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EX-32.2 - EXHIBIT 32.2 - US AIRWAYS GROUP INCc99421exv32w2.htm
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EX-31.3 - EXHIBIT 31.3 - US AIRWAYS GROUP INCc99421exv31w3.htm
EX-32.1 - EXHIBIT 32.1 - US AIRWAYS GROUP INCc99421exv32w1.htm
EX-31.4 - EXHIBIT 31.4 - US AIRWAYS GROUP INCc99421exv31w4.htm
EX-10.2 - EXHIBIT 10.2 - US AIRWAYS GROUP INCc99421exv10w2.htm
EX-31.2 - EXHIBIT 31.2 - US AIRWAYS GROUP INCc99421exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - US AIRWAYS GROUP INCc99421exv31w1.htm
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2010
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)
54-1194634 (IRS Employer Identification No.)
111 West Rio Salado Parkway, Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
US Airways, Inc.
(Exact name of registrant as specified in its charter)
(Commission File No. 1-8442)
53-0218143 (IRS Employer Identification No.)
111 West Rio Salado Parkway, Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(480) 693-0800
(Registrants’ telephone number, including area code)
Delaware
(State of Incorporation of all Registrants)
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 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.
                 
US Airways Group, Inc.
  Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
US Airways, Inc.
  Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
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
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 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 April 23, 2010, there were approximately 161,277,180 shares of US Airways Group, Inc. common stock outstanding.
As of April 23, 2010, US Airways, Inc. had 1,000 shares of common stock outstanding, all of which were held by US Airways Group, Inc.
 
 

 

 


 

US Airways Group, Inc.
US Airways, Inc.
Form 10-Q
Quarterly Period Ended March 31, 2010
Table of Contents
         
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 Exhibit 10.1
 Exhibit 10.2
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 31.3
 Exhibit 31.4
 Exhibit 32.1
 Exhibit 32.2

 

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This combined Quarterly Report on Form 10-Q is filed by US Airways Group, Inc. (“US Airways Group”) and its wholly owned subsidiary US Airways, Inc. (“US Airways”). References in this Quarterly Report on Form 10-Q 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 II, 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;
   
the impact of the price and availability of fuel and significant disruptions in the supply of aircraft fuel;
   
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;
   
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;

 

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delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity;
   
the impact of weather conditions and seasonality of airline travel;
   
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 II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q or as of the dates indicated in the statements.
Part I. Financial Information
This combined Quarterly Report on Form 10-Q is filed by US Airways Group and US Airways and includes the condensed consolidated financial statements of each company in Item 1A and Item 1B, respectively.

 

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Item 1A.  
Condensed Consolidated Financial Statements of US Airways Group, Inc.
US Airways Group, Inc.
Condensed Consolidated Statements of Operations
(In millions, except share and per share amounts)
(Unaudited)
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Operating revenues:
               
Mainline passenger
  $ 1,698     $ 1,611  
Express passenger
    601       551  
Cargo
    33       24  
Other
    319       269  
 
           
Total operating revenues
    2,651       2,455  
Operating expenses:
               
Aircraft fuel and related taxes
    534       378  
Loss on fuel hedging instruments, net
          27  
Salaries and related costs
    556       551  
Express expenses
    650       604  
Aircraft rent
    171       178  
Aircraft maintenance
    157       174  
Other rent and landing fees
    134       131  
Selling expenses
    95       92  
Special items, net
    5       6  
Depreciation and amortization
    61       60  
Other
    298       279  
 
           
Total operating expenses
    2,661       2,480  
 
           
Operating loss
    (10 )     (25 )
Nonoperating income (expense):
               
Interest income
    5       6  
Interest expense, net
    (82 )     (71 )
Other, net
    42       (13 )
 
           
Total nonoperating expense, net
    (35 )     (78 )
 
           
Loss before income taxes
    (45 )     (103 )
Income tax provision
           
 
           
Net loss
  $ (45 )   $ (103 )
 
           
Loss per common share:
               
Basic loss per common share
  $ (0.28 )   $ (0.90 )
Diluted loss per common share
  $ (0.28 )   $ (0.90 )
Shares used for computation (in thousands):
               
Basic
    161,115       114,121  
Diluted
    161,115       114,121  
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share and per share amounts)
(Unaudited)
                 
    March 31,     December 31,  
    2010     2009  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 1,532     $ 1,299  
Accounts receivable, net
    416       285  
Materials and supplies, net
    227       227  
Prepaid expenses and other
    564       520  
 
           
Total current assets
    2,739       2,331  
Property and equipment
               
Flight equipment
    4,094       3,852  
Ground property and equipment
    888       883  
Less accumulated depreciation and amortization
    (1,206 )     (1,151 )
 
           
 
    3,776       3,584  
Equipment purchase deposits
    41       112  
 
           
Total property and equipment
    3,817       3,696  
Other assets
               
Other intangibles, net of accumulated amortization of $120 million and $113 million, respectively
    496       503  
Restricted cash
    442       480  
Investments in marketable securities
    70       203  
Other assets
    244       241  
 
           
Total other assets
    1,252       1,427  
 
           
Total assets
  $ 7,808     $ 7,454  
 
           
 
               
LIABILITIES & STOCKHOLDERS’ DEFICIT
               
Current liabilities
               
Current maturities of debt and capital leases
  $ 481     $ 502  
Accounts payable
    370       337  
Air traffic liability
    1,110       778  
Accrued compensation and vacation
    187       178  
Accrued taxes
    209       141  
Other accrued expenses
    827       853  
 
           
Total current liabilities
    3,184       2,789  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    4,125       4,024  
Deferred gains and credits, net
    358       377  
Postretirement benefits other than pensions
    129       130  
Employee benefit liabilities and other
    459       489  
 
           
Total noncurrent liabilities and deferred credits
    5,071       5,020  
Commitments and contingencies
               
Stockholders’ deficit
               
Common stock, $0.01 par value; 400,000,000 shares authorized, 161,536,675 and 161,119,051 shares issued and outstanding at March 31, 2010; 161,520,457 and 161,102,833 shares issued and outstanding at December 31, 2009
    2       2  
Additional paid-in capital
    2,110       2,107  
Accumulated other comprehensive income
    40       90  
Accumulated deficit
    (2,586 )     (2,541 )
Treasury stock, common stock, 417,624 shares at March 31, 2010 and December 31, 2009
    (13 )     (13 )
 
           
Total stockholders’ deficit
    (447 )     (355 )
 
           
Total liabilities and stockholders’ deficit
  $ 7,808     $ 7,454  
 
           
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Net cash provided by operating activities
  $ 199     $ 187  
Cash flows from investing activities:
               
Purchases of property and equipment
    (78 )     (183 )
Sales of marketable securities
    132       20  
Decrease in long-term restricted cash
    38       37  
Proceeds from sale-leaseback transactions and dispositions of property and equipment
          52  
 
           
Net cash provided by (used in) investing activities
    92       (74 )
Cash flows from financing activities:
               
Repayments of debt and capital lease obligations
    (135 )     (105 )
Proceeds from issuance of debt
    80       221  
Deferred financing costs
    (3 )     (1 )
 
           
Net cash provided by (used in) financing activities
    (58 )     115  
 
           
Net increase in cash and cash equivalents
    233       228  
Cash and cash equivalents at beginning of period
    1,299       1,034  
 
           
Cash and cash equivalents at end of period
  $ 1,532     $ 1,262  
 
           
Non-cash investing and financing activities:
               
Note payables issued for aircraft purchases
  $ 111     $ 32  
Interest payable converted to debt
    11       9  
Net unrealized loss on available-for-sale securities
    1        
Maintenance payable converted to debt
          9  
Supplemental information:
               
Interest paid, net of amounts capitalized
  $ 67     $ 63  
Income taxes paid
           
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of US Airways Group, Inc. (“US Airways Group” or the “Company”) should be read in conjunction with the financial statements contained in US Airways Group’s Annual Report on Form 10-K for the year ended December 31, 2009. The accompanying unaudited condensed consolidated financial statements include the accounts of US Airways Group and its wholly owned subsidiaries. Wholly owned subsidiaries include US Airways, Inc. (“US Airways”), Piedmont Airlines, Inc. (“Piedmont”), PSA Airlines, Inc. (“PSA”), Material Services Company, Inc. (“MSC”) and Airways Assurance Limited (“AAL”). All significant intercompany accounts and transactions have been eliminated.
Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, valuation of investments in marketable securities, the frequent traveler program and the deferred tax asset valuation allowance.
Recent Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (“FASB”) issued 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 requires 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 is 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. The Company adopted ASU No. 2009-17 as of January 1, 2010, and its application had no impact on the Company’s condensed 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: (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. The Company is currently evaluating the requirements of ASU No. 2009-13 and has not yet determined its impact on the Company’s condensed consolidated financial statements.

 

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2. Special Items, Net
Special items, net as shown on the condensed consolidated statements of operations included the following charges for the three months ended March 31, 2010 and 2009 (in millions):
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Aircraft costs (a)
  $ 5     $ 5  
Severance charges (b)
          1  
 
           
Special items, net
  $ 5     $ 6  
 
           
 
     
(a)  
In the three months ended March 31, 2010 and 2009, the Company recorded $5 million for aircraft costs in each period as a result of its previously announced capacity reductions.
 
(b)  
In the three months ended March 31, 2009, the Company recorded $1 million in severance charges as a result of capacity reductions.
3. Loss Per Common Share
Basic earnings (loss) per common share (“EPS”) is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of potentially dilutive shares of common stock outstanding during the period using the treasury stock method. Potentially dilutive shares include outstanding employee stock options, employee stock appreciation rights, employee restricted stock units and convertible debt. The following table presents the computation of basic and diluted EPS (in millions, except share and per share amounts):
                 
    Three Months Ended  
    March 31,     March 31,  
    2010     2009  
Basic and diluted loss per share:
               
Net loss
  $ (45 )   $ (103 )
 
           
Weighted average common shares outstanding (in thousands)
    116,115       114,121  
 
           
Basic and diluted loss per share
  $ (0.28 )   $ (0.90 )
 
           
For the three months ended March 31, 2010 and 2009, 8,334,091 and 9,674,947 shares, respectively, underlying stock options, stock appreciation rights and restricted stock units were not included in the computation of diluted EPS because inclusion of such shares would be antidilutive or because the exercise prices were greater than the average market price of common stock for the period. In addition, for each of the three months ended March 31, 2010 and 2009, 3,048,914 incremental shares from the assumed conversion of the 7% Senior Convertible Notes due 2020 (the “7% notes”) were excluded from the computation of diluted EPS due to their antidilutive effect. For the three months ended March 31, 2010, 37,746,174 incremental shares from the assumed conversion of the 7.25% Convertible Senior Notes due 2014 (the “7.25% notes”) were excluded from the computation of diluted EPS due to their antidilutive effect.

