UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended September 30, 2009
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the transition period from 
to
 
 Commission
file number 1-15991
 
 
 
 AIRTRAN
HOLDINGS, INC.
 (Exact
name of registrant as specified in its charter)
 
 NEVADA
              
              58-2189551(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (IRS
      Employer
                Identification
      No.)9955
      AirTran Boulevard, Orlando, Florida
              
              32827(Address
      of principal executive offices)
              
              (Zip
      Code)
 
 Registrant’s
telephone number, including area code: (407) 318-5600
 
 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   ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).      Yeso
       No  o
      N/A  x
 
 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 in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer   ̈    Accelerated
filer  x    Non-accelerated
filer   ̈    Smaller
reporting company   ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 
 Number of
shares of Common Stock outstanding as of the close of business on October 19,
2009: 134,554,110  par value $0.001
 
 
 
 
 
 AIRTRAN
HOLDINGS, INC.
 Form 10-Q
 For
the Quarter Ended September 30, 2009
 
 TABLE
OF CONTENTS
 
 PAGEPART
      I.  FINANCIAL INFORMATIONItem 1.
              Financial
      Statements (unaudited)Condensed
      Consolidated Statements of Operations – Three and nine months ended
      September 30, 2009 and 2008
              
              
              1Condensed
      Consolidated Balance Sheets – September 30, 2009 and December 31,
      2008
              
              
              2Condensed Consolidated Statements of Cash Flows – Nine months ended
      September 30, 2009 and 2008
              
              
              4Condensed Consolidated Statement of Stockholders’ Equity – Nine months
      ended September 30, 2009
              
              
              5Notes
      to Condensed Consolidated Financial Statements
              
              
              6Item 2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              27Item 3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              
              44Item 4.
              Controls
      and Procedures
              
              
              46PART II.  OTHER
      INFORMATIONItem 1.
              Legal
      Proceedings
              
              
              47Item 1A.
              Risk
      Factors
              
              
              47Item 2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              
              47Item 3.
              Defaults
      Upon Senior Securities
              
              
              47Item 4.
              Submission
      of Matters to a Vote of Security Holders
              
              
              48Item 5.
              Other
      Information
              
              
              48Item 6.
              Exhibits
              
              
              48SignaturesExhibit
      ListingEx
      – 10.65 (Amendment No. 1 to Amended and Restated Revolving Line of Credit
      and Reimbursement Agreement)Ex
      – 31.1 (Exhibit 31.1 CEO Certification)Ex
      – 31.2 (Exhibit 31.2 CFO Certification)Ex
      – 32.1 (Exhibit 32.1 CEO and CFO Certifications)
 
 
 AirTran
Holdings, Inc.
 Condensed
Consolidated Statements of Operations
 (In
thousands, except per share data)
 (Unaudited)
 
 Three
      months ended
                September 30,
              
              
              Nine
      months ended
                September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008(As
      Adjusted, See Note 1)
              
              
              
              
              
              (As
      Adjusted, See Note 1)Operating
      Revenues:Passenger
              
              $
              529,435
              
              
              $
              635,316
              
              
              $
              1,552,507
              
              
              $
              1,860,379Other
              
              
              67,967
              
              
              
              37,976
              
              
              
              190,503
              
              
              
              102,684Total
      operating revenues
              
              
              597,402
              
              
              
              673,292
              
              
              
              1,743,010
              
              
              
              1,963,063Operating
      Expenses:Aircraft
      fuel
              
              
              190,235
              
              
              
              363,882
              
              
              
              483,008
              
              
              
              1,000,451Salaries,
      wages and benefits
              
              
              122,895
              
              
              
              120,170
              
              
              
              363,627
              
              
              
              362,469Aircraft
      rent
              
              
              60,632
              
              
              
              60,542
              
              
              
              181,621
              
              
              
              182,234Maintenance,
      materials and repairs
              
              
              49,973
              
              
              
              40,022
              
              
              
              145,884
              
              
              
              124,795Distribution
              
              
              25,306
              
              
              
              26,857
              
              
              
              70,540
              
              
              
              77,081Landing
      fees and other rents
              
              
              37,573
              
              
              
              36,196
              
              
              
              108,722
              
              
              
              104,990Aircraft
      insurance and security services
              
              
              5,440
              
              
              
              5,470
              
              
              
              15,756
              
              
              
              16,310Marketing
      and advertising
              
              
              9,349
              
              
              
              9,948
              
              
              
              30,947
              
              
              
              31,114Depreciation
              
              
              13,899
              
              
              
              15,445
              
              
              
              42,120
              
              
              
              43,558(Gain)
      loss on disposition of assets
              
              
              (6,379
              )
              
              
              (9,254
              )
              
              
              (3,073
              )
              
              
              (15,797
              )Impairment
      of goodwill
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,350Other
      operating
              
              
              51,446
              
              
              
              51,427
              
              
              
              152,952
              
              
              
              156,748Total
      operating expenses
              
              
              560,369
              
              
              
              720,705
              
              
              
              1,592,104
              
              
              
              2,092,303Operating
      Income (Loss)
              
              
              37,033
              
              
              
              (47,413
              )
              
              
              150,906
              
              
              
              (129,240
              )Other
      (Income) Expense:Interest
      income
              
              
              (3,835
              )
              
              
              (908
              )
              
              
              (5,212
              )
              
              
              (5,372
              )Interest
      expense
              
              
              20,089
              
              
              
              22,592
              
              
              
              61,068
              
              
              
              63,335Capitalized
      interest
              
              
              (179
              )
              
              
              (1,202
              )
              
              
              (1,244
              )
              
              
              (7,028
              )Net
      (gains) losses on derivative financial instruments
              
              
              10,281
              
              
              
              41,520
              
              
              
              (17,944
              )
              
              
              3,150Other
              
              
              18
              
              
              
              —
              
              
              
              (4,278
              )
              
              
              —Other
      (income) expense, net
              
              
              26,374
              
              
              
              62,002
              
              
              
              32,390
              
              
              
              54,085Income
      (Loss) Before Income Taxes
              
              
              10,659
              
              
              
              (109,415
              )
              
              
              118,516
              
              
              
              (183,325
              )Income
      tax expense (benefit)
              
              
              233
              
              
              
              (14,862
              )
              
              
              945
              
              
              
              (38,585
              )Net
      Income (Loss)
              
              $
              10,426
              
              
              $
              (94,553
              )
              
              $
              117,571
              
              
              $
              (144,740
              )Earnings
      (Loss) per Common ShareBasic
              
              $
              0.09
              
              
              $
              (0.81
              )
              
              $
              0.98
              
              
              $
              (1.36
              )Diluted
              
              $
              0.08
              
              
              $
              (0.81
              )
              
              $
              0.86
              
              
              $
              (1.36
              )Weighted-average
      Shares OutstandingBasic
              
              
              120,482
              
              
              
              117,177
              
              
              
              120,158
              
              
              
              106,170Diluted
              
              
              140,625
              
              
              
              117,177
              
              
              
              139,617
              
              
              
              106,170
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
 
 1
 
 AirTran
Holdings, Inc.
 Condensed
Consolidated Balance Sheets
 (In
thousands)
 
 September
      30, 2009
              
              
              December
      31, 2008(Unaudited)
              
              
              (As
      Adjusted, See Note 1)ASSETSCurrent
      Assets:Cash
      and cash equivalents
              
              $
              406,085
              
              
              $
              315,078Short-term
      investments
              
              
              2,156
              
              
              
              19,937Restricted
      cash
              
              
              55,216
              
              
              
              86,126Deposits
      held by counterparties to derivative financial instruments
              
              
              —
              
              
              
              48,820Accounts
      receivable, net
              
              
              48,312
              
              
              
              38,301Spare
      parts, materials and supplies, net
              
              
              16,273
              
              
              
              15,428Prepaid
      and stored fuel
              
              
              30,466
              
              
              
              16,004Derivative
      financial instruments
              
              
              32,127
              
              
              
              3,420Prepaid
      expenses and other current assets
              
              
              35,453
              
              
              
              34,053Deferred
      income taxes
              
              
              7,992
              
              
              
              7,992Total
      current assets
              
              
              634,080
              
              
              
              585,159Property
      and Equipment:Flight
      equipment
              
              
              1,382,907
              
              
              
              1,310,874Less:
      Accumulated depreciation and amortization
              
              
              (155,265
              )
              
              
              (125,663
              )1,227,642
              
              
              
              1,185,211Purchase
      deposits for flight equipment
              
              
              42,920
              
              
              
              64,032Other
      property and equipment
              
              
              116,548
              
              
              
              108,186Less:
      Accumulated depreciation and amortization
              
              
              (66,721
              )
              
              
              (55,642
              )49,827
              
              
              
              52,544Total
      property and equipment
              
              
              1,320,389
              
              
              
              1,301,787Other
      Assets:Long-term
      investments
              
              
              —
              
              
              
              5,497Trademarks
      and trade names
              
              
              21,567
              
              
              
              21,567Debt
      issuance costs
              
              
              13,123
              
              
              
              14,201Prepaid
      aircraft rent
              
              
              83,904
              
              
              
              87,003Derivative
      financial instruments
              
              
              11,998
              
              
              
              —Other
      assets
              
              
              71,969
              
              
              
              70,048Total
      assets
              
              $
              2,157,030
              
              
              $
              2,085,262
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 2
 
 AirTran
Holdings, Inc.
 Condensed
Consolidated Balance Sheets (Continued)
 (In
thousands)
 
 September
      30, 2009
              
              
              December
      31, 2008(Unaudited)
              
              
              (As
      Adjusted, See Note 1)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              60,307
              
              
              $
              81,557Accrued
      and other liabilities
              
              
              142,823
              
              
              
              147,889Air
      traffic liability
              
              
              268,417
              
              
              
              252,055Derivative
      financial instruments
              
              
              24,569
              
              
              
              69,646Current
      maturities of capital lease obligations
              
              
              1,070
              
              
              
              835Borrowing
      under revolving line of credit facility
              
              
              125,000
              
              
              
              90,000Current
      maturities of long-term debt
              
              
              152,714
              
              
              
              69,865Total
      current liabilities
              
              
              774,900
              
              
              
              711,847Long-term
      capital lease obligations
              
              
              15,082
              
              
              
              16,031Long-term
      debt
              
              
              818,291
              
              
              
              927,325Other
      liabilities
              
              
              113,898
              
              
              
              120,342Deferred
      income taxes
              
              
              7,992
              
              
              
              7,992Derivative
      financial instruments
              
              
              12,054
              
              
              
              20,616Commitments
      and ContingenciesStockholders’
      Equity:Preferred
      stock
              
              
              —
              
              
              
              —Common
      stock
              
              
              123
              
              
              
              120Additional
      paid-in capital
              
              
              530,091
              
              
              
              524,800Accumulated
      deficit
              
              
              (100,480
              )
              
              
              (218,051
              )Accumulated
      other comprehensive loss
              
              
              (14,921
              )
              
              
              (25,760
              )Total
      stockholders’ equity
              
              
              414,813
              
              
              
              281,109Total
      Liabilities and Stockholders’ Equity
              
              $
              2,157,030
              
              
              $
              2,085,262
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 3
 
 AirTran
Holdings, Inc.
 Condensed
Consolidated Statements of Cash Flows
 (In
thousands)
 (Unaudited)
 Nine
      Months Ended September 30,2009
              
              
              2008(As
      Adjusted, See Note 1)Operating
      activities:Net
      income (loss)
              
              $
              117,571
              
              
              $
              (144,740
              )Adjustments
      to reconcile net income (loss) to net cash provided by (used for)
      operating activities:Depreciation
      and amortization
              
              
              56,611
              
              
              
              54,440Amortization
      of deferred gains from sales/leaseback of aircraft
              
              
              (3,883
              )
              
              
              (3,429
              )Provisions
      for uncollectible accounts
              
              
              621
              
              
              
              1,026Deferred income taxes
              
              
              945
              
              
              
              (38,585
              )Impairment
      of goodwill
              
              
              —
              
              
              
              8,350(Gain)
      loss on asset dispositions
              
              
              (3,272
              )
              
              
              (15,671
              )Gain
      on debt extinguishment
              
              
              (4,278
              )
              
              
              —Other
              
              
              1,228
              
              
              
              4,472Changes
      in certain assets and liabilities:Restricted
      cash
              
              
              30,910
              
              
              
              (42,365
              )Derivative
      financial instruments
              
              
              (83,563
              )
              
              
              26,564Accounts receivable
              
              
              (12,582
              )
              
              
              (16,773
              )Spare parts, materials and supplies
              
              
              (1,408
              )
              
              
              (1,420
              )Prepaid and stored fuel
              
              
              (14,462
              )
              
              
              (19,524
              )Deposits
      held by counterparties to derivative financial instruments
              
              
              48,820
              
              
              
              —Prepaid
      aircraft rent
              
              
              1,069
              
              
              
              (5,673
              )Other
      assets
              
              
              (7,300
              )
              
              
              (8,914
              )Accounts payable, accrued and other liabilities
              
              
              (21,079
              )
              
              
              11,550Air
      traffic liability
              
              
              16,362
              
              
              
              97,564Net
      cash provided by (used for) operating activities
              
              
              122,310
              
              
              
              (93,128
              )Investing
      activities:Purchase
      of available-for-sale-securities
              
              
              —
              
              
              
              (30,304
              )Sale
      of available-for-sale-securities
              
              
              26,623
              
              
              
              89,496Purchases
      of property and equipment
              
              
              (86,092
              )
              
              
              (130,810
              )Return
      (payment) of aircraft purchase deposits, net
              
              
              21,112
              
              
              
              52,119Proceeds
      from sales of aircraft
              
              
              —
              
              
              
              206,211Other
              
              
              2,225
              
              
              
              1,000Net
      cash provided by (used for) investing activities
              
              
              (36,132
              )
              
              
              187,712Financing
      activities:Issuance
      of long-term debt
              
              
              49,427
              
              
              
              99,942Payments
      on long-term debt and capital lease obligations
              
              
              (80,860
              )
              
              
              (217,161
              )Borrowings
      under revolving line of credit facility
              
              
              925,000
              
              
              
              —Repayment
      of borrowings under revolving line of credit facility
              
              
              (890,000
              )
              
              
              —Net
      proceeds from issuance of common stock
              
              
              —
              
              
              
              74,669Proceeds
      from issuance of stock for exercise of options and under employee stock
      purchase plan
              
              
              1,389
              
              
              
              1,269Other
              
              
              (127
              )
              
              
              —Net
      cash provided by (used for) financing activities
              
              
              4,829
              
              
              
              (41,281
              )Net
      change in cash and cash equivalents
              
              
              91,007
              
              
              
              53,303Cash
      and cash equivalents at beginning of period
              
              
              315,078
              
              
              
              206,873Cash
      and cash equivalents at end of period
              
              $
              406,085
              
              
              $
              260,176Supplemental
      Disclosure of Cash Flow Activities:Non-cash
      investing and financing activities:Purchase
      of equipment in exchange for debt
              
              $
              —
              
              
              $
              178,550
 See
accompanying Notes to Condensed Consolidated Financial Statements.
 4
 
 AirTran
Holdings, Inc.
 Condensed
Consolidated Statement of Stockholders’ Equity
 (In
thousands)
 (Unaudited)
 
 Common
      Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Accumulated
      Deficit
              
              
              Accumulated
                Other
                Comprehensive
                Income
      (Loss)
              
              Total
                Stockholders’
      EquityShares
              
              
              AmountBalance
      at January 1, 2009 (As Adjusted, See Note 1)
              
              
              119,550
              
              
              $
              120
              
              
              $
              524,800
              
              
              $
              (218,051
              )
              
              $
              (25,760
              )
              $
              281,109Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              117,571
              
              
              
              —
              
              
              117,571Unrealized
      gain on derivative instruments, net of income taxes of $0
      million
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              10,782
              
              
              10,782Other
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              57
              
              
              57Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              128,410Issuance
      of common stock for exercise of options
              
              
              94
              
              
              
              —
              
              
              
              530
              
              
              
              —
              
              
              
              —
              
              
              530Stock-based
      compensation
              
              
              525
              
              
              
              —
              
              
              
              4,445
              
              
              
              —
              
              
              
              —
              
              
              4,445Issuance
      of common stock under employee stock purchase plan
              
              
              160
              
              
              
              —
              
              
              
              859
              
              
              
              —
              
              
              
              —
              
              
              859Repurchase
      of 7% convertible notes, net of income taxes of $0.9
    million
              
              
              —
              
              
              
              —
              
              
              
              (969
              )
              
              
              —
              
              
              
              —
              
              
              (969
              )Issuance
      of common stock for detachable stock warrants
              
              
              2,900
              
              
              
              3
              
              
              
              426
              
              
              
              —
              
              
              
              —
              
              
              429Balance
      at September 30, 2009
              
              
              123,229
              
              
              $
              123
              
              
              $
              530,091
              
              
              $
              (100,480
              )
              
              $
              (14,921
              )
              $
              414,813
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 5
 
  AirTran
Holdings, Inc.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 
 Note
1 –Accounting Policies, Business and October 2009 Financings
 
 Basis
of Presentation
 
 Our
unaudited Condensed Consolidated Financial Statements include the accounts of
AirTran Holdings, Inc. (the Company, AirTran, or Holdings) and our wholly-owned
subsidiaries, including our principal subsidiary, AirTran Airways, Inc. (AirTran
Airways or Airways) (collectively, we, our, or us). All significant intercompany
accounts and transactions have been eliminated in consolidation for all periods
presented. In the opinion of management, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments, which, except as
otherwise disclosed, are of a normal recurring nature, necessary to present
fairly the Company’s financial position, results of operations, cash flows and
stockholders’ equity for the periods presented. Certain information and footnote
disclosures normally included in the annual financial statements prepared in
accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission (SEC) for reports on Form 10-Q. These
unaudited interim financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended
December 31, 2008 included in our report on Form 8-K filed with the SEC on
April 24, 2009.
 
