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 March 31, 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).Yes o       No  o      N/Ax


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 April 16,
2009: 119,935,827 par value $0.001
















AIRTRAN
HOLDINGS, INC.


Form 10-Q


For
the Quarter Ended March 31, 2009





TABLE
OF CONTENTS




PAGEPART
      I.  FINANCIAL INFORMATIONItem 1.
            Financial
      Statements (unaudited)Condensed
      Consolidated Statements of Operations – Three months ended March 31, 2009
      and 2008
            
            
            1Condensed
      Consolidated Balance Sheets – March 31, 2009 and December 31,
      2008
            
            
            2Condensed Consolidated Statements of Cash Flows – Three months ended March
      31, 2009 and 2008
            
            
            4Condensed Consolidated Statement of Stockholders’ Equity – Three months
      ended March 31, 2009
            
            
            5Notes
      to Condensed Consolidated Financial Statements
            
            
            6Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            22Item 3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            
            33Item 4.
            Controls
      and Procedures
            
            
            35PART II.  OTHER
      INFORMATIONItem 1.
            Legal
      Proceedings
            
            
            36Item 1A.
            Risk
      Factors
            
            
            36Item 2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            
            36Item 3.
            Defaults
      Upon Senior Securities
            
            
            36Item 4.
            Submission
      of Matters to a Vote of Security Holders
            
            
            36Item 5.
            Other
      Information
            
            
            36Item 6.
            Exhibits
            
            
            36SignaturesExhibit ListingEx – 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 March 31,2009
            
            
            2008(As
      Adjusted,
              See
      Note 1)Operating
      Revenues:Passenger
            
            $
            486,101
            
            
            $
            566,429Other
            
            
            55,854
            
            
            
            29,962Total
      operating revenues
            
            
            541,955
            
            
            
            596,391Operating
      Expenses:Aircraft
      fuel
            
            
            132,870
            
            
            
            268,442Salaries,
      wages and benefits
            
            
            117,948
            
            
            
            118,907Aircraft
      rent
            
            
            60,431
            
            
            
            60,851Maintenance,
      materials and repairs
            
            
            46,443
            
            
            
            41,332Distribution
            
            
            20,215
            
            
            
            22,539Landing
      fees and other rents
            
            
            33,784
            
            
            
            35,113Aircraft
      insurance and security services
            
            
            5,072
            
            
            
            5,293Marketing
      and advertising
            
            
            11,361
            
            
            
            11,468Depreciation
      and amortization
            
            
            14,117
            
            
            
            13,348Other
      operating
            
            
            52,007
            
            
            
            54,484Total
      operating expenses
            
            
            494,248
            
            
            
            631,777Operating
      Income (Loss)
            
            
            47,707
            
            
            
            (35,386
            )Other
      (Income) Expense:Interest
      income
            
            
            (678
            )
            
            
            (1,782
            )Interest
      expense
            
            
            21,230
            
            
            
            20,452Capitalized
      interest
            
            
            (340
            )
            
            
            (3,625
            )Net
      (gains) losses on derivative financial instruments
            
            
            (890
            )
            
            
            5,190Other
            
            
            (322
            )
            
            
            —Other
      (income) expense, net
            
            
            19,000
            
            
            
            20,235Income
      (Loss) Before Income Taxes
            
            
            28,707
            
            
            
            (55,621
            )Income
      tax benefit
            
            
            —
            
            
            
            (20,264
            )Net
      Income (Loss)
            
            $
            28,707
            
            
            $
            (35,357
            )Earnings
      (Loss) Per Common Share:Basic
            
            $
            0.24
            
            
            $
            (0.38
            )Diluted
            
            $
            0.21
            
            
            $
            (0.38
            )Weighted-Average
      Shares Outstanding:Basic
            
            
            119,828
            
            
            
            92,114Diluted
            
            
            138,084
            
            
            
            92,114





See
accompanying Notes to Condensed Consolidated Financial Statements.







1


AirTran
Holdings, Inc.


Condensed
Consolidated Balance Sheets


(In
thousands)





March
      31, 2009
            
            
            December
      31, 2008(Unaudited)
            
            
            (As
      Adjusted,See
      Note 1)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            373,839
            
            
            $
            315,078Short-term
      investments
            
            
            10,485
            
            
            
            19,937Restricted
      cash
            
            
            89,913
            
            
            
            86,126Deposits
      held by counterparties to derivative financial instruments
            
            
            5,280
            
            
            
            48,820Accounts
      receivable, net
            
            
            40,386
            
            
            
            38,301Spare
      parts, materials and supplies, net
            
            
            15,006
            
            
            
            15,428Prepaid
      and stored fuel
            
            
            9,663
            
            
            
            16,004Derivative
      financial instruments
            
            
            16,332
            
            
            
            3,420Prepaid
      expenses and other current assets
            
            
            36,167
            
            
            
            34,053Deferred
      income taxes
            
            
            7,992
            
            
            
            7,992Total
      current assets
            
            
            605,063
            
            
            
            585,159Property
      and Equipment:Flight
      equipment
            
            
            1,314,998
            
            
            
            1,310,874Less:
      Accumulated depreciation and amortization
            
            
            (135,464
            )
            
            
            (125,663
            )1,179,534
            
            
            
            1,185,211Purchase
      deposits for flight equipment
            
            
            64,032
            
            
            
            64,032Other
      property and equipment
            
            
            109,661
            
            
            
            108,186Less:
      Accumulated depreciation and amortization
            
            
            (59,577
            )
            
            
            (55,642
            )50,084
            
            
            
            52,544Total
      property and equipment
            
            
            1,293,650
            
            
            
            1,301,787Other
      Assets:Long-term
      investments
            
            
            5,311
            
            
            
            5,497Trademarks
      and trade names
            
            
            21,567
            
            
            
            21,567Debt
      issuance costs
            
            
            13,665
            
            
            
            14,201Prepaid
      aircraft rent
            
            
            85,324
            
            
            
            87,003Derivative
      financial instruments
            
            
            2,530
            
            
            
            —Other
      assets
            
            
            71,666
            
            
            
            70,048Total
      Assets
            
            $
            2,098,776
            
            
            $
            2,085,262




See
accompanying Notes to Condensed Consolidated Financial Statements.







2


AirTran
Holdings, Inc.


Condensed
Consolidated Balance Sheets (Continued)


(In
thousands)




March
      31, 2009
              
              
              December
      31, 2008(Unaudited)
              
              
              (As
      Adjusted,See
      Note 1)LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              72,549
              
              
              $
              81,557Accrued
      and other liabilities
              
              
              152,871
              
              
              
              147,889Air
      traffic liability
              
              
              296,970
              
              
              
              252,055Derivative
      financial instruments
              
              
              30,065
              
              
              
              69,646Current
      maturities of capital lease obligations
              
              
              968
              
              
              
              835Borrowing
      under revolving line of credit
              
              
              90,000
              
              
              
              90,000Current
      maturities of long-term debt
              
              
              65,651
              
              
              
              69,865Total
      current liabilities
              
              
              709,074
              
              
              
              711,847Long-term
      capital lease obligations
              
              
              15,669
              
              
              
              16,031Long-term
      debt
              
              
              915,505
              
              
              
              927,325Other
      liabilities
              
              
              118,692
              
              
              
              120,342Deferred
      income taxes
              
              
              7,992
              
              
              
              7,992Derivative
      financial instruments
              
              
              22,208
              
              
              
              20,616Commitments
      and ContingenciesStockholders'
      Equity:Preferred
      stock
              
              
              —
              
              
              
              —Common
      stock
              
              
              120
              
              
              
              120Addtional
      paid-in capital
              
              
              526,329
              
              
              
              524,800Accumulated
      deficit
              
              
              (189,344
              )
              
              
              (218,051
              )Accumulated
      other comprehensive loss
              
              
              (27,469
              )
              
              
              (25,760
              )Total
      stockholders' equity
              
              
              309,636
              
              
              
              281,109Total
      Liabilities and Stockholders' Equity
              
              $
              2,098,776
              
              
              $
              2,085,262
  See
accompanying Notes to Condensed Consolidated Financial Statements.








3


AirTran
Holdings, Inc.


