The following discussion and analysis presents factors that had a material effect on our results of operations during the three and six month periods ended June 30, 2012 and 2011. Also discussed is our financial position as of June 30, 2012 and December 31, 2011. 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, 2011. 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.

Second quarter 2012 results

During the second quarter of 2012, we achieved an 18.1% operating margin resulting in net income of $25.2 million on operating revenues of $231.2 million. Our second quarter 2012 operating margin was the highest since the first quarter of 2010. Our strong operating results were driven by our unit cost performance for the quarter, with a reduction in our operating expense per ASM ("CASM") of 10.9%, from 11.40¢ to 10.16¢. Our total average fare per passenger of $129.10 for the second quarter of 2012 decreased 2.7% from our record during the first quarter of 2012 of $132.70 but was comparable to the $128.30 we achieved in the second quarter of 2011. We were able to maintain our total average fare per passenger despite a 16.0% year-over-year increase in scheduled service passengers.

Our overall cost performance was favorably impacted by the recent decline in fuel prices, which resulted in an average fuel cost per gallon of $3.14, down from $3.28 in the first quarter of 2012, and $3.22 in the second quarter of 2011. In addition, our operating expense per passenger, excluding fuel, decreased 11.4% during the quarter compared to the prior year as we had a 15.1% increase in system passengers with only a 1.9% increase in total non-fuel operating expenses. A major contributor to the non-fuel cost performance was a decrease in maintenance and repairs expense of 25.0% with the completion of our 2011 engine overhaul program.

Our scheduled service revenues in the second quarter 2012 increased $18.3 million or 13.8% over second quarter 2011 due to a 16.0% increase in scheduled service passengers, offset by the effect of a 1.9% lower scheduled service average base fare. We substantially grew our average number of aircraft in revenue service by 16.3% from 51.0 aircraft during second quarter 2011 to 59.3 aircraft during second quarter 2012. The increase in average number of aircraft and the combination of increased seats in our MD-80 fleet and the utilization of our Boeing 757-200 aircraft with 223 seats (primarily one aircraft during the quarter with two aircraft beginning service in late June) drove a 20.4% increase in scheduled service available seat miles ("ASMs") during the quarter.

We achieved our record ancillary revenue per passenger of $39.67 during the second quarter of 2012, a 6.8% increase from the same quarter in the prior year. The increase more than offset a 1.9% lower scheduled service average base fare. The increase was primarily attributable to the implementation of a fee for carry-on bin bags in April 2012. The fee for carry-on bin bags ranges from $10 to $30 (varying by routes and markets) if booked on the website and $35 if purchased at the airport.

Durning the second quarter 2012, we successfully completed all requirements to enable us to gain flag carrier status and ETOPS certification. As a result of this certification, we were able to begin service to Hawaii in late June 2012 with routes from Las Vegas and Fresno, California to Honolulu. During the quarter, we also announced further expansion of service from five of our existing markets to begin in November 2012, which consists of service to Honolulu on five routes and service to Maui on one route.

In addition to Hawaii, we continue to expand our route network and extend our national footprint. In April 2012, we established an operational base and expanded service at Oakland International Airport with seven new routes to serve the San Francisco Bay Area. With the addition of these seven new routes, we serve a total of nine routes into the San Francisco Bay Area. We have also established a base of operations at Punta Gorda (Florida) with the expansion of service in June 2012 on four new routes into Punta Gorda. With the addition of these four new routes, we serve a total of seven routes into Punta Gorda.

During the second quarter of 2012, we continued our progress in the MD-80 aircraft seat reconfiguration program. As of June 30, 2012, we had 26 MD-80 aircraft with 166 seats in revenue service. These additional 16 seats have allowed us to grow capacity without adding incremental aircraft into our operating fleet. Our strategy is to convert each base to 166-seat MD-80 aircraft as soon as possible to optimize the selling effort in that particular base. Currently all of our MD-80 aircraft serving Bellingham, Phoenix-Mesa, Los Angeles and Oakland have been reconfigured to 166 seats with completion of the reconfiguration for our MD-80 aircraft serving Las Vegas to take place during the third quarter of 2012.

