UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form
10-Q
 
 (Mark
One)
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended June 30, 2008
 
 OR
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the transition period from
to
 
 Commission
file No. 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 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  x    Accelerated
filer   ̈    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 July 31, 2008:
117,082,606 par value $0.001
 
 
  
 AIRTRAN
HOLDINGS, INC.
 
 Form 10-Q
 
 For
the Quarter Ended June 30, 2008
  PagePART I.
              
              FINANCIAL
      INFORMATION
              
              1Item 1.
              
              Financial Statements
      (unaudited)
              
              1Condensed Consolidated Statements
      of Operations – Three and six months ended June 30, 2008 and
      2007
              
              1Condensed Consolidated Balance
      Sheets – June 30, 2008 and December 31, 2007
              
              2Condensed Consolidated Statements
      of Cash Flows – Six months ended June 30, 2008 and
      2007
              
              4Condensed Consolidated Statements
      of Stockholders’ Equity - Six months ended June 30,
      2008
              
              5Notes to
      Condensed Consolidated Financial Statements
              
              6Item 2.
              
              Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
              
              20Item 3.
              
              Quantitative and Qualitative
      Disclosures About Market Risk
              
              35Item 4.
              
              Controls and
      Procedures
              
              36PART
      II
              
              OTHER
      INFORMATION
              
              37Item 1.
              
              Legal
      Proceedings
              
              37Item 1A.
              
              Risk
      Factors
              
              37Item 2.
              
              Unregistered Sales of Equity
      Securities and Use of Proceeds
              
              42Item 3.
              
              Defaults Upon Senior
      Securities
              
              42Item 4.
              
              Submission of Matters to a Vote
      of Security Holders
              
              42Item 5.
              
              Other
      Information
              
              42Item 6.
              
              Exhibits
              
              42SignaturesExhibit
      ListingEx
      – 3l.1 (Exhibit 31.1 CEO Certification)Ex
      – 3l.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
                June 30,
              
              
              Six
      months ended
                June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Operating
      Revenues:Passenger
              
              $
              658,634
              
              
              $
              585,875
              
              
              $
              1,225,063
              
              
              $
              1,064,429Other
              
              
              34,746
              
              
              
              27,651
              
              
              
              64,708
              
              
              
              53,163Total
      operating revenues
              
              
              693,380
              
              
              
              613,526
              
              
              
              1,289,771
              
              
              
              1,117,592Operating
      Expenses:Aircraft
      fuel
              
              
              368,127
              
              
              
              201,588
              
              
              
              636,569
              
              
              
              367,668Salaries,
      wages and benefits
              
              
              123,392
              
              
              
              110,972
              
              
              
              242,299
              
              
              
              218,689Aircraft
      rent
              
              
              60,789
              
              
              
              60,667
              
              
              
              121,588
              
              
              
              121,560Maintenance,
      materials and repairs
              
              
              43,441
              
              
              
              38,190
              
              
              
              84,773
              
              
              
              71,724Distribution
              
              
              27,685
              
              
              
              23,874
              
              
              
              50,224
              
              
              
              42,803Landing
      fees and other rents
              
              
              33,681
              
              
              
              30,268
              
              
              
              68,794
              
              
              
              59,180Aircraft
      insurance and security services
              
              
              5,547
              
              
              
              5,895
              
              
              
              10,840
              
              
              
              11,631Marketing
      and advertising
              
              
              9,698
              
              
              
              10,151
              
              
              
              21,166
              
              
              
              21,280Depreciation
              
              
              14,649
              
              
              
              11,547
              
              
              
              27,890
              
              
              
              21,788Gain
      on sale of aircraft
              
              
              (7,292
              )
              
              
              (6,234
              )
              
              
              (7,292
              )
              
              
              (6,234
              )Impairment
      of goodwill
              
              
              8,350
              
              
              
              —
              
              
              
              8,350
              
              
              
              —Other
      operating
              
              
              50,837
              
              
              
              48,746
              
              
              
              105,321
              
              
              
              96,702Total
      operating expenses
              
              
              738,904
              
              
              
              535,664
              
              
              
              1,370,522
              
              
              
              1,026,791Operating
      Income (Loss)
              
              
              (45,524
              )
              
              
              77,862
              
              
              
              (80,751
              )
              
              
              90,801Other
      (Income) Expense:Interest
      income
              
              
              (2,682
              )
              
              
              (5,521
              )
              
              
              (4,464
              )
              
              
              (10,498
              )Interest
      expense
              
              
              18,478
              
              
              
              18,321
              
              
              
              37,182
              
              
              
              34,983Capitalized
      interest
              
              
              (1,528
              )
              
              
              (2,361
              )
              
              
              (4,112
              )
              
              
              (4,845
              )Net
      (gains) losses on derivative financial instruments
              
              
              (43,560
              )
              
              
              156
              
              
              
              (38,370
              )
              
              
              156Other
      (income) expense, net
              
              
              (29,292
              )
              
              
              10,595
              
              
              
              (9,764
              )
              
              
              19,796Income
      (Loss) Before Income Taxes
              
              
              (16,232
              )
              
              
              67,267
              
              
              
              (70,987
              )
              
              
              71,005Income
      tax expense (benefit)
              
              
              (2,694
              )
              
              
              25,208
              
              
              
              (22,636
              )
              
              
              26,788Net
      Income (Loss)
              
              $
              (13,538
              )
              
              $
              42,059
              
              
              $
              (48,351
              )
              
              $
              44,217Earnings
      (Loss) per Common ShareBasic
              
              $
              (0.12
              )
              
              $
              0.46
              
              
              $
              (0.48
              )
              
              $
              0.48Diluted
              
              $
              (0.12
              )
              
              $
              0.42
              
              
              $
              (0.48
              )
              
              $
              0.45Weighted-average
      Shares OutstandingBasic
              
              
              109,097
              
              
              
              91,524
              
              
              
              100,605
              
              
              
              91,431Diluted
              
              
              109,097
              
              
              
              104,366
              
              
              
              100,605
              
              
              
              104,244
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
  1
  
 
 
 AirTran
Holdings, Inc.
 Condensed
Consolidated Balance Sheets
 (In
thousands)
 June
      30,
                2008
              
              
              December 31,
                2007(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
              
              $
              405,006
              
              
              $
              206,873Short-term
      investments
              
              
              32,705
              
              
              
              111,119Restricted
      cash
              
              
              66,589
              
              
              
              29,618Accounts
      receivable, less allowance of $1,208and $1,128 at June
      30, 2008 and December 31, 2007, respectively
              
              
              68,655
              
              
              
              42,772Spare
      parts, materials and supplies, less allowance for obsolescence of $2,498
      and $2,281 at June 30, 2008 and December 31, 2007,
      respectively
              
              
              16,280
              
              
              
              14,488Prepaid
      and stored fuel
              
              
              35,504
              
              
              
              32,660Derivative
      financial instruments
              
              
              73,636
              
              
              
              13,035Prepaid
      expenses and other current assets
              
              
              29,978
              
              
              
              19,596Deferred
      income taxes
              
              
              9,776
              
              
              
              9,776Total
      current assets
              
              
              738,129
              
              
              
              479,937Property
      and Equipment:Flight
      equipment
              
              
              1,500,130
              
              
              
              1,284,273Less:
      Accumulated depreciation and amortization
              
              
              (117,916
              )
              
              
              (97,946
              )1,382,214
              
              
              
              1,186,327Purchase
      deposits for flight equipment
              
              
              75,624
              
              
              
              119,817Other
      property and equipment
              
              
              107,183
              
              
              
              100,763Less:
      Accumulated depreciation and amortization
              
              
              (47,744
              )
              
              
              (40,995
              )59,439
              
              
              
              59,768Total
      property and equipment
              
              
              1,517,277
              
              
              
              1,365,912Other
      Assets:Long-term
      investments
              
              
              8,230
              
              
              
              8,230Goodwill
              
              
              —
              
              
              
              8,350Trademarks
      and trade names
              
              
              21,567
              
              
              
              21,567Debt
      issuance costs
              
              
              17,461
              
              
              
              16,016Prepaid
      aircraft rent
              
              
              84,265
              
              
              
              81,109Derivative
      financial instruments
              
              
              6,039
              
              
              
              —Other
      assets
              
              
              70,188
              
              
              
              67,345Total
      Assets
              
              $
              2,463,156
              
              
              $
              2,048,466
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
 
 (Continued
on next page)
  2
  
 
 
 AirTran
Holdings, Inc.
 Condensed
Consolidated Balance Sheets (Continued)
 (In
thousands)
  June
      30,
                2008
              
              
              December 31,
                2007(Unaudited)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              60,897
              
              
              $
              50,644Accrued
      and other liabilities
              
              
              161,750
              
              
              
              137,896Air
      traffic liability
              
              
              377,684
              
              
              
              219,923Current
      portion of capital lease obligations
              
              
              1,390
              
              
              
              1,036Current
      portion of long-term debt
              
              
              79,920
              
              
              
              98,635Total
      current liabilities
              
              
              681,641
              
              
              
              508,134Long-term
      capital lease obligations
              
              
              10,993
              
              
              
              11,915Long-term
      debt
              
              
              1,148,569
              
              
              
              946,303Other
      liabilities
              
              
              99,449
              
              
              
              99,575Deferred
      income taxes
              
              
              20,763
              
              
              
              31,434Derivative
      financial instruments
              
              
              5,328
              
              
              
              4,755Commitments
      and ContingenciesStockholders’
      Equity:Preferred
      stock
              
              
              —
              
              
              
              —Common
      stock
              
              
              117
              
              
              
              92Additional
      paid-in capital
              
              
              475,339
              
              
              
              396,824Accumulated
      earnings (deficit)
              
              
              (267
              )
              
              
              48,084Accumulated
      other comprehensive income
              
              
              21,224
              
              
              
              1,350Total
      stockholders’ equity
              
              
              496,413
              
              
              
              446,350Total
      Liabilities and Stockholders’ Equity
              
              $
              2,463,156
              
              
              $
              2,048,466
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
  
 3
  
 
 
 AirTran
Holdings, Inc.
 Condensed
Consolidated Statements of Cash Flows
 (In
thousands)
 (Unaudited)
 
 Six
      Months Ended June 30,2008
              
              
              2007Operating
      activities:Net
      income (loss)
              
              $
              (48,351
              )
              
              $
              44,217Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              29,677
              
              
              
              22,540Amortization
      of deferred gains from sale/leaseback of aircraft
              
              
              (2,286
              )
              
              
              (2,237
              )Impairment
      of goodwill
              
              
              8,350
              
              
              
              —Provisions
      for uncollectible accounts
              
              
              529
              
              
              
              579Gain
      on asset disposals
              
              
              (7,292
              )
              
              
              (4,267
              )Deferred
      income taxes
              
              
              (22,636
              )
              
              
              26,788Stock-based
      compensation
              
              
              2,905
              
              
              
              2,517Other
              
              
              949
              
              
              
              —Changes
      in certain operating assets and liabilities:Restricted
      cash
              
              
              (36,971
              )
              
              
              (4,764
              )Derivative
      financial instruments
              
              
              (34,283
              )
              
              
              —Accounts
      receivable
              
              
              (26,412
              )
              
              
              (27,761
              )Spare
      parts, materials and supplies
              
              
              (2,131
              )
              
              
              (1,126
              )Prepaid
      and stored fuel
              
              
              (2,844
              )
              
              
              (24,414
              )Prepaid
      aircraft rent
              
              
              (5,589
              )
              
              
              (7,274
              )Other
      assets
              
              
              (9,704
              )
              
              
              (12,980
              )Accounts
      payable, accrued and other liabilities
              
              
              31,610
              
              
              
              38,821Air
      traffic liability
              
              
              157,761
              
              
              
              117,012Net
      cash provided by operating activities
              
              
              33,282
              
              
              
              167,651Investing
      activities:Purchase
      of available-for-sale securities
              
              
              —
              
              
              
              (1,009,300
              )Sale
      of available-for-sale securities
              
              
              77,465
              
              
              
              992,050Purchases
      of property and equipment
              
              
              (119,630
              )
              
              
              (133,933
              )Return
      (payment) of aircraft purchase deposits, net
              
              
              44,193
              
              
              
              6,264Midwest
      exchange offer expenses
              
              
              —
              
              
              
              (7,335
              )Proceeds
      from sales of aircraft
              
              
              86,069
              
              
              
              72,879Net
      cash provided by (used for) investing activities
              
              
              88,097
              
              
              
              (79,375
              )Financing
      activities:Issuance
      of long-term debt
              
              
              101,751
              
              
              
              39,568Payments
      on long-term debt and capital lease obligations
              
              
              (100,632
              )
              
              
              (57,382
              )Net
      proceeds from issuance of common stock
              
              
              74,671
              
              
              
              —Proceeds
      from exercise of stock options and employee stock purchase
      plans
              
              
              964
              
              
              
              1,242Net
      cash provided by (used for) financing activities
              
              
              76,754
              
              
              
              (16,572
              )Net
      change in cash and cash equivalents
              
              
              198,133
              
              
              
              71,704Cash
      and cash equivalents at beginning of period
              
              
              206,873
              
              
              
              159,100Cash
      and cash equivalents at end of period
              
              $
              405,006
              
              
              $
              230,804Supplemental
      Disclosure of Cash Flow Activities:Non-cash
      investing and financing activitiesPurchase
      of equipment in exchange for debt
              
              $
              178,550
              
              
              $
              234,650
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
  4
  
  
 AirTran
Holdings, Inc.
 Condensed
Consolidated Statement of Stockholders’ Equity
 (In
thousands)
 (Unaudited)
  Common
      StockShares
              
              
              Amount
              
              
              Additional
                Paid-in
                Capital
              
              
              Accumulated
                Other
                Comprehensive
                Income
              
              
              Accumulated
                Earnings
      (Deficit)
              
              
              Total
                Stockholders’
                EquityBalance
      at January 1, 2008
              
              
              91,886
              
              
              $
              92
              
              
              $
              396,824
              
              
              $
              1,350
              
              
              $
              48,084
              
              
              $
              446,350Net
      loss
              
              
              
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (48,351
              )
              
              
              (48,351
              )Unrealized
      gain on derivative instruments, net of income taxes of
      $11,891
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              19,818
              
              
              
              —
              
              
              
              19,818Other
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              56
              
              
              
              —
              
              
              
              56Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (28,477
              )Issuance
      of common stock for exercise of options
              
              
              73
              
              
              
              —
              
              
              
              272
              
              
              
              —
              
              
              
              —
              
              
              
              272Stock-based
      compensation
              
              
              323
              
              
              
              —
              
              
              
              2,905
              
              
              
              —
              
              
              
              —
              
              
              
              2,905Issuance
      of common stock under employee stock purchase plan
              
              
              182
              
              
              
              —
              
              
              
              692
              
              
              
              —
              
              
              
              —
              
              
              
              692Issuance
      of common stock
              
              
              24,659
              
              
              
              25
              
              
              
              74,646
              
              
              
              
              
              
              
              
              
              
              
              74,671Balance
      at June 30, 2008
              
              
              117,123
              
              
              $
              117
              
              
              $
              475,339
              
              
              $
              21,224
              
              
              $
              (267
              )
              
              $
              496,413
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
  5
  
 
 
 AIRTRAN
HOLDINGS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 Note
1—Basis of Presentation
 
 Our
unaudited Condensed Consolidated Financial Statements include the accounts of
AirTran Holdings, Inc. (Holdings or the Company) and our wholly owned
subsidiaries, including our principal subsidiary, AirTran Airways, Inc.
(Airways). 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, 2007.
 
 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.
 
 Business
 
 We offer
scheduled airline services, using Boeing B717-200 (B717) and Boeing B737-700
(B737) aircraft, to 57 locations across the United States, concentrated
primarily in short-haul markets east of the Mississippi, as well as to San Juan,
Puerto Rico.
 
 Our
financial and operating results for any interim period are not necessarily
indicative of those for the entire year. Air travel in our markets tends to be
seasonal. The second quarter tends to be our strongest revenue
quarter.
 
 We manage
our operations on a system-wide basis due to the interdependence of our route
structure in the various markets we serve. As we offer only one service (i.e.,
air transportation), management has concluded that we only have one business
segment.
 
 After a
successful 2007, during which we earned net income of $53 million, we planned to
grow our 2008 capacity (as measured by available seat miles) between ten and
twelve percent. Our original 2008 strategy was based on a strong U.S. economy
and jet fuel prices consistent with 2007 levels. However, during 2008 the
economic environment has deteriorated, jet fuel prices have increased
dramatically and the credit markets have tightened. During the first and second
quarters we have undertaken a variety of actions to respond to the challenges of
the high jet fuel cost environment including: reducing planned capacity starting
in September 2008; deferring new aircraft deliveries; selling aircraft;
deferring 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; proactively managing our costs; and obtaining
additional capital via the placement of convertible debt and common equity
securities. However, we have not been able to increase unit revenues
sufficiently to offset the impact of the dramatic increase in fuel prices. As a
result, we incurred a net loss before income taxes of $71.0 million for the six
months ended June 30, 2008 and, unless jet fuel prices decrease substantially
and/or we experience significant increases in revenues, we will likely incur
additional losses during the remainder of 2008, which will likely require us to
utilize a portion of our unrestricted cash to fund our operations. Continued
high jet fuel prices without a corresponding increase in fares will likely have
an adverse effect on our results of operations, cash flows and financial
condition.
 
 6
 
 
 
 
 
 Absent
the occurrence of adverse events, most of which are outside of our direct
control, such as terrorist attacks, hostilities involving the United States or
further significant increases in fuel prices, we currently believe that our
existing liquidity and projected 2008 cash flows will be sufficient to fund our
operations and other financial obligations through  December 2008.
Although we believe our financial projections are reasonable, one or more events
or a combination of events, most of which are outside of our direct control, may
cause our actual results, available liquidity, and cash flows to be materially
different from our projections. Such events could include the inability to meet
our revenue expectations either in the current unfavorable or a worsening
economic environment or the holdback of additional amounts under the terms of
our agreements with organizations that process credit card transactions arising
from purchases of air travel by our customers. Our ability to fund our
operations, increase unit revenues and meet our other financial commitments in
2009 will in large part be dependent on fuel prices, the competitive environment
and macro economic conditions at the time.
 