Condensed
Consolidated Statements of Cash Flows


(In
thousands)


(Unaudited)





Three
      Months Ended March 31,2009
            
            
            2008(As
      Adjusted,
              See
      Note 1)Operating
      activities:Net
      income (loss)
            
            $
            28,707
            
            
            $
            (35,357
            )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            17,068
            
            
            
            15,760Amortization
      of deferred gains from sales/leaseback of aircraft
            
            
            (1,287
            )
            
            
            (1,143
            )Provisions
      for uncollectible accounts
            
            
            186
            
            
            
            354Deferred
      income taxes
            
            
            —
            
            
            
            (20,264
            )Other
            
            
            4,102
            
            
            
            1,300Changes
      in certain operating assets and liabilities:Restricted
      cash
            
            
            (3,787
            )
            
            
            1,230Derivative
      financial instruments
            
            
            (55,159
            )
            
            
            5,498Accounts
      receivable
            
            
            (4,221
            )
            
            
            (20,056
            )Spare
      parts, materials and supplies
            
            
            240
            
            
            
            (1,754
            )Prepaid
      and stored fuel
            
            
            6,341
            
            
            
            20,742Deposits
      held by counterparties to derivative financial instruments
            
            
            43,540
            
            
            
            —Prepaid
      aircraft rent
            
            
            865
            
            
            
            (1,477
            )Other
      assets
            
            
            (4,188
            )
            
            
            (6,422
            )Accounts
      payable, accrued and other liabilities
            
            
            (4,352
            )
            
            
            35,493Air
      traffic liability
            
            
            44,915
            
            
            
            75,393Net
      cash provided by operating activities
            
            
            72,970
            
            
            
            69,297Investing
      activities:Sale
      of available-for-sale-securities
            
            
            9,657
            
            
            
            66,479Purchases
      of property and equipment
            
            
            (6,737
            )
            
            
            (27,409
            )Return
      (payment) of aircraft purchase deposits, net
            
            
            —
            
            
            
            (3,129
            )Other
            
            
            1,950
            
            
            
            5,000Net
      cash provided by investing activities
            
            
            4,870
            
            
            
            40,941Financing
      activities:Issuance
      of long-term debt
            
            
            —
            
            
            
            15,948Payments
      on long-term debt and capital lease obligations
            
            
            (19,220
            )
            
            
            (27,622
            )Borrowings
      under revolving line of credit
            
            
            375,000
            
            
            
            —Repayment
      of borrowings under revolving line of credit
            
            
            (375,000
            )
            
            
            —Proceeds
      from issuance of stock under employee stock purchase plan
            
            
            276
            
            
            
            604Other
            
            
            (135
            )
            
            
            —Net
      cash used for financing activities
            
            
            (19,079
            )
            
            
            (11,070
            )Net
      change in cash and cash equivalents
            
            
            58,761
            
            
            
            99,168Cash
      and cash equivalents at beginning of period
            
            
            315,078
            
            
            
            206,873Cash
      and cash equivalents at end of period
            
            $
            373,839
            
            
            $
            306,041Supplemental
      Disclosure of Cash Flow Activities:Non-cash
      investing and financing activities:Purchase
      of equipment in exchange for debt
            
            $
            —
            
            
            $
            89,500





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
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            28,707
            
            
            
            —
            
            
            28,707Unrealized
      loss on derivative instruments, net of income taxes of $0
      million
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,728
            )
            
            (1,728
            )Other
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            19
            
            
            19Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            26,998Stock-based
      compensation
            
            
            425
            
            
            
            —
            
            
            
            1,351
            
            
            
            —
            
            
            
            —
            
            
            1,351Issuance
      of common stock under employee stock purchase plan
            
            
            67
            
            
            
            —
            
            
            
            276
            
            
            
            —
            
            
            
            —
            
            
            276Other
            
            
            —
            
            
            
            —
            
            
            
            (98
            )
            
            
            —
            
            
            
            —
            
            
            (98
            )Balance
      at March 31, 2009
            
            
            120,042
            
            
            $
            120
            
            
            $
            526,329
            
            
            $
            (189,344
            )
            
            $
            (27,469
            )
            $
            309,636




See
accompanying Notes to Condensed Consolidated Financial Statements.







5







AirTran
Holdings, Inc.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)




Note
1 – Summary of Significant Accounting Policies




Business
and Liquidity




Through
our wholly owned subsidiary, AirTran Airways, Inc., we offer scheduled airline
services, using Boeing B717-200 aircraft (B717) and Boeing B737-700 aircraft
(B737), to 56 locations throughout the United States. A majority 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. On February 25, 2009, we
initiated new service to Cancun, Mexico. Additionally, we have announced we will
commence service to Allentown/Bethlehem, Pennsylvania, Asheville, North
Carolina, Atlantic City, New Jersey, Branson, Missouri, Charleston, West
Virginia, and Knoxville, Tennessee in the second quarter of 2009, and may add
additional markets later in the year. 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.





After six
consecutive years of profitability, during 2008, we were faced with record high
jet fuel prices, deteriorating macroeconomic conditions and disruption in the
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 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 $90 million revolving line of
credit.





During
the three months ended March 31, 2009, we reported operating income of
$47.7 million, net income of $28.7 million, and diluted earnings per common
share of $0.21. Due to the pronounced reduction in the average jet fuel price
and the actions that we have undertaken, our operating results for the quarter
were substantially improved compared to the first quarter of 2008. During the
three months ended March 31, 2008, we reported an operating loss of $35.4
million, a net loss of $35.4 million, and diluted loss per common share of
$0.38.





Our cash
flows for the remainder of 2009 and beyond will be impacted by a variety of
factors including our operating results, which are heavily impacted by the price
of jet fuel, scheduled debt maturities, and capital expenditure requirements.
Our cash flows may also be adversely impacted in the event that one or more of
our credit card processors withholds increased levels of cash that would
otherwise be remitted to us. Each of the 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. As of March 31, 2009, we were in compliance with our processing
agreements and our two largest processors were each entitled to withhold a
portion of our advance ticket sales that would otherwise be remitted to us;
however, our largest credit card processor was holding back no material
remittances from us because a $125 million letter of credit was issued for its
benefit. In the event that, among other things, our aggregate unrestricted
cash and investments (as therein defined) falls below agreed upon levels, or
certain other specified events were to occur, each of our two largest processors
would be entitled to withhold additional cash remittances from us. However, to
the extent that we achieve specified aggregate unrestricted cash and investment
amounts and profitability levels, each agreement also provides for a reduction
or elimination of the percent of its exposure that each processor is entitled to
holdback. An increase of the cash which our largest credit card processor is
entitled to holdback would only impact cash to the extent the holdback
requirement exceeds the letter of credit issued for the benefit of the
processor. An increase or a decrease of the cash heldback by our second largest
credit card processor would be a use or source of cash in 2009,
respectively.





6


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 an unfavorable impact on our
ability to generate sufficient cash from operations to maintain adequate
liquidity through December 31, 2009. 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 that are being heldback by our credit card processors. If one or
more of such events were to occur, we would likely undertake a variety of
actions to mitigate the impact of such events including seeking to obtain
additional secured or unsecured debt financing, equity financing, or both.
However, our current credit rating, the fact that we have limited assets to
serve as collateral for additional borrowings, and the disruption in the U.S.
and global capital markets could make it difficult for us to obtain financing in
2009.
Accordingly, to the extent unanticipated adverse events were to result in a need
for substantial additional financing, such additional debt or equity financing
might not be available to us on terms acceptable to us or at all.





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 included in our Annual Report on
Form 10-K for the year ended December 31, 2008.





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.




7


FASB
Staff Position APB 14-1




In May
2008, the Financial Accounting Standards Board (FASB) issued Staff
Position APB 14-1 (FSP 14-1),Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement). FSP 14-1 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 under FASB Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. We adopted FSP 14-1 as of January 1,
2009. FSP 14-1 requires 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 7.0% convertible notes
repurchased by the Company as of April 23, 2009. The retroactive application of
FSP 14-1 resulted in the recognition of additional financial accounting
annual interest expense of approximately $2.3 million for 2003, which gradually
increased to $7.4 million for 2008. Comparative financial statements of
prior years have been adjusted to apply FSP 14-1 retroactively. The
retroactive application of FSP 14-1 also resulted in the recognition of
additional annual capitalized interest in each of the years in the period 2003
thru 2008. As a result of the adoption of FSP 14-1, we reduced net income for
the three months ending March 31, 2009 by $2.0 million and reduced diluted
earnings per share by $0.02 per share. The adoption of FSP 14-1 has no impact on
our debt service payments.





