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EX-32.1 - EX-32.1 - US AIRWAYS GROUP INCp16852exv32w1.htm
EX-31.3 - EX-31.3 - US AIRWAYS GROUP INCp16852exv31w3.htm
EX-31.1 - EX-31.1 - US AIRWAYS GROUP INCp16852exv31w1.htm
EX-31.2 - EX-31.2 - US AIRWAYS GROUP INCp16852exv31w2.htm
EX-21.1 - EX-21.1 - US AIRWAYS GROUP INCp16852exv21w1.htm
EX-31.4 - EX-31.4 - US AIRWAYS GROUP INCp16852exv31w4.htm
EX-32.2 - EX-32.2 - US AIRWAYS GROUP INCp16852exv32w2.htm
EX-23.1 - EX-23.1 - US AIRWAYS GROUP INCp16852exv23w1.htm
EX-10.97 - EX-10.97 - US AIRWAYS GROUP INCp16852exv10w97.htm
EX-10.95 - EX-10.95 - US AIRWAYS GROUP INCp16852exv10w95.htm
EX-10.94 - EX-10.94 - US AIRWAYS GROUP INCp16852exv10w94.htm
EX-10.81 - EX-10.81 - US AIRWAYS GROUP INCp16852exv10w81.htm
EX-10.93 - EX-10.93 - US AIRWAYS GROUP INCp16852exv10w93.htm
EX-10.96 - EX-10.96 - US AIRWAYS GROUP INCp16852exv10w96.htm
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
US Airways Group, Inc.
(Exact name of registrant as specified in its charter)
(Commission File No. 1-8444)
 
     
Delaware
  54-1194634
(State or other Jurisdiction of
Incorporation or Organization)
  (IRS Employer
Identification No.)
 
111 West Rio Salado Parkway, Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
 
(480) 693-0800
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
  New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
US Airways, Inc.
(Exact name of registrant as specified in its charter)
(Commission File No. 1-8442)
 
     
Delaware
  53-0218143
(State or other Jurisdiction of
Incorporation or Organization)
  (IRS Employer
Identification No.)
111 West Rio Salado Parkway, Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
 
(480) 693-0800
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
 
         
US Airways Group, Inc. 
  Yes þ   No o
US Airways, Inc. 
  Yes o   No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
         
US Airways Group, Inc. 
  Yes o   No þ
US Airways, Inc. 
  Yes o   No þ
 
Indicate by check mark whether each 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 þ     No o
 
Indicate by check mark whether each registrant has submitted electronically and posted on its corporate website, 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).  Yes o     No o
 
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.  o
 
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):
 
                 
US Airways Group, Inc. 
  Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
                   (Do not check if a smaller reporting company)
US Airways, Inc. 
  Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   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).
 
         
US Airways Group, Inc. 
  Yes o   No þ
US Airways, Inc. 
  Yes o   No þ
 
The aggregate market value of common stock held by non-affiliates of US Airways Group, Inc. as of June 30, 2009 was approximately $319 million.
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
         
US Airways Group, Inc. 
  Yes þ   No o
US Airways, Inc. 
  Yes þ   No o
 
As of February 12, 2010, there were 161,118,427 shares of US Airways Group, Inc. common stock outstanding.
 
As of February 12, 2010, US Airways, Inc. had 1,000 shares of common stock outstanding, all of which were held by US Airways Group, Inc.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the proxy statement related to US Airways Group, Inc.’s 2010 Annual Meeting of Stockholders, which proxy statement will be filed under the Securities Exchange Act of 1934 within 120 days of the end of US Airways Group, Inc.’s fiscal year ended December 31, 2009, are incorporated by reference into Part III of this Annual Report on Form 10-K.
 


 

 
US Airways Group, Inc.
US Airways, Inc.
Form 10-K
Year Ended December 31, 2009
Table of Contents
 
             
        Page
 
  Business     5  
  Risk Factors     16  
  Unresolved Staff Comments     26  
  Properties     27  
  Legal Proceedings     28  
  Submission of Matters to a Vote of Security Holders     28  
PART II
  Market for US Airways Group’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     29  
  Selected Financial Data     31  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     35  
  Quantitative and Qualitative Disclosures About Market Risk     70  
  Consolidated Financial Statements and Supplementary Data of US Airways Group, Inc.      72  
  Consolidated Financial Statements and Supplementary Data of US Airways, Inc.      112  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     147  
  Controls and Procedures     147  
  Other Information     152  
PART III
  Directors, Executive Officers and Corporate Governance     153  
  Executive Compensation     153  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     153  
  Certain Relationships and Related Transactions, and Director Independence     153  
  Principal Accountant Fees and Services     153  
PART IV
  Exhibits and Financial Statement Schedules     154  
SIGNATURES     163  
 EX-10.81
 EX-10.93
 EX-10.94
 EX-10.95
 EX-10.96
 EX-10.97
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-31.3
 EX-31.4
 EX-32.1
 EX-32.2


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This combined Annual Report on Form 10-K is filed by US Airways Group, Inc. (“US Airways Group”) and its wholly owned subsidiary US Airways, Inc. (“US Airways”). References in this Annual Report on Form 10-K to “we,” “us,” “our” and the “Company” refer to US Airways Group and its consolidated subsidiaries.
 
Note Concerning Forward-Looking Statements
 
Certain of the statements contained in this report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” and “continue” and similar terms used in connection with statements regarding, among others, our outlook, expected fuel costs, the revenue environment, and our expected financial performance. These statements include, but are not limited to, statements about future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts. These statements are based upon the current beliefs and expectations of management and are subject to significant risks and uncertainties that could cause our actual results and financial position to differ materially from these statements. These risks and uncertainties include, but are not limited to, those described below under Part I, Item 1A, “Risk Factors” and the following:
 
  •   the impact of significant operating losses in the future;
 
  •   downturns in economic conditions and their impact on passenger demand and related revenues;
 
  •   increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates;
 
  •   our high level of fixed obligations and our ability to fund general corporate requirements, obtain additional financing and respond to competitive developments;
 
  •   any failure to comply with the liquidity covenants contained in our financing arrangements;
 
  •   the impact of the price and availability of fuel and significant disruptions in the supply of aircraft fuel;
 
  •   provisions in our credit card processing and other commercial agreements that may affect our liquidity;
 
  •   the impact of union disputes, employee strikes and other labor-related disruptions;
 
  •   our inability to maintain labor costs at competitive levels;
 
  •   our reliance on third-party regional operators or third-party service providers;
 
  •   our reliance on automated systems and the impact of any failure or disruption of these systems;
 
  •   the impact of changes to our business model;
 
  •   competitive practices in the industry, including the impact of industry consolidation;
 
  •   the loss of key personnel or our ability to attract and retain qualified personnel;
 
  •   the impact of conflicts overseas or terrorist attacks, and the impact of ongoing security concerns;
 
  •   changes in government legislation and regulation;
 
  •   our ability to operate and grow our route network;
 
  •   the impact of environmental laws and regulations;
 
  •   costs of ongoing data security compliance requirements and the impact of any data security breach;
 
  •   interruptions or disruptions in service at one or more of our hub airports;
 
  •   the impact of any accident involving our aircraft or the aircraft of our regional operators;
 
  •   delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity;
 
  •   the impact of weather conditions and seasonality of airline travel;


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  •   the cyclical nature of the airline industry;
 
  •   the impact of possible future increases in insurance costs and disruptions to insurance markets;
 
  •   the impact of global events that affect travel behavior, such as an outbreak of a contagious disease;
 
  •   the impact of foreign currency exchange rate fluctuations;
 
  •   our ability to use NOLs and certain other tax attributes; and
 
  •   other risks and uncertainties listed from time to time in our reports to and filings with the Securities and Exchange Commission.
 
All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. There may be other factors of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update or supplement any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these estimates other than as required by law. Any forward-looking statements speak only as of the date of this Annual Report on Form 10-K or as of the dates indicated in the statements.


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PART I
 
Item 1.  Business
 
Overview
 
US Airways Group, a Delaware corporation, is a holding company whose primary business activity is the operation of a major network air carrier through its wholly owned subsidiaries US Airways, Piedmont Airlines, Inc. (“Piedmont”), PSA Airlines, Inc. (“PSA”), Material Services Company, Inc. (“MSC”) and Airways Assurance Limited (“AAL”). MSC and AAL operate in support of our airline subsidiaries in areas such as the procurement of aviation fuel and insurance. US Airways Group was formed in 1982, and its origins trace back to the formation of All American Aviation in 1939. US Airways, a Delaware corporation, was formed in 1982. Effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005, US Airways Group merged with America West Holdings Corporation (“America West Holdings”), with US Airways Group as the surviving corporation.
 
Our principal executive offices are located at 111 West Rio Salado Parkway, Tempe, Arizona 85281. Our telephone number is (480) 693-0800, and our internet address is www.usairways.com. Information contained on our website is not and should not be deemed a part of this report or any other report or filing filed with or furnished to the Securities and Exchange Commission (“SEC”).
 
Available Information
 
You may read and copy any materials US Airways Group or US Airways files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. A copy of this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge at www.usairways.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
 
The U.S. Airline Industry
 
The airline industry in the United States was severely impacted in 2009 by the global economic recession. Passenger demand, as reported by the Air Transport Association (“ATA”), declined severely in 2009 as compared to 2008. Despite capacity cuts put in place to help offset the decline in demand for air travel, industry revenues were adversely affected by severe fare discounting by carriers to stimulate demand. Business bookings, which typically drive stronger yields, declined sharply in 2009 as companies cut costs by reducing their travel budgets in response to the economic recession. ATA reported yields for U.S. airlines declined by 13% in 2009 as compared to 2008 while U.S. airline passenger revenues were down 18% for fiscal year 2009, which represented the largest decline on record, exceeding the 14% decline observed from 2000 to 2001.
 
International markets were more severely impacted by the economic slowdown than domestic markets. This was a result of international traffic’s greater reliance on business travel, particularly premium business and first class seating, to drive profitability. Additionally, there was capacity expansion overseas during the past several years, which the U.S. industry reduced by only 6% in 2009 as compared to domestic capacity reductions of 7%. The contraction of business spending also significantly impacted cargo demand.
 
During times of weak travel demand, falling fuel prices have historically served as a natural hedge. Although the price of crude oil was down substantially in 2009 from its record high of $147 per barrel in July 2008, it remained volatile and did not fully offset the negative economic impact to passenger demand. During 2009, the price of crude oil on a per barrel basis ranged from a high of $81.03 to a low of $34.03, and closed at $79.39 on December 31, 2009. The volatility in oil prices made the use of hedging positions by airlines to contain fuel costs either expensive (call options) or risky due to counterparty cash collateral requirements (collars and swaps).
 
Accordingly, in 2009 the industry focused on conserving and building cash and matching capacity to demand. In the latter part of 2009, credit and equity markets were increasingly open to airlines and several U.S. airlines raised


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cash to enhance liquidity through a number of initiatives such as traditional public stock and debt issuances, asset sales, asset sale-leasebacks and transactions with co-branded credit card issuers.
 
Airline Operations
 
We operate the fifth largest airline in the United States as measured by domestic revenue passenger miles (“RPMs”) and available seat miles (“ASMs”). We have hubs in Charlotte, Philadelphia and Phoenix and a focus city at Ronald Reagan Washington National Airport. We offer scheduled passenger service on more than 3,000 flights daily to more than 190 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service, with a substantial presence at Washington National Airport. We had approximately 51 million passengers boarding our mainline flights in 2009. During 2009, our mainline operation provided regularly scheduled service or seasonal service at 138 airports while the US Airways Express network served 152 airports in the United States, Canada and Mexico, including 75 airports also served by our mainline operation. US Airways Express air carriers had approximately 27 million passengers boarding their planes in 2009. As of December 31, 2009, we operated 349 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express either under capacity purchase or prorate agreements, which operated approximately 236 regional jets and 60 turboprops.
 
For information regarding US Airways Group’s and US Airways’ operating segments and operating revenue in principal geographic areas, see Notes 13 and 12, respectively, to their respective financial statements included in Items 8A and 8B of this Annual Report on Form 10-K.
 
In October 2009, we announced the realignment of our operations to focus on our core network strengths, which include our hubs in Charlotte, Philadelphia and Phoenix and our focus city at Washington National Airport. These four cities, as well as our popular hourly Shuttle service between LaGuardia, Boston and Washington National airports, will serve as the cornerstone of our network and by the end of 2010 are expected to represent 99% of our ASMs versus approximately 93% in 2009. Changes to facilitate this strategy include reducing daily departures from Las Vegas, closing stations in Colorado Springs and Wichita, redeploying our E190 fleet to routes between Boston and Philadelphia and the Boston-LaGuardia leg of the Shuttle, suspending five European destinations, returning our Philadelphia-Beijing route authority, rightsizing our crew bases at our hubs and focus city and closing crew bases in Boston, LaGuardia and Las Vegas. In connection with the realignment of our operations, we will reduce staffing by approximately 1,000 positions across our system during the first half of 2010. These reductions include approximately 600 airport passenger and ramp service positions, approximately 200 pilot positions and approximately 150 flight attendant positions. We believe that by concentrating on our strengths and eliminating unprofitable flying we will be better positioned to return US Airways to profitability.
 
In August 2009, US Airways Group and US Airways entered into a mutual asset purchase and sale agreement with Delta Air Lines, Inc. (“Delta”). Pursuant to the agreement, US Airways would transfer to Delta certain assets related to flight operations at LaGuardia Airport in New York, including 125 pairs of slots currently used to provide US Airways Express service at LaGuardia. Delta would transfer to US Airways certain assets related to flight operations at Washington National Airport, including 42 pairs of slots, and the authority to serve Sao Paulo, Brazil and Tokyo, Japan. One slot equals one take-off or landing, and each pair of slots equals one roundtrip flight. The agreement is structured as two simultaneous asset sales and is expected to be cash neutral to US Airways. The closing of the transactions under the agreement is subject to certain closing conditions, including approvals from a number of government agencies, including the U.S. Department of Justice, the U.S. Department of Transportation (“DOT”), the Federal Aviation Administration (“FAA”) and The Port Authority of New York and New Jersey. If approved, this transaction will significantly increase our capacity in the Washington, D.C. market and improve profitability.
 
On February 9, 2010, the DOT issued a proposed order conditionally approving the transaction. The proposed order, which is subject to a 30-day comment period, would require the airlines to divest 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. Delta and we are currently reviewing the DOT’s proposed order to determine next steps. However, we expect that if this order is implemented as proposed the transaction will not go forward.


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To address the weak revenue environment in 2009, we continued to focus on matching capacity to demand and, as a result, our total RPMs decreased 4.2% on 4.5% lower capacity as compared to 2008. We achieved our 2009 capacity reductions through the sale of aircraft, return of aircraft to lessors and reductions in aircraft utilization. Despite the capacity reductions in 2009, we increased service in certain markets. Domestically, we added new non-stop service from our Charlotte hub to Honolulu, Hawaii. Internationally, we added new service from our Philadelphia hub to Oslo, Norway and Tel Aviv, Israel, service from our Charlotte hub to Paris, France and Rio de Janeiro, Brazil and service from our Phoenix hub to Montego Bay, Jamaica.
 
We continued our strong operational performance in 2009. Our 2009 on-time performance rate was 80.9% and ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. Our mishandled baggage ratio for 2009 improved 36.5% as compared to 2008. Our 2009 mishandled baggage ratio of 3.03 also ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. The combination of continued strong on-time performance and fewer mishandled bags contributed to 34.8% fewer reported customer complaints to the DOT in 2009 as compared to 2008.
 
Express Operations
 
Certain air carriers have code share arrangements with us to operate under the trade name “US Airways Express.” Typically, under a code share arrangement, one air carrier places its designator code and sells tickets on the flights of another air carrier, which is referred to generically as its code share partner. US Airways Express carriers are an integral component of our operating network. We rely heavily on feeder traffic from our US Airways Express partners, which carry passengers to our hubs from low-density markets that are uneconomical for us to serve with large jets. In addition, US Airways Express operators offer complementary service in our existing mainline markets by operating flights during off-peak periods between mainline flights. During 2009, the US Airways Express network served 152 airports in the continental United States, Canada and Mexico, including 75 airports also served by our mainline operation. During 2009, approximately 27 million passengers boarded US Airways Express air carriers’ planes, approximately 42% of whom connected to or from our mainline flights. Of these 27 million passengers, approximately 8 million were enplaned by our wholly owned regional airlines Piedmont and PSA, approximately 19 million were enplaned by third-party carriers operating under capacity purchase agreements and less than 1 million were enplaned by carriers operating under prorate agreements, as described below.
 
The US Airways Express code share arrangements are in the form of either capacity purchase or prorate agreements. The capacity purchase agreements provide that all revenues, including passenger, mail and freight revenues, go to us. In return, we agree to pay predetermined fees to these airlines for operating an agreed-upon number of aircraft, without regard to the number of passengers on board. In addition, these agreements provide that certain variable costs, such as airport landing fees and passenger liability insurance, will be reimbursed 100% by us. We control marketing, scheduling, ticketing, pricing and seat inventories. Under the prorate agreements, the prorate carriers receive a prorated share of ticket revenue and pay certain service fees to us. The prorate carrier is responsible for pricing the local, point to point markets to the extent that we do not have competing existing service in that market. We are responsible for pricing all other prorate carrier tickets. The prorate carrier is also responsible for all costs incurred operating the aircraft. All US Airways Express carriers use our reservation systems and have logos, service marks, aircraft paint schemes and uniforms similar to our mainline operation.
 
In January 2010, Mesa Air Group Inc. (“Mesa”) and its subsidiary Mesa Airlines filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. At December 31, 2009, Mesa Airlines operated 53 aircraft for our Express passenger operations, representing over $450 million in annual passenger revenues to us in 2009. Mesa Airlines continues to operate aircraft on behalf of US Airways Express in accordance with its capacity purchase agreement. Mesa has stated publicly that it intends to operate as normal during the pendency of its Chapter 11 case, including its code share agreements with its partners including US Airways. For more discussion, see Part 1, Item 1A, “Risk Factors — If we incur problems with any of our third-party regional operators or third-party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services.”


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The following table sets forth our US Airways Express code share agreements and the number and type of aircraft operated under those agreements at December 31, 2009.
 
         
        Number and Type
Carrier
  Agreement Type   of Aircraft
PSA (1)
  Capacity Purchase   49 regional jets
Piedmont (1)
  Capacity Purchase   44 turboprops
Air Wisconsin Airlines Corporation
  Capacity Purchase   70 regional jets
Mesa Airlines, Inc. 
  Capacity Purchase   47 regional jets and 6 turboprops
Chautauqua Airlines, Inc. 
  Capacity Purchase   9 regional jets
Republic Airways
  Capacity Purchase   58 regional jets
Colgan Airlines, Inc. 
  Prorate   10 turboprops
Trans States Airlines, Inc. 
  Prorate   3 regional jets
 
 
(1) PSA and Piedmont are wholly owned subsidiaries of US Airways Group.
 
Marketing and Alliance Agreements with Other Airlines
 
We maintain alliance agreements with several leading domestic and international carriers to give customers a greater choice of destinations. Airline alliance agreements provide an array of benefits that vary by partner. By code sharing, each airline is able to offer additional destinations to its customers under its flight designator code without materially increasing operating expenses and capital expenditures. Through frequent flyer arrangements, members are provided with extended networks for earning and redeeming miles on partner carriers. US Airways Club members also have access to certain partner carriers’ airport lounges. We also benefit from the distribution strengths of each of our partner carriers.
 
US Airways is a member of the Star Alliance, the world’s largest airline alliance, which now has 26 member airlines serving approximately 1,077 destinations in 175 countries. Membership in the Star Alliance further enhances the value of our domestic and international route network by allowing customers wide access to the global marketplace. Expanded benefits for customers include network expansion, frequent flyer program benefits, airport lounge access, convenient single-ticket pricing with electronic tickets, one-stop check-in and coordinated baggage handling. We also have bilateral marketing/code sharing agreements with Star Alliance members United, Lufthansa, Spanair, bmi, TAP Portugal, Swiss International, Asiana, Air New Zealand, Air China, Japan’s ANA, Singapore Airlines and TACA. Other international code sharing partners include Royal Jordanian Airlines, EVA Airways, Qatar Airways and Virgin Atlantic Airways. Marketing/code sharing agreements are maintained with two smaller regional carriers in the Caribbean that operate collectively as the “GoCaribbean” network. Each of these code share agreements funnel international traffic onto our domestic flights or support specific European and Caribbean markets in which we operate. Domestically, we code share with Hawaiian Airlines on intra-Hawaii flights.
 
Competition in the Airline Industry
 
The markets in which we operate are highly competitive. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target promotions and frequent flyer initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slack travel periods, or when they begin service to new cities or have excess capacity, to generate cash flow and maximize revenue per ASM and to establish, increase or preserve market share. Discount and promotional fares are generally non-refundable and may be subject to various restrictions such as minimum stay requirements, advance ticketing, limited seating and change fees. We have often elected to match discount or promotional fares initiated by other air carriers in certain markets in order to compete in those markets. Most airlines will quickly match price reductions in a particular market. Our ability to compete on the basis of price is limited by our fixed costs and depends on our ability to maintain our operating costs. Some of our competitors have greater financial resources and/or lower cost structures than we do. In addition, recent years have seen the entrance and growth of low-fare, low-cost competitors in many of the markets in which we operate. These competitors include Southwest, AirTran, JetBlue, Allegiant, Frontier and Virgin America. These low cost carriers generally have lower cost structures than US Airways.


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In addition to price competition, airlines compete for market share by increasing the size of their route system and the number of markets they serve. Airlines with international operations are less exposed to domestic economic conditions and may be able to offset less profitable domestic fares with more profitable international fares. We also compete on the basis of scheduling (frequency and flight times), availability of nonstop flights, on-time performance, type of equipment, cabin configuration, amenities provided to passengers, frequent flyer programs, the automation of travel agent reservation systems, on-board products, markets served and other services. We compete with both major full service airlines and low-cost airlines throughout our network.
 
Additionally, because we operate a significant number of flights in the eastern United States, our average trip distance, or stage length, is shorter than those of other major airlines. This makes us more susceptible than other major airlines to competition from surface transportation such as automobiles and trains. Surface competition can be more significant during economic downturns when consumers cut back on discretionary spending.
 
Industry Regulation and Airport Access
 
General
 
Our airline subsidiaries operate under certificates of public convenience and necessity or certificates of commuter authority, both of which are issued by the DOT. These certificates may be altered, amended, modified or suspended by the DOT if the public convenience and necessity so require, or may be revoked for failure to comply with the terms and conditions of the certificates.
 
Airlines are also regulated by the FAA, primarily in the areas of flight operations, maintenance, ground facilities and other operational and safety areas. Pursuant to these regulations, our airline subsidiaries have FAA-approved maintenance programs for each type of aircraft they operate. The programs provide for the ongoing maintenance of such aircraft, ranging from periodic routine inspections to major overhauls. From time to time, the FAA issues airworthiness directives and other regulations affecting our airline subsidiaries or one or more of the aircraft types they operate. In recent years, for example, the FAA has issued or proposed mandates relating to, among other things, enhanced ground proximity warning systems, fuselage pressure bulkhead reinforcement, fuselage lap joint inspection rework, increased inspections and maintenance procedures to be conducted on certain aircraft, increased cockpit security, fuel tank flammability reductions and domestic reduced vertical separation. Regulations of this sort tend to enhance safety and increase operating costs.
 
Our airline subsidiaries are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation. Our airline subsidiaries collect the ticket tax, along with certain other U.S. and foreign taxes and user fees on air transportation, and pass along the collected amounts to the appropriate governmental agencies. Although these taxes are not our operating expenses, they represent an additional cost to our customers. There are a number of efforts in Congress to raise different portions of the various taxes imposed on airlines and their passengers.
 
Most major U.S. airports impose a passenger facility charge. The ability of airlines to contest increases in this charge is restricted by federal legislation, DOT regulations and judicial decisions. With certain exceptions, air carriers pass these charges on to passengers. However, our ability to pass through passenger facility charges to our customers is subject to various factors, including market conditions and competitive factors. The current cap on the passenger facility charge is $4.50 per passenger, although there are efforts to raise the cap to a higher level before Congress.
 
On October 10, 2008, the FAA finalized new rules governing flight operations at the three major New York airports. These rules did not take effect because of a legal challenge, but the FAA has pushed forward with a reduction in the number of flights per hour at LaGuardia. Additionally, the DOT recently finalized a policy change that will permit airports to charge differentiated landing fees during congested periods, which could impact our ability to serve certain markets in the future. The new rule was challenged in court by the industry and ultimately withdrawn by the FAA. The Obama Administration has not yet articulated its policy concerning the New York area airports. Depending on that policy, our ability to operate at those airports or other constrained airports could be impacted.
 
The DOT has proposed several new initiatives concerning airline obligations toward passengers. During 2008, the DOT finalized rules pertaining to denied boarding compensation requiring additional consumer disclosure and higher payments to passengers. In addition, the DOT established a task force on long on-board delays that resulted in


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the issuance of a final report suggesting model contingency plans for long on-board delays. Contemporaneous with the end of the task force, the DOT issued proposed rules that would place additional requirements on airlines concerning service irregularities, consumer rights and contract of carriage obligations. These new rules were recently finalized by the DOT and take effect in April 2010. While we are preparing for the implementation of these new rules, we are still evaluating what the full impact of these rules will be on our operations.
 
Additional laws, regulations, taxes and policies have been proposed or discussed from time to time, including recently introduced federal legislation on a “passenger bill of rights,” that, if adopted, could significantly further increase the cost of airline operations or reduce revenues.
 
The DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate or foreign commerce or the national transportation system. Certain locales, including Boston, Washington D.C., Chicago, San Diego and San Francisco, among others, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of these operations. In some instances, these restrictions have caused curtailments in service or increases in operating costs, and these restrictions could limit the ability of our airline subsidiaries to expand their operations at the affected airports. Authorities at other airports may adopt similar noise regulations.
 
