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Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011
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 þ 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 þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
US Airways, Inc.
  Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
         
US Airways Group, Inc.
  Yes o   No þ
US Airways, Inc.
  Yes o   No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
         
US Airways Group, Inc.
  Yes þ   No o
US Airways, Inc.
  Yes þ   No o
As of April 22, 2011, there were approximately 161,997,642 shares of US Airways Group, Inc. common stock outstanding.
As of April 22, 2011, US Airways, Inc. had 1,000 shares of common stock outstanding, all of which were held by US Airways Group, Inc.
 
 

 

 


 

US Airways Group, Inc.
US Airways, Inc.
Form 10-Q
Quarterly Period Ended March 31, 2011
Table of Contents
         
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 Exhibit 10.1
 Exhibit 10.2
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 31.3
 Exhibit 31.4
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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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;
   
interruptions or disruptions in service at one or more of our hub airports;
   
our reliance on third-party regional operators or third-party service providers;
   
our reliance on and costs of third-party distribution channels, including those provided by global distribution systems and online travel agents;
   
changes in government legislation and regulation;
   
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;
   
our ability to operate and grow our route network;

 

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the impact of environmental laws and regulations;
   
costs of ongoing data security compliance requirements and the impact of any data security breach;
   
the impact of any accident involving our aircraft or the aircraft of our regional operators;
   
delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity;
   
the impact of weather conditions and seasonality of airline travel;
   
the impact of possible future increases in insurance costs and disruptions to insurance markets;
   
the impact of global events that affect travel behavior, such as an outbreak of a contagious disease;
   
the impact of foreign currency exchange rate fluctuations;
   
our ability to use NOLs and certain other tax attributes; and
   
other risks and uncertainties listed from time to time in our reports to and filings with the Securities and Exchange Commission.
All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. There may be other factors of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update or supplement any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these estimates other than as required by law. Any forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or as of the dates indicated in the statements.
Part I. Financial Information
This combined Quarterly Report on Form 10-Q is filed by US Airways Group and US Airways and includes the condensed consolidated financial statements of each company in Item 1A and Item 1B, respectively.

 

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Item 1A.  
Condensed Consolidated Financial Statements of US Airways Group, Inc.
US Airways Group, Inc.
Condensed Consolidated Statements of Operations
(In millions, except share and per share amounts)
(Unaudited)
                 
    Three Months  
    Ended March 31,  
    2011     2010  
Operating revenues:
               
Mainline passenger
  $ 1,900     $ 1,698  
Express passenger
    685       601  
Cargo
    43       33  
Other
    333       319  
 
           
Total operating revenues
    2,961       2,651  
Operating expenses:
               
Aircraft fuel and related taxes
    734       534  
Salaries and related costs
    573       556  
Express expenses
    770       650  
Aircraft rent
    164       171  
Aircraft maintenance
    163       157  
Other rent and landing fees
    129       134  
Selling expenses
    100       95  
Special items, net
    3       5  
Depreciation and amortization
    60       61  
Other
    304       298  
 
           
Total operating expenses
    3,000       2,661  
 
           
Operating loss
    (39 )     (10 )
Nonoperating income (expense):
               
Interest income
    1       5  
Interest expense, net
    (77 )     (82 )
Other, net
    1       42  
 
           
Total nonoperating expense, net
    (75 )     (35 )
 
           
Loss before income taxes
    (114 )     (45 )
Income tax provision
           
 
           
Net loss
  $ (114 )   $ (45 )
 
           
Loss per common share:
               
Basic loss per common share
  $ (0.71 )   $ (0.28 )
Diluted loss per common share
  $ (0.71 )   $ (0.28 )
Shares used for computation (in thousands):
               
Basic
    161,890       161,115  
Diluted
    161,890       161,115  
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)
                 
    March 31,     December 31,  
    2011     2010  
    (Unaudited)        
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 2,073     $ 1,859  
Accounts receivable, net
    457       311  
Materials and supplies, net
    236       231  
Prepaid expenses and other
    588       508  
 
           
Total current assets
    3,354       2,909  
Property and equipment
               
Flight equipment
    4,144       4,134  
Ground property and equipment
    856       843  
Less accumulated depreciation and amortization
    (1,355 )     (1,304 )
 
           
 
    3,645       3,673  
Equipment purchase deposits
    133       123  
 
           
Total property and equipment
    3,778       3,796  
Other assets
               
Other intangibles, net of accumulated amortization of $145 million and $139 million, respectively
    471       477  
Restricted cash
    345       364  
Investments in marketable securities
    45       57  
Other assets
    224       216  
 
           
Total other assets
    1,085       1,114  
 
           
Total assets
  $ 8,217     $ 7,819  
 
           
 
               
LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities
               
Current maturities of debt and capital leases
  $ 408     $ 397  
Accounts payable
    479       386  
Air traffic liability
    1,361       861  
Accrued compensation and vacation
    161       245  
Accrued taxes
    237       149  
Other accrued expenses
    812       802  
 
           
Total current liabilities
    3,458       2,840  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    3,885       4,003  
Deferred gains and credits, net
    338       336  
Postretirement benefits other than pensions
    142       141  
Employee benefit liabilities and other
    424       415  
 