 The
preparation of the accompanying unaudited Condensed Consolidated Financial
Statements in conformity with U.S. generally accepted accounting principles
requires us to make estimates and assumptions that affect the amounts reported
in the Condensed Consolidated Financial Statements and accompanying Notes.
Actual results may differ from those estimates and such differences may be
material to the Condensed Consolidated Financial Statements.
 
 We manage
our operations on a system-wide basis due to the interdependence of our route
structure in the various markets we serve. Because we offer only one service
(i.e., air transportation), management has concluded that we only have one
segment of business.
 
 Business
 
 Through
AirTran Airways, we offer scheduled airline services, using Boeing B717-200
aircraft (B717) and Boeing B737-700 aircraft (B737), to 62 locations throughout
the United States, including San Juan, Puerto Rico, and to Cancun, Mexico.
Additionally, we will commence scheduled services to Aruba, Key West, Florida,
and Nassau, The Bahamas in December 2009 and to Lexington, Kentucky and Montego
Bay, Jamaica in February 2010. Approximately half of our flights originate or
terminate at our largest hub in Atlanta, Georgia and we serve a number of
markets with non-stop service from our focus cities of Baltimore, Maryland,
Milwaukee, Wisconsin and Orlando, Florida. During the first nine months of 2009,
we initiated new service to Allentown/Bethlehem, Pennsylvania, Asheville, North
Carolina, Atlantic City, New Jersey, Branson, Missouri, Charleston, West
Virginia, Knoxville, Tennessee, and Cancun, Mexico. Air travel in our markets
tends to be seasonal, with the highest levels occurring during the winter months
to Florida and the summer months to the Northeastern and Western United States.
The second quarter tends to be our strongest revenue quarter.
 
 
 6
 
 October
2009 Financings
 
 During
October 2009, we completed a public offering of $115.0 million of our 5.25%
convertible senior notes due in 2016 and a public offering of 11.3 million
shares of our common stock at a price of $5.08 per share. The net proceeds from
the two offerings, which aggregated $166.3 million, are being used for general
corporate purposes including improving our overall liquidity. See Note 4 –
“Debt” for a description of the 5.25% convertible notes.
 
 New
Accounting Pronouncements
 
 In June
2009, the FASB issued Accounting Standards
Codification (ASC, or the Codification) as the source of authoritative
generally accepted accounting principles (GAAP) recognized by the FASB for
non-governmental entities. The Codification is effective for financial
statements issued for reporting periods that end after September 15, 2009. The
Codification superseded all then-existing non-SEC accounting and reporting
standards. The Codification did not change rules and interpretations of the SEC
which are also sources of authoritative GAAP for SEC registrants. Because the
Codification did not change GAAP, the Codification had no impact on our
consolidated financial statements or footnotes.
 
 On
January 1, 2009, we adopted ASC 470-20, “Debt with Conversion and Other Options
– Cash Conversion” (Cash Conversion Standard), regarding the accounting for
convertible debt instruments that may be settled in cash upon conversion. The
Cash Conversion Standard requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
nonconvertible debt borrowing rate, unless the embedded conversion option is
required to be separately accounted for as a derivative. The Cash Conversion
Standard required retroactive application to all periods presented. The adoption
impacts the accounting for our 7.0% convertible notes due 2023 and will result
in the recognition of additional financial accounting interest expense of
approximately $7.1 million for 2009 and $3.6 million for 2010, based on the
assumption that the 7.0% convertible notes will be settled in 2010, after giving
effect to the 7% convertible notes repurchased by the Company as of September
30, 2009. On April 24, 2009, we filed a report on Form 8-K with the SEC which
included our consolidated financial statements as of December 31, 2008 and 2007
and for each of the three years in the period ended December
31, 2008 which had been adjusted to apply the Cash Conversion Standard
retroactively. As a result of the adoption, we reduced net income for the three
and nine months ending September 30, 2009 by $1.9 million and $7.0 million,
respectively, and reduced diluted earnings per share by $0.01 per share and
$0.05 per share, respectively. The adoption has no impact on our debt service
payments.
 
 
 7
 
 The
following selected financial statement line items for the three and nine months
ended September 30, 2008, and as of December 31, 2008, were significantly
affected by the change in accounting principle (in thousands, except per share
data):
 
 Three
      months ended
                September
      30, 2008
              
              
              Effect
      of ChangeAs
      Adjusted
              
              
              As
      Previously ReportedStatement
      of Operations:Interest
      expense
              
              $
              22,592
              
              
              $
              20,708
              
              
              $
              1,884Capitalized
      interest
              
              
              (1,202
              )
              
              
              (751
              )
              
              
              (451
              )Loss
      before income taxes
              
              
              (109,415
              )
              
              
              (106,682
              )
              
              
              (2,733
              )Income
      tax expense (benefit)
              
              
              (14,862
              )
              
              
              405
              
              
              
              (15,267
              )Net
      loss
              
              
              (94,553
              )
              
              
              (107,087
              )
              
              
              12,534Loss
      per Common Share:Basic
              
              $
              (0.81
              )
              
              $
              (0.91
              )
              
              $
              0.10Diluted
              
              $
              (0.81
              )
              
              $
              (0.91
              )
              
              $
              0.10
 
 Nine
      months ended
                September
      30, 2008
              
              
              Effect
      of ChangeAs
      Adjusted
              
              
              As
      Previously ReportedStatement
      of Operations:Interest
      expense
              
              $
              63,335
              
              
              $
              57,890
              
              
              $
              5,445Capitalized
      interest
              
              
              (7,028
              )
              
              
              (4,863
              )
              
              
              (2,165
              )Loss
      before income taxes
              
              
              (183,325
              )
              
              
              (177,669
              )
              
              
              (5,656
              )Income
      tax benefit
              
              
              (38,585
              )
              
              
              (22,231
              )
              
              
              (16,354
              )Net
      loss
              
              
              (144,740
              )
              
              
              (155,438
              )
              
              
              10,698Loss
      per Common Share:Basic
              
              $
              (1.36
              )
              
              $
              (1.46
              )
              
              $
              0.10Diluted
              
              $
              (1.36
              )
              
              $
              (1.46
              )
              
              $
              0.10
 
 December 31,
      2008
              
              
              Effect
      of ChangeAs
      Adjusted
              
              
              As
      Previously ReportedBalance
      Sheet:Flight
      equipment
              
              $
              1,310,874
              
              
              $
              1,291,155
              
              
              $
              19,719Long-term
      debt
              
              
              927,325
              
              
              
              940,569
              
              
              
              (13,244
              )Additional
      paid-in capital
              
              
              524,800
              
              
              
              497,390
              
              
              
              27,410Accumulated
      deficit
              
              
              (218,051
              )
              
              
              (225,745
              )
              
              
              7,694
 
 On June
30, 2009, we adopted ASC 855-10-50 “Subsequent Events - Disclosure”
(Subsequent Events Standard), which established general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued.The Subsequent Events
Standard defines two types of subsequent events. The effects of events or
transactions that provide additional evidence about conditions that existed at
the balance sheet date, including the estimates inherent in the process of
preparing financial statements, are recognized in the financial statements. The
effects of events that provide evidence about conditions that did not exist at
the date of the balance sheet but arose after that date are not recognized in
the financial statements. We have reviewed subsequent events through October 26,
2009 (the date of the issuance of the accompanying condensed consolidated
financial statements).
 
 8
 
 In June
2009, the FASB issued Statement No. 167 (SFAS 167),Accounting for Variable
Interest Entities. SFAS 167 amends FASB Interpretation No. 46(R) (FIN No.
46(R)), Consolidation of
Variable Interest Entities, to require a comprehensive qualitative
analysis to be performed to determine whether a holder of variable interests in
a variable interest entity also has a controlling financial interest in that
entity. In addition, it requires the same such analysis be applied to entities
previously designated as qualified special-purpose entities under SFAS 140. SFAS
167 is effective as of the start of the first annual reporting period beginning
after November 15, 2009, for interim periods within the first annual reporting
period, and for all subsequent annual and interim reporting periods. We do not
expect the adoption of SFAS 167 to have a material impact on our consolidated
financial position, results of operations, or cash flows.
 
 Note
2 – Commitments and Contingencies
 
 Aircraft
Related Commitments, Financing Arrangements and Transactions
 
 In 2008,
to respond to the challenges of a volatile fuel cost environment, a recessionary
macroeconomic environment, and adverse capital market conditions, we recast our
business plan to defer previously planned growth. We reduced capacity
principally by deferring scheduled aircraft deliveries, reducing utilization,
and by selling B737 aircraft. In 2008, we entered into agreements to defer
delivery dates for 37 B737 aircraft originally scheduled for delivery between
2008 and 2012 to delivery dates between 2013 and 2016. In addition, during 2008,
we sold eight B737 aircraft. Of the eight B737 aircraft we sold in 2008, two
were new aircraft that we took delivery of and subsequently sold and six were
used aircraft in our fleet. During the nine months ended September 30, 2008, we
took delivery of eight aircraft, including the aforementioned two new aircraft
sold in 2008. We had four aircraft scheduled for delivery during 2009. During
the nine months ended September 30, 2009, we permitted The Boeing Company
(“Boeing”) to sell two of the B737 aircraft that were scheduled for delivery to
us to a foreign airline, pursuant to which we were released from our obligation
to purchase the aircraft. The amendment of our B737 purchase agreement with
respect to these two aircraft occurred in the second quarter of 2009. During
September 2009, we took delivery of two B737 aircraft that we had previously
agreed to sell to another foreign airline. We took delivery of these two
aircraft under our purchase agreement with Boeing because the counterparty
defaulted on its obligation to purchase the two aircraft. We placed these
aircraft in service in October 2009. As a consequence of these actions, we
expect our 2009 capacity, as measured by available seat miles, to be two to
three percent less than our 2008 capacity.
  During
the nine months ended September 30, 2009, we recognized net gains on the
disposition of assets of $3.1 million, including: $2.4 million loss for the
write-off of capitalized interest related to our release in the second quarter
of our obligation to purchase two B737 aircraft which Boeing sold to a foreign
airline; and, $6.6 million gain related to the deposits we previously received
from the potential buyer who defaulted on its obligation to purchase two B737
aircraft in the third quarter. Gain on disposition of assets for the nine months
ended September 30, 2008, consisting primarily of gains on the sale of five
aircraft, was $15.8 million.
 
 9
 
 The table
below summarizes, as of September 30, 2009, all aircraft scheduled for delivery
to us:
 
 Scheduled
                Firm Aircraft Deliveries
                B737Remainder
      of 2009
              
              
              -2010
              
              
              -2011
              
              
              72012
              
              
              82013
              
              
              62014
              
              
              122015
              
              
              82016
              
              
              10Total
              
              
              51
 
 As of
September 30, 2009, our aircraft purchase commitments for the remainder of 2009
and for the next five years and thereafter, in aggregate, are (in millions):
2009—$7; 2010—$50; 2011—$270; 2012—$335; 2013—$260; 2014—$505; and
thereafter—$715. These amounts include payment commitments, including payment of
pre-delivery deposits, for aircraft on firm order. Aircraft purchase commitments
include the forecasted impact of contractual price escalations. While our
intention is to finance the aircraft on order through either debt financing,
lease financing, or both, we have not yet arranged for any such financing. We
cannot assure you that sufficient financing will be available to us for our
future B737 aircraft deliveries.
 
 Our B737
contract with Boeing requires us to make pre-delivery deposits to Boeing.
Although we typically have financed a significant portion of our pre-delivery
deposit requirements with debt from banks or other financial institutions, we
currently have no such financing in place for future deliveries. Given the
current status of the financial markets, we cannot provide assurance that
satisfactory financing will be available to us when we are obligated to make
pre-delivery deposit payments.
 
 In
October 2008, as part of our agreement to defer certain aircraft deliveries and
obtain financing for 2009 aircraft deliveries, we granted an affiliate of Boeing
the right to require us to lease, for a period not to exceed ten years, up to
five additional B717 aircraft. It is not expected that AirTran will be required
to accept delivery of any B717 aircraft in 2009. If such affiliate of Boeing
exercises its right to require us to lease any B717 aircraft, we have the option
to cancel a like number of B737 aircraft we have on firm order for each such
B717 aircraft.
 
 In
September 2009, we granted Boeing the right to terminate the leases of up to two
B717 aircraft before the scheduled lease expiration. To date Boeing has not yet
elected to terminate any B717 aircraft leases.
 
 Credit
Card Processing Arrangements
 
 We have
agreements with organizations that process credit card transactions arising from
the purchase of air travel by customers of Airways. Each of our agreements with
our credit card processors allows, under specified conditions, the processor to
retain cash related to future travel that such processor otherwise would remit
to us (a holdback). Holdbacks are classified as restricted cash on our condensed
consolidated balance sheet. Once the customer travels, any related holdback is
remitted to us.
 
 
 10
 
 Each
agreement with our two largest credit card processors (based on volumes
processed for us) has been amended in 2009 resulting in changes to contractual
terms generally favorable to us. Our agreement with our largest credit card
processor now expires December 31, 2010. Each agreement with our two largest
credit card processors provides that a processor may holdback amounts that would
otherwise be remitted to us in the event that a processor reasonably determines
that there has been a material adverse occurrence or certain other events occur.
Our agreement with our largest credit card processor also provides that the
processor may holdback amounts that would otherwise
be remitted to us in the event that our aggregate unrestricted cash and
investments (as defined) falls below agreed upon levels. To the extent that we
achieve specified aggregate unrestricted cash and investment levels, our
agreement with our largest credit card processor also provides for a reduction
or elimination of the percent of its exposure that such processor is currently
entitled to holdback. We have the contractual right to reduce the amounts which
are otherwise withheld by our two largest credit card processors to the extent
that we provide the applicable processor with a letter or letters of credit. As
of September 30, 2009, a $50 million letter of credit had been issued for the
benefit of our largest credit card processor under our letter of credit
facility.
 
 As of
September 30, 2009: we had advance ticket sales of approximately $271 million
related to all credit card sales; we were in compliance with our credit card
processing agreements; and, our two largest processors were holding back no cash
remittances from us. Our maximum potential exposure to cash holdbacks by our two
largest credit card processors, based upon advance ticket sales as of September
30, 2009, was $190.3million (after
considering the $50 million letter of credit issued in favor of our largest
credit card processor). Even had there been no letter of credit issued for the
benefit of our largest credit card processor, as of October 19, 2009, neither of
our two largest credit card processors would have been entitled to holdback any
cash remittances from us.
 
 General
Indemnifications
 
 We are
party to many routine contracts under which we indemnify third parties for
various risks. We have not accrued any liability for any of these indemnities,
as the amounts are not determinable or estimable. Historically, we have not
incurred significant costs related to such indemnifications. These indemnities
consist of the following:
 
 ·
              Certain
      of our debt agreements related to aircraft-secured notes payable through
      2021 contain language, whereby, we have agreed to indemnify certain
      holders of certificates evidencing the debt associated with such notes, as
      necessary, to compensate them for any costs incurred by, or any reduction
      in receivables due to, such certificate holders resulting from broadly
      defined regulatory changes that impose or modify any reserve, special
      deposit or similar requirements relating to any extensions of credit or
      other assets of or any deposits with or other liabilities of such
      certificate holders. Additionally, if it becomes unlawful for such
      certificate holders to make or maintain the investment or credit evidenced
      by the certificates, we have agreed to pay such certificate holders an
      amount necessary to cause the interest rate with respect to the
      certificates to be a rate per annum equal to 4.88 percent over the rate
      specified by such certificate holders as the cost to them of obtaining
      funds in dollars in the United States in an amount equal to the pool
      balance of the certificates. The maximum potential payment under these
      indemnities cannot be determined.
 
 ·
              Our
      aircraft lease transaction documents contain customary indemnities
      concerning withholding taxes under which we are responsible, in some
      circumstances if withholding taxes are imposed, to pay, in the form of
      additional rent, such amounts as are necessary to ensure that the lessor
      still receives, after taxes, the rent stipulated in the lease agreements.
      These provisions apply on leases expiring through 2022. The maximum
      potential payment under these indemnities cannot be
      determined.
 
 ·
              In
      our aircraft financing agreements, we typically indemnify the financing
      parties, the trustees, if any, acting on their behalf, and other related
      parties against certain liabilities that arise from the manufacture,
      design, ownership, financing, use, operation, and maintenance of the
      aircraft, including tort liabilities, whether or not these liabilities
      arise out of or relate to the negligence of these indemnified parties,
      except for liabilities due to their own gross negligence or willful
      misconduct. We believe that we are covered by insurance (subject to
      deductibles) for most tort liabilities and related indemnities, as
      described above with respect to the aircraft we operate. Additionally, if
      there is a change in the law which results in the imposition of any
      reserve, capital adequacy, special deposit, or similar requirement which
      will increase the cost to the lender, we are obligated to pay the lender
      the additional amount necessary to compensate the lender for the actual
      cost increase.
   11
  ·
              We
      have various leases with respect to real property and various agreements
      among airlines relating to fuel consortia or fuel farms at airports in
      which we have agreed to standard language indemnifying the lessor against
      environmental liabilities associated with the real property covered under
      the agreement, even if we are not the party responsible for the
      environmental damage. In the case of fuel consortia at airports, these
      indemnities are generally joint and several among the airlines. We cannot
      quantify the maximum potential exposure under these indemnities and we do
      not currently have liability insurance that protects us against
      environmental damages.
 
 ·
              Under
      certain contracts with third parties, we indemnify the third party against
      legal liability arising out of an action by a third party. The terms of
      these contracts vary and the potential exposure under these indemnities
      cannot be determined. Generally, we have liability insurance protecting us
      from obligations undertaken under these
  indemnities.
 
