UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-49728

JETBLUE AIRWAYS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		87-0617894
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
118-29 Queens Boulevard, Forest Hills, New York		11375
(Address of principal executive offices)		(Zip Code)

(718) 286-7900
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

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. þ Yes      o 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes       o No

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(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). o Yes       No þ

As of June 30, 2010, there were 293,601,212 shares outstanding of the registrant’s common stock, par value $.01.

 

 

EXPLANATORY NOTE

          This Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q of JetBlue Airways Corporation for the quarter ended June 30, 2010 originally filed with the Securities and Exchange Commission on July 27, 2010, is being filed to restate our condensed consolidated financial statements and other financial information to properly account for the expiration of points and awards in the Company’s customer loyalty program, TrueBlue. Management determined certain financial amounts reflected in Items 1 and 2 as well as Exhibit 12.1 to our originally filed Form 10-Q needed to be restated to reflect this adjustment. The amended items have been amended and restated in their entirety. Other than as described below, no other changes have been made to the original Form 10-Q.

          As more fully described in Note 11 to our condensed consolidated financial statements, in connection with our fourth quarter of 2010 analysis of the winding down of the liability for TrueBlue points and awards outstanding when our original TrueBlue program was replaced, management concluded in January 2011, that there was an error in accounting for certain points and awards that had previously expired. As a result of this accounting error, revenue, net income, earnings per share and retained earnings were all understated in previously reported consolidated financial statements for the years ended 2007, 2008, and 2009 as well as for the three and six months ended June 30, 2010. The impact on our consolidated balance sheets was primarily an understatement to retained earnings offset by an overstatement of air traffic liability. There was no impact to previously reported total cash flows from operations, investing or financing activities. We also corrected smaller errors related to the calculation of interest expense, and have included these corrections in our condensed consolidated financial results in this Form 10-Q/A.

          As a result of this restatement, we have revised Item 4, Controls and Procedures, and have included new certifications pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002 as reflected in Exhibits 31.1, 31.2, and 32.1.

          Except as set forth above, this Form 10-Q/A does not modify or update other disclosures in the original Form 10-Q, including the nature and character of such disclosure to reflect events occurring after the filing date of the original Form 10-Q. While we are amending only certain portions of our Form 10-Q, for convenience and ease of reference, we are filing the entire Form 10-Q, except for certain exhibits. The disclosures in this amendment do not reflect events occurring after the filing of the original Form 10-Q. Accordingly, this amendment should be read in conjunction with our other filings made with the Securities and Exchange Commission subsequent to the filing of the originally filed Form 10-Q, including any amendments to those filings, as information in such filings may update or supersede certain information contained in those filings as well as in this amendment.

JetBlue Airways Corporation
FORM 10-Q
INDEX

		Page #’s
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements				2
Condensed Consolidated Balance Sheets — June 30, 2010 and December 31, 2009				2
Consolidated Statements of Operations — Three and Six Months Ended June 30, 2010 and 2009				4
Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2010 and 2009				5
Notes to Condensed Consolidated Financial Statements				6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		30
Item 4. Controls and Procedures		30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		31
Item 1A. Risk Factors		31
Item 6. Exhibits		33
EX-12.1
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

JETBLUE AIRWAYS CORPORATION

		June 30,				December 31,
		2010				2009
						(as adjusted,
		(unaudited)				Note 1)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	477			$	896
Investment securities			513				240
Receivables, less allowance			95				81
Restricted cash			9				13
Prepaid expenses and other			260				304
Total current assets			1,354				1,534
PROPERTY AND EQUIPMENT
Flight equipment			4,244				4,170
Predelivery deposits for flight equipment			155				139
			4,399				4,309
Less accumulated depreciation			608				540
			3,791				3,769
Other property and equipment			500				515
Less accumulated depreciation			164				169
			336				346
Assets constructed for others			554				549
Less accumulated amortization			38				26
			516				523
Total property and equipment			4,643				4,638
OTHER ASSETS
Investment securities			169				6
Restricted cash			61				64
Other			354				307
Total other assets			584				377
TOTAL ASSETS		$	6,581			$	6,549

See accompanying notes to condensed consolidated financial statements.

JETBLUE AIRWAYS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)
(as Restated, see Note 11)

		June 30,				December 31,
		2010				2009
						(as adjusted,
		(unaudited)				Note 1)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	115			$	93
Air traffic liability			579				443
Accrued salaries, wages and benefits			122				121
Other accrued liabilities			140				116
Current maturities of long-term debt and capital leases			220				384
Total current liabilities			1,176				1,157
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS			2,896				2,920
CONSTRUCTION OBLIGATION			530				529
DEFERRED TAXES AND OTHER LIABILITIES
Deferred income taxes			279				259
Other			138				138
			417				397
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 25,000,000 shares authorized, none issued			—				—
Common stock, $.01 par value; 900,000,000 and 500,000,000 shares authorized, 321,146,446 and 318,592,283 shares issued and 293,601,212 and 291,490,758 shares outstanding in 2010 and 2009, respectively			3				3
Treasury stock, at cost; 27,545,845 and 27,102,136 shares in 2010 and 2009, respectively			(4	)			(2	)
Additional paid-in capital			1,434				1,422
Retained earnings			152				122
Accumulated other comprehensive income (loss)			(23	)			1
Total stockholders’ equity			1,562				1,546
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	6,581			$	6,549

See accompanying notes to condensed consolidated financial statements.

JETBLUE AIRWAYS CORPORATION

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(as adjusted,								(as adjusted,
						Note 1)								Note 1)
OPERATING REVENUES
Passenger		$	851			$	722			$	1,637			$	1,430
Other			89				86				174				173
Total operating revenues			940				808				1,811				1,603
OPERATING EXPENSES
Aircraft fuel and related taxes			279				236				533				458
Salaries, wages and benefits			218				192				437				377
Landing fees and other rents			58				54				112				104
Depreciation and amortization			54				56				111				111
Aircraft rent			31				32				62				64
Sales and marketing			43				38				83				75
Maintenance materials and repairs			41				34				80				71
Other operating expenses			121				89				255				191
Total operating expenses			845				731				1,673				1,451
OPERATING INCOME			95				77				138				152
OTHER INCOME (EXPENSE)
Interest expense			(43	)			(49	)			(90	)			(98	)
Capitalized interest			1				2				2				4
Interest income and other			(1	)			7				1				1
Total other income (expense)			(43	)			(40	)			(87	)			(93	)
INCOME BEFORE INCOME TAXES			52				37				51				59
Income tax expense			21				16				21				25
NET INCOME		$	31			$	21			$	30			$	34
INCOME PER COMMON SHARE:
Basic		$	0.11			$	0.08			$	0.11			$	0.14
Diluted		$	0.10			$	0.07			$	0.11			$	0.11

See accompanying notes to condensed consolidated financial statements.