           
Total noncurrent liabilities and deferred credits
    4,789       4,895  
Commitments and contingencies
               
Stockholders’ equity (deficit)
               
Common stock, $0.01 par value; 400,000,000 shares authorized, 161,896,598 shares issued and outstanding at March 31, 2011; 161,874,756 shares issued and outstanding at December 31, 2010
    2       2  
Additional paid-in capital
    2,116       2,115  
Accumulated other comprehensive income
    13       14  
Accumulated deficit
    (2,161 )     (2,047 )
 
           
Total stockholders’ equity (deficit)
    (30 )     84  
 
           
Total liabilities and stockholders’ equity (deficit)
  $ 8,217     $ 7,819  
 
           
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
                 
    Three Months  
    Ended March 31,  
    2011     2010  
Net cash provided by operating activities
  $ 345     $ 199  
Cash flows from investing activities:
               
Purchases of property and equipment
    (40 )     (78 )
Sales of marketable securities
    12       132  
Decrease in long-term restricted cash
    19       38  
 
           
Net cash provided by (used in) investing activities
    (9 )     92  
Cash flows from financing activities:
               
Repayments of debt and capital lease obligations
    (128 )     (135 )
Proceeds from issuance of debt
    6       80  
Deferred financing costs
          (3 )
 
           
Net cash used in financing activities
    (122 )     (58 )
 
           
Net increase in cash and cash equivalents
    214       233  
Cash and cash equivalents at beginning of period
    1,859       1,299  
 
           
Cash and cash equivalents at end of period
  $ 2,073     $ 1,532  
 
           
Non-cash investing and financing activities:
               
Interest payable converted to debt
  $ 9     $ 11  
Note payables issued for aircraft purchases
          111  
Net unrealized loss on available-for-sale securities
          1  
Supplemental information:
               
Interest paid, net of amounts capitalized
  $ 57     $ 67  
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 consolidated financial statements contained in US Airways Group’s Annual Report on Form 10-K for the year ended December 31, 2010. 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 requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. 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 October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. The Company’s multiple-deliverable revenue arrangements consist principally of sales of frequent flyer program mileage credits to business partners, which are comprised of two components, transportation and marketing. The Company was required to adopt and apply ASU No. 2009-13 to any new or materially modified multiple deliverable revenue arrangements entered into on or after January 1, 2011. The Company adopted ASU No. 2009-13 on January 1, 2011, and its application has had no material 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 (in millions):
                 
    Three Months  
    Ended March 31,  
    2011     2010  
Other costs
  $ 3     $  
Aircraft costs (a)
          5  
 
           
Special items, net
  $ 3     $ 5  
 
           
 
     
(a)  
In the three months ended March 31, 2010, the Company recorded $5 million in aircraft costs as a result of capacity reductions.
3. Loss Per Common Share
Basic earnings (loss) per common share (“EPS”) is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of potentially dilutive shares of common stock outstanding during the period using the treasury stock method. Potentially dilutive shares include outstanding employee stock options, employee stock appreciation rights (“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  
    March 31,     March 31,  
    2011     2010  
Basic and diluted loss per share:
               
Net loss
  $ (114 )   $ (45 )
 
           
Weighted average common shares outstanding (in thousands)
    161,890       161,115  
 
           
Basic and diluted loss per share
  $ (0.71 )   $ (0.28 )
 
           
For the three months ended March 31, 2011 and 2010, 1,457,208 and 1,753,540 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 and 2,690,529 and 6,580,551 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 three months ended March 31, 2011 and 2010, 199,379 and 3,048,914 incremental shares, respectively, from the assumed conversion of the 7% Senior Convertible Notes (the “7% notes”) were excluded from the computation of diluted EPS due to their antidilutive effect. For each of the three months ended March 31, 2011 and 2010, 37,746,174 incremental shares, respectively, from the assumed conversion of the 7.25% Convertible Senior Notes (the “7.25% notes”) were excluded from the computation of diluted EPS due to their antidilutive effect.

 

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4. Debt
The following table details the Company’s debt (in millions). Variable interest rates listed are the rates as of March 31, 2011.
                 
    March 31,     December 31,  
    2011     2010  
Secured
               
Citicorp North America loan, variable interest rate of 2.75%, installments due through 2014
  $ 1,136     $ 1,152  
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.65% to 10.31%, maturing from 2011 to 2029
    1,865       1,920  
Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 6.25% to 9.01%, maturing from 2015 to 2023
    783       809  
Other secured obligations, fixed interest rate of 8%, maturing from 2015 to 2021
    79       85  
 
           
 
    3,863       3,966  
Unsecured
               
Barclays prepaid miles, variable interest rate of 4.99%, interest only payments
    200       200  
Airbus advance, repayments through 2018
    210       222  
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
    5       5  
Industrial development bonds, fixed interest rate of 6.30%, interest only payments until due in 2023
    29       29  
Other unsecured obligations, maturing from 2011 to 2012
    20       23  
 
           
 
    636       651  
 
           
Total long-term debt and capital lease obligations
    4,499       4,617  
Less: Total unamortized discount on debt
    (206 )     (217 )
Current maturities
    (408 )     (397 )
 
