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EX-31.1 - EXHIBIT 31.1 - US AIRWAYS GROUP INCc03596exv31w1.htm
EX-10.1 - EXHIBIT 10.1 - US AIRWAYS GROUP INCc03596exv10w1.htm
EX-31.2 - EXHIBIT 31.2 - US AIRWAYS GROUP INCc03596exv31w2.htm
EX-31.4 - EXHIBIT 31.4 - US AIRWAYS GROUP INCc03596exv31w4.htm
EX-32.2 - EXHIBIT 32.2 - US AIRWAYS GROUP INCc03596exv32w2.htm
EX-31.3 - EXHIBIT 31.3 - US AIRWAYS GROUP INCc03596exv31w3.htm
EX-32.1 - EXHIBIT 32.1 - US AIRWAYS GROUP INCc03596exv32w1.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 June 30, 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 July 16, 2010, there were approximately 161,374,301 shares of US Airways Group, Inc. common stock outstanding.
As of July 16, 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 June 30, 2010
Table of Contents
         
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 Exhibit 10.1
 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 and pricing environment, and our expected financial performance and liquidity position. 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 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     Six Months  
    Ended June 30,     Ended June 30,  
    2010     2009     2010     2009  
Operating revenues:
                               
Mainline passenger
  $ 2,036     $ 1,724     $ 3,735     $ 3,335  
Express passenger
    767       642       1,368       1,194  
Cargo
    37       20       69       44  
Other
    331       272       649       540  
 
                       
Total operating revenues
    3,171       2,658       5,821       5,113  
Operating expenses:
                               
Aircraft fuel and related taxes
    616       440       1,151       819  
Loss (gain) on fuel hedging instruments, net
          (21 )           5  
Salaries and related costs
    573       549       1,128       1,100  
Express expenses
    683       625       1,333       1,228  
Aircraft rent
    169       174       340       352  
Aircraft maintenance
    162       184       319       358  
Other rent and landing fees
    135       142       270       273  
Selling expenses
    107       99       201       192  
Special items, net
    (9 )     1       (4 )     7  
Depreciation and amortization
    63       62       124       121  
Other
    301       281       598       561  
 
                       
Total operating expenses
    2,800       2,536       5,460       5,016  
 
                       
Operating income
    371       122       361       97  
Nonoperating income (expense):
                               
Interest income
    3       6       9       13  
Interest expense, net
    (86 )     (77 )     (168 )     (148 )
Other, net
    (9 )     7       33       (7 )
 
                       
Total nonoperating expense, net
    (92 )     (64 )     (126 )     (142 )
 
                       
Income (loss) before income taxes
    279       58       235       (45 )
Income tax provision
                       
 
                       
Net income (loss)
  $ 279     $ 58     $ 235     $ (45 )
 
                       
Earnings (loss) per common share:
                               
Basic earnings (loss) per common share
  $ 1.73     $ 0.47     $ 1.46     $ (0.38 )
Diluted earnings (loss) per common share
  $ 1.41     $ 0.42     $ 1.23     $ (0.38 )
Shares used for computation (in thousands):
                               
Basic
    161,292       123,790       161,204       118,956  
Diluted
    203,809       144,125       200,404       118,956  
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)
                 
    June 30,     December 31,  
    2010     2009  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 1,814     $ 1,299  
Investments in marketable securities
    180        
Accounts receivable, net
    394       285  
Materials and supplies, net
    226       227  
Prepaid expenses and other
    500       520  
 
           
Total current assets
    3,114       2,331  
Property and equipment
               
Flight equipment
    4,104       3,852  
Ground property and equipment
    876       883  
Less accumulated depreciation and amortization
    (1,254 )     (1,151 )
 
           
 
    3,726       3,584  
Equipment purchase deposits
    63       112  
 
           
Total property and equipment
    3,789       3,696  
Other assets
               
Other intangibles, net of accumulated amortization of $126 million and $113 million, respectively
    490       503  
Restricted cash
    442       480  
Investments in marketable securities
    59       203  
Other assets
    237       241  
 
           
Total other assets
    1,228       1,427  
 
           
Total assets
  $ 8,131     $ 7,454  
 
           
 
               
LIABILITIES & STOCKHOLDERS’ DEFICIT
               
Current liabilities
               
Current maturities of debt and capital leases
  $ 475     $ 502  
Accounts payable
    370       337  
Air traffic liability
    1,215       778  
Accrued compensation and vacation
    212       178  
Accrued taxes
    211       141  
Other accrued expenses
    851       853  
 
           
Total current liabilities
    3,334       2,789  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    4,061       4,024  
Deferred gains and credits, net
    344       377  
Postretirement benefits other than pensions
    129       130  
Employee benefit liabilities and other
    431       489  
 
           
Total noncurrent liabilities and deferred credits
    4,965       5,020  
Commitments and contingencies
               
Stockholders’ deficit
               
Common stock, $0.01 par value; 400,000,000 shares authorized, 161,791,870 and 161,374,246 shares issued and outstanding at June 30, 2010; 161,520,457 and 161,102,833 shares issued and outstanding at December 31, 2009
    2       2  
Additional paid-in capital
    2,114       2,107  
Accumulated other comprehensive income
    35       90  
Accumulated deficit
    (2,306 )     (2,541 )
Treasury stock, common stock, 417,624 shares at June 30, 2010 and December 31, 2009
    (13 )     (13 )
 
           
Total stockholders’ deficit
    (168 )     (355 )
 
           
Total liabilities and stockholders’ deficit
  $ 8,131     $ 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)
                 
    Six Months Ended June 30,  
    2010     2009  
Net cash provided by operating activities
  $ 739     $ 360  
Cash flows from investing activities:
               
Purchases of property and equipment
    (94 )     (621 )
Purchases of marketable securities
    (180 )      
Sales of marketable securities
    143       20  
Decrease in long-term restricted cash
    38       6  
Proceeds from sale-leaseback transactions and dispositions of property and equipment
    2       52  
 
           
Net cash used in investing activities
    (91 )     (543 )
Cash flows from financing activities:
               
Repayments of debt and capital lease obligations
    (220 )     (175 )
Proceeds from issuance of debt
    90       749  
Deferred financing costs
    (3 )     (8 )
Proceeds from issuance of common stock, net
          66  
 
           
Net cash provided by (used in) financing activities
    (133 )     632  
 
           
Net increase in cash and cash equivalents
    515       449  
Cash and cash equivalents at beginning of period
    1,299       1,034  
 
           
Cash and cash equivalents at end of period
  $ 1,814     $ 1,483  
 
           
Non-cash investing and financing activities:
               
Note payables issued for aircraft purchases
  $ 111     $ 32  
Interest payable converted to debt
    22       19  
Net unrealized loss (gain) on available-for-sale securities
    1       (34 )
Deposit applied to principal repayment on debt
    (19 )      
Maintenance payable converted to debt
          10  
Supplemental information:
               
Interest paid, net of amounts capitalized
  $ 111     $ 100  
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 (credits) for the three and six months ended June 30, 2010 and 2009 (in millions):
                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2010     2009     2010     2009  
Aviation Security Infrastructure Fee (“ASIF”) refund (a)
  $ (16 )   $     $ (16 )   $  
Other costs (b)
    7             7        
Aircraft costs (c)
          1       5       6  
Severance charges (d)
                      1  
 
                       
Special items, net
  $ (9 )   $ 1     $ (4 )   $ 7  
 
                       
 
     
(a)  
In the second quarter of 2010, the Company recorded a $16 million refund of ASIF paid to the Transportation Security Administration (“TSA”) during the years 2005 to 2009.
 
(b)  
In the second quarter of 2010, the Company recorded other net special charges of $7 million, which included a settlement and corporate transaction costs.
 
(c)  
In the six months ended June 30, 2010, the Company recorded $5 million in aircraft costs as a result of previously announced capacity reductions.
 
   
In the three and six months ended June 30, 2009, the Company recorded $1 million and $6 million in aircraft costs, respectively, as a result of capacity reductions.
 
(d)  
In the six months ended June 30, 2009, the Company recorded $1 million in severance charges as a result of capacity reductions.

 

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3. Earnings (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 (“SARs”), employee restricted stock units (“RSUs”) 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     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2010     2009     2010     2009  
Basic earnings (loss) per share:
                               
Net income (loss)
  $ 279     $ 58     $ 235     $ (45 )
 
                       
Weighted average common shares outstanding (in thousands)
    161,292       123,790       161,204       118,956  
 
                       
Basic earnings (loss) per share
  $ 1.73     $ 0.47     $ 1.46     $ (0.38 )
 
                       
Diluted earnings (loss) per share:
                               
Net income (loss)
  $ 279     $ 58     $ 235     $ (45 )
Interest expense on 7.25% convertible senior notes
    6       3       11        
Interest expense on 7% senior convertible notes
    3                    
 
                       
Net income (loss) for purposes of computing diluted earnings (loss) per share
  $ 288     $ 61     $ 246     $ (45 )
 
                       
Share computation (in thousands):
                               
Weighted average common shares outstanding
    161,292       123,790       161,204       118,956  
Dilutive effect of stock awards
    1,722       10       1,454        
Assumed conversion of 7.25% convertible senior notes
    37,746       20,325       37,746        
Assumed conversion of 7% senior convertible notes
    3,049                    
 
                       
Weighted average common shares outstanding as adjusted
    203,809       144,125       200,404       118,956  
 
                       
Diluted earnings (loss) per share
  $ 1.41     $ 0.42     $ 1.23     $ (0.38 )
 
                       
For the three and six months ended June 30, 2010, the adjustments to net income for purposes of computing diluted EPS are net of the related effect of profit sharing.
For the three and six months ended June 30, 2010, 1,809,192 and 1,849,056 shares, respectively, underlying stock options, SARs and RSUs were not included in the computation of diluted EPS because inclusion of such shares would be antidilutive. For the three and six months ended June 30, 2010, 4,399,390 and 5,489,971 SARs, respectively, were not included in the computation of diluted EPS because their exercise prices were greater than the average market price of common stock for the period. In addition, for the six months ended June 30, 2010, 3,048,914 incremental shares from the assumed conversion of the 7% senior convertible notes were excluded from the computation of diluted EPS due to their antidilutive effect.
For the three and six months ended June 30, 2009, 5,166,690 and 3,895,225 shares, respectively, underlying stock options, SARs and RSUs were not included in the computation of diluted EPS because inclusion of such shares would be antidilutive. For the three and six months ended June 30, 2009, 6,896,792 and 6,973,989 SARs, respectively, were not included in the computation of diluted EPS because their exercise prices were greater than the average market price of common stock for the period. In addition, for each of the three and six months ended June 30, 2009, 3,048,914 incremental shares from the assumed conversion of the 7% senior convertible notes were excluded from the computation of diluted EPS due to their antidilutive effect. For the six months ended June 30, 2009, 10,162,432 incremental shares from the assumed conversion of the 7.25% convertible senior 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 June 30, 2010.
                 
    June 30,     December 31,  
    2010     2009  
Secured
               
Citicorp North America loan, variable interest rate of 2.81%, installments due through 2014
  $ 1,152     $ 1,168  
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.75% to 10.46%, maturing from 2010 to 2021
    2,305       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  
 
           
 
    4,021       3,990  
Unsecured
               
Barclays prepaid miles, variable interest rate of 5.1%, interest only payments
    200       200  
Airbus advance, repayments through 2018
    251       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 (a)
    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 2011 to 2012
    30       81  
 
           
 
    756       803  
 
           
Total long-term debt and capital lease obligations
    4,777       4,793  
Less: Total unamortized discount on debt
    (241 )     (267 )
Current maturities, less $2 million and $9 million of unamortized discount on debt at June 30, 2010 and December 31, 2009, respectively
    (475 )     (502 )
 
           
Long-term debt and capital lease obligations, net of current maturities
  $ 4,061     $ 4,024  
 
           
 
     
The Company was in compliance with the covenants in its debt agreements at June 30, 2010.
 