Aircraft

Operating Fleet

As of June 30, 2012, our total aircraft in service consisted of 58 MD-80
aircraft and three Boeing 757-200 aircraft. During the second quarter of 2012,
we placed two Boeing 757-200 aircraft into service. The following table sets
forth the number and type of aircraft in service and operated by us as of the
dates indicated:

                          As of June 30, 2012                             As of December 31, 2011                          As of June 30, 2011
               Own (a)(b)          Lease       Total (b)       Own (a)(b)         Lease (c)         Total(b)       Own (a)          Lease        Total

MD82/83/88s             56               -             56               52                 2               54            47               2           49
MD87s (d)                2               -              2                2                 -                2             2               -            2
B757-200                 3               -              3                1                 -                1             -               -            -
Total                   61               -             61               55                 2               57            49               2           51

(b) Includes MD-80 aircraft (MD-82/83/88s) modified to a 166-seat configuration:
June 30, 2012 - 26 and December 31, 2011 - seven.

(c(c((c) In December 2011, we exercised purchase options on two MD-80 aircraft and took ownership of these aircraft in January 2012. Subsequent to taking ownership of these two aircraft in January 2012, we no longer have any aircraft under operating leases.

(d) Used almost exclusively for fixed fee flying.

MD-80 Aircraft not in service

As of June 30, 2012, we had one MD-80 aircraft in storage which could be used for future growth opportunities. We continue to remove up to four of our MD-80 aircraft from service at a time in connection with reconfiguring them from 150 to 166 seats.

Boeing 757-200 Aircraft

During the quarter, we acquired our sixth Boeing 757-200 aircraft which was the last of those under an existing purchase contract. As of June 30, 2012, we owned six Boeing 757-200 aircraft, of which three were in revenue service, two were leased out to third parties on a short-term basis and one was being prepared for revenue service. In July 2012, we placed this aircraft being prepared for revenue service into our operating fleet. We expect the remaining two aircraft currently leased out to be returned off lease during the fourth quarter of 2012 and added to revenue service in the first half of 2013.

Network

We have increased the number of routes into our leisure destinations from 162 at
June 30, 2011 to 182 routes at June 30, 2012, primarily from the expansion of
service into the San Francisco Bay area and Punta Gorda, along with the
introduction of service into Hawaii. We now serve 79 cities in 40 states
(including small cities and destinations) through our route network. The
following shows the number of destinations and small cities served, and routes
operated as of the dates indicated (includes cities served seasonally):

                       As of June 30,   As of December 31,   As of June 30,
                            2012               2011               2011

Leisure destinations         12                 11                 11
Small cities served          67                 65                 62
Total cities served          79                 76                 73
Total routes                182                171                162

Trends and Uncertainties

We continue to experience volatility in fuel prices with a decrease in the second quarter of 2012. Our system average fuel cost per gallon for the second quarter of 2012 was $3.14, a 2.5% year-over-year decrease from the same period of 2011 and a 4.3% sequential decrease compared to the three months ended March 31, 2012. The sequential decrease was after a 6.3% increase on our system average cost per gallon of $3.08 during the fourth quarter of 2011 compared to $3.28 during the first quarter of 2012. Fuel availability is subject to periods of market surplus and shortage and is affected by demand for heating oil, gasoline and other petroleum products. The cost of fuel cannot be predicted with any degree of certainty and fuel cost volatility will most likely have a significant impact on our future results of operations. We will continue to try to offset high fuel prices through our continued focus on capacity management, driving additional ancillary revenues and the execution of our low fixed, high variable cost model. We remain pleased with the strength and flexibility of our model and believe it has proven successful to maintain profitability in a high fuel price environment.

Our total average fare increased year-over-year by 6.0% during the first quarter and, in the second quarter of 2012, increased slightly despite a 16.0% year-over-year increase in scheduled service passengers. We believe drivers of this strong performance are our pricing strategy and capacity management along with a continued strong leisure travel demand enviroment. We believe our customer booking activity for future travel represents a demand for leisure travel which will continue to have a favorable impact on our scheduled service and ancillary revenues.

