SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-K
  x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the fiscal year ended December 31, 2008
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the transition period from 
to
  Commission
file number 1-15991
  
  AIRTRAN
HOLDINGS, INC.
 (Exact
name of registrant as specified in its charter)
   Nevada
              58-2189551(State
      or other jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer
                Identification
      No.)
  9955
AirTran Boulevard
 Orlando,
Florida 32827
 (Address,
including zip code, of registrant’s principal executive offices)
  (407)
318-5600
 Registrant’s
telephone number, including area code
  Securities
registered pursuant to Section 12(b) of the Act:
 Common
Stock, $0.001 par value
 (Title
of class)
  Securities
registered pursuant to Section 12(g) of the Act:
 None
   Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.    Yes  ̈    No  x
  Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes  ̈    No x
  
 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
  Large accelerated filer
               ̈
              
              Accelerated filer
              xNon-accelerated filer
               ̈
              
              Smaller reporting company
               ̈(Do not check if a 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
  The
aggregate market value of common stock held by non-affiliates of the registrant
as of June 30, 2008, was approximately $240 million (based on the last
reported sale price on the New York Stock Exchange on that date). The number of
shares outstanding of the registrant’s common stock as of February 2, 2009, was
119,517,942 shares.
 
  
  
  
 DOCUMENTS
INCORPORATED BY REFERENCE
  Portions
of the proxy statement, to be used in connection with the solicitation of
proxies to be voted at the registrant’s annual meeting of stockholders to be
held on May 20, 2009 and to be filed with the Commission, are incorporated by
reference into this Report on Form 10-K.
 
 
 
  
  
 
 TABLE
OF CONTENTS
  PAGEPART
      IItem 1.
              Business
              
              
              1Item 1A.
              Risk
      Factors
              
              
              13Item 1B.
              Unresolved
      Staff Comments
              
              
              31Item 2.
              Properties
              
              
              31Item 3.
              Legal
      Proceedings
              
              
              32Item 4.
              Submission
      of Matters to Vote of Security Holders
              
              
              32PART IIItem 5.
              Market
      for Registrant’s Common Equity, Related Stockholder
Mattersand
      Issuer Purchases of Equity Securities
              
              
              33Item 6.
              Selected
      Financial and Operating Data
              
              
              34Item 7.
              Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
              
              
              36Item 7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              
              60Item 8.
              Financial
      Statements and Supplementary Data
              
              
              62Item 9.
              Changes
      in and Disagreements with Accountants on Accountingand
      Financial Disclosure
              
              
              99Item 9A.
              Controls
      and Procedures
              
              
              99Item 9B.
              Other
      Information
              
              
              101PART IIIItem 10.
              Directors,
      Executive Officers and Corporate Governance
              
              
              101Item 11.
              Executive
      Compensation
              
              
              101Item 12.
              Security
      Ownership of Certain Beneficial Owners and Managementand
      Related Stockholder Matters
              
              
              101Item 13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              
              
              101Item 14.
              Principal
      Accountant Fees and Services
              
              
              101PART IVItem 15.
              Exhibits
      and Financial Statement Schedule
              
              
              102
 
 
 
 
 
 FORWARD-LOOKING
INFORMATION
  Statements
in this Form 10-K report (or otherwise made by AirTran or on AirTran’s
behalf) contain various forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or
the Exchange Act, which represent our management’s beliefs and assumptions
concerning future events. When used in this document and in documents
incorporated by reference, forward-looking statements include, without
limitation, statements regarding financial forecasts or projections, our
expectations, beliefs, intentions or future strategies and may be signified by
the words “expects”, “anticipates”, “intends”, “believes” or similar language.
These forward-looking statements are subject to risks, uncertainties, and
assumptions that could cause our actual results and the timing of certain events
to differ materially from those expressed in the forward-looking statements. All
forward-looking statements included in this report are based on information
available to us on the date specified or if no date is specified, then as of the
date of this report. It is routine for our internal projections and expectations
to change as the year or each quarter in the year progress, and therefore it
should be clearly understood that the internal projections, beliefs, and
assumptions upon which we base our expectations may change. Although these
expectations may change, we may not inform you if they do, except as required by
law. Our policy is generally to provide our expectations only once per quarter,
and not to update that information until the next quarter.
  You
should understand that many important factors, in addition to those discussed in
this report, could cause our results to differ materially from those expressed
in the forward-looking statements. Potential factors that could affect our
results include, in addition to others not described in this report, those
described in Item 1A of our report on Form 10-K under “Risk Factors”. In
light of these risks and uncertainties, the forward-looking events discussed in
this report might not occur.
       
  
  
 PART
I
  ITEM 1.
              BUSINESS
  The
Company
  All of
the flight operations of AirTran Holdings, Inc. (the Company, AirTran, or
Holdings) are conducted by our wholly-owned subsidiary, AirTran Airways, Inc.
(AirTran Airways or Airways) (collectively we, our, or us). AirTran Airways is
one of the largest low cost scheduled airlines in the United States in terms of
departures and seats offered. We operate scheduled airline service throughout
the United States with a concentration in the eastern United States. A majority
of our flights originate or terminate at our largest hub in Atlanta,
Georgia. As of February 2, 2009, we operated 86 Boeing B717-200 aircraft (B717)
and 50 Boeing B737-700 aircraft (B737) offering approximately 700 scheduled
flights per day to 56 locations in the United States (including San Juan, Puerto
Rico). Additionally, we have announced that we will commence service to Cancun,
Mexico and Branson, Missouri in the first half of 2009 and may add additional
markets later in the year.
  Our
service is designed not only to satisfy the transportation needs of our target
customers, but also to provide customers with a travel experience worth
repeating. We flew 24.6 million revenue passengers during 2008, a 3.5
percent increase from the 23.8 million revenue passengers we served in
2007. Our operating cost structure ranks among the lowest among major
airlines. We believe that we have the lowest non-fuel unit operating costs
among United States major airlines on an aircraft stage length adjusted basis.
We use our low cost advantage to provide value to both business and leisure
customers.
  Our
principal executive offices are located at 9955 AirTran Boulevard, Orlando,
Florida 32827, and our telephone number is (407) 318-5600. Our official Web
site address is http://www.airtran.com. We make available, free of charge, at
http://www.airtran.com, the charters for the committees of our board of
directors, our code of conduct and ethics, and, as soon as practicable after we
file them with the SEC, our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to these reports. We also
post filings under Section 16 of the Exchange Act on our Web site. Any waiver of
the terms of our code of conduct and ethics for the chief executive officer, the
chief financial officer, any accounting officer, and all other executive
officers will be disclosed on our Web site.
  The
reference to our Web site does not constitute incorporation by reference of any
information contained at that site.
  Business
Strategy
 
 Our
business strategy is centered on providing quality low fare service by operating
a strong Atlanta hub and network system utilizing a modern aircraft fleet of all
Boeing aircraft.
 
 Prior to
2008, we positioned ourselves as a growth airline. We successfully grew our
business at double-digit rates annually from 2000 through 2007, and at a rate of
4.9 percent in 2008. Nevertheless, in 2008, to respond to the challenges of a
volatile fuel cost environment, a weaker macroeconomic environment, and
very adverse capital market conditions, we recast our plans which resulted in
our deferral of previously planned growth. We implemented reductions in fleet
size, capacity, and capital expenditures. We reduced capacity principally
by deferring scheduled aircraft deliveries, reducing utilization, and by selling
B737 aircraft. We reduced our capacity (as measured by available seat miles) in
the last four months of 2008 from a planned ten percent increase to a reduction
of approximately seven percent compared to the comparable period of 2007. We are
also reducing 2009 capacity. By adjusting our business strategy and
implementing revised tactics, we believe we have positioned AirTran Airways to
deal with the volatile fuel cost environment, the current economic recession,
and the reduction in consumer demand. We expect to be ready to resume our
historical growth strategy when the business environment allows.
   1
 
 Provide Quality Low Fare Service. We
established our competitive position by providing affordable fares that appeal
to price conscious travelers. We have grown our business through innovative
product offerings designed to enhance the entire airline travel experience of
our customers while maintaining affordable fares. The AirTran Airways experience
features:
  •
              competitive
      fares offered in an easy to understand fare
  structure
  •
              user-friendly
      automated services for reservations, ticketing, and check-in through
      our
  •
              award
      winning Web site,
http://www.airtran.com
  •
              Bye-Pass®
      airport self-service kiosks
  •
              Mobile
      Web program, allowing customers to view flight status, check in for
      flights and select seats using their personal mobile devices and cell
      phones
  •
              customer
      friendly services, including
 
 •
              trained
      and friendly customer contact
personnel
 
 •
              a
      highly affordable Business Class
  •
              advance
      seat assignments
  •
              special
      amenities, such as XM Satellite Radio, which we introduced to the air
      travel industry
  •
              attractive
      customer loyalty programs, including
our
  •
              A+
      Rewards® program
  •
              A2B®
      corporate travel program
  •
              AirTran
      U® student travel program
 
 •
              AirTran
      Airways co-branded credit card
 
 Through
the AirTran Airways experience, we have created an air travel product with broad
appeal which generates a growing number of repeat customers. We believe our
comparatively low-cost structure will enable us to continue our existing
successful strategies and provide us with opportunities to enhance further the
AirTran Airways experience in innovative ways.
 
 Operate a StrongAtlanta Hub and Network
System. As the second largest carrier at Hartsfield–Jackson Atlanta
International Airport, the world’s busiest airport, our brand and presence are
strong in Atlanta. The metropolitan Atlanta population base represents one of
the largest travel markets in the United States and its geographic position
provides a strong hub as the foundation of our route network. As measured by
absolute population increase, the Atlanta area was the fastest growing
metropolitan area between 2000 and 2006 according to U.S. census
data.
 
 
 2
 
 In 2008,
we increased service to a number of existing locations and added five new
cities: Burlington, Vermont; Columbus, Ohio; Harrisburg, Pennsylvania; San
Antonio, Texas; and San Juan, Puerto Rico. In the fourth quarter of 2008, we
announced service to Cancun, Mexico, which is expected to commence February
25, 2009. We also announced service to Branson, Missouri, which is expected to
commence May 11, 2009.
 
 Since
2000, we have expanded the scope of our route structure to include
coast-to-coast flying and have increased the number of flights both from our
Atlanta hub as well as from other airports. Also, we have expanded our route
structure by increasing the amount of non-Atlanta related operations from
approximately ten percent of our daily operations as of December 31, 2001,
to approximately 38 percent of daily operations in January 2009 (see table
below). Much of this diversification was done through the addition of nonstop
service to the state of Florida. In the future, we may selectively add new
“point-to-point” routes between cities that we currently serve, as well as
create additional hubs or additional “focus” cities similar to our operations at
Orlando and Baltimore/Washington. We have announced that our presence in
Milwaukee will increase significantly in 2009.
  Airport
              
              Daily
                Operations*
              
              
              Nonstop
                Markets
                Served
              
              
              %
      ofSystem
                Daily
      Flights*Atlanta
      (ATL)
              
              
              433
              
              
              
              54
              
              
              
              62
              %Orlando
      (MCO)
              
              
              126
              
              
              
              31
              
              
              
              18
              %Baltimore-Washington
      (BWI)
              
              
              90
              
              
              
              17
              
              
              
              13
              %Fort
      Myers (RSW)
              
              
              50
              
              
              
              12
              
              
              
              7
              %Tampa
      (TPA)
              
              
              40
              
              
              
              10
              
              
              
              6
              %Fort
      Lauderdale (FLL)
              
              
              40
              
              
              
              7
              
              
              
              6
              %Milwaukee
      (MKE)
              
              
              38
              
              
              
              8
              
              
              
              5
              %Boston
      (BOS)
              
              
              36
              
              
              
              6
              
              
              
              5
              %New
      York (LGA)
              
              
              35
              
              
              
              6
              
              
              
              5
              %Chicago
      (MDW)
              
              
              30
              
              
              
              4
              
              
              
              4
              %Indianapolis
      (IND)
              
              
              28
              
              
              
              6
              
              
              
              4
              %Philadelphia
      (PHL)
              
              
              20
              
              
              
              2
              
              
              
              3
              %
  *
              Operations
      is defined as the number of take-offs and landings at each city;
      percentage of system flights will be greater than
  100%
  Increase Sales through Our
Website. We utilize the Internet
as an integral part of our distribution network and emphasize our Web site,
http://www.airtran.com, prominently in all of our marketing. Sales booked
directly on http://www.airtran.com represent our most cost-effective form
of distribution. In addition to being user-friendly and simple, our
Web site is designed to sell tickets efficiently. We continue to add
functionality to http://www.airtran.com that allows customers to easily book and
manage their travel including the ability to retrieve and change future flight
reservations, make seat selection and check-in online. We also launched new
alternate forms of payment, including Bill Me Later and PayPal, in order to
ensure we are meeting our customers’ needs. Sales through http://www.airtran.com
produced 58 percent of our revenues during 2008.
 
 Utilize New and Modern Fleet. Our
entire fleet is comprised of B717 and B737 aircraft. We had a combined total of
136 aircraft on February 2, 2009, with an average fleet age among the lowest in
the industry at 5.6 years.
 
 We were
the launch customer for the B717 in 1999, which was designed specifically for
efficient short-haul service. As of February 2, 2009, our fleet included 86 B717
aircraft. Although Boeing discontinued the production of the aircraft in 2006,
we believe the B717 remains well suited for the short-haul, high-frequency
service that we operate and provides operating efficiencies which support our
low cost structure.
   
 3
 We took
delivery of our first B737 aircraft in June 2004 and, as of February 2, 2009,
our B737 fleet was comprised of 50 aircraft. In addition to the 50 B737
aircraft, we hold firm orders for 55 B737 aircraft to be delivered between 2009
and 2016. We believe the B737 is an ideal complement to our B717 aircraft,
offering us a larger aircraft, increased range, and even lower operating cost
per available seat mile flown. The B737 aircraft has allowed us to extend our
network to selected cities in the western United States and gives us the ability
to expand our international operations to additional locations in Mexico as
well as locations in Canada, Central America, and the Caribbean should we choose
to do so. We believe the B737 aircraft enhances the AirTran Airways brand while
offering improvements in our operating performance.
 
 Seasonality
  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, with the highest levels occurring during the winter months to Florida
and the summer months to the northeastern and western United States. Advertising
and promotional expenses may be greater in lower traffic periods, as well as
when entering a new market, as we seek to stimulate demand and promote the
AirTran Airways brand.
  Competitive
Strengths
  Low Cost Structure. Our cost
structure ranks among the lowest in the domestic airline industry in terms of
cost per available seat mile, providing a competitive advantage compared to
higher cost carriers. Our low operating costs are made possible through a
company-wide focus on cost controls with emphasis on high labor productivity,
lower distribution costs, and higher asset utilization. In addition, we realize
efficiencies from the operation of only two aircraft types from a single
manufacturer as well as enhanced efficiencies from the increased number of new
modern B737 aircraft in our fleet.
 
 We reduced
our average non-fuel operating costs per available seat mile for each of the six
years in the 2002 to 2007 period. During 2008, we managed our employment levels
to match our planned capacity. As we reduce our capacity, our total non-fuel
operating costs are reduced and our unit operating costs, as measured by
operating costs per available seat mile, tend to
increase­­­­­­­­­­­­­. As a
result, our non-fuel operating cost per ASM increased 4.6 percent during the
fourth quarter of 2008 compared to the analogous period in 2007. We believe that
we continue to have the lowest non-fuel operating costs among U.S. major
airlines on an aircraft stage length adjusted basis.
 
 Attractive Atlanta Hub and Route
Network. We operate 22 gates from a single concourse under long-term
leases at Hartsfield-Jackson Atlanta International Airport, the world’s busiest
airport, and have use agreements for additional gates on an adjacent concourse
and potential for expansion. With our 2008 expansion to Burlington, Vermont;
Columbus, Ohio; Harrisburg, Pennsylvania; San Antonio, Texas; and San Juan,
Puerto Rico, we now offer quality low fare service to 52 destinations from
Atlanta, including service to most of the largest travel markets within the
continental United States and Puerto Rico. Additionally, we have announced that
we will commence service to Cancun, Mexico and Branson, Missouri in the first
half of 2009 and we may add additional markets later in the year.
  Diversified Traffic Base. We
serve both the leisure and business traveler. Our revenue base grew by more than
22 percent in 2007, and more than ten percent in 2008. Over the past six years,
we have also diversified our network, increasing operations in key business
markets like Baltimore/Washington (BWI), New York (LGA), Milwaukee (MKE),
Chicago-Midway (MDW), and Indianapolis (IND), as well as adding a number of new
direct routes from Florida. As a percentage of total operations, Atlanta
represents approximately 62 percent of our network, down from approximately 90
percent at the end of 2001. This market diversification provides a number of
marketing and cost synergies and adds stability to our revenues by protecting
against risks that may impact individual markets.
   4
 Flexibility. We have
demonstrated consistently our resiliency and our ability to adjust to changes in
the economy, market conditions, and a competitive industry environment. We
responded rapidly to the effects on our business from the September 11,
2001, terrorist attacks by reducing capacity approximately 20 percent. Working
with our labor groups, we quickly reached agreement on a variety of temporary
cost reduction measures, including both pay and work rule changes, which reduced
our costs consistent with capacity. By retaining our workforce, we were able to
quickly respond to market opportunities and expand service to a number of new
markets. In 2008, we made adjustments to our business strategy to respond to the
deteriorating economic conditions and volatile fuel cost environment; the
adjustments included deferring aircraft deliveries and reducing the size of our
operations commencing in September 2008.
 
 Innovative Marketing. Our
marketing efforts target both business and leisure travelers. We have developed
a number of unique and innovative programs designed to stimulate demand for
travel, create customer loyalty, highlight our unique product attributes, like
affordable Business Class, and target both business and leisure travelers. Our
popular leisure programs include Net Escapes Internet specials and the AirTran U
student travel program. Our A2B Corporate Program and EventSavers
Meetings & Conventions Program effectively attract and retain business
customers.
  A+ Rewards. Our A+ Rewards
frequent flyer program offers a number of ways to earn free travel including the
use of the AirTran VISA card, Hertz car rentals, and bonus earnings for Business
Class travel. We believe this program creates strong brand loyalty and provides
opportunities for incremental revenue through credit sales and
partnerships.
 
 In March
2008, we announced new features to our A+ Rewards program. A+ Rewards
members can now purchase A+ Rewards credits, extend the expiration of A+
credits, or give A+ credits to another member to help earn a free flight
faster.During the
fourth quarter 2007, we announced that A+ Rewards credits earned after November
13, 2007, by holders of our AirTran VISA card and our elite A+ Rewards members,
would have a two-year expiration date instead of the one-year expiration date
for the general member.
  Competition
  The
airline industry is highly competitive. Airlines compete on the basis of markets
served, price, schedule (frequency and flight times), quality of service,
amenities, frequent flyer programs and other services. We compete with other
airlines primarily on the basis of price, which is made possible by our low cost
structure relative to other airlines and by focusing on selected markets across
the United States. We may face greater competition from existing or new carriers
in the future that could negatively impact our financial and operating results,
particularly if those carriers are able to lower their unit operating costs to
levels closer to ours.
  Competitors
with greater liquidity and access to capital may price their fares at or below
our fares or increase the frequency of their service. This competition could
prevent us from attaining a share of the passenger traffic necessary to sustain
profitable operations. Our ability to meet price competition is dependent on
operating with costs equal to, or lower than our competitors or potential
competitors.
 
 We
believe that our competitive strengths are our low cost structure, friendly
service, competitive fares, and strong route network anchored by our hub at
Hartsfield-Jackson Atlanta International Airport. We believe that our brand and
our presence in Baltimore/Washington, Milwaukee, Orlando, and a number of other
Florida markets augment operations from our Atlanta hub and provide us with a
strong and defensible route system.
  
 5
 Fares,
Fees, Route System and Scheduling
  The
majority of markets we currently serve are located in the eastern United States.
These markets are attractive due to the concentration of major population
centers within relatively short distances from our hub and focus cities, the
historically high airfares charged by our competitors in these markets, and the
significant number of both current and potential business and leisure
customers.
 
 Our
schedules are designed to provide convenient nonstop service and connections for
our business and leisure travelers to our hubs and focus cities and to
facilitate connections for our passengers traveling through our hubs and focus
cities. Our network strength in Atlanta provides a strong base of local and
connecting traffic.
  We offer
an easy to understand fare structure with a variety of fares at differing
advance purchase intervals as well as “walk-up” fares. We manage the
availability of seats at each fare level by day of week and by flight to
maximize revenue. We implemented a number of fare increases, beginning
in September 2007, which partially mitigated the impact of record high fuel
prices during the first nine months of 2008. In addition to increasing fares, we
also increased surcharge and ancillary revenues. We implemented fuel surcharges
and introduced fees for advance and priority seat selection, call center
utilization, checked baggage and the purchase, extension, or transfer of A+
Miles Rewards.
 
 All of
our fares are one-way and most tickets are nonrefundable but can be changed
prior to departure with a service charge. Our fares never require a round trip
purchase or a minimum stay (e.g., Saturday night stay). Our fare offerings are
in direct contrast to prevalent pricing policies in the industry which typically
feature many different price offerings and restrictions for seats on any one
flight. We have established interline ticketing and baggage agreements with
various airlines which can increase our revenue opportunities and assist us with
accommodating passengers during irregular operations.
  In the
future, we may add new markets to our existing routes and/or additional service
between cities that are already served by us. If necessary, we may exit
unprofitable routes. Our selection of markets depends on a number of factors
existing at the time we consider service. In our city selection process, we
evaluate the market demographics, the potential for service diversification, the
ability to stimulate air travel, and various competitive factors. Consequently,
there can be no assurance that we will continue to provide service to all of the
markets we currently serve.
  Ancillary
Revenue
 
 During
2008, we continued to unbundle pricing and services, a program that began in
2007 with the introduction of optional fees for advance seat assignments and a
fee for call center services. These revenues, along with traditional fees
for the carriage of pets, liquor sales, excess baggage charges, service fees
such as fees related to the transportation of unaccompanied minors, and income
from the sale of frequent traveler credits, are referred to as “ancillary
revenues”. We significantly increased ancillary revenues in 2008 with the
implementation of fees for the second checked bag and, at the end of the year, a
moderate fee for the first checked bag. We will continue to evaluate potential
new fees, service, and other ancillary revenue programs in 2009.
 
 Distribution,
Marketing, and e-Commerce
  Our
marketing efforts are focused on price-sensitive business and leisure
travelers who are vital to our success as we seek to position our
product and stimulate new customer demand. These are the market segments in
which consumers seek value and which we believe offer the greatest opportunity
for growing our revenue base.
 
 
 6
  The
primary objective of our marketing activities is to further an innovative brand
identity that is visibly unique and easily contrasted with our competitors. We
communicate regularly and frequently with existing and potential customers
through the use of advertisements in newspapers, digital radio, television,
out-of-home media, direct mail, e-mail, movie theatres and the Internet, as well
as public relations efforts. These communications typically feature our
destinations, quality of product, such as Business Class, XM radio, our young
all Boeing aircraft fleet and assigned seating, everyday affordable fares and
special sales promotions. We also promote the use of our http://www.airtran.com
Web site.
 
 Customers
may book flights with us through our Web site, other Internet Web sites, travel
agencies booking via global distribution systems (GDS), our mobile web program,
and our own reservation call centers. Our Web site, http://www.airtran.com,
continues to be our primary distribution channel, accounting for more than 58
percent of our total bookings in 2008. Travel agency Web sites such as
http://www.Travelocity.com and http://www.Expedia.com, corporate booking
agencies, and traditional travel agencies represented approximately 33 percent
of our total bookings while our reservation call centers generated the
remainder.
  On our
customer friendly Web site, passengers can select their seats,
check-in, and print their own boarding passes, purchase trip insurance, and book
hotel accommodations and car rentals with Hertz.com. Our Bye-Pass self-service
kiosks facilitate check-ins at the airport and provide our customers with an
additional opportunity to purchase Business Class upgrades. Over half of our
customers now check-in using http://www.airtran.com or Bye-Pass self-service
kiosks.
 
 During
2008, we adapted our reservations system to accommodate industry standard
electronic tickets, or E-ticket, capability. This new feature enables
travel agencies, travel management companies, and online travel distributors
using certain GDS systems to issue conventional, industry standard electronic
tickets that greatly improve the efficiency of the ticketing, accounting, and
post-departure reporting aspects of air travel. We believe this feature
will improve revenue from these travel companies.
 
 We charge
a convenience fee for bookings made using our internal call centers. We believe
this fee is consistent with other booking channels that provide interactive
travel assistance, namely travel agents. During 2007, we introduced the Bill Me
Later and PayPal payment options for call center and online bookings at
http://www.airtran.com. These options provide expanded payment options for our
customers and may help reduce our distribution costs going forward.
  We offer
our customers an affordable Business Class product. An AirTran Airways Business
Class cabin is configured with two by two-oversized seats with more leg and seat
room than the typical coach cabin. For a fee, our Business Class is available on
certain fares on a standby basis. Select members of our A2B Corporate program
and Elite members in our A+ Rewards program may also receive complimentary
Business Class upgrades when purchasing certain fares.
 
 In
contrast to other low cost airlines, we offer our customers the ability to
select seats in advance. Full fare passengers, A+ Reward Elite members, and
members of our A2B Corporate travel program, many of whom tend to purchase
tickets at the last minute, are allowed to reserve seats at the time of
purchase. All other customers may reserve seats at the time they check-in,
either at the airport or online at http://www.airtran.com. In May 2007, we
initiated a program whereby a passenger purchasing a coach ticket could also
reserve a coach cabin seat for a fee per seat reservation.
  We also
offer our automated frequent flier program known as “A+ Rewards.” Our customers
may earn either free roundtrip travel or Business Class upgrades, or under
certain circumstances, free travel on other airlines. A+ Rewards credits can
also be earned for purchases made with an AirTran Airways A+ Visa card, when
renting from Hertz, purchases from other A+ Rewards partners, and in conjunction
with marketing promotions that we may run from time to time. Additionally,
American Express Membership Rewards is a partner and enrollees may convert
Membership Rewards into A+ Rewards credits.
  7
 We
perform substantially all of our marketing, promotional and media relations
in-house and utilize an outside firm for advertising and public
relations.
 
 Computer
Reservations
  We are a
participant in the major travel agency Global Distribution Systems (GDSs),
including Amadeus, SABRE, and Travelport. These systems provide flight schedules
and pricing information and allow travel agents to electronically book a flight
reservation without contacting our reservations facility. We pay booking fees
for the completed transactions made in the GDS systems. We also participate with
a number of emerging distribution tools and other internet based booking tools.
These companies generally have a lower cost for participation.
  Employees
  As of
February 2, 2009, we employed approximately 8,000 employees representing
approximately 7,600 full-time equivalents.
  Both
initial and recurrent training are provided for all employee groups. The average
training period for new employees ranges from approximately one to eight weeks
depending on job classification. Both pilot and mechanic training are provided
by in-house training instructors.
  Federal
Aviation Administration (FAA) regulations require pilots to have commercial
licenses with specific ratings for the aircraft to be flown, and to be medically
certified as physically fit to fly. FAA and medical certifications are subject
to periodic renewal requirements including recurrent training and recent flying
experience. In December 2007, federal legislation was enacted increasing the
mandatory retirement age for U.S. commercial airline pilots from age 60 to age
65. Mechanics, quality-control inspectors, and flight dispatchers must be
certificated and qualified for specific aircraft. Flight attendants must have
initial and periodic competency training and qualification. Training programs
are subject to approval and monitoring by the FAA. Management personnel directly
involved in the supervision of flight operations, training, maintenance, and
aircraft inspection must also meet experience standards prescribed by FAA
regulations. All safety-sensitive employees are subject to pre-employment,
random, and post-accident drug testing.
  We have
seven craft or classes of employees that are represented by labor unions and are
covered by collective bargaining agreements. The Railway Labor Act governs our
relations with these labor organizations. The agreement with our dispatchers,
who are represented by the Transport Workers Union (TWU), was ratified in
October 2004 and became amendable in January 2009. Our agreement with our
pilots, who are represented by the National Pilots Association (NPA), was
ratified in August 2001 and became amendable in 2005. During 2007, we reached a
tentative agreement with the NPA; however, our pilots declined to ratify the
tentative agreement. Our negotiations with the NPA are currently in mediation
under the auspices of the National Mediation Board.
  We have
four separate agreements with employee groups represented by the International
Brotherhood of Teamsters (IBT). Our agreement with our maintenance technicians
and inspectors was ratified in October 2005 and becomes amendable in October
2009. The agreement with our technical training instructors was ratified in
March 2006 and becomes amendable in March 2011. The agreement with our stock
clerks was ratified in June 2006 and becomes amendable in June 2011. Our
agreement with our ground service mechanic employees was effective September
2006 and becomes amendable in September 2011. We have a collective bargaining
agreement with our flight attendants who are represented by the Association of
Flight Attendants (AFA). Our agreement with the flight attendants was ratified
in June 2005 and became amendable December 1, 2008. Negotiations on proposed
amendments began in early 2008 and direct negotiations are
continuing.
 
 8
 We also
have many employees who are not represented by labor unions. Our customer
service, ramp and reservations agents are not represented by labor unions and
rejected unionization, for the third time, by a substantial margin in December
2005. We are unable to predict whether any of our non-union employee groups will
elect to be represented by a labor union or become covered by a collective
bargaining agreement in the future. The election of a bargaining representative
could result in employee compensation and/or working condition demands that
could impact operating performance and expenses.
 
 Fuel
  Aircraft
fuel is our largest expenditure and accounted for 45.5 percent, 37.1 percent and
36.5 percent of our 2008, 2007, and 2006 operating expenses, respectively.
Increases in fuel prices or a shortage of supply could have a material adverse
effect on our operations and operating results. Efforts to reduce our exposure
to increases in the price of aviation fuel have included the utilization of both
fuel pricing arrangements in purchase contracts with fuel suppliers and
derivative financial instruments. As of December 31, 2008, we had no fixed
pricing arrangements with fuel suppliers for any future period. During the year
ended December 31, 2008, we entered into various derivative financial
instruments with financial institutions to reduce the variability of ultimate
cash flows associated with fluctuations in jet fuel prices. We have entered into
both fuel swap and option arrangements. For a discussion of jet fuel related
derivative financial instruments, see ITEM 8. “FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA, Note 4 – Financial Instruments.” Also, see ITEM 7A.
“QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK – Aviation Fuel” for a
discussion of the effects of future fuel prices.
  The
impacts of recent high fuel prices were mitigated somewhat by the addition of
new, fuel-efficient B737 aircraft, which consume less fuel on an average seat
mile basis than our already fuel efficient B717 aircraft. In September 2005, we
began installing winglets on a number of our B737s which further improve their
fuel efficiency. While we believe the fuel efficiency of our fleet offers us an
advantage over many of our competitors who operate less fuel-efficient aircraft,
increases in fuel costs which are not offset by our fuel purchase arrangements,
fuel related derivative financial instruments, or fare increases will have an
adverse effect on our future operating margins.
  Maintenance,
Repairs and Training
  As of
February 2, 2009, our operating fleet consisted of 86 B717 aircraft and 50 B737
aircraft having a weighted-average age of 5.6 years. Our B737 airframes are
under warranty for four years from the date of delivery and our B737 engines are
under warranty for a minimum of two years from the date of delivery. We believe
the long-term cost of maintaining our aircraft will be within industry norms.
However, we will be required to comply with new FAA regulations or Airworthiness
Directives that may be promulgated in the future and there can be no assurance
that we will not encounter unexpected maintenance expenses or that our
maintenance expense will remain within industry norms.
  Aircraft
airframe maintenance and repair consists of routine and non-routine daily
maintenance, A Check and phase level maintenance, and heavy maintenance checks.
Routine and non-routine maintenance is performed in Atlanta, Orlando, Baltimore,
Fort Lauderdale, and Dallas by our employees and by qualified third party
contractors at the other cities we serve. Heavy maintenance is performed
currently by AAR Aircraft Services under multiyear agreements for both B717 and
B737 aircraft. Maintenance repair costs for major components on our aircraft,
including engines and auxiliary power units (APUs), are covered under
maintenance agreements with FAA approved repair stations and are expensed as
incurred.
  Our
recent maintenance expenses have been lower than what we expect to incur in the
future because of the relatively young age of our B717 and B737 aircraft fleet.
Our maintenance costs are expected to increase as these aircraft age and come
off of manufacturer’s warranty. Maintenance costs also increase as the
maintenance, repair, and overhaul providers escalate their pricing. During 2009,
we expect aircraft maintenance costs to increase due the aging of both aircraft
types, a contractual cost increase for B717 engine repairs and an increased
number of heavy checks for our B717 aircraft.
  9
 Our
maintenance technicians undergo extensive initial and ongoing training to ensure
the safety of our aircraft. The FAA recently awarded us with the Air Maintenance
Technical Diamond Certificate of Excellence for Maintenance Training, the FAA’s
highest maintenance award. This marks the thirteenth consecutive year we have
received this award for exceeding the required levels of safety training for our
maintenance technicians. In addition to core model specific training on each
type of aircraft, AirTran Airways has initiated wiring and fuel tank safety
specific training in response to FAA initiatives in these areas.
 
 Insurance
  We carry
what we believe are customary levels of passenger liability insurance, aircraft
insurance for aircraft loss or damage, war-risk insurance and other business
insurance. We also believe our insurance coverage in these areas is adequate. We
are exposed to potential catastrophic losses that may be incurred in the event
of an aircraft accident. Any such accident could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent loss
from service but also significant potential claims by passengers and others. We
currently maintain liability insurance in amounts and of the type which we
believe are consistent with industry practice. Although we currently believe our
insurance coverage is adequate, there can be no assurance that the amount of
such coverage will not be changed or that we will not be forced to bear
substantial losses from accidents. Substantial claims resulting from an accident
in excess of related insurance coverage or not covered by our insurance could
have a material adverse effect on us.
  Congress
passed the Homeland Security Act of 2002, which mandated the federal government
to provide third party, passenger, and hull war-risk insurance coverage to
commercial carriers through August 31, 2003. Coverage under this Act has
been extended and currently we have received certification of coverage through
March 31, 2009.
  Airport
Operations
  Ground
handling services, provided by third parties, typically are of three types:
above-wing only, under-wing only and complete ground handling. Above-wing
services include, but are not limited to, aircraft cleaning and catering.
Under-wing ground handling services include, but are not limited to, directing
the aircraft into and out of the gate, baggage loading and unloading, lavatory
and water servicing, de-icing and certain other services. Complete ground
handling consists of public contact (at the ticket counter, gate and baggage
service office) and under-wing services combined.
  Using our
employees, we conduct complete ground handling services at 32 airports,
including Atlanta. At other airports, the operations not conducted by our
employees are contracted to other air carriers, ground handling companies or
fixed base operators. We have employees at each of these cities to oversee our
operations.
  Government
Regulations and Airline Industry Taxation
  The
airline industry is highly competitive, primarily due to the effects of the
Airline Deregulation Act of 1978, which substantially eliminated government
authority to regulate domestic routes and fares. Deregulation has increased the
ability of airlines to compete with respect to destination, flight frequencies,
and fares. Nevertheless, the airline industry remains highly regulated in other
aspects, as more fully described below. U.S. airlines are subject to regulation
by the United States Department of Transportation (DOT) and by the Federal
Aviation Administration (FAA), an agency of DOT.
 
 
 10
 
 DOT Oversight. Although the
Airline Deregulation Act of 1978 abolished regulation of domestic routes and
fares, the DOT retains the authority to alter or amend any airline’s
certificate or to revoke such certificate for intentional failure to comply with
the terms and conditions of the certificate. In addition, the DOT has
jurisdiction over international tariffs and pricing, international routes,
computer reservation systems, and economic and consumer protection matters such
as advertising, denied boarding compensation, smoking and codeshare arrangements
and has the authority to impose civil penalties for violation of the United
States Transportation Code or DOT regulations.
 
 Congestion. There have been a
number of efforts to regulate congestion at high density airports recently that
may have an impact on entry or expansion potential and cost of operation at a
number of airports. In January 2008, the FAA issued an order limiting the number
of scheduled flight operations at New York’s John F. Kennedy International
Airport (JFK); in the same month the DOT issued a notice of proposed amendment
to its Airport Rates and Charges policy that would allow airports to establish
non-weight based fees during peak hours in a effort to limit congestion. We
cannot predict the outcome of this potential rule change on our costs or ability
to operate in congested airports nor if these efforts will migrate to other
airports in or contemplated to be in our network.
  Aircraft Maintenance and
Operations. We are subject to the jurisdiction of the FAA with respect to
aircraft maintenance and operations, including equipment, dispatch,
communications, training, flight personnel, and other matters affecting air
safety. In 2006, the FAA converted the oversight of AirTran Airways to the ATOS
(Aviation Transportation Oversight System) programs. The ATOS process assesses
the safety of air carrier operating systems using system safety principles,
safety attributes, risk management, and structured system engineering practices.
ATOS utilizes structured, automated tools to develop a dynamic, flexible, air
carrier-specific comprehensive surveillance plan (CSP). The air carrier
assessment tool (ACAT) looks for indicators of risk in the air carrier’s
systems. The results of ACAT determine the frequency of the inspections in our
CSP.
  The FAA
has the authority to issue new or additional regulations. To ensure compliance
with its regulations, the FAA conducts regular safety audits and requires all
airlines to obtain operating, airworthiness, and other certificates, which are
subject to suspension or revocation for cause.
  We cannot
predict the cost of compliance with all present and future rules and regulations
and the effect of such compliance on our business or aircraft acquisition
program.
  Federal Aviation Taxes and Passenger
Facility Charges. In 1997, a law was enacted imposing new aviation ticket
(excise) taxes as part of larger tax legislation designed to balance the
nation’s budget and provide targeted tax relief as well as fund air traffic
control, other FAA programs and airport development. Such taxes have
periodically been extended by various legislation and currently are authorized
through March 31, 2009. Currently, the federal excise tax on tickets is 7.5
percent of the base fare with a segment fee of $3.60 per passenger enplanement,
a $0.10 increase from 2008. These taxes are collected by each airline from its
passengers and remitted to the U.S. Government.
  During
1990, Congress enacted legislation to permit airport authorities, with prior
approval from the DOT, to impose passenger facility charges as a means of
funding local airport projects. These charges are collected by the airlines from
their passengers and remitted to the appropriate airport authority and range
from $2.00 to $4.50 per enplanement up to $18 per round trip.
 