 

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4. Debt
The following table details the Company’s debt (in millions). Variable interest rates listed are the rates as of March 31, 2010.
                 
    March 31,     December 31,  
    2010     2009  
Secured
               
Citicorp North America loan, variable interest rate of 2.75%, installments due through 2014
  $ 1,152     $ 1,168  
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.63% to 10.25%, maturing from 2010 to 2021
    2,342       2,201  
Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 7.08% to 9.01%, maturing from 2015 to 2022
    481       505  
Other secured obligations, fixed interest rates ranging from 8% to 8.08%, maturing from 2015 to 2021
    83       84  
Senior secured discount notes
          32  
 
           
 
    4,058       3,990  
Unsecured
               
Barclays prepaid miles, variable interest rate of 5%, interest only payments
    200       200  
Airbus advance, repayments beginning in 2010 through 2018
    259       247  
7.25% convertible senior notes, interest only payments until due in 2014
    172       172  
7% senior convertible notes, interest only payments until due in 2020
    74       74  
Industrial development bonds, fixed interest rate of 6.3%, interest only payments until due in 2023
    29       29  
Other unsecured obligations, maturing from 2010 to 2012
    68       81  
 
           
 
    802       803  
 
           
Total long-term debt and capital lease obligations
    4,860       4,793  
Less: Total unamortized discount on debt
    (254 )     (267 )
Current maturities, less $5 million and $9 million of unamortized discount on debt at March 31, 2010 and December 31, 2009, respectively
    (481 )     (502 )
 
           
Long-term debt and capital lease obligations, net of current maturities
  $ 4,125     $ 4,024  
 
           
The Company was in compliance with the covenants in its debt agreements at March 31, 2010.
2010 Financing Transactions
US Airways borrowed $181 million in the first quarter of 2010 to finance Airbus aircraft deliveries. 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.
Fair Value of Debt
The fair value of the Company’s long-term debt was approximately $3.95 billion at each of March 31, 2010 and December 31, 2009, respectively. The fair values were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

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5. Income Taxes
As of December 31, 2009, the Company had approximately $2.13 billion of gross net operating losses (“NOLs”) to reduce future federal taxable income. All of the Company’s NOLs are expected to be available to reduce federal taxable income in the calendar year 2010. The NOLs expire during the years 2022 through 2029. The Company’s net deferred tax assets, which include $2.06 billion of the NOLs, have been subject to a full valuation allowance. The Company also had approximately $90 million of tax-effected state NOLs at December 31, 2009. At December 31, 2009, the federal and state valuation allowance was $546 million and $77 million, respectively.
The Company reported a loss before income taxes in the first quarter of each of 2010 and 2009, and the Company did not record a tax provision in either period.
The Patient Protection and Affordable Care Act was signed into law in March 2010. Beginning in 2013, the Company will no longer be able to claim an income tax deduction related to prescription drug benefits provided to retirees and reimbursed under the Medicare Part D retiree drug subsidy. Although the tax increase does not take effect until 2013, generally accepted accounting principles require that the related deferred tax assets be written down in the period of legislation changing the tax law enacted. Because the Company’s net deferred tax assets have been subject to a full valuation allowance, the write-off of the deferred tax asset associated with the Medicare Part D subsidy was offset dollar for dollar by a corresponding reduction in the Company’s valuation allowance and had no impact on the Company’s results of operations.
6. Express Expenses
Expenses associated with the Company’s wholly owned regional airlines and affiliate regional airlines operating as US Airways Express are classified as Express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Aircraft fuel and related taxes
  $ 170     $ 123  
Salaries and related costs
    63       63  
Capacity purchases
    264       263  
Aircraft rent
    13       13  
Aircraft maintenance
    19       23  
Other rent and landing fees
    31       31  
Selling expenses
    36       34  
Depreciation and amortization
    6       6  
Other expenses
    48       48  
 
           
Express expenses
  $ 650     $ 604  
 
           
7. Derivative Instruments
Since the third quarter of 2008, the Company has not entered into any new fuel hedging transactions, and the Company has no fuel hedging contracts outstanding. In the three months ended March 31, 2009, the Company recognized $197 million of net realized losses on settled fuel hedging transactions, offset by $170 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.

 

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8. Investments in Marketable Securities (Noncurrent)
As of March 31, 2010, the Company held auction rate securities totaling $114 million at par value, which are classified as available-for-sale securities and noncurrent assets on the Company’s condensed consolidated balance sheets. Contractual maturities for these auction rate securities range from six to 42 years, with 18% of the Company’s portfolio maturing within the next 10 years (2016), 58% maturing within the next 30 years (2033 — 2036) and 24% maturing thereafter (2049 - 2052). With the liquidity issues experienced in the global credit and capital markets, all of the Company’s 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 March 31, 2010, the fair value of the Company’s auction rate securities was $70 million. Refer to Note 9 for discussion on how the Company determines the fair value of its investments in auction rate securities.
In the three months ended March 31, 2010, the Company sold certain investments in auction rate securities for net proceeds of $132 million, resulting in a $49 million net realized gain recorded in nonoperating expense, net, of which $48 million represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. In April 2010, the Company sold an additional amount of auction rate securities for net proceeds of $11 million, leaving it with a remaining investment of $59 million. Net proceeds for all sale transactions approximated the carrying amount of the Company’s investments. Additionally, in the first quarter of 2010, the Company recorded net unrealized losses of $1 million in other comprehensive income, offsetting previously recognized unrealized gains, related to the decline in fair value of certain investments in auction rate securities.
In the three months ended March 31, 2009, the Company recorded $7 million of other-than-temporary impairment charges in other nonoperating expense, net related to the decline in fair value of certain investments in auction rate securities.
The Company continues to monitor the market for auction rate securities and consider its impact (if any) on the fair value of its investments. If the current market conditions deteriorate, the Company may be required to record additional impairment charges in other nonoperating expense, net in future periods.
9. Fair Value Measurements
Assets measured at fair value on a recurring basis are as follows (in millions):
                                         
            Quoted Prices in     Significant Other     Significant        
            Active Markets for     Observable     Unobservable        
            Identical Assets     Inputs     Inputs     Valuation  
    Fair Value     (Level 1)     (Level 2)     (Level 3)     Technique  
At March 31, 2010
                                       
Investments in marketable securities (noncurrent)
  $ 70     $     $     $ 70       (1 )
At December 31, 2009
                                       
Investments in marketable securities (noncurrent)
  $ 203     $     $     $ 203       (1 )
     
(1)  
The Company estimated the fair value of its 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. Refer to Note 8 for further discussion of the Company’s investments in marketable securities.
Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (in millions):
         
    Investments in  
    Marketable  
    Securities  
    (Noncurrent)  
Balance at December 31, 2009
  $ 203  
Sales of marketable securities
    (132 )
Net unrealized losses recorded to other comprehensive income
    (1 )
 
     
Balance at March 31, 2010
  $ 70  
 
     

 

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10. Other Comprehensive Income (Loss)
The Company’s other comprehensive loss consisted of the following (in millions):
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Net loss
  $ (45 )   $ (103 )
Recognition of net realized gains on sale of available-for-sale securities
    (48 )      
Net unrealized losses on available-for-sale securities
    (1 )      
Pension and other postretirement benefits
    (1 )     (4 )
 
           
Total comprehensive loss
  $ (95 )   $ (107 )
 
           
The components of accumulated other comprehensive income were as follows (in millions):
                 
    March 31,     December 31,  
    2010     2009  
Pension and other postretirement benefits
  $ 54     $ 55  
Available-for-sale securities
    (14 )     35  
 
           
Accumulated other comprehensive income
  $ 40     $ 90  
 
           
11. Slot Exchange
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 Ronald Reagan Washington National Airport (“Washington National”), 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.
On February 9, 2010, the FAA 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.
Subsequently, on March 22, 2010, Delta and US Airways announced the proposed divestiture of 12% of the takeoff and landing slots to four airlines, contingent upon the subsequent closing of the originally proposed Delta-US Airways transaction. Under the proposed divestiture transaction, AirTran Airlines, Inc., Spirit Airlines, Inc. and WestJet Airlines, Ltd. will each receive five pairs of takeoff and landing slots at LaGuardia and JetBlue Airways Corporation will receive five pairs of Washington National slots. Delta would then operate an additional 110 slot pairs at LaGuardia and US Airways would operate an additional 37 slot pairs at Washington National as well as gain access to the Sao Paulo and Tokyo route authorities. The divestiture and asset purchase and sale agreement with Delta remain subject to the regulatory approvals described above.