We continue to make progress on our automation projects including the upgrade of our current system platform and the transfer to our new website. During the second quarter of 2012, our new website went live and is currently utilized for a limited portion of our website traffic. We look to fully integrate all our traffic to the website during the second half of the year. We expect the continued improvement to our website and other automation enhancements will create additional revenue oppurtunities by allowing us to capitalize on customer loyalty with additional product offerings.

A recently reported settlement of a class action lawsuit against Visa and MasterCard may result in significant decreases in retailers' credit card transaction costs or may allow retailers to seek to recoup these costs by imposing charges on customers paying with credit cards. The lawsuit alleged anticompetitive practices by the credit card companies. The settlement remains subject to approval by the court and certain other parties. Further, it is uncertain as to the particulars of how the credit card companies will revise their rules in response to the settlement. In the meantime, we have in late July 2012 implemented a discount for paying with debit cards to drive higher debit card usage in light of the significantly lower processing costs for our debit card transactions. We are hopeful that these developments will enable us to significantly lower our transaction processing costs or allow us to recoup these costs from customers in future periods, but the impact of these changes is far from certain at this time.

In July 2012, we received notification from the National Mediation Board ("NMB") that the International Brotherhood of Teamsters, Airline Division has filed an application for a representation election on behalf of our pilots. This will be the first time our pilots have voted on union representation. If our employees unionize in the future and we are unable to reach agreement on the terms of their collective bargaining agreement, or we were to experience wide-spread employee dissatisfaction, we could be subject to work slowdowns or stoppages. Any of these events could have an adverse effect on our future results.

In July 2012, we announced our intention to acquire 19 Airbus A319 aircraft with 156 seats. We believe the introduction of the A319 into our operating fleet will support our future growth opportunities and is a continuation of our existing business model. We believe the current environment to aquire this type of aircraft presents similar opportunities as we experienced when we began adding MD-80 aircraft to our fleet.

RESULTS OF OPERATIONS

Comparison of three months ended June 30, 2012 to three months ended June 30,
2011

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

                                             Three months ended June 30,
                                              2012                2011

          Total operating revenues                100.0 %             100.0 %
          Operating expenses:
          Aircraft fuel                            40.8                43.1
          Salaries and benefits                    14.4                14.9
          Station operations                        8.5                 8.3
          Maintenance and repairs                   6.5                10.1
          Sales and marketing                       2.4                 2.7
          Aircraft lease rentals                      -                 0.1
          Depreciation and amortization             5.7                 5.1
          Other                                     3.6                 5.4
          Total operating expenses                 81.9 %              89.7 %
          Operating margin                         18.1 %              10.3 %

Operating Revenue

Our operating revenue increased 15.3% to $231.2 million for the three months ended June 30, 2012, up from $200.4 million for the same period of 2011 primarily due to a 13.8% increase in scheduled service revenue and a 23.9% increase in ancillary revenue. Scheduled service revenue and ancillary revenue increases were primarily driven by a 16.0% increase in scheduled service passengers on a 12.7% increase in scheduled service departures.

Scheduled service revenue. Scheduled service revenue increased 13.8% to $151.6 million for the three months ended June 30, 2012, up from $133.3 million in the same period of 2011. The increase was primarily driven by a 16.0% increase in the number of scheduled service passengers, offset by a 1.9% reduction in the scheduled service average base fare for the three months ended June 30, 2012, compared to the same period of 2011. Passenger growth was driven by a 12.7% increase in the number of scheduled service departures as we increased the average number of aircraft in service by 16.3% and by a 2.9% increase in the average number of passengers per departure. Of our year-over-year departure increase, 35.5% of the increase was on Orlando routes and 18.6% of the increase was on Oakland routes.

