Attached files
UNITED
STATES
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, 2009
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
file number 1-15991
AIRTRAN
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
58-2189551
|
(State
or other jurisdiction of
incorporation
or organization)
|
(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 x No ¨
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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files).
Yes ¨ No ¨ N/A x
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. x
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
|
x
|
Accelerated filer
|
¨
|
|
Non-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, 2009, was approximately $740 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 1, 2010, was
134,753,283 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 18, 2010 and to be filed with the Commission, are incorporated by
reference into this Report on Form 10-K.
TABLE
OF CONTENTS
PAGE
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PART
I
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Item 1.
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Business
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1
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Item 1A.
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Risk
Factors
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15
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Item 1B.
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Unresolved
Staff Comments
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27
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Item 2.
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Properties
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27
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Item 3.
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Legal
Proceedings
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28
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Item 4.
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Submission
of Matters to Vote of Security Holders
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29
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PART II
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder
Matters
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and
Issuer Purchases of Equity Securities
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30
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Item 6.
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Selected
Financial and Operating Data
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31
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition
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and
Results of Operations
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33
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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56
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Item 8.
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Financial
Statements and Supplementary Data
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60
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting
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and
Financial Disclosure
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100
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Item 9A.
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Controls
and Procedures
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100
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Item 9B.
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Other
Information
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102
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PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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102
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Item 11.
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Executive
Compensation
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102
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management
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and
Related Stockholder Matters
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102
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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103
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Item 14.
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Principal
Accountant Fees and Services
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103
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PART IV
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Item 15.
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Exhibits
and Financial Statement Schedule
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103
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FORWARD-LOOKING
INFORMATION
This
annual report on Form 10-K and the documents incorporated by reference herein
and therein include “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act and Section 21E of the Exchange Act.
We use
words such as “anticipate,” believe,” “could,” “continue,” “estimate,” “expect,”
“forecast,” “guidance,” “indicate,” “intend,” “may,” “outlook,” “plan,”
“project,” “should,” “will,” “would,” and similar expressions or the negative
thereof to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. Forward-looking statements appear
throughout this annual report and the documents incorporated by
reference into this annual report.
All of
our statements, other than statements of historical facts, are forward-looking
statements, including estimates, projections, statements relating to our
business plans and objectives, expected financial performance and expected
results of operations, our operations and related industry developments,
expected fuel costs, the revenue and pricing environment, our future financing
plans and needs, our overall financial condition, and the overall economic
environment. Forward-looking statements also include the assumptions upon which
such statements are based.
Forward-looking
statements are based upon information currently available to us and our current
intent, beliefs, and expectations. Certain forward-looking statements discuss
the possible future effects of current known trends or uncertainties and include
statements which indicate that the future effects of known trends or
uncertainties cannot be predicted, guaranteed or assured.
Forward-looking
statements are subject to significant risks and uncertainties that could cause
actual events including our actual results and financial position, to differ
materially from expectations. Likewise the timing of certain events may differ
materially from those expressed in forward-looking statements. There may be
other existing factors not identified, of which we may not be currently aware or
which we may not appreciate, that may be separate risks or that may affect
matters discussed in the forward-looking statements and such unknown or
unappreciated or underappreciated risks also may cause actual events and results
to differ materially from those discussed. We cannot guarantee that we actually
will achieve the plans, intentions or expectations disclosed in our
forward-looking statements and, accordingly, you should not place undue reliance
on our forward-looking statements.
Any
forward-looking statement speaks only as of the date on which it is made, based
on the information available to us on the date specified or, if no date is
specified then as of the date of this annual report. Except as may be
required by applicable law, we undertake no obligation to publicly update or
revise any forward-looking statement to reflect new information or changes in
assumptions, events or circumstances after the date on which the statement is
made, including actual results or to reflect the occurrence of unanticipated
events or changes in other factors affecting such statements. New factors emerge
from time to time, and it is not possible for us to predict which factors will
arise. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
events or results to differ materially from information contained in any
forward-looking statements.
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. As noted above, although these expectations may change,
we may not inform you if they do, except as required by law.
Certain
important factors could cause actual events or results to differ materially from
those expressed or implied by forward-looking statements include those factors
discussed elsewhere in this annual report in Item 1A under “Risk Factors” or in
the documents incorporated by reference into this annual report. Such risks,
uncertainties, and forward-looking statements include, but are not limited to,
statements and risks regarding the following:
•
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changes
in our business strategy, and our ability to successfully execute our
current strategy;
|
•
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the
continuing impact of the global adverse macroeconomic conditions and
disruption in U.S. and global capital
markets;
|
•
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the
cost, price volatility, and availability of aviation fuel – including the
impact of significant disruptions in fuel supply and significant increases
in fuel prices;
|
•
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the
impact of potential future significant operating
losses;
|
•
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our
ability to generate working capital from
operations;
|
•
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our
ability to maintain adequate
liquidity;
|
•
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our
fixed obligations and our ability to obtain and maintain financing for
operations, aircraft financing, the refinancing of existing indebtedness,
and other purposes;
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•
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the
amount of our floating rate or hedged indebtedness and changes in
prevailing interest rates;
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•
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the
impact of our fuel hedging activities and the scope and terms of such
activities;
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•
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our
ability to operate pursuant to the terms of financing facilities
(particularly any financial
covenants);
|
•
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our
ability to obtain, maintain, and comply with the terms of credit card
processing agreements;
|
•
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our
ability to take delivery of and to finance
aircraft;
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•
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the
adequacy of our insurance coverage;
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•
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consumer
demand for, and acceptance of, services offered by us, as well as our
ability to attract and retain
customers;
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•
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our
ability to achieve and maintain acceptable cost and fare
levels;
|
•
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our
ability to grow new and existing
markets;
|
•
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our
ability to maintain or expand cost advantages compared to various
competitors;
|
•
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our
ability to attract and retain qualified
personnel;
|
•
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labor
costs and relations with unionized employees generally, and the impact and
outcome of labor negotiations;
|
•
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the
impact of global political instability, including the current instability
in the Middle East;
|
•
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the
potential impact of future terrorist attacks, hostilities, infectious
disease outbreaks or other global events that affect travel
behavior;
|
•
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our
reliance on automated systems and the potential impact of any failure or
disruption of these systems;
|
•
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our
ability to obtain and maintain commercially reasonable terms with vendors
and service providers and our reliance on those vendors and service
providers;
|
•
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changes
in government legislation and regulation, including increased fees and
taxes, increased environmental regulation, and changes in, or termination
of, government-guaranteed
insurance;
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•
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the
impact of fleet concentration and changes in fleet
mix;
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•
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the
impact of increased maintenance costs as our aircraft age and/or
utilization increases;
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•
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the
impact of new FAA regulations or Airworthiness Directives on our
operations, including the cost of complying with such regulations or
directives, or the impact of new manufacturer recommendations with respect
to aircraft operation or
maintenance;
|
•
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actions
by competitors and competitive practices in the industry, including
significant fare restructuring activities, capacity changes, and in-court
or out-of-court restructuring by major airlines and industry
consolidation;
|
•
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interruptions
or disruptions in service at one or more of our hub or focus airports,
whether due to weather conditions or otherwise;
and
|
•
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risks
associated with actual or potential acquisitions or other business
transactions including our ability to achieve any synergies anticipated as
a result of such transactions and to achieve any such synergies in a
timely manner.
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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 and to selected international locations. Approximately half of
our flights originate or terminate at our largest hub in Atlanta, Georgia
and we serve a number of markets with non-stop service from our focus cities of
Baltimore, Maryland, Milwaukee, Wisconsin and Orlando, Florida. As of February
1, 2010, we operated 86 Boeing B717-200 aircraft (B717) and 52 Boeing B737-700
aircraft (B737) offering approximately 700 scheduled flights per day to 63
locations in the United States, including San Juan, Puerto Rico, and to
Orangestad, Aruba, Cancun, Mexico, and Nassau, The Bahamas. We offer competitive
fares by concentrating on keeping our unit costs low. The enthusiasm and skill
of our employees have also been a key to our success.
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 24.0 million revenue passengers during 2009, a 2.5
percent decrease from the 24.6 million revenue passengers we served in
2008. Our operating cost structure ranks the lowest of the 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 hub and network system utilizing a modern fleet of all Boeing aircraft.
Our strategy continues to place strong emphasis on providing high quality and
friendly service while maintaining our low unit cost advantage.
While
third party assessments for 2009 are not yet available, for 2008, AirTran
Airways was rated first among all low-cost carriers for the second consecutive
year in the highly regarded annual Airline Quality Rating (AQR) study, developed
in 1991 as an objective method for assessing airline quality. The year 2008 was
the fifth consecutive year for which AirTran ranked third or higher for quality
among all U.S. carriers in this prestigious rating which 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.
1
Prior to
2008, we positioned ourselves as a growth airline. We successfully grew our
capacity (as measured by available seat miles) at double-digit rates annually
from 2000 through 2007. Nevertheless, in 2008, to respond to the challenges of a
volatile fuel cost environment, a weak macroeconomic environment, and
adverse capital market conditions, we recast our plans which resulted in our
deferral of previously planned growth. We reduced planned capacity, principally
by deferring scheduled aircraft deliveries, and selling B737 aircraft. By
adjusting our business strategy and implementing revised tactics, we believe
that we have positioned AirTran to more effectively deal with a volatile fuel
cost environment and reduced demand for air travel due to weak macroeconomic
conditions. As a result of our actions, our capacity growth slowed to 4.9
percent in 2008, we reduced capacity by 2.2 percent in 2009, and we currently
expect our capacity to grow by three to four percent in
2010.
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
|
•
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user-friendly
automated services for reservations, ticketing, and check-in through
our
|
•
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award
winning Web site,
http://www.airtran.com
|
•
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Bye-Pass®
airport self-service kiosks
|
•
|
Mobile
Web program, allowing customers to view flight status, check in for
flights and select seats using their mobile communications and information
devices (MCIDs)
|
•
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customer
friendly services, including
|
•
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trained
and friendly customer contact
personnel
|
•
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a
highly affordable Business Class
|
•
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advance
seat assignments
|
•
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special
amenities, such as XM Satellite Radio, which we introduced to the air
travel industry
|
•
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wireless,
broadband Internet access on every flight including: Web, e-mail, instant
messaging and access to corporate e-mail and network systems (virtual
private networks) through passengers’
Wi-Fi
enabled MCIDs
|
•
|
attractive
customer loyalty programs, including
our
|
•
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A+
Rewards® program
|
•
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A2B®
corporate travel program
|
•
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AirTran
U® student travel program
|
•
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AirTran
Airways co-branded credit card
|
2
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.
In
January 2010, AirTran Airways was awarded the prestigious 2009 Market Leadership
Award from leading industry publication, Air
Transport World, for AirTran’s innovative combination of low-cost,
high-quality service and response to the global financial crisis.
Operate
a Strong 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.
During
2009, we continued to develop our route network by: substantially increasing our
presence in Orlando, Baltimore, and Milwaukee; initiating service to seven
domestic locations; and initiating service to three international destinations.
More specifically, during 2009, we:
·
|
Doubled
the size of our Milwaukee operations, as measured by available seat miles
(ASMs). The new flights are part of our strategy to expand service from
General Mitchell International Airport in Milwaukee and build our presence
in the Midwest. Together with our marketing partner SkyWest Airlines, in
February 2010, we will serve 22 non-stop destinations to and from
Milwaukee.
|
·
|
Initiated
new service to Allentown/Bethlehem, Pennsylvania; Asheville, North
Carolina; Atlantic City, New Jersey; Branson, Missouri; Charleston, West
Virginia; Key West, Florida, and Knoxville, Tennessee. In the fourth
quarter of 2009, we announced that we would resume service to Gulfport,
Mississippi in January 2010. We also announced service to Lexington,
Kentucky, which commenced in February 2010, and we announced service
to Des Moines, Iowa, which is expected to commence in March 2010. We also
suspended service to three U.S. cities for which the revenue performance
was not meeting our expectations.
|
·
|
Expanded
our presence in the Caribbean in 2009 by adding service to Orangestad,
Aruba, Cancun, Mexico, and Nassau, The Bahamas. In the third quarter of
2009, we announced service to Montego Bay, Jamaica, which commenced in
February 2010. We believe that we are enhancing the AirTran Airways travel
experience by offering flights to these popular tourist
destinations.
|
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 45 percent of daily operations in January 2010 (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 Baltimore/Washington, and Milwaukee.
3
Airport
|
Daily
Operations*
|
Nonstop
Markets
Served
|
%
of System
Daily
Flights*
|
|||||||||
Atlanta
(ATL)
|
374
|
53
|
55
|
%
|
||||||||
Orlando
(MCO)
|
113
|
39
|
17
|
%
|
||||||||
Baltimore-Washington
(BWI)
|
95
|
20
|
14
|
%
|
||||||||
Milwaukee
(MKE)
|
85
|
19
|
13
|
%
|
||||||||
Fort
Lauderdale (FLL)
|
39
|
10
|
6
|
%
|
||||||||
Indianapolis
(IND)
|
39
|
9
|
6
|
%
|
||||||||
Fort
Myers (RSW)
|
38
|
12
|
6
|
%
|
||||||||
New
York (LGA)
|
37
|
6
|
5
|
%
|
||||||||
Boston
(BOS)
|
36
|
7
|
5
|
%
|
||||||||
Tampa
(TPA)
|
35
|
10
|
5
|
%
|
||||||||
Akron
Canton (CAK)
|
27
|
8
|
4
|
%
|
||||||||
Chicago
(MDW)
|
26
|
4
|
4
|
%
|
||||||||
Pittsburgh
(PIT)
|
26
|
6
|
4
|
%
|
||||||||
Washington
(DCA)
|
22
|
4
|
3
|
%
|
*
|
Operations
is defined as the average number of take-offs and landings at each city;
percentage of system flights will be greater than
100%
|
Offer
Sales through Our Web site. 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 offer 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
59 percent of our revenues during 2009.
Utilize
New and Modern Fleet. Our entire fleet is comprised of B717 and B737
aircraft. We had a combined total of 138 aircraft on February 1, 2010, with an
average fleet age among the lowest in the industry at 6.6
years.
We were
the launch customer for the B717 in 1999, which was designed specifically for
efficient short-haul service. As of February 1, 2010, 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.
We took
delivery of our first B737 aircraft in June 2004 and, as of February 1, 2010,
our fleet included 52 B737 aircraft. In addition to our existing 52 B737
aircraft, we hold firm orders for 51 additional B737 aircraft to be delivered
between 2011 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 the Caribbean and Mexico as well as locations in
Canada and Central America should we choose to do so. We believe the B737
aircraft enhances the AirTran Airways brand while offering improvements in our
operating performance.
4
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. The second
quarter tends to be our strongest revenue quarter. Advertising and promotional
expenses may be greater in lower traffic periods, as well as when we enter a new
market, if we seek to stimulate demand and promote the AirTran Airways brand
through such activities.
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 an 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 as we
increase the 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. As we slowed our growth in 2008 and reduced
our capacity in 2009, our total non-fuel operating costs and our non-fuel
operating cost per available seat mile increased in both years. 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
Hub and Route Network. We operate 22 gates from a single concourse under
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 2009 expansion to Atlantic City, New
Jersey; Branson, Missouri; Key West, Florida; Knoxville, Tennessee and
Orangestad, Aruba, Cancun, Mexico and Nassau, The Bahamas, we now offer quality
low fare service to 53 destinations from Atlanta, including service to most of
the largest travel markets within the continental United States and to Puerto
Rico. Additionally, we have announced that we will commence service to
Lexington, Kentucky and Montego Bay, Jamaica in February 2010 and we may add
additional markets later in the year.
Diversified
Traffic Base. We serve both the leisure and business traveler. Over the
past seven years, we have also diversified our network, increasing operations in
key business markets like Baltimore/Washington (BWI), Milwaukee (MKE),
Indianapolis (IND), New York (LGA), and Chicago-Midway (MDW), as well as adding
a number of new direct routes from Florida. As a percentage of total operations,
Atlanta presently represents approximately 55 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.
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.
5
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. During 2009, we introduced wireless, broadband
Internet access on every flight including: Web, e-mail, instant
messaging and access to corporate e-mail and network systems (virtual private
networks) through passengers’ Wi-Fi enabled mobile communication and information
devices including mobile computers, and mobile phones.
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
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 of 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 general members.
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.
Competitors
with greater liquidity and access to capital or with a broader network 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 in one or more markets. Our
ability to meet price competition is dependent, in part, 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.
Route
System, Scheduling, Fares, and Market Selection
Our route
system extends from coast to coast in the United States as well as to selected
destinations in Mexico and the Caribbean. 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.
6
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. From time to time we also revise our fares and implement fuel surcharges.
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 fares for an
individual flight typically vary based on the length of time that a ticket is
booked in advance and whether the passenger wishes to travel in Business Class.
Our fare offerings are in direct contrast to historical 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 2009,
we announced a new marketing agreement with SkyWest Airlines Inc., a subsidiary
of SkyWest, Inc., to support our Milwaukee focus city. Service under this
new agreement commenced in late 2009. Under this new agreement, SkyWest Airlines
offers regional jet service between Milwaukee and six destinations. These
flights are operated by SkyWest Airlines and are available for customers to book
through AirTran's normal distribution channels. Seats on these flights are sold
in conjunction with AirTran Airways flights with revenue shared on a pro-rated
basis. Once fully implemented in February 2010, SkyWest Airlines will offer 18
daily non-stop flights from Milwaukee to six destinations, and, together with
our marketing partner, we will serve 22 non-stop destinations to and from
Milwaukee.
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, our
anticipated 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
In 2007,
we began unbundling our pricing and services. Today, non-fare ancillary revenue
is an important source of our revenue from operations. Traditional sources
of ancillary revenues include fees we charge for the carriage of pets; liquor
sales; excess baggage charges; special services fees, such as fees related
to the transportation of unaccompanied minors; and revenue from the sale of
frequent travel credits. In 2007, we introduced optional fees for advance
seat assignments and a fee for call center services. In 2008, we introduced
fees for priority seat selection, the extension or transfer of A+ Miles Rewards,
in addition to fees for the purchase of A+ Miles Rewards, and for checked
baggage with a fee for the second checked bag and, as of the end of the year, a
fee for the first checked bag. We continually evaluate potential new
services which may be of interest to our customers, especially services for
which our customers are prepared to pay a fee and from which we may derive
additional ancillary revenue. As a result of the unbundling of our pricing
and services and, to a lesser extent the introduction of new fee-generating
services, our ancillary revenues have grown since 2007, with significant growth
in ancillary revenues occurring in 2008 with the introduction of checked bag
fees and in 2009, with a full year of checked bag fees for all checked baggage.
We will continue to evaluate how and when we offer unbundled services as well as
consider new services in 2010.
7
Distribution,
Marketing, and E-Commerce
As we
seek to position our product and stimulate new customer demand, our marketing
efforts are focused on price-sensitive business and leisure travelers who
are key to our success. We believe that targeting price-sensitive travelers
offers the greatest opportunity for growing our revenue base.
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 or on: newspapers; satellite,
Internet, and over-the-air radio; broadcast, cable, and satellite 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. During 2009, we introduced wireless, broadband Internet access on
every flight including: Web, e-mail, instant messaging and access to corporate
e-mail and network systems (virtual private networks) through passengers’ Wi-Fi
enabled mobile communication and information devices.
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, continued to be our primary distribution channel and,
along with our reservation call centers, accounted for 67 percent of our total
bookings in 2009. Travel agency Web sites such as
http://www.Travelocity.com and http://www.Expedia.com, corporate booking
agencies, and traditional travel agencies represented 33 percent of our total
bookings.
On our
customer friendly Web site, passengers can select their seats, check
in, and print their own boarding passes, purchase trip insurance, and book both
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 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. We also offer 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
via an upgrade program that can be purchased within 24 hours of travel. 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.
8
In
contrast to certain 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. Passengers purchasing
a coach ticket can 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.
We
perform substantially all of our marketing, promotional, and media relations
in-house and typically utilize outside services 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 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 1, 2010, we employed approximately 8,070 employees, equivalent to
approximately 7,740 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
February 2010. Our agreement with our pilots, who are represented by the Air
Line Pilots Association (ALPA), as successor by merger to the National Pilots
Association (NPA), became amendable in April 2005. During 2007, we reached a
tentative agreement with NPA; however, our pilots declined to ratify the
tentative agreement. Our negotiations with ALPA are currently in mediation under
the auspices of the National Mediation Board.
9
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 2009 and becomes amendable in October 2013. 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.
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 fourth time, by a substantial margin, in November
2009. 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 our operating performance and expenses.
Fuel
Aircraft
fuel is our largest expenditure and accounted for 31.4 percent, 45.5 percent and
37.1 percent of our 2009, 2008, and 2007 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, 2009, we had no fixed
pricing arrangements with fuel suppliers for any future period. During the year
ended December 31, 2009, 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 3 – 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
adverse impacts of recent high fuel prices are mitigated somewhat by the
relatively new fuel-efficient B737 and B717 aircraft which comprise our fleet.
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 the impacts of our fuel-related derivative
financial instruments, or fare increases will have an adverse effect on our
future operating margins.
Warranties,
Maintenance, Repairs and Training
When we
purchase aircraft we receive certain manufacturer warranties. The lengths of
manufacturer warranties for airframes and engines are established by mutual
agreement and vary based on a numerous factors including: the identity of the
manufacturer; the identity of the customer; the number of aircraft ordered; the
number of aircraft previously ordered; whether the aircraft or engines are new
production models, established production models, or production models nearing
the end of their expected manufacture; the demand for aircraft and engines in
general and by specific type at the time the purchase commitments are
negotiated; and various other factors.
10
Our B737
airframes and our B737 engines are purchased with manufacturer warranties for
specific limited periods which we believe are within the range of customary
warranty periods. Manufacturer warranties commence upon the date of delivery of
the applicable aircraft. The manufacturer warranties for all of our B717
airframes and engines have expired. Manufacturer warranties for our B737
airframes and engines expire as the applicable aircraft and engines
age.
We
receive certain limited third party warranties when our aircraft and engines
undergo maintenance and overhaul.
As of
December 31, 2009, our aircraft fleet consisted of 86 B717 aircraft and 52 B737
aircraft having a collective weighted-average age of 6.5 years. We expect our
maintenance expenses to rise as the ages of our aircraft increase and as
manufacturer warranties expire. Maintenance costs also increase as the
maintenance, repair, and overhaul providers escalate their pricing. During 2010,
we expect aircraft maintenance costs to increase due to 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.
We
believe the long-term cost of maintaining our aircraft will be within industry
norms. However, we may 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,
Milwaukee, Fort Lauderdale, and Dallas by our employees and by qualified third
party contractors at the other cities we serve. Heavy B717 and B737 aircraft
airframe maintenance is performed by an FAA approved third party. Maintenance
repair costs for major components on our aircraft, including engines, landing
gear and auxiliary power units (APUs), are covered under maintenance agreements
with FAA approved repair stations.
Our
maintenance technicians undergo extensive initial and on-going training to
ensure safety of our aircraft. The FAA has advised that we have qualified
again for the Air Maintenance Technical Diamond Certificate of Excellence for
Maintenance Training, the FAA’s highest maintenance award. This marks the
fourteenth 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, human factors, and fuel tank safety specific
training.
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 the consequent temporary or permanent loss
of the original aircraft 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 decreased 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.
11
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
August 31, 2010.
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, passenger check-in and baggage office
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.
Using our
employees, we conduct complete ground handling services at 31 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.
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 of operating authority 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 prohibition, 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.
12
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 to 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, 2010. Currently, the federal excise tax on tickets
is 7.5 percent of the base fare with a segment fee of $3.70 per passenger
enplanement, a $0.10 increase from 2009. 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 currently
range from $3.00 to $4.50 per enplanement with a maximum of up to $18 per round
trip.
Fuel
Taxes. We pay federal, state, and other taxes on fuel. We paid
approximately $30.6 million, $49.4 million, and $50.2 million in fuel taxes
during 2009, 2008, and 2007, respectively.
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, with a
maximum of 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.
13
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 foreign countries 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 or governments.
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 such programs 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.”
14
Item
1A - RISK FACTORS
In
addition to the risks 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. Any of the following risks could have a material
adverse effect on our business, financial condition, results of operations and
prospects, may cause actual results, events or performances to differ materially
from those expressed in any forward-looking statements we make in this annual
report and may cause the value of our securities to decline, which could cause
you to lose all or part of your investment. In addition, please read
“Forward-Looking Statements” in this annual report, where we describe additional
uncertainties associated with our business and the forward-looking statements
included or incorporated by reference in this annual report. Please note that
additional risks not presently known to us or that we currently deem immaterial
may also impair our business and operations.
Risk
Factors Associated with the Airline Industry Generally
Our
business has been, and may continue to be, adversely affected by the price of
aircraft fuel. Additionally, a shortage of aircraft fuel would have an adverse
impact on us.
Like all
airlines, our business has been, and may continue to be, adversely affected by
the price of aircraft fuel. Because our non-fuel operating costs are
the lowest of any major U.S. airline and because some carriers may have greater
financial resources than we do, our business may be more sensitive to changes in
fuel prices. 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 of 2008. In 2009, aircraft fuel
remained our single largest expenditure and accounted for 31.4 percent of our
operating expenses compared to 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, would increase approximately $9.5 million for 2010 for each
$1 per barrel increase in the cost of crude oil or refining costs. 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.
Neither
the future price nor the availability of aircraft fuel can 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 aircraft fuel in
particular likely would result in increased fuel prices. Additionally,
market manipulation and price speculation or other unpredictable events may
result in higher fuel prices, increases volatility, or both.
Our
operations are largely concentrated in the Southeast United States with Atlanta
being the highest volume fueling location in our network. Approximately 84
percent of our fuel is sourced from aircraft fuel produced in the Gulf Coast.
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 the price and availability of fuel in the
Southeast United States.
15
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 impacts 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. A continuation of the current weak economic
environment or a return to worsening economic conditions could have a further
significant adverse effect on our results of operations, cash flows, and
financial condition.
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 airline competitors include other major domestic airlines as
well as foreign and regional airlines, some of which have greater financial
resources. We face competition from other existing low cost carriers and in the
future could face competition from start-up airlines seeking to employ low-cost
strategies. 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 airline and one or more major legacy
airlines. Our revenues are, and will continue to be, sensitive to numerous
competitive factors, and the actions of other airlines in the areas of cost
structure, 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. Any increased competition could have a negative impact
on our business and operating results.
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 the consequent temporary or permanent
loss of such aircraft 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 decreased 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, as
well as 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.
16
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 in
the United States 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. The availability of international routes may also be
limited 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.
Increases
in insurance costs or reduction in insurance coverage may adversely impact our
operations and financial results.
Past
terrorist attacks and the possibility of future terrorist attacks have adversely
affected the ability of airlines to obtain private war risk insurance as well as
the cost of such private insurance, when it is available. Since November 2002,
the federal government has provided third party, passenger, and hull war-risk
insurance coverage to commercial carriers pursuant to legislation under a
variety of federal laws. Currently, program authority is effective until
December 31, 2013. We have received certification of coverage through August 31,
2010. 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 our industry, our
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.
Like
all U.S. airlines with operations outside of the United States, we face certain
risks associated with our international operations, including failure to
adequately comply with existing U.S. legal requirements regulating foreign
business practices.
We have
recently expanded our service to Mexico and various countries in the Caribbean.