 Fuel Taxes. We pay federal,
state, and other taxes on fuel. We paid approximately $49.4 million, $50.2
million, and $46.2 million in fuel taxes during 2008, 2007, and 2006,
respectively.
 
 
 11
 
 Security and Safety Measures.
The Aviation and Transportation Security Act was enacted in December 2001
and federalized substantially all aspects of civil aviation security and
required, among other things, the creation of the Transportation Security
Administration (TSA) to oversee all aviation security and the implementation of
certain security measures by airlines and airports, such as the requirement that
all passenger bags be screened for explosives. Funding for airline and airport
security under the law is partially provided by a security ticket tax, that is
currently $2.50 per enplaned passenger, up to $5.00 each way or $10.00 per round
trip, and has been imposed since February 2002, the date the TSA began
taking responsibility for airport security. The TSA was granted authority to
impose additional fees on air carriers if necessary to cover additional federal
aviation security costs. Pursuant to its authority, the TSA may revise the way
it assesses this fee, which could result in increased costs for passengers
and/or us. We cannot forecast what additional security and safety requirements
may be imposed in the future or the costs or revenue impact that would be
associated with complying with such requirements.
 
 Miscellaneous. All air
carriers are subject to certain provisions of the Communications Act of 1934, as
amended, because of their extensive use of radio and other communication
facilities, and are required to obtain an aeronautical radio license from the
Federal Communications Commission (FCC). To the extent we are subject to FCC
requirements, we have taken and will continue to take all necessary steps to
comply with those requirements.
  Our labor
relations are covered under Title II of the Railway Labor Act of 1926, as
amended, and are subject to the jurisdiction of the National Mediation Board.
During a period of past fuel scarcity, air carrier access to jet fuel was
subject to allocation regulations promulgated by the Department of Energy. We
are also subject to state and local laws and regulations at locations where we
operate and the regulations of various local authorities that operate the
airports we serve. Our operations may become subject to additional federal
regulatory requirements in the future.
  All
international service is subject to the regulatory requirements of the
appropriate authorities of the other country involved. To the extent we seek to
provide additional international air transportation in the future, we will
be required to obtain necessary authority from the DOT and the applicable
foreign government.
  Environmental Regulations.
The Airport Noise and Capacity Act of 1990 (ANCA) generally recognizes the
rights of airport operators with noise problems to implement local noise
abatement programs so long as they do not interfere unreasonably with interstate
or foreign commerce or the national air transportation system. The ANCA
generally requires FAA approval of local noise restrictions on Stage 3 aircraft.
While we have had sufficient scheduling flexibility to accommodate local noise
restrictions imposed to date, our operations could be adversely affected if
locally-imposed regulations become more restrictive or widespread.
  The
Environmental Protection Agency (EPA) regulates operations, including air
carrier operations, which affect the quality of air in the United States. We
believe the aircraft in our fleet meet all emission standards issued by the EPA.
We may become subject to additional taxes or requirements to obtain permits for
green house gas emissions. See ITEM 1A - “RISK FACTORS.”
 
 
 12
 ITEM 1A.    RISK
FACTORS
  In
addition to the risk factors set forth elsewhere in this annual report,
including, without limitation, in Items 1, 7, 7a, and 9a, investors should
carefully consider the following risk factors before making investment decisions
regarding our securities.
 
 Risks
Related To Our Business and Industry
  Our
business has been, and may continue to be, adversely affected by the price of
aircraft fuel, the volatility of the price of aircraft fuel, or
both.
  During
2008, our business was adversely affected by both increases in the price of
aircraft fuel and the volatility in aircraft fuel prices. Fuel prices reached
record highs on an actual and inflation adjusted basis before moderating
beginning in the fourth quarter. Aircraft fuel was our single largest
expenditure in 2008, and accounted for 45.5 percent, 37.1 percent, and 36.5
percent of our operating expenses in 2008, 2007, and 2006, respectively. Based
on current and projected operations, our fuel expense, before the impact of
hedging arrangements, will increase approximately $9.0 million in 2009 for each
$1 per barrel increase in the cost of crude oil and refining costs. In 2008, we
incurred a loss primarily due to the increased cost of jet fuel.
  In 2008,
the market for aircraft fuel was marked by extreme volatility. Prices per gallon
in 2008 ranged from a high of $4.21 to a low of $1.24. Volatility in fuel
prices, whether due to global demand, global economic conditions, speculation,
or market manipulation subjects us to a variety of risks. Even though our
operations benefit in the long term from a low fuel cost environment, because we
entered into hedging arrangements while fuel costs were relatively high to
mitigate the impact of potentially higher fuel costs, the material downward
spikes in fuel costs in late 2008 had an adverse impact on our cash, especially
in the fourth quarter, either because we were required to post cash as
collateral related to our hedging activities or we elected to unwind a
substantial percentage of our hedged fuel needs based on our assessment of
expected 2009 prices and volatility. The extent of cash collateral that we are
required to post is dependent on the composition of the derivative portfolio;
purchased calls do not expose us to collateral requirements, whereas collars and
swaps do expose us to collateral requirements.
  Although
we have made adjustments to our business strategy to address high fuel costs and
we believe such adjustments should continue to help us if fuel prices again
rise, we may not have the ability to operate profitably if we are faced with
extended periods of high fuel costs or shorter periods of extremely high fuel
costs.
  Volatility
risks include the impact of rapid changes on our ability to set, implement, and
adjust our strategic plans, which generally have multi-year time horizons,
especially with respect to aircraft acquisitions, and to manage our liquidity,
including our cash assets and working capital. Rapid upward spikes in fuel costs
have an immediate adverse impact on our fuel costs and adversely affect our
ability to adjust prices or hedge fuel cost risks. Volatility makes it more
difficult for us to manage our fuel costs and subjects us to a greater risk of
loss if the market price of jet fuel or crude oil is less than the relevant
underlying commodity price in the applicable derivative financial arrangements
utilized to hedge against price changes. Accordingly, volatility in fuel prices
may have an adverse effect on our financial condition, results of operations, or
liquidity.
  It is
impossible to predict reliably the future price of or the volatility of aircraft
fuel. Political disruptions or wars involving oil-producing countries, changes
in governmental policy concerning the production, transportation, or marketing
of aircraft fuel, changes in jet fuel production capacity, environmental
concerns, macroeconomic conditions both within the United States and globally,
market manipulation and price speculation and other unpredictable events may
result in higher fuel prices, increased volatility, or both.
  
 13
  If
our costs and unfunded capital expenditure needs exceed our revenues, we may not
be able to maintain adequate liquidity.
  Although
our available capital has been sufficient to meet our current operating
expenses, lease obligation and debt service requirements to date, we may not be
able to maintain adequate liquidity in future years unless we are able to
increase our revenues, manage expenses effectively, or otherwise improve
operating results or obtain new sources of capital. We have made adjustments to
our business strategy based on: capacity reductions—both in available seat miles
and in number of aircraft; fares and fees; the deferral of capital expenditures;
continued cuts in non-fuel costs, including workforce reductions; and obtaining
additional sources of capital, all with the aim of improving our results of
operations and liquidity. Although our aggregate unrestricted cash and
short-term investments at December 31, 2008, was $335.0million ($340.5 million
including long-term investments), our strategy 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 but may increase capacity in markets we serve, 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, 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 profitably.
  We
may be adversely affected by a further deterioration of economic
conditions.
  The
recent unprecedented deterioration in the U.S. and global credit markets and the
deterioration in consumer demand could negatively impact our business in several
ways. For instance, rising unemployment, market turmoil and tightening of
credit, as well as the recent and dramatic decline in the housing market in the
United States, has led to a lack of consumer confidence and widespread reduction
of business activity and consumer spending generally, which could significantly
negatively impact our revenues. The recent decline in stock prices has also
reduced the availability of funds for persons that invested directly or
indirectly in the stock market. We do not expect that the difficult economic
conditions are likely to improve significantly in the near future, and any
continuation or worsening of the credit crisis, or even the fear of such a
development, could intensify the adverse effects of these difficult market
conditions.
  We
may be adversely affected by the limited availability and increased cost of
credit.
  U.S. and
global credit and equity markets have recently undergone significant disruption,
making it difficult for many businesses to obtain financing on acceptable terms
or at all. As a result of this disruption, we have experienced an increase in
the costs associated with, and a decrease in the availability of, borrowings
necessary to operate our business. If these conditions continue or worsen, our
cost of borrowing may further increase and it may be more difficult to obtain
financing for our operations or to refinance long-term obligations as they come
due in the ordinary course. In addition, our borrowing costs can be affected by
short and long-term debt ratings assigned by independent rating agencies which
are based, in significant part, on our performance as measured by credit metrics
such as interest coverage and leverage ratios. A decrease in these ratings would
likely also increase our cost of borrowing and make it more difficult for us to
obtain financing. A significant increase in the costs we incur in order to
finance our operations likely would have a material adverse impact on our
business results and financial condition. If our available funding is limited or
we are forced to fund our operations at a higher cost, these conditions may
require us to curtail our business activities.
  
 14
   Further
downgrades in our credit ratings and macroeconomic conditions may adversely
affect our borrowing costs, limit our financing options, reduce our flexibility
under future financings, and adversely affect our liquidity.
  Our
long-term debt is rated by Standard & Poor’s and Moody’s Investors Service.
The credit ratings for our existing public debt were lowered in July 2008. Our
public debt is currently rated below-investment grade by Standard & Poor’s
and Moody’s Investors Service, and any future long-term borrowings or the
extension or replacement of our short-term borrowing facilities will reflect the
negative impact of this rating, increasing our borrowing costs, limiting our
financing options, including limiting our access to the unsecured borrowing
market, and subjecting us to more restrictive covenants than our existing debt
arrangements. Additional reductions in our credit ratings could further increase
our borrowing costs, subject us to more onerous terms, and reduce our borrowing
flexibility in the future. Such limitations on our financing options may affect
our ability to fund major new acquisitions or capital-intensive internal
initiatives.
  In
addition, deteriorating economic conditions, including market disruptions,
tightened credit markets and significantly wider corporate borrowing spreads,
may make it more difficult or costly for us to obtain replacement financing,
including in connection with the renewal of an existing revolving credit
facility that expires in April 2010 and the refinancing of debt maturing in 2009
and 2010. Currently, we do not have any debt obligations that would be
accelerated as a result of a credit rating downgrade.
  Our
liquidity could be adversely impacted in the event we need to and are unable to
monetize additional aircraft assets or obtain additional sources of
financing.
  Despite
our 2008 public offerings, our recent and pending aircraft sales and our Letter
of Credit and Revolving Line of Credit Facility (which is discussed elsewhere in
this report and these Risk Factors), we cannot assure you that, in the event we
need to obtain additional liquidity, we will be able to sell additional
aircraft, renew or extend existing financing arrangements, or obtain new
financing on terms acceptable to us or at all. Nor can we predict with any
certainty when any such sales or other financings might 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 would likely adversely affect
the market for such aircraft and our ability to sell or otherwise monetize such
aircraft if we decide to do so. 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 our Letter of Credit
and Revolving Line of Credit Facility, and we would likely 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 also have or are reducing
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 our Letter of Credit and
Revolving Line of Credit Facility could result in reductions in the amount
available under such facility. Finally, continued turmoil in the global capital
markets and a continued economic recession in the United States and other
countries 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.
  
 15
  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 have
agreements with organizations that process credit card transactions arising from
purchasing air travel by our customers. Each of our agreements with our credit
card processors allows, under specified conditions, the processor to retain
cash related to future travel that such processor otherwise would remit to us
(i.e., a “holdback”). Holdbacks are classified as restricted cash on our
consolidated balance sheet. Our exposure to credit card holdbacks consists of
advanced ticket sales that customers purchase with credit cards. Once the
customer travels, any related holdback is remitted to us. The imposition of
holdbacks or increases in the amount of existing holdbacks will adversely affect
our liquidity and could result in a material adverse effect on our business,
including our financial condition and operations.
  As of
December 31, 2008, we had advanced ticket sales of approximately $223.5 million
related to all credit card sales. As of December 31, 2008, we were in compliance
with our processing agreements and based on our level of profitability and
unrestricted cash and investments, as defined, our two largest processors were
entitled to holdback 50% of their exposure to credit card chargebacks. Had we
not been in compliance with the agreements, or if our level of unrestricted cash
and investments, as defined, was lower, our potential cash exposure to
additional holdbacks by our largest two credit card processors based on advanced
ticket sales as of December 31, 2008, after considering the $125 million letter
of credit issued in favor of our largest credit card processor, was up to a
maximum of $84.0 million. Our levels of unrestricted cash and air traffic
liability are highly seasonal reaching their highest levels in the early summer
and late fall and reaching their lowest levels in the winter; accordingly the
amounts potentially withheld by our credit card processors are also higher, and
in some cases substantially higher, during certain times of the year. Our future
aggregate cash and investments will be dependent on, among other factors, our
future profitability, including the cost of fuel, the extent of cash collateral
related to derivative financial instruments we may be required to fund, the
level of advance ticket sales, our borrowing availability under our new
Revolving Line of Credit Facility, and the continued availability of our Letter
of Credit Facility. While a decrease in our unrestricted cash and investments
could result in additional amounts being withheld by our credit card processors,
to the extent that we achieve specified aggregate unrestricted cash and
investment amounts and profitability levels, each agreement also provides for a
reduction or elimination of the percent of its exposure that each processor is
currently entitled to hold back.
 
 Although
we have been able to negotiate agreements with our two largest credit card
processors, we cannot predict whether we will continue to be able to maintain
agreements with either or both credit card processors, or the level of holdbacks
we will be required to maintain, if our liquidity is further adversely affected
for an extended period of time whether due to changes in fuel costs, high fuel
prices 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 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 processor 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 also have a material
adverse effect on our business.
  For
additional discussion of our credit card processing agreements see ITEM 7.
“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS – LIQUIDITY AND CAPITAL RESOURCES – Credit Card Processing
Arrangements.” For discussion of the Letter of Credit and Revolving Line of
Credit Facility, see ITEM 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS – LIQUIDITY AND CAPITAL RESOURCES – Letter
of Credit and Revolving Line of Credit Facility.”
  16
 Our
results of operations, cash flows, and financial position are, and will continue
to be, influenced by economic conditions as demand for discretionary travel
diminishes during economic downturns.
  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. The profitability of
our operations is especially influenced by the condition of the United States
economy, which may impact the demand for discretionary travel and our
competitive pricing position. Most air travel is price sensitive and
discretionary travel, which is a substantial portion of our business, declines
during economic downturns. Our 2008 results of operations, cash flows, and
financial condition were, and our 2009 results of operation, cash flows, and
financial condition likely will be, adversely affected by recent, current, and
emerging weak macroeconomic conditions in the United States, including the
current recession. A prolonged economic recession could have a significant
adverse effect on our results of operations, cash flows, and financial
condition. Air travel tends to be seasonal. Demand tends to be highest in the
second quarter due to higher family air travel. Accordingly, the second quarter
tends to be our strongest revenue quarter. In light of economic conditions and
rapidly changing network operations and travel pricing in our industry, we
cannot predicate whether demand for air travel either for the industry in
general, or AirTran Airways in particular, for 2009 will be in accord with
recent historical seasonally adjusted demand.
  Airline
bankruptcies, strategic combinations, or industry consolidations could have an
impact on our competitive environment in ways yet to be determined.
  The
environment in the airline industry changes from time to time as carriers enter
and, more rarely, exit the U.S. market, implement varying strategies in pursuit
of profitability, including consolidation to expand operations and increase
market strength and enter into national or global alliance arrangements. The
bankruptcy, merger or acquisition of one or more of our competitors may result
in rapid changes to the identity of our competitors in particular markets, a
substantial reduction in the operating costs of our competitors or the entry of
new competitors into some or all of the markets we serve or currently are
seeking to serve. We are unable to predict exactly what effect, if any, changes
in the strategic landscape might have on our business, financial condition, and
results of operations.
  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, which may include future
funding obligations for potential acquisitions. Our total indebtedness as of
February 2, 2009 and December 31, 2008, respectively, was approximately $1.0
billion and $1.1 billion, of which $824.8 million and $832.8 million,
respectively, was aircraft related. Our debt service obligations with respect to
our indebtedness could have an adverse impact on our earnings, cash flows, and
financial position 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.
  
 17
   The
amount of our debt and other fixed obligations, and potential increases in the
amount of our debt and other fixed obligations, an inability to refinance our
debt and fixed obligations, and any acceleration of our debt or other
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 one or more downgrades in the rating of our indebtedness, which could
      limit our ability to borrow additional funds or increase the interest
      rates applicable to the
indebtedness.
  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 February 2, 2009, $824.8 million 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 under our Letter of Credit and
Revolving Line of Credit Facility and our 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 or decrease, 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 likely have a material adverse impact on us and on
our ability to sustain operations.
   18
 Covenants
in our existing debt instruments and potential future indebtedness could limit
how we conduct our business, which could affect our long-term growth potential.
A failure by us to comply with any of our existing or prospective restrictions
could result in acceleration of the repayment terms of our existing or potential
future debt. Were this to occur, we might not have, or be able to obtain,
sufficient cash to pay our accelerated indebtedness.
  Certain
of our existing debt instruments and financing agreements contain covenants
that, among other things, limit our ability to:
  ·
              pay
      dividends and/or other
distributions;
  ·
              incur
      additional indebtedness;
  ·
              dispose
      of certain assets without application of the proceeds in one or more
      specified ways; and
  ·
              enter
      into mergers, consolidations or other business
    combinations.
  As a
result of these restrictive covenants, we may be limited in how we conduct
business, and we may be unable to raise additional debt or equity financing to
operate during general economic or business downturns, to compete effectively,
or to take advantage of new business opportunities. This may affect our ability
to generate revenues and make profits.
  Our
failure to comply with the covenants and restrictions contained in our Letter of
Credit and Revolving Line of Credit Facility, our indentures, leases, other
financing agreements, and our aircraft purchase agreements could lead to a
default under the terms of those agreements. If such a default occurs, the other
parties to these agreements could declare all amounts borrowed and all amounts
due under other instruments, which contain provisions for cross-acceleration or
cross-default, due and payable. If that occurs, we may not be able to make
payments on our debt, meet our working capital and capital expenditure
requirements, or be able to find additional alternative financing on favorable
or acceptable terms or sustain operations.
  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.
  Our
operations are, and will continue to be, largely dependent upon the availability
of fuel in the Gulf Coast area.
  Our
operations are largely concentrated in the Southeast United States with Atlanta
being the highest volume fueling point in our system. In addition, over 80
percent of our fuel contracts are based on prices of jet fuel produced in the
Gulf Coast area. Any disruption to the oil production or refinery capacity in
the Gulf Coast, as a result of weather or any other disaster could, among other
potential effects, have a material adverse effect on our financial condition and
results of operations, not only in East Coast routes but across our network due
to disruptions in supply of jet fuel, dramatic escalations in the costs of jet
fuel, and/or the failure of fuel providers to perform under our fuel
arrangements.
  We
endeavor to manage and mitigate the risks of changes in aviation fuel prices,
where we believe appropriate, by entering into hedging arrangements. We do not
enter into fuel hedge contracts for speculative purposes.
  To the
extent we do not hedge our aviation fuel risk or correspondingly adjust our fare
levels, fluctuations in the market prices of jet fuel will have the effect of
reducing or increasing the amount of profit we earn or loss we incur.
Conversely, by entering into hedging contracts, we may, in exchange for
minimizing the risk of potential cost increases associated with aviation jet
fuel costs, also minimize the potential for cost savings associated with
decreases in the price of such fuel and, depending on volatility, may subject
ourselves to hedging related losses.
  19
  We
typically hedge a portion of our fuel exposure with a portfolio of swaps and
various types of options using both crude oil and jet fuel as the underlying
commodity. Generally our hedging 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. For a further discussion of our hedging activities and our potential
exposure and benefits at specified price points, see the discussion and chart
with respect to our hedging activities under the heading ITEM 7A. “QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK – Aviation Fuel.”
  While we
have generally been able to enter into hedging transactions when we have sought
such arrangements, no assurances can be given that our ability to enter into
such transactions will not adversely be affected in the future by (i) limited
interest in the provision of hedging arrangements by financial or other
institutions, and (ii) the inability to procure hedging agreements as the result
of some crisis (financial or other) associated with the supply of aviation fuel,
political instability in oil producing countries or other developments which
have otherwise affected the interest of financial or other institutions in
entering into fuel hedging transactions in general. Likewise, we cannot assure
you that counterparties to hedging agreements will always perform or that our
hedging activities will be successful in materially mitigating the impact of
rising fuel costs.
  Initiatives
to address global climate change may increase our costs and adversely affect our
business.
  Efforts
to address greenhouse gases, or GHG emissions, and the resulting impacts of such
gases on climate change may increase our cost, adversely affect our
environmental progress, and result in diminished air travel due to higher costs.
Both the aviation industry, in general, and our company in particular, generate
green house gas emissions from our utilization of petroleum-based fuel. Although
the industry is estimated to be responsible for approximately 2-3% of the
world's daily GHG emissions, until recently aviation was one of the fastest
growing sources of GHG, primarily due to the growth in flights outside of the
United States. Our GHG generation is directly related to our fuel consumption
and fuel efficiency.
  Beginning
in 2012, any airline flying into or out of the European Union will be required
to join the EU's emissions trading system and buy a permit for their GHG
emissions; limited relief is expected to be available for new and certain fast
growing carriers. Similar "cap and trade" restrictions have been proposed in the
United States. A number of states and environmental organizations have asked the
U.S. Environmental Protection Agency to regulate greenhouse gas emissions from
aircraft and in late 2007, various pieces of legislation, including the
Lieberman-Warner Climate Security Act, were introduced in Congress to
effectively regulate and tax GHG emissions, including through a cap and trade
system. Under certain of such proposed legislation fuel producers would have
been required to acquire allowances sufficient to cover the GHG content of the
fuel they sell, the cost of which would be expected to be passed along to fuel
consumers, including airlines.
  In the
event such U.S. legislation or regulation is promulgated or in the event similar
legislation or regulation is promulgated in other existing non-U.S.
jurisdictions where we currently operate or where we may operate in the future,
our fuel costs likely will increase as a result thereof. We are unable to
predict whether any such legislation or regulation would apportion costs between
one or more jurisdictions in which we operate and we may be subject to the risks
of multiple taxation or permitting requirements from one or more jurisdictions
or our costs may be based on our total flight activities regardless of the
relationship of our flight operations to operations in the airspace of the
applicable regulatory authority. For example, EU regulations may apply to the
entire length of trans-Atlantic flights in determining permit costs rather than
just that portion of the flight occurring in EU airspace. Under various proposed
legislation, emitters may be eligible for credits based on efforts to reduce GHG
emissions preceding the effective date of regulating legislation and may also be
eligible for statutory credits to reduce the costs of permits in order to
mitigate the impact of such regulations on ultimate consumers. Furthermore,
funds from permits may be utilized to fund technology research and development
activities for certain industries with the goal of reducing GHG emissions by
such industries. We can not predict whether the aviation industry in general or
our company in particular will have access to offsets, credit for early
action,  special funding, or directed utilization of permit proceeds
to provide funding for aviation research and development or alternative jet fuel
research. Similarly, we cannot predict whether particular benefits or exemptions
would be available to us or at all based on our status as a low cost carrier, as
a new market entrant in a particular market or based on our rate of
growth.
  20
  We
rely heavily on technology and automated systems to operate our business, and a
failure of these technologies or systems or failures by their operators could
harm our business.
  We depend
on technology and automated systems to operate our business, including our
computerized airline reservations system, our telecommunication systems, our Web
site, our maintenance and engineering systems, our flight scheduling and yield
management systems, and other technologies and systems. In order to reduce costs
and maintain and enhance customer service, we have automated numerous activities
and functions and our integration and interaction requirements for our systems
continue to increase as we strive to achieve maximum rational utilization of all
of our resources.
  Virtually
all of our customer flight reservations are issued to passengers as electronic
confirmations, ticketless or as electronic tickets. We depend on our
computerized reservation system to be able to issue, track, and accept this
data. In order for our operations to work efficiently, our Web site and
reservation system must be able to accommodate a high volume of traffic,
maintain secure information, and deliver important flight information. While our
systems have certain redundancies, substantial or repeated Web site,
reservations system, or telecommunication systems failures could reduce the
attractiveness of our services and cause our customers to purchase tickets from
another airline.
  We rely
on other automated systems for coordinating maintenance and engineering
activities with flight operations and for crew scheduling, flight dispatch, and
other operational needs. Disruption in, changes to, or a breach of, these
systems could result in the loss of important data, increase our expenses, and
possibly delay or impede our flight and related operations.
  Our
technologies and systems are subject primarily to three types of risk, internal
errors or failures, errors or failures by our vendors, and externally caused
failures. Many of these risks are beyond our control.
  We seek
to minimize internal risks through various processes and internal controls, by
employing redundant systems, security initiatives and procedures, and disaster
recovery plans.
  We rely
on outside vendors and licensors for a variety of technological services,
products, and functions critical to our business, including computer reservation
system hosting, software design, and software maintenance. Our use of outside
vendors increases our exposure to several risks. If one of our major technology
or automated systems vendors fails to perform adequately, we may experience
increased costs, delays, or negative public perception of our airline. We
believe there currently are other available vendors and alternative systems for
all of our licensed technologies and outsourced system operations; however, in
the event that one or more of our primary technology or systems' vendors goes
into bankruptcy, ceases operation or fails to perform as  promised,
replacement services may not be readily available at competitive rates, or at
all. Vendor bankruptcies, unionization, regulatory compliance issues, or
significant changes in the competitive marketplace among suppliers could
adversely affect vendor services or force us to renegotiate existing agreements
on less favorable terms. These events could result in disruptions in our
operations or increases in our cost structure. We seek to minimize our vendor
risk through a vendor oversight and quality control process that we believe is
among the best in the industry. We regularly review the risk profiles of all of
our major vendors and assess the criticality of their products and services to
our business. We have implemented redundant systems, disaster recovery programs,
or contingency plans for all of principal outsourced systems and have redundant,
disaster recovery systems for our major outsourced systems. We also require
computer code escrow arrangements for all of our major systems which would allow
us to operate key systems in the event of a vendor failure. Despite our
initiatives, plans and procedures, such measures may not be adequate or
implemented properly or sufficiently to prevent business
disruption.
  21
 Despite
our plans, programs and procedures, we may be vulnerable to external
interruption in technology infrastructure on which we are dependent, such as
power, telecommunications or the internet, whether due to large scale events,
such as natural disasters, or directed actions, including terrorist attacks and
system security attacks seeking to compromise or obtain financial data, infect
systems with computer viruses or impair or disrupt functionality through denial
of services.
  Any
individual, sustained, or repeated failure or compromise of our technologies and
automated systems could result in the loss of or a failure to capture data,
negatively affect our customer service, result in increased costs and expenses,
or generally cause harm to our business.
  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 labor agreements generally provide for
annual pay rate step increases.
  We
reduced our labor costs in 2008 through both voluntary leaves of absence and
early exits; however, we cannot predict whether we will need to reduce our labor
costs further in 2009 or whether we will be able to effect any necessary or
desirable reductions. If additional reductions are necessary or desirable, we
cannot predict whether we will be able to obtain voluntary workforce reductions.
We also cannot predict the timing of any voluntary workforce reductions nor can
we assure you that we will not need to implement involuntary reductions.
Likewise, we cannot predict whether any of our labor groups would agree to
voluntary wage and benefit reductions and we cannot predict when any such
reductions might be implemented, if at all. We intend to continue to review
staffing levels for all other work groups to align staffing with the level of
future operations. If fuel prices increase materially from 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 recent and current operating environment. Accordingly, we cannot assure
you that our labor costs going forward will remain competitive on even a
comparative basis because: our labor agreements may be amended or become
amendable and new agreements could have terms with higher labor costs, one or
more of our competitors may significantly reduce their labor costs thereby
reducing or eliminating comparative advantages as to one or more of such
competitors, or our 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. In most circumstances, the RLA prohibits strikes;
however, after release by the NMB, carriers and unions are free to engage in
self-help measures such as strikes and lockouts.
  22
 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 NMB. Our flight attendants are represented by the Association of
Flight Attendants, or AFA. The agreement with our flight attendants became
amendable in December 2008. Negotiations on proposed amendments began in early
2008 and meetings are scheduled to continue into 2009. Our dispatchers are
represented by the Transport Workers Union, or TWU, and the agreement with our
dispatchers became 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 favorable, 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 in the current adverse operating environment 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.
  If
we incur problems with any of our third party airport services providers, our
operations could be adversely affected by a resulting decline in revenue or
negative public perception about our services.
  We
conduct complete ground handling services at 32 of the 57 airports we serve,
including at our Atlanta hub. Ground handling services are provided by third
parties at the remaining 25 airports and typically are of three types:
above-wing only, under-wing only and complete ground handling. Above-wing
services include, but are not limited, to aircraft cleaning and food and
beverage services. Under-wing ground handling services include, but are not
limited to, directing the aircraft into and out of the gate, baggage loading and
unloading, lavatory and water servicing, de-icing and certain other services.
Complete ground handling consists of public contact (at the ticket counter, gate
and baggage service office) and under-wing services combined. Operations not
conducted by our employees are contracted to other air carriers, ground handling
companies, or fixed-base operators with such operations overseen by our
employees.
  Our
reliance on third party service providers will continue in the foreseeable
future and may result in the relative inability to control the efficiency and
timeliness of all of our outsourced ground handling operations. Although we do
not anticipate any material problems with the efficiency and timeliness of our
existing contract services, problems in connection with such third party
services could have a material adverse effect on our business, financial
condition, and results of operations.
  Our
business is and will continue to be subject to weather factors and seasonal
variations in airline travel, which cause results to fluctuate.
  Our
operations will continue to be vulnerable to weather conditions in different
parts of our network that could disrupt service, create air traffic control
problems, decrease revenue and increase costs, such as during hurricane season
in the Southeast United States, and, as our operations in the Midwest and
Northeast United States expand, snow and severe winter weather in such regions.
Air travel tends to be seasonal. The second quarter tends to be our strongest
revenue quarter. Our results of operations reflect weather factors and
seasonality, and therefore quarterly results are not necessarily indicative of
those for an entire year and the prior results are not necessarily indicative of
our future results. In addition, our dependence on a primary hub and on a route
network operating largely on the East Coast makes us more susceptible to adverse
weather conditions and other traffic delays along the East Coast than some of
our competitors that may be better able to spread these traffic risks over
larger route networks.
  23
 We
are subject to various risks as a result of our fleet concentration in two fleet
types.
  As of
February 2, 2009, we have 86 B717 aircraft and 50 B737 aircraft in our fleet.
Because fewer carriers operate B717 aircraft, FAA actions to ground that
aircraft generally (if actual or suspected defects were discovered in the future
unique to that aircraft) would have a more pronounced effect on us. Also,
because Boeing discontinued the production of B717 aircraft in 2006, we expect
to experience increased costs in later years in connection with parts
acquisition and/or maintenance for such aircraft than we would likely incur if
such aircraft were still in production.
  Our
maintenance costs are expected to increase.
  Our
recent maintenance expenses have been lower than what we expect to incur in the
future because of the relatively young age of our B717 and B737 aircraft fleet.
Our maintenance costs are expected to increase as these aircraft age and come
off the manufacturer’s warranty. Several of our maintenance contracts with third
party vendors also provide for annual contractual increases, either based on an
inflation-index or a fixed amount.
  Our
reputation and financial results could be negatively affected in the event of a
major aircraft accident.
  An
accident involving one of our aircraft could involve not only repair or
replacement of the damaged aircraft and our consequent temporary or permanent
loss from service, but also significant potential claims by passengers and
others. Moreover, any aircraft accident, even if fully insured, could cause a
public perception that our aircraft are less safe or reliable than other
airlines, and that could have a negative effect on our business. The occurrence
of one or more incidents or accidents involving our aircraft could have a
material adverse effect on the public’s perception of us and our future
operations.
  We are
required by the DOT to carry liability insurance on each of our aircraft. We
currently maintain liability insurance in amounts and of the type consistent
with industry practice. Although we currently believe our insurance coverage is
adequate, the amount of such coverage may be changed in the future or we may be
forced to bear substantial losses from accidents. Substantial claims resulting
from an accident in excess of related insurance coverage could have a material
adverse impact on our business and financial results.
  We
are subject to extensive regulation by the FAA, the DOT, and other governmental
agencies, compliance with which could cause us to incur increased costs and
negatively affect our business and financial results.
  We and
airlines in general, are subject to a wide range of governmental regulation,
including regulation by the FAA. A modification, suspension, or revocation of
any of our FAA authorizations or certificates could adversely impact our
business.
  In the
last several years, Congress has passed laws and the FAA has issued a number of
maintenance directives and other regulations. These requirements impose
substantial costs to airlines. Additional laws and regulations have been
proposed from time to time that could significantly increase the cost of airline
operations or reduce revenues by imposing additional requirements or
restrictions on operations. Laws and regulations have also been considered that
would prohibit or restrict the ownership and/or transfer of airline routes or
takeoff and landing slots. Also, the availability of international routes to
United States carriers is regulated by treaties and related agreements between
the United States and foreign governments that may be amended from time to time,
or because appropriate slots or facilities may not be available. We cannot
assure you that laws or regulations enacted in the future will not adversely
affect our operating costs, or our ability to conduct existing or future
operations outside of the United States. We cannot predict what laws and
regulations may be adopted or their impact, and we cannot guarantee that laws or
regulations currently proposed or enacted in the future will not adversely
affect us.
  24
 Increases
in insurance costs or reduction in insurance coverage may adversely impact our
operations and financial results.
  The
terrorist attacks of September 11, 2001, led to a significant increase in
insurance premiums and a decrease in the insurance coverage available to
commercial airlines. Accordingly, our insurance costs increased significantly.
Likewise, the ability to continue to obtain insurance even at current prices
will remain uncertain. Pursuant to the Airline Transportation and System
Stabilization Act, the federal government stepped in to provide supplemental
third party war-risk insurance coverage to commercial carriers for renewable
60-day periods, at substantially lower premiums than prevailing commercial rates
and for levels of coverage not available in the commercial market. In November
2002, Congress passed the Homeland Security Act of 2002, which mandated the
federal government to provide third party, passenger, and hull war-risk
insurance coverage to commercial carriers through August 31, 2003. Pursuant to
legislation under a variety of Federal acts, Congress has further extended the
government’s mandate to provide war-risk insurance. During 2008, the coverage
was extended in six-month increments. For 2009, coverage has initially been
extended in a three-month increment. Currently, we have received certification
of coverage through March 31, 2009. If the federal insurance program terminates,
we would likely face a material increase in the cost of war-risk insurance or
such insurance might not be available at all. Because of the competitive
pressures in the industry, the ability to pass along additional insurance costs
to passengers may be limited. As a result, further increases in insurance costs
or reductions in available insurance coverage could harm earnings. Any coverage
that might be available to us through commercial aviation insurers also could
have substantially less desirable terms, and might not be adequate to protect
our risk, which could harm our business.
  Future acts of terrorism or
escalation of U.S. military involvement overseas could adversely affect the
airline industry.
  Even if
not directed at the airline industry, a future act of terrorism, the threat of
such acts or escalation of United States military involvement overseas could
have an adverse effect on the airline industry. In the event of a terrorist
attack, the airline industry would likely experience significantly reduced
demand. We cannot assure you that such actions, or consequences resulting from
such actions, will not materially harm our business or the airline industry
generally.
  Certain
major airlines have reduced their cost structures reducing our competitive cost
advantage.
  Since
2001, as a result of slower general economic conditions, the high price of fuel,
and intense competition, the airline industry experienced record financial
losses. In response to the adverse financial results the airline industry has
experienced, airlines have taken actions in an effort to reduce losses by,
reducing employee headcount, limiting service offerings, renegotiating labor
contracts, restructuring through the bankruptcy process, and reconfiguring
flight schedules, as well as other efficiency and cost-cutting measures. While
our cost advantage remains significant, these changes have reduced our cost
advantage over certain airlines, and additional cost reductions by such airlines
could further reduce our cost advantage.
  The
airline industry is intensely competitive and some of our competitors have
greater financial resources.
  The
airline industry in general and the low-fare sector in particular, is highly
competitive. Our competitors include other major domestic airlines as well as
foreign, regional, and new entrant airlines, some of which will have more
financial resources and/or could have lower cost structures than us, and other
forms of transportation, including rail and private automobiles. In most of the
markets which we currently serve, and in most of the markets which we expect to
serve within the coming year, we compete or expect to compete with at least one
other low-cost air carrier and one or more major legacy carriers. Our revenues
are, and will continue to be, sensitive to numerous competitive factors, and the
actions of other carriers in the areas of pricing, scheduling, and promotions,
all of which can have a substantial adverse impact on individual airline and
overall industry revenues. These factors may become even more significant in
periods when the industry experiences large losses, as airlines, under financial
stress or in bankruptcy, may institute pricing structures intended to achieve
near-term survival rather than long-term viability. In 2008, according to
published reports, approximately twenty-nine, predominantly smaller, air
carriers, including five, predominantly smaller, U.S. domestic air carriers,
filed proceedings under applicable U.S. or non-U.S. bankruptcy or insolvency
laws or otherwise ceased operations, with the majority of such U.S. and non-U.S.
carriers liquidating rather than seeking to reorganize.
  We may
face greater competition in the future from existing and new competitors. Any
increased competition could have a negative impact on our business and operating
results.
  25
 If
we lose key senior management or are unable to attract and retain the talent
required for our business, our operating results could suffer.
  Our
performance depends largely on the efforts and abilities of our members of
senior management. These executives have substantial experience and expertise in
our business and have made significant contributions to our growth and success.
The unexpected loss of services of one or more of these individuals could have
an adverse effect on our business. We will need to attract and retain additional
qualified personnel and develop, train and manage an increasing number of
management-level employees. We cannot assure you that we will be able to attract
and retain personnel as needed in the future.
  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, and certain of our long-lived assets (principally aircraft and
related spare engines and spare parts) in mid-2008. Factors deemed by management
to be indicators of potential impairment triggering events included record high
fuel prices, significant losses incurred in the first and second quarters of
2008, a softening U.S. economy, and a significant decrease in the fair value of
our outstanding equity and debt securities during 2008, including 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 in 2008. We performed the annual impairment test of
the financial statement carrying value of our trade name and trademarks which
test indicated that there was not an impairment. However, we still have
approximately $1.2 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, and other uncertainties. We
cannot assure you that a material impairment charge related to our 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 ITEM 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS – Critical Accounting Policies and
Estimates.”
  26
 Our
ability to utilize net operating loss carryforwards may be limited.
  At
December 31, 2008, we had estimated net operating loss carryforwards (“NOLs”) of
$428.0 million for federal income tax purposes that expire beginning in 2017 and
continuing through 2028. Section 382 of the Internal Revenue Code (“Section
382”) imposes limitations on a corporation’s ability to utilize NOLs if it
experiences an “ownership change.” In general terms, an ownership change may
result from transactions increasing the ownership of certain stockholders in the
stock of a corporation by more than 50 percentage points over a three-year
period.
  In the
event of an ownership change, utilization of our NOLs would be subject to an
annual limitation under Section 382 determined by multiplying the aggregate
value of our stock at the time of the ownership change by the applicable
long-term tax-exempt rate (which was 5.4% for as of December 31, 2008). Any
unused NOLs in excess of the annual limitation may be carried over to later
years. Based on analysis that we performed, we believe we have not experienced a
change in ownership as defined by Section 382, and, therefore, our NOLs are not
currently under any Section 382 limitation.
  As a
result of our common stock trading at depressed market prices in the last year
(relative to the prices at which our stock has generally traded during the
previous three-year period), the costs associated with acquiring a sufficient
number of shares of our common stock to become a holder of 5% or more of the
outstanding shares has decreased significantly. This decline in the cost of
reaching the 5% ownership threshold may increase the likelihood that we will
experience an “ownership change” for purposes of Section 382, as increases in
share holdings by, or that result in a person becoming, a holder of 5% or more
of the outstanding shares of our common stock are aggregated for purposes of
determining whether such a change has occurred. Although we cannot currently
predict whether or when such an “ownership change” may occur, if we were to
experience an ownership change under current conditions, our annual NOL
utilization could be significantly limited. The imposition of this limitation on
our ability to use our NOLs to offset future taxable income could cause U.S.
federal income taxes to be paid earlier than otherwise would be paid if such
limitation were not in effect and could cause such NOLs to expire unused,
reducing or eliminating the benefit of such NOLs. In addition, depending on the
market value of our common stock at the time of any such ownership change, we
may be required to recognize a significant non-cash tax charge, the amount of
which we cannot estimate at this time.
  