(a)  
As of June 30, 2010, the Company has $74 million of principal amount outstanding under its 7% Senior Convertible Notes (the “7% notes”). The 7% notes may be converted by the holders into common stock at an effective conversion price of $24.12 per share. Holders may require the Company to purchase for cash or shares or a combination thereof, at the Company’s election, all or a portion of their 7% notes on September 30, 2010 and September 30, 2015 at a purchase price equal to 100% of the principal amount of the 7% notes to be repurchased plus accrued and unpaid interest, if any, to the purchase date. If the holders require the Company to repurchase the notes, the Company will provide notice on or before the 20th day prior to the purchase date stating, among other things, the amount of the repurchase price, whether the Company elects to deliver shares of common stock to satisfy all or a portion of the purchase price and the procedures that holders must follow to require the Company to repurchase their notes. If the Company elects to deliver, in full or in partial satisfaction of the purchase price, shares of its common stock, the number of such shares the Company delivers shall be equal to the portion of the purchase price to be paid in common stock divided by the market price (less a 2.5% discount) of a share of the Company’s common stock. The Company is currently evaluating its options in regards to these notes.
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 and capital lease obligations was approximately $4.11 billion and $3.95 billion at June 30, 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, are 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 allowances were $546 million and $77 million, respectively.
During the three and six months ended June 30, 2010, the Company utilized NOLs to offset its income tax obligation. Utilization of these NOLs results in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in the valuation allowance offsets the Company’s tax provision dollar for dollar.
The Company reported a loss in the six months ended June 30, 2009, and the Company did not record a tax benefit in any 2009 period as its net deferred tax assets which include the NOLs are subject to a full valuation allowance.
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     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Aircraft fuel and related taxes
  $ 195     $ 145     $ 365     $ 267  
Salaries and related costs
    63       61       126       124  
Capacity purchases
    273       268       537       531  
Aircraft rent
    13       13       26       26  
Aircraft maintenance
    17       20       36       43  
Other rent and landing fees
    32       30       63       61  
Selling expenses
    44       40       80       74  
Special items, net (a)
    (1 )           (1 )      
Depreciation and amortization
    6       6       12       12  
Other expenses
    41       42       89       90  
 
                       
Express expenses
  $ 683     $ 625     $ 1,333     $ 1,228  
 
                       
     
(a)  
In the second quarter of 2010, the Company recorded a $1 million refund for its Express subsidiaries of ASIF paid to the TSA during the years 2005 to 2009.
7. Derivative Instruments
Since the third quarter of 2008, the Company has not entered into any new fuel hedging transactions, and the Company has not had any fuel hedging contracts outstanding since the third quarter of 2009. In the three months and six months ended June 30, 2009, the Company recognized $135 million and $332 million, respectively, of net realized losses on settled fuel hedging transactions, offset by $156 million and $327 million, respectively, 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.

 

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8. Investments in Marketable Securities
Current
As of June 30, 2010, the Company held $180 million of investments in debt securities, which are classified as held-to-maturity. Held-to-maturity investments are carried at amortized cost, which approximates fair value. These debt securities consist of investments in treasury bills and U.S. government sponsored enterprise bonds with original maturity dates of six months or less.
Noncurrent
As of June 30, 2010, the Company held auction rate securities with a fair value of $59 million ($93 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 23 to 42 years, with 71% of the Company’s portfolio maturing within the next 30 years (2033 — 2036) and 29% maturing thereafter (2049 — 2052). As a result of 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. 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 June 30, 2010, the Company sold certain investments in auction rate securities for net proceeds of $11 million, resulting in a $4 million net realized gain recorded in nonoperating expense, net, which represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. In the six months ended June 30, 2010, the Company sold certain investments in auction rate securities for net proceeds of $143 million, resulting in a $53 million net realized gain recorded in nonoperating expense, net, of which $52 million represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. Net proceeds for all of these sale transactions approximated the carrying amount of the Company’s investments. Additionally, in the six months ended June 30, 2010, the Company recorded net unrealized losses of $1 million in other comprehensive income, all of which was recognized in the first quarter of 2010 and offset previously recognized unrealized gains, related to the decline in fair value of certain investments in auction rate securities.
In the six months ended June 30, 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, all of which was recognized in the first quarter of 2009.
The Company continues to monitor the market for auction rate securities and consider its impact (if any) on the fair value of its remaining investments in these securities. 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 June 30, 2010
                                       
Investments in marketable securities (noncurrent)
  $ 59     $     $     $ 59       (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.

 

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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
    (143 )
Net unrealized losses recorded to other comprehensive income
    (1 )
 
     
Balance at June 30, 2010
  $ 59  
 
     
10. Other Comprehensive Income (Loss)
The Company’s other comprehensive income (loss) consisted of the following (in millions):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Net income (loss)
  $ 279     $ 58     $ 235     $ (45 )
Recognition of net realized gains on sale of available-for-sale securities
    (4 )           (52 )      
Net unrealized gains (losses) on available-for-sale securities
          34       (1 )     34  
Pension and other postretirement benefits
    (1 )     (1 )     (2 )     (5 )
 
                       
Total comprehensive income (loss)
  $ 274     $ 91     $ 180     $ (16 )
 
                       
The components of accumulated other comprehensive income were as follows (in millions):
                 
    June 30,     December 31,  
    2010     2009  
Pension and other postretirement benefits
  $ 53     $ 55  
Available-for-sale securities
    (18 )     35  
 
           
Accumulated other comprehensive income
  $ 35     $ 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 (“LaGuardia”), 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 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.
In February 2010, the FAA issued a proposed order conditionally approving the transaction. However, the proposed order required the divestiture of 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. In March 2010, Delta and US Airways announced a proposed alternative transaction which contemplated fewer divestitures than required by the FAA’s February 2010 proposed order. In a final decision dated May 4, 2010, the FAA rejected the alternative transaction proposed by Delta and US Airways, and affirmed its proposed order. In connection with this action by the FAA, Delta and US Airways were obligated to advise the FAA no later than July 2, 2010 whether they intended to proceed with the transaction as described in the FAA’s May 4, 2010 action. On July 2, 2010, Delta and US Airways jointly advised the FAA that they do not intend to proceed with the transaction under the conditions imposed by the FAA, and that Delta and US Airways are prepared to complete the transaction without those conditions. Also on July 2, 2010, Delta and US Airways jointly filed with the United States Circuit Court of Appeals for the District of Columbia Circuit a notice of appeal of the FAA’s order seeking to set the FAA’s order aside. The Company cannot predict the outcome of this judicial proceeding or whether a slot transaction with Delta will be completed.

 

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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     Six Months  
    Ended June 30,     Ended June 30,  
    2010     2009     2010     2009  
Operating revenues:
                               
Mainline passenger
  $ 2,036     $ 1,724     $ 3,735     $ 3,335  
Express passenger
    767       642       1,368       1,194  
Cargo
    37       20       69       44  
Other
    369       310       721       614  
 
                       
Total operating revenues
    3,209       2,696       5,893       5,187  
Operating expenses:
                               
Aircraft fuel and related taxes
    616       440       1,151       819  
Loss (gain) on fuel hedging instruments, net
          (21 )           5  
Salaries and related costs
    573       549       1,128       1,100  
Express expenses
    721       656       1,396       1,287  
Aircraft rent
    169       174       340       352  
Aircraft maintenance
    162       184       319       358  
Other rent and landing fees
    135       142       270       273  
Selling expenses
    107       99       201       192  
Special items, net
    (9 )     1       (4 )     7  
Depreciation and amortization
    65       64       128       126  
Other
    308       287       612       573  
 
                       
Total operating expenses
    2,847       2,575       5,541       5,092  
 
                       
Operating income
    362       121       352       95  
Nonoperating income (expense):
                               
Interest income
    3       6       9       13  
Interest expense, net
    (62 )     (64 )     (121 )     (125 )
Other, net
    (8 )     6       32       (9 )
 
                       
Total nonoperating expense, net
    (67 )     (52 )     (80 )     (121 )
 
                       
Income (loss) before income taxes
    295       69       272       (26 )
Income tax provision
                       
 
                       
Net income (loss)
  $ 295     $ 69     $ 272     $ (26 )
 
                       
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)
                 
    June 30,     December 31,  
    2010     2009  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 1,772     $ 1,209  
Investments in marketable securities
    180        
Accounts receivable, net
    391       282  
Materials and supplies, net
    193       188  
Prepaid expenses and other
    489       507  
 
           
Total current assets
    3,025       2,186  
Property and equipment
               
Flight equipment
    3,957       3,710  
Ground property and equipment
    849       856  
Less accumulated depreciation and amortization
    (1,196 )     (1,098 )
 
           
 
    3,610       3,468  
Equipment purchase deposits
    63       112  
 
           
Total property and equipment
    3,673       3,580  
Other assets
               
Other intangibles, net of accumulated amortization of $118 million and $106 million, respectively
    455       467  
Restricted cash
    442       480  
Investments in marketable securities
    59       203  
Other assets
    206       207  
 
           
Total other assets
    1,162       1,357  
 
           
Total assets
  $ 7,860     $ 7,123  
 
           
 
               
LIABILITIES & STOCKHOLDER’S EQUITY
               
Current liabilities
               
Current maturities of debt and capital leases
  $ 388     $ 418  
Accounts payable
    354       319  
Payables to related parties, net
    672       642  
Air traffic liability
    1,215       778  
Accrued compensation and vacation
    200       171  
Accrued taxes
    212       142  
Other accrued expenses
    809       815  
 
           
Total current liabilities
    3,850       3,285  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    2,705       2,667  
Deferred gains and credits, net
    292       317  
Postretirement benefits other than pensions
    128       129  
Employee benefit liabilities and other
    413       470  
 
           
Total noncurrent liabilities and deferred credits
    3,538       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
    39       94  
Accumulated deficit
    (2,012 )     (2,284 )
 
           
Total stockholder’s equity
    472       255  
 
           
Total liabilities and stockholder’s equity
  $ 7,860     $ 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)
                 
    Six Months Ended June 30,  
    2010     2009  
Net cash provided by operating activities
  $ 764     $ 346  
Cash flows from investing activities:
               
Purchases of property and equipment
    (87 )     (618 )
Purchases of marketable securities
    (180 )      
Sales of marketable securities
    143       20  
Decrease in long-term restricted cash
    38       6  
Proceeds from sale-leaseback transactions and dispositions of property and equipment
    2       52  
 
           
Net cash used in investing activities
    (84 )     (540 )
Cash flows from financing activities:
               
Repayments of debt and capital lease obligations
    (204 )     (159 )
Proceeds from issuance of debt
    90       576  
Deferred financing costs
    (3 )     (3 )
 
           
Net cash provided by (used in) financing activities
    (117 )     414  
 
           
Net increase in cash and cash equivalents
    563       220  
Cash and cash equivalents at beginning of period
    1,209       1,026  
 
           
Cash and cash equivalents at end of period
  $ 1,772     $ 1,246  
 
           
Non-cash investing and financing activities:
               
Note payables issued for aircraft purchases
  $ 111     $ 32  
Interest payable converted to debt
    22       19  
Net unrealized loss (gain) on available-for-sale securities
    1       (34 )
Deposit applied to principal repayment on debt
    (19 )      
Maintenance payable converted to debt
          10  
Supplemental information:
               
Interest paid, net of amounts capitalized
  $ 81     $ 75  
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 (credits) for the three and six months ended June 30, 2010 and 2009 (in millions):
                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2010     2009     2010     2009  
Aviation Security Infrastructure Fee (“ASIF”) refund (a)
  $ (16 )   $     $ (16 )   $  
Other costs (b)
    7             7        
Aircraft costs (c)
          1       5       6  
Severance charges (d)
                      1  
 
                       
Special items, net
  $ (9 )   $ 1     $ (4 )   $ 7  
 
                       
 
     
(a)  
In the second quarter of 2010, US Airways recorded a $16 million refund of ASIF paid to the Transportation Security Administration (“TSA”) during the years 2005 to 2009.
 