Operations outside the United States may subject us to increased legal
compliance risks. Likewise, non-U.S. operations may subject us to political and
economic risks based on developments in an individual country. We emphasize
legal compliance and have implemented policies, procedures and certain ongoing
training of employees with regard to business ethics and many key legal
requirements; however, there can be no assurance that our employees will adhere
to our code of business ethics, other company policies, or other legal
requirements. If we fail to enforce our policies and procedures properly or
maintain adequate records and internal accounting practices to accurately record
our non-U.S. transactions, we may be subject to sanctions. In the event that we
believe or have reason to believe that employees have or may have violated
applicable laws or regulations, we may be subject to investigation costs,
potential penalties, and other related costs which in turn could negatively
affect our results of operations and cash flow. We periodically evaluate the
political, economic, and business climate in each country in which we operate
for developments which could adversely affect our business.
17
Global climate change and initiatives to address global climate change may adversely affect our business and increase our costs.
Many
existing aspects of airline operations are subject to stringent environmental
regulations. Legislative and/or regulatory action to address concerns about
climate change in general and the emission of greenhouse gases (GHG), in
particular, could result in substantial additional costs for us. On June 26,
2009, the U.S. House of Representatives passed HR 2454, the American Clean
Energy and Security Act of 2009. The Senate is scheduled to consider the
legislation in 2010. The law would regulate GHG emissions through a cap and
trade system. Fuel producers may be 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 October 2009, the
U.S. Environmental Protection Agency proposed regulations that would impose
controls on GHG emissions. The proposed regulations would not directly control
GHG regulations by airlines. However, a number of states and environmental
organizations have asked the U.S. Environmental Protection Agency to regulate
greenhouse gas emissions from aircraft.
Because
of the competitive pressures in our industry, our ability to pass along
additional costs to passengers may be limited. We cannot assure you that the
costs of complying with potential new environmental laws and/or regulations will
not have a material adverse effect on our financial position, results of
operations or cash flows. We are unable to predict the impact of global climate
change itself on our business. Please refer to other weather related
risk factors in this annual report for a discussion of the existing risks
associated with weather conditions on our business.
We,
like other airlines, are subject to risks related to public health and
weather
Public
health threats, such as the H1N1 flu virus, the avian flu, Severe Acute
Respiratory Syndrome (“SARS”), and other highly communicable diseases, outbreaks
of which have occurred in the United States, Mexico, and the Caribbean where we
currently operate or plan to operate, could have a significant adverse impact on
our operations and the demand for air travel both worldwide and in the countries
in which we operate or may operate.
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, and decrease revenue and increase costs, such as during hurricane
season in the Southeast United States and Caribbean, and, during snow and severe
winter weather in the Midwest and Northeast United States. Should it occur, we
cannot predict the impact of global warming on our existing weather related
risks.
18
Risk
Factors Related to AirTran
Future
developments could affect our ability to maintain adequate liquidity.
Additionally, our ability to access alternative sources of capital could be
subject to increased costs or otherwise be limited.
We may
not be able to maintain adequate liquidity due to various reasons, including one
or more of the following: a pronounced increase in aircraft fuel prices, a
decline in demand for air travel due to adverse macroeconomic conditions;
competitive actions by other airlines which reduce revenue; insufficient
availability of financing for new aircraft deliveries; increases in interest
rates on existing obligations, or an inability to re-finance our existing
debt.
Although,
historically our available capital has been sufficient to meet our operating
expenses, lease obligations, debt service requirements, and capital
expenditures and we have managed our liquidity such that our
aggregate unrestricted cash and short-term investments at December 31, 2009, was
$544.3 million and we have a $125 million revolving line of credit facility
(which was fully drawn as of December 31, 2009), future circumstances could
require us to materially increase our revenues, materially reduce our
expenses, or otherwise materially improve operating results or obtain material
new sources of capital in order to maintain adequate liquidity.
We cannot
assure you that we would be successful either in further improving our results
of operations or in reducing our costs. Likewise, although we have been able to
conduct public offerings of our equity and debt securities, sell aircraft, and
obtain a letter of credit facility and a revolving line of credit facility over
the course of the last two years, we cannot assure you that, in the event we
need to obtain additional liquidity, we will be able to access the capital
markets, sell additional aircraft, utilize, renew or extend existing
financing arrangements, or obtain new financing on terms acceptable to us or at
all.
U.S. and
global equity and debt markets have undergone significant disruption, making it
difficult for many businesses to obtain financing in the capital markets on
acceptable terms or at all. Further, the capital markets in general, and the
market prices of securities of airline companies and the market prices of our
securities each in particular, have experienced, and in the future may
experience, extreme volatility including fluctuations that are unrelated or
disproportionate to the operating performance of particular companies. These
broad market and industry fluctuations could adversely affect our ability to
access the capital markets or the terms of the securities we might offer,
regardless of our actual operating performance.
Our
ability to sell or otherwise monetize aircraft assets could be adversely
affected by similar attempts by other operators of commercial aircraft in
general or by operators of B737 aircraft in particular. Similarly, the limited
number of operators of B717 aircraft may adversely affect the market for such
aircraft and our ability to sell or otherwise monetize such aircraft 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 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. 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, especially if other carriers
are reducing capacity or ceasing operations. Reductions in the value of assets
pledged to secure our obligations under our Credit Facility could result in
reductions in the amount available under such facility.
Like the
U.S. and global equity and public debt markets, the market for lender or lessor
financing has undergone significant disruption, making it difficult for many
businesses to obtain lender or lessor 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 economic conditions do not improve or again worsen, our
cost of borrowing may again further increase and it may be more difficult to
obtain financing for our operations or to refinance obligations as they come due
in the ordinary course. If our available funding is withdrawn or otherwise
materially limited or we are forced to fund our operations at a higher cost,
these conditions could require us to curtail our business
activities.
19
We have significant current and future obligations related to aircraft purchase commitments, indebtedness and lease obligations. If we do not generate sufficient cash flows and / or are unable to access the capital markets, our liquidity and our ability to fulfill such obligations could be impaired.
We have
and will continue to have significant indebtedness and other
commitments including aircraft purchase commitments, significant debt
and lease obligations related to existing purchased and leased aircraft, and
debt and lease obligations for existing and planned operating
facilities.
Our
aircraft purchase commitments for the next five years and thereafter, in
aggregate, are (in millions): 2010—$50; 2011—$270; 2012—$335; 2013—$260; and
2014—$500; and thereafter, $720. 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. Our intention is to finance the aircraft on order through either
debt financing, lease financing, or a mix thereof. Except for a financing
commitment for two aircraft, we have not yet arranged for aircraft financing for
any of our scheduled aircraft deliveries.
There are
multiple variables including capital market conditions, asset valuations, and
our own operating performance that could affect the availability of satisfactory
financing for our future B737 aircraft deliveries. While there was
limited availability of satisfactory aircraft financing in early 2009, it is our
view that the aircraft financing market has improved. While we cannot provide
assurance that sufficient financing will be available, we expect to be able to
obtain acceptable financing for future deliveries. Our view is based upon our
discussions with prospective lenders and lessors, the consummation of aircraft
financing transactions by other airlines, our own improved operating performance
in 2009, and our recent ability to refinance certain B737 aircraft.
Our B737
contract with Boeing requires us to make pre-delivery deposits to Boeing.
Although we typically have financed a significant portion of our pre-delivery
deposit requirements with debt from banks or other financial institutions, we
currently have no such financing in place for future deliveries.
Our total
indebtedness as of December 31, 2009, was $1.2 billion, of which $811.2 million
was aircraft related. Of our indebtedness, as of December 31, 2009,
approximately $936.2 million, including amounts borrowed under our revolving
line of credit, was secured by certain of our assets, principally aircraft,
which likely would limit the utility of such assets in obtaining additional
financing. Our ability to make scheduled payments of principal and interest for
our 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.
20
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;
and
|
·
|
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.
|
As a
result of the substantial fixed costs associated with our obligations 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.
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;
|
·
|
prepay
certain 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 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 acceptable terms or sustain our
operations.
21
Holders
of our 7.0% Notes have the right to require us to repurchase such notes at
specified dates, including in July 2010. We have the right to repurchase such
notes in cash or in shares of our common stock or any combination
thereof. We currently intend to repurchase such notes with cash. If
we repurchase the notes with cash, such repurchase would reduce our liquidity
unless we arrange substitute financing. We may not be able to arrange
refinancing on acceptable terms or at all. Further, we cannot assure you that
our ability to repurchase our 7.0% Notes in cash would not be limited by the
terms of other agreements outstanding at the time or by law. If we repurchase
such notes using shares of our common stock, substantial dilution to our
existing shareholders could occur. Our failure to repurchase our 7.0% 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 other
indebtedness.
Downgrades
in our credit ratings may adversely affect our financing options, or increase
our borrowing costs, which could adversely affect our liquidity.
Currently,
our public debt is rated below-investment grade. Our existing credit rating may
adversely affect our borrowing costs or ability to borrow. A reduction in our
existing credit ratings could further adversely affect our borrowing costs or
ability to borrow.
The
imposition of a holdback by one of our largest credit card processors could have
a material adverse impact on our liquidity.
Most
airlines have agreements with organizations that process credit card
transactions arising from purchasing air travel by their customers. Each of our
agreements with our two largest credit card processors provides that a processor
may holdback monies related to future travel that such processor otherwise would
remit to us (i.e., a “holdback”)
in the event that a processor reasonably determines that there has been a
material adverse occurrence or certain other events occur. 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 would adversely affect our liquidity and
could result in a material adverse effect on our business, including our
financial condition, cash flows and operations.
We
cannot assure you that we will be able to maintain our competitive low cost
advantage.
We
believe we currently have the lowest non-fuel operating costs among major U.S.
air carriers. However, since 2001, in order to respond to intense
competition, the high price of fuel, and slower general economic conditions, a
number of our competitors have taken various actions in an effort to reduce
their costs including 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 we believe our cost advantage over major airlines remains
significant, certain of our competitors’ actions have reduced our cost
advantage, and additional cost reductions by such major airlines could further
reduce our cost advantage.
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 our aircraft age and the
number of our aircraft under the manufacturer warranty decrease. 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.
22
Fuel
is our largest operating cost. Our fuel hedging activities may not protect us in
the event of rising fuel prices, and we could sustain losses from our hedging
activities.
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.
We
typically hedge a portion of our exposure to aircraft fuel price increases with
a portfolio of swaps and various types of options using crude oil, heating oil,
and aircraft fuel as the underlying commodity.
To the
extent we do not hedge our aviation fuel risk or correspondingly increase our
revenues, 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, in exchange for reducing the
risk of potential jet fuel price increases, we subject ourselves to hedging
related losses.
While we
have generally been able to enter into hedging transactions when we have sought
such arrangements, no assurances can be given that, in the future,
counterparties will be willing to enter into hedging transactions with us on
terms acceptable to us. 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.
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, 2009, we were not required to provide counterparties to
fuel-related derivative financial instruments with any collateral. However, in
the future, the fair value of our obligations under derivative financial
instruments may obligate us to provide collateral to counterparties, which would
reduce our unrestricted cash and investments. 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.
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.
While we
believe that we have a competitive advantage in labor costs relative to many of
our competitors, many air carriers may seek 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, or our labor
costs may increase in connection with potential acquisitions.
While we
believe that our relations with labor are generally favorable, the outcome of
our current collective bargaining negotiations cannot presently be determined.
See “Business—Employees” for a discussion of the current status of our
individual labor contracts. If we are unable to reach agreement with any of our
unionized work groups in 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. Any strike or labor dispute with our unionized employees may
adversely affect our ability to conduct business. Any need for work force
reductions or wage and benefit concessions as a result of an adverse business
and operating environment could have an adverse effect on our labor relations
and employee morale.
23
We are subject to various risks as a result of our fleet concentration in two aircraft types.
As of
February 1, 2010, we have 86 B717
aircraft and 52 B737 aircraft in our fleet. Because few 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 greater
than we would likely incur if such aircraft were still in production. All of our
B717 and B737 aircraft utilize a respective single type of engine which may
subject us to risks of higher operating costs under power-by-the-hour agreements
and other risks if actual or suspected defects exist or are suspected to exist
with respect to such engines.
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 including external
infrastructure, such as the power grid, telecommunications grid, and the
Internet. 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 travel 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. 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. 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.
24
Despite our plans, programs, and procedures, we may be vulnerable to external interruption in technology infrastructure on which we are dependent, 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.
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.
Ground
handling services are provided to us by third parties at 35 airports. 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.
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.
Although we have, or are implementing, emergency and long term succession
policies, an unexpected loss of services of one or more of members of
senior management or the failure to develop, train, and
retain qualified personnel could have an adverse effect on our
business. Further, as our business continues to grow, we will need to attract
and retain, and manage an increasing number of management-level employees. We
cannot assure you that we will always be able to do so.
Our
ability to utilize net operating loss carry-forwards may be
limited.
At
December 31, 2009, we had estimated net operating loss carry-forwards (“NOLs”)
of $477.5 million for federal income tax purposes that expire between 2017 and
2029. 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. Any unused NOLs in excess of the annual
limitation may be carried over to later years.
25
The imposition of a 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. 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.
26
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
ITEM 2.
|
PROPERTIES
|
Operating
Aircraft Fleet
We
operated the following owned and leased aircraft as of December 31,
2009:
Aircraft
Type
|
Number of
Passenger Seats
|
Owned
|
Leased
|
Total
|
Weighted-
Average
Age (Years)
|
|||||||||||||||
B717 |
117
|
8
|
78
|
86
|
8.3
|
|||||||||||||||
B737 |
137
|
30
|
22
|
52
|
3.6
|
|||||||||||||||
Total
|
38
|
100
|
138
|
6.5
|
As of
December 31, 2009, we had 51 B737 aircraft on order scheduled to be
delivered in the years indicated:
Scheduled
Firm Aircraft Deliveries
B737
|
||||
2010
|
-
|
|||
2011
|
7
|
|||
2012
|
8
|
|||
2013
|
6
|
|||
2014
|
12
|
|||
2015
|
8
|
|||
2016
|
10
|
|||
Total
|
51
|
As of
December 31, 2009, 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 1, 2, 4 and 5 to the Consolidated Financial
Statements.
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 eight gates. The lease at Baltimore/Washington International (BWI)
covers seven gates and expires in 2014. 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.
27
Our
principal corporate offices are located at the Orlando International Airport in
a facility leased from the Greater Orlando Aviation Authority. The facility
houses our executive offices as well as our operations staff, general
administrative staff, and some of our computer systems. Our corporate office
lease expires in 2023. We have an agreement with the Greater Orlando Aviation
Authority to create a hurricane resilient operations center, and we are
proceeding with construction of a second building on the existing leased
property for such purpose.
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.
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 2014, a warehouse and engine repair facility in Atlanta
under a lease that expires in 2014, and a reservation center in Carrollton,
Georgia, under a lease that expires in 2019.
In 2009,
we consolidated some of our Atlanta-based operations and all of our training
requirements for stations, flight attendants, and management. We have entered
into a 26-year lease on the facility that expires in 2035 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 in any existing or future
market served by us cease to be available to us at acceptable rates, we may
choose to cease serving those markets. Similarly, the unavailability
of facilities to us at acceptable rates may deter us from expanding services to
one or more otherwise attractive destinations.
ITEM 3.
|
LEGAL
PROCEEDINGS
|
A
complaint alleging violations of federal antitrust laws and seeking
certification as a class action was filed against Delta Air Lines, Inc. (Delta)
and AirTran in the United States District Court for the Northern District of
Georgia in Atlanta on May 22, 2009. The complaint alleges, among other things,
that AirTran conspired with Delta in imposing $15-per-bag fees for the first
item of checked luggage. The initial complaint sought treble damages on behalf
of a putative class of persons or entities in the United States who directly
paid Delta and/or AirTran such fees on domestic flights beginning December 5,
2008. Subsequent to the filing of the May 2009 complaint, various other nearly
identical complaints also seeking certification as class actions were filed in
federal district courts in Atlanta, Georgia; Orlando, Florida; and Las Vegas,
Nevada. All of the cases were consolidated before a single judge in
Atlanta. An amended complaint filed in February 2010 in the consolidated action
broadened the allegations to add claims that Delta and AirTran also cut capacity
on competitive routes and raised prices. The amended complaint seeks
injunctive relief against a broad range of alleged anticompetitive activities
and attorneys fees. AirTran denies all allegations of wrongdoing, including
those in the amended complaint, and intends to defend vigorously any and all
such allegations.
28
ITEM 4.
|
SUBMISSION
OF MATTERS TO VOTE OF SECURITY
HOLDERS
|
None.
29
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
2009 and 2008:
2009
|
2008
|
|||||||||||||||
Quarter
|
High
|
Low
|
High
|
Low
|
||||||||||||
1st
|
$
|
4.93
|
$
|
2.44
|
$
|
9.13
|
$
|
5.61
|
||||||||
2nd
|
$
|
8.68
|
$
|
4.40
|
$
|
6.95
|
$
|
1.97
|
||||||||
3rd
|
$
|
7.47
|
$
|
5.52
|
$
|
3.69
|
$
|
1.28
|
||||||||
4th
|
$
|
6.36
|
$
|
4.05
|
$
|
4.66
|
$
|
1.50
|
Holders
As of
February 1, 2010, there were approximately 4,216 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 Credit Facility restrict our ability to pay cash
dividends. In particular, under our 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, 2009, 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.
30
ITEM 6. SELECTED
FINANCIAL AND OPERATING DATA
The
following financial information for the five years ended December 31, 2009
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,
2009.
Financial Data:
|
|||||||||||||||||||||
(in
thousands, except per share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Operating
revenues
|
$ | 2,341,442 | $ | 2,552,478 | $ | 2,309,983 | $ | 1,892,083 | $ | 1,449,700 | |||||||||||
Operating
income (loss)
|
177,010 | (13) | (75,821 | ) | (15) | 142,646 | (17) | 40,294 | 22,646 | ||||||||||||
Net
income (loss)
|
$ | 134,662 | (14) | $ | (266,334 | ) | (16) | $ | 50,545 | (18) | $ | 14,494 | $ | 9,320 | |||||||
Earnings
(loss) per common share:
|
|||||||||||||||||||||
Basic
|
$ | 1.09 | $ | (2.44 | ) | $ | 0.55 | $ | 0.16 | $ | 0.11 | ||||||||||
Diluted
|
0.95 | (2.44 | ) | 0.54 | 0.16 | 0.10 | |||||||||||||||
Total
assets at year-end
|
$ | 2,284,172 | $ | 2,085,262 | $ | 2,071,784 | $ | 1,616,159 | $ | 1,160,483 | |||||||||||
Long-term
debt and capital lease obligations including current maturities at
year-end
|
$ | 1,214,017 | $ | 1,104,056 | $ | 1,037,246 | $ | 784,093 | $ | 440,091 | |||||||||||
Operating
Data:
|
|||||||||||||||||||||
Revenue
passengers
|
23,997,810 | 24,619,120 | 23,780,058 | 20,051,219 | 16,638,214 | ||||||||||||||||
Revenue
passenger miles (RPM) (000s)(1) (000s)(1)
|
18,588,036 | 18,955,843 | 17,297,724 | 13,836,378 | 11,301,534 | ||||||||||||||||
Available
seat miles (ASM) (000s)(2)
|
23,294,117 | 23,809,190 | 22,692,355 | 19,007,416 | 15,369,505 | ||||||||||||||||
Passenger
load factor(3)
|
79.8 |
%
|
79.6 | % | 76.2 |
%
|
72.8 |
%
|
73.5 |
%
|
|||||||||||
Departures
|
251,694 | 260,120 | 261,505 | 237,137 | 194,741 | ||||||||||||||||
Average
aircraft stage length (miles) (4)
|
738 | 728 | 695 | 652 | 651 | ||||||||||||||||
Average
fare, excluding transportation taxes(5)
|
$ | 87.05 | $ | 98.04 | $ | 92.47 | $ | 90.51 | $ | 83.93 | |||||||||||
Average
yield per RPM(6)
|
11.24 | ¢ | 12.73 | ¢ | 12.71 | ¢ | 13.12 | ¢ | 12.36 | ¢ | |||||||||||
Passenger
revenue per ASM (RASM)(7)
|
8.97 | ¢ | 10.14 | ¢ | 9.69 | ¢ | 9.55 | ¢ | 9.09 | ¢ | |||||||||||
Total
revenue per ASM(8)
|
10.05 | ¢ | 10.72 | ¢ | 10.18 | ¢ | 9.95 | ¢ | 9.43 | ¢ | |||||||||||
Operating
cost per ASM (CASM)(9)
|
9.29 | ¢ | 11.04 | ¢ | 9.55 | ¢ | 9.74 | ¢ | 9.28 | ¢ | |||||||||||
Non-fuel
operating cost per ASM (10)
|
6.38 | ¢ | 6.02 | ¢ | 6.01 | ¢ | 6.19 | ¢ | 6.27 | ¢ | |||||||||||
Average
cost of aircraft fuel per gallon (11)
|
$ | 1.87 | $ | 3.25 | $ | 2.23 | $ | 2.17 | $ | 1.81 | |||||||||||
Gallons
of fuel burned (000’s)
|
363,215 | 367,169 | 359,759 | 310,926 | 255,643 | ||||||||||||||||
Operating
aircraft in fleet at end of year
|
138 | 136 | 137 | 127 | 105 | ||||||||||||||||
Average
daily utilization (hours:minutes) (12)
|
10:59
|
11:02
|
11:02
|
11:08
|
11:01
|
||||||||||||||||
Full-time
equivalent employees at end of year
|
7,844 | 7,489 | 8,236 | 7,415 | 6,703 |
31
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)
|
Total
aircraft miles flown divided by
departures
|
(5)
|
Passenger
revenue divided by total
passengers
|
(6)
|
The
average amount one passenger pays to fly one
mile
|
(7)
|
Passenger
revenue divided by
ASMs
|
(8)
|
Total
revenue divided by
ASMs
|
(9)
|
Operating
expenses divided by
ASMs
|
(10)
|
Total
operating expenses less aircraft fuel expense divided by ASMs. Non-fuel
operating cost per ASM (non-fuel CASM) is a measure of unit operating
costs which is not determined in accordance with generally accepted
accounting principles. Both the cost and availability of fuel are subject
to many factors which are out of our control; therefore, we believe that
non-fuel CASM provides a useful measure of an airline’s unit operating
expense which facilitates an understanding of operating costs over
time.
|
(11)
|
Total
fuel expense, including taxes and into-plane fees, divided by gallons of
fuel
burned
|
(12)
|
The
average amount of time per day that an aircraft flown is operated in
revenue
service
|
(13)
|
Includes
an operating expense reduction of $3.0 million related to the net gain on
sale of assets, principally gains on the sale of
aircraft.
|
(14)
|
Includes
an operating expense reduction of $3.0 million related to the net gain on
sale of assets, principally gains on the sale of aircraft, non-operating
income of $30.6 million related to a net gain on fuel derivative
instruments, and non-operating income of $4.3 million related to a gain
associated with the repurchase of our 7.0% convertible
notes.
|
(15)
|
Includes
an operating expense reduction of $20.0 million related to the net 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.
|
(16)
|
Includes
an operating expense reduction of $20.0 million related to the net 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.
|
(17)
|
Includes
an operating expense reduction of $5.3 million related to the gain on the
sale of two B737
aircraft.
|
(18)
|
Includes
an operating expense reduction of $5.3 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.
|
32
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 and to selected international locations. Approximately half of
our flights originate or terminate at our largest hub in Atlanta, Georgia
and we serve a number of markets with non-stop service from our focus cities of
Baltimore, Maryland; Milwaukee, Wisconsin; and Orlando, Florida. As of February
1, 2010, we operated 86 Boeing B717-200 aircraft (B717) and 52 Boeing B737-700
aircraft (B737) offering approximately 700 scheduled flights per day to 63
locations in the United States, including San Juan, Puerto Rico; as well as to
Orangestad, Aruba; Cancun, Mexico; and Nassau, The Bahamas. Our positive
operating results in 2009 were based, in part, on traditional elements of our
success: competitive fares, superior service, an attractive network, and product
value; low unit costs; adaptability; flexibility; innovation; and the enthusiasm
and skills of our employees.
Capacity
and Network Changes
Prior to
2008, we positioned ourselves as a growth airline. We successfully grew our
capacity (as measured by available seat miles) at double-digit rates annually
from 2000 through 2007. Nevertheless, in 2008, to respond to the challenges of a
volatile fuel cost environment, a weak macroeconomic environment, and
adverse capital market conditions, we recast our plans which resulted in our
deferral of previously planned growth. We reduced planned capacity, principally
by deferring scheduled aircraft deliveries, and selling B737 aircraft. By
adjusting our business strategy and implementing revised tactics, we believe
that we have positioned AirTran to more effectively deal with a volatile
fuel-cost environment and reduced demand for air travel due to weak
macroeconomic conditions. As a result of our actions, our capacity growth slowed
to 4.9 percent in 2008, we reduced capacity by 2.2 percent in 2009, and we
currently expect our capacity to grow by three to four percent in
2010.
33
During
2009 we continued to develop our route network by: substantially increasing our
presence in Orlando, Baltimore, and Milwaukee; initiating service to seven
domestic locations; and initiating service to three international destinations.
More specifically, during 2009, we:
·
|
Doubled
the size of our Milwaukee operations, as measured by available seat miles
(ASMs). The new flights are part of our strategy to expand service from
General Mitchell International Airport in Milwaukee and build our presence
in the Midwest. Together with our marketing partner SkyWest Airlines, in
February 2010, we will serve 22 non-stop destinations to and from
Milwaukee.
|
·
|
Initiated
new service to Allentown/Bethlehem, Pennsylvania; Asheville, North
Carolina; Atlantic City, New Jersey; Branson, Missouri; Charleston, West
Virginia; Key West, Florida; and Knoxville, Tennessee. In the fourth
quarter of 2009, we announced that we would resume service to Gulfport,
Mississippi in January 2010. We also announced service to Lexington,
Kentucky, which commenced in February 2010, and we announced service
to Des Moines, Iowa, which is expected to commence in March 2010. We also
suspended service to three U.S. cities for which the revenue performance
was not meeting our expectations.
|
·
|
Expanded
our presence in the Caribbean in 2009 by adding service to Orangestad,
Aruba; Cancun, Mexico; and Nassau, The Bahamas. In the third quarter of
2009, we announced service to Montego Bay, Jamaica, which commenced in
February 2010. We believe that we are enhancing the AirTran Airways travel
experience by offering flights to these popular tourist
destinations.
|
Key
Initiatives
After six
consecutive years of profitability, during 2008, we were faced with record high
jet fuel prices, an adverse macroeconomic environment, and disrupted capital
markets. During 2008, we undertook a variety of actions to respond to these
challenges including: reducing capacity starting in September 2008; deferring
new aircraft deliveries; selling aircraft; reducing other capital expenditures;
implementing increases in certain fares and ancillary fees; entering into a
variety of derivative financial arrangements to hedge the cost of fuel; and
managing our costs and employment levels. We also completed capital market
transactions in 2008 exceeding $375 million, including: issuing convertible debt
and common stock; entering into a letter of credit facility to reduce our
exposure to holdbacks of cash remittances by a credit card processor; and
obtaining a combined letter of credit facility (the letter of credit facility)
and revolving line of credit facility (the revolving line of credit facility)
which combined facility is referred to as the Credit Facility.