 Taxes
 
 We remit
a variety of taxes and fees to various governmental authorities including:
income taxes; transportation fees and taxes collected from our customers;
property taxes; sales and use taxes; payroll taxes; and fuel taxes. The taxes
and fees remitted by us are subject to review and audit by the applicable
governmental authorities which could result in liability for additional
assessments. Contingencies for taxes, which are not based on income, are
accounted for in accordance with ASC 450-10,“Contingencies”
(Contingencies Standard). Uncertain income tax positions taken on income tax
returns are accounted for in accordance with ASC 740-10, “Income Taxes” (Income
Taxes Standard). Although management believes that the positions taken on
previously filed tax returns are reasonable, we nevertheless have recorded
accrued liabilities in recognition that various taxing authorities may challenge
certain of the positions we have taken, which may also potentially result in
additional liabilities for taxes and interest in excess of accrued liabilities.
These accrued liabilities are reviewed periodically and are adjusted as events
occur that affect the estimates, such as: the availability of new information;
the lapsing of applicable statutes of limitations; the conclusion of tax audits;
the measurement of additional estimated liability based on current calculations;
the identification of new tax contingencies; or the rendering of relevant court
decisions.
 
 Litigation
 
 Acomplaint
alleging violations of federal antitrust laws and seeking certification as a
class action was filed against Delta Air Lines, Inc. and AirTran in the United
States District Court for the Northern District of Georgia in Atlanta on May 22,
2009. The complaint alleges, among other things, that AirTran conspired with
Delta in imposing $15-per-bag fees for the first item of checked luggage. The
complaint seeks treble damages on behalf of a putative class of persons or
entities in the United States who directly paid Delta and/or AirTran such fees
on domestic flights beginning December 5, 2008. The complaint also seeks
injunctive relief and attorneys fees. Subsequent to the filing of that initial
complaint, various other nearly identical complaints also seeking certification
as class actions were filed in federal district courts in Atlanta, Orlando,
Florida, and Las Vegas, Nevada. All of the cases have now been consolidated in
federal district court in Atlanta. AirTran denies all allegations of wrongdoing
and intends to defend vigorously any and all such allegations.
 
 In
addition to the above litigation, AirTran is a party to other claims, and
litigation incidental to its business, for which it is not currently possible to
determine the ultimate liability, if any. While the outcome of such claims and
litigation is subject to uncertainty, based on an evaluation of information
currently available and consultation with legal counsel, management believes
that resolution of such claims, and litigation is not likely to have a material
effect on the financial position, cash flows, or results of operations of the
Company. The Company expenses legal costs as they are incurred.
   12
 Restricted
Cash and Letters of Credit
 
 Restricted
cash consists of amounts escrowed related to aircraft leases, amounts securing
letters of credit, credit card holdbacks on advance ticket sales, cash escrowed
for future interest payments and collateral to support derivative financial
arrangements. As of September 30, 2009, $17.3 million of restricted cash relates
to outstanding letters of credit, primarily for airport facilities and
insurance.
 
 We also
have a letter of credit facility which provides for a financial institution to
issue letters of credit for the benefit of our credit card processors. The
letter of credit facility is supported by a variety of assets. As of September
30, 2009, no amount was drawn against the $50 million letter of
credit.
 
 Note
3 – Financial Instruments
 
 Financial
instruments that potentially subject us to significant concentrations of credit
risk consist principally of cash and cash equivalents, restricted cash,
short-term and long-term investments, accounts receivable, and derivative
financial instruments (including deposits held by counterparties). We maintain
cash and cash equivalents and short-term investments in what we believe are high
credit-quality financial institutions or in what we believe are in
short-duration, high-quality debt securities. Investments are stated at fair
value. We periodically evaluate the relative credit standing of those financial
institutions that are considered in our investment strategy. We use specific
identification of securities for determining gains and losses. All of our
investments are available for sale securities. As of September 30, 2009, all of
our investments were classified as short term and consisted of funds invested in
a money market fund. During the quarter ended September 30, 2009, we redeemed
all of our investments in an enhanced cash investment fund and recorded a $3.3
million gain classified as interest income. During the nine months ended
September 30, 2008, we recorded a charge of $2.2 million to interest income for
realized and unrealized losses related to our investments in available for sale
securities.
 
 We enter
into various derivative financial instruments with financial institutions to
seek to reduce the variability of the ultimate cash flows associated with
fluctuations in jet fuel prices. We enter into both fuel related swap and option
derivative financial arrangements. We do not hold or issue derivative financial
instruments for trading purposes. As of September 30, 2009, we have entered into
fuel related swap and option agreements, which pertain to 49 million
gallons or 55 percent of our projected October through December 2009 fuel
requirements, and 87 million gallons or 24 percent of our projected 2010 fuel
requirements. As of October 19, 2009, we have entered into fuel related swap and
option agreements, which pertain to 49 million gallons or 55 percent of our
projected October through December 2009 fuel requirements, and 123 million
gallons or 34 percent of our projected 2010 fuel requirements. Under jet fuel
swap arrangements, we pay a fixed rate per gallon and receive the monthly
average price of Gulf Coast jet fuel. The fuel related option arrangements
include collars, purchased call options, and sold call options. Depending on
market conditions at the time a derivative contract is entered into, we
generally use jet fuel, heating oil, or crude oil as the underlying commodity.
Additionally, from time to time, we enter into refinery margin swap agreements
pertaining to certain periods pursuant to which we pay a fixed rate per gallon
and receive the monthly average price of jet fuel refinery costs. As of October
19, 2009, we had entered into refinery margin swap agreements pertaining to
approximately 40 percent of our projected October through December 2009 fuel
requirements.
 
 Realized
and unrealized gains and losses on derivatives that are not designated as hedges
for financial accounting purposes or that do not qualify for hedge accounting
are recognized currently in other (income) expense. In order to simplify the
financial reporting for fuel related derivatives, effective January 1, 2009, we
no longer designate new fuel related derivative financial instruments as
accounting hedges. For our hedges entered into prior to January 1, 2009, a
majority of our historical fuel related derivative financial instruments did not
qualify to be accounted for as hedges. Consequently, a majority of the gains and
losses on such fuel related derivative financial instruments were classified as
other (income) expense based on changes in estimated fair value. The gains and
losses on other fuel related derivative financial instruments, designated as
hedges for financial accounting purposes, are classified as a component of fuel
expense when realized.
   13
 We
continue to account for fuel related derivative financial instruments
outstanding as of December 31, 2008 and previously designated as accounting
hedges as hedges. The ineffective portion of changes in the fair value of each
such derivative designated as a cash flow hedge is recognized currently in other
(income) expense, and the effective portion of the change in the fair value is
recorded as a component of other comprehensive income (loss). The effective
portion is reclassified to earnings as a component of fuel expense during the
period in which the hedged transaction affects earnings.
 
 We have
interest rate swap agreements that effectively convert a portion of our
floating-rate debt to a fixed-rate basis for the remaining life of the debt,
thus reducing the impact of interest-rate changes on future interest expense and
cash flows. Under these agreements, which expire between 2018 and 2020, we pay
fixed rates between 2.95 percent and 5.085 percent and receive either
three-month or six-month USD London Interbank Offered Rate (LIBOR) on the
notional values. During the nine months ended September
30, 2009, we entered into eleven interest rate swap arrangements pertaining to
$293.3 million notional amount of outstanding debt. The notional amount of
outstanding debt related to the interest rate swaps as of September 30, 2009 was
$454.5million. The
primary objective for our use of interest rate swaps is to reduce the impact of
the volatility of interest rates on our operating results. These interest rate
swap arrangements are accounted for as cash flow hedges. The ineffective portion
of the change in fair value of each derivative is recognized in other (income)
expense, and the effective portion of the change in fair value is recorded as a
component of other comprehensive income (loss). The effective portion is
reclassified to interest expense during the period in which the hedged
transaction affects earnings.
 
 
 14
 
 The
following table summarizes the fair value of our derivative financial
instruments (in thousands):
 
 Derivative
      Assets
              
              
              Derivative
      LiabilitiesBalance
      Sheet Location
              
              September
      30, 2009
              
              December
      31, 2008
              
              
              September
      30, 2009
              
              December
      31, 2008Derivatives
      designated as hedging instrumentsInterest
      rate contracts
              Current
              $
              -
              $
              -
              
              $
              (13,751)
              $
              (5,644)Interest
      rate contracts
              Noncurrent
              
              7,076
              
              -
              
              
              (11,684)
              
              (15,694)Jet-fuel
      swaps and options
              Current
              
              798
              
              2,722
              
              
              (1,068)
              
              (6,710)Total
              
              
              7,874
              
              2,722
              
              
              (26,503)
              
              (28,048)Derivatives
      not designated as hedging instrumentsJet-fuel
      options
              Current
              
              -
              
              77
              
              
              (1)
              
              (548)Crude
      swaps and options
              Current
              
              31,329
              
              621
              
              
              (3,013)
              
              (56,744)Crude
      swaps and options
              Noncurrent
              
              4,922
              
              -
              
              
              (370)
              
              (4,922)Other
              Current
              
              -
              
              -
              
              
              (6,736)
              
              -Total
              
              
              36,251
              
              698
              
              
              (10,120)
              
              (62,214)Total
      derivatives
              
              $
              44,125
              $
              3,420
              
              $
              (36,623)
              $
              (90,262)Fair
      value includes any premiums paid or received, unrealized gains and losses,
      and any amounts receivable or payable from or to counterparties. Fair
      value does not include collateral provided to
    counterparties.Liability
      and asset amounts with one counterparty are netted against each other for
      financial reporting purposes for derivative contracts entered into as one
      trade and for derivatives entered into for the purpose of effectively
      settling open positions.
 
 
 15
 
 The
following tables summarize the effects of derivative financial instruments on
the Statements of Operations and on Other Comprehensive Income (OCI) (in
thousands):


For
      the Three Months Ended September 30, 2009Amount
      of (gain) loss on derivatives recognized in OCI (effective
      portion)
              
              Location
      of (gain) loss reclassified from accumulated OCI into income (effective
      portion)
              
              Amount
      of (gain) loss reclassified from OCI into income (effective
      portion)
              
              
              Net
      (gains) losses on derivative financial instruments2009
              
              
              2008
              
              
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Derivatives
      designated as hedging instrumentsInterest
      rate contracts
              
              $
              4,948
              
              
              $
              1,900
              
              Interest
      expense
              
              $
              115
              
              
              $
              36
              
              
              $
              -
              
              
              $
              -Jet-fuel
      swaps and options
              
              
              133
              
              
              
              19,641
              
              Aircraft
      fuel
              
              
              1,069
              
              
              
              (1,915
              )
              
              
              18
              
              
              
              229$
              5,081
              
              
              $
              21,541
              
              
              
              $
              1,184
              
              
              $
              (1,879
              )
              
              
              18
              
              
              
              229Derivatives
      not designated as hedging instrumentsJet-fuel
      options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2
              
              
              
              (14,796
              )Crude
      swaps and options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,256
              
              
              
              59,025Other
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,005
              
              
              
              (2,938
              )10,263
              
              
              
              41,291$
              10,281
              
              
              $
              41,520
 
  16
   For
      the Nine Months Ended September 30, 2009Amount
      of (gain) loss on derivatives recognized in OCI (effective
      portion)
                
                Location
      of (gain) loss reclassified from accumulated OCI into income (effective
      portion)
                
                Amount
      of (gain) loss reclassified from OCI into income (effective
      portion)
                
                
                Net
      (gains) losses on derivative financial instruments2009
                
                
                2008
                
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Derivatives
      designated as hedging instrumentsInterest
      rate contracts
                
                $
                (4,453
                )
                
                $
                1,936
                
                Interest
      expense
                
                $
                496
                
                
                $
                126
                
                
                $
                -
                
                
                $
                (46
                )Jet-fuel
      swaps and options
                
                
                760
                
                
                
                (21,232
                )
                Aircraft
      fuel
                
                
                6,593
                
                
                
                (11,133
                )
                
                
                30
                
                
                
                1,233$
                (3,693
                )
                
                $
                (19,296
                )
                
                
                $
                7,089
                
                
                $
                (11,007
                )
                
                
                30
                
                
                
                1,187Derivatives
      not designated as hedging instrumentsJet-fuel
      options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (469
                )
                
                
                11,771Crude
      swaps and options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (25,066
                )
                
                
                (6,870
                )Other
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,561
                
                
                
                (2,938
                )(17,974
                )
                
                
                1,963$
                (17,944
                )
                
                $
                3,150




Based on
fair values as of September 30, 2009, we expect to reclassify $1.9 million of
net losses on derivative instruments from accumulated other comprehensive income
(loss) to earnings during the next twelve months due to the actual jet fuel
purchases and the payment of variable interest associated with floating rate
debt. However, the amounts actually realized will be dependent on the fair
values as of the date of settlement.


Outstanding
financial derivative instruments expose us to credit loss in the event of
nonperformance by the counterparties to the agreements. However, we do not
expect any of the counterparties to fail to meet their obligations. Our credit
exposure related to these financial instruments is represented by the fair value
of contracts reported as assets. To manage credit risk, we select and
periodically review counterparties based on credit ratings. We provide the
counterparties with collateral when the fair value of our obligation exceeds
contractually specified amounts. As of September 30, 2009, we had provided the
counterparties with collateral aggregating $20.1 million. The collateral is
classified as restricted cash if the funds are held in our name and is
classified as a deposit held by counterparty to derivative financial instrument
if the funds are held by the counterparty. For financial reporting purposes, we
do not offset the collateral provided to counterparties against the fair value
of our obligation. Any outstanding collateral is released to us upon settlement
of the related derivative financial instrument liability.
 
 17
 
 Note
4 –Debt
 
 The
components of debt were (in thousands):
 
 September
      30, 2009
              
              
              December
      31, 2008B737
      Aircraft Purchase Financing Facilities:Floating
      rate aircraft notes payable through 2021, 2.08 percent weighted-average
      interest rate as of September 30, 2009
              
              $
              675,599
              
              
              $
              655,931Fixed
      rate aircraft notes payable through 2018, 7.02 percent weighted-average
      interest rate as of September 30, 2009
              
              
              54,294
              
              
              
              61,014Fixed
      rate B717 aircraft notes payable through 2017, 10.21 percent
      weighted-average interest rate as of September 30, 2009
              
              
              80,003
              
              
              
              80,854Floating
      rate B737 aircraft pre-delivery deposit financings payable through
      2009
              
              
              —
              
              
              
              18,1357.0%
      convertible notes due 2023
              
              
              95,835
              
              
              
              125,0005.5%
      convertible senior notes due 2015
              
              
              69,500
              
              
              
              69,500Other
              
              
              1,180
              
              
              
              —Total
      long-term debt
              
              
              976,411
              
              
              
              1,010,434Less
      unamortized debt discount
              
              
              (5,406
              )
              
              
              (13,244
              )971,005
              
              
              
              997,190Less
      current maturities of long-term debt
              
              
              (152,714
              )
              
              
              (69,865
              )Long-term
      debt less current maturities
              
              $
              818,291
              
              
              $
              927,325
 
 Borrowing
      under revolving line of credit facility
              
              $
              125,000
              
              
              $
              90,000
 
 As of
October 19, 2009, all amounts outstanding under the revolving line of credit
facility have been repaid.
 
 During
the nine months ended September 30, 2009, we reduced the outstanding principal
amount of our 7% convertible notes by repurchasing $29.2 million of such notes
in market transactions, which resulted in a $4.3 million gain classified as
Other Income (Expense) - Other.
 
 Maturities
of debt outstanding as of September 30, 2009 for the remainder of 2009 and for
the next four years, and thereafter, in aggregate, are (in millions): 2009-$140;
2010-$156; 2011-$65; 2012-$61; 2013-$72; thereafter-$608. Maturities for the
remainder of 2009 at September 30, 2009 included
$­­­­­­­125 million outstanding under the revolving
line of credit facility. As of October 19, 2009, all amounts outstanding under
the revolving line of credit facility have been repaid. The holders of our 7%
convertible notes due in 2023 may require us to repurchase such notes in 2010,
2013 or 2018. The maturities of debt amounts include the cash impact of the
holders of such notes potentially exercising their options to require us to
repurchase such notes prior to 2023; therefore, the $95.8 million principal
amount of the 7% convertible notes is included in the 2010 maturity amount. We
have the option to pay the repurchase price in shares of our common stock, in
cash, or in any combination of the two. If the holders of the 7% convertible
notes require us to repurchase the notes, it is our policy to pay the repurchase
price in cash. The $95.8 million principal amount of the 7% convertible notes is
classified as a current liability as of September 30, 2009.
 
 
 18
 
 As of
September 30, 2009, the following assets served as collateral for outstanding
debt:
 
 ·
              Assets
      (primarily flight equipment) with a net book value of $1.1 billion served
      as collateral for the B737 and B717
notes.
 ·
              Aircraft
      pre-delivery deposits served as collateral for pre-delivery deposit
      financing and for the Credit
Facility.
 
 Airways’s
obligations under the Credit Facility are secured by the pledge of -- directly
or indirectly -- its accounts receivable; ground equipment; aircraft parts;
certain inventory; its residual interest in owned B717 aircraft; certain real
property assets, and certain other assets, including various contract rights
which include but are not limited to rights under certain purchase and sale
agreements for aircraft and hedging agreements. Airway’s obligations under
the Credit Facility are guaranteed by AirTran. Airways’ obligations and the
related AirTran guarantee rank senior in right of payment to the subordinated
indebtedness of the applicable company and rank equally with senior indebtedness
of the applicable company.
  Floating
Rate B737 Aircraft Notes
 
 During
September 2009, we borrowed $50 million under a floating rate facility to
finance the purchase of two B737 aircraft. The equipment notes are scheduled to
mature through 2021, bear interest at a floating rate per annum above
three-month US Dollar LIBOR, and require payments of principal and interest in
monthly installments. Each note is secured by a first mortgage on the aircraft
to which it relates.
 