International
 
The availability of international routes to domestic air carriers is regulated by agreements between the U.S. and foreign governments. Changes in U.S. or foreign government aviation policy could result in the alteration or termination of these agreements and affect our international operations. We could continue to see significant changes in terms of air service between the United States and Europe as a result of the implementation of the U.S. and the EU Air Transport Agreement, generally referred to as the Open Skies Agreement, which took effect in March 2008. The Open Skies Agreement removes bilateral restrictions on the number of flights between the U.S. and EU. One result of the Open Skies Agreements has been applications before the DOT for antitrust immunity between various domestic and international airlines. If granted, antitrust immunity permits carriers to coordinate schedules, pricing and other competitive aspects on international routes to/from the United States. It is possible that the grant of these immunities could have an impact on our international operations.
 
Security
 
The Aviation and Transportation Security Act (the “Aviation Security Act”) was enacted in November 2001. Under the Aviation Security Act, substantially all aspects of civil aviation security screening were federalized, and a new Transportation Security Administration (the “TSA”) under the DOT was created. The TSA was then transferred to the Department of Homeland Security pursuant to the Homeland Security Act of 2002. The Aviation Security Act, among other matters, mandates improved flight deck security; carriage at no charge of federal air marshals; enhanced security screening of passengers, baggage, cargo, mail, employees and vendors; enhanced security training; fingerprint-based background checks of all employees and vendor employees with access to secure areas of airports pursuant to regulations issued in connection with the Aviation Security Act; and the provision of certain passenger data to U.S. Customs and Border Protection.
 
Funding for the TSA is provided by a combination of air carrier fees, passenger fees and taxpayer monies. A “passenger security fee,” which is collected by air carriers from their passengers, is currently set at a rate of $2.50 per flight segment but not more than $10 per round trip. An air carrier fee, or Aviation Security Infrastructure Fee (“ASIF”), has also been imposed with an annual cap equivalent to the amount that an individual air carrier paid in calendar year 2000 for the screening of passengers and property. The TSA may lift this cap at any time and set a new higher fee for air carriers.
 
In 2009, we incurred expenses of $53 million for the ASIF, including amounts paid by our wholly owned regional subsidiaries, PSA and Piedmont, and amounts attributable to the other regional carriers. Implementation of and compliance with the requirements of the Aviation Security Act have resulted and will continue to result in increased costs for us and our passengers and has and will likely continue to result in service disruptions and delays. As a result of competitive pressure, US Airways and other airlines may be unable to recover all of these additional security costs from passengers through increased fares. In addition, we cannot forecast what new security and safety requirements may be imposed in the future or the costs or financial impact of complying with any such requirements.


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Civil Reserve Air Fleet
 
We are a participant in the Civil Reserve Air Fleet program, which is a voluntary program administered by the U.S. Air Force Air Mobility Command. The General Services Administration of the U.S. Government requires that airlines participate in the Civil Reserve Air Fleet program in order to receive U.S. Government business. We are reimbursed at compensatory rates if aircraft are activated under the Civil Reserve Air Fleet program or when participating in Department of Defense business.
 
Environmental
 
The airline industry is also subject to increasingly stringent federal, state and local laws aimed at protecting the environment. Future regulatory developments and actions could affect operations and increase operating costs for the airline industry, including our airline subsidiaries.
 
Recently, climate change issues and greenhouse gas emissions (including carbon) have attracted international and domestic regulatory interest that may result in the imposition of additional regulation on airlines. The U.S. Congress is currently considering legislation on climate change. In June 2009, the U.S. House of Representatives passed a comprehensive clean energy and climate bill (H.R. 2454, also known as “Waxman-Markey”). In the Senate, the Boxer-Kerry climate bill has been reported out of the Senate Environment and Public Works Committee. These bills have a variety of provisions and differences, but in substance they both propose a “cap and trade” approach to greenhouse gas regulation. Under such an approach, companies would be required to hold sufficient emission allowances to cover their greenhouse gas emissions. Over time, the total number of allowances would be reduced or expire, thereby relying on market-based incentives to allocate investment in emission reductions across the economy. As the number of available allowances declines, the cost would presumably increase. In addition to the prospect of federal legislation, several states have adopted or are in the process of adopting greenhouse gas reporting or cap-and-trade programs.
 
Even without further federal legislation, the U.S. Environmental Protection Agency (“EPA”) may act to regulate greenhouse gas emissions. In December 2009, the EPA issued its final Endangerment and Cause or Contribute Findings for Greenhouse Gases, which became effective in January 2010. This regulatory finding sets the foundation for future EPA greenhouse gas regulation under the Clean Air Act. The EPA also promulgated a new greenhouse gas reporting rule, which became effective in December 2009, and which requires facilities that emit more than 25,000 tons per year of carbon dioxide-equivalent emissions to prepare and file certain emission reports. Some of our facilities may be covered by this rule. On February 3, 2009, the EPA adopted regulations implementing changes to the renewable fuel standard program, which require an increasing amount of renewable fuels in the nation’s transportation fuel mix. The EPA is also considering additional regulatory programs. Depending on the final outcome of this rulemaking, some of our facilities may be subject to additional operating and other permit requirements. As a result of these various regulatory initiatives, our operating costs may increase in compliance with these programs, although we are not situated differently in this respect from our competitors in the industry.
 
In addition, the EU has adopted legislation to include aviation within the EU’s existing greenhouse gas emission trading scheme effective in 2012. This legislation has been legally challenged in the EU but we have had to begin to comply and incurred additional compliance costs as a result of this legislation. While we cannot yet determine what the final regulatory scheme will be in the United States or in other areas in which we do business, such climate change-related regulatory activity in the future may adversely affect our business and financial results.
 
For more discussion of environmental regulation, see Part I, Item 1A, “Risk Factors – We are subject to many forms of environmental regulation and may incur substantial costs as a result.”
 
Employees and Labor Relations
 
Our businesses are labor intensive. In 2009, wages, salaries and benefits were one of our largest expenses and represented approximately 23% of our operating expenses. As of December 31, 2009, US Airways employed approximately 31,300 active full-time equivalent employees, including approximately 4,100 pilots, 6,800 flight attendants, 6,200 passenger service personnel, 6,100 fleet service personnel, 3,300 maintenance personnel and


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4,800 personnel in administrative and various other job categories. Our Express subsidiaries, Piedmont and PSA, employed approximately 4,700 active full-time equivalent employees, including approximately 800 pilots, 400 flight attendants, 2,700 passenger service personnel, 400 maintenance personnel and 400 personnel in administrative and various other job categories.
 
A large majority of the employees of the major airlines in the United States are represented by labor unions. As of December 31, 2009, approximately 87% of our active employees were represented by various labor unions. Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act (the “RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”).
 
If no agreement is reached during direct negotiations between the parties, either party may request the NMB to appoint a federal mediator. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to the parties. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30-day “cooling off” period commences. During or after that period, a Presidential Emergency Board (“PEB”) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another 30-day “cooling off” period. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self-help,” such as a strike, and the airline may resort to its own “self-help,” including the imposition of any or all of its proposed amendments and the hiring of new employees to replace any striking workers.
 
Since the merger, we have been in the process of integrating the labor agreements of US Airways and America West Airlines, Inc. (“AWA”). Listed below are the integrated labor agreements and the status of the US Airways and AWA labor agreements that remain separate with their major domestic employee groups.
 
                         
                Contract
 
Union   Class or Craft     Employees (1)     Amendable Date  
 
Integrated labor agreements:
                       
International Association of Machinists & Aerospace Workers (“IAM”)
    Fleet Service       6,100       12/31/2011  
Airline Customer Service Employee Association — IBT and CWA (the “Association”)
    Passenger Service       6,200       12/31/2011  
IAM
    Mechanics, Stock Clerks and Related       3,300       12/31/2011  
IAM
    Maintenance Training Instructors       30       12/31/2011  
Transport Workers Union (“TWU”)
    Dispatch       200       12/31/2009  
TWU
    Flight Crew Training Instructors       100       12/31/2011  
TWU
    Flight Simulator Engineers       50       12/31/2011  
                         
US Airways:
                       
US Airline Pilots Association (“USAPA”)
    Pilots       2,600       12/31/2009 (2)
Association of Flight Attendants-CWA (“AFA”)
    Flight Attendants       4,700       12/31/2011 (3)
                         
AWA:
                       
USAPA
    Pilots       1,500       12/30/2006 (2)
AFA
    Flight Attendants       2,100       05/04/2004 (3)
 
 
(1) Approximate number of active full-time equivalent employees covered by the contract as of December 31, 2009.
 
(2) Pilots continue to work under the terms of their separate US Airways and AWA collective bargaining agreements, as modified by the transition agreements reached in connection with the merger.
 
(3) In negotiations for a single labor agreement applicable to both US Airways and AWA. On December 15, 2005, the NMB recessed AFA’s separate contract negotiations with AWA indefinitely. Flight attendants continue to


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work under the terms of their separate US Airways and AWA collective bargaining agreements, as modified by the transition agreements reached in connection with the merger.
 
On April 18, 2008, the NMB certified USAPA as the collective bargaining representative for the pilots of the combined company, including pilot groups from both pre-merger AWA and US Airways. Since that time, we have been engaged in negotiations with USAPA over the terms of a single labor agreement covering both groups. In the meantime, while those negotiations are underway, each of the pilot groups continues to be covered by the USAPA collective bargaining agreements referenced above.
 
There are few remaining unrepresented employee groups that could engage in organization efforts. We cannot predict the outcome of any future efforts to organize those remaining employees or the terms of any future labor agreements or the effect, if any, on US Airways’ operations or financial performance. For more discussion, see Part I, Item 1A, “Risk Factors – Union disputes, employee strikes and other labor-related disruptions may adversely affect our operations.”
 
Aviation Fuel
 
The average cost of a gallon of aviation fuel for our mainline and Express operations decreased 44.8% from 2008 to 2009, and our total mainline and Express fuel expense decreased $2.28 billion, or 48%, from 2008 to 2009. We estimate that a one cent per gallon increase in aviation fuel prices would result in a $14 million increase in annual fuel expense based on our 2010 forecasted mainline and Express fuel consumption.
 
Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts. During 2009, 2008 and 2007, we recognized a net loss of $7 million, a net loss of $356 million and a net gain of $245 million, respectively, related to our fuel hedging program.
 
The following table shows annual aircraft fuel consumption and costs for our mainline operations for 2007 through 2009 (gallons and aircraft fuel expense in millions):
 
                                 
        Average Price
  Aircraft Fuel
  Percentage of Total
Year
  Gallons   per Gallon (1)   Expense (1)   Operating Expenses
 
2009
    1,069     $   1.74     $   1,863       23.8 %
2008
    1,142       3.17       3,618       33.3 %
2007
    1,195       2.20       2,630       30.7 %
 
 
(1) Includes fuel taxes and excludes the impact of fuel hedges. The impact of fuel hedges is described in Part II, Item 7 under “US Airways Group’s Results of Operations” and “US Airways’ Results of Operations.”
 
In addition, we incur fuel expenses related to our Express operations. Total fuel expenses for US Airways Group’s wholly owned regional airlines and affiliate regional airlines operating under capacity purchase agreements as US Airways Express for the years ended December 31, 2009, 2008 and 2007 were $609 million, $1.14 billion and $765 million, respectively.
 
Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of our control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices and availability may be affected by many factors, including:
 
  •   the impact of global political instability on crude oil production;
 
  •   unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries, as evidenced in the third quarter of 2005 when Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations and pipeline capacity along certain portions of the U.S. Gulf Coast;
 
  •   unpredictable increases to crude oil demand due to weather or the pace of economic growth;
 
  •   inventory levels of crude oil, refined products and natural gas; and


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  •   other factors, such as the relative fluctuation in value between the U.S. dollar and other major currencies and the influence of speculative positions on the futures exchanges.
 
Insurance
 
We maintain insurance of the types that we believe are customary in the airline industry. Principal coverage includes liability for injury to members of the public, including passengers, damage to property of US Airways Group, its subsidiaries and others, and loss of or damage to flight equipment, whether on the ground or in flight. We also maintain other types of insurance such as workers’ compensation and employer’s liability, with limits and deductibles that we believe are standard within the industry.
 
Since September 11, 2001, we and other airlines have been unable to obtain coverage for liability to persons other than employees and passengers for claims resulting from acts of terrorism, war or similar events, which is called war risk coverage, at reasonable rates from the commercial insurance market. US Airways, therefore, purchased its war risk coverage through a special program administered by the FAA, as have most other U.S. airlines. The Emergency Wartime Supplemental Appropriations Act extended this insurance protection until August 2005. The program was subsequently extended, with the same conditions and premiums, until August 31, 2010. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk coverage, and because of competitive pressures in the industry, our ability to pass this additional cost to passengers may be limited.
 
Customer Service
 
In 2009, we continued our commitment to running a successful airline. One of the important ways we do this is by taking care of our customers. We believe that our focus on excellent customer service in every aspect of our operations, including personnel, flight equipment, in-flight and ancillary amenities, on-time performance, flight completion ratios and baggage handling, will strengthen customer loyalty and attract new customers.
 
Our 2009 on-time performance rate was 80.9% and ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. Our mishandled baggage ratio for 2009 improved 36.5% as compared to 2008. Our 2009 mishandled baggage ratio of 3.03 also ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. The combination of continued strong on-time performance and fewer mishandled bags contributed to 34.8% fewer reported customer complaints to the DOT in 2009 as compared to 2008.
 
We reported the following combined operating statistics to the DOT for mainline operations for the years ended December 31, 2009, 2008 and 2007:
 
                         
    Full Year  
    2009     2008     2007  
 
On-time performance (a)
    80.9       80.1       68.7  
Completion factor (b)
    98.8       98.5       98.2  
Mishandled baggage (c)
    3.03       4.77       8.47  
Customer complaints (d)
    1.31       2.01       3.16  
 
 
(a) Percentage of reported flight operations arriving on time as defined by the DOT.
 
(b) Percentage of scheduled flight operations completed.
 
(c) Rate of mishandled baggage reports per 1,000 passengers.
 
(d) Rate of customer complaints filed with the DOT per 100,000 passengers.
 
Frequent Traveler Program
 
All major United States airlines offer frequent flyer programs to encourage travel on their respective airlines and customer loyalty. Our Dividend Miles frequent flyer program allows participants to earn mileage credits for each paid flight segment on US Airways, Star Alliance carriers and certain other airlines that participate in the program. Participants flying in first class or Envoy class may receive additional mileage credits. Participants can also receive mileage credits through special promotions that we periodically offer and may also earn mileage credits by utilizing


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certain credit cards and purchasing services from non-airline partners such as hotels and rental car agencies. We sell mileage credits to credit card companies, telephone companies, hotels, car rental agencies and others that participate in the Dividend Miles program. Mileage credits can be redeemed for travel awards on US Airways, Star Alliance carriers or other participating airlines.
 
We and the other participating airline partners limit the number of seats per flight that are available for redemption by award recipients by using various inventory management techniques. Award travel for all but the highest-level Dividend Miles participants is generally not permitted on blackout dates, which correspond to certain holiday periods or peak travel dates. We charge various fees for issuing awards dependent upon destination and booking method and for issuing awards within 14 days of the travel date. We reserve the right to terminate Dividend Miles or portions of the program at any time. Program rules, partners, special offers, blackout dates, awards and requisite mileage levels for awards are subject to change.
 
In 2009, we launched the new Dividend Miles Select program in conjunction with certain of our co-branded credit cards. Participants in this program are eligible to receive discounted award travel and award processing fee waivers.
 
Ticket Distribution
 
Passengers can book tickets for travel on US Airways through several distribution channels including our direct website (www.usairways.com), online travel agent sites (e.g., Orbitz, Travelocity, Expedia and others), traditional travel agents, reservations centers and airline ticket offices. Traditional travel agencies use Global Distribution Systems (“GDSs”), such as Sabre Travel Network®, to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee, referred to as a “GDS fee,” that is charged to the airline. Bookings made directly with an airline, through its reservation call centers or website, do not generate a GDS fee. Travel agent sites that connect directly to airline host systems, effectively by-passing the traditional connection via GDSs, help us reduce distribution costs. In 2009, we received 63% of our sales from internet sites. Our website accounted for 27% of our sales, while other internet sites accounted for 36% of our sales. Internal channels of distribution account for 32% of our sales.
 
Seasonality
 
Our results are seasonal. Due to the greater demand for air and leisure travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year.
 
Pre-merger US Airways Group’s Chapter 11 Bankruptcy Proceedings
 
On September 12, 2004, US Airways Group and its domestic subsidiaries, US Airways, Piedmont, PSA and MSC (collectively, the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (the “Bankruptcy Court”). On September 16, 2005, the Bankruptcy Court confirmed the Debtors’ plan of reorganization. Substantially all of the claims in the 2004 bankruptcy have been settled and the remaining claims, if paid at all, will be paid out in common stock of the post-bankruptcy US Airways Group at a small fraction of the actual claim amount. However, the effects of these common stock distributions were already reflected in our financial statements upon emergence from bankruptcy and will not have any further impact on our financial position or results of operations. We presently expect the bankruptcy case to be closed during 2010.


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Item 1A.  Risk Factors
 
Below are a series of risk factors that may affect our results of operations or financial performance. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of these risk factors on our business or the extent to which any factor or combination of factors may impact our business.
 
Risk Factors Relating to the Company and Industry Related Risks
 
US Airways Group could experience significant operating losses in the future.
 
There are several reasons, including those addressed in these risk factors, why US Airways Group might fail to achieve profitability and might experience significant losses. In particular, the weakened condition of the economy and the high volatility of fuel prices have had and continue to have an impact on our operating results, and overall worsening economic conditions increase the risk that we will experience losses.
 
Downturns in economic conditions adversely affect our business.
 
Due to the discretionary nature of business and leisure travel spending, airline industry revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may continue to result, in decreased passenger demand for air travel and changes in booking practices, both of which in turn have had, and may continue to have, a strong negative effect on our revenues. In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our revenues. See “The airline industry is intensely competitive and dynamic” below. Certain contractual obligations limit our ability to reduce the number of aircraft in operation below certain levels. As a result, we may not be able to optimize the number of aircraft in operation in response to a decrease in passenger demand for air travel.
 
Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, operating expenses and results.
 
Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions. Continued concerns about the systemic impact of inflation, the availability and cost of credit, energy costs and geopolitical issues, combined with declining business activity levels and consumer confidence, increased unemployment and volatile oil prices, have contributed to unprecedented levels of volatility in the capital markets. As a result of these market conditions, the cost and availability of credit have been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. These changes in the domestic and global financial markets may increase our costs of financing and adversely affect our ability to obtain financing needed for the acquisition of aircraft that we have contractual commitments to purchase and for other types of financings we may seek in order to raise capital or fund other types of obligations. Any downgrades to our credit rating may likewise increase the cost and reduce the availability of financings.
 
In addition, we have substantial non-cancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines. Although we have in place financing for the four aircraft scheduled for delivery in 2010 and backstop financing for the remaining narrow body aircraft we have on order, we have not yet secured financing commitments or backstop financing for some of the widebody aircraft we have on order, commencing with deliveries scheduled for 2013, and cannot assure you of the availability or cost of that financing. If we are not able to arrange financing for such aircraft at customary advance rates and on terms and conditions acceptable to us, we expect we would seek to negotiate deferrals of aircraft deliveries with the manufacturer or financing at lower than customary advance rates, or, if required, use cash from operations or other sources to purchase the aircraft.
 
Further, a substantial portion of our indebtedness bears interest at fluctuating interest rates. These are primarily based on the London interbank offered rate for deposits of U.S. dollars, or “LIBOR.” LIBOR tends to fluctuate based on general economic conditions, general interest rates, federal reserve rates and the supply of and demand for


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credit in the London interbank market. We have not hedged our interest rate exposure and, accordingly, our interest expense for any particular period may fluctuate based on LIBOR and other variable interest rates. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected. See also the discussion of interest rate risk in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”
 
Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions.
 
We have a significant amount of fixed obligations, including debt, aircraft leases and financings, aircraft purchase commitments, leases and developments of airport and other facilities and other cash obligations. We also have certain guaranteed costs associated with our regional alliances. Our existing indebtedness is secured by substantially all of our assets.
 
As a result of the substantial fixed costs associated with these obligations:
 
  •   a decrease in revenues results in a disproportionately greater percentage decrease in earnings;
 
  •   we may not have sufficient liquidity to fund all of these fixed costs if our revenues decline or costs increase; and
 
  •   we may have to use our working capital to fund these fixed costs instead of funding general corporate requirements, including capital expenditures.
 
These obligations also impact our ability to obtain additional financing, if needed, and our flexibility in the conduct of our business.
 
Any failure to comply with the liquidity covenants contained in our financing arrangements would likely have a material adverse effect on our business, financial condition and results of operations.
 
The terms of our Citicorp credit facility and certain of our other financing arrangements require us to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements.
 
Our ability to comply with these covenants while paying the fixed costs associated with our contractual obligations and our other expenses will depend on our operating performance and cash flow, which are seasonal, as well as factors including fuel costs and general economic and political conditions.
 
The factors affecting our liquidity (and our ability to comply with related covenants) will remain subject to significant fluctuations and uncertainties, many of which are outside our control. Any breach of our liquidity covenants or failure to timely pay our obligations could result in a variety of adverse consequences, including the acceleration of our indebtedness, the withholding of credit card proceeds by our credit card processors and the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our contractual obligations, repay the accelerated indebtedness, make required lease payments or otherwise cover our fixed costs.
 
Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.
 
Our operating results are significantly impacted by changes in the availability, price volatility and the cost of aircraft fuel, which represents one of the largest single cost items in our business. Fuel prices have fluctuated substantially over the past several years and sharply in the last year.


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Because of the amount of fuel needed to operate our airline, even a relatively small increase in the price of fuel can have a significant adverse aggregate effect on our costs and liquidity. Due to the competitive nature of the airline industry and unpredictability of the market, we can offer no assurance that we may be able to increase our fares, impose fuel surcharges or otherwise increase revenues sufficiently to offset fuel price increases.
 
Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price volatility or cost of aircraft fuel. Natural disasters, political disruptions or wars involving oil-producing countries, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, additional fuel price volatility and cost increases in the future.
 
Historically, from time to time, we have entered into hedging arrangements designed to protect against rising fuel costs. Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts. Our ability to hedge in the future may be limited, particularly if our financial condition provides insufficient liquidity to meet counterparty collateral requirements. Our future fuel hedging arrangements, if any, may not completely protect us against price increases and may be limited in both volume of fuel and duration. Also, a rapid decline in the price of fuel can adversely impact our short-term liquidity as our hedge counterparties require that we post collateral in the form of cash or letters of credit when the projected future market price of fuel drops below the strike price. See also the discussion in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”
 
If our financial condition worsens, provisions in our credit card processing and other commercial agreements may adversely affect our liquidity.
 
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. These holdback requirements can be modified at the discretion of the processing companies upon the occurrence of specific events, including material adverse changes in our financial condition. An increase in the current holdback balances to higher percentages up to and including 100% of relevant advanced ticket sales could materially reduce our liquidity. Likewise, other of our commercial agreements contain provisions that allow other entities to impose less favorable terms, including the acceleration of amounts due, in the event of material adverse changes in our financial condition.
 
Union disputes, employee strikes and other labor-related disruptions may adversely affect our operations.
 
Relations between air carriers and labor unions in the United States are governed by the RLA. Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the NMB.
 
If no agreement is reached during direct negotiations between the parties, either party may request the NMB to appoint a federal mediator. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to the parties. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30-day “cooling off” period commences. During or after that period, a Presidential Emergency Board (“PEB”) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another 30-day “cooling off” period. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self-help,” such as a strike, which could adversely affect our ability to conduct our business and our financial performance.
 
Additionally, these processes do not apply to our current and ongoing negotiations for post-merger integrated labor agreements, and this means unions may not lawfully engage in concerted refusals to work, such as strikes, slow-downs, sick-outs or other similar activity, against us. Nonetheless, after more than four years of negotiations


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without a resolution to the bargaining issues that arose from the merger, there is a risk that disgruntled employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our financial performance. Likewise, employees represented by unions that have reached post-merger integrated agreements could engage in improper actions that disrupt our operations. We are also involved in binding arbitrations regarding grievances under our collective bargaining agreements, including but not limited to issues related to wages and working conditions, which if determined adversely against us could negatively affect our ability to conduct our business and our financial performance.
 
The inability to maintain labor costs at competitive levels could harm our financial performance.
 
Currently, our labor costs are very competitive relative to the other big five hub-and-spoke carriers. However, we cannot assure you that labor costs going forward will remain competitive because some of our agreements are amendable now and others may become amendable, competitors may significantly reduce their labor costs or we may agree to higher-cost provisions in our current labor negotiations. Approximately 87% of the employees within US Airways Group are represented for collective bargaining purposes by labor unions, including unionized groups of our employees abroad. Some of our unions have brought and may continue to bring grievances to binding arbitration. Unions may also bring court actions and may seek to compel us to engage in the bargaining processes where we believe we have no such obligation. If successful, there is a risk these judicial or arbitral avenues could create additional costs that we did not anticipate.
 
If we incur problems with any of our third-party regional operators or third-party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services.
 
A significant portion of our regional operations are conducted by third-party operators on our behalf, primarily under capacity purchase agreements. Due to our reliance on third parties to provide these essential services, we are subject to the risks of disruptions to their operations, which may result from many of the same risk factors disclosed in this report, such as the impact of current economic conditions, and other risk factors, such as a bankruptcy restructuring of the regional operators. For example, in January 2010, Mesa Air Group Inc. and its subsidiary Mesa Airlines filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. We cannot predict whether Mesa Airlines will be successfully reorganized or any other aspect of the pending bankruptcy case. At December 31, 2009, Mesa Airlines operated 53 aircraft for our Express passenger operations, representing over $450 million in annual passenger revenues to us in 2009. In addition, we may also experience disruption to our regional operations if we terminate the capacity purchase agreement with one or more of our current operators and transition the services to another provider. As our regional segment provides revenues to us directly and indirectly (by providing flow traffic to our hubs), any significant disruption to our regional operations would have a material adverse effect on our business, financial condition and results of operations.
 
In addition, our reliance upon others to provide essential services on behalf of our operations may result in our relative inability to control the efficiency and timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our operations, including Express flight operations, aircraft maintenance, ground services and facilities, reservations and baggage handling. Similar agreements may be entered into in any new markets we decide to serve. These agreements are generally subject to termination after notice by the third-party service provider. We are also at risk should one of these service providers cease operations, and there is no guarantee that we could replace these providers on a timely basis with comparably priced providers. Recent volatility in fuel prices, disruptions to capital markets and the current economic downturn in general have subjected certain of these third-party service providers to strong financial pressures. Any material problems with the efficiency and timeliness of contract services, resulting from financial hardships or otherwise, could have a material adverse effect on our business, financial condition and results of operations.