Ancillary revenue. Ancillary revenue increased 23.9% to $67.3 million for the three months ended June 30, 2012, up from $54.3 million in the same period of 2011, driven by a 16.0% increase in scheduled service passengers and a 6.8% increase in ancillary revenue per scheduled passenger from $37.13 to $39.67. The increase in our ancillary revenue per scheduled service passenger of $2.54 was primarily attributable to increased bag fees from the implementation of a fee for carry-on bags in April 2012. The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

                                                    Three months ended
                                                         June 30,
                                                   2012             2011           % Change
Air-related charges                            $      33.90      $     31.45              7.8 %
Third party products                                   5.77             5.68              1.6 %
Total ancillary revenue per scheduled
service passenger                              $      39.67      $     37.13              6.8 %

The following table details the calculation of ancillary revenue from third party products. Third party products consist of revenue from the sale of hotel rooms, ground transportation (rental cars and hotel shuttle products), attraction and show tickets, and fees we receive from other merchants selling products through our website:

                                                   Three months ended
                                                        June 30,
(in thousands)                                    2012            2011           % Change
Gross ancillary revenue - third party
products                                       $    32,909     $    29,547             11.4 %
Cost of goods sold                                 (21,909 )       (20,046 )            9.3 %
Transaction costs (a)                               (1,218 )        (1,210 )            0.7 %
Ancillary revenue - third party products       $     9,782     $     8,291             18.0 %
As percent of gross ancillary revenue -
third party                                           29.7 %          28.1 %            1.6 pp
Hotel room nights                                  204,327         186,161              9.8 %
Rental car days                                    201,605         156,989             28.4 %

During the three months ended June 30, 2012, we generated gross revenue of $32.9 million from third party products, which resulted in net revenue of $9.8 million. For the second quarter in a row, we achieved rental car days in excess of 200,000. These rental car days grew year-over-year by 28.4% which outpaced our scheduled service passenger growth of 16.0%.

Fixed fee contract revenue. Fixed fee contract revenue increased 3.6% to $9.8 million for the three months ended June 30, 2012, from $9.5 million in the same period of 2011. The increase was mainly a result of a higher per-block hour rate on a reduction in total block hours from certain fixed fee agreements, primarily our agreement with Caesars Entertainment Inc. ("Caesars"). Under our agreement with Caesars, the per-block hour rate increases during periods of lower fuel cost reimbursements.

Other revenue. We generated other revenue of $2.4 million for the three months ended June 30, 2012 compared to $3.4 million in the same period of 2011, primarily from lease revenue for aircraft and flight equipment. In the first quarter of 2011, we leased three Boeing 757-200 aircraft to third parties on a short-term basis. In April 2012, one of these leased out aircraft was returned to us. The expected return dates of the remaining two leased out aircraft are in the fourth quarter of 2012.

Operating Expenses

Our operating expenses increased only 5.3% to $189.3 million for the three months ended June 30, 2012 compared to $179.7 million in the same period of 2011 despite an 18.1% increase in capacity. We primarily evaluate our expense management by comparing our costs per passenger and per ASMs across different periods, which enables us to assess trends in each expense category.

The following table presents operating expense per passenger for the indicated periods ("per-passenger costs"). The table also presents operating expense per passenger, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by the number of passengers carried. 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 beyond our control.

                                                     Three Months Ended
                                                          June 30,            Percentage
                                                      2012          2011        Change
 Aircraft fuel                                     $    52.50     $  55.43        (5.3) %
 Salary and benefits                                    18.52        19.16          (3.3)
 Station operations                                     10.91        10.61            2.8
 Maintenance and repairs                                 8.41        12.91         (34.9)
 Sales and marketing                                     3.06         3.47         (11.8)
 Aircraft lease rentals                                     -         0.21        (100.0)
 Depreciation and amortization                           7.33         6.51           12.6
 Other                                                   4.75         6.94         (31.6)
 Operating expense per passenger                   $   105.48     $ 115.24          (8.5)
 Operating expense per passenger, excluding fuel   $    52.98     $  59.81        (11.4)%

The following table presents unit costs, defined as Operating CASM, for the indicated periods. The table also presents Operating CASM, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by ASMs. As on a per passenger basis, excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility.