JETBLUE AIRWAYS CORPORATION

		Six months ended
		June 30,
		2010				2009
						(as adjusted,
						Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	30			$	34
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes			20				25
Depreciation			96				90
Amortization			20				24
Stock-based compensation			8				8
Collateral returned (paid) for derivative instruments			(5	)			109
Changes in certain operating assets and liabilities			172				(58	)
Other, net			15				(7	)
Net cash provided by operating activities			356				225
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(131	)			(342	)
Predelivery deposits for flight equipment			(20	)			(15	)
Proceeds from the sale of flight equipment			—				58
Assets constructed for others			(8	)			(22	)
Sale of auction rate securities			36				29
Purchase of available-for-sale securities			(722	)			—
Sale of available-for-sale securities			761				—
Purchase of held-to-maturity investments			(584	)			—
Proceeds from the maturities of held-to-maturity investments			72				—
Other, net			—				(4	)
Net cash used in investing activities			(596	)			(296	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Issuance of common stock			5				116
Issuance of long-term debt			66				446
Short-term borrowings and lines of credit			20				13
Construction obligation			9				25
Repayment of long-term debt and capital lease obligations			(239	)			(77	)
Repayment of short-term borrowings and lines of credit			(37	)			(120	)
Other, net			(3	)			(13	)
Net cash provided by (used in) financing activities			(179	)			390
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(419	)			319
Cash and cash equivalents at beginning of period			896				561
Cash and cash equivalents at end of period		$	477			$	880

See accompanying notes to condensed consolidated financial statements.

JETBLUE AIRWAYS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

Note 1 — Summary of Significant Accounting Policies

     Basis of Presentation: Our condensed consolidated financial statements include the accounts of JetBlue Airways Corporation and our subsidiaries, collectively “we” or the “Company”, with all intercompany transactions and balances having been eliminated. These condensed consolidated financial statements and related notes should be read in conjunction with our 2009 audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, or our 2009 Form 10-K.

     These condensed consolidated financial statements are unaudited and have been prepared by us following the rules and regulations of the Securities and Exchange Commission, or the SEC, and, in our opinion, reflect all adjustments including normal recurring items which are necessary to present fairly the results for interim periods. Our revenues are recorded net of excise and other related taxes in our condensed consolidated statements of operations.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations; however, we believe that the disclosures are adequate to make the information presented not misleading. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for the entire year.

     Loyalty Program: During the six months ended June 30, 2010, we recognized approximately $5 million of other revenue related to the minimum point sales guarantee associated with our co-branded credit card, leaving $11 million deferred and included in our air traffic liability.

     New Accounting Pronouncements: Effective January 1, 2010, we adopted the guidance for Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance, under the debt topic of the Financial Accounting Standard Board’s Codification, or Codification, which changes the accounting for equity share lending arrangements on an entity’s own shares when executed in contemplation of a convertible debt offering. This new guidance requires share lending arrangements be measured at fair value and recognized as an issuance cost. These issuance costs are then amortized and recognized as interest expense over the life of the financing arrangement. Shares loaned under these arrangements are excluded from computation of earnings per share. Retrospective application is required for all arrangements outstanding as of the beginning of the fiscal year. As described more fully in our 2009 Form 10-K, we lent 44.9 million shares of our common stock in conjunction with our 2008 $201 million convertible debt issuance, which is subject to this new guidance. Our share lending agreement requires that the shares borrowed be returned upon the maturity of the related debt, October 2038, or earlier, if the debentures are no longer outstanding.

     We determined the fair value of the share lending arrangement was approximately $5 million at the date of the issuance based on the value of the estimated fees the shares loaned would have generated over the term of the share lending arrangement. We have retrospectively applied this change in accounting to affected accounts for all periods presented. The $5 million fair value was recognized as a debt issuance cost and is being amortized to interest expense through the earliest put date of the related debt, October 2013 and October 2015 for Series A and Series B, respectively. For 2008, adoption of this new accounting treatment resulted in approximately $2 million of additional interest expense, an increase in net loss of approximately $1 million and had no impact on earnings (loss) per share. For 2009, this adoption resulted in an insignificant increase in interest expense and had no overall impact on net income or earnings per share. As of June 30, 2010, approximately $2 million of net debt issuance costs remain outstanding related to the share lending arrangement and will continue to be amortized through the earliest put date of the related debt. We estimate that the $2 million value of the shares remaining outstanding under the share lending arrangement approximates their fair value as of June 30, 2010.

     Effective January 1, 2010, we adopted the latest provisions in the Codification related to the accounting for an entity’s involvement with variable interest entities, or VIEs. Under these rules, the quantitative based method of determining if an entity is the primary beneficiary was replaced with the entity’s assessment on an ongoing basis of which entity has the power to direct activities of the VIE and the obligation to absorb the losses or the right to receive the benefits from the VIE. Adoption of these new rules had no impact on our consolidated financial statements.

     In September 2009, the EITF reached final consensus on updates to the Codification’s Revenue Recognition rules, which changes the accounting for certain revenue arrangements. The new requirements change the allocation methods used in determining how to account for multiple element arrangements and will result in the ability to separately account for more deliverables, and potentially less revenue deferrals. Additionally, this new accounting treatment will require enhanced disclosures in financial statements. The new rule is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010 on a prospective basis, with early application permitted. We are currently evaluating the impact this will have on our financial statements.

Note 2 — Stock-Based Compensation

     During the six months ended June 30, 2010, we granted approximately 1.9 million restricted stock units under our Amended and Restated 2002 Stock Incentive Plan, at a weighted average grant date fair value of $5.28 per share. We issued approximately 1.1 million shares of our common stock in connection with the vesting of restricted stock units during the six months ended June 30, 2010. At June 30, 2010, 4.0 million restricted stock units were unvested with a weighted average grant date fair value of $5.14 per share.

Note 3 — Long-term Debt, Short-term Borrowings, and Capital Lease Obligations

$250 million 3.75% Convertible Debentures due 2035

     In March 2010, on the first repurchase date, holders of the $156 million outstanding of our 3.75% convertible debentures due 2035 required us to repurchase approximately $155 million aggregate principal amount of debentures at par, plus accrued interest.

UBS Line of Credit

     In March 2010, our line of credit with UBS Securities LLC and UBS Financial Services Inc, or UBS, was increased to $63 million. During the six months ended June 30, 2010, certain auction rate securities, or ARS, securing this line of credit were redeemed by their issuers and the proceeds were used to reduce the line of credit to $40 million as of June 30, 2010. In July 2010, we sold at par value the remaining $49 million of ARS securing this line of credit and used the proceeds to pay off the outstanding balance on this line of credit.

Other Indebtedness

     During the six months ended June 30, 2010, we issued $47 million in fixed rate equipment notes due through 2025 and $19 million in non-public floating rate equipment notes due through 2015, which are secured by two new EMBRAER 190 aircraft and four previously unfinanced spare engines.

     Aircraft, engines and other equipment and facilities having a net book value of $3.60 billion at June 30, 2010 were pledged as security under various loan agreements.

     Our outstanding debt and capital lease obligations were reduced by $274 million as a result of principal payments made during the six months ended June 30, 2010. At June 30, 2010, the weighted average interest rate of all of our long-term debt was 4.43% and scheduled maturities were $131 million for the remainder of 2010, $181 million in 2011, $182 million in 2012, $380 million in 2013, $600 million in 2014 and $1.64 billion thereafter.