The
following financial statement line items for the three months ended March 31,
2008, and as of December 31, 2008, were materially affected by the change in
accounting principle (in thousands, except per share data):





Three
      months ended
              March 31,
      2008
            
            
            Effect
      of ChangeAs
      Adjusted
            
            
            As
      Previously ReportedStatement
      of Operations:Interest
      expense
            
            $
            20,452
            
            
            $
            18,704
            
            
            $
            1,748Capitalized
      interest
            
            
            (3,625
            )
            
            
            (2,584
            )
            
            
            (1,041
            )Loss
      before income taxes
            
            
            (55,621
            )
            
            
            (54,755
            )
            
            
            (866
            )Income
      tax benefit
            
            
            (20,264
            )
            
            
            (19,942
            )
            
            
            (322
            )Net
      loss
            
            
            (35,357
            )
            
            
            (34,813
            )
            
            
            (544
            )Loss
      per Common Share:Basic
            
            $
            (0.38
            )
            
            $
            (0.38
            )
            
            $
            —Diluted
            
            $
            (0.38
            )
            
            $
            (0.38
            )
            
            $
            —





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








8





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 very 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.





As of
March 31, 2009, we had on order 55 B737 aircraft with delivery dates
between 2009 and 2016, including four aircraft scheduled for delivery in 2009.
We may decide to sell or re-market additional aircraft.





Our B737
aircraft contract with The Boeing Company (“Boeing”) requires us to make
pre-delivery deposits  to Boeing. No additional pre-delivery deposits
are due for the 2009 scheduled deliveries. Although we have typically 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 deliveries scheduled for 2011 and beyond. Given the current status of
the financial markets, we cannot assure you that satisfactory financing will be
available to us when we are obligated to make pre-delivery deposit payments of
$9.4 million in 2009 for future scheduled deliveries.





We have
four B737 aircraft scheduled for delivery in 2009, two of which we have agreed
to sell in the second quarter of 2009 to a foreign air carrier to whom we
previously sold two B737 aircraft in 2008. We have received deposits from the
foreign carrier. However, these pending transactions are subject to customary
closing conditions, some of which are outside of our control, and therefore we
cannot give any assurances that the closing of these transactions will occur. We
have not arranged financing for such aircraft as we intend for those aircraft to
be sold to the buyer substantially contemporaneously with our purchase from
Boeing. Should these sales not close, we will seek to obtain aircraft debt or
lease financing for these aircraft. We have arranged backstop secured debt
financing to fund a portion of the purchase price of each of the other two 2009
aircraft deliveries.





In
October 2008, as part of our agreement to defer certain aircraft deliveries and
obtain backstop financing for other 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. We have no obligation to accept
delivery of more than four aircraft in total (i.e., B737 deliveries and B717
leases) in 2009. If such affiliate of Boeing exercises its right to require us
to lease any B717 aircraft, we have the option to cancel firm B737 aircraft on
order for each such B717 aircraft.





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 (i.e., a “holdback”). Holdbacks are classified as restricted
cash on our condensed consolidated balance sheet. Our exposure to credit card
holdbacks consists of advanced ticket sales that customers purchase with credit
cards. Once the customer travels, any related holdback is remitted to
us.





Each
agreement with our two largest credit card processors (based on volumes
processed for us) provides that a processor may holdback amounts that would
otherwise be remitted to us in the event that, among other things, our
aggregate unrestricted cash and investments (as defined) falls below agreed upon
levels, or a processor reasonably determines that there has been a material
adverse occurrence or certain other events occur. 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 March 31, 2009, a $125 million letter of
credit had been issued for the benefit of our largest credit card processor
under our Letter of Credit Facility and the processor was holding back no
material cash remittances from us.





9


As of
March 31, 2009, we had advanced ticket sales of approximately $298.9 million
related to all credit card sales. As of March 31, 2009, we were in compliance
with our processing agreements and based on our level of profitability and
unrestricted cash and investments, as defined, our two largest processors were
each entitled to holdback a portion of its exposure to credit card chargebacks.
Had we not been in compliance with the agreements, or if our level of
unrestricted cash and investments, as defined, was lower, our maximum
potential additional cash exposure to holdbacks by our largest two credit
card processors based upon advanced ticket sales as of March 31, 2009 was $108.3
million (after considering both the $125 million letter of credit issued in
favor of our largest credit card processor and the cash heldback by our second
largest credit card processor). While a decrease in our unrestricted cash and
investments could result in additional amounts being withheld by our credit card
processors, to the extent that we achieve specified aggregate unrestricted cash
and investment amounts and profitability levels, each agreement also provides
for a reduction or elimination of the percent of its exposure that each
processor is currently entitled to holdback.




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
      2017 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 in which we are responsible in some
      circumstances should withholding taxes be imposed for paying such amounts
      of additional rent, as is 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 liabilities that arise from the manufacture, design,
      ownership, financing, use, operation, and maintenance of the aircraft for
      tort liability, whether or not these liabilities arise out of or relate to
      the negligence of these indemnified parties except for their 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 will pay the
      lender the additional amount necessary to compensate the lender for the
      actual cost increase.





10


·
            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 the 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 Statement of Financial Accounting Standards
No. 5,Accounting for
Contingencies. Uncertain income tax positions taken on income tax returns
are accounted for in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An interpretation of FASB Statement No. 109 (FIN 48).
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.





Restricted
Cash and Letters of Credit





Restricted
cash consists of amounts escrowed related to aircraft leases, letters of credit,
credit card holdbacks for advanced ticket sales, cash escrowed for future
interest payments and collateral to support derivative financial arrangements.
As of March 31, 2009, $17.2 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 March 31,
2009, no amount was drawn against the $125 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 March 31, 2009,
we had short-term and long-term investments, of $10.5 million and $5.3 million,
respectively, consisting of $12.5 million in an enhanced cash investment fund
and $3.3 million in a money market fund. The managers of the funds have limited
immediate redemptions and we have classified $5.3 million of our investment in
the enhanced cash investment fund as long-term as of March 31, 2009. During the
three months ended March 31, 2008, we recorded a charge of $1.0 million to
interest income for realized and unrealized losses on one of these
funds.




11


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 March 31, 2009, we have
entered into fuel related swap and option agreements, which pertain to
115.8 million gallons of our projected April through December 2009 fuel
purchases and 32.4 million gallons of our projected 2010 fuel purchases. Such
agreements pertain to 42.5 percent of our projected April through December
2009 jet fuel requirements and 9.1 percent of our projected 2010 jet fuel
requirements. Based on actions subsequent to March 31, 2009, as of April 16,
2009, we have entered into fuel related swap and option agreements, which
have increased our gallons under contract to 122.5 million
gallons of our projected April through December 2009 fuel purchases. Such
agreements pertain to 44.7 percent of our projected April through December
2009 jet 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.





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. Historically, a
majority of our fuel related derivative financial instruments did not qualify to
be accounted for as hedges. Consequently, a majority of the gains and losses on
our fuel related derivative financial instruments have been 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, have been classified as a component of fuel
expense when realized. In order to simplify the financial reporting for fuel
related derivatives, effective January 1, 2009, we ceased designating all new
fuel related derivative financial instruments as accounting hedges.





Fuel
related derivative financial instruments outstanding as of December 31, 2008
previously designated as accounting hedges will continue to be accounted for 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 loan,
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 three months ended March 31, 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 March 31, 2009 was $468.2million. 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.





