SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number 001-33166

Allegiant Travel Company

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

The number of shares of the registrant’s common stock outstanding as of the close of business on November 13, 2007 was 20,761,206.

Allegiant Travel Company

Form 10-Q

September 30, 2007

INDEX

PART 1. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)

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

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ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)

(1)           Prior to its December 2006 initial public offering, the Company was organized as a limited liability company (LLC) and as such was generally not subject to income taxes, except in certain state and local jurisdictions. The pro-forma net income (loss) per share reflects income taxes as if the Company were organized as a corporation effective January 1, 2006.

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

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ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1 – Summary of Significant Accounting Policies

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

On December 13, 2006, the Company completed the initial public offering of its common stock. The Company issued 5,750,000 shares at $18.00 per share resulting in net proceeds of approximately $94,500.  Prior to the completion of its initial public offering in December 2006, the Company converted from a Nevada limited liability company to a Nevada corporation. In connection with the conversion, its common shares and preferred shares were exchanged for shares of its common stock  pursuant to the terms of a merger agreement with Allegiant Travel Company, LLC. The reorganization did not affect its operations, which it continued to conduct through its operating subsidiaries.

These unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission.

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

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

Note 2 – Newly Issued Accounting Pronouncements

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”), effective January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.  The adoption of FIN 48 has not had a material effect on the Company’s consolidated financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, SFAS 157, which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact adoption of SFAS 157 may have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities–Including an Amendment of FASB Statement No. 115.  This statement permits, but does not require, entities to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized in earnings at each subsequent reporting date.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, and cannot be adopted early unless SFAS No. 157, Fair Value Measurements, is also adopted. The Company is currently evaluating the impact adoption of SFAS 159 may have on its consolidated financial statements.

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Note 3 – Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payments, requiring the compensation cost relating to share-based payment transactions to be recognized in the statement of operations. The cost is measured at the grant date, based on the calculated fair value of the award using the Black-Scholes-Merton option pricing model, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).

Note 4 – Income Taxes

For the three and nine months ended September 30, 2007, the Company did not have any material unrecognized tax benefits and there was no material effect on the Company’s financial condition or results of operation as a result of implementing FIN 48.  The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  There is no significant accrued interest at September 30, 2007.  No penalties were accrued at September 30, 2007.

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

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

Note 5 – Stockholders’ Equity

On December 13, 2006, simultaneously with the Company’s initial public offering, certain of the Company’s shareholders sold 1,750,000 shares of common stock to Par Investment Partners, L.P. (“PAR”). At that time, the Company agreed to register the shares purchased by PAR for resale. A registration statement for these shares was declared effective on April 26, 2007.

On May 24, 2007, the Company sold 155,714 shares in a public offering.  In conjunction with the public offering, on June 13, 2007, the underwriters exercised their overallotment option to purchase an additional 592,000 shares from the Company.  The Company received approximately $22,300 in net proceeds from the sale of these shares.

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Note 6 – Earnings Per Share

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

Note 7 – Long-Term Debt

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

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Note 8 – Financial Instruments and Risk Management:  Airline operations are inherently dependent on energy, and are therefore impacted by changes in jet fuel prices. Aircraft fuel expense represented approximately 47.7% and 46.2% of the Company’s operating expenses for the three months ended September 30, 2007 and 2006, respectively.  For the nine months ended September 30, 2007 and 2006, aircraft fuel represented approximately 46.6% and 47.1%, respectively, of the Company’s operating expenses.  The Company endeavors to acquire jet fuel at the lowest possible cost. To manage a portion of the aircraft fuel price risk, the Company uses jet fuel and heating oil option contracts or swap agreements. The Company does not purchase or hold derivative financial instruments for trading purposes.

The Company’s derivatives have historically not qualified as hedges for financial reporting purposes in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Accordingly, changes in the fair value of such derivative contracts, which amounted to gains of $348 and losses of $3,505 for the three months ended September 30, 2007 and 2006, respectively, and gains of $2,252 and losses of  $2,927 for the nine months ended September 30, 2007 and 2006, respectively, were recorded as a “(Gain) loss on fuel derivatives, net” within Other income (expense) in the accompanying condensed consolidated statements of operations.  These amounts include both realized gains and losses and mark-to-market adjustments of the fair value of the derivative instruments at the end of each period.  The fair value of hedge contracts amounted to $423 and ($1,622) as of September 30, 2007 and December 31, 2006, respectively, and was recorded in “Other current assets” or “Accrued liabilities” in the accompanying condensed consolidated balance sheets.