 5.25% Convertible
Senior Notes
 
 In
October 2009, we completed a public offering of $115.0 million of our
convertible senior notes due in 2016, which we refer to as the 5.25% convertible
notes. The net proceeds are being used for general corporate purposes including
improving our overall liquidity. Such notes bear interest at 5.25 percent
payable semi-annually, in arrears, on May 1 and November 1. The
5.25% convertible notes are senior unsecured obligations of Holdings and
rank equally with all existing and future senior unsecured obligations of
Holdings. The 5.25% convertible notes are effectively subordinated to all
liabilities of our subsidiaries. The 5.25%
convertible notes are convertible into shares of our common stock at a
conversion rate of 164.0420 shares per $1,000 in principal amount of such notes
which equals an initial conversion price of approximately $6.10 per share. This
conversion rate is subject to adjustment in certain circumstances. Holders may
convert their 5.25% convertible notes into shares of our common stock at
their option at any time. The 5.25% convertible notes are not redeemable at
our option prior to maturity. The holders of the 5.25% convertible notes
may require us to repurchase such notes, in whole or in part, for cash upon the
occurrence of a fundamental change, as defined in the governing supplemental
indenture, at a repurchase price of 100 percent of principal amounts plus any
accrued and unpaid interest.
 
 7%
Convertible Notes
 
 In May
2003, we completed a private placement of $125 million of our 7% convertible
notes due in 2023, which we refer to as our 7% convertible notes. The proceeds
were used for general corporate purposes including improving our overall
liquidity by providing working capital. Such notes bear interest at 7 percent,
payable semi-annually on January 1 and July 1. The 7% convertible
notes are unconditionally guaranteed by Airways and rank equally with all
unsecured obligations of Airways. Such notes and the note guarantee are junior
to any secured obligations of Holdings or Airways to the extent of the
collateral pledged and are also effectively subordinated to all liabilities of
our subsidiaries (other than Airways).
 
 The 7%
convertible notes are convertible into shares of our common stock at a
conversion rate of 89.9281 shares per $1,000 in principal amount of the notes
which equals an initial conversion price of approximately $11.12 per share. This
conversion rate is subject to adjustment in certain circumstances. We may redeem
the 7% convertible notes, in whole or in part, for cash, beginning on
July 5, 2010 at a redemption price equal to the principal amount of the
notes plus any accrued and unpaid interest.
 
 19
 
 The
holders of the 7% convertible notes may require us to repurchase the notes on
July 1, 2010, 2013 and 2018 at a repurchase price of 100 percent of
principal amounts plus any accrued and unpaid interest. We may, at our option,
elect to pay the repurchase price in cash, in shares of our common stock or in
any combination of the two. If we elect to pay the repurchase price, in
whole or in part in shares of our common stock, the number of shares to be
delivered in exchange for the portion of the repurchase price to be paid in our
common stock will be equal to that portion of the repurchase price divided by
97.5% of the closing sale price of our common stock for the five trading days
ending on the third business day prior to the applicable repurchase date
(appropriately adjusted to take into account the occurrence of certain events
that would result in an adjustment of the conversion rate with respect to our
common stock).
 
 We
separately account for the debt and equity components of the 7% convertible
notes in a manner that reflects our estimated nonconvertible debt-borrowing rate
of 15%. The principal amount, unamortized discount, net carrying amount of the
debt and equity components as presented below are (in thousands):
 
 September
      30, 2009
              
              
              December
      31, 2008Principal
      Amount
              
              $
              95,835
              
              
              $
              125,000Unamortized
      Discount
              
              
              (5,306
              )
              
              
              (13,244
              )Net
      Carrying Amount
              
              $
              90,529
              
              
              $
              111,756Additional
      paid-in capital, net of tax
              
              $
              26,441
              
              
              $
              27,411
 
 We
recorded contractual interest expense of $1.7 million and $5.6 million for the
three and nine months ended September 30, 2009, respectively, and $2.2 million
and $6.6 million for the three and nine months ended September 30, 2008,
respectively. We also recorded interest expense related to debt discount
amortization of $1.7 million and $5.4 million for the three and nine months
ended September 30, 2009, respectively, and $1.9 million and $5.4 million for
the three and nine months ended September 30, 2008, respectively.
 
 At
September 30, 2009, the unamortized discount has a remaining recognition period
of 9 months assuming redemption at the first repurchase date on July 1, 2010. At
September 30, 2009, the if-converted value of the 7% convertible notes did not
exceed the principal amount.
 
 In 2009,
our Board of Directors authorized, at management’s discretion, the repurchase,
from time-to-time, of up to $50 million of our 7% convertible notes in open
market transactions at prevailing market prices or in privately negotiated
purchases. During the nine months ended September 30, 2009, we repurchased $29.2
million of our 7% convertible notes resulting in a gain of $4.3 million.
Repurchases pursuant to the Board's authorization may be effected,
suspended or terminated at any time, or from time-to-time at the discretion of
management or the Board without prior notice and it is uncertain whether or
not we will repurchase additional 7% convertible notes.
 
 Credit
Facility
 
 In July
2008, Airways, obtained a letter of credit facility which provided for a
financial institution to issue letters of credit.  Such letter of
credit facility was amended and restated in October 2008 to, among other things,
provide Airways with a revolving line of credit. We generally refer to the
combined letter of credit facility and revolving line of credit facility as a
whole as the Credit Facility, and we generally refer to its components as the
letter of credit facility and the revolving line of credit facility,
respectively.
  20
 The
following discussion summarizes the terms of the Credit Facility as amended in
September 2009.  Under the revolving line of credit facility we are
permitted to borrow, upon two  (2) business days notice, until
December 31, 2010 (the Expiration Date), up to $125 million for general
corporate purposes. Under the letter of credit facility, we are entitled to the
issuance by a financial institution, until 30 days prior to the Expiration Date,
of letters of credit for the
benefit of one or more of our credit card processors. The aggregate amount of
outstanding letters of credit under the letter of credit facility plus the
outstanding amount borrowed under the revolving line of credit facility is not
permitted to exceed an aggregate of $175 million. Amounts borrowed under the
revolving line of credit facility bear interest at a rate of 12 percent per
annum and must be repaid within three (3) business days to the extent that our
aggregate unrestricted cash and investment amount exceeds $405 million at any
time. We are also required to pay a facility fee, letter of credit fees and fees
on undrawn amounts under the revolving line of credit facility. We may borrow
once a month and are permitted to repay amounts borrowed at any time without
penalty. As of December 31, 2008, September 30, 2009 and October 19, 2009, we
had $90 million, $125 million and no outstanding borrowings under the revolving
line of credit facility, respectively. As of December 31, 2008, a $125 million
letter of credit had been issued for the benefit our largest credit card
processor. As of September 30, 2009, the stated amount of the letter of credit
issued for the benefit of our largest credit card processor was reduced to $50
million.
 
 The
aggregate of amounts borrowed and outstanding letters of credit under the Credit
Facility is not permitted to exceed the estimated value of the collateral
securing such facility. The Credit Facility includes various covenants,
including limitations on:   dividends and distributions; the
incurrence of indebtedness; the prepayment of indebtedness; and mergers and
acquisitions. In the event of a change in control, as defined, the lender may
require us to post cash collateral to secure the letter of credit obligations
and require us to repay outstanding loans under the revolving line of credit
facility. Drawings under any letter of credit may be made only to satisfy our
obligation to a beneficiary credit card processor to cover chargebacks arising
from tickets sold during the period of exposure to be covered by the letter of
credit, which, in the case of the soleletter of credit
outstanding in favor of our largest credit card processor, will end November 30,
2009, but is subject to periodic extensions, at the discretion of the lender,
ending not later than December 31, 2010, and is subject to earlier termination
upon the occurrence of a material adverse change in our financial condition or
other like event. We expect that the period of exposure covered by the initial
letter of credit will be periodically extended through December 31, 2010, in the
absence of a material adverse change in our financial condition or other like
event. The letter of credit in favor of our largest credit card processor will
expire no later than eighteen months after the end of the period of exposure
covered. The periods of exposure to be covered by, and expiration dates of,
subsequently issued letters of credit will be determined by mutual agreement
between the lender and us.
 
 In
connection with the Credit Facility, on October 31, 2008, we issued warrants
expiring on October 31, 2011, to purchase approximately 4.7 million shares of
our common stock for $4.49 per share. The $8.6 million aggregate fair value of
the warrants at the date of issuance was recorded as debt issuance cost with a
corresponding increase in paid in capital.  The amortization of the
debt issuance cost is classified as interest expense.  In September
2009, we entered into an agreement whereby we issued and exchanged 2.9 million
shares of our common stock for all of the previously issued and outstanding
warrants, which warrants were thereafter cancelled.
 
 Note
5 - Fair Value Measurements
 
 We
adopted the required provisions of ASC 820-10, “Fair Value Measurements and
Disclosures” (Fair Value Measurements and Disclosures Standard), as of
January 1, 2008, and adopted certain deferred provisions on January 1,
2009. The Fair Value Measurements and Disclosures Standard is a technical
standard which defines fair value, establishes a consistent framework for
measuring fair value, and expands disclosures for each major asset and liability
category measured at fair value on either a recurring or a nonrecurring basis.
The Fair Value Measurements and Disclosures Standard clarifies that fair value
is an exit price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions, the Fair Value
Measurements and Disclosures Standard establishes a three-tier fair value
hierarchy which prioritizes the inputs used in measuring fair value as
follows:
  21
  Level 1-
observable inputs such as quoted prices in active markets;
 
 Level 2-
inputs, other than the quoted market prices in active markets, which are
observable, either directly or indirectly; and
 
 Level 3-
unobservable inputs in which there are little or no market data, which require
the reporting entity to develop its own assumptions.
 
 Assets
and liabilities are to be measured at fair value and are based on one or more of
the three valuation techniques noted in the Fair Value Measurements and
Disclosures Standard. The valuation techniques are as follows:
 
 (a)
              Market
      approach. Prices and other relevant information generated by market
      transactions involving identical or comparable
  assets;
 
 (b)
              Cost
      approach. Amount that would be required to replace the service capacity of
      an asset; (replacement cost); and
 
 (c)
              Income
      approach. Techniques to convert future amounts to a single present amount
      based on expectations (including present value techniques, option-pricing
      and excess earnings models).
 
 Assets
and (liabilities) measured at fair value on a recurring basis during the period
were as follows (in thousands):
 
 Fair Value at
                September
      30, 2009
              
              
              Quoted Prices in
                Active Markets
                for
      Identical
                Assets (Level 1)
              
              Other
                Observable
                Inputs (Level 2)
              
              
              Fair
      Value
                Measurements
                Using
                Unobservable
                Inputs (Level 3)
              
              
              Valuation
                TechniqueCash
      and cash equivalents
              
              $
              406,085
              
              
              $
              —
              
              $
              406,085
              
              
              $
              —
              
              
              MarketShort-term
      investments
              
              
              2,156
              
              
              
              —
              
              
              2,156
              
              
              
              —
              
              
              MarketInterest
      rate derivatives, net
              
              
              (18,359
              )
              
              
              —
              
              
              (18,359
              )
              
              
              —
              
              
              MarketFuel
      derivatives, net
              
              
              25,861
              
              
              
              —
              
              
              —
              
              
              
              25,861
              
              
              Market
 
 The
financial statement carrying amounts and estimated fair values of our debt at
September 30, 2009 were as follows (in thousands):
 
 Carrying
      Value
              
              
              Estimated
      Fair ValueB737
      Aircraft Purchase Financing Facilities:Floating
      rate aircraft notes payable through 2021
              
              $
              675,599
              
              
              $
              534,691Fixed
      rate aircraft notes payable through 2018
              
              
              54,294
              
              
              
              48,444Fixed
      rate B717 aircraft notes payable through 2017
              
              
              80,003
              
              
              
              69,4617.0%
      convertible notes due 2023
              
              
              90,529
              
              
              
              94,3265.5%
      convertible senior notes due 2015
              
              
              69,500
              
              
              
              125,274Other
              
              
              1,180
              
              
              
              1,180Borrowing
      under revolving line of credit facility
              
              
              125,000
              
              
              
              125,000$
              1,096,105
              
              
              $
              998,376
  22
 
 The fair
value of our debt was estimated using quoted market prices where available. For
long-term debt not actively traded, the fair value was estimated using a
discounted cash flow analysis based on our current borrowing rates for
instruments with similar terms. The fair values of our other financial
instruments and borrowings under our revolving line of credit facility
approximate their respective carrying values. Given the current volatility in
the credit markets, there is an atypical element of uncertainty associated with
valuing debt securities, including our debt securities.
 
 The
reconciliation of our fuel derivatives that are measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
January 1, 2009 through September 30, 2009 follows (in
thousands):
 
 Fair
      Value
                Measurements
      Using Significant
                Unobservable
                Inputs
      (Level 3)Fuel
      related derivative asset (liability):Balance
      at January 1, 2009
              
              $
              (65,504
              )Total
      realized and unrealized gains or (losses):Included
      in earnings
              
              
              11,348Included
      in other comprehensive income
              
              
              5,834Purchases,
      issuances, and settlements
              
              
              74,183Balance
      at September 30, 2009
              
              $
              25,861The
      amount of total gains or (losses) for the nine months ended
      September 30, 2009, included in earnings attributable to the change
      in unrealized gains or losses relating to assets and liabilities still
      held at September 30, 2009
              
              $
              19,065
 
 Note
6 – Income Tax Expense (Benefit)
 
 Our
effective tax rate was 2.2 percent and 0.8 percent for the three and nine months
ended September 30, 2009 compared to 13.6 percent and 21.0 percent for the three
and nine months ended September 30, 2008. Our effective tax rate can differ from
the 37.2 percent composite statutory tax rate (35 percent federal statutory rate
plus the 2.2 percent state composite statutory rate) due to changes in the
valuation allowance on our deferred tax assets, certain expenses that are not
deductible for income tax purposes and non-recurring discrete items related to
restricted stock vesting. Non-deductible expense items and discrete items tend
to increase the effective tax rate when pre-tax income is reported and tend to
decrease the effective tax rate when a pre-tax loss is reported.
 
 Income
tax benefits recorded on losses result in deferred tax assets for financial
reporting purposes. We are required to provide a valuation allowance for
deferred tax assets to the extent management determines that it is more likely
than not that such deferred tax assets will ultimately not be realized. We
expect to realize a portion of our deferred tax assets (including the deferred
tax asset associated with loss carry-forwards) through the reversal of existing
temporary differences. However, we have determined that it is more likely than
not that our deferred tax assets in excess of our deferred tax liabilities will
not ultimately be realized, in part due to our cumulative losses measured over
the past three years. Therefore, we are required to provide a valuation
allowance for our deferred tax assets in excess of our deferred tax liabilities.
As a result, beginning with the third quarter of 2008, our losses were not
reduced by any tax benefit. We reported income before income taxes during both
the three and nine-month periods ended September 30, 2009; however, we did not
recognize material tax expense in either period due to reductions in the
valuation allowance which largely offset income tax expense for the periods.
During the nine months ended September 30, 2009, we recognized $0.9 million of
income tax expense related to our repurchase of a portion of our 7% convertible
notes.
 
 23
 
 The total
amount of unrecognized tax benefits and related interest and penalties was not
material as of December 31, 2008. During 2009, we determined that it was more
likely than not that certain tax positions taken in the preparation of prior
year income tax returns would not be sustained on the basis of technical merit.
Consequently, we reduced deferred tax assets by $4.6 million and also reduced
the valuation allowance for deferred tax assets by the same amount with no net
impact on income tax expense (benefit). As of
September 30, 2009, we had recorded a $29.7 million valuation allowance
applicable to our net deferred tax assets and our deferred tax assets net of the
valuation allowance equaled our gross deferred tax liabilities. Regardless of
the financial accounting for income taxes, our net operating loss carry-forwards
currently are available for use on our income tax returns to offset future
taxable income.
 
 Note
7 – Earnings (Loss) Per Common Share
 
 The
following table sets forth the computation of basic and diluted earnings (loss)
per common share (in thousands, except per share amounts):
 
 Three months ended September 30,
              
              
              Nine months ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008NUMERATOR:Net
      income (loss) available to common stockholders
              
              $
              10,426
              
              
              $
              (94,553
              )
              
              $
              117,571
              
              
              $
              (144,740
              )Plus
      income effect of assumed conversion-interest on 5.5% convertible
      notes
              
              
              957
              
              
              
              —
              
              
              
              2,867
              
              
              
              —Income
      after assumed conversion, diluted
              
              $
              11,383
              
              
              $
              (94,553
              )
              
              $
              120,438
              
              
              $
              (144,740
              )DENOMINATOR:Weighted-average
      shares outstanding, basic
              
              
              120,482
              
              
              
              117,177
              
              
              
              120,158
              
              
              
              106,170Effect
      of 7.0% convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Effect
      of 5.5% convertible notes
              
              
              18,099
              
              
              
              —
              
              
              
              18,099
              
              
              
              —Effect
      of dilutive stock options
              
              
              220
              
              
              
              —
              
              
              
              132
              
              
              
              —Effect
      of dilutive restricted stock awards
              
              
              416
              
              
              
              —
              
              
              
              329
              
              
              
              —Effect
      of warrants to purchase common stock
              
              
              1,408
              
              
              
              —
              
              
              
              899
              
              
              
              —Weighted-average
      shares outstanding, diluted
              
              
              140,625
              
              
              
              117,177
              
              
              
              139,617
              
              
              
              106,170EARNINGS
      (LOSS) PER COMMON SHARE:Basic
              
              $
              0.09
              
              
              $
              (0.81
              )
              
              $
              0.98
              
              
              $
              (1.36
              )Diluted
              
              $
              0.08
              
              
              $
              (0.81
              )
              
              $
              0.86
              
              
              $
              (1.36
              )
  24
 
 Excluded
from the diluted earnings per share calculations for 2009 is the impact on the
weighted average shares outstanding of the 8.6 million shares related to
our 7.0% convertible notes that are issuable upon conversion which would have
been anti-dilutive for the period.
 