  27
 Certain
Risk Factors Relating to Our Securities
  Our
securities have been and may continue to be adversely affected by conditions in
the global financial markets and economic conditions generally.
 
 Since
mid-2007, and particularly during the second half of 2008, the air carrier
industry and the securities markets generally were materially and adversely
affected by significant declines in the values of nearly all asset classes and
by a serious lack of liquidity. This was initially triggered by rapid and all
time high fuel prices and general macroeconomic conditions, especially with
regard to the housing and financial industries.
 
 We
may incur substantially more debt or take other actions that may affect our
ability to satisfy our existing debt obligations including under our 7%
Convertible Notes and under our 5.5% Convertible Senior Notes (collectively, the
“Notes”).
  We are
not restricted under the terms of the Notes or the respective indentures for the
Notes from incurring substantial additional indebtedness in the future,
including secured indebtedness or indebtedness at the subsidiary level, to which
the Notes would be structurally subordinated. In addition, the limited covenants
applicable to the Notes do not require us to achieve or maintain any minimum
financial results relating to our financial position or results of operations.
The governing indentures do not contain any restrictive covenants limiting our
ability to pay dividends, make any payments on junior or other indebtedness, or
otherwise limit our financial condition. Our ability to recapitalize, incur
additional debt and take a number of other actions that are not limited by the
terms of the Notes could have the effect of diminishing our ability to make
payments on the Notes when due, and require us to dedicate a substantial portion
of our cash flow from operations to payments on our indebtedness, which would
reduce the availability of cash flow to fund our operations, working capital and
capital expenditures.
  We
may not have the ability to repurchase our 5.5% Convertible Senior Notes in cash
upon the occurrence of a fundamental change as required by the indenture
governing the notes.
  Holders
of our 5.5% Convertible Senior Notes have the right to require us to repurchase
the notes upon the occurrence of a fundamental change. We may not have
sufficient funds to repurchase such notes in cash or to make the required
repayment at such time or have the ability to arrange necessary financing on
acceptable terms. A fundamental change may also constitute an event of default
under, or result in the acceleration of the maturity of, our then-existing
indebtedness. Our ability to repurchase our 5.5% Convertible Senior Notes in
cash may be limited by law or the terms of other agreements relating to our
indebtedness outstanding at the time. Our failure to repurchase our 5.5%
Convertible Senior Notes when required would result in an event of default with
respect to such notes and could result in a cross default with respect to
certain of our indebtedness.
  Our
stock price has been volatile historically and may continue to be volatile. The
price of our common stock, and therefore the price of the Notes, may fluctuate
significantly, which may make it difficult for holders to resell the Notes or
the shares of our common stock issuable upon conversion of the Notes when
desired or at attractive prices.
  The
trading price of our common stock has been and may continue to be subject to
wide fluctuations. From January 1, 2007 through February 2, 2009, the sale price
of our common stock on the New York Stock Exchange ranged from $1.28 to $13.09
per share, and the last reported sale price of our common stock on February 2,
2009 was $4.11 per share.
  
 28
 The price
of our common stock may fluctuate significantly as a result of many factors in
addition to the factors discussed in these risk factors. These factors, some or
all of which are beyond our control, include:
  ·
              actual
      or anticipated fluctuations in our operating
  results;
  ·
              changes
      in expectations as to our future financial performance or changes in
      financial estimates of securities
analysts;
  ·
              success
      of our operating, growth and high priced fuel
  strategies;
  ·
              investor
      anticipation of competitive and industry threats, whether or not warranted
      by actual events;
  ·
              operating
      and stock price performance of other comparable companies or companies
      investors may deem comparable to
us;
  ·
              news
      reports relating to trends in our industry or general economic conditions;
      and
  ·
              realization
      of any of the risks described in these risk
  factors.
  In
addition, the stock market can experience extreme volatility that often may be
unrelated or disproportionate to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance. Because the Notes are convertible into shares of our common stock,
volatility or depressed prices of our common stock could have a similar effect
on the trading price of our Notes. Holders who receive common stock upon
conversion also will be subject to the risk of volatility and depressed prices
of our common stock. Also, the existence of the Notes may encourage short
selling in our common stock by market participants because the conversion of the
Notes could depress the price of our common stock. In addition, the issuance of
the Notes could have a dilutive effect on our earnings per share in the
future.
  If
our stock price fluctuates, purchasers of our common stock could incur
substantial losses.
  The
market price of our common stock may fluctuate significantly in response to
factors that are beyond our control. The stock market in general has recently
experienced extreme price and volume fluctuations. The market prices of
securities of airline companies have been extremely volatile, and may reflect
fluctuations that are unrelated or disproportionate to the operating performance
of these companies. These broad market fluctuations could result in extreme
fluctuations in the price of our common stock, which could cause purchasers of
our common stock to incur substantial losses.
  Investors
in our common stock may experience future dilution.
  In order
to raise additional capital, we may in the future offer additional shares of our
common stock or other securities convertible into or exchangeable for, our
common stock in transactions that may be dilutive to existing holders of our
common stock. The holders of our 7% Notes have certain redemption rights which
become exercisable in 2010. We may elect to exercise rights to pay the
redemption price of our 7% Notes in shares of our common stock which could
result in the issuance of a significant number of additional shares. The
conversion ratio of our 5.5% Notes is subject to increase in connection with a
Make Whole Fundamental Change as defined in the indenture governing such notes.
In connection with our Letter of Credit and Revolving Line of Credit Facility,
we issued warrants to purchase approximately 4.7 million shares of our common
stock for $4.49 per share. The number of shares issuable pursuant to such
warrants as well as the shares of common stock issuable upon a conversion of our
Notes are subject to adjustments for certain dilutive events as defined in the
warrant agreement and the respective Notes indentures. The issuance and sale of
shares pursuant to our warrants and Notes may result in substantial dilution to
the proportionate equity interest and voting power of holders of our common
stock. The sale of such shares also has potential to cause significant downward
pressure on the price of our common stock. This is particularly the case if the
shares being placed into the market exceed the market's ability to absorb the
increased outstanding stock. Such an event could place further downward pressure
on the price of our common stock. This could present an opportunity for short
sellers to contribute to a further decline of our stock price. If there are
significant short sales of our stock, the price decline that would result from
such activity likely would cause the share price to decline, which, in turn, may
cause persons who actually hold our stock to sell their shares thereby
contributing to a further share price decline of our common stock in the
market.
  29
 Sales
of a significant number of shares of our common stock in the public markets, or
the perception of such sales, could depress the market price of our Notes and
our common stock.
  Sales of
a substantial number of shares of our common stock or other equity-related
securities in the public markets, including in an offering of our common stock,
could depress the market price of the Notes, our common stock, or both, and
impair our ability to raise capital through the sale of additional equity or
equity-linked securities. We cannot predict the effect that future sales of our
common stock or other equity-related securities would have on the market price
of our common stock or the value of the Notes. The price of our common stock
could be affected by possible sales of our common stock by investors who view
the Notes as a more attractive means of equity participation in our company and
by hedging or arbitrage trading activity that may occur involving our common
stock. This hedging or arbitrage could, in turn, affect the market price of the
Notes.
  Our
anti-takeover provisions may delay or prevent a change of control, which could
adversely affect the price of our common stock or our securities convertible
into common stock.
  The
existence of some provisions in our corporate documents and Nevada law may
discourage, delay, or prevent a change in control, which could adversely affect
the price of our common stock or the price of the Notes or our other securities
convertible into common stock. Our certificate of incorporation and bylaws
contain some provisions that may make the acquisition of control more difficult,
including provisions relating to the nomination, election, and removal of
directors, the structure of the board of directors, and limitations on actions
by our shareholders. In addition, Nevada law also imposes some restrictions on
mergers and other business combinations between us and any holder of ten percent
or more of our outstanding common stock.
  
   30
  ITEM 1B.
              UNRESOLVED
      STAFF COMMENTS
  None.
  ITEM 2.
              PROPERTIES
  Operating
Aircraft Fleet
  We
operated the following owned and leased aircraft as of December 31,
2008:
  Aircraft
      Type
              
              
              Number of
                Passenger Seats
              
              
              Owned
              
              
              Leased
              
              
              Total
              
              
              Weighted-
                Average
                Age (Years)B717
              
              
              
              
              117
              
              
              
              8
              
              
              
              78
              
              
              
              86
              
              
              
              7.3B737
              
              
              
              
              137
              
              
              
              28
              
              
              
              22
              
              
              
              50
              
              
              
              2.7Total
              
              
              
              
              
              
              
              36
              
              
              
              100
              
              
              
              136
              
              
              
              5.6
  As of
December 31, 2008, we had 55 B737 aircraft on order scheduled to be
delivered in the year indicated:
  Firm Aircraft Deliveries
                B7372009
              
              
              42010
              
              
              ­-2011
              
              
              52012
              
              
              92013
              
              
              52014
              
              
              142015
              
              
              82016
              
              
              10Total
              
              
              55
  We have
agreed to sell two B737 aircraft to a foreign air carrier in 2009
contemporaneous with the delivery thereof to us. The same foreign air carrier
purchased two B737s from us in 2008.
  As of
December 31, 2008, all of our owned aircraft were encumbered under debt
agreements. For information concerning the estimated useful lives, residual
values, lease terms, operating rent expense, aircraft debt, and firm orders for
additional aircraft, see Notes 2, 3, 5 and 6 to the Consolidated Financial
Statements.
 
  31
  Ground
Facilities
 
 We have
signatory status on the lease of facilities at Hartsfield-Jackson Atlanta
International Airport. This lease covers use of 22 gates and expires in
September 2010. We also have signatory status at several other airports. The
current lease at Orlando International Airport, which expires in September 2013,
covers use of seven gates. The lease at Baltimore/Washington International (BWI)
covers six gates and expires in June 2009. The check-in-counters, gates, and
airport office facilities at each of the other airports we serve are leased from
the appropriate airport authority or subleased from other airlines.
 
 Our
principal corporate offices are located at the Orlando International Airport in
a leased facility. The facility houses our executive offices as well as our
operations staff, general administrative staff, and some of our computer
systems. We have a 15-year lease with the Orlando Airport Authority that expires
in 2023. We have an agreement to expand our corporate headquarters which is on
hold while we evaluate our options on future development. We are in discussions
with our funding partners on how we will proceed.
  We rent
an aircraft hangar at the Orlando International Airport, subject to a ground
lease with the Greater Orlando Aviation Authority. The ground lease agreement
for this facility expires in 2011 and may be extended an additional ten years
through the exercise of options in five-year increments. The hangar houses a
portion of our maintenance staff, and parts inventory.
  In May
2004, we opened a two bay hangar facility at Hartsfield-Jackson Atlanta
International Airport. The hangar can hold three B717 aircraft simultaneously
and has an office building attached to the hangar to house maintenance and
engineering staff. We have a 20-year lease on the facility which expires in
2024.
  We also
lease office space in Atlanta for use as a reservations center under a lease
which expires in May 2010, a reservation center in Savannah, Georgia, under a
lease which expires in February 2009, a warehouse and engine repair facility in
Atlanta under a lease that expires in February, 2014, and a reservation center
in Carrollton, Georgia, under a lease that expires in March 2009.
  During
2008, we entered into a lease for an office building in Atlanta which will be
used primarily as a training facility and administrative offices for customer
service, recruiting, in flight services, marketing, and internal audit. We have
a 26-year lease on the facility that expires in 2034 and has two five-year
renewal options.
 
 We
believe we will be able to obtain lease renewals or substitute facilities for
our leased facilities upon the expiration of the applicable lease.
  Our
existing facilities are generally adequate for our present needs. However, we
are unable to predict whether we will be able to obtain adequate facilities to
accommodate future growth or expansion. If facilities at any additional cities
to be served by us are not available at acceptable rates, or if such facilities
become no longer available to us at acceptable rates, then we may choose not to
serve those markets.
  ITEM 3.
              LEGAL
      PROCEEDINGS
  From time
to time, we are engaged in litigation arising in the ordinary course of our
business. We do not believe that any such pending litigation will have a
material adverse effect on our results of operations or financial
condition.
  ITEM 4.
              SUBMISSION
      OF MATTERS TO VOTE OF SECURITY
HOLDERS
  None.
  
 32
 PART
II
  ITEM 5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
  Market
Information
  Our
common stock, $.001 par value per share, is traded on the New York Stock
Exchange under the symbol “AAI.” The following table sets forth the reported
high and low sale prices for our common stock for each quarterly period during
2008 and 2007:
  2008
              
              
              2007Quarter
              
              High
              
              
              Low
              
              
              High
              
              
              Low1st
              
              $
              9.13
              
              
              $
              5.61
              
              
              $
              13.09
              
              
              $
              9.692nd
              
              $
              6.95
              
              
              $
              1.97
              
              
              $
              12.65
              
              
              $
              10.183rd
              
              $
              3.69
              
              
              $
              1.28
              
              
              $
              11.50
              
              
              $
              9.004th
              
              $
              4.66
              
              
              $
              1.50
              
              
              $
              10.85
              
              
              $
              7.13
  Holders
  As of
February 2, 2009, there were approximately 4,257 stockholders of record of
common stock.
  Dividends
  Historically,
we have not declared cash dividends on our common stock. In addition, our debt
indentures and our Letter of Credit and Revolving Line of Credit Facility
restrict our ability to pay cash dividends. In particular, under our Letter
of Credit and Revolving Line of Credit Facility, our ability to pay
dividends is restricted to a defined amount available for restricted payments
including dividends, which amount is determined based on a variety of
factors including 50% of our consolidated net income for the applicable
reference period and our proceeds from the sale of capital stock, including
pursuant to the conversion of indebtedness to our capital stock, all as
defined. We intend to retain earnings to finance the development and growth
of our business. Accordingly, we do not anticipate that any cash dividends will
be declared on our common stock for the foreseeable future. Future payments of
cash dividends, if any, will depend on our financial condition, results of
operations, business conditions, capital requirements, restrictions contained in
agreements, future prospects, and other factors deemed relevant by our Board of
Directors.
  Securities
Authorized for Issuance under Equity Compensation Plans
  See
Item 12 of this Report on Form 10-K below.
  Issuance
of Unregistered Securities and Repurchase of AirTran Equity
Securities
  During
the fourth quarter of the year ended December 31, 2008, we did not issue
any unregistered equity securities nor did we purchase any of our equity
securities, exclusive of any net option exercises to pay withholding taxes
and/or the exercise price of the applicable option.
 
  33
 ITEM 6.                      SELECTED
FINANCIAL AND OPERATING DATA
  The
following financial information for the five years ended December 31, 2008
has been derived from our Consolidated Financial Statements. This information
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto and management’s discussion and analysis of financial
condition and results of operations included elsewhere herein. No cash dividends
per common share were declared during the five years ended December 31,
2008.
 
 Financial  Data:(in
      thousands, except per share data)
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Operating
      revenues
              
              $
              2,552,478
              
              
              $
              2,309,983
              
              
              $
              1,892,083
              
              
              $
              1,449,700
              
              
              $
              1,040,994Operating
      income (loss)
              
              
              (72,010)
              (13)
              
              
              144,160
              (15)
              
              
              40,861
              
              
              
              22,646
              
              
              
              29,073Net
      income (loss)
              
              $
              (273,829)
              (14)
              
              $
              52,683
              (16)
              
              $
              14,714
              
              
              $
              7,545
              
              
              $
              9,834
              (17)Earnings
      (loss) per common share:Basic
              
              $
              (2.51)
              
              
              $
              0.58
              
              
              $
              0.16
              
              
              $
              0.09
              
              
              $
              0.12Diluted
              
              
              (2.51)
              
              
              
              0.56
              
              
              
              0.16
              
              
              
              0.08
              
              
              
              0.11Total
      assets at year-end
              
              $
              2,062,860
              
              
              $
              2,048,466
              
              
              $
              1,603,582
              
              
              $
              1,161,543
              
              
              $
              904,792Long-term
      debt and capital lease obligations including current maturities at
      year-end
              
              $
              1,117,300
              
              
              $
              1,057,889
              
              
              $
              811,110
              
              
              $
              472,599
              
              
              $
              313,970Operating
      Data:Revenue
      passengers
              
              
              24,619,120
              
              
              
              23,780,058
              
              
              
              20,051,219
              
              
              
              16,638,214
              
              
              
              13,170,230Revenue
      passenger miles (RPM) (000s)(1)
              
              
              18,955,843
              
              
              
              17,297,724
              
              
              
              13,836,378
              
              
              
              11,301,534
              
              
              
              8,479,262Available
      seat miles (ASM) (000s)(2)
              
              
              23,809,190
              
              
              
              22,692,355
              
              
              
              19,007,416
              
              
              
              15,369,505
              
              
              
              11,977,443Passenger
      load factor(3)
              
              
              79.6
              %
              
              
              76.2
              %
              
              
              72.8
              %
              
              
              73.5
              %
              
              
              70.8
              %Break-even
      load factor(4)
              
              
              89.3
              %
              
              
              73.2
              %
              
              
              71.8
              %
              
              
              72.9
              %
              
              
              69.7
              %Average
      fare, excluding transportation taxes(5)
              
              $
              98.04
              
              
              $
              92.47
              
              
              $
              90.51
              
              
              $
              83.93
              
              
              $
              76.30Average
      yield per RPM(6)
              
              
              12.73
              ¢
              
              
              12.71
              ¢
              
              
              13.12
              ¢
              
              
              12.36
              ¢
              
              
              11.85
              ¢Passenger
      revenue per ASM (RASM)(7)
              
              
              10.14
              ¢
              
              
              9.69
              ¢
              
              
              9.55
              ¢
              
              
              9.09
              ¢
              
              
              8.39
              ¢Total
      revenue per ASM(8)
              
              
              10.72
              ¢
              
              
              10.18
              ¢
              
              
              9.95
              ¢
              
              
              9.43
              ¢
              
              
              8.69
              ¢Operating
      cost per ASM (CASM)(9)
              
              
              11.02
              ¢
              
              
              9.54
              ¢
              
              
              9.74
              ¢
              
              
              9.28
              ¢
              
              
              8.45
              ¢Gallons
      of fuel consumed (000’s)
              
              
              367,169
              
              
              
              359,759
              
              
              
              310,926
              
              
              
              255,643
              
              
              
              205,927Average
      stage length (miles) (10)
              
              
              728
              
              
              
              695
              
              
              
              652
              
              
              
              651
              
              
              
              628Average
      passenger length of haul(11)
              
              
              770
              
              
              
              727
              
              
              
              690
              
              
              
              679
              
              
              
              644Average
      cost of aircraft fuel per gallon, including fuel taxes and into-plane
      fees
              
              $
              3.25
              
              
              $
              2.23
              
              
              $
              2.17
              
              
              $
              1.81
              
              
              $
              1.22Average
      daily utilization (hours: minutes) (12)
              
              11:00
              
              
              11:00
              
              
              11:06
              
              
              11:00
              
              
              10:54Number
      of operating aircraft in fleet at end of year
              
              
              136
              
              
              
              137
              
              
              
              127
              
              
              
              105
              
              
              
              87
 34
  Note: All
monetary amounts listed below are pre-tax.
 (1)
              The
      number of scheduled revenue miles flown by
  passengers
 (2)
              The
      number of seats available for passengers multiplied by the number of miles
      the seats are flown
 (3)
              The
      percentage of aircraft seating capacity that is actually utilized (RPMs
      divided by ASMs)
 (4)
              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)
              The
      average amount one passenger pays to fly one
  mile
 (7)
              Passenger
      revenue divided by ASMs
 (8)
              Total
      revenue divided by ASMs
 (9)
              Operating
      expenses divided by ASMs
 (10)
              Total
      aircraft miles flown divided by departures(11)
              RPMs
      divided by revenue passengers
 (12)
              The
      average amount of time per day that an aircraft flown is operated in
      revenue service
 (13)
              Includes
      an operating expense reduction of $23.2 million related to the gain on
      sale of assets, principally gains on the sale of aircraft, and an
      operating expense of $8.4 million related to an impairment of
      goodwill.
  (14)
              Includes
      an operating expense reduction of $23.2 million related to the gain on
      sale of assets, principally gains on the sale of aircraft, an operating
      expense of $8.4 million related to an impairment of goodwill, and a
      non-operating expense of $150.8 million related to losses on fuel
      derivative instruments.(15)
              Includes
      an operating expense reduction of $6.2 million related to the gain on the
      sale of two B737 aircraft.
 (16)
              Includes
      an operating expense reduction of $6.2 million related to the gain on the
      sale of two B737 aircraft and non-operating expense of $10.7 million
      related to costs associated with the proposed acquisition of Midwest Air
      Group, Inc. (Midwest), including exchange offer
  expenses.
 (17)
              Includes
      a $1.3 million benefit related to our unsuccessful bid for certain leased
      gates and other assets of another airline at Chicago-Midway airport and
      $1.5 million of additional fuel expense related to prior
      periods
  35
   ITEM 7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  FORWARD-LOOKING
STATEMENTS
  The
information contained in this section has been derived from our historical
financial statements and should be read together with our historical financial
statements and related notes included elsewhere in this document. The discussion
below contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve risks and uncertainties including, but not limited to: consumer demand
and acceptance of services offered by us, our ability to achieve and maintain
acceptable cost levels, fare levels and actions by competitors, regulatory
matters, general economic conditions, commodity prices, and changing business
strategies. Forward-looking statements are subject to a number of factors that
could cause actual results to differ materially from our expressed or implied
expectations, including, but not limited to: our performance in future periods,
our ability to generate working capital from operations, our ability to take
delivery of and to finance aircraft, the adequacy of our insurance coverage, and
the results of litigation or investigation. Our forward-looking statements often
can be identified by the use of terminology such as “anticipates,” “expects,”
“intends,” “believes,” “will” or the negative thereof, or variations thereon or
comparable terminology. Except as required by law, we undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
  OVERVIEW
 
 All of
the flight operations of AirTran Holdings, Inc. (the Company, AirTran, or
Holdings) are conducted by our wholly-owned subsidiary, AirTran Airways, Inc.
(AirTran Airways or Airways) (collectively we, our, or us). AirTran Airways is
one of the largest low cost scheduled airlines in the United States in terms of
departures and seats offered. We operate scheduled airline service throughout
the United States with a concentration in the eastern United States. A majority
of our flights originate and terminate at our largest hub in Atlanta,
Georgia. As of December 31, 2008, we operated 86 Boeing 717-200 aircraft (B717)
and 50 Boeing 737-700 aircraft (B737) offering approximately 700 scheduled
flights per day to 56 locations in the United States. Additionally, we have
announced we will commence service to Cancun, Mexico and Branson, Missouri in
the first half of 2009 and may add additional markets later in the year. We
offer very competitive fares by concentrating on keeping our unit costs low. The
enthusiasm and skill of our employees has also been a key to our
success.
 
 After a
successful 2007, during which we earned net income of $52.7 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 deteriorated, jet fuel prices increased to record high
levels, and the credit markets tightened. During 2008, we undertook a variety of
actions to respond to the challenges of the high and volatile cost of jet fuel
and the deteriorating U.S. economic environment, including: reducing capacity
starting in September 2008; deferring new aircraft deliveries; selling aircraft;
reducing other capital expenditures; implementing increases in certain fares and
ancillary fees; entering into a variety of derivative financial arrangements to
hedge the cost of fuel; and managing our costs and employment levels. We
also completed capital market transactions exceeding $375 million,
including: placing convertible debt and common equity securities; entering into
a letter of credit facility to reduce our exposure to holdbacks of cash
remittances by a credit card processor; and obtaining a $90 million revolving
line of credit.
 
 Despite
our efforts to increase unit revenues, control costs, and reduce capacity, after
six consecutive years of profitability, we reported an operating loss of
$72.0 million and a net loss of $273.8 million for 2008. Included in our
results are gains on the sale of assets of $23.2 million, an impairment charge
to write-off goodwill of $8.4 million and a non-operating loss on derivative
financial instruments of $150.8 million. The 2008 loss was primarily
attributable to record high fuel prices during the first nine months of 2008.
However, during the fourth quarter of 2008 jet fuel prices decreased
dramatically and consequently we reported operating income for the fourth
quarter. The fourth quarter also includes non-operating losses on derivative
financial instruments which resulted in a pre-tax loss and a net loss for the
quarter.
 
 36
 Recent
Operating Results
 
 As
summarized below, our fourth quarter of 2008 operating income improved compared
to both the first nine months of 2008 and the fourth quarter of 2007. This
improvement reflects reduced fuel prices as well as the adjustments we made to
our business strategy, including the capacity reductions we implemented
beginning in September 2008.
  Selected
      Unaudited Financial and Operating Data(In
      thousands, unless otherwise noted)Three
      months ended December 31, 2008
              
              
              Nine
      months ended
                September 30, 2008
              
              
              Three months ended
      December 31, 2007Operating
      revenue
              
              $
              589,415
              
              
              $
              1,963,063
              
              
              $
              583,836Operating
      income (loss)
              
              
              54,854
              
              
              
              (126,864
              )
              
              
              14,893Net
      (gain) loss on derivative financial instruments
              
              
              147,686
              
              
              
              3,150
              
              
              
              1,695Net loss
              
              
              (118,391
              )
              
              
              (155,438
              )
              
              
              (2,171
              )Available
      seat miles (ASM)
              
              
              5,359,177
              
              
              
              18,450,013
              
              
              
              5,732,017Total
      revenue per ASM - in cents
              
              
              11.00
              ¢
              
              
              10.64
              ¢
              
              
              10.19
              ¢Operating
      cost per ASM - in cents
              
              
              9.97
              ¢
              
              
              11.33
              ¢
              
              
              9.93
              ¢Average
      cost of aircraft fuel per gallon - in dollars
              
              $
              2.32
              
              
              $
              3.53
              
              
              $
              2.45
  Our
losses for the year ended December 31, 2008, were driven primarily by record
high jet fuel prices during the first nine months. During the first nine months
of 2008, jet fuel prices (including taxes and into-plane fees) averaged $3.53
per gallon; however, during the fourth quarter jet fuel prices decreased to an
average of $2.32 per gallon. The reduction in the average price of jet fuel
resulted in a $101.6 million decrease in our aircraft fuel cost during the
fourth quarter compared to what fuel cost would have been had fuel prices
remained at the average level experienced during the first nine months. Due
largely to the decrease in average fuel prices, we reported fourth quarter
operating income of $54.9 million compared to an operating loss of $126.9
million for the first three quarters of 2008. Our fourth quarter operating
income was also favorably impacted by a 3.4 percent improvement in unit revenue
as measured by total revenue per available seat mile compared to the first nine
months of 2008. Our fourth quarter 2008 unit revenue also improved by 7.9
percent compared to the fourth quarter of 2007. The unit revenue improvement was
attributable to both increased average fare and ancillary revenue levels.
Additionally, our aggregate non-fuel operating costs decreased $7.8 million
compared to the fourth quarter of 2007 as we reduced capacity as measured by
available seat miles by 6.5 percent.
 
 Due to
the decrease in crude oil prices during the fourth quarter, we reported a $147.7
million non-operating loss on derivative financial instruments compared to a
non-operating loss on derivative financial instruments of $3.1 million for the
first nine months. The fourth quarter non-operating loss on derivative financial
instruments combined with interest expense caused us to report a loss before
income taxes of $114.2 million for the fourth quarter.
 
 37
 Implementation
of our Business Strategy in 2008
 
 Prior to
2008, we positioned ourselves as a growth airline. We successfully grew our
business at double-digit rates annually from 2000 through 2007 and at a rate of
4.9 percent in 2008. Nevertheless, in 2008, to respond to the challenges of a
volatile fuel cost environment in much of 2008, a weaker macroeconomic
environment, and very adverse capital market conditions, we recast our plans in
order to defer previously planned growth. We implemented reductions in fleet
size, capacity, and capital expenditures. We reduced capacity principally by
deferring scheduled aircraft deliveries, reducing utilization, and by selling
B737 aircraft. We reduced our capacity (as measured by available seat miles) in
the last four months of 2008 from a planned ten percent increase to a reduction
of approximately seven percent compared to the comparable period of 2007. We are
also reducing 2009 capacity. By adjusting our business strategy and implementing
revised tactics, we believe we have positioned AirTran Airways to deal with the
volatile fuel cost environment, current economic recession, and reduction in
consumer demand. We expect to be ready to resume our historical growth strategy
when the business environment allows. We made the following adjustments to our
strategy to respond to the challenges of a volatile fuel cost environment and
weaker macroeconomic conditions.
 
 Reduce the Size of Our
Operationand Focus on
Strengthening Established Markets. We recast our plans in order to defer
previously planned growth and effected strategic reductions in fleet size,
capacity, and operations.
 
 More
specifically, we reduced capacity by deferring scheduled aircraft deliveries and
by selling B737 aircraft. In 2008, we entered into agreements to defer delivery
dates for 37 B737 aircraft originally scheduled for delivery between 2008 and
2012 to delivery dates between 2013 and 2016. As of December 31, 2008, we had on
order 55 B737 aircraft with delivery dates between 2009 and 2016. We have four
B737 aircraft scheduled for delivery in 2009 and no aircraft scheduled for
delivery in 2010. Two of the 2009 scheduled aircraft deliveries are being sold
upon delivery. During 2008, we sold eight B737 aircraft and recognized an
aggregate gain of $20.1 million related to the sales of these aircraft. We may
reduce or delay further growth in our fleet and are evaluating possible net
reductions in our current fleet including via the sale of additional
aircraft.
 
 We
anticipate several benefits from postponing our growth and reducing the size of
our operation by deferring deliveries and selling aircraft. First, we avoid the
revenue ramp-up period associated with entering new markets or expanding service
in existing markets. Second, the sale of an aircraft generally results in a cash
benefit because the sales proceeds tend to exceed the indebtedness associated
with each sold aircraft. Third, the deferral of aircraft deliveries postpones
our obligation to make pre-delivery deposits and to arrange and incur permanent
aircraft financing.
 
 Continue to Aggressively Cut
Costsand Reduce
Non-aircraft Capital Expenditures. We reduced our average non-fuel
operating costs per available seat mile for each of the six years in the 2002 to
2007 period. During 2008, we managed our employment levels to match our planned
capacity. For the year as a whole, our non-fuel unit cost was relatively flat.
In addition to continuing to seek ways to cut operating costs, we reduced
non-aircraft capital expenditures for 2008 by deferring or eliminating a
variety of discretionary capital expenditures.
 
 Increase Cash Resources.
During 2008, we completed capital market transactions exceeding
$375 million, including: placing convertible debt and common equity
securities; executing a letter of credit facility to reduce our exposure to
holdbacks by a credit card processor; and arranging a $90 million revolving line
of credit. 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 from these two offerings aggregated $147 million. In July, 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 favor of our
largest card processor. The provision of the initial letter of credit resulted
in a reduction in the cash remittances which such credit card processor would
have otherwise been entitled to withhold from us. In October 2008, the letter of
credit facility was amended to also provide for a revolving line of credit of up
to $90 million. Our repayment obligations with respect to the letter of
credit and revolving line of credit facility are collateralized by certain of
our assets. As of December 31, 2008, $90 million of the line of credit had been
drawn by us and our unrestricted cash and short-term investments aggregated
$335.0 million ($340.5 million including long-term investments).
 
 38
 Mitigate Our Fuel Exposure.
We continued to seek to mitigate our fuel cost exposure by entering into a
variety of hedging arrangements that provide partial protection against price
increases. For every dollar increase per barrel in crude oil or refining costs,
our fuel expense for 2009, before the impact of our derivative financial
instruments, would increase approximately $9.0 million, based on our projected
level of operations. We hedge our fuel cost exposure with a portfolio of
swaps and various types of options using both crude oil and jet fuel as the
underlying commodity. 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. One effect of the recent decreases in the prices of crude oil and
jet fuel has been the need for us to post significant cash collateral related to
certain of our fuel related derivative agreements. As of December 31, 2008, we
had provided counterparties with collateral aggregating $69.2 million, which
represented approximately 80 percent of the aggregate fair value of our fuel
related derivative financial instrument obligations and our interest rate
swap arrangements. Also, in response to the decline in fuel prices, we have
elected to unwind certain of our other derivative agreements. During the fourth
quarter of 2008, we realized losses of $109 million (of which $41.2 million
was paid in early January 2009) to unwind certain derivative financial
arrangements pertaining to 2009 fuel requirements which decreased the gallons
under hedges to approximately 9.1 percent of our expected 2009 fuel
requirements, which will continue to provide partial protection against price
increases. Since September 30, 2008, we have revised the composition of our
portfolio of fuel related derivative financial instruments in part to reduce our
obligation to provide collateral to counterparties in the event of a decrease in
the price of the underlying commodity. More specifically, as of February 2,
2009, our portfolio contained relatively fewer collars and relatively more
purchased calls.
 
 Increase Revenues. We
implemented a number of fare increases beginning in September 2007, which
partially mitigated the impact of record high fuel prices during the first nine
months of 2008. In addition to increasing fares, we also increased surcharge and
ancillary revenues. We implemented fuel surcharges and introduced fees for
advance and priority seat selection, call center utilization, checked baggage
and the purchase, extension or transfer A+ Rewards. As a result, our total
revenue per available seat mile metrics for the fourth quarter of 2008, and for
2008 as a whole, were record highs.
 
 Provide Quality Low Fare
Service. Despite the need to make adjustments to our business strategy in
2008, our strategy continues to place strong emphasis on providing superior and
friendly service. While third party assessments for 2008 are not yet available,
in April 2008, AirTran Airways was rated first in the highly regarded annual
Airline Quality Rating (AQR) study, developed in 1991 as an objective method for
assessing airline quality. AirTran Airways, ranked second the prior year,
was one of only four airlines to improve its AQR score between 2006 and 2007.
Our most recent Airline Quality Rating reflects monthly scores for the calendar
year 2007 and is based on four major areas: on-time performance, denied
boardings, mishandled baggage, and customer complaints. Researchers at the
University of Nebraska at Omaha Aviation Institute and the W. Frank Barton
School of Business at Wichita State University conduct the study each
year.
 
 
 39
 Other
2008 Accomplishments
 
 During
2008, we:
 
 ·
              Carried
      in excess of 24.6 million revenue
passengers;
 
 ·
              Joined
      the major trade association for the industry, Air Transport Association
      (ATA), while also retaining membership in the Air Carrier Association of
      America (ACAA);
 
 ·
              Initiated
      service to Burlington, Vermont; Columbus, Ohio; Harrisburg, Pennsylvania;
      San Antonio, Texas; and San Juan, Puerto
Rico;
 
 ·
              Launched
      22 new non-stop routes such as Milwaukee-New York LaGuardia; and
      Baltimore/Washington International – Los Angeles,
    California;
 
 ·
              Developed
      new functionality for A+ Rewards members at http://www.airtran.com
      including the ability to purchase additional credits, extend expiring
      credits, or give credits to other
members;
 
 ·
              Increased
      the value of the A+ Rewards Elite program by adding upgrade opportunities
      for Elite fliers at the gate and improving conveniences at the airport;
      and
 
 ·
              Announced
      that we will begin service to Branson, Missouri and Cancun, Mexico in
      2009.
 
 We expect
our mix of low fares, excellent customer service, an affordable Business Class
product, and one of the youngest all-Boeing aircraft fleets will provide product
value that customers will continue to find attractive.
 
 2009
Outlook
 
 We will
face challenges during 2009. Managing costs and increasing unit revenues in the
face of volatile fuel costs and a weak economy will continue to be a primary
focus. While fuel market prices have recently decreased dramatically, fuel
prices remain volatile and may again increase in 2009. Additionally, our 2009
revenues may be adversely impacted by recessionary macroeconomic conditions in
the United States. The pilots’ collective bargaining agreement became amendable
in 2005 and is currently in mediation and the flight attendants’ collective
bargaining agreement became amendable on December 1, 2008; the impact on our
operating results of any new collective bargaining agreement is
uncertain.
 
 Based on
our current outlook, we expect to reduce capacity as measured by available seat
miles by approximately four percent for 2009 compared to 2008.
Additionally, we expect our 2009 non-fuel unit operating costs per available
seat mile to increase six to seven percent compared to 2008. We expect our
non-fuel unit operating costs to increase primarily due to: increases in
aircraft maintenance costs due to the aging of both aircraft types, a contract
cost increase for B717 engine repairs, and an increased number of heavy airframe
checks for our B717 aircraft; higher employee compensation costs due to higher
wage rates attributable to higher average employee seniority; increased pilot
training expenses; higher airport rents and landing fees; and a higher
percentage of leased aircraft. Our fuel costs in the first quarter 2009 are
estimated to be between $1.80 and $1.85 per gallon, including taxes,
transportation, and into-plane fees and excluding the impact of our fuel risk
management program. This assumes $47 a barrel crude oil and an $18 jet fuel
refining margin.
 