     The carrying amounts and estimated fair values of our long-term debt at June 30, 2010 were as follows (in millions):

		Carrying				Estimated
		Value				Fair Value
Public Debt
Floating rate enhanced equipment notes
Class G-1, due through 2016		$	252			$	208
Class G-2, due 2014 and 2016			373				291
Class B-1, due 2014			49				41
Fixed rate special facility bonds, due through 2036			84				72
6 3/4% convertible debentures due in 2039			201				244
5 1/2% convertible debentures due in 2038			123				162
Other			2				2
Non-Public Debt
Floating rate equipment notes, due through 2020			681				642
Fixed rate equipment notes, due through 2025			1,178				1,197
Total		$	2,943			$	2,859

     The estimated fair values of our publicly held long-term debt were based on quoted market prices or other observable market inputs when instruments are not actively traded. The fair value of our non-public debt was estimated using discounted cash flow analysis based on our borrowing rates for instruments with similar terms. The fair values of our other financial instruments approximate their carrying values.

     We utilize a policy provider to provide credit support on the Class G-1 and Class G-2 certificates. The policy provider has unconditionally guaranteed the payment of interest on the certificates when due and the payment of principal on the certificates no later than 18 months after the final expected regular distribution date. The policy provider is MBIA Insurance Corporation (a subsidiary of MBIA, Inc.).

Note 4 — Comprehensive Income / (Loss)

     Comprehensive income (loss) includes changes in fair value of our aircraft fuel derivatives and interest rate swap agreements, which qualify for hedge accounting. The differences between net income (loss) and comprehensive income (loss) for each of these periods are as follows (dollars are in millions):

		Three Months Ended
		June 30,
		2010				2009
Net income		$	31			$	21
Gain (loss) on derivative instruments (net of $11 and $23 of taxes)			(16	)			36
Total other comprehensive income (loss)			(16	)			36
Comprehensive income		$	15			$	57

		Six Months Ended
		June 30,
		2010				2009
Net income		$	30			$	34
Gain (loss) on derivative instruments (net of $16 and $42 of taxes)			(24	)			65
Total other comprehensive income (loss)			(24	)			65
Comprehensive income		$	6			$	99

     A rollforward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and six months ended June 30, 2010 is as follows (in millions):

		Aircraft Fuel				Interest
		Derivatives				Rate Swaps				Total
Beginning accumulated gains (losses), at March 31, 2010		$	2			$	(9	)		$	(7	)
Reclassifications into earnings			2				2				4
Change in fair value			(14	)			(6	)			(20	)
Ending accumulated gains (losses), at June 30, 2010		$	(10	)		$	(13	)		$	(23	)

		Aircraft Fuel				Interest
		Derivatives				Rate Swaps				Total
Beginning accumulated gains (losses), at December 31, 2009		$	7			$	(6	)		$	1
Reclassifications into earnings			1				3				4
Change in fair value			(18	)			(10	)			(28	)
Ending accumulated gains (losses), at June 30, 2010		$	(10	)		$	(13	)		$	(23	)

Note 5 — Earnings (Loss) Per Share

     The following table shows how we computed basic and diluted earnings (loss) per common share (dollars in millions; share data in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Numerator:
Net income		$	31			$	21			$	30			$	34
Effect of dilutive securities:
Interest on convertible debt, net of income taxes			3				2				6				3
Net income applicable to common stockholders after assumed conversion for diluted earnings per share		$	34			$	23			$	36			$	37
Denominator:
Weighted average shares outstanding for basic earnings per share			275,229				251,770				274,644				248,102
Effect of dilutive securities:
Employee stock options			2,603				2,887				2,506				2,775
Convertible debt			68,605				68,605				68,605				68,605
Adjusted weighted average shares outstanding and assumed conversions for diluted earnings			346,437				323,262				345,755				319,482
Shares excluded from EPS calculation (in millions):
Shares issuable upon conversion of our convertible debt since assumed conversion would be antidilutive			—				10.2				—				10.2
Shares issuable upon exercise of outstanding stock options or vesting of restricted stock units since assumed exercise would be antidilutive			22.5				23.2				25.8				24.8

     As of June 30, 2010, a total of approximately 18.0 million shares of our common stock, which were lent to our share borrower pursuant to the terms of our share lending agreement in which we initially loaned 44.9 million shares of our common stock in conjunction with our 2008 $201 million convertible debt issuance, as described more fully in Note 2 to our 2009 Form 10-K, were issued and outstanding for corporate law purposes, and holders of the borrowed shares have all the rights of a holder of our common stock. However, because the share borrower must return all borrowed shares to us (or identical shares or, in certain circumstances of default by the counterparty, the cash value thereof), the borrowed shares are not considered outstanding for the purpose of computing and reporting basic or diluted earnings (loss) per share.

Note 6 — Employee Retirement Plan

     We sponsor a retirement savings 401(k) defined contribution plan, or the Plan, a component of which is a profit sharing plan. All employees are eligible to participate in the Plan. Our contributions expensed for the Plan for the three months ended June 30, 2010 and 2009 were $13 million and $11 million, respectively, and contributions expensed for the Plan for the six months ended June 30, 2010 and 2009 were $27 million and $23 million, respectively.

Note 7 — Commitments and Contingencies

     In February 2010, we amended our Airbus A320 purchase agreement, deferring six aircraft previously scheduled for delivery in 2011 and 2012 to 2015. This amendment had the effect of reducing our 2010

capital expenditures by $40 million in related predelivery deposits, which will be required to be made in future periods.

     As of June 30, 2010, our firm aircraft orders consisted of 55 Airbus A320 aircraft, 58 EMBRAER 190 aircraft and 17 spare engines scheduled for delivery through 2018. Committed expenditures for these aircraft, including the related flight equipment and estimated amounts for contractual price escalations and predelivery deposits, are approximately $115 million for the remainder of 2010, $425 million in 2011, $715 million in 2012, $815 million in 2013, $765 million in 2014 and $1.65 billion thereafter.

     In addition to our purchase commitments above, in April 2010, we signed a letter of intent and plan to lease seven used Airbus A320 aircraft from a third party. We subsequently agreed to lease only six aircraft, which are scheduled to be delivered later in 2010. The terms of these operating leases are still being negotiated.

     As of June 30, 2010, we had approximately $30 million of restricted assets pledged under standby letters of credit related to certain of our leases which will expire at the end of the related lease terms. Additionally, we had $19 million pledged related to our workers compensation insurance policies and other business partner agreements, which will expire according to the terms of the related policies or agreements.

     In March 2010, we announced we will be combining our Darien, CT and Forest Hills, NY corporate offices and relocating to a new corporate headquarters in Long Island City, NY. As of June 30, 2010, we do not have any material commitments related to this corporate move, which is currently scheduled to commence in 2011.