During
2009, we took additional steps to enhance our liquidity and our operating
performance substantially improved. In September 2009, our Credit Facility was
amended to, among other things: extend the expiration date of the facility to
December 31, 2010; increase the amount that may be borrowed under the revolving
line of credit facility to $125 million; and reduce the maximum aggregate amount
of outstanding letters of credit plus outstanding borrowing to $175 million.
During October 2009, we completed a public offering of $115.0 million of our
5.25% convertible senior notes due in 2016 and a public offering of
11.3 million shares of our common stock at a price of $5.08 per share. The
net proceeds from the two offerings, which aggregated $166.3 million, were used
for general corporate purposes including improving our overall liquidity. We
also continued to utilize a variety of derivative financial arrangements to
hedge the costs of fuel and interest rate volatility.
Recent
Operating Results
As
summarized below, our operating results for 2009 were substantially improved
compared to 2008. The pronounced reduction in jet fuel price levels during 2009
compared to 2008, coupled with the actions that we undertook to reduce and
redeploy capacity, increase ancillary revenues, and control costs produced the
improved operating results.
34
(In
thousands, unless otherwise noted)
|
Selected
Financial and
Operating
Data
|
|||||||
2009
|
2008
|
|||||||
Operating
revenue
|
$
|
2,341,442
|
$
|
2,552,478
|
||||
Operating
income (loss)
|
177,010
|
(75,821
|
)
|
|||||
Net
(gain) loss on derivative financial instruments
|
(30,624
|
)
|
150,836
|
|||||
Net
income (loss)
|
134,662
|
(266,334
|
)
|
|||||
Available
seat miles (ASM)
|
23,294,117
|
23,809,190
|
||||||
Total
revenue per ASM – in cents
|
10.05
|
¢
|
10.72
|
¢
|
||||
Operating
cost per ASM – in cents
|
9.29
|
¢
|
11.04
|
¢
|
||||
Gallons
of fuel burned
|
363,215
|
367,169
|
||||||
Average
cost of aircraft fuel per gallon – in dollars
|
$
|
1.87
|
$
|
3.25
|
Our 2009
operating income improved by $252.8 million compared to 2008. Fuel prices
retreated in 2009 from the record high 2008 levels. The reduction in the average
cost of jet fuel per gallon resulted in a $501.2 million decrease in our
aircraft fuel expense during 2009 compared to what fuel expense would have been
had jet fuel prices been at the average level experienced during 2008. The
favorable impacts of lower 2009 fuel prices coupled with actions we took to
reduce and redeploy capacity, increase ancillary revenues and control costs were
somewhat offset by the unfavorable impacts of adverse macroeconomic conditions
and higher non-fuel unit operating costs. More specifically, our total unit
revenue per available seat mile decreased by 6.3 percent to 10.05 cents and our
non-fuel unit operating costs per available seat mile increased by 6.0 percent
to 6.38 cents compared to 2008. Continuing a trend which started in September
2008, in 2009, we reduced capacity as measured by available seat miles. We
believe that the 2.2 percent reduction in 2009 capacity compared to 2008
capacity had the salutary effect of partially mitigating the unfavorable impact
of adverse macroeconomic conditions on our unit revenues. However, the capacity
reduction was also a contributing factor to the increase in our non-fuel unit
operating costs.
As
summarized below, our operating results for the second half of 2009 were
impacted by increased jet fuel prices.
(In
thousands, unless otherwise noted)
|
Selected
2009 Unaudited
Financial
and Operating Data
|
|||||||
January
–
June
|
July
- December
|
|||||||
Operating
revenue
|
$
|
1,145,608
|
$
|
1,195,834
|
||||
Operating
income (loss)
|
113,873
|
63,137
|
||||||
Net
(gain) loss on derivative financial instruments
|
(28,225
|
)
|
(2,399
|
)
|
||||
Net
income
|
107,145
|
27,517
|
||||||
Available
seat miles (ASM)
|
11,327,284
|
11,966,833
|
||||||
Total
revenue per ASM – in cents
|
10.11
|
¢
|
9.99
|
¢
|
||||
Operating
cost per ASM – in cents
|
9.11
|
¢
|
9.47
|
¢
|
||||
Gallons
of fuel burned
|
176,166
|
187,049
|
||||||
Average
cost of aircraft fuel per gallon – in dollars
|
$
|
1.66
|
$
|
2.06
|
35
The
increase in the average cost of jet fuel per gallon resulted in a $74.8 million
increase in our aircraft fuel expense during the second half of 2009 compared to
what fuel expense would have been had jet fuel prices been at the average level
experienced during the first half of 2009.
Other
Accomplishments
While
third party assessments for 2009 are not yet available, for 2008, AirTran
Airways was rated first among all low-cost carriers for the second consecutive
year in the highly regarded annual Airline Quality Rating (AQR) study, developed
in 1991 as an objective method for assessing airline quality. The year 2008 was
the fifth consecutive year for which AirTran ranked third or higher for quality
among all U.S. carriers in this prestigious rating which 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.
In
January 2010, AirTran Airways was awarded the prestigious 2009 Market Leadership
Award from leading industry publication, Air
Transport World, for AirTran’s innovative combination of low-cost,
high-quality service and response to the global financial crisis.
During
2009, we:
·
|
Carried
24.0 million revenue
passengers;
|
·
|
Became
the first major airline to offer passengers wireless, broadband Internet
access on every flight. AirTran passengers now have full Internet access
including: Web, e-mail, instant messaging and access to corporate e-mail
and network systems (virtual private networks) – through their Wi-Fi
mobile communication and information devices. The Today Show produced a
live remote broadcast from 30,000 feet over the Eastern Seaboard on the
day we launched our Gogo In-flight Internet
service;
|
·
|
Announced
that we will commence scheduled services to Des Moines, Iowa, Gulfport,
Mississippi, Lexington, Kentucky, and Montego Bay, Jamaica, in
2010;
|
·
|
Initiated
service to Allentown/Bethlehem, Pennsylvania; Asheville, North Carolina;
Atlantic City, New Jersey; Branson, Missouri; Charleston, West Virginia;
Key West, Florida; Knoxville, Tennessee; as well as Orangestad, Aruba;
Cancun, Mexico; and Nassau, The
Bahamas;
|
·
|
Launched
24 other new non-stop
routes;
|
·
|
Entered
into a new marketing agreement with SkyWest Airlines Inc., a subsidiary of
SkyWest, Inc., to support our Milwaukee focus city.
Service under this new agreement commenced in late 2009. Under this new
agreement, SkyWest Airlines offers regional jet service between Milwaukee
and six destinations. These flights are operated by SkyWest Airlines and
are available for customers to book through AirTran's normal distribution
channels. Seats on these flights are sold in conjunction with AirTran
Airways flights with revenue shared on a pro-rated basis. Once fully
implemented in February 2010, SkyWest Airlines will offer 18 daily
non-stop flights from Milwaukee to six destinations, and, together with
our marketing partner, we will serve 22 non-stop destinations to and from
Milwaukee;
|
36
·
|
Entered
into a multi-year partnership with the National Football League’s Atlanta
Falcons that includes: joint promotions, prominent signage at
the Georgia Dome, a specially designed, Falcons-themed Boeing 717, and
billboards and other advertising featuring Falcons’ players in full
uniform;
|
·
|
Became
the official airline of the National Basketball Association’s Orlando
Magic, entering into a multi-year partnership that includes: designation
as a Magic “Champion of the Community,” unparalleled team and facility
access, brand recognition visibility, category exclusivity, and a
specially designed, Magic-themed Boeing
717;
|
·
|
Unveiled
specially designed, Baltimore Ravens and Indianapolis Colts-themed Boeing
717 aircraft; and
|
·
|
Partnered
with comedian Mark Malkoff, who lived on an aircraft for 30 days in June
2009 and flew 136 flights, setting a new Guinness World
Record.
|
2010
Outlook
We expect
to face challenges during 2010. Managing costs and increasing unit revenues in
the face of volatile fuel costs and a weak economy will continue to be a primary
focus. Fuel prices remain volatile and may again increase in 2010. Additionally,
the pace and extent of the recovery of airline industry revenue are
uncertain.
Our
pilots’ collective bargaining agreement became amendable in 2005 and is
currently in mediation. Our flight attendants’ collective bargaining agreement
became amendable in December 2008 and is currently the subject of negotiation.
The impact on our operating results of any new collective bargaining agreement
is not known.
Compared
to 2009, we expect our capacity, as measured by available seats miles (ASMs), to
increase by seven to eight percent for the first quarter and to increase by
three to four percent for 2010 as a whole. We also expect our first quarter
total revenue per ASM to increase by two and one-half to three and one-half
percent compared to the first quarter of 2009. We project our unit non-fuel
costs per ASM (1) to increase by two and one-half to three percent for the first
quarter and to increase by three to four percent for 2010 as a
whole.
We
anticipate that our 2010 non-fuel unit operating costs will increase due to:
increases in aircraft maintenance costs, higher employee compensation costs due
to higher wage rates attributable to higher average employee seniority and wage
scales, increased revenue related costs, and higher airport rents and landing
fees. The increased aircraft maintenance costs will be due to the aging of each
of our aircraft types and a contractual cost increase for B717 engine
repairs.
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.
(1)
|
Total
operating expenses less aircraft fuel expense divided by ASMs. Non-fuel
operating cost per ASM is a measure of unit operating costs which is not
determined in accordance with generally accepted accounting principles.
Both the cost and availability of fuel are subject to many factors which
are out of our control; therefore, we believe that non-fuel operating cost
per ASM provides a useful measure of an airline’s unit operating expense
which facilitates an understanding of operating costs over
time.
|
37
RESULTS
OF OPERATIONS
2009
Compared to 2008
Summary
During
2009, we reported operating income of $177.0 million, net income of $134.7
million, and diluted earnings per common share of $0.95. Included in our results
are gains on disposition of assets of $3.0 million, a non-operating gain on
derivative financial instruments of $30.6 million, and a non-operating gain on
extinguishment of debt of $4.3 million. Due to the pronounced reduction in the
average cost of jet fuel per gallon during 2009 compared to 2008 and the actions
that we have undertaken, our operating results for the year were substantially
improved compared to 2008. During 2008, we reported an operating loss of $75.8
million, a net loss of $266.3 million, and diluted loss per common share of
$2.44. Included in our 2008 results are gains on disposition of assets of $20.0
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.
Operating
Revenues
Our
operating revenues for the year ended December 31, 2009 decreased $211.0 million
(8.3 percent) due to the net effect of a $324.6 million decrease in passenger
revenues and a $113.6 million increase in other revenues compared to the year
ended December 31, 2008. Our total revenue per available seat mile for the year
ended December 31, 2009 was 10.05 cents, a decrease of 6.3 percent compared to
the year ended December 31, 2008. We believe that our capacity reductions
combined with increases in ancillary fees partially mitigated the unfavorable
impact of current adverse macroeconomic conditions by preventing a more
pronounced erosion of total unit revenues.
The
$324.6 million (13.5 percent) decrease in 2009 passenger revenue compared to
2008 was due to lower capacity, reduced traffic, and reduced passenger yield. We
believe the reductions in traffic and yield were attributable in large part to
the weak air travel demand caused by adverse macroeconomic conditions. During
2009, we reduced our capacity, as measured by available seat miles (ASMs), by
2.2 percent compared to 2008. The reduction in capacity was primarily the
intended consequence of actions we took in 2008 to defer aircraft deliveries and
sell aircraft. The reduced capacity coupled with a 1.9 percent decrease in
revenue passenger miles produced an average passenger load factor of 79.8
percent, which was a 0.2 percentage point increase compared to the year ended
December 31, 2008. Average yield per revenue passenger mile was 11.24 cents,
11.7 percent lower than 2008. The decrease in average yield was in part
attributable to an increase in average length of passenger haul. During 2009,
our average length of passenger haul increased 0.6 percent; an increase in
average length of passenger haul tends to increase average fare and tends to
reduce average yield.
Other
revenues for the year ended December 31, 2009, increased $113.6 million (81.8
percent) compared to the year ended December 31, 2008, reflecting in large part
pricing changes for ancillary customer services resulting from the unbundling of
our service product. Other revenues include change and cancellation fees, direct
booking fees, revenues derived from the sale of frequent flyer credits, baggage
fees, and other miscellaneous revenues.
Operating
Expenses
Our
operating expenses for the year ended December 31, 2009, decreased $463.9
million (17.6 percent) and decreased 15.9 percent on a unit cost basis, as
measured by operating cost per ASM (CASM) compared to the year ended December
31, 2008. Our financial results were significantly affected by the price of fuel
and volatility of the price of fuel during the year ended December 31, 2009. The
decrease in total operating costs per ASM was the net result of a 42.0 percent
decrease in fuel cost per ASM and a 6.0 percent increase in non-fuel operating
cost per ASM.
38
In
general, our operating expenses are significantly affected by changes in our
capacity, as measured by available seat miles (ASMs). The following table
summarizes our unit costs, as defined by CASM, for the indicated
periods:
Year ended
December 31,
|
Percent
Increase
|
|||||||||||
2009
|
2008
|
(Decrease)
|
||||||||||
Aircraft
fuel
|
2.91
|
¢
|
5.02
|
¢
|
(42.0
|
)% | ||||||
Salaries,
wages and benefits
|
2.10
|
1.99
|
5.5
|
|||||||||
Aircraft
rent
|
1.04
|
1.02
|
2.0
|
|||||||||
Maintenance,
materials and repairs
|
0.85
|
0.68
|
25.0
|
|||||||||
Distribution
|
0.41
|
0.42
|
(2.4
|
) | ||||||||
Landing
fees and other rents
|
0.62
|
0.58
|
6.9
|
|||||||||
Aircraft
insurance and security services
|
0.09
|
0.09
|
—
|
|||||||||
Marketing
and advertising
|
0.16
|
0.17
|
(5.9
|
) | ||||||||
Depreciation
and amortization
|
0.24
|
0.25
|
(4.0
|
) | ||||||||
(Gain)
loss on disposition of assets
|
(0.01
|
)
|
(0.08
|
)
|
(87.5
|
) | ||||||
Impairment
of goodwill
|
—
|
0.04
|
(100.0
|
) | ||||||||
Other
operating
|
0.88
|
0.86
|
2.3
|
|||||||||
Total
CASM
|
9.29
|
¢
|
11.04
|
¢
|
(15.9
|
)% |
Aircraft
fuel decreased 42.0 percent on a cost per ASM basis because jet fuel cost
per gallon decreased. During 2009, our average fuel cost per gallon, including
taxes and into-plane fees, decreased 42.5 percent from $3.25 during 2008 to
$1.87 during 2009. During 2009, we realized $8.4 million in losses on
fuel-related derivative financial instruments which increased fuel
expense.
Salaries,
wages and benefits expense increased 5.5 percent on a cost per ASM basis
primarily due to an increase in wage rates attributable to higher average
employee seniority and lower employee attrition while ASMs declined by 2.2
percent.
Maintenance,
materials and repairs expense increased 25.0 percent on a cost per ASM
basis primarily due to increases in the number and cost of airframe checks and
rate increases in certain of our power-by-the-hour maintenance
agreements.
Landing
fees and other rents increased 6.9 percent on a cost per ASM basis
primarily due to increased landing fees and higher rental rates at various
airports for gate and certain terminal space.
(Gain)
loss on disposition of assets for the years ended December 31, 2009 and
2008 was ($3.0) million and ($20.0) million, respectively. (Gain) loss on
disposition of assets pertains primarily to aircraft related transactions.
During 2009, we recognized: $2.4 million loss for the write-off of
capitalized interest related to the release of our obligation to purchase two
B737 aircraft which Boeing sold to an unrelated foreign airline, and $6.6
million gain related to the deposits we previously received from the potential
buyer who defaulted on its obligation to purchase two B737 aircraft in the third
quarter. During 2008, we sold eight B737 aircraft.
39
Other
(Income) Expense
Other
(income) expense, net decreased by $183.2 million to $41.7 million
net expense for 2009 compared to $224.9 million net expense for 2008. Other
(income) expense, net includes: interest income; interest expense, capitalized
interest; net (gains) losses on derivative financial instruments; and (gain) on
extinguishment of debt.
Interest
income increased by $2.0 million from 2008 to $5.7 million for 2009 primarily
due to the net effects of the unfavorable impact of lower interest rates and a
$3.3 million gain classified as interest income upon the redemption of all of
our investments in an enhanced cash investment fund. During 2008, we recorded a
charge of $5.2 million classified as interest income for realized and unrealized
losses related to our investments in available for sale securities.
Interest
expense, including amortization of debt discount and debt issuance costs,
decreased by $1.5 million from 2008 to $84.0 million for 2009. The decrease was
primarily due to the net effects of the following: the favorable impact of lower
interest rates applicable to variable-interest rate debt due to declines in
market interest rates; the repurchase of $29.2 million of our 7.0% convertible
notes; interest on our 5.5% convertible senior notes issued in May 2008;
interest associated with our Credit Facility obtained in the third quarter of
2008; and interest on our 5.25% convertible senior notes issued in October
2009.
Capitalized
interest decreased by $6.0 million from 2008 to $1.7 million for 2009.
Capitalized interest represents the interest cost to finance purchase deposits
for future aircraft. These amounts are classified as part of the cost of the
aircraft upon delivery.
We
reported net (gains) on derivative financial instruments of ($30.6 million) for
2009, compared to a net loss of $150.8 million for 2008. Net (gains) losses on
derivative financial instruments consists primarily of realized and unrealized
gains and losses on fuel-related derivatives which either did not qualify for
hedge accounting or were not designated as hedges for financial accounting
purposes.
During
2009, we repurchased $29.2 million of our 7.0% convertible notes resulting in a
gain of $4.3 million.
Income
Tax Expense (Benefit)
Our
effective income tax rate was 0.5 percent and 11.4 percent for the years ended
December 31, 2009 and 2008, respectively. Our effective tax rate can
differ from the 37.2 percent composite statutory tax rate (35 percent federal
statutory rate plus the 2.2 percent 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.
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 carry-forwards) through the reversal
of existing temporary differences. However, we have determined that it is more
likely than not that our deferred tax assets in excess of our deferred tax
liabilities will not ultimately be realized, in part due to our cumulative
losses over the past three years, 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, 2009
and 2008, we had recorded $6.1 million and $84.1 million of valuation allowance
related to our net deferred tax assets, respectively. Regardless of the
financial accounting for income taxes, our net operating loss carry-forwards are
currently available for use on our income tax returns to offset future taxable
income.
The 2009 income tax expense of $0.7 million is primarily attributable to
income tax expense associated with the repurchase of our 7.0% convertible
notes.
40
2008
Compared to 2007
Summary
We
reported an operating loss of $75.8 million, net loss of $266.3 million,
and loss per diluted common share of $2.44 for 2008. Included in our results
were gains on the sale of assets of $20.0 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 $53.4 million in
2008. For 2007, we recorded operating income of $142.6 million, net income of
$50.5 million, and diluted earnings per common share of $0.54. Included in our
results for 2007 are gains on the sale of aircraft of $5.3 million, a $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. Total revenue per available seat mile increased 5.3 percent to 10.72
cents compared to 2007 as a result of stronger loads and increases in ancillary
revenues.
The
$214.7 million (9.8 percent) increase in 2008 passenger revenues compared to
2007 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.
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. Load factor increased to
79.6 percent, 3.4 percentage 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.
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 was 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.
41
Operating
Expenses
Our
operating expenses for the year ended December 31, 2008 increased $461.0
million (21.3 percent) and increased 15.6 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.
In
general, our operating expenses are significantly affected by changes in our
capacity, as measured by ASMs. The following table summarizes our unit costs,
defined as operating expense per ASM (CASM), for the indicated
periods:
Year ended
December 31,
|
Percent
Increase
|
|||||||||||
2008
|
2007
|
(Decrease)
|
||||||||||
Aircraft
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
|
1.5
|
|||||||||
Distribution
|
0.42
|
0.39
|
7.7
|
|||||||||
Landing
fees and other rents
|
0.58
|
0.54
|
7.4
|
|||||||||
Aircraft
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
|
19.0
|
|||||||||
(Gain)
loss on disposition of assets
|
(0.08
|
)
|
(0.02
|
)
|
300.0
|
|||||||
Impairment
of goodwill
|
0.04
|
—
|
—
|
|||||||||
Other
operating
|
0.86
|
0.88
|
(2.3
|
)
|
||||||||
Total
CASM
|
11.04
|
¢
|
9.55
|
¢
|
15.6
|
%
|
Aircraft
fuel increased 41.8 percent on a cost per ASM basis due to an increase in
the average price of jet fuel per gallon. 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 services expense 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
basis because our ASMs increased while our marketing and advertising costs
were relatively unchanged.
Depreciation
and 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)
loss on disposition of assets for the year ended December 31, 2008 was
($20.0) million compared to ($5.3) million for the year ended December 31, 2007.
(Gain) loss on disposition of assets in each year consisted 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 goodwill expense for the year ended December 31, 2008 was $8.4
million. Because adverse industry conditions and our 2008 operating losses
were indicators that our intangible assets may have been impaired, we prepared
an assessment 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 $166.2 million to $224.9 million
for 2008 compared to $58.7 million for 2007. Other (income) expense, net
includes: interest income, interest expense, capitalized interest, net (gains)
losses on derivative financial instruments, and other.
Interest
income decreased by $16.7 million from $20.4 million in 2007 to $3.7 million in
2008 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 discount and debt issuance costs,
increased by $3.6 million from $81.9 million in 2007 to $85.5 million in 2008.
The increase was primarily due to the net effects of the following: the
favorable impact of lower interest rates applicable to variable-interest rate
debt due to declines in market interest rates; 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 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 associated with B737 aircraft sold during
2008.
Capitalized
interest decreased by $6.0 million from 2007 to $7.7 million for 2008.
Capitalized interest represents the interest cost to finance purchase deposits
for future aircraft. These amounts are classified as part of the cost of the
aircraft upon delivery.
We
reported net losses on derivative financial instruments of $150.8 million for
2008, compared to losses of $0.3 million for 2007. Net (gains) losses on
derivative financial instruments consisted primarily of realized and unrealized
gains and losses on fuel-related derivatives which either did not qualify for
hedge accounting or were not designated as hedges for financial accounting
purposes.
Other
(Income) Expense for 2007 included $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 income tax rate was 11.4 percent and 39.8 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. During 2008, we recorded an $8.4 million charge to
write-off all of the carrying value of our goodwill. Because this write-off was
not deductible for income tax purposes, we did not record a tax benefit and
consequently our effective tax rate was reduced.
43
We
determined that it was more likely than not that our deferred tax assets in
excess of our deferred tax liabilities would not ultimately be realized and that
we were 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 $84.1 million of
valuation allowance related to our net deferred tax assets.
LIQUIDITY
AND CAPITAL RESOURCES
At
December 31, 2009, we had aggregate unrestricted cash, cash equivalents, and
short-term investments of $544.3 million, and we also had $52.4 million of
restricted cash. At December 31, 2009, we had $125 million of borrowing
outstanding under our revolving line of credit facility. During 2009, our
primary sources of cash were cash provided by operating activities, the issuance
of debt and equity securities, borrowings under our revolving line of credit
facility, and borrowings to finance aircraft acquisitions. Our primary uses of
cash were repayment of long-term debt, repayment of borrowings under our
revolving line of credit facility, and expenditures for the acquisition of two
B737 aircraft. As of February 1, 2010, we had no borrowing outstanding under our
revolving line of credit facility and a $50 million letter of credit had been
issued under our letter of credit facility. The letter of credit beneficiary was
not entitled to draw any amounts as of February 1, 2010.
In 2009,
we entered into amendments to (a) our letter of credit facility (the letter of
credit facility) and revolving line of credit facility (the revolving line of
credit facility) which combined facility we refer to as the Credit Facility and
(b) our credit card processing agreements with our two largest credit card
processors (as measured by volume processed for us). The Credit Facility was
amended to:
·
|
Extend
the expiration date to December 31,
2010;
|
·
|
Increase
the amount that may be borrowed under the revolving line of credit
facility from $90 million to $125 million;
and
|
·
|
Reduce
the permitted maximum aggregate amount of outstanding letters of credit
plus outstanding borrowing under the Credit Facility from $215 million to
$175 million.
|
Each
agreement with our two largest credit card processors (based on volumes
processed for us) was amended in 2009 resulting in changes to contractual terms
generally favorable to us. Our agreement with our largest credit card processor
now expires December 31, 2010.
During
October 2009, we completed a public offering of our 5.25% convertible senior
notes and a public offering of our common stock. The net proceeds from these two
public offerings aggregated $166.3 million.
2009
Operating, Investing, and Financing Activities
Operating
activities in 2009 provided $118.2 million of cash flow compared to
$179.9 million used in 2008. Cash flow from operating activities is related to
both the level of our profitability and 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, 2009, we reported net income of $134.7 million compared to a net
loss of $266.3 million for the year ended December 31, 2008.
44
Changes
in the components of our working capital also impact cash flow from operating
activities. Changes in the air traffic liability balance and the related
accounts receivable balance have had a significant impact on our net cash flow
from operating activities. We have a liability to provide future air travel
because travelers tend to purchase air transportation in advance of their
intended travel date. Advance ticket sales, which are recorded as air traffic
liability, fluctuate seasonally and also provide cash when we grow and
consequently receive additional cash for future travel. This historical source
of cash will decline or change to a use to the extent our growth slows or
reverses or the amounts held back by our credit card processors increase. During
2009, our air traffic liability balance decreased $25.2 million, negatively
impacting our net cash flow from operating activities. During 2008, our air
traffic liability balance increased $32.1 million, contributing to net cash flow
from operating activities. Changes in accounts payable, accrued, and other
current and non-current liabilities also impact our cash flow from operating
activities. During 2009, the $22.0 million decrease in accounts payable and
accrued and other liabilities negatively impacted net cash provided by operating
activities. During 2008, the $37.3 million increase in accounts payable and
accrued and other liabilities contributed favorably to net cash flow from
operating activities.
Our
derivative financial instruments reduced our cash flow provided by operating
activities during 2009 by $56.1 million. Cash flow from operations was reduced
by $104.9 million primarily due to payments to counterparties (including amounts
paid to unwind certain fuel-related derivatives) and changes in the fair value
of derivatives. Changes in the fair value of derivative financial instruments
neither provide nor use cash until realized. During 2009, counterparties to our
derivative financial instrument arrangements released deposits held by them as
consequences of the unwinding of fuel-related derivatives and the reduction of
the value of our fuel-related derivative financial instrument obligations. The
amount of deposits received from counterparties, net of amounts paid to
counterparties, aggregated $48.8 million during the year ended December 31,
2009.
We used
cash to increase other assets by $5.7 million and $4.5 million during the years
ended December 31, 2009 and 2008, respectively. Other assets include prepaid
aircraft maintenance and other deposits, prepaid insurance, and prepaid
distribution costs. Additionally, cash was used to increase prepaid and stored
fuel by $18.3 million during the year ended December 31, 2009. During the year
ended December 31, 2008, cash was provided as we decreased prepaid and stored
fuel by $16.7 million.
Investing
activities in 2009 used $47.2 million in cash compared to the $328.7
million provided in 2008. Purchases and sales of available for sales securities
are classified as investing activities. During 2009, we sold $27.1 million of
available for sale securities. During 2008, we purchased $30.3 million and sold
$119.0 million of available for sale securities. Investing activities also
include expenditures for aircraft deposits and the purchase of aircraft and
other property and equipment.