12


The
following table summarizes the fair value of our derivative financial
instruments (in thousands):





Derivative
      Assets
            
            
            Derivative
      LiabilitiesBalance
      Sheet Location
            
            March
      31, 2009
            
            December
      31, 2008
            
            
            March
      31, 2009
            
            December
      31, 2008Derivatives
      designated as hedging instruments under SFAS 133Interest
      rate contracts
            Current
            $
            -
            $
            -
            
            $
            (6,934)
            $
            (5,644)Interest
      rate contracts
            Noncurrent
            
            -
            
            -
            
            
            (19,470)
            
            (15,694)Jet-fuel
      swaps and options
            Current
            
            2,217
            
            2,722
            
            
            (5,443)
            
            (6,710)2,217
            
            2,722
            
            
            (31,847)
            
            (28,048)Derivatives
      not designated as hedging instruments under SFAS 133Jet-fuel
      options
            Current
            
            -
            
            77
            
            
            (71)
            
            (548)Crude
      swaps and options
            Current
            
            14,020
            
            621
            
            
            (14,602)
            
            (56,744)Crude
      swaps and options
            Noncurrent
            
            2,530
            
            -
            
            
            (2,738)
            
            (4,922)Other
            Current
            
            95
            
            -
            
            
            (3,015)
            
            -16,645
            
            698
            
            
            (20,426)
            
            (62,214)Total
      derivatives
            
            $
            18,862
            $
            3,420
            
            $
            (52,273)
            $
            (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.








13


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 March 31,Amount
      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)
            
            Location
      of (Gain) Loss recognized in income on derivatives (ineffective
      portion)
            
            Amount
      of (gain) loss recognized in income on derivatives (ineffective
      portion)2009
            
            2008
            
            
            
            2009
            
            2008
            
            
            
            2009
            
            2008Derivatives
      designated as hedging instruments under SFAS 133Interest
      rate contracts
            $
            4,438
            $
            7,731
            
            Interest
      expense
            $
            218
            $
            —
            
            Net
      (gains) losses on derivative financial instruments
            $
            —
            $
            32Jet-fuel
      swaps and options
            
            1,000
            
            (11,062
            )
            Aircraft
      fuel
            
            3,492
            
            (1,782
            )
            Net
      (gains) losses on derivative financial instruments
            
            (45)
            
            138$
            5,438
            $
            (3,331
            )
            
            $
            3,710
            $
            (1,782
            )
            
            $
            (45)
            $
            170Location
      of (Gain) Loss recognized in income on derivative
            
            Amount
      of (gain) loss on derivatives recognized in earnings2009
            
            2008Derivatives
      not designated as hedging instruments under SFAS 133Jet-fuel
      options
            
            
            
            
            
            
            
            
            
            
            
            Net
      (gains) losses on derivative financial instruments
            $
            (401)
            $
            6,578Crude
      swaps and  options
            
            
            
            
            
            
            
            
            
            
            
            Net
      (gains) losses on derivative financial instruments
            
            (3,364)
            
            (3,828)Other
            
            
            
            
            
            
            
            
            
            
            
            Net
      (gains) losses on derivative financial instruments
            
            2,920
            
            —$
            (845)
            $
            2,750


14





Based on
fair values as of March 31, 2009, we expect to reclassify $5.2 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 settlements.





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
specified amounts. As of March 31, 2009, we provided the counterparties with
collateral aggregating $25.6 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.





Note
4 –Debt





The
components of debt were (in thousands):


March
      31, 2009
              
              
              December
      31, 2008B737
      Aircraft Purchase Financing Facilities:Floating
      rate aircraft notes payable through 2020, 2.85 percent weighted-average
      interest rate as of March 31, 2009
              
              $
              645,109
              
              
              $
              655,931Fixed
      rate aircraft notes payable through 2018, 7.02 percent weighted-average
      interest rate as of March 31, 2009
              
              
              58,370
              
              
              
              61,014Fixed
      rate B717 aircraft notes payable through 2017, 10.21 percent
      weighted-average interest rate as of March 31, 2009
              
              
              80,854
              
              
              
              80,854Floating
      rate B737 aircraft pre-delivery deposit financings payable through 2009,
      2.17 percent weighted-average interest rate as of March 31,
      2009
              
              
              13,774
              
              
              
              18,1357.0%
      convertible notes due 2023
              
              
              123,500
              
              
              
              125,0005.5%
      convertible senior notes due 2015
              
              
              69,500
              
              
              
              69,500Other
              
              
              1,300
              
              
              
              —Total
      long-term debt
              
              
              992,407
              
              
              
              1,010,434Less
      unamortized debt discount
              
              
              (11,251
              )
              
              
              (13,244
              )981,156
              
              
              
              997,190Less
      current maturities of long-term debt
              
              
              (65,651
              )
              
              
              (69,865
              )Long-term
      debt less current maturities
              
              $
              915,505
              
              
              $
              927,325Borrowing
      under Revolving Line of Credit Facility
              
              $
              90,000
              
              
              $
              90,000
  As of
April 16, 2009, all amounts outstanding under the Revolving Line of Credit have
been repaid.








15





Maturities
of debt for the remainder of 2009 and for the next four years, and thereafter,
in aggregate, are (in millions): 2009-$142; 2010-$57; 2011-$62; 2012-$58;
2013-$68; thereafter-$695. Maturities for the remainder of 2009 include $90
million outstanding under the Revolving Line of Credit Facility.




As of
March 31, 2009, the following assets served as collateral for outstanding
debt:
 
 ·
              Assets
      (primarily flight equipment) with a net book value of $1.0 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 Letter of Credit and Revolving Line of Credit
      Facility.
 
 Additionally,
our obligations under the Letter of Credit and Revolving Line of Credit Facility
are secured by the pledge of, directly or indirectly, our accounts receivable;
ground equipment; aircraft parts; certain inventory; our 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 sales agreements for aircraft and derivative
financial instruments.


7%
Convertible Notes




In May
2003, we completed a private placement of $125 million in convertible notes due
in 2023. The proceeds were used to improve our overall liquidity by providing
working capital and for general corporate purposes. The 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. The unsecured 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.





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):





March
      31,
              2009
            
            
            December 31,
              2008Principal
      amount
            
            $
            123,500
            
            
            $
            125,000Unamortized
      discount
            
            
            (11,081
            )
            
            
            (13,244
            )Net carrying amount
            
            $
            112,419
            
            
            $
            111,756Additional
      paid-in capital, net of  tax
            
            $
            27,312
            
            
            $
            27,411





16




We
recorded contractual interest expense of $2.2 million for the three months ended
March 31, 2009 and 2008, respectively, and recorded interest expense related to
debt discount amortization of $2.0 million and $1.7 million for the three months
ended March 31, 2009 and 2008, respectively.




At March
31, 2009, the unamortized discount has a remaining amortization period of
15 months assuming redemption at the first repurchase date on July 1,
2010.  At March 31, 2009, the if-converted value of the 7% convertible
notes did not exceed the principal amount.




In the
first and second quarters of 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 three months ended March
31, 2009, we repurchased $1.5 million of our 7% convertible notes resulting in a
gain of $0.3 million. In addition, we purchased an additional $27.7 million of
our 7% convertible notes through April 23, 2009, resulting in gains of $4.1
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.





Note
5 - Fair Value Measurements





We
adopted the required provisions of FASB Statement of Financial Accounting
Standards No. 157 (SFAS 157), Fair Value Measurements, as
of January 1, 2008, and adopted certain deferred provisions on January 1,
2009. SFAS 157 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. SFAS 157 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, SFAS 157 establishes a
three-tier fair value hierarchy which prioritizes the inputs used in measuring
fair value as follows:





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 SFAS 157. 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).