           
Long-term debt and capital lease obligations, net of current maturities
  $ 3,885     $ 4,003  
 
           
The Company was in compliance with the covenants in its debt agreements at March 31, 2011.
Fair Value of Debt
The fair value of the Company’s long-term debt and capital lease obligations was approximately $4.14 billion and $4.37 billion at March 31, 2011 and December 31, 2010, 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.
5. Income Taxes
At December 31, 2010, the Company had approximately $1.92 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 2011. The NOLs expire during the years 2024 through 2029. The Company’s net deferred tax assets, which include $1.85 billion of the NOLs, are subject to a full valuation allowance. The Company also had approximately $82 million of tax-effected state NOLs at December 31, 2010. At December 31, 2010, the federal and state valuation allowances were $368 million and $62 million, respectively.
The Company reported a loss before income taxes in the first quarter of each of 2011 and 2010, and the Company did not record a tax provision in either period.

 

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6. Express Expenses
Expenses associated with the Company’s wholly owned regional airlines and affiliate regional airlines operating as US Airways Express are classified as Express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Aircraft fuel and related taxes
  $ 242     $ 170  
Salaries and related costs
    70       63  
Capacity purchases
    266       264  
Aircraft rent
    13       13  
Aircraft maintenance
    47       19  
Other rent and landing fees
    34       31  
Selling expenses
    41       36  
Special items, net
    1        
Depreciation and amortization
    6       6  
Other expenses
    50       48  
 
           
Express expenses
  $ 770     $ 650  
 
           
7. Investments in Marketable Securities
As of March 31, 2011, the Company held auction rate securities with a fair value of $45 million ($69 million 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 22 to 25 years. 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. The estimated fair value of these auction rate securities no longer approximates par value. Refer to Note 8 for discussion on how the Company determines the fair value of its investments in auction rate securities.
In the three months ended March 31, 2011, the Company sold certain investments in auction rate securities for proceeds of $12 million. Proceeds from the auction rate security sale transactions approximated the carrying amount of the investments.
In the three months ended March 31, 2010, the Company sold certain investments in auction rate securities for proceeds of $132 million, resulting in $49 million of net realized gains recorded in nonoperating expense, net, of which $48 million represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. Additionally, in the first quarter of 2010, the Company recorded net unrealized losses of $1 million in other comprehensive income related to the decline in fair value of certain investments in auction rate securities, which offset previously recognized unrealized gains.
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.

 

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8. Fair Value Measurements
Assets measured at fair value on a recurring basis are as follows (in millions):
                                         
            Quoted Prices in     Significant Other     Significant        
            Active Markets for     Observable     Unobservable        
            Identical Assets     Inputs     Inputs     Valuation  
    Fair Value     (Level 1)     (Level 2)     (Level 3)     Technique  
At March 31, 2011
                                       
Investments in marketable securities (noncurrent)
  $ 45     $     $     $ 45       (1 )
At December 31, 2010
                                       
Investments in marketable securities (noncurrent)
  $ 57     $     $     $ 57       (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 7 for further discussion of the Company’s investments in marketable securities.
Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (in millions):
         
    Investments in  
    Marketable  
    Securities  
    (Noncurrent)  
Balance at December 31, 2010
  $ 57  
Sales of marketable securities
    (12 )
 
     
Balance at March 31, 2011
  $ 45  
 
     
9. Other Comprehensive Income (Loss)
The Company’s other comprehensive loss consisted of the following (in millions):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Net loss
  $ (114 )   $ (45 )
Recognition of net realized gains on sale of available-for-sale securities
          (48 )
Net unrealized losses on available-for-sale securities
          (1 )
Pension and other postretirement benefits
    (1 )     (1 )
 
           
Total comprehensive loss
  $ (115 )   $ (95 )
 
           
The components of accumulated other comprehensive income were as follows (in millions):
                 
    March 31,     December 31,  
    2011     2010  
Pension and other postretirement benefits
  $ 31     $ 32  
Available-for-sale securities
    (18 )     (18 )
 
           
Accumulated other comprehensive income
  $ 13     $ 14  
 
           

 

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10. Slot Transaction
In August 2009, US Airways Group and US Airways entered into a mutual asset purchase and sale agreement with Delta Airlines, 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. The closing of the transactions under the agreement is subject to certain closing conditions, including approvals from a number of government agencies. In a final decision dated May 4, 2010, the Federal Aviation Administration (“FAA”) rejected an alternative transaction proposed by Delta and US Airways. On July 2, 2010, US Airways and Delta jointly filed with the United States Circuit Court of Appeals for the District of Columbia Circuit a notice of appeal of the regulatory action taken by the FAA with respect to this transaction. The Company is presently in discussions with Delta and the relevant government agencies regarding a possible resolution that would allow a slot transaction with Delta to proceed. However, the Company cannot predict the outcome of these discussions or the related judicial proceeding, or whether a slot transaction with Delta will be completed.
11. 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 allowed claims have been paid out in common stock of the post-bankruptcy US Airways Group at a small fraction of the actual claim amount. However, the effects of these common stock distributions were already reflected in the Company’s consolidated financial statements upon emergence from bankruptcy and will not have any further impact on its financial position or results of operations. The Company presently expects the bankruptcy case to be closed during 2011.
The Company is party to an arbitration proceeding relating to a grievance brought by its pilots union to the effect that, effective January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. A hearing was conducted and the parties are awaiting the ruling of the arbitrator. An adverse ruling by the arbitrator could require a material increase in the wages of the Company’s pilots and a material back payment to make the wage increase retroactive to January 1, 2010. The Company believes that the union’s position is without merit and that the possibility of an adverse outcome is remote.
On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation and certain of its affiliates (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices to preserve its monopoly power by restricting US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and has allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. US Airways intends to pursue these claims vigorously, but there can be no assurance of the outcome of this litigation.
The Company and/or its subsidiaries are defendants in various other 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.