Note 8 —Financial Derivative Instruments and Risk Management

     As part of our risk management strategy, we periodically purchase crude or heating oil option contracts or swap agreements to manage our exposure to the effect of changes in the price and availability of aircraft fuel. Prices for these commodities are normally highly correlated to aircraft fuel, making derivatives of them effective at providing short-term protection against sharp increases in average fuel prices. We also periodically enter into basis swaps for the differential between heating oil and jet fuel, as well as jet fuel swaps, to further limit the variability in fuel prices at various locations. To manage the variability of the cash flows associated with our variable rate debt, we have also entered into interest rate swaps. We do not hold or issue any derivative financial instruments for trading purposes.

     Aircraft fuel derivatives: We attempt to obtain cash flow hedge accounting treatment for each aircraft fuel derivative that we enter into. This treatment is provided for under the Derivatives and Hedging topic of the Codification, which allows for gains and losses on the effective portion of qualifying hedges to be deferred until the underlying planned jet fuel consumption occurs, rather than recognizing the gains and losses on these instruments into earnings for each period they are outstanding. The effective portion of realized aircraft fuel hedging derivative gains and losses is recognized in fuel expense, while ineffective gains and losses are recognized in interest income and other. All cash flows related to our fuel hedging derivatives are classified as operating cash flows.

     Ineffectiveness results, in certain circumstances, when the change in the total fair value of the derivative instrument differs from the change in the value of our expected future cash outlays for the purchase of aircraft fuel and is recognized in interest income and other immediately. Likewise, if a hedge does not qualify for hedge accounting, the periodic changes in its fair values are recognized in interest income and other in the period of the change. When aircraft fuel is consumed and the related derivative contract settles, any gain or loss previously deferred in other comprehensive income is recognized in aircraft fuel expense.

     Our current approach to fuel hedging is to enter into hedges on a discretionary basis without a specific target of hedge percentage needs in order to mitigate the liquidity issues and cap fuel prices, when possible.

     The following table illustrates the approximate hedged percentages of our projected fuel usage by quarter as of June 30, 2010, related to our outstanding fuel hedging contracts that were designated as cash flow hedges for accounting purposes.

		Crude oil cap				Heating oil				Jet fuel swap
		agreements				collars				agreements				Total
Third Quarter 2010			13	%			18	%			16	%			47	%
Fourth Quarter 2010			13	%			19	%			14	%			46	%
First Quarter 2011			15	%			5	%			—				20	%
Second Quarter 2011			19	%			—				—				19	%
Third Quarter 2011			14	%			—				—				14	%
Fourth Quarter 2011			2	%			—				—				2	%

     In April 2010, we sold some of our outstanding crude oil cap agreements scheduled to settle in the third and fourth quarter of 2010 back to the original counterparties for a slight gain. We simultaneously entered into jet fuel swap agreements for the same quantity and duration, and as a result maintained the same level of overall hedge positions for the third and fourth quarter of 2010.

     We also enter into basis swaps and certain jet fuel swap agreements, which we do not designate as cash flow hedges for accounting purposes and adjust their fair value through earnings each period based on their current fair value.

     Interest rate swaps: The interest rate hedges we had outstanding as of June 30, 2010 effectively swap floating rate for fixed rate, taking advantage of lower borrowing rates in existence at the time of the hedge transaction as compared to the date our original debt instruments were executed. As of June 30, 2010, we had $392 million in notional debt outstanding related to these swaps, which cover certain interest payments through August 2016. The notional amount decreases over time to match scheduled repayments of the related debt.

     All of our outstanding interest rate swap contracts qualify as cash flow hedges in accordance with the Derivatives and Hedging topic of the Codification. Since all of the critical terms of our swap agreements match the debt to which they pertain, there was no ineffectiveness relating to these interest rate swaps in 2010 or 2009, and all related unrealized losses were deferred in accumulated other comprehensive income. We recognized approximately $4 million and $2 million in additional interest expense as the related interest payments were made during the six months ended June 30, 2010 and 2009, respectively.

     Any outstanding derivative instrument exposes us to credit loss in the event of nonperformance by the counterparties to the agreements, but we do not expect that any of our four counterparties will fail to meet their obligations. The amount of such credit exposure is generally the fair value of our outstanding contracts. To manage credit risks, we select counterparties based on credit assessments, limit our overall exposure to any single counterparty and monitor the market position with each counterparty. All of our agreements require cash deposits if market risk exposure exceeds a specified threshold amount.

     The financial derivative instrument agreements we have with our counterparties may require us to fund all, or a portion of, outstanding loss positions related to these contracts prior to their scheduled maturities. The amount of collateral posted, if any, is periodically adjusted based on the fair value of the hedge contracts. Our policy is to offset the liabilities represented by these contracts with any cash collateral paid to the counterparties. We did not have any collateral posted related to our outstanding fuel hedge contracts at June 30, 2010 or December 31, 2009. The table below reflects a summary of our collateral balances (in millions).

		As of
		June 30,				December 31,
		2010				2009
Interest rate derivatives
Cash collateral posted to counterparty offsetting hedge liability in other current liabilities		$	22			$	17

     The table below reflects quantitative information related to our derivative instruments and where these amounts are recorded in our financial statements. The fair value of those contracts not designated as cash flow hedges was not material at either June 30, 2010 or December 31, 2009 (dollar amounts in millions).

		As of
		June 30,				December 31,
		2010				2009
Fuel derivatives
Asset fair value recorded in prepaid expenses and other		$	6			$	25
Liability fair value recorded in other accrued liabilities			9				—
Asset fair value recorded in other long term assets			3				3
Longest remaining term (months)			18				18
Hedged volume (barrels, in thousands)			4,575				5,070
Estimated amount of existing gains (losses) expected to be reclassified into earnings in the next 12 months			(15	)			12
Interest rate derivatives
Liability fair value recorded in other long term liabilities (1)			22				10
Estimated amount of existing gains (losses) expected to be reclassified into earnings in the next 12 months			(8	)			(8	)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Fuel derivatives
Hedge effectiveness gains (losses) recognized in aircraft fuel expense		$	(2	)		$	(42	)		$	—			$	(98	)
Hedge ineffectiveness gains (losses) recognized in other income (expense)			(2	)			—				(2	)			—
Gains (losses) of derivatives not qualifying for hedge accounting recognized in other income (expense)			—				—				—				—
Hedge gains (losses) of derivatives recognized in comprehensive income, (see Note 4)			(21	)			6				(28	)			3
Percentage of actual consumption economically hedged			45	%			9	%			55	%			9	%
Interest rate derivatives
Hedge gains (losses) of derivatives recognized in comprehensive income, (see Note 4)			(7	)			10				(12	)			5

Note 9 —Fair Value of Financial Instruments

     Under the Fair Value Measurements and Disclosures topic of the Codification, disclosures are required about how fair value is determined for assets and liabilities and a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

Level 1		quoted prices in active markets for identical assets or liabilities;

Level 2		quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3		unobservable inputs, such as discounted cash flow models or valuations.

     The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a listing of our assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30, 2010 (in millions).