 Air
travel in our markets tends to be seasonal, with the highest levels occurring
during the winter months to Florida and the summer months to the Northeastern
and Western United States. The second quarter tends to be our strongest revenue
quarter.
 
 40
 
 RESULTS
OF OPERATIONS
  2008
Compared to 2007
  Summary
  We
reported an operating loss of $72.0 million, net loss of $273.8 million,
and loss per diluted common share of $2.51 for 2008. Included in our results are
gains on the sale of assets of $23.2 million, an impairment charge to write-off
goodwill of $8.4 million and a non-operating loss on derivative financial
instruments of $150.8 million. The 2008 losses were attributable primarily to
record high fuel prices during the first nine months of 2008. However, during
the fourth quarter jet fuel prices decreased dramatically and consequently we
reported a fourth quarter operating profit of $54.9 million. For 2007, we
recorded operating income of $144.2 million, net income of $52.7 million and
diluted earnings per common share of $0.56. Included in our results for 2007 are
gains on the sale of aircraft of $6.2 million, $0.3 million loss on derivative
financial instruments, and the write-off of $10.7 million of expenses related to
the attempted acquisition of Midwest Air Group (Midwest Airlines).
  Operating
Revenues
  Our
operating revenues for the year ended December 31, 2008 increased $242.5
million (10.5 percent), primarily due to a 9.8 percent increase in passenger
revenues. The increase in passenger revenues was largely due to a 9.6 percent increase in
passenger traffic as measured by revenue passenger miles (RPMs). Average yield
per RPM was 12.73 cents, 0.2 percent higher than the year ended December 31,
2007. During the year ended December 31, 2008, our average passenger length of
haul increased 5.9 percent; an increase in average passenger length of haul
tends to increase average fare and tends to reduce average yield. Load factor
increased to 79.6 percent, 3.4 points higher than the prior year, resulting in a
4.6 percent increase in passenger revenue per ASM versus the year ended December
31, 2007. Total unit revenue increased 5.3 percent as a result of stronger loads
and increases in ancillary revenues.
 
 During
2008, we moderated our growth by taking delivery of only eight B737 aircraft,
selling eight B737 aircraft, and terminating early the lease of one B717
aircraft, bringing our total fleet to 136 aircraft at year-end. While the
aircraft fleet size was reduced by one unit, the average fleet size was 3.7
percent higher in 2008 compared to 2007. As a result, our capacity, as measured
by available seat miles (ASMs), increased 4.9 percent. Our traffic, as measured
by RPMs, increased 9.6 percent, resulting in a 3.4 percentage point increase in
passenger load factor to 79.6 percent.
  Other
revenues for 2008 increased $27.8 million (25.0 percent). Other revenues include
change and cancellation fees, direct booking fees, revenues derived from the
sale of frequent flyer credits, additional and 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 baggage fees. In late 2007, we ceased offering cargo
services. Other revenues for the year ended December 31, 2007 included $3.4
million of cargo revenue.
 
 Operating
Expenses
  Our
operating expenses for the year ended December 31, 2008 increased $458.7
million (21.2 percent) and increased 15.5 percent on an operating cost
per ASM basis (CASM). Our financial results were significantly affected by the
price of fuel and volatility of the price of fuel.
 
 
 41
  In
general, our operating expenses are significantly affected by changes in our
capacity, as measured by ASMs. The following table presents our unit costs,
defined as operating expense per ASM (CASM), for the indicated
periods:
  Year ended
                December 31,
              
              
              Percent
                Increase
                (Decrease)2008
              
              
              2007Aircraft
      fuel
              
              
              5.02
              ¢
              
              
              3.54
              ¢
              
              
              41.8
              %Salaries,
      wages and benefits
              
              
              1.99
              
              
              
              1.99
              
              
              
              —Aircraft
      rent
              
              
              1.02
              
              
              
              1.07
              
              
              
              (4.7
              )Maintenance,
      materials and repairs
              
              
              0.68
              
              
              
              0.67
              
              
              
              1.5Distribution
              
              
              0.42
              
              
              
              0.39
              
              
              
              7.7Landing
      fees and other rents
              
              
              0.58
              
              
              
              0.54
              
              
              
              7.4Aircraft
      insurance and security services
              
              
              0.09
              
              
              
              0.10
              
              
              
              (10.0
              )Marketing
      and advertising
              
              
              0.17
              
              
              
              0.18
              
              
              
              (5.6
              )Depreciation
      and amortization
              
              
              0.25
              
              
              
              0.21
              
              
              
              19.0Gain
      on sale of assets
              
              
              (0.10
              )
              
              
              (0.03
              )
              
              
              233.3Impairment
      of goodwill
              
              
              0.04
              
              
              
              —
              
              
              
              —Other
      operating
              
              
              0.86
              
              
              
              0.88
              
              
              
              (2.3
              )Total
      CASM
              
              
              11.02
              ¢
              
              
              9.54
              ¢
              
              
              15.5
              %
  Aircraft fuel increased 41.8
percent on a cost per ASM basis. During 2008, our fuel price per gallon,
including taxes and into-plane fees, increased 45.7 percent from $2.23 during
2007 to $3.25 during 2008. During 2008, we realized $15.7 million in gains from
fuel related derivative financial instruments which reduced fuel
expenses.
 
 Distribution expense
increased 7.7 percent on a cost per ASM basis primarily due to higher credit
card fees paid to various credit card companies.
 
 Landing fees and other rents
increased 7.4 percent on a cost per ASM basis primarily due to facility rental
rate increases by various airports.
 
 Aircraft insurance and security
servicesexpense decreased 10.0
percent on a cost per ASM basis primarily due to negotiated lower rates for hull
and liability insurance.
 
 Marketing and advertising
costs decreased 5.6 percent on a cost per ASM basisbecause our ASMs increased
more than marketing and advertising costs.
  Depreciationand
amortization increased 19.0 percent on a cost per ASM basis
primarily because a higher proportion of our fleet was owned during 2008
compared to 2007. Also, additions to computer equipment and software increased
depreciation and amortization expense.
 
 Gain on sale ofassets for the year ended
December 31, 2008 was $23.2 million compared to $6.2 million for the year ended
December 31, 2007. Gain on sale of assets in each year consists primarily of
gains on aircraft sales. During the years ended December 31, 2008 and 2007, we
sold eight and two B737 aircraft, respectively.
 
 
 42
 
   Impairment of goodwillexpense for the year ended
December 31, 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 our
recent operating losses were indicators that our intangible assets may have been
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 impaired. Consequently, we recorded a charge
of $8.4 million to write-off the financial statement carrying value of all of
our goodwill during 2008.
  Other
(Income) Expense
  Other (income) expense,
net increased by $163.1 million to $219.9 million for 2008 compared
to 2007. We reported losses on derivative financial instruments of $150.8
million for 2008, compared to losses of $0.3 million for 2007. Interest income
decreased $16.7 million due to lower interest rates. Also, during 2008, we
recorded a $5.2 million charge to interest income related to realized and
unrealized losses on investments. Interest expense, including amortization of
debt issuance costs, increased by $2.6 million primarily due to the net effects
of the following: the favorable impact of lower interest rates applicable to
variable interest rate debt due to declines in market interest rates; the
unfavorable impact of debt service for our 5.5% convertible senior notes issued
in May 2008; the unfavorable impact of debt service for our letter of credit and
revolving line of credit facility obtained in 2008; and a $2.4 million charge
related to debt issuance costs written off and prepayment penalties related to
debt repayments from B737 aircraft sold during 2008. Capitalized interest
decreased by $3.9 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. Other (Income) Expense for 2007
includes $10.7 million to write-off the costs associated with the attempted
acquisition of Midwest Airlines which was terminated in August
2007.
 
 Income
Tax Expense (Benefit)
  Our
effective rate was 6.2 percent and 39.7 percent for the years ended
December 31, 2008 and 2007, respectively.Our effective tax rate can
differ from the 37.2 percent composite statutory tax rate (35 percent federal
statutory rate plus the 2.2 percent effective state tax rate) due to changes in
the valuation allowance on our deferred tax assets, certain expenses which are
not deductible for income tax purposes and non-recurring discrete items related
to restricted stock vesting. Non-deductible expense items and discrete items
tend to increase the effective tax rate when pre-tax income is reported and tend
to decrease the effective tax rate when a pre-tax loss is reported. Also, during
2008, we recorded an $8.4 million charge to write-off all of the carrying value
of our goodwill. Because this write-off is not deductible for income tax
purposes, we did not record a tax benefit and consequently our effective tax
rate was reduced.
 
 Income
tax benefits recorded on losses result in deferred tax assets for financial
reporting purposes. We are required to provide a valuation allowance for
deferred tax assets to the extent management determines that it is more likely
than not that such deferred tax assets will ultimately not be realized. We
expect to realize a portion of our deferred tax assets (including a portion of
the deferred tax asset associated with loss carryforwards) through the reversal
of existing temporary differences. However, we have determined that it is more
likely than not that our deferred tax assets in excess of our deferred tax
liabilities will not ultimately be realized, in part due to our cumulative
losses over the past three years, and that we are therefore required to provide
a valuation allowance on our deferred tax assets in excess of our deferred tax
liabilities. As a
result, beginning with the third quarter of 2008, our losses were not reduced by
any tax benefit. Consequently, our effective tax rate for 2008 was substantially
lower than the statutory rate. As of December 31, 2008, we had recorded $97.2
million of valuation allowance related to our net deferred tax
assets.
 
 
 43
 Regardless
of the financial accounting for income taxes, our net operating loss
carryforwards are currently available for use on our income tax returns to
offset future taxable income.
 
 2007
Compared to 2006
  Summary
  We
reported operating income of $144.2 million, net income of $52.7 million and
diluted earnings per common share of $0.56 for the year ended December 31,
2007. For 2006, we reported operating income of $40.9 million, net income of
$14.7 million, and diluted earnings per common share of $0.16.
 
 Operating
Revenues
  Our
operating revenues for the year ended December 31, 2007, increased $417.9
million (22.1 percent), primarily due to a 21.2 percent increase in passenger
revenues. The increase in passenger revenues was largely due to a 25.0 percent
increase in passenger traffic as measured by revenue passenger miles (RPMs), net
of the impact of a decrease in our average yield per RPM of 3.1 percent to 12.71
cents. The decrease in yield resulted primarily from an increase in the average
stage length of 6.6 percent to 695 miles. Our average fare increased 2.2 percent
to $92.47. The 3.4 percentage point increase in load factor combined with the
3.1 percent decrease in yield resulted in a 1.5 percent increase in passenger
unit revenues as measured by passenger revenue per available seat mile (RASM) to
9.69 cents.
  During
the year ended December 31, 2007, we took delivery and placed in service
ten B737 aircraft. As a result, our capacity, as measured by available seat
miles (ASMs), increased 19.4 percent. The combination of our 19.4 percent
increase in capacity and 25.0 percent increase in traffic resulted in a 3.4
percentage point increase in passenger load factor to 76.2 percent.
  Other
revenues for 2007 increased $34.3 million (46.8 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 was attributable primarily to increases
in change and cancellation fees, direct booking fees, and sales of frequent
flyer credits.
  Operating
Expenses
  Our
operating expenses for the year ended December 31, 2007, increased $314.6
million (17.0 percent), but decreased 2.1 percent on an operating cost per ASM
basis (CASM). Our financial results were significantly affected by the price of
fuel and volatility in the price of fuel.
 
 
 44
 
 In
general, our operating expenses are significantly affected by changes in our
capacity, as measured by ASMs. The following table presents our unit costs,
defined as operating expense per ASM, for the indicated periods:
 Year ended
                December 31,
              
              
              Percent
                Increase
                (Decrease)2007
              
              
              2006Aircraft
      fuel
              
              
              3.54
              ¢
              
              
              3.55
              ¢
              
              
              (0.3
              )%Salaries,
      wages and benefits
              
              
              1.99
              
              
              
              2.05
              
              
              
              (2.9
              )Aircraft
      rent
              
              
              1.07
              
              
              
              1.21
              
              
              
              (11.6
              )Maintenance,
      materials and repairs
              
              
              0.67
              
              
              
              0.66
              
              
              
              1.5Distribution
              
              
              0.39
              
              
              
              0.37
              
              
              
              5.4Landing
      fees and other rents
              
              
              0.54
              
              
              
              0.53
              
              
              
              1.9Aircraft
      insurance and security services
              
              
              0.10
              
              
              
              0.14
              
              
              
              (28.6
              )Marketing
      and advertising
              
              
              0.18
              
              
              
              0.24
              
              
              
              (25.0
              )Depreciation
      and amortization
              
              
              0.21
              
              
              
              0.16
              
              
              
              31.3Gain
      on sale of assets
              
              
              (0.03
              )
              
              
              —
              
              
              
              —Other
      operating
              
              
              0.88
              
              
              
              0.83
              
              
              
              6.0Total
      CASM
              
              
              9.54
              ¢
              
              
              9.74
              ¢
              
              
              (2.1
              )%
  Aircraft fuel decreased 0.3
percent on a cost per ASM basis. Our fuel price per gallon, including taxes and
into-plane fees, increased 2.8 percent from $2.17 during 2006 to $2.23 during
2007. However, average fuel cost per ASM was favorably impacted by increases in
both average stage length and average aircraft size, each of which tends to
reduce fuel consumption per ASM.
  Salaries, wages and benefits
decreased 2.9 percent on a cost per ASM basis, primarily due to gains in
productivity driven by an increase in ASMs which exceeded the impact of the
increase in salaries, wages, and benefits. We employed approximately 8,200
full-time equivalent employees as of December 31, 2007, representing an
11.1 percent increase over the comparable date in 2006.
  Aircraft rentdecreased 11.6
percent on a cost per ASM basis. From December 31, 2006 to December 31,
2007, we took delivery of ten B737 aircraft. As a result, our capacity, as
measured by ASMs, increased 19.4 percent. However, of the ten aircraft we took
delivery of, none were leased. As a result, aircraft rent expense increased only
5.2 percent from 2006 to 2007.
 
 Aircraft insurance and security
services decreased 28.6 percent on a cost per ASM basis. While the
addition of ten new Boeing aircraft to our fleet during the year ended
December 31, 2007 increased our total insured hull value and related
insurance premiums, the decrease on a cost per ASM basis was primarily due to a
reduction in hull and liability negotiated insurance rates for our 2007 fleet
coverage.
  Marketing and advertising
costs decreased 25.0 percent on a cost per ASM basis, primarily due to a
reduction in promotional costs.
  Depreciationand amortization increased
31.3 percent on a cost per ASM basis, primarily due to the addition of ten owned
B737 aircraft for the year ended December 31, 2007, as well as the purchase
of spare aircraft parts for the B737 fleet.
  Gain on sale ofassets for the year ended
December 31, 2007, was $6.2 million. In April 2007, we took delivery of and
in May 2007, we subsequently sold two aircraft and recognized a gain of $6.2
million related to the sale of these two aircraft. During the year ended
December 31, 2006, we did not sell any aircraft.
 
 Other operating expense
increased 6.0 percent on a cost per ASM basis. The increase is attributable in
large part to increased ground handling services, contracted services, and
de-icing operations.
 
 
 45
 Other
(Income) Expense
  Other (income) expense, net
increased by $40.6 million. Interest income decreased by $1.3 million. Interest
expense, including amortization of debt issuance costs, increased by $24.7
million primarily due to the effect of aircraft debt financings entered into
during 2006 and 2007. Capitalized interest decreased by $3.7 million due to
fewer future aircraft deliveries resulting in lower pre delivery deposits
(PDPs). 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.
  Net
unrealized (gains) losses on derivative financial instruments in 2007 were $0.3
million. The net unrealized (gains) losses are attributable to the net of $2.9
million of unrealized losses on interest rate swap arrangements and $2.6 million
of unrealized gains on fuel related derivatives.
 
 On
January 11, 2007, we commenced an exchange offer for all of the outstanding
shares of Midwest Airlines. On August 12, 2007, we announced that our
exchange offer for all of the outstanding shares of Midwest Airlines had
terminated and on August 17, 2007, we announced that we had terminated all
our efforts to acquire Midwest Airlines in a negotiated transaction. As of
September 30, 2007, costs associated with the proposed acquisition,
including the exchange offer, were $10.7 million, and consisted primarily of
fees for attorneys, accountants, investment bankers, travel and other related
costs. All costs related to the proposed acquisition were charged to Other
(income) expense during the three months ended September 30,
2007.
  Income
Tax Expense
  Our
effective income tax rate was 39.7 percent and 40.3 percent for the years ended
December 31, 2007 and 2006, respectively.
 
 LIQUIDITY
AND CAPITAL RESOURCES
  At
December 31, 2008, we had aggregate unrestricted cash, cash equivalents, and
short-term investments of $335.0 million ($340.5 million including long-term
investments). As of December 31, 2008, we also had $86.1 million of restricted
cash. In October 2008, we obtained a Revolving Line of Credit Facility pursuant
to which we are permitted to borrow up to $90 million for general corporate
purposes, of which $90 million had been borrowed as of December 31, 2008. As of
February 2, 2009, we had no borrowings outstanding under the Revolving Line of
Credit Facility. During 2008, our primary sources of cash were from sales of
aircraft, the issuance of debt and equity securities, and borrowings under the
new Revolving Line of Credit Facility. Our primary uses were for cash used by
operating activities, purchase of aircraft and repayment of debt.
 
 2008
Operating, Financing, and Investing Activities
 
 Operating activities in 2008
used $179.9 million of cash flow compared to providing $182.1 million 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 year ended
December 31, 2008, we reported a net loss of $273.8 million compared to net
income of $52.7 million for the year ended December 31, 2007. The 2008 loss
negatively impacted cash used by operating activities.
 
 
 46
 
 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 or change to a use to the extentwe slow or reverse our
growth or the amounts held back by our credit card processors increase.During 2008, our air traffic
liability balance increased $32.1 million contributing favorably to net cash
used by operating activities. During 2007, our air traffic liability balance
increased $64.3 million, contributing to net cash flow from operating
activities. During 2008, restricted cash increased by $44.3 million, primarily
due to cash remittances held back by credit card processors and cash collateral
deposits remitted by us to counterparties to certain derivative financial
instrument arrangements. 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 2008, the $37.3 million increase in accounts
payable and accrued and other liabilities contributed favorably to net cash used
by operating activities. Accounts payable and accrued and other liabilities
increased in 2008 primarily due to increased accounts payable. During 2007, the
$46.5 million increase in accounts payable and accrued and other liabilities
contributed favorably to net cash provided by operating activities.
 
 Derivative
financial instruments significantly impacted cash flow used by operating
activities in 2008. Changes in the fair value of derivative financial
instruments, which adversely impacted our loss before taxes but did not require
the use of cash, aggregated $66 million. Also, counterparties to derivative
financial instruments held deposits made by us aggregating $48.8 million which
required the use of cash.
 
 We used
cash to increase other assets by $4.5 million and $16.4 million during the years
ended December 31, 2008 and 2007, respectively. Other assets include
prepaid aircraft maintenance and other deposits, prepaid insurance and prepaid
distribution costs. Cash was provided as we reduced prepaid fuel and
stored fuel by $16.7 million during the year ended December 31, 2008, and
was used to increase prepaid fuel and stored fuel by $27.2 million during the
year ended December 31, 2007.
  Investing activities in 2008
provided $328.7 million in cash compared to the $82.8 million used in 2007.
Purchases and sales of available for sales securities are classified as
investing activities. During 2008, sales of available for sale securities
exceeded purchases of available for sale securities by $88.7 million. As of
December 31, 2008, our investments included $17.5 million in an enhanced cash
investment fund and $7.9 million in a money market fund. The managers of each of
these funds have limited immediate redemptions and we have classified $5.5
million of our investment in the enhanced cash investment fund as long-term as
of December 31, 2008. During 2007, sales of available for sale securities
exceeded purchases of available for sale securities by $30.6 million. Investing
activities also include expenditures for aircraft deposits, the purchase of
aircraft and other property and equipment, and, in 2007, deferred costs related
to the attempted acquisition of Midwest Airlines.
  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 2008, we received $114.9 million in previously paid aircraft
deposits while paying $59.1 million in new aircraft deposits. During 2007, we
received $90.7 million in previously paid aircraft deposits while paying $90.6
million in new aircraft deposits. During 2008, we purchased eight B737 aircraft,
of which four were sold. We incurred $178.6 million of debt related to the
acquisition of aircraft. During 2008, we expended $136.4 million in cash,
primarily for the acquisition of aircraft, and for the acquisition of rotable
parts and other property and equipment. Acquisitions of other property and
equipment included additions to leasehold improvements and the purchases of
ground and computer equipment. During 2007, we purchased 12 B737 aircraft, of
which two were sold. We incurred $293.7 million of debt related to the
acquisition of these aircraft. During 2007, we expended $176.0 million in
cash, primarily for the acquisition of aircraft, and for the acquisition of
other property and equipment.
 
 47
 Financing
activities used $40.6 million of cash during 2008 compared to using
cash of $51.5 million in 2007. During 2008, we received cash from the issuance
of debt financing for aircraft pre-delivery deposits of $32.7 million and repaid
$91.1 million of pre-delivery deposit debt financing. During 2008, we repaid
$229.4 million of aircraft purchase debt financing. Also, during 2008, we
borrowed $178.6 million in non-cash transactions to finance the purchase
of six B737 aircraft. During 2007, we received cash from the issuance of
debt financing for aircraft pre-delivery deposits of $67.7 million and repaid
$61.4 million of pre-delivery deposit debt financing. During 2007, we repaid
$53.7 million of aircraft purchase debt financing. Also, during 2007, we
borrowed $293.7 million in non-cash transactions to finance the purchase of ten
B737 aircraft. See ITEM 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 5
– “Debt” for additional information regarding our outstanding debt.
 
 During
the second quarter 2008, we completed two additional 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% 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
$12.2 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
are being used to make the first six scheduled semi-annual interest payments on
the notes, and these payments are secured by a pledge of the assets in
escrow. 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.
 
 In August
2008, we entered into an amendment to our agreement with a co-branded credit
card issuer to sell a specified number of pre-award frequent flyer credits. In
2008, we received $20 million related to an early purchase of frequent flyer
credits.
 
 During
2008 and 2007, we received $3.9 million and $2.4 million, respectively, from the
issuance of common stock related to the exercise of options and the employee
stock purchase plan.
 
 Year
2009 Cash Requirements and Potential Sources of Liquidity
 
 Our 2009
cash flows will be impacted by a variety of factors including our operating
results, scheduled debt maturities, and capital expenditure requirements. In
addition, we may need cash resources to fund increases in collateral provided to
counterparties to our derivative financial instrument arrangements and our cash
flows may be adversely impacted in the event that one or more credit card
processors withholds amounts that would otherwise be remitted to
us.
 
 During
2009, we will need cash for capital expenditures and debt maturities. We
anticipate that during 2009: expenditures for acquisition of property and
equipment other than aircraft and aircraft parts will be approximately $10
million to $15 million. Payments of current maturities of existing debt and
capital lease obligations will aggregate $160.7 million in 2009, including $90
million previously borrowed under the Revolving Line of Credit
Facility.
 
 Our 2009 aircraft purchase commitments
aggregate $135.0million, including our obligation to
make pre-delivery deposit payments to Boeing.No additionalpre-deliverydeposits are due for the2009 scheduled deliveries. Although we
typically have financed a significant portion of our pre-delivery deposit
requirements with debt fromfinancial institutions, we currently have no such financing
in place for our deliveries in 2011 and beyond and we have no assurance that,
given the current status of the financial markets, satisfactory financing will
be available to us when we are obligated tomake pre-delivery depositpaymentsof $16.2 millionin 2009. We have four B737 aircraft scheduled
for delivery in 2009, two of which wehave agreed to sell to a foreign air carrier to whom we
previously sold two B737 aircraft in 2008.We have received deposits of $5.0
million from the foreign carrier.However, these pending salesare subject to customary closing
conditions, some of which are outside of our control,and therefore we cannot
giveassurances that the
closing of these transactions will occur. We have not arrangedpermanent financing for such aircraft
becausewe intend for
those aircraft to be sold to the buyer substantially contemporaneously with our
purchase from Boeing.However,wehave arranged backstop secured debt
financing to fund a portion of the purchase price of each of theother two B737 aircraftdeliveriesscheduled for 2009.
 
 48
 We may
need cash resources to fund increases in collateral provided to counterparties
to our derivative financial arrangements and our cash flows may be adversely
impacted in the event that one or more credit card processors withholds amounts
that would otherwise be remitted to us. We provide counterparties to our
derivative financial instrument arrangements with collateral when the fair value
of our obligation exceeds specified amounts. Our obligation to provide
collateral pursuant to fuel related derivative financial instrument arrangements
tends to be inversely related to fuel prices; consequently, to the extent fuel
prices decrease we will experience lower fuel expense and higher collateral
requirements. Because we hedge significantly less than 100 percent of our fuel
requirements, over time a sustained decrease in fuel prices tends to produce a
net cash benefit even though a significant decrease in fuel prices tends to
cause a net use of cash in the period when prices decrease. As of December 31,
2008 and February 2, 2009, we provided counterparties with collateral
aggregating $69.2 million and $32.2 million, respectively.
 
 Each of
our agreements with our credit card processors allows, under specified
conditions, the processor to retain cash related to future travel that such
processor otherwise would remit to us (i.e., a “holdback”). As of December
31, 2008, we were in compliance with our processing agreements and each of our
two largest processors was entitled to withhold amounts that would otherwise be
remitted to us. The largest processor was holding back no remittances because we
had obtained a letter of credit for the benefit of the processor. In the event
that, among other things, our aggregate unrestricted cash and investments
(as defined) falls below agreed upon levels, or a processor reasonably
determines that there has been a material adverse occurrence or certain other
events occur, the processor would be entitled to withhold additional cash
remittances from us; our potential cash exposure to additional holdbacks by our
largest two credit card processors based on advanced ticket sales as of December
31, 2008, after considering the $125 million letter of credit issued in favor of
our largest credit card processor, was up to a maximum of $84.0
million.
 
 We
believe we have options available to meet our debt repayments, capital
expenditures and operating commitments which may include internally generated
funds and various financing or leasing options, including the sale, lease, or
sublease of our aircraft. Additionally, we have arranged for a $90 million
Revolving Line of Credit Facility, under which $90 million and $0 was
outstanding as of December 31, 2008 and February 2, 2009, respectively. However,
our owned aircraft and our pre-delivery deposits are pledged as collateral for
outstanding debt, and we have pledged—directly or indirectly—a variety of our
assets to collateralize our obligations under our Letter of Credit and Revolving
Line of Credit Facility. The counterparty to the Revolving Line of Credit
Facility has agreed to release its lien on certain of the collateral securing
that Facility for certain purposes, which may include securing a new
financing.
 
 We
believe that our existing liquidity and projected 2009 cash flows will be
sufficient to fund our operations and other financial obligations through
December 2009. While we believe our 2009 plan is reasonable, a combination of
one or more material and significant adverse events, most of which are outside
of our direct control, could, depending on severity and duration, have an
unfavorable impact on our ability to generate sufficient cash from operations to
maintain adequate liquidity through December 31, 2009. Such adverse events could
include: significant increases in fuel prices for an extended period of time;
significant sustained declines in unit revenues as a consequence of unfavorable
macroeconomic or other conditions; or, the increase in the percentage of advance
ticket sales that are being held back by our credit card processors. If one or
more of such events were to occur, we would likely undertake a variety of
actions to mitigate the impact of such events including seeking to obtain
additional secured debt, unsecured debt or equity financing. However, our
current credit rating, the fact that we have limited operating assets to serve
as collateral for additional borrowings, and the disruption in the U.S. and
global capital markets combined to make it difficult for us to obtain financing
in the latter part of 2008.
Accordingly, to the extent unanticipated adverse events were to result in a need
for substantial additional financing, such additional debt or equity financing
might not be available to us on terms acceptable to us or at all. For further
discussions of 2009 liquidity requirements and the risks of our business, see
ITEM 1A. “RISK FACTORS.”
 
 49
 Letter
of Credit and Revolving Line of Credit Facility
  In 2008,
we, with Airways as the borrower and Holdings as the guarantor, entered into an
agreement, as amended, to provide for a combined letter of credit and revolving
line of credit facility (the Letter of Credit and Revolving Line of Credit
Facility). Under the Letter of Credit and Revolving Line of Credit Facility we
are permitted to borrow, upon two days notice, until April 30, 2010 (the
Expiration Date), up to $90 million for general corporate purposes (the
Revolving Line of Credit Facility). Also, we are entitled to the issuance
by a financial institution, until 30 days prior to the Expiration Date, of
letters of credit for the benefit of one or more of our credit card processors
(the Letter of Credit Facility). The aggregate amount of outstanding letters of
credit plus the outstanding amount borrowed under the Revolving Line of Credit
Facility is not permitted to exceed $215 million. Amounts borrowed under the
Revolving Line of Credit Facility bear interest at a rate of 12 percent per
annum and must be repaid to the extent that our aggregate unrestricted cash and
investment amount exceeds $305 million at any time. We may borrow up to twice a
month and are permitted to repay amounts borrowed at any time without penalty.
As of December 31, 2008 and February 2, 2009, we had $90 million and $0 of
outstanding borrowings under the Revolving Line of Credit Facility,
respectively. As of both December 31, 2008 and February 2, 2009, a letter of
credit for $125 million had been issued for the benefit of our largest credit
card processor.
 
 Our
obligations under the Letter of Credit and Revolving Line of Credit Facility are
secured by the pledge of — directly or indirectly — our accounts receivable;
ground equipment; aircraft parts; certain inventory; our residual interest in
owned B717 aircraft; certain real property assets, and certain other assets,
including various contract rights which include but are not limited to rights
under certain purchase and sales agreements for aircraft and derivative
financial instruments. The aggregate of amounts borrowed and outstanding letters
of credit under the Letter of Credit and Revolving Line of Credit Facility is
not permitted to exceed the estimated value of the collateral. The Letter of
Credit and Revolving Line of Credit Facility includes various covenants,
including limitations on dividends and distributions, limitations on the
incurrence of indebtedness, and limitations on mergers and acquisitions. In the
event of a change in control, as defined, the lender may require us to post cash
collateral to secure the letter of credit obligations and require us to repay
outstanding loans under the Revolving Line of Credit Facility. Drawings under
any letter of credit may be made only to satisfy our obligation to a beneficiary
credit card processor to cover chargebacks arising from tickets sold during the
period of exposure to be covered by the letter of credit, which, in the case of
the initial letter of credit, will end August 14, 2009, but is subject to
periodic extensions, at the discretion of the lender, ending not later than June
30, 2011, and is subject to earlier termination upon the occurrence of a
material adverse change in our financial condition or other like event. We
expect that the period of exposure to be covered by the initial letter of credit
will be periodically extended through December 31, 2009, in the absence of
a material adverse change in our financial condition or other like event. The
initial letter of credit will expire no later than eighteen months after the end
of the period of exposure covered. The periods of exposure to be covered by, and
expiration dates of, subsequently issued letters of credit will be determined by
mutual agreement between the lender and us.
 
 50
 In
connection with the Letter of Credit and Revolving Line of Credit Facility, on
October 31, 2008, we issued warrants to purchase approximately 4.7 million
shares of our common stock for $4.49 per share. The number of shares issuable
pursuant to the warrants is subject to adjustments depending on whether the
holder elects to pay the exercise price in cash or through delivery of warrants
with a value at least equal to the exercise price and is also subject to
adjustments for certain dilutive events as defined. The warrants expire on
October 31, 2011.
 Credit
Card Processing Arrangements
 
 We have
agreements with organizations that process credit card transactions arising from
purchasing air travel by our customers. Each of our agreements with our credit
card processors allows, under specified conditions, the processor to retain
cash related to future travel that such processor otherwise would remit to us
(i.e., a “holdback”). Holdbacks are classified as restricted cash on our
consolidated balance sheet. Our exposure to credit card holdbacks consists of
advanced ticket sales that customers purchase with credit cards. Once the
customer travels, any related holdback is remitted to us.
 
 In 2008,
we amended our agreements with our two largest credit card processors (based on
volumes processed for us). The agreement with our largest credit card processor
expires December 31, 2009. Each of the amended agreements provides that a
processor may hold back amounts that would otherwise be remitted to us in the
event that, among other things, our aggregate unrestricted cash and
investments (as defined) falls below agreed upon levels, or a processor
reasonably determines that there has been a material adverse occurrence or
certain other events occur. The amount that each processor is entitled to hold
back is determined by a combination of the level of our aggregate unrestricted
cash and investments (as defined) and our profitability. If our aggregate
unrestricted cash and investments (as defined) is less than the specified
amounts at specified testing dates, each processor is entitled to increase
amounts held back to specified percentages (ranging from 25% to 100%) of its
exposure to credit card chargebacks. To the extent such increases are funded
with unrestricted cash, the resultant reduced levels of unrestricted cash and
investments may trigger incremental holdback requirements under each of the two
processing agreements. We have the contractual right to reduce the amounts
which are otherwise withheld by our two largest credit card processors to the
extent that we provide the applicable processor with a letter or letters of
credit. As of December 31, 2008, a $125 million letter of credit had been issued
for the benefit of our largest credit card processor under our Letter of Credit
Facility and the processor was holding back no cash remittances from
us.
 
 As of
December 31, 2008, we had advanced ticket sales of approximately $223.5 million
related to all credit card sales. As of December 31, 2008, we were in compliance
with our processing agreements and based on our level of profitability and
unrestricted cash and investments, as defined, our two largest processors were
entitled to holdback 50% of their exposure to credit card chargebacks. Had we
not been in compliance with the agreements, or if our level of unrestricted cash
and investments, as defined, was lower, our potential cash exposure to
additional holdbacks by our largest two credit card processors based on advanced
ticket sales as of December 31, 2008, after considering the $125 million letter
of credit issued in favor of our largest credit card processor, was up to a
maximum of $84.0 million. Our levels of unrestricted cash and air traffic
liability are highly seasonal reaching their highest levels in the early summer
and late fall and reaching their lowest levels in the winter; accordingly, the
amounts potentially withheld by our credit card processors are also higher, and
in some cases substantially higher, during certain times of the year. Our future
aggregate cash and investments will be dependent on, among other factors, our
future profitability, including the cost of fuel, the extent of cash collateral
related to derivative financial instruments we may be required to fund, the
level of advance ticket sales, our borrowing availability under our Revolving
Line of Credit Facility, and the continued availability of our Letter of Credit
Facility. While a decrease in our unrestricted cash and investments could result
in additional amounts being withheld by our credit card processors, to the
extent that we achieve specified aggregate unrestricted cash and investment
amounts and profitability levels, each agreement also provides for a reduction
or elimination of the percent of its exposure that each processor is currently
entitled to holdback.
 
 
 51
 
 Fuel
Related Derivative Financial Instrument Arrangements
 
 We enter
into fuel related derivative financial instruments to reduce the ultimate
variability of cash flows associated with fluctuations in jet-fuel prices. The
financial accounting for fuel related derivatives is discussed in ITEM 8.
“FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 4 – Financial Instruments”
and our exposure to market risk is discussed in ITEM 7A. “QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK –Aviation Fuel.” In summary,
our fuel related derivative financial instruments impacted our 2008 financial
statements as follows:
  •
              
              Net
      realized gains related to derivative financial instruments that qualify
      for hedge accounting reduced fuel expense by $15.7 million during
      2008.
  •
              
              We
      recorded non-operating net losses related to derivative financial
      instruments that do not qualify for hedge accounting of $150.8 million
      during 2008. During 2008, we realized losses related to derivative
      financial instruments that do not qualify for hedge accounting of $126.3
      million (including $109 million to unwind certain derivative financial
      instruments pertaining to 2009 fuel requirements). Realized losses include
      $41.2 million that settled in cash in early January
  2009.
  •
              
              As
      of December 31, 2008, the estimated fair value of our fuel related
      derivative financial instruments was a net liability of $65.5 million. The
      fair value of our fuel related derivatives is in large part a function of
      the current market and futures prices of the underlying commodities.
      Consequently, changes in the current market and futures prices tend to
      have a substantial impact on the fair value of the fuel related
      derivatives.
  •
              
              As
      of December 31, 2008, other accumulated comprehensive income included $7.7
      million (before income tax) of net unrealized losses which had not yet
      been recognized in the Consolidated Statements of
    Operations.
 
 We
provide counterparties to our derivative financial instrument arrangements with
collateral when the fair value of our obligation exceeds specified amounts. As
of December 31, 2008, we provided counterparties to fuel and interest rate
related derivative financial instruments with collateral aggregating $69.2
million. As of February 2, 2009, the collateral that we provided counterparties
decreased to $32.2 million largely as a result of the unwinding of certain
derivative financial instruments pertaining to 2009 fuel requirements. The
collateral is classified as restricted cash if the funds are held in our name
and is classified as deposits held by counterparties to derivative financial
instruments if the funds are held by the counterparty. Any future increases in
the fair value of our obligations under derivative financial instruments may
obligate us to provide additional collateral to counterparties which would
reduce our unrestricted cash and investments. Any future decreases in the
fair value of our obligations would result in the release of collateral to us
and consequently would increase our unrestricted cash and investments. Any
outstanding collateral is released to us upon settlement of the related
derivative financial instrument liability. Our obligation to provide collateral
pursuant to fuel related derivative financial instrument arrangements tends to
be inversely related to fuel prices; consequently, to the extent fuel prices
decrease we will experience lower fuel expense and higher collateral
requirements. Because we hedge significantly less than 100 percent of our fuel
requirements, over time a sustained decrease in fuel prices tends to produce a
net cash benefit even though a significant decrease in fuel prices may cause a
net use of cash in the period when prices decrease. Since September 30, 2008, we
have revised the composition of our portfolio of fuel related derivative
financial instruments in part to reduce our obligation to provide collateral to
counterparties in the event of a decrease in the price of the underlying
commodity. More specifically, as of February 2, 2009, our portfolio contained
relatively fewer collars and relatively more purchased calls.
 
 
 52
 
 Aircraft
Acquisitions, Purchase Commitments and Financings
  During
2008, we took delivery of eight purchased B737 aircraft from The Boeing Company
(“Boeing”), of which two were sold upon delivery and two were sold after
delivery. In May, July and October 2008, we entered into agreements to defer
delivery dates for 37 B737 aircraft originally scheduled for delivery between
2008 and 2012 to delivery dates between 2013 and 2016. As of December 31,
2008, we had on order 55 B737 aircraft with delivery dates between 2009 and
2016.
 