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We rely heavily on automated systems to operate our business and any failure or disruption of these systems could harm our business.
 
To operate our business, we depend on automated systems, including our computerized airline reservation systems, flight operations systems, telecommunication systems, airport customer self-service kiosks and websites. Our website and reservation systems must be able to accommodate a high volume of traffic, process transactions and deliver important flight information on a timely and reliable basis. Substantial or repeated disruptions or failures of any of these automated systems could impair our operations, reduce the attractiveness of our services and could result in lost revenues and increased costs. In addition, these automated systems require periodic maintenance, upgrades and replacements, and our business may be harmed if we fail to properly maintain, upgrade or replace such systems.
 
Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand.
 
We have implemented several new measures designed to increase revenue and offset costs. These measures include charging separately for services that had previously been included within the price of a ticket and increasing other pre-existing fees. We may introduce additional initiatives in the future, however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives. We cannot assure you that these new measures or any future initiatives will be successful in increasing our revenues. Additionally, the implementation of these initiatives creates logistical challenges that could harm the operational performance of our airline. Also, the new and increased fees might reduce the demand for air travel on our airline or across the industry in general, particularly as weakening economic conditions make our customers more sensitive to increased travel costs.
 
The airline industry is intensely competitive and dynamic.
 
Our competitors include other major domestic airlines as well as foreign, regional and new entrant airlines, some of which have more financial resources or lower cost structures than ours, and other forms of transportation, including rail and private automobiles. In many of our markets we compete with at least one low cost air carrier. Our revenues are sensitive to numerous factors, and the actions of other carriers in the areas of pricing, scheduling and promotions can have a substantial adverse impact not only on our revenues but on overall industry revenues. These factors may become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near-term survival rather than long-term viability. In addition, because a significant portion of our traffic is short-haul travel, we are more susceptible than other major airlines to competition from surface transportation such as automobiles and trains.
 
Low cost carriers have a profound impact on industry revenues. Using the advantage of low unit costs, these carriers offer lower fares in order to shift demand from larger, more-established airlines. Some low cost carriers, which have cost structures lower than ours, have better financial performance and significant numbers of aircraft on order for delivery in the next few years. These low-cost carriers are expected to continue to increase their market share through growth and could continue to have an impact on the overall performance of US Airways Group.
 
Additionally, if mergers or other forms of industry consolidation including antitrust immunity grants take place, we might or might not be included as a participant. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with such combinations, our competitive position relative to the post-combination carriers or other carriers that acquire such assets could be harmed. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks might grow and result in greater overlap with our network, which in turn could result in lower overall market share and revenues for us. Such consolidation is not limited to the U.S., but could include further consolidation among international carriers in Europe and elsewhere.


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The loss of key personnel upon whom we depend to operate our business or the inability to attract additional qualified personnel could adversely affect the results of our operations or our financial performance.
 
We believe that our future success will depend in large part on our ability to attract and retain highly qualified management, technical and other personnel, particularly in light of reductions in headcount associated with cost-saving measures that we have implemented. We may not be successful in retaining key personnel or in attracting and retaining other highly qualified personnel. Any inability to retain or attract significant numbers of qualified management and other personnel could adversely affect our business.
 
We may be adversely affected by conflicts overseas or terrorist attacks; the travel industry continues to face ongoing security concerns.
 
Acts of terrorism or fear of such attacks, including elevated national threat warnings, wars or other military conflicts, including the wars in Iraq and Afghanistan, may depress air travel, particularly on international routes, and cause declines in revenues and increases in costs. The attacks of September 11, 2001 and continuing terrorist threats and attempted attacks materially impacted and continue to impact air travel. Increased security procedures introduced at airports since the attacks and other such measures as may be introduced in the future generate higher operating costs for airlines. The Aviation Security Act mandates improved flight deck security; deployment of federal air marshals on board flights; improved airport perimeter access security; airline crew security training; enhanced security screening of passengers, baggage, cargo, mail, employees and vendors; enhanced training and qualifications of security screening personnel; additional provision of passenger data to U.S. Customs and enhanced background checks. A concurrent increase in airport security charges and procedures, such as restrictions on carry-on baggage, has also had and may continue to have a disproportionate impact on short-haul travel, which constitutes a significant portion of our flying and revenue. We would also be materially impacted in the event of further terrorist attacks or perceived terrorist threats.
 
Changes in government regulation could increase our operating costs and limit our ability to conduct our business.
 
Airlines are subject to extensive regulatory requirements. In the last several years, Congress has passed laws, and the DOT, the FAA, the TSA and the Department of Homeland Security have issued a number of directives and other regulations. These requirements impose substantial costs on airlines. On October 10, 2008, the FAA finalized new rules governing flight operations at the three major New York airports. These rules did not take effect because of a legal challenge, but the FAA has pushed forward with a reduction in the number of flights per hour at LaGuardia. The FAA is attempting to work with carriers on a voluntary basis to implement its new lower operations cap at LaGuardia. If this is not successful, the FAA may resort to other methods to reduce congestion in New York. Additionally, the DOT recently finalized a policy change that will permit airports to charge differentiated landing fees during congested periods, which could impact our ability to serve certain markets in the future. The new rule is being challenged in court by the industry. The Obama Administration has not yet indicated how it intends to move forward on the issue of congestion management in the New York region.
 
The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions. Some FAA requirements cover, among other things, retirement of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement, fuel tank inerting, crew scheduling and other environmental concerns, aircraft operation and safety and increased inspections and maintenance procedures to be conducted on older aircraft. Our failure to timely comply with these requirements can result in fines and other enforcement actions by the FAA or other regulators. For example, on October 14, 2009, the FAA proposed a fine of $5.4 million with respect to certain alleged violations and we are in discussions with the agency regarding resolution of this matter. Additionally, new proposals by the FAA to further regulate flight crew duty times could increase our costs and reduce staffing flexibility.
 
Additional laws, regulations, taxes and policies have been proposed or discussed from time to time, including recently introduced federal legislation on a “passenger bill of rights,” that, if adopted, could significantly increase the cost of airline operations or reduce revenues. The state of New York’s attempt to adopt such a measure has been successfully challenged by the airline industry. Other states, however, are contemplating similar legislation. The


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DOT finalized rules requiring new procedures for customer handling during long onboard delays, as well as additional reporting requirements for airlines.
 
Finally, the ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the U.S. and foreign governments may be amended from time to time, or because appropriate slots or facilities may not be available. We cannot assure you that laws or regulations enacted in the future will not adversely affect our operating costs. In addition, increased environmental regulation, particularly in the EU, may increase costs or restrict our operations.
 
Our ability to operate and grow our route network in the future is dependent on the availability of adequate facilities and infrastructure throughout our system.
 
In order to operate our existing flight schedule and, where appropriate, add service along new or existing routes, we must be able to obtain adequate gates, ticketing facilities, operations areas, slots (where applicable) and office space. For example, at our largest hub airport, we are seeking to increase international service despite challenging airport space constraints. The nation’s aging air traffic control infrastructure presents challenges as well. The ability of the air traffic control system to handle traffic in high-density areas where we have a large concentration of flights is critical to our ability to operate our existing schedule. Also, as airports around the world become more congested, we cannot always be sure that our plans for new service can be implemented in a commercially viable manner given operating constraints at airports throughout our network.
 
We are subject to many forms of environmental regulation and may incur substantial costs as a result.
 
We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. Compliance with all environmental laws and regulations can require significant expenditures.
 
Several U.S. airport authorities are actively engaged in efforts to limit discharges of de-icing fluid (glycol) to local groundwater, often by requiring airlines to participate in the building or reconfiguring of airport de-icing facilities. Such efforts are likely to impose additional costs and restrictions on airlines using those airports. We do not believe, however, that such environmental developments will have a material impact on our capital expenditures or otherwise adversely affect our operations, operating costs or competitive position.
 
We are also subject to other environmental laws and regulations, including those that require us to remediate soil or groundwater to meet certain objectives. Under federal law, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. We have liability for such costs at various sites, although the future costs associated with the remediation efforts are currently not expected to have a material adverse affect on our business.
 
We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators. Under these leases and agreements, we have agreed to standard language indemnifying the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, even if we are not the party responsible for the initial event that caused the environmental damage. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines.
 
There is increasing global regulatory focus on climate change and greenhouse gas emissions. In particular, the United States and the EU have developed regulatory requirements that may affect our business. The U.S. Congress is considering climate-related legislation to reduce emissions of greenhouse gases. Several states have also developed measures to regulate emissions of greenhouse gases, primarily through the planned development of greenhouse gas emissions inventories and/or regional greenhouse gas cap and trade programs. In late 2009 and early 2010, the U.S. EPA adopted regulations requiring reporting of greenhouse gas emissions from certain facilities, updating the renewable fuels standard and is considering additional regulation of greenhouse gases under the existing federal Clean Air Act. In addition, the EU has adopted legislation to include aviation within the EU’s existing greenhouse gas emission trading scheme effective in 2012. This legislation has been legally challenged in the EU but we have had to begin complying and incurred additional costs as a result of this legislation.


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While we cannot yet determine what the final regulatory programs will be in the United States, the EU or in other areas in which we do business, such climate change-related regulatory activity in the future may adversely affect our business and financial results.
 
California is in the process of implementing environmental provisions aimed at limiting emissions from motorized vehicles, which may include some airline belt loaders and tugs and require a change of ground service vehicles. The future costs associated with replacing some or all of our ground fleets in California cities are currently not expected to have a material adverse affect on our business.
 
Governmental authorities in several U.S. and foreign cities are also considering or have already implemented aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.
 
Ongoing data security compliance requirements could increase our costs, and any significant data breach could harm our business, financial condition or results of operations.
 
Our business requires the appropriate and secure utilization of customer and other sensitive information. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit existing vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting the networks that access and store database information. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad (particularly in the EU), including requirements for varying levels of customer notification in the event of a data breach.
 
Many of our commercial partners, including credit card companies, have imposed certain data security standards that we must meet. In particular, we are required by the Payment Card Industry Security Standards Council, founded by the credit card companies, to comply with their highest level of data security standards. While we continue our efforts to meet these standards, new and revised standards may be imposed that may be difficult for us to meet.
 
In addition to the Payment Card Industry Standards discussed above, failure to comply with the other privacy and data use and security requirements of our partners or related laws and regulations to which we are subject may expose us to fines, sanctions or other penalties, which could materially and adversely affect our results of operations and overall business. In addition, failure to address appropriately these issues could also give rise to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur further related costs and expenses.
 
Interruptions or disruptions in service at one of our hub airports or our focus city could have a material adverse impact on our operations.
 
We operate principally through hubs in Charlotte, Philadelphia and Phoenix and a focus city at Washington National Airport. Substantially all of our flights either originate in or fly into one of these locations. A significant interruption or disruption in service at one of our hubs resulting from air traffic control delays, weather conditions, natural disasters, growth constraints, relations with third-party service providers, failure of computer systems, labor relations, fuel supplies, terrorist activities or otherwise could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, operations and financial performance.
 
We are at risk of losses and adverse publicity stemming from any accident involving any of our aircraft or the aircraft of our regional operators.
 
If one of our aircraft, an aircraft that is operated under our brand by one of our regional operators or an aircraft that is operated by an airline that is one of our codeshare partners were to be involved in an accident, we could be exposed to significant tort liability. The insurance we carry to cover damages arising from any future accidents may be inadequate. In the event that our insurance is not adequate, we may be forced to bear substantial losses from an accident. In addition, any accident involving an aircraft that we operate, an aircraft that is operated under our brand by one of our regional operators or an aircraft that is operated by an airline that is one of our codeshare partners could create a public perception that our aircraft or those of our regional operators or codeshare partners are not safe


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or reliable, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft or those of our regional operators or codeshare partners and adversely impact our financial condition and operations.
 
Delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity may adversely impact our operations and financial results.
 
The success of our business depends on, among other things, the ability to operate a certain number and type of aircraft. In many cases, the aircraft we intend to operate are not yet in our fleet, but we have contractual commitments to purchase or lease them. If for any reason we were unable to accept or secure deliveries of new aircraft on contractually scheduled delivery dates, this could have a negative impact on our business, operations and financial performance. Our failure to integrate newly purchased aircraft into our fleet as planned might require us to seek extensions of the terms for some leased aircraft. Such unanticipated extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs. If new aircraft orders are not filled on a timely basis, we could face higher monthly rental rates.
 
Our business is subject to weather factors and seasonal variations in airline travel, which cause our results to fluctuate.
 
Our operations are vulnerable to severe weather conditions in parts of our network that could disrupt service, create air traffic control problems, decrease revenue and increase costs, such as during hurricane season in the Caribbean and Southeast United States, snow and severe winter weather in the Northeast United States and thunderstorms in the Eastern United States. In addition, the air travel business historically fluctuates on a seasonal basis. Due to the greater demand for air and leisure travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year. Our results of operations will likely reflect weather factors and seasonality, and therefore quarterly results are not necessarily indicative of those for an entire year, and our prior results are not necessarily indicative of our future results.
 
Increases in insurance costs or reductions in insurance coverage may adversely impact our operations and financial results.
 
The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease in the insurance coverage available to commercial air carriers. Accordingly, our insurance costs increased significantly and our ability to continue to obtain insurance even at current prices remains uncertain. In addition, we have obtained third-party war risk (terrorism) insurance through a special program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial insurance market. The program has been extended, with the same conditions and premiums, until August 31, 2010. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk insurance. The failure of one or more of our insurers could result in a lack of coverage for a period of time. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. Because of competitive pressures in our industry, our ability to pass additional insurance costs to passengers is limited. As a result, further increases in insurance costs or reductions in available insurance coverage could have an adverse impact on our financial results.
 
We may be adversely affected by global events that affect travel behavior.
 
Our revenue and results of operations may be adversely affected by global events beyond our control. An outbreak of a contagious disease such as Severe Acute Respiratory Syndrome (“SARS”), H1N1 influenza virus, avian flu, or any other influenza-type illness, if it were to persist for an extended period, could again materially affect the airline industry and us by reducing revenues and impacting travel behavior.
 
We are exposed to foreign currency exchange rate fluctuations.
 
As we expand our international operations, we will have significant operating revenues and expenses, as well as assets and liabilities, denominated in foreign currencies. Fluctuations in foreign currencies can significantly affect our operating performance and the value of our assets and liabilities located outside of the United States.


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The use of US Airways Group’s net operating losses and certain other tax attributes could be limited in the future.
 
When a corporation undergoes an “ownership change” as defined in Section 382 of the Internal Revenue Code, or Section 382, a limitation is imposed on the corporation’s future ability to utilize any net operating losses, or NOLs, generated before the ownership change and certain subsequently recognized “built-in” losses and deductions, if any, existing as of the date of the ownership change. We believe an “ownership change” as defined in Section 382 occurred for US Airways Group in February 2007. Since February 2007 there have been additional changes in the ownership of US Airways Group that, if combined with sufficiently large future changes in ownership, could result in another “ownership change” as defined in Section 382. Until US Airways Group has used all of its existing NOLs, future shifts in ownership of US Airways Group’s common stock could result in new Section 382 limitations on the use of our NOLs as of the date of an additional ownership change. For purposes of determining if an ownership change has occurred, the right to convert convertible notes into stock may be treated as if US Airways Group had issued the underlying stock.
 
Risks Relating to Our Common Stock
 
The price of our common stock has recently been and may in the future be volatile.
 
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:
 
  •   our operating results failing to meet the expectations of securities analysts or investors;
 
  •   changes in financial estimates or recommendations by securities analysts;
 
  •   material announcements by us or our competitors;
 
  •   movements in fuel prices;
 
  •   new regulatory pronouncements and changes in regulatory guidelines;
 
  •   general and industry-specific economic conditions;
 
  •   public sales of a substantial number of shares of our common stock; and
 
  •   general market conditions.
 
Conversion of our convertible notes will dilute the ownership interest of existing stockholders and could adversely affect the market price of our common stock.
 
The conversion of some or all of US Airways Group’s 7% senior convertible notes due 2020 or 7.25% convertible senior notes due 2014 will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the convertible notes may encourage short selling by market participants because the conversion of the notes could depress the price of our common stock.
 
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group make it difficult for stockholders to change the composition of our board of directors and may discourage takeover attempts that some of our stockholders might consider beneficial.
 
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of US Airways Group and its stockholders. These provisions include, among other things, the following:
 
  •   a classified board of directors with three-year staggered terms;
 
  •   advance notice procedures for stockholder proposals to be considered at stockholders’ meetings;
 
  •   the ability of US Airways Group’s board of directors to fill vacancies on the board;
 
  •   a prohibition against stockholders taking action by written consent;
 
  •   a prohibition against stockholders calling special meetings of stockholders;


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  •   a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve amendment of the amended and restated bylaws; and
 
  •   super-majority voting requirements to modify or amend specified provisions of US Airways Group’s amended and restated certificate of incorporation.
 
These provisions are not intended to prevent a takeover, but are intended to protect and maximize the value of US Airways Group’s stockholders’ interests. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable our board of directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, US Airways Group is subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders. Interested stockholders do not include stockholders, such as our equity investors at the time of the merger, whose acquisition of US Airways Group’s securities is approved by the board of directors prior to the investment under Section 203.
 
Our charter documents include provisions limiting voting and ownership of our equity interests, which includes our common stock and our convertible notes, by foreign owners.
 
Our charter documents provide that, consistent with the requirements of Subtitle VII of Title 49 of the United States Code, as amended, or as the same may be from time to time amended (the “Aviation Act”), any person or entity who is not a “citizen of the United States” (as defined under the Aviation Act and administrative interpretations issued by the Department of Transportation, its predecessors and successors, from time to time), including any agent, trustee or representative of such person or entity (a “non-citizen”), shall not own (beneficially or of record) and/or control more than (a) 24.9% of the aggregate votes of all of our outstanding equity securities (as defined, which definition includes our capital stock, securities convertible into or exchangeable for shares of our capital stock, including our outstanding convertible notes, and any options, warrants or other rights to acquire capital stock) (the “voting cap amount”) or (b) 49.9% of our outstanding equity securities (the “absolute cap amount”). If non-citizens nonetheless at any time own and/or control more than the voting cap amount, the voting rights of the equity securities in excess of the voting cap amount shall be automatically suspended in accordance with the provisions of our bylaws. Voting rights of equity securities, if any, owned (beneficially or of record) by non-citizens shall be suspended in reverse chronological order based upon the date of registration in the foreign stock record. Further, if at any time a transfer of equity securities to a non-citizen would result in non-citizens owning more than the absolute cap amount, such transfer shall be void and of no effect, in accordance with provisions of our bylaws. Certificates for our equity securities must bear a legend set forth in our amended and restated certificate of incorporation stating that such equity securities are subject to the foregoing restrictions. Under our bylaws, it is the duty of each stockholder who is a non-citizen to register his, her or its equity securities on our foreign stock record. In addition, our bylaws provide that in the event that non-citizens shall own (beneficially or of record) or have voting control over any equity securities, the voting rights of such persons shall be subject to automatic suspension to the extent required to ensure that we are in compliance with applicable provisions of law and regulations relating to ownership or control of a United States air carrier. In the event that we determine that the equity securities registered on the foreign stock record or the stock records of the Company exceed the absolute cap amount, sufficient shares shall be removed from the foreign stock record and the stock records of the Company so that the number of shares entered therein does not exceed the absolute cap amount. Shares of equity securities shall be removed from the foreign stock record and the stock records of the Company in reverse chronological order based on the date of registration in the foreign stock record and the stock records of the Company.
 
Item 1B.  Unresolved Staff Comments
 
None.


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Item 2.  Properties
 
Flight Equipment
 
We operated a mainline fleet of 349 aircraft at the end of 2009, down from a total of 354 mainline aircraft at the end of 2008. During 2009, we removed 11 leased Boeing 757-200 aircraft, six leased Boeing 737-300 aircraft, seven leased Airbus A320 aircraft and six owned Embraer 190 aircraft from our mainline operating fleet. We sold 10 of our Embraer 190 aircraft to Republic in 2009 and are currently leasing back four of these aircraft for periods ranging from one to five months. During 2009, we took delivery of 18 Airbus A321 aircraft, five Airbus A330-200 aircraft and two Airbus A320 aircraft. We are also supported by our regional airline subsidiaries and affiliates operating as US Airways Express either under capacity purchase or prorate agreements, which operate approximately 236 regional jets and 60 turboprops.
 
US Airways has definitive purchase agreements with Airbus for the acquisition of 134 aircraft, including 97 single-aisle A320 family aircraft and 37 widebody aircraft (comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft), of which 30 aircraft have been delivered through December 31, 2009. Deliveries of the A320 family aircraft commenced during 2008 with the delivery of five A321 aircraft. As described above, in 2009 we took delivery of 18 Airbus A321 aircraft and two Airbus A320 aircraft under our Amended and Restated Airbus A320 Family Aircraft Purchase Agreement and five Airbus A330-200 aircraft under our Airbus A330 Aircraft Purchase Agreement.
 
In November 2009, US Airways amended its purchase agreements with Airbus to defer 54 aircraft originally scheduled for delivery between 2010 and 2012 to 2013 and beyond. US Airways now plans to take delivery of 28 Airbus aircraft between 2010 and 2012, consisting of four aircraft in 2010 (two A320 aircraft and two A330 aircraft) and 24 A320 family aircraft in 2011-2012. US Airways has financing commitments in place for all 28 of these aircraft. In addition, commencement of US Airways’ Airbus A350 XWB operations, with aircraft deliveries originally scheduled to start in 2015, will now be postponed to 2017. The aircraft deferrals will not significantly alter our capacity as we are currently in the process of extending leases for certain aircraft originally scheduled to be replaced during 2010-2012. We intend to retain these aircraft until the rescheduled new aircraft delivery dates.
 
As of December 31, 2009, our mainline operating fleet consisted of the following aircraft:
 
                                         
          Owned/
                   
Aircraft Type
  Avg. Seats     Mortgaged (1)     Leased (2)     Total     Avg. Age  
 
A330-300
    293       4       5       9       9.3  
A330-200
    258       2       3       5       0.3  
A321
    183       38       13       51       5.0  
A320
    150       9       61       70       11.1  
A319
    124       3       90       93       9.2  
B767-200ER
    204             10       10       20.4  
B757-200
    188       3       25       28       18.5  
B737-400
    144             40       40       19.8  
B737-300
    131             24       24       22.0  
ERJ 190
    99       15       4       19       2.1  
                                         
Total
    153       74       275       349       11.6  
 
 
(1) All owned aircraft are pledged as collateral for various secured financing agreements.
 
(2) The terms of the leases expire between 2010 and 2024.
 
As of December 31, 2009, our wholly owned regional airline subsidiaries operated the following regional jet and turboprop aircraft:
 
                                         
    Average Seat
                      Average
 
Aircraft Type
  Capacity     Owned     Leased (1)     Total     Age (years)  
 
CRJ-700
    70       7       7       14       5.3  
CRJ-200
    50       12       23       35       5.8  
De Havilland Dash 8-300
    50             11       11       18.3  
De Havilland Dash 8-100
    37       33             33       20.4  
                                         
Total
    48       52       41       93       12.4  
 
 
(1) The terms of the leases expire between 2013 and 2022.


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We maintain inventories of spare engines, spare parts, accessories and other maintenance supplies sufficient to support our operating requirements.
 
The following table illustrates our committed orders and scheduled lease expirations at December 31, 2009:
 
                                                 
    2010   2011   2012   2013   2014   Thereafter
 
Firm orders remaining
    4       12       12       21       21       34  
Scheduled mainline lease expirations
    33       28       26       24       14       150  
Scheduled wholly owned Express subsidiaries lease expirations
                      3       3       35  
 
See Notes 9 and 8, “Commitments and Contingencies” in Part II, Items 8A and 8B, respectively, for additional information on aircraft purchase commitments.
 
Ground Facilities
 
At each airport where we conduct flight operations, we lease passenger and baggage handling space, generally from the airport operator, but in some cases on a subleased basis from other airlines. Our main operational facilities are located at our hubs and focus city at the following airports: Charlotte, Philadelphia, Phoenix and Washington National airports. At those locations and in other cities we serve, we maintain administrative offices, terminal, catering, cargo and other airport facilities, training facilities, maintenance facilities and other facilities, in each case as necessary to support our operations in the particular city. Our Operations Control Center is located in Pittsburgh, Pennsylvania, in a facility leased from the Allegheny County Airport Authority.
 
Our corporate headquarters building is located in Tempe, Arizona, and we have satellite facilities housing various headquarter support functions in the surrounding metropolitan area. The leases on these office facilities have expiration dates ranging from 2013 to 2015.
 
Terminal Construction Projects
 
We use public airports for our flight operations under lease arrangements with the government entities that own or control these airports. Airport authorities frequently require airlines to execute long-term leases to assist in obtaining financing for terminal and facility construction. Any future requirements for new or improved airport facilities and passenger terminals at airports in which our airline subsidiaries operate could result in additional occupancy costs and long-term commitments.
 
Item 3.  Legal Proceedings
 
On September 12, 2004, US Airways Group and its domestic subsidiaries (collectively, the “Reorganized Debtors”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (Case Nos. 04-13819-SSM through 03-13823-SSM) (the “2004 Bankruptcy”). On September 16, 2005, the Bankruptcy Court issued an order confirming the plan of reorganization submitted by the Reorganized Debtors and on September 27, 2005, the Reorganized Debtors emerged from the 2004 Bankruptcy. The Bankruptcy Court’s order confirming the plan included a provision called the plan injunction, which forever bars other parties from pursuing most claims against the Reorganized Debtors that arose prior to September 27, 2005 in any forum other than the Bankruptcy Court. Substantially all of the claims in the 2004 Bankruptcy have been settled and the remaining claims, if paid at all, will be paid out in common stock of the post-bankruptcy US Airways Group at a small fraction of the actual claim amount. However, the effects of these common stock distributions were already reflected in our financial statements upon emergence from bankruptcy and will not have any further impact on our financial position or results of operations. We presently expect the bankruptcy case to be closed during 2010.
 