 

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Item 1B.  
Condensed Consolidated Financial Statements of US Airways, Inc.
US Airways, Inc.
Condensed Consolidated Statements of Operations
(In millions)
(Unaudited)
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Operating revenues:
               
Mainline passenger
  $ 1,698     $ 1,611  
Express passenger
    601       551  
Cargo
    33       24  
Other
    353       305  
 
           
Total operating revenues
    2,685       2,491  
Operating expenses:
               
Aircraft fuel and related taxes
    534       378  
Loss on fuel hedging instruments, net
          27  
Salaries and related costs
    556       551  
Express expenses
    675       632  
Aircraft rent
    171       178  
Aircraft maintenance
    157       174  
Other rent and landing fees
    134       131  
Selling expenses
    95       92  
Special items, net
    5       6  
Depreciation and amortization
    63       62  
Other
    305       286  
 
           
Total operating expenses
    2,695       2,517  
 
           
Operating loss
    (10 )     (26 )
Nonoperating income (expense):
               
Interest income
    5       6  
Interest expense, net
    (59 )     (61 )
Other, net
    41       (14 )
 
           
Total nonoperating expense, net
    (13 )     (69 )
 
           
Loss before income taxes
    (23 )     (95 )
Income tax provision
           
 
           
Net loss
  $ (23 )   $ (95 )
 
           
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share and per share amounts)
(Unaudited)
                 
    March 31,     December 31,  
    2010     2009  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 1,494     $ 1,209  
Accounts receivable, net
    413       282  
Materials and supplies, net
    192       188  
Prepaid expenses and other
    551       507  
 
           
Total current assets
    2,650       2,186  
Property and equipment
               
Flight equipment
    3,948       3,710  
Ground property and equipment
    860       856  
Less accumulated depreciation and amortization
    (1,150 )     (1,098 )
 
           
 
    3,658       3,468  
Equipment purchase deposits
    41       112  
 
           
Total property and equipment
    3,699       3,580  
Other assets
               
Other intangibles, net of accumulated amortization of $112 million and $106 million, respectively
    461       467  
Restricted cash
    442       480  
Investments in marketable securities
    70       203  
Other assets
    212       207  
 
           
Total other assets
    1,185       1,357  
 
           
Total assets
  $ 7,534     $ 7,123  
 
           
 
               
LIABILITIES & STOCKHOLDER’S EQUITY
               
Current liabilities
               
Current maturities of debt and capital leases
  $ 395     $ 418  
Accounts payable
    358       319  
Payables to related parties, net
    664       642  
Air traffic liability
    1,110       778  
Accrued compensation and vacation
    178       171  
Accrued taxes
    210       142  
Other accrued expenses
    789       815  
 
           
Total current liabilities
    3,704       3,285  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    2,777       2,667  
Deferred gains and credits, net
    302       317  
Postretirement benefits other than pensions
    129       129  
Employee benefit liabilities and other
    440       470  
 
           
Total noncurrent liabilities and deferred credits
    3,648       3,583  
Commitments and contingencies
               
Stockholder’s equity
               
Common stock, $1 par value, 1,000 shares issued and outstanding
           
Additional paid-in capital
    2,445       2,445  
Accumulated other comprehensive income
    44       94  
Accumulated deficit
    (2,307 )     (2,284 )
 
           
Total stockholder’s equity
    182       255  
 
           
Total liabilities and stockholder’s equity
  $ 7,534     $ 7,123  
 
           
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Net cash provided by operating activities
  $ 231     $ 176  
Cash flows from investing activities:
               
Purchases of property and equipment
    (74 )     (182 )
Sales of marketable securities
    132       20  
Decrease in long-term restricted cash
    38       37  
Proceeds from sale-leaseback transactions and dispositions of property and equipment
          52  
 
           
Net cash provide by (used in) investing activities
    96       (73 )
Cash flows from financing activities:
               
Repayments of debt and capital lease obligations
    (119 )     (89 )
Proceeds from issuance of debt
    80       221  
Deferred financing costs
    (3 )     (1 )
 
           
Net cash provided by (used in) financing activities
    (42 )     131  
 
           
Net increase in cash and cash equivalents
    285       234  
Cash and cash equivalents at beginning of period
    1,209       1,026  
 
           
Cash and cash equivalents at end of period
  $ 1,494     $ 1,260  
 
           
Non-cash investing and financing activities:
               
Note payables issued for aircraft purchases
  $ 111     $ 32  
Interest payable converted to debt
    11       9  
Net unrealized loss on available-for-sale securities
    1        
Maintenance payable converted to debt
          9  
Supplemental information:
               
Interest paid, net of amounts capitalized
  $ 49     $ 50  
Income taxes paid
           
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of US Airways, Inc. (“US Airways”) should be read in conjunction with the financial statements contained in US Airways’ Annual Report on Form 10-K for the year ended December 31, 2009. US Airways is a wholly owned subsidiary of US Airways Group, Inc. (“US Airways Group”). The accompanying unaudited condensed consolidated financial statements include the accounts of US Airways and its wholly owned subsidiary, US Airways Holdings, LLC. US Airways, LLC and its wholly owned subsidiary, FTCHP LLC, are wholly owned subsidiaries of US Airways Holdings, LLC. All significant intercompany accounts and transactions between US Airways and its wholly owned subsidiaries have been eliminated.
Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, valuation of investments in marketable securities, the frequent traveler program and the deferred tax asset valuation allowance.
Recent Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (“FASB”) issued 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 requires 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 is 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. US Airways adopted ASU No. 2009-17 as of January 1, 2010, and its application had no impact on US Airways’ condensed 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: (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. US Airways is currently evaluating the requirements of ASU No. 2009-13 and has not yet determined its impact on US Airways’ condensed consolidated financial statements.

 

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2. Special Items, Net
Special items, net as shown on the condensed consolidated statements of operations included the following charges for the three months ended March 31, 2010 and 2009 (in millions):
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Aircraft costs (a)
  $ 5     $ 5  
Severance charges (b)
          1  
 
           
Special items, net
  $ 5     $ 6  
 
           
 
     
(a)  
In the three months ended March 31, 2010 and 2009, US Airways recorded $5 million for aircraft costs in each period as a result of its previously announced capacity reductions.
 
(b)  
In the three months ended March 31, 2009, US Airways recorded $1 million in severance charges as a result of capacity reductions.
3. Debt
The following table details US Airways’ debt (in millions). Variable interest rates listed are the rates as of March 31, 2010.
                 
    March 31,     December 31,  
    2010     2009  
Secured
               
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.63% to 10.25%, maturing from 2010 to 2021
    2,342       2,201  
Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 7.08% to 9.01%, maturing from 2015 to 2022
    481       505  
Other secured obligations, fixed interest rates ranging from 8% to 8.08%, maturing from 2015 to 2021
    83       84  
Senior secured discount notes
          32  
 
           
 
    2,906       2,822  
Unsecured
               
Airbus advance, repayments beginning in 2010 through 2018
    259       247  
Industrial development bonds, fixed interest rate of 6.3%, interest only payments until due in 2023
    29       29  
Other unsecured obligations, maturing from 2010 to 2012
    68       81  
 
           
 
    356       357  
 
           
Total long-term debt and capital lease obligations
    3,262       3,179  
Less: Total unamortized discount on debt
    (90 )     (94 )
Current maturities, less $2 million and $4 million of unamortized discount on debt at March 31, 2010 and December 31, 2009, respectively
    (395 )     (418 )
 
           
Long-term debt and capital lease obligations, net of current maturities
  $ 2,777     $ 2,667  
 
           
US Airways was in compliance with the covenants in its debt agreements at March 31, 2010.
2010 Financing Transactions
US Airways borrowed $181 million in the first quarter of 2010 to finance Airbus aircraft deliveries. 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.
Fair Value of Debt
The fair value of US Airways’ long-term debt was approximately $2.86 billion and $2.83 billion at March 31, 2010 and December 31, 2009, respectively. The fair values were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using a discounted cash flow analysis, based on US Airways’ current incremental borrowing rates for similar types of borrowing arrangements.

 

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4. Related Party Transactions
The following represents the net payable balances to related parties (in millions):
                 
    March 31,     December 31,  
    2010     2009  
US Airways Group
  $ 618     $ 607  
US Airways Group’s wholly owned subsidiaries
    46       35  
 
           
 
  $ 664     $ 642  
 
           
US Airways Group has the ability to move funds freely between operating subsidiaries to support operations. These transfers are recognized as intercompany transactions.
The net payable to US Airways Group’s wholly owned subsidiaries consists of amounts due under regional capacity agreements with the other airline subsidiaries and fuel purchase arrangements with a non-airline subsidiary.
5. Income Taxes
US Airways and its wholly owned subsidiaries are part of the US Airways Group consolidated income tax return.
As of December 31, 2009, US Airways had approximately $2.05 billion of gross net operating losses (“NOLs”) to reduce future federal taxable income. All of US Airways’ NOLs are expected to be 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 had approximately $86 million of tax-effected state NOLs at December 31, 2009. At December 31, 2009, the federal and state valuation allowance was $575 million and $78 million, respectively.
US Airways reported a loss before income taxes in the first quarter of each of 2010 and 2009, and US Airways did not record a tax provision in either period.
The Patient Protection and Affordable Care Act was signed into law in March 2010. Beginning in 2013, US Airways will no longer be able to claim an income tax deduction related to prescription drug benefits provided to retirees and reimbursed under the Medicare Part D retiree drug subsidy. Although the tax increase does not take effect until 2013, generally accepted accounting principles require that the related deferred tax assets be written down in the period of legislation changing the tax law enacted. Because US Airways’ net deferred tax assets have been subject to a full valuation allowance, the write-off of the deferred tax asset associated with the Medicare Part D subsidy was offset dollar for dollar by a corresponding reduction in US Airways’ valuation allowance and had no impact on US Airways’ results of operations.
6. Express Expenses
Expenses associated with affiliate regional airlines operating as US Airways Express are classified as Express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Aircraft fuel and related taxes
  $ 170     $ 123  
Salaries and related costs
    6       6  
Capacity purchases
    412       418  
Other rent and landing fees
    26       26  
Selling expenses
    36       34  
Other expenses
    25       25  
 
           
Express expenses
  $ 675     $ 632  
 
           

 

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7. Derivative Instruments
Since the third quarter of 2008, US Airways has not entered into any new fuel hedging transactions, and US Airways has no fuel hedging contracts outstanding. In the three months ended March 31, 2009, US Airways recognized $197 million of net realized losses on settled fuel hedging transactions, offset by $170 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.
8. Investments in Marketable Securities (Noncurrent)
As of March 31, 2010, US Airways held auction rate securities totaling $114 million at par value, which are classified as available-for-sale securities and noncurrent assets on US Airways’ condensed consolidated balance sheets. Contractual maturities for these auction rate securities range from six to 42 years, with 18% of US Airways’ portfolio maturing within the next 10 years (2016), 58% maturing within the next 30 years (2033 — 2036) and 24% maturing thereafter (2049 - 2052). With the liquidity issues experienced in the global credit and capital markets, all of US Airways’ 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 March 31, 2010, the fair value of US Airways’ auction rate securities was $70 million. Refer to Note 9 for discussion on how US Airways determines the fair value of its investments in auction rate securities.
In the three months ended March 31, 2010, US Airways sold certain investments in auction rate securities for net proceeds of $132 million, resulting in a $49 million net realized gain recorded in nonoperating expense, net, of which $48 million represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. In April 2010, US Airways sold an additional amount of auction rate securities for net proceeds of $11 million, leaving it with a remaining investment of $59 million. Net proceeds for all sale transactions approximated the carrying amount of US Airways’ investments. Additionally, in the first quarter of 2010, US Airways recorded net unrealized losses of $1 million in other comprehensive income, offsetting previously recognized unrealized gains, related to the decline in fair value of certain investments in auction rate securities.
In the three months ended March 31, 2009, US Airways recorded $7 million of other-than-temporary impairment charges in other nonoperating expense, net related to the decline in fair value of certain investments in auction rate securities.
US Airways continues to monitor the market for auction rate securities and consider its impact (if any) on the fair value of its investments. If the current market conditions deteriorate, US Airways may be required to record additional impairment charges in other nonoperating expense, net in future periods.
9. Fair Value Measurements
Assets measured at fair value on a recurring basis are as follows (in millions):
                                         
            Quoted Prices in     Significant Other     Significant        
            Active Markets for     Observable     Unobservable        
            Identical Assets     Inputs     Inputs     Valuation  
    Fair Value     (Level 1)     (Level 2)     (Level 3)     Technique  
At March 31, 2010
                                       
Investments in marketable securities (noncurrent)
  $ 70     $     $     $ 70       (1 )
At December 31, 2009
                                       
Investments in marketable securities (noncurrent)
  $ 203     $     $     $ 203       (1 )
     
(1)  
US Airways estimated the fair value of its 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. Refer to Note 8 for further discussion of US Airways’ investments in marketable securities.