 We may
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 December 31, 2008, all
aircraft currently scheduled for delivery:
  Firm Aircraft Deliveries
                B7372009
              
              
              42010
              
              
              -2011
              
              
              52012
              
              
              92013
              
              
              52014
              
              
              142015
              
              
              82016
              
              
              10Total
              
              
              55
 
 Our
aircraft purchase commitments for the next five years and thereafter, in
aggregate, are (in millions): 2009—$135; 2010—$45; 2011—$210; 2012—$365; and
2013—$230; and thereafter $1,290. 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 and directly related costs. The aircraft purchase commitment totals
do not reflect the effects of prearranged aircraft financings, or planned
disposition of aircraft.
 
 Our B737
contract with Boeing requires us to make pre-delivery deposits to Boeing. No
additional pre-delivery deposits are due for the 2009 scheduled deliveries.
Although we typically have financed a significant portion of our pre-delivery
deposit requirements with debt from banks, we currently have no such financing
in place for our deliveries in 2011 and beyond and we have no assurance that,
given the current status of the financial markets, satisfactory financing will
be available to us when we are obligated to make pre-delivery deposit
payments of $16.2 million in 2009.
 
 We have
agreed to sell two B737 aircraft to a foreign air carrier in 2009
contemporaneous with the delivery thereof to us. The same foreign air
carrier purchased two B737s from us in 2008. However, these pending transactions
are subject to customary closing conditions, some of which are outside of our
control, and therefore we cannot give any assurances that the closing of these
transactions will occur. We have not arranged financing for such aircraft as we
intend for those aircraft to be sold to the buyer substantially
contemporaneously with our purchase from Boeing. We have arranged backstop
secured debt financing to fund a portion of the purchase price of each of the
remaining two 2009 aircraft deliveries.
 
 While our
intention is to finance the remainder of the aircraft on order through either
debt financing, lease financing, or both, we have not yet arranged for any such
financing. However, we have sale/leaseback commitments from an aircraft leasing
company with respect to four spare engines to be delivered through
2010.
 
 
 53
 
 There can
be no assurance that sufficient financing will be available for all B737
aircraft deliveries or for other capital expenditures not covered by firm
financing commitments. If we are unable to generate revenues to cover our costs,
we may slow our growth, including by the sale, lease, or sublease of certain of
our existing or on-order aircraft.
 
 During
the year ended December 31, 2008, we sold eight B737 aircraft and recognized an
aggregate gain of $20.1 million related to the sales of these aircraft. In
August 2008, we also returned one leased B717 aircraft to the lessor. During the
year ended December 31, 2007, we took delivery of and subsequently sold two B737
aircraft. We recognized a gain of $6.2 million during the year ended December
31, 2007 related to the sales of these aircraft. The gain on sales of the
aircraft is classified as a component of operating expense.
 
 During
October 2008, we completed a sale-leaseback financing transaction of three spare
aircraft engines. We realized an aggregate cash benefit of $12.7 million related
to the sale-leaseback transaction.
 
 In
October 2008, as part of our agreement to defer certain aircraft deliveries and
obtain backstop financing for other aircraft deliveries, we granted an affiliate
of Boeing the right to require us to lease, for a period not to exceed ten
years, up to five B717 aircraft. We have no obligation to accept delivery of
more than four aircraft in total (i.e., B737 deliveries and B717 leased
aircraft) in 2009. If such affiliate exercises its right to require us to lease
any B717 aircraft, we have the option to cancel firm B737 aircraft on order for
each such B717 aircraft to be leased to us.
 
 Contractual
Obligations
  Our
contractual obligations as of December 31, 2008 are estimated to be due as
follows (in millions):
  Nature of
commitment
 Total
              
              
              2009
              
              
              
              2010-2011
              
              
              
              2012-2013
              
              
              ThereafterDebt
      (1)
              $
              1,501.7
              
              
              212.0
              
              
              
              213.0
              
              
              
              208.3
              
              
              868.4Operating
      lease obligations (2)
              
              3,125.5
              
              
              288.0
              
              
              
              539.7
              
              
              
              518.9
              
              
              1,778.9Capital
      lease obligations
              
              27.5
              
              
              2.3
              
              
              
              4.7
              
              
              
              4.6
              
              
              15.9Aircraft
      purchase commitments (3)
              
              2,275.0
              
              
              135.0
              
              
              
              255.0
              
              
              
              595.0
              
              
              1,290.0Other
      (4)
              
              1.5
              
              
              1.5
              
              
              
              —
              
              
              
              —
              
              
              —Total
      contractual obligations
              
              $
              6,931.2
              
              
              $
              638.8
              
              
              $
              1,012.4
              
              
              $
              1,326.8
              
              
              $
              3,953.2
 
 (1)
              Includes
      principal and interest payments, including interest payments on $674.1
      million of floating rate debt that have been forecasted at the current
      interest rates. Also includes in 2009, repayment of $90 million
      outstanding under the Revolving Line of Credit Facility. The holders of
      the $125 million 7% convertible notes due in 2023 may require us to
      repurchase such notes in 2010, 2013 or 2018. The maturities of debt
      amounts do not include the effects of the holders exercising their options
      to require us to repurchase the notes prior to 2023. Our debt agreements
      for aircraft acquisitions generally carry terms of twelve years and are
      repaid either quarterly or
semiannually.
  (2)
              Amounts
      include minimum operating lease obligations for aircraft, airport
      facilities, and other leased property. Amounts exclude contingent payments
      and aircraft maintenance deposit payments based on flight hours or
      landings. Aircraft lease agreements are generally for fifteen years for
      B737 aircraft and for eighteen to nineteen years for B717
      aircraft.
 
 (3)
              Amounts
      include payment commitments, including payment of pre-delivery deposits,
      for aircraft on firm order. Payment commitments include the forecasted
      impact of contractual price escalations and directly related costs. The
      aircraft purchase commitment amounts do not reflect the effects of
      pre-arranged financing or planned disposition of
  aircraft.
   54
  (4)
                Amounts
      include other contractual commitments. The table does not include payments
      to be made to third party aircraft maintenance contractors pursuant to
      agreements whereby we pay such contractors based on aircraft flight hours
      or landings. The table does not include liabilities to vendors, employees
      and others classified as current liabilities on our December 31, 2008
      consolidated balance sheet. Additionally, the above table does not include
      any obligations associated with derivative financial instruments. As of
      December 31, 2008, we had recorded the following related to derivative
      financial instruments: a $3.4 million asset; a $69.6 million current
      liability; and a $20.6 million non-current liability. Also, as of December
      31, 2008, we had provided counterparties to derivative financial
      instruments with collateral aggregating $69.2
  million.
  A
variety of assumptions are necessary in order to derive the information with
respect to contractual commitments described in the above table, including, but
not limited to, the timing of the aircraft delivery dates. Our actual
obligations may differ from these estimates under different assumptions or
conditions.
  Income
Taxes
  We have
not been required to pay significant federal or state income taxes since 1999
because we have had a loss for federal income tax purposes in each of those
years, largely because tax basis depreciation has exceeded depreciation expense
calculated for financial accounting purposes.
 
 Our
December 31, 2008 consolidated balance sheet includes gross deferred tax
assets of $276.7 million and gross deferred tax liabilities of $179.5 million.
The deferred tax assets include $146.5 million pertaining to the tax effect of
$418.5 million of federal net operating losses (NOLs). Such NOLs, which expire
in the years 2017 to 2028, are available to be carried forward to offset future
taxable income and thereby reduce future income tax payments. Our deferred
income tax liability is in large part due to the excess of the financial
statement carrying values of owned flight equipment and other assets over the
tax bases of such assets. Consequently, future tax basis depreciation will tend
to be lower than financial accounting depreciation for these
assets.
 
 Income
tax benefits recorded on losses result in deferred tax assets for financial
reporting purposes. We are required to provide a valuation allowance for
deferred tax assets to the extent management determines that it is more likely
than not that such deferred tax assets will ultimately not be realized. We
expect to realize a portion of our deferred tax assets (including a portion of
the deferred tax asset associated with loss carryforwards) through the reversal
of existing temporary differences. However, we have determined that it is more
likely than not that our deferred tax assets in excess of our deferred tax
liabilities will not ultimately be realized, in part due to our cumulative
losses over the past three years, and that we are therefore required to provide
a valuation allowance on our deferred tax assets in excess of our deferred tax
liabilities. As of December 31, 2008, we had recorded $97.2 million of
valuation allowance related to our net deferred tax assets.
 
 Regardless
of the financial accounting for income taxes, our net operating loss
carryforwards currently are available for use on our income tax returns to
offset future taxable income.
  Section 382
of the Internal Revenue Code (Section 382) imposes limitations on a
corporation’s ability to utilize NOLs if it experiences an “ownership change.”
In general terms, an ownership change may result from transactions increasing
the ownership of certain stockholders in the stock of a corporation by more than
50 percentage points over a three-year period. In the event of an ownership
change as defined in the Internal Revenue Code, utilization of our NOLs would be
subject to an annual limitation under Section 382 determined by multiplying
the value of our stock at the time of the ownership change by the applicable
long-term tax-exempt rate. Any unused NOLs in excess of the annual limitation
may be carried over to later years. As of December 31, 2008, we believe
that we were not subject to the limitations under Section 382.
 
 55
 Off-Balance
Sheet Arrangements
  An
off-balance sheet arrangement is any transaction, agreement or other contractual
arrangement involving an unconsolidated entity under which a company has
(1) made guarantees, (2) a retained or a contingent interest in
transferred assets, (3) an obligation under derivative instruments
classified as equity or (4) any obligation arising out of a material
variable interest in an unconsolidated entity that provides financing,
liquidity, market risk or credit risk support to the company, or that engages in
leasing, hedging or research and development arrangements with the
company.
 
 We have
no arrangements of the types described in the first three categories that we
believe may have a material current or future affect on our financial condition,
liquidity or results of operations. Certain guarantees that we do not expect to
have a material current or future effect on our financial condition, liquidity
or resulted operations are disclosed in ITEM 8. “FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA, Note 3 – Commitments and Contingencies.”
  We have
variable interests in many of our aircraft leases. The lessors are trusts
established specifically to purchase, finance and lease aircraft to us. These
leasing entities meet the criteria of variable interest entities, as defined by
Financial Accounting Standards Board (FASB) Interpretation 46,Consolidation of Variable Interest
Entities. We are generally not the primary beneficiary of the leasing
entities if the lease terms are consistent with market terms at the inception of
the lease and do not include a residual value guarantee, a fixed-price purchase
option or similar feature that obligates us to absorb decreases in value or
entitles us to participate in increases in the value of the aircraft. This is
the case in the majority of our aircraft leases; however, we have two aircraft
leases that contain fixed-price purchase options that allow us to purchase the
aircraft at predetermined prices on specified dates during the lease term. We
have not consolidated the related trusts because even taking into consideration
these purchase options, we are not the primary beneficiary based on our cash
flow analysis.
  Critical
Accounting Policies and Estimates
  General. The discussion and
analysis of our financial condition and results of operations is based upon our
Consolidated Financial Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of our
financial statements.
  Our
actual results may differ from these estimates under different assumptions or
conditions. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and are sufficiently
sensitive to result in materially different results under different assumptions
and conditions. The following is a description of what we believe to be our most
critical accounting policies and estimates. See Notes to the Consolidated
Financial Statements for a description of our financial accounting
policies.
 
 Revenue Recognition.
Passenger revenue is recognized when transportation is provided. Ticket sales
for transportation which has not yet been provided are recorded as air traffic
liability. Air traffic liability represents tickets sold for future travel
dates. The balance of the air traffic liability fluctuates throughout the year
based on seasonal travel patterns and fare sale activity. Passenger revenue
accounting is inherently complex and the measurement of the air traffic
liability is subject to some uncertainty.
  A
nonrefundable ticket expires at the date of scheduled travel unless the customer
exchanges the ticket in advance of such date for a credit to be used by the
customer as a form of payment for another ticket. We recognize as revenue the
value of a non-refundable ticket at the date of scheduled travel unless the
customer exchanges his or her ticket for credit. A percent of credits expire
unused. We recognize as revenue over time, in proportion to the credits that are
used, the value of credits that we expect to go unused based on historical
experience. Estimating the amount of credits that will go unused involves some
level of subjectivity and judgment. Changes in our estimate of the amount of
unused credits could have an effect on our revenues.
  56
 Frequent Flyer Program. We
accrue a liability for the estimated incremental cost of providing free travel
for awards earned under our A+ Rewards Program based on credits we expect to be
redeemed on us or the contractual rate of expected redemption on other carriers.
Incremental cost includes the cost of fuel, catering, and miscellaneous direct
costs, but does not include any costs for aircraft ownership, maintenance, labor
or overhead allocation. We adjust this liability based on credits earned and
redeemed, changes in the estimated incremental costs, and changes in the A+
Rewards Program.
  We also
sell credits in our A+ Rewards Program to third parties, such as credit card
companies, financial institutions, car rental agencies, and florists. Revenue
from the sale of credits is deferred and recognized as passenger revenue when
transportation is expected to be provided, based on estimates of its fair value.
The remaining portion, which is the excess of the total sales proceeds over the
estimated fair value of the transportation to be provided, is recognized in
other revenue at the time of sale. A change to the time period over which the
credits are used (currently one to two years), the actual redemption activity or
our estimate of the amount or fair value of expected transportation could have a
significant impact on our revenue in the year of change as well as future
years.
 
 Accounting for Derivative Financial
Instruments. We enter into various commodity derivative financial
instruments with financial institutions to reduce the variability of ultimate
cash flows associated with fluctuations in jet fuel prices. We enter into both
fuel swap and option arrangements. We also enter into interest rate swap
agreements that effectively convert a portion of our floating-rate debt to a
fixed-rate basis thus reducing the impact of interest-rate changes on future
interest expense and cash flows. See ITEM 7A. “QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK” and ITEM 8. “FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA, Note 4 – Financial Instruments” for additional information
about the derivative instruments that we have executed.
  Statement
of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, requires a company to recognize all
of its derivative instruments as either assets or liabilities in the statement
of financial position at fair value. The accounting for changes in the fair
value (i.e., unrealized gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedges for accounting purposes, a
company must designate the hedging instrument, based upon the exposure being
hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in
a foreign operation. For derivative instruments that are designated and qualify
as a cash flow hedge (i.e., hedging the exposure to variability in expected
future cash flows that is attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in the
same line item associated with the forecasted transaction in the same period or
periods during which the hedged transaction affects earnings (for example, in
“interest expense” when the hedged transactions are interest cash flows
associated with floating-rate debt). For derivative instruments that are not
designated as hedges for accounting purposes or do not qualify as hedges for
accounting purposes, changes in the unrealized fair value of the derivatives are
reflected in other (income) expense each period.
 
 SFAS 133
is a very complex accounting standard with stringent requirements which
generally requires: documenting the hedging strategy; using statistical analysis
to qualify certain derivative arrangements as a hedge for accounting purposes
both on a historical and a prospective basis; and preparing strict
contemporaneous documentation that is required at the time each accounting hedge
is designated by us. As required by SFAS 133, we assess the effectiveness
of each of our individual hedges on a quarterly basis. This analysis involves
utilizing regression and other statistical analyses intended to assess the
effectiveness of each derivative designated as a hedge for accounting purposes.
Certain derivatives may not qualify for treatment as accounting hedges if there
is an insufficient correlation between the hedged item and the derivative
underlying price. For example, derivatives based on crude oil as the underlying
price did not qualify for hedge accounting treatment as of December 31,
2008.
 
 57
 Historically,
a majority of our fuel related derivative financial instruments did not qualify
to be accounted for as hedges. Consequently, a majority of the gains and losses
on our fuel related derivative financial instruments have been classified as
other (income) expense based on estimated changes in fair value and the gains
and losses on other fuel related derivative financial instruments have been
classified as a component of fuel expense when realized. In order to simplify
the financial reporting for fuel related derivatives, effective January 1, 2009,
we ceased designating all fuel related derivative financial instruments as
accounting hedges. Fuel related derivative financial instruments outstanding as
of December 31, 2008, previously designated as accounting hedges will continue
to be accounted for as hedges. We will continue to account for interest rate
swaps as accounting hedges.
 
 We enter
into commodity related derivative instruments with third party institutions in
“over-the-counter” markets. As the majority of our commodity related derivative
instruments are not traded on a market exchange, we estimate their fair values.
Depending on the type of instrument, the values are determined by the use of
present value methods or mathematical option value models with assumptions about
commodity prices based on those observed in the respective markets. Also, since
there is not a well defined forward market for jet fuel, we must estimate the
future prices of jet fuel in order to measure the effectiveness of the hedging
instruments in offsetting changes in jet fuel prices, as required by
SFAS 133. Forward jet fuel prices are estimated using other energy
commodity futures prices (such as heating oil) and adjusted based on historical
variations to those similar energy commodities.
  In
summary, SFAS 133 requires that changes in fair value (i.e., unrealized gains
and losses) on some derivative financial instruments be recognized in earnings
in advance of realization. The accounting for derivative financial instruments
may result in increased and unanticipated earnings volatility.
 
 Accounting for Long-Lived
Assets. When appropriate, we evaluate our long-lived assets in accordance
with Statement of Financial Accounting Standards 142, Goodwill and Other Intangible
Assets (SFAS 142), and Statement of Financial Accounting Standards
144,Accounting for the
Impairment or Disposal of Long-Lived Assets. We review goodwill and
indefinite-lived assets for impairment annually and whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable.
The provisions of SFAS 142 require that a two-step impairment test be performed
on goodwill. In the first step, we compare the fair value of the reporting unit
to its carrying value. If the fair value of the reporting unit exceeds the
carrying value of its net assets, goodwill is not impaired and we are not
required to perform further testing. If the carrying value of the net assets of
the reporting unit exceeds it fair value, then we must perform the second step
of the impairment test in order to determine the implied fair value reporting
unit’s goodwill. If the carrying value of the goodwill exceeds its implied fair
value, then we record an impairment loss equal to the difference. SFAS 142 also
requires that the fair value of the intangible assets with indefinite lives be
estimated and compared to the carrying value. We recognize an impairment loss
when the estimated fair value of the intangible asset is less than the carrying
value. We record impairment losses on depreciating and amortizing long-lived
assets used in operations when events or circumstances indicate that the assets
may be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the net book value of those assets. In making these
determinations, we utilize certain assumptions, including, but not limited to:
(i) estimated fair market value of the assets; and (ii) estimated
future cash flows expected to be generated by such assets, which are based on
additional assumptions such as asset utilization, length of time the asset will
be used in our operations, and estimated salvage values.
 
 
 58
 In
accounting for long-lived assets, we must estimate the useful lives and salvage
values of the assets. The actual useful lives and salvage values could be
different from the estimates. Generally, changes in estimated lives and salvage
values are accounted for by adjusting depreciation and amortization expense
prospectively.
  New
Accounting Pronouncement
 
 In May
2008, the FASB issued Staff Position APB 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 SFAS 133. 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. The adoption
of this Staff Position in 2009 will affect the accounting for our 7.0%
Convertible Notes due 2023 and is expected to result in additional annual
interest expense of approximately $8.6 million in 2009 and $4.7 million in 2010,
assuming the 7.0% Convertible Notes will be settled in 2010. The retroactive
application of this Staff Position to 2003 is expected to result in additional
annual interest expense of approximately $2.3 million in 2003, gradually
increasing to $7.4 million in 2008.
 
 
 
 59
 ITEM 7A.      QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Market
Risk-Sensitive Instruments and Positions
  We are
subject to certain market risks, including changes in interest rates and
commodity prices (i.e., aircraft fuel). The adverse effects of changes in these
markets pose a potential loss as discussed below. The sensitivity analyses do
not consider the effects that such adverse changes may have on overall economic
activity, nor do they consider additional actions we may take to mitigate our
exposure to such changes. Actual results may differ. See the Notes to the
Consolidated Financial Statements for a description of our financial accounting
policies and additional information.
  Interest
Rates
  We had
approximately $674.1 million and $764.9 million of variable-rate debt as of
December 31, 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 May 8, 2018 and February 22,
2019. The notional amount of the outstanding debt related to interest rate swaps
at December 31, 2008 and 2007 was $177.7 and $190.8 million,
respectively. 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 December 31, 2008, the fair market value of
our interest rate swaps was a liability of $21.3 million. If average interest
rates increased by 100 basis points during 2009, as compared to 2008, our
projected 2009 interest expense would increase by approximately $4.8
million.
  As of
December 31, 2008 and 2007, the fair value of our debt was estimated to be $1.0
billion and $1.1 billion, respectively, based upon discounted future cash flows
using estimated incremental borrowing rates for similar types of instruments or
market prices. Our 7% and 5.5% convertible notes trade from time to time. We
used market prices to value the unsecured convertible notes. A majority of our
other debt consists of floating rate notes secured by B737 aircraft. Given the
relatively high quality of the underlying collateral, we valued the floating
rate B737 aircraft purchase facility debt at par. We valued the fixed rate notes
secured by aircraft at a discount to par consistent with observed discounts on
comparable traded debt. Given the current turmoil in the credit markets, there
is an unusual amount of uncertainty associated with valuing all securities,
including our debt securities. Market risk on our fixed rate debt, estimated as
the potential increase in fair value resulting from a hypothetical 100 basis
point decrease in interest rates, was approximately $20.9 million as of
December 31, 2008.
  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 years ended
December 31, 2008 and 2007 represented 45.5 percent and 37.1 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 December 31, 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 variability of ultimate cash flows associated with fluctuations in
jet fuel prices. We do not hold or issue derivative financial instruments for
trading purposes. As of December 31, 2008, we have entered into fuel related
swap and option agreements, which pertain to 32.2 million gallons of our
projected 2009 fuel purchases, and 9.1 million gallons of our projected
2010 fuel purchases. Such agreements pertain to 9.1 percent of our
projected 2009 jet fuel requirements, and 2.5 percent of our projected 2010 jet
fuel requirements. Based on actions subsequent to year end, as of February 2,
2009, we have entered into fuel related swap and option agreements, which has
increased our gallons under contract to 116.0 million gallons of our
projected 2009 fuel purchases, and 17.3 million gallons of our projected 2010
fuel purchases. Such agreements pertain to 32.5 percent of our projected
2009 jet fuel requirements, and 4.9 percent of our projected 2010 jet fuel
requirements. Under jet fuel swap arrangements, we pay a fixed rate per gallon
and receive the monthly average price of Gulf Coast jet fuel. The fuel
related option arrangements include collars, purchased call options, and sold
call options. Depending on market conditions at the time a derivative contract
is entered into, we generally use jet fuel, heating oil, or crude oil as the
underlying commodity. Since September 30, 2008, we have revised the composition
of our portfolio of fuel related derivative financial instruments in part to
reduce our obligation to provide collateral to counterparties in the event of a
decrease in the price of the underlying commodity. More specifically, as of
February 2, 2009, our portfolio contained relatively fewer collars and
relatively more purchased calls.
 60
 For every
dollar increase per barrel in crude oil or refining costs, our fuel expense
(including taxes and into-plane fees) for 2009, before the impact of our
derivative financial instruments, would increase approximately $9.0 million
based on projected operations.
 
 The
(a) estimated total ultimate cash benefit (use) of our fuel related
derivatives and (b) the expected difference in aggregate fuel cost compared
to jet fuel cost based on crude oil at $62 per barrel are estimated as follows
(in millions) at the specified crude prices:
 
 Estimated Total Ultimate
      Cash Benefit (Use) of Our Fuel Related Derivative Financial Instruments
      Held as of February 2,
              
              
              Estimated Lower (Higher)
                Aggregate
      Jet Fuel Cost (Prior to Impact of Derivatives) Compared to Jet Fuel Cost
      Based on Crude Oil at $62 per Barrel2009
              
              
              2009Assumed
      average market crude price:$
      30 per barrel
              
              $
              (47
              )
              
              $
              275$
      50 per barrel
              
              $
              (30
              )
              
              $
              101$
      70 per barrel
              
              $
              8
              
              
              $
              (72
              )$
      90 per barrel
              
              $
              60
              
              
              $
              (246
              )$110
      per barrel
              
              $
              106
              
              
              $
              (420
              )
 
 Notes:
 
 1.
              The
      total ultimate derivative financial instrument related cash amounts
      include all estimated payments and receipts during the period that the
      derivatives are outstanding. The cash flows related to derivative
      financial instruments include both the settlement of such instruments and
      any obligation for us to provide counterparties with collateral prior to
      settlement of a derivative financial instrument. Any collateral held by
      counterparties at the time a derivative financial instrument settles
      reduces any cash required at time of settlement.2.
              As
      of February 2, 2009, we had provided counterparties with
      collateral aggregating $32.2 million for fuel related derivatives
      pertaining to future fuel purchases and for our interest rate swap
      arrangements.3.
              Changes
      in the refining margin will also impact the cost of jet fuel. The impact
      of changes in refining margin is not included in the table
      above.
 
  61
    ITEM 8.                      FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
  Index to
Financial Statements and Supplementary Data
  PageAirTran
      Holdings, Inc.Report
      of Independent Registered Public Accounting Firm
              63Consolidated
      Statements of Operations - Years ended December 31, 2008, 2007,
      and 2006
              64Consolidated
      Balance Sheets - December 31, 2008 and 2007
              65Consolidated
      Statements of Cash Flows - Years ended December 31, 2008, 2007,
      and 2006
              67Consolidated
      Statements of Stockholders’ Equity - Years ended December 31,
      2008, 2007, and 2006
              68Notes
      to Consolidated Financial Statements
              69
  
 
 
 62
 Report
of Independent Registered Public Accounting Firm
  The
Board of Directors and Stockholders of AirTran Holdings, Inc.
  We have
audited the accompanying consolidated balance sheets of AirTran Holdings, Inc.
(the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, cash flows, and stockholders’ equity for
each of the three years in the period ended December 31, 2008. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
  We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 11, 2009,
expressed an unqualified opinion thereon.
  /s/
Ernst & Young LLP
  Orlando,
Florida
 February
11, 2009
 
  
  63
  
 AirTran
Holdings, Inc.
 Consolidated
Statements of Operations
 (In
thousands, except per share data)
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Operating
      Revenues:Passenger
              
              $
              2,413,609
              
              
              $
              2,198,910
              
              
              $
              1,814,907Other
              
              
              138,869
              
              
              
              111,073
              
              
              
              77,176Total
      operating revenues
              
              
              2,552,478
              
              
              
              2,309,983
              
              
              
              1,892,083Operating
      Expenses:Aircraft
      fuel
              
              
              1,194,938
              
              
              
              803,640
              
              
              
              675,336Salaries,
      wages and benefits
              
              
              474,889
              
              
              
              451,818
              
              
              
              390,348Aircraft
      rent
              
              
              242,464
              
              
              
              242,764
              
              
              
              230,699Maintenance,
      materials and repairs
              
              
              163,350
              
              
              
              151,265
              
              
              
              126,062Distribution
              
              
              100,400
              
              
              
              88,461
              
              
              
              69,888Landing
      fees and other rents
              
              
              137,738
              
              
              
              122,800
              
              
              
              100,761Aircraft
      insurance and security services
              
              
              21,556
              
              
              
              23,761
              
              
              
              25,678Marketing
      and advertising
              
              
              40,475
              
              
              
              40,415
              
              
              
              44,792Depreciation
      and amortization
              
              
              58,618
              
              
              
              48,485
              
              
              
              30,078Gain
      on sale of assets
              
              
              (23,185
              )
              
              
              (6,234
              )
              
              
              —Impairment
      of goodwill
              
              
              8,350
              
              
              
              —
              
              
              
              —Other
      operating
              
              
              204,895
              
              
              
              198,648
              
              
              
              157,580Total
      operating expenses
              
              
              2,624,488
              
              
              
              2,165,823
              
              
              
              1,851,222Operating
      Income (Loss)
              
              
              (72,010
              )
              
              
              144,160
              
              
              
              40,861Other
      (Income) Expense:Interest
      income
              
              
              (3,679
              )
              
              
              (20,401
              )
              
              
              (21,714
              )Interest
      expense
              
              
              78,080
              
              
              
              75,530
              
              
              
              50,861Capitalized
      interest
              
              
              (5,355
              )
              
              
              (9,226
              )
              
              
              (12,943
              )Net
      (gains) losses on derivative financial instruments
              
              
              150,836
              
              
              
              255
              
              
              
              —Midwest
      exchange offer expenses
              
              
              —
              
              
              
              10,650
              
              
              
              —Other
      (income) expense, net
              
              
              219,882
              
              
              
              56,808
              
              
              
              16,204Income
      (Loss) Before Income Taxes
              
              
              (291,892
              )
              
              
              87,352
              
              
              
              24,657Income
      tax expense (benefit)
              
              
              (18,063
              )
              
              
              34,669
              
              
              
              9,943Net
      Income (Loss)
              
              $
              (273,829
              )
              
              $
              52,683
              
              
              $
              14,714Earnings
      (Loss) Per Common Share:Basic
              
              $
              (2.51
              )
              
              $
              0.58
              
              
              $
              0.16Diluted
              
              $
              (2.51
              )
              
              $
              0.56
              
              
              $
              0.16Weighted-Average
      Shares Outstanding:Basic
              
              
              109,153
              
              
              
              91,574
              
              
              
              90,504Diluted
              
              
              109,153
              
              
              
              104,319
              
              
              
              92,436
  See
accompanying notes to Consolidated Financial Statements.
   64
   AirTran
Holdings, Inc.
 Consolidated
Balance Sheets
 (In
thousands)
  December 31,2008
              
              
              2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
              
              $
              315,078
              
              
              $
              206,873Short-term
      investments
              
              
              19,937
              
              
              
              111,119Restricted
      cash
              
              
              86,126
              
              
              
              29,618Deposits
      held by counterparties to derivative financial instruments
              
              
              48,820
              
              
              
              —Accounts
      receivable, less allowance of $1,250 and $1,128 at December 31, 2008
      and 2007, respectively
              
              
              38,301
              
              
              
              42,772Spare
      parts, materials and supplies, less allowance for obsolescence of $2,844
      and $2,281 at December 31, 2008 and 2007,
respectively
              
              
              15,428
              
              
              
              14,488Prepaid
      and stored fuel
              
              
              16,004
              
              
              
              32,660Derivative
      financial instruments
              
              
              3,420
              
              
              
              13,035Prepaid
      expenses and other current assets
              
              
              33,843
              
              
              
              19,596Deferred
      income taxes
              
              
              7,450
              
              
              
              9,776Total
      current assets
              
              
              584,407
              
              
              
              479,937Property
      and Equipment:Flight
      equipment
              
              
              1,291,155
              
              
              
              1,284,273Less:
      Accumulated depreciation and amortization
              
              
              (124,759
              )
              
              
              (97,946
              )1,166,396
              
              
              
              1,186,327Purchase
      deposits for flight equipment
              
              
              64,032
              
              
              
              119,817Other
      property and equipment
              
              
              108,186
              
              
              
              100,763Less:
      Accumulated depreciation and amortization
              
              
              (55,642
              )
              
              
              (40,995
              )52,544
              
              
              
              59,768Total
      property and equipment
              
              
              1,282,972
              
              
              
              1,365,912Other
      Assets:Long-term
      investments
              
              
              5,497
              
              
              
              8,230Goodwill
              
              
              —
              
              
              
              8,350Trademarks
      and trade names
              
              
              21,567
              
              
              
              21,567Debt
      issuance costs
              
              
              14,201
              
              
              
              16,016Prepaid
      aircraft rent
              
              
              84,168
              
              
              
              81,109Other
      assets
              
              
              70,048
              
              
              
              67,345Total
      Assets
              
              $
              2,062,860
              
              
              $
              2,048,466
  See
accompanying notes to Consolidated Financial Statements.
  
  65
  
 AirTran
Holdings, Inc.
 Consolidated
Balance Sheets (Continued)
 (In
thousands)
  December 31,2008
              
              
              2007LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              81,557
              
              
              $
              50,644Accrued
      and other liabilities
              
              
              147,889
              
              
              
              137,896Air
      traffic liability
              
              
              252,055
              
              
              
              219,923Derivative
      financial instruments
              
              
              69,646
              
              
              
              —Current
      maturities of capital lease obligations
              
              
              835
              
              
              
              1,036Borrowing
      under revolving line of credit
              
              
              90,000
              
              
              
              —Current
      maturities of long-term debt
              
              
              69,865
              
              
              
              98,635Total
      current liabilities
              
              
              711,847
              
              
              
              508,134Long-term
      capital lease obligations
              
              
              16,031
              
              
              
              11,915Long-term
      debt
              
              
              940,569
              
              
              
              946,303Other
      liabilities
              
              
              120,342
              
              
              
              99,575Deferred
      income taxes
              
              
              7,450
              
              
              
              31,434Derivative
      financial instruments
              
              
              20,616
              
              
              
              4,755Commitments
      and ContingenciesStockholders'
      Equity:Preferred
      stock, $.01 par value per share, 5,000 sharesauthorized, no
      shares issued or outstanding
              
              
              —
              
              
              
              —Common stock, $.001 par value per share, 1,000,000 sharesauthorized, and
      119,550 and 91,886 shares issued andoutstanding at
      December 31, 2008 and 2007, respectively
              
              
              120
              
              
              
              92Additional
      paid-in capital
              
              
              497,390
              
              
              
              396,824Accumulated
      earnings (deficit)
              
              
              (225,745
              )
              
              
              48,084Accumulated
      other comprehensive income (loss)
              
              
              (25,760
              )
              
              
              1,350Total
      stockholder's equity
              
              
              246,005
              
              
              
              446,350Total
      Liabilities and Stockholders' Equity
              
              $
              2,062,860
              
              
              $
              2,048,466
  See
accompanying notes to Consolidated Financial Statements.
  