The Company and/or its subsidiaries are defendants in various pending lawsuits and proceedings, and from time to time are subject to other claims arising in the normal course of our business, many of which are covered in whole or in part by insurance. The outcome of those matters cannot be predicted with certainty at this time, but the Company, having consulted with outside counsel, believes that the ultimate disposition of these contingencies will not materially affect its consolidated financial position or results of operations.
 
Item 4.  Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of security holders during the fourth quarter of 2009.


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PART II
 
Item 5. Market for US Airways Group’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Stock Exchange Listing
 
Our common stock trades on the NYSE under the symbol “LCC.” As of February 12, 2010, the closing price of our common stock on the NYSE was $6.81. As of February 12, 2010, there were 1,927 holders of record of our common stock.
 
Market Prices of Common Stock
 
The following table sets forth, for the periods indicated, the high and low sale prices of our common stock on the NYSE:
 
                         
Year Ended
           
December 31
  Period   High   Low
 
  2009     Fourth Quarter   $ 5.40     $   2.82  
        Third Quarter     5.60       2.00  
        Second Quarter     5.35       2.11  
        First Quarter     9.70       1.88  
                         
  2008     Fourth Quarter   $   11.24     $ 3.16  
        Third Quarter     10.46       1.45  
        Second Quarter     9.94       2.30  
        First Quarter     16.44       7.24  
 
US Airways Group has not declared or paid cash or other dividends on its common stock since 1990 and currently does not intend to do so. Under the provisions of certain debt agreements, including our secured loans, our ability to pay dividends on or repurchase our common stock is restricted. Any future determination to pay cash dividends will be at the discretion of our board of directors, subject to applicable limitations under Delaware law, and will depend upon our results of operations, financial condition, contractual restrictions and other factors deemed relevant by our board of directors.
 
Foreign Ownership Restrictions
 
Under current federal law, non-U.S. citizens cannot own or control more than 25% of the outstanding voting securities of a domestic air carrier. We believe that we were in compliance with this statute during the time period covered by this report.


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Stock Performance Graph
 
The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
 
The following stock performance graph compares our cumulative total shareholder return on an annual basis on our common stock with the cumulative total return on the Standard and Poor’s 500 Stock Index and the AMEX Airline Index from September 27, 2005 (the date our stock began trading on the NYSE under the symbol LCC after the merger) through December 31, 2009. The comparison assumes $100 was invested on September 27, 2005 in US Airways Group common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
 
(PERFORMANCE GRAPH)
 
                                                 
    9/27/2005     12/31/2005     12/31/2006     12/31/2007     12/31/2008     12/31/2009  
 
US Airways Group, Inc. 
  $   100     $   192     $   279     $   76     $   40     $   25  
Amex Airline Index
    100       133       142       84       59       82  
S&P 500
    100       103       117       121       74       92  


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Item 6. Selected Financial Data
 
Selected Consolidated Financial Data of US Airways Group
 
The selected consolidated financial data presented below under the captions “Consolidated statements of operations data” and “Consolidated balance sheet data” as of and for the years ended December 31, 2005 to 2009 are derived from the consolidated financial statements of US Airways Group, which have been audited by KPMG LLP, an independent registered public accounting firm. The full years 2009, 2008, 2007 and 2006 are comprised of the consolidated financial data of US Airways Group. The 2005 consolidated financial data presented includes the consolidated results of America West Holdings for the 269 days through September 27, 2005, the effective date of the merger, and the consolidated results of US Airways Group and its subsidiaries, including US Airways, America West Holdings and AWA, for the 96 days from September 27, 2005 to December 31, 2005. The selected consolidated financial data should be read in conjunction with the consolidated financial statements for the respective periods, the related notes and the related reports of US Airways Group’s independent registered public accounting firm.
 
                                         
    Year Ended December 31,  
    2009     2008     2007     2006     2005  
    (In millions except share and per share data)  
 
Consolidated statements of operations data:
                                       
Operating revenues
  $ 10,458     $ 12,118     $ 11,700     $ 11,557     $ 5,069  
Operating expenses (a)
    10,340       13,918       11,167       10,999       5,286  
                                         
Operating income (loss) (a)
    118       (1,800 )     533       558       (217 )
Income (loss) before cumulative effect of change in accounting principle (b)
    (205 )     (2,215 )     423       285       (337 )
Cumulative effect of change in accounting principle, net (c)
                      1       (202 )
                                         
Net income (loss)
  $ (205 )   $ (2,215 )   $ 423     $ 286     $ (539 )
                                         
Earnings (loss) per common share before cumulative effect of change in accounting principle:
                                       
Basic
  $ (1.54 )   $ (22.11 )   $ 4.62     $ 3.30     $ (10.70 )
Diluted
    (1.54 )     (22.11 )     4.52       3.20       (10.70 )
Cumulative effect of change in accounting principle:
                                       
Basic
  $     $     $     $ 0.01     $ (6.41 )
Diluted
                      0.01       (6.41 )
Earnings (loss) per common share:
                                       
Basic
  $ (1.54 )   $ (22.11 )   $ 4.62     $ 3.31     $ (17.11 )
Diluted
    (1.54 )     (22.11 )     4.52       3.21       (17.11 )
Shares used for computation (in thousands):
                                       
Basic
     133,000        100,168        91,536        86,447        31,488  
Diluted
    133,000       100,168       95,603       93,821       31,488  
Consolidated balance sheet data (at end of period):
                                       
Total assets
  $ 7,454     $ 7,214     $ 8,040     $ 7,576     $ 6,964  
Long-term obligations, less current maturities (d)
    4,643       4,281       3,654       3,454       3,366  
Total stockholders’ equity (deficit)
    (355 )     (494 )     1,455       990       465  
 
 
(a) The 2009 period included $375 million of net unrealized gains on fuel hedging instruments, $22 million in aircraft costs as a result of our previously announced capacity reductions, $16 million in non-cash impairment charges due to the decline in fair value of certain indefinite lived intangible assets associated with our international routes, $11 million in severance and other charges, $6 million in costs incurred related to our liquidity improvement program and $3 million in non-cash charges related to the decline in fair value of certain Express spare parts.
 
The 2008 period included a $622 million non-cash charge to write off all of the goodwill created by the merger of US Airways Group and America West Holdings in September 2005, as well as $496 million of net


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unrealized losses on fuel hedging instruments. In addition, the 2008 period included $35 million of merger-related transition expenses, $18 million in non-cash charges related to the decline in fair value of certain spare parts associated with our Boeing 737 aircraft fleet and, as a result of our capacity reductions, $14 million in aircraft costs and $9 million in severance charges.
 
The 2007 period included $187 million of net unrealized gains on fuel hedging instruments, $7 million in tax credits due to an IRS rule change allowing us to recover certain fuel usage tax amounts for years 2003-2006, $9 million of insurance settlement proceeds related to business interruption and property damages incurred as a result of Hurricane Katrina in 2005 and a $5 million Piedmont pilot pension curtailment gain related to the FAA-mandated pilot retirement age change. These credits were offset by $99 million of merger-related transition expenses, a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of the FAA-mandated pilot retirement age change and $5 million in charges related to reduced flying from Pittsburgh.
 
The 2006 period included $131 million of merger-related transition expenses and $70 million of net unrealized losses on fuel hedging instruments, offset by a $90 million gain associated with the return of equipment deposits upon forgiveness of a loan and $14 million of gains associated with the settlement of bankruptcy claims.
 
The 2005 period included $28 million of merger-related transition expenses, a $27 million loss on the sale-leaseback of six Boeing 737-300 aircraft and two Boeing 757 aircraft, $7 million of power-by-the-hour program penalties associated with the return of certain leased aircraft, $1 million of severance for terminated employees resulting from the merger, a $1 million charge related to aircraft removed from service and a $50 million charge related to an amended Airbus purchase agreement, along with the write off of $7 million in capitalized interest. The $50 million charge was paid by means of set-off against existing equipment purchase deposits held by Airbus. The 2005 period also included $4 million of net unrealized gains on fuel hedging instruments.
 
(b) The 2009 period included $49 million in non-cash charges associated with the sale of 10 E190 aircraft and write off of related debt discount and issuance costs, $10 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities and a $2 million non-cash asset impairment charge. In addition, the period included a tax benefit of $38 million. Of this amount, $21 million was due to a non-cash income tax benefit related to gains recorded within other comprehensive income. In addition, we recorded a $14 million tax benefit related to a legislation change allowing us to carry back 100% of 2008 Alternative Minimum Tax liability (“AMT”) net operating losses, resulting in the recovery of AMT amounts paid in prior years. We also recognized a $3 million tax benefit related to the reversal of the deferred tax liability associated with the indefinite lived intangible assets that were impaired during 2009.
 
The 2008 period included $214 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities as well as $7 million in write offs of debt discount and debt issuance costs in connection with the refinancing of certain aircraft equipment notes and certain loan prepayments, offset by $8 million in gains on forgiveness of debt.
 
The 2007 period included an $18 million write off of debt issuance costs in connection with the refinancing of the $1.25 billion senior secured credit facility with General Electric Capital Corporation (“GECC”), referred to as the GE loan, in March 2007 and $10 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities, offset by a $17 million gain recognized on the sale of stock in ARINC Incorporated. In addition, the period also included a non-cash expense for income taxes of $7 million related to the utilization of net operating loss carryforwards (“NOLs”) acquired from US Airways. The valuation allowance associated with these acquired NOLs was recognized as a reduction of goodwill rather than a reduction in tax expense.
 
The 2006 period included a non-cash expense for income taxes of $85 million related to the utilization of NOLs acquired from US Airways. In addition, the period included $6 million of prepayment penalties and $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan previously guaranteed by the Air Transportation Stabilization Board (“ATSB”) and two loans previously provided to AWA by GECC, $17 million in payments in connection with the inducement to convert $70 million of US Airways Group’s 7% Senior Convertible Notes to common stock and a $14 million


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write off of debt discount and issuance costs associated with those converted notes, offset by $8 million of interest income earned by AWA on certain prior year federal income tax refunds.
 
The 2005 period included an $8 million charge related to the write off of the unamortized value of the ATSB warrants upon their repurchase in October 2005 and an aggregate $2 million write off of debt issuance costs associated with the exchange of AWA’s 7.25% Senior Exchangeable Notes due 2023 and retirement of a portion of the loan formerly guaranteed by the ATSB. In the fourth quarter of 2005, which was subsequent to the effective date of the merger, US Airways recorded $4 million of mark-to-market gains attributable to stock options in Sabre Inc. (“Sabre”) and warrants in a number of e-commerce companies.
 
(c) The 2006 period included a $1 million benefit which represents the cumulative effect on the accumulated deficit of the adoption of new share-based payment accounting guidance. The adjustment reflects the impact of estimating future forfeitures for previously recognized compensation expense.
 
The 2005 period included a $202 million adjustment which represents the cumulative effect on the accumulated deficit of the adoption of the direct expense method of accounting for major scheduled airframe, engine and certain component overhaul costs as of January 1, 2005.
 
(d) Includes debt, capital leases, postretirement benefits other than pensions and employee benefit liabilities and other.
 
Selected Consolidated Financial Data of US Airways
 
The selected consolidated financial data presented below under the captions “Consolidated statements of operations data” and “Consolidated balance sheet data” as of and for the years ended December 31, 2009, 2008, 2007 and 2006, three months ended December 31, 2005 and nine months ended September 30, 2005 are derived from the consolidated financial statements of US Airways, which have been audited by KPMG LLP, an independent registered public accounting firm. In 2007, US Airways Group contributed 100% of its equity interest in America West Holdings, the parent company of AWA, to US Airways in connection with the combination of all mainline operations under one FAA operating certificate. This contribution is reflected in US Airways’ consolidated financial statements as though the transfer had occurred at the time of US Airways’ emergence from bankruptcy at the end of September 2005. Thus, the full years 2009, 2008, 2007 and 2006 and three months ended December 31, 2005 are comprised of the consolidated financial data of US Airways and America West Holdings. The nine months ended September 30, 2005 consolidated financial data presented include the results of only US Airways. The selected consolidated financial data should be read in conjunction with the consolidated financial statements for the respective periods, the related notes and the related reports of US Airways’ independent registered public accounting firm.
 
                                                 
          Predecessor
 
    Successor Company (a)     Company (a)  
                            Three Months
    Nine Months
 
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Ended
    Ended
 
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
    September 30,
 
    2009     2008     2007     2006     2005     2005  
    (In millions)  
 
Consolidated statements of operations data:
                                               
Operating revenues
  $   10,609     $   12,244     $   11,813     $   11,692     $   2,589     $   5,452  
Operating expenses (b)
    10,487       14,017       11,289       11,135       2,772       5,594  
                                                 
Operating income (loss) (b)
    122       (1,773 )     524       557       (183 )     (142 )
Income (loss) before cumulative effect of change in accounting principle (c)
    (140 )     (2,148 )     478       348       (256 )     280  
Cumulative effect of change in accounting principle, net (d)
                      1              
                                                 
Net income (loss)
  $ (140 )   $ (2,148 )   $ 478     $ 349     $ (256 )   $ 280  
                                                 
 


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    Successor Company (a)  
    December 31,  
    2009     2008     2007     2006     2005  
    (In millions)  
 
Consolidated balance sheet data (at end of period):
                                       
Total assets
  $   7,123     $   6,954     $   7,787     $   7,351     $   6,763  
Long-term obligations, less current maturities (e)
    3,266       2,867       2,013       2,131       3,238  
Total stockholder’s equity (deficit)
    255       (221 )     1,850       (461 )     (810 )
 
 
(a) In connection with emergence from bankruptcy in September 2005, US Airways adopted fresh-start reporting. As a result of the application of fresh-start reporting, the financial statements after September 30, 2005 are not comparable with the financial statements from periods prior to September 30, 2005. References to “Successor Company” refer to US Airways on and after September 30, 2005, after the application of fresh-start reporting for the bankruptcy.
 
(b) The 2009 period included $375 million of net unrealized gains on fuel hedging instruments, $22 million in aircraft costs as a result of US Airways’ previously announced capacity reductions, $16 million in non-cash impairment charges due to the decline in fair value of certain indefinite lived intangible assets associated with US Airways’ international routes, $11 million in severance and other charges and $6 million in costs incurred related to US Airways’ liquidity improvement program.
 
The 2008 period included a $622 million non-cash charge to write off all of the goodwill created by the merger of US Airways Group and America West Holdings in September 2005, as well as $496 million of net unrealized losses on fuel hedging instruments. In addition, the 2008 period included $35 million of merger-related transition expenses, $18 million in non-cash charges related to the decline in fair value of certain spare parts associated with US Airways’ Boeing 737 aircraft fleet and, as a result of US Airways’ capacity reductions, $14 million in aircraft costs and $9 million in severance charges.
 
The 2007 period included $187 million of net unrealized gains on fuel hedging instruments, $7 million in tax credits due to an IRS rule change allowing US Airways to recover certain fuel usage tax amounts for years 2003-2006 and $9 million of insurance settlement proceeds related to business interruption and property damages incurred as a result of Hurricane Katrina in 2005. These credits were offset by $99 million of merger-related transition expenses, a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of the FAA-mandated pilot retirement age change and $4 million in charges related to reduced flying from Pittsburgh.
 
The 2006 period included $131 million of merger-related transition expenses and $70 million of net unrealized losses on fuel hedging instruments, offset by a $90 million gain associated with the return of equipment deposits upon forgiveness of a loan and $3 million of gains associated with the settlement of bankruptcy claims.
 
The period for the three months ended December 31, 2005 included $69 million of net unrealized losses on fuel hedging instruments, $28 million of merger-related transition expenses, $7 million of power-by-the-hour program penalties associated with the return of certain leased aircraft and $1 million of severance costs for terminated employees resulting from the merger.
 
(c) The 2009 period included $49 million in non-cash charges associated with the sale of 10 E190 aircraft and write off of related debt discount and issuance costs, $10 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities and a $2 million non-cash asset impairment charge. In addition, the period included a tax benefit of $38 million. Of this amount, $21 million was due to a non-cash income tax benefit related to gains recorded within other comprehensive income. In addition, US Airways recorded a $14 million tax benefit related to a legislation change allowing it to carry back 100% of 2008 AMT net operating losses, resulting in the recovery of AMT amounts paid in prior years. US Airways also recognized a $3 million tax benefit related to the reversal of the deferred tax liability associated with the indefinite lived intangible assets that were impaired during 2009.
 
The 2008 period included $214 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities as well as $6 million in write offs of debt discount and debt

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issuance costs in connection with the refinancing of certain aircraft equipment notes and a loan prepayment, offset by $8 million in gains on forgiveness of debt.
 
The 2007 period included a $17 million gain recognized on the sale of stock in ARINC Incorporated, offset by $10 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities. In addition, the period also included a non-cash expense for income taxes of $7 million related to the utilization of NOLs that were generated prior to the merger. The decrease in the corresponding valuation allowance was recognized as a reduction of goodwill rather than a reduction in tax expense.
 
The 2006 period included a non-cash expense for income taxes of $85 million related to the utilization of NOLs that were generated prior to the merger. In addition, the period included $6 million of prepayment penalties and $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan previously guaranteed by the ATSB and two loans previously provided to AWA by GECC, offset by $8 million of interest income earned by AWA on certain prior year federal income tax refunds.
 
The period for the three months ended December 31, 2005 included an $8 million charge related to the write off of the unamortized value of the ATSB warrants upon their repurchase in October 2005 and an aggregate $2 million write off of debt issuance costs associated with the exchange of AWA’s 7.25% Senior Exchangeable Notes due 2023 and retirement of a portion of the loan formerly guaranteed by the ATSB. US Airways also recorded in this period $4 million of mark-to-market gains attributable to stock options in Sabre and warrants in a number of e-commerce companies.
 
The nine months ended September 30, 2005 included reorganization items, which amounted to a $636 million net gain.
 
(d) The 2006 period included a $1 million benefit which represents the cumulative effect on the accumulated deficit of the adoption of new share-based payment accounting guidance. The adjustment reflects the impact of estimating future forfeitures for previously recognized compensation expense.
 
(e) Includes debt, capital leases, postretirement benefits other than pensions and employee benefit liabilities and other.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Background
 
US Airways Group is a holding company whose primary business activity is the operation of a major network air carrier through its wholly owned subsidiaries US Airways, Piedmont, PSA, MSC and AAL. Effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005, US Airways Group merged with America West Holdings, with US Airways Group as the surviving corporation.
 
We operate the fifth largest airline in the United States as measured by domestic RPMs and ASMs. We have hubs in Charlotte, Philadelphia and Phoenix and a focus city at Ronald Reagan Washington National Airport. We offer scheduled passenger service on more than 3,000 flights daily to more than 190 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service, with a substantial presence at Washington National Airport. We had approximately 51 million passengers boarding our mainline flights in 2009. As of December 31, 2009, we operated 349 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express either under capacity purchase or prorate agreements, which operated approximately 236 regional jets and 60 turboprops.
 
2009 Year in Review
 
The U.S. Airline Industry
 
The airline industry in the United States was severely impacted in 2009 by the global economic recession. Passenger demand, as reported by the Air Transport Association (“ATA”), declined severely in 2009 as compared to 2008. Despite capacity cuts put in place to help offset the decline in demand for air travel, industry revenues were adversely affected by severe fare discounting by carriers to stimulate demand. Business bookings, which typically drive stronger yields, declined sharply in 2009 as companies cut costs by reducing their travel budgets in response to


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the economic recession. ATA reported yields for U.S. airlines declined by 13% in 2009 as compared to 2008 while U.S. airline passenger revenues were down 18% for fiscal year 2009, which represented the largest decline on record, exceeding the 14% decline observed from 2000 to 2001.
 
International markets were more severely impacted by the economic slowdown than domestic markets. This was a result of international traffic’s greater reliance on business travel, particularly premium business and first class seating, to drive profitability. Additionally, there was capacity expansion overseas during the past several years, which the U.S. industry reduced by only 6% in 2009 as compared to domestic capacity reductions of 7%. The contraction of business spending also significantly impacted cargo demand.
 
During times of weak travel demand, falling fuel prices have historically served as a natural hedge. Although the price of crude oil was down substantially in 2009 from its record high of $147 per barrel in July 2008, it remained volatile and did not fully offset the negative economic impact to passenger demand. During 2009, the price of crude oil on a per barrel basis ranged from a high of $81.03 to a low of $34.03, and closed at $79.39 on December 31, 2009. The volatility in oil prices made the use of hedging positions by airlines to contain fuel costs either expensive (call options) or risky due to counterparty cash collateral requirements (collars and swaps).
 
Accordingly, in 2009 the industry focused on conserving and building cash and matching capacity to demand. In the latter part of 2009, credit and equity markets were increasingly open to airlines and several U.S. airlines raised cash to enhance liquidity through a number of initiatives such as traditional public stock and debt issuances, asset sales, asset sale-leasebacks and transactions with co-branded credit card issuers.
 
US Airways
 
Financial Results
 
US Airways Group’s net loss for 2009 was $205 million, or a loss of $1.54 per share, as compared to a net loss of $2.22 billion, or $22.11 per share, in 2008. Similar to other carriers in the U.S. airline industry, we experienced significant declines in revenues as a result of the global economic recession, which more than offset the benefits of reduced fuel costs during 2009.
 
Revenue
 
The weak demand environment caused by the economic recession resulted in a $1.81 billion, or 16.3%, decrease in mainline and Express passenger revenues in 2009 on lower capacity as compared to 2008. Our decline in passenger revenues was lower than the U.S. industry average of 18% reported by ATA as relative to the other U.S. legacy or big five hub-and-spoke carriers, our larger domestic presence meant our revenues were less exposed to the more adverse effects of the economic recession experienced in international markets. Our international capacity represents approximately 22% of our total ASMs. The industry took more aggressive corrective capacity reductions domestically than it did internationally in 2009.
 
Our revenues also benefited from our new revenue initiatives which generated $424 million in ancillary revenues for 2009. Given our shorter length of haul and domestic focus, we believe these initiatives provided greater benefit to us than our competitors. Ancillary revenues include first and second checked bag service fees, processing fees for travel awards issued through our Dividend Miles frequent traveler program, our new Choice Seats program, and call center/airport ticketing fees. As a result of new ancillary revenues, while our mainline and Express PRASM was 10.88 cents in 2009, a 12.4% decline as compared to 12.42 cents in 2008, our total revenue per available seat mile (“RASM”) declined by a lower amount. RASM was 12.29 cents in 2009, as compared to 13.6 cents in 2008, representing only a 9.6% decline.
 
Fuel
 
The average mainline and Express price per gallon of fuel decreased 44.8% to $1.76 in 2009 from $3.18 in 2008. As a result, our mainline and Express fuel expense for 2009 was $2.28 billion, or 48%, lower than the 2008 period on 4.5% lower capacity. Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts. Net losses associated with fuel hedging transactions were $7 million in 2009, a decline of $349 million from 2008. The year ended


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December 31, 2009 included $382 million of net realized losses, offset by $375 million of net unrealized gains. The 2009 net unrealized gains represent the reversal of prior year unrealized losses related to the hedge transactions settling during the current year.
 
Capacity and Cost Control
 
We remain committed to maintaining our low cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel. In 2009, we continued our practice of minimizing and deferring discretionary expenditures whenever possible. We also controlled costs by continuing to run a good operation. See the “Customer Service” section below for a further discussion. Although there are significant ongoing fixed costs that do not vary with changes in capacity, we effectively managed our mainline operating cost per available seat mile (“CASM”). Excluding the effects of fuel and fuel hedging transactions as well as the $622 million non-cash charge recorded in 2008 to write off all of the goodwill created by the merger of US Airways Group and America West Holdings, our mainline CASM was relatively constant year over year. Mainline CASM decreased 3.6 cents, or 24.6%, to 11.06 cents in 2009 from 14.66 cents in 2008. Decreases in fuel and fuel hedging costs represented 2.71 cents, or 75.4%, of the CASM decrease, while the non-cash charge to write off goodwill represented 0.84 cents, or 23.3%, of the year-over-year decline.
 
To address the weak revenue environment in 2009, we continued to focus on matching capacity to demand and, as a result, our total RPMs decreased 4.2% on 4.5% lower capacity as compared to 2008. We achieved our 2009 capacity reductions through the sale of aircraft, return of aircraft to lessors and reductions in aircraft utilization. As a result of this reduced flying, we eliminated approximately 1,000 positions, including 400 flight attendants and 600 airport employees, thereby reducing salary expense in 2009 and going forward.
 
Customer Service
 
In 2009, we continued our commitment to running a successful airline. One of the important ways we do this is by taking care of our customers. We believe that our focus on excellent customer service in every aspect of our operations, including personnel, flight equipment, in-flight and ancillary amenities, on-time performance, flight completion ratios and baggage handling, will strengthen customer loyalty and attract new customers.
 
Our 2009 on-time performance rate was 80.9% and ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. Our mishandled baggage ratio for 2009 improved 36.5% as compared to 2008. Our 2009 mishandled baggage ratio of 3.03 also ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. The combination of continued strong on-time performance and fewer mishandled bags contributed to 34.8% fewer reported customer complaints to the DOT in 2009 as compared to 2008.
 
We reported the following combined operating statistics to the DOT for mainline operations for the years ended December 31, 2009, 2008 and 2007:
 
                         
    Full Year  
    2009     2008     2007  
 
On-time performance (a)
    80.9       80.1       68.7  
Completion factor (b)
    98.8       98.5       98.2  
Mishandled baggage (c)
    3.03       4.77       8.47  
Customer complaints (d)
    1.31       2.01       3.16  
 
 
(a) Percentage of reported flight operations arriving on time as defined by the DOT.
 
(b) Percentage of scheduled flight operations completed.
 
(c) Rate of mishandled baggage reports per 1,000 passengers.
 
(d) Rate of customer complaints filed with the DOT per 100,000 passengers.


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Liquidity Position
 
As of December 31, 2009, our cash, cash equivalents, investments in marketable securities and restricted cash were $1.98 billion, of which $480 million was restricted. Our investments in marketable securities included $203 million of auction rate securities that are classified as noncurrent assets on our consolidated balance sheets.
 