 Excluded
from the diluted earnings per share calculations for 2008 are the impacts on the
weighted average shares outstanding of the following which would have been
anti-dilutive for the period in 2008: 11.2 million shares related to our
7.0% convertible notes that are issuable upon conversion; 19.5 million shares
related to our 5.5% convertible notes that are issuable upon conversion;
2.9million shares
related to our outstanding stock options; and 1.6million shares related
to our unvested restricted stock awards.
 
 During
October 2009, we completed a public offering of 11.3 million shares of our
common stock at a price of $5.08 per share, receiving net proceeds of
approximately $54.7 million, after deducting discounts and commissions paid to
the underwriters and other expenses incurred with the offering.
 
 Note
8 – Accumulated Other Comprehensive Income (Loss)
 
 Other
comprehensive income (loss) is composed of changes in the fair value of certain
of our derivative financial instruments and the funded status of our
post-employment obligations. The components of “Accumulated other comprehensive
income (loss)” are as follows (in thousands):
 
 Unrealized
                  gain (loss) on
                  derivative
      financial
                  instruments
                
                
                Postemployment
                  obligations
                
                
                Accumulated other
                  comprehensive
                  income
      (loss)Balance
      at January 1, 2009
                
                $
                (25,569
                )
                
                $
                (191
                )
                
                $
                (25,760
                )Changes
      in fair value, net of income taxes
                
                
                3,693
                
                
                
                —–
                
                
                
                3,693Reclassification
      to earnings, net of income taxes
                
                
                7,089
                
                
                
                57
                
                
                
                7,146Balance
      at September 30, 2009
                
                $
                (14,787
                )
                
                $
                (134
                )
                
                $
                (14,921
                )
 
 Balance
      at January 1, 2008
                
                $
                1,117
                
                
                $
                233
                
                
                $
                1,350Changes
      in fair value, net of income taxes
                
                
                12,091
                
                
                
                —–
                
                
                
                12,091Reclassification
      to earnings, net of income taxes
                
                
                (6,910
                )
                
                
                59
                
                
                
                (6,851
                )Balance
      at September 30, 2008
                
                $
                6,298
                
                
                $
                292
                
                
                $
                6,590
 Total
comprehensive income (loss) was $6.5 million and $128.4 million for the three
and nine months ended September 30, 2009, respectively, and $(109.2) million and
$(139.5) million for the three and nine months ended September 30, 2008,
respectively.
 
 Note
9 – Stock Option Awards and Restricted Stock Awards
 
 Restricted
stock awards, market-based (performance stock) awards, and stock options have
been granted to certain of our officers, directors and key employees. Restricted
stock awards are grants of shares of our common stock, which typically vest over
time (generally three years). Our market-based awards are grants of our common
stock that vest, if at all, at the end of the specified performance period
(currently three years) in amounts that are largely dependent on the achievement
of specified goals which are expressed in terms of threshold, target, and
maximum award achievement levels. During the first nine months of 2009 and 2008,
we granted restricted stock awards for approximately 664,000 and 914,000 shares,
respectively, and approximately 551,000 and 347,000 shares of restricted stock
vested, respectively. During the first nine months of 2009, we granted
market-based awards for up to 360,360 shares of our common stock. The estimated
fair value of the market-based share awards at the date of grant is being
recognized ratably as compensation expense over the three-year service period.
No market-based awards were granted in the first nine months of 2008. No stock
options were granted in either period.
 
 25
 
 Compensation
expense for our restricted stock grants and market-based awards was $1.5 million
and $4.6 million during the three and nine months ended September 30, 2009,
respectively, and $1.6 million and $4.5 million during the three and nine months
ended September 30, 2008, respectively. As of September 30, 2009, we have $8.4
million in total unrecognized future compensation expense that will be
recognized over the next three years relating to awards for approximately 2.0
million restricted shares which were outstanding at such date, but which had not
yet vested and for market-based awards. Unvested restricted shares are not
included in reported common shares outstanding amounts. As shares vest,
restricted shares are transferred to common shares.
 
 As of
September 30, 2009, options to purchase 2.0million shares of common
stock, at exercise prices between $3.90and$13.80per share were
outstanding.  All outstanding options to purchase common shares were
exercisable as of September 30, 2009.
 
 
 26
 
 ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 FORWARD-LOOKING
STATEMENTS
 
 The
information contained in this section has been derived from our historical
financial statements and should be read together with our historical financial
statements and related notes included elsewhere in this document. The discussion
below contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve risks and uncertainties including, but not limited to: consumer demand
and acceptance of services offered by us, our ability to achieve and maintain
acceptable cost levels, fare levels and actions by competitors, regulatory
matters, general economic conditions, commodity prices, and changing business
strategies. Forward-looking statements are subject to a number of factors that
could cause actual results to differ materially from our expressed or implied
expectations, including, but not limited to: our performance in future periods,
our ability to generate working capital from operations, our ability to take
delivery of and to finance aircraft, the adequacy of our insurance coverage, and
the results of litigation or investigation. Our forward-looking statements often
can be identified by the use of terminology such as “anticipates,” “expects,”
“intends,” “believes,” “will” or the negative thereof, or variations thereon or
comparable terminology. Except as required by law, we undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
 
 OVERVIEW
 
 All of
the flight operations of AirTran Holdings, Inc. (the Company, AirTran, or
Holdings) are conducted by our wholly owned subsidiary, AirTran Airways, Inc.
(AirTran Airways or Airways) (collectively we, our, or us). AirTran Airways is
one of the largest low cost scheduled airlines in the United States in terms of
departures and seats offered. We operate scheduled airline service throughout
the United States. Approximately half of our flights originate or terminate at
our largest hub in Atlanta, Georgia and we serve a number of markets with
non-stop service from our focus cities of Baltimore, Maryland, Milwaukee,
Wisconsin, and Orlando, Florida. As of October 19, 2009, we operated 86 Boeing
717-200 aircraft (B717) and 52 Boeing 737-700 aircraft (B737) offering
approximately 700 scheduled flights per day to 62 locations in the United
States, including San Juan, Puerto Rico, and to Cancun, Mexico. Additionally, we
will commence scheduled services to Aruba, Key West, Florida, and Nassau, The
Bahamas in December 2009 and to Lexington, Kentucky and Montego Bay, Jamaica in
February 2010. During the first nine months of 2009, we initiated new service to
Allentown/Bethlehem, Pennsylvania, Asheville, North Carolina, Atlantic City, New
Jersey, Branson, Missouri, Charleston, West Virginia, Knoxville, Tennessee, and
Cancun, Mexico. We offer very competitive fares by concentrating on keeping our
unit costs low. The enthusiasm and skill of our employees has also been a key to
our success.
 
 After six
consecutive years of profitability, during 2008, we were faced with record high
jet fuel prices, an adverse macroeconomic environment, and disrupted capital
markets. During 2008, we undertook a variety of actions to respond to these
challenges including: reducing capacity starting in September 2008; deferring
new aircraft deliveries; selling aircraft; reducing other capital expenditures;
implementing increases in certain fares and ancillary fees; entering into a
variety of derivative financial arrangements to hedge the cost of fuel; and
managing our costs and employment levels. We also completed capital market
transactions in 2008 exceeding $375 million, including: issuing convertible debt
and common equity securities; entering into a letter of credit facility to
reduce our exposure to holdbacks of cash remittances by a credit card
processor; and obtaining a combined letter of credit facility (the letter of
credit facility) and revolving line of credit facility (the revolving line of
credit facility) which combined facility is referred to as the Credit
Facility.
 
 27
 
 During
2009, we have taken additional steps to enhance our liquidity and our operating
performance has substantially improved. In September 2009, our Credit Facility
was amended to, among other things: extend the expiration date of the facility
to December 31, 2010; increase the amount that may be borrowed under the
revolving line of credit to $125 million; and reduce the maximum aggregate
amount of outstanding letters of credit plus outstanding borrowing to $175
million. During October 2009, we completed a public offering of $115.0 million
of our 5.25% convertible senior notes due in 2016 and a public offering of
11.3 million shares of our common stock at a price of $5.08 per share. The
net proceeds from the two offerings, which aggregated $166.3 million, are being
used for general corporate purposes including improving our overall
liquidity.
 
 During
the three and nine months ended September 30, 2009, we reported operating income
of $37.0 million and $150.9 million, net income of $10.4 million and $117.6
million, and diluted earnings per common share of $0.08 and $0.86, respectively.
Due to the pronounced reduction in jet fuel price levels during the first nine
months of 2009 compared to the first nine months of 2008 and the actions that we
have undertaken, our operating results for the three and nine months ended
September 30, 2009 were substantially improved compared to the analogous periods
of 2008. During the three and nine months ended September 30, 2008, we reported
an operating loss of $47.4 million and $129.2 million, a net loss of $94.6
million and $144.7 million, and diluted loss per common share of $0.81 and
$1.36, respectively.
 
 Our third
quarter 2009 operating income improved by $84.4 million compared to the third
quarter of 2008. The reduction in the average cost of jet fuel per gallon
resulted in a $176.9 million decrease in our aircraft fuel expense during the
third quarter of 2009 compared to what fuel expense would have been had jet fuel
prices been at the average level experienced during the third quarter of 2008.
The favorable impact of the reduced average fuel cost per gallon was somewhat
offset by the unfavorable impacts of adverse macroeconomic conditions and higher
non-fuel unit operating costs. More specifically, our total unit revenue per
available seat mile decreased by 10.5 percent to 9.68 cents and our non-fuel
unit operating costs per available seat mile increased by 4.7 percent to 6.00
cents compared to the third quarter of 2008. Continuing a trend which started in
September 2008, in the quarter ended September 30, 2009, we reduced capacity as
measured by available seat miles. We believe that the 0.8 percent reduction in
third quarter 2009 capacity compared to third quarter 2008 capacity had the
salutary effect of partially mitigating the unfavorable impact of adverse
macroeconomic conditions on our unit revenues. However, the capacity reduction
was also a contributing factor to the increase in our non-fuel unit operating
costs.
 
 Other
Accomplishments
 
 During
the first nine months of 2009, we:
 
 ·
              Carried
      in excess of 18 million revenue
passengers;
 
 ·
              Ranked
      first among all low-cost carriers for the second consecutive year in the
      Airline Quality Rating. This is the fifth consecutive year AirTran ranked
      third or higher for quality among all U.S. carriers in this prestigious
      rating;
 
 ·
              Became
      the first major airline to offer passengers wireless, broadband Internet
      access on every flight. AirTran passengers now have full Internet access
      including: Web, e-mail, instant messaging and access to corporate e-mail
      and network systems (virtual private networks) – through their Wi-Fi
      enabled laptops, smartphones and personal digital assistants
      (PDAs);
 
 ·
              Announced
      that we will commence scheduled services to Aruba, Key West, Florida, and
      Nassau, The Bahamas in December 2009 and to Lexington, Kentucky and
      Montego Bay, Jamaica in February
2010;
 
 28
 
 ·
              Initiated
      service to Allentown/Bethlehem, Pennsylvania, Asheville, North Carolina,
      Atlantic City, New Jersey, Branson, Missouri, Charleston, West Virginia,
      Knoxville, Tennessee, and Cancun,
Mexico;
 
 ·
              Entered
      into a multi-year partnership with the National Football League’s Atlanta
      Falcons that includes: joint promotions, prominent signage at the Georgia
      Dome, a specially designed, Falcons-themed Boeing 717 and billboards and
      other advertising featuring Falcon players in full
  uniform.
 
 ·
              Became
      the official airline of the National Basketball Association’s Orlando
      Magic, entering into a multi-year partnership that includes: designation
      as a Magic “Champion of the Community”, unparalleled team and facility
      access, brand recognition visibility, and category exclusivity;
      and
 
 ·
              Launched
      seventeen other new non-stop
routes.
 
 2009
Outlook
 
 We expect
our mix of low fares, excellent customer service, an affordable Business Class
product, wireless broadband Internet access, and one of the youngest all-Boeing
aircraft fleets will provide product value that customers will continue to find
attractive.
 
 Our
projected capacity, as measured by available seat miles (ASMs), compared to the
analogous periods of 2008 are as follows:
 
 Period
              
              Percent
      ChangeFourth
      Quarter 2009
              
              Increase
      approximately 7%2009
      as a whole
              
              Decrease
      2% to 3%
 
 Our
projected unit revenue and non-fuel unit cost for the fourth quarter of 2009
compared to the fourth quarter of 2008 are as follows:
 
 Percent
      ChangeTotal
      revenue per ASM (1)
              
              Decrease
      7% to 8%Non-fuel
      operating cost per ASM (2)
              
              Increase
      1% to 2%
 
 (1)
              Total
      revenue divided by ASMs(2)
              Total
      operating expenses less aircraft fuel expense divided by ASMs. Non-fuel
      operating cost per ASM is a measure of unit operating costs which is not
      determined in accordance with generally accepted accounting principles.
      Both the cost and availability of fuel are subject to many factors which
      are out of our control; therefore, we believe that non-fuel operating cost
      per ASM provides a useful measure of an airline’s unit operating expense
      which facilitates an understanding of operating costs over
      time.
 
 Current
adverse macroeconomic conditions have affected our revenues and if current
macroeconomic conditions continue or worsen, such conditions may further impact
our near term revenues.
 
 29
 
 RESULTS
OF OPERATIONS
  SELECTED
FINANCIAL INFORMATION
  The table
below sets forth selected financial and operating data for the three and nine
months ended September 30, 2009 and 2008:
  Three
      Months Ended
                September
      30,
              
              
              Percentage
                Increase
                (Decrease)2009
              
              
              2008Revenue
      passengers
              
              
              6,533,184
              
              
              
              6,612,928
              
              
              
              (1.2
              )Revenue
      passenger miles (RPM) (000s) (1)
              
              
              5,172,347
              
              
              
              5,260,949
              
              
              
              (1.7
              )Available
      seat miles (ASM) (000s) (2)
              
              
              6,170,977
              
              
              
              6,221,858
              
              
              
              (0.8
              )Passenger
      load factor (3)
              
              
              83.8
      percent
              
              
              
              84.6
      percent
              
              
              
              (0.8
              )
              ptsDepartures
              
              
              65,559
              
              
              
              66,337
              
              
              
              (1.2
              )Average
      aircraft stage length (miles) (4)
              
              
              749
              
              
              
              745
              
              
              
              0.5Average
      fare (excluding transportation taxes) (5)
              
              $
              81.04
              
              
              $
              96.07
              
              
              
              (15.6
              )Average
      yield per RPM (6)
              
              
              10.24
              ¢
              
              
              12.08
              ¢
              
              
              (15.2
              )Passenger
      revenue per ASM (RASM) (7)
              
              
              8.58
              ¢
              
              
              10.21
              ¢
              
              
              (16.0
              )Total
      revenue per ASM (8)
              
              
              9.68
              ¢
              
              
              10.82
              ¢
              
              
              (10.5
              )Operating
      cost per ASM (CASM) (9)
              
              
              9.08
              ¢
              
              
              11.58
              ¢
              
              
              (21.6
              )Non-fuel
      operating cost per ASM (10)
              
              
              6.00
              ¢
              
              
              5.73
              ¢
              
              
              4.7Average
      cost of aircraft fuel per gallon (11)
              
              $
              1.98
              
              
              $
              3.82
              
              
              
              (48.2
              )Gallons
      of fuel burned (000’s)
              
              
              96,098
              
              
              
              95,303
              
              
              
              0.8Operating
      aircraft in fleet at end of period
              
              
              136
              
              
              
              139
              
              
              
              (2.2
              )Average
      daily utilization (hours: minutes) (12)
              
              
              11:24
              
              
              11:12
              
              
              
              1.8Full-time
      equivalent employees at end of period
              
              
              7,717
              
              
              
              7,372
              
              
              
              4.7
  Nine
      Months Ended
                September
      30,
              
              
              Percentage
                Increase
                (Decrease)2009
              
              
              2008Revenue
      passengers
              
              
              18,086,257
              
              
              
              18,864,674
              
              
              
              (4.1
              )Revenue
      passenger miles (RPM) (000s) (1)
              
              
              14,076,956
              
              
              
              14,737,024
              
              
              
              (4.5
              )Available
      seat miles (ASM) (000s) (2)
              
              
              17,498,261
              
              
              
              18,450,013
              
              
              
              (5.2
              )Passenger
      load factor (3)
              
              
              80.4
      percent
              
              
              
              79.9
      percent
              `
              
              
              0.5
              
              ptsDepartures
              
              
              188,576
              
              
              
              198,978
              
              
              
              (5.2
              )Average
      aircraft stage length (miles) (4)
              
              
              740
              
              
              
              737
              
              
              
              0.4Average
      fare (excluding transportation taxes) (5)
              
              $
              85.84
              
              
              $
              98.62
              
              
              
              (13.0
              )Average
      yield per RPM (6)
              
              
              11.03
              ¢
              
              
              12.62
              ¢
              
              
              (12.6
              )Passenger
      revenue per ASM (RASM) (7)
              
              
              8.87
              ¢
              
              
              10.08
              ¢
              
              
              (12.0
              )Total
      revenue per ASM (8)
              
              
              9.96
              ¢
              
              
              10.64
              ¢
              
              
              (6.4
              )Operating
      cost per ASM (CASM) (9)
              
              
              9.10
              ¢
              
              
              11.34
              ¢
              
              
              (19.8
              )Non-fuel
      operating cost per ASM (10)
              
              
              6.34
              ¢
              
              
              5.92
              ¢
              
              
              7.1Average
      cost of aircraft fuel per gallon (11)
              
              $
              1.77
              
              
              $
              3.53
              
              
              
              (49.9
              )Gallons
      of fuel burned (000’s)
              
              
              272,264
              
              
              
              283,169
              
              
              
              (3.9
              )Operating
      aircraft in fleet at end of period
              
              
              136
              
              
              
              139
              
              
              
              (2.2
              )Average
      daily utilization (hours: minutes) (12)
              
              
              11:00
              
              
              11:18
              
              
              
              (2.7
              )Full-time
      equivalent employees at end of period
              
              
              7,717
              
              
              
              7,372
              
              
              
              4.7
  (1)
              The
      number of scheduled revenue miles flown by
    passengers(2)
              The
      number of seats available for passengers multiplied by the number of miles
      the seats are flown(3)
              The
      percentage of aircraft seating capacity that is actually utilized (RPMs
      divided by ASMs)(4)
              Total
      aircraft miles flown divided by departures(5)
              Passenger
      revenue divided by total passengers(6)
              The
      average amount one passenger pays to fly one
mile(7)
              Passenger
      revenue divided by ASMs(8)
              Total
      revenue divided by ASMs(9)
              Operating
      expenses divided by ASMs(10)
              Total
      operating expenses less aircraft fuel expense divided by ASMs. Non-fuel
      operating cost per ASM (non-fuel CASM) is a measure of unit operating
      costs which is not determined in accordance with generally accepted
      accounting principles. Both the cost and availability of fuel are subject
      to many factors which are out of our control; therefore, we believe that
      non-fuel CASM provides a useful measure of an airline’s unit operating
      expense which facilitates an understanding of operating costs over
      time.(11)
              Total
      fuel expense, including taxes and into-plane fees, divided by gallons of
      fuel burned(12)
              The
      average amount of time per day that an aircraft flown is operated in
      revenue service
 
 30
 
 For
the three months ended September 30, 2009 and 2008
 
 Summary
 
 During
the three months ended September 30, 2009, we reported operating income of $37.0
million, net income of $10.4 million, and diluted earnings per common share of
$0.08. Due to the substantial reduction in the average cost of jet fuel per
gallon and the actions that we have undertaken, our operating results for the
quarter were substantially improved compared to the third quarter of 2008.
During the three months ended September 30, 2008, we reported an operating loss
of $47.4 million, a net loss of $94.6 million, and diluted loss per common share
of $0.81.
 