As of September 30, 2007, the Company had derivative instruments on approximately 9.0% of its projected fuel consumption for the remainder of 2007.

Note 9 – Commitments and Contingencies

AFH, Inc., a wholly owned subsidiary of Allegiant Travel Company, entered into a joint venture agreement with Orlando Sanford International, Inc. (“OSI”) to handle certain fuel operations for the Orlando Sanford International Airport.  The joint venture, which began operations in January 2007, is responsible for the purchase and transport of jet fuel to a fuel farm facility owned and operated by OSI, and for the sale of jet fuel to air carriers.  In addition, AFH, Inc. is responsible for the administrative functions for the joint venture.  AFH, Inc.’s proportionate allocation of earnings from this joint venture is reported in the Company’s condensed consolidated statements of operations in Other income (expense).

The National Transportation Safety Board has not yet released its report on its investigation of the nose landing gear failure the Company had at the Orlando Sanford International Airport in March 2007. Although no claims relating to this event have been made against the Company to date, it could be subject to claims in the future. The Company believes any such claims would be covered by its insurance policies in effect.

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

Note 10 – Subsequent Events

In November 2007, the Company entered into an agreement for the purchase of four MD-88 aircraft with seller financing for delivery through the first quarter of 2008.  The closings are subject to customary conditions.

In October 2007, the Company entered into a forward purchase agreement for two MD-82 aircraft currently operated by the Company under an operating lease.  The purchases are expected to be effective in July 2008 and are subject to customary closing conditions.  In addition, the Company purchased one engine and one MD-83 aircraft during October with the purchase price paid in cash.

In October 2007, the Company entered into an Air Transportation Charter Agreement with a subsidiary of Harrah’s Entertainment.  The Company is to provide charter services for Harrah’s to and from Tunica, Mississippi, Gulfport/Biloxi, Mississippi, New Orleans, Louisiana, Shreveport, Lousiana, St. Louis, Missouri and Council Bluffs, Iowa.  The Company will devote two of its aircraft to the operations under the Agreement and Harrah’s will guarantee a minimum amount of flying during the two-year term of the Agreement.  Service under the Agreement will begin in January 2008.

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

The following discussion and analysis presents factors that had a material effect on our results of operations during the three and nine month periods ending September 30, 2007 and 2006. Also discussed is our financial position as of September 30, 2007 and December 31, 2006. You should read this discussion in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q and our consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2006.  This discussion and analysis contains forward-looking statements. Please refer to the section below entitled “Special Note About Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

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

We provide service primarily to Las Vegas (Nevada), Orlando (Florida), and Tampa/St. Petersburg (Florida), three of the largest and most popular leisure destinations in the United States.  In addition, in October 2007, we began service to Phoenix-Mesa (Arizona) and will commence service in November 2007 to Ft. Lauderdale (Florida), two other popular leisure destinations in the United States.  We have positioned our business to take advantage of current lifestyle and demographic trends in the U.S. which we believe are positive drivers for the leisure travel industry. The most notable demographic shift occurring in the U.S. is the aging of the baby boomer generation as they enter their peak earning years and have more time and disposable income to spend on leisure travel. We believe a large percentage of our customers fall within the baby boomer demographic and we target these customers through the use of advertisements in more than 300 print circulations.

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

Our Fleet:

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

(a) Aircraft owned includes five aircraft subject to capital leases.

Our Markets:

Our scheduled service consists of limited frequency nonstop flights into world-class leisure destinations from small cities. As of September 30, 2007, we offered scheduled service from 53 small cities primarily into Las Vegas, Orlando and Tampa/St. Petersburg including seasonal service. The following shows the number of destinations and small cities served as of the dates indicated:

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Results of Operations

Comparison of three months ended September 30, 2007 to three months ended September 30, 2006

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

We recorded total operating revenue of $86.3 million, income from operations of $9.5 million and net income of $7.0 million for third quarter of 2007. By comparison, for the same period in 2006, we recorded total operating revenue of $60.9 million, income from operations of $2.9 million and net loss of $1.2 million.