                 
    December 31,
    December 31,
 
    2009     2008  
    (In millions)  
 
Cash, cash equivalents and short-term investments in marketable securities
  $ 1,299     $ 1,054  
Short and long-term restricted cash
    480       726  
Long-term investments in marketable securities
    203       187  
                 
Total cash, cash equivalents, investments in marketable securities and restricted cash
  $   1,982     $   1,967  
                 
 
In addition to our capacity and cost control initiatives described above, we took further action in 2009 to strengthen and preserve our liquidity position. In the first nine months of 2009, we completed financing transactions generating $486 million. These transactions included net proceeds from public offerings of common stock and convertible notes of $66 million and $168 million, respectively, in May, and $137 million from an additional public offering of common stock in September. The remaining $115 million included proceeds from additional loans under a spare parts loan agreement, a loan secured by certain airport landing slots and an unsecured financing with one of our third-party Express carriers.
 
In November 2009, we completed a series of transactions with key business partners designed to improve our near-term and future liquidity. Our actions included the deferral of 54 Airbus aircraft previously scheduled for delivery between 2010 and 2012 that are now to be delivered in 2013 and beyond. These deferral arrangements will reduce our aircraft capital expenditures over the next three years by approximately $2.5 billion and reduce near- and medium-term obligations to Airbus and others by approximately $132 million. In addition to the aircraft deferral, we arranged credit facilities in the amount of $95 million and $180 million of aircraft financing commitments for the 2010 deliveries. Also, we agreed with Barclays Bank Delaware, our co-branded credit card provider, to permanently lower the monthly unrestricted cash condition precedent for the advance purchase of frequent flyer miles and defer for 14 months the amortization of $200 million advanced in connection with the previous purchase of miles. In the aggregate, these transactions improved year-end 2009 liquidity by approximately $150 million and will generate approximately $450 million of projected liquidity improvements by the end of 2010.
 
Strategic Initiatives
 
In 2009, we took the following actions which we believe will position us for success and help return us to profitability as the economy improves:
 
Delta Slot Transaction
 
In August 2009, US Airways Group and US Airways entered into a mutual asset purchase and sale agreement with Delta. Pursuant to the agreement, US Airways would transfer to Delta certain assets related to flight operations at LaGuardia Airport in New York, including 125 pairs of slots currently used to provide US Airways Express service at LaGuardia. Delta would transfer to US Airways certain assets related to flight operations at Washington National Airport, including 42 pairs of slots, and the authority to serve Sao Paulo, Brazil and Tokyo, Japan. One slot equals one take-off or landing, and each pair of slots equals one roundtrip flight. The agreement is structured as two simultaneous asset sales and is expected to be cash neutral to US Airways. The closing of the transactions under the agreement is subject to certain closing conditions, including approvals from a number of government agencies, including the U.S. Department of Justice, the DOT, the FAA and The Port Authority of New York and New Jersey. If approved, this transaction will significantly increase our capacity in the Washington, D.C. market and improve profitability.
 
On February 9, 2010, the DOT issued a proposed order conditionally approving the transaction. The proposed order, which is subject to a 30-day comment period, would require the airlines to divest 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. Delta and we are currently reviewing the


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DOT’s proposed order to determine next steps. However, we expect that if this order is implemented as proposed the transaction will not go forward.
 
Operational Realignment
 
In October 2009, we announced the realignment of our operations to focus on our core network strengths, which include our hubs in Charlotte, Philadelphia and Phoenix and our focus city at Washington National Airport. These four cities, as well as our popular hourly Shuttle service between LaGuardia, Boston and Washington National airports, will serve as the cornerstone of our network and by the end of 2010 are expected to represent 99% of our ASMs versus approximately 93% in 2009. Changes to facilitate this strategy include reducing daily departures from Las Vegas, closing stations in Colorado Springs and Wichita, redeploying our E190 fleet to routes between Boston and Philadelphia and the Boston-LaGuardia leg of the Shuttle, suspending five European destinations, returning our Philadelphia-Beijing route authority, rightsizing our crew bases at our hubs and focus city and closing crew bases in Boston, LaGuardia and Las Vegas. In connection with the realignment of our operations, we will reduce staffing by approximately 1,000 positions across our system during the first half of 2010. These reductions include approximately 600 airport passenger and ramp service positions, approximately 200 pilot positions and approximately 150 flight attendant positions. We believe that by concentrating on our strengths and eliminating unprofitable flying we will be better positioned to return US Airways to profitability.
 
2010 Outlook
 
As we begin 2010, it is difficult to predict the ongoing effects of the global economic recession. We have taken numerous actions to strengthen our current and future liquidity position. We have significantly reduced our required capital expenditures for 2010 through 2012 and eliminated our need to access aircraft finance markets in 2010. We believe that these actions coupled with our operational realignment have well positioned us as the economy recovers.
 
US Airways Group’s Results of Operations
 
In 2009, we realized operating income of $118 million and a loss before income taxes of $243 million. We experienced significant declines in revenues as a result of the global economic recession, which more than offset the benefits of reduced fuel costs during 2009. Our 2009 results were also impacted by recognition of the following items:
 
  •   $382 million of net realized losses on settled fuel hedging instruments, offset by $375 million of net unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments. In mark-to-market accounting, the unrealized losses recognized in prior periods are reversed as hedge transactions are settled in the current period. We were required to use mark-to-market accounting as our fuel hedging instruments did not meet the requirements for hedge accounting. If these instruments had qualified for hedge accounting treatment, any unrealized gains or losses would have been recorded in other comprehensive income, a component of stockholders’ equity;
 
  •   $55 million of net special charges consisting of $22 million in aircraft costs as a result of our previously announced capacity reductions, $16 million in non-cash impairment charges due to the decline in fair value of certain indefinite lived intangible assets associated with our international routes, $11 million in severance and other charges and $6 million in costs incurred related to our liquidity improvement program;
 
  •   $3 million in non-cash charges related to the decline in fair value of certain Express spare parts; and
 
  •   $49 million in non-cash charges associated with the sale of 10 Embraer 190 aircraft and write off of related debt discount and issuance costs, $10 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities and a $2 million non-cash asset impairment charge, all included in nonoperating expense, net.
 
In 2008, we realized an operating loss of $1.8 billion and a loss before income taxes of $2.22 billion. The 2008 loss was driven by an average mainline and Express price per gallon of fuel of $3.18 as well as a $622 million non-


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cash charge to write off all of the goodwill created by the merger of US Airways Group and America West Holdings in September 2005. Our 2008 results were also impacted by recognition of the following items:
 
  •   $496 million of net unrealized losses resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments, offset by $140 million of net realized gains on settled fuel hedge transactions;
 
  •   $76 million of net special charges consisting of $35 million of merger-related transition expenses, $18 million in non-cash charges related to the decline in fair value of certain spare parts associated with our Boeing 737 aircraft fleet and, as a result of our capacity reductions, $14 million in aircraft costs and $9 million in severance charges; and
 
  •   $214 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities as well as $7 million in write offs of debt discount and debt issuance costs in connection with the refinancing of certain aircraft equipment notes and certain loan prepayments, offset by $8 million in gains on forgiveness of debt, all included in nonoperating expense, net.
 
In 2007, we realized operating income of $533 million and income before income taxes of $430 million. Our 2007 results were impacted by recognition of the following items:
 
  •   $187 million of net unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments as well as $58 million of net realized gains on settled fuel hedge transactions;
 
  •   $99 million of net special charges due to merger-related transition expenses;
 
  •   a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of a change in the FAA-mandated retirement age for pilots from 60 to 65;
 
  •   $7 million in tax credits due to an IRS rule change allowing us to recover certain fuel usage tax amounts for years 2003-2006, $9 million of insurance settlement proceeds related to business interruption and property damages incurred as a result of Hurricane Katrina in 2005 and a $5 million Piedmont pilot pension curtailment gain related to the FAA-mandated pilot retirement age change discussed above. These gains were offset in part by $5 million in charges related to reduced flying from Pittsburgh; and
 
  •   an $18 million write off of debt issuance costs in connection with the refinancing of the $1.25 billion GE loan in March 2007 and $10 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities, offset by a $17 million gain recognized on the sale of stock in ARINC Incorporated, all included in nonoperating expense, net.
 
We reported a loss in 2009, which increased our NOLs. As of December 31, 2009, we have approximately $2.13 billion of gross NOLs to reduce future federal taxable income. All of our NOLs are available to reduce federal taxable income in the calendar year 2010. The NOLs expire during the years 2022 through 2029.
 
Our net deferred tax assets, which include $2.06 billion of the NOLs, have been subject to a full valuation allowance. We also have approximately $90 million of tax-effected state NOLs at December 31, 2009. At December 31, 2009, the federal and state valuation allowance is $546 million and $77 million, respectively, all of which will reduce future tax expense when recognized.
 
For the year ended December 31, 2009, we recorded a tax benefit of $38 million. Of this amount, $21 million was due to a non-cash income tax benefit related to gains recorded within other comprehensive income. In addition, we recorded a $14 million tax benefit related to a legislation change allowing us to carry back 100% of 2008 AMT net operating losses, resulting in the recovery of AMT amounts paid in prior years. We also recognized a $3 million tax benefit related to the reversal of the deferred tax liability associated with the indefinite lived intangible assets that were impaired during 2009.
 
For the year ended December 31, 2008, we reported a loss, which increased our NOLs, and we did not record a tax provision.


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For the year ended December 31, 2007, we utilized NOLs to reduce our income tax obligation. Utilization of these NOLs resulted in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in valuation allowance offsets the tax provision dollar for dollar. We recognized $7 million of non-cash state income tax expense for the year ended December 31, 2007, as we utilized NOLs that were generated by US Airways prior to the merger. As these were acquired NOLs, the accounting rules in place at that time required that the decrease in the valuation allowance associated with these NOLs reduce goodwill instead of the provision for income taxes.
 
The table below sets forth our selected mainline and Express operating data:
 
                                         
                      Percent
    Percent
 
    Year Ended December 31,     Change
    Change
 
    2009     2008     2007     2009-2008     2008-2007  
 
Mainline
                                       
Revenue passenger miles (millions) (a)
    57,889       60,570       61,262       (4.4 )     (1.1 )
Available seat miles (millions) (b)
    70,725       74,151       75,842       (4.6 )     (2.2 )
Passenger load factor (percent) (c)
    81.9       81.7       80.8       0.2   pts     0.9   pts
Yield (cents) (d)
    11.66       13.51       13.28       (13.7 )     1.7  
Passenger revenue per available seat mile (cents) (e)
    9.55       11.04       10.73       (13.5 )     2.9  
Operating cost per available seat mile (cents) (f)
    11.06       14.66       11.30       (24.6 )     29.7  
Passenger enplanements (thousands) (g)
    51,016       54,820       57,871       (6.9 )     (5.3 )
Departures (thousands)
    461       496       525       (7.1 )     (5.5 )
Aircraft at end of period
    349       354       356       (1.4 )     (0.6 )
Block hours (thousands) (h)
    1,224       1,300       1,343       (5.8 )     (3.3 )
Average stage length (miles) (i)
    972       955       925       1.8       3.3  
Average passenger journey (miles) (j)
    1,637       1,554       1,489       5.4       4.4  
Fuel consumption (gallons in millions)
    1,069       1,142       1,195       (6.4 )     (4.4 )
Average aircraft fuel price including related taxes (dollars per gallon)
    1.74       3.17       2.20       (45.0 )     43.9  
Full time equivalent employees at end of period
    31,333       32,671       34,437       (4.1 )     (5.1 )
                                         
Express (k)
                                       
Revenue passenger miles (millions) (a)
    10,570       10,855       10,332       (2.6 )     5.1  
Available seat miles (millions) (b)
    14,367       14,953       14,159       (3.9 )     5.6  
Passenger load factor (percent) (c)
    73.6       72.6       73.0       1.0   pts     (0.4 )  pts
Yield (cents) (d)
    23.68       26.52       26.12       (10.7 )     1.6  
Passenger revenue per available seat mile (cents) (e)
    17.42       19.26       19.06       (9.5 )     1.0  
Operating cost per available seat mile (cents) (f)
    17.53       20.39       18.32       (14.0 )     11.3  
Passenger enplanements (thousands) (g)
    26,949       26,732       25,748       0.8       3.8  
Aircraft at end of period
    283       296       286       (4.4 )     3.5  
Fuel consumption (gallons in millions)
    338       352       343       (3.8 )     2.7  
Average aircraft fuel price including related taxes (dollars per gallon)
    1.80       3.23       2.23       (44.3 )     44.8  
                                         
Total Mainline and Express
                                       
Revenue passenger miles (millions) (a)
    68,459       71,425       71,594       (4.2 )     (0.2 )
Available seat miles (millions) (b)
    85,092       89,104       90,001       (4.5 )     (1.0 )
Passenger load factor (percent) (c)
    80.5       80.2       79.5       0.3   pts     0.7   pts
Yield (cents) (d)
    13.52       15.49       15.13       (12.7 )     2.4  
Passenger revenue per available seat mile (cents) (e)
    10.88       12.42       12.04       (12.4 )     3.1  
Total revenue per available seat mile (cents) (l)
    12.29       13.60       13.00       (9.6 )     4.6  
Passenger enplanements (thousands) (g)
    77,965       81,552       83,619       (4.4 )     (2.5 )
Aircraft at end of period
    632       650       642       (2.8 )     1.2  
Fuel consumption (gallons in millions)
    1,407       1,494       1,537       (5.8 )     (2.8 )
Average aircraft fuel price including related taxes (dollars per gallon)
    1.76       3.18       2.21       (44.8 )     44.1  


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(a) Revenue passenger mile (“RPM”) — A basic measure of sales volume. One RPM represents one passenger flown one mile.
 
(b) Available seat mile (“ASM”) — A basic measure of production. One ASM represents one seat flown one mile.
 
(c) Passenger load factor — The percentage of available seats that are filled with revenue passengers.
 
(d) Yield — A measure of airline revenue derived by dividing passenger revenue by RPMs and expressed in cents per mile.
 
(e) Passenger revenue per available seat mile (“PRASM”) — Passenger revenues divided by ASMs.
 
(f) Operating cost per available seat mile (“CASM”) — Operating expenses divided by ASMs.
 
(g) Passenger enplanements — The number of passengers on board an aircraft, including local, connecting and through passengers.
 
(h) Block hours — The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down.
 
(i) Average stage length — The average of the distances flown on each segment of every route.
 
(j) Average passenger journey — The average one-way trip measured in miles for one passenger origination.
 
(k) Express statistics include Piedmont and PSA, as well as operating and financial results from capacity purchase agreements with Air Wisconsin Airlines Corporation, Republic Airways, Mesa Airlines, Inc. and Chautauqua Airlines, Inc.
 
(l) Total revenue per available seat mile (“RASM”) — Total revenues divided by total mainline and Express ASMs.
 
2009 Compared With 2008
 
Operating Revenues:
 
                         
                Percent
 
    2009     2008     Change  
    (In millions)        
 
Operating revenues:
                       
Mainline passenger
  $ 6,752     $ 8,183       (17.5 )
Express passenger
    2,503       2,879       (13.1 )
Cargo
    100       144       (30.3 )
Other
    1,103       912       20.9  
                         
Total operating revenues
  $ 10,458     $ 12,118       (13.7 )
                         
 
Total operating revenues in 2009 were $10.46 billion as compared to $12.12 billion in 2008, a decline of $1.66 billion or 13.7%. Significant changes in the components of operating revenues are as follows:
 
  •   Mainline passenger revenues were $6.75 billion in 2009 as compared to $8.18 billion in 2008. Mainline RPMs decreased 4.4% as mainline capacity, as measured by ASMs, decreased 4.6%, resulting in a 0.2 point increase in load factor to 81.9%. Mainline passenger yield decreased 13.7% to 11.66 cents in 2009 from 13.51 cents in 2008. Mainline PRASM decreased 13.5% to 9.55 cents in 2009 from 11.04 cents in 2008. Mainline yield and PRASM decreased in 2009 due to the decline in passenger demand and weak pricing environment driven by the global economic recession.
 
  •   Express passenger revenues were $2.5 billion in 2009, a decrease of $376 million from 2008. Express RPMs decreased by 2.6% as Express capacity, as measured by ASMs, decreased 3.9%, resulting in a one point increase in load factor to 73.6%. Express passenger yield decreased by 10.7% to 23.68 cents in 2009 from 26.52 cents in 2008. Express PRASM decreased 9.5% to 17.42 cents in 2009 from 19.26 cents in 2008. The decreases in Express yield and PRASM were the result of the same passenger demand declines and weak pricing environment discussed in mainline passenger revenues above.


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  •   Cargo revenues were $100 million in 2009, a decrease of $44 million, or 30.3%, from 2008. The decrease in cargo revenues was driven by declines in yield and freight volumes as a result of the contraction of business spending in the current economic environment as well as a decrease in fuel surcharges in 2009 as compared to 2008.
 
  •   Other revenues were $1.1 billion in 2009, an increase of $191 million, or 20.9%, from 2008 primarily due to an increase of $250 million generated by our first and second checked bag fees, which were implemented in the second and third quarters of 2008. This increase was offset in part by a decline in the volume of passenger ticketing change fees and declines in fuel sales to our pro-rate carriers through our MSC subsidiary due to lower fuel prices in 2009.
 
Operating Expenses:
 
                         
                Percent
 
    2009     2008     Change  
    (In millions)        
 
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 1,863     $ 3,618       (48.5 )
Loss (gain) on fuel hedging instruments, net:
                       
Realized
    382       (140 )     nm  
Unrealized
    (375 )     496       nm  
Salaries and related costs
    2,165       2,231       (3.0 )
Aircraft rent
    695       724       (4.0 )
Aircraft maintenance
    700       783       (10.6 )
Other rent and landing fees
    560       562       (0.5 )
Selling expenses
    382       439       (13.0 )
Special items, net
    55       76       (27.3 )
Depreciation and amortization
    242       215       12.5  
Goodwill impairment
          622       nm  
Other
    1,152       1,243       (7.4 )
                         
Total mainline operating expenses
    7,821       10,869       (28.0 )
Express expenses:
                       
Fuel
    609       1,137       (46.4 )
Other
    1,910       1,912       (0.1 )
                         
Total Express expenses
    2,519       3,049       (17.4 )
                         
Total operating expenses
  $   10,340     $   13,918       (25.7 )
                         
 
Total operating expenses were $10.34 billion in 2009, a decrease of $3.58 billion or 25.7% compared to 2008. Mainline operating expenses were $7.82 billion in 2009, a decrease of $3.05 billion or 28% from 2008, while ASMs decreased 4.6%.
 
Excluding the effects of fuel and fuel hedging transactions as well as the $622 million non-cash charge recorded in 2008 to write off all of the goodwill created by the merger of US Airways Group and America West Holdings, our mainline CASM was relatively constant year over year. Mainline CASM decreased 3.6 cents, or 24.6%, to 11.06 cents in 2009 from 14.66 cents in 2008. Decreases in fuel and fuel hedging costs represented 2.71 cents, or 75.4%, of the CASM decrease, while the non-cash charge to write off goodwill represented 0.84 cents, or 23.3%, of the year-over-year decline.
 
The 2009 period included $55 million of net special charges consisting of $22 million in aircraft costs as a result of our previously announced capacity reductions, $16 million in non-cash impairment charges due to the decline in fair value of certain indefinite lived intangible assets associated with our international routes, $11 million in severance and other charges and $6 million in costs incurred related to our liquidity improvement program. This compares to net special charges of $76 million in 2008, consisting of $35 million of merger-related transition expenses, $18 million in non-cash charges related to the decline in the fair value of certain spare parts associated with our Boeing 737 aircraft fleet and, as a result of our capacity reductions, $14 million in aircraft costs and $9 million in severance charges.


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The table below sets forth the major components of our mainline CASM for the years ended December 31, 2009 and 2008:
 
                         
    Year Ended
       
    December 31,     Percent
 
    2009     2008     Change  
    (In cents)        
 
Mainline CASM:
                       
Aircraft fuel and related taxes
    2.64       4.88       (46.0 )
Loss on fuel hedging instruments, net
    0.01       0.48       (97.8 )
Salaries and related costs
    3.06       3.01       1.7  
Aircraft rent
    0.98       0.98       0.7  
Aircraft maintenance
    0.99       1.05       (6.2 )
Other rent and landing fees
    0.79       0.76       4.4  
Selling expenses
    0.54       0.59       (8.8 )
Special items, net
    0.08       0.10       (23.8 )
Depreciation and amortization
    0.34       0.29       18.0  
Goodwill impairment
          0.84       nm  
Other
    1.63       1.68       (2.9 )
                         
Total mainline CASM
    11.06       14.66       (24.6 )
                         
 
Significant changes in the components of mainline operating expense per ASM are as follows:
 
  •   Aircraft fuel and related taxes per ASM decreased 46% primarily due to a 45% decrease in the average price per gallon of fuel to $1.74 in 2009 from $3.17 in the 2008 period. A 6.4% decrease in gallons of fuel consumed in 2009 on 4.6% lower capacity also contributed to the decrease.
 
  •   Loss on fuel hedging instruments, net per ASM was a loss of 0.01 cent in 2009 as compared to a loss of 0.48 cents in 2008. Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts. The net loss in the 2009 period included realized losses of $382 million on settled fuel hedging instruments, offset by $375 million of net unrealized gains. The unrealized gains are the result of the application of mark-to-market accounting in which unrealized losses recognized in prior periods are reversed as hedge transactions are settled in the current period. We recognized net losses from our fuel hedging program in 2008 due to the significant decline in the price of oil in the latter part of 2008, which generated unrealized losses on certain open fuel hedge transactions as the price of heating oil fell below the lower limit of our collar transactions.
 
  •   Aircraft maintenance expense per ASM decreased 6.2% due principally to decreases in the number of engine overhauls performed in 2009 as compared to 2008 as a result of the timing of maintenance cycles.
 
  •   Selling expenses per ASM decreased 8.8% due to lower credit card fees, booking fees and commissions paid as a result of a decline in the number and value of tickets sold resulting from the weakened demand and pricing environment caused by the economic recession.
 
  •   Depreciation and amortization expense per ASM increased 18% due to a net increase in owned aircraft, primarily driven by the acquisition of 19 Airbus A320 family aircraft and two Airbus A330 aircraft in 2009, which increased depreciation expense on owned aircraft.
 
Total Express expenses decreased $530 million or 17.4% in 2009 to $2.52 billion from $3.05 billion in 2008. The year-over-year decrease was primarily driven by decreases in fuel costs. Express fuel costs decreased $528 million as the average fuel price per gallon decreased 44.3% from $3.23 in 2008 to $1.80 in 2009. In addition, gallons of fuel consumed in 2009 decreased 3.8% on 3.9% lower capacity. Other Express expenses decreased $2 million or 0.1% despite a 3.9% decrease in Express ASMs due to certain fixed costs associated with our capacity purchase agreements as well as certain contractual rate increases with these carriers.


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Nonoperating Income (Expense):
 
                         
                Percent
 
    2009     2008     Change  
    (In millions)        
 
Nonoperating income (expense):
                       
Interest income
  $ 24     $ 83       (71.5 )
Interest expense, net
    (304 )     (258 )     17.9  
Other, net
    (81 )     (240 )     (66.5 )
                         
Total nonoperating expense, net
  $   (361 )   $   (415 )     (13.1 )
                         
 
Net nonoperating expense was $361 million in 2009 as compared to $415 million in 2008. Interest income decreased $59 million in 2009 due to lower average investment balances and lower rates of return. Interest expense, net increased $46 million due to an increase in the average debt balance outstanding primarily as a result of financing transactions completed in the fourth quarter of 2008 and in 2009, partially offset by reductions in average interest rates associated with variable rate debt as compared to 2008.
 
Other nonoperating expense, net in 2009 included $49 million in non-cash charges associated with the sale of 10 Embraer 190 aircraft and write off of related debt discount and issuance costs, a $14 million loss on the sale of certain aircraft equipment, $10 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities, $3 million in foreign currency losses and a $2 million non-cash asset impairment charge. Other nonoperating expense, net in 2008 included $214 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities, $25 million in foreign currency losses and $7 million in write offs of debt discount and debt issuance costs in connection with the refinancing of certain aircraft equipment notes and certain loan prepayments, offset in part by $8 million in gains on forgiveness of debt. The impairment charges on auction rate securities are discussed in more detail under “Liquidity and Capital Resources.”
 
2008 Compared With 2007
 
Operating Revenues:
 
                         
                Percent
 
    2008     2007     Change  
    (In millions)        
 
Operating revenues:
                       
Mainline passenger
  $ 8,183     $ 8,135       0.6  
Express passenger
    2,879       2,698       6.7  
Cargo
    144       138       3.7  
Other
    912       729       25.3  
                         
Total operating revenues
  $   12,118     $   11,700       3.6  
                         
 
Total operating revenues in 2008 were $12.12 billion as compared to $11.7 billion in 2007. Significant changes in the components of operating revenues are as follows:
 
  •   Mainline passenger revenues were $8.18 billion in 2008, as compared to $8.14 billion in 2007. Mainline RPMs decreased 1.1% as mainline capacity, as measured by ASMs, decreased 2.2%, resulting in a 0.9 point increase in load factor to 81.7%. Mainline passenger yield increased 1.7% to 13.51 cents in 2008 from 13.28 cents in 2007. Mainline PRASM increased 2.9% to 11.04 cents in 2008 from 10.73 cents in 2007. Mainline yield and PRASM increased in 2008 due principally to strong passenger demand, continued capacity and pricing discipline and fare increases in substantially all markets during 2008.
 
  •   Express passenger revenues were $2.88 billion in 2008, an increase of $181 million from the 2007 period. Express capacity, as measured by ASMs, increased 5.6% in 2008 due principally to the year-over-year increase in capacity purchased from an affiliate Express carrier. Express RPMs increased by 5.1% on this higher capacity resulting in a 0.4 point decrease in load factor to 72.6%. Express passenger yield increased by 1.6% to 26.52 cents in 2008 from 26.12 cents in 2007. Express PRASM increased 1% to 19.26 cents in 2008 from 19.06 cents in 2007. The increase in Express yield and PRASM was the result of the same favorable industry pricing environment discussed in the mainline operations above.


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  •   Other revenues were $912 million in 2008, an increase of $183 million from 2007 primarily due to our new revenue initiatives, principally our first and second checked bag fees, which were implemented in the second and third quarters of 2008.
 