 

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Item 1B.  
Condensed Consolidated Financial Statements of US Airways, Inc.
US Airways, Inc.
Condensed Consolidated Statements of Operations
(In millions)
(Unaudited)
                 
    Three Months  
    Ended March 31,  
    2011     2010  
Operating revenues:
               
Mainline passenger
  $ 1,900     $ 1,698  
Express passenger
    685       601  
Cargo
    43       33  
Other
    366       353  
 
           
Total operating revenues
    2,994       2,685  
Operating expenses:
               
Aircraft fuel and related taxes
    734       534  
Salaries and related costs
    573       556  
Express expenses
    787       675  
Aircraft rent
    164       171  
Aircraft maintenance
    163       157  
Other rent and landing fees
    129       134  
Selling expenses
    100       95  
Special items, net
    3       5  
Depreciation and amortization
    62       63  
Other
    309       305  
 
           
Total operating expenses
    3,024       2,695  
 
           
Operating loss
    (30 )     (10 )
Nonoperating income (expense):
               
Interest income
    1       5  
Interest expense, net
    (53 )     (59 )
Other, net
    (1 )     41  
 
           
Total nonoperating expense, net
    (53 )     (13 )
 
           
Loss before income taxes
    (83 )     (23 )
Income tax provision
           
 
           
Net loss
  $ (83 )   $ (23 )
 
           
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)
                 
    March 31,     December 31,  
    2011     2010  
    (Unaudited)        
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 2,067     $ 1,856  
Accounts receivable, net
    452       309  
Materials and supplies, net
    203       184  
Prepaid expenses and other
    553       480  
 
           
Total current assets
    3,275       2,829  
Property and equipment
               
Flight equipment
    3,996       3,985  
Ground property and equipment
    826       812  
Less accumulated depreciation and amortization
    (1,290 )     (1,238 )
 
           
 
    3,532       3,559  
Equipment purchase deposits
    133       123  
 
           
Total property and equipment
    3,665       3,682  
Other assets
               
Other intangibles, net of accumulated amortization of $136 million and $130 million, respectively
    437       443  
Restricted cash
    345       364  
Investments in marketable securities
    45       57  
Other assets
    200       190  
 
           
Total other assets
    1,027       1,054  
 
           
Total assets
  $ 7,967     $ 7,565  
 
           
 
               
LIABILITIES & STOCKHOLDER’S EQUITY
               
Current liabilities
               
Current maturities of debt and capital leases
  $ 367     $ 381  
Accounts payable
    421       343  
Payables to related parties, net
    608       626  
Air traffic liability
    1,361       861  
Accrued compensation and vacation
    151       236  
Accrued taxes
    237       149  
Other accrued expenses
    775       766  
 
           
Total current liabilities
    3,920       3,362  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    2,510       2,596  
Deferred gains and credits, net
    300       293  
Postretirement benefits other than pensions
    140       140  
Employee benefit liabilities and other
    401       394  
 
           
Total noncurrent liabilities and deferred credits
    3,351       3,423  
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
    19       20  
Accumulated deficit
    (1,768 )     (1,685 )
 
           
Total stockholder’s equity
    696       780  
 
           
Total liabilities and stockholder’s equity
  $ 7,967     $ 7,565  
 
           
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
                 
    Three Months  
    Ended March 31,  
    2011     2010  
Net cash provided by operating activities
  $ 324     $ 231  
Cash flows from investing activities:
               
Purchases of property and equipment
    (38 )     (74 )
Sales of marketable securities
    12       132  
Decrease in long-term restricted cash
    19       38  
 
           
Net cash provided by (used in) investing activities
    (7 )     96  
Cash flows from financing activities:
               
Repayments of debt and capital lease obligations
    (112 )     (119 )
Proceeds from issuance of debt
    6       80  
Deferred financing costs
          (3 )
 
           
Net cash used in financing activities
    (106 )     (42 )
 
           
Net increase in cash and cash equivalents
    211       285  
Cash and cash equivalents at beginning of period
    1,856       1,209  
 
           
Cash and cash equivalents at end of period
  $ 2,067     $ 1,494  
 
           
Non-cash investing and financing activities:
               
Interest payable converted to debt
  $ 9     $ 11  
Note payables issued for aircraft purchases
          111  
Net unrealized loss on available-for-sale securities
          1  
Supplemental information:
               