		Level 1				Level 2				Level 3				Total
Assets
Cash and cash equivalents		$	454			$	—			$	—			$	454
Restricted cash			63				—				—				63
Investment Securities
Auction rate securities (ARS)			—				—				42				42
Available-for-sale securities			123				—				—				123
Held-to-maturity bonds			518				—				—				518
Put option related to ARS			—				—				7				7
Aircraft fuel derivatives			—				3				—				3
		$	1,158			$	3			$	49			$	1,210
Liabilities
Aircraft fuel derivatives		$	—			$	3			$	—			$	3
Interest rate swap			—				—				22				22
		$	—			$	3			$	22			$	25

     Refer to Note 3 for fair value information related to our outstanding debt obligations as of June 30, 2010. The following tables reflect the activity for the major classes of our assets and liabilities measured at fair value using level 3 inputs (in millions) for the three and six months ended June 30, 2010:

		Auction Rate				Put Option				Interest Rate
		Securities				related to ARS				Swaps				Total
Balance as of March 31, 2010		$	63			$	9			$	(15	)		$	57
Total gains or (losses), realized or unrealized
Included in earnings			3				(3	)			(2	)			(2	)
Included in comprehensive income			—				—				(5	)			(5	)
Purchases, sales, issuances and settlements, net			(24	)			1				—				(23	)
Balance as of June 30, 2010		$	42			$	7			$	(22	)		$	27
Balance as of December 31, 2009		$	74			$	11			$	(10	)		$	75
Total gains or (losses), realized or unrealized
Included in earnings			4				(4	)			(4	)			(4	)
Included in comprehensive income			—				—				(8	)			(8	)
Purchases, sales, issuances and settlements, net			(36	)			—				—				(36	)
Balance as of June 30, 2010		$	42			$	7			$	(22	)		$	27

     Cash and cash equivalents: Our cash and cash equivalents include money market securities and trade deposits and commercial paper which are readily convertible into cash with maturities of three months or less when purchased. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as level 1 within our fair value hierarchy.

     Investment securities: We held various investment securities at June 30, 2010 and December 31, 2009. When sold, we use a specific identification method to determine the cost of the securities. The carrying value of these investments was as follows (in millions):

		June 30,				December 31,
		2010				2009
Available-for-sale securities
Asset-back securities with maturities within one year		$	—			$	109
Time deposits with maturities within one year			33				36
Commercial paper with maturities within one year			90				5
			123				150
Held-to-maturity securities
Corporate bonds with maturities within one year			297				22
Corporate bonds with maturities between one and five years			45				—
Government bonds with maturities within one year			35				—
Government bonds with maturities between one and five years			124				—
Municipal bonds with maturities within one year			16				—
			517				22
Trading securities
Student loan bonds			42				74
Total		$	682			$	246

     Available-for-sale investment securities: Included in our available-for-sale investment securities are certificate of deposits placed through an account registry service, or CDARS, and commercial paper with original maturities greater than 90 days but less than one year. At December 31, 2009, we also held asset backed securities, which are considered variable rate demand notes with contractual maturities generally greater than ten years with interest reset dates often every 30 days or less. The fair values of these investments are based on observable market data. We did not record any significant gains or losses on these securities during the six months ended June 30, 2010.

     Held-to-maturity investment securities: During 2009 and the six months ended June 30, 2010, we purchased various corporate bonds. Those with original maturities less than twelve months are included in short-term investments on our condensed consolidated balance sheets, and those with original maturities in excess of twelve months are included in long-term investments on our condensed consolidated balance sheets. The fair value of these investments is based on observable market data. We did not record any significant gains or losses on these securities during the six months ended June 30, 2010

     Auction rate securities: At June 30, 2010, the fair values of our ARS all of which are collateralized by student loan portfolios (substantially all of which are guaranteed by the United States Government), were estimated through discounted cash flow models. Since these inputs were not observable, they are classified as level 3 inputs. For the three months ended June 30, 2009, we recorded an unrealized holding gain on our ARS of $8 million, based on the then current fair value. We classify our ARS as trading securities and therefore measure at each reporting period with the resulting gain (loss) recognized in other income (expense). Our discounted cash flow analysis considered, among other things, the quality of the underlying collateral, the credit rating of the issuers, an estimate of when these securities are either expected to have a successful auction or otherwise return to par value, expected interest income to be received over this period, and the estimated required rate of return for investors. Because of the inherent subjectivity in valuing these securities, we also considered independent valuations obtained for each of our ARS as of June 30, 2009 in estimating their fair values.

     In July 2010, the remaining $49 million par value of ARS were repurchased at par by UBS in accordance with the settlement agreement with them as described more fully in Note 14 of our 2009 Form 10-K. The proceeds were used to terminate the outstanding balance on the line of credit with UBS.

     Put option related to ARS: We have elected to apply the fair value option under the Financial Instruments topic of the Codification, to UBS’s agreement to repurchase, at par, ARS brokered by them. We have done so in order to closely conform to our treatment of the underlying ARS. As of June 30, 2010, the $7 million fair value of this put option is included in other current assets in our condensed consolidated balance sheets. Any gain (loss) resulting from an adjustment of the fair value is included in other income (expense). The change in fair value was insignificant during the six months ended June 30, 2010 and 2009, respectively. The fair value of the put option is based on unobservable inputs and is therefore classified as level 3 in the hierarchy.

     Interest Rate Swaps: The fair values of our interest rate swaps are initially based on inputs received from the counterparty. These values were corroborated by adjusting the active swap indications in quoted markets for similar terms (6 – 8 years) for the specific terms within our swap agreements. Since some of these inputs were not observable, they are classified as level 3 inputs in the hierarchy.

     Aircraft fuel derivatives: Our heating oil and jet fuel swaps, heating oil collars, and crude oil caps are not traded on public exchanges. Their fair values are determined using a market approach based on inputs that are readily available from public markets for commodities and energy trading activities; therefore, they are classified as level 2 inputs. The data inputs are combined into quantitative models and processes to generate forward curves and volatilities related to the specific terms of the underlying hedge contracts.

Note 10 — Stockholders’ Equity

     In May 2010, at our annual meeting of stockholders, shareholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the Company’s authorized capital from 500 million common shares to 900 million common shares.

Note 11 — Restatement

Correction of error

In connection with our fourth quarter of 2010 analysis of the winding down of the liability for TrueBlue points and awards outstanding when our original TrueBlue program was replaced by an enhanced customer loyalty program described in Note 1 to our 2009 Annual Report on Form 10-K/A, we determined that as of June 30, 2010, there was an error in our prior accounting for approximately $13 million of points and awards that had previously expired. As a result of this accounting error, revenue, net income, earnings per share and retained earnings were all understated in previously reported consolidated financial statements for the years ended 2007, 2008 and 2009 as well as for the quarterly periods reported for 2010. Management determined that our previously issued consolidated financial statements should be restated to properly reflect the non-cash revenue for expired TrueBlue points and awards in the periods in which expiration occurred. We also corrected smaller errors related to our calculation of interest expense.