Operating Expenses:
 
                         
                Percent
 
    2008     2007     Change  
    (In millions)        
 
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 3,618     $ 2,630       37.6  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
    (140 )     (58 )     nm  
Unrealized
    496       (187 )     nm  
Salaries and related costs
    2,231       2,302       (3.1 )
Aircraft rent
    724       727       (0.4 )
Aircraft maintenance
    783       635       23.2  
Other rent and landing fees
    562       536       4.9  
Selling expenses
    439       453       (3.2 )
Special items, net
    76       99       (23.2 )
Depreciation and amortization
    215       189       13.7  
Goodwill impairment
    622             nm  
Other
    1,243       1,247       (0.2 )
                         
Total mainline operating expenses
    10,869       8,573       26.8  
Express expenses:
                       
Fuel
    1,137       765       48.6  
Other
    1,912       1,829       4.5  
                         
Total Express operating expense
    3,049       2,594       17.5  
                         
Total operating expenses
  $   13,918     $   11,167       24.6  
                         
 
Total operating expenses were $13.92 billion in 2008, an increase of $2.75 billion or 24.6% compared to 2007. Mainline operating expenses were $10.87 billion in 2008, an increase of $2.3 billion or 26.8% from 2007, while ASMs decreased 2.2%.
 
Mainline CASM increased 29.7% to 14.66 cents in 2008 from 11.3 cents in 2007. The 2008 period included a $622 million non-cash charge to write off all of the goodwill created by the merger of US Airways Group and America West Holdings in September 2005, which contributed 0.84 cents to our mainline CASM for 2008. The remaining period-over-period increase in CASM was driven principally by increases in aircraft fuel costs ($988 million or 1.41 cents per ASM) and a net loss on fuel hedging instruments ($356 million) in 2008 compared to a net gain ($245 million) in 2007, which accounted for 0.8 cents per ASM.
 
The 2008 period also included $76 million of net special charges, consisting of $35 million of merger-related transition expenses, $18 million in non-cash charges related to the decline in fair value of certain spare parts associated with our Boeing 737 aircraft fleet and, as a result of our capacity reductions, $14 million in aircraft costs and $9 million in severance charges. This compares to net special charges of $99 million in the 2007 period due to merger-related transition expenses.


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The table below sets forth the major components of our mainline CASM for the years ended December 31, 2008 and 2007:
 
                         
    Year Ended
       
    December 31,     Percent
 
    2008     2007     Change  
    (In cents)        
 
Mainline CASM:
                       
Aircraft fuel and related taxes
    4.88       3.47       40.7  
Loss (gain) on fuel hedging instruments, net
    0.48       (0.32 )     nm  
Salaries and related costs
    3.01       3.03       (0.8 )
Aircraft rent
    0.98       0.96       2.2  
Aircraft maintenance
    1.05       0.84       25.4  
Other rent and landing fees
    0.76       0.70       7.6  
Selling expenses
    0.59       0.60       (1.2 )
Special items, net
    0.10       0.13       (23.2 )
Depreciation and amortization
    0.29       0.25       16.4  
Goodwill impairment
    0.84             nm  
Other
    1.68       1.64       2.2  
                         
Total mainline CASM
    14.66       11.30       29.7  
                         
 
Significant changes in the components of mainline operating expense per ASM are as follows:
 
  •   Aircraft fuel and related taxes per ASM increased 40.7% primarily due to a 43.9% increase in the average price per gallon of fuel to a record high $3.17 in 2008 from $2.20 in 2007, offset by a 4.4% decrease in gallons consumed.
 
  •   Loss (gain) on fuel hedging instruments, net per ASM fluctuated from a gain of 0.32 cents in 2007 to a loss of 0.48 cents in 2008. The net loss in the 2008 period is the result of net unrealized losses of $496 million on open fuel hedge transactions, offset by $140 million of net realized gains on settled fuel hedge transactions. We recognized net gains from our fuel hedging program in the first half of 2008 as the price of heating oil exceeded the upper limit on certain of our collar transactions. However, the significant decline in the price of oil in the latter part of 2008 generated unrealized losses on certain open fuel hedge transactions as the price of heating oil fell below the lower limit of those collar transactions.
 
  •   Aircraft maintenance expense per ASM increased 25.4% due principally to increases in the number of engine and landing gear overhauls performed in 2008 as compared to 2007.
 
  •   Other rent and landing fees per ASM increased 7.6% due primarily to increases in rental rates at certain airports in 2008 as compared to 2007.
 
  •   Depreciation and amortization per ASM increased 16.4% due to the acquisition of 14 Embraer aircraft and five Airbus aircraft in 2008, which increased depreciation expense on owned aircraft.
 
Total Express expenses increased 17.5% in 2008 to $3.05 billion from $2.59 billion in 2007. Express fuel costs increased $372 million as the average fuel price per gallon increased 44.8% from $2.23 in 2007 to a record high $3.23 in 2008. Other Express operating expenses increased $83 million year over year as a result of the 5.6% increase in Express capacity in 2008.
 
Nonoperating Income (Expense):
 
                         
                Percent
 
    2008     2007     Change  
    (In millions)        
 
Nonoperating income (expense):
                       
Interest income
  $ 83     $ 172       (51.6 )
Interest expense, net
    (258 )     (277 )     (6.9 )
Other, net
    (240 )     2       nm  
                         
Total nonoperating expense, net
  $   (415 )   $   (103 )     nm  
                         


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Net nonoperating expense was $415 million in 2008 as compared to $103 million in 2007. Interest income decreased $89 million in 2008 due to lower average investment balances and lower rates of return. Interest expense, net decreased $19 million due primarily to reductions in average interest rates associated with variable rate debt, partially offset by an increase in the average debt balance outstanding as compared to the 2007 period.
 
Other nonoperating expense, net in 2008 included $214 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities primarily due to the length of time and extent to which the fair value has been less than cost for these securities. We also recognized $25 million in foreign currency losses and $7 million in write offs of debt discount and debt issuance costs in connection with the refinancing of certain aircraft equipment notes and certain loan prepayments in connection with our 2008 financing transactions, offset in part by $8 million in gains on forgiveness of debt. Other nonoperating expense, net in 2007 included an $18 million write off of debt issuance costs in connection with the refinancing of the GE loan in March 2007 as well as $10 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities, offset by a $17 million gain on the sale of stock in ARINC Incorporated and $7 million in foreign currency gains.
 
US Airways’ Results of Operations
 
On September 26, 2007, as part of the integration efforts following the merger, AWA surrendered its FAA operating certificate. As a result, all mainline airline operations are now being conducted under US Airways’ FAA operating certificate. In connection with the combination of all mainline airline operations under one FAA operating certificate, US Airways Group contributed 100% of its equity interest in America West Holdings, the parent company of AWA, to US Airways. As a result, America West Holdings and AWA became wholly owned subsidiaries of US Airways. In addition, AWA transferred substantially all of its assets and liabilities to US Airways. All off-balance sheet commitments of AWA were also transferred to US Airways.
 
Transfers of assets between entities under common control are accounted for similar to the pooling of interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the contribution of shares. This management’s discussion and analysis of financial condition and results of operations is presented as though the transfer had occurred at the time of US Airways’ emergence from bankruptcy in September 2005.
 
In 2009, US Airways realized operating income of $122 million and a loss before income taxes of $178 million. US Airways experienced significant declines in revenues as a result of the global economic recession, which more than offset the benefits of reduced fuel costs during 2009. US Airways’ 2009 results were also impacted by recognition of the following items:
 
  •   $382 million of net realized losses on settled fuel hedging instruments, offset by $375 million of net unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments. In mark-to-market accounting, the unrealized losses recognized in prior periods are reversed as hedge transactions are settled in the current period. US Airways was required to use mark-to-market accounting as its fuel hedging instruments did not meet the requirements for hedge accounting. If these instruments had qualified for hedge accounting treatment, any unrealized gains or losses would have been recorded in other comprehensive income, a component of stockholder’s equity;
 
  •   $55 million of net special charges consisting of $22 million in aircraft costs as a result of US Airways’ previously announced capacity reductions, $16 million in non-cash impairment charges due to the decline in fair value of certain indefinite lived intangible assets associated with US Airways’ international routes, $11 million in severance and other charges and $6 million in costs incurred related to US Airways’ liquidity improvement program; and
 
  •   $49 million in non-cash charges associated with the sale of 10 Embraer 190 aircraft and write off of related debt discount and issuance costs, $10 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities and a $2 million non-cash asset impairment charge, all included in nonoperating expense, net.


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In 2008, US Airways realized an operating loss of $1.77 billion and a loss before income taxes of $2.15 billion. The 2008 loss was driven by an average mainline and Express price per gallon of fuel of $3.18 as well as a $622 million non-cash charge to write off all of the goodwill created by the merger of US Airways Group and America West Holdings in September 2005. US Airways’ 2008 results were also impacted by recognition of the following items:
 
  •   $496 million of net unrealized losses resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments, offset by $140 million of net realized gains on settled fuel hedge transactions;
 
  •   $76 million of net special charges consisting of $35 million of merger-related transition expenses, $18 million in non-cash charges related to the decline in fair value of certain spare parts associated with US Airways’ Boeing 737 aircraft fleet and, as a result of US Airways’ capacity reductions, $14 million in aircraft costs and $9 million in severance charges; and
 
  •   $214 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities as well as $6 million in write offs of debt discount and debt issuance costs in connection with the refinancing of certain aircraft equipment notes and a loan prepayment, offset by $8 million in gains on forgiveness of debt, all included in nonoperating expense, net.
 
In 2007, US Airways realized operating income of $524 million and income before income taxes of $485 million. US Airways’ 2007 results were impacted by recognition of the following items:
 
  •   $187 million of net unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments as well as $58 million of net realized gains on settled fuel hedge transactions;
 
  •   $99 million of net special charges due to merger-related transition expenses;
 
  •   a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of a change in the FAA-mandated retirement age for pilots from 60 to 65;
 
  •   $7 million in tax credits due to an IRS rule change allowing US Airways to recover certain fuel usage tax amounts for years 2003-2006 and $9 million of insurance settlement proceeds related to business interruption and property damages incurred as a result of Hurricane Katrina in 2005. These gains were offset in part by $4 million in charges related to reduced flying from Pittsburgh; and
 
  •   a $17 million gain recognized on the sale of stock in ARINC Incorporated, offset by $10 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities, all included in nonoperating expense, net.
 
US Airways reported a loss in 2009, which increased its NOLs. As of December 31, 2009, US Airways has approximately $2.05 billion of gross NOLs to reduce future federal taxable income. All of US Airways’ NOLs are available to reduce federal taxable income in the calendar year 2010. The NOLs expire during the years 2022 through 2029.
 
US Airways’ net deferred tax assets, which include $1.98 billion of the NOLs, have been subject to a full valuation allowance. US Airways also has approximately $86 million of tax-effected state NOLs at December 31, 2009. At December 31, 2009, the federal and state valuation allowance is $575 million and $78 million, respectively, all of which will reduce future tax expense when recognized.
 
For the year ended December 31, 2009, US Airways recorded a tax benefit of $38 million. Of this amount, $21 million was due to a non-cash income tax benefit related to gains recorded within other comprehensive income. In addition, US Airways recorded a $14 million tax benefit related to a legislation change allowing it to carry back 100% of 2008 AMT net operating losses, resulting in the recovery of AMT amounts paid in prior years. US Airways also recognized a $3 million tax benefit related to the reversal of the deferred tax liability associated with the indefinite lived intangible assets that were impaired during 2009.


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For the year ended December 31, 2008, US Airways reported a loss, which increased its NOLs, and it did not record a tax provision.
 
For the year ended December 31, 2007, US Airways utilized NOLs to reduce its income tax obligation. Utilization of these NOLs resulted in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in valuation allowance offsets the tax provision dollar for dollar. US Airways recognized $7 million of non-cash state income tax expense for the year ended December 31, 2007, as US Airways utilized NOLs that were generated prior to the merger. As these were acquired NOLs, the accounting rules in place at that time required that the decrease in the valuation allowance associated with these NOLs reduce goodwill instead of the provision for income taxes.
 
The table below sets forth US Airways’ selected mainline and Express operating data:
 
                                         
                      Percent
    Percent
 
    Year Ended December 31,     Change
    Change
 
    2009     2008     2007     2009-2008     2008-2007  
 
Mainline
                                       
Revenue passenger miles (millions) (a)
    57,889       60,570       61,262       (4.4 )     (1.1 )
Available seat miles (millions) (b)
    70,725       74,151       75,842       (4.6 )     (2.2 )
Passenger load factor (percent) (c)
    81.9       81.7       80.8       0.2   pts     0.9   pts
Yield (cents) (d)
    11.66       13.51       13.28       (13.7 )     1.7  
Passenger revenue per available seat mile (cents) (e)
    9.55       11.04       10.73       (13.5 )     2.9  
Aircraft at end of period
    349       354       356       (1.4 )     (0.6 )
Fuel consumption (gallons in millions)
    1,069       1,142       1,195       (6.4 )     (4.4 )
Average aircraft fuel price including related taxes (dollars per gallon)
    1.74       3.17       2.20       (45.0 )     43.9  
                                         
Express (f)
                                       
Revenue passenger miles (millions) (a)
    10,570       10,855       10,332       (2.6 )     5.1  
Available seat miles (millions) (b)
    14,367       14,953       14,159       (3.9 )     5.6  
Passenger load factor (percent) (c)
    73.6       72.6       73.0       1.0   pts     (0.4 )  pts
Yield (cents) (d)
    23.68       26.52       26.12       (10.7 )     1.6  
Passenger revenue per available seat mile (cents) (e)
    17.42       19.26       19.06       (9.5 )     1.0  
Aircraft at end of period
    283       296       286       (4.4 )     3.5  
Fuel consumption (gallons in millions)
    338       352       343       (3.8 )     2.7  
Average aircraft fuel price including related taxes (dollars per gallon)
    1.80       3.23       2.23       (44.3 )     44.8  
                                         
Total Mainline and Express
                                       
Revenue passenger miles (millions) (a)
    68,459       71,425       71,594       (4.2 )     (0.2 )
Available seat miles (millions) (b)
    85,092       89,104       90,001       (4.5 )     (1.0 )
Passenger load factor (percent) (c)
    80.5       80.2       79.5       0.3   pts     0.7   pts
Yield (cents) (d)
    13.52       15.49       15.13       (12.7 )     2.4  
Passenger revenue per available seat mile (cents) (e)
    10.88       12.42       12.04       (12.4 )     3.1  
Total revenue per available seat mile (cents) (g)
    12.47       13.74       13.13       (9.3 )     4.7  
Aircraft at end of period
    632       650       642       (2.8 )     1.2  
Fuel consumption (gallons in millions)
    1,407       1,494       1,537       (5.8 )     (2.8 )
Average aircraft fuel price including related taxes (dollars per gallon)
    1.76       3.18       2.21       (44.8 )     44.1  
 
 
(a) Revenue passenger mile (“RPM”) — A basic measure of sales volume. One RPM represents one passenger flown one mile.
 
(b) Available seat mile (“ASM”) — A basic measure of production. One ASM represents one seat flown one mile.
 
(c) Passenger load factor — The percentage of available seats that are filled with revenue passengers.


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(d) Yield — A measure of airline revenue derived by dividing passenger revenue by RPMs and expressed in cents per mile.
 
(e) Passenger revenue per available seat mile (“PRASM”) — Passenger revenues divided by ASMs.
 
(f) Express statistics include Piedmont and PSA, as well as operating and financial results from capacity purchase agreements with Air Wisconsin Airlines Corporation, Republic Airways, Mesa Airlines, Inc. and Chautauqua Airlines, Inc.
 
(g) Total revenue per available seat mile (“RASM”) — Total revenues divided by total mainline and Express ASMs.
 
2009 Compared With 2008
 
Operating Revenues:
 
                         
                Percent
 
    2009     2008     Change  
    (In millions)        
 
Operating revenues:
                       
Mainline passenger
  $ 6,752     $ 8,183       (17.5 )
Express passenger
    2,503       2,879       (13.1 )
Cargo
    100       144       (30.3 )
Other
    1,254       1,038       20.8  
                         
Total operating revenues
  $   10,609     $   12,244       (13.4 )
                         
 
Total operating revenues in 2009 were $10.61 billion as compared to $12.24 billion in 2008, a decline of $1.64 billion or 13.4%. Significant changes in the components of operating revenues are as follows:
 
  •   Mainline passenger revenues were $6.75 billion in 2009 as compared to $8.18 billion in 2008. Mainline RPMs decreased 4.4% as mainline capacity, as measured by ASMs, decreased 4.6%, resulting in a 0.2 point increase in load factor to 81.9%. Mainline passenger yield decreased 13.7% to 11.66 cents in 2009 from 13.51 cents in 2008. Mainline PRASM decreased 13.5% to 9.55 cents in 2009 from 11.04 cents in 2008. Mainline yield and PRASM decreased in 2009 due to the decline in passenger demand and weak pricing environment driven by the global economic recession.
 
  •   Express passenger revenues were $2.5 billion in 2009, a decrease of $376 million from 2008. Express RPMs decreased by 2.6% as Express capacity, as measured by ASMs, decreased 3.9%, resulting in a one point increase in load factor to 73.6%. Express passenger yield decreased by 10.7% to 23.68 cents in 2009 from 26.52 cents in 2008. Express PRASM decreased 9.5% to 17.42 cents in 2009 from 19.26 cents in 2008. The decreases in Express yield and PRASM were the result of the same passenger demand declines and weak pricing environment discussed in mainline passenger revenues above.
 
  •   Cargo revenues were $100 million in 2009, a decrease of $44 million, or 30.3%, from 2008. The decrease in cargo revenues was driven by declines in yield and freight volumes as a result of the contraction of business spending in the current economic environment as well as a decrease in fuel surcharges in 2009 as compared to 2008.
 
  •   Other revenues were $1.25 billion in 2009, an increase of $216 million, or 20.8%, from 2008 primarily due to an increase of $250 million generated by US Airways’ first and second checked bag fees, which were implemented in the second and third quarters of 2008. This increase was offset in part by a decline in the volume of passenger ticketing change fees.


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Operating Expenses:
 
                         
                Percent
 
    2009     2008     Change  
    (In millions)        
 
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 1,863     $ 3,618       (48.5 )
Loss (gain) on fuel hedging instruments, net:
                       
Realized
    382       (140 )     nm  
Unrealized
    (375 )     496       nm  
Salaries and related costs
    2,165       2,231       (3.0 )
Aircraft rent
    695       724       (4.0 )
Aircraft maintenance
    700       783       (10.6 )
Other rent and landing fees
    560       562       (0.5 )
Selling expenses
    382       439       (13.0 )
Special items, net
    55       76       (27.3 )
Depreciation and amortization
    251       224       12.0  
Goodwill impairment
          622       nm  
Other
    1,181       1,243       (5.1 )
                         
Total mainline operating expenses
    7,859       10,878       (27.8 )
Express expenses:
                       
Fuel
    609       1,137       (46.4 )
Other
    2,019       2,002       0.9  
                         
Total Express expenses
    2,628       3,139       (16.3 )
                         
Total operating expenses
  $   10,487     $   14,017       (25.2 )
                         
 
Total operating expenses were $10.49 billion in 2009, a decrease of $3.53 billion or 25.2% compared to 2008. Mainline operating expenses were $7.86 billion in 2009, a decrease of $3.02 billion or 27.8% from 2008. The period-over-period decrease in mainline operating expenses was driven principally by decreases in fuel costs ($1.76 billion) as well as a decrease in the net losses on fuel hedging instruments ($349 million) in 2009 as compared to 2008. In addition, the 2008 period included a $622 million non-cash charge to write off all of the goodwill created by the merger of US Airways Group and America West Holdings in September 2005.
 
The 2009 period included $55 million of net special charges consisting of $22 million in aircraft costs as a result of US Airways’ previously announced capacity reductions, $16 million in non-cash impairment charges due to the decline in fair value of certain indefinite lived intangible assets associated with US Airways’ international routes, $11 million in severance and other charges and $6 million in costs incurred related to US Airways’ liquidity improvement program. This compares to net special charges of $76 million in 2008, consisting of $35 million of merger-related transition expenses, $18 million in non-cash charges related to the decline in the fair value of certain spare parts associated with US Airways’ Boeing 737 aircraft fleet and, as a result of US Airways’ capacity reductions, $14 million in aircraft costs and $9 million in severance charges.
 
Significant changes in the components of mainline operating expense are as follows:
 
  •   Aircraft fuel and related taxes decreased 48.5% primarily due to a 45% decrease in the average price per gallon of fuel to $1.74 in 2009 from $3.17 in the 2008 period. A 6.4% decrease in gallons of fuel consumed in 2009 on 4.6% lower capacity also contributed to the decrease.
 
  •   Loss on fuel hedging instruments, net was a loss of $7 million in 2009 as compared to a loss of $356 million in 2008. Since the third quarter of 2008, US Airways has not entered into any new fuel hedging transactions and, as of December 31, 2009, US Airways had no remaining outstanding fuel hedging contracts. The net loss in the 2009 period included realized losses of $382 million on settled fuel hedging instruments, offset by $375 million of net unrealized gains. The unrealized gains are the result of the application of mark-to-market accounting in which unrealized losses recognized in prior periods are reversed as hedge transactions are settled in the current period. US Airways recognized net losses from its fuel hedging program in 2008 due to the significant decline in the price of oil in the latter part of 2008, which generated unrealized losses on certain open fuel hedge transactions as the price of heating oil fell below the lower limit of its collar transactions.


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  •   Aircraft maintenance expense decreased 10.6% due principally to decreases in the number of engine overhauls performed in 2009 as compared to 2008 as a result of the timing of maintenance cycles.
 
  •   Selling expenses decreased 13% due to lower credit card fees, booking fees and commissions paid as a result of a decline in the number and value of tickets sold resulting from the weakened demand and pricing environment caused by the economic recession.
 
  •   Depreciation and amortization expense increased 12% due to a net increase in owned aircraft, primarily driven by the acquisition of 19 Airbus A320 family aircraft and two Airbus A330 aircraft in 2009, which increased depreciation expense on owned aircraft.
 
Total Express expenses decreased $511 million or 16.3% in 2009 to $2.63 billion from $3.14 billion in 2008. The year-over-year decrease was primarily driven by decreases in fuel costs. Express fuel costs decreased $528 million as the average fuel price per gallon decreased 44.3% from $3.23 in 2008 to $1.80 in 2009. In addition, gallons of fuel consumed in 2009 decreased 3.8% on 3.9% lower capacity. Other Express expenses increased $17 million or 0.9% despite a 3.9% decrease in Express ASMs due to certain fixed costs associated with our capacity purchase agreements as well as certain contractual rate increases with these carriers.
 
Nonoperating Income (Expense):
 
                         
                Percent
 
    2009     2008     Change  
    (In millions)        
 
Nonoperating income (expense):
                       
Interest income
  $ 24     $ 83       (71.5 )
Interest expense, net
    (241 )     (218 )     10.7  
Other, net
    (83 )     (240 )     (65.8 )
                         
Total nonoperating expense, net
  $   (300 )   $   (375 )     (20.1 )
                         
 
Net nonoperating expense was $300 million in 2009 as compared to $375 million in 2008. Interest income decreased $59 million in 2009 due to lower average investment balances and lower rates of return. Interest expense, net increased $23 million due to an increase in the average debt balance outstanding primarily as a result of financing transactions completed in the fourth quarter of 2008 and in 2009, partially offset by reductions in average interest rates associated with variable rate debt as compared to 2008.
 
Other nonoperating expense, net in 2009 included $49 million in non-cash charges associated with the sale of 10 Embraer 190 aircraft and write off of related debt discount and issuance costs, a $14 million loss on the sale of certain aircraft equipment, $10 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities, $3 million in foreign currency losses and a $2 million non-cash asset impairment charge. Other nonoperating expense, net in 2008 included $214 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities, $25 million in foreign currency losses and $6 million in write offs of debt discount and debt issuance costs in connection with the refinancing of certain aircraft equipment notes and a loan prepayment, offset in part by $8 million in gains on forgiveness of debt. The impairment charges on auction rate securities are discussed in more detail under “Liquidity and Capital Resources.”


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2008 Compared With 2007
 
Operating Revenues:
 
                         
                Percent
 
    2008     2007     Change  
    (In millions)        
 
Operating revenues:
                       
Mainline passenger
  $ 8,183     $ 8,135       0.6  
Express passenger
    2,879       2,698       6.7  
Cargo
    144       138       3.7  
Other
    1,038       842       23.3  
                         
Total operating revenues
  $   12,244     $   11,813       3.6  
                         
 
Total operating revenues in 2008 were $12.24 billion as compared to $11.81 billion in 2007. Significant changes in the components of operating revenues are as follows:
 
  •   Mainline passenger revenues were $8.18 billion in 2008, as compared to $8.14 billion in 2007. Mainline RPMs decreased 1.1% as mainline capacity, as measured by ASMs, decreased 2.2%, resulting in a 0.9 point increase in load factor to 81.7%. Mainline passenger yield increased 1.7% to 13.51 cents in 2008 from 13.28 cents in 2007. Mainline PRASM increased 2.9% to 11.04 cents in 2008 from 10.73 cents in 2007. Mainline yield and PRASM increased in 2008 due principally to strong passenger demand, continued capacity and pricing discipline and fare increases in substantially all markets during 2008.
 
  •   Express passenger revenues were $2.88 billion in 2008, an increase of $181 million from the 2007 period. Express capacity, as measured by ASMs, increased 5.6% in 2008 due principally to the year-over-year increase in capacity purchased from an affiliate Express carrier. Express RPMs increased by 5.1% on this higher capacity resulting in a 0.4 point decrease in load factor to 72.6%. Express passenger yield increased by 1.6% to 26.52 cents in 2008 from 26.12 cents in 2007. Express PRASM increased 1% to 19.26 cents in 2008 from 19.06 cents in 2007. The increase in Express yield and PRASM was the result of the same favorable industry pricing environment discussed in the mainline operations above.
 
  •   Other revenues were $1.04 billion in 2008, an increase of $196 million from 2007 primarily due to US Airways’ new revenue initiatives, principally its first and second checked bag fees, which were implemented in the second and third quarters of 2008.