17




Assets
and (liabilities) measured at fair value on a recurring basis during the period
were as follows (in thousands):





(in
      thousands)
            
            Fair Value at
              March
      31, 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
            
            $
            373,839
            
            
            $
            —
            
            $
            373,839
            
            
            $
            —
            
            
            MarketShort-term
      investments
            
            
            10,485
            
            
            
            —
            
            
            10,485
            
            
            
            —
            
            
            MarketLong-term
      investments
            
            
            5,311
            
            
            
            —
            
            
            5,311
            
            
            
            —
            
            
            MarketInterest
      rate derivatives
            
            
            (26,404
            )
            
            
            —
            
            
            (26,404
            )
            
            
            —
            
            
            MarketFuel
      derivatives, net
            
            
            (7,007
            )
            
            
            —
            
            
            —
            
            
            
            (7,007
            )
            
            Market





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 March 31, 2009 is as 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
            
            
            (2,602
            )Included
      in other comprehensive income
            
            
            2,494Purchases,
      issuances, and settlements
            
            
            58,605Balance
      at March 31, 2009
            
            $
            (7,007
            )The
      amount of total gains or (losses) for the three months ended March 31,
      2009, included in earnings attributable to the change in unrealized gains
      or losses relating to assets and liabilities still held at March 31,
      2009
            
            $
            839





Note
6 – Income Taxes





We did
not record any income tax expense (benefit) during the three months ended March
31, 2009.  Our effective rate was 36.4 percent for the three months
ended March 31, 2008. Our effective tax rate can differ from the 37.5 percent
composite statutory tax rate (35 percent federal statutory rate plus the 2.5
percent state statutory rate) due to changes in the valuation allowance on our
deferred tax assets, certain expenses which 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 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. Consequently, because a valuation allowance was still required for
deferred tax assets in excess of our deferred tax liabilities at March 31, 2009,
our effective tax rate for the three months ended March 31, 2009 was
zero.





18


The total
amount of unrecognized tax benefits and related interest and penalties was not
material as of December 31, 2008. During the three months ended March 31, 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
$6.0 million and also reduced the valuation allowance for deferred tax assets by
the same amount with no net impact on income tax expense (benefit) for the
period.





As of
March 31, 2009, we had recorded a valuation allowance applicable to our 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 March 31,2009
            
            
            2008(As
      Adjusted, See Note 1)NUMERATOR:Net
      income (loss) available to common stockholders
            
            $
            28,707
            
            
            $
            (35,357)Plus
      income effect of assumed conversion-interest on convertible
      debt
            
            
            956
            
            
            
            —Income
      after assumed conversion, diluted
            
            $
            29,663
            
            
            $
            (35,357)DENOMINATOR:Weighted-average
      shares outstanding, basic
            
            
            119,828
            
            
            
            92,114Effect
      of 7.0% convertible notes
            
            
            —
            
            
            
            —Effect
      of 5.5% convertible notes
            
            
            18,099
            
            
            
            —Effect
      of dilutive stock options
            
            
            4
            
            
            
            —Effect
      of dilutive restricted shares
            
            
            153
            
            
            
            —Effect
      of warrants to purchase common stock
            
            
            —
            
            
            
            —Adjusted
      weighted-average shares outstanding, diluted
            
            
            138,084
            
            
            
            92,114EARNINGS
      (LOSS) PER COMMON SHARE:Basic
            
            $
            0.24
            
            
            $
            (0.38)Diluted
            
            $
            0.21
            
            
            $
            (0.38)











19








Excluded
from the diluted earnings per share calculation for 2009 are the impacts on the
weighted average shares outstanding of the following which would have been
anti-dilutive for the period in 2009: 11.2 million shares related to
our 7.0% convertible notes that are issuable upon conversion; and, 4.7million shares related
to warrants to purchase our common stock.





Excluded
from the diluted earnings per share calculation 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; 3.0million shares related
to our outstanding stock options; and 1.3million shares related
to our unvested restricted stock. The 5.5% convertible notes were issued in the
second quarter of 2008.




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
postemployment 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
            
            
            (5,438
            )
            
            
            —–
            
            
            
            (5,438
            )Reclassification
      to earnings, net of income taxes
            
            
            3,710
            
            
            
            19
            
            
            
            3,729Balance
      March 31, 2009
            
            $
            (27,297
            )
            
            $
            (172
            )
            
            $
            (27,469
            )




Balance
      at January 1, 2008
            
            $
            1,117
            
            
            $
            233
            
            
            $
            1,350Changes
      in fair value, net of income taxes
            
            
            2,112
            
            
            
            —–
            
            
            
            2,112Reclassification
      to earnings, net of income taxes
            
            
            (1,131
            )
            
            
            52
            
            
            
            (1,079
            )Balance
      March 31, 2008
            
            $
            2,098
            
            
            $
            285
            
            
            $
            2,383





Note
9 – Stock Option Awards and Restricted Stock Awards




Restricted
stock awards, market-based 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 three months of 2009 and 2008, we
granted restricted stock awards for approximately 558,470 and 550,000 shares,
respectively, and approximately 451,063 and 299,000 shares, respectively, of
restricted stock vested. During the first three 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 will be
recognized ratably as compensation expense over the three-year service
period.  No market-based awards were granted in the first three months
of 2008.  No stock options were granted in either period.




20


Compensation
expense for our restricted stock grants was $1.5 million and $1.4 million during
the first three months of 2009 and 2008, respectively. As of March 31, 2009, we
have $9.5 million in total unrecognized future compensation expense that will be
recognized over the next three years relating to awards for approximately 1.6
million restricted shares which were outstanding at such date, but which had not
yet vested. Unvested restricted shares are not included in reported common
shares outstanding amounts. As shares vest, restricted shares are transferred to
common shares.





As of
March 31, 2009, options to purchase 2.2million 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 March 31, 2009.





21





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. A majority 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 April 16, 2009, we operated 86 Boeing 717-200 aircraft
(B717) and 50 Boeing 737-700 aircraft (B737) offering approximately 700
scheduled flights per day to 56 locations in the United States and to Cancun,
Mexico. We initiated our new service to Cancun, Mexico on February 25, 2009.
Additionally, we have announced we will commence service to Allentown/Bethlehem,
Pennsylvania, Asheville, North Carolina, Atlantic City, New Jersey, Branson,
Missouri, Charleston, West Virginia, and Knoxville, Tennessee in the second
quarter of 2009, and we may add additional markets later in the year. 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, deteriorating macroeconomic conditions and disruption in the
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 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 $90 million revolving line of
credit.





We
reported operating losses in each of the first three quarters of 2008. However,
we reported an operating profit for the fourth quarter of 2008 as fuel prices
declined substantially compared to the first nine months of 2008 and as we began
to benefit from our capacity reductions. We reported a net loss for the fourth
quarter of 2008 due to losses on our derivative financial
instruments.





22


During
the three months ended March 31, 2009, we reported operating income of
$47.7 million, net income of $28.7 million, and diluted earnings per common
share of $0.21. Due to the substantial reduction in the average jet fuel price
and the actions that we have undertaken, our operating results for the quarter
were substantially improved compared to the first quarter of 2008. During the
three months ended March 31, 2008, we reported an operating loss of $35.4
million, a net loss of $35.4 million, and diluted loss per common share of
$0.38.





Our first
quarter 2009 operating income improved by $83.1 million compared to the first
quarter of 2008. The reduction in the average price of jet fuel resulted in a
$117.2 million decrease in our aircraft fuel cost during the first quarter of
2009 compared to what fuel cost would have been had fuel prices been at the
average level experienced during first quarter of 2008. The favorable impact of
the reduced average fuel price was somewhat offset by the unfavorable impacts of
recessionary macroeconomic conditions and higher non-fuel unit operating costs.
More specifically, our total unit revenue per available seat mile decreased by
2.1 percent to 10.11 cents and our non-fuel unit operating costs per available
seat mile increased by 7.0 percent to 6.74 cents compared to the first quarter
of 2008. Continuing a trend which started in September 2008, we reduced capacity
as measured by available seat miles. We believe that the 7.2 percent reduction
in first quarter 2009 capacity compared to first quarter 2008 capacity had the
salutary effect of partially mitigating the adverse impact of recessionary
conditions on our unit revenues. However, the capacity reduction was also one of
the causes of the increase in non-fuel unit operating costs.





Other
Accomplishments





During
2009, we:





·
            Carried
      in excess of 5.3 million revenue passengers during the three months ended
      March 31, 2009;





·
            Ranked
      #1 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;




·
            Initiated
      service to Cancun, Mexico; and





·
            Launched
      3 other new non-stop routes.





2009
Outlook





We expect
our mix of low fares, excellent customer service, an affordable Business Class
product, and one of the youngest all-Boeing aircraft fleets will provide product
value that customers will continue to find attractive.