 Common
Stock Issuance
 
 In May
2008, we completed a public offering of 24.7 million shares of our common stock
at a price of $3.20 per share. We received net proceeds from the offering
of approximately $74.7 million, after deducting discounts and commissions paid
to the underwriters and other expenses incurred with the offering.
 
 Reclassifications
 
 Certain
2007 amounts related to gains on sales of aircraft in the Condensed Consolidated
Statements of Operations have been reclassified from Other (Income) Expense to
Operating Expenses to conform to current presentation. Certain other 2007
amounts have been reclassified to conform to 2008 presentation. These
reclassifications have no material impact on the Condensed Consolidated
Statements of Operations, Condensed Consolidated Balance Sheets, Condensed
Consolidated Statements of Cash Flows or Condensed Consolidated Statements of
Stockholders’ Equity.
 
 Measurement
of Impairment of Long-lived assets
 
 In
accordance with Statement of Financial Accounting Standards No. 144 (SFAS
144), Accounting for the
Impairment or Disposal of Long-Lived Assets, we record impairment losses
on long-lived assets used in operations when events or circumstances indicate
that the assets may be impaired, the undiscounted cash flows estimated to be
generated by those assets are less than the net book value of those assets and
the fair value is less than the net book value. Because the current adverse
industry conditions and the recent operating losses experienced by AirTran are
indicators that an asset impairment of our long-lived assets (primarily flight
equipment) may exist, we prepared an assessment in accordance with SFAS 144
which indicated that the expected undiscounted cash flows exceed the net book
value of the associated long-lived assets. Consequently, we concluded that the
long-lived assets had not been impaired as of June 30, 2008. However, if our
assessment changes in the future, we may be required to record a charge for the
impairment of long-lived assets in a subsequent period.
 
 Intangible
Assets
 
 Excess of
cost over fair value of net assets acquired (goodwill) and indefinite-lived
intangibles, such as trade names, are not amortized but are subject to periodic
impairment tests in accordance with Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. Because current adverse industry conditions and recent operating
losses experienced by AirTran are indicators that our intangible assets may be
impaired, we prepared an assessment in accordance with SFAS 142 and concluded
that goodwill was impaired as of June 30, 2008, while trademarks and trade names
were not. Consequently, we recorded a charge of $8.4 million to write-off all of
the carrying value of our goodwill as of June 30, 2008.
 
 Attempted
Acquisition of Midwest Air Group
 
 On
January 11, 2007, we commenced an exchange offer for all of the common
stock of Midwest Air Group, Inc. (Midwest). On August 17, 2007, we
announced that we had terminated our efforts to acquire Midwest. During the six
months ended June 30, 2007, we deferred $7.3 million of costs related to the
subsequently terminated effort to acquire Midwest. The results of the third
quarter of 2007 included non-operating expense of $10.7 million ($6.4 million
net of tax) to write-off the costs associated with the attempted acquisition of
Midwest, including the exchange offer, and consisted primarily of fees for
attorneys, accountants, investment bankers, travel and other related
charges.
 
 7
 
 
 
 
 New
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157 (SFAS 157),Fair Value Measurements.
SFAS 157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement does not require any
new fair value measurements; rather, it applies under other accounting
pronouncements that require or permit fair value measurements. The provisions of
this statement are to be applied prospectively as of the beginning of the fiscal
year in which this statement is initially applied, with any transition
adjustment recognized as a cumulative-effect adjustment to the opening balance
of retained earnings. The provisions of SFAS 157 were to be effective for fiscal
years beginning after November 15, 2007. However, on February 12,
2008, the FASB issued Staff Position Financial Accounting Standard
No. 157-2 (FSP FAS 157-2),Effective Date of FASB
Statement No. 157, that amends SFAS 157 to delay the effective date
of Statement 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years. On February 14, 2008, the FASB issued Staff Position Financial
Accounting Standard No. 157-1 (FSP FAS 157-1),Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement Under Statement 13, that amends SFAS 157 to
exclude its application to FASB Statement No. 13 (SFAS 13),Accounting for
Leases, and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS 13.
We adopted the required provisions of SFAS 157 as of January 1, 2008. The
adoption of the required provisions did not have a material impact on our
Condensed Consolidated Financial Statements. We have not determined whether the
adoption of the deferred provisions will have a material impact on our Condensed
Consolidated Financial Statements. See Note 8 for additional information and
related disclosures regarding our fair value measurements.
 
 In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159 (SFAS 159),The
Fair Value Option for Financial Assets and Financial Liabilities. The
fair value option established by SFAS 159 permits, but does not require, all
entities to measure eligible items at fair value, as measured in accordance with
SFAS 157, at specified election dates. An entity would report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. SFAS 159 is effective as of the beginning of
an entity’s first fiscal year that begins after November 15, 2007. Although
we adopted SFAS 159 as of January 1, 2008, we have not yet elected the fair
value option for any items permitted under SFAS 159.
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (Revised 2007) (SFAS 141R),Business Combinations. SFAS
141R establishes principles and requirements for how an acquirer
(a) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, (b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. In addition,
material adjustments made to the initial acquisition purchase accounting will be
required to be recorded back to the acquisition date. This will cause some
companies to revise previously reported results when reporting comparative
financial information in subsequent filings. SFAS 141R is effective for us on a
prospective basis for transactions occurring in 2009 and early adoption is not
permitted. SFAS 141R may have a material impact on our consolidated results of
operations, balance sheets and cash flows if we enter into material business
combinations after the standard’s effective date.
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160 (SFAS 160),Noncontrolling Interests in Consolidated Financial Statements—An Amendment of
ARB No. 51. SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. We do not currently expect the
adoption of SFAS 160 to have a material impact on our consolidated financial
position, results of operations, and cash flows.
 
 In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161
(SFAS 161),Disclosures about
Derivative Instruments and Hedging Activities—An Amendment of FASB Statement
No. 133. SFAS 161 applies to all derivative instruments and related
hedged items accounted for under FASB Statement No. 133,Accounting for Derivative
Instruments and Hedging Activities. It requires entities to provide
greater transparency about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement No. 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, results of operations, and cash flows. SFAS 161 is effective
for fiscal years and interim periods beginning after November 15, 2008.
Because SFAS 161 applies only to financial statement disclosures, it will not
have any impact on our consolidated financial position, results of operations,
and cash flows.
 
 8
 
 
 
 
 
 In May
2008, the FASB issued Staff Position Accounting Principles Board
No. 14-1 (FSP APB 14-1),Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 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 No.
133, Accounting for Derivative
Instruments and Hedging Activities. FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008.
Though early adoption is not permitted, the Staff Position must be applied
retrospectively to all periods presented, except for those instruments within
the scope of the Staff Position that were not outstanding during any of the
periods that would be presented in the annual financial statements for the
period of adoption but were outstanding during an earlier period. We are
currently evaluating the impact the adoption of FSP 14-1 will have on our
condensed consolidated financial statements.
 
 Note
2—Stock-Based Employee Compensation
 
 Restricted
stock awards have been granted to certain of our officers, directors, and key
employees pursuant to our 2002 Long-Term Incentive Plan. Restricted stock awards
are grants of shares of our common stock that typically vest over time and are
valued at the fair market value of our publicly traded stock on the date of
issuance and charged to expense on a straight-line basis over the respective
vesting period (generally three years). During the first six months of 2008 and
2007, we granted restricted stock awards for approximately 789,000 and 409,000
shares, respectively, and approximately 323,000 and 241,000 shares,
respectively, of restricted stock vested.
 
 Compensation
expense for our restricted stock grants was $1.5 million and $2.9 million during
the three and six months ended June 30, 2008, respectively, and $1.3
million and $2.5 million during the three and six months ended June 30, 2007,
respectively. As of June 30, 2008, we have $11.3 million in total unrecognized
future compensation expense that will be recognized over the next three years
relating to awards for approximately 1.5million 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
June 30, 2008, options to purchase 3.0 million shares of common stock, at
exercise prices between $3.03 and $13.80 per share were outstanding. All
outstanding options to purchase common shares were exercisable as of June 30,
2008.
 
 Note
3—Earnings (Loss) Per Common Share
 
 The
following table sets forth the computation of basic and diluted earnings per
common share:
 
 Three months ended June 30,
              
              
              Six months ended June 30,(in
      thousands, except per share amounts)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007NUMERATOR:Net
      income (loss) available to common stockholders
              
              $
              (13,538
              )
              
              $
              42,059
              
              
              $
              (48,351
              )
              
              $
              44,217Plus
      income effect of assumed conversion-interest on convertible
      debt
              
              
              —
              
              
              
              1,369
              
              
              
              —
              
              
              
              2,739Income
      after assumed conversion, diluted
              
              $
              (13,538
              )
              
              $
              43,428
              
              
              $
              (48,351
              )
              
              $
              46,956DENOMINATOR:Weighted-average
      shares outstanding, basic
              
              
              109,097
              
              
              
              91,524
              
              
              
              100,605
              
              
              
              91,431Effect
      of dilutive securities:Stock
      options
              
              
              —
              
              
              
              1,034
              
              
              
              —
              
              
              
              1,026Convertible
      debt
              
              
              —
              
              
              
              11,241
              
              
              
              —
              
              
              
              11,241Restricted
      stock
              
              
              —
              
              
              
              567
              
              
              
              —
              
              
              
              546Weighted-average
      shares outstanding, diluted
              
              
              109,097
              
              
              
              104,366
              
              
              
              100,605
              
              
              
              104,244EARNINGS
      (LOSS) PER COMMON SHARE:Basic
              
              $
              (0.12
              )
              
              $
              0.46
              
              
              $
              (0.48
              )
              
              $
              0.48Diluted
              
              $
              (0.12
              )
              
              $
              0.42
              
              
              $
              (0.48
              )
              
              $
              0.45
 
 Excluded
from the diluted earnings per share calculation for the three and six months
ended June 30, 2008 are 11.2 million shares related to our 7.0 %
convertible notes, and 19.5 million shares related to our 5.5 % convertible
senior notes that would be issued upon conversion because the effect of
including these shares would have been anti-dilutive for the three and six
months ended June 30, 2008. Additionally, we have excluded from the diluted
earnings per share calculation for the three and six months ended June 30, 2008,
3.0million shares
related to our outstanding stock options and 1.5million shares related
to our unvested restricted stock because the effect of including these shares
would also have been anti-dilutive.
  9
  
  
 Note
4—Commitments and Contingencies
 
 Aircraft
Related Commitments and Transactions
 
 During
the six months ended June 30, 2008, we took delivery of eight purchased B737
aircraft, of which two were sold upon delivery. In May and July 2008, we
announced that we would defer 22 B737 aircraft originally scheduled for delivery
between 2009 and 2011 to delivery dates between 2013 and 2015. As of August 8,
2008, we had on order 55 B737 aircraft with delivery dates between 2008 and
2015. As further discussed below, the table includes two aircraft to be
delivered in December 2008 that we have agreed to sell upon delivery under
executed purchase agreements. During the three months ended December 31, 2008,
we expect to recognize a gain of approximately $8 million related to the sale of
these two aircraft. Excluding the two aircraft for which we have a purchase
agreement to sell in December 2008, we do not have any aircraft purchase
commitments for the remainder of 2008.
 
 We intend
to reduce or delay further growth in our fleet and are evaluating possible net
reductions in our current fleet including through the sale of additional
aircraft. The table below illustrates, as of August 8, 2008, all aircraft
currently scheduled for delivery:
  Firm Aircraft Deliveries
                B737December
      2008
              
              
              22009
              
              
              22010
              
              
              72011
              
              
              102012
              
              
              122013
              
              
              62014
              
              
              122015
              
              
              4Total
              
              
              55
 
 Aircraft
purchase contracts typically require the purchaser to make pre-delivery deposits
to the manufacturer. We have arranged pre-delivery aircraft deposit financing
for a portion of our pre-delivery deposit requirements for aircraft scheduled to
be delivered during the remainder of 2008, 2009, and some aircraft in 2010. The
pre-delivery deposit financing typically funds between 75 percent and 80 percent
of our pre-delivery deposit obligation for any given aircraft.
 
 Our
aircraft purchase commitments for the remainder of 2008 and for the next five
years and thereafter, in aggregate, are (in thousands): 2008—$25,400;
2009—$106,900; 2010—$266,800; 2011—$357,000; 2012—$439,600; 2013—$234,100; and
thereafter—$560,000. These amounts include payment commitments, including
payment of pre-delivery deposits, for aircraft on firm order. Aircraft purchase
commitments include the forecasted impact of contractual price escalations. The
aircraft purchase commitment totals do not reflect the effects of prearranged
aircraft financings.
 
 During
each of the three months ended June 30, 2008 and 2007, we took delivery of and
subsequently sold two aircraft. We recognized gains of $7.3 million and $6.2
million during the three months ended June 30, 2008 and 2007, respectively,
related to the sale of these aircraft. The gain on sale of the aircraft is
classified as a component of operating expense.
 
 We have
also executed an agreement to sell two owned B737 aircraft during the three
months ended September 30, 2008. We expect to recognize a gain of approximately
$7.6 million related to the sale of these two aircraft.
  Aircraft
Financing Arrangements
 
 While we
have arranged financing for one of the two December 2008 scheduled B737
deliveries, we have definitive purchase agreements to sell the aircraft. We are
currently in negotiations to finance our 2009 deliveries. While our intention is
to finance the remainder of the aircraft on order through a combination of debt
and lease financings, we have not yet arranged for such financing.
 
 10
 
 
 
 
 Credit
Card Arrangements
 
 We have
agreements with organizations that process credit card transactions arising from
purchases of air travel by customers of AirTran Airways. As of August 8, 2008,
we were in compliance with the terms of all of our credit card processing
agreements. Each of our agreements with our processors allows, under
specified conditions, the credit card processor to retain cash that such
processor otherwise would deliver to the Company (i.e., a “holdback”). Holdbacks
are classified as restricted cash on our consolidated balance sheet. Our
exposure to credit card holdbacks consists of advanced ticket sales that
customers purchased with credit cards.  Once the customer travels, any
related holdback is remitted to us. Our exposure fluctuates seasonally with
seasonal travel demands and may also fluctuate based on changes in advance
ticket sales patterns.  As of June 30, 2008, we had advanced ticket
sales of approximately $406 million related to credit card sales. As of June 30
and August 4, 2008, $23.9 million and $86.7 million, respectively, was held back
by our two largest credit card processors.
 
 In July
2008, we amended our agreement with our largest credit card processor (based on
volume processed for us) to extend the expiration date of such agreement to
December 31, 2009. The amended agreement provides that such processor may
holdback amounts that would otherwise be remitted to us in the event that, among
other things, our aggregate cash and unrestricted investments fall below
agreed upon levels, or such processor reasonably determines that there has been
a material adverse occurrence or certain other events occur. The amount that
such processor is entitled to holdback is determined by a combination of such
processor’s exposure to potential credit card chargebacks and our aggregate
unrestricted cash and investments balance.
 We have
the right to reduce the amounts which are otherwise withheld by our largest
credit card processor to the extent that we provide the processor with a letter
or letters of credit.  In July 2008, we obtained a commitment for a
facility which will provide for a financial institution to issue letters of
credit of up to $150 million for the benefit or such processor, which will
result in a reduction in the amounts that would otherwise be withheld by the
processor. Our reimbursement obligations under the facility will be 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, and will be guaranteed by AirTran Holdings and
each subsidiary of Airways. Our reimbursement obligations and the related
holding company level guarantee will rank senior in right of payment to the
subordinated indebtedness of the applicable company and rank equally with senior
indebtedness of the applicable company. Letters of credit issued pursuant to the
facility will secure our obligations to the processor arising during the period
to be covered by the facility, which will end December 31, 2009; unless the
period is earlier terminated. The letters of credit will expire no later than
eighteen months after the end of the period. The maximum amount of the letters
of credit to be issued will be based on the value of the collateral securing our
reimbursement obligations.
  Upon the
issuance of one or more letters of credit for the benefit of the processor, we
expect all cash currently being held back by the processor to be returned to us.
Nevertheless, the processor may in the future be entitled to withhold amounts in
excess of the outstanding amount of the letter or letters of credit if by the
terms of our card processing agreement with the processor the processor is
entitled to increase the amount of its holdback or if the period covered by the
facility ends and is not replaced by a similar facility.
 Our
credit card processing agreement with our second largest processor (based on
volume processed for us) currently has no fixed term and is terminable without
cause with 30 days notice. During July 2008, we agreed that such processor could
commence a holdback of a portion of the amounts that would otherwise be remitted
to us while we negotiate the conditions and amounts of potential holdbacks. We
believe that we may be able to satisfy any holdback requirements by providing
the processor with cash deposits, a letter of credit, collateral, or other forms
of security, in lieu of a cash holdback. The ultimate results of these
negotiations and the impact on our liquidity is uncertain. If we cannot reach an
agreement the processor currently may withhold up to approximately $50 million
in addition to the amount that had been withheld as of August 4,
2008.
  11
 
 
 
 
 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 probable or reasonably 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 trustee 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.
 
 ·
              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 terms 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 48, Accounting for Uncertainty in Income
Taxes. 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.
 