The effects of these changes on our consolidated statements of operations are summarized as follows (amounts in millions, except per share amounts):

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Passenger Revenue
As reported		$	850			$	721			$	1,635			$	1,427
Correction of True Blue points and awards			1				1				2				3
Restated		$	851			$	722			$	1,637			$	1,430
Operating Income
As reported		$	94			$	76			$	136			$	149
Correction of True Blue points and awards			1				1				2				3
Restated		$	95			$	77			$	138			$	152
Interest Expense
As reported		$	(43	)		$	(49	)		$	(90	)		$	(98	)
Correction of interest expence			—				—				—				—
Restated		$	(43	)		$	(49	)		$	(90	)		$	(98	)
Income Tax Expense (Benefit)
As reported		$	21			$	16			$	20			$	24
Correction of misstatement			—				—				1				1
Restated		$	21			$	16			$	21			$	25
Net Income
As reported		$	30			$	20			$	29			$	32
Correction of misstatement			1				1				1				2
Restated		$	31			$	21			$	30			$	34
Basic earnings per share
As reported		$	0.11			$	0.08			$	0.11			$	0.13
Correction of misstatement			—				—				—				0.01
Restated		$	0.11			$	0.08			$	0.11			$	0.14
Diluted earnings per share
As reported		$	0.10			$	0.07			$	0.10			$	0.11
Correction of misstatement			—				—				0.01				—
Restated		$	0.10			$	0.07			$	0.11			$	0.11

     The impact of these changes on our consolidated balance sheets are summarized as follows (amounts in millions):

		As of
		June 30, 2010				December 31, 2009
Prepaid expenses and other
As reported		$	265			$	308
Correction of misstatement			(5	)			(4	)
Restated		$	260			$	304
Long term Other Assets
As reported		$	358			$	311
Correction of deferred interest			(4	)			(4	)
Restated		$	354			$	307
Total Other Assets
As reported		$	588			$	381
Correction of deferred interest			(4	)			(4	)
Restated		$	584			$	377
Total Assets
As reported		$	6,590			$	6,557
Correction of misstatement			(9	)			(8	)
Restated		$	6,581			$	6,549
Air traffic liability
As reported		$	593			$	455
Correction of True Blue points and awards			(14	)			(12	)
Restated		$	579			$	443
Deferred income taxes
As reported		$	280			$	260
Correction of misstatement			(1	)			(1	)
Restated		$	279			$	259
Retained Earnings
As reported		$	146			$	117
Correction of misstatement			6				5
Restated		$	152			$	122
Total stockholders’ equity
As reported		$	1,556			$	1,541
Correction of misstatement			6				5
Restated		$	1,562			$	1,546

     There was no impact to previously reported total cash flows from operations, investing or financing activities resulting from the error correction. In addition, the restatement also resulted in changes to Notes 4 and 5 to our consolidated financial statements.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations. (RESTATED)

Outlook

     Overall economic conditions continued to show signs of improvement during the second quarter with airlines benefiting from the global economic recovery in the form of increased demand and improved yield. Our average fare for the second quarter increased 10% to $139.20 over the same period in 2009. The stronger fare environment and our ability to attract and retain higher yielding customers have contributed to better than expected revenue gains. While we remain optimistic the revenue environment will continue to improve throughout 2010, a competitive industry landscape is ever present, and as such we will continue to focus on striving to achieve our long-term sustainable growth goals. For us to achieve these goals, we plan to continue to maximize network profitability, build and maintain our financial strength, control costs and enhance our unique culture.

     We continue our focus on key growth regions, including Boston, New York, and the Caribbean and Latin America by building upon our leisure markets and strong visiting friends and relatives travel while leveraging our presence as the largest domestic carrier at both John F. Kennedy Airport, or JFK, and Boston’s Logan International Airport, or Boston. In doing so, we continue to expand our portfolio of strategic commercial partnerships. In May 2010, we announced an interline agreement with South African Airways allowing customers to connect between all of our current destinations and 40 cities in the South African Airways network via JFK. We also continue to expand in Boston with new destinations and increased frequencies to existing markets, and as a result we are now the largest carrier serving Boston. We believe that optimizing our schedule across our network and building upon the success of our revamped loyalty program, TrueBlue, has increased our relevance to the business traveler and allows us to further grow and strengthen our network.

     We commenced service to Punta Cana, Dominican Republic in May 2010, and have announced plans to begin service to Ronald Reagan National Airport in Washington, DC and Hartford, CT in November 2010. Our disciplined overall growth includes managing the growth, size, age, and type of aircraft in our fleet. With new opportunities, including slots at Washington National and commercial partnerships, we have agreed to take delivery of six used Airbus A320 aircraft from a third party later this year, which are in addition to our purchase commitments with Airbus. We expect to execute operating leases for these six aircraft, the terms of which are still being negotiated. Including these six used aircraft, we expect our operating aircraft to consist of 116 Airbus A320 aircraft and 45 EMBRAER 190 aircraft at the end of 2010. We have one of the youngest and most fuel efficient fleets in the industry, with an average age of 4.8 years, which we believe gives us a competitive advantage.

     We continue to reap the benefits of our recent investment in a new integrated customer service system, which we implemented in the first quarter of 2010 and which we believe better positions us for our long-term growth. These benefits include several near-term opportunities such as improved pricing and revenue management capabilities, higher yielding traffic from increased participation in global distribution systems, additional ancillary revenue opportunities, and facilitating future commercial partnerships.

     We also remain committed to our financial goals, including a commitment to generating positive free cash flow, maintaining an adequate liquidity position, and rigorously focusing on cost control. However, costs presented a challenge in the first half of 2010. As expected, we incurred one time implementation costs associated with our new integrated customer service system, as well as overall higher technology infrastructure costs. Additionally, the winter storm season was more severe than recent years. All of these factors pressured our costs per available seat mile, or CASM, excluding fuel. Unlike most airlines, we have a policy of not furloughing crewmembers during economic downturns and a non-union workforce, which we believe provides us with more flexibility and allows us to be more productive. Historically, our distribution costs tend to be lower than those of most other airlines on a per unit basis because the majority of our customers book directly through our website or our agents; however, with our new customer service system, real time global distribution system, or GDS, connectivity has increased the number of bookings through these more expensive channels, which has increased our distribution costs.

     The price and availability of aircraft fuel, which is our single largest operating expense, are extremely volatile due to global economic and geopolitical factors that we can neither control nor accurately predict. Fuel prices have been on the rise in 2010, climbing to levels not seen since the end of 2008. In response, we continue to actively build our portfolio of fuel hedges. We effectively hedged 55% of our total first half of 2010 fuel consumption. As of June 30, 2010, we had outstanding fuel hedge contracts covering approximately 47% of our forecasted consumption for the third quarter of 2010, 50% for the full year 2010, and 14% for the full year 2011. We will continue to monitor fuel prices closely and take advantage of fuel hedging opportunities in order to mitigate our liquidity exposure and provide some level of protection against significant volatility and further increases in fuel prices.

     We expect our full-year operating capacity to increase approximately 6% to 8% over 2009 primarily as a result of the maturation of cities added over the past year, as well as the addition of four EMBRAER 190 and six Airbus A320 aircraft to our operating fleet. Revenue per available seat mile, or RASM, is expected to improve between 8% and 11% over 2009, which reflects the improving demand and pricing environments, maturation of markets we previously opened, and some improved capabilities in the later part of the year associated with our new customer service system. Assuming fuel prices of $2.28 per gallon, including fuel taxes and net of effective hedges, our cost per available seat mile for 2010 is expected to increase by 6% to 8% over 2009. This expected increase is a result of higher fuel prices, higher overall technology infrastructure costs, higher salaries and wages due to the pilot wage increases implemented in June of 2009, higher maintenance costs and the one-time costs associated with transitioning to our new customer service system.