Aircraft
purchase contracts typically require that the purchaser make pre-delivery
deposits to the manufacturer. These deposits are refunded at the time of
aircraft delivery. We may invest a portion or all of the refunded deposits in
the aircraft. During 2009, we paid $11.8 million in deposits and received $26.1
million in previously paid deposits. During 2008, we paid $59.1 million in
deposits and received $114.9 million in previously paid deposits. During 2009,
we expended $90.9 million in cash, primarily for the acquisition of two B737
aircraft as well as for the acquisition of rotable parts, buyer-furnished
equipment, and other property and equipment. Acquisitions of other property and
equipment included additions to leasehold improvements and the purchase of
ground and computer equipment. During 2008, we expended $136.4 million in cash,
primarily for the acquisition of eight B737 aircraft (of which two were sold to
a foreign airline) as well as for the acquisition of rotable parts and other
property and equipment.
Financing
activities provided $156.5 million of cash during 2009, compared to using
cash of $40.6 million during 2008.
45
During
October 2009, we completed a public offering of $115.0 million of our 5.25%
convertible senior notes due in 2016 and a public offering of 11.3 million
shares of our common stock at a price of $5.08 per share. The net proceeds from
the two offerings aggregated $166.3 million, after deducting offering expenses,
discounts and commissions paid to the underwriters. The net proceeds were used
for general corporate purposes including improving our overall liquidity. The
5.25% convertible notes are convertible into shares of our common stock at a
conversion rate of 164.0420 shares per $1,000 in principal amount of such notes
which equals an initial conversion price of approximately $6.10 per
share.
In 2009,
our Board of Directors authorized, at management’s discretion, the repurchase,
from time-to-time, of up to $50 million of our 7.0% convertible notes in open
market transactions at prevailing market prices or in privately negotiated
purchases. During 2009, we repurchased $29.2 million of our 7.0% convertible
notes resulting in a gain of $4.3 million. Repurchases pursuant to the Board's
authorization may be effected, suspended or terminated at any time, or from
time-to-time at the discretion of management or the Board of Directors without
prior notice and it is uncertain whether or not we will repurchase
additional 7.0% convertible notes.
During
2009, we borrowed $1.05 billion and repaid $1.02 billion under our revolving
line of credit facility. Also during 2009, we borrowed $50 million to finance
aircraft acquisitions and repaid $70.8 million of aircraft debt financing,
including $18.1 million for repayments of pre-delivery deposit
financing.
During
the second quarter of 2008, we completed two financings. The proceeds were used
to improve our overall liquidity and for general corporate purposes. We
completed a public offering of $74.8 million of our 5.5% convertible senior
notes due 2015. We placed approximately $12.2 million of the proceeds of such
offering in an escrow account with a trustee. In addition to the escrowed
amount, we received net proceeds of approximately $60.1 million after deducting
discounts and commissions paid to the underwriters and other expenses incurred
with the offering. Funds in the escrow account are invested in government
securities and are being used to make the first six scheduled semi-annual
interest payments on the notes, and these payments are secured by a pledge of
the assets in escrow. We also completed a public offering of 24.7 million shares
of our common stock at a price of $3.20 per share, receiving net proceeds of
approximately $74.7 million, after deducting discounts and commissions paid to
the underwriters and other expenses incurred with the offering.
During
2008, we borrowed $377 million and repaid $287 million under our revolving line
of credit facility. 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.
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.
See ITEM
8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 4 – “Debt” for additional
information regarding our outstanding debt.
46
Year
2010 Cash Requirements and Potential Sources of Liquidity
Our 2010
cash flows will be impacted by a variety of factors including our operating
results, payments of our debt and capital lease obligations, and capital
expenditure requirements. In addition, we may need cash resources to fund
increases in collateral provided to counterparties to our derivative financial
instrument arrangements and our cash flows may be adversely impacted in the
event that one or more credit card processors withholds amounts that would
otherwise be remitted to us.
During
2010, we will need cash for capital expenditures and debt and capital lease
obligations. Expenditures for acquisition of property and equipment, other than
aircraft and aircraft parts, are anticipated to be approximately $20 million
during 2010. Additionally, during 2010, we currently have scheduled payments of
$50 million related to aircraft purchase commitments. Payments of current
maturities of existing debt and capital lease obligations will aggregate $282.1
million during 2010, including payment of $125 million previously borrowed under
our revolving line of credit facility and which was repaid as of February 1,
2010. The maturities of debt amount also includes the $95.8 million assumed
effect of all holders of our 7.0% convertible notes exercising their option to
require us to repurchase the notes in 2010.
We may
need cash resources to fund increases in collateral provided to counterparties
to our derivative financial arrangements and our cash flows may be adversely
impacted in the event that one or more credit card processors withholds amounts
that would otherwise be remitted to us. We provide counterparties to our
derivative financial instrument arrangements with collateral when the fair value
of our obligation exceeds specified amounts. As of December 31, 2009, we
provided counterparties with collateral aggregating $15.0 million.
Each
agreement with our two largest credit card processors (based on volumes
processed for us) was amended in 2009 resulting in changes to contractual terms
generally favorable to us. Our agreement with our largest credit card processor
now expires December 31, 2010. Each agreement with our two largest credit card
processors allows, under specified conditions, the processor to retain cash
related to future travel that such processor otherwise would remit to us (a
holdback). As of December 31, 2009, we were in compliance with our processing
agreements and our two largest credit card processors were holding back no cash
remittances from us. Our potential cash exposure to holdbacks by our largest two
credit card processors, based on advance ticket sales as of December 31, 2009,
was up to a maximum of $149.1 million (after considering the $50 million letter
of credit issued in favor of our largest credit card processor). Even had there
been no letter of credit issued for the benefit of our largest credit card
processor, as of December 31, 2009, neither of our two largest credit card
processors would have been entitled to holdback any cash remittances from us. A
decrease in our unrestricted cash and investments could result in cash
remittance amounts being held back by our largest credit card processors. Should
the largest processor be entitled in the future to withhold amounts that would
otherwise be remitted to us, we retain the contractual right to eliminate or
reduce the amounts withheld by achieving specified aggregate unrestricted cash
and investment levels and / or by providing the processor with letters of
credit. While we may be subject to holdbacks in the future in accordance
with the terms of our credit card processing agreements, based on our current
liquidity and current forecast, we do not expect that our two largest credit
card processors would be entitled to holdback cash amounts during
2010.
We
believe we have options available to meet our debt repayment, capital
expenditure needs, and operating commitments; such options may include
internally generated funds as well as various financing or leasing options,
including the sale, lease, or sublease of our aircraft or other assets.
Additionally, we have a $125 million revolving line of credit facility, under
which $125 million and zero borrowings were outstanding as of December 31, 2009
and February 1, 2010, respectively. However, our future financing options may be
limited because our owned aircraft are pledged to the lenders that provided
financing to acquire such aircraft, and we have pledged, directly or indirectly,
a significant portion of our owned assets, other than aircraft and engines, to
collateralize our obligations under our Credit Facility. The counterparty to the
Credit Facility has agreed to release its lien on certain specified assets
securing that facility in the event we seek to re-pledge those assets in order
to secure a new financing so long as the aggregate collateral value of the
assets pledged under the Credit Facility is at least equal to the amount then
available under the Credit Facility.
47
We
believe that our existing liquidity and forecasted 2010 cash flows will be
sufficient to fund our operations and other financial obligations in 2010. While
we believe our 2010 forecast is reasonable, a combination of one or more
material and significant adverse events, most of which are outside of our direct
control, could, depending on the severity and duration thereof, have significant
unfavorable impacts on our future cash flows. Such adverse events could include:
significant increases in fuel prices for an extended period of time, significant
sustained declines in unit revenues as a consequence of unfavorable
macroeconomic or other conditions, or an increase in the percentage of advance
ticket sales held back by our credit card processors.
Credit
Facility
We have a
combined letter of credit facility and a revolving line of credit facility. We
generally refer to the combined letter of credit facility and revolving line of
credit facility as a whole as the Credit Facility, and we generally refer to its
components as the letter of credit facility and the revolving line of credit
facility, respectively.
The
following discussion summarizes the current terms of the Credit
Facility. Under the revolving line of credit facility, we are
permitted to borrow, upon two (2) business days notice, until December 31, 2010,
up to $125 million for general corporate purposes. Under the letter of credit
facility, we are entitled to the issuance by a financial institution of letters
of credit for the benefit of one or more of our credit card processors. The
total amount of outstanding letters of credit under the letter of credit
facility plus the outstanding amount borrowed under the revolving line of credit
facility is not permitted to exceed an aggregate of $175 million. Amounts
borrowed under the revolving line of credit facility bear interest at a rate of
12 percent per annum and must be repaid within three (3) business days to the
extent that our aggregate unrestricted cash and investment amount exceeds $405
million at any time. We may borrow once a month and are permitted to repay
amounts borrowed at any time without penalty. As of December 31, 2008, December
31, 2009, and February 1, 2010, we had $90 million, $125 million and $0,
respectively in outstanding borrowings under the revolving line of credit
facility. As of December 31, 2009, the stated amount of the letter of credit
issued for the benefit of our largest credit card processor was $50
million.
The
aggregate of amounts borrowed and outstanding letters of credit under the Credit
Facility is not permitted to exceed the estimated value of the collateral
securing such facility. The Credit Facility includes various covenants,
including limitations on: dividends and distributions, the incurrence
of indebtedness, the prepayment of indebtedness, and mergers and acquisitions.
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 sole letter
of credit outstanding in favor of our largest credit card processor, ends March
31, 2010, but is subject to periodic extensions, at the discretion of the
lender, ending not later than December 31, 2010, and is subject to earlier
termination upon the occurrence of a material adverse change in our financial
condition or other like event. We expect that the period of exposure covered by
the letter of credit will be periodically extended through December 31, 2010, in
the absence of a material adverse change in our financial condition or other
like event.
48
Aircraft
Acquisitions, Purchase Commitments, and Financings
In 2008,
to respond to the challenges of a volatile fuel-cost environment, a recessionary
macroeconomic environment, and adverse capital market conditions, we recast our
business plan to defer previously planned growth. We reduced capacity,
principally by deferring scheduled aircraft deliveries, 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. During 2008, we sold two new B737 aircraft
(that we took delivery of and subsequently sold) and we also sold six used B737
aircraft in our fleet. In 2008, we took delivery of eight aircraft, including
the aforementioned two new aircraft that we sold in 2008.
We had
four B737 aircraft scheduled for delivery during 2009. In 2009, we permitted The
Boeing Company (“Boeing”) to sell two of the B737 aircraft to a foreign airline
and we were released from our obligation to purchase such aircraft. During 2009,
we took delivery of two B737 aircraft that we had previously agreed to sell to
another foreign airline. The foreign airline defaulted on its obligation to us
to purchase the two aircraft. We placed these aircraft in service in October
2009.
The table
below summarizes, as of December 31, 2009, all aircraft scheduled for delivery
to us:
|
Scheduled
Firm Aircraft Deliveries
B737
|
|||
2010
|
-
|
|||
2011
|
7
|
|||
2012
|
8
|
|||
2013
|
6
|
|||
2014
|
12
|
|||
2015
|
8
|
|||
2016
|
10
|
|||
Total
|
51
|
Our
aircraft purchase commitments for the next five years and thereafter, in
aggregate, are (in millions): 2010—$50; 2011—$270; 2012—$335; 2013—$260; and
2014—$500; and thereafter, $720. 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. Our intention is to finance the aircraft on order through either
debt financing, lease financing, or a mix thereof. We have financing commitments
from a lender to finance a portion of the acquisition price of two B737 aircraft
scheduled for delivery to us in 2011. The financing commitment for the second
aircraft is conditioned upon our refinancing by March 31, 2010 existing
indebtedness owed to the lender on another B737 aircraft. Except for the
financing commitment for two aircraft, we have not yet arranged for aircraft
financing for any of the other firm aircraft deliveries.
There are
multiple variables including capital market conditions, asset valuations, and
our own operating performance that could affect the availability of satisfactory
financing for our future B737 aircraft deliveries. While there was
limited availability of satisfactory aircraft financing in early 2009, it is our
view that the aircraft financing market has improved. While we cannot provide
assurance that sufficient financing will be available, we expect to be able to
obtain acceptable financing for future deliveries. Our view is based upon our
discussions with prospective lenders and lessors, the consummation of aircraft
financing transactions by other airlines, our own improved operating performance
in 2009, and our recent ability to refinance certain B737 aircraft.
49
Our B737
contract with Boeing requires us to make pre-delivery deposits to Boeing.
Although we typically have financed a significant portion of our pre-delivery
deposit requirements with debt from banks or other financial institutions, we
currently have no such financing in place for future deliveries.
If we are
unable to generate revenues to cover our costs, we may slow our growth,
including by the sale, lease, or sub-lease of certain of our existing or
on-order aircraft.
Contractual
Obligations
Our
contractual obligations as of December 31, 2009 are estimated to be due as
follows (in millions):
Nature of
commitment
Total
|
2010
|
2011-2012
|
2013-2014
|
Thereafter
|
||||||||||
Debt
(1)
|
$
|
1,494
|
$
|
323
|
$
|
203
|
$
|
208
|
$
|
760
|
||||
Operating
lease obligations (2)
|
2,885
|
288
|
545
|
522
|
1,530
|
|||||||||
Capital
lease obligations
|
22
|
2
|
4
|
4
|
12
|
|||||||||
Aircraft
purchase commitments (3)
|
2,135
|
50
|
605
|
760
|
720
|
|||||||||
Total
contractual obligations (4)
|
$
|
6,536
|
$
|
663
|
$
|
1,357
|
$
|
1,494
|
$
|
3,022
|
(1)
|
Includes
principal and interest payments, including interest payments on $665.7
million of floating rate debt that have been forecasted at current
interest rates. Also includes in 2010, repayment of $125 million
outstanding under the Revolving Line of Credit Facility. The holders of
the $125 million 7.0% convertible notes due in 2023 may require us to
repurchase such notes in 2010, 2013 or 2018. The maturities of debt
amounts include the $95.8 million assumed impact of the holders exercising
their option to require us to repurchase the notes in 2010. 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.
|
(4)
|
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, 2009 consolidated balance
sheet. Additionally, the above table does not include any obligations
associated with derivative financial instruments. As of December 31, 2009,
we had recorded the following related to derivative financial instruments:
a $47.0 million current asset; a $14.8 million non-current asset; a $14.9
million current liability; and a $7.8 million non-current liability. Also,
as of December 31, 2009, we had provided counterparties to derivative
financial instruments with collateral aggregating $15.0
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.
50
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, in large part because tax basis depreciation has exceeded depreciation
expense calculated for financial accounting purposes.
Our
December 31, 2009 consolidated balance sheet includes gross deferred tax
assets of $233.1 million and gross deferred tax liabilities of $227.1 million.
The deferred tax assets include $159.3 million pertaining to the tax effect of
$477.5 million of federal net operating losses (NOLs). Such NOLs, which expire
in the years 2017 to 2029, 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 carry-forwards) through the reversal
of existing temporary differences. However, we have determined that it is more
likely than not that our deferred tax assets in excess of our deferred tax
liabilities will not ultimately be realized, in part due to our cumulative
losses over the past three years, 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, 2009, we had recorded $6.1 million of
valuation allowance related to our net deferred tax assets.
Regardless
of the financial accounting for income taxes, our net operating loss
carry-forwards currently are available for use on our income tax returns to
offset future taxable income.
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, 2009, we believe
that we were not subject to the limitations under Section 382.
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 2 – Commitments and Contingencies.”
51
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
Accounting Standards Codification (ASC) 810 “Consolidation” (Consolidation
Topic). 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.
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, 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 of, or fair value of, expected transportation
could have a significant impact on our revenue in the year of change as well as
future years.
52
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 3 – Financial Instruments”
for additional information about the derivative instruments to which we are a
party.
ASC 815
“Derivatives and Hedging” (Derivatives and Hedging Topic), 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.
The
Derivatives and Hedging Topic is a very complex accounting standard with
stringent requirements which generally require: documenting the
hedging strategy, using statistical analysis to qualify certain derivative
arrangements as a hedge for accounting purposes on a historical and a
prospective basis, and preparing strict contemporaneous documentation that is
required at the time each accounting hedge is designated as such. As required by
the Derivatives and Hedging Topic, 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.
Historically,
a substantial portion of our fuel-related derivative financial instruments did
not qualify to be accounted for as hedges. Consequently, a substantial portion
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 whereas 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. We will continue to
account for interest rate swaps as accounting hedges.
53
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. 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, the Derivatives and Hedging Topic 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 ASC 350 “Intangibles
- Goodwill and Other” (Intangibles - Goodwill and Other Topic), and ASC 360 “Property,
Plant and Equipment” (Property, Plant and Equipment Topic).
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 Intangibles - Goodwill and Other Topic 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
operate an integrated network, and accordingly, cash flows for most of our
assets are assessed at a fleet level, not an individual asset level, for our
analysis of impairment. 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: (1) estimated fair market value of the
assets; and (2) 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.
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 Pronouncements
In June
2009, the FASB issued Accounting
Standards Codification (ASC, or the Codification) as the source of
authoritative generally accepted accounting principles (GAAP) recognized by the
FASB for non-governmental entities. The Codification is effective for financial
statements issued for reporting periods that end after September 15, 2009. The
Codification superseded all then-existing non-SEC accounting and reporting
standards. The Codification did not change rules and interpretations of the SEC
which are also sources of authoritative GAAP for SEC registrants. Because the
Codification did not change GAAP, the Codification had no impact on our
consolidated financial statements or footnotes.
On
January 1, 2009, we adopted ASC 470-20, “Debt with Conversion and Other Options
– Cash Conversion” (Cash Conversion Topic), regarding the accounting for
convertible debt instruments that may be settled in cash upon conversion. The
Cash Conversion Topic requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) upon conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate, unless the embedded conversion option is
required to be separately accounted for as a derivative. The Cash Conversion
Topic required retroactive application to all periods presented. The adoption
impacted the accounting for our 7.0% convertible notes due 2023. On April 24,
2009, we filed a report on Form 8-K with the SEC which included our consolidated
financial statements as of December 31, 2008 and 2007 and for each of the three
years in the period ended December 31, 2008 which were adjusted to apply the
Cash Conversion Topic retroactively. The accompanying historical financial
statements have also been adjusted to apply the Cash Conversion
Topic.
54
On June
30, 2009, we adopted ASC 855-10-50 “Subsequent Events - Disclosure”
(Subsequent Events Topic), which established general standards of accounting
for, and disclosure of, events that occur after the balance sheet date but
before the financial statements are issued.
The Subsequent Events Topic defines two types of subsequent events. The
effects of events or transactions that provide additional evidence about
conditions that existed at the balance sheet date, including the estimates
inherent in the process of preparing financial statements, are recognized in the
financial statements. The effects of events that provide evidence about
conditions that did not exist at the date of the balance sheet but arose after
that date are not recognized in the financial statements. We have reviewed
subsequent events through February 11, 2010 (the date of the issuance of the
accompanying Consolidated Financial Statements).
55
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 $665.7 million and $674.1 million of variable-rate debt as of
December 31, 2009 and December 31, 2008, respectively. We have
mitigated our exposure on certain variable-rate debt by entering into interest
rate swap agreements. During 2009, we entered into eleven interest rate swap
arrangements pertaining to $293.3 million notional amount of outstanding debt.
The notional amount of the outstanding debt related to interest rate swaps at
December 31, 2009 and December 31, 2008 was $447.0 million and $177.7
million, respectively. These swaps expire between 2018 and 2020. The
interest rate swaps effectively result in us paying a fixed rate of interest on
a portion of our floating-rate debt securities through the expiration of the
swaps. As of December 31, 2009, the fair market value of our interest rate swaps
was a liability of $10.2 million. If average interest rates increased by 100
basis points during 2010, as compared to 2009, our projected 2010 interest
expense would increase by approximately $2.1 million. In January and February
2010, we entered into additional interest-rate swap agreements pertaining to
$43.5 million notional amount of our outstanding debt.
As of
December 31, 2009 and 2008, the fair value of our debt was estimated to be $1.1
billion and $1.0 billion, respectively, versus a carrying amount of $1.2 billion
and $1.1 billion as of December 31, 2009 and 2008, respectively.
The fair value of our debt was estimated using quoted market prices where
available. For long-term debt not actively traded, the fair value was estimated
using a discounted cash flow analysis based on our current borrowing rates for
instruments with similar terms. The fair values of our other financial
instruments and borrowings under our revolving line of credit facility
approximate their respective carrying values. Given the current volatility in
the credit markets, there is an atypical element of uncertainty associated with
valuing debt securities, including our debt securities. 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 $24.5
million as of December 31, 2009.
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, 2009, 2008, and 2007 represented 31.4 percent, 45.5 percent,
and 37.1 percent of our operating expenses, respectively.
56
Jet fuel
prices reached record high levels during 2008 and were volatile during 2009 and
2008. The following table summarizes our fuel expense (including taxes and
into-plane fees), gallons of fuel burned and average cost per gallon (including
taxes and into-plane fees) during 2009, 2008 and 2007 (in thousands, except
average cost per gallon amounts):
Three
Months Ended
|
|||||||||||||||
March 31
|
June 30
|
September 30
|
December 31
|
Annual
|
|||||||||||
2009
|
|||||||||||||||
Gallons
burned
|
83,352
|
92,813
|
96,098
|
90,952
|
363,215
|
||||||||||
Average
cost per gallon
|
$
|
1.59
|
$
|
1.72
|
$
|
1.98
|
$
|
2.15
|
$
|
1.87
|
|||||
Aircraft
fuel expense
|
$
|
132,870
|
$
|
159,903
|
$
|
190,235
|
$
|
195,827
|
$
|
678,835
|
|||||
|
|
|
|||||||||||||
2008
|
|
|
|
||||||||||||
Gallons
burned
|
89,605
|
98,261
|
95,303
|
84,000
|
367,169
|
||||||||||
Average
cost per gallon
|
$
|
3.00
|
$
|
3.75
|
$
|
3.82
|
$
|
2.32
|
$
|
3.25
|
|||||
Aircraft
fuel expense
|
$
|
268,442
|
$
|
368,127
|
$
|
363,882
|
$
|
194,487
|
$
|
1,194,938
|
|||||
2007
|
|||||||||||||||
Gallons
burned
|
82,679
|
91,433
|
95,339
|
90,308
|
359,759
|
||||||||||
Average
cost per gallon
|
$
|
2.01
|
$
|
2.20
|
$
|
2.25
|
$
|
2.45
|
$
|
2.23
|
|||||
Aircraft
fuel expense
|
$
|
166,080
|
$
|
201,588
|
$
|
214,867
|
$
|
221,105
|
$
|
803,640
|
We enter
into fuel-related derivative financial instruments with financial institutions
to reduce the ultimate variability of cash flows associated with fluctuations in
jet fuel prices. We do not hold or issue derivative financial instruments for
trading purposes. The financial accounting for fuel-related derivatives is
discussed in ITEM 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 3 –
Financial Instruments”.
In
summary, our fuel-related derivative financial instruments impacted our 2009
financial statements as follows:
•
|
Net
realized losses related to derivative financial instruments increased fuel
expense by $8.4 million during 2009. The $8.4 million net realized loss is
largely attributable to realized losses on contracts entered into in
2008.
|
•
|
We
recorded a non-operating net gain related to derivative financial
instruments of $30.6 million during 2009. During 2009, we realized losses
related to derivative financial instruments (not accounted for as hedges
for accounting purposes) of $4.1 million. The $4.1 million net realized
loss is largely attributable to realized losses on contracts entered into
in 2008.
|
•
|
As
of December 31, 2009, the estimated fair value of our fuel-related
derivative financial instruments was a net asset of $49.3 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.
|
57
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, 2009, we were not required to provide counterparties to
fuel-related derivative financial instruments with any collateral. Any
collateral is classified as restricted cash, if the funds are held in our name.
The collateral 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 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.
As of
December 31, 2009, we have entered into fuel-related swap and option agreements,
which pertain to 153 million gallons or 41 percent of our projected 2010 fuel
requirements, and 10 million gallons or 3 percent of our projected 2011 fuel
requirements. In January and February 2010, we entered into fuel-related option
agreements, which pertain to 18 million gallons or 4 percent of our projected
2010 fuel requirements, and 48 million gallons or 12 percent of our projected
2011 fuel requirements. Under jet fuel swap arrangements, we pay a fixed rate
per gallon and receive the monthly average price of Gulf Coast jet fuel. The
fuel-related option arrangements include collars, purchased call options, and
sold call options. Depending on market conditions at the time a derivative
contract is entered into, we generally use jet fuel, heating oil, or crude oil
as the underlying commodity. Additionally, from time to time, we enter into
refinery-margin swap agreements pertaining to certain periods pursuant to which
we pay a fixed rate per gallon and receive the monthly average price of jet fuel
refinery costs. As of December 31, 2009, we did not have any outstanding
refinery-margin swap agreements.
For every
dollar increase per barrel in crude oil or refining costs, our fuel expense
(including taxes and into-plane fees) for 2010, before the impact of our
derivative financial instruments, would increase approximately $9.5 million based
on projected operations.
58
The
(1) estimated total ultimate cash benefit (use) of our fuel-related
derivatives scheduled to settle in 2010 and (2) the expected difference in
aggregate fuel cost compared to jet fuel cost based on crude oil at $70 per
barrel are estimated as follows at the specified crude per barrel prices (in
millions, except per barrel amounts which are in dollars):
Estimated
Total Ultimate Cash Benefit (Use) of Our Fuel-Related Derivative Financial
Instruments
Held
as of
December
31, 2009
|
Estimated
Lower (Higher) Aggregate Jet Fuel Cost
(Prior
to Impact of
Derivative
Financial Instruments) Compared to Jet Fuel Cost Based on
Crude
Oil
of
$70 per Barrel
|
|||||||
Year
Ended December 31, 2010
|
||||||||
Assumed
average market crude price:
|
||||||||
$
50 per barrel
|
$ | (45.3 | ) | $ | 219.1 | |||
$
70 per barrel
|
(20.1 | ) | — | |||||
$
90 per barrel
|
25.6 | (219.1 | ) |
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 ultimate cash benefit (use) includes: any
premiums paid to counterparties at the inception of the arrangements, any
obligation for us to provide counterparties with collateral prior to final
settlement, and the cash benefit or use at the time of final settlement.
Any collateral held by counterparties at the time a derivative financial
instrument settles reduces any cash required from us at time of
settlement.
|
|
2.
|
As
of December 31, 2009 and February 1, 2010, we had provided no
collateral for fuel-related derivatives to
counterparties.
|
|
3.
|
Changes
in the refining margin may also impact the cost of jet fuel. The refining
margin assumption included in the table above is 15% of the assumed
average market crude price.
|
59
Index to
Financial Statements and Supplementary Data
Page
|
|
AirTran
Holdings, Inc.
|
|
Report
of Independent Registered Public Accounting Firm
|
61
|
Consolidated
Statements of Operations - Years ended December 31, 2009, 2008,
and 2007
|
62
|
Consolidated
Balance Sheets - December 31, 2009 and 2008
|
63
|
Consolidated
Statements of Cash Flows - Years ended December 31, 2009, 2008,
and 2007
|
65
|
Consolidated
Statements of Stockholders’ Equity - Years ended December 31,
2009, 2008, and 2007
|
66
|
Notes
to Consolidated Financial Statements
|
67
|
60
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.
as of December 31, 2009 and 2008, and the related consolidated statements
of operations, cash flows, and stockholders’ equity for each of the three years
in the period ended December 31, 2009. 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 AirTran Holdings, Inc.
at December 31, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, 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), AirTran Holdings, Inc.’s internal control over
financial reporting as of December 31, 2009, 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, 2010,
expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
Orlando,
Florida
February
11, 2010
61
AirTran
Holdings, Inc.