(b)  
In the second quarter of 2010, US Airways recorded other net special charges of $7 million, which included a settlement and corporate transaction costs.
 
(c)  
In the six months ended June 30, 2010, US Airways recorded $5 million in aircraft costs as a result of previously announced capacity reductions.
 
   
In the three and six months ended June 30, 2009, US Airways recorded $1 million and $6 million in aircraft costs, respectively, as a result of capacity reductions.
 
(d)  
In the six months ended June 30, 2009, US Airways recorded $1 million in severance charges as a result of capacity reductions.

 

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3. Debt
The following table details US Airways’ debt (in millions). Variable interest rates listed are the rates as of June 30, 2010.
                 
    June 30,     December 31,  
    2010     2009  
Secured
               
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.75% to 10.46%, maturing from 2010 to 2021
    2,305       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  
 
           
 
    2,869       2,822  
Unsecured
               
Airbus advance, repayments through 2018
    251       247  
Industrial development bonds, fixed interest rate of 6.3%, interest only payments until due in 2023
    29       29  
Other unsecured obligations, maturing from 2011 to 2012
    30       81  
 
           
 
    310       357  
 
           
Total long-term debt and capital lease obligations
    3,179       3,179  
Less: Total unamortized discount on debt
    (86 )     (94 )
Current maturities, less $4 million of unamortized discount on debt at December 31, 2009
    (388 )     (418 )
 
           
Long-term debt and capital lease obligations, net of current maturities
  $ 2,705     $ 2,667  
 
           
US Airways was in compliance with the covenants in its debt agreements at June 30, 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 and capital lease obligations was approximately $2.74 billion and $2.83 billion at June 30, 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.
4. Related Party Transactions
The following represents the net payable balances to related parties (in millions):
                 
    June 30, 2010     December 31, 2009  
US Airways Group
  $ 626     $ 607  
US Airways Group’s wholly owned subsidiaries
    46       35  
 
           
 
  $ 672     $ 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.

 

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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, are 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 allowances were $575 million and $78 million, respectively.
During the three and six months ended June 30, 2010, US Airways utilized NOLs to offset its income tax obligation. Utilization of these NOLs results in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in the valuation allowance offsets US Airways’ tax provision dollar for dollar.
US Airways reported a loss in the six months ended June 30, 2009, and US Airways did not record a tax benefit in any 2009 period as its net deferred tax assets which include the NOLs are subject to a full valuation allowance.
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     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Aircraft fuel and related taxes
  $ 196     $ 145     $ 366     $ 267  
Salaries and related costs
    6       6       12       12  
Capacity purchases
    427       418       839       836  
Other rent and landing fees
    27       25       53       51  
Selling expenses
    44       40       80       74  
Other expenses
    21       22       46       47  
 
                       
Express expenses
  $ 721     $ 656     $ 1,396     $ 1,287  
 
                       
7. Derivative Instruments
Since the third quarter of 2008, US Airways has not entered into any new fuel hedging transactions, and US Airways has not had any fuel hedging contracts outstanding since the third quarter of 2009. In the three and six months ended June 30, 2009, US Airways recognized $135 million and $332 million, respectively, of net realized losses on settled fuel hedging transactions, offset by $156 million and $327 million, respectively, 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.

 

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8. Investments in Marketable Securities
Current
As of June 30, 2010, US Airways held $180 million of investments in debt securities, which are classified as held-to-maturity. Held-to-maturity investments are carried at amortized cost, which approximates fair value. These debt securities consist of investments in treasury bills and U.S. government sponsored enterprise bonds with original maturity dates of six months or less.
Noncurrent
As of June 30, 2010, US Airways held auction rate securities with a fair value of $59 million ($93 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 23 to 42 years, with 71% of US Airways’ portfolio maturing within the next 30 years (2033 – 2036) and 29% maturing thereafter (2049 – 2052). As a result of 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. 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 June 30, 2010, US Airways sold certain investments in auction rate securities for net proceeds of $11 million, resulting in a $4 million net realized gain recorded in nonoperating expense, net, which represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. In the six months ended June 30, 2010, US Airways sold certain investments in auction rate securities for net proceeds of $143 million, resulting in a $53 million net realized gain recorded in nonoperating expense, net, of which $52 million represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. Net proceeds for all of these sale transactions approximated the carrying amount of US Airways’ investments. Additionally, in the six months ended June 30, 2010, US Airways recorded net unrealized losses of $1 million in other comprehensive income, all of which was recognized in the first quarter of 2010 and offset previously recognized unrealized gains, related to the decline in fair value of certain investments in auction rate securities.
In the six months ended June 30, 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, all of which was recognized in the first quarter of 2009.
US Airways continues to monitor the market for auction rate securities and consider its impact (if any) on the fair value of its remaining investments in these securities. 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 June 30, 2010
                                       
Investments in marketable securities (noncurrent)
  $ 59     $     $     $ 59       (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
    (143 )
Net unrealized losses recorded to other comprehensive income
    (1 )
 
     
Balance at June 30, 2010
  $ 59  
 
     
10. Other Comprehensive Income
US Airways’ other comprehensive income consisted of the following (in millions):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Net income (loss)
  $ 295     $ 69     $ 272     $ (26 )
Recognition of net realized gains on sale of available-for-sale securities
    (4 )           (52 )      
Net unrealized gains (losses) on available-for-sale securities
          34       (1 )     34  
Other postretirement benefits
    (1 )     (1 )     (2 )     (5 )
 
                       
Total comprehensive income
  $ 290     $ 102     $ 217     $ 3  
 
                       
The components of accumulated other comprehensive income were as follows (in millions):
                 
    June 30,     December 31,  
    2010     2009  
Other postretirement benefits
  $ 57     $ 59  
Available-for-sale securities
    (18 )     35  
 
           
Accumulated other comprehensive income
  $ 39     $ 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 (“LaGuardia”), 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 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.
In February 2010, the FAA issued a proposed order conditionally approving the transaction. However, the proposed order required the divestiture of 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. In March 2010, Delta and US Airways announced a proposed alternative transaction which contemplated fewer divestitures than required by the FAA’s February 2010 proposed order. In a final decision dated May 4, 2010, the FAA rejected the alternative transaction proposed by Delta and US Airways, and affirmed its proposed order. In connection with this action by the FAA, Delta and US Airways were obligated to advise the FAA no later than July 2, 2010 whether they intended to proceed with the transaction as described in the FAA’s May 4, 2010 action. On July 2, 2010, Delta and US Airways jointly advised the FAA that they do not intend to proceed with the transaction under the conditions imposed by the FAA, and that Delta and US Airways are prepared to complete the transaction without those conditions. Also on July 2, 2010, Delta and US Airways jointly filed with the United States Circuit Court of Appeals for the District of Columbia Circuit a notice of appeal of the FAA’s order seeking to set the FAA’s order aside. US Airways cannot predict the outcome of this judicial proceeding or whether a slot transaction with Delta will be completed.

 

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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 3,200 flights daily to more than 200 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service, with a substantial presence at Washington National. For the six months ended June 30, 2010, we had approximately 25 million passengers boarding our mainline flights. As of June 30, 2010, we operated 345 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
During the second quarter of 2010, the revenue environment continued to show strong improvement as the U.S. airline industry recovered from the economic recession that drove record declines in passenger revenue in 2009. Industry analysts are now predicting 2010 will be a profitable year for the U.S. airline industry. In its most recent data available, the Air Transport Association of America (“ATA”) reported that passenger revenues increased 13% and 21% on a year-over-year basis in April and May 2010, respectively, with May 2010 marking the fifth consecutive month of revenue growth. Although yields are not yet back to levels experienced in 2008, industry capacity discipline and the rebound of business travel drove an increase in yields of 14% and 17% on a year-over-year basis in April and May 2010, respectively.
International markets continued to outperform domestic markets in 2010 with respect to year-over-year improvements in revenue. ATA reported that U.S. airline international passenger revenues increased 15% and 36% on a year-over-year basis in April and May 2010, respectively, due to stronger yields. 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. Cargo demand, which was also significantly impacted by the contraction of business spending in 2009, also improved in the second quarter of 2010.
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 $77.82 per barrel for the second quarter of 2010 as compared to $78.81 per barrel for the first quarter of 2010. However, during the second quarter, the price of crude oil was volatile, ranging from a high of $86.54 to a low of $64.78 per barrel. Accordingly, 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.
Although liquidity risk for the industry appears to be fading due to the overall improving macroeconomic environment, 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.

 

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US Airways
Similar to other U.S. carriers, we experienced growth in revenues driven by increasing yields as a result of the improving economy. Our corporate booked revenue was up 42% and we experienced an 18.6% increase in mainline and Express yield for the second quarter of 2010 as compared to the 2009 period. Mainline and Express passenger revenues in the second quarter of 2010 increased $437 million, or 18.4%, on a 0.4% increase in capacity as compared to the 2009 period. Our mainline and Express PRASM was 12.7 cents in the second quarter of 2010, an 18% increase as compared to 10.76 cents in the 2009 period. Our revenues also continued to benefit from our ancillary revenue initiatives which generated $134 million in revenues for the second quarter of 2010, an increase of $32 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 14.37 cents in the second quarter of 2010, as compared to 12.09 cents in the 2009 period, representing an 18.9% improvement.
Fuel
Since the third quarter of 2008, we have not entered into any new fuel hedging transactions, and we have not had any fuel hedging contracts outstanding since the third quarter of 2009. As discussed above, the average per-barrel price of crude oil in the second quarter of 2010 was relatively constant as compared to the first quarter of 2010. However, when comparing the average price of crude oil per barrel for the second quarter of 2010 with the corresponding second quarter of 2009, the 2010 period was significantly higher. The average price of crude oil for the second quarter of 2009, spurred by the global economic downturn, was $59.61 per barrel. As a result, the average mainline and Express price per gallon of fuel was $1.60 for the second quarter of 2009 as compared to an average cost per gallon of $2.24 in the second quarter of 2010, an increase of 39.7%. Accordingly, our mainline and Express fuel expense for the second quarter of 2010 was $226 million, or 38.7%, higher than the 2009 period on a 0.4% increase in capacity.
Cost Control
We remain committed to maintaining a 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 second quarter of 2010, system capacity was up 0.4% as compared to the second quarter of 2009. For the full year 2010, total system capacity is expected to be up slightly.
The following table presents our mainline costs per available seat mile (“CASM”) for the three months ended June 30, 2010 and 2009:
                         
                    Percent  
    2010     2009     Change  
    (In cents)          
Mainline CASM excluding special items, fuel and profit sharing:
                       
Total mainline CASM
    11.48       10.44       10.0  
Special items, net
    0.05             nm  
Aircraft fuel and related taxes
    (3.34 )     (2.41 )     38.9  
Gain on fuel hedging instruments, net
          0.12       nm  
Profit sharing
    (0.10 )           nm  
 
                   
Total mainline CASM excluding special items, fuel and profit sharing (1)
    8.08       8.14       (0.7 )
 
                   
     
(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 and profit sharing 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, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Our mainline operating CASM excluding special items, fuel, 2009 fuel hedging gains and profit sharing, decreased 0.06 cents, or 0.7%, from 8.14 cents in the second quarter of 2009 to 8.08 cents in the second quarter of 2010. The slight decrease in the 2010 period was primarily due to lower maintenance expenses, offset in part by increased frequent traveler program costs.