As of September 30, 2007, we had a fleet of 29 aircraft in service, compared with a fleet of 21 aircraft in service as of September 30, 2006. The growth of our fleet enabled a 31.0% increase in available seat miles (“ASMs”) for third quarter 2007 compared to the same period in 2006 as departures increased by 36.0% and average stage length decreased by 3.6%.

Substantially all of our ASM growth in the third quarter of 2007 compared to the same period of 2006 was in scheduled service which represented 89.5% of total ASMs in third quarter of 2007 compared to 86.7% in the same period of 2006.  Scheduled service ASMs increased 35.2% while other flying (including fixed fee and non-revenue) ASMs increased 4.0% .

Operating Revenue

Our operating revenue increased 41.7%, or $25.4 million, to $86.3 million in third quarter 2007 from $60.9 million in the same period of 2006. This was driven by a 41.2% increase in revenue passenger miles (“RPMs”) and a 8.1% increase in revenue per ASM (“RASM”).  In addition, we generated other revenue of $0.7 million from lease revenue related to the purchase of eight engines in the third quarter on lease to another operator.  The engines were returned to us after the end of the quarter and we currently project no further lease revenue beyond October.

Scheduled service revenues.    Scheduled service revenues increased 40.8%, or $18.1 million, to $62.3 million in third quarter 2007 from $44.2 million in the same period of 2006 due to a 45.6% increase in scheduled service RPMs. Yield declined 3.3% year-over-year in the third quarter of 2007 due to the dilutive effect of introductory pricing on new routes offset in part by a 6.5% shorter scheduled stage length.  During the third quarter 2007, we started four new routes to Las Vegas.  The decrease in average stage length coupled with an increase in load factor of 6.2 percentage points resulted in a 4.2% year-over-year increase in scheduled service RASM from 7.32¢ to 7.63¢.

Fixed fee contract revenues.    Fixed fee contract revenues were $7.4 million in third quarter 2007 compared to $8.1 million in the same period of 2006.  The decrease of 8.8% for the third quarter 2007 compared to the same period in 2006 is primarily a result of a short term contract that ended in August 2006.

Ancillary revenue.    Ancillary revenue increased 85.5% to $16.0 million in third quarter 2007 up from $8.6 million in the same period of 2006. The increase in ancillary revenue was due to a 56.6% increase in scheduled service passengers and a 18.5% increase in ancillary revenue per passenger from $17.99 to $21.31 due primarily to the sale of new products.

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Operating Expenses

Our operating expenses increased by 32.3%, or $18.8 million, to $76.8 million in third quarter 2007 up from $58.0 million during the same period in 2006.

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

Aircraft fuel expense.    Aircraft fuel expense increased 36.8%, or $9.9 million, to $36.6 million in third quarter 2007 up from $26.8 million in the same period of 2006. This change was due to a 35.1% increase in gallons consumed and a 1.3% increase in the average cost per gallon to $2.32 per gallon during third quarter 2007 compared to $2.29 in the same period of 2006.

Salary and benefits expense.    Salary and benefits expense increased 43.1% to $12.7 million in third quarter 2007 up from $8.9 million in the same period of 2006. This increase is largely attributable to a 31.5% increase in full-time equivalent employees to support our system growth.  We employed 1,035 full-time equivalent employees as of September 30, 2007, compared to 787 full-time equivalent employees as of September 30, 2006.

Station operations expense.    Station operations expense increased 29.4%, or $1.9 million, to $8.2 million in third quarter 2007 compared to $6.3 million in the same period of 2006. The percentage increase in station operations expense lagged the 36.0% increase in departures as station expense per departure decreased by 4.8%.  Reduced station expense per departure is consistent with a reduced proportion of fixed-fee flying, as scheduled service station expense per departure is typically lower than fixed fee flying.

Maintenance and repairs expense.    Maintenance and repairs expense decreased by 12.2%, or $0.8 million, to $5.9 million in third quarter 2007 down from $6.8 million in the same period of 2006.  The decrease is largely attributable to having no unplanned engine overhauls during the third quarter of 2007 compared with two engine overhauls in the third quarter 2006.  In addition, there were heavy maintenance checks on five aircraft in third quarter of 2007 compared to six heavy maintenance checks in the same period of 2006.  Maintenance and repairs CASM decreased 33.0%, due to the lower expense in 2007 and the growth in ASMs.  The timing of maintenance events may cause our maintenance and repairs expense to vary significantly from period to period.