 
 66
 AirTran
Holdings, Inc.
 Consolidated
Statements of Cash Flows
 (In
thousands)
 Year
      ended December 31,2008
              
              
              2007
              
              
              2006Operating
      activities:Net
      income (loss)
              
              $
              (273,829
              )
              
              $
              52,683
              
              
              $
              14,714Adjustments
      to reconcile net income (loss) to net cash provided by (used for)
      operating activities:Depreciation
      and amortization
              
              
              64,981
              
              
              
              50,842
              
              
              
              31,700Amortization
      of deferred gains from sales/leaseback of aircraft
              
              
              (4,668
              )
              
              
              (4,887
              )
              
              
              (4,407
              )Impairment
      of goodwill
              
              
              8,350
              
              
              
              —
              
              
              
              —Midwest
      exchange offer expenses
              
              
              —
              
              
              
              10,650
              
              
              
              —Provisions
      for uncollectible accounts
              
              
              1,264
              
              
              
              1,407
              
              
              
              1,619(Gain)
      loss on asset disposals
              
              
              (22,356
              )
              
              
              (4,811
              )
              
              
              4,387Deferred
      income taxes
              
              
              (18,063
              )
              
              
              34,464
              
              
              
              9,943Other
              
              
              13,013
              
              
              
              6,551
              
              
              
              4,576Changes
      in certain operating assets and liabilities:Restricted
      cash
              
              
              (44,326
              )
              
              
              (4,803
              )
              
              
              (5,372
              )Derivative
      financial instruments
              
              
              66,027
              
              
              
              (6,492
              )
              
              
              —Accounts
      receivable
              
              
              5,157
              
              
              
              (5,566
              )
              
              
              (10,437
              )Spare
      parts, materials and supplies
              
              
              (1,625
              )
              
              
              (3,284
              )
              
              
              (1,248
              )Prepaid
      and stored fuel
              
              
              16,656
              
              
              
              (27,161
              )
              
              
              (1,835
              )Deposits
      held by counterparties to derivative financial instruments
              
              
              (48,820
              )
              
              
              —
              
              
              
              —Prepaid
      aircraft rent
              
              
              (6,618
              )
              
              
              (11,892
              )
              
              
              (12,986
              )Other
      assets
              
              
              (4,507
              )
              
              
              (16,429
              )
              
              
              (20,934
              )Accounts
      payable, accrued and other liabilities
              
              
              37,331
              
              
              
              46,477
              
              
              
              26,809Air
      traffic liability
              
              
              32,132
              
              
              
              64,330
              
              
              
              38,597Net
      cash provided by (used for) operating activities
              
              
              (179,901
              )
              
              
              182,079
              
              
              
              75,126Investing
      activities:Purchase
      of available-for-sale securities
              
              
              (30,303
              )
              
              
              (2,040,593
              )
              
              
              (2,540,215
              )Sale
      of available-for-sale-securities
              
              
              118,986
              
              
              
              2,071,195
              
              
              
              2,389,190Purchases
      of property and equipment
              
              
              (136,427
              )
              
              
              (176,020
              )
              
              
              (119,113
              )Return
      (payment) of aircraft purchase deposits, net
              
              
              55,785
              
              
              
              78
              
              
              
              13,635Midwest
      exchange offer expenses
              
              
              —
              
              
              
              (10,348
              )
              
              
              —Proceeds
      from sale of aircraft
              
              
              305,965
              
              
              
              72,879
              
              
              
              5,000Other
              
              
              14,650
              
              
              
              —
              
              
              
              —Net
      cash provided by (used for) investing activities
              
              
              328,656
              
              
              
              (82,809
              )
              
              
              (251,503
              )Financing
      activities:Issuance
      of long-term debt
              
              
              107,577
              
              
              
              62,029
              
              
              
              66,034Payments
      on long-term debt and capital lease obligations
              
              
              (317,153
              )
              
              
              (115,904
              )
              
              
              (113,132
              )Borrowings
      under revolving line of credit
              
              
              377,000
              
              
              
              —
              
              
              
              —Repayment
      of borrowings under revolving line of credit
              
              
              (287,000
              )
              
              
              —
              
              
              
              —Net
      proceeds from issuance of common stock
              
              
              74,669
              
              
              
              —
              
              
              
              —Proceeds
      from exercise of stock options, employee stock purchase plans and
      warrants
              
              
              3,902
              
              
              
              2,378
              
              
              
              12,003Other
              
              
              455
              
              
              
              —
              
              
              
              —Net
      cash used for financing activities
              
              
              (40,550
              )
              
              
              (51,497
              )
              
              
              (35,095
              )Net
      change in cash and cash equivalents
              
              
              108,205
              
              
              
              47,773
              
              
              
              (211,472
              )Cash
      and cash equivalents at beginning of year
              
              
              206,873
              
              
              
              159,100
              
              
              
              370,572Cash
      and cash equivalents at end of year
              
              $
              315,078
              
              
              $
              206,873
              
              
              $
              159,100
  See
accompanying notes to Consolidated Financial Statements.
 67
  
 AirTran
Holdings, Inc.
 Consolidated
Statements of Stockholders’ Equity
 (In
thousands)
  Common
      Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Unearned
                Compensation
              
              
              Accumulated
                Other
                Comprehensive
                Income
      (Loss)
              
              
              Accumulated
                Earnings
                (Deficit)
              
              
              Total
                Stockholders’
                EquityShares
              
              
              AmountBalance
      at January 1, 2006
              
              
              88,791
              
              
              $
              89
              
              
              $
              376,627
              
              
              $
              (4,028
              )
              
              $
              —
              
              
              $
              (19,313
              )
              
              $
              353,375Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              14,714
              
              
              
              14,714Unrealized
      gain on derivative instruments, net of deferred
taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              84
              
              
              
              —
              
              
              
              84Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              14,798Adjustment
      to recognize unfunded post retirement obligations, net of income taxes of
      $3.1 million
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (5,336
              )
              
              
              —
              
              
              
              (5,336
              )Issuance
      of common stock for exercise of options
              
              
              951
              
              
              
              1
              
              
              
              5,952
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,953Stock-based
      compensation
              
              
              305
              
              
              
              —
              
              
              
              4,443
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,443Adjustment
      upon adoption of SFAS 123(R)
              
              
              —
              
              
              
              —
              
              
              
              (4,028
              )
              
              
              4,028
              
              
              
              —
              
              
              
              —
              
              
              
              —Issuance
      of common stock for detachable stock warrants
              
              
              1,000
              
              
              
              1
              
              
              
              4,509
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,510Issuance
      of common stock under employee stock purchase plan
              
              
              113
              
              
              
              —
              
              
              
              1,540
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,540Balance
      at December 31, 2006
              
              
              91,160
              
              
              
              91
              
              
              
              389,043
              
              
              
              —
              
              
              
              (5,252
              )
              
              
              (4,599
              )
              
              
              379,283Net income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              52,683
              
              
              
              52,683Unrealized
      gain on derivative instruments, net of income taxes of $0.6
      million
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,033
              
              
              
              —
              
              
              
              1,033Actuarial
      gain on postemployment obligations, net of income taxes of $2.7
      million
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,557
              
              
              
              —
              
              
              
              4,557Reclassification
      of postemployment expense to earnings, net of income taxes of $0.6
      million
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,012
              
              
              
              —
              
              
              
              1,012Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              59,285Issuance
      of common stock for exercise of options
              
              
              198
              
              
              
              —
              
              
              
              1,022
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,022Stock-based
      compensation
              
              
              374
              
              
              
              1
              
              
              
              5,403
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,404Issuance
      of common stock under employee stock purchase plan
              
              
              154
              
              
              
              —
              
              
              
              1,356
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,356Balance
      at December 31, 2007
              
              
              91,886
              
              
              
              92
              
              
              
              396,824
              
              
              
              —
              
              
              
              1,350
              
              
              
              48,084
              
              
              
              446,350N
      Net loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (273,829
              )
              
              
              (273,829
              )Unrealized
      loss on derivative instruments, net of income taxes of $0.7
      million
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (26,686
              )
              
              
              —
              
              
              
              (26,686
              )Other
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (424
              )
              
              
              —
              
              
              
              (424
              )Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (300,939
              )Issuance
      of common stock for exercise of options
              
              
              843
              
              
              
              1
              
              
              
              2,604
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,605Stock-based
      compensation
              
              
              419
              
              
              
              1
              
              
              
              5,819
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,820Conversion
      of 5.5% senior notes to common stock
              
              
              1,367
              
              
              
              1
              
              
              
              4,560
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,561Issuance
      of common stock under employee stock purchase plan
              
              
              376
              
              
              
              —
              
              
              
              1,295
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,295Issuance
      of common stock
              
              
              24,659
              
              
              
              25
              
              
              
              74,644
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              74,669Issuance of stock warrants
              
              
              —
              
              
              
              —
              
              
              
              8,586
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,586Other
              
              
              —
              
              
              
              —
              
              
              
              3,058
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,058Balance
      at December 31, 2008
              
              
              119,550
              
              
              $
              120
              
              
              $
              497,390
              
              
              
              —
              
              
              $
              (25,760
              )
              
              $
              (225,745
              )
              
              $
              246,005
   See
accompanying notes to Consolidated Financial Statements.
   68
   AirTran
Holdings, Inc.
 Notes
to Consolidated Financial Statements
 December 31,
2008
  Note
1 – Business and Liquidity
  Business
and Liquidity
  Through
our wholly-owned subsidiary, AirTran Airways, Inc., we offer scheduled airline
services, using Boeing B717-200 aircraft (B717) and Boeing B737-700 aircraft
(B737), to 56 locations throughout the United States with a concentration in the
eastern United States. Air travel in our markets tends to be seasonal, with
the highest levels occurring during the winter months to Florida and the summer
months to the Northeastern and Western United States. The second quarter tends
to be our strongest revenue quarter.
  After a
successful 2007, during which we earned net income of $52.7 million, the
economic environment deteriorated, jet fuel prices increased to record high
levels, and the credit markets tightened. In response, during 2008, we undertook
a variety of actions including: reducing capacity starting in September 2008;
deferring new aircraft deliveries; selling aircraft; reducing other capital
expenditures; implementing increases in certain fares and ancillary fees;
entering into a variety of derivative financial arrangements to hedge the cost
of fuel; and managing our costs and employment levels. We also completed
capital market transactions exceeding $375 million, including: placing
convertible debt and common equity securities; executing a letter of credit
facility to reduce (but not eliminate) our exposure to holdbacks of cash
remittances by a credit card processor; and arranging a $90 million revolving
line of credit.
 
 Despite
our efforts to increase unit revenues, control costs, and reduce capacity, we
reported an operating loss of $72.0 million and a net loss of $273.8
million for 2008. Included in our results are gains on the sale of assets of
$23.2 million, an impairment charge to write-off goodwill of $8.4 million and a
non-operating loss on derivative financial instruments of $150.8 million. The
2008 loss is primarily attributable to record high fuel prices during the first
nine months of 2008. However, during the fourth quarter jet fuel prices
decreased dramatically and consequently we reported operating income for the
fourth quarter of $54.9 million. The fourth quarter also includes non-operating
losses on derivative financial instruments which resulted in a pre-tax loss and
a net loss for the quarter.
 
 Our cash
flows for 2009 and beyond will be impacted by a variety of factors including our
operating results, scheduled debt maturities, and capital expenditure
requirements. In addition, we may need additional cash resources if we are
required to fund increases in collateral provided to our counterparties as a
consequence of significant increases in the value of our derivative financial
instrument obligations. Our cash flows may also be adversely impacted in the
event that one or more of our credit card processors withholds amounts that
would otherwise be remitted to us. Each of the agreements with our credit card
processors allows, under specified conditions, the processor to retain cash
related to future travel that such processor otherwise would remit to us. We may
substitute a letter of credit in favor of the largest credit card processor in
lieu of cash. As of December 31, 2008, our two largest processors were entitled
to withhold 50% of our advance ticket sales that would otherwise be remitted to
us; however, our largest credit card processor was holding back no
remittances from us because a $125 million letter of credit was issued for its
benefit. In the event that, among other things, our aggregate unrestricted
cash and investments (as defined) falls below agreed upon levels, or a processor
reasonably determines that there has been a material adverse occurrence or
certain other events occur, each of our two largest processors would be entitled
to withhold additional cash remittances from us or we would have to obtain a
larger letter of credit.
 
 69
 We
believe that our existing liquidity and projected 2009 cash flows will be
sufficient to fund our operations and other financial obligations through
December 2009. While we believe our 2009 plan is reasonable, a combination of
one or more material and significant adverse events, most of which are outside
of our direct control, could, depending on severity and duration, have an
unfavorable impact on our ability to generate sufficient cash from operations to
maintain adequate liquidity through December 31, 2009. Such adverse events could
include: significant increases in fuel prices for an extended period of time;
significant sustained declines in unit revenues as a consequence of unfavorable
macroeconomic or other conditions; or, the increase in the percentage of advance
ticket sales that are being held back by our credit card processors. If one or
more of such events were to occur, we would likely undertake a variety of
actions to mitigate the impact of such events including seeking to obtain
additional secured debt, unsecured debt or equity financing. However, our
current credit rating, the fact that we have limited operating assets to serve
as collateral for additional borrowings, and the disruption in the U.S. and
global capital markets combined to make it difficult for us to obtain financing
in the latter part of 2008.
Accordingly, to the extent unanticipated adverse events were to result in a need
for substantial additional financing, such additional debt or equity financing
might not be available to us on terms acceptable to us or at all.
 
 Note
2 – Summary of Significant Accounting Policies
 
 Basis
of Presentation
  Our
accompanying Consolidated Financial Statements include the accounts of AirTran
Holdings, Inc. (the Company, AirTran, or Holdings) and our wholly-owned
subsidiaries, including our principal subsidiary, AirTran Airways, Inc. (AirTran
Airways or Airways) (collectively we, our, or us). All significant intercompany
accounts and transactions have been eliminated in consolidation.
 
 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 segment of
business.
  Reclassifications
  Certain
2007 amounts in the Consolidated Statements of Operations related to gain on
sale of assets have been reclassified from Other (Income) Expense to Operating
Expenses to conform to 2008 presentation. Certain other 2007 and 2006 amounts
have been reclassified to conform to 2008 presentation. These reclassifications
have no material impact on the Consolidated Statements of Operations,
Consolidated Balance Sheets, Consolidated Statements of Cash Flows, or
Consolidated Statements of Stockholders’ Equity.
  Use
of Estimates
  The
preparation of 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 consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
  Cash,
Cash Equivalents and Restricted Cash
  All
highly liquid investments, with maturities of three months or less when
purchased, are considered to be cash equivalents. Restricted cash primarily
consists of amounts escrowed related to aircraft leases, letters of credit for
airports and insurance, credit card holdbacks for advance ticket sales, cash
escrowed for future interest payments, and collateral to support derivative
financial instrument arrangements.
 
 Investments
  Investments
are considered available for sale securities and are stated at fair value.
Short-term investments consist of investments in funds which are expected to
convert to cash within twelve months. Long-term investments consist of
investments in funds expected to convert to cash after twelve
months.
 
  70
 
 Accounts
Receivable
  Accounts
receivable are due primarily from major credit card processors, travel agents,
the issuer of co-branded credit cards, taxing authorities and municipalities
related to guaranteed revenue agreements. We provide an allowance for doubtful
accounts equal to the estimated losses expected to be incurred in the collection
of credit card receivables based on historical credit card charge backs and of
other receivables based on specific analysis. Collateral is generally not
required for accounts receivable. During the years ended December 31, 2008,
2007 and 2006, we wrote off accounts receivable aggregating $1.1 million, $1.0
million and $1.4 million, respectively, against the allowance for doubtful
accounts.
 
 Spare
Parts and Supplies
  Spare
parts and supplies consist of expendable aircraft spare parts and miscellaneous
supplies. These items are stated at cost using the first-in, first-out method.
These items are charged to expense when used. Allowances for obsolescence are
provided over the estimated useful life of the related aircraft and engines for
spare parts expected to be on hand at the date aircraft are retired from
service.
  Property
and Equipment
  Property
and equipment are stated on the basis of cost. The estimated salvage values and
depreciable lives are periodically reviewed for reasonableness, and revised if
necessary. Flight equipment is depreciated to salvage value of ten percent,
using the straight-line method. The estimated useful lives for airframes,
engines and aircraft parts are 30 years. Other property and equipment is
depreciated over three to ten years. Leasehold improvements are amortized over
the economic life of the asset or the lease term, whichever is
shorter.
  The
financial statement carrying value of computer software and equipment, which is
included in other property and equipment on the consolidated balance sheets, was
$14.8 million and $15.2 million at December 31, 2008 and 2007,
respectively. Depreciation and amortization expense related to computer
equipment and software was $8.6 million, $6.5 million and $5.4 million for the
years ended December 31, 2008, 2007 and 2006, respectively.
  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 adverse industry
conditions and the recent operating losses experienced by us were indicators
that an impairment of our long-lived assets (primarily flight equipment) may
have existed, we prepared an assessment during 2008 in accordance with SFAS 144
which indicated that the expected undiscounted future cash flows exceeded the
net book value of the associated long-lived assets. Consequently, we concluded
that the long-lived assets were not impaired. 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 future 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. During the second quarter of 2008,
because adverse industry conditions and recent operating losses experienced by
us were indicators that our intangible assets may have been impaired, we
prepared an assessment in accordance with SFAS 142 and concluded that goodwill
was impaired as of June 30, 2008, while our trade name and trademarks were
not impaired. Consequently, we recorded a charge of $8.4 million to write-off
all of the carrying value of our goodwill during the second quarter of 2008. We
also performed the annual impairment test of the financial statement carrying
value of our trade name and trademarks in the fourth quarter of each year and
concluded there was no impairment.
  71
 Capitalized
Interest
  Interest
attributable to funds used to finance the acquisition of new aircraft is
capitalized as an additional cost of the related asset. Interest is capitalized
at our weighted average interest rate on long-term debt or, where applicable,
the interest rate related to specific borrowings. Capitalization of interest
ceases when the asset is ready for service.
  Aircraft
Maintenance
  Aircraft
maintenance costs are expensed as incurred. Maintenance reserves paid to
aircraft lessors in advance of the performance of major maintenance activities
are recorded as deposits and then recognized as maintenance expense when the
maintenance is performed. The personnel costs of our employees performing
aircraft maintenance activities are classified as salaries, wages and benefits
expense. The costs of replacement parts and services performed by third parties
are classified as maintenance, materials and repairs expense.
  Maintenance
expense is recognized when the work is performed if the work is performed by our
employees or by third party FAA approved contractors pursuant to arrangements
whereby our contractual liability to a contractor is incurred at the time the
work is performed. The costs of line maintenance activities, overhauls of
airframes, overhauls of engines for B737 aircraft and repairs of certain
component parts are recognized as expense when the repair is
performed.
  Maintenance
expense is recognized based on flight hours or landings if we incur a
contractual liability to a third party FAA approved contractor to repair or
overhaul major component parts based on a contractually specified rate per
flight hour or landing, as applicable. Accordingly, maintenance repair costs for
certain major components, including engines for B717 aircraft, are expensed
monthly based on flight hours flown or landings, as applicable.
 
 Advertising
and Promotion Costs
  Advertising
costs are charged to expense in the period the costs are incurred. Advertising
expense was approximately $35.7 million, $35.7 million and $34.3 million for the
years ended December 31, 2008, 2007 and 2006, respectively.
  From time
to time, we enter into barter transactions whereby we acquire goods or services
in exchange for future air travel to be provided by us. We recognize operating
expense based on the estimated fair value of travel to be provided by us. During
2005, we entered into a barter transaction in which we exchanged flight credits
in our frequent flyer program for promotional consideration. The transaction was
originally recorded at the estimated fair value of the credits exchanged. During
2006, we recorded expense of $4.1 million related to this promotion due to
changes in the estimated volume of travel exchanged. The revenue relating to the
flight credits was recognized as passenger revenue as the credits were utilized
or expired. During 2008, 2007, and 2006, $0.6 million, $2.4 million and $5.0
million, respectively, related to this program was recognized as passenger
revenue.
 
 
 72
 Revenue
Recognition
  Passenger
revenue is recognized when transportation is provided. Ticket sales for
transportation which has not yet been provided are recorded as air traffic
liability. Air traffic liability represents tickets sold for future travel
dates. The balance of the air traffic liability fluctuates throughout the year
based on seasonal travel patterns and fare sale activity. Passenger revenue
accounting is inherently complex and the measurement of the air traffic
liability is subject to some uncertainty. A nonrefundable ticket expires at the
date of scheduled travel unless the customer exchanges the ticket in advance of
such date for a credit to be used by the customer as a form of payment. We
recognize as revenue the value of a non-refundable ticket at the date of
scheduled travel unless the customer exchanges his or her ticket for a credit. A
percent of credits we issue expire unused. We recognize as revenue over time the
value of credits that we expect to go unused in proportion to the credits that
are used. We estimate the amount of credits that we expect to go unused based on
historical experience. Estimating the amount of credits that will go unused
involves some level of subjectivity and judgment. Changes in our estimate of the
amount of unused credits would have an effect on our revenues.
  We are
required to collect certain taxes and fees on our passenger tickets. These taxes
and fees include U.S. federal transportation taxes, federal security charges,
airport passenger facility charges, and foreign arrival and departure taxes.
These taxes and fees are legal assessments on the customer. We have a legal
obligation to act as a collection agent. Because we do not retain these taxes
and fees, we do not include such amounts in passenger revenue. We record a
liability when the amounts are collected and relieve the liability when payments
are made to the applicable government agency.
 
 Stock
Based Employee Compensation
 
 Consistent
with Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)), Share-Based Payment, we recognize
the financial accounting cost of employee services received in exchange for
awards of equity instruments based on the fair value of each instrument at the
date of grant. Compensation expense is recognized ratably over the period during
which an employee is required to provide service in exchange for an award. The
fair value of a stock option grant is estimated using an option pricing model.
The fair value of a restricted stock award is based on the trading price of our
common stock on the date of grant.
  Frequent
Flyer Program
  We accrue
a liability for the estimated incremental cost of providing free travel for
awards earned under our A+ Rewards Program based on credits we expect to be
redeemed on us or the contractual rate of expected redemption on other carriers.
Incremental cost includes the cost of fuel, catering, and miscellaneous direct
costs, but does not include any costs for aircraft ownership, maintenance,
labor, or overhead allocation. We adjust this liability based on credits earned
and redeemed, changes in the estimated incremental costs, and changes in the A+
Rewards Program.
  We also
sell credits in our A+ Rewards Program to third parties, such as credit card
companies, internet service providers, and car rental agencies. Revenue from the
sale of credits is deferred and recognized as passenger revenue when
transportation is expected to be provided, based on estimates of its fair value.
The remaining portion, which is the excess of the total sales proceeds over the
estimated fair value of the transportation to be provided, is recognized in
other revenue at the time of sale. A change to the time period over which the
credits are used (currently one to two years), the actual redemption activity,
or our estimate of the amount or fair value of expected transportation could
have a significant impact on our revenue in the year of change as well as future
years.
 
 73
  Derivative
Financial Instruments
  Statement
of Financial Accounting Standards No. 133 (SFAS 133),Accounting for Derivative
Instruments and Hedging Activities, requires companies to recognize all
of its derivative instruments as either assets or liabilities in the statement
of financial position at fair value. The accounting for changes in the fair
value (i.e., unrealized gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, further, on the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the exposure being hedged, as
a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign
operation.
 
 For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income (loss) and reclassified into earnings in the same line item in which the
forecasted transaction is reported in the same period or periods during which
the hedged transaction affects earnings (for example, in “interest expense” when
the hedged transactions are interest cash flows associated with floating-rate
debt). The ineffective portion of the unrealized gain or loss on the cash flow
hedges is reported currently as other (income) expense in our Consolidated
Statements of Operations.
  Income
Taxes
  We
account for deferred income taxes utilizing Statement of Financial Accounting
Standards No. 109 (SFAS 109), Accounting for Income Taxes.
SFAS 109 requires the asset and liability method, whereby deferred tax
assets and liabilities are recognized based on the tax effects of temporary
differences between the financial statement and the tax bases of assets and
liabilities, as measured at current enacted tax rates. When appropriate we
evaluate the need for a valuation allowance to reduce deferred tax
assets.
  In June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes—An interpretation of FASB Statement
No. 109. The Interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement attributes of income tax
positions taken or expected to be taken on a tax return. Under FIN 48, the
impact of an uncertain tax position taken or expected to be taken on an income
tax return must be recognized in the financial statements at the largest amount
that is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized in the
financial statements unless it is more likely than not of being sustained. We
adopted the provisions of FIN 48 as of January 1, 2007. The impact of
adopting FIN 48 was not material as of the date of adoption or in subsequent
periods.
 
 Interest
associated with uncertain income tax positions is classified as interest expense
and penalties are classified as income tax expense. We have not recorded any
material interest or penalties during any of the years presented.
  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 the
fiscal years beginning after November 15, 2007; however, the requirement to
implement certain provisions of SFAS 157 were deferred. 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 Consolidated Financial
Statements. We do not expect the adoption of the deferred provisions, as of
January 1, 2009, to have a material impact on our Consolidated Financial
Statements.
 
 74
 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. SFAS 141R is effective for
us on a prospective basis for transactions occurring in 2009. 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 (SFAS 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 SFAS 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. We adopted SFAS 161 for the
year ended December 31, 2008. Because SFAS 161 applies only to financial
statement disclosures, it did not have any impact on our consolidated financial
position, results of operations, and cash flows.
 
 In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162
(SFAS 162),The Hierarchy of
Generally Accepted Accounting Principles. SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). Because SFAS 162 applies only to
establishing hierarchy, it will not have a material impact on our consolidated
financial position, results of operations, and cash flows.
 
 75
 In May
2008, the FASB issued Staff Position APB 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 SFAS 133. 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. The adoption
of this Staff Position in 2009 will affect the accounting for our 7.0%
Convertible Notes due 2023 and will result in additional annual interest expense
of approximately $8.6 million in 2009 and $4.7 million in 2010, assuming the
7.0% Convertible Notes will be settled in 2010. The retroactive application of
this Staff Position will result in additional annual interest expense of
approximately $2.3 million in 2003, gradually increasing to $7.4 million in
2008.
 
 Note
3 – Commitments and Contingencies
  Aircraft
Related Commitments, Financing Arrangements and Transactions
  During
2008, we took delivery of eight B737 aircraft purchased from The Boeing Company
(“Boeing”), of which two were sold upon delivery and two were sold after
delivery. In May, July and October 2008, we entered into agreements to defer
delivery dates for 37 B737 aircraft originally scheduled for delivery between
2008 and 2012 to delivery dates between 2013 and 2016. As of December 31,
2008, we had on order 55 B737 aircraft with delivery dates between 2009 and
2016.
 
 We may
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 December 31, 2008, all
aircraft currently scheduled for delivery:
  Firm Aircraft Deliveries
                B7372009
              
              
              42010
              
              
              -2011
              
              
              52012
              
              
              92013
              
              
              52014
              
              
              142015
              
              
              82016
              
              
              10Total
              
              
              55
 
 Our
aircraft purchase commitments for the next five years and thereafter, in
aggregate, are (in millions): 2009—$135; 2010—$45; 2011—$210; 2012—$365; and
2013—$230; and thereafter, $1,290. 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 and directly related costs. The aircraft purchase commitment totals
do not reflect the effects of prearranged aircraft financings, or planned
disposition of aircraft.
 
 Our B737
aircraft contract with Boeing requires us to make pre-delivery deposits to
Boeing. No additional pre-delivery deposits are due for the 2009 scheduled
deliveries. Although we typically have financed a significant portion of our
pre-delivery deposit requirements with debt from banks, we currently have no
such financing in place for our deliveries in 2011 and beyond and we have no
assurance that, given the current status of the financial markets, satisfactory
financing will be available to us when we are obligated to make pre-delivery
deposit payments of $16.2 million in 2009.
 
 76
 We have
agreed to sell two B737 aircraft to a foreign air carrier in 2009
contemporaneous with the delivery thereof to us. That same foreign air carrier
purchased two B737s from us in 2008. However, these pending transactions are
subject to customary closing conditions, some of which are outside of our
control, and therefore we cannot give any assurances that the closing of these
transactions will occur. We have not arranged financing for such aircraft as we
intend for those aircraft to be sold to the buyer substantially
contemporaneously with our purchase from Boeing. We have arranged backstop
secured debt financing to fund a portion of the purchase price of each of the
remaining two 2009 aircraft deliveries.
 
 During
the year ended December 31, 2008, we sold eight B737 aircraft and recognized an
aggregate gain of $20.1 million related to the sales of these aircraft. In
August 2008, we also returned one leased B717 aircraft to the lessor. During the
year ended December 31, 2007, we took delivery of and subsequently sold two B737
aircraft. We recognized a gain of $6.2 million during the year ended December
31, 2007 related to the sales of these aircraft. The gain on sales of the
aircraft is classified as a component of operating expense.
 
 During
October 2008, we completed a sale-leaseback financing transaction of three spare
aircraft engines. We realized an aggregate cash benefit of $12.7 million related
to the sale-leaseback transaction.
 
 In
October 2008, as part of our agreement to defer certain aircraft deliveries and
obtain backstop financing for other aircraft deliveries, we granted an affiliate
of Boeing the right to require us to lease, for a period not to exceed ten
years, up to five B717 aircraft. We have no obligation to accept delivery of
more than four aircraft in total (i.e., B737 deliveries and B717 leases) in
2009. If such affiliate exercises its right to require us to lease any B717
aircraft, we have the option to cancel firm B737 aircraft on order for each such
B717 aircraft.
  Credit
Card Processing Arrangements
  We have
agreements with organizations that process credit card transactions arising from
purchasing air travel by customers of Airways. Each of our agreements with our
credit card processors allows, under specified conditions, the processor to
retain cash related to future travel that such processor otherwise would remit
to us (i.e., a “holdback”). Holdbacks are classified as restricted cash on our
consolidated balance sheets. Our exposure to credit card holdbacks consists of
advanced ticket sales that customers purchase with credit cards. Once the
customer travels, any related holdback is remitted to us.
 
 In 2008,
we amended our agreements with our two largest credit card processors (based on
volumes processed for us). The agreement with our largest credit card processor
expires December 31, 2009. Each of the amended agreements provides that a
processor may hold back amounts that would otherwise be remitted to us in the
event that, among other things, our aggregate unrestricted cash and
investments (as defined) falls below agreed upon levels, or a processor
reasonably determines that there has been a material adverse occurrence or
certain other events occur. The amount that each processor is entitled to hold
back is determined by a combination of the level of our aggregate unrestricted
cash and investments and our profitability. If our aggregate unrestricted cash
and investments (as defined) is less than the specified amounts at specified
testing dates, each processor is entitled to increase amounts held back to
specified percentages (ranging from 25% to 100%) of its exposure to credit card
chargebacks. To the extent such increases are funded with unrestricted cash, the
resultant reduced levels of unrestricted cash and investments may trigger
incremental holdback requirements under each of the two processing agreements. We have
the contractual right to reduce the amounts which are otherwise withheld by our
two largest credit card processors to the extent that we provide the applicable
processor with a letter or letters of credit. As of December 31, 2008, a $125
million letter of credit had been issued for the benefit of our largest credit
card processor under our Letter of Credit Facility and the processor was holding
back no cash remittances from us.
 
 77
 As of
December 31, 2008, we had advanced ticket sales of approximately $223.5 million
related to all credit card sales. As of December 31, 2008, we were in compliance
with our processing agreements and based on our level of profitability and
unrestricted cash and investments, as defined, our two largest processors were
entitled to holdback 50% of their exposure to credit card chargebacks. Had we
not been in compliance with the agreements, or if our level of unrestricted cash
and investments, as defined, was lower, our potential cash exposure to
additional holdbacks by our largest two credit card processors based on advanced
ticket sales as of December 31, 2008, after considering the $125 million letter
of credit issued in favor of our largest credit card processor, was up to a
maximum of $84.0 million. Our levels of unrestricted cash and air traffic
liability are highly seasonal reaching their highest levels in the early summer
and late fall and reaching their lowest levels in the winter; accordingly the
amounts potentially withheld by our credit card processors are also higher, and
in some cases substantially higher, during certain times of the year. Our future
aggregate cash and investments will be dependent on, among other factors, our
future profitability, including the cost of fuel, the extent of cash collateral
related to derivative financial instruments we may be required to fund, the
level of advance ticket sales, our borrowing availability under our Line of
Credit Facility, and the continued availability of our Letter of Credit
Facility. While a decrease in our unrestricted cash and investments could result
in additional amounts being withheld by our credit card processors, to the
extent that we achieve specified aggregate unrestricted cash and investment
amounts and profitability levels, each agreement also provides for a reduction
or elimination of the percent of its exposure that each processor is currently
entitled to holdback.
  General
Indemnifications
  We are
party to many routine contracts under which we indemnify third parties for
various risks. We have not accrued any liability for any of these indemnities,
as the amounts are not determinable or estimable. Historically, we have not
incurred significant costs related to such indemnifications. These indemnities
consist of the following:
  ·
              Certain
      of our debt agreements related to aircraft-secured notes payable through
      2017 contain language, whereby, we have agreed to indemnify certain
      holders of certificates evidencing the debt associated with such notes, as
      necessary, to compensate them for any costs incurred by, or any reduction
      in receivables due to, such certificate holders resulting from broadly
      defined regulatory changes that impose or modify any reserve, special
      deposit or similar requirements relating to any extensions of credit or
      other assets of or any deposits with or other liabilities of such
      certificate holders. Additionally, if it becomes unlawful for such
      certificate holders to make or maintain the investment or credit evidenced
      by the certificates, we have agreed to pay such certificate holders an
      amount necessary to cause the interest rate with respect to the
      certificates to be a rate per annum equal to 4.88 percent over the rate
      specified by such certificate holders as the cost to them of obtaining
      funds in dollars in the United States in an amount equal to the pool
      balance of the certificates. The maximum potential payment under these
      indemnities cannot be determined.
 
 ·
              Our
      aircraft lease transaction documents contain customary indemnities
      concerning withholding taxes in which we are responsible in some
      circumstances should withholding taxes be imposed for paying such amounts
      of additional rent, as is necessary to ensure that the lessor still
      receives, after taxes, the rent stipulated in the lease agreements. These
      provisions apply on leases expiring through 2022. The maximum potential
      payment under these indemnities cannot be
  determined.
 
 ·
              In
      our aircraft financing agreements, we typically indemnify the financing
      parties, the 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.
 
 78
 
 
 ·
              We
      have various leases with respect to real property and various agreements
      among airlines relating to fuel consortia or fuel farms at airports in
      which we have agreed to standard language indemnifying the lessor against
      environmental liabilities associated with the real property covered under
      the agreement, even if we are not the party responsible for the
      environmental damage. In the case of fuel consortia at the airports, these
      indemnities are generally joint and several among the airlines. We cannot
      quantify the maximum potential exposure under these indemnities and we do
      not currently have liability insurance that protects us against
      environmental damages.
 
 ·
              Under
      certain contracts with third parties, we indemnify the third party against
      legal liability arising out of an action by a third party. The terms of
      these contracts vary and the potential exposure under these indemnities
      cannot be determined. Generally, we have liability insurance protecting us
      from obligations undertaken under these
  indemnities.
  Taxes
  We remit
a variety of taxes and fees to various governmental authorities including:
income taxes; transportation fees and taxes collected from our customers;
property taxes; sales and use taxes; payroll taxes; and fuel taxes. The taxes
and fees remitted by us are subject to review and audit by the applicable
governmental authorities which could result in liability for additional
assessments. Contingencies for taxes which are not based on income are accounted
for in accordance with Statement of Financial Accounting Standards
No. 5,Accounting for
Contingencies. Uncertain income tax positions taken on income tax returns
are accounted for in accordance with FIN 48. Although management believes
that the positions taken on previously filed tax returns are reasonable, we
nevertheless have recorded accrued liabilities in recognition that various
taxing authorities may challenge certain of the positions we have taken, which
may also potentially result in additional liabilities for taxes and interest in
excess of accrued liabilities. These accrued liabilities are reviewed
periodically and are adjusted as events occur that affect the estimates, such
as: the availability of new information; the lapsing of applicable statutes of
limitations; the conclusion of tax audits; the measurement of additional
estimated liability based on current calculations; the identification of new tax
contingencies; or the rendering of relevant court decisions.
 
 Employees
  As of
December 31, 2008, approximately 46 percent of our employees were
represented by unions. Our agreement with our flight attendants became amendable
in December 2008. The pilots’ collective bargaining agreement became amendable
in 2005 and is currently in mediation. 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 outcome of
our collective bargaining negotiations cannot presently be determined. 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.
 
 Restricted
Cash and Letters of Credit
 
 Restricted
cash consists of amounts escrowed related to aircraft leases, letters of credit,
credit card holdbacks for advanced ticket sales, cash escrowed for future
interest payments and collateral to support derivative financial arrangements.
As of December 31, 2008, $16.3 million of restricted cash relates to outstanding
letters of credit, primarily for airport facilities and insurance. In August
2008 and as amended and restated in October 2008, we obtained a Letter of
Credit Facility which provides for a financial institution to issue letters of
credit for the benefit of our credit card processors. The Letter of Credit
Facility is supported by a variety of assets. As of December 31, 2008, no amount
had been drawn against the $125 million letter of credit.
 
 79
 
 Note
4 – Financial Instruments
  Financial
instruments that potentially subject us to significant concentrations of credit
risk consist principally of cash and cash equivalents, restricted cash,
short-term and long-term investments, accounts receivable, and derivative
financial instruments (including deposits held by counterparties). We maintain
cash and cash equivalents and short-term investments in what we believe are high
credit-quality financial institutions or in what we believe are in
short-duration, high-quality debt securities. Investments are stated at fair
value. We periodically evaluate the relative credit standing of those financial
institutions that are considered in our investment strategy. We use specific
identification of securities for determining gains and losses. All of our
investments are available for sale securities. As of December 31, 2008, we
had short-term and long-term investments, of $19.9 million and $5.5 million,
respectively, consisting of $17.5 million in an enhanced cash investment fund
and $7.9 million in a money market fund. The managers of the funds have limited
immediate redemptions and we have classified $5.5 million of our investment in
the enhanced cash investment fund as long-term as of December 31, 2008. During
2008 and 2007, we recorded charges of $5.2 million and $1.1 million,
respectively, to interest income for realized and unrealized losses on these
funds. There were no material realized or unrealized gains or losses on our
available-for-sale securities for the year ended December 31,
2006.
  The
estimated fair value of other financial instruments, excluding debt,
approximates their carrying amount. The financial statement carrying amounts and
estimated fair values of debt and capital leases were $1.1 billion and $1.0
billion, respectively, at December 31, 2008, and $1.1 billion and $1.1
billion, respectively, at December 31, 2007. The estimated fair value
of debt is based upon discounted future cash flows using estimated incremental
borrowing rates for similar types of instruments or market prices. Our 7% and
5.5% convertible notes trade from time to time. We used market prices to value
the unsecured convertible notes. A majority of our other debt consists of
floating rate notes secured by B737 aircraft. Given the relatively high quality
of the underlying collateral, we valued the floating rate B737 aircraft purchase
facility debt at par. We valued the fixed rate notes secured by aircraft at a
discount to par consistent with observed discounts on comparable traded debt.
Given the current turmoil in the credit markets, there is an unusual amount of
uncertainty associated with valuing all securities, including our debt
securities.
  The
majority of our receivables result from the sale of tickets to individuals,
mostly through the use of major credit cards. These receivables are short-term,
generally being settled shortly after sale subject to any applicable
holdbacks.
  We enter
into various derivative financial instruments with financial institutions to
seek to reduce the variability of the ultimate cash flows associated with
fluctuations in jet fuel prices. We enter into both fuel related swap and option
derivative financial arrangements. We do not hold or issue derivative financial
instruments for trading purposes. As of December 31, 2008, we have entered into
fuel related swap and option agreements, which pertain to 32.2 million
gallons of our projected 2009 fuel purchases, and 9.1 million gallons of
our projected 2010 fuel purchases. Such agreements pertain to 9.1 percent
of our projected 2009 jet fuel requirements, and 2.5 percent of our projected
2010 jet fuel requirements. Based on actions subsequent to year end, as of
February 2, 2009, we have entered into fuel related swap and option agreements,
which has increased our gallons under contract to 116.0 million
gallons of our projected 2009 fuel purchases, and 17.3 million gallons of our
projected 2010 fuel purchases. Such agreements pertain to 32.5 percent of
our projected 2009 jet fuel requirements, and 4.9 percent of our projected 2010
jet fuel requirements. Under jet fuel swap arrangements, we pay a fixed rate per
gallon and receive the monthly average price of Gulf Coast jet fuel. The fuel
related option arrangements include collars, purchased call options, and sold
call options. Depending on market conditions at the time a derivative contract
is entered into, we generally use jet fuel, heating oil, or crude oil as the
underlying commodity.
  80
 Fuel
related derivative financial instruments are accounted for as cash flow hedges
under SFAS 133 when the required accounting documentation is in place and the
derivative arrangement has been analytically demonstrated to be effective. The
ineffective portion of changes in the fair value of each such derivative is
recognized currently in other (income) expense, and the effective portion of the
change in the fair value is recorded as a component of other comprehensive
income (loss). The effective portion is reclassified to earnings 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 currently in other (income) expense. Sold calls and derivatives using
crude oil as the underlying commodity did not qualify for hedge accounting. In
2008, we recognized non-operating losses related to derivatives that did not
qualify for hedge accounting and ineffectiveness on derivatives that qualified
for hedge accounting of $150.8 million. During 2008, we realized losses of
$126.3 million (including $109 million to unwind certain derivative financial
instruments pertaining to 2009 fuel requirements). Realized losses include $41.2
million that settled in cash in early 2009. In 2007, we recognized non-operating
gains on fuel related derivatives that did not qualify for hedge accounting
and ineffectiveness on fuel related derivatives that qualified for hedge
accounting of $2.6 million.
  Historically,
a majority of our fuel related derivative financial instruments did not qualify
to be accounted for as hedges. Consequently, a majority of the gains and losses
on our fuel related derivative financial instruments have been classified as
other (income) expense based on estimated changes in fair value and the gains
and losses on other fuel related derivative financial instruments have been
classified as a component of fuel expense when realized. In order to simplify
the financial reporting for fuel related derivatives, effective January 1, 2009,
we ceased designating all fuel related derivative  financial
instruments as accounting hedges. Fuel related derivative financial instruments
outstanding as of December 31, 2008 previously designated as accounting hedges
will continue to be accounted for as hedges.
 
 We have
interest rate swap agreements that effectively convert a portion of our
floating-rate debt to a fixed-rate basis for the remaining life of the loan,
thus reducing the impact of interest-rate changes on future interest expense and
cash flows. Under these agreements, which expire in 2018 and 2019, we pay fixed
rates between 4.560 percent and 5.085 percent and receive the three-month USD
London Interbank Offered Rate (LIBOR) on the notional values. The notional
amount of outstanding debt related to the interest rate swaps as of December 31,
2008 was $177.7million. The primary
objective for our use of interest rate swaps 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. The ineffective portion of
the change in fair value of each derivative is recognized in other (income)
expense, and the effective portion of the change in fair value is recorded as a
component of other comprehensive income (loss). The effective portion is
reclassified to interest expense during the period in which the hedged
transaction affects earnings.
 