Interest paid, net of amounts capitalized
  $ 41     $ 49  
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 consolidated financial statements contained in US Airways’ Annual Report on Form 10-K for the year ended December 31, 2010. 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, FTCHP LLC. All significant intercompany accounts and transactions between US Airways and its wholly owned subsidiary 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 requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. 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 October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. US Airways’ multiple-deliverable revenue arrangements consist principally of sales of frequent flyer program mileage credits to business partners, which are comprised of two components, transportation and marketing. US Airways was required to adopt and apply ASU No. 2009-13 to any new or materially modified multiple deliverable revenue arrangements entered into on or after January 1, 2011. US Airways adopted ASU No. 2009-13 on January 1, 2011, and its application has had no material impact on US Airways’ condensed consolidated financial statements.
2. Special Items, Net
Special items, net as shown on the condensed consolidated statements of operations included the following charges (in millions):
                 
    Three Months  
    Ended March 31,  
    2011     2010  
Other costs
  $ 3     $  
Aircraft costs (a)
          5  
 
           
Special items, net
  $ 3     $ 5  
 
           
 
     
(a)  
In the three months ended March 31, 2010, US Airways recorded $5 million in aircraft costs 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 March 31, 2011.
                 
    March 31,     December 31,  
    2011     2010  
Secured
               
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.65% to 10.31%, maturing from 2011 to 2021
  $ 1,835     $ 1,890  
Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 6.25% to 9.01%, maturing from 2015 to 2023
    783       809  
Other secured obligations, fixed interest rate of 8%, maturing from 2015 to 2021
    79       85  
 
           
 
    2,697       2,784  
Unsecured
               
Airbus advance, repayments through 2018
    210       222  
Industrial development bonds, fixed interest rate of 6.30%, interest only payments until due in 2023
    29       29  
Other unsecured obligations, maturing from 2011 to 2012
    20       23  
 
           
 
    259       274  
 
           
Total long-term debt and capital lease obligations
    2,956       3,058  
Less: Total unamortized discount on debt
    (79 )     (81 )
Current maturities
    (367 )     (381 )
 
           
Long-term debt and capital lease obligations, net of current maturities
  $ 2,510     $ 2,596  
 
           
US Airways was in compliance with the covenants in its debt agreements at March 31, 2011.
Fair Value of Debt
The fair value of US Airways’ long-term debt and capital lease obligations was approximately $2.72 billion and $2.85 billion at March 31, 2011 and December 31, 2010, 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):
                 
    March 31, 2011     December 31, 2010  
US Airways Group
  $ 521     $ 571  
US Airways Group’s wholly owned subsidiaries
    87       55  
 
           
 
  $ 608     $ 626  
 
           
US Airways Group has the ability to move funds freely between its 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 subsidiary are part of the US Airways Group consolidated income tax return.
At December 31, 2010, US Airways had approximately $1.84 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 2011. The NOLs expire during the years 2024 through 2029. US Airways’ net deferred tax assets, which include $1.77 billion of the NOLs, are subject to a full valuation allowance. US Airways also had approximately $78 million of tax-effected state NOLs at December 31, 2010. At December 31, 2010, the federal and state valuation allowances were $388 million and $62 million, respectively.
US Airways reported a loss before income taxes in the first quarter of each of 2011 and 2010, and US Airways did not record a tax provision in either period.
6. Express Expenses
Expenses associated with affiliate regional airlines operating as US Airways Express are classified as Express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Aircraft fuel and related taxes
  $ 243     $ 170  
Salaries and related costs
    6       6  
Capacity purchases
    447       412  
Other rent and landing fees
    28       26  
Selling expenses
    41       36  
Other expenses
    22       25  
 
           
Express expenses
  $ 787     $ 675  
 
           
7. Investments in Marketable Securities
As of March 31, 2011, US Airways held auction rate securities with a fair value of $45 million ($69 million 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 22 to 25 years. 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. The estimated fair value of these auction rate securities no longer approximates par value. Refer to Note 8 for discussion on how US Airways determines the fair value of its investments in auction rate securities.
In the three months ended March 31, 2011, US Airways sold certain investments in auction rate securities for proceeds of $12 million. Proceeds from the auction rate security sale transactions approximated the carrying amount of the investments.
In the three months ended March 31, 2010, US Airways sold certain investments in auction rate securities for proceeds of $132 million, resulting in $49 million of net realized gains recorded in nonoperating expense, net, of which $48 million represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. Additionally, in the first quarter of 2010, US Airways recorded net unrealized losses of $1 million in other comprehensive income related to the decline in fair value of certain investments in auction rate securities, which offset previously recognized unrealized gains.
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.