Sales and marketing expense.    Sales and marketing expense increased 50.3%, or $1.1 million, to $3.3 million in third quarter 2007 compared to $2.2 million in the same period of 2006. This resulted in an increase on a CASM basis of 12.5%.  This increase is primarily due to an increase in advertising and credit card discount fees associated with the 40.8% increase in scheduled service revenue in third quarter 2007 compared to the same period in 2006.

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Aircraft lease rentals expense.    Aircraft lease rentals expense decreased by 25.9% to $0.8 million in the third quarter of 2007 down from $1.1 million in the same period of 2006 primarily due to an increase in the percentage of owned versus leased aircraft.  Of the 32 aircraft that had been delivered to us as of September 30, 2007, four aircraft are subject to operating leases, whereas five aircraft were subject to operating leases as of September 30, 2006.

Depreciation and amortization expense.    Depreciation and amortization expense was $4.2 million in third quarter 2007 compared to $2.9 million in the same period of 2006, an increase of 48.5% as the number of in-service aircraft owned or subject to capital lease increased from 16 as of September 30, 2006 to 25 as of September 30, 2007.

Other expense.    Other expense increased by 59.2% to $5.0 million in third quarter 2007 compared to $3.1 million in same period of 2006 primarily due to growth and the additional administrative requirements resulting from being a public company.

Other (Income) Expense

Other (income) expense increased from a net other expense amount of $4.1 million in third quarter 2006 to a net other income amount of $1.6 million in the same period of 2007.  This change is primarily attributable to two factors: (1) a net loss on fuel derivatives of $3.5 million in the third quarter 2006 compared to a net gain on fuel derivatives of $0.3 million in the same period of 2007 and (2) an increase in interest income from $0.7 million in third quarter 2006 to $2.5 million in the same period of 2007 as a result of increased cash balances.

Income Tax Expense

Income tax expense for the third quarter of 2007 was $4.1 million as our effective income tax rate for the period was approximately 36.8%.  Prior to our reorganization into a corporation at the time of our initial public offering on December 13, 2006, we operated as an LLC and we did not pay corporate federal income tax at the entity level and therefore, we did not incur any federal income tax for the third quarter of 2006.

Comparison of nine months ended September 30, 2007 to nine months ended September 30, 2006

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

We recorded total operating revenue of $259.6 million, income from operations of $38.0 million and net income of $26.7 million for the first nine months of 2007. By comparison, for the same period in 2006, we recorded total operating revenue of $180.2 million, income from operations of $15.2 million and net income of $10.3 million.

As of September 30, 2007, we had a fleet of 29 aircraft in service, compared with a fleet of 21 aircraft in service as of September 30, 2006. The growth of our fleet enabled a 29.8% increase in ASMs for the first nine months of 2007 compared to the same period in 2006 as departures increased by 40.8% and average stage length decreased by 7.8%.

Compared to the first nine months of 2006, scheduled service ASMs increased by 33.2% in the first nine months of 2007 and other flying (including fixed fee and non-revenue) increased 10.1%.

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Operating Revenue

Our operating revenue increased 44.1%, or $79.4 million, to $259.6 million in the first nine months of 2007 from $180.2 million in the same period of 2006. This was driven by a 35.6% increase in RPMs and a 10.9% increase in RASM.

Scheduled service revenue.  Scheduled service revenues increased 41.3%, or $54.4 million, to $186.1 million in the first nine months of 2007 from $131.7 million in the same period of 2006 due to a 38.4% increase in scheduled service RPMs. Yield increased 2.0% from 8.88¢ for the first nine months of 2006 to 9.06¢ for the same period of 2007, due to a 10.4% shorter scheduled stage length offset by the dilutive effect of introductory pricing on new routes.  During the first nine months of 2007, we started 12 new routes to Las Vegas, six new routes to Orlando, four new routes to Tampa/St. Petersburg and two other new routes.  The decrease in average stage length coupled with an increase in load factor of 3.1 percentage points resulted in a 6.1% year-over-year increase in scheduled service RASM from 7.23¢ to 7.67¢.

Fixed fee contract revenue.  Fixed fee contract revenues increased 3.7% to $28.2 million in the first nine months of 2007 up from $27.2 million for the same period of the prior year.  Fixed fee revenues increased principally because of increased flying for Harrah’s during the first nine months of 2007.