  81
  The
following table summarizes the fair value of our derivative financial
instruments (in thousands):
 
 Derivative
      Assets
              
              
              Derivative
      LiabilitiesDecember
      31,
              
              
              December
      31,2008
              
              2007
              
              
              2008
              
              2007Balance
      Sheet Location
              
              Fair
      Value
              
              Fair
      Value
              
              
              Fair
      Value
              
              Fair
      ValueDerivatives
      designated as hedging instruments under SFAS 133Interest
      rate contracts
              
              Current
              $
              —
              $
              —
              
              $
              (5,644)
              $
              —Interest
      rate contracts
              
              Noncurrent
              
              —
              
              —
              
              
              (15,694)
              
              (4,755)Jet-fuel
      swaps and options
              
              Current
              
              2,722
              
              14,969
              
              
              (6,710)
              
              —Total
      derivatives designated
                as
      hedging instruments under SFAS 133
              
              
              
              2,722
              
              14,969
              
              
              (28,048)
              
              (4,755)Derivatives
      not designated
                as
      hedging instruments
                under
      SFAS 133Jet-fuel
      options
              
              Current
              
              77
              
              (7,133
              )
              
              (548)
              
              —Crude
      swaps and options
              
              Current
              
              621
              
              5,199
              
              
              (56,744)
              
              —Crude
      swaps and options
              
              Noncurrent
              
              —
              
              —
              
              
              (4,922)
              
              —Total
      derivatives not
                designated
      as hedging
                instrumentsunder
      SFAS 133
              
              
              
              698
              
              (1,934
              )
              
              (62,214)
              
              —Total
      derivatives
              
              
              $
              3,420
              $
              13,035
              
              $
              (90,262)
              $
              (4,755)Fair
      value includes any premiums paid or received, unrealized gains and losses,
      and any amounts receivable or payable from or to counterparties. Fair
      value does not include collateral provided to
    counterparties.Liability
      and asset amounts with one counterparty are netted against each other for
      financial reporting purposes for derivative contracts entered into as one
      trade and for derivatives entered into for the purpose of effectively
      settling open positions.
 
 
 
 
 82
 
 The
following tables summarize the effects of derivative financial instruments on
the Statements of Operations and on Other Comprehensive Income (in
thousands):
 
 Years
      ended December 31,Amount
      of (gain) loss on derivatives recognized in OCI  (effective
      portion)
              
              Location
      of (Gain)
                Loss
      reclassified from accumulated OCI into income (effective
      portion)
              
              Amount
      of (gain) loss
                reclassified
      from OCI into
                income
      (effective portion)
              
              Location
      of (Gain)Loss
      recognized in income on derivatives (ineffective
      portion)
              
              Amount
      of (gain) loss recognized in income on derivatives
      (ineffective portion)2008
              
              2007
              
              
              
              2008
              
              2007
              
              
              
              2008
              
              2007Derivatives
      designated as hedging instruments under SFAS 133Interest
      rate contracts
              $
              16,179
              $
              1,902
              
              Interest
      expense
              $
              199
              $
              —
              
              Net
      (gains) losses on derivative financial instruments
              $
              (46
              )  
      $
              2,852Jet-fuel
      swaps and options
              
              (4,303
              )
              (27,239)
              
              Aircraft
      fuel
              
              (15,677)
              
              (23,549)
              
              Net
      (gains) losses on derivative financial instruments
              
              1,969
              
              (3,905)Total
      derivatives designated as hedging instruments under SFAS
    133
              $
              11,876
              $
              (25,337)
              
              
              $
              (15,478)
              $
              (23,549)
              
              
              $
              1,923
              $
              (1,053)Amount
      of (gain) loss on derivatives recognized in earnings
              
              Location
      of (Gain)
                Loss
      recognized in
                income
      on derivative2008
              
              2007Derivatives
      not designated as hedging instruments under SFAS 133Jet-fuel
      options
              $
              6,053
              $
              4,132
              
              Net
      (gains) losses on derivative financial instrumentsCrude
      swaps and options
              
              147,941
              
              (2,824
              )
              Net
      (gains) losses on derivative financial instrumentsOther
              
              (5,081
              )
              —
              
              Net
      (gains) losses on derivative financial instrumentsTotal
      derivatives not designated as hedging instruments under SFAS
      133
              $
              148,913
              $
              1,308
  83
  Based on
fair values as of December 31, 2008, we expect to reclassify $(7.7) million of
net gains (losses) on derivative instruments from accumulated other
comprehensive income to earnings during the next twelve months due to the actual
jet fuel purchases and the payment of variable interest associated with floating
rate debt. However, the amounts actually realized will be dependent on the fair
values as of the date of settlements.
 
 Outstanding
financial derivative instruments expose us to credit loss in the event of
nonperformance by the counterparties to the agreements. However, we do not
expect any of the counterparties to fail to meet their obligations. Our credit
exposure related to these financial instruments is represented by the fair value
of contracts reported as assets. To manage credit risk, we select and
periodically review counterparties based on credit ratings. We provide the
counterparties with collateral when the fair value of our obligation exceeds
specified amounts. As of December 31, 2008, we provided the counterparties
with collateral aggregating $69.2 million. The collateral is classified as
restricted cash if the funds are held in our name and is classified as a deposit
held by counterparty to derivative financial instrument if the funds are held by
the counterparty. For financial reporting purposes, we do not offset the
collateral provided to counterparties against the fair value of our obligation.
Any outstanding collateral is released to us upon settlement of the related
derivative financial instrument liability.
 
 Note
5 –Debt
 
 The
components of debt were (in thousands):
 
 December 31,2008
              
              
              December 31, 2007B737
      Aircraft Purchase Financing Facilities:Floating
      rate aircraft notes payable through 2020, 4.06 percent weighted-average
                interest
      rate as of December 31, 2008
              
              $
              655,931
              
              
              $
              688,427Fixed
      rate aircraft notes payable through 2018, 7.02 percent weighted-average
                interest
      rate as of December 31, 2008
              
              
              61,014
              
              
              
              68,724Fixed
      rate B717 aircraft notes payable through 2017, 10.21 percent
      weighted-average interest rate as of December 31,
2008
              
              
              80,854
              
              
              
              86,270Floating
      rate aircraft pre-delivery deposit financings payable through 2009, 2.92
      percent weighted-average interest rate as of December 31,
    2008
              
              
              18,135
              
              
              
              76,5177.0%
      convertible senior notes due 2015
              
              
              125,000
              
              
              
              125,0005.5%
      convertible senior notes due 2015
              
              
              69,500
              
              
              
              —Total
      long-term debt
              
              
              1,010,434
              
              
              
              1,044,938Less
      current maturities of long-term debt
              
              
              69,865
              
              
              
              98,635Long-term
      debt less current maturities
              
              $
              940,569
              
              
              $
              946,303Borrowing
      under Revolving Line of Credit Facility
              
              $
              90,000
 
 Maturities
of debt for the next five years and thereafter, in aggregate, are (in millions):
2009-$160; 2010-$56; 2011-$62; 2012-$58; 2013-$68; thereafter-$697. Maturities
for 2009 include $90 million outstanding under the Revolving Line of Credit
Facility. The holders of the $125 million 7% convertible notes due in 2023 may
require us to repurchase such notes in 2010, 2013 or 2018. The maturities of
debt amounts do not include the effects of the holders exercising their options
to require us to repurchase such notes prior to 2023.
 
 
 84
 
 As of
December 31, 2008, the following assets served as collateral for outstanding
debt:
 
 ·
              Assets
      (primarily flight equipment) with a net book value of $1.04 billion served
      as collateral for the B737 and B717
notes.
 ·
              Aircraft
      pre-delivery deposits served as collateral for pre-delivery deposit
      financing and for the Letter of Credit and Revolving Line of Credit
      Facility.
 
 Additionally,
our obligations under the Letter of Credit and Revolving Line of Credit Facility
are secured by the pledge of — directly or indirectly — our accounts receivable;
ground equipment; aircraft parts; certain inventory; our residual interest in
owned B717 aircraft; certain real property assets, and certain other assets,
including various contract rights which include but are not limited to rights
under certain purchase and sales agreements for aircraft and derivative
financial instruments.
 
 B737
Aircraft Purchase Financing Facilities
  Through
December 31, 2008, we have entered into seven separate aircraft purchase
financing facilities for purposes of financing the acquisition of B737 aircraft
on order with Boeing.
  Six of
the facilities are floating rate facilities. As of December 31, 2008, 25
B737 aircraft had been financed 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, we have the right to prepay the remaining debt outstanding without
penalty. The notes mature in years 2016 to 2020.
 
 One of
the facilities is a fixed rate facility. As of December 31, 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. Payments of principal and
interest under the notes are payable semi-annually. Commencing after the third
anniversary date of each note, we have the right to prepay the remaining debt
outstanding without penalty. The notes mature in years 2016 to
2018.
 
 As of
December 31, 2008, no additional financing was available under the B737 Aircraft
Purchase Financing Facilities.
  Fixed
Rate B717 Aircraft Notes Payable
  Principal
and interest payments on the enhanced equipment trust certificates (EETCs) are
due semiannually through April 2017. As of December 31, 2008, ten B717
aircraft were pledged as collateral.
 
 Floating
Rate Aircraft Pre-delivery Deposit Financing
 
 We have
arranged loan facilities (each a “PDP facility”) for purposes of financing our
obligations to make pre-delivery payments to Boeing with respect to B737
aircraft on order. The PDP facilities entitle us to draw amounts to fund a
portion of our obligations to make pre-delivery payments for each applicable
aircraft. The amount outstanding under each PDP loan is paid off at the time the
respective aircraft is delivered. As of December 31, 2008, $18 million had been
borrowed to fund a portion of our pre-delivery payment obligations for four
B737 aircraft on order and no additional amounts were available for us to
borrow under the existing facilities.
  7%
Convertible Notes
  In May
2003, we completed a private placement of $125 million in convertible notes due
in 2023. The proceeds were used to improve our overall liquidity by providing
working capital and for general corporate purposes. The notes bear interest at 7
percent, payable semi-annually on January 1 and July 1. The notes are
unconditionally guaranteed by Airways and rank equally with all unsecured
obligations of Airways. The unsecured notes and the note guarantee are junior to
any secured obligations of Holdings or Airways to the extent of the collateral
pledged and are also effectively subordinated to all liabilities of our
subsidiaries (other than Airways).
  85
 The notes
are convertible into shares of our common stock at a conversion rate of 89.9281
shares per $1,000 in principal amount of the notes which equals an initial
conversion price of approximately $11.12 per share. This conversion rate is
subject to adjustment in certain circumstances. We may redeem the notes, in
whole or in part, for cash, beginning on July 5, 2010 at a redemption price
equal to the principal amount of the notes plus any accrued and unpaid
interest.
 
 The
holders of the notes may require us to repurchase the notes on July 1,
2010, 2013 and 2018 at a repurchase price of 100 percent of principal amounts
plus any accrued and unpaid interest. We may, at our option, elect to pay the
repurchase price in cash, in shares of our common stock or in any combination of
the two. If we elect to pay the repurchase price, in whole or in part in
shares of our common stock, the number of shares to be delivered in exchange for
the portion of the repurchase price to be paid in our common stock will be equal
to that portion of the repurchase price divided by 97.5% of the closing sale
price of our common stock for the five trading days ending on the third business
day prior to the applicable repurchase date (appropriately adjusted to take into
account the occurrence of certain events that would result in an adjustment of
the conversion rate with respect to our common stock).
 
 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 $12.2 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.
 
 During
the fourth quarter of 2008, $5.3 million of such notes were converted to 1.4
million shares of our common stock and $0.7 million was paid from the escrow
account to the former note holders.
 
 
 86
 
 Letter
of Credit and Revolving Line of Credit Facility
 
 In 2008,
we, with Airways as the borrower and Holdings as a guarantor, entered into an
agreement, as amended, to provide for a combined letter of credit and revolving
line of credit facility (the Letter of Credit and Revolving Line of Credit
Facility). Under the Letter of Credit and Revolving Line of Credit Facility we
are permitted to borrow, upon two days notice, until April 30, 2010 (the
Expiration Date), up to $90 million for general corporate purposes (the
Revolving Line of Credit Facility). Also, we are entitled to the issuance
by a financial institution, until 30 days prior to the Expiration Date, of
letters of credit for the benefit of one or more of our credit card processors
(the Letter of Credit Facility). The aggregate amount of outstanding letters of
credit plus the outstanding amount borrowed under the Revolving Line of Credit
Facility is not permitted to exceed $215 million. Amounts borrowed under the
Revolving Line of Credit Facility bear interest at a rate of 12 percent per
annum and must be repaid to the extent that our aggregate unrestricted cash and
investment amount exceeds $305 million at any time. We may borrow up to twice a
month and are permitted to repay amounts borrowed at any time without penalty.
As of December 31, 2008 and February 2, 2009, we had $90 million and $0 of
outstanding borrowings under the Revolving Line of Credit Facility,
respectively. As of both December 31, 2008 and February 2, 2009, a letter of
credit for $125 million, had been issued for the benefit of our largest credit
card processor.
 
 The
aggregate of amounts borrowed and outstanding letters of credit under the Letter
of Credit and Revolving Line of Credit Facility is not permitted to exceed the
estimated value of the collateral. The Letter of Credit and Revolving Line of
Credit Facility includes various covenants, including limitations on dividends
and distributions, limitations on the incurrence of indebtedness, and
limitations on mergers and acquisitions. In the event of a change in control, as
defined, the lender may require us to post cash collateral to secure the letter
of credit obligations and require us to repay outstanding loans under the
Revolving Line of Credit Facility. Drawings under any letter of credit may be
made only to satisfy our obligation to a beneficiary credit card processor to
cover chargebacks arising from tickets soldduring the period of
exposure to be covered by the letter of credit, which, in the case of the
initial letter of credit, will end August 14, 2009, but is subject to periodic
extensions, at the discretion of the lender, ending not later than June 30,
2011, and is subject to earlier termination upon the occurrence of a material
adverse change in our financial condition or other like event. We expect that
the period of exposure to be covered by the initial letter of credit will be
periodically extended through December 31, 2009, in the absence of a
material adverse change in our financial condition or other like event. The
initial letter of credit will expire no later than eighteen months after the end
of the period of exposure covered. The periods of exposure to be covered by, and
expiration dates of, subsequently issued letters of credit will be determined by
mutual agreement between the lender and us.
 
 In
connection with the Letter of Credit and Revolving Line of Credit Facility, on
October 31, 2008, we issued warrants to purchase approximately 4.7 million
shares of our common stock for $4.49 per share. The number of shares issuable
pursuant to the warrants is subject to adjustments depending on whether the
holder elects to pay the exercise price in cash or through delivery of warrants
with a value at least equal to the exercise price and is also subject to
adjustments for certain dilutive events as defined. The warrants expire on
October 31, 2011. The $8.6 million aggregate fair value of the warrants at the
date of issuance was recorded as debt issuance costs with a corresponding
increase in paid in capital. The amortization of the debt issuance costs is
classified as interest expense.
 
 Note
6 – Leases
  Total
rental expense charged to operations for aircraft, facilities and office space
for the years ended December 31, 2008, 2007 and 2006 was approximately
$326.0 million, $315.6 million and $287.5 million, respectively.
 
 
 87
 
 We lease
78 B717 aircraft through various lessors under leases with terms that expire
through 2022. We have the option to renew the B717 leases for periods ranging
from one to four years. The B717 leases have purchase options at or near the end
of the lease term at fair market value, and two have purchase options based on a
stated percentage of the lessor’s defined cost of the aircraft at the end of the
thirteenth year of the lease term. Each of the leases contains return conditions
that must be met prior to the termination of the leases. Forty-one of the B717
leases are the result of sale/leaseback transactions. Deferred gains from these
transactions are included in other liabilities and are being amortized over the
terms of the leases. At December 31, 2008 and 2007, unamortized deferred
gains, including gains on engine sale/leasebacks, were $58.4 million and $56.2
million, respectively.
  We lease
22 B737 aircraft through a single lessor, under leases with terms that expire
through 2021. We have the option to extend the lease term for 12 months and up
to 39 months. There are no purchase options. Each of the leases contains return
conditions that must be met prior to the termination of the leases.
 
 The B737
leases require us to remit monthly maintenance deposit payments to the lessor
based on actual flight hours and landings. The balance of such payments, which
is capped at any point in time at $2.25 million for each aircraft, is available
to reimburse us for the cost of airframe, engine and certain other component
part maintenance. There will be an accounting at the end of each aircraft lease
to ascertain if there is any excess balance of the deposit payments; if so, such
excess will be returned to us. These payments are accounted for as deposits and
the aggregate amount of such deposits is included in other assets. As of
December 31, 2008 and 2007, the balance of all maintenance deposits for all
the B737 leased aircraft and leased engines aggregated $54.2 million and $49.4
million, respectively.
 
 We also
lease facilities from local airport authorities or other carriers, as well as
office space under operating leases with terms ranging up to 12 years. In
addition, we lease spare engines and certain rotable parts under capital
leases.
 
 The
amounts applicable to capital leases included in property and equipment were (in
thousands):
 December 31,2008
              
              
              2007Flight
      equipment
              
              $
              20,302
              
              
              $
              20,336Less:
      Accumulated amortization
              
              
              (1,139
              )
              
              
              (3,669
              )Flight
      equipment, net
              
              $
              19,163
              
              
              $
              16,667
  The
following schedule outlines the future minimum lease payments at
December 31, 2008, under non-cancelable operating leases and capital leases
with initial terms in excess of one year (in thousands):
  Capital
                Leases
              
              
              Operating
                Leases2009
              
              $
              2,328
              
              
              $
              288,0312010
              
              
              2,328
              
              
              
              275,9852011
              
              
              2,328
              
              
              
              263,6842012
              
              
              2,328
              
              
              
              262,0202013
              
              
              2,328
              
              
              
              256,901Thereafter
              
              
              15,904
              
              
              
              1,778,897Total
      minimum lease payments
              
              
              27,544
              
              
              $
              3,125,518Less:
      amount representing interest
              
              
              (10,678
              )Present
      value of future payments
              
              
              16,866Less:
      current obligations
              
              
              (835
              )Long-term
      obligations
              
              $
              16,031
 
 Amortization
of assets recorded under capital leases is included as “depreciation and
amortization” in the accompanying consolidated statements of
operations.
 
 88
 We have
variable interests in our aircraft leases. The lessors are trusts established
specifically to purchase, finance and lease aircraft to us. These leasing
entities meet the criteria of variable interest entities, as defined by FASB
Interpretation 46R,Consolidation of Variable Interest Entities. We are generally not the
primary beneficiary of the leasing entities if the lease terms are consistent
with market terms at the inception of the lease and do not include a residual
value guarantee, a fixed-price purchase option or similar feature that obligates
us to absorb decreases in value or entitles us to participate in increases in
the value of the aircraft. This is the case in the majority of our aircraft
leases; however, we have two aircraft leases that contain fixed-price purchase
options that allow us to purchase the aircraft at predetermined prices on
specified dates during the lease term. We have not consolidated the related
trusts because, even taking into consideration these purchase options, we are
not the primary beneficiary based on our cash flow analysis. Our maximum
exposure under the two leases is limited to the remaining lease payments, which
are reflected in the future minimum lease payments in the table
above.
 
 Note
7 - Fair Value Measurements
 
 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).
 
 
 
 89
 
 Assets
and (liabilities) measured at fair value on a recurring basis during the period
were as follows (in thousands):
  (in
      thousands)
              
              Fair Value at
                December
      31, 2008
              
              Quoted Prices in
                Active Markets
                for
      Identical
                Assets (Level 1)
              Other
                Observable
                Inputs (Level 2)
              
              Fair
      Value
                Measurements
                UsingUnobservable
                Inputs (Level 3)
              
              Valuation
                TechniqueCash
      and cash equivalents
              
              $
              315,078
              
              $
              —
              $
              315,078
              
              $
              —
              
              MarketShort-term
      investments
              
              
              19,937
              
              
              —
              
              19,937
              
              
              —
              
              MarketLong-term
      investments
              
              
              5,497
              
              
              —
              
              5,497
              
              
              —
              
              MarketInterest
      rate derivatives
              
              
              (21,338
              )
              
              —
              
              (21,338
              )
              
              —
              
              MarketFuel
      derivatives
              
              
              (65,504
              )
              
              —
              
              —
              
              
              (65,504
              )
              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 December 31, 2008 is as follows (in
thousands):
  Fair
      Value
                Measurements
      Using Significant
                Unobservable
                Inputs
      (Level 3)Fuel
      related derivative asset (liability):Balance
      at January 1, 2008
              
              $
              13,035Total
      realized and unrealized gains or (losses):Included
      in earnings
              
              
              (135,205
              )Included
      in other comprehensive income
              
              
              (11,374
              )Purchases,
      issuances, and settlements
              
              
              68,040Balance
      at December 31, 2008
              
              $
              (65,504
              )The
      amount of total gains or (losses) for the twelve months ended
      December 31, 2008, included in earnings attributable to the change in
      unrealized gains or losses relating to assets and liabilities still held
      at December 31, 2008
              
              $
              (12,885
              )
 
 Note
8 – Common Stock
  We have
one class of common stock. Holders of shares of our common stock are entitled to
one vote per share. As of December 31, 2008, we had reserved 9,793,912
common shares for issuance for stock option exercises, conversion of restricted
stock, and the exercise of warrants, of which 3,662,901 shares are reserved
for stock options that are vested and exercisable and restricted stock that have
been granted but not vested, and 4,700,886 shares are reserved for issuance upon
the exercise of warrants.
  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.
 
 On
April 6, 2006, 55,468 warrants were exercised for the purchase of our
common stock. Each warrant entitled the purchaser to 18.0289 shares of common
stock for a total of 1,000,024 shares at $4.51 per share. Total proceeds from
the aforementioned transaction amounted to approximately $4.5
million.
  Certain
of our debt agreements restrict our ability to pay cash dividends.
 
 
 90
 
 Note
9 – Income Taxes
  We are
subject to taxation in the United States and various state jurisdictions. Our
tax years for 1997 through 2008 are subject to examination by the Internal
Revenue Service. The total amount of unrecognized tax benefits and related
penalties and interest was not material as of December 31, 2008 or 2007. We
do not anticipate any material change in the total amount of unrecognized tax
benefits to occur within the next twelve months.
 
 The
components of the provision (benefit) for income taxes are as follows (in
thousands):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Current
      provision (benefit):Federal
              
              $
              (198
              )
              
              $
              205
              
              
              $
              —State
              
              
              —
              
              
              
              —
              
              
              
              —Total
      current provision (benefit)
              
              
              (198
              )
              
              
              205
              
              
              
              —Deferred
      provision (benefit):Federal
              
              
              (14,938
              )
              
              
              31,771
              
              
              
              9,805State
              
              
              (2,927
              )
              
              
              2,693
              
              
              
              138Total
      deferred provision (benefit)
              
              
              (17,865
              )
              
              
              34,464
              
              
              
              9,943Income
      tax expense (benefit)
              
              $
              (18,063
              )
              
              $
              34,669
              
              
              $
              9,943
  A
reconciliation of taxes computed at the statutory federal tax rate on income
before income taxes to the provision (benefit) for income taxes is as follows
(in thousands):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Tax
      expense (benefit) computed at federal statutory rate
              
              $
              (102,162
              )
              
              $
              30,573
              
              
              $
              8,629State
      income taxes, net of federal benefit
              
              
              (6,173
              )
              
              
              2,241
              
              
              
              516Change
      in valuation allowance
              
              
              86,852
              
              
              
              —
              
              
              
              —Other
              
              
              3,420
              
              
              
              1,855
              
              
              
              798Income
      tax expense (benefit)
              
              $
              (18,063
              )
              
              $
              34,669
              
              
              $
              9,943
 
 Income
tax benefits of losses result in deferred tax assets for financial reporting
purposes. We are required to provide a valuation allowance for deferred tax
assets to the extent management determines that it is more likely than not that
such deferred tax assets will ultimately not be realized. We expect to realize a
portion of our deferred tax assets (including a portion of the deferred tax
asset associated with loss carryforwards) through the reversal of existing
temporary differences. However, we have determined that it is more likely than
not that our deferred tax assets in excess of our deferred tax liabilities will
not ultimately be realized, in part due to our cumulative losses over the past
three years, and, as a result, we have provided a valuation allowance on our
deferred tax assets in excess of our deferred tax liabilities. As a result,
beginning with the third quarter of 2008, our losses were not reduced by any tax
benefit. Consequently, our effective tax rate for the year ended December 31,
2008 was substantially lower than the statutory rate. As of December 31, 2008,
we had recorded $97.2 million of valuation allowance related to our net deferred
tax assets.
 
 
 91
 
 Deferred
income taxes reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
 
 Significant
components of our deferred tax liabilities and assets are as follows (in
thousands):
 
 December 31,2008
              
              
              2007Deferred
      tax assets related to:Deferred
      gains from sale and leaseback of aircraft
              
              $
              21,733
              
              
              $
              21,073Accrued
      liabilities
              
              
              26,353
              
              
              
              21,938Unrealized
      loss on derivatives
              
              
              49,906
              
              
              
              —Federal
      net operating loss carryforwards
              
              
              146,521
              
              
              
              88,623State
      operating loss carryforwards
              
              
              8,098
              
              
              
              4,593AMT
      credit carryforwards
              
              
              3,300
              
              
              
              3,498Other
              
              
              20,764
              
              
              
              5,627Total
      deferred tax assets
              
              
              276,675
              
              
              
              145,352Valuation
      allowance
              
              
              (97,169
              )
              
              
              —Net
      deferred tax assets
              
              $
              179,506
              
              
              $
              145,352Deferred
      tax liabilities related to:Depreciation
              
              
              143,957
              
              
              
              133,592Aircraft
      rent
              
              
              35,064
              
              
              
              32,865Other
              
              
              485
              
              
              
              553Gross
      deferred tax liabilities
              
              
              179,506
              
              
              
              167,010Total
      net deferred tax asset (liability)
              
              $
              —
              
              
              $
              (21,658
              )
  At
December 31, 2008 and 2007, federal net operating loss carryforwards
available for use on our income tax returns to offset future taxable
income were approximately $428.0 million and $256.0 million, respectively,
which expire between 2017 and 2028. State net operating loss carryforwards at
December 31, 2008 and 2007, respectively, were $117.6 million and $110.8
million, and will expire between 2017 and 2028. Included in the net operating
loss carryforwards for the year ending December 31, 2008 is $13.7
million related to deductions from equity-based compensation. Our
alternative minimum tax (AMT) credit carryforwards for income tax purposes were
$3.3 million and $3.5 million at December 31, 2008 and 2007,
respectively.
 
 
 92
 
 Note
10 – Earnings (Loss) Per Common Share
  The
following table sets forth the computation of basic and diluted earnings (loss)
per common share (in thousands, except per share amounts):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Numerator:Net
      income (loss) available to common stockholders
              
              $
              (273,829
              )
              
              $
              52,683
              
              
              $
              14,714Plus
      income effect of assumed conversion-interest on convertible
      debt
              
              
              —
              
              
              
              5,468
              
              
              
              —Income
      (loss) after assumed conversion
              
              $
              (273,829
              )
              
              $
              58,151
              
              
              $
              14,714Denominator:Weighted-average
      shares outstanding, basic
              
              
              109,153
              
              
              
              91,574
              
              
              
              90,504Effect
      of 7.0% convertible notes
              
              
              —
              
              
              
              11,241
              
              
              
              —Effect
      of 5.5% convertible notes
              
              
              —
              
              
              
              —
              
              
              
              —Effect
      of dilutive stock options
              
              
              —
              
              
              
              924
              
              
              
              1,243Effect
      of dilutive restricted shares
              
              
              —
              
              
              
              580
              
              
              
              494Effect
      of warrants to purchase common stock
              
              
              —
              
              
              
              —
              
              
              
              195Adjusted
      weighted-average shares outstanding, diluted
              
              
              109,153
              
              
              
              104,319
              
              
              
              92,436Basic
      earnings per common share
              
              $
              (2.51
              )
              
              $
              0.58
              
              
              $
              0.16Diluted
      earnings per common share
              
              $
              (2.51
              )
              
              $
              0.56
              
              
              $
              0.16
  Excluded
from the diluted earnings per share calculation for 2008 are the impacts on the
weighted average shares outstanding of the following which would have been
anti-dilutive in 2008: 11.2 million shares related to our 7.0% convertible
notes that are issuable upon conversion; 18.1 million shares related to our 5.5%
convertible senior notes that are issuable upon conversion; 2.1million shares related
to our outstanding stock options; 1.5million shares related
to our unvested restricted stock; and 4.7 million common shares related to
warrants that were issued on October 31, 2008 . The impact of the 11.2 million
common shares related to our 7% convertible notes was excluded from the earnings
per share calculation for 2006 because the impact would have been
anti-dilutive.
  
 93
 
 
 Note
11 – Accumulated Other Comprehensive Income (Loss)
  Other
comprehensive income 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):
  Unrealizedgain (loss) onderivative
      financialinstruments
              
              
              Postemployment
                obligations
              
              
              Accumulated other
                comprehensive
                income
      (loss)Balance
      at January 1, 2006
              
              $
              —
              
              
              $
              —
              
              
              $
              —Changes
      in fair value, net of income taxes
              
              
              84
              
              
              
              —
              
              
              
              84Adjustment
      to initially recognize unfunded postretirement obligations, net of income
      taxes
              
              
              —
              
              
              
              (5,336
              )
              
              
              (5,336
              )Balance
      at December 31, 2006
              
              
              84
              
              
              
              (5,336
              )
              
              
              (5,252
              )Changes
      in fair value, net of income taxes
              
              
              15,721
              
              
              
              —
              
              
              
              15,721Reclassification
      to earnings, net of income taxes
              
              
              (14,688
              )
              
              
              1,012
              
              
              
              (13,676
              )Change
      in actuarial gains and losses, net of income taxes
              
              
              —
              
              
              
              4,557
              
              
              
              4,557Balance
      at December 31, 2007
              
              
              1,117
              
              
              
              233
              
              
              
              1,350Changes
      in fair value, net of income taxes
              
              
              (11,877
              )
              
              
              —
              
              
              
              (11,877
              )Reclassification
      to earnings, net of income taxes
              
              
              (14,809
              )
              
              
              15
              
              
              
              (14,794
              )Change
      in actuarial gains and losses, net of income taxes
              
              
              —
              
              
              
              (439
              )
              
              
              (439
              )Balance
      at December 31, 2008
              
              $
              (25,569
              )
              
              $
              (191
              )
              
              $
              (25,760
              )
  Note
12 – Stock Option Plans and Restricted Stock Awards
  Our 1993
Incentive Stock Option Plan provided for the grant of options to officers,
directors and key employees to purchase up to 4.8 million shares of common
stock at prices not less than the fair value of the shares on the dates of
grant. Our 2002 Long Term Incentive Plan, 1996 Stock Option Plan and 1994 Stock
Option Plan authorized up to 5 million, 5 million, and 4 million
incentive stock options or nonqualified options, respectively, to be granted to
our officers, directors, key employees and consultants.
  In
connection with the acquisition of Airways Corporation in 1997, we assumed the
Airways Corporation 1995 Stock Option Plan (Airways Plan) and the Airways
Corporation 1995 Director Stock Option Plan (Airways DSOP). Under the Airways
Plan, up to 1.2 million incentive stock options or nonqualified options
could be granted to our officers, directors, key employees, or consultants.
Under the Airways DSOP, up to 150,000 nonqualified options could be granted to
directors.
  Vesting
and term of all options is determined by the Board of Directors and may vary by
optionee; however, the term may be no longer than ten years from the date of
grant. As of December 31, 2008, an aggregate of 1.4 million shares of
restricted stock and options to acquire common stock remained available for
future grant.
 
 
 94
 Stock
Options
  There
were no options granted during 2008, 2007, or 2006. No compensation expense for
stock options was recognized during 2008 or 2007, and compensation expense for
stock options was not significant during 2006.
 
 A summary
of stock option activity under the aforementioned plans are as
follows:
  Options
              
              
              Weighted-
                Average
                Exercise
                PriceBalance
      at January 1, 2008
              
              
              3,092,677
              
              
              $
              6.42Exercised
              
              
              (842,533
              )
              
              
              3.09Expired
              
              
              (5,000
              )
              
              
              8.00Cancelled
              
              
              (67,549
              )
              
              
              10.76Balance
      at December 31, 2008
              
              
              2,177,595
              
              
              $
              7.57Exercisable
      at December 31, 2008
              
              
              2,177,595
              
              
              $
              7.57
 
 The
options outstanding, as of December 31, 2008, have a weighted-average remaining
contractual life of 3.4 years and an aggregate intrinsic value of $0.1
million. The total intrinsic value of options exercised during the years
ended December 31, 2008, 2007, and 2006, was $1.0 million, $1.0 million,
and $9.8 million, respectively. Cash received from options exercised under
all share-based payment arrangements for the years ended December 31, 2008,
2007, and 2006, was $2.6 million, $1.0 million, and $6.0 million, respectively.
The benefits associated with the tax deductions in excess of recognized
compensation cost have been reported as a financing cash flow rather than an
operating cash flow. For the years ended December 31, 2008 and 2007, we did
not record any excess tax benefit generated from option exercises.
  Restricted
Stock
  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 which typically vest over time
(generally three years).
  Compensation
expense for our restricted stock grants was $5.8 million, $5.4 million, and $4.4
million during the years ended December 31, 2008, 2007 and 2006,
respectively. As of December 31, 2008, we have $8.5 million in total
unrecognized future compensation expense that will be recognized over the next
three years relating to awards for approximately 1.5 million restricted shares
which were outstanding but which had not yet vested.
 
 A summary
of restricted stock activity under the aforementioned plan is as
follows:
  Restricted
                Stock
                AwardsUnvested
      at January 1, 2008
              
              
              1,074,070Vested
              
              
              (462,264
              )Issued
              
              
              915,299Surrendered
              
              
              (41,799
              )Unvested
      at December 31, 2008
              
              
              1,485,306
  The grant
date weighted-average fair value per share of restricted stock awards granted
during the years ended December 31, 2008, 2007, and 2006, was $6.96, $9.10,
and $15.16, respectively. Unvested restricted stock awards are not included in
the number of outstanding common shares. Upon vesting, the shares are included
in the number of outstanding common shares. The total fair value of shares
vested during the years ended December 31, 2008, 2007, and 2006, was $3.2
million, $4.1 million, and $3.1 million, respectively.
  95
 Note
13 – Employee Benefit Plans
  All
employees, except pilots, are eligible to participate in the consolidated 401(k)
plan, a defined contribution benefit plan that qualifies under
Section 401(k) of the Internal Revenue Code. Participants may contribute up
to 15 percent of their base salary to the plan. Our contributions to the plan
are discretionary. The amount of our contributions to the plan expensed in 2008,
2007, and 2006 was approximately $1.4 million, $1.2 million, and $1.0 million,
respectively.
  Effective
August 1, 2001, the AirTran Airways Pilot Savings and Investment Plan
(Pilot Savings Plan) was established. This plan is designed to qualify under
Section 401(k) of the Internal Revenue Code. Eligible employees may
contribute up to the IRS maximum allowed. We do not match pilot contributions to
this Pilot Savings Plan. Effective on August 1, 2001, we also established
the Pilot-Only Defined Contribution Pension Plan (DC Plan) which qualifies under
Section 403(b) of the Internal Revenue Code. Our contributions were 10.5
percent of compensation, as defined, during 2008, 2007, and 2006, respectively.
We expensed $15.7 million, $14.0 million, and $11.1 million in contributions to
the DC Plan during 2008, 2007 and 2006, respectively.
  Under our
1995 Employee Stock Purchase Plan, employees who complete 12 months of service
are eligible to make periodic purchases of our common stock at up to a 15
percent discount from the market value on the offering date. The Board of
Directors determines the discount rate, which was increased to 10 percent from 5
percent effective November 1, 2001. We are authorized to issue up to
4 million shares of common stock under this plan. During 2008, 2007, and
2006, the employees purchased approximately 376,000, 154,000, and 113,000
shares, respectively, at an average price of $3.65, $8.81, and $12.32 per share,
respectively.
 
 We
provide postemployment defined benefits to certain eligible employees. At
December 31, 2008, the liability for the accumulated postemployment benefit
obligations under the plans was $7.4 million, and unrecognized prior service
costs and net actuarial gains were $0.2 million. Benefit expense under the plans
was $1.1 million and $3.9 million in 2008 and 2007, respectively. Benefit
payments in all periods presented are not material. In December 2007, federal
legislation was enacted increasing the mandatory retirement age for U.S.
commercial airline pilots from age 60 to age 65. The impact of the legislation
was to decrease the actuarially determined liability for the unfunded status of
the plan by $6.0 million with a corresponding increase in accumulated other
comprehensive income, net of income tax of $3.8 million.
 
 Note
14 – Supplemental Cash Flow Information
  Supplemental
cash flow information is summarized as follows, (in thousands):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Supplemental disclosure of cash
      flow activities:Cash
      paid for interest, net of capitalized interest
              
              $
              75,473
              
              
              $
              64,397
              
              
              $
              34,307Cash
      paid (received) for income taxes, net of amounts refunded
              
              
              332
              
              
              
              —
              
              
              
              —Non-cash
      financing and investing activities:Aircraft
      acquisition debt financing
              
              
              178,550
              
              
              
              293,650
              
              
              
              380,600Acquisition
      under capital leases
              
              
              5,077
              
              
              
              —
              
              
              
              —
  
 96
 
 Note
15 – Other Assets, Accrued and Other Liabilities, and Other (Income)
Expense
  The
components of other assets were (in thousands):
  December 31,2008
              
              
              2007Aircraft
      maintenance deposits
              
              $
              54,169
              
              
              $
              49,447Deposits
              
              
              13,816
              
              
              
              13,789Other
              
              
              2,063
              
              
              
              4,109Other
      assets
              
              $
              70,048
              
              
              $
              67,345
  The
components of accrued and other liabilities were (in thousands):
  December 31,2008
              
              
              2007Accrued
      interest
              
              $
              22,865
              
              
              $
              27,434Accrued
      salaries, wages and benefits
              
              
              48,520
              
              
              
              47,963Unremitted
      passenger taxes and fees
              
              
              32,651
              
              
              
              30,050Other
              
              
              43,853
              
              
              
              32,449Accrued
      and other liabilities
              
              $
              147,889
              
              
              $
              137,896
 
 On
January 11, 2007, we commenced an exchange offer for all of the common
stock of Midwest Air Group (Midwest). On August 17, 2007, we announced that
we had terminated our efforts to acquire Midwest. The results of the third
quarter of 2007 include non-operating expense of $10.7 million, ($6.4 million
net of tax), related to costs associated with the proposed acquisition of
Midwest, including the exchange offer, and consisted primarily of fees for
attorneys, accountants, investment bankers, travel, and other related
costs.
 