 

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Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (in millions):
         
    Investments in  
    Marketable  
    Securities  
    (Noncurrent)  
Balance at December 31, 2009
  $ 203  
Sales of marketable securities
    (132 )
Net unrealized losses recorded to other comprehensive income
    (1 )
 
     
Balance at March 31, 2010
  $ 70  
 
     
10. Other Comprehensive Income (Loss)
US Airways’ other comprehensive loss consisted of the following (in millions):
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Net loss
  $ (23 )   $ (95 )
Recognition of net realized gains on sale of available-for-sale securities
    (48 )      
Net unrealized losses on available-for-sale securities
    (1 )      
Other postretirement benefits
    (1 )     (4 )
 
           
Total comprehensive loss
  $ (73 )   $ (99 )
 
           
The components of accumulated other comprehensive income were as follows (in millions):
                 
    March 31,     December 31,  
    2010     2009  
Other postretirement benefits
  $ 58     $ 59  
Available-for-sale securities
    (14 )     35  
 
           
Accumulated other comprehensive income
  $ 44     $ 94  
 
           
11. Slot Exchange
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 Ronald Reagan Washington National Airport (“Washington National”), 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.
On February 9, 2010, the FAA 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.
Subsequently, on March 22, 2010, Delta and US Airways announced the proposed divestiture of 12% of the takeoff and landing slots to four airlines, contingent upon the subsequent closing of the originally proposed Delta-US Airways transaction. Under the proposed divestiture transaction, AirTran Airlines, Inc., Spirit Airlines, Inc. and WestJet Airlines, Ltd. will each receive five pairs of takeoff and landing slots at LaGuardia and JetBlue Airways Corporation will receive five pairs of Washington National slots. Delta would then operate an additional 110 slot pairs at LaGuardia and US Airways would operate an additional 37 slot pairs at Washington National as well as gain access to the Sao Paulo and Tokyo route authorities. The divestiture and asset purchase and sale agreement with Delta remain subject to the regulatory approvals described above.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of US Airways Group, Inc.’s and US Airways, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). The information contained herein is not a comprehensive discussion and analysis of the financial condition and results of operations of the Company, but rather updates disclosures made in the 2009 Form 10-K.
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 Airlines, Inc. (“Piedmont”), PSA Airlines, Inc. (“PSA”), Material Services Company, Inc. (“MSC”) and Airways Assurance Limited (“AAL”).
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 in Washington, D.C. at Ronald Reagan Washington National Airport (“Washington National”). 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 substantial presence at Washington National. For the three months ended March 31, 2010, we had approximately 12 million passengers boarding our mainline flights. As of March 31, 2010, we operated 347 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 operate approximately 235 regional jets and 60 turboprops.
The U.S. Airline Industry
The first quarter of 2010 provided several indications that economic recovery is now on the horizon and that the U.S. airline industry is rebounding from the economic recession that drove record declines in passenger revenue in 2009. The Air Transport Association of America (“ATA”) reported that January 2010 marked the first month that total system passenger revenue for U.S. airlines had increased compared to the same month in 2009 after 14 consecutive months of declines. Continued sequential passenger revenue improvements in February and March of 2010 further support that the industry is in the recovery phase of the economic cycle.
Domestic passenger revenue per available seat mile (“PRASM”) rose approximately 2% and 8% year over year in January and February 2010, respectively. Overall domestic revenues also continue to benefit from ancillary revenue initiatives including baggage fees, premium seat fees and transaction processing fees.
International markets are expected to outperform domestic markets in 2010 with respect to year-over-year improvements in revenue. International markets were more severely impacted by the economic slowdown than domestic markets in 2009 due to their greater reliance on business travel, particularly premium and first class seating, to drive profitability. Business travel now appears to be recovering. International PRASM rose approximately 5% and 13% year over year in January and February 2010, respectively. Cargo, which was also significantly impacted by the contraction of business spending in 2009, also appears to be improving. In its most recent data available, ATA reported cargo demand, as measured by cargo revenue ton miles, rose 14% in each of January and February 2010 over the same prior year period.
Increases in revenue generated by the economic recovery were offset in part by the effects of severe weather particularly on the East Coast of the United States, which negatively impacted passenger revenues in the first quarter of 2010. ATA reported that approximately 2.9% fewer passengers traveled on U.S. airlines in February 2010 as compared to the same period prior year, in large part due to weather.
The industry has also been subject to service disruption due to a natural disaster. On April 14, 2010, a volcano under a glacier in Iceland erupted, resulting in volcanic ash clouds covering and closing much of Europe’s airspace. This closure caused a significant disruption in air travel to and from Europe. The ultimate impact of the closure of Europe’s airspace due to the volcano has yet to be determined.
In addition to the factors described above, another key variable the industry cannot control is the cost of fuel. The average price of crude oil was relatively constant at $78.81 per barrel for the first quarter of 2010 as compared to $76.00 per barrel for the fourth quarter of 2009. However, the price of crude oil in the first quarter of 2010 was somewhat volatile ranging from a high of $83.45 to a low of $71.15 per barrel. This volatility continued in April 2010 as the average price of crude oil rose to $84.68 per barrel through April 23, 2010. Fuel price remains a risk for the industry as the current economic recovery may drive the cost of fuel higher more quickly than the industry can recover that cost with higher yields.

 

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U.S. airline liquidity balances have improved due to recent capital raising efforts. In the latter part of 2009, credit and equity markets were increasingly open to airlines, and several U.S. airlines raised cash to enhance liquidly through public stock and debt offerings, asset sales, asset sale-leasebacks and transactions with co-branded credit card issuers. The overall macro economic environment also contributes to an improved liquidity outlook for the industry. Although liquidity risk appears to be fading, the risk remains that the economy could dip into a recession again and cause the current recovery in passenger demand and pricing to reverse itself.
US Airways
Similar to other U.S. carriers, we experienced growth in revenues as a result of the improving economy. Our corporate booked revenue for the first quarter of 2010 was up 34% on a year-over-year basis. Mainline and Express passenger revenues in the first quarter of 2010 increased $137 million or 6.4% on 2.8% lower capacity as compared to the 2009 period. Our mainline and Express PRASM was 11.58 cents in the first quarter of 2010, a 9.5% increase as compared to 10.58 cents in the 2009 period. Our revenues also continued to benefit from our ancillary revenue initiatives which generated $118 million in revenues for the first quarter of 2010, an increase of $25 million over the 2009 period primarily due to additional baggage fees in effect during the 2010 period. As a result of our ancillary revenues, our total revenue per available seat mile (“RASM”) increased by a greater amount. RASM was 13.35 cents in 2010, as compared to 12.02 cents in the 2009 period, representing an 11.1% improvement.
We estimate weather-related cancellations reduced revenues for the first quarter 2010 by approximately $30 million. With more departures than any carrier on the East Coast of the United States, our first quarter 2010 operations were severely impacted by the extreme weather in that region. Due to the length and severity of the storms, flight operations were suspended for a total of six days in the month of February at three of the hardest hit major airports (two days at our hub in Philadelphia, three days at Washington National in our focus city Washington, D.C. and one day at New York-LaGuardia where we maintain a substantial presence). See the “Customer Service” section below for a further discussion.
We do not believe the April 2010 closure of much of Europe’s airspace and resulting disruption in air travel to and from Europe will have as significant an effect on us, relative to other U.S. legacy or big five hub-and-spoke carriers, as our larger domestic presence means we have less exposure to international markets. Our transatlantic capacity represents 14% of our total ASMs.
Fuel
Since the third quarter of 2008, we have not entered into any new fuel hedging transactions, and we have no fuel hedging contracts outstanding. As discussed above the average per barrel price of crude oil in the first quarter of 2010 was relatively constant as compared to the fourth quarter of 2009. However, when comparing the average price of crude oil per barrel for the first quarter of 2010 with the corresponding first quarter of 2009, the 2010 period was significantly higher. The average price of crude oil for the first quarter of 2009, spurred by the global economic downturn, was very low at only $43.14 per barrel. As a result, the average mainline and Express price per gallon of fuel was $1.48 for first quarter of 2009 as compared to an average cost per gallon of $2.18 in the first quarter of 2010, an increase of 47.1%. Accordingly, our mainline and Express fuel expense for the first quarter of 2010 was $203 million, or 40.6%, higher than the 2009 period on 2.8% lower capacity.
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. We continue to focus on matching capacity to demand. For the first quarter of 2010, system capacity was down 2.8% as compared to the first quarter of 2009, due in part to the significant weather-related cancellations. However, for the full year 2010, total system capacity is expected to be up slightly.

 

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The following table presents our mainline costs per available seat mile (“CASM”).
                         