Based on
our current outlook, as of April 22, 2009, we expect capacity, as measured by
available seat miles (ASMs), to decrease by approximately three to four percent
for 2009 compared to 2008. We expect capacity to decrease
seven percent for the second quarter compared to the second
quarter of 2008. Also, for the second quarter compared to the second quarter of
last year, we expect our total unit revenue per ASM to be down two to four
percent and our non-fuel unit operating cost per ASM to increase eight and
one-half to nine and one-half percent. Worsening macroeconomic conditions
may adversely impact our near term revenues.


23





RESULTS
OF OPERATIONS





SELECTED
FINANCIAL INFORMATION





The table
below sets forth selected financial and operating data for the three months
ended March 31, 2009 and 2008:





Three
      Months Ended
              March
      31,
            
            
            Percentage
              Increase
              (Decrease)2009
            
            2008Revenue
      passengers
            
            5,344,683
            
            
            5,718,319
            
            
            
            (6.5
            )Revenue
      passenger miles (RPM) (000s) (1)
            
            4,086,181
            
            
            4,347,399
            
            
            
            (6.0
            )Available
      seat miles (ASM) (000s) (2)
            
            5,358,382
            
            
            5,771,038
            
            
            
            (7.2
            )Passenger
      load factor (3)
            
            76.3
      percent
            
            
            75.3
      percent
            
            
            
            1.0
            ptsDepartures
            
            58,959
            
            
            63,570
            
            
            
            (7.3
            )Average
      stage length (miles) (4)
            
            727
            
            
            724
            
            
            
            0.4Average
      fare (excluding transportation taxes) (5)
            $
            90.95
            
            $
            99.06
            
            
            
            (8.2
            )Average
      yield per RPM (6)
            
            11.90
            ¢
            
            13.03
            ¢
            
            
            (8.7
            )Passenger
      revenue per ASM (RASM) (7)
            
            9.07
            ¢
            
            9.82
            ¢
            
            
            (7.6
            )Total
      revenue per ASM (8)
            
            10.11
            ¢
            
            10.33
            ¢
            
            
            (2.1
            )Operating
      cost per ASM (CASM) (9)
            
            9.22
            ¢
            
            10.95
            ¢
            
            
            (15.8
            )Non-fuel
      operating cost per ASM (10)
            
            6.74
            ¢
            
            6.30
            ¢
            
            
            7.0Average
      cost of aircraft fuel per gallon (11)
            $
            1.59
            
            $
            3.00
            
            
            
            (47.0
            )Gallons
      of fuel burned (000’s)
            
            83,352
            
            
            89,605
            
            
            
            (7.0
            )Operating
      aircraft in fleet at end of period
            
            136
            
            
            140
            
            
            
            (2.9
            )Average
      daily utilization (hours: minutes) (12)
            
            10:36
            
            10:54
            
            
            
            (2.8
            )Full-time
      equivalent employees at end of period
            
            7,850
            
            
            8,282
            
            
            
            (5.2
            )





(1)
            The number ofscheduled revenue miles flown bypassengers(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 divided by gallons of fuel burned(12)
            The
      average amount of time per day that an aircraft flown is operated in
      revenue service





For
the three months ended March 31, 2009 and 2008




Summary




During
the three months ended March 31, 2009, we reported operating income of
$47.7 million, net income of $28.7 million, and diluted earnings per common
share of $0.21. Due to the substantial reduction in the average jet fuel price
and the actions that we have undertaken, our operating results for the quarter
were substantially improved compared to the first quarter of 2008. During the
three months ended March 31, 2008, we reported an operating loss of $35.4
million, a net loss of $35.4 million, and diluted loss per common share of
$0.38.


24





Operating
Revenues




Our
operating revenues for the three months ended March 31, 2009 decreased $54.4
million (9.1 percent) due to the net effect of an $80.3 million decrease in
passenger revenues and a $25.9 million increase in other revenues compared to
the three months ended March 31, 2008. Our total revenue per available seat mile
for the first quarter of 2009 was 10.11 cents, a decrease of 2.1 percent
compared to the first quarter of 2008.  We believe that our capacity
reductions combined with increases in ancillary fees partially mitigated the
adverse impact of the current recession by preventing a more pronounced erosion
of unit revenues.





The $80.3
million (14.2 percent) decrease in passenger revenue was due to both reduced
traffic and reduced passenger yield. We believe the reductions in traffic and
yield were attributable in large part to the current economic recession. During
the three months ended March 31, 2009, we reduced our capacity by 7.2percent compared to the
three months ended March 31, 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 6.0 percent decrease in revenue passenger miles produced
an average passenger load factor of 76.3 percent, which was a 1.0 percentage
point increase compared to the three months ended March 31, 2008. Average yield
per revenue passenger mile was 11.90 cents,8.7 percent lower than the
analogous period in 2008.




Other
revenues for the three months ended March 31, 2009, increased $25.9 million
(86.4 percent) compared to the three months ended March 31, 2008, reflecting in
large part pricing changes for ancillary customer services resulting from the
unbundling of our service product to create more options for our passengers.
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 March 31,
2009, decreased $137.5 million (21.8 percent)
and decreased 15.8 percent on a unit cost basis, as measured by
operating cost per ASM (CASM). Our financial results were significantly
affected by the price of fuel and volatility of the price of fuel during the
three months ended March 31, 2009.





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
              March 31,
            
            
            Percent
              Increase
              (Decrease)2009
            
            
            2008Aircraft
      fuel
            
            
            2.48
            ¢
            
            
            4.65
            ¢
            
            
            (46.7
            )%Salaries,
      wages and benefits
            
            
            2.20
            
            
            
            2.06
            
            
            
            6.8Aircraft
      rent
            
            
            1.13
            
            
            
            1.05
            
            
            
            7.6Maintenance,
      materials and repairs
            
            
            0.87
            
            
            
            0.72
            
            
            
            20.8Distribution
            
            
            0.38
            
            
            
            0.39
            
            
            
            (2.6
            )Landing
      fees and other rents
            
            
            0.63
            
            
            
            0.61
            
            
            
            3.3Aircraft
      insurance and security services
            
            
            0.09
            
            
            
            0.09
            
            
            
            -Marketing
      and advertising
            
            
            0.21
            
            
            
            0.20
            
            
            
            5.0Depreciation
      and amortization
            
            
            0.26
            
            
            
            0.23
            
            
            
            13.0Other
      operating
            
            
            0.97
            
            
            
            0.95
            
            
            
            2.1Total
      CASM
            
            
            9.22
            ¢
            
            
            10.95
            ¢
            
            
            (15.8
            )%




25


Aircraft
fuel decreased 46.7 percent on a cost per ASM basis. For the
three months ended March 31, 2009, our fuel price per gallon, including taxes
and into-plane fees, decreased 47.0 percent from $3.00 during the
first quarter of 2008 to $1.59 during the first quarter of 2009.





Salaries, wages and
benefits expense increased 6.8 percent on a cost per ASM basis
primarily due to increases in contractual rates and insurance
costs.





Aircraft
rent increased 7.6 percent on a cost per ASM basis primarily
due to rent expense being relatively flat for the three months ended March 31,
2009 as compared to the three months ended March 31, 2008, while ASMs declined
by 7.2 percent.





Maintenance, materials and repairsexpense increased 20.8 percent on a cost per ASM basis primarily due
to:  increases in airframe checks; engine power-by-the-hour
maintenance costs; tire, wheel, and brake costs; and rotable
repairs.





Marketing and advertising
costs increased 5.0 percent on a cost per ASM basisdue to planned spending
levels.




Depreciation and
amortization increased 13.0 percent on a cost per ASM basis
primarily due to purchases of ground service equipment, computer equipment, and
spare aircraft parts for our B737 aircraft fleet, while ASMs declined by 7.2
percent.





Other
(Income) Expense




Other (income) expense,
net decreased by $1.2 million to $19.0 million for the first
quarter of 2009 compared to $20.2 million for the first quarter of 2008. We
reported gains on derivative financial instruments of $0.9 million for the first
quarter of 2009, compared to losses of $5.2 million for the first quarter of
2008. Interest income decreased $1.1 million due to lower market interest rates.
Interest expense, including amortization of debt issuance costs, increased by
$0.8 million 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 letter of credit and revolving line of
credit facility obtained in the third quarter of 2008. Capitalized interest
decreased by $3.3 million. 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.