Consolidated
Statements of Operations
(In
thousands, except per share data)
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
Revenues:
|
||||||||||||
Passenger
|
$
|
2,088,965
|
$
|
2,413,609
|
$
|
2,198,910
|
||||||
Other
|
252,477
|
138,869
|
111,073
|
|||||||||
Total
operating revenues
|
2,341,442
|
2,552,478
|
2,309,983
|
|||||||||
Operating
Expenses:
|
||||||||||||
Aircraft
fuel
|
678,835
|
1,194,938
|
803,640
|
|||||||||
Salaries,
wages and benefits
|
488,366
|
474,889
|
451,818
|
|||||||||
Aircraft
rent
|
242,236
|
242,674
|
242,974
|
|||||||||
Maintenance,
materials and repairs
|
198,852
|
163,350
|
151,265
|
|||||||||
Distribution
|
94,688
|
100,400
|
88,461
|
|||||||||
Landing
fees and other rents
|
144,756
|
137,738
|
122,800
|
|||||||||
Aircraft
insurance and security services
|
21,045
|
21,556
|
23,761
|
|||||||||
Marketing
and advertising
|
38,097
|
40,475
|
40,415
|
|||||||||
Depreciation
and amortization
|
56,871
|
59,049
|
48,853
|
|||||||||
(Gain)
loss on disposition of assets
|
(2,964
|
)
|
(20,015
|
)
|
(5,298
|
)
|
||||||
Impairment
of goodwill
|
—
|
8,350
|
—
|
|||||||||
Other
operating
|
203,650
|
204,895
|
198,648
|
|||||||||
Total
operating expenses
|
2,164,432
|
2,628,299
|
2,167,337
|
|||||||||
Operating
Income (Loss)
|
177,010
|
(75,821
|
)
|
142,646
|
||||||||
Other
(Income) Expense:
|
||||||||||||
Interest
income
|
(5,702
|
)
|
(3,679
|
)
|
(20,401
|
)
|
||||||
Interest
expense
|
83,967
|
85,479
|
81,904
|
|||||||||
Capitalized
interest
|
(1,692
|
)
|
(7,707
|
)
|
(13,710
|
)
|
||||||
Net
(gains) losses on derivative financial instruments
|
(30,624
|
)
|
150,836
|
255
|
||||||||
Midwest
exchange offer expenses
|
—
|
—
|
10,650
|
|||||||||
(Gain)
on extinguishment of debt
|
(4,278
|
)
|
—
|
—
|
||||||||
Other
(income) expense, net
|
41,671
|
224,929
|
58,698
|
|||||||||
Income
(Loss) Before Income Taxes
|
135,339
|
(300,750
|
)
|
83,948
|
||||||||
Income
tax expense (benefit)
|
677
|
(34,416
|
)
|
33,403
|
||||||||
Net
Income (Loss)
|
$
|
134,662
|
$
|
(266,334
|
)
|
$
|
50,545
|
|||||
Earnings
(Loss) Per Common Share:
|
||||||||||||
Basic
|
$
|
1.09
|
$
|
(2.44
|
)
|
$
|
0.55
|
|||||
Diluted
|
$
|
0.95
|
$
|
(2.44
|
)
|
$
|
0.54
|
|||||
Weighted-Average
Shares Outstanding:
|
||||||||||||
Basic
|
123,624
|
109,153
|
91,574
|
|||||||||
Diluted
|
146,891
|
109,153
|
93,078
|
See
accompanying notes to Consolidated Financial Statements.
62
AirTran
Holdings, Inc.
Consolidated
Balance Sheets
(In
thousands)
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$
|
542,619
|
$
|
315,078
|
||||
Short-term
investments
|
1,663
|
19,937
|
||||||
Restricted
cash
|
52,390
|
86,126
|
||||||
Deposits
held by counterparties to derivative financial instruments
|
—
|
48,820
|
||||||
Accounts
receivable, less allowance of $1,468 and $1,250 at December 31, 2009
and 2008, respectively
|
27,067
|
38,301
|
||||||
Spare
parts, materials and supplies, less allowance for obsolescence of $3,602
and $2,844 at December 31, 2009 and 2008,
respectively
|
16,133
|
15,428
|
||||||
Prepaid
and stored fuel
|
34,338
|
16,004
|
||||||
Derivative
financial instruments
|
47,037
|
3,420
|
||||||
Prepaid
expenses and other current assets
|
31,970
|
34,053
|
||||||
Deferred
income taxes
|
4,206
|
7,992
|
||||||
Total
current assets
|
757,423
|
585,159
|
||||||
Property
and Equipment:
|
||||||||
Flight
equipment
|
1,384,529
|
1,310,874
|
||||||
Less:
Accumulated depreciation and amortization
|
(165,694
|
)
|
(125,663
|
)
|
||||
1,218,835
|
1,185,211
|
|||||||
Purchase
deposits for flight equipment
|
49,720
|
64,032
|
||||||
Other
property and equipment
|
119,150
|
108,186
|
||||||
Less:
Accumulated depreciation and amortization
|
(67,666
|
)
|
(55,642
|
)
|
||||
51,484
|
52,544
|
|||||||
Total
property and equipment
|
1,320,039
|
1,301,787
|
||||||
Other
Assets:
|
||||||||
Long-term
investments
|
—
|
5,497
|
||||||
Trademarks
and trade names
|
21,567
|
21,567
|
||||||
Debt
issuance costs
|
16,017
|
14,201
|
||||||
Prepaid
aircraft rent
|
82,062
|
87,003
|
||||||
Derivative
financial instruments
|
14,783
|
—
|
||||||
Other
assets
|
72,281
|
70,048
|
||||||
Total
Assets
|
$
|
2,284,172
|
$
|
2,085,262
|
See
accompanying notes to Consolidated Financial Statements.
63
AirTran
Holdings, Inc.
Consolidated
Balance Sheets (Continued)
(In
thousands)
December 31,
|
||||||||
2009
|
2008
|
|||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$
|
57,482
|
$
|
81,557
|
||||
Accrued
and other liabilities
|
145,174
|
147,889
|
||||||
Air
traffic liability
|
226,891
|
252,055
|
||||||
Derivative
financial instruments
|
14,903
|
69,646
|
||||||
Current
maturities of capital lease obligations
|
1,085
|
835
|
||||||
Borrowing
under revolving line of credit facility
|
125,000
|
90,000
|
||||||
Current
maturities of long-term debt
|
156,004
|
69,865
|
||||||
Total
current liabilities
|
726,539
|
711,847
|
||||||
Long-term
capital lease obligations
|
14,806
|
16,031
|
||||||
Long-term
debt
|
917,122
|
927,325
|
||||||
Other
liabilities
|
111,760
|
120,342
|
||||||
Deferred
income taxes
|
4,206
|
7,992
|
||||||
Derivative
financial instruments
|
7,796
|
20,616
|
||||||
Commitments
and Contingencies
|
||||||||
Stockholders'
Equity:
|
||||||||
Preferred
stock, $.01 par value per share, 5,000 shares authorized, no shares issued
or outstanding
|
—
|
—
|
||||||
Common
stock, $.001 par value per share, 1,000,000 shares authorized, and 134,726
and 119,550 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
135
|
120
|
||||||
Additional
paid-in capital
|
586,727
|
524,800
|
||||||
Accumulated
deficit
|
(83,389
|
)
|
(218,051
|
)
|
||||
Accumulated
other comprehensive loss
|
(1,530
|
)
|
(25,760
|
)
|
||||
Total
stockholders’ equity
|
501,943
|
281,109
|
||||||
Total
Liabilities and Stockholders' Equity
|
$
|
2,284,172
|
$
|
2,085,262
|
See
accompanying notes to Consolidated Financial Statements.
64
AirTran
Holdings, Inc.
Consolidated
Statements of Cash Flows
(In
thousands)
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
activities:
|
||||||||||||
Net
income (loss)
|
$
|
134,662
|
$
|
(266,334
|
)
|
$
|
50,545
|
|||||
Adjustments
to reconcile net income (loss) to net cash provided by (used for)
operating activities:
|
||||||||||||
Depreciation
and amortization
|
68,363
|
65,412
|
51,210
|
|||||||||
Amortization
of deferred gains from sales/leaseback of aircraft
|
(5,193
|
)
|
(4,668
|
)
|
(4,887
|
)
|
||||||
Amortization
of debt discount
|
7,258
|
7,399
|
6,374
|
|||||||||
Midwest
exchange offer expenses
|
—
|
—
|
10,650
|
|||||||||
Provisions
for uncollectible accounts
|
573
|
1,264
|
1,407
|
|||||||||
Deferred
income taxes
|
677
|
(34,416
|
)
|
33,403
|
||||||||
Impairment
of goodwill
|
—
|
8,350
|
—
|
|||||||||
(Gain)
loss on asset dispositions
|
(2,914
|
)
|
(19,184
|
)
|
(3,875
|
)
|
||||||
Gain
on debt extinguishment
|
(4,278
|
)
|
—
|
—
|
||||||||
Other
|
2,750
|
10,659
|
2,067
|
|||||||||
Changes
in certain operating assets and liabilities:
|
||||||||||||
Restricted
cash
|
33,736
|
(44,326
|
)
|
(4,803
|
)
|
|||||||
Derivative
financial instruments
|
(104,894
|
)
|
66,027
|
(6,492
|
)
|
|||||||
Accounts
receivable
|
8,711
|
5,157
|
(5,566
|
)
|
||||||||
Spare
parts, materials, and supplies
|
(1,463
|
)
|
(1,625
|
)
|
(3,284
|
)
|
||||||
Prepaid
and stored fuel
|
(18,334
|
)
|
16,656
|
(27,161
|
)
|
|||||||
Deposits
held by counterparties to derivative financial instruments
|
48,820
|
(48,820
|
)
|
—
|
||||||||
Prepaid
aircraft rent
|
2,650
|
(6,408
|
)
|
(11,682
|
)
|
|||||||
Other
assets
|
(5,733
|
)
|
(4,507
|
)
|
(16,429
|
)
|
||||||
Accounts
payable, accrued and other liabilities
|
(21,994
|
)
|
37,331
|
46,272
|
||||||||
Air
traffic liability
|
(25,164
|
)
|
32,132
|
64,330
|
||||||||
Net
cash provided by (used for) operating
activities
|
118,233
|
(179,901
|
)
|
182,079
|
||||||||
Investing
activities:
|
||||||||||||
Purchase
of available-for-sale securities
|
—
|
(30,303
|
)
|
(2,040,593
|
)
|
|||||||
Sale
of available-for-sale securities
|
27,116
|
118,986
|
2,071,195
|
|||||||||
Purchases
of property and equipment
|
(90,877
|
)
|
(136,427
|
)
|
(176,020
|
)
|
||||||
Return
(payment) of aircraft purchase deposits, net
|
14,312
|
55,785
|
78
|
|||||||||
Proceeds
from sale of aircraft
|
—
|
305,965
|
72,879
|
|||||||||
Midwest
exchange offer expenses
|
—
|
—
|
(10,348
|
)
|
||||||||
Other
|
2,225
|
14,650
|
—
|
|||||||||
Net
cash provided by (used for) investing
activities
|
(47,224
|
)
|
328,656
|
(82,809
|
)
|
|||||||
Financing
activities:
|
||||||||||||
Issuance
of long-term debt
|
160,916
|
107,577
|
62,029
|
|||||||||
Payments
on long-term debt and capital lease obligations
|
(95,774
|
)
|
(317,153
|
)
|
(115,904
|
)
|
||||||
Borrowings
under revolving line of credit facility
|
1,050,000
|
377,000
|
—
|
|||||||||
Repayment
of borrowings under revolving line of credit facility
|
(1,015,000
|
)
|
(287,000
|
)
|
—
|
|||||||
Net
proceeds from issuance of common stock
|
54,805
|
74,669
|
—
|
|||||||||
Proceeds
from exercise of stock options, and purchases under employee stock
purchase plan
|
1,708
|
3,902
|
2,378
|
|||||||||
Other
|
(123
|
)
|
455
|
—
|
||||||||
Net
cash provided by (used for) financing
activities
|
156,532
|
(40,550
|
)
|
(51,497
|
)
|
|||||||
Net
change in cash and cash equivalents
|
227,541
|
108,205
|
47,773
|
|||||||||
Cash
and cash equivalents at beginning of year
|
315,078
|
206,873
|
159,100
|
|||||||||
Cash
and cash equivalents at end of year
|
$
|
542,619
|
$
|
315,078
|
$
|
206,873
|
See
accompanying notes to Consolidated Financial Statements.
65
AirTran
Holdings, Inc.
Consolidated
Statements of Stockholders’ Equity
(In
thousands)
Common
Stock
|
Additional
Paid-in
|
Accumulated
Other
Comprehensive
|
Accumulated
Earnings
|
Total
Stockholders’
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
(Loss)
|
(Deficit)
|
Equity
|
|||||||||||||||||||
Balance
at January 1, 2007
|
91,160
|
$
|
91
|
$
|
416,453
|
$
|
(5,252
|
)
|
$
|
(2,262
|
)
|
$
|
409,030
|
|||||||||||
Net
income
|
—
|
—
|
—
|
—
|
50,545
|
50,545
|
||||||||||||||||||
Unrealized
gain on derivative instruments, net of income taxes of $0.6
million
|
—
|
—
|
—
|
1,033
|
—
|
1,033
|
||||||||||||||||||
Actuarial
gain on post-employment obligations, net of income taxes of $2.7
million
|
—
|
—
|
—
|
4,557
|
—
|
4,557
|
||||||||||||||||||
Reclassification
of post-employment expense to earnings, net of income taxes of $0.6
million
|
—
|
—
|
—
|
1,012
|
—
|
1,012
|
||||||||||||||||||
Total
comprehensive income
|
57,147
|
|||||||||||||||||||||||
Issuance
of common stock for exercise of options
|
198
|
—
|
1,022
|
—
|
—
|
1,022
|
||||||||||||||||||
Stock-based
compensation
|
374
|
1
|
5,403
|
—
|
—
|
5,404
|
||||||||||||||||||
Issuance
of common stock under employee stock purchase plan
|
154
|
—
|
1,356
|
—
|
—
|
1,356
|
||||||||||||||||||
Balance
at December 31, 2007
|
91,886
|
92
|
424,234
|
1,350
|
48,283
|
473,959
|
||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
(266,334
|
)
|
(266,334
|
)
|
||||||||||||||||
Unrealized
loss on derivative instruments, net of income taxes of $0.7
million
|
—
|
—
|
—
|
(26,686
|
)
|
—
|
(26,686
|
)
|
||||||||||||||||
Other
|
—
|
—
|
—
|
(424
|
)
|
—
|
(424
|
)
|
||||||||||||||||
Total
comprehensive loss
|
(293,444
|
)
|
||||||||||||||||||||||
Issuance
of common stock for exercise of options
|
843
|
1
|
2,604
|
—
|
—
|
2,605
|
||||||||||||||||||
Stock-based
compensation
|
419
|
1
|
5,819
|
—
|
—
|
5,820
|
||||||||||||||||||
Conversion
of 5.5% senior notes to common stock
|
1,367
|
1
|
4,560
|
—
|
—
|
4,561
|
||||||||||||||||||
Issuance
of common stock under employee stock purchase plan
|
376
|
—
|
1,295
|
—
|
—
|
1,295
|
||||||||||||||||||
Issuance
of common stock
|
24,659
|
25
|
74,644
|
—
|
—
|
74,669
|
||||||||||||||||||
Issuance of stock warrants
|
—
|
—
|
8,586
|
—
|
—
|
8,586
|
||||||||||||||||||
Other
|
—
|
—
|
3,058
|
—
|
—
|
3,058
|
||||||||||||||||||
Balance
at December 31, 2008
|
119,550
|
120
|
524,800
|
(25,760
|
)
|
(218,051)
|
281,109
|
|||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
134,662
|
|
134,662
|
|
||||||||||||||||
Unrealized
gain on derivative instruments, net of income taxes of $0
million
|
—
|
—
|
—
|
21,070
|
|
—
|
21,070
|
|
||||||||||||||||
Actuarial
gain on post-employment obligations, net of income taxes of $0
million
|
—
|
—
|
—
|
3,084
|
—
|
3,084
|
||||||||||||||||||
Other
|
—
|
—
|
—
|
76
|
|
—
|
76
|
|
||||||||||||||||
Total
comprehensive income
|
158,892
|
|
||||||||||||||||||||||
Issuance
of common stock for exercise of options
|
99
|
552
|
—
|
—
|
552
|
|||||||||||||||||||
Stock-based
compensation
|
631
|
1
|
5,968
|
—
|
—
|
5,969
|
||||||||||||||||||
Issuance
of common stock under employee stock purchase plan
|
227
|
—
|
1,156
|
—
|
—
|
1,156
|
||||||||||||||||||
Repurchase
of 7.0% convertible notes, net of income taxes of $0.9
million
|
—
|
—
|
(969
|
)
|
—
|
—
|
(969
|
)
|
||||||||||||||||
Issuance
of common stock
|
11,319
|
11
|
54,794
|
—
|
—
|
54,805
|
||||||||||||||||||
Issuance of common stock exchanged for stock
warrants
|
2,900
|
3
|
426
|
—
|
—
|
429
|
||||||||||||||||||
Balance
at December 31, 2009
|
134,726
|
$
|
135
|
$
|
586,727
|
$
|
(1,530
|
)
|
$
|
(83,389
|
)
|
$
|
501,943
|
See accompanying notes to Consolidated Financial Statements.
66
AirTran
Holdings, Inc.
Notes
to Consolidated Financial Statements
December 31,
2009
Note
1 – 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. Because we offer only one service
(i.e., air transportation), management has concluded that we only have one
segment of business. Most of our revenues are earned in the United
States.
Business
Through
AirTran Airways, we offer scheduled airline services, using Boeing B717-200
aircraft (B717) and Boeing B737-700 aircraft (B737), to 62 locations throughout
the United States and to selected international locations. Approximately
half of our flights originate or terminate at our largest hub in Atlanta,
Georgia and we serve a number of markets with non-stop service from our focus
cities of Baltimore, Maryland; Milwaukee, Wisconsin; and Orlando, Florida. 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.
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 consists
primarily 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.
67
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, 2009,
2008, and 2007, we wrote off accounts receivable aggregating $1.0 million, $1.1
million, and $1.0 million, respectively, against the allowance for doubtful
accounts. During the years ended December 31, 2009, 2008, and 2007, we recorded
expense related to allowance for doubtful accounts of $1.2 million, $1.3
million, and $1.0 million, respectively.
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. During the years ended December 31, 2009, 2008, and 2007, we recorded
expense related to obsolescence reserves of $0.8 million, $0.6 million, and $0.5
million, respectively.
Property
and Equipment
Property
and equipment is 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
$11.2 million and $14.8 million at December 31, 2009 and 2008,
respectively. Depreciation and amortization expense related to computer
equipment and software was $7.9 million, $8.6 million and $6.5 million for the
years ended December 31, 2009, 2008, and 2007, respectively.
Measurement
of Impairment of Long-lived Assets
In
accordance with the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 360 “Property,
Plant and Equipment” (Property, Plant and Equipment Topic) 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.
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 as required by ASC 350 “Intangibles – Goodwill and Other”
(Intangibles - Goodwill and Other Topic). During the second quarter of 2008,
because adverse industry conditions and operating losses were indicators that
our intangible assets may have been impaired, we prepared an assessment and
concluded that goodwill was impaired as of June 30, 2008, while our trade
name and trademarks were not impaired. The Company used current market
capitalization, control premiums, discounted cash flows, and other factors as
best evidence of market value. Consequently, we recorded a charge of $8.4
million to write-off all of the gross carrying value of our goodwill during the
second quarter of 2008. There have been no subsequent changes to goodwill and
accumulated impairment losses as of December 31, 2009. 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.
68
Capitalized
Interest
Interest
attributable to funds used to finance the acquisition of new aircraft is
capitalized as an additional cost of the aircraft. 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 not being readied for its intended use or when it 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 $31.3 million, $35.7 million, and $35.7 million for
the years ended December 31, 2009, 2008, and 2007,
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.
Other
Operating
Other
operating expenses include various general and administrative expenses
including, professional fees, audit fees, legal fees, and property
taxes. Additionally included in other operating expenses are ground
handling and contracted services at various station locations, deicing costs and
overnight costs for our flight crews, including hotel costs and per
diem.
69
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 could have a material 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.
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 awards 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 of, or fair value of expected transportation could
have a significant impact on our revenue in the year of change as well as future
years.
Stock
Based Employee Compensation
Consistent
with ASC 718 “Compensation – Stock Compensation” (Compensation – Stock
Compensation Topic), 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.
70
Derivative
Financial Instruments
ASC 815
“Derivatives and Hedging” (Derivatives and Hedging Topic), requires companies to
recognize all of their 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 our
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 income taxes utilizing ASC 740 “Income Taxes” (Income Taxes Topic).
The Income Taxes Topic 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. The
Income Taxes Topic also 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 the Income Taxes Topic, 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. The
impact of adopting the guidance on uncertain tax positions was not material as
of January 1, 2007, the date of adoption.
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 June
2009, the FASB issued Accounting
Standards Codification (ASC, or the Codification) as the source of
authoritative generally accepted accounting principles (GAAP) recognized by the
FASB for non-governmental entities. The Codification became effective for
financial statements issued for reporting periods that end after September 15,
2009. The Codification superseded all then-existing non-SEC accounting and
reporting standards. The Codification did not change rules and interpretations
of the SEC which are also sources of authoritative GAAP for SEC registrants.
Because the Codification did not change GAAP, the Codification had no impact on
our consolidated financial statements or footnotes.
71
On June
30, 2009, we adopted ASC 855-10-50 “Subsequent Events - Disclosure”
(Subsequent Events Topic), which established general standards of accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued.
The Subsequent Events Topic defines two types of subsequent events. The
effects of events or transactions that provide additional evidence about
conditions that existed at the balance sheet date, including the estimates
inherent in the process of preparing financial statements, are recognized in the
financial statements. The effects of events that provide evidence about
conditions that did not exist at the date of the balance sheet but arose after
that date are not recognized in the financial statements. We have reviewed
subsequent events through February 11, 2010 (the date of the issuance of the
accompanying condensed consolidated financial statements).
In
October 2009, the FASB issued an Accounting Standards Update (ASU No. 2009-13)
pertaining to multiple-deliverable revenue arrangements. The new guidance will
affect accounting and reporting for companies that enter into
multiple-deliverable revenue arrangements with their customers when those
arrangements are within the scope of ASC 605-25 “Revenue Recognition -
Multiple-Element Arrangements”. The new guidance will eliminate the residual
method of allocation and require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method. The new guidance will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted and the guidance may be applied
retroactively. We are currently evaluating the impact that ASU No. 2009-13 will
have on our consolidated financial position, results of operations, and cash
flows.
In
December 2009, the FASB issued ASU No. 2009-17, Improvements
to Financial Reporting by Enterprises Involved with Variable Interest
Entities, which incorporates into the FASB Codification amendments to
FASB Interpretation No. 46(R), Consolidation
of Variable Interest Entities, made by Statement of Financial Accounting
Standard No. 167, Accounting
for Variable Interest Entities, to require that a comprehensive
qualitative analysis be performed to determine whether a holder of variable
interests in a variable interest entity also has a controlling financial
interest in that entity. In addition, the amendments require that the same type
of analysis be applied to entities that were previously designated as qualified
special-purpose entities. The amendments are effective as of the start of the
first annual reporting period beginning after November 15, 2009, for interim
periods within the first annual reporting period, and for all subsequent annual
and interim reporting periods. We do not expect the adoption of ASU No. 2009-17
to have a material impact on our consolidated financial position, results of
operations, and cash flows.
72
Note
2 – Commitments and Contingencies
Aircraft
Related Commitments, Financing Arrangements and Transactions
In 2008,
to respond to the challenges of a volatile fuel-cost environment, a recessionary
macroeconomic environment, and adverse capital market conditions, we recast our
business plan to defer previously planned growth. We reduced capacity,
principally by deferring scheduled aircraft deliveries, 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. During 2008, we sold two new B737 aircraft
(that we took delivery of and subsequently sold) and we also sold six used B737
aircraft in our fleet. In 2008, we took delivery of eight aircraft, including
the aforementioned two new aircraft that we sold in 2008.
We had
four B737 aircraft scheduled for delivery during 2009. In 2009, we permitted The
Boeing Company (“Boeing”) to sell two of the B737 aircraft to a foreign airline
and we were released from our obligation to purchase such aircraft. During 2009,
we took delivery of two B737 aircraft that we had previously agreed to sell to
another foreign airline. The foreign airline defaulted on its obligation to us
to purchase the two aircraft. We placed these aircraft in service in October
2009.
During
2009, we recognized net gains on the disposition of assets of $3.0 million,
including: $2.4 million loss for the write-off of capitalized interest related
to our release of our obligation to purchase two B737 aircraft which Boeing sold
to a foreign airline, and, $6.6 million gain related to the deposits we
previously received from the counterparty who defaulted on its obligation to
purchase two B737 aircraft. Gain on disposition of assets for the year ended
December 31, 2008, consisting primarily of gains on the sale of eight aircraft,
was $20.0 million.
The table
below summarizes, as of December 31, 2009, all aircraft scheduled for
delivery to us:
|
Scheduled
Firm Aircraft Deliveries
B737
|
|||
2010
|
-
|
|||
2011
|
7
|
|||
2012
|
8
|
|||
2013
|
6
|
|||
2014
|
12
|
|||
2015
|
8
|
|||
2016
|
10
|
|||
Total
|
51
|
Our
aircraft purchase commitments for the next five years and thereafter, in
aggregate, are (in millions): 2010—$50; 2011—$270; 2012—$335; 2013—$260; and
2014—$500; and thereafter, $720. 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. Our intention is to finance the aircraft on order through either
debt financing, lease financing, or a mix thereof. We have financing commitments
from a lender to finance a portion of the acquisition price of two B737 aircraft
scheduled for delivery to us in 2011. The financing commitment for the second
aircraft is conditioned upon our refinancing by March 31, 2010 existing
indebtedness owed to the lender on another B737 aircraft. Except for the
financing commitment for two aircraft, we have not yet arranged for aircraft
financing for any of the other firm aircraft deliveries.
73
There are multiple variables including capital market conditions, asset valuations, and our own operating performance that could affect the availability of satisfactory financing for our future B737 aircraft deliveries. While there was limited availability of satisfactory aircraft financing in early 2009, it is our view that the aircraft financing market has improved. While we cannot provide assurance that sufficient financing will be available, we expect to be able to obtain acceptable financing for future deliveries. Our view is based upon our discussions with prospective lenders and lessors, the consummation of aircraft financing transactions by other airlines, our own improved operating performance in 2009, and our recent ability to refinance certain B737 aircraft.
Our B737
contract with Boeing requires us to make pre-delivery deposits to Boeing.