 Operating
Revenues
 
 Our
operating revenues for the three months ended September 30, 2009 decreased $75.9
million (11.3 percent) due to the net effect of a $105.9 million decrease in
passenger revenues and a $30.0 million increase in other revenues compared to
the three months ended September 30, 2008. Our total revenue per available seat
mile for the third quarter of 2009 was 9.68 cents, a decrease of 10.5 percent
compared to the third quarter of 2008. We believe that our capacity reductions
combined with increases in ancillary fees partially mitigated the unfavorable
impact of adverse macroeconomic conditions by preventing a more pronounced
erosion of total unit revenues.
 
 The
$105.9 million (16.7 percent) decrease in passenger revenue was due to lower
capacity, reduced traffic, and reduced passenger yield. We believe the
reductions in traffic and yield were attributable in large part to weak air
travel demand caused by adverse macroeconomic conditions. During the three
months ended September 30, 2009, we reduced our capacity by 0.8percent compared to the
three months ended
 September
30, 2008. The reduction in capacity was the intended consequence of a reduction
in our aircraft fleet size caused by actions we took in 2008 to defer aircraft
deliveries and sell aircraft. The reduced capacity coupled with a 1.7 percent
decrease in revenue passenger miles produced an average passenger load factor of
83.8 percent, which was a 0.8 percentage point decrease compared to the record
load factor recorded for the three months ended September 30, 2008. Average
yield per revenue passenger mile was 10.24 cents,15.2 percent lower than the
analogous period in 2008.
 
 Other
revenues for the three months ended September 30, 2009, increased $30.0 million
(79.0 percent) compared to the three months ended September 30, 2008, reflecting
in large part pricing changes for ancillary customer services resulting from the
unbundling of our service product. Other revenues include change and
cancellation fees, direct booking fees, revenues derived from the sale of
frequent flyer credits, baggage fees, and other miscellaneous
revenues.
 
 Operating
Expenses
 
 Our
operating expenses for the three months ended September 30, 2009, decreased
$160.3 million (22.2 percent) and decreased 21.6 percent on a unit cost basis,
as measured by operating cost per ASM (CASM) compared to the three months ended
September 30, 2008. Our financial results were significantly affected by the
price of fuel and volatility of the price of fuel during the three months ended
September 30, 2009. The decrease in total operating cost per ASM was the net
result of a 47.4 percent decrease in fuel cost per ASM and a 4.7 percent
increase in non-fuel operating cost per ASM.
 
 31
 
 In
general, our operating expenses are significantly affected by changes in our
capacity, as measured by available seat miles (ASMs). The following table
presents our CASM for the indicated periods:
 
 Three
      months ended
                September30,
              
              
              Percent
                Increase
                (Decrease)2009
              
              
              2008Aircraft
      fuel
              
              
              3.08
              ¢
              
              
              5.85
              ¢
              
              
              (47.4)%Salaries,
      wages and benefits
              
              
              1.99
              
              
              
              1.93
              
              
              
              3.1Aircraft
      rent
              
              
              0.98
              
              
              
              0.97
              
              
              
              1.0Maintenance,
      materials and repairs
              
              
              0.81
              
              
              
              0.64
              
              
              
              26.6Distribution
              
              
              0.41
              
              
              
              0.43
              
              
              
              (4.7)Landing
      fees and other rents
              
              
              0.61
              
              
              
              0.58
              
              
              
              5.2Aircraft
      insurance and security services
              
              
              0.09
              
              
              
              0.09
              
              
              
              —Marketing
      and advertising
              
              
              0.15
              
              
              
              0.16
              
              
              
              (6.3)Depreciation
      and amortization
              
              
              0.23
              
              
              
              0.25
              
              
              
              (8.0)(Gain)
      loss on disposition of assets
              
              
              (0.10
              )
              
              
              (0.15
              )
              
              
              (33.3)Other
      operating
              
              
              0.83
              
              
              
              0.83
              
              
              
              —Total
      CASM
              
              
              9.08
              ¢
              
              
              11.58
              ¢
              
              
              (21.6)%
 
 Aircraft fuel decreased 47.4
percent on a cost per ASM basis. For the three months ended September 30, 2009,
our average fuel cost per gallon, including taxes and into-plane fees, decreased
48.2 percent from $3.82 during the third quarter of 2008 to $1.98 during the
third quarter of 2009.
 
 Maintenance, materials and repairsexpense increased 26.6 percent on a cost per ASM basis primarily due to
increases in the number and cost of airframe checks and rate increases in
certain of our power-by-the-hour maintenance agreements.
 
 Landing fees and other rents
increased 5.2 percent on a cost per ASM basis primarily due to higher rental
rates at various airports for gate and certain terminal space, and increases in
our share of gate and terminal space at certain airports.
 
 Marketing and advertising
costs decreased 6.3 percent on a cost per ASM basisdue to planned decreases
in spending levels associated with print and radio advertising.
 
 Depreciation and amortization
decreased 8.0 percent on a cost per ASM basis primarilydue to sales of aircraft.
Three B737 aircraft were sold in the third quarter of 2008 and three were sold
in the fourth quarter of 2008. Additionally, we did not place any aircraft into
service during the nine months ended September
30, 2009.
 
 (Gain) loss on disposition of
assets for the three months ended September 30, 2009 and 2008 was ($6.4)
million and ($9.3) million, respectively. (Gain) loss on disposition of assets
pertains primarily to aircraft related transactions. During the three months
ended September 30, 2009, we recognized a $6.6 million gain pertaining primarily
to the deposits we previously received from the potential buyer who defaulted on
its obligation to purchase two B737 aircraft. During the three months ended
September 30, 2008, we sold three B737 aircraft.
 
 Other
(Income) Expense
 
 Other (income) expense,
net decreased by $35.6 million to $26.4 million net expense for the
third quarter of 2009 compared to $62.0 million net expense for the third
quarter of 2008. Other (income) expense, net includes: interest income; interest
expense, capitalized interest; net (gains) losses on derivative financial
instruments; and other.
 
 32
 
 Interest
income increased by $2.9 million from the quarter ended September 30, 2008 to
$3.8 million for the quarter ended September 30, 2009. During the three months
ended September 30, 2009, we redeemed all of our investments in an enhanced cash
investment fund and recorded a $3.3 million gain classified as interest income.
During the three months ended September 30, 2008, we recorded a charge of $1.3
million to interest income for realized and unrealized losses related to our
investments in available for sale securities.
 
 Interest
expense, including amortization of debt issuance costs, decreased by $2.5
million from the quarter ended September 30, 2008 to $20.1 million for the
quarter ended September 30, 2009. The decrease was due primarily to the net
effects of the following: the favorable impact of lower interest rates
applicable to variable interest rate debt due to declines in market interest
rates; interest on our 5.5% convertible senior notes issued in May 2008; and
interest on our Credit Facility obtained in 2008.
 
 Capitalized
interest decreased by $1.0 million from the quarter ended September 30, 2008 to
$0.2 million for the quarter ended September 30, 2009. Capitalized interest
represents the interest cost to finance purchase deposits for future aircraft.
These amounts are classified as part of the cost of the aircraft upon
delivery.
 
 We
reported net losses on derivative financial instruments of $10.3 million for the
third quarter of 2009, compared to net losses of $41.5 million for the third
quarter of 2008. Net (gains) losses on derivative financial instruments consists
primarily of realized and unrealized gains and losses on fuel related
derivatives which either did not qualify for hedge accounting or were not
designated as hedges for financial accounting purposes.
 
 Income
Tax Expense (Benefit)
 
 Our
effective tax rate was 2.2 percent and 13.6 percent for the three months ended
September 30, 2009 and 2008, respectively. Our effective tax rate can differ
from the 37.2 percent composite statutory tax rate (35 percent federal statutory
rate plus the 2.2 percent state composite statutory rate) due to changes in the
valuation allowance on our deferred tax assets, certain expenses that are not
deductible for income tax purposes and non-recurring discrete items related to
restricted stock vesting. Non-deductible expense items and discrete items tend
to increase the effective tax rate when pre-tax income is reported and tend to
decrease the effective tax rate when a pre-tax loss is reported. Also, during
the nine months ended September 30, 2008, we recorded an $8.4 million
charge to write-off all of the carrying value of our goodwill. Because this
write-off is not deductible for income tax purposes, we did not record a tax
benefit and consequently our effective tax rate was reduced.
 
 Income
tax benefits recorded on losses result in deferred tax assets for financial
reporting purposes. We are required to provide a valuation allowance for
deferred tax assets to the extent management determines that it is more likely
than not that such deferred tax assets will ultimately not be realized. We
expect to realize a portion of our deferred tax assets (including a portion of
the deferred tax asset associated with loss carryforwards) through the reversal
of existing temporary differences. However, we have determined that it is more
likely than not that our deferred tax assets in excess of our deferred tax
liabilities will not ultimately be realized, in part due to our cumulative
losses measured over the past three years, and that we are therefore required to
provide a valuation allowance on our deferred tax assets in excess of our
deferred tax liabilities. As a result, beginning with the third quarter of 2008,
our losses were not reduced by any tax benefit. We reported income before income
taxes during both the three and nine month periods ended September 30, 2009;
however, we did not recognize material tax expense in either period due to
reductions in the valuation allowance which largely offset income tax expense
for the periods.
 
 Regardless
of the financial accounting for income taxes, our net operating loss
carryforwards are currently available for use on our income tax returns to
offset future taxable income.
 
 33
 
 For
the nine months ended September 30, 2009 and 2008
 
 Summary
 
 During
the nine months ended September 30, 2009, we reported operating income of $150.9
million, net income of $117.6 million, and diluted earnings per common share of
$0.86. Due to the pronounced reduction in the average cost of jet fuel per
gallon during the first nine months of 2009 compared to the first nine months of
2008 and the actions that we have undertaken, our operating results for the
period were substantially improved compared to the analogous period of 2008.
During the nine months ended September
30, 2008, we reported an operating loss of $129.2 million, a net loss of $144.7
million, and diluted loss per common share of $1.36.
 
 Operating
Revenues
 
 Our
operating revenues for the nine months ended September 30, 2009 decreased $220.1
million (11.2 percent) due to the net effect of a $307.9 million decrease in
passenger revenues and a $87.8 million increase in other revenues compared to
the nine months ended September 30, 2008. Our total revenue per available seat
mile for the nine months ended September 30, 2009 was 9.96 cents, a decrease of
6.4 percent compared to the analogous period of 2008. We believe that our
capacity reductions combined with increases in ancillary fees partially
mitigated the unfavorable impact of current adverse macroeconomic conditions by
preventing a more pronounced erosion of total unit revenues.
 
 The
$307.9 million (16.5 percent) decrease in passenger revenue was due to lower
seat capacity, reduced traffic, and reduced passenger yield. We believe the
reductions in traffic and yield were attributable in large part to the weak air
travel demand caused by adverse macroeconomic conditions. Additionally, although
a relatively small portion of our route system is outside the United States, the
public’s concern with the H1N1 flu virus did have unfavorable impacts on both
our advance reservations and passenger revenue during the nine months ended
September 30, 2009. During the nine months ended September 30, 2009, we reduced
our capacity by 5.2percent compared to the
nine months ended September 30, 2008. The reduction in capacity was primarily
the intended consequence of a reduction in our aircraft fleet size caused by
actions we took in 2008 to defer aircraft deliveries and sell aircraft. The
reduced capacity coupled with a 4.5 percent decrease in revenue passenger miles
produced an average passenger load factor of 80.4 percent, which was a 0.5
percentage point increase compared to the nine months ended September 30, 2008.
Average yield per revenue passenger mile was 11.03 cents,12.6 percent lower than the
analogous period in 2008.
 
 Other
revenues for the nine months ended September 30, 2009, increased $87.8 million
(85.5 percent) compared to the nine months ended September 30, 2008, reflecting
in large part pricing changes for ancillary customer services resulting from the
unbundling of our service product. Other revenues include change and
cancellation fees, direct booking fees, revenues derived from the sale of
frequent flyer credits, baggage fees, and other miscellaneous
revenues.
 
 Operating
Expenses
 
 Our
operating expenses for the nine months ended September 30, 2009, decreased
$500.2 million (23.9 percent) and decreased 19.8 percent on a unit cost basis,
as measured by operating cost per ASM (CASM) compared to the nine months ended
September 30, 2008. Our financial results were significantly affected by the
price of fuel and volatility of the price of fuel during the nine months ended
September 30, 2009. The decrease in total operating costs per ASM was the net
result of a 49.1 percent decrease in fuel cost per ASM and a 7.1 percent
increase in non-fuel operating cost per ASM.
 
 34
 
 In
general, our operating expenses are significantly affected by changes in our
capacity, as measured by available seat miles (ASMs). The following table
presents our CASM for the indicated periods:
 
 Nine
      months ended
                September
      30,
              
              
              Percent
                Increase
                (Decrease)2009
              
              
              2008Aircraft
      fuel
              
              
              2.76
              ¢
              
              
              5.42
              ¢
              
              
              (49.1)%Salaries,
      wages and benefits
              
              
              2.08
              
              
              
              1.96
              
              
              
              6.1Aircraft
      rent
              
              
              1.04
              
              
              
              0.99
              
              
              
              5.1Maintenance,
      materials and repairs
              
              
              0.83
              
              
              
              0.68
              
              
              
              22.1Distribution
              
              
              0.40
              
              
              
              0.42
              
              
              
              (4.8)Landing
      fees and other rents
              
              
              0.62
              
              
              
              0.57
              
              
              
              8.8Aircraft
      insurance and security services
              
              
              0.09
              
              
              
              0.09
              
              
              
              —Marketing
      and advertising
              
              
              0.18
              
              
              
              0.17
              
              
              
              5.9Depreciation
      and amortization
              
              
              0.24
              
              
              
              0.23
              
              
              
              4.3(Gain)
      loss on disposition of assets
              
              
              (0.02
              )
              
              
              (0.09
              )
              
              
              (77.8)Impairment
      of goodwill
              
              
              —
              
              
              
              0.05
              
              
              
              —Other
      operating
              
              
              0.88
              
              
              
              0.85
              
              
              
              3.5Total
      CASM
              
              
              9.10
              ¢
              
              
              11.34
              ¢
              
              
              (19.8)%
 
 Aircraft fuel decreased 49.1
percent on a cost per ASM basis. For the nine months ended September 30, 2009,
our average fuel cost per gallon, including taxes and into-plane fees, decreased
49.9 percent from $3.53 during the nine months ended September 30, 2008 to $1.77
during the analogous period of 2009.
 
 Salaries, wages and benefits
expense increased 6.1 percent on a cost per ASM basis because expenses were
relatively unchanged while ASMs declined by 5.2 percent.
 
 Aircraft rent increased 5.1
percent on a cost per ASM basis because rent expense was relatively flat for the
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008, while ASMs declined by 5.2 percent.
 
 Maintenance, materials and repairsexpense increased 22.1 percent on a cost per ASM basis primarily due to
increases in the number and cost of airframe checks and rate increases in
certain of our power-by-the-hour maintenance agreements.
 
 Landing fees and other rents
increased 8.8 percent on a cost per ASM basis primarily due to increased landing
fees, higher rental rates at various airports for gate and certain terminal
space, and increases in our share of gate and terminal space at certain
airports.
 
 Marketing and advertising
costs increased 5.9 percent on a cost per ASM basisdue to additional spending
associated with efforts to stimulate demand, particularly related to fare sales,
and the launch of our fleet wide high speed internet service.
  (Gain) loss on disposition of
assets for the nine months ended September 30, 2009 and 2008 was ($3.1)
million and ($15.8) million, respectively. (Gain) loss on disposition of assets
pertains primarily to aircraft related transactions. During the nine months
ended September 30, 2009, we recognized:  $2.4 million loss for the
write-off of capitalized interest related to the release in the second quarter
of our obligation to purchase two B737 aircraft which Boeing sold to an
unrelated foreign airline; and, $6.6 million gain related to the deposits we
previously received from the potential buyer who defaulted on its obligation to
purchase two B737 aircraft in the third quarter. During the nine months ended
September 30, 2008, we sold five B737 aircraft.
 