Income
Tax Expense




We did
not record any income tax expense (benefit) during the three months ended March
31, 2009.  Our effective rate was 36.4 percent for the three months
ended March 31, 2008.





LIQUIDITY
AND CAPITAL RESOURCES




At March
31, 2009, we had aggregate unrestricted cash, cash equivalents, and short-term
investments of $384.3 million ($389.6 million including long-term investments).
As of March 31, 2009, we also had $89.9 million of restricted cash. We also have
a Revolving Line of Credit Facility pursuant to which we are permitted to borrow
up to $90 million for general corporate purposes, of which $90 million was
borrowed as of March 31, 2009. As of April 16, 2009, we had no borrowings
outstanding under the Revolving Line of Credit Facility. During the three months
ended March 31, 2009, our primary source of cash was from cash provided by
operating activities. Our primary use was for repayment of
debt.





26





First
Quarter 2009 Operating, Financing, and Investing Activities





Operating
activities during the three months ended March 31, 2009, provided
$73.0 million of cash flow compared to $69.3 million provided 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 three
months ended March 31, 2009, we reported net income of $28.7 million
compared to a net loss of $35.4 million for the three months ended
March 31, 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. Advanced 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 we slow or reverse our growth
or the amounts heldback by our credit card processors increase. During the three
months ended March 31, 2009, our air traffic liability balance increased $44.9
million contributing favorably to net cash flow from operating activities.
During the three months ended March 31, 2008, our air traffic liability balance
increased $75.4 million, contributing to net cash flow from operating
activities. Changes in accounts payable, accrued, and other current and
non-current liabilities can also have an impact on our cash flow from
operating activities. During the three months ended March 31, 2009, the
$4.4 million decrease in accounts payable and accrued and other liabilities
adversely impacted net cash provided by operating activities. During the three
months ended March 31, 2008, the $35.5 million increase in accounts payable and
accrued and other liabilities contributed favorably to net cash provided by
operating activities.





Our
derivative financial instruments reduced our cash flow provided by operating
activities during the quarter ended March 31, 2009 by $11.7 million. Cash flow
from operations was reduced by $55.2 million primarily due to payments to
counterparties (including amounts paid to unwind certain fuel related
derivatives which we believed were unlikely to provide benefit in 2009) and
changes in the fair value of derivatives. During the quarter, 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 $43.5 million during the quarter.





We used
cash to increase other assets by $4.2 million and $6.4 million during the three
months ended March 31, 2009 and 2008, respectively. Other assets include
prepaid aircraft maintenance and other deposits, prepaid insurance and prepaid
distribution costs. Additionally, prepaid and stored fuel decreased by $6.3
million and $20.7 million during the three months ended March 31, 2009 and
2008, respectively, contributing favorably to net cash provided by operating
activities.




Investing
activities during the three months ended March 31, 2009, provided
$4.9 million in cash compared to the $40.9 million provided during the similar
period in 2008. Purchases and sales of available for sales securities are
classified as investing activities. During the three months ended March 31,
2009, we sold $9.7 million of available for sale securities. During the three
months ended March 31, 2008, we sold $66.5 million of available for sale
securities. Investing activities also include expenditures for aircraft deposits
and the purchase of aircraft and other property and equipment.





27





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 three months ended March 31, 2009, we did not pay
nor were we refunded any aircraft purchase deposits. During the three
months ended March 31, 2008, we received $16.8 million in previously paid
aircraft deposits while paying $20.0 million in new aircraft deposits. We did
not purchase any aircraft during the three months ended March 31, 2009. During
the three months ended March 31, 2009, we expended $6.7 million in cash 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 three months ended March 31, 2008, we purchased three B737 aircraft
and incurred $89.5 million of debt related to the acquisition of these aircraft.
During the three months ended March 31, 2008, we expended $27.4 million in cash,
primarily for the acquisition of aircraft as well as for the acquisition of
rotable parts and other property and equipment.





Financing
activities used $19.1 million of cash during the three months ended
March 31, 2009, compared to using cash of $11.1 million in the analogous period
in 2008. During the three months ended March 31, 2009, we repaid $4.4
million of pre-delivery deposit debt financing, and repaid $14.6 million of
aircraft purchase and other debt financing. Also, during the quarter, we
received cash from our Revolving Line of Credit of $375 million and repaid $375
million. During the three months ended March 31, 2008, we received cash from the
issuance of debt financing for aircraft pre-delivery deposits of $16.0 million
and repaid $12.6 million of pre-delivery deposit debt financing. During the
three months ended March 31, 2008, we repaid $14.7 million of aircraft purchase
debt financing. Also, during the first quarter of 2008, we borrowed $89.5
million in non-cash transactions to finance the purchase of three 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 $10 million. Payments of current
maturities of existing debt and capital lease obligations will aggregate $142.9
million in the remainder of 2009, including $90 million previously borrowed
under the Revolving Line of Credit Facility.





In the
first and second quarters of 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 three months ended March
31, 2009, we repurchased $1.5 million of our 7% convertible notes resulting in a
gain of $0.3 million. In addition, we purchased an additional $27.7 million of
our 7% convertible notes through April 23, 2009, resulting in gains of $4.1
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.





28





Our aircraft purchase commitmentsfor the remainder of 2009
aggregate$135.0million, including our obligation to
make pre-delivery deposit payments toThe Boeing Company (“Boeing”).No additionalpre-deliverydeposits are due for the2009 scheduled deliveries. Although we
typically have financed a significant portion of our pre-delivery deposit
requirements with debt frombanks or other financial
institutions, we currently
have no such financing in place for deliveriesscheduled for2011 and beyond. Given the current status of the
financial markets,we
cannot assure you thatsatisfactory financing will be
available to us when we are obligated tomake pre-delivery depositpaymentsof $9.4 millionduring the remainder of
2009for future scheduled
deliveries. We have four B737 aircraft scheduled
for delivery in 2009, two of which wehave agreed to sell in the second quarter of 2009 to a
foreign air carrier to whom we previously sold two B737 aircraft in
2008.We have received deposits from the
foreign carrier.However, these pending salesare subject to customary closing
conditions, some of which are outside of our controland, therefore, we cannot
giveassurances that the
closing of these transactions will occur. We have not arrangedpermanent financing for such aircraft
becausewe intend for
those aircraft to be sold to the buyer substantially contemporaneously with our
purchase from Boeing.However,we havearranged backstop secured debt
financing to fund a portion of the purchase price of each of theother two B737 aircraftdeliveriesscheduled for 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 March 31, 2009, we provided
counterparties with collateral aggregating $25.6 million. 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.





Each
agreement with our two largest credit card processors (based on volumes
processed for us) allows, under specified conditions, the processor to retain
cash related to future travel that such processor otherwise would remit to
us (i.e., a “holdback”). As of March 31, 2009, we were in compliance with
our processing agreements and each of our two largest processors was entitled to
withhold amounts that would otherwise be remitted to us. The largest processor
was not holding back any significant remittances, because we obtained a letter
of credit for the benefit of the processor. Our potential cash exposure to
additional holdbacks by our largest two credit card processors based on advanced
ticket sales as of March 31, 2009 was up to a maximum of $108.3 million (after
considering both the $125 million letter of credit issued in favor of our
largest credit card processor and the cash heldback by our second largest credit
card processor). While a decrease in our unrestricted cash and investments could
result in additional amounts being withheld by our credit card processors, to
the extent that we achieve specified aggregate unrestricted cash and investment
amounts and profitability levels, each agreement also provides for a reduction
or elimination of the percent of its exposure that each processor is currently
entitled to holdback. A reduction of the cash heldback by our second largest
credit card processor would be a source of cash in 2009.





We
believe we have options available to meet our debt repayments, capital
expenditures and operating commitments, which may include internally
generated funds, and various financing or leasing options, including the sale,
lease, or sublease of our aircraft. Additionally, we have a $90 million
Revolving Line of Credit Facility, under which $90 million and $0 was
outstanding as of March 31, 2009 and April 16, 2009, respectively. However, our
owned aircraft and our pre-delivery deposits are pledged as collateral for
outstanding debt, and we have pledged, directly or indirectly, a variety of our
assets to collateralize our obligations under our Letter of Credit and Revolving
Line of Credit Facility. The counterparty to the Revolving Line of Credit
Facility has agreed to release its lien on certain of the collateral securing
that Facility for certain purposes, which may include securing a new
financing.