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Operating Expenses:
 
                         
                Percent
 
    2008     2007     Change  
    (In millions)        
 
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 3,618     $ 2,630       37.6  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
    (140 )     (58 )     nm  
Unrealized
    496       (187 )     nm  
Salaries and related costs
    2,231       2,302       (3.1 )
Aircraft rent
    724       727       (0.4 )
Aircraft maintenance
    783       635       23.2  
Other rent and landing fees
    562       536       4.9  
Selling expenses
    439       453       (3.2 )
Special items, net
    76       99       (23.2 )
Depreciation and amortization
    224       198       13.1  
Goodwill impairment
    622             nm  
Other
    1,243       1,227       1.5  
                         
Total mainline operating expenses
    10,878       8,562       27.1  
Express expenses:
                       
Fuel
    1,137       765       48.6  
Other
    2,002       1,962       2.0  
                         
Total Express operating expense
    3,139       2,727       15.1  
                         
Total operating expenses
  $   14,017     $   11,289       24.2  
                         
 
Total operating expenses were $14.02 billion in 2008, an increase of $2.73 billion or 24.2% compared to 2007. Mainline operating expenses were $10.88 billion in 2008, an increase of $2.32 billion or 27.1% from 2007. The 2008 period included a $622 million non-cash charge to write off all of the goodwill created by the merger of US Airways Group and America West Holdings in September 2005. The remaining period-over-period increase in mainline operating expenses was driven principally by increases in aircraft fuel costs ($988 million) and a net loss on fuel hedging instruments ($356 million) in 2008 compared to a net gain ($245 million) in 2007.
 
The 2008 period also included $76 million of net special charges, consisting of $35 million of merger-related transition expenses, $18 million in non-cash charges related to the decline in fair value of certain spare parts associated with US Airways’ Boeing 737 aircraft fleet and, as a result of US Airways’ capacity reductions, $14 million in aircraft costs and $9 million in severance charges. This compares to net special charges of $99 million in the 2007 period due to merger-related transition expenses.
 
Significant changes in the components of mainline operating expenses are as follows:
 
  •   Aircraft fuel and related taxes increased 37.6% primarily due to a 43.9% increase in the average price per gallon of fuel to a record high $3.17 in 2008 from $2.20 in 2007, offset by a 4.4% decrease in gallons consumed.
 
  •   Loss (gain) on fuel hedging instruments, net fluctuated from a net gain of $245 million in 2007 to a net loss of $356 million in 2008. The net loss in the 2008 period is the result of net unrealized losses of $496 million on open fuel hedge transactions, offset by $140 million of net realized gains on settled fuel hedge transactions. US Airways recognized net gains from its fuel hedging program in the first half of 2008 as the price of heating oil exceeded the upper limit on certain of its collar transactions. However, the significant decline in the price of oil in the latter part of 2008 generated unrealized losses on certain open fuel hedge transactions as the price of heating oil fell below the lower limit of those collar transactions.
 
  •   Aircraft maintenance expense increased 23.2% due principally to increases in the number of engine and landing gear overhauls performed in 2008 as compared to 2007.


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  •   Other rent and landing fees increased 4.9% due primarily to increases in rental rates at certain airports in 2008 as compared to 2007.
 
  •   Depreciation and amortization increased 13.1% due to the acquisition of 14 Embraer aircraft and five Airbus aircraft in 2008, which increased depreciation expense on owned aircraft.
 
Total Express expenses increased 15.1% in 2008 to $3.14 billion from $2.73 billion in 2007. Express fuel costs increased $372 million as the average fuel price per gallon increased 44.8% from $2.23 in 2007 to a record high $3.23 in 2008. Other Express operating expenses increased $40 million year over year as a result of the 5.6% increase in Express capacity in 2008, partially offset by a decrease in amounts paid under capacity purchases with US Airways Group’s wholly owned Express carriers.
 
Nonoperating Income (Expense):
 
                         
                Percent
 
    2008     2007     Change  
    (In millions)        
 
Nonoperating income (expense):
                       
Interest income
  $ 83     $ 172       (51.6 )
Interest expense, net
    (218 )       (229 )     (5.1 )
Other, net
    (240 )     18       nm  
                         
Total nonoperating expense, net
  $   (375 )   $ (39 )     nm  
                         
 
Net nonoperating expense was $375 million in 2008 as compared to $39 million in 2007. Interest income decreased $89 million in 2008 due to lower average investment balances and lower rates of return. Interest expense, net decreased $11 million due primarily to reductions in average interest rates associated with variable rate debt, partially offset by an increase in the average debt balance outstanding as compared to the 2007 period.
 
Other nonoperating expense, net in 2008 included $214 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities primarily due to the length of time and extent to which the fair value has been less than cost for these securities. US Airways also recognized $25 million in foreign currency losses and $6 million in write offs of debt discount and debt issuance costs in connection with the refinancing of certain aircraft equipment notes and a loan prepayment in connection with US Airways’ 2008 financing transactions, offset in part by $8 million in gains on forgiveness of debt. Other nonoperating expense, net in 2007 included a $17 million gain on the sale of stock in ARINC Incorporated as well as $7 million in foreign currency gains, offset by $10 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities.
 
Liquidity and Capital Resources
 
As of December 31, 2009, our cash, cash equivalents, investments in marketable securities and restricted cash were $1.98 billion, of which $480 million was restricted. Our investments in marketable securities included $203 million of auction rate securities at fair value ($347 million par value) that are classified as noncurrent assets on our consolidated balance sheets.
 
Investments in Marketable Securities
 
As of December 31, 2009, we held auction rate securities totaling $347 million at par value, which are classified as available-for-sale securities and noncurrent assets on our consolidated balance sheets. Contractual maturities for these auction rate securities range from seven to 43 years, with 73% of our portfolio maturing within the next 10 years (2016 – 2017), 19% maturing within the next 30 years (2033 – 2036) and 8% maturing thereafter (2049 – 2052). With the liquidity issues experienced in the global credit and capital markets, all of our auction rate securities have experienced failed auctions since August 2007. The estimated fair value of these auction rate securities no longer approximates par value. At December 31 2009, the fair value of our auction rate securities was $203 million.
 
During 2009, we sold certain investments in auction rate securities for net proceeds of $32 million. Additionally, we recorded net unrealized gains of $58 million in other comprehensive income related to the increase in fair value


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of certain investments in auction rate securities, as well as $10 million in other-than-temporary impairment charges recorded in other nonoperating expense, net related to the decline in fair value of certain investments in auction rate securities.
 
We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair value of our investments. If the current market conditions deteriorate, we may be required to record additional impairment charges in other nonoperating expense, net in future periods.
 
We believe that, based on our current unrestricted cash and cash equivalents balance at December 31, 2009, the current lack of liquidity in our investments in auction rate securities will not have a material impact on our liquidity, our cash flow or our ability to fund our operations.
 
Sources and Uses of Cash
 
US Airways Group
 
2009 Compared to 2008
 
Net cash provided by operating activities was $59 million in 2009 as compared to net cash used in operating activities of $980 million in 2008, a period-over-period improvement of $1.04 billion. Operating cash flows significantly improved in 2009 due to the substantial reduction in the cost of fuel offset by declines in revenues as a result of the global economic recession. Our mainline and Express fuel expense was $2.28 billion, or 48%, lower in 2009 as compared to 2008 on 4.5% lower capacity. The weak demand environment caused by the global economic recession resulted in a $1.66 billion, or 13.7%, decline in total operating revenues. In addition, operating cash flows in 2009 improved by $321 million principally as a result of the wind down of our fuel hedging program. In the latter part of 2008, we recognized unrealized losses on certain open fuel hedge transactions as the price of heating oil fell below the lower limit of our collar transactions and caused us to use cash from operations to collateralize our counterparties. Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts. Accordingly, our 2009 operating cash flows were not significantly impacted by fuel hedging transactions as any hedges settling in 2009 had been fully collateralized through the cash deposits posted during 2008.
 
Net cash used in investing activities was $495 million and $915 million in 2009 and 2008, respectively. Principal investing activities in 2009 included expenditures for property and equipment totaling $683 million primarily related to the purchase of Airbus aircraft. These expenditures were offset by $76 million in proceeds from the disposition of property and equipment, a $60 million decrease in restricted cash and $52 million of net proceeds from sales of investments in marketable securities. Proceeds from the disposition of property and equipment are comprised of proceeds from the swap of one of our owned aircraft in exchange for the leased aircraft involved in the Flight 1549 accident and sale-leaseback transactions involving four aircraft and five engines. Restricted cash decreased during 2009 due to changes in the amount of holdback held by certain credit card processors for advance ticket sales for which we had not yet provided air transportation. Principal investing activities in 2008 included expenditures for property and equipment totaling $1.07 billion, including the purchase of 14 Embraer aircraft, five Airbus aircraft and a $139 million net increase in equipment purchase deposits for aircraft on order, as well as a $74 million increase in restricted cash, all of which were offset in part by net sales of investments in marketable securities of $206 million. The change in the 2008 restricted cash balance was due to changes in the amount of holdback held by certain credit card processors.
 
Net cash provided by financing activities was $701 million and $981 million for 2009 and 2008, respectively. Principal financing activities in 2009 included proceeds from the issuance of debt of $919 million, which primarily included the financing associated with the purchase of Airbus aircraft, as well as the issuance of $172 million of convertible notes, additional loans under a spare parts loan agreement, a loan secured by certain airport landing slots and an unsecured financing with one of our third-party Express carriers. Debt repayments totaled $407 million in 2009. Financing activities in 2009 also included net proceeds from the issuance of common stock of $66 million from a May 2009 public stock offering of 17.5 million shares and $137 million from a September 2009 public stock offering of 29 million shares. Principal financing activities in 2008 included proceeds from the issuance of debt of $1.59 billion, of which $800 million was from the series of financing transactions completed in October 2008,


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including the Barclays pre-purchased miles, Airbus advance and spare parts and engine loans. Proceeds also included the financing associated with the purchase of 14 Embraer aircraft and five Airbus aircraft and $145 million in proceeds from the refinancing of certain aircraft equipment notes. Debt repayments were $734 million, including a $400 million paydown at par of our Citicorp credit facility, a $100 million prepayment of certain indebtedness incurred as part of our October 2008 financing transactions and $97 million related to the $145 million aircraft equipment note refinancing discussed above. Financing activities in 2008 also included $179 million in net proceeds from the issuance of common stock as a result of a public stock offering of 21.85 million common shares during the third quarter of 2008.
 
2008 Compared to 2007
 
Net cash used in operating activities was $980 million in 2008 as compared to net cash provided by operating activities of $451 million in 2007. The period-over-period decrease of $1.43 billion is due principally to our net loss for 2008, which was driven by record high fuel prices. Our mainline and Express fuel expense was $1.36 billion higher in 2008 than in 2007 on slightly lower capacity. Additionally, the 2008 period included operating cash outflows of $321 million related to fuel hedging transactions versus operating cash inflows of $106 million related to fuel hedging transactions in the 2007 period. The substantial decrease in the fuel prices in the latter part of 2008, while a significant positive development, had the near-term liquidity impact of reducing our operating cash flow as we were required to use cash from operations to collateralize our counterparties in connection with our fuel hedging positions. The increase in fuel costs and fuel hedge collateral was partially offset by an increase in revenue of $418 million due to a 3.1% increase in mainline and Express PRASM and our new revenue initiatives that went into effect in 2008.
 
Net cash used in investing activities was $915 million in 2008 as compared to net cash provided by investing activities of $269 million in 2007. Principal investing activities in 2008 included expenditures for property and equipment totaling $1.07 billion, including the purchase of 14 Embraer aircraft, five Airbus aircraft and a $139 million net increase in equipment purchase deposits for aircraft on order, as well as a $74 million increase in restricted cash, offset in part by net sales of investments in marketable securities of $206 million. The change in the 2008 restricted cash balance was due to changes in the amount of holdback held by certain credit card processors for advance ticket sales for which we had not yet provided air transportation. Principal investing activities in 2007 included net sales of investments in marketable securities of $612 million, a decrease in restricted cash of $200 million and $56 million in proceeds from the sale of investments in ARINC and Sabre, offset in part by expenditures for property and equipment totaling $603 million, including the purchase of nine Embraer aircraft and a net increase in equipment purchase deposits of $80 million. The net sales of investments in marketable securities in 2007 were primarily certain auction rate securities sold at par value in the third quarter of 2007. The change in the 2007 restricted cash balance was due to changes in the amount of holdback held by certain credit card processors.
 
Net cash provided by financing activities was $981 million and $112 million in 2008 and 2007, respectively. Principal financing activities in 2008 included proceeds from the issuance of debt of $1.59 billion, of which $800 million was from the series of financing transactions completed in October 2008, including the Barclays pre-purchased miles, Airbus advance and spare parts and engine loans. Proceeds also included the financing associated with the purchase of 14 Embraer aircraft and five Airbus aircraft and $145 million in proceeds from the refinancing of certain aircraft equipment notes. Debt repayments were $734 million, including a $400 million paydown at par of our Citicorp credit facility, a $100 million prepayment of certain indebtedness incurred as part of our October 2008 financing transactions and $97 million related to the $145 million aircraft equipment note refinancing discussed above. Financing activities in 2008 also included $179 million in net proceeds from the issuance of common stock as a result of a public stock offering of 21.85 million common shares during the third quarter of 2008. Principal financing activities in 2007 included proceeds from the issuance of debt of $1.8 billion, including $1.6 billion generated from the Citicorp credit facility and proceeds from property and equipment financings. Debt repayments were $1.68 billion and, using the proceeds from the Citicorp credit facility, included the repayment in full of the balances outstanding on the $1.25 billion GE loan, the Barclays Bank Delaware prepaid miles loan of $325 million and a GECC credit facility of $19 million.


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US Airways
 
2009 Compared to 2008
 
Net cash provided by operating activities was $326 million in 2009 as compared to net cash used in operating activities of $1.03 billion in 2008, a period-over-period improvement of $1.35 billion. Operating cash flows significantly improved in 2009 due to the substantial reduction in the cost of fuel offset by declines in revenues as a result of the global economic recession.. US Airways’ mainline and Express fuel expense was $2.28 billion, or 48%, lower in 2009 as compared to 2008 on 4.5% lower capacity. The weak demand environment caused by the global economic recession resulted in a $1.64 billion, or 13.4%, decline in total operating revenues. In addition, operating cash flows in 2009 improved by $321 million principally as a result of the wind down of US Airways’ fuel hedging program. In the latter part of 2008, US Airways recognized unrealized losses on certain open fuel hedge transactions as the price of heating oil fell below the lower limit of US Airways’ collar transactions and caused it to use cash from operations to collateralize our counterparties. Since the third quarter of 2008, US Airways has not entered into any new fuel hedging transactions and, as of December 31, 2009, US Airways had no remaining outstanding fuel hedging contracts. Accordingly, US Airways’ 2009 operating cash flows were not significantly impacted by fuel hedging transactions as any hedges settling in 2009 had been fully collateralized through the cash deposits posted during 2008.
 
Net cash used in investing activities was $489 million and $889 million in 2009 and 2008, respectively. Principal investing activities in 2009 included expenditures for property and equipment totaling $677 million, primarily related to the purchase of Airbus aircraft. These expenditures were offset by $76 million in proceeds from the disposition of property and equipment, a $60 million decrease in restricted cash and $52 million of net proceeds from sales of investments in marketable securities. Proceeds from the disposition of property and equipment are comprised of proceeds from the swap of one of US Airways’ owned aircraft in exchange for the leased aircraft involved in the Flight 1549 accident and sale-leaseback transactions involving four aircraft and five engines. Restricted cash decreased during 2009 due to changes in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation. Principal investing activities in 2008 included expenditures for property and equipment totaling $1.04 billion, including the purchase of 14 Embraer aircraft, five Airbus aircraft and a $139 million net increase in equipment purchase deposits for aircraft on order, as well as a $74 million increase in restricted cash, all of which were offset in part by net sales of investments in marketable securities of $206 million. The change in the 2008 restricted cash balance was due to changes in the amount of holdback held by certain credit card processors.
 
Net cash provided by financing activities was $346 million and $1 billion for 2009 and 2008, respectively. Principal financing activities in 2009 included proceeds from the issuance of debt of $747 million, which primarily included the financing associated with the purchase of Airbus aircraft as well as additional loans under a spare parts loan agreement, a loan secured by certain airport landing slots and an unsecured financing with one of US Airways’ third-party Express carriers. Debt repayments totaled $391 million in 2009. Principal financing activities in 2008 included proceeds from the issuance of debt of $1.39 billion, of which $600 million was from the series of financing transactions completed in October 2008, including the Airbus advance and spare parts and engine loans. Proceeds also included the financing associated with the purchase of 14 Embraer aircraft and five Airbus aircraft and $145 million in proceeds from the refinancing of certain aircraft equipment notes. Debt repayments were $318 million, including a $100 million prepayment of certain indebtedness incurred as part of US Airways’ October 2008 financing transactions and $97 million related to the $145 million aircraft equipment note refinancing discussed above.
 
2008 Compared to 2007
 
Net cash used in operating activities was $1.03 billion in 2008 as compared to net cash provided by operating activities of $433 million in 2007. The period-over-period decrease of $1.46 billion is due principally to US Airways’ net loss for 2008, which was driven by record high fuel prices. US Airways’ mainline and Express fuel expense was $1.36 billion higher in 2008 than in 2007 on slightly lower capacity. Additionally, the 2008 period included operating cash outflows of $321 million related to fuel hedging transactions versus operating cash flows inflows of $106 million related to fuel hedging transactions in the 2007 period. The substantial decrease in the fuel


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prices in the latter part of 2008, while a significant positive development, had the near-term liquidity impact of reducing US Airways’ operating cash flow as US Airways was required to use cash from operations to collateralize its counterparties in connection with US Airways’ fuel hedging positions. The increase in fuel costs and fuel hedge collateral was partially offset by an increase in revenue of $431 million due to a 3.1% increase in mainline and Express PRASM and US Airways’ new revenue initiatives that went into effect in 2008.
 
Net cash used in investing activities was $889 million in 2008 as compared to net cash provided by investing activities of $306 million in 2007. Principal investing activities in 2008 included expenditures for property and equipment totaling $1.04 billion, including the purchase of 14 Embraer aircraft, five Airbus aircraft and a $139 million net increase in equipment purchase deposits for aircraft on order, as well as a $74 million increase in restricted cash, offset in part by net sales of investments in marketable securities of $206 million. The change in the 2008 restricted cash balance was due to changes in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation. Principal investing activities in 2007 included net sales of investments in marketable securities of $612 million, a decrease in restricted cash of $200 million and $56 million in proceeds from the sale of investments in ARINC and Sabre, offset in part by expenditures for property and equipment totaling $566 million, including the purchase of nine Embraer aircraft and a net increase in equipment purchase deposits of $80 million. The net sales of investments in marketable securities in 2007 were primarily certain auction rate securities sold at par value in the third quarter of 2007. The change in the 2007 restricted cash balance was due to changes in the amount of holdback held by certain credit card processors.
 
Net cash provided by financing activities was $1 billion and $90 million in 2008 and 2007, respectively. Principal financing activities in 2008 included proceeds from the issuance of debt of $1.39 billion, of which $600 million was from the series of financing transactions completed in October 2008, including the Airbus advance and spare parts and engine loans. Proceeds also included the financing associated with the purchase of 14 Embraer aircraft and five Airbus aircraft and $145 million in proceeds from the refinancing of certain aircraft equipment notes. Debt repayments were $318 million, including a $100 million prepayment of certain indebtedness incurred as part of US Airways’ October 2008 financing transactions and $97 million related to the $145 million aircraft equipment note refinancing discussed above. Principal financing activities in 2007 included proceeds from the issuance of debt of $198 million to finance the acquisition of property and equipment and total debt repayments of $105 million.
 
Commitments
 
As of December 31, 2009, we had $4.79 billion of long-term debt and capital leases (including current maturities and before discount on debt).
 
Citicorp Credit Facility
 
On March 23, 2007, US Airways Group entered into a term loan credit facility with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways Group borrowed an aggregate principal amount of $1.6 billion. US Airways, AWA and certain other subsidiaries of US Airways Group are guarantors of the Citicorp credit facility.
 
The Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at our option, LIBOR plus an applicable LIBOR margin for interest periods of one, two, three or six months. The applicable index margin, subject to adjustment, is 1.00%, 1.25% or 1.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. The applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25% or 2.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. In addition, interest on the Citicorp credit facility may be adjusted based on the credit rating for the Citicorp credit facility as follows: (i) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least one subgrade better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be the lower of 2.25% and the rate otherwise applicable based upon the adjusted Citicorp credit facility balance and (B) the applicable index margin will be the lower of 1.25% and the rate otherwise applicable based upon the Citicorp credit facility principal balance, and (ii) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least two subgrades


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better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be 2.00% and (B) the applicable index margin will be 1.00%. As of December 31, 2009, the interest rate on the Citicorp credit facility was 2.78% based on a 2.50% LIBOR margin.
 
The Citicorp credit facility matures on March 23, 2014, and is repayable in seven annual installments with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.
 
In addition, the Citicorp credit facility requires certain mandatory prepayments upon the occurrence of specified events, establishes certain financial covenants, including minimum cash requirements and maintenance of certain minimum ratios, contains customary affirmative covenants and negative covenants and contains customary events of default. The Citicorp credit facility requires us to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements, which would become restricted for use by us if certain adverse events occur per the terms of the agreement. In addition, the Citicorp credit facility amendment provides that we may issue debt in the future with a second lien on the assets pledged as collateral under the Citicorp credit facility. The principal amount outstanding under the Citicorp credit facility was $1.17 billion as of December 31, 2009. As of December 31, 2009, we were in compliance with all debt covenants under the amended credit facility.
 
7.25% Convertible Senior Notes
 
In May 2009, US Airways Group issued $172 million aggregate principal amount of 7.25% Convertible Senior Notes due 2014 (the “7.25% notes”) for proceeds, net of expenses, of approximately $168 million. The 7.25% notes bear interest at a rate of 7.25% per annum, which shall be payable semi-annually in arrears on each May 15 and November 15. The 7.25% notes mature on May 15, 2014.
 
Holders may convert their 7.25% notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date for the 7.25% notes. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination thereof at our election. The initial conversion rate for the 7.25% notes is 218.8184 shares of our common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of $4.57 per share). Such conversion rate is subject to adjustment in certain events.
 
If we undergo a fundamental change, holders may require us to purchase all or a portion of their 7.25% notes for cash at a price equal to 100% of the principal amount of the 7.25% notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. A fundamental change includes a person or group (other than us or our subsidiaries) becoming the beneficial owner of more than 50% of the voting power of our capital stock, certain merger or combination transactions, a substantial turnover of our directors, stockholder approval of our liquidation or dissolution and US Airways Group common stock ceasing to be listed on at least one national securities exchange.
 
The 7.25% notes rank equal in right of payment to all of our other existing and future unsecured senior debt and senior in right of payment to our debt that is expressly subordinated to the 7.25% notes, if any. The 7.25% notes impose no limit on the amount of debt we or our subsidiaries may incur. The 7.25% notes are structurally subordinated to all debt and other liabilities and commitments (including trade payables) of our subsidiaries. The 7.25% notes are also effectively junior to our secured debt, if any, to the extent of the value of the assets securing such debt.
 
As the 7.25% notes can be settled in cash upon conversion, for accounting purposes, the 7.25% notes were bifurcated into a debt component that is initially recorded at fair value and an equity component. In addition to the 7.25% coupon interest, we expect to record non-cash interest expense of $12 million in 2010, $16 million in 2011, $22 million in 2012, $29 million in 2013 and $13 million in 2014 representing the amortization of the discounted carrying value of the 7.25% notes to face value over the five-year term.


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Other 2009 Financing Transactions
 
US Airways borrowed $825 million in 2009 to finance Airbus aircraft deliveries through a combination of facility agreements and manufacturer backstop financing. These financings bear interest at a rate of LIBOR plus an applicable margin and contain default provisions and other covenants that are typical in the industry.
 
US Airways borrowed an additional $120 million in 2009 under its spare parts loan agreement. The spare parts loan agreement bears interest at a rate of LIBOR plus a margin per annum and is secured by a first priority security interest in substantially all of US Airways’ rotable, repairable and expendable aircraft spare parts. The spare parts loan agreement matures on October 20, 2014.
 
In 2009, US Airways sold 10 of its Embraer 190 aircraft to Republic. In connection with this transaction, Republic assumed $216 million of debt outstanding on the 10 Embraer 190 aircraft and US Airways was released from its obligations associated with the principal due under the debt. Additionally, at the time of sale, US Airways had $35 million outstanding under a loan from Republic (the “Republic loan”). The Republic loan was scheduled to be repaid starting in January 2010 and fully repaid in October 2011. The full amount outstanding under the Republic loan was applied to the purchase price of the 10 aircraft.
 
US Airways Group is party to a co-branded credit card agreement with Barclays Bank Delaware. The co-branded credit card agreement provides for, among other things, the pre-purchase of frequent flyer miles in an amount totaling $200 million. Barclays has agreed that it will pre-purchase additional miles on a monthly basis in an amount equal to the difference between $200 million and the amount of unused miles then outstanding. In November 2009, US Airways Group entered into an amendment to its co-branded credit card agreement with Barclays. Commencing in January 2012, the $200 million will be reduced over a period of up to approximately two years. Among the conditions to this monthly purchase of miles is a requirement that US Airways Group maintain an unrestricted cash balance, as defined in the agreement, of at least $1.35 billion for the months of March through November and $1.25 billion for the months of January, February and December.
 
Credit Card Processing Agreements
 
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. Credit card processors have financial risk associated with tickets purchased for travel because, although the processor generally forwards the cash related to the purchase to us soon after the purchase is completed, the air travel generally occurs after that time, and the processor may have liability if we do not ultimately provide the air travel. Our agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. These holdback requirements can be modified at the discretion of the processing companies, up to the estimated liability for future air travel purchased with the respective credit cards, upon the occurrence of specified events, including material adverse changes in our financial condition. The amount that the processing companies may withhold also varies as a result of changes in financial risk due to seasonal fluctuations in ticket volume. Additional holdback requirements will reduce our liquidity in the form of unrestricted cash and short-term investments by the amount of the holdbacks.
 