 

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8. Fair Value Measurements
Assets measured at fair value on a recurring basis are as follows (in millions):
                                         
            Quoted Prices in     Significant Other     Significant        
            Active Markets for     Observable     Unobservable        
            Identical Assets     Inputs     Inputs     Valuation  
    Fair Value     (Level 1)     (Level 2)     (Level 3)     Technique  
At March 31, 2011
                                       
Investments in marketable securities (noncurrent)
  $ 45     $     $     $ 45       (1 )
At December 31, 2010
                                       
Investments in marketable securities (noncurrent)
  $ 57     $     $     $ 57       (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 7 for further discussion of US Airways’ investments in marketable securities.
Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (in millions):
         
    Investments in  
    Marketable  
    Securities  
    (Noncurrent)  
Balance at December 31, 2010
  $ 57  
Sales of marketable securities
    (12 )
 
     
Balance at March 31, 2011
  $ 45  
 
     
9. Other Comprehensive Income (Loss)
US Airways’ other comprehensive loss consisted of the following (in millions):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Net loss
  $ (83 )   $ (23 )
Recognition of net realized gains on sale of available-for-sale securities
          (48 )
Net unrealized losses on available-for-sale securities
          (1 )
Other postretirement benefits
    (1 )     (1 )
 
           
Total comprehensive loss
  $ (84 )   $ (73 )
 
           
The components of accumulated other comprehensive income were as follows (in millions):
                 
    March 31,     December 31,  
    2011     2010  
Other postretirement benefits
  $ 37     $ 38  
Available-for-sale securities
    (18 )     (18 )
 
           
Accumulated other comprehensive income
  $ 19     $ 20  
 
           

 

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10. Slot Transaction
In August 2009, US Airways Group and US Airways entered into a mutual asset purchase and sale agreement with Delta Airlines, 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. The closing of the transactions under the agreement is subject to certain closing conditions, including approvals from a number of government agencies. In a final decision dated May 4, 2010, the Federal Aviation Administration (“FAA”) rejected an alternative transaction proposed by Delta and US Airways. On July 2, 2010, US Airways and Delta jointly filed with the United States Circuit Court of Appeals for the District of Columbia Circuit a notice of appeal of the regulatory action taken by the FAA with respect to this transaction. US Airways is presently in discussions with Delta and the relevant government agencies regarding a possible resolution that would allow a slot transaction with Delta to proceed. However, US Airways cannot predict the outcome of these discussions or the related judicial proceeding, or whether a slot transaction with Delta will be completed.
11. 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 allowed claims have been 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 US Airways’ consolidated financial statements upon emergence from bankruptcy and will not have any further impact on its financial position or results of operations. US Airways presently expects the bankruptcy case to be closed during 2011.
US Airways is party to an arbitration proceeding relating to a grievance brought by its pilots union to the effect that, effective January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. A hearing was conducted and the parties are awaiting the ruling of the arbitrator. An adverse ruling by the arbitrator could require a material increase in the wages of US Airways’ pilots and a material back payment to make the wage increase retroactive to January 1, 2010. US Airways believes that the union’s position is without merit and that the possibility of an adverse outcome is remote.
On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation and certain of its affiliates (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices to preserve its monopoly power by restricting US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and has allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. US Airways intends to pursue these claims vigorously, but there can be no assurance of the outcome of this litigation.
US Airways is a defendant in various other pending lawsuits and proceedings, and from time to time is 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 US Airways, 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.

 

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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, 2010 (the “2010 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 2010 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. 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. For the three months ended March 31, 2011, we had approximately 12 million passengers boarding our mainline flights. As of March 31, 2011, we operated 340 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 231 regional jets and 50 turboprops. Our prorate carriers operated 14 turboprops and six regional jets at March 31, 2011.
The U.S. Airline Industry
In the first quarter of 2011, the U.S. airline industry faced an unexpected challenge when political unrest in the Middle East and North Africa substantially increased the cost of crude oil. Since mid-March 2011, the daily spot price for crude has consistently exceeded $100 per barrel and in April 2011 peaked as high as $112 per barrel for West Texas Intermediate (“WTI”) crude oil and $126 per barrel for Brent Crude oil. Accordingly, market prices for jet fuel, one of an airline’s largest expenses, surged as well. In the first half of April 2011, the average U.S. Gulf Coast spot market price for jet fuel was $3.25 per gallon. The Air Transport Association of America (“ATA”) estimates that if a $3 per gallon jet fuel price was sustained for 2011, it would increase the U.S. airlines’ 2011 fuel costs by $15 billion over their 2010 fuel costs of $39 billion. ATA reports that in 2010, U.S. airlines reported an estimated net profit of $3 billion representing a 2% profit margin.
The industry is responding to the significant spike in fuel costs by increasing fares. The economic recovery, which started in 2010 and continues to drive strong consumer demand for air travel, as well as the industry’s continued capacity discipline, resulted in a robust pricing environment in the first quarter of 2011. Since December 2010, U.S. airlines have been able to raise ticket prices through several major fare increases. In its most recent data available, the ATA reported that industry passenger revenues increased 10% and 13% on a year-over-year basis in January and February 2011, respectively, with February 2011 marking the 14th consecutive month of revenue growth. Increased industry yields of 7.2% and 10.8% on a year-over-year basis in January and February 2011, respectively, were the key contributors to revenue growth.
Despite the major earthquake in Japan and tsunami, which resulted in a significant drop in passenger traffic in that region, international markets continued to outperform domestic markets with respect to year-over-year improvements in revenue. ATA reported international passenger revenues grew 16% and 17% in January and February 2011, respectively, as compared to domestic revenue growth of 6.7% and 11.5%, respectively, in January and February 2011. Cargo revenues were also up in the first quarter of 2011 with greater growth internationally.
The industry also has responded to the significant spike in fuel costs by reducing capacity. Since the beginning of the year, many U.S. airlines have implemented or announced capacity reductions for 2011.
Unlike 2008, the U.S. airline industry has been able to pass on at least some of these higher costs to customers thus far in 2011. However, significant uncertainty exists as to whether the economic conditions driving passenger demand and the capacity discipline that permitted the industry to increase revenues in the first quarter of 2011 will be sufficient to continue to absorb high fuel prices. See Part II, Item 1A, “Risk Factors — 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.