29





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 an unfavorable impact on our ability to generate
sufficient cash from operations to maintain adequate liquidity through December
31, 2009. 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 that are being held back
by our credit card processors. If one or more of such events were to occur, we
would likely undertake a variety of actions to mitigate the impact of such
events including seeking to obtain additional secured or unsecured debt
financing, equity financing, or both. However, our current credit rating, the
fact that we have limited assets to serve as collateral for additional
borrowings, and the disruption in the U.S. and global capital markets could make
it difficult for us to obtain financing in 2009.
Accordingly, to the extent unanticipated adverse events were to result in a need
for substantial additional financing, such additional debt or equity financing
might not be available to us on terms acceptable to us or at all.





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.”





During
the fourth quarter of 2008, we unwound certain derivative financial instrument
positions pertaining to 2009 fuel requirements. The positions were unwound
because we believed that such positions were unlikely to provide benefit in
2009. Because crude oil prices declined after we unwound the positions, we
avoided an estimated $14.8 million of first quarter 2009 fuel hedging related
realized losses.





In
summary, our fuel related derivative financial instruments impacted our
financial statements for the three months ended March 31, 2009 as
follows:





•
            
            Net
      realized losses related to derivative financial instruments increased fuel
      expense by $3.5 million during the three months ended March 31,
      2009.




•
            
            We
      recorded non-operating net gains related to derivative financial
      instruments of $0.9 million during the three months ended March 31,
      2009. During the three months ended March 31, 2009, we realized losses
      related to derivative financial instruments of $2.1
    million.




•
            
            As
      of March 31, 2009, the estimated fair value of our fuel related derivative
      financial instruments was a net liability of $7.0 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 March 31, 2009, accumulated other comprehensive income (loss) included
      $5.2 million (before income tax) of net unrealized losses which had not
      yet been recognized in the Condensed Consolidated Statements of
      Operations.




30


We
provide counterparties to our derivative financial instrument arrangements with
collateral when the fair value of our obligation exceeds specified amounts. As
of March 31, 2009, we provided counterparties to fuel and interest rate related
derivative financial instruments with collateral aggregating $25.6 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 very 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 and we have agreements to sell two of the four aircraft
scheduled for delivery in 2009. As a consequence of these actions, we expect our
2009 capacity, as measured by available seat miles, to be three to four percent
less than our 2008 capacity.





As of
March 31, 2009, we had on order 55 B737 aircraft with delivery dates
between 2009 and 2016, including four aircraft scheduled for delivery in 2009.
We may decide to further delay growth in our capacity or reduce our
absolute level of capacity through the sale or other re-marketing of additional
aircraft.





Our B737
contract with Boeing requires us to make pre-delivery deposits to Boeing. No
additional pre-delivery deposits are due for the 2009 scheduled deliveries.
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 deliveries scheduled for 2011
and beyond. Given the current status of the financial markets, we cannot assure
you that satisfactory financing will be available to us when we are obligated to
make pre-delivery deposit payments of $9.4 million in 2009.





We have
four B737 aircraft scheduled for delivery in 2009, two of which we have agreed
to sell in the second quarter of 2009 to a foreign air carrier to whom we
previously sold two B737 aircraft in 2008. We have received deposits from the
foreign carrier. However, these pending transactions are subject to customary
closing conditions, some of which are outside of our control and, therefore, we
cannot give any assurances that the closing of these transactions will occur. We
have not arranged financing for such aircraft as we intend for those aircraft to
be sold to the buyer substantially contemporaneously with our purchase from
Boeing. Should these sales not close, we will seek to obtain aircraft debt or
lease financing for these aircraft. We have arranged backstop secured debt
financing to fund a portion of the purchase price of each of the other two 2009
aircraft deliveries.


31





While our
intention is to finance the remainder of the aircraft on order through either
debt financing, lease financing, or both, we have not yet arranged for any such
financing. There can be no assurance that sufficient financing will be available
for all B737 aircraft deliveries. 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 Pronouncement





In May
2008, the Financial Accounting Standards Board (FASB) issued Staff
Position APB 14-1 (FSP 14-1),Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement). FSP 14-1 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 under FASB Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. We adopted FSP 14-1 as of January 1,
2009. FSP 14-1 requires 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 7.0% convertible notes
repurchased by the Company as of April 23, 2009. The retroactive application of
FSP 14-1 resulted in the recognition of additional financial accounting
annual interest expense of approximately $2.3 million for 2003, which gradually
increased to $7.4 million for 2008. Comparative financial statements of
prior years have been adjusted to apply FSP 14-1 retroactively. The
retroactive application of FSP 14-1 also resulted in the recognition of
additional annual capitalized interest in each of the years in the period 2003
thru 2008. As a result of the adoption of FSP 14-1, we reduced net income for
the three months ending March 31, 2009 by $2.0 million and reduced diluted
earnings per share by $0.02 per share. The adoption of FSP 14-1 has no impact on
our debt service payments.








32





ITEM3. 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” in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
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 $658.9 million and $674.1 million of variable-rate debt as of
March 31, 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 three months ended March 31, 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 March 31, 2009 and December 31, 2008 was $468.2 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 March 31, 2009, the fair market value of our interest rate swaps
was a liability of $26.4 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 $4.8 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
March 31, 2009 and 2008 represented 26.9 percent and 42.5 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 March 31, 2009, we have entered into
fuel related swap and option agreements, which pertain to 115.8 million
gallons of our projected April through December 2009 fuel purchases and 32.4
million gallons of our projected 2010 fuel purchases. Such agreements pertain
to 42.5 percent of our projected April through December 2009 jet fuel
requirements and 9.1 percent of our projected 2010 jet fuel requirements. Based
on actions subsequent to March 31, 2009, as of April 16, 2009, we have entered
into fuel related swap and option agreements, which have increased our
gallons under contract to 122.5 million gallons of our projected April
through December 2009 fuel purchases. Such agreements pertain to 44.7
percent of our projected April through December 2009 jet 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.





33


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
$6.9 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 $57 per barrel are estimated as follows
(in millions) at the specified crude prices:





Nine
      Months Ended December 31, 2009Estimated
      Total Ultimate Cash Benefit (Use) of Our Fuel Related Derivative Financial
      Instruments Held as of April 16, 2009
            
            
            Estimated
      Lower (Higher) Aggregate Jet Fuel Cost (Prior to Impact of Derivatives)
      Compared to Jet Fuel Cost Based on Crude Oil
              at
      $57 per BarrelAssumed
      average market crude: price:$
      30 per barrel
            
            
            $
            (40.5)
            
            $
            182.0$
      50 per barrel
            
            
            $
            (26.2)
            
            $
            46.6$
      70 per barrel
            
            
            $
            12.9
            
            $
            (88.8)$
      90 per barrel
            
            
            $
            68.3
            
            $
            (224.2)$110
      per barrel
            
            
            $
            119.6
            
            $
            (359.5)





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 April 16, 2009, we had provided counterparties with
      collateral aggregating $25.8 million for fuel related derivatives
      pertaining to future fuel purchases and for our interest rate swap
      arrangements.3.
            Changes
      in the refining margin will also impact the cost of jet fuel. The impact
      of changes in refining margin is not included in the table
      above.








34





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 March 31, 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. There were no changes in our internal control over
financial reporting during the fiscal quarter ended March 31, 2009, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.











35


PART
II.





OTHER
INFORMATION




Item 1.
            Legal
      Proceedings





From time
to time, we are engaged in litigation arising in the ordinary course of
business. We do not believe that any such pending litigation, individually or
collectively, will have a material adverse effect on our results of operations
or financial condition.




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





None




Item 3.
            Defaults
      Upon Senior Securities





None




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.
            
            Description31.1
      -
            
            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








36







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: April
      24, 2009
            
            /s/
      Arne G. HaakArne
      G. Haak
              Senior
      Vice President of Finance, Treasurer,
              and
      Chief Financial Officer














37








EXHIBIT
INDEX




Exhibit No.
            
            
            
            Description31.1
            
            —
            
            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