Overview

We are a low-fare, low-cost passenger airline that provides high-quality customer service primarily on point-to-point routes. We offer our customers a differentiated product, with new aircraft, low fares, leather seats, free LiveTV (a direct 24-channel satellite TV service) at every seat, pre-assigned seating and reliable performance.

We were incorporated on August 24, 1998. For the period from our incorporation in 1998 until the commencement of our operations, our operating activities related primarily to the initial development of our airline. We launched our flying operations on February 11, 2000 with two aircraft providing scheduled passenger service between New York's John F. Kennedy International Airport, or JFK, and Fort Lauderdale, Florida and the following week began service between JFK and Buffalo, New York. Through consistent and controlled growth, as of December 31, 2002, we operated 168 flights a day with a fleet of 37 single-class Airbus A320 aircraft serving 20 cities throughout the United States and Puerto Rico.

The following chart demonstrates our growth:

We expect to continue to grow. Including the effects of a February 2003 amendment to our contract with Airbus, we had orders to acquire 49 aircraft, options for 26 aircraft and purchase rights for an additional 19 aircraft as of December 31, 2002. Our growth strategy involves increasing the frequency of flights on our existing routes and entering attractive new markets. During 2002, we initiated service to San Juan, Puerto Rico and Las Vegas, Nevada.

We derive our revenue primarily from transporting passengers on our aircraft. Passenger revenue was 97% of our operating revenues for the year ended December 31, 2002. Because all of our fares are

nonrefundable, revenue is recognized either when the transportation is provided or after the ticket or customer credit expires. We measure capacity in terms of available seat miles, which represents the number of seats available for passengers multiplied by the number of miles the seats are flown. Yield, or the average amount one passenger pays to fly one mile, is calculated by dividing passenger revenue by revenue passenger miles.

We strive to increase passenger revenue primarily by increasing our load factor, which is the percentage of aircraft seating capacity that is actually utilized. Based on published fares at our time of entry, our advance purchase fares have been 30-40% below those existing in markets prior to our entry, while our "walk-up" fares are generally 60-70% below major U.S. airlines' unrestricted "full coach" fares. Our low fares are designed to stimulate demand, particularly from fare-conscious leisure and business travelers who might otherwise have used alternate forms of transportation or would not have traveled at all.

Other revenue consists primarily of the $25 fee charged to change a customer's reservation. Other components include mail revenue, excess baggage charges, commissions from website travel sales, revenue from the sale of liquor in-flight and concession revenues at our terminal at JFK.

We have low operating expenses because we operate a single type of aircraft, with a single class of service and high utilization, have a productive workforce and use advanced technologies. The largest components of our operating expenses are salaries, wages and benefits provided to our employees, including provisions for our profit sharing plan, and aircraft fuel. Sales and marketing expenses include advertising and fees paid to credit card companies and third-party computerized reservation systems. Our distribution costs tend to be lower than those of most other airlines on a per unit basis because a relatively high percentage of our customers book through our website and our own reservation agents. Maintenance materials and repairs are expensed when incurred. Because the average age of our aircraft is 15.5 months, all of our aircraft require less maintenance now than they will in the future. Our maintenance costs will increase on an absolute basis, on a per seat mile basis and as a percentage of our unit costs, as our fleet ages. Other operating expenses consist of purchased services (including expenses related to fueling, ground handling, skycap and janitorial services), insurance, personnel expenses, taxes other than payroll taxes, professional fees, passenger refreshments, supplies, bad debts and communication costs.

Our operating margin, which measures operating income as a percentage of operating revenues, improved significantly in 2002 and was higher than all of the major U.S. airlines, according to reports by these airlines.

The highest levels of traffic and revenue on our routes to and from Florida are generally realized from October through April and on our routes to and from the western United States in the summer. Many of our areas of operations in the Northeast experience bad weather conditions in the winter, causing increased costs associated with deicing aircraft, cancelled flights and accommodating displaced passengers. Our Florida routes experience bad weather conditions in the summer and fall due to thunderstorms and hurricanes. As we enter new markets, we could be subject to additional seasonal variations. Given our high proportion of fixed costs, this seasonality may cause our results of operations to vary from quarter to quarter.