 35
 
 Other
(Income) Expense
 
 Other (income) expense,
net decreased by $21.7 million to $32.4 million for the nine months
ended September 30, 2009 compared to $54.1 million for the analogous period of
2008. Other (income) expense, net includes: interest income; interest expense,
capitalized interest; net (gains) losses on derivative financial instruments;
and other.
 
 Interest
income decreased by $0.2 million from the nine months ended September 30, 2008
to $5.2 million for the nine months ended September 30, 2009. During the nine
months ended September 30, 2009, we redeemed all of our investments in an
enhanced cash investment fund and recorded a $3.3 million gain classified as
interest income. During the nine months ended September 30, 2008, we recorded a
charge of $2.2 million classified as interest income for realized and unrealized
losses related to our investments in available for sale securities.
 
 Interest
expense, including amortization of debt issuance costs, decreased by $2.3
million from the nine months ended September 30, 2008 to $61.1 million for the
nine months ended September 30, 2009. The decrease was primarily due to the net
effects of the following: the favorable impact of lower interest rates
applicable to variable interest rate debt due to declines in market interest
rates; interest on our 5.5% convertible senior notes issued in May 2008; and
interest on our Credit Facility obtained in the third quarter of
2008.
 
 Capitalized
interest decreased by $5.8 million from the nine months ended September 30, 2008
to $1.2 million for the nine months ended September 30, 2009. Capitalized
interest represents the interest cost to finance purchase deposits for future
aircraft. These amounts are classified as part of the cost of the aircraft upon
delivery.
 
 We
reported net (gains) on derivative financial instruments of ($17.9 million) for
the nine months ended September 30, 2009, compared to a net loss of $3.2 million
for the nine months ended September 30, 2008. Net (gains) losses on derivative
financial instruments consists primarily of realized and unrealized gains and
losses on fuel related derivatives which either did not qualify for hedge
accounting or were not designated as hedges for financial accounting
purposes.
 
 During
the nine months ended September 30, 2009, we repurchased $29.2 million of our 7%
convertible notes resulting in a gain of $4.3 million, which is classified as
other.
 
 Income
Tax Expense
 
 Our
effective tax rate was 0.8 percent and 21.0 percent for the nine months ended
September 30, 2009 and 2008, respectively. We did not report material tax
expense for the nine months ended September 30, 2009 due to a reduction in the
valuation allowance for deferred tax assets. However, during the nine months
ended September 30, 2009, we recognized $0.9 million of income tax expense
related to our repurchase of our 7% convertible notes.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As of
September 30, 2009, we had aggregate unrestricted cash, cash equivalents, and
short-term investments of $408.2 million, and we also had $55.2 million of
restricted cash. As of September 30, 2009, we had $125 million of borrowing
outstanding under our revolving line of credit facility. During the nine months
ended September 30, 2009, our primary sources of cash were cash provided by
operating activities, borrowings under our revolving line of credit facility,
and borrowings to finance aircraft acquisitions. Our primary uses of cash were
repayment of long-term debt, repayment of borrowings under the revolving line of
credit facility, and expenditures for the acquisition of two B737 aircraft. As
of October 19, 2009, we had no borrowing outstanding under our revolving line of
credit facility and a $50 million letter of credit had been issued under our
letter of credit facility.
 
 36
 
 In
September 2009, we entered into amendments to (a) our letter of credit facility
(the letter of credit facility) and revolving line of credit facility (the
revolving line of credit facility) which combined facility we refer to as the
Credit Facility and (b) our credit card processing agreement with our largest
credit card processor (as measured by volume processed for us). The Credit
Facility was amended to:
  ·
              Extend
      the expiration date to December 31,
2010;
  ·
              Increase
      the amount that may be borrowed under the revolving line
      of  credit facility from $90 million to $125 million;
      and
  ·
              Reduce
      the permitted maximum aggregate amount of outstanding letters of credit
      plus outstanding borrowing under the Credit Facility from $215 million to
      $175 million.
  Our
agreement with our largest credit card processor was amended to extend the
expiration date from December 31, 2009 to December 31, 2010.
 
 During
October 2009, we completed a public offering of $115.0 million of our 5.25%
convertible senior notes due in 2016 and a public offering of 11.3 million
shares of our common stock at a price of $5.08 per share. The net proceeds from
the two offerings aggregated $166.3 million, after deducting offering expenses,
discounts and commissions paid to the underwriters, including the exercise of
the underwriter over-allotment options. The net proceeds are being used for
general corporate purposes including improving our overall liquidity. The 5.25%
convertible notes are convertible into shares of our common stock at a
conversion rate of 164.0420 shares per $1,000 in principal amount of such notes
which equals an initial conversion price of approximately $6.10 per
share.
 
 Year
to Date 2009 Operating, Investing and Financing Activities
 
 Operating activities during
the nine months ended September 30, 2009 provided $122.3 million of cash flow
compared to $93.1 million used during the analogous period in 2008. Cash flow
from operating activities is related to both the level of our profitability and
to changes in working capital and other assets and liabilities. Operating cash
inflows are largely attributable to revenues derived from the transportation of
passengers. Operating cash outflows are largely attributable to recurring
expenditures for fuel, labor, aircraft rent, aircraft maintenance, marketing,
and other activities. For the nine months ended September 30, 2009, we reported
net income of $117.6 million compared to a net loss of $144.7 million for the
nine months ended September 30, 2008.
 
 Changes
in the components of our working capital also impact cash flow from operating
activities. Changes in the air traffic liability balance and the related
accounts receivable balance have had a significant impact on our net cash flow
from operating activities. We have a liability to provide future air travel
because travelers tend to purchase air transportation in advance of their
intended travel date. Advance ticket sales, which are recorded as air traffic
liability, fluctuate seasonally and also provide cash when we grow and
consequently receive additional cash for future travel.This historical source of
cash will decline or change to a use to the extent our growth slows or reverses
or the amounts heldback by our credit card processors increase. During the nine
months ended September 30, 2009, our air traffic liability balance increased
$16.4 million contributing to net cash flow from operating activities. During
the nine months ended September 30, 2008, our air traffic liability balance
increased $97.6 million, contributing to net cash flow from operating
activities. Changes in accounts payable, accrued, and other current and
non-current liabilities also impact our cash flow from operating activities.
During the nine months ended September 30, 2009, the $21.1 million decrease in
accounts payable and accrued and other liabilities negatively impacted net cash
provided by operating activities. During the nine months ended September 30,
2008, the $11.6 million increase in accounts payable and accrued and other
liabilities contributed favorably to net cash flow from operating
activities.
 
 37
 
 Our
derivative financial instruments reduced our cash flow provided by operating
activities during the nine months ended September 30, 2009 by $34.8 million.
Cash flow from operations was reduced by $83.6 million primarily due to payments
to counterparties (including amounts paid to unwind certain fuel related
derivatives) and changes in the fair value of derivatives. Changes in the fair
value of derivative financial instruments neither provide nor use cash until
realized. During the nine-month period, counterparties to our derivative
financial instrument arrangements released deposits held by them as consequences
of the unwinding of fuel related derivatives and the reduction of the value of
our fuel related derivative financial instrument obligations. The amount of
deposits received from counterparties, net of amounts paid to counterparties,
aggregated $48.8 million during the nine months ended September 30,
2009.
 
 We used
cash to increase other assets by $7.3 million and $8.9 million during the nine
months ended September 30, 2009 and 2008, respectively. Other assets include
prepaid aircraft maintenance and other deposits, prepaid insurance and prepaid
distribution costs. Additionally, prepaid and stored fuel increased by $14.5
million and $19.5 million during the nine months ended September 30, 2009 and
2008, respectively, adversely impacting net cash provided by operating
activities.
 
 Investing activities during
the nine months ended September 30, 2009, used $36.1 million in cash compared to
the $187.7 million provided during the similar period in 2008. Purchases and
sales of available for sales securities are classified as investing activities.
During the nine months ended September 30, 2009, we sold $26.6 million of
available for sale securities. During the nine months ended September 30, 2008,
we purchased $30.3 million and sold $89.5 million of available for sale
securities. Investing activities also include expenditures for aircraft deposits
and the purchase of aircraft and other property and equipment.
 
 Aircraft
purchase contracts typically require that the purchaser make pre-delivery
deposits to the manufacturer. These deposits are refunded at the time of
aircraft delivery. We may invest a portion or all of the refunded deposits in
the aircraft. During the nine months ended September 30, 2009, we paid $19.9
million in deposits and received $41.0 million in previously paid deposits.
During the nine months ended September 30, 2008, we paid $51.0 million in
deposits and received $103.1 million in previously paid deposits. During the
nine months ended September 30, 2009, we expended $86.1 million in cash,
primarily for the acquisition of two B737 aircraft as well as for the
acquisition of rotable parts, buyer furnished equipment and other property and
equipment. Acquisitions of other property and equipment included additions to
leasehold improvements and the purchase of ground and computer equipment. During
the nine months ended September 30, 2008, we expended $130.8 million in cash,
primarily for the acquisition of eight B737 aircraft (of which two were sold to
a foreign airline) as well as for the acquisition of rotable parts and other
property and equipment.
 
 Financing activities provided
$4.8 million of cash during the nine months ended September 30, 2009, compared
to using cash of $41.3 million during the nine months ended September 30,
2008. During September 2009, we borrowed $50 million to finance aircraft
acquisitions. During the nine months ended September 30, 2009, we repaid $56.2
million of debt.
 
 In 2009,
our Board of Directors authorized, at management’s discretion, the repurchase,
from time-to-time, of up to $50 million of our 7% convertible notes in open
market transactions at prevailing market prices or in privately negotiated
purchases. During the nine months ended September 30, 2009, we repurchased $29.2
million of our 7% convertible notes resulting in a gain of $4.3 million.
Repurchases pursuant to the Board's authorization may be effected,
suspended or terminated at any time, or from time-to-time at the discretion of
management or the Board without prior notice and it is uncertain whether or
not we will repurchase additional 7% convertible notes.
 
 During
the nine months ended September 30, 2009, we borrowed $925 million and repaid
$890 million under our revolving line of credit facility.
 
 38
 
 During
the second quarter of 2008, we completed two financings. The proceeds were used
to improve our overall liquidity and for general corporate purposes. We
completed a public offering of $74.8 million of our 5.5% convertible senior
notes due 2015. We placed approximately $12.2 million of the proceeds of such
offering in an escrow account with a trustee. In addition to the escrowed
amount, we received net proceeds of approximately $60.1 million after deducting
discounts and commissions paid to the underwriters and other expenses incurred
with the offering. Funds in the escrow account are invested in government
securities and are being used to make the first six scheduled semi-annual
interest payments on the notes, and these payments are secured by a pledge of
the assets in escrow. We also completed a public offering of 24.7 million shares
of our common stock at a price of $3.20 per share, receiving net proceeds of
approximately $74.7 million, after deducting discounts and commissions paid to
the underwriters and other expenses incurred with the offering.
 
 During
the nine months ended September 30, 2008, we received cash from the issuance of
debt financing for aircraft pre-delivery deposits of $32.7 million and repaid
$87.4 million of pre-delivery deposit debt financing. During the nine months
ended September 30, 2008, we repaid $128.8 million of aircraft purchase debt
financing. Also, during the nine months ended September 30 2008, we borrowed
$178.6 million in non-cash transactions to finance the purchase of six B737
aircraft.
 
 See ITEM
1. “FINANCIAL STATEMENTS (Unaudited) – Notes to Condensed Consolidated Financial
Statements, Note 4 – Debt” for additional information regarding our outstanding
debt.
 
 Year
2009 Cash Requirements and Potential Sources of Liquidity
 
 Our cash
flows, for the remainder of 2009, will be impacted by a variety of factors
including our operating results, payments of our debt and capital lease
obligations, and capital expenditure requirements. In addition, we may need cash
resources to fund increases in collateral provided to counterparties to our
derivative financial instrument arrangements and our cash flows may be adversely
impacted in the event that one or more credit card processors withholds amounts
that would otherwise be remitted to us.
 
 During
the remainder of 2009, we will need cash for capital expenditures and debt and
capital lease obligations. We anticipate that during the remainder of 2009:
expenditures for acquisition of property and equipment, other than aircraft and
aircraft parts, will be approximately $1.5 million. Additionally, during the
remainder of 2009, we have scheduled payments of $6.8 million related to
aircraft purchase commitments. Payments of current maturities of existing debt
and capital lease obligations will aggregate $140 million during the fourth
quarter of 2009, including payment of $125 million previously borrowed under our
revolving line of credit facility and repaid as of October 19,
2009.
 
 We may
need cash resources to fund increases in collateral provided to counterparties
to our derivative financial arrangements and our cash flows may be adversely
impacted in the event that one or more credit card processors withholds amounts
that would otherwise be remitted to us. We provide counterparties to our
derivative financial instrument arrangements with collateral when the fair value
of our obligation exceeds specified amounts. As of September 30, 2009, we
provided counterparties with collateral aggregating $20.1 million. Compared to
last year, we believe that we have reduced our exposure to collateral
requirements due to changes in our portfolio of fuel related derivative
financial instruments.
 
 
 
 39
 
 Each
agreement with our two largest credit card processors (based on volumes
processed for us) has been amended in 2009 resulting in changes to contractual
terms generally favorable to us. Our agreement with our largest credit card
processor now expires December 31, 2010. Each agreement with our two largest
credit card processors allows, under specified conditions, the processor to
retain cash related to future travel that such processor otherwise would remit
to us (a holdback). Because we obtained a letter of credit for its benefit, as
of September 30, 2009, our largest processor was holding back no cash
remittances from us. As of September 30, 2009, we were in compliance with our
processing agreements and our two largest credit card processors were holding
back no cash remittances from us. Our potential cash exposure to holdbacks by
our largest two credit card processors, based on advance
ticket sales as of September 30, 2009, was up to a maximum of $190.3 million
(after considering the $50 million letter of credit issued in favor of our
largest credit card processor). Even had there been no letter of credit issued
for the benefit of our largest credit card processor, as of October 19, 2009,
neither of our two largest credit card processors would have been entitled to
holdback any cash remittances from us. A decrease in our unrestricted cash and
investments could result in cash remittance amounts being heldback by our
largest credit card processors. To the extent that we achieve specified
aggregate unrestricted cash and investment levels, the agreement with our
largest processor also provides for a reduction or elimination of the percent of
the exposure that our largest processor is entitled to holdback. While we may be
subject to holdbacks in accordance with the terms of our credit card processing
agreements, based on our current liquidity and current forecast, we do not
expect that our two largest credit card processors would be entitled to holdback
cash amounts during the remainder of 2009.
 
 We
believe we have options available to meet our debt repayment, capital
expenditure and operating commitments, which may include internally generated
funds, and various financing or leasing options, including the sale, lease, or
sublease of our aircraft or other assets. As previously discussed, during
October 2009, we completed two concurrent public offerings. The net proceeds
from the October 2009 offerings of common stock and senior unsecured convertible
notes, which aggregated $166.3 million, are being used for general corporate
purposes including improving our overall liquidity. Additionally, we have a $125
million revolving line of credit facility, under which $125 million and none was
outstanding as of September 30, 2009 and October 19, 2009, respectively.
However, our future financing options may be limited because our owned aircraft
are pledged to the lenders that provided financing to acquire such aircraft, and
we have pledged, directly or indirectly, a significant portion of our owned
assets other than aircraft and engines to collateralize our obligations under
our Credit Facility. The counterparty to the Credit Facility has agreed to
release its lien on certain specified assets securing that facility in the event
we seek to re-pledge those assets in order to secure a new financing so long as
the collateral value of the assets pledged under the Credit Facility are at
least equal to the amount then-available under the Credit Facility.
 
 We
believe that our existing liquidity and forecasted 2009 cash flows will be
sufficient to fund our operations and other financial obligations for the
remainder of 2009. While we believe our 2009 forecast is reasonable, a
combination of one or more material and significant adverse events, most of
which are outside of our direct control, could, depending on the severity and
duration thereof, have significant unfavorable impacts on our future cash flows.
Such adverse events could include: significant increases in fuel prices for an
extended period of time; significant sustained declines in unit revenues as a
consequence of unfavorable macroeconomic or other conditions; or an increase in
the percentage of advance ticket sales held back by our credit card
processors.
 
 Fuel
Related Derivative Financial Instrument Arrangements
 
 We enter
into fuel related derivative financial instruments to reduce the ultimate
variability of cash flows associated with fluctuations in jet-fuel prices. The
financial accounting for fuel related derivatives is discussed in ITEM 1.
“FINANCIAL STATEMENTS (Unaudited) – Notes to Condensed Consolidated Financial
Statements, Note 3 – Financial Instruments” and our exposure to market risk is
discussed in ITEM 3. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK –Aviation
Fuel.”
 
 In
summary, our fuel related derivative financial instruments impacted our
financial statements for the three and nine months ended September 30, 2009 as
follows:
 
 •
              
              Net
      realized losses related to derivative financial instruments increased fuel
      expense by $1.1 million and $6.6 million during the three and nine months
      ended September 30, 2009,
respectively.
 
 40
 
 •
              
              We
      recorded a non-operating net loss related to derivative financial
      instruments of $10.3 million during the three months ended September 30,
      2009 and a non-operating net gain related to derivative financial
      instruments of $17.9 million during the nine months ended September 30,
      2009. During the three and nine months ended September 30, 2009, we
      realized losses related to derivative financial instruments (not accounted
      for as hedges for accounting purposes) of $4.0 million and $9.7
      million.
 
 •
              
              As
      of September 30, 2009, the estimated fair value of our fuel related
      derivative financial instruments was a net asset of $25.9 million. The
      fair value of our fuel related derivatives is in large part a function of
      the current market and futures prices of the underlying commodities.
      Consequently, changes in the current market and futures prices tend to
      have a substantial impact on the fair value of the fuel related
      derivatives.
 