 12
 
 
 
 
 
 
 Note
5—Long-term Debt
 
 The
components of long-term debt were (in thousands):
  June
      30,
                2008
              
              
              December 31,
                2007Floating
      rate aircraft notes payable through 2020, 4.27 percent weighted-average
      interest rate as of June 30, 2008
              
              $
              844,853
              
              
              $
              688,427Fixed
      rate aircraft notes payable through 2018, 7.02 percent weighted-average
      interest rate
              
              
              64,919
              
              
              
              68,7247.0
      percent convertible notes due 2023
              
              
              125,000
              
              
              
              125,0005.5
      percent convertible senior notes due 2015
              
              
              74,750
              
              
              
              —Aircraft
      notes payable through 2017, 10.42 percent weighted-average interest
      rate
              
              
              84,110
              
              
              
              86,270Floating
      rate aircraft pre-delivery deposit financings payable through 2010, 4.45
      percent weighted-average interest rate as of June 30,
      2008
              
              
              34,857
              
              
              
              76,517Total
      long-term debt
              
              
              1,228,489
              
              
              
              1,044,938Less
      current maturities
              
              
              79,920
              
              
              
              98,635Long-term
      debt maturities
              
              $
              1,148,569
              
              
              $
              946,303
 
 Aircraft
Purchase Financing Facilities
 
 Through
June 30, 2008, we have entered into seven separate aircraft purchase financing
facilities for purposes of financing the acquisition of B737 aircraft acquired
from or on order with the aircraft manufacturer.
 
 Six of
the facilities are floating rate facilities. As of June 30, 2008, 31 B737
aircraft had been financed pursuant to equipment notes issued under these
facilities. Each note is secured by a first mortgage on the aircraft to which it
relates. The equipment notes bear interest at a floating rate per annum above
the three or six-month U.S. Dollar London Interbank Offering Rate (LIBOR)
in effect at the commencement of each semi-annual or three month period, as
applicable. Payments of principal and interest under the notes are payable
semi-annually or every three months, as applicable. Commencing after the third
anniversary date of each note, AirTran has the right to prepay the remaining
debt outstanding without penalty. The notes mature in years 2016 through 2020.
As of June 30, 2008, $30.5 million of additional debt financing was available to
finance one future B737 aircraft delivery.
 
 One of
the facilities is a fixed rate facility. As of June 30, 2008, three B737
aircraft had been financed under the facility. Each note is secured by a first
mortgage on the aircraft to which it relates. The equipment notes bear interest
at an average fixed rate of 7.02 percent. Payments of principal and
interest under the notes are payable semi-annually. Commencing after the third
anniversary date of each note, AirTran has the right to prepay the remaining
debt outstanding without penalty. The notes mature in years 2016 through
2018.
 
 7.0%
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. Such notes bear interest at
7.0 percent payable semi-annually on January 1 and July 1. The 7.0%
notes are unconditionally guaranteed by Airways and rank equally with all
unsecured obligations of Airways. The 7.0% 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).
 
 The7.0%notes are convertible into shares of
our common stock at a conversion rate of 89.9281 shares per $1,000 in principal
amount ofsuchnotes that equals an initial
conversion price of approximately $11.12 per share. This conversion rate is
subject to adjustment in certain circumstances. We may redeem the7.0%notes, in whole or in part, for cash,
beginning on July 5, 2010 at a redemption price equal to
the principal amount
ofsuchnotes plus any accrued and unpaid
interest.
 
 The
holders of the 7.0% notes may require us to repurchase the notes on July 1,
2010, 2013 and 2018 at a repurchase price of 100 percent of principal amount of
such notes 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
percent 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).
 
 13
 
 
 
 
 
 5.5% Convertible
Senior Notes:
 
 On April
30, 2008, we completed a public offering of $74.8 million in convertible senior
notes due in 2015. The proceeds were used to improve our overall liquidity by
providing working capital and for general corporate purposes. Such notes bear
interest at 5.5 percent payable semi-annually, in arrears, on April 15 and
October 15. The 5.5% notes are senior unsecured obligations of Holdings and
rank equally with all existing and future senior unsecured obligations of
Holdings. The 5.5% notes are effectively subordinated to all liabilities of
our subsidiaries.
 
 The 5.5%
notes are convertible into shares of our common stock at a conversion rate of
260.4167 shares per $1,000 in principal amount of such notes that equals an
initial conversion price of approximately $3.84 per share. This conversion rate
is subject to adjustment in certain circumstances. Holders may convert their
5.5% notes into shares of our common stock at their option on any day
until, and including, the business day immediately preceding the maturity date
of such notes. The 5.5% notes are not redeemable at our option prior to
maturity. The holders of the 5.5% notes may require us to repurchase such
notes, in whole or in part, for cash upon the occurrence of a fundamental
change, as defined in the governing supplemental indenture, at a repurchase
price of 100 percent of principal amounts plus any accrued and unpaid
interest.
 
 We placed
approximately $12.3 million of the proceeds of the offering in an escrow account
with the trustee. Funds in the escrow account are invested in government
securities and will be used to make the first six scheduled semi-annual interest
payments on the 5.5% notes, and these payments are secured by a pledge of
the assets in escrow. Holders who convert their notes prior to April 15, 2011
will receive, in addition to a number of shares of our common stock calculated
based on the conversion rate, the cash proceeds from the sale by the escrow
agent of that portion of government securities in the escrow account that relate
to the applicable holder’s 5.5% notes being converted.
 
 Floating
Rate Aircraft Pre-delivery Deposit Financing
 
 As of
June 30, 2008, we have two separate facilities (each a “PDP facility”)
outstanding for purposes of financing our obligations to make pre-delivery
payments with respect to B737 aircraft on order with the aircraft
manufacturer.
 
 The PDP
facilities entitle us to draw amounts to fund a portion of our obligations to
make pre-delivery payments for each aircraft. Drawings under a PDP facility bear
interest at a floating interest rate above the one-month U.S. dollar LIBOR. Each
loan is secured by certain rights under our B737 aircraft purchase agreement
with the aircraft manufacturer. The amount outstanding under each PDP loan is
paid off at the time the respective aircraft is delivered. As of June 30, 2008,
$7.2 million was available to borrow, and $34.9million had been
borrowed to fund a portion of our pre-delivery payment obligations for nine
B737aircraft on
order.
 
 Letters
of Credit
 
 As of
June 30, 2008, $17.0 million of restricted cash on the accompanying consolidated
balance sheet serves to collateralize outstanding letters of credit, primarily
for airport facilities and insurance.In July
2008, Airways obtained a commitment pursuant to which a financial
institution will provide a standby letter of credit facility to us pursuant to
which one or more letters of credit of up to $150 million will be issued in
favor of our largest credit card processor.
 
 14
  
 
 Note
6—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 investments, long-term investments, in-the-money derivative financial
instruments, and accounts receivable. We maintain cash and cash equivalents and
short-term investments with various high credit-quality financial institutions
or 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. As of
June 30, 2008, we had short-term and long-term investments, all of which are
available for sale securities, of $32.7 million and $8.2 million, respectively,
in an enhanced cash investment fund. In December 2007, we were advised that the
enhanced cash investment fund would be closed to new investments and immediate
redemptions. In the first six months of 2008, we recorded a $0.9 million charge
to interest income for realized and unrealized losses on the fund. During the
three and six months ended June 30, 2008, we received distributions aggregating
$11.0 million and $40.4million, respectively
from the enhanced cash investment fund and we converted all of our other
investments, which were in auction rate securities, to cash.
 
 We enter
into various derivative financial instruments with financial institutions to
seek to reduce the impact of fluctuations in jet fuel prices on future fuel
expense. Our primary objective of entering into derivative instruments is to
seek to reduce the impact on our operating results of the volatility of jet fuel
prices. We do not hold or issue derivative financial instruments for trading
purposes. We enter into both fuel related swap and option derivative financial
arrangements.
 
 As of
June 30, 2008, we have entered into fuel related swaps and option agreements,
which pertain to 120.8million gallons of our
remaining 2008 fuel purchases, 85.6 million gallons of our 2009 fuel
purchases, and 9.1 million gallons of our 2010 fuel purchases. Such
agreements pertain to 66.3 percent of our projected July to December 2008
jet fuel requirements, 21.9 percent of our projected 2009 jet fuel requirements,
and 2.2 percent of our projected 2010 jet fuel requirements. Subsequent to June
30, 2008, we entered into additional fuel related derivatives, which increased
the gallons under contract to 72.6 percent and 24.7percent of our total
projected remaining 2008 and total 2009 projected fuel consumption,
respectively. Under the 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. These derivative financial arrangements are accounted for
as cash flow hedges under SFAS 133 when the required accounting documentation is
in place and when the derivative arrangement has been analytically demonstrated
to be effective. The ineffective portion of changes in unrealized (gain) loss of
each derivative is recognized in other (income) expense, and the effective
portion of the change in unrealized (gain) loss is recorded as a component of
other comprehensive income (loss). The effective portion is reclassified to
earnings during the period in which the hedged transaction affects earnings.
Realized and unrealized gains and losses on derivatives that do not qualify for
hedge accounting are recognized in other (income) expense. The sold calls that
we have entered into do not qualify for hedge accounting.  During the
three months ended June 30, 2008, we recognized non-operating gains related to
derivatives that do not qualify for hedge accounting and ineffectiveness on
hedged transactions of $43.6 million, consisting of $9.4 million of realized
gains and $34.2 million of unrealized gains on derivative instruments where the
derivative settles or the contract expires in future periods.  During
the six months ended June 30, 2008, we recognized non-operating gains related to
derivatives that do not qualify for hedge accounting and ineffectiveness on
hedged transactions of $38.4 million, consisting of $9.4 million of realized
gains and $29.0 million of unrealized gains on derivative instruments where the
derivative settles or the contract expires in future periods.
 
 We have
interest rate swap agreements that effectively convert a portion of our
floating-rate debt to a fixed-rate basis for the next 12 years, thus reducing
the impact of interest-rate changes on future interest expense and cash flows.
Under these agreements, which expire in 2018 and 2019, we pay fixed rates
between 4.560 percent and 5.085 percent and receive the London InterBank Offered
Rate (LIBOR) for U.S. dollar deposits every three months. The notional amount of
outstanding debt related to the interest rate swaps as of June 30, 2008 was
$183.9million. The
primary objective for our use of interest rate hedges is to reduce the impact on
our operating results of the volatility of interest rates. These interest rate
swap arrangements are accounted for as cash flow hedges under SFAS 133 when the
required accounting documentation is in place and when the derivative
arrangement has been analytically demonstrated to be effective. The ineffective
portion of the change in unrealized (gain) loss of each derivative is recognized
in other (income) expense, and the effective portion of the change in unrealized
(gain) loss is recorded as a component of other comprehensive income (loss). The
effective portion is reclassified to earnings during the period in which the
hedged transaction affects earnings.
  15
 
  
  
 The
following table summarizes the financial statement impact of derivative
financial instruments (dollars and gallons in thousands) for the three months
ended June 30, 2008:
  Derivatives
                Designated
                as Cash Flow
                Hedges
              
              Balance
      Sheet
                Classification
              
              Notional
      Amount
                at
      June 30,
                2008
      (1) (2)
              
              Fair
      Value
                Assets
                (Liabilities)
                at
                June
      30,
                2008
      (3)
              
              
              Income
      Statement
                Classification
      of
                Realized
      (Gains)
                and
      Losses
              
              Amount of Unrealized
                (Gains) and Losses
                in the Income Statement
                For
      the Three Months Ended June 30,
              
              Cumulative
      Pre-tax Amount of
                Unrealized (Gains) and
                Losses
      in OCI
                at
      June 30,
              
              Pre-tax
      Amount of
                (Gains)
      and Losses
                Reclassified
      to
                Earnings
      from
                OCI
      For the Three Months Ended June 30,2008
              
              
              2007
              
              2008
              
              
              2007
              
              2008
              
              
              2007Interest
      rate swaps
              
              Derivative liability
              
              $
              183,871
              
              $
              (5,328
              )
              
              Interest expense
              
              $
              (78
              )
              
              $
              —
              
              $
              1,849
              
              
              $
              (2,111
              )
              $
              90
              
              
              $
              —Jet
      fuel swaps and options
              
              Derivative
      asset
              
              
              24,768
              
              $
              43,884
              
              
              Fuel expense
              
              $
              (477
              )
              
              $
              156
              
              $
              (35,345
              )
              
              $
              (13,943
              )
              $
              (7,436
              )
              
              $
              (2,235)Derivatives
                not Designated
                as
      HedgesJet
      fuel options
              
              Derivative
      asset
              
              
              —
              
              $
              (30,904
              )
              
              Net
      (gains) losses on derivative financial instruments
              
              $
              21,471
              
              
              $
              —
              
              $
              —
              
              
              $
              —Crude
      swaps and options
              
              Derivative
      asset
              
              
              190,659
              
              $
              66,695
              
              
              Net
      (gains) losses on derivative financial instruments
              
              $
              (64,476
              )
              
              $
              —
              
              $
              —
              
              
              $
              —
 
 (1)
              If
      a sold call and a collar relate to the same notional quantity, the
      notional amount is included only once in the above table to avoid double
      counting the quantities.(2)
              Notional
      amount of fuel related derivatives is stated in
gallons.(3)
              Fair
      value includes any premiums paid or received, unrealized gains and losses,
      and any amounts receivable or payable from or to counterparties. Liability
      and asset amounts are netted against each other for financial reporting
      purposes if the amounts are net settled with a
    counterparty.
 
 
 16
 
 
 
 
 
 
 
 The
following table summarizes the financial statement impact of derivative
financial instruments (dollars and gallons in thousands) for the six months
ended June 30, 2008:
  Derivatives
                Designated
                as Cash Flow
                Hedges
              
              Balance
      Sheet
                Classification
              
              Notional
      Amount
                at
      June 30,
                2008
      (1) (2)
              
              Fair
      Value
                Assets
                (Liabilities)
                at
                June
      30,
                2008
      (3)
              
              
              Income
      Statement
                Classification
      of
                Realized
      (Gains)
                And
      Losses
              
              Amount of Unrealized
                (Gains) and Losses
                in the Income Statement
                For
      the Six Months Ended June 30,
              
              Cumulative
      Pre-tax Amount of
                Unrealized (Gains) and
                Losses
      in OCI
                at
      June 30,
              
              Pre-tax
      Amount of
                (Gains)
      and Losses
                Reclassified
      to
                Earnings
      from
                OCI
      For the Six Months Ended June 30,2008
              
              
              2007
              
              2008
              
              
              2007
              
              2008
              
              
              2007Interest
      rate swaps
              
              Derivative liability
              
              $
              183,871
              
              $
              (5,328
              )
              
              Interest expense
              
              $
              (46
              )
              
              $
              —
              
              $
              1,849
              
              
              $
              (2,111
              )
              $
              —
              
              
              $
              —Jet
      fuel swaps and options
              
              Derivative
      asset
              
              
              24,768
              
              $
              43,884
              
              
              Fuel expense
              
              $
              1,004
              
              
              $
              156
              
              $
              (35,345
              )
              
              $
              (13,943
              )
              $
              (9,218
              )
              
              $
              (2,195)Derivatives
                not Designated
                as
      HedgesJet
      fuel options
              
              Derivative
      asset
              
              
              —
              
              $
              (30,904
              )
              
              Net
      (gains) losses on derivative financial instruments
              
              $
              26,567
              
              
              $
              —
              
              
              —Crude
      swaps and options
              
              Derivative
      asset
              
              
              190,659
              
              $
              66,695
              
              
              Net
      (gains) losses on derivative financial instruments
              
              $
              (65,895
              )
              
              $
              —
              
              
              —
 
 (1)
              If
      a sold call and a collar relate to the same notional quantity, the
      notional amount is included only once in the above table to avoid double
      counting the quantities.(2)
              Notional
      amount of fuel related derivatives is stated in
gallons.(3)
              Fair
      value includes any premiums paid or received, unrealized gains and losses,
      and any amounts receivable or payable from or to counterparties. Liability
      and asset amounts are netted against each other for financial reporting
      purposes if the amounts are net settled with a
    counterparty.
 
 17
   
  
 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. The 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 are required to
provide the counterparties with collateral when the fair value of our obligation
exceeds specified amounts. As of June 30, 2008, we were required to provide a
counterparty with collateral, which is classified as restricted cash,
aggregating $1.0 million.
 
 Note
7—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
                instruments
              
              
              Postemployment
                obligations
              
              
              Accumulated other
                comprehensive
                income
      (loss)Balance
      at January 1, 2008
              
              $
              1,117
              
              
              $
              233
              
              
              $
              1,350Changes
      in fair value, net of income taxes
              
              
              25,553
              
              
              
              —
              
              
              
              25,553Reclassification
      to earnings, net of income taxes
              
              
              (5,735
              )
              
              
              56
              
              
              
              (5,679
              )Balance
      at June 30, 2008
              
              $
              20,935
              
              
              $
              289
              
              
              $
              21,224
 
 Total
comprehensive income (loss) was $5.3 million and $(28.5) million for the three
and six months ended June 30, 2008, respectively, and $44.0 million and $55.4
million for the three and six months ended June 30, 2007,
respectively.
 
 Note
8—Fair Value Measurements
 
 As
described in Note 1, we adopted the required provisions of SFAS 157 as of
January 1, 2008. 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).
  18
  
 
 Assets
and liabilities measured at fair value on a recurring basis during the period
were as follows:
  (in
      thousands)
              
              Fair Value
      at
                June
      30, 2008
              
              
              Quoted Prices
                in
                Active Markets
                for
      Identical
                Assets (Level 1)
              
              Other
                Observable
                Inputs (Level 2)
              
              
              Fair
      Value
                Measurements
                Using
                Unobservable
                Inputs (Level 3)
              
              Valuation
                TechniqueShort-term
      investments
              
              $
              32,705
              
              
              $
              —
              
              $
              32,705
              
              
              $
              —
              
              MarketLong-term
      investments
              
              
              8,230
              
              
              
              —
              
              
              8,230
              
              
              
              —
              
              MarketInterest
      rate derivatives
              
              
              (5,328
              )
              
              
              —
              
              
              (5,328
              )
              
              
              —
              
              MarketFuel
      derivatives
              
              
              79,675
              
              
              
              —
              
              
              —
              
              
              
              79,675
              
              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, 2008 through June 30, 2008 is as follows:
 
 (in
      thousands)
              
              Fair
      Value
                Measurements
                Using Significant
                Unobservable
                Inputs
      (Level 3)Fuel
      related derivative asset:Balance
      at January 1, 2008
              
              $
              13,035Total
      gains or (losses) (realized and unrealized):Included
      in earnings
              
              
              49,835Included
      in other comprehensive income
              
              
              31,656Purchases,
      issuances, and settlements
              
              
              (14,851
              )Balance
      at June 30, 2008
              
              $
              79,675The
      amount of total (gains) or losses for the six months ended June 30, 2008,
      included in earnings attributable to the change in unrealized gains or
      losses relating to assets still held at June 30, 2008
              
              $
              (40,564
              )
   Note
9—Income Tax Expense
 
 Our
effective rate was 16.6 percent and 31.9 percent for the three and six months
ended June 30, 2008 compared to 37.5 percent and 37.7 percent for the three and
six months ended June 30, 2007. 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 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. In addition,
during the three months ended June 30, 2008, we recorded an $8.4 million charge
to write-off all of the carrying value of our goodwill. Because this write-off
is not deductible for income tax purposes, we did not record a tax benefit and
consequently our effective tax rate was reduced.
 