Ancillary revenue.  Ancillary revenues increased 109.7% to $44.5 million in the first nine months of 2007 up from $21.2 million in the same period of 2006. The increase in ancillary revenue was due to a 54.5% increase in scheduled service passengers and a 35.7% increase in ancillary revenue per passenger from $15.08 to $20.46 due primarily to the sale of several new products.

Operating Expenses

Our operating expenses increased by 34.3%, or $56.6 million, to $221.6 million in the first nine months of 2007 up from $165.0 million during the same period in 2006.

The following table presents our unit costs, CASM, for the indicated periods: 

Aircraft fuel expense  Aircraft fuel expense increased 33.0%, or $25.6 million, to $103.3 million in the first nine months of 2007 up from $77.7 million in the same period of 2006. This change was primarily due to a 33.3% increase in gallons consumed.  The average cost per gallon was $2.17 per gallon during the first nine months of 2007 compared to $2.18 in the same period of 2006.

Salary and benefits expense.    Salary and benefits expense increased 44.8% to $36.1 million in the first nine months of 2007 up from $24.9 million in the same period of 2006. This increase is largely attributable to a 31.5% increase in full-time equivalent employees to support our growth along with a wage scale increase for flight operations employees granted during the fourth quarter of 2006.  We employed 1,035 full-time equivalent employees as of September 30, 2007, compared to 787 full-time equivalent employees as of September 30, 2006.

Station operations expense.    Station operations expense increased 34.0%, or $6.3 million, to $25.0 million in the first nine months of 2007 compared to $18.7 million in the same period of 2006. The percentage increase in station operations expense lagged the 40.8% increase in departures as station expense per departure decreased by 4.9%.  However, the decrease in year-over-year average stage length resulted in year-over-year station operations expenses increasing by 4.7% on a CASM basis.

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Maintenance and repairs expense.    Maintenance and repairs expense increased by 27.5%, or $3.9 million, to $18.2 million in the first nine months of 2007 up from $14.2 million in the same period of 2006.  This increase resulted from an increase in normal routine maintenance expenditures from growth of our fleet as we had one planned heavy engine overhaul performed during the first nine months of 2006 compared to two planned heavy engine overhauls performed during the same period of 2007.  Additionally, the maintenance and repairs expense for the first nine months of 2007 included a $0.3 million deductible for a gear-up landing during the first quarter at Orlando Sanford International Airport.  Maintenance and repairs CASM declined 3.0% as certain maintenance expenses were spread over a larger base of ASMs.

Sales and marketing expense.    Sales and marketing expense increased 34.8%, or $2.4 million, to $9.4 million in the first nine months of 2007 compared to $7.0 million in the same period of 2006. On a CASM basis, sales and marketing expense remained relatively constant from the first nine months of 2006.

Aircraft lease rentals expense.    Aircraft lease rentals expense decreased by 50.3% to $2.1 million in the first nine months of 2007 down from $4.3 million in the same period of 2006 primarily due to an increase in the percentage of owned versus leased aircraft.

Depreciation and amortization expense.    Depreciation and amortization expense was $11.6 million in the first nine months of 2007 compared to $7.6 million in the same period of 2006, an increase of 52.8% as the number of in-service aircraft owned or subject to capital leases increased from 16 as of September 30, 2006 to 25 as of September 30, 2007.

Other expense.    Other expense increased by 49.1% to $16.0 million in the first nine months of 2007 compared to $10.7 million in same period of 2006 primarily due to growth and the additional administrative requirements resulting from being a public company.

Other (Income) Expense

Other (income) expense increased from a net other expense amount of $4.9 million in the first nine months of 2006 to a net other income amount of $5.2 million in the same period of 2007. This change is primarily attributable to two factors: (1) a loss on fuel derivatives of $2.9 million in the first nine months of 2006 compared to a gain on fuel derivatives of $2.3 million in the same period of 2007 and (2) an increase in interest income from $2.0 million in the first nine months of 2006 to $6.8 million in the same period of 2007 as a result of increased cash balances.

Income Tax Expense

Income tax expense for the first nine months of 2007 was $16.4 million as our effective income tax rate for the period was 38.1%.  Prior to our reorganization into a corporation at the time of our initial public offering on December 13, 2006, we did not pay corporate federal income tax at the entity level and therefore, we did not incur any federal income tax for the first nine months of 2006.

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Comparative Consolidated Operating Statistics

The following tables set forth our operating statistics for the three and nine months ended September 30, 2007 and 2006:

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