Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with generally accepted accounting principles requires management to adopt accounting policies and make estimates and judgments to develop amounts reported in our financial statements and accompanying notes. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare our financials statements. We believe that our estimates and judgments are reasonable; however, actual results and the timing of recognition of such amounts could differ from those estimates. In addition, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

Critical accounting policies and estimates are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The policies and estimates discussed below have been reviewed with our independent auditors and with the Audit Committee of our Board of Directors. For a discussion of these and other accounting policies, see Note 1 to our consolidated financial statements.

Passenger revenue.    Passenger ticket sales are initially recorded as a component of air traffic liability. Revenue is recognized at the time the transportation is provided or after the ticket or customer credit (issued upon payment of change fee) expires. However, certain amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are based upon the evaluation of historical trends, which in our case are limited due to our short operating history.

Accounting for long-lived assets.    In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values and the potential for impairment. In estimating useful lives and residual values of our aircraft, we have relied upon actual experience with the same or similar aircraft types and our anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance program or operations could result in changes to these estimates. Our purchased technology from the LiveTV acquisition is amortized over seven years based on the average number of aircraft currently expected to be in service, resulting in an increasing annual expense because we have commitments to purchase 49 additional aircraft over the next five years.

Our long-lived assets are evaluated for impairment when events and circumstances indicate that the assets may be impaired. Indicators include operating or cash flow losses, significant decreases in market value or changes in technology. As our assets are all relatively new and we continue to have positive cash flow, we have not identified any impairments related to our long-lived assets at this time.

Derivative instruments used for aircraft fuel.    We utilize financial derivative instruments to manage the price risk of changing aircraft fuel prices. The December 31, 2002 fair value of our derivative instruments was $2.0 million. As the majority of our financial derivative instruments are not traded on a market exchange, we estimate their fair values with the assistance of third parties determined by the use of present value methods or standard option value models, with assumptions about commodity prices based on those observed in underlying markets. In addition, as there is not a reliable forward market for jet fuel, we must estimate the future prices of jet fuel in order to measure the effectiveness of the hedging instruments in offsetting changes to those prices, as required by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Forward jet fuel prices are estimated through the observation of similar commodity futures prices (such as crude oil) and adjusted based on variations to those like commodities. As the majority of our hedges settle within 15 months, the variation between estimates and actuals are recognized in a short period of time.

Frequent flyer accounting.    We utilize a number of estimates in accounting for our customer loyalty program, TrueBlue, which are consistent with industry practices. We record a liability for the estimated incremental cost of providing free travel awards which includes the cost of incremental fuel, insurance, passenger food and supplies and making an award reservation. A change to these cost estimates, the minimum award level or when points expire could have a significant impact on our liability in the year of change as well as in future years.