                    Percent  
    2010     2009     Change  
    (In cents)        
Mainline CASM excluding special items and fuel:
                       
Total mainline CASM
    12.13       11.05       9.8  
Special items, net
    (0.03 )     (0.04 )     (20.9 )
Aircraft fuel and related taxes
    (3.22 )     (2.23 )     44.7  
Loss on fuel hedging instruments, net
          (0.16 )   nm  
 
                   
Total mainline CASM excluding special items and fuel (1)
    8.88       8.63       2.9  
 
                   
     
(1)  
We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.
Our mainline operating CASM excluding special items, fuel, and 2009 fuel hedging losses, increased 0.25 cents, or 2.9%, from 8.63 cents in the first quarter of 2009 to 8.88 cents in the first quarter of 2010 due primarily to the reduction in available seat miles caused by the February 2010 weather-related flight cancellations.
Customer Service
We are committed 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.
As discussed above, our first quarter 2010 operations were severely impacted by the extreme weather on the East Coast of the United States resulting in 7.1% of our flights in the month of February 2010 being cancelled. This cancellation rate is the highest since the merger of US Airways and America West in 2005, exceeding the previous high by 3.3 points, or 87.9%. The weather-related cancellations drove a completion factor for February 2010 of 92.9%. Our on-time performance rate of 75.3% and customer complaints rate of 1.69 in February 2010 also reflects the impact of this weather. Despite these weather-related challenges, our first quarter 2010 baggage handling performance improved by more than 10% on a year-over-year basis.
We reported the following combined operating statistics to the U.S. Department of Transportation (“DOT”) for mainline operations for the first quarter of 2010 and 2009:
                                                                         
    2010     2009     Percent Better (Worse) 2010-2009  
    January     February     March (e)     January     February     March     January     February     March  
On-time performance (a)
    79.4       75.3       80.9       77.3       82.2       79.6       2.7       (8.4 )     1.6  
Completion factor (b)
    97.0       92.9       98.6       98.1       99.0       98.1       (1.1 )     (6.2 )     0.5  
Mishandled baggage (c)
    3.45       3.22       2.92       4.15       3.08       3.46       16.9       (4.5 )     15.6  
Customer complaints (d)
    2.03       1.69       1.78       2.05       1.64       1.00       1.0       (3.0 )     (78.0 )
 
     
(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.
 
(e)  
March 2010 operating statistics are preliminary as the DOT has not issued its March 2010 Air Travel Consumer Report as of the date of this filing.

 

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Liquidity Position
As of March 31, 2010, our cash, cash equivalents, investments in marketable securities and restricted cash were $2.04 billion, of which $442 million was restricted. Our investments in marketable securities included $70 million of auction rate securities that are classified as noncurrent assets on our condensed consolidated balance sheets.
                 
    March 31,     December 31,  
    2010     2009  
    (In millions)  
Cash and cash equivalents
  $ 1,532     $ 1,299  
Short and long-term restricted cash
    442       480  
Long-term investments in marketable securities
    70       203  
 
           
Total cash, cash equivalents, investments in marketable securities and restricted cash
  $ 2,044     $ 1,982  
 
           
During the first quarter of 2010, we sold a portion of our investments in auction rate securities for net proceeds of $132 million. In April 2010, we sold an additional amount of auction rate securities for net proceeds of $11 million, leaving us with a remaining investment of $59 million. Net proceeds for all sale transactions approximated the carrying amount of our investments. Restricted cash declined during the first quarter of 2010 primarily due to a reduction in the amount of holdback held by certain credit card processors for advance ticket sales for which we have not yet provided air transportation.
Status of Strategic Initiatives
Delta Slot Transaction
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, 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 Federal Aviation Administration (“FAA”) and The Port Authority of New York and New Jersey. If approved, this transaction would significantly increase our capacity in the Washington, D.C. market and improve profitability.
On February 9, 2010, the FAA 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.
Subsequently, on March 22, 2010, Delta and US Airways announced the proposed divestiture of 12% of the takeoff and landing slots to four airlines, contingent upon the subsequent closing of the originally proposed Delta-US Airways transaction. Under the proposed divestiture transaction, AirTran Airlines, Inc., Spirit Airlines, Inc. and WestJet Airlines, Ltd. will each receive five pairs of takeoff and landing slots at LaGuardia and JetBlue Airways Corporation will receive five pairs of Washington National slots. Delta would then operate an additional 110 slot pairs at LaGuardia and US Airways would operate an additional 37 slot pairs at Washington National as well as gain access to the Sao Paulo and Tokyo route authorities. The divestiture and asset purchase and sale agreement with Delta remain subject to the regulatory approvals described above.
2010 Outlook
As we begin 2010, it is difficult to predict or quantify the ongoing impacts of the global economic recovery. 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 previously announced operational realignment, which focuses on our core network strengths and will result in our Phoenix, Philadelphia and Charlotte Hubs and focus city in Washington, D.C. at Washington National representing 99% of our ASMs by the end of 2010, have positioned us well as the economy recovers.

 

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US Airways Group’s Results of Operations
In the three months ended March 31, 2010, we realized an operating loss of $10 million and a loss before income taxes of $45 million. We experienced growth in revenues as a result of the improving economy. Our first quarter 2010 results were also impacted by recognition of the following items:
   
$5 million of net special charges for aircraft costs as a result of our previously announced capacity reductions; and
   
$49 million of net realized gains related to sales of certain investments in auction rate securities, included in nonoperating expense, net.
In the three months ended March 31, 2009, we realized an operating loss of $25 million and a loss before income taxes of $103 million. We experienced significant declines in revenues in the first quarter of 2009 as a result of the global economic recession. Our first quarter 2009 results were also impacted by recognition of the following items:
   
$197 million of net realized losses on settled fuel hedging instruments, offset by $170 million of net unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments. These unrealized gains were due primarily to the reversal of unrealized losses recognized in prior periods as hedge transactions settled in the 2009 period;
   
$6 million of net special charges consisting of $5 million in aircraft costs and $1 million in severance charges, both as a result of capacity reductions; and
   
$7 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities, included in nonoperating expense, net.
At December 31, 2009, we had approximately $2.13 billion of gross net operating losses (“NOLs”) to reduce future federal taxable income. All of our NOLs are expected to be 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 had approximately $90 million of tax-effected state NOLs at December 31, 2009. At December 31, 2009, the federal and state valuation allowance was $546 million and $77 million, respectively.
We reported a loss before income taxes in the first quarter of each of 2010 and 2009, and we did not record a tax provision in either period.

 

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The table below sets forth our selected mainline and Express operating data:
                         
    Three Months Ended     Percent  
    March 31,     Change  
    2010     2009     2010-2009  
Mainline
                       
Revenue passenger miles (millions) (a)
    13,053       13,309       (1.9 )
Available seat miles (millions) (b)
    16,579       16,979       (2.4 )
Passenger load factor (percent) (c)
    78.7       78.4     0.3  pts
Yield (cents) (d)
    13.01       12.10       7.5  
Passenger revenue per available seat mile (cents) (e)
    10.24       9.49       8.0  
Operating cost per available seat mile (cents) (f)
    12.13       11.05       9.8  
Passenger enplanements (thousands) (g)
    11,985       12,409       (3.4 )
Departures (thousands)
    108       117       (7.5 )
Aircraft at end of period
    347       347        
Block hours (thousands) (h)
    286       304       (5.9 )
Average stage length (miles) (i)
    959       934       2.6  
Average passenger journey (miles) (j)
    1,599       1,527       4.8  
Fuel consumption (gallons in millions)
    247       258       (4.3 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.17       1.47       47.6  
Full time equivalent employees at end of period
    30,439       32,245       (5.6 )
 
                       
Express (k)
                       
Revenue passenger miles (millions) (a)
    2,270       2,374       (4.4 )
Available seat miles (millions) (b)
    3,279       3,455       (5.1 )
Passenger load factor (percent) (c)
    69.2       68.7     0.5  pts
Yield (cents) (d)
    26.49       23.22       14.1  
Passenger revenue per available seat mile (cents) (e)
    18.34       15.95       14.9  
Operating cost per available seat mile (cents) (f)
    19.80       17.48       13.3  
Passenger enplanements (thousands) (g)
    5,946       5,978       (0.5 )
Aircraft at end of period
    282       293       (3.8 )
Fuel consumption (gallons in millions)
    77       81       (4.9 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.20       1.51       45.7  
 
                       
Total Mainline and Express
                       
Revenue passenger miles (millions) (a)
    15,323       15,683       (2.3 )
Available seat miles (millions) (b)
    19,858       20,434       (2.8 )
Passenger load factor (percent) (c)
    77.2       76.7     0.5  pts
Yield (cents) (d)
    15.01       13.79       8.9  
Passenger revenue per available seat mile (cents) (e)
    11.58       10.58       9.5  
Total revenue per available seat mile (cents) (l)
    13.35       12.02       11.1  
Passenger enplanements (thousands) (g)
    17,931       18,387       (2.5 )
Aircraft at end of period
    629       640       (1.7 )
Fuel consumption (gallons in millions)
    324       339       (4.5 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.18       1.48       47.1  
 
     
(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.
 
(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.

 

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(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.

 

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Three Months Ended March 31, 2010
Compared with the
Three Months Ended March 31, 2009
Operating Revenues:
                         
                    Percent  
    2010     2009     Change  
    (In millions)        
Operating revenues:
                       
Mainline passenger
  $ 1,698     $ 1,611       5.4  
Express passenger
    601       551       9.1  
Cargo
    33       24       37.1  
Other
    319       269       18.0  
 
                   
Total operating revenues
  $ 2,651     $ 2,455       7.9  
 
                   
Total operating revenues in the first quarter of 2010 were $2.65 billion as compared to $2.46 billion in the 2009 period, an increase of $196 million or 7.9%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $1.7 billion in the first quarter of 2010 as compared to $1.61 billion in the 2009 period. Mainline RPMs decreased 1.9% as mainline capacity, as measured by ASMs, decreased 2.4%, resulting in a 0.3 point increase in load factor to 78.7%. Mainline passenger yield increased 7.5% to 13.01 cents in the first quarter of 2010 from 12.1 cents in the 2009 period. Mainline PRASM increased 8% to 10.24 cents in the first quarter of 2010 from 9.49 cents in the 2009 period. Mainline yield and PRASM increased in the first quarter of 2010 due principally to the increase in passenger demand and improving pricing environment driven by the recovering global economy.
   