 

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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.
The second quarter of 2010 marked a quarter of outstanding operational performance for US Airways. In May of 2010 we ranked first in on-time performance, baggage handling and customer satisfaction among the big five hub-and-spoke carriers as measured by the U.S. Department of Transportation (“DOT”). US Airways last achieved first place rankings in these three important operational metrics in 2002. In April of 2010, we also ranked first in on-time performance among the big five hub-and-spoke carriers, with April marking our best on-time performance since the merger.
We reported the following combined operating statistics to the DOT for mainline operations for the second quarter of 2010 and 2009:
                                                                         
    2010     2009     Percent Better (Worse) 2010-2009  
    April     May     June (e)     April     May     June     April     May     June  
On-time performance (a)
    88.6       85.3       83.4       79.9       79.2       78.0       10.9       7.7       6.9  
Completion factor (b)
    99.6       99.4       99.3       99.1       99.1       98.9       0.5       0.3       0.4  
Mishandled baggage (c)
    2.07       2.27       2.53       2.88       2.91       2.86       28.1       22.0       11.5  
Customer complaints (d)
    1.55       1.19       1.81       1.35       1.34       1.38       (14.8 )     11.2       (31.2 )
 
     
(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)  
June 2010 operating statistics are preliminary as the DOT has not issued its June 2010 Air Travel Consumer Report as of the date of this filing.
Liquidity Position
As of June 30, 2010, our cash, cash equivalents, investments in marketable securities and restricted cash were $2.5 billion, of which $442 million was restricted. Our investments in marketable securities included $59 million of auction rate securities that are classified as noncurrent assets on our condensed consolidated balance sheets.
                 
    June 30,     December 31,  
    2010     2009  
    (In millions)  
Cash and cash equivalents and short-term investments in marketable securities
  $ 1,994     $ 1,299  
Long-term restricted cash
    442       480  
Long-term investments in marketable securities
    59       203  
 
           
Total cash, cash equivalents, investments in marketable securities and restricted cash
  $ 2,495     $ 1,982  
 
           
Our total liquidity position has improved by $513 million since December 31, 2009 primarily as a result of the improving revenue environment. 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 auction rate sale transactions approximated the carrying amount of our investments. Restricted cash declined during the first six months 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.

 

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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 (“LaGuardia”), 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 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.
In February 2010, the FAA issued a proposed order conditionally approving the transaction. However, the proposed order required the divestiture of 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. In March 2010, Delta and US Airways announced a proposed alternative transaction which contemplated fewer divestitures than required by the FAA’s February 2010 proposed order. In a final decision dated May 4, 2010, the FAA rejected the alternative transaction proposed by Delta and US Airways, and affirmed its proposed order. In connection with this action by the FAA, Delta and US Airways were obligated to advise the FAA no later than July 2, 2010 whether they intended to proceed with the transaction as described in the FAA’s May 4, 2010 action. On July 2, 2010, Delta and US Airways jointly advised the FAA that they do not intend to proceed with the transaction under the conditions imposed by the FAA, and that Delta and US Airways are prepared to complete the transaction without those conditions. Also on July 2, 2010, Delta and US Airways jointly filed with the United States Circuit Court of Appeals for the District of Columbia Circuit a notice of appeal of the FAA’s order seeking to set the FAA’s order aside. We cannot predict the outcome of this judicial proceeding or whether a slot transaction with Delta will be completed.
2010 Outlook
As we continue in 2010, it is difficult to predict or quantify the ongoing impact 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 are continuing to execute our previously announced operational realignment which will not be materially impacted by the status of the Delta slot transaction described above. Our operational realignment 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. We believe that these actions coupled with our strong operational performance, capacity discipline and cost management have positioned us well as the economy recovers.

 

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US Airways Group’s Results of Operations
In the three months ended June 30, 2010, we realized operating income of $371 million and income before income taxes of $279 million. We experienced growth in revenues driven by increased yields as a result of the improving economy, rebound of business travel and continued industry capacity discipline. This is our second highest quarterly profit since the merger in 2005. Our second quarter 2010 results were also impacted by recognition of the following special items:
   
$9 million of net special credits, consisting of a $16 million refund of Aviation Security Infrastructure Fees (“ASIF”) paid to the Transportation Security Administration (“TSA”) during the years 2005 to 2009, offset by other net special charges of $7 million, which included a settlement and corporate transaction costs;
   
$1 million refund for our Express subsidiaries of ASIF paid to the TSA during the years 2005 to 2009; and
   
$4 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 June 30, 2009, we realized operating income of $122 million and income before income taxes of $58 million. We experienced significant declines in revenues in the second quarter of 2009 as a result of the global economic recession. Our second quarter 2009 results were also impacted by recognition of the following special items:
   
$156 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;
   
$1 million of net special charges for aircraft costs as a result of capacity reductions; and
   
a $2 million non-cash asset impairment charge, included in nonoperating expense, net.
In the first six months of 2010, we realized operating income of $361 million and income before income taxes of $235 million, which was driven by the strong financial performance in the second quarter described above. Our results for the first six months of 2010 were also impacted by recognition of the following special items:
   
$4 million of net special credits, consisting of a $16 million refund of ASIF paid to the TSA during the years 2005 to 2009, offset by other net special charges of $7 million, which included a settlement and corporate transaction costs and $5 million in aircraft costs as a result of previously announced capacity reductions;
   
$1 million refund for our Express subsidiaries of ASIF paid to the TSA during the years 2005 to 2009; and
   
$53 million of net realized gains related to sales of certain investments in auction rate securities, included in nonoperating expense, net.
In the first six months of 2009, we realized operating income of $97 million and a loss before income taxes of $45 million. We experienced significant declines in revenues in the first six months of 2009 as a result of the global economic recession. Our results for the first six months of 2009 were also impacted by recognition of the following special items:
   
$327 million of net unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments;
   
$7 million of net special charges, consisting of $6 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 investments in auction rate securities as well as a $2 million non-cash asset impairment charge, all 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, are 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 allowances were $546 million and $77 million, respectively.

 

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During the three and six months ended June 30, 2010, we utilized NOLs to offset our income tax obligation. Utilization of these NOLs results in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in the valuation allowance offsets our tax provision dollar for dollar.
We reported a loss in the six months ended June 30, 2009, and we did not record a tax benefit in any 2009 period as our net deferred tax assets which include the NOLs are subject to a full valuation allowance.
The table below sets forth our selected mainline and Express operating data:
                                                 
    Three Months Ended     Percent     Six Months Ended     Percent  
    June 30,     Change     June 30,     Change  
    2010     2009     2010-2009     2010     2009     2010-2009  
Mainline
                                               
Revenue passenger miles (millions) (a)
    15,530       15,526             28,583       28,834       (0.9 )
Available seat miles (millions) (b)
    18,440       18,310       0.7       35,019       35,289       (0.8 )
Passenger load factor (percent) (c)
    84.2       84.8       (0.6 ) pts     81.6       81.7       (0.1 ) pts
Yield (cents) (d)
    13.11       11.11       18.1       13.07       11.57       13.0  
Passenger revenue per available seat mile (cents) (e)
    11.04       9.42       17.3       10.66       9.45       12.8  
Operating cost per available seat mile (cents) (f)
    11.48       10.44       10.0       11.79       10.73       9.8  
Passenger enplanements (thousands) (g)
    13,381       13,440       (0.4 )     25,366       25,850       (1.9 )
Departures (thousands)
    114       118       (3.4 )     222       235       (5.4 )
Aircraft at end of period
    345       350       (1.4 )     345       350       (1.4 )
Block hours (thousands) (h)
    306       317       (3.6 )     592       621       (4.7 )
Average stage length (miles) (i)
    996       984       1.2       978       959       1.9  
Average passenger journey (miles) (j)
    1,703       1,655       2.9       1,654       1,593       3.8  
Fuel consumption (gallons in millions)
    276       278       (0.6 )     523       536       (2.4 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.23       1.58       40.8       2.20       1.53       44.0  
Full-time equivalent employees at end of period
    30,860       32,393       (4.7 )     30,860       32,393       (4.7 )
 
                                               
Express (k)
                                               
Revenue passenger miles (millions) (a)
    2,777       2,809       (1.1 )     5,047       5,183       (2.6 )
Available seat miles (millions) (b)
    3,630       3,676       (1.3 )     6,909       7,132       (3.1 )
Passenger load factor (percent) (c)
    76.5       76.4       0.1  pts     73.0       72.7       0.3  pts
Yield (cents) (d)
    27.60       22.87       20.7       27.10       23.03       17.7  
Passenger revenue per available seat mile (cents) (e)
    21.12       17.47       20.9       19.80       16.74       18.3  
Operating cost per available seat mile (cents) (f)
    18.83       16.99       10.8       19.29       17.23       12.0  
Passenger enplanements (thousands) (g)
    7,261       7,051       3.0       13,208       13,029       1.4  
Aircraft at end of period
    282       290       (2.8 )     282       290       (2.8 )
Fuel consumption (gallons in millions)
    86       87       (1.1 )     163       168       (3.0 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.28       1.67       36.4       2.24       1.59       40.7  
 
                                               
Total Mainline and Express
                                               
Revenue passenger miles (millions) (a)
    18,307       18,335       (0.1 )     33,630       34,017       (1.1 )
Available seat miles (millions) (b)
    22,070       21,986       0.4       41,928       42,421       (1.2 )
Passenger load factor (percent) (c)
    82.9       83.4       (0.5 ) pts     80.2       80.2        pts
Yield (cents) (d)
    15.31       12.91       18.6       15.17       13.31       14.0  
Passenger revenue per available seat mile (cents) (e)
    12.70       10.76       18.0       12.17       10.68       14.0  
Total revenue per available seat mile (cents) (l)
    14.37       12.09       18.9       13.88       12.05       15.2  
Passenger enplanements (thousands) (g)
    20,642       20,491       0.7       38,574       38,879       (0.8 )
Aircraft at end of period
    627       640       (2.0 )     627       640       (2.0 )
Fuel consumption (gallons in millions)
    362       365       (0.7 )     686       704       (2.5 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.24       1.60       39.7       2.21       1.54       43.2  
 
     
(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.

 

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(c)  
Passenger load factor — The percentage of available seats that are filled with revenue passengers.
 
(d)  
Yield — A measure of airline revenue derived by dividing passenger revenue by RPMs and expressed in cents per mile.
 
(e)  
Passenger revenue per available seat mile (“PRASM”) — Passenger revenues divided by ASMs.
 
(f)  
Operating cost per available seat mile (“CASM”) — Operating expenses divided by ASMs.
 
(g)  
Passenger enplanements — The number of passengers on board an aircraft, including local, connecting and through passengers.
 
(h)  
Block hours — The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down.
 
(i)  
Average stage length — The average of the distances flown on each segment of every route.
 
(j)  
Average passenger journey — The average one-way trip measured in miles for one passenger origination.
 
(k)  
Express statistics include Piedmont and PSA, as well as operating and financial results from capacity purchase agreements with Air Wisconsin Airlines Corporation, Republic Airways, Mesa Airlines, Inc. and Chautauqua Airlines, Inc.
 
(l)  
Total revenue per available seat mile (“RASM”) — Total revenues divided by total mainline and Express ASMs.

 

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Three Months Ended June 30, 2010
Compared with the
Three Months Ended June 30, 2009
Operating Revenues:
                         
                    Percent  
    2010     2009     Change  
    (In millions)          
Operating revenues:
                       
Mainline passenger
  $ 2,036     $ 1,724       18.1  
Express passenger
    767       642       19.3  
Cargo
    37       20       82.1  
Other
    331       272       22.3  
 
                   
Total operating revenues
  $ 3,171     $ 2,658       19.3  
 
                   
Total operating revenues in the second quarter of 2010 were $3.17 billion as compared to $2.66 billion in the 2009 period, an increase of $513 million, or 19.3%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $2.04 billion in the second quarter of 2010 as compared to $1.72 billion in the 2009 period. Mainline RPMs were flat as mainline capacity, as measured by ASMs, increased 0.7%, resulting in a 0.6 point decrease in load factor to 84.2%. Mainline passenger yield increased 18.1% to 13.11 cents in the second quarter of 2010 from 11.11 cents in the 2009 period. Mainline PRASM increased 17.3% to 11.04 cents in the second quarter of 2010 from 9.42 cents in the 2009 period. These increases in mainline yield and PRASM were due principally to an improved pricing environment driven by the recovering economy, rebound of business travel and continued industry capacity discipline.
   