 

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US Airways Group
In the first quarter of 2011, the year-over-year growth in revenues driven by the strong pricing environment substantially offset higher costs, principally rising fuel costs. In the three months ended March 31, 2011, we realized an operating loss of $39 million as compared to an operating loss of $10 million in the 2010 period. Additionally, we continued to run one of the industry’s most reliable operations as measured by the Department of Transportation’s rankings in on-time performance, baggage handling and customer complaints ratios.
Capacity
In response to rising fuel costs, in March 2011 we announced we would reduce capacity in the fourth quarter of 2011. System capacity is now expected to be up approximately one to two percent in 2011. Mainline is forecast to be up approximately two percent, with domestic capacity expected to be up slightly and international up five percent. Express capacity is expected to be down approximately one percent.
Revenue
Mainline and Express passenger revenues increased $286 million, or 12.4%, as compared to the 2010 period. The increase in passenger revenues was driven by a 7.6% increase in yield as compared to the 2010 period. Our mainline and Express passenger revenue per available seat mile (“PRASM”) was 12.59 cents in 2011, an 8.7% increase, as compared to 11.58 cents in the 2010 period. Total revenue per available seat mile (“RASM”) was 14.42 cents in 2011 as compared to 13.35 cents in the 2010 period, representing an 8.1% improvement. Total revenues include our ancillary revenue initiatives, which generated $126 million in revenues for the first quarter of 2011, an increase of $8 million over the 2010 period.
Fuel
The average mainline and Express price per gallon of fuel was $2.88 for the first quarter of 2011 as compared to an average cost per gallon of $2.18 in the first quarter of 2010, an increase of 32.5%. Accordingly, our mainline and Express fuel expense was $976 million for the first quarter of 2011, which was 38.7% higher than the 2010 period, on a 3.4% increase in total system capacity.
Since the third quarter of 2008, we have not entered into any new transactions to hedge our fuel consumption, and we have not had any fuel hedging contracts outstanding since the third quarter of 2009.
Cost Control
We remained 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. Our mainline CASM excluding special items and fuel decreased 0.12 cents, or 1.3%, from 8.88 cents in first quarter of 2010 to 8.76 cents in the first quarter of 2011. The decrease in the 2011 period was primarily due to our strong operational performance and continued cost diligence.
The following table details our mainline costs per available seat mile (“CASM”) for the three months ended March 31, 2011 and 2010:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In cents)        
Mainline CASM excluding special items and fuel:
                       
Total mainline CASM
    13.09       12.13       7.9  
Special items, net
    (0.02 )     (0.03 )     (42.8 )
Aircraft fuel and related taxes
    (4.31 )     (3.22 )     33.7  
 
                   
Total mainline CASM excluding special items and fuel (1)
    8.76       8.88       (1.3 )
 
                   
     
(1)  
We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

 

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Customer Service
The first quarter of 2011 was another quarter of outstanding operational performance for US Airways as measured by the Department of Transportation’s (“DOT”) monthly operating performance metrics. Through February 2011, the most recently issued monthly DOT Air Travel Consumer Report, we have received two first place rankings in baggage handling and one first place ranking in on-time performance.
In addition, in April 2011, we received a first place ranking among the nation’s big hub-and spoke carriers in the annual Airline Quality Report (“AQR”). The AQR is published by teams of researchers at Wichita State University in Kansas and Purdue University in Indiana. US Airways improved its ranking among the big hub-and-spoke carriers for the fifth consecutive year, and received a 6th place overall ranking, which was up from 8th place a year ago.
We reported the following operating statistics to the DOT for mainline operations for the first quarter of 2011 and 2010:
                                                                         
    2011     2010     Percent Better (Worse) 2011-2010  
    January     February     March (e)     January     February     March     January     February     March  
On-time performance (a)
    78.6       80.5       82.8       79.4       75.3       80.9       (1.0 )     6.9       2.3  
Completion factor (b)
    95.0       97.9       99.3       97.0       92.9       98.6       (2.1 )     5.4       0.7  
Mishandled baggage (c)
    3.04       2.52       2.42       3.45       3.22       2.92       11.9       21.7       17.1  
Customer complaints (d)
    1.51       1.59       1.24       2.03       1.69       1.83       25.6       5.9       32.2  
 
     
(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)  
March 2011 operating statistics are preliminary as the DOT has not issued its March 2011 Air Travel Consumer Report as of the date of this filing.
Liquidity Position
As of March 31, 2011, our cash, cash equivalents, investments in marketable securities and restricted cash were $2.46 billion, of which $345 million was restricted.
                 