Aircraft and Engine Purchase Commitments
 
US Airways has definitive purchase agreements with Airbus for the acquisition of 134 aircraft, including 97 single-aisle A320 family aircraft and 37 widebody aircraft (comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft), of which 30 aircraft have been delivered through December 31, 2009. Deliveries of the A320 family aircraft commenced during 2008 with the delivery of five A321 aircraft. During 2009, US Airways took delivery of 18 Airbus A321 aircraft, five A330-200 aircraft and two Airbus A320 aircraft. Of the 20 A320 family aircraft, 11 were financed using manufacturer backstop financing, eight were financed through existing financing facilities and one was financed through a leasing transaction. Of the five A330-200 aircraft, three were financed through leasing transactions and two were financed through new loan agreements.
 
In November 2009, US Airways amended its purchase agreements with Airbus to defer 54 aircraft originally scheduled for delivery between 2010 and 2012 to 2013 and beyond. These deferral arrangements will reduce our


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aircraft capital expenditures over the next three years by approximately $2.5 billion and reduce near- and medium-term obligations to Airbus and others by approximately $132 million. US Airways now plans to take delivery of 28 Airbus aircraft between 2010 and 2012, consisting of four aircraft in 2010 (two A320 aircraft and two A330 aircraft) and 24 A320 family aircraft in 2011-2012. In addition, commencement of US Airways’ Airbus A350 XWB operations, with aircraft deliveries originally scheduled to start in 2015, will now be postponed to 2017.
 
US Airways has agreements for the purchase of eight new IAE V2500-A5 spare engines scheduled for delivery through 2014 for use on the Airbus A320 family fleet, three new Trent 700 spare engines scheduled for delivery through 2013 for use on the Airbus A330-200 fleet and three new Trent XWB spare engines scheduled for delivery in 2017 through 2019 for use on the Airbus A350 XWB aircraft. US Airways has taken delivery of two of the Trent 700 spare engines and one of the V2500-A5 spare engines, which were financed through leasing transactions.
 
Under all of our aircraft and engine purchase agreements, our total future commitments as of December 31, 2009 are expected to be approximately $6.09 billion through 2019 as follows: $296 million in 2010, $504 million in 2011, $579 million in 2012, $1.15 billion in 2013, $932 million in 2014 and $2.63 billion thereafter, which includes predelivery deposits and payments. We have financing commitments for all Airbus aircraft scheduled for delivery during 2010 to 2012. See Part  I, Item 1A, “Risk Factors — Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, operating expenses and results” and “Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions.
 
Covenants and Credit Rating
 
In addition to the minimum cash balance requirements, our long-term debt agreements contain various negative covenants that restrict or limit our actions, including our ability to pay dividends or make other restricted payments. Our long-term debt agreements also generally contain cross-default provisions, which may be triggered by defaults by us under other agreements relating to indebtedness. See Part I, Item 1A, “Risk Factors — Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions” and “Any failure to comply with the liquidity covenants contained in our financing arrangements would likely have a material adverse effect on our business, financial condition and results of operations.” As of December 31, 2009, we and our subsidiaries were in compliance with the covenants in our long-term debt agreements.
 
Our credit ratings, like those of most airlines, are relatively low. The following table details our credit ratings as of December 31, 2009:
 
             
    S&P
  Fitch
  Moody’s
    Local Issuer
  Issuer Default
  Corporate
    Credit Rating   Credit Rating   Family Rating
 
US Airways Group
  B-   CCC   Caa1
US Airways
  B-   *   *
 
 
(*) The credit agencies do not rate these categories for US Airways.
 
A decrease in our credit ratings could cause our borrowing costs to increase, which would increase our interest expense and could affect our net income, and our credit ratings could adversely affect our ability to obtain additional financing. If our financial performance or industry conditions do not improve, we may face future downgrades, which could further negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a decline in our business and in our ability to satisfy our obligations under our indebtedness.
 
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


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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 us, or that engages in leasing, hedging or research and development arrangements with us.
 
We have no off-balance sheet arrangements of the types described in the first three categories above that we believe may have a material current or future effect on financial condition, liquidity or results of operations. Certain guarantees that we do not expect to have a material current or future effect on financial condition, liquidity or results of operations are disclosed in Note 9(f) to the consolidated financial statements of US Airways Group included in Item 8A of this report and Note 8(f) to the consolidated financial statements of US Airways included in Item 8B of this report.
 
Pass Through Trusts
 
US Airways has obligations with respect to pass through trust certificates, also known as Enhanced Equipment Trust Certificates, or EETCs, issued by pass through trusts to cover the financing of 19 owned aircraft, 114 leased aircraft and three leased engines. These trusts are off-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment. Rather than finance each aircraft separately when such aircraft is purchased or delivered, these trusts allowed US Airways to raise the financing for several aircraft at one time and place such funds in escrow pending the purchase or delivery of the relevant aircraft. The trusts were also structured to provide for certain credit enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to US Airways.
 
Each trust covered a set amount of aircraft scheduled to be delivered within a specific period of time. At the time of each covered aircraft financing, the relevant trust used the funds in escrow to purchase equipment notes relating to the financed aircraft. The equipment notes were issued, at US Airways’ election in connection with a mortgage financing of the aircraft or by a separate owner trust in connection with a leveraged lease financing of the aircraft. In the case of a leveraged lease financing, the owner trust then leased the aircraft to US Airways. In both cases, the equipment notes are secured by a security interest in the aircraft. The pass through trust certificates are not direct obligations of, nor are they guaranteed by, US Airways Group or US Airways. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of US Airways. As of December 31, 2009, $505 million associated with these mortgage financings is reflected as debt in the accompanying consolidated balance sheet.
 
With respect to leveraged leases, US Airways evaluated whether the leases had characteristics of a variable interest entity. US Airways concluded the leasing entities met the criteria for variable interest entities. US Airways then evaluated whether or not it was the primary beneficiary by evaluating whether or not it was exposed to the majority of the risks (expected losses) or whether it receives the majority of the economic benefits (expected residual returns) from the trusts’ activities. US Airways does not provide residual value guarantees to the bondholders or equity participants in the trusts. Each lease does have a fixed price purchase option that allows US Airways to purchase the aircraft near the end of the lease term. However, the option price approximates an estimate of the aircraft’s fair value at the option date. Under this feature, US Airways does not participate in any increases in the value of the aircraft. US Airways concluded it was not the primary beneficiary under these arrangements. Therefore, US Airways accounts for its EETC leveraged lease financings as operating leases. US Airways’ total future obligations under these leveraged lease financings are $3.25 billion as of December 31, 2009.
 
Special Facility Revenue Bonds
 
US Airways guarantees the payment of principal and interest on certain special facility revenue bonds issued by municipalities to build or improve certain airport and maintenance facilities which are leased to US Airways. Under such leases, US Airways is required to make rental payments through 2023, sufficient to pay maturing principal and interest payments on the related bonds. As of December 31, 2009, the remaining lease payments guaranteeing the principal and interest on these bonds are $137 million, of which $34 million of these obligations is accounted for as a capital lease and reflected as debt in the accompanying consolidated balance sheet.


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Jet Service Agreements
 
Certain entities with which US Airways has capacity purchase agreements are considered variable interest entities. In connection with its restructuring and emergence from bankruptcy, US Airways contracted with Air Wisconsin and Republic to purchase a significant portion of these companies’ regional jet capacity for a period of 10 years. US Airways has determined that it is not the primary beneficiary of these variable interest entities, based on cash flow analyses. Additionally, US Airways has analyzed the arrangements with other carriers with which US Airways has long-term capacity purchase agreements and has concluded that it is not required to consolidate any of the entities.
 
Contractual Obligations
 
The following table provides details of our future cash contractual obligations as of December 31, 2009 (in millions):
 
                                                         
    Payments Due by Period  
    2010     2011     2012     2013     2014     Thereafter     Total  
 
US Airways Group (1)
                                                       
Debt (2)
  $ 90     $ 16     $ 116     $ 116     $ 1,276     $     $ 1,614  
Interest obligations (3)
    57       54       51       46       22             230  
US Airways (4)
                                                       
Debt and capital lease obligations (5) (6)
    421       334       305       255       265       1,599       3,179  
Interest obligations (3) (6)
    152       156       147       104       88       387       1,034  
Aircraft purchase and operating lease commitments (7)
    1,360       1,443       1,441       1,860       1,571       5,815       13,490  
Regional capacity purchase agreements (8)
    1,013       1,032       900       772       771       2,347       6,835  
Other US Airways Group subsidiaries (9)
    11       9       9       7       6       1       43  
                                                         
Total
  $  3,104     $  3,044     $  2,969     $  3,160     $  3,999     $  10,149     $  26,425  
                                                         
 
 
(1) These commitments represent those specifically entered into by US Airways Group or joint commitments entered into by US Airways Group and US Airways under which each entity is jointly and severally liable.
 
(2) Excludes $173 million of unamortized debt discount as of December 31, 2009.
 
(3) For variable-rate debt, future interest obligations are shown above using interest rates in effect as of December 31, 2009.
 
(4) Commitments listed separately under US Airways and its wholly owned subsidiaries represent commitments under agreements entered into separately by those companies.
 
(5) Excludes $94 million of unamortized debt discount as of December 31, 2009.
 
(6) Includes $505 million of future principal payments and $219 million of future interest payments as of December 31, 2009, respectively, related to pass through trust certificates or EETCs associated with mortgage financings for the purchase of certain aircraft as described above under “Off-Balance Sheet Arrangements” and in Note 9(c) to US Airways Group’s and Note 8(c) to US Airways’ consolidated financial statements in Item 8A and 8B of this report, respectively.
 
(7) Includes $3.25 billion of future minimum lease payments related to EETC leveraged leased financings of certain aircraft as of December 31, 2009, as described above under “Off-Balance Sheet Arrangements” and in Note 9(c) to US Airways Group’s and Note 8(c) to US Airways’ consolidated financial statements in Item 8A and 8B of this report, respectively.
 
(8) Represents minimum payments under capacity purchase agreements with third-party Express carriers.
 
(9) Represents operating lease commitments entered into by US Airways Group’s other airline subsidiaries Piedmont and PSA.


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We expect to fund these cash obligations from funds provided by operations and future financings, if necessary. The cash available to us from these sources, however, may not be sufficient to cover these cash obligations because economic factors may reduce the amount of cash generated by operations or increase our costs. For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks and natural disasters could reduce the demand for air travel, which would reduce the amount of cash generated by operations. An increase in our costs, either due to an increase in borrowing costs caused by a reduction in our credit rating or a general increase in interest rates or due to an increase in the cost of fuel, maintenance, aircraft and aircraft engines and parts, could decrease the amount of cash available to cover the cash obligations. Moreover, the Citicorp credit facility, our amended credit card agreement with Barclays and certain of our other financing arrangements contain significant minimum cash balance requirements. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements.
 
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States requires that we make certain estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of our financial statements. We believe our estimates and assumptions are reasonable; however, actual results could differ from those estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. We have identified the following critical accounting policies that impact the preparation of our consolidated financial statements. See also the summary of significant accounting policies included in the notes to the financial statements under Items 8A and 8B of this Annual Report on Form 10-K for additional discussion of the application of these estimates and other accounting policies.
 
Passenger Revenue
 
Passenger revenue is recognized when transportation is provided. Ticket sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on the consolidated balance sheets. The air traffic liability represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The balance in the air traffic liability fluctuates throughout the year based on seasonal travel patterns and fare sale activity. Our air traffic liability was $778 million and $698 million as of December 31, 2009 and 2008, respectively.
 
The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of our historical data. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of our estimates. Holding other factors constant, a 10% change in our estimate of the amount refunded, exchanged or forfeited for 2009 would result in a $29 million change in our passenger revenue, which represents less than 1% of our passenger revenue.
 
Passenger traffic commissions and related fees are expensed when the related revenue is recognized. Passenger traffic commissions and related fees not yet recognized are included as a prepaid expense.
 
Impairment of Intangible and Other Assets
 
We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, our international route authorities and trademark intangible assets are classified as indefinite lived assets and are reviewed for impairment annually. Factors which could trigger an impairment review include the following: significant changes in the manner of use of the assets; significant underperformance relative to historical or projected future operating results; or significant negative industry or economic trends. An impairment has occurred when the future undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Cash flow estimates are


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based on historical results adjusted to reflect management’s best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Estimates of fair value represent management’s best estimate based on appraisals, industry trends and reference to market rates and transactions. Changes in industry capacity and demand for air transportation can significantly impact the fair value of aircraft and related assets.
 
We performed the annual impairment test on our international route authorities and trademarks during the fourth quarter of 2009. The fair values of international route authorities were assessed using the market approach. The market approach took into consideration relevant supply and demand factors at the related airport locations as well as available market sale and lease data. For trademarks, we utilized a form of the income approach known as the relief-from-royalty method. As a result of our annual impairment test on international route authorities, we recorded a $16 million impairment charge related to the decline in value of certain international routes. We will perform our next annual impairment test on October 1, 2010.
 
Investments in Marketable Securities
 
As of December 31, 2009, all noncurrent investments in marketable securities, consisting entirely of auction rate securities, are classified as available for sale. We determine the appropriate classification of securities at the time of purchase and re-evaluate such designation as of each balance sheet date.
 
Our available-for-sale securities are measured at fair value on a recurring basis. 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. We use 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 prices in active markets, that are observable either directly or indirectly; and
  Level 3.        Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
We estimate the fair value of our auction rate securities based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, passing a future auction, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security. These estimated fair values could change significantly based on future market conditions.
 
We review declines in the fair value of our investments in marketable securities to determine the classification of the impairment as temporary or other-than-temporary. A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of stockholders’ equity. An other-than-temporary impairment charge must be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings and the amount related to other factors (referred to as noncredit losses) which is recognized in other comprehensive income. This noncredit loss component of the impairment may only be classified in other comprehensive income if both of the following conditions are met (a) the holder of the security concludes that it does not intend to sell the security and (b) the holder concludes that it is more likely than not that the holder will not be required to sell the security before the security recovers its value. If these conditions are not met, the noncredit loss must also be recognized in earnings. We review our investments on an ongoing basis for indications of possible impairment, and if impairment is identified, we determine whether the impairment is temporary or other-than-temporary. Determination of whether the impairment is temporary or other-than-temporary requires significant judgment. The primary factors that we consider in classifying the impairment include the extent and period of time the fair value of each investment has declined below its cost basis, the expected holding or recovery period for each investment, and our intent and ability to hold each investment until recovery. Subsequent increases in the fair value of our investments in marketable securities are recorded to other comprehensive income and accreted to interest income over the period the gains are expected to be realized.


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Refer to the “Liquidity and Capital Resources” section for further discussion of our investments in marketable securities.
 
Frequent Traveler Program
 
The Dividend Miles frequent traveler program awards mileage credits to passengers who fly on US Airways and Star Alliance carriers and certain other partner airlines that participate in our program. Mileage credits can be redeemed for travel on US Airways or other participating partner airlines, in which case we pay a fee. We use the incremental cost method to account for the portion of our frequent traveler program liability related to mileage credits earned by Dividend Miles members through purchased flights. We have an obligation to provide future travel when these mileage credits are redeemed and have therefore recognized an expense and recorded a liability for mileage credits outstanding.
 
The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger. Incremental cost includes unit costs incurred by us for fuel, credit card fees, insurance, denied boarding compensation, food and beverages as well as fees incurred when travel awards are redeemed on partner airlines. In addition, we also include in the determination of our incremental cost the amount of redemption fees expected to be collected from Dividend Miles members. These redemption fees reduce our incremental cost. No profit or overhead margin is included in the accrual of incremental cost.
 
Dividend Miles members may not reach the mileage credit threshold required to redeem a travel award. Additionally, outstanding mileage credits are subject to expiration if unused. Therefore, in calculating the liability we estimate how many mileage credits will never be redeemed for travel and exclude those mileage credits from the estimate of the liability. Estimates are also made for the number of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines. These estimates are based on historical program experience as well as consideration of enacted program changes, as applicable. Changes in the liability resulting from members earning additional mileage credits or changes in estimates are recorded in the statement of operations. A change to certain estimates in the calculation of incremental cost could have a material impact on the liability. At December 31, 2009, we have assumed 11% of our future travel award redemptions will be on partner airlines. A 1% increase or decrease in the percentage of travel awards redeemed on partner airlines would have an $8 million impact on the liability as of December 31, 2009.
 
As of December 31, 2009, the incremental cost liability for outstanding mileage credits expected to be redeemed for future travel awards accrued on our balance sheet within other accrued expenses was $130 million, representing 129.1 billion mileage credits.
 
We also sell frequent flyer program mileage credits to participating airline partners and non-airline business partners. Revenue earned from selling these mileage credits to other companies is recognized in two components. A portion of the revenue from these sales is deferred, representing the estimated fair value of the transportation component of the sold mileage credits. The deferred revenue for the transportation component is amortized on a straight-line basis over the period in which the credits are expected to be redeemed for travel as passenger revenue, which is currently estimated to be 28 months. The marketing component, which is earned at the time the miles are sold, is recognized in other revenues at the time of the sale. As of December 31, 2009, we had $212 million in deferred revenue from the sale of mileage credits included in other accrued expenses on our balance sheet. A change to the estimated fair value of the transportation component could have a significant impact on revenue. A 10% increase or decrease in the estimated fair value of the transportation component would have a $17 million impact on revenue recognized in 2009.
 
The number of travel award redemptions during the year ended December 31, 2009 was approximately 0.8 million, representing approximately 4% of US Airways’ mainline RPMs during that period. The use of inventory management techniques minimizes the displacement of revenue passengers by passengers traveling on award tickets.


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Deferred Tax Asset Valuation Allowance
 
At December 31, 2009, US Airways Group has a valuation allowance against its net deferred tax assets. In assessing the realizability of the deferred tax assets, we considered whether it was more likely than not that some portion or all of the deferred tax assets will be realized. NOLs generated in 2009 were also fully reserved by a valuation allowance.
 
Recent Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codificationtm and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of FASB Statement No. 162.” SFAS No. 168 establishes the FASB Accounting Standards Codificationtm (the “Codification” or “ASC”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. Effective July 1, 2009, the Codification superseded all existing non-SEC accounting and reporting standards.
 
In April 2009, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standards (“FAS”) 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” as adopted by the Codification on July 1, 2009. This FSP changes existing guidance for determining whether an impairment of debt securities is other-than-temporary. The FSP requires other-than-temporary impairments to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings and the amount related to other factors (referred to as noncredit losses) which is recognized in other comprehensive income. This noncredit loss component of the impairment may only be classified in other comprehensive income if both of the following conditions are met (a) the holder of the security concludes that it does not intend to sell the security and (b) the holder concludes that it is more likely than not that the holder will not be required to sell the security before the security recovers its value. If these conditions are not met, the noncredit loss must also be recognized in earnings. When adopting the FSP, an entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009. We adopted FSP FAS 115-2 and FAS 124-2 as of April 1, 2009. We do not meet the conditions necessary to recognize the noncredit loss component of our auction rate securities in other comprehensive income. Accordingly, we did not reclassify any previously recognized other-than-temporary impairment losses from retained earnings to accumulated other comprehensive income and the adoption of FSP FAS 115-2 and FAS 124-2 had no material impact on our consolidated financial statements.
 
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation (“FIN”) No. 46(R),” which was codified in December 2009 with the issuance of Accounting Standards Update (“ASU”) No. 2009-17, “Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU No. 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU No. 2009-17 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ASU No. 2009-17 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. We are currently evaluating the requirements of ASU No. 2009-17 and have not yet determined the impact on our consolidated financial statements.
 
In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on:


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(a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. We are currently evaluating the requirements of ASU No. 2009-13 and have not yet determined the impact on our consolidated financial statements.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Market Risk Sensitive Instruments
 
Our primary market risk exposures include commodity price risk (i.e., the price paid to obtain aviation fuel) and interest rate risk. The potential impact of adverse increases in these risks is discussed below. The following sensitivity analyses do not consider the effects that an adverse change may have on the overall economy nor do they consider additional actions we may take to mitigate our exposure to these changes. Actual results of changes in prices or rates may differ materially from the following hypothetical results.
 
Commodity Price Risk
 
Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of our control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices and availability may be affected by many factors, including:
 
  •   the impact of global political instability on crude production;
 
  •   unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries as evidenced in the third quarter of 2005 when Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations and pipeline capacity along certain portions of the U.S. Gulf Coast;
 
  •   unpredicted increases to oil demand due to weather or the pace of economic growth;
 
  •   inventory levels of crude, refined products and natural gas; and
 
  •   other factors, such as the relative fluctuation in value between the U.S. dollar and other major currencies and influence of speculative positions on the futures exchanges.
 
Our 2010 forecasted mainline and Express fuel consumption is approximately 1.42 billion gallons, and a one cent per gallon increase in aviation fuel price results in a $14 million annual increase in expense. Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts.
 
Interest Rate Risk
 
Our exposure to interest rate risk relates primarily to our cash equivalents, investment portfolios and variable rate debt obligations. At December 31, 2009, our variable-rate long-term debt obligations of approximately $3.33 billion represented approximately 69% of our total long-term debt. If interest rates increased 10% in 2009, the impact on our results of operations would have been approximately $13 million of additional interest expense. Additional information regarding our debt obligations as of December 31, 2009 is as follows (dollars in millions):
 
                                                         
    Expected Maturity Date  
    2010     2011     2012     2013     2014     Thereafter     Total  
 
Fixed-rate debt
  $  240     $  159     $  138     $ 76     $ 252     $  601     $  1,466  
Weighted avg. interest rate
    9.4 %     9.0 %     8.4 %     8.2 %     8.4 %     7.5 %        
Variable-rate debt
  $ 271     $ 191     $ 283     $  295     $  1,289     $ 998     $ 3,327  
Weighted avg. interest rate
    3.9 %     3.8 %     3.7 %     3.5 %     3.5 %     3.7 %        


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US Airways Group and US Airways have total future aircraft and spare engine purchase commitments of approximately $6.09 billion. We expect to finance such commitments either by entering into leases or debt agreements. Changes in interest rates will impact the cost of such financings.
 
At December 31, 2009, included within our investment portfolio are $347 million par value of investments in auction rate securities. With the liquidity issues experienced in the global credit and capital markets, all of our auction rate securities have experienced failed auctions since August 2007. The estimated fair value of these auction rate securities no longer approximates par value. As of December 31, 2009, the fair value of our auction rate securities was $203 million. We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair value of our investments. If the current market conditions deteriorate, we may be required to record additional impairment charges in other nonoperating expense, net in future periods.
 
We believe that, based on our current unrestricted cash and cash equivalents balance at December 31, 2009, the current lack of liquidity in our investments in auction rate securities will not have a material impact on our liquidity, our cash flow or our ability to fund our operations. See Notes 6(b) and 5(b) in Items 8A and 8B, respectively, of this report for additional information.


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Item 8A. Consolidated Financial Statements and Supplementary Data of US Airways Group, Inc.
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
US Airways Group, Inc.:
 
We have audited the accompanying consolidated balance sheets of US Airways Group, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of US Airways Group, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 7 to the consolidated financial statements, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements (included in FASB ASC Topic 320, Investments-Debt and Equity Securities), as of January 1, 2008.
 
As discussed in Note 8 to the consolidated financial statements, the Company adopted the measurement date provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (included in FASB ASC Topic 960, Plan Accounting – Defined Benefit Pension Plans), as of January 1, 2008.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 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 16, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ KPMG LLP
 
Phoenix, Arizona
February 16, 2010


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US Airways Group, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2009, 2008 and 2007
 
                         
    2009     2008     2007  
    (In millions, except share and per share amounts)  
 
Operating revenues:
                       
Mainline passenger
  $ 6,752     $ 8,183     $ 8,135  
Express passenger
    2,503       2,879       2,698  
Cargo
    100       144       138  
Other
    1,103       912       729  
                         
Total operating revenues
    10,458       12,118       11,700  
Operating expenses:
                       
Aircraft fuel and related taxes
    1,863       3,618       2,630  
Loss (gain) on fuel hedging instruments, net
    7       356       (245 )
Salaries and related costs
    2,165       2,231       2,302  
Express expenses
    2,519       3,049       2,594  
Aircraft rent
    695       724       727  
Aircraft maintenance
    700       783       635  
Other rent and landing fees
    560       562       536  
Selling expenses
    382       439       453  
Special items, net
    55       76       99  
Depreciation and amortization
    242       215       189  
Goodwill impairment
          622        
Other
    1,152       1,243       1,247  
                         
Total operating expenses
    10,340       13,918       11,167  
                         
Operating income (loss)
    118       (1,800 )     533  
Nonoperating income (expense):
                       
Interest income
    24       83       172  
Interest expense, net
    (304 )     (258 )     (277 )
Other, net
    (81 )     (240 )     2  
                         
Total nonoperating expense, net
    (361 )     (415 )     (103 )
                         
Income (loss) before income taxes
    (243 )     (2,215 )     430  
Income tax provision (benefit)
    (38 )           7  
                         
Net income (loss)
  $ (205 )   $ (2,215 )   $ 423  
                         
Earnings (loss) per common share:
                       
Basic earnings (loss) per share
  $ (1.54 )   $ (22.11 )   $ 4.62  
Diluted earnings (loss) per share
  $ (1.54 )   $ (22.11 )   $ 4.52  
Shares used for computation (in thousands):
                       
Basic
    133,000       100,168       91,536  
Diluted
    133,000       100,168       95,603  
 
See accompanying notes to consolidated financial statements.


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US Airways Group, Inc.
Consolidated Balance Sheets
December 31, 2009 and 2008
 
                 
    2009     2008  
    (In millions, except share
 
    and per share amounts)  
 
ASSETS                
Current assets
               
Cash and cash equivalents
  $ 1,299     $ 1,034  
Investments in marketable securities
          20  
Restricted cash
          186  
Accounts receivable, net
    285       293  
Materials and supplies, net
    227       201  
Prepaid expenses and other
    520       684  
                 
Total current assets
    2,331       2,418  
Property and equipment
               
Flight equipment
    3,852       3,157  
Ground property and equipment
    883       816  
Less accumulated depreciation and amortization
    (1,151 )     (954 )
                 
      3,584       3,019  
Equipment purchase deposits
    112       267  
                 
Total property and equipment
    3,696       3,286  
Other assets
               
Other intangibles, net of accumulated amortization of $113 million and $87 million, respectively
    503       545  
Restricted cash
    480       540  
Investments in marketable securities
    203       187  
Other assets
    241       238  
                 
Total other assets
    1,427       1,510  
              &nb