Express passenger revenues were $767 million in the second quarter of 2010, an increase of $125 million from the 2009 period. Express RPMs decreased 1.1% as Express capacity, as measured by ASMs, decreased 1.3%, resulting in a 0.1 point increase in load factor to 76.5%. Express passenger yield increased by 20.7% to 27.6 cents in the second quarter of 2010 from 22.87 cents in the 2009 period. Express PRASM increased 20.9% to 21.12 cents in the second quarter of 2010 from 17.47 cents in the 2009 period. The increases in Express yield and PRASM were the result of the same improved pricing environment discussed in mainline passenger revenues above.
   
Cargo revenues were $37 million in the second quarter of 2010, an increase of $17 million, or 82.1%, from the 2009 period. The increase in cargo revenues was driven primarily by an increase in freight volume as a result of the recovering economic environment in the 2010 period.
   
Other revenues were $331 million in the second quarter of 2010, an increase of $59 million, or 22.3%, from the 2009 period, primarily due to an increase in revenue generated by 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
  $ 616     $ 440       39.9  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
          135       nm  
Unrealized
          (156 )     nm  
Salaries and related costs
    573       549       4.3  
Aircraft rent
    169       174       (3.0 )
Aircraft maintenance
    162       184       (12.0 )
Other rent and landing fees
    135       142       (5.1 )
Selling expenses
    107       99       7.7  
Special items, net
    (9 )     1       nm  
Depreciation and amortization
    63       62       2.2  
Other
    301       281       6.9  
 
                   
Total mainline operating expenses
    2,117       1,911       10.8  
Express expenses:
                       
Fuel
    195       145       34.9  
Other
    488       480       1.8  
 
                   
Total Express expenses
    683       625       9.5  
 
                   
Total operating expenses
  $ 2,800     $ 2,536       10.4  
 
                   
Total operating expenses were $2.8 billion in the second quarter of 2010, an increase of $264 million, or 10.4%, compared to the 2009 period. Mainline operating expenses were $2.12 billion in the second quarter of 2010, an increase of $206 million, or 10.8%, from the 2009 period, while ASMs increased 0.7%.
The 2010 period included $9 million of net special credits, consisting of a $16 million refund of ASIF paid to the TSA during the years 2005 to 2009, offset by other net special charges of $7 million, which included a settlement and corporate transaction costs. This compares to net special charges in the 2009 period of $1 million in aircraft costs as a result of capacity reductions.
Our mainline operating CASM excluding special items, fuel, 2009 fuel hedging gains, net and profit sharing, decreased 0.06 cents, or 0.7%, from 8.14 cents in the second quarter of 2009 to 8.08 cents in the second quarter of 2010. The slight decrease in the 2010 period was primarily due to lower maintenance expenses, offset in part by increased costs related to frequent traveler awards due to higher fuel costs in the 2010 period.
The table below sets forth the major components of our mainline CASM and presents our mainline CASM including and excluding special items, fuel and profit sharing for the three months ended June 30, 2010 and 2009:
                         
                    Percent  
    2010     2009     Change  
    (In cents)          
Mainline CASM:
                       
Aircraft fuel and related taxes
    3.34       2.41       38.9  
Gain on fuel hedging instruments, net
          (0.12 )     nm  
Salaries and related costs
    3.11       3.00       3.6  
Aircraft rent
    0.92       0.95       (3.6 )
Aircraft maintenance
    0.88       1.01       (12.6 )
Other rent and landing fees
    0.73       0.78       (5.7 )
Selling expenses
    0.58       0.54       7.0  
Special items, net
    (0.05 )           nm  
Depreciation and amortization
    0.34       0.34        
Other
    1.63       1.53       6.2  
 
                   
Total mainline CASM
    11.48       10.44       10.0  
Special items, net
    0.05                
Aircraft fuel and related taxes
    (3.34 )     (2.41 )        
Gain on fuel hedging instruments, net
          0.12          
Profit sharing
    (0.10 )              
 
                   
Total mainline CASM excluding special items, fuel and profit sharing (1)
    8.08       8.14       (0.7 )
 
                   
     
(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 and profit sharing 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, fuel and profit sharing 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 38.9% primarily due to a 40.8% increase in the average price per gallon of fuel to $2.23 in the second quarter of 2010 from $1.58 in the 2009 period.
   
Since the third quarter of 2008, we have not entered into any new fuel hedging transactions, and we have not had any fuel hedging contracts outstanding since the third quarter of 2009. We recognized a net gain of $21 million in the second quarter of 2009 related to fuel hedging instruments.
   
Salaries and related costs per ASM increased 3.6% primarily due to the accrual of $18 million for profit sharing.
   
Aircraft maintenance expense per ASM decreased 12.6% due principally to a decrease in the number of engine overhauls performed in the 2010 period as compared to the 2009 period as a result of the timing of maintenance cycles.
   
Selling expenses per ASM increased 7% due to higher credit card fees and commissions paid as a result of the 18.1% increase in passenger revenues driven by the improved pricing environment in the 2010 period.
   
Other expense per ASM increased 6.2% due to higher costs associated with our frequent traveler program, principally an increase in the incremental cost of providing transportation for travel awards as a result of higher fuel costs in the 2010 period.
Total Express expenses increased $58 million, or 9.5%, in the second quarter of 2010 to $683 million from $625 million in the 2009 period. The period-over-period increase was primarily driven by a $50 million increase in fuel costs. The average fuel price per gallon was $1.67 in the 2009 period, which was 36.4% lower than the average fuel price per gallon of $2.28 in the 2010 period. Other Express expenses increased $8 million, or 1.8%, despite a 1.3% decrease in Express ASMs due to certain contractual rate increases and fixed costs associated with capacity purchase agreements and an increase in selling expenses as a result of the 19.3% increase in passenger revenues driven by the improved pricing environment in the 2010 period.
Nonoperating Income (Expense):
                         
                    Percent  
    2010     2009     Change  
    (In millions)          
Nonoperating income (expense):
                       
Interest income
  $ 3     $ 6       (47.5 )
Interest expense, net
    (86 )     (77 )     11.3  
Other, net
    (9 )     7       nm  
 
                   
Total nonoperating expense, net
  $ (92 )   $ (64 )     41.5  
 
                   
Net nonoperating expense was $92 million in the second quarter of 2010 as compared to $64 million in the 2009 period. Interest expense, net increased $9 million due to an increase in the average debt balance outstanding primarily as a result of liquidity raising initiatives completed throughout 2009.
Other nonoperating expense, net in the 2010 period included $15 million in foreign currency losses principally related to foreign sales and cash balances denominated in foreign currencies as a result of the strengthening U.S. dollar, offset by $4 million of net realized gains related to sales of certain investments in auction rate securities. Other nonoperating expense, net in the 2009 period included $8 million in foreign currency gains as the U.S. dollar weakened due to the global recession, partially offset by a $2 million non-cash asset impairment charge. The sales of auction rate securities are discussed in more detail under “Liquidity and Capital Resources.”

 

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Six Months Ended June 30, 2010
Compared with the
Six Months Ended June 30, 2009
Operating Revenues:
                         
                    Percent  
    2010     2009     Change  
    (In millions)          
Operating revenues:
                       
Mainline passenger
  $ 3,735     $ 3,335       12.0  
Express passenger
    1,368       1,194       14.6  
Cargo
    69       44       57.7  
Other
    649       540       20.2  
 
                   
Total operating revenues
  $ 5,821     $ 5,113       13.9  
 
                   
Total operating revenues in the first six months of 2010 were $5.82 billion as compared to $5.11 billion in the 2009 period, an increase of $708 million, or 13.9%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $3.74 billion in the first six months of 2010 as compared to $3.34 billion in the 2009 period. Mainline RPMs decreased 0.9% as mainline capacity, as measured by ASMs, decreased 0.8%, resulting in a 0.1 point decrease in load factor to 81.6%. Mainline passenger yield increased 13% to 13.07 cents in the first six months of 2010 from 11.57 cents in the 2009 period. Mainline PRASM increased 12.8% to 10.66 cents in the first six months of 2010 from 9.45 cents in the 2009 period. These increases in mainline yield and PRASM were due principally to an improved pricing environment driven by the recovering economy, rebound of business travel and continued industry capacity discipline.
   
Express passenger revenues were $1.37 billion in the first six months of 2010, an increase of $174 million from the 2009 period. Express RPMs decreased by 2.6% as Express capacity, as measured by ASMs, decreased 3.1%, resulting in a 0.3 point increase in load factor to 73%. Express passenger yield increased by 17.7% to 27.1 cents in the first six months of 2010 from 23.03 cents in the 2009 period. Express PRASM increased 18.3% to 19.8 cents in the first six months of 2010 from 16.74 cents in the 2009 period. The increases in Express yield and PRASM were the result of the same improved pricing environment discussed in mainline passenger revenues above.
   
Cargo revenues were $69 million in the first six months of 2010, an increase of $25 million, or 57.7%, from the 2009 period. The increase in cargo revenues was driven primarily by an increase in freight volume as a result of the recovering economic environment in the 2010 period.
   
Other revenues were $649 million in the first six months of 2010, an increase of $109 million, or 20.2%, from the 2009 period, primarily due to an increase in revenue generated by 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
  $ 1,151     $ 819       40.5  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
          332       nm  
Unrealized
          (327 )     nm  
Salaries and related costs
    1,128       1,100       2.6  
Aircraft rent
    340       352       (3.4 )
Aircraft maintenance
    319       358       (11.0 )
Other rent and landing fees
    270       273       (1.3 )
Selling expenses
    201       192       5.1  
Special items, net
    (4 )     7       nm  
Depreciation and amortization
    124       121       1.9  
Other
    598       561       6.9  
 
                   
Total mainline operating expenses
    4,127       3,788       9.0  
Express expenses:
                       
Fuel
    365       267       36.5  
Other
    968       961       0.7  
 
                   
Total Express expenses
    1,333       1,228       8.5  
 
                   
Total operating expenses
  $ 5,460     $ 5,016       8.9  
 
                   
Total operating expenses were $5.46 billion in the first six months of 2010, an increase of $444 million, or 8.9%, compared to the 2009 period. Mainline operating expenses were $4.13 billion in the first six months of 2010, an increase of $339 million, or 9%, from the 2009 period, while ASMs decreased 0.8%.
The 2010 period included $4 million of net special credits, consisting of a $16 million refund of ASIF paid to the TSA during the years 2005 to 2009, offset by other net special charges of $7 million, which included a settlement and corporate transaction costs and $5 million in aircraft costs as a result of previously announced capacity reductions. This compares to net special charges of $7 million in the 2009 period, consisting of $6 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, 2009 fuel hedging losses, net and profit sharing, increased 0.08 cents, or 1%, from 8.38 cents in the first six months of 2009 to 8.46 cents in the 2010 period. We incurred increased selling costs due to growth in revenues as well as increased costs related to frequent traveler awards due to higher fuel costs in the 2010 period. These increases in costs were offset in part by lower maintenance expenses during the 2010 period. A reduction in available seat miles caused by the February 2010 weather-related flight cancellations also negatively impacted our CASM.
The table below sets forth the major components of our mainline CASM and presents our mainline CASM including and excluding special items, fuel and profit sharing for the six months ended June 30, 2010 and 2009:
                         
                    Percent  
    2010     2009     Change  
    (In cents)          
Mainline CASM:
                       
Aircraft fuel and related taxes
    3.29       2.32       41.6  
Loss on fuel hedging instruments, net
          0.02       nm  
Salaries and related costs
    3.22       3.12       3.4  
Aircraft rent
    0.97       1.00       (2.6 )
Aircraft maintenance
    0.91       1.01       (10.3 )
Other rent and landing fees
    0.77       0.77        
Selling expenses
    0.58       0.54       5.9  
Special items, net
    (0.01 )     0.02       nm  
Depreciation and amortization
    0.35       0.34       2.6  
Other
    1.71       1.59       7.8  
 
                   
Total mainline CASM
    11.79       10.73       9.8  
Special items, net
    0.01       (0.02 )        
Aircraft fuel and related taxes
    (3.29 )     (2.32 )        
Loss on fuel hedging instruments, net
          (0.02 )        
Profit sharing
    (0.05 )              
 
                   
Total mainline CASM excluding special items, fuel and profit sharing (1)
    8.46       8.38       1.0  
 
                   
     
(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 and profit sharing 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, fuel and profit sharing 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 41.6% primarily due to a 44% increase in the average price per gallon of fuel to $2.20 in the first six months of 2010 from $1.53 in the 2009 period.
   