Express passenger revenues were $601 million in the first quarter of 2010, an increase of $50 million from the 2009 period. Express RPMs decreased by 4.4% as Express capacity, as measured by ASMs, decreased 5.1%, resulting in a 0.5 point increase in load factor to 69.2%. Express passenger yield increased by 14.1% to 26.49 cents in the first quarter of 2010 from 23.22 cents in the 2009 period. Express PRASM increased 14.9% to 18.34 cents in the first quarter of 2010 from 15.95 cents in the 2009 period. The increases in Express yield and PRASM were the result of the same favorable passenger demand and improving pricing environment discussed in mainline passenger revenues above.
   
Cargo revenues were $33 million in the first quarter of 2010, an increase of $9 million or 37.1% from the 2009 period. The increase in cargo revenues was driven by an increase in freight volume as a result of the recovering economic environment as compared to the 2009 period.
   
Other revenues were $319 million in the first quarter of 2010, an increase of $50 million or 18% from the 2009 period, primarily due to an increase in revenue generated by our checked bag fees as a result of increases in rates charged. An increase in revenues associated with our frequent traveler program also contributed to the increase in other revenues.

 

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Operating Expenses:
                         
                    Percent  
    2010     2009     Change  
    (In millions)        
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 534     $ 378       41.2  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
          197     nm  
Unrealized
          (170 )   nm  
Salaries and related costs
    556       551       0.9  
Aircraft rent
    171       178       (3.8 )
Aircraft maintenance
    157       174       (10.0 )
Other rent and landing fees
    134       131       2.8  
Selling expenses
    95       92       2.3  
Special items, net
    5       6       (22.8 )
Depreciation and amortization
    61       60       1.5  
Other
    298       279       6.9  
 
                   
Total mainline operating expenses
    2,011       1,876       7.2  
Express expenses:
                       
Fuel
    170       123       38.5  
Other
    480       481       (0.4 )
 
                   
Total Express expenses
    650       604       7.5  
 
                   
Total operating expenses
  $ 2,661     $ 2,480       7.3  
 
                   
Total operating expenses were $2.66 billion in the first quarter of 2010, an increase of $181 million or 7.3% compared to the 2009 period. Mainline operating expenses were $2.01 billion in the first quarter of 2010, an increase of $135 million or 7.2% from the 2009 period, while ASMs decreased 2.4%.
The 2010 period included net special charges of $5 million for aircraft costs as a result of our previously announced capacity reductions. This compares to net special charges of $6 million in the 2009 period, consisting of $5 million in aircraft costs and $1 million in severance charges, both as a result of capacity reductions.
Our mainline operating CASM excluding special items, fuel, and 2009 fuel hedging losses, increased 0.25 cents, or 2.9%, from 8.63 cents in the first quarter of 2009 to 8.88 cents in the first quarter of 2010 due primarily to the reduction in available seat miles caused by the February 2010 weather-related flight cancellations.
The table below sets forth the major components of our mainline CASM and presents our mainline CASM including and excluding special items and fuel for the three months ended March 31, 2010 and 2009:
                         
                    Percent  
    2010     2009     Change  
    (In cents)        
Mainline CASM:
                       
Aircraft fuel and related taxes
    3.22       2.23       44.7  
Loss on fuel hedging instruments, net
          0.16     nm  
Salaries and related costs
    3.35       3.24       3.3  
Aircraft rent
    1.03       1.04       (1.5 )
Aircraft maintenance
    0.95       1.03       (7.8 )
Other rent and landing fees
    0.81       0.77       5.3  
Selling expenses
    0.57       0.54       4.7  
Special items, net
    0.03       0.04       (20.9 )
Depreciation and amortization
    0.37       0.35       3.9  
Other
    1.80       1.65       9.5  
 
                   
Total mainline CASM
    12.13       11.05       9.8  
Special items, net
    (0.03 )     (0.04 )        
Aircraft fuel and related taxes
    (3.22 )     (2.23 )        
Loss on fuel hedging instruments, net
          (0.16 )        
 
                   
Total mainline CASM excluding special items and fuel (1)
    8.88       8.63       2.9  
 
                   
     
(1)  
We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

 

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Significant changes in the components of mainline operating expense per ASM are as follows:
   
Aircraft fuel and related taxes per ASM increased 44.7% primarily due to a 47.6% increase in the average price per gallon of fuel to $2.17 in the first quarter of 2010 from $1.47 in the 2009 period. A 4.3% decrease in gallons of fuel consumed in the 2010 period on 2.4% lower capacity partially offset the increase.
 
   
Since the third quarter of 2008, we have not entered into any new fuel hedging transactions, and we have no fuel hedging contracts outstanding. We recognized a net loss of $27 million in the first quarter of 2009 related to our fuel hedging instruments due to the decline in the price of heating oil in the 2009 period.
 
   
Aircraft maintenance expense per ASM decreased 7.8% due principally to a decrease in the number of engine overhauls performed in the 2010 period as compared to 2009 period as a result of the timing of maintenance cycles.
 
   
Other rent and landing fees per ASM increased 5.3% over the 2009 period due to the fixed nature of space rent.
 
   
Other expense per ASM increased 9.5% primarily due to the negative effects of the severe weather on the East Coast of the United States in the first quarter of 2010. An increase in the incremental cost of travel redemptions associated with our frequent traveler program, principally as a result of higher fuel costs, also contributed to the increase in other expenses.
Total Express expenses increased $46 million or 7.5% in the first quarter of 2010 to $650 million from $604 million in the 2009 period. The period-over-period increase was primarily driven by a $47 million increase in fuel costs. The average fuel price per gallon was $1.51 in the 2009 period, which was 45.7% lower than the average fuel price per gallon of $2.20 in the 2010 period. A 4.9% decrease in gallons of fuel consumed in the 2010 period on 5.1% lower capacity partially offset the increase. Other Express expenses decreased only $1 million or 0.4% despite a 5.1% 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  
    2010     2009     Change  
    (In millions)        
Nonoperating income (expense):
                       
Interest income
  $ 5     $ 6       (14.2 )
Interest expense, net
    (82 )     (71 )     15.9  
Other, net
    42       (13 )   nm  
 
                   
Total nonoperating expense, net
  $ (35 )   $ (78 )     (54.9 )
 
                   
Net nonoperating expense was $35 million in the first quarter of 2010 as compared to $78 million in the 2009 period. Interest expense, net increased $11 million due to an increase in the average debt balance outstanding primarily as a result of financing transactions completed throughout 2009.
Other nonoperating expense, net in the 2010 period included $49 million of net realized gains related to sales of certain investments in auction rate securities, offset by $6 million in foreign currency losses. Other nonoperating expense, net in the 2009 period included $7 million in other-than-temporary non-cash impairment charges for our investments in auction rate securities as well as $6 million in foreign currency losses. The sales of auction rate securities are discussed in more detail under “Liquidity and Capital Resources.”

 

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US Airways’ Results of Operations
In the three months ended March 31, 2010, US Airways realized an operating loss of $10 million and a loss before income taxes of $23 million. US Airways experienced growth in revenues as a result of the improving economy. US Airways’ first quarter 2010 results were also impacted by recognition of the following items:
   
$5 million of net special charges for aircraft costs as a result of US Airways’ previously announced capacity reductions; and
   
$49 million of net realized gains related to sales of certain investments in auction rate securities, included in nonoperating expense, net.
In the three months ended March 31, 2009, US Airways realized an operating loss of $26 million and a loss before income taxes of $95 million. US Airways experienced significant declines in revenues in the first quarter of 2009 as a result of the global economic recession. US Airways’ first quarter 2009 results were also impacted by recognition of the following items:
   
$197 million of net realized losses on settled fuel hedging instruments, offset by $170 million of net unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments. These unrealized gains were due primarily to the reversal of unrealized losses recognized in prior periods as hedge transactions settled in the 2009 period;
   
$6 million of net special charges consisting of $5 million in aircraft costs and $1 million in severance charges, both as a result of capacity reductions; and
   
$7 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities, included in nonoperating expense, net.
At December 31, 2009, US Airways had approximately $2.05 billion of gross NOLs to reduce future federal taxable income. All of US Airways’ NOLs are expected to be 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 had approximately $86 million of tax-effected state NOLs at December 31, 2009. At December 31, 2009, the federal and state valuation allowance was $575 million and $78 million, respectively.
US Airways reported a loss before income taxes in the first quarter of each of 2010 and 2009, and US Airways did not record a tax provision in either period.

 

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The table below sets forth US Airways’ selected mainline and Express operating data:
                         
    Three Months Ended     Percent  
    March 31,     Change  
    2010     2009     2010-2009  
Mainline
                       
Revenue passenger miles (millions) (a)
    13,053       13,309       (1.9 )
Available seat miles (millions) (b)
    16,579       16,979       (2.4 )
Passenger load factor (percent) (c)
    78.7       78.4     0.3  pts
Yield (cents) (d)
    13.01       12.10       7.5  
Passenger revenue per available seat mile (cents) (e)
    10.24       9.49       8.0  
Aircraft at end of period
    347       347        
Fuel consumption (gallons in millions)
    247       258       (4.3 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.17       1.47       47.6  
 
                       
Express (f)
                       
Revenue passenger miles (millions) (a)
    2,270       2,374       (4.4 )
Available seat miles (millions) (b)
    3,279       3,455       (5.1 )
Passenger load factor (percent) (c)
    69.2       68.7     0.5  pts
Yield (cents) (d)
    26.49       23.22       14.1  
Passenger revenue per available seat mile (cents) (e)
    18.34       15.95       14.9  
Aircraft at end of period
    282       293       (3.8 )
Fuel consumption (gallons in millions)
    77       81       (4.9 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.20       1.51       45.7  
 
                       
Total Mainline and Express
                       
Revenue passenger miles (millions) (a)
    15,323       15,683       (2.3 )
Available seat miles (millions) (b)
    19,858       20,434       (2.8 )
Passenger load factor (percent) (c)
    77.2       76.7     0.5  pts
Yield (cents) (d)
    15.01       13.79       8.9  
Passenger revenue per available seat mile (cents) (e)
    11.58       10.58       9.5  
Total revenue per available seat mile (cents) (g)
    13.52       12.19       10.9  
Aircraft at end of period
    629       640       (1.7 )
Fuel consumption (gallons in millions)
    324       339       (4.5 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.18       1.48       47.1  
 
     
(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.
 