 We have
recognized the tax benefit associated with pre-tax losses in the Condensed
Consolidated Statements of Operations because we expect to realize our deferred
tax assets (including the deferred tax asset associated with loss
carry-forwards) through the reversal of existing temporary differences. As of
June 30, 2008, our deferred tax liabilities exceeded our deferred tax assets
(including the deferred tax asset associated with previously recognized loss
carry-forwards) by approximately $11 million. We will continue to recognize the
financial accounting tax benefit of any future losses only to the extent that
deferred tax liabilities exceed deferred tax assets. To the extent our deferred
tax assets exceed our deferred tax liabilities, we will likely be unable to
recognize the full financial accounting tax benefit of future pre-tax accounting
losses. Our effective tax rates for the third and fourth quarters of 2008 may be
substantially different from our effective tax rate for the six months ended
June 30, 2008.
 
 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.
 
 19
  
  
 ITEM 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 FORWARD-LOOKING
STATEMENTS
 
 The
information contained in this section: (i) 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, in
addition to our Annual Report on Form 10-K for the year ended December 31,
2007 as filed with the U.S. Securities & Exchange Commission; and
(ii) is not a comprehensive discussion and analysis of our financial
condition and results of operations, but rather updates disclosures made in such
Annual Report. 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 and fare levels, 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 cost and availability of aviation
fuel. Our forward-looking statements 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. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events, or otherwise, except as may be
required by law.
 
 OVERVIEW
 
 All of
the flight operations of AirTran Holdings, Inc. (the Company, AirTran, we or us)
are conducted by our wholly owned subsidiary, AirTran Airways, Inc. (AirTran
Airways or Airways). 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 primarily in short-haul markets principally in the
eastern United States, with a majority of our flights originating or terminating
at our hub in Atlanta, Georgia. As of June 30, 2008, we operated 87 Boeing
717-200 (B717) and 55 Boeing 737-700 (B737) aircraft offering approximately 700
scheduled flights per day to 57 locations, consisting of 56 locations in the
United States and San Juan, Puerto Rico. We offer very competitive fares by
concentrating on keeping our unit costs low. The enthusiasm and skill of the
AirTran employees has been key to our success.
 
 After a
successful 2007, during which we earned net income of $53 million, we planned to
grow our 2008 capacity (as measured by available seat miles) from between ten
and twelve percent. Our original 2008 strategy was based on a strong U.S.
economy and jet fuel prices consistent with 2007 levels. However, during 2008
the economic environment has deteriorated, jet fuel prices have increased
dramatically and the credit markets have tightened. During the first and second
quarters we undertook a variety of actions to respond to the challenges of the
high cost fuel environment including: reducing planned capacity starting in
September 2008; deferring new aircraft deliveries; selling aircraft; deferring
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; proactively managing our costs; and
obtaining additional capital via the placement of convertible debt and common
equity securities. However, we have not been able to increase unit revenues
sufficiently to offset the impact of the dramatic increase in fuel
prices. Our ability to increase unit revenues was hindered in part by rapid
growth during the first six months. As we reduce capacity commencing in
September 2008, our ability to increase unit revenues should improve; however,
it is not certain whether near term increases in unit revenues will be
sufficient to fully mitigate the impacts of record high jet fuel prices.
U nless jet
fuel prices decrease substantially, we will likely incur significant additional
losses during the remainder of 2008 which will likely require us to
utilize a portion of our unrestricted cash to fund our operations and negatively
impact our liquidity.
 
 Second Quarter
Results.  The second quarter of 2008 was a challenging quarter
for us because the price of jet fuel, which is our largest expense, reached
record-high levels and remained at historically high levels throughout the
quarter. The record high fuel prices coupled with weak economic conditions
caused us to incur a loss for the second quarter of 2008. During the three
months ended June 30, 2008, we reported an operating loss of $45.5 million, net
loss of $13.5 million, and diluted loss per common share of
$(0.12). Included in our results for the three months ended June 30, 2008
are gains on the sale of two aircraft of $7.3 million, an impairment charge to
write-off goodwill of $8.4 million and non-operating gains on derivative
financial instruments of $43.6 million. During the three months ended June 30,
2007, we reported operating income of $77.9 million, net income of $42.1
million, and diluted earnings per common share of $0.42.  Included in
our results for the three months ended June 30, 2007 are gains on the sale of
two aircraft of $6.2 million. The second quarter 2008 operating loss was
attributable to increased jet fuel costs per gallon. While total revenue per
available seat mile (total RASM) increased 0.7 percent, the unit revenue
increase was not sufficient to offset the impact of the 62.4 percent increase in
fuel costs per available seat mile (ASM) compared to the prior period a year
ago.
 
 20
 
 
 
 
 Fuel.  Jet
fuel market prices have increased dramatically. For example, the average market
price (before taxes and fees) of Gulf Coast jet fuel increased to $3.24 per
gallon for the six months ended June 30, 2008 compared to an average 2007 price
per gallon of $2.13. Despite increasing fuel surcharges and fares and adding or
increasing fees, we have been unable to increase our revenue sufficiently to
keep pace with escalating fuel costs. As a result, current expected levels of
jet fuel prices are significantly affecting our results of operations, financial
condition and liquidity. We believe that our young, fuel-efficient fleet
provides us with a competitive advantage relative to our peers. For every
dollar increase per barrel in crude oil or refining costs, our fuel expense
(including taxes and into-plane fees) for the last six months of 2008 and for
2009, before the impact of our derivative financial instruments, would increase
$4.5 million and $8.9 million, respectively, based on current and projected
operations. We continue to hedge our fuel exposure with a portfolio of
swaps and various types of options using both crude oil and jet fuel as the
underlying commodity and have experienced some success in mitigating what would
have been the impact of unhedged prices on our operations. We have hedged
approximately 73percent of our expected
fuel requirements for the remainder of 2008 and approximately 25 percent of our
expected 2009 fuel requirements, which will provide partial protection against
further price increases. However, our portfolio contains a variety of compound
financial instruments including sold calls, which tend to limit the cash benefit
of our hedges if jet fuel and crude oil prices increase beyond the call strike
prices.
  Economic
Conditions.  Many economists have reported that the U.S.
economy is slowing and may be nearing, or in a recession. The airline industry
is highly cyclical, and the growth in demand for air travel is correlated to the
growth in the U.S. and global economies. We believe that weak economic
conditions in the United States adversely impacted our revenues for the first
six months of 2008 and likely will adversely impact revenues for the remainder
of 2008. An economic recession could have a significant adverse effect on our
results of operations and financial condition. Air travel tends to be
seasonal and price sensitive. Demand tends to be highest in the second quarter
due to higher family air travel combined with normal business demand.
Accordingly, the second quarter tends to be our strongest revenue quarter. In
light of economic conditions and rapidly changing network operations in our
industry, we cannot predicate whether the demand in the remaining two quarters
will be consistent with recent historical norms.
 
 Capacity and
Traffic.  During the six months ended June 30, 2008, we
continued to moderate our growth by selling two of the eight B737 aircraft
acquired during the period bringing our total fleet to 143 aircraft at period
end. Since June 30, 2007, we have taken delivery of ten B737 aircraft and sold
two aircraft. As a result, our capacity in the quarter, as measured by ASM’s,
increased by 12.3 percent compared to the second quarter of 2007. Revenue
passenger seat miles (RPM’s) increased by 13.3 percent, resulting in a load
factor of 79.4 percent, an increase of 0.6 percentage points from the prior year
second quarter. We set new second quarter records for passengers, traffic, and
capacity, launched 19 new non-stop routes, and initiated new service to San
Juan, Puerto Rico, Burlington, Vermont and San Antonio, Texas while ceasing
service to one existing market. As discussed elsewhere, we intend to reduce
overall capacity and continue to rationalize our flight operations in light of
the current operating environment.
 
 Liquidity.  In
response to the increased fuel prices, we took a number of steps generally to
strengthen our cash balance and liquidity both during and subsequent to the
second quarter of 2008. In the second quarter, we raised $101.8 million through
the issuance of new debt, including a public offering of $74.8 million in
convertible senior notes due in 2015, $75.6 million through the issuance of
common stock, primarily through a public offering of 24.7 million shares of our
common stock at a price of $3.20 per share, and $7.8 million net cash
benefit from sales of aircraft. We have also entered into agreements to defer
deliveries of 22 new B737 aircraft, which resulted in the net return of $4.4
million of aircraft predelivery deposits and we have agreed to sell three
existing B737 aircraft during the third quarter of 2008 and two new B737
aircraft scheduled for delivery in December 2008. The sale of the two new
aircraft will result in a cash gain and we will avoid the requirement to incur
additional indebtedness and invest cash resources in such aircraft.
  In July 2008, we amended
our agreement with our largest credit card processor (based on volume processed
for us) to extend the expiration date of such agreement to December 31, 2009.
The amended agreement provides that such processor may holdback amounts that
would otherwise be remitted to us in the event that, among other
things, our aggregate cash and unrestricted investments fall below agreed
upon levels, or such processor reasonably determines that there has been a
material adverse occurrence or certain other events occur. The amount that such
processor is entitled to holdback is determined by a combination of such
processor’s exposure to potential credit card chargebacks and our aggregate
unrestricted cash and investments balance.
  We have the right to
reduce the amounts which are otherwise withheld by our largest credit card
processor to the extent that we provide the processor with a letter or letters
of credit. In July 2008, we obtained a commitment for a facility which will
provide for a financial institution to issue letters of credit of up to $150
million for the benefit or such processor, which will result in a reduction in
the amounts that would otherwise be withheld by the processor. Our reimbursement
obligations under the facility will be 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, and will
be guaranteed by AirTran Holdings and each subsidiary of Airways. Our
reimbursement obligations and the related holding company level guarantee will
rank senior in right of payment to the subordinated indebtedness of the
applicable company and rank equally with  senior indebtedness of the
applicable company. Letters of credit issued pursuant to the facility will
secure our obligations to the processor arising during the period to be covered
by the facility, which will end December 31, 2009; unless the period is earlier
terminated The letters of credit will expire no later than eighteen months after
the end of the period. The maximum amount of the letters of credit to be issued
will be based on the value of the collateral securing our reimbursement
obligations.  Upon the
issuance of one or more letters of credit for the benefit of the processor, we
expect all cash currently being held back by the processor to be returned to
us. Nevertheless, the processor may in the future be entitled to withhold
amounts in excess of the outstanding amount of the letter or letters of credit
if by the terms of our card processing agreement with the processor the
processor is entitled to increase the amount of its holdback or if the period
covered by the facility ends and is not replaced by a similar
facility.
 21
 
 
 
 
 Our
credit card processing agreement with our second largest processor (based on
volume processed for us) currently has no fixed term and is terminable without
cause with 30 days notice. During July 2008, we agreed that such processor could
commence a holdback of a portion of the amounts that would otherwise be remitted
to us while we negotiate the conditions and amounts of potential
holdbacks. We believe that we may be able to satisfy any holdback
requirements by providing the processor with cash deposits, a letter of credit,
collateral, or other forms of security, in lieu of a cash holdback. The
ultimate results of these negotiations and the impact on our liquidity is
uncertain.
 Absent
the occurrence of adverse events, many of which are outside of our direct
control, such as additional terrorist attacks, hostilities involving the United
States or further significant increases in fuel prices, we currently believe
that our existing liquidity and projected 2008 cash flows will be sufficient to
fund our current operations and other financial obligations
through  December 2008. Although we believe our financial projections
are reasonable, one or more events or a combination of one or more events, many
of which are outside of our direct control, may cause our actual results,
available liquidity, and cash flows to be materially different from our
projections.  Such events could include the inability to meet our
revenue expectations either in the current unfavorable or a worsening economic
environment or the holdback of additional amounts by our credit card processors.
Our ability to fund our operations, increase unit revenues and meet our other
financial commitments in 2009 will in large part be dependent on fuel prices,
the competitive environment and macro economic conditions at the
time.
 
 Revised Business
Strategy. Like every other carrier in the industry, we must make
adjustments in order to respond to the challenges of a high-cost fuel
environment, especially when coupled with a period of slower economic growth in
the U.S. economy. Our strategy for responding to our challenges has five
principal elements:
 
 Reduce Growth Rates and Focus on
Strengthening Established Markets. We have successfully grown our
business at double-digit rates annually over the past five years and continue to
believe that there are abundant opportunities for a high quality, low cost
airline. Providing exceptional customer service remains a top priority, however,
given the current environment, we have modified our business strategy to adapt
to high fuel costs while still maintaining our flexibility to adapt quickly to
changes in the industry.
 
 ·
              We
      have recast our plans in order to defer previously planned growth and
      intend to effect strategic reductions in fleet size, capacity and
      operations as necessary to respond to the challenges of the current fuel
      and economic environment. In this regard, we have completed a
      comprehensive review of our future fleet and capacity plans and we are
      taking a number of steps to better match our capacity to the current
      environment. We intend to reduce our capacity (as measured by ASMs)
      commencing in the last four months of 2008 from a planned ten percent
      increase to a reduction of between six and eight percent compared to the
      comparable period in 2007. We also intend to reduce planned capacity
      growth in 2009 from just under 10 percent to a reduction of between four
      and eight percent compared to projected 2008
  capacity.
 
 ·
              We
      have revised our fleet plan and based on scheduled and or planned fleet
      actions, we expect to end 2008 with no more than 139 aircraft. We are
      managing our capacity, as measured by available seat miles and number of
      aircraft, by taking one or more of the following
  actions:
 
 ·
              deferring
      deliveries of new aircraft,
 ·
              selling,
      leasing or subleasing new aircraft scheduled for
  delivery,
 ·
              selling,
      leasing or subleasing existing
aircraft,
 ·
              making
      adjustments to our schedule to eliminate non-productive flights,
      and
 ·
              periodically
      redeploying aircraft from existing routes to other existing routes when
      and where we believe there are opportunities to maximize utilization of
      our aircraft and/or strengthen established
  markets.
 
 ·
              Although
      we will continue our rigorous review of our flight schedule, we may
      consider any strategic opportunities that present themselves, whether such
      opportunities arise as a result of actions by other carriers seeking
      to respond to the same challenges we face or from possible industry
      consolidation or the cessation of business operations by other carriers in
      this high fuel cost/weak economic environment.  We cannot assure
      you that we will have the ability to capitalize on strategic opportunities
      for expansion, either fully or at all, in light of the existing
      environment.
 
 Defer Capital Expenditures and
Continue to Aggressively Cut Costs. We have reduced our average non-fuel
costs per available seat mile for each of the past six years, primarily through
productivity improvements. In addition to continuing to seek ways to cut costs
as part of our business, we have reduced non-aircraft capital expenditures
planned for 2008 to between $12 and $18 million by deferring a variety of
discretionary capital expenditures. We also will manage our employment levels to
match our planned capacity. In July 2008, we announced projected workforce
reductions through a combination of voluntary leaves and eliminating
approximately 480 pilot and flight attendant positions commencing in September
2008. Additionally, we are seeking wage rate reductions of five to fifteen
percent from our employee workgroups. As we adjust our capacity, we may
implement further pilot and flight attendant reductions as well as other
reductions in corporate staff, airport, reservations, and aircraft maintenance
employment levels.
 
 22
 
 
 
 Strengthen Our Balance Sheet and
Liquidity. We are committed to obtaining additional cash resources by one
or more of the following means:
 
 ·
              First,
      because we negotiated what we believe to be very favorable aircraft
      purchase prices in 2003 and because we believe demand for new
      fuel-efficient aircraft should continue—particularly outside of the U.S.
      where potential purchasers may also have favorable currency exchange rates
      —we  believe we have the ability to monetize and intend to
      monetize selected aircraft assets. In addition to generating cash
      proceeds, each sale of new aircraft scheduled for future delivery frees up
      existing cash which would normally be paid as part of the purchase price
      and avoids the need for associated financing for the aircraft. We likewise
      are marketing the sale or lease of existing aircraft which we believe, in
      the case of a sale, would result in a gain to us or, in the case of a
      sublease, rental income to us in excess of our lease
    payments.
 
 ·
              Second,
      we continue to explore a variety of financing mechanisms by which we may
      opportunistically further monetize a portion of the value of our existing
      aircraft fleet should we deem it in our best interest to do so. Such
      actions could include credit facilities secured by junior liens, sale and
      lease back transactions or other financing mechanisms. Despite our recent
      letter of credit financing, given continued turmoil in the global capital
      markets and current conditions in our industry, we cannot assure that we
      will be able to further monetize available assets on terms which are
      acceptable to us or at all.
 
 ·
              Third,
      during the second quarter, we accessed the capital markets through an
      offering of 24.7 million shares of our common stock and through a
      concurrent offering of $74.8 million of our convertible senior notes. The
      net proceeds of such offerings provided us with additional liquidity
      needed in light of historic all-time high fuel costs. The net proceeds
      from these two offerings aggregated $147
  million.
 