Since the third quarter of 2008, we have not entered into any new fuel hedging transactions, and we have not had any fuel hedging contracts outstanding since the third quarter of 2009. We recognized a net loss of $5 million in the first six months of 2009 related to fuel hedging instruments.
   
Salaries and related costs per ASM increased 3.4% primarily due to the accrual of $18 million for profit sharing.
   
Aircraft maintenance expense per ASM decreased 10.3% due principally to a decrease in the number of engine overhauls performed in the 2010 period as compared to the 2009 period as a result of the timing of maintenance cycles.
   
Selling expenses per ASM increased 5.9% due to higher credit card fees and commissions paid as a result of the 12% increase in passenger revenues driven by the improved pricing environment in the 2010 period.
   
Other expense per ASM increased 7.8% primarily due to higher costs associated with our frequent traveler program, principally an increase in the incremental cost of providing transportation for travel awards as a result of higher fuel costs in the 2010 period. The negative effects of the severe weather on the East Coast of the United States in the first quarter of 2010 also contributed to the increase in other expenses.
Total Express expenses increased $105 million, or 8.5%, in the first six months of 2010 to $1.33 billion from $1.23 billion in the 2009 period. The period-over-period increase was primarily driven by a $98 million increase in fuel costs. The average fuel price per gallon was $1.59 in the 2009 period, which was 40.7% lower than the average fuel price per gallon of $2.24 in the 2010 period. A 3% decrease in gallons of fuel consumed in the 2010 period on 3.1% lower capacity partially offset the increase. Other Express expenses increased $7 million, or 0.7%, despite a 3.1% decrease in Express ASMs due to certain contractual rate increases and fixed costs associated with capacity purchase agreements and an increase in selling expenses as a result of the 14.6% increase in passenger revenues driven by the improved pricing environment in the 2010 period.

 

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Nonoperating Income (Expense):
                         
                    Percent  
    2010     2009     Change  
    (In millions)          
Nonoperating income (expense):
                       
Interest income
  $ 9     $ 13       (30.9 )
Interest expense, net
    (168 )     (148 )     13.5  
Other, net
    33       (7 )     nm  
 
                   
Total nonoperating expense, net
  $ (126 )   $ (142 )     (11.1 )
 
                   
Net nonoperating expense was $126 million in the first six months of 2010 as compared to $142 million in the 2009 period. Interest expense, net increased $20 million due to an increase in the average debt balance outstanding primarily as a result of liquidity raising initiatives completed throughout 2009.
Other nonoperating expense, net in the 2010 period included $53 million of net realized gains related to sales of certain investments in auction rate securities, offset by $21 million in foreign currency losses principally related to foreign sales and cash balances denominated in foreign currencies as a result of the strengthening U.S. dollar. 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 a $2 million non-cash asset impairment charge. 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 June 30, 2010, US Airways realized operating income of $362 million and income before income taxes of $295 million. US Airways experienced growth in revenues driven by increased yields as a result of the improving economy, rebound of business travel and continued industry capacity discipline. US Airways’ second quarter 2010 results were also impacted by recognition of the following special items:
   
$9 million of net special credits, consisting of a $16 million refund of ASIF paid to the TSA during the years 2005 to 2009, offset by other net special charges of $7 million, which included a settlement and corporate transaction costs; and
   
$4 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 June 30, 2009, US Airways realized operating income of $121 million and income before income taxes of $69 million. US Airways experienced significant declines in revenues in the second quarter of 2009 as a result of the global economic recession. US Airways’ second quarter 2009 results were also impacted by recognition of the following special items:
   
$156 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;
   
$1 million of net special charges for aircraft costs as a result of capacity reductions; and
   
a $2 million non-cash asset impairment charge, included in nonoperating expense, net.
In the first six months of 2010, US Airways realized operating income of $352 million and income before income taxes of $272 million, which was driven by the strong financial performance in the second quarter described above. US Airways’ results for the first six months of 2010 were also impacted by recognition of the following special items:
   
$4 million of net special credits, consisting of a $16 million refund of ASIF paid to the TSA during the years 2005 to 2009, offset by other net special charges of $7 million, which included a settlement and corporate transaction costs and $5 million in aircraft costs as a result of previously announced capacity reductions; and
   
$53 million of net realized gains related to sales of certain investments in auction rate securities, included in nonoperating expense, net.
In the first six months of 2009, US Airways realized operating income of $95 million and a loss before income taxes of $26 million. US Airways experienced significant declines in revenues in the first six months of 2009 as a result of the global economic recession. US Airways’ results for the first six months of 2009 were also impacted by recognition of the following special items:
   
$327 million of net unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments;
   
$7 million of net special charges, consisting of $6 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 investments in auction rate securities as well as a $2 million non-cash asset impairment charge, all 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, are 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 allowances were $575 million and $78 million, respectively.
During the three and six months ended June 30, 2010, US Airways utilized NOLs to offset its income tax obligation. Utilization of these NOLs results in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in the valuation allowance offsets US Airways’ tax provision dollar for dollar.

 

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US Airways reported a loss in the six months ended June 30, 2009, and did not record a tax benefit in any 2009 period as its net deferred tax assets which include the NOLs are subject to a full valuation allowance.
The table below sets forth US Airways’ selected mainline and Express operating data:
                                                 
    Three Months Ended     Percent     Six Months Ended     Percent  
    June 30,     Change     June 30,     Change  
    2010     2009     2010-2009     2010     2009     2010-2009  
Mainline
                                               
Revenue passenger miles (millions) (a)
    15,530       15,526             28,583       28,834       (0.9 )
Available seat miles (millions) (b)
    18,440       18,310       0.7       35,019       35,289       (0.8 )
Passenger load factor (percent) (c)
    84.2       84.8       (0.6 ) pts     81.6       81.7       (0.1 ) pts
Yield (cents) (d)
    13.11       11.11       18.1       13.07       11.57       13.0  
Passenger revenue per available seat mile (cents) (e)
    11.04       9.42       17.3       10.66       9.45       12.8  
Aircraft at end of period
    345       350       (1.4 )     345       350       (1.4 )
Fuel consumption (gallons in millions)
    276       278       (0.6 )     523       536       (2.4 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.23       1.58       40.8       2.20       1.53       44.0  
 
                                               
Express (f)
                                               
Revenue passenger miles (millions) (a)
    2,777       2,809       (1.1 )     5,047       5,183       (2.6 )
Available seat miles (millions) (b)
    3,630       3,676       (1.3 )     6,909       7,132       (3.1 )
Passenger load factor (percent) (c)
    76.5       76.4       0.1  pts     73.0       72.7       0.3  pts
Yield (cents) (d)
    27.60       22.87       20.7       27.10       23.03       17.7  
Passenger revenue per available seat mile (cents) (e)
    21.12       17.47       20.9       19.80       16.74       18.3  
Aircraft at end of period
    282       290       (2.8 )     282       290       (2.8 )
Fuel consumption (gallons in millions)
    86       87       (1.1 )     163       168       (3.0 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.29       1.67       36.8       2.25       1.59       41.1  
 
                                               
Total Mainline and Express
                                               
Revenue passenger miles (millions) (a)
    18,307       18,335       (0.1 )     33,630       34,017       (1.1 )
Available seat miles (millions) (b)
    22,070       21,986       0.4       41,928       42,421       (1.2 )
Passenger load factor (percent) (c)
    82.9       83.4       (0.5 ) pts     80.2       80.2        pts
Yield (cents) (d)
    15.31       12.91       18.6       15.17       13.31       14.0  
Passenger revenue per available seat mile (cents) (e)
    12.70       10.76       18.0       12.17       10.68       14.0  
Total revenue per available seat mile (cents) (g)
    14.54       12.26       18.6       14.06       12.23       14.9  
Aircraft at end of period
    627       640       (2.0 )     627       640       (2.0 )
Fuel consumption (gallons in millions)
    362       365       (0.7 )     686       704       (2.5 )
Average aircraft fuel price including related taxes (dollars per gallon)
    2.24       1.60       39.8       2.21       1.54       43.3  
 
     
(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 June 30, 2010
Compared with the
Three Months Ended June 30, 2009
Operating Revenues:
                         
                    Percent  
    2010     2009     Change  
    (In millions)          
Operating revenues:
                       
Mainline passenger
  $ 2,036     $ 1,724       18.1  
Express passenger
    767       642       19.3  
Cargo
    37       20       82.1  
Other
    369       310       19.3  
 
                   
Total operating revenues
  $ 3,209     $ 2,696       19.0  
 
                   
Total operating revenues in the second quarter of 2010 were $3.21 billion as compared to $2.7 billion in the 2009 period, an increase of $513 million, or 19%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $2.04 billion in the second quarter of 2010 as compared to $1.72 billion in the 2009 period. Mainline RPMs were flat as mainline capacity, as measured by ASMs, increased 0.7%, resulting in a 0.6 point decrease in load factor to 84.2%. Mainline passenger yield increased 18.1% to 13.11 cents in the second quarter of 2010 from 11.11 cents in the 2009 period. Mainline PRASM increased 17.3% to 11.04 cents in the second quarter of 2010 from 9.42 cents in the 2009 period. These increases in mainline yield and PRASM were due principally to an improved pricing environment driven by the recovering economy, rebound of business travel and continued industry capacity discipline.
   
Express passenger revenues were $767 million in the second quarter of 2010, an increase of $125 million from the 2009 period. Express RPMs decreased 1.1% as Express capacity, as measured by ASMs, decreased 1.3%, resulting in a 0.1 point increase in load factor to 76.5%. Express passenger yield increased by 20.7% to 27.6 cents in the second quarter of 2010 from 22.87 cents in the 2009 period. Express PRASM increased 20.9% to 21.12 cents in the second quarter of 2010 from 17.47 cents in the 2009 period. The increases in Express yield and PRASM were the result of the same improved pricing environment discussed in mainline passenger revenues above.
   
Cargo revenues were $37 million in the second quarter of 2010, an increase of $17 million, or 82.1%, from the 2009 period. The increase in cargo revenues was driven primarily by an increase in freight volume as a result of the recovering economic environment in the 2010 period.
   
Other revenues were $369 million in the second quarter of 2010, an increase of $59 million, or 19.3%, from the 2009 period, primarily due to an increase in revenue generated by 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
  $ 616     $ 440       39.9  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
          135     nm  
Unrealized
          (156 )   nm  
Salaries and related costs
    573       549       4.3  
Aircraft rent
    169       174       (3.0 )
Aircraft maintenance
    162       184       (12.0 )
Other rent and landing fees
    135       142       (5.1 )
Selling expenses
    107       99       7.7  
Special items, net
    (9 )     1     nm  
Depreciation and amortization
    65       64       2.1  
Other
    308       287       6.8  
 
                   
Total mainline operating expenses
    2,126       1,919       10.7  
Express expenses:
                       
Fuel
    196       145       35.2  
Other
    525       511       2.8  
 
                   
Total Express expenses
    721       656       10.0  
 
                   
Total operating expenses
  $ 2,847     $ 2,575       10.5  
 
                   
Total operating expenses were $2.85 billion in the second quarter of 2010, an increase of $272 million, or 10.5%, compared to the 2009 period. Mainline operating expenses were $2.13 billion in the second quarter of 2010, an increase of $207 million, or 10.7%, from the 2009 period. Fuel costs net of hedging gains in the 2009 period were $197 million higher in the 2010 period as compared to the 2009 period. As a result of US Airways’ profitability for the 2010 six month period, US Airways recorded $18 million in expense associated with its profit sharing program. US Airways also incurred increased selling costs due to growth in revenues as well as increased costs related to frequent traveler awards due to higher fuel costs in the 2010 period. These increases in costs were offset in part by lower maintenance expenses during the 2010 period. 
The 2010 period included $9 million of net special credits, consisting of a $16 million refund of ASIF paid to the TSA during the years 2005 to 2009, offset by other net special charges of $7 million, which included a settlement and corporate transaction costs. This compares to net special charges in the 2009 period of $1 million in aircraft costs as a result of capacity reductions.
Significant changes in the components of mainline operating expenses are as follows:
   
Aircraft fuel and related taxes increased 39.9% primarily due to a 40.8% increase in the average price per gallon of fuel to $2.23 in the second quarter of 2010 from $1.58 in the 2009 period.
   