(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.

 

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Three Months Ended March 31, 2010
Compared with the
Three Months Ended March 31, 2009
Operating Revenues:
                         
                    Percent  
    2010     2009     Change  
    (In millions)        
Operating revenues:
                       
Mainline passenger
  $ 1,698     $ 1,611       5.4  
Express passenger
    601       551       9.1  
Cargo
    33       24       37.1  
Other
    353       305       15.4  
 
                   
Total operating revenues
  $ 2,685     $ 2,491       7.8  
 
                   
Total operating revenues in the first quarter of 2010 were $2.69 billion as compared to $2.49 billion in the 2009 period, an increase of $194 million or 7.8%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $1.7 billion in the first quarter of 2010 as compared to $1.61 billion in the 2009 period. Mainline RPMs decreased 1.9% as mainline capacity, as measured by ASMs, decreased 2.4%, resulting in a 0.3 point increase in load factor to 78.7%. Mainline passenger yield increased 7.5% to 13.01 cents in the first quarter of 2010 from 12.1 cents in the 2009 period. Mainline PRASM increased 8% to 10.24 cents in the first quarter of 2010 from 9.49 cents in the 2009 period. Mainline yield and PRASM increased in the first quarter of 2010 due principally to the increase in passenger demand and improving pricing environment driven by the recovering global economy.
   
Express passenger revenues were $601 million in the first quarter of 2010, an increase of $50 million from the 2009 period. Express RPMs decreased by 4.4% as Express capacity, as measured by ASMs, decreased 5.1%, resulting in a 0.5 point increase in load factor to 69.2%. Express passenger yield increased by 14.1% to 26.49 cents in the first quarter of 2010 from 23.22 cents in the 2009 period. Express PRASM increased 14.9% to 18.34 cents in the first quarter of 2010 from 15.95 cents in the 2009 period. The increases in Express yield and PRASM were the result of the same favorable passenger demand and improving pricing environment discussed in mainline passenger revenues above.
   
Cargo revenues were $33 million in the first quarter of 2010, an increase of $9 million or 37.1% from the 2009 period. The increase in cargo revenues was driven by an increase in freight volume as a result of the recovering economic environment as compared to the 2009 period.
   
Other revenues were $353 million in the first quarter of 2010, an increase of $48 million or 15.4% from the 2009 period, primarily due to an increase in revenue generated by US Airways’ checked bag fees as a result of increases in rates charged. An increase in revenues associated with US Airways’ frequent traveler program also contributed to the increase in other revenues.

 

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Operating Expenses:
                         
                    Percent  
    2010     2009     Change  
    (In millions)        
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 534     $ 378       41.2  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
          197     nm  
Unrealized
          (170 )   nm  
Salaries and related costs
    556       551       0.9  
Aircraft rent
    171       178       (3.8 )
Aircraft maintenance
    157       174       (10.0 )
Other rent and landing fees
    134       131       2.8  
Selling expenses
    95       92       2.3  
Special items, net
    5       6       (22.8 )
Depreciation and amortization
    63       62       1.4  
Other
    305       286       6.6  
 
                   
Total mainline operating expenses
    2,020       1,885       7.1  
Express expenses:
                       
Fuel
    170       123       38.5  
Other
    505       509       (0.8 )
 
                   
Total Express expenses
    675       632       6.8  
 
                   
Total operating expenses
  $ 2,695     $ 2,517       7.1  
 
                   
Total operating expenses were $2.7 billion in the first quarter of 2010, an increase of $178 million or 7.1% compared to the 2009 period. Mainline operating expenses were $2.02 billion in the first quarter of 2010, an increase of $135 million or 7.1% from the 2009 period. Fuel costs net of hedging losses in the 2009 period were $129 million higher in the 2010 period as compared to the 2009 period.
The 2010 period included net special charges of $5 million for aircraft costs as a result of US Airways’ previously announced capacity reductions. This compares to net special charges of $6 million in the 2009 period, consisting of $5 million in aircraft costs and $1 million in severance charges, both as a result of capacity reductions.
Significant changes in the components of mainline operating expenses are as follows:
   
Aircraft fuel and related taxes increased 41.2% primarily due to a 47.6% increase in the average price per gallon of fuel to $2.17 in the first quarter of 2010 from $1.47 in the 2009 period. A 4.3% decrease in gallons of fuel consumed in the 2010 period on 2.4% lower capacity partially offset the increase.
   
Since the third quarter of 2008, US Airways has not entered into any new fuel hedging transactions, and US Airways has no fuel hedging contracts outstanding. US Airways recognized a net loss of $27 million in the first quarter of 2009 related to its fuel hedging instruments due to the decline in the price of heating oil in the 2009 period.
   
Aircraft maintenance expense decreased 10% due principally to a decrease in the number of engine overhauls performed in the 2010 period as compared to 2009 period as a result of the timing of maintenance cycles.
   
Other expense increased 6.6% primarily due to the negative effects of the severe weather on the East Coast of the United States in the first quarter of 2010. An increase in the incremental cost of travel redemptions associated with US Airways’ frequent traveler program, principally as a result of higher fuel costs, also contributed to the increase in other expenses.
Total Express expenses increased $43 million or 6.8% in the first quarter of 2010 to $675 million from $632 million in the 2009 period. The period-over-period increase was primarily driven by a $47 million increase in fuel costs. The average fuel price per gallon was $1.51 in the 2009 period, which was 45.7% lower than the average fuel price per gallon of $2.20 in the 2010 period. A 4.9% decrease in gallons of fuel consumed in the 2010 period on 5.1% lower capacity partially offset the increase. Other Express expenses decreased only $4 million or 0.8% despite a 5.1% decrease in Express ASMs due to certain fixed costs associated with US Airways’ capacity purchase agreements as well as certain contractual rate increases with these carriers.

 

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Nonoperating Income (Expense):
                         
                    Percent  
    2010     2009     Change  
    (In millions)        
Nonoperating income (expense):
                       
Interest income
  $ 5     $ 6       (14.2 )
Interest expense, net
    (59 )     (61 )     (3.8 )
Other, net
    41       (14 )   nm  
 
                   
Total nonoperating expense, net
  $ (13 )   $ (69 )     (82.2 )
 
                   
Net nonoperating expense was $13 million in the first quarter of 2010 as compared to $69 million in the 2009 period. Interest expense, net decreased $2 million due to a reduction in interest-bearing intercompany payable balances, offset by an increase in the average debt balance outstanding primarily as a result of financing transactions completed throughout 2009.
Other nonoperating expense, net in the 2010 period included $49 million of net realized gains related to sales of certain investments in auction rate securities, offset by $6 million in foreign currency losses. Other nonoperating expense, net in the 2009 period included $7 million in other-than-temporary non-cash impairment charges for US Airways’ investments in auction rate securities as well as $6 million in foreign currency losses. The sales of auction rate securities are discussed in more detail under “Liquidity and Capital Resources.”

 

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Liquidity and Capital Resources
As of March 31, 2010, our cash, cash equivalents, investments in marketable securities and restricted cash were $2.04 billion, of which $442 million was restricted. Our investments in marketable securities included $70 million of auction rate securities at fair value ($114 million par value) that are classified as noncurrent assets on our condensed consolidated balance sheets.
Investments in Marketable Securities
As of March 31, 2010, we held auction rate securities totaling $114 million at par value, which are classified as available-for-sale securities and noncurrent assets on our condensed consolidated balance sheets. Contractual maturities for these auction rate securities range from six to 42 years, with 18% of our portfolio maturing within the next 10 years (2016), 58% maturing within the next 30 years (2033 — 2036) and 24% 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 March 31, 2010, the fair value of our auction rate securities was $70 million.
In the three months ended March 31, 2010, we sold certain investments in auction rate securities for net proceeds of $132 million, resulting in a $49 million net realized gain recorded in nonoperating expense, net, of which $48 million represents the reclassification of prior period net unrealized gains from other comprehensive income. In April 2010, we sold an additional amount of auction rate securities for net proceeds of $11 million, leaving us with a remaining investment of $59 million. Net proceeds for all sale transactions approximated the carrying amount of our investments. Additionally, in the first quarter of 2010, we recorded net unrealized losses of $1 million in other comprehensive income, offsetting previously recognized unrealized gains, 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 March 31, 2010, 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
Net cash provided by operating activities was $199 million and $187 million for the first quarter of 2010 and 2009, respectively. Net loss for the first quarter of 2010 was $45 million as compared to a net loss of $103 million for the first quarter of 2009, an improvement of $58 million. However, included in the 2010 first quarter net loss was a $49 million nonoperating realized gain on the sales of auction rate securities during the period, which was previously recorded in other comprehensive income.
Net cash provided by investing activities was $92 million for the first three months of 2010 as compared to net cash used in operating activities of $74 million for the first three months of 2009. Principal investing activities in the 2010 period included net proceeds from sales of marketable securities of $132 million and a $38 million decrease in restricted cash, offset by expenditures for property and equipment totaling $78 million, primarily related to the purchase of Airbus aircraft. The $132 million in proceeds were related to sales of certain investments in auction rate securities. Restricted cash declined primarily due to a reduction in the amount of holdback held by certain credit card processors for advance ticket sales for which we have not yet provided air transportation. Principal investing activities in the 2009 period included expenditures for property and equipment totaling $183 million, primarily related to the purchase of Airbus aircraft and a $48 million increase in equipment purchase deposits for certain aircraft on order, offset by $52 million in proceeds from dispositions of property and equipment, a $37 million decrease in restricted cash and net sales of investments in marketable securities of $20 million. The $52 million in proceeds was the result of the swap of one of US Airways’ owned aircraft in exchange for the leased aircraft involved in the Flight 1549 accident and several engine sale-leaseback transactions.
Net cash used in financing activities was $58 million for the first three months of 2010 as compared to net cash provided by financing activities of $115 million for the first three months of 2009. Principal financing activities in the 2010 period included debt repayments of $135 million and proceeds from the issuance of debt of $80 million, which primarily included the financing associated with the purchase of Airbus aircraft. Principal financing activities in the 2009 period included proceeds from the issuance of debt of $221 million, which included additional loans under a spare parts loan agreement, a loan secured by certain airport landing slots, an unsecured financing with one of our third party Express carriers and the financing associated with the purchase of Airbus aircraft. Debt repayments totaled $105 million in the 2009 period.