 ·
              Fourth,
      as noted above, in July 2008 we obtained a commitment for a letter of
      credit facility pursuant to which a financial institution will provide one
      or more letters of credit in an amount up to a maximum of $150 million in
      favor of our largest card processor. We expect the provision of such
      letter or letters of credit will result in a reduction in the cash
      remittances which such credit card processor would otherwise be entitled
      to withhold from us. Our repayment obligations with respect to such letter
      of credit facility will be collateralized by certain of our assets. See
      “Management’s Discussion
      and Analysis of Financial Condition and Results of Operations Liquidity
      and Capital Resources” for additional discussion of this letter of
      credit commitment.
 
 Mitigate Our Fuel Exposure.
We have continued to seek to mitigate our fuel cost exposure by entering into a
variety of hedging arrangements that provide partial protection against price
increases. We have hedged approximately 73 percent of our anticipated fuel needs
for the remainder of 2008 and approximately 25 percent of our anticipated fuel
needs for 2009, which will provide partial protection against price
increases.
 
 Increase Revenues. Although
we have implemented a number of price increases since September 2007, such
increases have not been sufficient to offset rising fuel expenses. Accordingly,
we are actively working to increase surcharge and ancillary revenues and to
offer customers the option to purchase additional services. We have implemented
fuel surcharges and periodically evaluate our surcharge prices in light of fuel
costs. Likewise, we have introduced fees in connection with new or existing
services such as advance and priority seat selection, call center utilization,
transportation of multiple pieces of checked baggage and the ability to
purchase, extend or transfer A+ Miles Rewards. At the same time, we continue our
emphasis on superior and friendly service to maintain repeat customers and
attract new customers.
 
 Historically,
under our strategic plan, we used cash to buy aircraft, open new stations and
rapidly expand operations, taking advantage of opportunities to acquire aircraft
at favorable prices and grow our business while others were in bankruptcy and
reducing their fleets and networks. This strategy allowed us to increase
passengers and revenue for over ten straight years and generate profits for six
straight years. Flexibility has been one of our historical strengths and it
remains important to us now. By adjusting our existing strategy and implementing
revised tactics, we believe we should be able to position ourselves to both
address the current environment and be ready to resume our historical growth
strategy as and when the business environment best allows.
 
 Outlook.  Based
on our current projections, we expect capacity, as measured by available seat
miles to increase, by approximately nine percent year over year for July
and August of 2008, and to decrease by approximately six to eight
percent year over year beginning in September of 2008, with similar
decreases to continue through the remainder of 2008 when measured against the
analogous previous periods in 2007. We expect our capacity in 2009 when compared
to 2008 will also decrease by between four and eight percent. Non-fuel unit
operating cost per ASM is expected to be flat to down one percent for the third
quarter of 2008 and compared to the analogous previous period. Advanced
booked revenue for the remainder of the summer is up year over year and we
expect unit revenue to be up two to three percent for July and August of
2008.
 
 23
 
 
 
  RESULTS
OF OPERATIONS
 
 For
the three and six months ended June 30, 2008 and 2007
 
 The table
below sets forth selected financial and operating data for the three months and
six months ended June 30, 2008 and 2007:
  Three
      Months Ended
                June
      30,
              
              
              Percentage
                Increase2008
              
              
              2007
              
              
              (Decrease)Revenue
      passengers
              
              
              6,533,427
              
              
              
              6,323,023
              
              
              
              3.3Revenue
      passenger miles (RPM) (000s)(1)
              
              
              5,128,676
              
              
              
              4,527,372
              
              
              
              13.3Available
      seat miles (ASM) (000s)(2)
              
              
              6,457,117
              
              
              
              5,747,975
              
              
              
              12.3Passenger
      load factor(3)
              
              
              79.4
      percent
              
              
              
              78.8
      percent
              
              
              
              0.6
              
              ptsBreak-even
      load factor(4)
              
              
              81.4
      percent
              
              
              
              69.7
      percent
              
              
              
              11.7
              
              ptsAverage
      fare (excluding transportation taxes)(5)
              
              $
              100.81
              
              
              $
              92.66
              
              
              
              8.8Average
      yield per RPM(6)
              
              
              12.84
              
              
              
              12.94
              
              
              
              (0.8
              )Passenger
      revenue per ASM (passenger RASM)(7)
              
              
              10.20
              
              
              
              10.19
              
              
              
              0.1Total
      revenue per ASM (total RASM)(8)
              
              
              10.74
              
              
              
              10.67
              
              
              
              0.7Operating
      cost per ASM (CASM)(9)
              
              
              11.44
              
              
              
              9.32
              
              
              
              22.7Gallons
      of fuel consumed (000’s)
              
              
              98,261
              
              
              
              91,433
              
              
              
              7.5Average
      stage length (miles)(10)
              
              
              742
              
              
              
              689
              
              
              
              7.7Average
      cost of aircraft fuel per gallon, including fuel taxes and into-plane
      fees
              
              $
              3.75
              
              
              $
              2.20
              
              
              
              70.5Average
      daily utilization (hours:minutes)(11)
              
              
              11:36
              
              
              11:12
              
              
              
              3.6Number
      of operating aircraft in fleet at end of period
              
              
              142
              
              
              
              135
              
              
              
              5.2
  Six
      Months Ended
                June
      30,
              
              
              Percentage
                Increase2008
              
              
              2007
              
              
              (Decrease)Revenue
      passengers
              
              
              12,251,746
              
              
              
              11,403,131
              
              
              
              7.4Revenue
      passenger miles (RPM) (000s)(1)
              
              
              9,476,075
              
              
              
              8,175,491
              
              
              
              15.9Available
      seat miles (ASM) (000s)(2)
              
              
              12,228,154
              
              
              
              10,955,107
              
              
              
              11.6Passenger
      load factor(3)
              
              
              77.5
      percent
              
              
              
              74.6
      percent
              
              
              
              2.9
              
              ptsBreak-even
      load factor(4)
              
              
              82.0
      percent
              
              
              
              69.6
      percent
              
              
              
              12.4
              
              ptsAverage
      fare (excluding transportation taxes)(5)
              
              $
              99.99
              
              
              $
              93.35
              
              
              
              7.1Average
      yield per RPM(6)
              
              
              12.93
              
              
              
              13.02
              
              
              
              (0.7
              )Passenger
      revenue per ASM (passenger RASM)(7)
              
              
              10.02
              
              
              
              9.72
              
              
              
              3.1Total
      revenue per ASM (total RASM)(8)
              
              
              10.55
              
              
              
              10.20
              
              
              
              3.4Operating
      cost per ASM (CASM)(9)
              
              
              11.21
              
              
              
              9.37
              
              
              
              19.6Gallons
      of fuel consumed (000’s)
              
              
              187,866
              
              
              
              174,114
              
              
              
              7.9Average
      stage length (miles)(10)
              
              
              734
              
              
              
              685
              
              
              
              7.2Average
      cost of aircraft fuel per gallon, including fuel taxes and into-plane
      fees
              
              $
              3.39
              
              
              $
              2.11
              
              
              
              60.7Average
      daily utilization (hours:minutes)(11)
              
              
              11:18
              
              
              11:06
              
              
              
              1.8Number
      of operating aircraft in fleet at end of period
              
              
              142
              
              
              
              135
              
              
              
              5.2
 
 (1)
              The
      number of revenue miles flown by revenue passengers(2)
              The
      number of seats available for passengers multiplied by the number of
      schedule miles each seat is flown(3)
              The
      percentage of aircraft seating capacity that is actually utilized (RPMs
      divided by ASMs)(4)
              The
      percentage of seats that must be occupied by revenue passengers in order
      for us to break even on a pre-tax income basis(5)
              Passenger
      revenue divided by total passengers(6)
              Passenger
      revenue divided by RPMs(7)
              Passenger
      revenue divided by ASMs(8)
              Total
      revenue divided by ASMs(9)
              Operating
      expenses divided by ASMs(10)
              Total
      aircraft miles flown divided by departures(11)
              The
      average amount of time per day that an aircraft flown is operated in
      revenue service
 
 24
  
 
 For
the three months ended June 30, 2008 and 2007
 
 Summary
 
 We
recorded an operating loss of $45.5 million, net loss of $13.5 million, and loss
per diluted common share of $(0.12) for the second quarter of 2008. Included in
our results for the three months ended June 30, 2008 are gains on the sale of
aircraft of $7.3 million, an impairment charge to write-off goodwill of $8.4
million and non-operating gains on derivative financial instruments of $43.6
million.  For the comparative period in 2007, we recorded operating
income of $77.9 million, net income of $42.1 million, and income per diluted
common share of $0.42.  Included in our results for the three months
ended June 30, 2007 are gains on the sale of aircraft of $6.2
million.
 
 Operating
Revenues
 
 Our
operating revenues for the three months ended June 30, 2008 increased $79.9
million (13.0 percent), primarily due to a 12.4 percent increase in passenger
revenues. The increase in passenger revenues was largely due to a 13.3 percent
increase in passenger traffic as measured by revenue passenger miles (RPMs),
resulting in a record second quarter load factor of 79.4 percent, a 0.6 point
increase over 2007. Average yield per RPM was 12.84 cents, 0.8 percent lower
than the analogous period in 2007 due to an increase in average stage length of
7.7 percent, from 689 miles to 742miles. The decrease in
yield when combined with the increased load produced passenger revenue per ASM
(passenger RASM) of 10.20 cents, a 0.1 percent increase versus the second
quarter 2007.  Total unit revenue for the quarter increased 0.7
percent versus the prior year period to 10.74 cents.  While positive,
our unit revenue performance has lagged expectations and had been negatively
impacted by lower business demand for travel booked near to the departure date
and weakness in some of our long haul routes.
 
 During
the three months ended June 30, 2008, we continued to moderate our growth by
taking delivery of only five B737 aircraft and selling two aircraft, bringing
our total fleet to 143 aircraft at period end. We placed two of these new
aircraft into service during the three months ended June 30, 2008. Since June
30, 2007, we have placed seven B737 aircraft into service. As a result, our
capacity, as measured by available seat miles (ASMs), increased 12.3percent. Our traffic, as
measured by RPMs, increased 13.3 percent, resulting in a 0.6 percentage point
increase in passenger load factor to 79.4 percent.
 
 Other
revenues for the three months ended June 30, 2008 increased $7.1 million
(25.7 percent). Other revenues include change and cancellation fees, direct
booking fees, revenues derived from the sale of frequent flyer credits, excess
baggage fees, and other miscellaneous revenues. The increase in other revenues
is attributable primarily to increases in direct booking fees, unaccompanied
minor fees, change and cancellation fees and additional and excess baggage
fees. In addition, in late 2007 we ceased offering cargo services. Other
revenues for the three months ended June 30, 2007 included $1.2 million of cargo
revenue.
 
 Operating
Expenses
 
 Our
operating expenses for the three months ended June 30, 2008 increased $203.2
million (37.9 percent) and increased 22.7 percent on an operating cost per
ASM (CASM) basis. Our financial results were significantly affected by changes
in the price of fuel.
 
 In
general, our operating expenses are significantly affected by changes in the
cost of aviation fuel and our capacity, as measured by ASMs. The following table
presents our unit costs, or CASM, for the indicated periods:
 
 Three Months Ended
                June
      30,
              
              Percentage
                Increase2008
              
              
              2007
              
              (Decrease)Aircraft
      fuel
              
              
              5.70
              ¢
              
              
              3.51
              ¢
              62.4Salaries,
      wages and benefits
              
              
              1.91
              
              
              
              1.93
              
              (1.0)Aircraft
      rent
              
              
              0.94
              
              
              
              1.06
              
              (11.3)Maintenance,
      materials and repairs
              
              
              0.67
              
              
              
              0.66
              
              1.5Distribution
              
              
              0.43
              
              
              
              0.42
              
              2.4Landing
      fees and other rents
              
              
              0.52
              
              
              
              0.53
              
              (1.9)Aircraft
      insurance and security services
              
              
              0.09
              
              
              
              0.10
              
              (10.0)Marketing
      and advertising
              
              
              0.15
              
              
              
              0.18
              
              (16.7)Depreciation
              
              
              0.22
              
              
              
              0.20
              
              10.0Gain
      on sale of aircraft
              
              
              (0.11
              )
              
              
              (0.11
              )
              —Impairment
      of goodwill
              
              
              0.13
              
              
              
              —
              
              —Other
      operating
              
              
              0.79
              
              
              
              0.84
              
              (6.0)Total
      CASM
              
              
              11.44
              ¢
              
              
              9.32
              ¢
              22.7
  25
 
 
 
 Aircraft
fuel increased 62.4 percent on a cost per ASM basis. Our fuel
cost per gallon, including taxes and into-plane fees, increased 70.5
percent from $2.20 for the three months ended June 30, 2007, to $3.75 for the
three months ended June 30, 2008. We realized a $7.4 million benefit from fuel
related derivative financial instruments which reduced fuel expense during the
three months ended June 30, 2008.
 
 Aircraft
rent decreased 11.3 percent on a cost per ASM basis. Since June
30, 2007, we have placed seven B737 aircraft into service, none of which
were lease financed.
 
 Marketing and
advertising decreased 16.7 percent on a cost per ASM basis.
During the three months ended June 30, 2007, we incurred incremental advertising
and other marketing costs associated with commencing service to four new
locations. During the three months ended June 30, 2008, we initiated service to
two new locations.
 
 Depreciation increased 10.0
percent on a cost per ASM basis, primarily due to placing seven owned B737
aircraft into service since June 30, 2007, and purchases of spare aircraft parts
for our B737 aircraft fleet.
 
 Gain on sale of aircraft for
the three months ended June 30, 2008 was $7.3 million compared to $6.2 million
for the three months ended June 30, 2007. During each period, we took delivery
of and subsequently sold two B737 aircraft.
 
 Impairment of goodwill for
the three months ended June 30, 2008 was $8.4 million. Excess of cost over
fair value of net assets acquired (goodwill) and indefinite-lived intangibles,
such as trade names, are not amortized but are subject to periodic impairment
tests in accordance with Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. Because current adverse industry conditions and recent operating
losses experienced by AirTran are indicators that our intangible assets may be
impaired, we prepared an assessment in accordance with SFAS 142 and concluded
that goodwill was impaired as of June 30, 2008, while trademarks and trade names
were not. Consequently, we recorded a charge of $8.4 million to write-off all of
the carrying value of goodwill as of June 30, 2008.
 
 Non-operating
(Income) Expense
 
 Other (income) expense,
net changed from an expense of $10.6 million for the three months
ended June 30, 2007 to income of $29.3 million for the three months ended June
30, 2008. Interest income decreased $2.8 million due to lower returns on our
invested cash. Interest expense, including amortization of debt issuance costs,
increased by $0.2 million primarily due to the effect of aircraft debt
financings entered into during 2007 and 2008 and the interest expense associated
with the 5.5 percent convertible senior notes issued in May 2008 offset by the
impact of pay downs on various pre-delivery deposit financing. Capitalized
interest decreased by $0.8 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.
 
 We
reported gains on derivative financial instruments of $43.6 million for the
three months ended June 30, 2008, which consisted of $9.4 million of realized
gains and $34.2 million of unrealized gains on derivative instruments where the
derivative settles or contract expires in future periods.
 
 Income
Tax Expense
 
 Our
effective rate was 16.6 percent and 37.5 percent for the three months ended June
30, 2008 and 2007, respectively. Our effective tax rate can differ from the 37.5
percent composite statutory tax rate (35 percent federal statutory rate and 2.5
percent state statutory rate). See discussion of Income Tax Expense for the six
months ended June 30, 2008 for additional information on our effective tax
rates.
 
 For
the six months ended June 30, 2008 and 2007
 
 Summary
 
 We
recorded an operating loss of $80.8million, net loss of
$48.4 million, and loss per diluted common share of $0.48 for the six months
ended June 30, 2008. Included in our results for the six months ended June 30,
2008 are gains on the sale of aircraft of $7.3 million, an impairment charge to
write-off goodwill of $8.4 million and non-operating gains on derivative
financial instruments of $38.4 million.  For the comparative period in
2007, we recorded operating income of $90.8 million, net income of $44.2 million
and diluted earnings per common share of $0.45.  Included in our
results for the six months ended June 30, 2007 are gains on the sale of aircraft
of $6.2 million.
 
 26
 
 
 
 
 
 Operating
Revenues
 
 Our
operating revenues for the six months ended June 30, 2008 increased $172.2
million (15.4 percent), primarily due to a 15.1 percent increase in passenger
revenues. The increase in passenger revenues was largely due to a 15.9 percent
increase in passenger traffic as measured by revenue passenger miles (RPMs).
Average yield per RPM was 12.93 cents, 0.7 percent lower than the analogous
period in 2007 due to an increase in average stage length of 7.2 percent,
from 685 miles to 734 miles.  Load factor increased to 77.5 percent,
2.9 points higher than the prior year period, resulting in a 3.1 percent
increase in passenger revenue per ASM versus the first six months of
2007.  Total unit revenue increased 3.4 percent as a result of
stronger loads and increases in ancillary revenues.
 
 During
the six months ended June 30, 2008, we continued to moderate our growth by
taking delivery of only eight B737 aircraft and selling two aircraft,
bringing our total fleet to 143 aircraft at period end. Since June 30,
2007, we have taken delivery of ten B737 aircraft, placing seven into service.
As a result, our capacity, as measured by available seat miles (ASMs), increased
11.6 percent. Our traffic, as measured by RPMs, increased 15.9 percent,
resulting in a 2.9 percentage point increase in passenger load factor to 77.5
percent.
 
 Other
revenues for the six months ended June 30, 2008 increased $11.5 million
(21.7 percent). Other revenues include change and cancellation fees, direct
booking fees, revenues derived from the sale of frequent flyer credits, excess
baggage fees, and other miscellaneous revenues. The increase in other revenues
is attributable primarily to increases in direct booking fees, unaccompanied
minors, change and cancellation fees, direct booking fees, and additional and
excess baggage fees. In addition, in late 2007 we ceased offering cargo
services. Other revenues for the six months ended June 30, 2007 included $2.1
million of cargo revenue.
 