Since the third quarter of 2008, US Airways has not entered into any new fuel hedging transactions, and US Airways has not had any fuel hedging contracts outstanding since the third quarter of 2009. US Airways recognized a net gain of $21 million in the second quarter of 2009 related to fuel hedging instruments.
   
Salaries and related costs increased 4.3% primarily due to the accrual of $18 million for profit sharing.
   
Aircraft maintenance expense decreased 12% due principally to a decrease in the number of engine overhauls performed in the 2010 period as compared to the 2009 period as a result of the timing of maintenance cycles.
   
Selling expenses increased 7.7% due to higher credit card fees and commissions paid as a result of the 18.1% increase in passenger revenues driven by the improved pricing environment in the 2010 period.
   
Other expense increased 6.8% due to higher costs associated with US Airways’ frequent traveler program, principally an increase in the incremental cost of providing transportation for travel awards as a result of higher fuel costs in the 2010 period.

 

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Total Express expenses increased $65 million, or 10%, in the second quarter of 2010 to $721 million from $656 million in the 2009 period. The period-over-period increase was primarily driven by a $51 million increase in fuel costs. The average fuel price per gallon was $1.67 in the 2009 period, which was 36.8% lower than the average fuel price per gallon of $2.29 in the 2010 period. Other Express expenses increased $14 million, or 2.8%, despite a 1.3% decrease in Express ASMs due to certain contractual rate increases and fixed costs associated with capacity purchase agreements and an increase in selling expenses as a result of the 19.3% increase in passenger revenues driven by the improved pricing environment in the 2010 period.
Nonoperating Income (Expense):
                         
                    Percent  
    2010     2009     Change  
    (In millions)          
Nonoperating income (expense):
                       
Interest income
  $ 3     $ 6       (47.5 )
Interest expense, net
    (62 )     (64 )     (3.4 )
Other, net
    (8 )     6     nm  
 
                   
Total nonoperating expense, net
  $ (67 )   $ (52 )     29.7  
 
                   
Net nonoperating expense was $67 million in the second quarter of 2010 as compared to $52 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 liquidity raising initiatives completed throughout 2009.
Other nonoperating expense, net in the 2010 period included $15 million in foreign currency losses principally related to foreign sales and cash balances denominated in foreign currencies as a result of the strengthening U.S. dollar, offset by $4 million of net realized gains related to sales of certain investments in auction rate securities. Other nonoperating expense, net in the 2009 period included $8 million in foreign currency gains as the U.S. dollar weakened due to the global recession, partially offset by a $2 million non-cash asset impairment charge. The sales of auction rate securities are discussed in more detail under “Liquidity and Capital Resources.”

 

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Six Months Ended June 30, 2010
Compared with the
Six Months Ended June 30, 2009
Operating Revenues:
                         
                    Percent  
    2010     2009     Change  
    (In millions)          
Operating revenues:
                       
Mainline passenger
  $ 3,735     $ 3,335       12.0  
Express passenger
    1,368       1,194       14.6  
Cargo
    69       44       57.7  
Other
    721       614       17.4  
 
                   
Total operating revenues
  $ 5,893     $ 5,187       13.6  
 
                   
Total operating revenues in the first six months of 2010 were $5.89 billion as compared to $5.19 billion in the 2009 period, an increase of $706 million, or 13.6%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $3.74 billion in the first six months of 2010 as compared to $3.34 billion in the 2009 period. Mainline RPMs decreased 0.9% as mainline capacity, as measured by ASMs, decreased 0.8%, resulting in a 0.1 point decrease in load factor to 81.6%. Mainline passenger yield increased 13% to 13.07 cents in the first six months of 2010 from 11.57 cents in the 2009 period. Mainline PRASM increased 12.8% to 10.66 cents in the first six months of 2010 from 9.45 cents in the 2009 period. These increases in mainline yield and PRASM were due principally to an improved pricing environment driven by the recovering economy, rebound of business travel and continued industry capacity discipline.
   
Express passenger revenues were $1.37 billion in the first six months of 2010, an increase of $174 million from the 2009 period. Express RPMs decreased by 2.6% as Express capacity, as measured by ASMs, decreased 3.1%, resulting in a 0.3 point increase in load factor to 73%. Express passenger yield increased by 17.7% to 27.1 cents in the first six months of 2010 from 23.03 cents in the 2009 period. Express PRASM increased 18.3% to 19.8 cents in the first six months of 2010 from 16.74 cents in the 2009 period. The increases in Express yield and PRASM were the result of the same improved pricing environment discussed in mainline passenger revenues above.
   
Cargo revenues were $69 million in the first six months of 2010, an increase of $25 million, or 57.7%, from the 2009 period. The increase in cargo revenues was driven primarily by an increase in freight volume as a result of the recovering economic environment in the 2010 period.
   
Other revenues were $721 million in the first six months of 2010, an increase of $107 million, or 17.4%, from the 2009 period, primarily due to an increase in revenue generated by 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
  $ 1,151     $ 819       40.5  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
          332     nm  
Unrealized
          (327 )   nm  
Salaries and related costs
    1,128       1,100       2.6  
Aircraft rent
    340       352       (3.4 )
Aircraft maintenance
    319       358       (11.0 )
Other rent and landing fees
    270       273       (1.3 )
Selling expenses
    201       192       5.1  
Special items, net
    (4 )     7     nm  
Depreciation and amortization
    128       126       1.8  
Other
    612       573       6.7  
 
                   
Total mainline operating expenses
    4,145       3,805       8.9  
Express expenses:
                       
Fuel
    366       267       36.9  
Other
    1,030       1,020       1.0  
 
                   
Total Express expenses
    1,396       1,287       8.4  
 
                   
Total operating expenses
  $ 5,541     $ 5,092       8.8  
 
                   
Total operating expenses were $5.54 billion in the first six months of 2010, an increase of $449 million, or 8.8%, compared to the 2009 period. Mainline operating expenses were $4.15 billion in the first six months of 2010, an increase of $340 million, or 8.9%, from the 2009 period. Fuel costs net of hedging losses in the 2009 period were $327 million higher in the 2010 period as compared to the 2009 period. As a result of US Airways’ profitability for the 2010 six month period, US Airways recorded $18 million in expense associated with its profit sharing program. US Airways also incurred increased selling costs due to growth in revenues as well as increased costs related to frequent traveler awards due to higher fuel costs in the 2010 period. These increases in costs were offset in part by lower maintenance expenses during the 2010 period. A reduction in available seat miles caused by the February 2010 weather-related flight cancellations also negatively impacted US Airways’ operating expenses.
The 2010 period included $4 million of net special credits, consisting of a $16 million refund of ASIF paid to the TSA during the years 2005 to 2009, offset by other net special charges of $7 million, which included a settlement and corporate transaction costs and $5 million in aircraft costs as a result of previously announced capacity reductions. This compares to net special charges of $7 million in the 2009 period, consisting of $6 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 40.5% primarily due to a 44% increase in the average price per gallon of fuel to $2.20 in the first six months of 2010 from $1.53 in the 2009 period.
   
Since the third quarter of 2008, US Airways has not entered into any new fuel hedging transactions, and US Airways has not had any fuel hedging contracts outstanding since the third quarter of 2009. US Airways recognized a net loss of $5 million in the first six months of 2009 related to fuel hedging instruments.
   
Salaries and related costs increased 2.6% primarily due to the accrual of $18 million for profit sharing.
   
Aircraft maintenance expense decreased 11% due principally to a decrease in the number of engine overhauls performed in the 2010 period as compared to the 2009 period as a result of the timing of maintenance cycles.
   
Selling expenses increased 5.1% due to higher credit card fees and commissions paid as a result of the 12% increase in passenger revenues driven by the improved pricing environment in the 2010 period.
   
Other expense increased 6.7% primarily due to higher costs associated with US Airways’ frequent traveler program, principally an increase in the incremental cost of providing transportation for travel awards as a result of higher fuel costs in the 2010 period. The negative effects of the severe weather on the East Coast of the United States in the first quarter of 2010 also contributed to the increase in other expenses.

 

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Total Express expenses increased $109 million, or 8.4%, in the first six months of 2010 to $1.4 billion from $1.29 billion in the 2009 period. The period-over-period increase was primarily driven by a $99 million increase in fuel costs. The average fuel price per gallon was $1.59 in the 2009 period, which was 41.1% lower than the average fuel price per gallon of $2.25 in the 2010 period. A 3% decrease in gallons of fuel consumed in the 2010 period on 3.1% lower capacity partially offset the increase. Other Express expenses increased $10 million, or 1%, despite a 3.1% decrease in Express ASMs due to certain contractual rate increases and fixed costs associated with capacity purchase agreements and an increase in selling expenses as a result of the 14.6% increase in passenger revenues driven by the improved pricing environment in the 2010 period.
Nonoperating Income (Expense):
                         
                    Percent  
    2010     2009     Change  
    (In millions)          
Nonoperating income (expense):
                       
Interest income
  $ 9     $ 13       (30.9 )
Interest expense, net
    (121 )     (125 )     (3.6 )
Other, net
    32       (9 )   nm  
 
                   
Total nonoperating expense, net
  $ (80 )   $ (121 )     (34.1 )
 
                   
Net nonoperating expense was $80 million in the first six months of 2010 as compared to $121 million in the 2009 period. Interest expense, net decreased $4 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 liquidity raising initiatives completed throughout 2009.
Other nonoperating expense, net in the 2010 period included $53 million of net realized gains related to sales of certain investments in auction rate securities, offset by $21 million in foreign currency losses principally related to foreign sales and cash balances denominated in foreign currencies as a result of the strengthening U.S. dollar. 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 a $2 million non-cash asset impairment charge. 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 June 30, 2010, our cash, cash equivalents, investments in marketable securities and restricted cash were $2.5 billion, of which $442 million was restricted. Our investments in marketable securities included $59 million of auction rate securities at fair value ($93 million par value) that are classified as noncurrent assets on our condensed consolidated balance sheets.
Investments in Marketable Securities
Current
As of June 30, 2010, we held $180 million of investments in debt securities, which are classified as held-to-maturity. Held-to-maturity investments are carried at amortized cost, which approximates fair value. These debt securities consist of investments in treasury bills and U.S. government sponsored enterprise bonds with original maturity dates of six months or less.
Noncurrent
As of June 30, 2010, we held auction rate securities with a fair value of $59 million ($93 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 23 to 42 years, with 71% of our portfolio maturing within the next 30 years (2033 – 2036) and 29% maturing thereafter (2049 – 2052). As a result of the liquidity issues experienced in the global credit and capital markets, all of our auction rate securities have experienced failed auctions since August 2007.
In the second quarter of 2010, we sold certain investments in auction rate securities for net proceeds of $11 million, resulting in a $4 million net realized gain recorded in nonoperating expense, net. When added to our first quarter sales which generated proceeds of $132 million, resulting in a $49 million gain recorded in nonoperating expense net, we have now sold more than 75% of our investments in auction rate securities which have failed auction since August of 2007.
We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair value of our remaining investments in these securities. 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, cash equivalents and short-term investments in marketable securities balances at June 30, 2010, the current lack of liquidity in our remaining 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 $739 million and $360 million for the first six months of 2010 and 2009, respectively, an improvement of $379 million. The increase in net cash provided by operating activities was due to higher ticket sales and associated increased revenues in the 2010 period. Net income for the first six months of 2010 was $235 million as compared to a net loss of $45 million in the 2009 period.
Net cash used in investing activities was $91 million and $543 million for the first six months of 2010 and 2009, respectively. Principal investing activities in the 2010 period included purchases of marketable securities of $180 million and expenditures for property and equipment totaling $94 million, primarily related to the purchase of Airbus aircraft, offset by net proceeds from sales of auction rate securities of $143 million and a $38 million decrease in restricted cash. Restricted cash decreased primarily due to a change 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 $621 million, primarily related to the purchase of Airbus aircraft and a $43 million increase in equipment purchase deposits for certain aircraft on order, offset by $52 million in proceeds from dispositions of property and equipment 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 $133 million for the first six months of 2010 as compared to net cash provided by financing activities of $632 million for the first six months of 2009. Principal financing activities in the 2010 period included debt repayments of $220 million and proceeds from the issuance of debt of $90 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 $749 million, which primarily included the issuance of $172 million of convertible notes, 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 $175 million in the 2009 period. Financing activities in the 2009 period also included net proceeds from the issuance of common stock of $66 million from a May 2009 public stock offering of 17.5 million shares.