 
 97
 
 
 Note
16 – Quarterly Financial Data (Unaudited)
  Summarized quarterly financial data by
quarter for 2008 and 2007 is as follows (in thousands, except per share
data):
  Three
      Months EndedMarch 31
              
              
              June 30
              
              
              September 30
              
              
              December 312008Operating
      revenue
              
              $
              596,391
              
              
              $
              693,380
              
              
              $
              673,292
              
              
              $
              589,415Operating
      income (loss)
              
              
              (35,227
              )
              
              
              (45,524
              )
              
              
              (46,113
              )
              
              
              54,854Other
      (income) expense
              
              
              19,528
              
              
              
              (29,292
              )
              
              
              60,569
              
              
              
              169,077Income
      (loss) before income taxes
              
              
              (54,755
              )
              
              
              (16,232
              )
              
              
              (106,682
              )
              
              
              (114,223
              )Net
      loss
              
              
              (34,813
              )
              
              
              (13,538
              )
              
              
              (107,087
              )
              
              
              (118,391
              )Loss
      per common share:Basic
              
              $
              (.38
              )
              
              $
              (.12
              )
              
              $
              (.91
              )
              
              $
              (1.00
              )Diluted
              
              
              (.38
              )
              
              
              (.12
              )
              
              
              (.91
              )
              
              
              (1.00
              )Included
      in operating income (loss):
                Gain
      on sale of assets
              
              $
              —
              
              
              $
              7,292
              
              
              $
              10,390
              
              
              $
              5,503Impairment
      of goodwill
              
              
              —
              
              
              
              (8,350
              )
              
              
              —
              
              
              
              —Included
      in other (income) expense:Net
      (gains) losses on derivative financial instruments
              
              $
              5,190
              
              
              $
              (43,560
              )
              
              $
              41,520
              
              
              $
              147,6862007Operating
      revenue
              
              $
              504,066
              
              
              $
              613,526
              
              
              $
              608,555
              
              
              $
              583,836Operating
      income
              
              
              12,939
              
              
              
              77,862
              
              
              
              38,466
              
              
              
              14,893Other
      (income) expense
              
              
              9,201
              
              
              
              10,595
              
              
              
              21,389
              
              
              
              15,623Income
      (loss) before income taxes
              
              
              3,738
              
              
              
              67,267
              
              
              
              17,077
              
              
              
              (730
              )Net
      income (loss)
              
              
              2,158
              
              
              
              42,059
              
              
              
              10,637
              
              
              
              (2,171
              )Earnings
      (loss) per common share:Basic
              
              $
              0.02
              
              
              $
              0.46
              
              
              $
              0.12
              
              
              $
              (0.02
              )Diluted
              
              
              0.02
              
              
              
              0.42
              
              
              
              0.11
              
              
              
              (0.02
              )Included
      in operating income:
                Gain
      on sale of assets
              
              $
              —
              
              
              $
              6,234
              
              
              $
              —
              
              
              $
              —Included
      in other (income) expense:Net
      (gains) losses on derivative financial instruments
              
              $
              —
              
              
              $
              156
              
              
              $
              (1,596
              )
              
              $
              1,695Midwest
      exchange offer expenses
              
              
              —
              
              
              
              —
              
              
              
              10,650
              
              
              
              —
 
   98
   ITEM 9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  None.
 
 ITEM 9A.
              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 December 31, 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.
  Management’s Annual Report on
Internal Control over Financial Reporting. Management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934, as amended. Our internal control over financial reporting is designed to
provide reasonable assurance to management and the board of directors regarding
the preparation and fair presentation of published financial
statements.
  Because
of its inherent limitations, internal controls over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
  Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) inInternal
Control-Integrated Framework. Based on our assessment, management
concluded that, as of December 31, 2008, our internal control over
financial reporting was effective based on those criteria.
  Ernst &
Young LLP, the independent registered public accounting firm that audited our
Consolidated Financial Statements included in this Annual Report on Form 10-K,
audited the effectiveness of our internal control over financial reporting as of
December 31, 2008. Ernst & Young LLP has issued their report which
is included in this Annual Report on Form 10-K.
  Changes in Internal Controls over
Financial Reporting. There were no changes in our internal controls over
financial reporting during the quarter ended December 31, 2008, that
materially affected, or were reasonably likely to materially affect, our
internal controls over financial reporting.
  
  99
 Report
of Independent Registered Public Accounting Firm
  The
Board of Directors and Stockholders of AirTran Holdings, Inc.
  We have
audited the internal control over financial reporting of AirTran Holdings Inc.
(the “Company”) as of December 31, 2008, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO
criteria.
  We have
also audited, in accordance with the standards of the Public Company Oversight
Board (United States), the consolidated balance sheets of the Company as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, cash flows and stockholders’ equity of the Company for each of the
three years in the period ended December 31, 2008 and our report dated
February 11, 2009 expressed an unqualified opinion thereon.
  /s/
Ernst & Young LLP
  Orlando,
      Florida
 February
      11, 2009
 
 100
  ITEM 9B.
              OTHER
      INFORMATION
  Not
applicable.
  PART
III
  ITEM 10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  Code
of Ethics
  The
information required by this Item is incorporated herein by reference to our
2009 Proxy Statement.
  Audit
Committee Financial Expert
  The
information required by this Item is incorporated herein by reference to our
2009 Proxy Statement.
  ITEM 11.
              EXECUTIVE
      COMPENSATION
  The
information required by this Item is incorporated herein by reference to our
2009 Proxy Statement.
  ITEM 12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
  Certain
information required by this Item is incorporated herein by reference to our
2009 Proxy Statement.
 
 Securities
Authorized for Issuance Under Equity Compensation Plans
  (a)
              
              
              (b)
              
              
              (c)Plan
      Category
              
              Number of securities to
                be
      issued upon exercise
                of
      outstanding options
                and
      restricted stock
              
              
              Weighted-average
                exercise
      price of
                outstanding options
                and restricted stock
              
              
              Number of securities
                remaining available for
                future
      issuance under
                equity
      compensation
                plans
      (excluding
                securities
      reflected in
                column
      (a))Equity
      compensation plans approved by security holders (1)
              
              
              3,662,901
              
              
              
              7.57
              
              
              
              1,430,125Equity
      compensation plans not approved by security holders
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              
              3,662,901
              
              
              
              7.57
              
              
              
              1,430,125
  (1)
              Includes
      our 1993, 1994 and 1996 Stock Option Plans and our 2002 Long-Term
      Incentive Plan.
  ITEM 13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
  The
information required by this Item is incorporated herein by reference to our
2009 Proxy Statement.
  ITEM 14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
  The
information required by this Item is incorporated herein by reference to our
2009 Proxy Statement.
  
 101
 
 PART
IV
  ITEM 15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULE
  Page(a)(1)
      The following Consolidated Financial Statements of AirTran Holdings, Inc.
      are filed as part of this report under Item 8- Financial Statements
      and Supplementary Data:Report
      of Independent Registered Public Accounting Firm
              63Consolidated
      Statements of Operations
              64—Years
      ended December 31, 2008, 2007, and 2006Consolidated
      Balance Sheets
              65—December 31,
      2008 and 2007Consolidated
      Statements of Cash Flows
              67—Years
      ended December 31, 2008, 2007, and 2006Consolidated
      Statements of Stockholders’ Equity
              68—Years
      ended December 31, 2008, 2007 and 2006Notes
      to Consolidated Financial Statements
              69
  (a)(2)
              All
      schedules for which provision is made in the applicable accounting
      regulations of the Securities and Exchange Commission are not required
      under the related instructions or are inapplicable and therefore have been
      omitted.
 (a)(3)
              The
      following exhibits are filed herewith or incorporated by reference as
      indicated. Exhibit numbers refer to Item 601 of Regulation
      S-K.
  Exhibit No.
              Description3.1
              Articles
      of Incorporation (1)3.2
              By-Laws
      (As Amended and Restated on July 28, 2005) (13)4.1
              See
      the Articles of Incorporation filed as Exhibit 3.1 and Bylaws filed as
      Exhibit 3.210.1
              Incentive
      Stock Option Agreement dated June 1, 1993, between ValuJet Airlines, Inc.
      and Lewis H. Jordan (2)(3)10.2
              1993
      Incentive Stock Option Plan (2)(3)10.3
              1994
      Stock Option Plan (2)(3)10.4
              1995
      Employee Stock Purchase Plan (4)10.5
                *
              Purchase
      Agreement between McDonnell Douglas Corporation and ValuJet Airlines, Inc.
      dated December 6, 1995 (5)10.6
              Agreement
      and Lease of Premises Central Passenger Terminal Complex Hartsfield
      Atlanta International Airport (5)10.7
              1996
      Stock Option Plan (3)(6)10.8
              Airways
      Corporation 1995 Stock Option Plan (3)(8)10.9
              Airways
      Corporation 1995 Directors Stock Option Plan (3)(8)10.10
              Lease
      of headquarters in Orlando, Florida, dated November 14, 1995
      (9)10.11
              Orlando
      International Lease and Use Agreement (10)10.12
              Orlando
      Tradeport Maintenance Hangar Lease Agreement by and between Greater
      Orlando Aviation Authority and Page AvJet Corporation dated December 11,
      1989 (11)10.13
              Amendment
      No. 1 to Orlando Tradeport Maintenance Hangar Lease Agreement by and
      between Greater Orlando Aviation Authority and Page AvJet Corporation
      dated June 22, 1990 (11)10.14
              Agreement
      and Second Amendment to Orlando Tradeport Maintenance Hangar Lease
      Agreement by and between Greater Orlando Aviation Authority and the
      Company dated January 25, 1996 (11)
  102
 10.15
              Note
      Purchase Agreement dated as of November 3, 1999, among the Company,
      AirTran Airways, Inc., State Street Bank and Trust Company of Connecticut
      National Association and First Security Bank, National Association
      (12)10.16
              Note
      Agreement, dated April 12, 2001, between AirTran Holdings, Inc. and Boeing
      Capital Loan Corporation, including as an exhibit thereto the form of
      notes (15)10.17
              Warrant
      Agreement, dated April 12, 2001, between AirTran Holdings, Inc. and
      Wilmington Trust Company (14)10.18
              Purchase
      Agreement, dated April 12, 2001, among AirTran Holdings, Inc., AirTran
      Airways, Inc. and Boeing Capital Loan Corporation (15)10.19
              Indenture,
      dated as of April 12, 2001, between AirTran Airways, Inc. and Wilmington
      Trust Company, as trustee, including as an exhibit thereto the form of
      note (15)10.20
              Employment
      Agreement dated as of October 6, 2001, between the Company and Joseph B.
      Leonard (16)10.21
              Employment
      Agreement dated as of October 28, 2004, between the Company and Joseph B.
      Leonard (3) (17)10.22
                *
              Aircraft
      General Terms Agreement Number AGTA-CQT, dated July 3, 2003, by and
      between The Boeing Company (“Boeing”), and AirTran Airways, Inc.
      (“AirTran”) (18)10.23
                *
              Purchase
      Agreement Number 2444, dated July 3, 2003 (“Purchase Agreement 2444”),
      between Boeing and AirTran, as supplemented by Purchase Agreement 2444
      Supplement No. 1, by and between Boeing and AirTran
(18)10.24
                *
              Letter
      Agreements to Purchase Agreement 2444, each dated July 3, 2003, by and
      between Boeing and AirTran (18)10.25
                *
              General
      Terms Agreement No. CFM-03-0017 (“GTA CFM-03-0017”), dated June 30, 2003,
      by and between CFM International Inc. (“CFM”) and AirTran, as supplemented
      by Letter Agreement No. 1 to GTA CFM-03-0017, dated June 30, 2003, by and
      between CFM and AirTran, and Letter Agreement No. 1-A, dated September 10,
      2003, by and between CFM and AirTran (18)10.26
                *
              Maintenance
      Cost Per Hour Engine Service Agreement, dated August 13, 2003, by and
      between GE Engine Services, Inc. and AirTran (18)10.27
              Aircraft
      Lease Common Terms Agreement, dated August 15, 2003, by and between
      Aviation Financial Services, Inc. and AirTran (18)10.28
                *
              Form
      of Aircraft Lease Agreement entered into with respect to twenty-two (23)
      Boeing model 737-700 aircraft, together with the cover page from each of
      the twenty-two (23) individual Aircraft Lease Agreements
    (18)10.29
              Engine
      Lease Common Terms Agreement, dated August 15, 2003, by and between
      Aviation Financial Services, Inc. and AirTran (18)10.30
                *
              Form
      of Engine Lease Agreement entered into with respect to six (6) CFM
      International model CFM56-7B20 engines, together with the cover pages from
      each of the six (6) individual Engine Lease Agreements
  (18)10.31
                *
              Letter
      Agreement 5-1005-JSW-737, dated July 3, 2003, by and between Boeing and
      AirTran (18)10.32
                *
              Amendment
      No. 11 to Purchase Agreement No. DAC95-40-D, dated July 3, 2003, by and
      between McDonnell Douglas Corporation, a wholly owned subsidiary of Boeing
      (“MDC”), and AirTran (18)10.33
                *
              Amendment
      No. 6 to Letter Agreement No. 1 to Purchase Agreement No. DAC95-40-D,
      dated July 3, 2003, by and between MDC and AirTran (18)10.34
                *
              B717
      Lease Financing Letter Agreement, dated July 3, 2003, by and between
      Boeing and AirTran (18)10.35
                *
              AirTran
      Holdings, Inc. Amended and Restated 2002 Long Term Incentive Plan
      (17)10.36
                *
              Loan
      Agreement, dated as of August 31, 2005, by and among AirTran Airways, Inc.
      (“AirTran”), as Borrower, The Parties Identified in Schedule 1 thereto as
      Lenders, as Lenders, and The Royal Bank of Scotland plc, New York Brach
      (“RBS”), as Security Agent (20)10.37
                *
              Credit
      Agreement, dated as of August 31, 2005, by and among AirTran, as Borrower,
      Each Lender Identified in Schedule 1 thereto, as Lenders, and RBS, as
      Security Agent (20)10.38
                *
              Security
      Agreement, dated as of August 31, 2005, by and between AirTran, as
      Borrower, and RBS, as Security Agent (20)10.39
                *
              Credit
      Agreement, dated as of December 7, 2005, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lenders, and
      HSH Nordbank AG, New York Branch, as Security Agent
(23)10.40
                *
              Security
      Agreement, dated as of December 7, 2005, by and between AirTran, as
      Borrower, and HSH Nordbank AG, New York Branch, as Security Agent
      (23)10.41
                *
              Association
      of Flight Attendants — CWA, AFL-CIO, Flight Attendant Labor Contract with
      AirTran Airways, Effective June 1, 2005, Amendable December 1, 2008
      (7)
 103
 
 10.42
              Notice
      to executive officers of AirTran Holdings, Inc. regarding the acceleration
      of incentive options and acceleration of non-qualified options
      (22)10.43*
              Credit
      Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
      Each Lender Identified in Schedule 1 thereto, as Lender, and BNP Paribas
      S.A. (acting through its Paris Branch), as Security Agent
    (24)10.44*
              Security
      Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
      and the BNP Paribas S.A. (acting through its Paris Branch), as Security
      Agent (24)10.45*
              Credit
      Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
      Each Lender Identified in Schedule 1 thereto, as Lender, and The Royal
      Bank of Scotland Plc New York Branch, as Security Agent
    (24)10.46*
              Security
      Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
      and  The Royal Bank of Scotland Plc New York Branch, as Security
      Agent (24)10.47*
              Loan
      Agreement [N320AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.48*
              Loan
      Agreement [N330AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.49*
              Loan
      Agreement [N336AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.50*
              Loan
      Agreement [N337AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.51*
              Loan
      Agreement [N344AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.52
              Third
      Amended and Restated Long-Term Incentive Plan, Amended and Restated March
      28, 2007 (25)10.53*
              Loan
      Agreement, dated as of February 12, 2007, by and among AirTran, as
      Borrowers, The Parties Identified in Schedule 1 thereto, as Lenders, and
      Wells Fargo Bank Northwest, National Association, as Security Agent
      (25)10.54*
              Purchase
      Agreement No. 2444, Supplement No. 12, dated as of June 4, 2007, by and
      between the Boeing and AirTran (26)10.55*
              Credit
      Agreement, dated as of June 28, 2007, by and among AirTran, as Borrower,
      Each Lender Identified in Schedule 1 thereto, as Lender, and Bayerische
      hypo-und Vereinsbank AG, London Branch, as Security Agent
    (26)10.56*
              Security
      Agreement, dated as of June 28, 2007, by and between AirTran and
      Bayerische Hypo-und Vereinsbank AG, London Branch, as Security Agent
      (26)10.57*
              Amendment
      to Employment Agreement for Robert L. Fornaro dated October 31, 2007
      (27)10.58*
              Employment
      Agreement for Robert L. Fornaro dated November 1, 2007
  (27)10.59*
              Employment
      Agreement for Joseph B. Leonard dated November 1, 2007 effective as of
      September 1, 2007 (27)10.60*
              Pledge
      and Escrow Agreement, dated as of April 30, 2008, by and among AirTran,
      U.S. Bank National Association, as Trustee and U.S. Bank National
      Association, as Escrow Agent (29)10.61*
              Amended
      and Restated Revolving Line of Credit and Reimbursement Agreement, dated
      as of October 31, 2008, by and among Bank of Utah, not in its individual
      capacity, but solely as trustee, the Lender and AirTran Airways, Inc., as
      Borrower (30)10.62
                *
              Amended
      and Restated Pledge and Escrow Agreement, dated as of October 31, 2008, by
      and among AirTran Airways, Inc., as the Grantor and Bank of Utah, not in
      its individual capacity, but as security trustee, as Secured Party
      (30)10.63
                *
              Warrant
      Agreement, dated as of October 31, 2008, by and among AirTran, as Issuer
      and Bank of Utah, not in its individual capacity but in a trust capacity
      as the Initial Holder10.64
                *
              Registration
      Rights Agreement, dated as of October 31, 2008, by and among AirTran, as
      Issuer and Bank of Utah, not in its individual capacity but in a trust
      capacity as Initial Holder21.1
              Subsidiaries
      of AirTran Holdings, Inc. (28)21.2
              Subsidiaries
      of AirTran Airways, Inc. (19)23
              Consent
      of Independent Registered Public Accounting Firm31.1
              CEO
      certification pursuant to Rule 13(a)-14 or 15(d)-1431.2
              CFO
      certification pursuant to Rule 13(a)-14 or 15(d)-1432
              CEO
      and CFO certification pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200299.1
              Instructions
      on requesting copies of AirTran Holdings, Inc.’s Corporate Governance
      Guidelines, Code of Ethics and the charters for the Audit, Compensation
      and Corporate Governance Committees
  104
  *
              Pursuant
      to 17 CFR 240.24b-2, confidential information was omitted from these
      Exhibits and was filed separately with the Securities and Exchange
      Commission pursuant to a Confidential Treatment Request filed with the
      Commission.(1)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-4,
      registration number 33-95232, filed with the Commission on August 1,
      1995 and amendments thereto.(2)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-1,
      registration number 33-78856, filed with the Commission on May 12,
      1994 and amendments thereto.(3)
              Management
      contract or compensation plan or arrangement required to be filed as an
      exhibit to this Report on Form 10-K pursuant to Item 14(c) of Form
      10-K.(4)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 1995, (Commission File No. 0-24164), filed
      with the Commission on August 11, 1995.(5)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1995, (Commission File No. 0-24164), filed with
      the Commission on March 29, 1996 and amendment
    thereto.(6)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1996, (Commission File No. 0-24164), filed with
      the Commission on March 31, 1997.(7)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on May 26,
      2005.(8)
              Incorporated
      by reference to Airways Corporation’s Registration Statement on Form S-4,
      registration number 33-93104, filed with the
Commission.(9)
              Incorporated
      by reference to the Quarterly Report on Form 10-Q of Airways Corporation
      (Commission File No. 0-26432) for the quarter ended December 31,
      1995.(10)
              Incorporated
      by reference to the Quarterly Report on Form 10-Q of Airways Corporation
      (Commission File No. 0-26432) for the quarter ended December 31,
      1996.
  105
 (11)
              Incorporated
      by reference to the Annual Report on Form 10-K of Airways Corporation for
      the year ended December 31, 1996 (Commission File No. 0-26432), filed with
      the Commission on March 31, 1997.(12)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1999, (Commission File No. 0-26914), filed with
      the Commission on March 30, 2000.(13)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on August 1,
      2005.(14)
              Incorporated
      by reference to the Company’s Current Report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on June 18,
      2001.(15)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q, (Commission
      File No. 1-15991), for the quarter ended June 30,
      2001.(16)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2001, (Commission File No. 1-15991), filed
      with the Commission on March 28, 2002.(17)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on May 19,
      2005.(18)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2003, (Commission File No. 1-15991),
      filed with the Commission on November 14, 2003.(19)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2003, (Commission File No. 1-15991), filed
      with the Commission on March 26, 2003.(20)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2005, (Commission File No. 1-15991),
      filed with the Commission on November 9, 2005.(21)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on May 6,
      2005.(22)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on September 16,
      2005.(23)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K, (Commission File
      No. 1-15991), filed with the Commission on March 9,
      2006.(24)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-Q for the quarter
      ending September 30, 2006, (Commission File No. 1-15991), filed
      with the Commission on November 1, 2006.(25)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2007 (Commission File No. 1-15991), filed with the
      Commission on May 8, 2007.(26)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2007 (Commission File No. 1-15997), filed with the
      Commission on August 9, 2007.(27)
              Incorporated
      by reference to the Company’s report on Form 8-K (Commission File No.
      (Commission File No. 1-15997), filed with the Commission on November 6,
      2007.(28)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-4,
      registration number 333-139917, filed with the Commission on January 11,
      2007.(29)
              Incorporated
      by reference to the Company's report on Form 8-K (Commission File No.
      1-15991), filed with the Commission on May 2, 2008.(30)
              Incorporated
      by reference to the Company's Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2008 (Commission File No. 1-15991), filed with
      the Commission on November 6, 2008.
 
 106
 SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) 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.By:
              /s/
      Robert L. FornaroRobert
      L. FornaroChairman
      of the Board,
      President and Chief Executive OfficerDate:
      February 13, 2009
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
  /s/
      Robert L. Fornaro
              
              February 13,
      2009Robert
      L. FornaroChairman
      of the Board, President and Chief Executive Officer/s/
      Arne Haak
              
              February 13,
      2009Arne
      HaakSenior
      Vice President of Finance, Treasurer and Chief Financial
      Officer
                (Principal
      Accounting and Financial Officer)/s/
      J. Veronica Biggins
              
              February 13,
      2009J.
      Veronica BigginsDirector/s/
      Don L. Chapman
              
              February 13,
      2009Don
      L. ChapmanDirector/s/
      Geoffrey T. Crowley
              
              February 13,
      2009Geoffrey
      T. CrowleyDirector/s/
      Peter D’Aloia
              
              February 13,
      2009Peter
      D’AloiaDirector/s/
      Jere A. Drummond
              
              February 13,
      2009Jere
      A. DrummondDirector/s/
      John F. Fiedler
              
              February 13,
      2009John
      F. FiedlerDirector
  107
 
 /s/
      Lewis H. Jordan
              
              February 13,
      2009Lewis
      H. JordanDirector/s/
      Alexis P. Michas
              
              February 13,
      2009Alexis
      P. MichasDirectorMichael
      P. JacksonDirector
    108
    INDEX TO
EXHIBITS
  Exhibit No.
              Description3.1
              Articles
      of Incorporation (1)3.2
              By-Laws
      (As Amended and Restated on July 28, 2005) (13)4.1
              See
      the Articles of Incorporation filed as Exhibit 3.1 and Bylaws filed as
      Exhibit 3.210.1
              Incentive
      Stock Option Agreement dated June 1, 1993, between ValuJet Airlines, Inc.
      and Lewis H. Jordan (2)(3)10.2
              1993
      Incentive Stock Option Plan (2)(3)10.3
              1994
      Stock Option Plan (2)(3)10.4
              1995
      Employee Stock Purchase Plan (4)10.5
                *
              Purchase
      Agreement between McDonnell Douglas Corporation and ValuJet Airlines, Inc.
      dated December 6, 1995 (5)10.6
              Agreement
      and Lease of Premises Central Passenger Terminal Complex Hartsfield
      Atlanta International Airport (5)10.7
              1996
      Stock Option Plan (3)(6)10.8
              Airways
      Corporation 1995 Stock Option Plan (3)(8)10.9
              Airways
      Corporation 1995 Directors Stock Option Plan (3)(8)10.10
              Lease
      of headquarters in Orlando, Florida, dated November 14, 1995
      (9)10.11
              Orlando
      International Lease and Use Agreement (10)10.12
              Orlando
      Tradeport Maintenance Hangar Lease Agreement by and between Greater
      Orlando Aviation Authority and Page AvJet Corporation dated December 11,
      1989 (11)10.13
              Amendment
      No. 1 to Orlando Tradeport Maintenance Hangar Lease Agreement by and
      between Greater Orlando Aviation Authority and Page AvJet Corporation
      dated June 22, 1990 (11)10.14
              Agreement
      and Second Amendment to Orlando Tradeport Maintenance Hangar Lease
      Agreement by and between Greater Orlando Aviation Authority and the
      Company dated January 25, 1996 (11)10.15
              Note
      Purchase Agreement dated as of November 3, 1999, among the Company,
      AirTran Airways, Inc., State Street Bank and Trust Company of Connecticut
      National Association and First Security Bank, National Association
      (12)10.16
              Note
      Agreement, dated April 12, 2001, between AirTran Holdings, Inc. and Boeing
      Capital Loan Corporation, including as an exhibit thereto the form of
      notes (15)10.17
              Warrant
      Agreement, dated April 12, 2001, between AirTran Holdings, Inc. and
      Wilmington Trust Company (14)10.18
              Purchase
      Agreement, dated April 12, 2001, among AirTran Holdings, Inc., AirTran
      Airways, Inc. and Boeing Capital Loan Corporation (15)10.19
              Indenture,
      dated as of April 12, 2001, between AirTran Airways, Inc. and Wilmington
      Trust Company, as trustee, including as an exhibit thereto the form of
      note (15)10.20
              Employment
      Agreement dated as of October 6, 2001, between the Company and Joseph B.
      Leonard (16)10.21
              Employment
      Agreement dated as of October 28, 2004, between the Company and Joseph B.
      Leonard (3) (17)10.22
                *
              Aircraft
      General Terms Agreement Number AGTA-CQT, dated July 3, 2003, by and
      between The Boeing Company (“Boeing”), and AirTran Airways, Inc.
      (“AirTran”) (18)
  
  109
  
 
 10.23*
              Purchase
      Agreement Number 2444, dated July 3, 2003 (“Purchase Agreement
      2444”), between Boeing and AirTran, as supplemented by Purchase Agreement
      2444 Supplement No. 1, by and between Boeing and AirTran
    (18)10.24*
              Letter
      Agreements to Purchase Agreement 2444, each dated July 3, 2003, by and
      between Boeing and AirTran (18)10.25*
              General
      Terms Agreement No. CFM-03-0017 (“GTA CFM-03-0017”), dated June 30, 2003,
      by and between CFM International Inc. (“CFM”) and AirTran, as supplemented
      by Letter Agreement No. 1 to GTA CFM-03-0017, dated June 30, 2003, by and
      between CFM and AirTran, and Letter Agreement No. 1-A, dated September 10,
      2003, by and between CFM and AirTran (18)10.26*
              Maintenance
      Cost Per Hour Engine Service Agreement, dated August 13, 2003, by and
      between GE Engine Services, Inc. and AirTran (18)10.27
              Aircraft
      Lease Common Terms Agreement, dated August 15, 2003, by and between
      Aviation Financial Services, Inc. and AirTran (18)10.28*
              Form
      of Aircraft Lease Agreement entered into with respect to twenty-two (23)
      Boeing model 737-700 aircraft, together with the cover page from each of
      the twenty-two (23) individual Aircraft Lease Agreements
    (18)10.29
              Engine
      Lease Common Terms Agreement, dated August 15, 2003, by and between
      Aviation Financial Services, Inc. and AirTran (18)10.30*
              Form
      of Engine Lease Agreement entered into with respect to six (6) CFM
      International model CFM56-7B20 engines, together with the cover pages from
      each of the six (6) individual Engine Lease Agreements
  (18)10.31*
              Letter
      Agreement 5-1005-JSW-737, dated July 3, 2003, by and between Boeing and
      AirTran (18)10.32*
              Amendment
      No. 11 to Purchase Agreement No. DAC95-40-D, dated July 3, 2003, by and
      between McDonnell Douglas Corporation, a wholly owned subsidiary of Boeing
      (“MDC”), and AirTran (18)10.33*
              Amendment
      No. 6 to Letter Agreement No. 1 to Purchase Agreement No. DAC95-40-D,
      dated July 3, 2003, by and between MDC and AirTran (18)10.34*
              B717
      Lease Financing Letter Agreement, dated July 3, 2003, by and between
      Boeing and AirTran (18)10.35*
              AirTran
      Holdings, Inc. Amended and Restated 2002 Long Term Incentive Plan
      (17)10.36*
              Loan
      Agreement, dated as of August 31, 2005, by and among AirTran Airways, Inc.
      (“AirTran”), as Borrower, The Parties Identified in Schedule 1 thereto as
      Lenders, as Lenders, and The Royal Bank of Scotland plc, New York Brach
      (“RBS”), as Security Agent (20)10.37*
              Credit
      Agreement, dated as of August 31, 2005, by and among AirTran, as Borrower,
      Each Lender Identified in Schedule 1 thereto, as Lenders, and RBS, as
      Security Agent (20)10.38*
              Security
      Agreement, dated as of August 31, 2005, by and between AirTran, as
      Borrower, and RBS, as Security Agent (20)10.39*
              Credit
      Agreement, dated as of December 7, 2005, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lenders, and
      HSH Nordbank AG, New York Branch, as Security Agent
(23)10.40*
              Security
      Agreement, dated as of December 7, 2005, by and between AirTran, as
      Borrower, and HSH Nordbank AG, New York Branch, as Security Agent
      (23)10.41*
              Association
      of Flight Attendants — CWA, AFL-CIO, Flight Attendant Labor Contract with
      AirTran Airways, Effective June 1, 2005, Amendable December 1, 2008
      (7)
  110
  10.42
              Notice
      to executive officers of AirTran Holdings, Inc. regarding the acceleration
      of incentive options and acceleration of non-qualified options
      (22)10.43*
              Credit
      Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
      Each Lender Identified in Schedule 1 thereto, as Lender, and BNP Paribas
      S.A. (acting through its Paris Branch), as Security Agent
    (24)10.44*
              Security
      Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
      and the BNP Paribas S.A. (acting through its Paris Branch), as Security
      Agent (24)10.45*
              Credit
      Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
      Each Lender Identified in Schedule 1 thereto, as Lender, and The Royal
      Bank of Scotland Plc New York Branch, as Security Agent
    (24)10.46*
              Security
      Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
      and The Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.47*
              Loan
      Agreement [N320AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.48*
              Loan
      Agreement [N330AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.49*
              Loan
      Agreement [N336AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.50*
              Loan
      Agreement [N337AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.51*
              Loan
      Agreement [N344AT], dated as of August 1, 2006, by and among AirTran, as
      Borrower, Each Lender Identified in Schedule 1 thereto, as Lender, and The
      Royal Bank of Scotland Plc New York Branch, as Security Agent
      (24)10.52
              Third
      Amended and Restated Long-Term Incentive Plan, Amended and Restated March
      28, 2007 (25)10.53*
              Loan
      Agreement, dated as of February 12, 2007, by and among AirTran, as
      Borrowers, The Parties Identified in Schedule 1 thereto, as Lenders, and
      Wells Fargo Bank Northwest, National Association, as Security Agent
      (25)10.54*
              Purchase
      Agreement No. 2444, Supplement No. 12, dated as of June 4, 2007, by and
      between the Boeing and AirTran (26)10.55*
              Credit
      Agreement, dated as of June 28, 2007, by and among AirTran, as Borrower,
      Each Lender Identified in Schedule 1 thereto, as Lender, and Bayerische
      hypo-und Vereinsbank AG, London Branch, as Security Agent
    (26)10.56*
              Security
      Agreement, dated as of June 28, 2007, by and between AirTran and
      Bayerische Hypo-und Vereinsbank AG, London Branch, as Security Agent
      (26)10.57*
              Amendment
      to Employment Agreement for Robert L. Fornaro dated October 31, 2007
      (27)10.58*
              Employment
      Agreement for Robert L. Fornaro dated November 1, 2007
  (27)10.59*
              Employment
      Agreement for Joseph B. Leonard dated November 1, 2007 effective as of
      September 1, 2007 (27)10.60*
              Pledge
      and Escrow Agreement, dated as of April 30, 2008, by and among AirTran,
      U.S. Bank National Association, as Trustee and U.S. Bank National
      Association, as Escrow Agent (29)10.61*
              Amended
      and Restated Revolving Line of Credit and Reimbursement Agreement, dated
      as of October 31, 2008, by and among Bank of Utah, not in its individual
      capacity, but solely as trustee, the Lender and AirTran Airways, Inc., as
      Borrower (30)10.62
                *
              Amended
      and Restated Pledge and Escrow Agreement, dated as of October 31, 2008, by
      and among AirTran Airways, Inc., as the Grantor and Bank of Utah, not in
      its individual capacity, but as security trustee, as Secured Party
      (30)10.63
                *
              Warrant
      Agreement, dated as of October 31, 2008, by and among AirTran, as Issuer
      and Bank of Utah, not in its individual capacity but in a trust capacity
      as the Initial Holder10.64
                *
              Registration
      Rights Agreement, dated as of October 31, 2008, by and among AirTran, as
      Issuer and Bank of Utah, not in its individual capacity but in a trust
      capacity as Initial Holder21.1
              Subsidiaries
      of AirTran Holdings, Inc. (28)21.2
              Subsidiaries
      of AirTran Airways, Inc. (19)23
              Consent
      of Independent Registered Public Accounting Firm31.1
              CEO
      certification pursuant to Rule 13(a)-14 or 15(d)-1431.2
              CFO
      certification pursuant to Rule 13(a)-14 or 15(d)-1432
              CEO
      and CFO certification pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200299.1
              Instructions
      on requesting copies of AirTran Holdings, Inc.’s Corporate Governance
      Guidelines, Code of Ethics and the charters for the Audit, Compensation
      and Corporate Governance Committees
  111
 *
              Pursuant
      to 17 CFR 240.24b-2, confidential information was omitted from these
      Exhibits and was filed separately with the Securities and Exchange
      Commission pursuant to a Confidential Treatment Request filed with the
      Commission.(1)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-4,
      registration number 33-95232, filed with the Commission on August 1,
      1995 and amendments thereto.(2)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-1,
      registration number 33-78856, filed with the Commission on May 12,
      1994 and amendments thereto.(3)
              Management
      contract or compensation plan or arrangement required to be filed as an
      exhibit to this Report on Form 10-K pursuant to Item 14(c) of Form
      10-K.(4)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 1995, (Commission File No. 0-24164), filed
      with the Commission on August 11, 1995.(5)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1995, (Commission File No. 0-24164), filed with
      the Commission on March 29, 1996 and amendment
    thereto.(6)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1996, (Commission File No. 0-24164), filed with
      the Commission on March 31, 1997.(7)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on May 26,
      2005.(8)
              Incorporated
      by reference to Airways Corporation’s Registration Statement on Form S-4,
      registration number 33-93104, filed with the
Commission.(9)
              Incorporated
      by reference to the Quarterly Report on Form 10-Q of Airways Corporation
      (Commission File No. 0-26432) for the quarter ended December 31,
      1995.
  112
 (10)
              Incorporated
      by reference to the Quarterly Report on Form 10-Q of Airways Corporation
      (Commission File No. 0-26432) for the quarter ended December 31,
      1996.(11)
              Incorporated
      by reference to the Annual Report on Form 10-K of Airways Corporation for
      the year ended December 31, 1996 (Commission File No. 0-26432), filed with
      the Commission on March 31, 1997.(12)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1999, (Commission File No. 0-26914), filed with
      the Commission on March 30, 2000.(13)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on August 1,
      2005.(14)
              Incorporated
      by reference to the Company’s Current Report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on June 18,
      2001.(15)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q, (Commission
      File No. 1-15991), for the quarter ended June 30,
      2001.(16)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2001, (Commission File No. 1-15991), filed
      with the Commission on March 28, 2002.(17)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on May 19,
      2005.(18)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2003, (Commission File No. 1-15991),
      filed with the Commission on November 14, 2003.(19)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2003, (Commission File No. 1-15991), filed
      with the Commission on March 26, 2003.(20)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2005, (Commission File No. 1-15991),
      filed with the Commission on November 9, 2005.(21)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on May 6,
      2005.(22)
              Incorporated
      by reference to the Company’s report on Form 8-K, (Commission File
      No. 1-15991), filed with the Commission on September 16,
      2005.(23)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-K, (Commission File
      No. 1-15991), filed with the Commission on March 9,
      2006.(24)
              Incorporated
      by reference to the Company’s Annual Report on Form 10-Q for the quarter
      ending September 30, 2006, (Commission File No. 1-15991), filed
      with the Commission on November 1, 2006.(25)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2007 (Commission File No. 1-15991), filed with the
      Commission on May 8, 2007.(26)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2007 (Commission File No. 1-15997), filed with the
      Commission on August 9, 2007.(27)
              Incorporated
      by reference to the Company’s report on Form 8-K (Commission File No.
      (Commission File No. 1-15997), filed with the Commission on November 6,
      2007.(28)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-4,
      registration number 333-139917, filed with the Commission on January 11,
      2007.(29)
              Incorporated
      by reference to the Company's report on Form 8-K (Commission File No.
      1-15991), filed with the Commission on May 2, 2008.(30)
              Incorporated
      by reference to the Company's Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2008 (Commission File No. 1-15991), filed with
      the Commission on November 6,
2008.
   113