Results of Operations

     Our operating revenue per available seat mile for the quarter increased 10% over the same period in 2009. Our average fares for the quarter increased 10% over 2009 to $139.20, while our load factor increased 2.5 points to 82.0% from a year ago. Our on-time performance, defined by the Department of Transportation, or DOT, as arrival within 14 minutes of schedule, was 83.2% in the second quarter of 2010 compared to 75.1% for the same period in 2009, while our completion factor was 99.2% and 98.6% in 2010 and 2009, respectively.

Three Months Ended June 30, 2010 and 2009

     We reported net income of $31 million for the three months ended June 30, 2010, compared to $21 million for the three months ended June 30, 2009. Diluted earnings per share were $0.10 for the second quarter of 2010 compared to $0.07 for 2009. Our operating income for the three months ended June 30, 2010 was $95 million compared to $77 million for the same period last year, and our pre-tax margin increased 0.9 points from 2009 to 5.6%.

     Operating Revenues. Operating revenues increased 16%, or $132 million, over the same period in 2009, primarily due to an 18%, or $129 million, increase in passenger revenues. The increase in passenger revenues was largely attributable to a 5% increase in capacity along with an 8% increase in yield over the second quarter of 2009. This includes the positive impact of improved pricing capabilities and increased participation in GDSs as a result of our new customer service system. Additionally, our Even More Legroom fees increased approximately $4 million.

     Other revenue increased 5%, or $3 million, primarily due to a $4 million increase in marketing related revenues and a $2 million increase in baggage fees offset by a reduction in rental income and lower LiveTV third party revenues.

     Operating Expenses. Operating expenses increased 16%, or $114 million, over the same period in 2009, primarily due to higher fuel prices, increased salaries, wages, and benefits related to pilot pay increases implemented in mid 2009, higher technology related operating expenses, and increased

maintenance costs. Operating capacity increased 5% to 8.69 billion available seat miles. Operating expenses per available seat mile increased 10% to 9.72 cents for the three months ended June 30, 2010. Excluding fuel, our cost per available seat mile for the three months ended June 30, 2010 was 8% higher compared to the same period in 2009. In detail, operating costs per available seat mile were as follows (percent changes are based on unrounded numbers):

		Three Months Ended
		June 30,								Percent
		2010				2009				Change
		(in cents)
Operating expenses:
Aircraft fuel			3.21				2.86				12.2	%
Salaries, wages and benefits			2.51				2.33				7.5	%
Landing fees and other rents			.66				.65				1.5	%
Depreciation and amortization			.62				.69				(9.7	)%
Aircraft rent			.35				.39				(8.2	)%
Sales and marketing			.50				.47				6.9	%
Maintenance materials and repairs			.48				.41				16.7	%
Other operating expenses			1.39				1.08				28.6	%
Total operating expenses			9.72				8.88				9.5	%

     Aircraft fuel expense increased 18%, or $43 million, due to a 12% increase in average fuel cost per gallon, or $30 million after the impact of fuel hedging, and an increase of six million gallons of aircraft fuel consumed, resulting in $13 million in additional fuel expense. We recorded $2 million in effective fuel hedge losses during the second quarter of 2010 versus $42 million in effective fuel hedge losses during the same period in 2009. Our average fuel cost per gallon was $2.30 for the second quarter of 2010 compared to $2.05 for the second quarter of 2009. Cost per available seat mile increased 12% primarily due to the increase in fuel price.

     Salaries, wages and benefits increased 13%, or $26 million, primarily due to an increase in full-time equivalent employees and increases in wages and related benefits under our pilot employment agreements implemented in June 2009. Cost per available seat mile increased 8% primarily due to an increase in full-time equivalent employees.

     Landing fees and other rents increased 7%, or $4 million, due to a 2% increase in departures over 2009 and an increase in landing fee and airport rental rates.

     Depreciation and amortization decreased 5%, or $2 million, primarily due to our purchased technology becoming fully amortized in late 2009. This decrease was offset by having an average of 96 owned and capital leased aircraft in 2010 compared to 93 in 2009 and increased software amortization related to our new customer service system.

     Sales and marketing expense increased 13%, or $5 million, due to $4 million in higher commissions in 2010 related to our increased participation in GDSs and online travel agencies and $4 million in higher credit card fees resulting from the increased average fares, offset by $3 million in lower advertising costs. On a cost per available seat mile basis, sales and marketing expense increased 7% primarily due to increased fares and distribution costs resulting from the enhanced capabilities of our new customer service system.

     Maintenance, materials, and repairs increased 23%, or $7 million, due to three additional average operating aircraft in 2010, compared to the same period in 2009 and the gradual aging of our fleet. The

average age of our fleet increased to 4.8 years as of June 30, 2010 compared to 3.8 years as of June 30, 2009. Maintenance expense is expected to increase significantly as our fleet ages, resulting in the need for additional repairs over time. Cost per available seat mile increased 17% primarily due to the gradual aging of our fleet.

     Other operating expenses increased 36%, or $32 million, primarily due to technology infrastructure related costs. Variable costs increased as a result of 2% more departures versus 2009, and operating out of eight additional cities opened throughout 2009. Other operating expenses were offset in 2009 by $11 million for certain tax incentives. Cost per available seat mile increased 29% primarily due to technology infrastructure related costs.

     Other Income (Expense). Interest expense decreased 12%, or $6 million, primarily due to lower interest rates.

     Interest income and other decreased $8 million, primarily due to a $6 million gain recorded in 2009 related to the valuation of our auction rate securities, or ARS, and related put option. Accounting ineffectiveness on our crude and heating oil derivative instruments classified as cash flow hedges resulted in a $2 million loss in 2010, compared to an immaterial amount in 2009. We are unable to predict what the amount of ineffectiveness will be related to these instruments, or the potential loss of hedge accounting, which is determined on a derivative-by-derivative basis, due to the volatility in the forward markets for these commodities.

Six Months Ended June 30, 2010 and 2009

     We reported net income of $30 million for the six months ended June 30, 2010, compared to $34 million for the six months ended June 30, 2009. Diluted earnings per share were $0.11 for the six months ended June 30, 2010 compared to $0.11 for the same period in 2009. Our operating income for the six months ended June 30, 2010 was $138 million compared to $152 million for the same period last year, and our pre-tax margin decreased 0.9 points from 2009.

     Operating Revenues. Operating revenues increased 13%, or $208 million, over the same period in 2009, primarily due to a 14%, or $207 million, increase in passenger revenues. The increase in passenger revenues was largely attributable to a 6% increase in capacity along with a 6% increase in yield over the first half of 2009, amounts which include capacity reductions during the initial cutover period to our new customer service system in the first quarter. Additionally, we had an $8 million increase in Even More Legroom fees as a result of increased capacity and revised pricing.