 

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US Airways
Net cash provided by operating activities was $231 million and $176 million for the first quarter of 2010 and 2009, respectively. Net loss for the first quarter of 2010 was $23 million as compared to a net loss of $95 million for the first quarter of 2009, an improvement of $72 million. However, included in the 2010 first quarter net loss was a $49 million nonoperating realized gain on the sales of auction rate securities during the period, which was previously recorded in other comprehensive income. In addition, in the first quarter of 2010, US Airways’ operating cash flow benefited from intercompany cash transfers from US Airways Group.
Net cash provided by investing activities was $96 million for the first three months of 2010 as compared to net cash used in operating activities of $73 million for the first three months of 2009. Principal investing activities in the 2010 period included net proceeds from sales of marketable securities of $132 million and a $38 million decrease in restricted cash, offset by expenditures for property and equipment totaling $74 million, primarily related to the purchase of Airbus aircraft. The $132 million in proceeds were related to sales of certain investments in auction rate securities. Restricted cash declined primarily due to a reduction in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways has not yet provided air transportation. Principal investing activities in the 2009 period included expenditures for property and equipment totaling $182 million, primarily related to the purchase of Airbus aircraft and a $48 million increase in equipment purchase deposits for certain aircraft on order, offset by $52 million in proceeds from dispositions of property and equipment, a $37 million decrease in restricted cash and net sales of investments in marketable securities of $20 million. The $52 million in proceeds was the result of the swap of one of US Airways’ owned aircraft in exchange for the leased aircraft involved in the Flight 1549 accident and several engine sale-leaseback transactions.
Net cash used in financing activities was $42 million for the first three months of 2010 as compared to net cash provided by financing activities of $131 million for the first three months of 2009. Principal financing activities in the 2010 period included debt repayments of $119 million and proceeds from the issuance of debt of $80 million, which primarily included the financing associated with the purchase of Airbus aircraft. Principal financing activities in the 2009 period included proceeds from the issuance of debt of $221 million, which included additional loans under a spare parts loan agreement, a loan secured by certain airport landing slots, an unsecured financing with one of US Airways’ third party Express carriers and the financing associated with the purchase of Airbus aircraft. Debt repayments totaled $89 million in the 2009 period.
Commitments
As of March 31, 2010, we had $4.86 billion of long-term debt and capital leases (including current maturities and before discount on debt). The information contained herein is not a comprehensive discussion and analysis of our commitments, but rather updates disclosures made in the 2009 Annual Report on Form 10-K.
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 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 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 March 31, 2010, the interest rate on the Citicorp credit facility was 2.75% 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.

 

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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 $1.15 billion as of March 31, 2010. As of March 31, 2010, we were in compliance with all debt covenants under the amended credit facility.
2010 Financing Transactions
US Airways borrowed $181 million in the first quarter of 2010 to finance Airbus aircraft deliveries. 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.
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 were delivered through December 31, 2009. During the first quarter of 2010, US Airways took delivery of two A320 aircraft and two A330-200 aircraft, which were financed as discussed above. US Airways plans to take delivery of 24 A320 family aircraft in 2011 and 2012, with the remaining 46 A320 family aircraft scheduled to be delivered between 2013 and 2015. In addition, US Airways plans to take delivery of the eight remaining A330-200 aircraft in 2013 and 2014. Deliveries of the 22 A350 XWB aircraft are scheduled to begin in 2017 and extend through 2019.
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 through December 31, 2009.
Under all of our aircraft and engine purchase agreements, our total future commitments as of March 31, 2010 are expected to be approximately $5.95 billion through 2019, which includes predelivery deposits and payments. We have financing commitments for all Airbus aircraft scheduled for delivery in 2011 and 2012. See Part II, 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.

 

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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 II, 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 March 31, 2010, 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 March 31, 2010:
             
    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 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.
There have been no material changes in our off-balance sheet arrangements as set forth in our 2009 Annual Report on Form 10-K.

 

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Contractual Obligations
The following table provides details of our future cash contractual obligations as of March 31, 2010 (in millions):
                                                         
    Payments Due by Period  
    2010     2011     2012     2013     2014     Thereafter     Total  
US Airways Group (1)
                                                       
Debt (2)
  $ 74     $ 16     $ 116     $ 116     $ 1,276     $     $ 1,598  
Interest obligations (3)
    43       54       51       46       21             215  
US Airways (4)
                                                       
Debt and capital lease obligations (5) (6)
    295       387       320       271       282       1,707       3,262  
Interest obligations (3) (6)
    120       156       157       112       96       405       1,046  
Aircraft purchase and operating lease commitments (7)
    806       1,497       1,441       1,860       1,573       5,795       12,972  
Regional capacity purchase agreements (8)
    765       1,036       903       773       772       2,347       6,596  
Other US Airways Group subsidiaries (9)
    9       9       9       7       6       1       41  
 
                                         
Total
  $ 2,112     $ 3,155     $ 2,997     $ 3,185     $ 4,026     $ 10,255     $ 25,730  
 
                                         
 
     
(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 $164 million of unamortized debt discount as of March 31, 2010.
 
(3)  
For variable-rate debt, future interest obligations are shown above using interest rates in effect as of March 31, 2010.
 
(4)  
Commitments listed separately under US Airways and its wholly owned subsidiaries represent commitments under agreements entered into separately by those companies.
 
(5)  
Excludes $90 million of unamortized debt discount as of March 31, 2010.
 
(6)  
Includes $481 million of future principal payments and $209 million of future interest payments as of March 31, 2010, respectively, related to pass through trust certificates or EETCs associated with mortgage financings for the purchase of certain aircraft.
 
(7)  
Includes $3.12 billion of future minimum lease payments related to EETC leveraged leased financings of certain aircraft as of March 31, 2010.
 
(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.
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.

 

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Critical Accounting Policies and Estimates
In the first quarter of 2010, there were no changes to our critical accounting policies and estimates from those disclosed in the financial statements and accompanying notes contained in our 2009 Annual Report on Form 10-K.
Recent Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (“FASB”) issued 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 requires 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 is 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 adopted ASU No. 2009-17 as of January 1, 2010, and its application had no impact on our condensed 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: (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 its impact on our condensed consolidated financial statements.

 

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Item 3. 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. Our exposure to market risk from changes in commodity prices and interest rates has not changed materially from our exposure discussed in our 2009 Annual Report on Form 10-K except as updated below.
Commodity price risk
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 we have no fuel hedging contracts outstanding.
Interest rate risk
Our exposure to interest rate risk relates primarily to our cash equivalents, investment portfolios and variable rate debt obligations. At March 31, 2010, our variable-rate long-term debt obligations of approximately $3.42 billion represented approximately 70% of our total long-term debt. If interest rates increased 10% in 2010, the impact on our results of operations would be approximately $14 million of additional interest expense.
At March 31, 2010, included within our investment portfolio are $114 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 March 31, 2010, the fair value of our auction rate securities was $70 million. In April 2010, we sold auction rate securities for net proceeds of $11 million, leaving us with a remaining investment of $59 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 March 31, 2010, 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. Refer to Note 8, “Investments in Marketable Securities (Noncurrent)” in Part I, Items 1A and 1B, respectively, of this report for additional information.

 

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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
An evaluation was performed under the supervision and with the participation of US Airways Group’s and US Airways’ management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) as of March 31, 2010. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2010.
Changes in internal control over financial reporting.
There has been no change to US Airways Group’s or US Airways’ internal control over financial reporting that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, US Airways Group’s or US Airways’ internal control over financial reporting.
Limitation on the effectiveness of controls.
We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO believe that our disclosure controls and procedures were effective at the “reasonable assurance” level as of March 31, 2010.

 

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Part II. Other Information
Item 1. 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 the Company’s financial statements upon emergence from bankruptcy and will not have any further impact on its financial position or results of operations. The Company presently expects 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 its 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 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 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.

 

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In addition, we have substantial non-cancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines. We have not yet secured financing commitments for some of the 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 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 I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”
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 two years.
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 we have no fuel hedging contracts outstanding. 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 could adversely impact our short-term liquidity as our hedge counterparties could 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 I, Item 3, “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.

 

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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 Railway Labor Act (“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, 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 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.

 

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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.
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.

 

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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.
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 Transportation Security Administration 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.

 

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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 DOT finalized rules, taking effect on April 29, 2010, requiring new procedures for customer handling during long onboard delays, as well as additional reporting requirements for airlines. The DOT has signaled its intent to aggressively enforce the new rules and is planning to release additional proposed regulations in this area in 2010.
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. 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.

 

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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 in Washington, D.C. at Ronald Reagan 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 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.

 

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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.
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.

 

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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;
   
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.

 

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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.

 

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Item 5. Exhibits
         
Exhibit No.   Description
  10.1    
2010 Annual Incentive Program Under 2008 Equity Incentive Plan.†
       
 
  10.2    
2010 Long Term Incentive Performance Program Under 2008 Equity Incentive Plan.†
       
 
  31.1    
Certification of US Airways Group’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.2    
Certification of US Airways Group’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.3    
Certification of US Airways’ Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.4    
Certification of US Airways’ Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  32.1    
Certification of US Airways Group’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of US Airways’ Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
     
 
Management contract or compensatory plan or arrangement.

 

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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
         
  US Airways Group, Inc. (Registrant)
 
 
Date: April 26, 2010  By:   /s/ Derek J. Kerr    
    Derek J. Kerr    
    Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
 
 
  US Airways, Inc. (Registrant)
 
 
Date: April 26, 2010  By:   /s/ Derek J. Kerr    
    Derek J. Kerr    
    Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
 

 

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Exhibit Index
         
Exhibit No.   Description
  10.1    
2010 Annual Incentive Program Under 2008 Equity Incentive Plan.†
       
 
  10.2    
2010 Long Term Incentive Performance Program Under 2008 Equity Incentive Plan.†
       
 
  31.1    
Certification of US Airways Group’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.2    
Certification of US Airways Group’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.3    
Certification of US Airways’ Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.4    
Certification of US Airways’ Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  32.1    
Certification of US Airways Group’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of US Airways’ Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
     
 
Management contract or compensatory plan or arrangement.

 

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