 Operating
Expenses
 
 Our
operating expenses for the six months ended June 30, 2008 increased $343.7
million (33.5 percent) and increased 19.6 percent on an operating cost per
ASM (CASM) basis. Our financial results were significantly affected by changes
in the price of fuel.
 
 In
general, our operating expenses are significantly affected by changes in the
cost of aviation fuel and our capacity, as measured by ASMs. The following table
presents our unit costs, or CASM, for the indicated periods:
  Six Months Ended
                June
      30,
              
              Percentage
                Increase2008
              
              
              2007
              
              (Decrease)Aircraft
      fuel
              
              
              5.21
              ¢
              
              
              3.36
              ¢
              55.1Salaries,
      wages and benefits
              
              
              1.98
              
              
              
              2.00
              
              (1.0)Aircraft
      rent
              
              
              0.99
              
              
              
              1.11
              
              (10.8)Maintenance,
      materials and repairs
              
              
              0.69
              
              
              
              0.65
              
              6.2Distribution
              
              
              0.41
              
              
              
              0.39
              
              5.1Landing
      fees and other rents
              
              
              0.56
              
              
              
              0.54
              
              3.7Aircraft
      insurance and security services
              
              
              0.09
              
              
              
              0.11
              
              (18.2)Marketing
      and advertising
              
              
              0.17
              
              
              
              0.19
              
              (10.5)Depreciation
              
              
              0.23
              
              
              
              0.20
              
              15.0Gain
      on sale of aircraft
              
              
              (0.06
              )
              
              
              (0.06
              )
              —Impairment
      of goodwill
              
              
              0.07
              
              
              
              —
              
              —Other
      operating
              
              
              0.87
              
              
              
              0.88
              
              (1.1)Total
      CASM
              
              
              11.21
              ¢
              
              
              9.37
              ¢
              19.6
 
 Aircraft
fuel increased 55.1 percent on a cost per ASM basis. Our fuel
cost per gallon, including taxes and into-plane fees, increased 60.7 percent
from $2.11 for the six months ended June 30, 2007, to $3.39 for the six months
ended June 30, 2008. We realized a $9.2 million benefit from fuel related
derivative financial instruments which reduced fuel expense during the six
months ended June 30, 2008.
 
 Aircraft rent decreased
10.8 percent on a cost per ASM basis. Since June 30, 2007, we have taken
delivery of ten B737 aircraft, none of which were lease financed.
 
 Maintenance, materials and repairsincreased 6.2 percent on a cost per ASM basis, due to the increase in
maintenance costs per block hour. Maintenance costs per block hour were
approximately $301 compared to $277 in 2007 representing an 8.7 percent
increase. The increase was due primarily to increased contract rates and an
increase in rotable repairs due to various aircraft being released from
warranty.
  27
  
 
 
 Distributionincreased 5.1
percent on a cost per ASM basis primarily due to higher credit card fees paid to
various credit card companies.
 
 Marketing and
advertising decreased 10.5 percent on a cost per ASM basis.
During the six months ended June 30, 2007, we incurred incremental advertising
and other marketing costs associated with commencing service to seven new
locations. During the six months ended June 30, 2008, we initiated service to
three new locations.
 
 Depreciation increased 15.0
percent on a cost per ASM basis, primarily due to placing seven owned B737
aircraft into service since June 30, 2007, and purchases of spare aircraft parts
for our B737 aircraft fleet.
 
 Gain on sale of aircraft for
the three months ended June 30, 2008 was $7.3 million compared to $6.2 million
for the three months ended June 30, 2007. During each period, we took delivery
of and subsequently sold two B737 aircraft.
 
 Impairment of goodwill for
the three months ended June 30, 2008 was $8.4 million. Excess of cost over
fair value of net assets acquired (goodwill) and indefinite-lived intangibles,
such as trade names, are not amortized but are subject to periodic impairment
tests in accordance with Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. Because current adverse industry conditions and recent operating
losses experienced by AirTran are indicators that our intangible assets may be
impaired, we prepared an assessment in accordance with SFAS 142 and concluded
that all of our goodwill was impaired as of June 30, 2008, while our trademarks
and trade names were not. Consequently, we recorded a charge of $8.4 million to
write-off the carrying value of all of our goodwill as of June 30,
2008.
 
 Non-operating
(Income) Expense
 
 Other (income) expense,
net changed from an expense of $19.8 million for the six months
ended June 30, 2007 to income of $9.8 million for the six months ended June 30,
2008. Interest income decreased $6.0 million due to lower returns on our
invested cash. Also, during the six months ended June 30 2008, we recorded a
$0.9 million charge to interest income related to realized and unrealized losses
on investments. Interest expense, including amortization of debt issuance costs,
increased by $2.2 million primarily due to the effect of aircraft debt
financings entered into during 2007 and 2008 and interest expense associated
with the 5.5 percent convertible senior notes issued in May 2008. Capitalized
interest decreased by $0.7 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.
 
 We
reported gains on derivative financial instruments of $38.4 million for
the six months ended June 30, 2008, which consisted of $9.4 million of
realized gains and $29.0 million of unrealized gains on derivative
instruments where the derivative settles or contract expires in future
periods.
 
 Income
Tax Expense
 
 Our
effective rate was 31.9 percent and 37.7 percent for the six months ended June
30, 2008 and 2007, respectively. 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 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. Also, during
the three months ended June 30, 2008, we recorded an $8.4 million charge to
write-off all of the carrying value of our goodwill. Because this write-off is
not deductible for income tax purposes, we did not record a tax benefit and
consequently our effective tax rate was reduced.
 
 We have
recognized the tax benefit associated with pre-tax losses in the Condensed
Consolidated Statements of Operations because we expect to realize our deferred
tax assets (including the deferred tax asset associated with loss
carry-forwards) through the reversal of existing temporary differences. As of
June 30, 2008, our deferred tax liabilities exceeded our deferred tax assets
(including the deferred tax asset associated with previously recognized loss
carry-forwards) by approximately $11 million. We will continue to recognize the
financial accounting tax benefit of any future losses only to the extent that
deferred tax liabilities exceed deferred tax assets. Therefore, we may be unable
to recognize the full financial accounting tax benefit of future pre-tax
accounting losses. Our effective tax rates for the third and fourth quarters of
2008 may be substantially different from our effective tax rate for the six
months ended June 30, 2008.
 
 Regardless
of the financial accounting for income taxes, our net operating loss
carry-forwards are currently available for use on our income tax returns to
offset future taxable income.
 
 28
  
  
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 At June
30, 2008, we had unrestricted cash, cash equivalents, and short-term investments
of $437.7 million, which is an increase of $119.7 million compared to
December 31, 2007. As of June 30, 2008, we also had $66.6 million of
restricted cash and $8.2 million of long-term investments. During the six months
ended June 30, 2008, our primary sources of cash were from operating activities
and the issuance of debt and equity securities.
 
 Year
2008 Cash Requirements and Potential Sources of Liquidity
 
 Due
largely to a dramatic increase in jet fuel prices we incurred a net loss before
income taxes of $71.0 million for the six months ended June 30, 2008. Unless jet
fuel prices decrease substantially, we will likely incur additional losses
during the remainder of 2008 which may require us to utilize a portion of our
unrestricted cash to fund our operations. Continued high jet fuel prices will
have an adverse effect on our results of operations, cash flow and financial
condition.
 
 During
the remainder of 2008, we will also need cash for capital expenditures and debt
maturities. It is anticipated that capital expenditures and debt and capital
lease maturities, in each case, for the remainder of the year, will be funded by
a mix of financings and the use of a portion of our unrestricted cash and
investments. We anticipate that during the remainder of 2008: expenditures for
acquisition of other property and equipment will aggregate $11.0 million;
expenditures for rotable parts will aggregate approximately $7.0 million; and
the maturities of existing debt and capital lease obligations will aggregate
$42.8 million. Excluding the payments associated with the two B737 aircraft
scheduled for delivery which are being sold and the payments associated with two
existing B737 aircraft which are being sold in July 2008 and August 2008,
payments of current maturities of existing debt and capital lease obligations
will aggregate $32.4 million.
 
 We
believe we have various options available to meet our debt repayments, capital
expenditures and operating commitments including internally generated funds and
various financing or leasing options including the sale, lease or sublease of
additional aircraft and incurrence of additional secured indebtedness.
 However, except for our committed new letter of credit facility, we have
no unused lines of credit available, our owned aircraft and our pre-delivery
deposits are pledged as collateral for outstanding debt, and we have committed
to pledge—directly or indirectly—a variety of our assets, to secure our
reimbursement obligations under our new letter of credit facility as discussed
below.
 
 In
response to the increased fuel prices, we took a number of steps to strengthen
our cash balance and liquidity both during, and subsequent to, the second
quarter of 2008. In the second quarter, we raised $101.8 million through the
issuance of new debt, including a public offering of $74.8 million in
convertible senior notes due in 2015, $75.6 million through the issuance of
common stock, primarily through a public offering of 24.7 million shares of our
common stock at a price of $3.20 per share, and $7.8 million net cash
benefit from sales of aircraft. See “Liquidity and Capital Resources
–Year to Date 2008 Cash Flows–Financing Activities”.
 
 We also
entered into agreements to defer deliveries of 22 new B737 aircraft, which
resulted in the net return of $4.4 million of aircraft predelivery deposits and
we have agreements to sell three existing B737 aircraft during the third
quarter of 2008 and two new B737 aircraft scheduled for delivery in December
2008. The sale of the two new aircraft will result in a cash gain and we will
avoid the requirement to incur additional indebtedness and invest cash resources
in such aircraft. We also currently are in discussions regarding the sale
and leaseback of three existing B737 aircraft and have an agreement in principal
to return one of our leased B717 aircraft to the lessor in September
2008.
 
 Because
we negotiated what we believe to be very favorable aircraft purchase prices in
2003 and because we believe demand for new fuel-efficient aircraft should
continue—particularly outside of the U.S. where potential purchasers may also
have favorable currency exchange rates —we  believe we have the
ability to monetize and intend to monetize selected aircraft
assets.
 
 In
addition to generating cash proceeds, each sale of new aircraft scheduled for
future delivery frees up existing cash which would normally be paid as part of
the purchase price and avoids the need for associated financing for the
aircraft. Nevertheless, we cannot assure you that we will be able to sell
other aircraft on terms acceptable to us or at all. Nor can we predict with any
certainty when any such sales may occur. We also cannot assure you that our
ability to sell or otherwise monetize aircraft assets will not be adversely
affected by similar attempts by other operators of commercial aircraft in
general or by operators of B737 aircraft in particular. Similarly, the limited
number of operators of B717 aircraft may adversely affect the market for such
aircraft and our ability to sell any such aircraft. Furthermore, the liquidation
of other air carriers could have an adverse impact on market values of our
aircraft assets, including any aircraft we seek to sell or otherwise monetize.
Finally, our ability to generate cash from the disposition of certain aircraft
may require the consent of one or more secured parties, including in connection
with our reimbursement obligations entered into in connection with our letter of
credit facility discussed below, and we may be required to apply the proceeds
from the sale of aircraft which are encumbered by liens to reduce or pay off
indebtedness.
 
 29
 
 
 
 
 We
continue to explore a variety of financing mechanisms by which we may
opportunistically further monetize a portion of the value of our existing
aircraft fleet should we deem it in our best interest to do so. Such actions
could include credit facilities secured by junior liens, sale and lease back
transactions or other financing mechanisms. Despite our committed letter of
credit financing discussed below, in light of the continued turmoil and reduced
liquidity in the global capital markets, as well as the current conditions in
our industry, we cannot offer any assurances that we will be able to further
monetize our available aircraft and non-aircraft assets on terms which are
acceptable to us or at all. Nor can we predict with any certainty when any such
financings may occur.
 
 We have
agreements with organizations that process credit card transactions arising from
purchases of air travel by customers of AirTran Airways. As of August 8, 2008,
we were in compliance with the terms of all of our credit card processing
agreements. Each of our agreements with our processors allows, under
specified conditions, the credit card processor to retain cash that such
processor otherwise would deliver to the Company (i.e., a “holdback”). Holdbacks
are classified as restricted cash on the consolidated balance
sheet.  Our exposure to credit card holdbacks consists of advanced
ticket sales that customers purchased with credit cards.  Once the
customers travel, any related holdback is remitted to us.  Our
exposure fluctuates seasonally with seasonal travel demands and may also
fluctuate based on changes in advance ticket sales patterns.  As of
June 30, 2008, we had advanced ticket sales of approximately $406 million
related to credit card sales. As of June 30 and August 4, 2008, $23.9 million
and $86.7 million, respectively, had been held back by our two largest credit
card processors.
 
 In July
2008, we amended our agreement with our largest credit card processor (based on
volume processed for us) to extend the expiration date to December 31, 2009. The
amended agreement provides that such processor may holdback amounts that would
otherwise be remitted to us in the event that, among other things, our aggregate
cash and unrestricted investments fall below agreed upon levels, or such
processor reasonably determines that there has been a material adverse
occurrence or certain other events occur. The amount that such processor is
entitled to holdback is determined by a combination of such processor’s exposure
to potential credit card chargebacks and our aggregate unrestricted cash and
investments balance.
 
 We have
the right to reduce the amounts which are otherwise withheld by our largest
credit card processor to the extent that we provide the processor with a letter
or letters of credit.  In July 2008, we obtained a commitment for a
facility which will provide for a financial institution to issue letters of
credit of up to $150 million for the benefit or such processor, which will
result in a reduction in the amounts that would otherwise be withheld by the
processor. Our reimbursement obligations under the facility will be 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, and will be  guaranteed by AirTran Holdings
and each subsidiary of Airways. Our reimbursement obligations and the related
holding company level guarantee will rank senior in right of payment to the
subordinated indebtedness of the applicable company and rank equally
with senior indebtedness of the applicable company. Letters of credit
issued pursuant to the facility will secure our obligations to the processor
arising during the period to be covered by the facility, which will end December
31, 2009; unless the period is earlier terminated. The letters of credit will
expire no later than eighteen months after the end of the period. The maximum
amount of the letters of credit to be issued will be based on the value of the
collateral securing our reimbursement obligations.
  Upon the
issuance of one or more letters of credit for the benefit of the processor, we
expect all cash currently being held back by the processor to be returned to
us.  Nevertheless, the processor may in the future be entitled to withhold
amounts in excess of the outstanding amount of the letter or letters of credit
if by the terms of our card processing agreement with the processor the
processor is entitled to increase the amount of its holdback or if the period
covered by the facility ends and is not replaced by a similar
facility.
 
 Our
credit card processing agreement with our second largest processor (based on
volume processed for us) currently has no fixed term and is terminable without
cause with 30 days notice. During July 2008, we agreed that such processor could
commence a holdback of a portion of the amounts that would otherwise be remitted
to us while we negotiate the conditions and amounts of potential
holdbacks. We believe that we may be able to satisfy any holdback
requirements by providing such processor with cash, a letter of credit,
collateral, or other forms of security in lieu of a cash holdback. The
ultimate results of these negotiations and the impact on our liquidity is
uncertain. If we cannot reach an agreement the processor currently may withhold
up to approximately $50 million in addition to the amount that had been withheld
as of August 4, 2008.
 
 30
 
 
 
 Absent
the occurrence of adverse events, many of which are outside of our direct
control, such as additional terrorist attacks, hostilities involving the United
States or further significant increases in fuel prices, we currently believe
that our existing liquidity and projected 2008 cash flows will be sufficient to
fund our current operations and other financial obligations
through  December 2008. Although we believe our financial projections
are reasonable, one or more events or a combination of one or more events, many
of which are outside of our direct control, may cause our actual results and
available liquidity and cash flows to be materially different from our
projections. Such events could include not only the events noted above and
discussed elsewhere in this quarterly report or in our discussion of Risk
Factors but also the inability to meet our revenue expectations either in the
current unfavorable or a worsening economic environment or the holdback of
additional amounts under the terms of our agreements with organizations that
process credit card transactions arising from purchases of air travel by our
customers. Our ability to fund our operations, increase unit revenues and meet
our other financial commitments in 2009 will in large part be dependent on fuel
prices, the competitive environment and macro economic conditions at the time.
For a further discussion of the risks of our business, see “Risk Factors” included herein
or incorporated by reference herein.
 
 Year
to Date 2008 Cash Flows
 
 Operating activities during
the first six months of 2008 provided $33.3 million of net cash compared to
$167.7 million during the analogous period in 2007. 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 six months ended June 30, 2008, we reported a net loss of
$48.4 million compared to net income of $44.2 million for the six months ended
June 30, 2007. The loss negatively impacted net cash provided by operating
activities.
 
 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 in air traffic
liability, fluctuate seasonally and also provide cash as we grow and
consequently receive additional cash for future travel. This source of cash will
decline to the extent we slow or curtail our growth or the amounts held back by
our credit card processors increase.  During the six months ended June
30, 2008 and 2007, our air traffic liability balance increased $157.8million and $117.0
million, respectively, contributing to net cash flow from operating activities.
In June 2008, our largest credit card processor held back amounts that would
have been otherwise remitted to us. As of June 30, 2008, $23.9 million had been
withheld, reducing net cash flow from operating activities. Changes in accounts
payable, accrued and other current and non-current liabilities also have had a
significant impact on our cash flow from operating activities. During the six
months ended June 30, 2008, the $31.6 million increase in accounts payable and
accrued and other liabilities contributed to net cash provided by operating
activities. Accounts payable and accrued and other liabilities increased during
the period primarily due to liabilities to governmental authorities for taxes
and fees that we collected on their behalf and various other liabilities.
During the six months ended June 30, 2007, the $38.8 million increase in
accounts payable and accrued and other liabilities contributed favorably to net
cash provided by operating activities.
 
 We used
cash to increase other assets by $9.7 million and $13.0 million during the six
months ended June 30, 2008 and 2007, respectively. Other assets include prepaid
aircraft maintenance and other deposits, prepaid insurance and prepaid
distribution costs. Additionally, a $2.8 million increase in prepaid and stored
fuel decreased net cash provided by operating activities during the six months
ended June 30, 2008. During the six months ended June 30, 2007, a $24.4 million
increase in prepaid and stored fuel decreased net cash provided by operating
activities.
 