Although we typically have financed a significant portion of our pre-delivery
deposit requirements with debt from banks or other financial institutions, we
currently have no such financing in place for future deliveries.
In
October 2008, as part of our agreement to defer certain aircraft deliveries and
obtain financing for 2009 aircraft deliveries, we granted an affiliate of Boeing
the right to require us to lease, for a period not to exceed ten years, up to
five additional B717 aircraft. If such affiliate of Boeing exercises its right
to require us to lease any B717 aircraft, we have the option to cancel a like
number of B737 aircraft we have on firm order for each such B717 aircraft. In
September 2009, we granted Boeing the right to terminate the leases of up to two
of our B717 aircraft before the scheduled lease expiration. To date, Boeing has
not yet elected to require us to lease additional aircraft or terminate any B717
aircraft leases.
Credit
Card Processing Arrangements
We have
agreements with organizations that process credit card transactions arising from
purchases of air travel by customers of Airways. Each of our agreements with our
credit card processors allows, under specified conditions, the processor to
retain cash related to future travel that such processor otherwise would remit
to us (i.e., a “holdback”). Holdbacks are classified as restricted cash on our
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.
Each
agreement with our two largest credit card processors (based on volumes
processed for us) was amended in 2009 resulting in changes to contractual terms
generally favorable to us. Our agreement with our largest credit card processor
now expires December 31, 2010. Each agreement with our two largest credit card
processors provides that a processor may holdback amounts that would otherwise
be remitted to us in the event that a processor reasonably determines that there
has been a material adverse occurrence or certain other events occur. Our
agreement with our largest credit card processor also provides that the
processor may holdback amounts that would otherwise be remitted to us in the
event that our aggregate unrestricted cash and investments (as defined) falls
below agreed upon levels. Should the processor be entitled in the future to
withhold amounts that would otherwise be remitted to us, we retain the
contractual right to eliminate or reduce the amounts withheld by achieving
specified aggregate unrestricted cash and investment levels and / or by
providing the processor with letters of credit. As of December, 2009, a $50
million letter of credit had been issued under our letter of credit facility for
the benefit of our largest credit card processor.
As of
December 31, 2009, we had advance ticket sales of approximately $212.3 million
related to all credit card sales, we were in compliance with our credit card
processing agreements, and our two largest processors were holding back no cash
remittances from us. Our maximum potential exposure to cash holdbacks by our two
largest credit card processors, based upon advance ticket sales as of December
31, 2009, was $149.1 million
(after considering the $50 million letter of credit issued in favor of our
largest credit card processor). Even had there been no letter of credit issued
for the benefit of our largest credit card processor, as of December 31, 2009,
neither of our two largest credit card processors would have been entitled to
holdback any cash remittances from us.
74
General
Indemnifications
We are
party to many routine contracts under which we indemnify third parties for
various risks. We have not accrued any liability for any of these indemnities,
as the amounts are not determinable or estimable.
Historically,
we have not incurred significant costs related to such indemnifications. These
indemnities consist of the following:
·
|
Certain
of our debt agreements related to aircraft-secured notes payable through
2021 contain language, whereby, we have agreed to indemnify certain
holders of certificates evidencing the debt associated with such notes, as
necessary, to compensate them for any costs incurred by, or any reduction
in receivables due to, such certificate holders resulting from broadly
defined regulatory changes that impose or modify any reserve, special
deposit, or similar requirements relating to any extensions of credit or
other assets of, or any deposits with, or other liabilities of, such
certificate holders. Additionally, if it becomes unlawful for such
certificate holders to make or maintain the investment or credit evidenced
by the certificates, we have agreed to pay such certificate holders an
amount necessary to cause the interest rate with respect to the
certificates to be a rate per annum equal to 4.88 percent over the rate
specified by such certificate holders as the cost to them of obtaining
funds in dollars in the United States in an amount equal to the pool
balance of the certificates. The maximum potential payment under these
indemnities cannot be
determined.
|
·
|
Our
aircraft lease transaction documents contain customary indemnities
concerning withholding taxes under which we are responsible, in some
circumstances should withholding taxes be imposed, for paying amounts of
additional rent, as are necessary to ensure that the lessor still
receives, after taxes, the rent stipulated in the lease agreements. These
provisions apply on leases expiring through 2022. The maximum potential
payment under these indemnities cannot be
determined.
|
·
|
In
our aircraft financing agreements, we typically indemnify the financing
parties, the trustee acting on their behalf, and other related parties
against tort liabilities that arise from the manufacture, design,
ownership, financing, use, operation, and maintenance of the aircraft,
whether or not these liabilities arise out of or relate to the negligence
of these indemnified parties except for their gross negligence or willful
misconduct. We believe that we are covered by insurance (subject to
deductibles) for most tort liabilities and related indemnities, as
described above with respect to the aircraft we operate. Additionally, if
there is a change in the law which results in the imposition of any
reserve, capital adequacy, special deposit, or similar requirement which
will increase the cost to the lender, we will pay the lender the
additional amount necessary to compensate the lender for the actual cost
increase.
|
·
|
We
have various leases with respect to real property and various agreements
among airlines relating to fuel consortia or fuel farms at airports in
which we have agreed to standard 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.
|
75
Taxes
We remit
a variety of taxes and fees to various governmental authorities including:
income taxes, transportation fees and taxes collected from our customers,
property taxes, sales and use taxes, payroll taxes, and fuel taxes. The taxes
and fees remitted by us are subject to review and audit by the applicable
governmental authorities which could result in liability for additional
assessments. Contingencies for taxes, which are not based on income, are
accounted for in accordance with ASC 450 “Contingencies”
(Contingencies Topic). Uncertain income tax positions taken on income tax
returns are accounted for in accordance with the Income Taxes Topic. 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, 2009, approximately 52 percent of our employees were
represented by unions. Our agreement with our flight attendants became amendable
in December 2008. Negotiations on proposed amendments began in January 2008 and
direct negotiations are continuing. The pilots’ collective bargaining agreement
became amendable in 2005 and is currently in mediation under the auspices of the
National Mediation Board. 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 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.
Litigation
A
complaint alleging violations of federal antitrust laws and seeking
certification as a class action was filed against Delta Air Lines, Inc. (Delta)
and AirTran in the United States District Court for the Northern District of
Georgia in Atlanta on May 22, 2009. The complaint alleges, among other things,
that AirTran conspired with Delta in imposing $15-per-bag fees for the first
item of checked luggage. The initial complaint sought treble damages on behalf
of a putative class of persons or entities in the United States who directly
paid Delta and/or AirTran such fees on domestic flights beginning December 5,
2008. Subsequent to the filing of the May 2009 complaint, various other nearly
identical complaints also seeking certification as class actions were filed in
federal district courts in Atlanta, Georgia; Orlando, Florida; and Las Vegas,
Nevada. All of the cases were consolidated before a single judge in
Atlanta. An amended complaint filed in February 2010 in the consolidated action
broadened the allegations to add claims that Delta and AirTran also cut capacity
on competitive routes and raised prices. The amended complaint seeks
injunctive relief against a broad range of alleged anticompetitive activities
and attorneys fees. AirTran denies all allegations of wrongdoing, including
those in the amended complaint, and intends to defend vigorously any and all
such allegations.
76
In
addition to the above litigation, AirTran is a party to other claims, and
litigation incidental to its business, for which it is not currently possible to
determine the ultimate liability, if any. While the outcome of such claims and
litigation is subject to uncertainty, based on an evaluation of information
currently available and consultation with legal counsel, management believes
that resolution of such claims, and litigation is not likely to have a material
effect on the financial position, cash flows, or results of operations of the
Company. The Company expenses legal costs as they are incurred.
Restricted
Cash and Letters of Credit
Restricted
cash consists primarily 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. As of December 31, 2009, $17.5
million of restricted cash relates to outstanding letters of credit, primarily
for airport facilities and insurance.
We also
have a letter of credit facility which provides for a financial institution to
issue letters of credit for the benefit of our credit card processors. The
letter of credit facility is supported by a variety of assets. As of December
31, 2009, no amount was drawn against the $50 million letter of
credit.
Note
3 – Financial Instruments
The
estimated fair value of financial instruments, excluding debt, approximates
their financial statement carrying amount.
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, 2009, all of
our investments were classified as short-term and consisted of funds invested in
a money market fund. During 2009, we redeemed all of our investments in an
enhanced cash investment fund and recorded a $3.3 million gain classified as
interest income. During 2008 and 2007, we recorded a charge of $5.2 million and
$1.1 million, respectively, to interest income for realized and unrealized
losses related to our investments in available for sale 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, 2009, we have entered into
fuel related swap and option agreements which pertain to 153 million
gallons or 41 percent of our projected 2010 fuel requirements, and
10 million gallons or 3 percent of our projected 2011 fuel requirements. In
January and February 2010, we entered into fuel-related option agreements, which
pertain to 18 million gallons or 4 percent of our projected 2010 fuel
requirements, and 48 million gallons or 12 percent of our projected 2011 fuel
requirements. Under jet fuel swap arrangements, we pay a fixed rate per gallon
and receive the monthly average price of Gulf Coast jet fuel. The fuel-related
option arrangements include collars, purchased call options, and sold call
options. Depending on market conditions at the time a derivative contract is
entered into, we generally use jet fuel, heating oil, or crude oil as the
underlying commodity. Additionally, from time to time, we enter into
refinery-margin swap agreements pertaining to certain periods pursuant to which
we pay a fixed rate per gallon and receive the monthly average price of jet fuel
refinery costs. As of December 31, 2009, we did not have any outstanding
refinery-margin swap agreements.
77
Realized
and unrealized gains and losses on derivatives that are not designated as hedges
for financial accounting purposes or that do not qualify for hedge accounting
are recognized currently in Other (Income) Expense. In order to simplify the
financial reporting for fuel-related derivatives, effective January 1, 2009, we
ceased designating new fuel-related derivative financial instruments as
accounting hedges. For our fuel-related derivative financial instruments entered
into prior to January 1, 2009, a substantial portion did not qualify to be
accounted for as hedges. Consequently, a majority of the gains and losses on
such fuel-related derivative financial instruments were classified as Other
(Income) Expense based on changes in estimated fair value. The gains and losses
on other fuel-related derivative financial instruments, previously designated as
hedges for financial accounting purposes, were classified as a component of fuel
expense when realized.
We have
interest-rate swap agreements that effectively convert a portion of our
floating-rate debt to a fixed-rate basis for the remaining life of the debt,
thus reducing the impact of interest rate changes on future interest expense and
cash flows. Under these agreements, which expire between 2018 and 2020, we pay
fixed rates between 2.95 percent and 5.085 percent and receive either
three-month or six-month USD London Interbank Offered Rate (LIBOR) on the
notional values. During the year ended December 31, 2009, we entered into eleven
interest-rate swap arrangements pertaining to $293.3 million notional amount of
outstanding debt. The notional amount of outstanding debt related to the
interest-rate swaps as of December 31, 2009 was $447.0 million.
In January and February 2010, we entered into additional interest-rate swap
agreements pertaining to $43.5 million notional amount of our outstanding debt.
The primary objective for our use of interest-rate swaps is to reduce the impact
of the volatility of interest rates on our operating results. These
interest-rate swap arrangements are accounted for as cash flow hedges. The
ineffective portion of the change in fair value of each derivative is recognized
in Other (Income) Expense, and the effective portion of the change in fair value
is recorded as a component of Other Comprehensive Income (Loss). The effective
portion is reclassified to interest expense during the period in which the
hedged transaction affects earnings. The differences to be paid or received
under the swap agreements are reflected as an adjustment to interest
expense.
78
The
following table summarizes the fair value of our derivative financial
instruments (in thousands):
Derivative
Assets
|
Derivative
Liabilities
|
||||||||||||||||
Balance
Sheet Location
|
December
31, 2009
|
December
31, 2008
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||
Derivatives
designated as hedging instruments
|
|||||||||||||||||
Interest-rate
contracts
|
Current
|
$ | - | $ | - | $ | (13,902 | ) | $ | (5,644 | ) | ||||||
Interest-rate
contracts
|
Noncurrent
|
11,492 | - | (7,796 | ) | (15,694 | ) | ||||||||||
Jet
fuel swaps and options
|
Current
|
147 | 2,722 | (108 | ) | (6,710 | ) | ||||||||||
Total
|
11,639 | 2,722 | (21,806 | ) | (28,048 | ) | |||||||||||
Derivatives
not designated as hedging instruments
|
|||||||||||||||||
Jet
fuel options
|
Current
|
- | 77 | - | (548 | ) | |||||||||||
Crude
swaps and options
|
Current
|
35,970 | 621 | (833 | ) | (56,744 | ) | ||||||||||
Crude
swaps and options
|
Noncurrent
|
- | - | - | (4,922 | ) | |||||||||||
Heating
oil options
|
Current
|
10,775 | - | - | - | ||||||||||||
Heating
oil options
|
Noncurrent
|
3,291 | - | - | - | ||||||||||||
Other
|
Current
|
145 | - | (60 | ) | - | |||||||||||
Total
|
50,181 | 698 | (893 | ) | (62,214 | ) | |||||||||||
Total
derivatives
|
$ | 61,820 | $ | 3,420 | $ | (22,699 | ) | $ | (90,262 | ) |
Fair
value includes any premiums paid or received, unrealized gains and losses,
and any amounts receivable or payable from or to counterparties. Fair
value does not include collateral provided to
counterparties.
|
|||||||||||
Liability
and asset amounts with one counterparty are netted against each other for
financial reporting purposes for derivative contracts entered into as one
trade and for derivatives entered into for the purpose of effectively
settling open
positions.
|
79
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,
|
|||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||||
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)
|
Net
(gains) losses on derivative financial instruments
|
||||||||||||||||||||||
Derivatives
designated as hedging instruments
|
|||||||||||||||||||||||||
Interest-rate
contracts
|
$ | (12,753 | ) | $ | 16,179 |
Interest
expense
|
$ | 631 | $ | 199 | $ | - | $ | (46 | ) | ||||||||||
Jet
fuel swaps and options
|
730 | (4,303 | ) |
Aircraft
fuel
|
8,416 | (15,677 | ) | 73 | 1,969 | ||||||||||||||||
$ | (12,023 | ) | $ | 11,876 | $ | 9,047 | $ | (15,478 | ) | 73 | 1,923 | ||||||||||||||
Derivatives
not designated as hedging instruments
|
|||||||||||||||||||||||||
Jet
fuel options
|
(471 | ) | 6,053 | ||||||||||||||||||||||
Crude
swaps and options
|
(38,512 | ) | 147,941 | ||||||||||||||||||||||
Heating
oil options
|
517 | - | |||||||||||||||||||||||
Other
|
7,769 | (5,081 | ) | ||||||||||||||||||||||
(30,697 | ) | 148,913 | |||||||||||||||||||||||
$ | (30,624 | ) | $ | 150,836 |
Based on
fair values as of December 31, 2009, we do not expect to reclassify any material
net gains (losses) on derivative instruments from accumulated other
comprehensive income to earnings during the next twelve months.
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, 2009, we provided the counterparties
with collateral aggregating $15.0 million. The collateral is classified as
restricted cash if the funds are held in our name. The collateral is classified
as deposits held by counterparty to derivative financial instruments 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.
80
Note
4 –Debt
The
components of debt were (in thousands):
December 31,
|
||||||||
2009
|
2008
|
|||||||
B737
Aircraft Purchase Financing Facilities:
|
||||||||
Floating-rate
aircraft notes payable through 2021, 1.91 percent weighted-average
interest rate as of December 31, 2009 (1)
|
$
|
665,694
|
$
|
655,931
|
||||
Fixed-rate
aircraft notes payable through 2018, 7.02 percent weighted-average
interest rate as of December 31, 2009
|
52,901
|
61,014
|
||||||
Fixed-rate
B717 aircraft notes payable through 2017, 10.21 percent weighted-average
interest rate as of December 31, 2009
|
76,708
|
80,854
|
||||||
Floating-rate
B737 aircraft pre-delivery deposit financings payable
|
—
|
18,135
|
||||||
7.0%
convertible senior notes due 2023
|
95,835
|
125,000
|
||||||
5.5%
convertible senior notes due 2015
|
69,500
|
69,500
|
||||||
5.25%
convertible senior notes due 2016
|
115,000
|
—
|
||||||
Other
|
1,120
|
—
|
||||||
Total
long-term debt
|
1,076,758
|
1,010,434
|
||||||
Less
unamortized debt discount
|
(3,632
|
)
|
(13,244
|
)
|
||||
1,073,126
|
997,190
|
|||||||
Less
current maturities of long-term debt
|
(156,004
|
)
|
(69,865
|
)
|
||||
Long-term
debt less current maturities
|
$
|
917,122
|
$
|
927,325
|
||||
Borrowing
under revolving line of credit facility
|
$
|
125,000
|
$
|
90,000
|
(1)
|
During
2009, we entered into eleven interest rate swap arrangements pertaining to
$293.3 million notional amount of outstanding debt. The notional amount of
the outstanding debt related to interest rate swaps at December 31, 2009
and December 31, 2008 was $447.0 million and $177.7 million,
respectively. These swaps expire between 2018 and 2020. The interest
rate swaps effectively result in us paying a fixed rate of interest on a
portion of our floating-rate debt securities through the expiration of the
swaps.
|
As
discussed below, we have a combined Credit Facility consisting of a letter of
credit facility and a revolving line of credit facility.
Maturities of debt for the next five years and thereafter, in aggregate, are (in millions): 2010-$281; 2011-$65; 2012-$61; 2013-$72; 2014-$70; thereafter-$652. Maturities for 2010 include $125 million outstanding under the revolving line of credit facility. As of February 1, 2010, all amounts outstanding under the revolving line of credit facility have been repaid. The holders of our 7.0% convertible notes due in 2023 may require us to repurchase such notes in 2010, 2013 or 2018. The maturities of debt amounts include the assumed cash impact of the holders of such notes potentially exercising their options to require us to repurchase such notes in 2010; therefore, the $95.8 million principal amount of the 7.0% convertible notes is included in the 2010 maturity amount, and classified as a current liability as of December 31, 2010. We have the option to pay the repurchase price in shares of our common stock, in cash, or in any combination of the two. If the holders of the 7.0% convertible notes require us to repurchase the notes, it is our policy to pay the repurchase price in cash.
81
As of December 31, 2009, the following assets served as collateral for outstanding debt:
·
|
Assets
(primarily flight equipment) with a net book value of $1.1 billion served
as collateral for the B737 and B717 aircraft notes
payable.
|
·
|
Aircraft
pre-delivery deposits served as collateral for the Credit
Facility.
|
Airways’ obligations under the Credit Facility are secured by the pledge of -- directly or indirectly -- its accounts receivable; ground equipment; aircraft parts; certain inventory; its residual interest in owned B717 aircraft; certain real property assets, and certain other assets, including various contract rights which include but are not limited to rights under certain purchase and sale agreements for aircraft and hedging agreements. Airways’ obligations under the Credit Facility are guaranteed by AirTran. Airways’ obligations and the related AirTran guarantee rank senior in right of payment to the subordinated indebtedness of the applicable company and rank equally with senior indebtedness of the applicable company.
B737 Aircraft Purchase Financing Facilities
Through
December 31, 2009, we have entered into nine separate aircraft purchase
financing facilities for purposes of financing the acquisition of B737 aircraft
from Boeing. A total of 30 aircraft have been financed under these nine
facilities.
Eight of
the facilities are floating rate facilities. As of December 31, 2009, 27
B737 aircraft had been financed under these facilities. Each note is secured by
a first mortgage on the aircraft to which it relates. The 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, three-month, or monthly period as applicable. Payments of principal
and interest under the notes are payable semi-annually, every three months, or
monthly as applicable. As of December 31, 2009, we have the right to prepay the
remaining debt outstanding without penalty under all aircraft loans provided
under such facilities with the exception of nine aircraft loans. Under such
aircraft loans, our right to prepay without penalty commences on the third
anniversary of the date of such loans were made. The notes mature in years 2016
to 2021. As of December 31, 2009, no financing for additional aircraft was
available under these facilities.
One of
the facilities is a fixed rate facility. As of December 31, 2009, 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. We have the right to prepay
the remaining debt outstanding without penalty. The notes mature in years 2016
to 2018. As of December 31, 2009, no financing for additional aircraft was
available under this facility.
In
January 2010, we refinanced the acquisition of a B737 aircraft that was
delivered to Airways in September 2009. Under the refinancing, we repaid
$24.6 million of existing aircraft indebtedness and borrowed $27 million of
new aircraft debt. The note issued under the refinancing is secured by a first
mortgage on the B737 aircraft. The new note bears interest at a
floating rate per annum above the three-month LIBOR in effect at the
commencement of each three-month period. Payments of principal and interest
under the note will be payable every three months. Commencing after the third
anniversary of the closing date of the borrowing, we will have the right to
prepay the remaining debt outstanding without penalty. No financing for
additional aircraft is available under this facility.
82
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, 2009, eight B717
aircraft were pledged as collateral for Airways’ obligations related to the
EETCs.
Floating
Rate B737 Aircraft Pre-delivery Deposit Financing
We
arranged loan facilities (each a “PDP facility”) for purposes of financing a
portion of our obligations to make pre-delivery payments to Boeing with respect
to B737 aircraft on order. The amount outstanding under each PDP loan is paid
off at the time the respective aircraft is delivered. As of December 31, 2009,
all PDP facility borrowings had been paid off and no amounts were available for
us to borrow in the future.
7.0%
Convertible Notes
In May
2003, we completed a private placement of $125 million of our 7.0% convertible
notes due in 2023, which we refer to as our 7.0% convertible notes. The net
proceeds from such offering were used for general corporate purposes including
improving our overall liquidity by providing working capital. Such notes bear
interest at 7 percent, payable semi-annually on January 1 and July 1.
The 7.0% convertible notes are unconditionally guaranteed by Airways and rank
equally with all unsecured obligations of Airways. Such notes and the note
guarantee are junior to any secured obligations of Holdings or Airways to the
extent of the collateral pledged and are also effectively subordinated to all
liabilities of our subsidiaries (other than Airways).
The 7.0%
convertible notes are convertible into shares of our common stock at a
conversion rate of 89.9281 shares per $1,000 in principal amount of the notes
which equals an initial conversion price of approximately $11.12 per share. This
conversion rate is subject to adjustment in certain circumstances. We may redeem
the 7.0% convertible notes, in whole or in part, for cash, beginning on
July 5, 2010 at a redemption price equal to the principal amount of the
notes plus any accrued and unpaid interest.
The
holders of the 7.0% convertible notes may require us to repurchase the notes on
July 1, 2010, 2013, and 2018 at a repurchase price of 100 percent of
principal amounts plus any accrued and unpaid interest. We may, at our option,
elect to pay the repurchase price in cash, in shares of our common stock, or in
any combination of the two. If we elect to pay the repurchase price, in
whole or in part in shares of our common stock, the number of shares to be
delivered in exchange for the portion of the repurchase price to be paid in our
common stock will be equal to that portion of the repurchase price divided by
97.5% of the closing sale price of our common stock for the five trading days
ending on the third business day prior to the applicable repurchase date
(appropriately adjusted to take into account the occurrence of certain events
that would result in an adjustment of the conversion rate with respect to our
common stock).
83
We
separately account for the debt and equity components of the 7.0% convertible
notes in a manner that reflects our estimated non-convertible debt borrowing
rate of 15% as of May 2003, consistent with ASC 470-20, “Debt with Conversion
and Other Options – Cash Conversion”. The principal amount, unamortized
discount, net carrying amount of the debt, and equity components are (in
thousands):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Principal
amount
|
$
|
95,835
|
$
|
125,000
|
||||
Unamortized
discount
|
(3,567
|
)
|
(13,244
|
)
|
||||
Net
carrying amount
|
$
|
92,268
|
$
|
111,756
|
||||
Additional
paid-in capital, net of tax
|
$
|
26,441
|
$
|
27,411
|
We
recorded contractual interest expense of $7.3 million, $8.8 million, and $8.8
million for the years ended December 31, 2009, 2008, and 2007, respectively. We
also recorded interest expense related to debt discount amortization of $7.1
million, $7.4 million, and $6.4 million for the years ended December 31, 2009,
2008, and 2007, respectively.
At
December 31, 2009, the unamortized discount has a remaining recognition period
of six months assuming redemption at the first repurchase date on July 1, 2010.
At December 31, 2009, the if-converted value of the 7.0% convertible notes did
not exceed the principal amount.
In 2009,
our Board of Directors authorized, at management’s discretion, the repurchase,
from time-to-time, of up to $50 million of our 7.0% convertible notes in open
market transactions at prevailing market prices or in privately negotiated
purchases. During the year ended December 31, 2009, we repurchased $29.2 million
of our 7.0% convertible notes resulting in a gain of $4.3 million classified as
Other (Income) Expense. Repurchases pursuant to the Board's
authorization may be effected, suspended, or terminated at any time or from
time to time at the discretion of management or the Board without prior
notice and it is uncertain whether or not we will repurchase additional
7.0% convertible notes.
5.5% Convertible
Senior Notes
On
April 30, 2008, we completed a public offering of $74.8 million of our
convertible senior notes due in 2015, which we refer to as our 5.5% convertible
notes. The proceeds from the offering were used for general corporate purposes
including improving our overall liquidity by providing working capital. Such
notes bear interest at 5.5 percent payable semi-annually, in arrears, on
April 15 and October 15. The 5.5% convertible notes are senior
unsecured obligations of Holdings and rank equally with all existing and future
senior unsecured obligations of Holdings. The 5.5% convertible notes are
effectively subordinated to all liabilities of our subsidiaries.
The 5.5%
convertible 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% convertible 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% convertible notes are
not redeemable at our option prior to maturity. The holders of the
5.5% convertible notes may require us to repurchase such notes, in whole or
in part, for cash upon the occurrence of a fundamental change, as defined in the
governing supplemental indenture, at a repurchase price of 100 percent of
principal amounts plus any accrued and unpaid interest.
84
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 5.5% convertible 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% convertible
notes being converted.
During
the fourth quarter of 2008, $5.3 million of the 5.5% convertible 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.
5.25% Convertible
Senior Notes
In
October 2009, we completed a public offering of $115.0 million of our
convertible senior notes due in 2016, which we refer to as the 5.25% convertible
notes. The net proceeds from the offering were used for general corporate
purposes including improving our overall liquidity by providing working capital.
Such notes bear interest at 5.25 percent payable semi-annually, in arrears, on
May 1 and November 1. The 5.25% convertible notes are senior unsecured
obligations of Holdings and rank equally with all existing and future senior
unsecured obligations of Holdings. The 5.25% convertible notes are
effectively subordinated to all liabilities of our subsidiaries. The 5.25%
convertible notes are convertible into shares of our common stock at a
conversion rate of 164.0420 shares per $1,000 in principal amount of such notes
which equals an initial conversion price of approximately $6.10 per share. This
conversion rate is subject to adjustment in certain circumstances. Holders may
convert their 5.25% convertible notes into shares of our common stock at
their option at any time. The 5.25% convertible notes are not redeemable at
our option prior to maturity. The holders of the 5.25% convertible notes
may require us to repurchase such notes, in whole or in part, for cash upon the
occurrence of a fundamental change, as defined in the governing supplemental
indenture, at a repurchase price of 100 percent of principal amounts plus any
accrued and unpaid interest.