 

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US Airways
Net cash provided by operating activities was $764 million and $346 million for the first six months of 2010 and 2009, respectively, an improvement of $418 million. The increase in net cash provided by operating activities was due to higher ticket sales and associated increased revenues in the 2010 period. Net income for the first six months of 2010 was $272 million as compared to a net loss of $26 million in the 2009 period.
Net cash used in investing activities was $84 million and $540 million for the first six months of 2010 and 2009, respectively. Principal investing activities in the 2010 period included purchases of marketable securities of $180 million and expenditures for property and equipment totaling $87 million, primarily related to the purchase of Airbus aircraft, offset by net proceeds from sales of auction rate securities of $143 million and a $38 million decrease in restricted cash. Restricted cash decreased primarily due to a change 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 $618 million, primarily related to the purchase of Airbus aircraft and a $43 million increase in equipment purchase deposits for certain aircraft on order, offset by $52 million in proceeds from dispositions of property and equipment 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 $117 million for the first six months of 2010 as compared to net cash provided by financing activities of $414 million for the first six months of 2009. Principal financing activities in the 2010 period included debt repayments of $204 million and proceeds from the issuance of debt of $90 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 $576 million, which primarily 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 $159 million in the 2009 period.
Commitments
As of June 30, 2010, we had $4.78 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 June 30, 2010, the interest rate on the Citicorp credit facility was 2.81% based on a 2.50% LIBOR margin.

 

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The Citicorp credit facility matures on March 23, 2014, and is repayable in seven annual installments with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.
In addition, the Citicorp credit facility requires certain mandatory prepayments upon the occurrence of specified events, establishes certain financial covenants, including minimum cash requirements and maintenance of certain minimum ratios, contains customary affirmative covenants and negative covenants and contains customary events of default. The Citicorp credit facility requires us to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements, which would become restricted for use by us if certain adverse events occur per the terms of the agreement. In addition, the Citicorp credit facility amendment provides that we may issue debt in the future with a second lien on the assets pledged as collateral under the Citicorp credit facility. The principal amount outstanding under the Citicorp credit facility was $1.15 billion as of June 30, 2010. As of June 30, 2010, we were in compliance with all debt covenants under the amended credit facility.
7% Senior Convertible Notes
As of June 30, 2010, we have $74 million of principal amount outstanding under our 7% Senior Convertible Notes (the “7% notes”). The 7% notes may be converted by the holders into common stock at an effective conversion price of $24.12 per share. Holders may require us to purchase for cash or shares or a combination thereof, at our election, all or a portion of their 7% notes on September 30, 2010 and September 30, 2015 at a purchase price equal to 100% of the principal amount of the 7% notes to be repurchased plus accrued and unpaid interest, if any, to the purchase date. If the holders require us to repurchase the notes, we will provide notice on or before the 20th day prior to the purchase date stating, among other things, the amount of the repurchase price, whether we elect to deliver shares of common stock to satisfy all or a portion of the purchase price and the procedures that holders must follow to require us to repurchase their notes. If we elect to deliver, in full or in partial satisfaction of the purchase price, shares of our common stock, the number of such shares we deliver shall be equal to the portion of the purchase price to be paid in common stock divided by the market price (less a 2.5% discount) of a share of our common stock. We are currently evaluating our options in regards to these notes.
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.

 

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Under all of our aircraft and engine purchase agreements, our total future commitments as of June 30, 2010 are expected to be approximately $5.92 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.
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 June 30, 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 June 30, 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 June 30, 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)
    29       55       52       46       22             204  
US Airways (4)
                                                       
Debt and capital lease obligations (5) (6)
    201       397       321       271       282       1,707       3,179  
Interest obligations (3) (6)
    81       148       158       114       97       410       1,008  
Aircraft purchase and operating lease commitments (7)
    572       1,503       1,446       1,864       1,576       5,771       12,732  
Regional capacity purchase agreements (8)
    501       1,046       911       780       779       2,390       6,407  
Other US Airways Group subsidiaries (9)
    6       9       9       7       6       1       38  
 
                                         
Total
  $ 1,464     $ 3,174     $ 3,013     $ 3,198     $ 4,038     $ 10,279     $ 25,166  
 
                                         
 
     
(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 $155 million of unamortized debt discount as of June 30, 2010.
 
(3)  
For variable-rate debt, future interest obligations are shown above using interest rates in effect as of June 30, 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 $86 million of unamortized debt discount as of June 30, 2010.
 
(6)  
Includes $481 million of future principal payments and $200 million of future interest payments as of June 30, 2010, respectively, related to pass through trust certificates or EETCs associated with mortgage financings for the purchase of certain aircraft.
 
(7)  
Includes $3.1 billion of future minimum lease payments related to EETC leveraged leased financings of certain aircraft as of June 30, 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 second quarter of 2010, there were no changes to our critical accounting policies and estimates from those disclosed in the consolidated 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 not had any fuel hedging contracts outstanding since the third quarter of 2009.
Interest rate risk
Our exposure to interest rate risk relates primarily to our cash equivalents, investment portfolios and variable-rate debt obligations. At June 30, 2010, our variable-rate long-term debt obligations of approximately $3.39 billion represented approximately 71% 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 June 30, 2010, included within our investment portfolio are investments in auction rate securities with a fair value of $59 million ($93 million par value). As a result of the liquidity issues experienced in the global credit and capital markets, all of our auction rate securities have experienced failed auctions since August 2007. 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, cash equivalents and short-term investments in marketable securities balances at June 30, 2010, the current lack of liquidity in our remaining 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” 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 June 30, 2010. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 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 June 30, 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 June 30, 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 our financial statements upon emergence from bankruptcy and will not have any further impact on our financial position or results of operations. We presently expect the bankruptcy case to be closed during 2010.
The Company and/or its subsidiaries are defendants in various pending lawsuits and proceedings, and from time to time are subject to other claims arising in the normal course of 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 labor agreements to which we are a party limit our ability to reduce the number of aircraft in operation, and the utilization of such aircraft, 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 refinance debt maturities, raise capital or fund other types of obligations. Any downgrades to our credit rating may likewise increase the cost and reduce the availability of financing.

 

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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, 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 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, we have from time to time 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 presently 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.”

 

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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.
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.

 

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We are currently in negotiations with unions representing our pilots and flight attendants, and both negotiations are being overseen by the NMB. As a result, these unions presently 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.
The inability to maintain labor costs at competitive levels would harm our financial performance.
Currently, our labor costs are very competitive relative to the other big five hub-and-spoke carriers. However, we cannot provide assurance 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. 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.

 

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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 if weakened economic conditions continue to make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers which determine not to institute similar charges.
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.

 

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Changes in government regulation could increase our operating costs and limit our ability to conduct our business.
Airlines are subject to extensive regulatory requirements. In the last several years, Congress has passed laws, and the DOT, the FAA, the TSA and the Department of Homeland Security have issued a number of directives and other regulations. These requirements impose substantial costs on airlines. On October 10, 2008, the FAA finalized new rules governing flight operations at the three major New York airports. These rules did not take effect because of a legal challenge, but the FAA has pushed forward with a reduction in the number of flights per hour at LaGuardia. The FAA is attempting to work with carriers on a voluntary basis to implement its new lower operations cap at LaGuardia. If this is not successful, the FAA may resort to other methods to reduce congestion in New York. Additionally, the DOT recently finalized a policy change that will permit airports to charge differentiated landing fees during congested periods, which could impact our ability to serve certain markets in the future. This decision was recently upheld by the District of Columbia Circuit Court of Appeals. The Obama Administration has not yet indicated how it intends to move forward on the issue of congestion management in the New York region.
The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions.  Some FAA requirements cover, among other things, retirement of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement, other environmental concerns, fuel tank inerting, crew scheduling, 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.
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 that could increase the cost of airline operations or reduce revenues. The DOT has been aggressively investigating alleged violations of the new rules. In addition, the DOT released a second set of proposed new rules addressing concerns about how airlines handle interactions with passengers through the reservations process, at the airport and on board the aircraft. The comment period on the proposed rules ends later this summer. We anticipate that any new rules will take effect in 2011.
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.

 

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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 and 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 U.S., the EU or in other areas in which we do business, such climate change-related regulatory activity in the future may adversely affect our business and financial results.
California is in the process of implementing environmental provisions aimed at limiting emissions from motorized vehicles, which may include some airline belt loaders and tugs and require a change of ground service vehicles. The future costs associated with replacing some or all of our ground fleets in California cities are currently not expected to have a material adverse affect on our business.
Governmental authorities in several U.S. and foreign cities are also considering or have already implemented aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.
Ongoing data security compliance requirements could increase our costs, and any significant data breach could harm our business, financial condition or results of operations.
Our business requires the appropriate and secure utilization of customer and other sensitive information. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit existing vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting the networks that access and store database information. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad (particularly in the EU), including requirements for varying levels of customer notification in the event of a data breach.
Many of our commercial partners, including credit card companies, have imposed 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.

 

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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.
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 an optimum 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 December 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 claims paying ability 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 a result of our international operations, we have significant operating revenues and expenses, as well as assets and liabilities, denominated in foreign currencies. Fluctuations in foreign currencies can significantly affect our operating performance and the value of our assets and liabilities located outside of the United States.

 

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

 

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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 any amendment of our amended and restated bylaws submitted to stockholders for approval; and
   
super-majority voting requirements to modify or amend specified provisions of US Airways Group’s amended and restated certificate of incorporation.
These provisions are not intended to prevent a takeover, but are intended to protect and maximize the value of US Airways Group’s stockholders’ interests. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable our board of directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, US Airways Group is subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders. Interested stockholders do not include stockholders 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 DOT, 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    
Amendment No. 7, dated as of April 1, 2010, to the Amended and Restated Airbus A320 Family Aircraft Purchase Agreement, dated as of October 2, 2007, between Airbus S.A.S. and US Airways, Inc.*
       
 
  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.
 
     
*  
Portions of this exhibit have been omitted under a request for confidential treatment and filed separately with the United States Securities and Exchange Commission.

 

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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: July 20, 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: July 20, 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    
Amendment No. 7, dated as of April 1, 2010, to the Amended and Restated Airbus A320 Family Aircraft Purchase Agreement, dated as of October 2, 2007, between Airbus S.A.S. and US Airways, Inc.*
       
 
  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.
 
     
*  
Portions of this exhibit have been omitted under a request for confidential treatment and filed separately with the United States Securities and Exchange Commission.

 

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