 Investing activities during
the six months ended June 30, 2008 provided $88.1 million in net cash compared
to the $79.4 million used during the similar period in 2007. Investing
activities includes sales and purchases of available for sale securities,
expenditures for aircraft deposits, the purchase of aircraft and other property
and equipment, and 2007 deferred costs related to the attempted acquisition of
Midwest.
 
 As of
June 30, 2008, we had short-term and long-term investments of $32.7 million and
$8.2 million, respectively, in an enhanced cash investment fund.  In
December 2007, we were advised that the enhanced cash fund would be closed to
new investments and immediate redemptions. During the six months ended June 30,
2008, we received distributions of $40.4 million from our enhanced cash fund. In
addition, in December 2008, we elected to convert all of our auction rate
security investments into cash as they came up for re-auction.  As of
December 31, 2007, we had a balance of $37.1 million in auction rate
securities. During the first week of January, we completed the conversion
of all of our auction rate securities to cash. During the six months ended
June 30, 2007, purchases of available for sale securities exceeded sales of
available for sale securities by $17.3 million.
 
 31
 
 
 
 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 refunded deposits in the
aircraft. During the six months ended June 30, 2008, we paid $39.8 million in
new aircraft deposits and received $84.0 million in previously paid deposits.
Included in the amount we received in previously paid deposits was $38.7 million
related to an agreement to defer delivery of B737 aircraft. During the six
months ended June 30, 2008, we purchased eight B737 aircraft, of which two were
sold to an airline outside of the United States. We expended $113.6 million in
cash and incurred $178.6 million of debt related to the acquisition of six of
the aircraft. During the six months ended June 30, 2007, we purchased ten B737
aircraft, of which two were sold to an airline outside of the United States. We
expended $121.3 million in cash and incurred $234.7 million of debt related to
the acquisition of these aircraft.
 
 During
the six months ended June 30, 2008, we expended $6.0 million in cash for the
acquisition of other property and equipment. Acquisitions of other property and
equipment included purchases of rotable spare parts, additions to leasehold
improvements, and the purchases of ground and computer equipment. During the six
months ended June 30, 2007, we expended $12.7 million in cash for the
acquisition of other property and equipment.
 
 Financing
activities provided $76.8 million of net cash during the six months
ended June 30, 2008 compared to using cash of $16.6 million in the similar
period in 2007. During the six months ended June 30, 2008, we received cash from
the issuance of debt financing for aircraft pre-delivery deposits of $30.3
million and repaid $72.0million of pre-delivery
deposit debt financing. During the six months ended June 30, 2008, we repaid
$28.1 million of aircraft purchase debt financing. Also, during the first six
months of 2008, we borrowed $178.6 million in non-cash transactions to finance
the purchase of six B737 aircraft. During the first six months of 2007, we
received cash from the issuance of debt financing for aircraft pre-delivery
deposits of $43.2 million and repaid $57.4 million of pre-delivery deposit debt
financing. Also, during the first six months of 2007, we borrowed $234.7 million
in non-cash transactions to finance the purchase of eight B737 aircraft. See
Note 5 to Condensed Consolidated Financial Statements for additional information
regarding our outstanding debt.
 
 During
the second quarter 2008, we completed two other financings. The proceeds were
used to improve our overall liquidity and for general corporate purposes. 
On April 30, 2008, we completed a public offering of $74.8 million in
convertible senior notes due in 2015. Such notes bear interest at 5.5 percent
payable semi-annually, in arrears, on April 15 and October 15. The 5.5% notes
are senior unsecured obligations of Holdings and rank equally with all existing
and future senior unsecured obligations of Holdings. We placed approximately
$12.3 million of the proceeds of the offering in an escrow account with the
trustee. Funds in the escrow account are invested in government securities and
will be used to make the first six scheduled semi-annual interest payments on
the notes, and these payments are secured by a pledge of the assets in
escrow. On May 1, 2008, we completed a public offering of 24.7 million
shares of our common stock at a price of $3.20 per share, receiving net proceeds
of approximately $74.7 million, after deducting discounts and commissions paid
to the underwriters and other expenses incurred with the offering.
 
 During
the six months ended June 30, 2008 and 2007, we received $1.0 million and $1.2
million, respectively, from the issuance of common stock related to the exercise
of options and employee stock purchase plan.
 
 Summary
of Financial Statement Impacts of Fuel Related Derivative Financial
Instruments
 
 We enter
into fuel related derivative financial instruments to reduce the impact of
fluctuations in jet-fuel prices on future fuel costs. The accounting for fuel
related derivatives is discussed in Note 6 “Financial Instruments”to Condensed
Consolidated Financial Statements and our exposure to market risk is discussed
in  ITEM 3. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK – Aviation Fuel”.
In summary, our fuel related derivative financial instruments impacted our
financial statements as follows:
 
 ·
              Net
      realized gains related to derivative financial instruments that qualify
      for hedge accounting reduced fuel expense by $7.4 million and $9.2 million
      during the three and six month periods ended June 30,
  2008.
 ·
              We
      recorded net gains related to derivative financial instruments that do not
      qualify for hedge accounting of $43.6 million and $38.4 million during the
      three and six months ended June 30,
2008.
 ·
              During
      the six months ended June 30, 2008 we realized $20.8 million of net cash
      benefit related to our fuel related hedging
  activities.
 ·
              As
      of June 30, 2008, the estimated fair value of our fuel related derivative
      financial instruments was a net asset of $79.7
  million.
 ·
              As
      of June 30, 2008, other comprehensive income included $33.5 million
      (before income tax) of net unrealized gains which had not yet been
      recognized in the Condensed Consolidated Statements of
      Operations.
 
 32
 
 
 
 Aircraft
Acquisitions, Sales and Current Aircraft Purchase Commitments
 
 Pursuant
to our strategy for responding to the high-cost of jet fuel, we have
recast our growth plans. In this regard, we have completed a comprehensive
review of our future fleet and capacity plans and we are taking a number of
steps to better match our capacity to the current and expected future
environment. We have revised our planned level of flying commencing in the last
four months of 2008 from a planned 10 percent increase in ASMs compared to the
comparable period in 2007 to a reduction of between six and eight percent
compared to the comparable period in 2007. We also intend to reduce planned
capacity in 2009 from a growth in ASMs of just under 10 percent to a reduction
of between four and eight percent compared to projected 2008 capacity. We have
revised our fleet plan and based on scheduled and or planned fleet actions and
we expect to end 2008 with no more than 139 aircraft. We are taking the
following steps to achieve our targeted levels of future
operations:
 
 ·
              We
      have entered into agreements to defer deliveries of 22 new B737
      aircraft,
 ·
              We
      have agreements in place to sell the two B737 aircraft scheduled for
      delivery in December 2008. The sale of these two aircraft will result in a
      cash gain and we will avoid the requirement to incur additional debt and
      invest cash resources in new
aircraft.
 ·
              We
      have agreements to sell two existing B737 aircraft during the third
      quarter of 2008. We also have a letter of intent to sell one additional
      B737 aircraft during the third
quarter.
 ·
              We
      are in discussions regarding the sale / leaseback of existing B737
      aircraft.
 ·
              We
      are in discussions to return one B737
aircraft.
 ·
              We
      are offering additional aircraft for
sale.
 ·
              We
      are in discussions to arrange one or more secured debt
      financings.
 
 During
the six months ended June 30, 2008, we took delivery of eight purchased B737
aircraft, of which two were sold. In May and July 2008, we announced that we
would defer 22 B737 aircraft originally scheduled for delivery between 2009 and
2011 to delivery dates between 2013 and 2015. As of August 8, 2008, we had on
order 55 B737 aircraft with delivery dates between 2008 and 2015. As further
discussed below, the table includes two aircraft to be delivered in December
2008 that we have agreed to sell upon delivery under executed purchase
agreements.  Excluding these two aircraft, we do no have any aircraft
purchase commitments for the remainder of 2008. We intend to reduce or delay
further growth in our fleet and are evaluating possible net reductions in our
current fleet including through the sale of additional aircraft. The table below
illustrates, as of August 8, 2008, all aircraft currently scheduled for
delivery:
  Firm Aircraft Deliveries
                B737December
      2008
              
              
              22009
              
              
              22010
              
              
              72011
              
              
              102012
              
              
              122013
              
              
              62014
              
              
              122015
              
              
              4Total
              
              
              55
 
  Aircraft
purchase contracts typically require the purchaser to make pre-delivery deposits
to the manufacturer. We have arranged pre-delivery aircraft deposit financing
for a portion of our pre-delivery deposit requirements for aircraft scheduled to
be delivered during the remainder of 2008, 2009, and some aircraft in 2010. The
pre-delivery deposit financing typically funds between 75 percent and 80 percent
of our pre-delivery deposit obligation for any given aircraft.
 
 33
 
 
 
 Our
aircraft purchase commitments for the remainder of 2008 and for the next five
years and thereafter, in aggregate, are (in thousands): 2008—$25,400;
2009—$106,900; 2010—$266,800; 2011—$357,000; 2012—$439,600; 2013—$234,100; and
thereafter—$560,000. These amounts include payment commitments, including
payment of pre-delivery deposits, for aircraft on firm order. Aircraft purchase
commitments include the forecasted impact of contractual price escalations. The
aircraft purchase commitment totals do not reflect the effects of prearranged
aircraft financings.
 
 Aircraft
Financing Arrangements
 
 While we
have arranged financing for one of the two December 2008 scheduled B737
deliveries, we have definitive purchase agreements to sell the aircraft. We are
currently in negotiations to finance our 2009 deliveries. While our intention is
to finance the remainder of the aircraft on order through a combination of debt
and lease financings, we have not yet arranged for such financing.
 
 Letters
of Credit
 
 As of
June 30, 2008, $17.0 million of restricted cash relates to outstanding letters
of credit, primarily for airport facilities and insurance.In July, Airways obtained a
commitment pursuant to which a financial institution will provide a standby
letter of credit facility to us pursuant to which one or more letters of credit
of up to $150 million will be issued in favor of our largest credit card
processor
 
 Critical
Accounting Policies and Estimates
 
 For
additional information regarding our Critical Accounting Policies and Estimates,
see “Critical Accounting
Policies and Estimates” in Management’s Discussion and Analysis of
Financial Condition and Liquidity in our Form 10-K.
  34
  
  
 
 ITEM 3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 There have been no material changes in market
risk from the information provided in Part II, Item 7A “Quantitative and Qualitative
Disclosures About Market Risk” in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, other than those discussed
below.
 
 Interest
Rates
 
 We had
$879.7 million and $764.9 million of variable-rate debt as of June 30, 2008 and
December 31, 2007, respectively. We have mitigated our exposure on certain
variable-rate debt by entering into interest rate swap agreements. These swaps
expire between 2018 and 2019. The notional amount of the outstanding debt
related to interest rate swaps at June 30, 2008 was $183.9 million. 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
June 30, 2008, the fair market value of our interest rate swaps was a liability
of $5.3 million. If average interest rates increased by 100 basis points during
the remainder of 2008 as compared to 2007, our projected 2008 interest expense
related to floating rate debt would increase by approximately $3.8
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
June 30, 2008 and 2007 represented 49.8 percent and 37.6 percent of our
operating expenses, respectively. Aircraft fuel expense for the six months ended
June 30, 2008 and 2007 represented 46.4 percent and 35.8 percent of our
operating expenses, respectively. Efforts to reduce our exposure to increases in
the price and decreases in the availability of aviation fuel include the
utilization of fuel pricing arrangements in purchase contracts with fuel
suppliers covering a portion of our anticipated fuel requirements. The fuel
pricing arrangements consist of both fixed price and collar arrangements.
Because these contracts are accounted for under the normal purchase exception
included in SFAS 133, these contracts are not considered derivative financial
instruments for financial reporting purposes. As of June 30, 2008, we had no
fixed pricing arrangements with fuel suppliers for any future
period.
 
 In
addition to the fuel purchase contracts discussed above, we have entered into
fuel related derivative financial instruments with financial institutions to
reduce the impact of fluctuations in jet-fuel prices on future fuel costs. Our
primary objective of entering into derivative instruments is to reduce the
impact on our operating results of the volatility of jet fuel prices. We do not
hold or issue derivative financial instruments for trading purposes. As of June
30, 2008, the net fair market value of our fuel related derivative assets was
$79.7 million and was comprised of option and swap arrangements. As of June 30,
2008, these contracts pertain to 120.8 million gallons of our remaining
2008 fuel purchases, 85.6 million gallons of our 2009 fuel purchases, and
9.1 million gallons of our 2010 fuel purchases, and represent 66.3 percent
of our projected July to December 2008 jet fuel requirements, 21.9 percent of
our projected 2009 jet fuel requirements, and 2.2 percent of our projected 2010
jet fuel requirements. Subsequent to June 30, 2008, we entered into additional
fuel related derivatives, which increased the gallons under contract to
127.1 million gallons for the last six months of 2008. At August 7, 2008,
our agreements pertain to 72.6 percent and 24.7 percent of our total
projected remaining 2008 and total 2009 projected fuel consumption,
respectively.
 
 As noted
above we use a variety of financial instruments to hedge our fuel prices. The
financial instruments include swaps, purchased options and collars. Our fuel
hedge and derivative portfolio contains compound derivatives with sold out of
the money call options which act to limit the benefit of collars to the extent
that the market price level exceeds the sold call option prices.
 
 35
  
  
 The
estimated total cash benefits of our derivatives held at July 29, 2008
are estimated as follows (in millions) at the specified crude
prices:
  Estimated
      Total Cash Benefit of Our Derivatives HeldJuly
      to
                December
                2008
              
              2009Assumed
      average market crude price:$100
      per barrel
              
              $
              8.7
              
              $
              25.3$120
      per barrel
              
              $
              34.1
              
              $
              29.5$130
      per barrel
              
              $
              43.0
              
              $
              29.6$150
      per barrel
              
              $
              68.6
              
              $
              29.6$170
      per barrel
              
              $
              89.8
              
              $
              29.6
 
 For every
dollar increase per barrel in crude oil or refining costs, our fuel expense
(including taxes and into-plane fees) for the last six months of 2008 and for
2009, before the impact of our derivative financial instruments, would increase
$4.5 million and $8.9 million, respectively, based on current and projected
operations.
 
 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 June 30, 2008, 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 June 30, 2008, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
  36
  
  
 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, 2007 and in our prospectus supplements to our registration
statement on Form S-3 which supplement was filed with the SEC on April 22,
2008. We have included below the risk factors that we believe have significantly
changed from the risk factors previously disclosed in such Annual
Report and prospectus supplement. You should carefully consider, in
addition to the other information set forth in this report, the risk factors
discussed in our Annual Report, as updated in such prospectus supplements, 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.
 
 Our
business is being, and may continue to be, adversely affected by the price of
aircraft fuel.
 
 Both spot
and average crude oil spot prices rose to all time record highs in the second
quarter of 2008.  Aircraft fuel is now our single largest operating
expenditure and, as a percentage of our operating expenses, accounted for 49.8
percent in the second quarter of 2008, 42.5 percent in the first quarter of 2008
and 37.0 percent, 36.5 percent, and 32.4 percent in 2007, 2006 and 2005,
respectively. Based on projected operations, for every dollar increase per
barrel in crude oil or refining costs, our fuel expense (including taxes and
into-plane fees) for the last six months of 2008 and for 2009, before the impact
of our derivative financial instruments, would increase $4.5 million and $8.9
million, respectively.
 
 In the
first six months of 2008, we recorded consecutive quarterly losses primarily due
to the increased cost of jet fuel. Unless jet fuel prices decrease
substantially, we will likely incur significant additional losses during the
remainder of 2008 which will likely require us to utilize a portion of our
unrestricted cash to fund our operations and negatively impact our liquidity.
Although we are adjusting our business strategy, including increasing certain
fares and implementing ancillary fees, to address such costs, we cannot assure
you that we will be able to operate profitably in light of current fuel
costs.
 
 It is
impossible to reliably predict the future price of aircraft fuel. Political
disruptions or wars involving oil-producing countries, changes in government
policy concerning the production, transportation or marketing of aircraft fuel,
changes in jet fuel production capacity, environmental concerns and other
unpredictable events may result in additional fuel price increases in the
future. Since January 1, 2008, fuel prices have reached new record highs on
a nominal and inflation adjusted basis.
 
 If
our costs continue to exceed our revenues, we may not be able to maintain
adequate liquidity.
 
 While our
cash flows from operations and our available capital have been sufficient to
meet our current operating expenses, lease obligation and debt service
requirements to date, unless fuel prices substantially moderate, we may not be
able to maintain adequate liquidity in future years unless we are able to
increase our revenues or otherwise improve operating results or obtain new
sources of capital. We have announced a business strategy based on capacity
reductions—both in available seat miles and number of aircraft, increases in
fuel surcharges, fares and fees, the deferral of capital expenditures, continued
cuts in non-fuel costs, including further productivity improvements, workforce
reductions, and obtaining additional sources of capital all in order to improve
our results of operations and liquidity. Although our aggregate unrestricted
cash and investments at June 30, 2008, was the highest in company history, our
strategy we may not be successful either in improving our results of operations
or in further improving our liquidity. We may not achieve necessary
increases in unit revenue as a consequence of either capacity reductions in the
industry in general or our own individual capacity reductions in particular.
Further, certain of our competitors may not reduce capacity and may increase
capacity, thereby diminishing our expected benefit from individual and industry
capacity reductions. Higher fares and fees may have an adverse impact on travel
demand and we may not be able to optimize our fees and fares relative to demand.
In addition to operating cash needs, such as for fuel expense, certain elements
of our plan may require the use of cash in connection with work force reductions
or early termination fees in connection with aircraft lease terminations. At
certain fuel price levels, our current and potential cost structure—even with
full implementation of our business plan may preclude our ability to operate
profitability.
 
 37
 
 
 
 
  Our
liquidity could be adversely impacted in the event we need to and are unable to
monetize additional assets or obtain additional sources of
financing.
 