     Other revenue remained relatively flat, increasing 1%, or $1 million, primarily due to an $8 million increase in marketing related revenues offset by a $6 million reduction in change fees as a result of several change fee waivers during the first half of 2010 in conjunction with our new system migration.

     Operating Expenses. Operating expenses increased 15%, or $222 million, over the same period in 2009, primarily due to higher fuel prices and an increase in other operating expenses including the one time implementation related expenses related to our new customer service system and overall higher technology infrastructure costs. Additionally, operating expenses increased due to higher salaries, wages, and benefits related to pilot pay increases implemented in mid 2009 and increased maintenance costs. Operating capacity increased 6% to 17.11 billion available seat miles, despite capacity reductions during our initial cutover period to our new customer service system. Operating expenses per available seat mile increased 9% to 9.77 cents for the six months ended June 30, 2010. Excluding fuel, our cost per available seat mile for the six months ended June 30, 2010 was 9% higher compared to the same period in 2009. In detail, operating costs per available seat mile were as follows (percent changes are based on unrounded numbers):

		Six Months Ended
		June 30,								Percent
		2010				2009				Change
		(in cents)
Operating expenses:
Aircraft fuel			3.11				2.83				10.1	%
Salaries, wages and benefits			2.55				2.33				9.4	%
Landing fees and other rents			.65				.64				2.0	%
Depreciation and amortization			.65				.69				(5.8	)%
Aircraft rent			.36				.39				(8.7	)%
Sales and marketing			.49				.47				4.9	%
Maintenance materials and repairs			.47				.44				7.2	%
Other operating expenses			1.49				1.18				26.5	%
Total operating expenses			9.77				8.97				9.0	%

     Aircraft fuel expense increased 16%, or $75 million, due to a 10% increase in average fuel cost per gallon, or $48 million after the impact of fuel hedging, and an increase of 13 million gallons of aircraft fuel consumed, resulting in $27 million in additional fuel expense. We recorded an immaterial amount in effective fuel hedge losses during 2010 versus $98 million in effective fuel hedge losses during 2009. Our average fuel cost per gallon was $2.25 for the six months ended June 30, 2010 compared to $2.04 for the same period in 2009. Cost per available seat mile increased 10% primarily due to the increase in fuel price.

     Salaries, wages and benefits increased 16%, or $60 million, primarily due to increases in wages and related benefits under our pilot employment agreements implemented in June 2009. We also incurred an additional $6 million associated with higher staffing levels in the first quarter related to the implementation of our new customer service system. Cost per available seat mile increased 9% primarily due to an increase in full-time equivalent employees.

     Landing fees and other rents increased 8%, or $8 million, due to a 2% increase in departures over 2009 and an increase in landing fee and airport rental rates associated with expanded operations in certain markets. Cost per available seat mile increased 2% due to increased rates.

     Depreciation and amortization remained flat. We had an average of 96 owned and capital leased aircraft in 2010 compared to 91 in 2009 and increased software amortization related to our new customer service system. This increase in depreciation was offset by our purchased technology becoming fully amortized in late 2009. Cost per available seat mile decreased 6% due to increased capacity.

     Sales and marketing expense increased 11%, or $8 million, due to $7 million in higher commissions in 2010 related to our increased participation in GDSs and OTAs and $6 million in higher credit card fees resulting from the increased average fares, offset by $5 million in lower advertising costs. On a cost per available seat mile basis, sales and marketing expense increased 5% primarily due to increased distribution costs resulting from the enhanced capabilities of our new customer service system.

     Maintenance, materials, and repairs increased 13%, or $9 million, due to five additional average operating aircraft in 2010, compared to the same period in 2009 and the gradual aging of our fleet. The average age of our fleet increased to 4.8 years as of June 30, 2010 compared to 3.8 years as of June 30, 2009. Maintenance expense is expected to increase significantly as our fleet ages, resulting in the need for additional repairs over time. Cost per available seat mile increased 7% primarily due to the gradual aging of our fleet.

     Other operating expenses increased 34%, or $64 million, primarily due to increased costs related to the implementation of our new customer service system. We incurred approximately $13 million in one time, non-recurring implementation of our new customer service system related expenses as well as higher other technology infrastructure related costs. Additionally, variable costs increased as a result of 2% more departures versus 2009, a severe winter storm season, and operating out of eight additional cities opened throughout 2009. Other operating expenses were offset in 2009 by $11 million for certain tax incentives. Cost per available seat mile increased 27% primarily due to the implementation costs associated with our new customer service system.

     Other Income (Expense). Interest expense decreased 9%, or $8 million, primarily due to lower interest rates and a lower principal balance of debt outstanding.

     Interest income and other decreased 35% primarily due to a $2 million loss recorded in 2009 related to the valuation of our ARS and related put option. This was slightly offset by lower interest rates earned on investments. Accounting ineffectiveness on our crude and heating oil derivative instruments classified as cash flow hedges was a loss of $2 million in 2010, compared to an immaterial amount in 2009. We are unable to predict what the amount of ineffectiveness will be related to these instruments, or the potential loss of hedge accounting, which is determined on a derivative-by-derivative basis, due to the volatility in the forward markets for these commodities.

     The following table sets forth our operating statistics for the three months ended June 30, 2010 and 2009:

		Three Months Ended												Six Months Ended
		June 30,								Percent				June 30,								Percent
		2010				2009				Change				2010				2009				Change
Operating Statistics:
Revenue passengers (thousands)			6,114				5,691				7.4				11,642				10,982				6.0
Revenue passenger miles (millions)			7,126				6,545				8.9				13,596				12,585				8.0
Available seat miles (ASMs) (millions)			8,688				8,237				5.5				17,112				16,179				5.8
Load factor			82.0	%			79.5	%			2.5	pts.			79.5	%			77.8	%			1.7	pts.
Aircraft utilization (hours per day)			11.8				11.9				(0.3	)			11.8				11.9				(1.0	)
Average fare		$	139.20			$	127.04				9.6			$	140.60			$	130.26				7.9
Yield per passenger mile (cents)			11.94				11.04				8.1				12.04				11.37				5.9
Passenger revenue per ASM (cents)			9.79				8.78				11.6				9.57				8.84				8.2
Operating revenue per ASM (cents)			10.83				9.82				10.3				10.58				9.91				6.8
Operating expense per ASM (cents)			9.72				8.88				9.5				9.77				8.97				9.0
Operating expense per ASM, excluding fuel (cents)			6.51				6.02				8.2				6.66				6.13				8.6
Airline operating expense per ASM (cents) (1)			9.55				8.66				10.3				9.58				8.74				9.6
Departures			56,202				54,885				2.4				110,569				107,899				2.5
Average stage length (miles)			1,102				1,067				3.3				1,102				1,066				3.4
Average number of operating aircraft during period			151.0				147.4				2.5				151.0				144.9				4.2
Average fuel cost per gallon		$	2.30			$	2.05				12.3			$	2.25			$	2.04				10.0
Fuel gallons consumed (millions)			121				115				5.4				237				224				5.8
Full-time equivalent employees at period end (1)															10,906				10,235				6.6