Credit
Facility
In July
2008, Airways, obtained a letter of credit facility which provided for a
financial institution to issue letters of credit. Such letter of credit facility
was amended and restated in October 2008 to, among other things, provide Airways
with a revolving line of credit. We generally refer to the combined letter of
credit facility and revolving line of credit facility as a whole as the Credit
Facility, and we generally refer to its components as the letter of credit
facility and the revolving line of credit facility, respectively.
The
following discussion summarizes the terms of the Credit Facility as amended in
September 2009. Under the revolving line of credit facility we are
permitted to borrow, upon two (2) business days notice, until December 31, 2010
(the Expiration Date), up to $125 million for general corporate purposes. Under
the letter of credit facility, we are entitled to the issuance by a financial
institution, until 30 days prior to the Expiration Date, of letters of credit
for the benefit of one or more of our credit card processors. The aggregate
amount of outstanding letters of credit under the letter of credit facility plus
the outstanding amount borrowed under the revolving line of credit facility is
not permitted to exceed an aggregate of $175 million. Amounts borrowed under the
revolving line of credit facility bear interest at a rate of 12 percent per
annum and must be repaid within three (3) business days to the extent that our
aggregate unrestricted cash and investment amount exceeds $405 million at any
time. We are also required to pay a facility fee, letter of credit fees and fees
on undrawn amounts under the revolving line of credit facility. We may borrow
once a month and are permitted to repay amounts borrowed at any time without
penalty. As of December 31, 2008, December 31, 2009 and February 1, 2010, we had
$90 million, $125 million and $0 outstanding borrowings under the revolving line
of credit facility, respectively. As of December 31, 2008, December 31, 2009,
and February 1, 2010, a letter of credit for $125 million, $50 million, and $50
million had been issued for the benefit of our largest credit card processor;
the letter of credit beneficiary was not entitled to draw any amount as of any
date.
85
The
aggregate of amounts borrowed and outstanding letters of credit under the Credit
Facility is not permitted to exceed the estimated value of the collateral
securing such facility. The Credit Facility includes various covenants,
including limitations on: dividends and distributions, the incurrence of
indebtedness, the prepayment of indebtedness, and mergers and acquisitions. In
the event of a change in control, as defined, the lender may require us to post
cash collateral to secure the letter of credit obligations and require us to
repay outstanding loans under the revolving line of credit facility. Drawings
under any letter of credit may be made only to satisfy our obligation to a
beneficiary credit card processor to cover chargebacks arising from tickets sold
during the period of exposure to be covered by the letter of credit, which, in
the case of the sole letter
of credit outstanding in favor of our largest credit card processor, ends March
31, 2010, but is subject to periodic extensions, at the discretion of the
lender, ending not later than December 31, 2010, and is subject to earlier
termination upon the occurrence of a material adverse change in our financial
condition or other like event. We expect that the period of exposure covered by
the letter of credit will be periodically extended through December 31, 2010, in
the absence of a material adverse change in our financial condition or other
like event. The letter of credit in favor of our largest credit card processor
will expire no later than eighteen months after the end of the period of
exposure covered. The periods of exposure to be covered by, and expiration dates
of, subsequently issued letters of credit will be determined by mutual agreement
between the lender and us.
In
connection with the Credit Facility, on October 31, 2008, we issued warrants
expiring on October 31, 2011, to purchase approximately 4.7 million shares of
our common stock for $4.49 per share. The $8.6 million aggregate fair value of
the warrants at the date of issuance was recorded as debt issuance cost with a
corresponding increase in paid in capital. The amortization of the
debt issuance cost is classified as interest expense. In September
2009, we entered into an agreement whereby we issued and exchanged 2.9 million
shares of our common stock for all of the previously issued and outstanding
warrants, which warrants were thereafter cancelled.
Note
5 – Leases
Total
rental expense charged to operations for aircraft, facilities, and office space
for the years ended December 31, 2009, 2008, and 2007 was approximately
$328.5 million, $326.2 million, and $315.8 million, respectively.
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 additional 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, 2009 and 2008,
unamortized deferred gains, including gains on engine sale/leasebacks, were
$54.6 million and $58.4 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 terms for additional
periods ranging from 12 months 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.
86
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, 2009 and 2008, the balance of all
maintenance deposits for all the B737 leased aircraft and related leased engines
aggregated $55.8 million and $54.2 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,
|
||||||||
2009
|
2008
|
|||||||
Flight
equipment
|
$
|
20,302
|
$
|
20,302
|
||||
Less: Accumulated
amortization
|
(2,723
|
)
|
(1,139
|
)
|
||||
Flight
equipment, net
|
$
|
17,579
|
$
|
19,163
|
The
following schedule outlines the future minimum lease payments at
December 31, 2009, under non-cancelable operating leases and capital leases
with initial terms in excess of one year (in thousands):
Capital
Leases
|
Operating
Leases
|
|||||||
2010
|
$
|
1,981
|
$
|
288,663
|
||||
2011
|
1,981
|
273,385
|
||||||
2012
|
1,981
|
271,156
|
||||||
2013
|
1,981
|
265,993
|
||||||
2014
|
1,981
|
255,532
|
||||||
Thereafter
|
11,556
|
1,530,406
|
||||||
Total
minimum lease payments
|
21,461
|
$
|
2,885,135
|
|||||
Less:
amount representing interest
|
(5,570
|
)
|
||||||
Present
value of future payments
|
15,891
|
|||||||
Less:
current obligations
|
(1,085
|
)
|
||||||
Long-term
obligations
|
$
|
14,806
|
Amortization
of assets recorded under capital leases is included as “depreciation and
amortization” in the accompanying consolidated statements of
operations.
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 ASC 810
“Consolidation” (Consolidation Topic). 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.
87
Note
6 - Fair Value Measurements
We
adopted the required provisions of ASC 820, “Fair Value Measurements and
Disclosures” (Fair Value Measurements and Disclosures Topic), as of
January 1, 2008, and adopted certain deferred provisions on January 1,
2009. The Fair Value Measurements and Disclosures Topic is a technical standard
which defines fair value, establishes a consistent framework for measuring fair
value, and expands disclosures for each major asset and liability category
measured at fair value on either a recurring or a nonrecurring basis. The Fair
Value Measurements and Disclosures Topic clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumptions, the Fair Value
Measurements and Disclosures Topic 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. 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).
|
88
Assets
(liabilities) measured at fair value on a recurring basis during the period were
as follows (in thousands):
Fair Value at
December
31, 2009
|
Quoted Prices in
Active Markets
for
Identical
Assets (Level 1)
|
Other
Observable
Inputs (Level 2)
|
Fair
Value
Measurements
Using
Unobservable
Inputs (Level 3)
|
Valuation
Technique
|
|||||||||||||
Cash
and cash equivalents
|
$ | 542,619 | $ | 542,619 | $ | — | $ | — |
Market
|
||||||||
Short-term
investments
|
1,663 | — | 1,663 | — |
Market
|
||||||||||||
Interest
rate derivatives, net
|
(10,206 | ) | — | (10,206 | ) | — |
Market
|
||||||||||
Fuel
derivatives, net
|
49,327 | — | — | 49,327 |
Market
|
The
financial statement carrying amounts and estimated fair values of our debt at
December 31, 2009 were as follows (in thousands):
Carrying
Value
|
Estimated
Fair
Value
|
|||||||
B737
Aircraft Purchase Financing Facilities:
|
||||||||
Floating-rate
aircraft notes payable through 2021, 1.91 percent
weighted-average
interest rate as of December 31, 2009
|
$
|
665,694
|
$
|
562,384
|
||||
Fixed-rate
aircraft notes payable through 2018, 7.02 percent
weighted-average
interest rate as of December 31, 2009
|
52,901
|
49,514
|
||||||
Fixed-rate
B717 aircraft notes payable through 2017, 10.21 percent weighted-average
interest rate as of December 31, 2009
|
|
76,708
|
68,975
|
|||||
7.0%
convertible notes due 2023, net of discount
|
92,268
|
94,562
|
||||||
5.5%
convertible senior notes due 2015
|
69,500
|
104,243
|
||||||
5.25%
convertible senior notes due 2016
|
115,000
|
124,200
|
||||||
Other
|
1,120
|
1,120
|
||||||
Borrowing
under revolving line of credit facility
|
125,000
|
125,000
|
||||||
$
|
1,198,191
|
$
|
1,129,998
|
The fair
value of our debt was estimated using quoted market prices where available. For
long-term debt not actively traded, the fair value was estimated using a
discounted cash flow analysis based on our current borrowing rates for
instruments with similar terms. The fair values of our other financial
instruments and borrowings under our revolving line of credit facility
approximate their respective carrying values. Given the current volatility in
the credit markets, there is an atypical element of uncertainty associated with
valuing debt securities, including our debt securities.
89
The
reconciliation of our fuel derivatives that are measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
January 1, 2009 through December 31, 2009 is as follows (in
thousands):
|
Fair
Value
Measurements
Using Significant
Unobservable
Inputs
(Level 3)
|
|||
Fuel-related
derivative asset (liability):
|
|
|||
Balance
at January 1, 2009
|
|
$
|
(65,504
|
)
|
Total
realized and unrealized gains (losses):
|
|
|||
Included
in earnings
|
|
22,208
|
||
Included
in other comprehensive income
|
|
7,686
|
||
Purchases,
issuances, and settlements
|
|
84,937
|
||
Balance
at December 31, 2009
|
|
$
|
49,327
|
|
The
amount of total gains (losses) for the year ended December 31,
2009, included in earnings attributable to the change in unrealized gains
(losses) relating to assets and liabilities still held at December 31,
2009
|
$
|
26,047
|
Note
7 – 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, 2009, we had reserved 49,481,144
common shares for issuance for stock option exercises, and conversion of
convertible debt, and the vesting of restricted stock, of which 3,899,094
shares are reserved for stock options that are vested and exercisable and
restricted stock that have been granted but not vested, and 45,582,050 shares
are reserved for issuance upon the conversion of convertible debt. Unvested
restricted stock awards are not included in the number of outstanding common
shares.
In
October 2009, we completed a public offering of 11.3 million shares of our
common stock at a price of $5.08 per share, receiving net proceeds of
approximately $54.8 million, after deducting discounts and commissions paid to
the underwriters and other expenses incurred with the offering.
In
September 2009, we entered into an agreement whereby we issued 2.9 million
shares of our common stock in exchange for previously issued and outstanding
warrants issued in connection with the Credit Facility, which warrants were
thereby cancelled.
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.
Historically,
we have not declared cash dividends on our common stock. In addition, our debt
indentures and our Credit Facility restrict our ability to pay cash
dividends. In particular, under our 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.
90
Note
8 – Income Taxes
We are
subject to income taxation in the United States and various state jurisdictions.
Our tax years for 1998 through 2009 are subject to examination by the Internal
Revenue Service.
The
components of the provision (benefit) for income taxes are as follows (in
thousands):
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Current
provision (benefit):
|
||||||||||||
Federal
|
$
|
(268
|
)
|
$
|
(198
|
)
|
$
|
205
|
||||
State
|
—
|
—
|
—
|
|||||||||
Total
current provision (benefit)
|
(268
|
)
|
(198
|
)
|
205
|
|||||||
Deferred
provision (benefit):
|
||||||||||||
Federal
|
890
|
(31,049
|
)
|
30,579
|
||||||||
State
|
55
|
(3,169
|
)
|
2,619
|
||||||||
Total
deferred provision (benefit)
|
945
|
(34,218
|
)
|
33,198
|
||||||||
Income
tax expense (benefit)
|
$
|
677
|
$
|
(34,416
|
)
|
$
|
33,403
|
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,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Tax
expense (benefit) computed at federal statutory rate
|
$
|
47,369
|
$
|
(105,263
|
)
|
$
|
29,382
|
|||||
State
income taxes, net of federal benefit
|
3,113
|
(6,283
|
)
|
1,977
|
||||||||
Change
in valuation allowance
|
(67,437
|
)
|
73,793
|
—
|
||||||||
Change
in unrecognized tax benefits
|
4,645
|
—
|
—
|
|||||||||
Other
nondeductible expenses
|
12,987
|
3,337
|
2,044
|
|||||||||
Income
tax expense (benefit)
|
$
|
677
|
$
|
(34,416
|
)
|
$
|
33,403
|
Income
tax benefits recorded on losses result in deferred tax assets for financial
reporting purposes. We are required to provide a valuation allowance for
deferred tax assets to the extent management determines that it is more likely
than not that such deferred tax assets will ultimately not be realized. We
expect to realize a portion of our deferred tax assets (including the deferred
tax asset associated with loss carry-forwards) through the reversal of existing
temporary differences. However, we have determined that it is more likely than
not that our deferred tax assets in excess of our deferred tax liabilities will
not ultimately be realized, in part due to our cumulative losses measured over
the past three years. Therefore, we are required to provide a valuation
allowance for our deferred tax assets in excess of our deferred tax liabilities.
As a result, beginning with the third quarter of 2008, our losses were not
reduced by any tax benefit. We reported income before income taxes during the
year ended December 31, 2009; however, we did not recognize material tax expense
in 2009 due to reductions in the valuation allowance which largely offset income
tax expense for 2009. During 2009, we recognized $0.7 million of income tax
expense primarily related to our repurchase of a portion of our 7.0% convertible
notes. As of December 31, 2009, we had recorded a $6.1 million valuation
allowance applicable to our net deferred tax assets and our deferred tax assets
net of the valuation allowance equaled our gross deferred tax liabilities.
Regardless of the financial accounting for income taxes, our net operating loss
carry-forwards currently are available for use on our income tax returns to
offset future taxable income.
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,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets related to:
|
||||||||
Deferred
gains from sale and leaseback of aircraft
|
$
|
20,328
|
$
|
21,733
|
||||
Accrued
liabilities
|
27,303
|
26,353
|
||||||
Unrealized
loss on derivatives
|
3,413
|
49,906
|
||||||
Federal
net operating loss carry-forwards
|
159,328
|
146,521
|
||||||
State
operating loss carry-forwards
|
8,862
|
8,098
|
||||||
AMT
credit carry-forwards
|
3,094
|
3,300
|
||||||
Other
|
10,746
|
20,764
|
||||||
Total
deferred tax assets
|
233,074
|
276,675
|
||||||
Valuation
allowance
|
(5,959
|
)
|
(84,111
|
)
|
||||
Net
deferred tax assets
|
$
|
227,115
|
$
|
192,564
|
||||
Deferred
tax liabilities related to:
|
||||||||
Depreciation
|
182,974
|
150,956
|
||||||
Aircraft
rent
|
35,211
|
36,196
|
||||||
Other
|
8,930
|
5,412
|
||||||
Gross
deferred tax liabilities
|
227,115
|
192,564
|
||||||
Total
net deferred tax asset (liability)
|
$
|
—
|
$
|
—
|
At
December 31, 2009 and 2008, federal net operating loss carry-forwards
(NOLs) available for use on our income tax returns to offset future taxable
income were approximately $477.5 million
and $428.0 million, respectively, which expire between 2017 and 2029. State net
operating loss carry-forwards at December 31, 2009 and 2008, respectively,
were $238.6 million and $117.6 million, respectively, which expire between 2017
and 2029. Included in the net operating loss carry-forwards for the year
ending December 31, 2008 is $13.7 million related to deductions
from equity-based compensation. Our alternative minimum tax (AMT) credit
carry-forwards for income tax purposes were $3.1 million and $3.3 million at
December 31, 2009 and 2008, respectively.
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, 2009, we believe
that we were not subject to the limitations under Section 382.
92
The total
amount of unrecognized tax benefits and related interest and penalties was not
material as of December 31, 2008. During 2009, we determined that it was more
likely than not that certain tax positions taken in the preparation of prior
year income tax returns would not be sustained on the basis of technical merit.
Consequently, we reduced deferred tax assets by $4.6 million and also reduced
the valuation allowance for deferred tax assets by the same amount with no
impact on income tax expense (benefit). A reconciliation of the beginning and
ending amount of unrecognized tax benefits follows (in
thousands):
|
Unrecognized
Tax Benefits
|
|||
Balance
at January 1, 2009
|
|
$
|
—
|
|
Additions
for tax positions related to prior years
|
|
4,645
|
||
Balance
at December 31, 2009
|
$
|
4,645
|
We do not
anticipate any material change in the total amount of unrecognized tax benefits
to occur within the next twelve months.
Note
9 – 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,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Numerator:
|
||||||||||||
Net
income (loss) available to common stockholders
|
$
|
134,662
|
$
|
(266,334
|
)
|
$
|
50,545
|
|||||
Plus
income effect of assumed-conversion interest on 5.5% convertible
debt
|
3,823
|
—
|
—
|
|||||||||
Plus
income effect of assumed-conversion interest on 5.25% convertible
notes
|
1,298
|
—
|
—
|
|||||||||
Income
(loss) after assumed conversion
|
$
|
139,783
|
$
|
(266,334
|
)
|
$
|
50,545
|
|||||
Denominator:
|
||||||||||||
Weighted-average
shares outstanding, basic
|
123,624
|
109,153
|
91,574
|
|||||||||
Effect
of 5.5% convertible notes
|
18,099
|
—
|
n/a
|
|||||||||
Effect
of 5.25% convertible notes
|
4,050
|
n/a
|
n/a
|
|||||||||
Effect
of dilutive stock options
|
113
|
—
|
924
|
|||||||||
Effect
of dilutive restricted shares
|
331
|
—
|
580
|
|||||||||
Effect
of warrants to purchase common stock
|
674
|
—
|
—
|
|||||||||
Adjusted
weighted-average shares outstanding, diluted
|
146,891
|
109,153
|
93,078
|
|||||||||
Basic
earnings (loss) per common share
|
$
|
1.09
|
$
|
(2.44
|
)
|
$
|
0.55
|
|||||
Diluted
earnings (loss) per common share
|
$
|
0.95
|
$
|
(2.44
|
)
|
$
|
0.54
|
|||||
n/a
– not applicable
|
Excluded
from the diluted earnings per share calculations for 2009 is the impact on the
weighted average shares outstanding of the 8.6 million shares related to
our 7.0% convertible notes that are issuable upon conversion which would have
been anti-dilutive for the period.
93
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, 2.1 million
shares related to our outstanding stock options, 1.5 million
shares related to our unvested restricted stock, and 4.7 million common shares
related to warrants that were issued on October 31, 2008.
Excluded
from the diluted earnings per share calculations for 2007 is the impact on the
weighted average shares outstanding of the 11.2 million shares related to
our 7.0% convertible notes that are issuable upon conversion which would have
been anti-dilutive for the period.
Note
10 – 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):
Unrealized
gain (loss) on derivative
financial instruments
|
Postemployment
obligations
|
Accumulated other
comprehensive
income
(loss)
|
||||||||||
Balance
at January 1, 2007
|
$
|
84
|
$
|
(5,336
|
)
|
$
|
(5,252
|
)
|
||||
Changes
in fair value, net of income taxes
|
15,721
|
—
|
15,721
|
|||||||||
Reclassification
to earnings, net of income taxes
|
(14,688
|
)
|
1,012
|
(13,676
|
)
|
|||||||
Change
in actuarial gains and losses, net of income taxes
|
—
|
4,557
|
|
4,557
|
|
|||||||
Balance
at December 31, 2007
|
1,117
|
233
|
|
1,350
|
|
|||||||
Changes
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
|
)
|
||||||
Changes
in fair value, net of income taxes
|
12,023
|
—
|
12,023
|
|||||||||
Reclassification
to earnings, net of income taxes
|
9,047
|
76
|
9,123
|
|||||||||
Change
in actuarial gains and losses, net of income taxes
|
—
|
3,084
|
3,084
|
|||||||||
Balance
at December 31, 2009
|
$
|
(4,499
|
)
|
$
|
2,969
|
$
|
(1,530
|
)
|
94
Note
11 – Stock Option Awards and Restricted Stock Awards
Our 1994 Stock Option Plan
and 1996 Stock Option Plan authorized up to 4 million, and 5 million
incentive stock options or non-qualified stock options, respectively, to be
granted to our officers, directors, key employees and consultants. No new
awards may be made under the 1994 Stock Option Plan or the 1996 Stock Option
Plan. Our Fifth Amended and Restated Long Term Incentive Plan (which we
refer to as our Long-Term Incentive Plan or LTIP), was, as amended and restated,
adopted in 2009 and authorizes the grant of up to 13.5 million
shares of our common stock, which may be awarded in the form of options,
restricted stock awards and other securities to our officers, directors,
key employees and consultants. Awards for the issuance of up to 3,899,094 shares
remain outstanding under such plans.
Vesting
and the term of all options under the LTIP 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, 2009, an aggregate of 6.8
million shares of restricted stock and options to acquire common stock remained
available for future grant under the LTIP.
Stock
Options
There
were no options granted during 2009, 2008, or 2007. No compensation expense for
stock options was recognized during 2009, 2008, or 2007.
A summary
of stock option activity under the aforementioned plans is as
follows:
Options
|
Weighted-
Average
Exercise
Price
|
|||||||
Balance
at January 1, 2009
|
2,177,406
|
$
|
7.57
|
|||||
Exercised
|
(98,809
|
)
|
5.59
|
|||||
Expired
|
(10,000
|
)
|
5.00
|
|||||
Cancelled
|
(13,775
|
)
|
8.59
|
|||||
Balance
at December 31, 2009
|
2,054,822
|
$
|
7.67
|
|||||
Exercisable
at December 31, 2009
|
2,054,822
|
$
|
7.67
|
The
options outstanding, as of December 31, 2009, have a weighted-average remaining
contractual life of 2.5 years and an aggregate intrinsic value of $0.5
million. The total intrinsic value of options exercised during the years
ended December 31, 2009, 2008, and 2007, was $0.2 million, $1.0 million,
and $1.0 million, respectively. Cash received from options exercised under
all share-based payment arrangements for the years ended December 31, 2009,
2008, and 2007, was $0.6 million, $2.6 million, and $1.0 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, 2009, 2008, and 2007,
we did not record any excess tax benefit generated from option
exercises.
95
Restricted
Stock
Restricted
stock awards have been granted to certain of our officers, directors, and key
employees pursuant to our LTIP. 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 $5.7 million, $5.8 million, and $5.4
million during the years ended December 31, 2009, 2008 and 2007,
respectively. As of December 31, 2009, we have $5.9 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
Awards
|
||||
Unvested
at January 1, 2009
|
1,483,306
|
|||
Vested
|
(659,134
|
)
|
||
Issued
|
671,640
|
|||
Surrendered
|
(11,900
|
)
|
||
Unvested
at December 31, 2009
|
1,483,912
|
The grant
date weighted-average fair value per share of restricted stock awards granted
during the years ended December 31, 2009, 2008, and 2007, was $4.74, $6.96,
and $9.10, 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, 2009, 2008, and 2007, was $3.1
million, $3.2 million, and $4.1 million, respectively.
Performance
Stock
Our
Long-Term Incentive Plan provides for the grant of performance stock awards. In
2009, performance share awards were made to certain officers and other employees
based on AirTran’s relative Total Shareholder Return (“TSR”) performance against
a peer group of companies. The actual number of shares earned at the
end of the Performance Period will range from 0% to a maximum of 200% of the
target, depending on AirTran’s relative TSR performance. Payment of
the earned performance shares will be made in common stock. There are
a maximum of 360,360 performance shares issuable at the end of the performance
period for awards made in 2009. All existing performance share awards are based
on a three year performance period which began on January 1, 2009 and ends
December 31, 2012.
Compensation
expense for our performance stock awards was $0.4 million for the year ended
December 31, 2009. As of December 31, 2009, we have $1.0 million in
total unrecognized future compensation expense that will be recognized over the
next two years. No performance base stock awards vested during the year ended
December 31, 2009.
96
Note
12 – Employee Benefit Plans
All
employees, except pilots, are eligible to participate in our 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 2009,
2008, and 2007 was approximately $1.4 million, $1.4 million, and $1.2 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 2009, 2008, and 2007, respectively.
We expensed $17.3 million, $15.7 million, and $14.0 million in contributions to
the DC Plan during 2009, 2008 and 2007, 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 2009, 2008, and
2007, the employees purchased approximately 227,000, 376,000, and 154,000
shares, respectively, at an average price of $4.85, $3.65, and $8.81 per share,
respectively.
We
provide postemployment defined benefits to certain eligible employees. At
December 31, 2009, the liability for the accumulated postemployment benefit
obligations under the plans was $2.9 million, and unrecognized prior service
costs and net actuarial gains were $4.4 million. Benefit expense under the plans
was $1.0 million, $1.1 million and $3.9 million in 2009, 2008 and 2007,
respectively. The plans have no assets and benefit payments are funded from
operations and 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
13 – Supplemental Cash Flow Information
Supplemental
cash flow information is summarized as follows, (in thousands):
Year
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Supplemental
disclosure of cash flow activities:
|
||||||||||||
Cash
paid for interest, net of capitalized interest
|
$
|
77,238
|
$
|
75,473
|
$
|
64,397
|
||||||
Cash
paid (received) for income taxes, net of amounts refunded
|
(198
|
)
|
332
|
—
|
||||||||
Non-cash
financing and investing activities:
|
||||||||||||
Aircraft
acquisition debt financing
|
—
|
178,550
|
293,650
|
|||||||||
Acquisition
under capital leases
|
—
|
5,077
|
—
|
97
Note
14 – Other Assets, Accrued and Other Liabilities, and Other (Income)
Expense
The
components of other assets were (in thousands):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Aircraft
maintenance deposits
|
$
|
55,841
|
$
|
54,169
|
||||
Deposits
|
13,906
|
13,816
|
||||||
Other
|
2,534
|
2,063
|
||||||
Other
assets
|
$
|
72,281
|
$
|
70,048
|
The
components of accrued and other liabilities were (in thousands):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
interest
|
$
|
16,897
|
$
|
22,865
|
||||
Accrued
salaries, wages and benefits
|
55,507
|
48,520
|
||||||
Unremitted
passenger taxes and fees
|
29,198
|
32,651
|
||||||
Other
|
43,572
|
43,853
|
||||||
Accrued
and other liabilities
|
$
|
145,174
|
$
|
147,889
|
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.