                                                Three Months
                                               Ended June 30,       Percentage
                                              2012        2011        Change
          Aircraft fuel                         5.06 ¢      5.48 ¢       (7.7)%
          Salary and benefits                   1.78        1.90          (6.3)
          Station operations                    1.05        1.05              -
          Maintenance and repairs               0.81        1.28         (36.7)
          Sales and marketing                   0.29        0.34         (14.7)
          Aircraft lease rentals                   -        0.02        (100.0)
          Depreciation and amortization         0.71        0.64           10.9
          Other                                 0.46        0.69         (33.3)
          Operating expense per ASM (CASM)     10.16 ¢     11.40 ¢      (10.9)%
          CASM, excluding fuel                  5.10 ¢      5.92 ¢      (13.9)%

Our CASM, excluding fuel, decreased 13.9%, primarily due to an 18.1% increase in system capacity, lower aircraft utilization of 4.9% and a slight increase in our average stage length of 1.3%. The system capacity increase enabled us to spread our increased operating expenses over more ASMs.

Aircraft fuel expense. Aircraft fuel expense increased $7.8 million, or 9.0%, to $94.2 million for the three months ended June 30, 2012, up from $86.5 million in the same period of 2011. This change was due to an 11.8% increase in gallons consumed from 26.9 million to 30.0 million, offset by a 2.5% decrease in the average fuel cost per gallon from $3.22 to $3.14. The increase in gallons consumed is attributable to a 10.8% increase in our total system departures.

Salary and benefits expense. Salary and benefits expense increased 11.2% to $33.2 million for the three months ended June 30, 2012 up from $29.9 million in the same period of 2011. Excluding accrued employee bonus expense and stock compensation expense, salaries and benefits expense increased 7.0% attributable to a 12.3% increase in the number of full-time equivalent employees offset by a 4.7% reduction in salary and benefits expense per full-time equivalent employee. The number of full-time equivalent employees increased from 1,559 at June 30, 2011 to 1,750 at June 30, 2012 to support the growth of our aircraft fleet, our ongoing significant information technology enhancements and other company growth activities. The decrease in salary and benefits expense per full-time equivalent employee was attributable to the pilot base pay scale and the outsourcing of our station operations in Las Vegas in May 2011. The pilot base pay scale is variable based on operating margin which was lower in the prior periods on which the quarter's pilot base pay scale was based. Another major contributor to our salary and benefits expense increase was an increase in accrued employee bonus expense as a result of the year-over-year increase in operating income.

Station operations expense. Station operations expense increased 18.2% to $19.6 million for the three months ended June 30, 2012 compared to $16.6 million in the same period of 2011. The increase was primarily due to a year-over-year increase of 10.8% in system departures. In addition, our station operations expense per departure increased 6.8% compared to the prior year, as a result of increased fees at airports where we operate larger aircraft (Boeing 757-200) along with the outsourcing of our station operations in Las Vegas beginning in May 2011.

Maintenance and repairs expense. Maintenance and repairs expense decreased 25.0% to $15.1 million for the three months ended June 30, 2012, compared to $20.1 million in the same period of 2011. The decrease is primarily attributable to a reduction in engine overhauls and heavy airframe maintenance events. We experienced higher engine overhaul expenses during the prior year as a result of our 2011 engine overhaul program. Throughout 2011, we made a substantial investment to increase the reliability and reduce the overall age of our engine portfolio.

Sales and marketing expense. Sales and marketing expense increased 1.6% to $5.5 million for the three months ended June 30, 2012, compared to $5.4 million for the same period of 2011. We experienced an 11.8% decrease in sales and marketing expense per passenger from $3.47 to $3.06 primarily due to a reduction in payment processing costs per passenger as a result of increased debit card usage.

Aircraft lease rentals expense. We had no aircraft lease rentals expense for the three months ended June 30, 2012 compared to $0.3 million in the same period of 2011. In early January 2012, we took ownership of two MD-80 aircraft for which we exercised purchase options in December 2011 and which we were operating under . . .