 Despite
our recent public offerings, our recent and pending aircraft sales and our
committed letter of credit facility, we cannot assure you that we will be able
to sell additional aircraft or obtain other financing on terms acceptable to us
or at all. Nor can we predict with any certainty when any such sales or other
financings may occur. We also cannot assure you that our ability to sell or
otherwise monetize aircraft assets will not be adversely affected by similar
attempts by other operators of commercial aircraft in general or by operators of
B737 aircraft in particular. Similarly, the limited number of operators of B717
aircraft may adversely affect the market for such aircraft and our ability to
sell or otherwise monetize such aircraft. Our ability to generate cash from the
disposition of certain aircraft may require the consent of one or more secured
parties including in connection with our  obligations under the
reimbursement agreement to be entered into in connection with our letter of
credit facility discussed elsewhere in this report, and we may be required to
apply the proceeds from the sale of aircraft which are encumbered by liens to
reduce or pay off indebtedness. Certain other carriers have also announced plans
to reduce capacity and various other air carriers are in the process of
liquidation or may liquidate if they are unable to reorganize.  The
availability of other aircraft for sale could have an adverse impact on our
ability to sell or otherwise monetize aircraft and on the market values of our
aircraft assets, including any aircraft we seek to sell or pledge as
collateral.  Reductions in the value of assets pledged to secure our
obligations under the reimbursement agreement to be entered into in connection
with our committed letter of credit facility could result in reductions in the
amount available under such facility.  Finally, continued turmoil in
the global capital markets may reduce the market for aircraft assets or other
financings. Accordingly, we may not be able to further monetize available assets
or enter into additional financing transactions on terms which are acceptable to
us or at all.
 
 Credit
rating downgrades could have an adverse effect on our liquidity.
 
 The
credit ratings for our existing public debt were reduced in July 2008. Such
reduction or further reductions in our credit ratings may increase the cost and
reduce the availability of financing to us in the future. We do not have
any debt obligations that would be accelerated as a result of a credit rating
downgrade.
 
 If
our liquidity position deteriorates significantly it could be further adversely
impacted in the event our primary credit card processors were to re-impose or
increase existing holdbacks on payments due to us from credit card
transactions.
  We
currently have agreements with organizations that process credit card
transactions arising from purchases of air travel by customers of AirTran
Airways. As of the date of this report, we were in compliance with the terms of
our credit card agreements. We have two primary credit card processors. Our
agreement with the largest card processor was amended in July 2009 and
currently expires December 31, 2009. Our credit card processing agreement
with our second largest credit card processor has no fixed term and is
terminable without cause on 30 days notice. We refer to both processors as
"credit card processors". Each of our agreements with our credit card processors
allows, under specified conditions, the credit card processor to retain cash
that such processor otherwise would deliver to us, i.e., a “holdback”. A
holdback is classified as restricted cash. The imposition of holdbacks or
increases in the amount of existing holdbacks will adversely affect our
liquidity and could result in a concomitant material adverse effect on our
business, including our financial condition and operations.
  Our
agreement with our largest processor provides that such processor may
withhold amounts that would otherwise be remitted to us in the event that our
aggregate cash and unrestricted investments fall below agreed upon levels
“trigger events”, if the processor reasonably determines that there has been a
material adverse occurrence or certain other events occur. The amount
that such processor is entitled to withhold is determined by a combination
of such processor’s exposure to potential chargebacks for future travel
purchased with the branded credit cards and our aggregate unrestricted cash and
investments balance. The maximum amount that such processor is entitled to
withhold varies over time and is up to the estimated liability for future air
travel purchased with such branded credit cards. We have the right to reduce the
amount withheld to the extent that we provide such processor with a letter
of credit and/or a cash deposit.
 
 In July,
Airways obtained a commitment pursuant to which a financial institution will
provide a standby letter of credit facility to us pursuant to which one or more
letters of credit of up to $150 million will be issued in favor of
our largest processor, which letters of credit are expected to entitle us
to a reduction in the amount that would otherwise be withheld by
our largest processor pursuant to the terms of our processing agreement
with it. However, our largest processor may in the future be entitled to
withhold amounts in excess of the letter of credit amount or if the letter of
credit facility is terminated.
 
 38
 
 
 
 In July
2008, we agreed that our second largest processor could withhold a portion
of the amount which would otherwise be remitted to us while we negotiate the
conditions and amounts of potential holdback. Regardless of whether we formally
amend our agreement with our second largest processor, such processor
may seek to withhold other amounts up to the maximum exposure for chargebacks
for tickets purchased with its credit card. We are currently in
negotiations with such processor regarding the conditions and amounts
of current and potential holdbacks.  In connection with continuing
negotiations with such processor, we may agree to modifications to our
existing agreement. We believe that we may be able to reach an
agreement with such processor which would allow us to satisfy any current
or potential holdbacks by providing such processor with a letter of credit
or collateral in lieu of a cash holdback. The ultimate results of these
negotiations and the impact on our liquidity is uncertain. Even if we negotiate
arrangements with such processor which are acceptable to us, one or more
events or a combination of events, most of which are outside of our direct
control, could result in such processor holding back cash that would
otherwise be remitted to us.
 
 Although
we have been able to negotiate arrangements and ultimately agreement amendments
with our largest processor and although we are in current negotiations
with our second largest processor to amend and continue our agreement with
it, we cannot predict whether we will continue to be able to maintain agreements
with both processors, with or without holdbacks, if our liquidity is further
adversely affected for an extended period of continuing all time high fuel
prices, by further increases in fuel costs or a worsening economic environment.
The inability to maintain our existing credit card processing agreement with
our largest credit card processor would have a material adverse effect on
our business. The number of credit card processors providing services to the
airline industry for such branded credit cards currently is limited and we
believe that certain processors for such cards generally are not
entering into arrangements with new customers.  If our agreement with
our largest processor is terminated we may be unable to enter into new
credit card processing agreements with any other processor of similarly
branded credit cards on terms acceptable to us or at all. Because our
second largest processors generally issues and processes its own cards,
termination of our agreement with such processor likely would result
in our inability to accept such card as a method of payment. Such inability
could have a material adverse effect on our business.
 
 We
have a significant amount of aircraft related fixed obligations that could
impair our ability to make principal and interest payments on our debt
obligations and lease payments on our lease obligations.
  We have
significant obligations including debt and lease obligations related to aircraft
purchase commitments, aircraft delivery obligations and aircraft leases, debt
and lease obligations for operating facilities, including existing facilities
and planned new facilities, and other cash obligations including future funding
obligations for other potential acquisitions. Our total indebtedness as of June
30, 2008 and December 31, 2007, respectively, was approximately $1.24
billion and $1.06 billion, of which $1.03 billion and $919.9 million,
respectively, was aircraft related. Our debt service obligations with respect to
our indebtedness could have an adverse impact on our earnings and cash flows for
as long as the indebtedness is outstanding.
  Our
ability to make scheduled payments of principal and interest for our financing
obligations depends on our future performance and financial results. These
results are subject to general economic, financial, competitive, legislative,
regulatory and other factors that are, to some extent, beyond our
control.
  The
amount of our debt, and other fixed obligations, and potential increases in the
amount of our debt and other fixed obligations could have important consequences
to investors and could:
 
 ·
              require
      a substantial portion of cash flows from operations for debt service
      payments, thereby reducing the availability of our cash flow to fund
      working capital, capital expenditures, acquisitions and other general
      corporate purposes;
 
 ·
              limit
      our ability to obtain additional financing for aircraft purchases, capital
      expenditures, working capital or general corporate
    purposes;
 
 ·
              make
      it more difficult for us to pay our debts as they become due during
      general adverse economic and market industry conditions because any
      related decrease in revenues could cause us to not have sufficient cash
      flows from operations to make our scheduled debt
  payments;
 
 ·
              limit
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we operate and, consequently, place us at a
      competitive disadvantage to our competitors with less debt;
      and
 
 ·
              result
      in a downgrade in the rating of our indebtedness, which could limit our
      ability to borrow additional funds or increase the interest rates
      applicable to the indebtedness.
 
 39
 
 
 
 
 As
a result of the substantial fixed costs associated with our
obligations:
 
 ·
              a
      decrease in revenues would result in a disproportionately greater
      percentage decrease in earnings;
 
 ·
              we
      may not have sufficient liquidity to fund all of our fixed costs if
      revenues decline or costs increase;
and
 
 ·
              we
      may not have sufficient liquidity to respond to competitive developments
      and adverse economic conditions.
  Of our
indebtedness, as of June 30, 2008, $1.03 billion was secured by certain of our
assets, principally aircraft, which may limit the utility of such assets in
obtaining additional financing.
  Our
ability to make all of the principal and interest payments when such payments
are due under our indebtedness, including the indentures governing our existing
7.0% Convertible Notes and 5.5% Convertible Senior Notes, will be dependent on
our cash flows and future liquidity. Accordingly, there can be no assurance
that we will be able to repay such borrowings. Likewise, our ability to pay the
fixed costs associated with our contractual obligations will depend on our
operating performance and cash flow, which will in turn depend on, among other
things, the success of our current business strategy, whether fuel prices
continue at current prices levels and/or further increase, further weakening or
improvement in the U.S. economy, as well as general economic and political
conditions. A failure to pay our fixed costs or a breach of our contractual
obligations could result in a variety of adverse consequences, including the
acceleration of our indebtedness, the withholding of credit card proceeds by one
or more credit card processors, and the exercise of remedies of our creditors
and lessors. In such a situation, it is unlikely that we would be able to
fulfill our obligations under or repay the accelerated indebtedness, make
required lease payments or otherwise cover our fixed costs, which would have a
material adverse impact on us and on our ability to sustain operations over the
long-term.
  Our
business is, and will continue to be, dependent on the general availability of
aircraft fuel.
  Due to
the effect of political and economic events on the availability of oil, the
future availability of aircraft fuel cannot be predicted with any degree of
certainty. Although we are currently able to obtain adequate supplies of
aircraft fuel, political disruptions or wars involving oil-producing countries,
changes in government policy concerning the production, transportation or
marketing of aircraft fuel, changes in aircraft fuel production capacity,
environmental concerns and other unpredictable events may result in fuel supply
shortages in the future. Adverse changes in the availability of, or increases in
demand for, oil in general and jet fuel in particular likely would result in
increased fuel prices.
 
 Increased
labor costs, union disputes, employee strikes and other labor-related disruption
may adversely affect our operations.
  Labor
costs constitute a significant percentage of our total operating costs. A
substantial portion of our workforce is represented by labor unions and covered
by collective bargaining agreements.
  Our
business plan includes assumptions about labor costs. We believe that our labor
costs must be reduced in the current operating environment. Accordingly, we
are seeking both voluntary leaves of absence and early exits to reduce the size
of our work force and wage and benefit concessions to reduce costs. Our
current plans call for a 300 position reduction in the number of our flight
attendants and a 180 position reduction in the number of our pilots, as
well as wage and benefit concessions of between 5 and 15 percent, depending
on rate of pay from both our union and non-union employees. We cannot
assure you that we will be able to obtain the desired voluntary reductions or
the timing of any such reductions.  Likewise, we cannot assure you
that each of our labor groups will agree to voluntary wage and benefit
reductions and we cannot predict when such reductions may be implemented, if at
all. As of August 8, 2008, we believe we will not have to furlough any
flight attendants given the level of leave requests received from this work
group, but we do anticipate the involuntarily furlough of pilots. We will review
staffing levels for all other work groups to align staffing with the level of
future operations. If fuel prices remain at current levels, we may need to
effect additional reductions in our work force and/or seek additional wage and
benefit concessions. While we believe that we have a competitive advantage
in labor costs relative to many of our competitors, many air carriers are
seeking or may seek similar reductions and concessions in light of the current
operating environment.  Accordingly, we cannot assure you that our
labor costs going forward will remain competitive on even a comparative basis
because: labor agreements may be amended or become amendable, competitors may
significantly reduce their labor costs, reducing or eliminating any comparative
advantages as to one or more competitors, or labor costs may increase in
connection with potential acquisitions.
  Relations
between air carriers and labor unions in the United States are governed by the
Railway Labor Act, or the RLA. Under the RLA, collective bargaining agreements
generally contain “amendable dates” rather than expiration dates, and the RLA
requires that a carrier maintain the existing terms and conditions of employment
following the amendable date through a multi-stage and usually lengthy series of
bargaining processes overseen by the National Mediation Board, or NMB. This
process continues until either the parties have reached agreement on a new
collective bargaining agreement, or the parties have been released to
“self-help” by the NMB. Although in most circumstances the RLA prohibits
strikes, after release by the NMB, carriers and unions are free to engage in
self-help measures such as strikes and lock-outs.
 
 40
  
  Our
pilots are represented by the National Pilots Association, or NPA. The agreement
with our pilots became amendable in 2005 and is currently in mediation under the
auspices of the National Mediation Board. AirTran’s flight attendants are
represented by the Association of Flight Attendants, or AFA. The agreement with
the flight attendants becomes amendable in December 2008. Our dispatchers are
represented by the Transport Workers Union, or TWU and the agreement with our
dispatchers becomes amendable in January 2009. We have four separate agreements
with employee groups represented by the International Brotherhood of Teamsters,
or IBT. The agreement with our maintenance technicians and inspectors becomes
amendable in October 2009. The agreement with our technical training instructors
becomes amendable in March 2010. The agreement with our stores clerks becomes
amendable in June 2010. Finally, the agreement with our ground service equipment
employees becomes amendable in September 2011.
  While we
believe that our relations with labor are generally good, any strike or labor
dispute with our unionized employees may adversely affect our ability to conduct
business. The need for work force reductions and wage and benefit
concessions may have an adverse effect on our labor relations and employee
morale.
 
 Finally,
the outcome of our collective bargaining negotiations cannot presently be
determined and are complicated by the current adverse operating environment. If
we are unable to reach agreement with any of our unionized work groups on future
negotiations regarding the terms of their collective bargaining agreements or if
additional segments of our workforce become unionized, we may be subject to work
interruptions or stoppages.
  We
may not realize the full value of our intangible assets or our long-lived assets
causing us to record impairments that may negatively affect our results of
operations.
 
 In
accordance with Statement of Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangibles
Assets, and Statement of Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or
Disposal of Long-Lived Assets, we are required to test certain of our
assets for impairment of value on an annual basis, or more frequently if
conditions indicate that an impairment may have occurred.  Because
current adverse industry conditions and recent operating losses are indicators
that our intangible assets may be impaired, we performed an interim impairment
test of our goodwill, other indefinite-lived intangible assets and certain of
our long-lived assets (principally aircraft and related spare engines and spare
parts) as of June 30, 2008. Factors deemed by management to be indicators
of  potential impairment included significant losses incurred in the
first and second quarters of 2008, and a softening U.S. economy during the six
months ended June 30, 2008, as well as a decline in the market price of our
common stock relative to the net book value per share of our common
stock.
 
 As a
result of this impairment testing, we recorded goodwill impairment charges of
approximately $8.4 million during the three months ended June 30,
2008. However, we still have approximately $1.44 billion of operating
property and equipment and $21.6 million of intangible assets that could be
subject to impairment. We may be required to recognize additional
impairments in the future due to, among other factors, continuing operating
losses, extreme fuel price volatility, tight credit markets, the decline in our
market capitalization and in the fair value of our debt securities, the
uncertain economic environment, as well as other uncertainties. We cannot
assure you that a material impairment charge of our other intangible assets or
tangible assets, including aircraft, will not occur in a future period. The
value of our aircraft could be impacted in future periods by changes in the
market for these aircraft.  Such changes could result in a greater
supply and lower demand for certain aircraft types as other carriers are selling
and/or grounding aircraft. An impairment charge could have a material
adverse effect on our financial position and results of operations in the period
of recognition.  See “Critical Accounting Policies” in Management’s Discussion and Analysis
of Financial Condition and Results of Operationsin the 2007 Annual
Report and in this quarterly report on Form 10-Q.
 
 41
  
  
  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
 
 Our
annual meeting of stockholders was held on May 21, 2008. We solicited proxies
for the meeting pursuant to Regulation 14A under the Securities Exchange Act of
1934.
 
 Management’s
nominees for election to our Board of Directors as listed in our proxy statement
were elected for three-year terms; with the results of the voting as follows
(there were no broker non-votes on this matter):
  Nominee
              
              Votes
      For
              
              
              Votes
      WithheldG.
      Peter D’Aloia
              
              
              73,293,939
              
              
              
              3,361,981Jere
      A. Drummond
              
              
              75,021,826
              
              
              
              1,634,094John
      F. Fiedler
              
              
              73,063,689
              
              
              
              3,592,231
 
 As
indicated in the table above, Peter D’Aloia, Jere A. Drummond and John F.
Fiedler were elected as Class II Directors for terms expiring at the 2011 annual
meeting of stockholders. The terms of the following incumbent Class I Directors
continue until the annual meeting in 2009: Don L. Chapman and Lewis H. Jordan.
The terms of the following incumbent Class III Directors continue until the
annual meeting in 2010: J. Veronica Biggins, Robert L. Fornaro, and Alexis P.
Michas. In addition, Robert L. Fornaro, President and CEO of AirTran Airways,
was elected as Chairman of the Board, effective June 1, 2008. Mr. Fornaro
succeeded Joseph B. Leonard, who retired from the Board effective May 31,
2008.
 
 AirTran stockholders
ratified the appointment of Ernst & Young LLP as the company's independent
registered public accountants for 2008.  Voting results on the proposal
were as follows:
  Votes
      For
                
                Votes
      Against
                
                Votes
      Withheld74,146,736
                
                
                2,395,292
                
                
                113,892
 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 Chief Financial Officer32.1
      -
              
              Chief
      Executive Officer and Chief Financial Officer certifications pursuant to
      18 U.S.C. Section 1350
  42
  
  
 
 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: August 8,
2008
              
              /s/
      Arne G. HaakArne
      G. Haak
                Senior
      Vice President of Finance, Treasurer,
                and
      Chief Financial Officer
 
  
  
 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