 •
              
              As
      of September 30, 2009, accumulated other comprehensive income (loss)
      included $1.9 million (before income tax) of net unrealized losses which
      had not yet been recognized in the Condensed Consolidated Statements of
      Operations.
 
 We
provide counterparties to our derivative financial instrument arrangements with
collateral when the fair value of our obligation exceeds specified amounts. As
of September 30, 2009, we provided counterparties to fuel and interest rate
related derivative financial instruments with collateral aggregating $20.1
million. The collateral is classified as restricted cash, if the funds are held
in our name, and is classified as deposits held by counterparties to derivative
financial instruments if the funds are held by the counterparty. Any future
increases in the fair value of our obligations under derivative financial
instruments may obligate us to provide additional collateral to counterparties,
which would reduce our unrestricted cash and investments. Any future decreases
in the fair value of our obligations would result in the release of collateral
to us and consequently would increase our unrestricted cash and investments.
However, compared to last year, we believe that we have reduced our exposure to
increased collateral requirements due to changes in our portfolio of fuel
related derivative financial instruments. Any outstanding collateral is released
to us upon settlement of the related derivative financial instrument liability.
Our obligation to provide collateral pursuant to fuel related derivative
financial instrument arrangements tends to be inversely related to fuel prices;
consequently, to the extent fuel prices decrease, we will experience lower fuel
expense and higher collateral requirements. Because we hedge significantly less
than 100 percent of our fuel requirements, over time, a sustained decrease in
fuel prices tends to produce a net cash benefit even though a significant
decrease in fuel prices may cause a net use of cash in the period when prices
decrease.
 
 Aircraft
Acquisitions, Purchase Commitments and Financings
 
 In 2008,
to respond to the challenges of a volatile fuel cost environment, a recessionary
macroeconomic environment, and adverse capital market conditions, we recast our
business plan to defer previously planned growth. We reduced capacity
principally by deferring scheduled aircraft deliveries, reducing utilization,
and by selling B737 aircraft. In 2008, we entered into agreements to defer
delivery dates for 37 B737 aircraft originally scheduled for delivery between
2008 and 2012 to delivery dates between 2013 and 2016. Also, during 2008, we
sold eight B737 aircraft. Of the eight B737 aircraft we sold in 2008, two were
new aircraft that we took delivery of and subsequently sold and six were used
aircraft in our fleet. During the nine months ended September 30, 2008, we took
delivery of eight aircraft, including the aforementioned two new aircraft sold
in 2008. We had four aircraft scheduled for delivery during 2009. During the
nine months ended September 30, 2009, we permitted Boeing to sell two of the
B737 aircraft that were scheduled for delivery to us to a foreign airline,
pursuant to which we were released from our obligation to purchase the aircraft.
The amendment of our B737 purchase agreement with respect to these two aircraft
occurred in the second quarter of 2009. During September 2009, we took delivery
of two B737 aircraft that we had previously agreed to sell to another foreign
airline. We took delivery of these two aircraft under our purchase agreement
with Boeing because the counterparty defaulted on its obligation to purchase the
two aircraft. We placed these aircraft in service in October 2009.
 
 41
 
 The table
below summarizes, as of September 30, 2009, all aircraft currently scheduled for
delivery to us:
 
 Scheduled
                Firm Aircraft Deliveries
                B737Remainder
      of 2009
              
              
              -2010
              
              
              -2011
              
              
              72012
              
              
              82013
              
              
              62014
              
              
              122015
              
              
              82016
              
              
              10Total
              
              
              51
 
 As of
September 30, 2009, our aircraft purchase commitments for the remainder of 2009
and for the next five years and thereafter, in aggregate, are (in millions):
2009—$7; 2010—$50; 2011—$270; 2012—$335; 2013—$260; 2014—$505; and
thereafter—$715. These amounts include payment commitments, including payment of
pre-delivery deposits, for aircraft on firm order. Aircraft purchase commitments
include the forecasted impact of contractual price escalations. While our
intention is to finance the aircraft on order through either debt financing,
lease financing, or both, we have not yet arranged for any such financing. We
cannot assure you that sufficient financing will be available to us for our
future B737 aircraft deliveries.
 
 Our B737
contract with Boeing requires us to make pre-delivery deposits to Boeing.
Although we typically have financed a significant portion of our pre-delivery
deposit requirements with debt from banks or other financial institutions, we
currently have no such financing in place for future deliveries. Given the
current status of the financial markets, we cannot provide assurance that
satisfactory financing will be available to us when we are obligated to make
pre-delivery deposit payments.
 
 If we are
unable to generate revenues to cover our costs, we may slow our growth,
including by the sale, lease, or sublease of certain of our existing or on-order
aircraft.
 
 New
Accounting Pronouncements
 
 In June
2009, the FASB issued Accounting Standards
Codification (ASC, or the Codification) as the source of authoritative
generally accepted accounting principles (GAAP) recognized by the FASB for
non-governmental entities. The Codification is effective for financial
statements issued for reporting periods that end after September 15, 2009. The
Codification superseded all then-existing non-SEC accounting and reporting
standards. The Codification did not change rules and interpretations of the SEC
which are also sources of authoritative GAAP for SEC registrants. Because the
Codification did not change GAAP, the Codification had no impact on our
consolidated financial statements or footnotes.
 
 
 
 42
 
 On
January 1, 2009, we adopted ASC 470-20, “Debt with Conversion and Other Options
– Cash Conversion” (Cash Conversion Standard), regarding the accounting for
convertible debt instruments that may be settled in cash upon conversion. The
Cash Conversion Standard requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
nonconvertible debt borrowing rate, unless the embedded conversion option is
required to be separately accounted for as a derivative. The Cash Conversion
Standard required retroactive application to all periods presented. The adoption
impacts the accounting for our 7.0% convertible notes due 2023 and will result
in the recognition of additional financial accounting interest expense of approximately
$7.1 million for 2009 and $3.6 million for 2010, based on the assumption that
the 7.0% convertible notes will be settled in 2010, after giving effect to the
7% convertible notes repurchased by the Company as of September 30, 2009. On
April 24, 2009, we filed a report on Form 8-K with the SEC which included our
consolidated financial statements as of December 31, 2008 and 2007 and for each
of the three years in the period ended December 31, 2008 which had been adjusted
to apply the Cash Conversion Standard retroactively. As a result of the
adoption, we reduced net income for the three and nine months ending September
30, 2009 by $1.9 million and $7.0 million, respectively, and reduced diluted
earnings per share by $0.01 per share and $0.05 per share, respectively. The
adoption has no impact on our debt service payments.
 
 On June
30, 2009, we adopted ASC 855-10-50 “Subsequent Events - Disclosure”
(Subsequent Events Standard), which established general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued.The Subsequent Events
Standard defines two types of subsequent events. The effects of events or
transactions that provide additional evidence about conditions that existed at
the balance sheet date, including the estimates inherent in the process of
preparing financial statements, are recognized in the financial statements. The
effects of events that provide evidence about conditions that did not exist at
the date of the balance sheet but arose after that date are not recognized in
the financial statements. We have reviewed subsequent events through October 26,
2009 (the date of the issuance of the accompanying condensed consolidated
financial statements).
 
 
 43
 ITEM 3.  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
 
 There
have been no material changes in market risk from the information provided in
Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk”
included in our report on Form 8-K filed with the Securities and Exchange
Commission on April 24, 2009, other than those discussed below.
 
 Market
Risk-Sensitive Instruments and Positions
 
 We are
subject to certain market risks, including changes in interest rates and
commodity prices (primarily jet fuel). The adverse effects of changes in these
markets pose a potential loss as discussed below. The sensitivity analyses do
not consider the effects that such adverse changes may have on overall economic
activity, nor do they consider additional actions we may take to mitigate our
exposure to such changes. Actual results may differ. See the Notes to Condensed
Consolidated Financial Statements for a description of our financial accounting
policies and additional information.
 
 Interest
Rates
 
 We had
approximately $675.6 million and $674.1 million of variable-rate debt as of
September 30, 2009 and December 31, 2008, respectively. We have mitigated
our exposure on certain variable-rate debt by entering into interest rate swap
agreements. During the nine months ended September 30, 2009, we entered into
eleven interest rate swap arrangements pertaining to $293.3 million notional
amount of outstanding debt. The notional amount of the outstanding debt related
to interest rate swaps at September 30, 2009 and December 31, 2008 was
$454.5 and $177.7 million, respectively. These swaps expire between 2018 and
2020. The interest rate swaps effectively result in us paying a fixed rate
of interest on a portion of our floating rate debt securities through the
expiration of the swaps. As of September 30, 2009, the fair market value of our
interest rate swaps was a liability of $18.4 million. If average interest rates
increased by 100 basis points during 2009, as compared to 2008, our projected
2009 interest expense would increase by approximately $1.7 million.
 
 Aviation
Fuel
 
 Our
results of operations can be significantly impacted by changes in the price and
availability of aircraft fuel. Aircraft fuel expense for the three months ended
September 30, 2009 and 2008 represented 33.9 percent and 50.4 percent of
our operating expenses, respectively. Aircraft fuel expense for the nine months
ended September 30, 2009 and 2008 represented 30.3 percent and 47.8 percent
of our operating expenses, respectively.
 
 We have
entered into fuel related derivative financial instruments with financial
institutions to reduce the variability of ultimate cash flows associated with
fluctuations in jet fuel prices. We do not hold or issue derivative financial
instruments for trading purposes. As of September 30, 2009, we have entered into
fuel related swap and option agreements, which pertain to 49 million
gallons or 55 percent of our projected October through December 2009 fuel
requirements, and 87 million gallons or 24 percent of our projected 2010 fuel
requirements. As of October 19, 2009, we have entered into fuel related swap and
option agreements, which pertain to 49 million gallons or 55 percent of our
projected October through December 2009 fuel requirements, and 123 million
gallons or 34 percent of our projected 2010 fuel requirements. Under jet fuel
swap arrangements, we pay a fixed rate per gallon and receive the monthly
average price of Gulf Coast jet fuel. The fuel related option
arrangements include collars, purchased call options, and sold call options.
Depending on market conditions at the time a derivative contract is entered
into, we generally use jet fuel, heating oil, or crude oil as the underlying
commodity. Additionally, from time to time, we enter into refinery margin swap
agreements pertaining to certain periods pursuant to which we pay a fixed rate
per gallon and receive the monthly average price of jet fuel refinery costs. As
of October 19, 2009, we had entered into refinery margin swap agreements
pertaining to approximately 40 percent of our projected October through December
2009 fuel requirements.
 
 44
 
 For every
dollar increase per barrel in crude oil or refining costs, our fuel expense
(including taxes and into-plane fees) for the remainder of 2009, before the
impact of our derivative financial instruments, would increase approximately
$2.2 million based on projected operations.
 
 The
(a) estimated total ultimate cash benefit (use) of our fuel related
derivatives and (b) the expected difference in aggregate fuel cost compared
to jet fuel cost based on crude oil at $75 per barrel are estimated as follows
at the specified crude per barrel prices (in millions except per barrel amounts
which are in dollars):
 Estimated
      Total Ultimate Cash Benefit (Use) of Our Fuel Related Derivative Financial
      Instruments Held as of
                  October
      19, 2009
                
                Estimated
      Lower (Higher) Aggregate
                  Jet
      Fuel Cost
                  (Prior
      to Impact of
                  Derivative
      Financial Instruments)
                  Compared
      to Jet Fuel Cost
                  Based
      onCrude
      Oil
                  of
      $75 per BarrelThree
      Months Ended December 31, 2009Assumed
      average market crude price:$
      40 per barrel
                
                
                $
                (16.9
                )
                $
                79.0$
      60 per barrel
                
                
                
                (12.5
                )
                
                33.8$
      80 per barrel
                
                
                
                6.6
                
                
                (11.4
                )$
      100 per barrel
                
                
                
                27.6
                
                
                (56.7
                )Year
      Ended December 31, 2010Assumed
      average market crude price:$
      40 per barrel
                
                
                $
                (48.7
                )
                $
                310.3$
      60 per barrel
                
                
                
                (23.8
                )
                
                132.7$
      80 per barrel
                
                
                
                0.4
                
                
                (44.9
                )$100
      per barrel
                
                
                
                52.5
                
                
                (222.5
                )
  Notes:
 
 1.
              The
      total ultimate derivative financial instrument related cash amounts
      include all estimated payments and receipts during the period that the
      derivatives are outstanding. The cash flows related to derivative
      financial instruments include both the settlement of such instruments and
      any obligation for us to provide counterparties with collateral prior to
      settlement of a derivative financial instrument. Any collateral held by
      counterparties at the time a derivative financial instrument settles
      reduces any cash required at time of settlement.2.
              As
      of October 19, 2009, we had provided counterparties with
      collateral aggregating $18.1 million for fuel related derivatives
      pertaining to future fuel purchases and for our interest rate swap
      arrangements.3.
              Changes
      in the refining margin may also impact the cost of jet fuel. The impact of
      changes in refining margin is not included in the table
    above.
 
 
 45
 
 ITEM 4.                   CONTROLS
AND PROCEDURES
 
 Evaluation of Disclosure Controls
and Procedures. We maintain controls and procedures designed to ensure
that we are able to collect the information we are required to disclose in the
reports we file with the SEC, and to process, summarize and disclose this
information within the time periods specified in the rules of the SEC. Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and
Exchange Act of 1934, as amended (the “Exchange Act”). Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of September 30, 2009, our controls and procedures were effective to ensure that
we are able to collect, process and disclose the information we are required to
disclose in the reports we file with the SEC within the required time
periods.
 
 Internal Control over Financial
Reporting. A third party provides our passenger revenue accounting
system. During the fiscal quarter ended September 30, 2009, we migrated to a new
passenger revenue accounting system with improved functionality provided by the
same third party. The operating effectiveness of this change to our internal
controls over financial reporting is being evaluated as part of our annual
assessment of internal control over financial reporting. We believe that the new
revenue accounting functionality will have a favorable impact on our internal
control over financial reporting.
 
 Except as
noted in the preceding paragraph, there were no other changes in
our internal control over financial reporting during the fiscal quarter
ended September 30, 2009, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 
 46
 PART
II.
 
 OTHER
INFORMATION
 
 Item 1.
              Legal
      Proceedings
 
 Acomplaint
alleging violations of federal antitrust laws and seeking certification as a
class action was filed against Delta Air Lines, Inc. and AirTran in the United
States District Court for the Northern District of Georgia in Atlanta on May 22,
2009. The complaint alleges, among other things, that AirTran conspired with
Delta in imposing $15-per-bag fees for the first item of checked luggage. The
complaint seeks treble damages on behalf of a putative class of persons or
entities in the United States who directly paid Delta and/or AirTran such fees
on domestic flights beginning December 5, 2008. The complaint also seeks
injunctive relief and attorneys fees. Subsequent to the filing of that initial
complaint, various other nearly identical complaints also seeking certification
as class actions have been filed in federal district courts in Atlanta, Orlando,
Florida, and Las Vegas, Nevada. All of the cases have now been consolidated in
federal district court in Atlanta. AirTran denies all allegations of wrongdoing
and intends to defend vigorously any and all such allegations.
 
 In
addition to the above litigation, AirTran is a party to other claims, and
litigation incidental to its business, for which it is not currently possible to
determine the ultimate liability, if any. While the outcome of such claims and
litigation is subject to uncertainty, based on an evaluation of information
currently available and consultation with legal counsel, management believes
that resolution of such claims, and litigation is not likely to have a material
effect on the financial position, cash flows, or results of operations of the
Company.
 
 Item 1A.
              Risk
      Factors
 
 Information
regarding risk factors appears in “MD&A — Forward-Looking Statements,” in
Part I — Item 2 of this Form 10-Q and in “Risk Factors” in Part I —
Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008. We believe there have been no material changes from the
risk factors previously disclosed in such Annual Report. You should carefully
consider, in addition to the other information set forth in this report, the
risk factors discussed in our Annual Report, which could materially affect our
business, financial condition, or future results. Such risk factors are
expressly incorporated herein by reference. The risks described in our Annual
Report are not the only risks facing our Company. In addition to risks and
uncertainties inherent in forward looking statements contained in this Report on
Form 10-Q, additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our
business, financial condition, and/or operating results.
 
 Item 2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 See Item
3.02 of Current Report on Form 8-K filed September 30, 2009.
 
 Item 3.
              Defaults
      Upon Senior Securities
 
 None
 
 
 47
 
 Item 4.
              Submission
      of Matters to a Vote of Security
Holders
 
 None
 
 Item 5.
              Other
      Information
 
 None
 
 Item 6.
              Exhibits
 
 The
following exhibits are filed with this report:
 
 (a)
              
              Exhibit No.
              
              Description10.65 -
              
              Amendment
      No. 1 to Amended and Restated Revolving Line of Credit and Reimbursement
      Agreement31.1
      -
              
              Rule
      13(a)-14 Certification of Chief Executive Officer31.2 -
              
              Rule
      13(a)-14 Certification of Principal Financial Officer32.1
      -
              
              Chief
      Executive Officer and Principal Financial Officer certifications pursuant
      to 18 U.S.C. Section 1350
 
 
 48
 
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 AirTran
      Holdings, Inc.(Registrant)Date: October
      26, 2009
              
              /s/
      Arne G. HaakArne
      G. Haak
                Senior
      Vice President of Finance, Treasurer,
                and
      Chief Financial Officer
 
 
 
 
 
 EXHIBIT
INDEX
 
 Exhibit No.
              
              
              
              Description10.65
              
              —
              
              Amendment
      No. 1 to Amended and Restated Revolving Line of Credit and Reimbursement
      Agreement31.1
              
              —
              
              Rule
      13(a)-14 Certification of Chief Executive Officer31.2
              
              —
              
              Rule
      13(a)-14 Certification of Chief Financial Officer32.1
              
              —
              
              Chief
      Executive Officer and Chief Financial Officer certifications pursuant to
      18 U.S.C. Section
1350