98
Note
15 – Quarterly Financial Data (Unaudited)
Summarized
quarterly financial data by quarter for 2009 and 2008 is as follows (in
thousands, except per share data):
Three
Months Ended
|
||||||||||||||||
March 31
|
June 30
|
September 30
|
December 31
|
|||||||||||||
2009
|
||||||||||||||||
Operating
revenue
|
$
|
541,955
|
$
|
603,653
|
$
|
597,402
|
$
|
598,432
|
||||||||
Operating
income
|
47,707
|
|
66,166
|
|
37,033
|
|
26,104
|
|||||||||
Other
(income) expense
|
19,000
|
(12,984
|
)
|
26,374
|
9,281
|
|||||||||||
Income
(loss) before income taxes
|
28,707
|
|
79,150
|
|
10,659
|
|
16,823
|
|
||||||||
Net
income (loss)
|
28,707
|
|
78,438
|
|
10,426
|
|
17,091
|
|
||||||||
Earnings
(loss) per common share:
|
||||||||||||||||
Basic
|
$
|
0.24
|
|
$
|
0.65
|
$
|
0.09
|
|
$
|
0.13
|
|
|||||
Diluted
|
0.21
|
|
0.56
|
|
0.08
|
|
0.11
|
|
||||||||
Included
in operating income (loss):
|
||||||||||||||||
(Gain)
loss on disposition of assets
|
$
|
922
|
$
|
2,384
|
|
$
|
(6,379
|
)
|
$
|
109
|
||||||
Included
in other (income) expense:
|
||||||||||||||||
Net
(gains) losses on derivative financial instruments
|
$
|
(890
|
)
|
$
|
(27,335
|
)
|
$
|
10,281
|
$
|
(12,680
|
)
|
|||||
(Gain)
on extinguishment of debt
|
(322
|
)
|
(3,974
|
)
|
18
|
—
|
||||||||||
2008
|
||||||||||||||||
Operating
revenue
|
$
|
596,391
|
$
|
693,380
|
$
|
673,292
|
$
|
589,415
|
||||||||
Operating
income (loss)
|
(35,386
|
)
|
(46,441
|
)
|
(47,413
|
)
|
53,419
|
|||||||||
Other
(income) expense
|
20,235
|
(28,152
|
)
|
62,002
|
170,844
|
|||||||||||
Income
(loss) before income taxes
|
(55,621
|
)
|
(18,289
|
)
|
(109,415
|
)
|
(117,425
|
)
|
||||||||
Net
loss
|
(35,357
|
)
|
(14,830
|
)
|
(94,553
|
)
|
(121,594
|
)
|
||||||||
Loss
per common share:
|
||||||||||||||||
Basic
|
$
|
(0.38
|
)
|
$
|
(0.14
|
)
|
$
|
(0.81
|
)
|
$
|
(1.03
|
)
|
||||
Diluted
|
(0.38
|
)
|
(0.14
|
)
|
(0.81
|
)
|
(1.03
|
)
|
||||||||
Included
in operating income (loss):
|
||||||||||||||||
(Gain)
loss on disposition of assets
|
$
|
—
|
$
|
(6,543
|
)
|
$
|
(9,254
|
)
|
$
|
(4,218
|
)
|
|||||
Impairment
of goodwill
|
—
|
8,350
|
—
|
—
|
||||||||||||
Included
in other (income) expense:
|
||||||||||||||||
Net
(gains) losses on derivative financial instruments
|
$
|
5,190
|
$
|
(43,560
|
)
|
$
|
41,520
|
$
|
147,686
|
During
the three months ended December 31, 2009, we recorded a $2.4 million reduction
in advertising expense to correct overstatements of expense recorded in prior
periods.
99
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). Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of
December 31, 2009, our controls and procedures were effective to ensure
that we are able to collect, process and disclose the information we are
required to disclose in the reports we file with the SEC within the required
time periods.
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, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in
Internal Control-Integrated Framework. Based on our assessment,
management concluded that, as of December 31, 2009, 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, 2009. 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, 2009, that materially affected, or were reasonably likely to
materially affect, our internal controls over financial
reporting.
100
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.
as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). AirTran Holdings, Inc.’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, AirTran Holdings, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, 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 AirTran Holdings, Inc.
as of December 31, 2009 and 2008, and the related consolidated statements
of operations, cash flows and stockholders’ equity of AirTran Holdings, Inc. for
each of the three years in the period ended December 31, 2009 and our
report dated February 11, 2010 expressed an unqualified opinion
thereon.
/s/
Ernst & Young LLP
Orlando,
Florida
|
February
11, 2010
|
101
ITEM 9B.
|
OTHER
INFORMATION
|
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
2010 Proxy Statement.
Audit
Committee Financial Expert
The
information required by this Item is incorporated herein by reference to our
2010 Proxy Statement.
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The
information required by this Item is incorporated herein by reference to our
2010 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
2010 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) (2)
|
3,899,094
|
7.67
|
6,823,288
|
|||||||||
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||||||
Total
|
3,899,094
|
7.67
|
6,823,288
|
(1)
|
Includes
all existing equity compensation plans under which awards have been or may
be made.
|
(2)
|
Includes
the maximum of 360,360 shares of common stock issuable pursuant to
performance share awards granted in 2009 assuming the required performance
criteria for the awards are achieved as of December 31, 2011. The weighted
average exercise price in column (b) does not include the effect of the
grant of any performance awards. Shares included in column (a) reflect the
company’s current expectation with respect to the shares to be issued
under such awards.
|
102
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this Item is incorporated herein by reference to our
2010 Proxy Statement.
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
information required by this Item is incorporated herein by reference to our
2010 Proxy Statement.
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
|
61 |
Consolidated
Statements of Operations
|
62 |
—Years
ended December 31, 2009, 2008, and 2007
|
|
Consolidated
Balance Sheets
|
63 |
—December 31,
2009 and 2008
|
|
Consolidated
Statements of Cash Flows
|
65 |
—Years
ended December 31, 2009, 2008, and 2007
|
|
Consolidated
Statements of Stockholders’ Equity
|
66 |
—Years
ended December 31, 2009, 2008 and 2007
|
|
Notes
to Consolidated Financial Statements
|
67 |
(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.
|
Information
included in agreements filed as exhibits to this annual report and our other
periodic and current reports has been included in this report and such filings
pursuant to applicable SEC rules and regulations or to provide information
regarding the terms of such agreements. Such agreements are not intended to
provide any other factual information about us. Such information can be found
elsewhere in this annual report and in our other reports. Agreements filed as
exhibits to this annual report and our other reports may contain representations
and warranties made to us or by us to third parties solely for the purpose of
the transaction or transactions described in such agreements and, except as
expressly provided in such agreements, no other person was or is an intended
third party beneficiary of such agreements or standards of materiality in
such
103
agreements
or in disclosure schedules thereto. While we do not believe that any disclosure
schedules which have not been filed as part of any agreements contain any
information which securities laws require us to publicly disclose, other than
information that has already been so disclosed, disclosure schedules may contain
information that modifies, qualifies, and creates exceptions to the
representations and warranties set forth in the filed agreements. Accordingly,
you should not rely on the representations and warranties contained in any such
agreements as characterizations of the actual state of facts, since they may be
modified in important part by the underlying disclosure schedules or by defined
standards of materiality for purposes of such agreements. Disclosure schedules
to filed agreements may contain information that has been included in the
Company’s general prior public disclosures, as well as potential additional
non-public information. Moreover, information concerning the subject matter of
the representations and warranties in filed agreements may have changed since
the date of the applicable agreement, which subsequent information may or may
not be fully reflected in our public disclosures, the disclosures of third
parties, or at all. Except as required by law we undertake no obligation to
update such information or disclose any such changes.
Exhibit
No.
|
Description
|
3.1
|
Articles
of Incorporation (1)
|
3.2
|
Bylaws
(As Amended and Restated on July 28, 2005) (2)
|
4.1
|
See
the Articles of Incorporation filed as Exhibit 3.1
|
4.2
|
See
the Bylaws filed as Exhibit 3.2
|
4.3
|
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
(3)
|
4.4
|
Note
Agreement for 13% Series A Senior Notes due April 12, 2009, dated April
12, 2001, between AirTran Airways, Inc. and Boeing Capital Loan
Corporation, including as an exhibit thereto the form of notes
(4)
|
4.5
|
Indenture
dated as of May 7, 2003 among AirTran Holdings, Inc., as issuer, AirTran
Airways, Inc., as guarantor, and Wilmington Trust Company, as trustee,
including as an exhibit thereto the form of Note (5)
|
4.6
|
Senior
Indenture dated as of April 30, 2008, between AirTran Holdings, Inc. and
U.S. Bank National Association, as trustee, including as an exhibit
thereto the form of Note (6)
|
4.7
|
First
Supplemental Indenture dated as of April 30, 2008, between AirTran
Holdings, Inc. and U.S. Bank National Association, as trustee, including
as an exhibit thereto the form of Note (6)
|
4.8
|
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 (6)
|
4.9
|
Senior
Indenture dated as of October 14, 2009, between AirTran Holdings, Inc. and
U.S. Bank National Association, as trustee, including as an exhibit
thereto the form of Note (7)
|
4.10
|
First
Supplemental Indenture dated as of October 14, 2009, between AirTran
Holdings, Inc. and U.S. Bank National Association, as trustee, including
as an exhibit thereto the form of Note (7)
|
10.1+
|
1994
Stock Option Plan (8)
|
10.2*
|
Purchase
Agreement between McDonnell Douglas Corporation and ValuJet Airlines, Inc.
dated December 6, 1995 (9)
|
10.3
|
Agreement
and Lease of Premises Central Passenger Terminal Complex Hartsfield
Atlanta International Airport (9)
|
10.4+
|
1996
Stock Option Plan (10)
|
10.5
|
Lease
of headquarters in Orlando, Florida, dated November 14, 1995
(11)
|
10.6
|
Orlando
International Lease and Use Agreement (12)
|
10.7
|
Orlando
Tradeport Maintenance Hangar Lease Agreement by and between Greater
Orlando Aviation Authority and Page AvJet Corporation dated December 11,
1989 (13)
|
10.8
|
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 (13)
|
10.9
|
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 (13)
|
10.10*
|
Aircraft
General Terms Agreement AGTA-CQT, dated July 3, 2003, by and between
Boeing and AirTran Airways, Inc. (“AirTran”) (14)
|
10.11*
|
Purchase
Agreement Number 2444, dated July 3, 2003 (“Purchase Agreement 2444”),
between Boeing and AirTran, as supplemented by Letter Agreement No. 1, by
and between Boeing and AirTran (14)
|
10.12*
|
Letter
Agreements to Purchase Agreement 2444, dated July 3, 2003, by and between
Boeing and AirTran (14)
|
10.13*
|
General
Terms Agreement No. CFM-03-0017 (“GTA CFM-03-0017”), dated June 30, 2003,
by and between CFM International Inc. 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
(14)
|
104
10.14*
|
Maintenance
Cost Per Hour Engine Service Agreement, dated August 13, 2003, by and
between GE Engine Services, Inc. and AirTran (14)
|
10.15
|
Aircraft
Lease Common Terms Agreement, dated August 15, 2003, by and between
Aviation Financial Services, Inc. and AirTran (14)
|
10.16*
|
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 six (6) individual Aircraft Lease Agreements (14)
|
10.17
|
Engine
Lease Common Terms Agreement, dated August 15, 2003, by and between
Aviation Financial Services, Inc. and AirTran (14)
|
10.18*
|
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
(14)
|
10.19*
|
Letter
Agreement 5-1005-JSW-737, dated July 3, 2003, by and between Boeing and
AirTran (14)
|
10.20*
|
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 (14)
|
10.21*
|
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 (14)
|
10.22*
|
B717
Lease Financing Letter Agreement, dated July 3, 2003, by and between
Boeing and AirTran (14)
|
10.23+
|
AirTran
Holdings, Inc. Amended and Restated Long Term Incentive Plan
(15)
|
10.24*
|
Loan
Agreement, dated as of August 31, 2005, by and among AirTran, as Borrower,
The Parties Identified in Schedule 1 thereto, as Lenders, and The Royal
Bank of Scotland plc, New York Brach (“RBS”), as Security Agent
(16)
|
10.25*
|
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 (16)
|
10.26*
|
Security
Agreement, dated as of August 31, 2005, by and between AirTran, as
Borrower, and RBS, as Security Agent (16)
|
10.27*
|
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
(17)
|
10.28*
|
Security
Agreement, dated as of December 7, 2005, by and between AirTran, as
Borrower, and HSH Nordbank AG, New York Branch, as Security Agent
(17)
|
10.29*
|
Association
of Flight Attendants — CWA, AFL-CIO, Flight Attendant Labor Contract with
AirTran Airways, Effective June 1, 2005, Amendable December 1, 2008
(18)
|
10.30*
|
Credit
Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
and BNP Paribas S.A. (acting through its Paris Branch), as Security Agent
(19)
|
10.31*
|
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 (19)
|
10.32*
|
Credit
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 (19)
|
10.33*
|
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
(19)
|
10.34*
|
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 (19)
|
10.35*
|
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
(19)
|
10.36*
|
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
(19)
|
10.37*
|
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
(19)
|
10.38*
|
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
(19)
|
10.39*
|
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
(19)
|
10.40*
|
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
(20)
|
105
10.41*
|
Purchase
Agreement No. 2444, Supplement No. 12, dated as of June 4, 2007, by and
between the Boeing and AirTran (21)
|
10.42*
|
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
(21)
|
10.43*
|
Security
Agreement, dated as of June 28, 2007, by and between AirTran and
Bayerische Hypo-und Vereinsbank AG, London Branch, as Security Agent
(21)
|
10.44+
|
Amendment
to Employment Agreement for Robert L. Fornaro dated October 31, 2007
(22)
|
10.45+
|
Employment
Agreement for Robert L. Fornaro dated November 1, 2007
(22)
|
10.46*
|
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 (23)
|
10.47*
|
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
(23)
|
10.48*
|
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 Holder (24)
|
10.49*
|
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 Holder (24)
|
10.50*
|
Amendment
No. 1 to Amended and Restated Revolving Line of Credit and Reimbursement
Agreement (25)
|
12.1
|
Statement
regarding computation of ratio of earnings to fixed
charges
|
21.1
|
Subsidiaries
of AirTran Holdings, Inc.
|
21.2
|
Subsidiaries
of AirTran Airways, Inc.
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
31.1
|
CEO
certification pursuant to Rule 13(a)-14 or 15(d)-14
|
31.2
|
CFO
certification pursuant to Rule 13(a)-14 or 15(d)-14
|
32
|
CEO
and CFO certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
99.1
|
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
|
*
|
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.
|
+
|
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.
|
(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 report on Form 8-K (Commission File
No. 1-15991), filed with the Commission on August 1,
2005.
|
(3)
|
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.
|
(4)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 (Commission File No. 1-15991), filed with
the Commission on August 2, 2001.
|
(5)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3
(Commission File No. 333-107415), filed with the Commission on July 28,
2003.
|
(6)
|
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.
|
(7)
|
Incorporated
by reference to the Company’s report on Form 8-K (Commission File No.
1-15991), filed with the Commission on October 14,
2009.
|
(8)
|
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.
|
(9)
|
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.
|
(10)
|
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.
|
(11)
|
Incorporated
by reference to the Annual Report on Form 10-K of Airways Corporation
(Commission File No. 0-26432) for the year ended December 31,
1995.
|
106
(12)
|
Incorporated
by reference to the Quarterly Report on Form 10-Q of Airways Corporation
for the quarter ended December 31, 1996 (Commission File No.
0-26432), filed with the Commission on February 13,
1997.
|
(13)
|
Incorporated
by reference to the Annual Report on Form 10-K of Airways Corporation
(Commission File No. 0-26432) for the year ended March 31, 1996, filed
with the Commission on June 28, 1996.
|
(14)
|
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.
|
(15)
|
Incorporated
by reference to the Company’s report on Form 8-K (Commission File
No. 1-15991), filed with the Commission on May 22,
2009.
|
(16)
|
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.
|
(17)
|
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.
|
(18)
|
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.
|
(19)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006 (Commission File No. 1-15991), filed
with the Commission on November 1, 2006.
|
(20)
|
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.
|
(21)
|
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.
|
(22)
|
Incorporated
by reference to the Company’s report on Form 8-K (Commission File
No. 1-15997), filed with the Commission on November 6,
2007.
|
(23)
|
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.
|
(24)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K (Commission File
No. 1-15991), filed with the Commission on February 13,
2009.
|
(25)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009 (Commission File No. 1-15991), filed with
the Commission on October 27,
2009.
|
107
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. Fornaro
|
Robert
L. Fornaro
|
|
Chairman
of the Board,
President and Chief Executive Officer
|
|
Date:
February 11, 2010
|
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
11, 2010
|
|
Robert
L. Fornaro
|
||
Chairman
of the Board, President and Chief Executive Officer
|
||
/s/
Arne Haak
|
February
11, 2010
|
|
Arne
Haak
|
||
Senior
Vice President of Finance, Treasurer and Chief Financial
Officer
(Principal
Accounting and Financial Officer)
|
||
/s/
J. Veronica Biggins
|
February
11, 2010
|
|
J.
Veronica Biggins
|
||
Director
|
||
/s/
Don L. Chapman
|
February
11, 2010
|
|
Don
L. Chapman
|
||
Director
|
||
/s/
Geoffrey T. Crowley
|
February
11, 2010
|
|
Geoffrey
T. Crowley
|
||
Director
|
||
/s/
Peter D’Aloia
|
February
11, 2010
|
|
Peter
D’Aloia
|
||
Director
|
||
/s/
Jere A. Drummond
|
February
11, 2010
|
|
Jere
A. Drummond
|
||
Director
|
||
108
/s/
John F. Fiedler
|
February
11, 2010
|
|
John
F. Fiedler
|
||
Director
|
||
/s/
Michael P. Jackson
|
February
11, 2010
|
|
Michael
P. Jackson
|
||
Director
|
||
/s/
Lewis H. Jordan
|
February
11, 2010
|
|
Lewis
H. Jordan
|
||
Director
|
||
/s/
Alexis P. Michas
|
February
11, 2010
|
|
Alexis
P. Michas
|
||
Director
|
||
109
Information
included in agreements filed as exhibits to this annual report and our other
periodic and current reports has been included in this report and such filings
pursuant to applicable SEC rules and regulations or to provide information
regarding the terms of such agreements. Such agreements are not intended to
provide any other factual information about us. Such information can be found
elsewhere in this annual report and in our other reports. Agreements filed as
exhibits to this annual report and our other reports may contain representations
and warranties made to us or by us to third parties solely for the purpose of
the transaction or transactions described in such agreements and, except as
expressly provided in such agreements, no other person was or is an intended
third party beneficiary of such agreements or standards of materiality in such
agreements or in disclosure schedules thereto. While we do not believe that any
disclosure schedules which have not been filed as part of any agreements contain
any information which securities laws require us to publicly disclose, other
than information that has already been so disclosed, disclosure schedules may
contain information that modifies, qualifies, and creates exceptions to the
representations and warranties set forth in the filed agreements. Accordingly,
you should not rely on the representations and warranties contained in any such
agreements as characterizations of the actual state of facts, since they may be
modified in important part by the underlying disclosure schedules or by defined
standards of materiality for purposes of such agreements. Disclosure schedules
to filed agreements may contain information that has been included in the
Company’s general prior public disclosures, as well as potential additional
non-public information. Moreover, information concerning the subject matter of
the representations and warranties in filed agreements may have changed since
the date of the applicable agreement, which subsequent information may or may
not be fully reflected in our public disclosures, the disclosures of third
parties, or at all. Except as required by law we undertake no obligation to
update such information or disclose any such changes.
INDEX
TO EXHIBITS
Exhibit
No.
|
Description
|
3.1
|
Articles
of Incorporation (1)
|
3.2
|
Bylaws
(As Amended and Restated on July 28, 2005) (2)
|
4.1
|
See
the Articles of Incorporation filed as Exhibit 3.1
|
4.2
|
See
the Bylaws filed as Exhibit 3.2
|
4.3
|
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
(3)
|
4.4
|
Note
Agreement for 13% Series A Senior Notes due April 12, 2009, dated April
12, 2001, between AirTran Airways, Inc. and Boeing Capital Loan
Corporation, including as an exhibit thereto the form of notes
(4)
|
4.5
|
Indenture
dated as of May 7, 2003 among AirTran Holdings, Inc., as issuer, AirTran
Airways, Inc., as guarantor, and Wilmington Trust Company, as trustee,
including as an exhibit thereto the form of Note (5)
|
4.6
|
Senior
Indenture dated as of April 30, 2008, between AirTran Holdings, Inc. and
U.S. Bank National Association, as trustee, including as an exhibit
thereto the form of Note (6)
|
4.7
|
First
Supplemental Indenture dated as of April 30, 2008, between AirTran
Holdings, Inc. and U.S. Bank National Association, as trustee, including
as an exhibit thereto the form of Note (6)
|
4.8
|
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 (6)
|
4.9
|
Senior
Indenture dated as of October 14, 2009, between AirTran Holdings, Inc. and
U.S. Bank National Association, as trustee, including as an exhibit
thereto the form of Note (7)
|
4.10
|
First
Supplemental Indenture dated as of October 14, 2009, between AirTran
Holdings, Inc. and U.S. Bank National Association, as trustee, including
as an exhibit thereto the form of Note (7)
|
10.1+
|
1994
Stock Option Plan (8)
|
10.2*
|
Purchase
Agreement between McDonnell Douglas Corporation and ValuJet Airlines, Inc.
dated December 6, 1995 (9)
|
10.3
|
Agreement
and Lease of Premises Central Passenger Terminal Complex Hartsfield
Atlanta International Airport (9)
|
10.4+
|
1996
Stock Option Plan (10)
|
10.5
|
Lease
of headquarters in Orlando, Florida, dated November 14, 1995
(11)
|
10.6
|
Orlando
International Lease and Use Agreement
(12)
|
110
10.7
|
Orlando
Tradeport Maintenance Hangar Lease Agreement by and between Greater
Orlando Aviation Authority and Page AvJet Corporation dated December 11,
1989 (13)
|
10.8
|
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 (13)
|
10.9
|
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 (13)
|
10.10*
|
Aircraft
General Terms Agreement AGTA-CQT, dated July 3, 2003, by and between
Boeing and AirTran Airways, Inc. (“AirTran”) (14)
|
10.11*
|
Purchase
Agreement Number 2444, dated July 3, 2003 (“Purchase Agreement 2444”),
between Boeing and AirTran, as supplemented by Letter Agreement No. 1, by
and between Boeing and AirTran (14)
|
10.12*
|
Letter
Agreements to Purchase Agreement 2444, dated July 3, 2003, by and between
Boeing and AirTran (14)
|
10.13*
|
General
Terms Agreement No. CFM-03-0017 (“GTA CFM-03-0017”), dated June 30, 2003,
by and between CFM International Inc. 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 (14)
|
10.14*
|
Maintenance
Cost Per Hour Engine Service Agreement, dated August 13, 2003, by and
between GE Engine Services, Inc. and AirTran (14)
|
10.15
|
Aircraft
Lease Common Terms Agreement, dated August 15, 2003, by and between
Aviation Financial Services, Inc. and AirTran (14)
|
10.16*
|
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 six (6) individual Aircraft Lease Agreements (14)
|
10.17
|
Engine
Lease Common Terms Agreement, dated August 15, 2003, by and between
Aviation Financial Services, Inc. and AirTran (14)
|
10.18*
|
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
(14)
|
10.19*
|
Letter
Agreement 5-1005-JSW-737, dated July 3, 2003, by and between Boeing and
AirTran (14)
|
10.20*
|
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 (14)
|
10.21*
|
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 (14)
|
10.22*
|
B717
Lease Financing Letter Agreement, dated July 3, 2003, by and between
Boeing and AirTran (14)
|
10.23+
|
AirTran
Holdings, Inc. Amended and Restated Long Term Incentive Plan
(15)
|
10.24*
|
Loan
Agreement, dated as of August 31, 2005, by and among AirTran, as Borrower,
The Parties Identified in Schedule 1 thereto, as Lenders, and The Royal
Bank of Scotland plc, New York Brach (“RBS”), as Security Agent
(16)
|
10.25*
|
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 (16)
|
10.26*
|
Security
Agreement, dated as of August 31, 2005, by and between AirTran, as
Borrower, and RBS, as Security Agent (16)
|
10.27*
|
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
(17)
|
10.28*
|
Security
Agreement, dated as of December 7, 2005, by and between AirTran, as
Borrower, and HSH Nordbank AG, New York Branch, as Security Agent
(17)
|
10.29*
|
Association
of Flight Attendants — CWA, AFL-CIO, Flight Attendant Labor Contract with
AirTran Airways, Effective June 1, 2005, Amendable December 1, 2008
(18)
|
10.30*
|
Credit
Agreement, dated as of August 1, 2006, by and among AirTran, as Borrower,
and BNP Paribas S.A. (acting through its Paris Branch), as Security Agent
(19)
|
10.31*
|
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 (19)
|
10.32*
|
Credit
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 (19)
|
10.33*
|
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
(19)
|
10.34*
|
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 (19)
|
10.35*
|
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
(19)
|
10.36*
|
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
(19)
|
111
10.37*
|
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
(19)
|
10.38*
|
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
(19)
|
10.39*
|
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
(19)
|
10.40*
|
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
(20)
|
10.41*
|
Purchase
Agreement No. 2444, Supplement No. 12, dated as of June 4, 2007, by and
between the Boeing and AirTran (21)
|
10.42*
|
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
(21)
|
10.43*
|
Security
Agreement, dated as of June 28, 2007, by and between AirTran and
Bayerische Hypo-und Vereinsbank AG, London Branch, as Security Agent
(21)
|
10.44+
|
Amendment
to Employment Agreement for Robert L. Fornaro dated October 31, 2007
(22)
|
10.45+
|
Employment
Agreement for Robert L. Fornaro dated November 1, 2007
(22)
|
10.46*
|
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 (23)
|
10.47*
|
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
(23)
|
10.48*
|
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 Holder (24)
|
10.49*
|
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 Holder (24)
|
10.50*
|
Amendment
No. 1 to Amended and Restated Revolving Line of Credit and Reimbursement
Agreement (25)
|
12.1
|
Statement
regarding computation of ratio of earnings to fixed
charges
|
21.1
|
Subsidiaries
of AirTran Holdings, Inc.
|
21.2
|
Subsidiaries
of AirTran Airways, Inc.
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
31.1
|
CEO
certification pursuant to Rule 13(a)-14 or 15(d)-14
|
31.2
|
CFO
certification pursuant to Rule 13(a)-14 or 15(d)-14
|
32
|
CEO
and CFO certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
99.1
|
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
|
*
|
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.
|
+
|
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.
|
(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 report on Form 8-K (Commission File
No. 1-15991), filed with the Commission on August 1,
2005.
|
(3)
|
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.
|
(4)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 (Commission File No. 1-15991), filed with
the Commission on August 2, 2001.
|
(5)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3
(Commission File No. 333-107415), filed with the Commission on July 28,
2003.
|
112
(6)
|
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.
|
(7)
|
Incorporated
by reference to the Company’s report on Form 8-K (Commission File No.
1-15991), filed with the Commission on October 14,
2009.
|
(8)
|
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.
|
(9)
|
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.
|
(10)
|
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.
|
(11)
|
Incorporated
by reference to the Annual Report on Form 10-K of Airways Corporation
(Commission File No. 0-26432) for the year ended December 31,
1995.
|
(12)
|
Incorporated
by reference to the Quarterly Report on Form 10-Q of Airways Corporation
for the quarter ended December 31, 1996 (Commission File No.
0-26432), filed with the Commission on February 13,
1997.
|
(13)
|
Incorporated
by reference to the Annual Report on Form 10-K of Airways Corporation
(Commission File No. 0-26432) for the year ended March 31, 1996, filed
with the Commission on June 28, 1996.
|
(14)
|
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.
|
(15)
|
Incorporated
by reference to the Company’s report on Form 8-K (Commission File
No. 1-15991), filed with the Commission on May 22,
2009.
|
(16)
|
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.
|
(17)
|
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.
|
(18)
|
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.
|
(19)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006 (Commission File No. 1-15991), filed
with the Commission on November 1, 2006.
|
(20)
|
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.
|
(21)
|
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.
|
(22)
|
Incorporated
by reference to the Company’s report on Form 8-K (Commission File
No. 1-15997), filed with the Commission on November 6,
2007.
|
(23)
|
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.
|
(24)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K (Commission File
No. 1-15991), filed with the Commission on February 13,
2009.
|
(25)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009 (Commission File No. 1-15991), filed with
the Commission on October 27,
2009.
|
113