    March 31,     December 31,  
    2011     2010  
    (In millions)  
Cash and cash equivalents
  $ 2,073     $ 1,859  
Long-term restricted cash
    345       364  
Long-term investments in marketable securities
    45       57  
 
           
Total cash, cash equivalents, investments in marketable securities and restricted cash
  $ 2,463     $ 2,280  
 
           
In the first quarter of 2011, a strong pricing environment and seasonal factors drove a $183 million improvement in our liquidity position.
Long-term restricted cash primarily includes cash collateral to secure workers’ compensation claims and credit card processing holdback requirements for advance ticket sales for which US Airways has not yet provided air transportation.
As of March 31, 2011, our investments in marketable securities included $45 million ($69 million par value) of auction rate securities that are classified as noncurrent assets on our condensed consolidated balance sheets. The reduction in long-term investments during the first quarter of 2011 was due principally to sales of $12 million of auction rate securities. Proceeds from our auction rate security sale transactions approximated the carrying amount of the investments.

 

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2011 Outlook
Looking forward it is difficult to predict the price of oil, the pace at which the economy may continue to recover or the capacity actions of other airlines, which may impact our ability to be profitable in 2011. Over the past few years we have taken significant and decisive actions to maintain capacity that is in line with demand, realign our network to focus on key markets, introduce new revenue streams, control costs and continue our commitment to exceptional operating reliability. We will continue to evaluate our planned capacity in light of fuel prices, the state of the economy and general industry conditions.

 

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US Airways Group’s Results of Operations
In the three months ended March 31, 2011, we realized an operating loss of $39 million and a loss before income taxes of $114 million. We experienced year-over-year growth in revenues driven by the strong pricing environment, which substantially offset higher costs, primarily rising fuel costs. Our first quarter 2011 results were also impacted by recognition of $4 million in special charges.
In the three months ended March 31, 2010, we realized an operating loss of $10 million and a loss before income taxes of $45 million. Our first quarter 2010 results were also impacted by recognition of $44 million in net special credits as follows:
   
$5 million of net special charges for aircraft costs as a result of capacity reductions; and
   
$49 million of net realized gains related to the sale of certain investments in auction rate securities, included in nonoperating expense, net.
At December 31, 2010, we had approximately $1.92 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 2011. The NOLs expire during the years 2024 through 2029. Our net deferred tax assets, which include $1.85 billion of the NOLs, are subject to a full valuation allowance. We also had approximately $82 million of tax-effected state NOLs at December 31, 2010. At December 31, 2010, the federal and state valuation allowances were $368 million and $62 million, respectively.
We reported a loss before income taxes in the first quarter of each of 2011 and 2010, and we did not record a tax provision in either period.

 

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The table below sets forth our selected mainline and Express operating data:
                         
    Three Months Ended        
    March 31,     Increase  
    2011     2010     (Decrease)  
Mainline
                       
Revenue passenger miles (millions) (a)
    13,570       13,053       4.0 %
Available seat miles (millions) (b)
    17,035       16,579       2.8 %
Passenger load factor (percent) (c)
    79.7       78.7     1.0 pts
Yield (cents) (d)
    14.00       13.01       7.6 %
Passenger revenue per available seat mile (cents) (e)
    11.15       10.24       8.9 %
Operating cost per available seat mile (cents) (f)
    13.09       12.13       7.9 %
Passenger enplanements (thousands) (g)
    12,504       11,985       4.3 %
Departures (thousands)
    112       108       3.7 %
Aircraft at end of period
    340       347       (2.0 )%
Block hours (thousands) (h)
    294       286       2.7 %
Average stage length (miles) (i)
    946       959       (1.3 )%
Average passenger journey (miles) (j)
    1,593       1,599       (0.4 )%
Fuel consumption (gallons in millions)
    256       247       3.7 %
Average aircraft fuel price including related taxes (dollars per gallon)
    2.87       2.17       32.5 %
Full-time equivalent employees at end of period
    30,621       30,439       0.6 %
 
                       
Express (k)
                       
Revenue passenger miles (millions) (a)
    2,438       2,270       7.4 %
Available seat miles (millions) (b)
    3,492       3,279       6.5 %
Passenger load factor (percent) (c)
    69.8       69.2     0.6 pts
Yield (cents) (d)
    28.08       26.49       6.0 %
Passenger revenue per available seat mile (cents) (e)
    19.60       18.34       6.9 %
Operating cost per available seat mile (cents) (f)
    22.06       19.80       11.4 %
Passenger enplanements (thousands) (g)
    6,347       5,946       6.7 %
Aircraft at end of period
    281       282       (0.4 )%
Fuel consumption (gallons in millions)
    83       77       7.6 %
Average aircraft fuel price including related taxes (dollars per gallon)
    2.92       2.20       32.6 %
 
                       
Total Mainline and Express
                       
Revenue passenger miles (millions) (a)
    16,008       15,323       4.5 %
Available seat miles (millions) (b)
    20,527       19,858       3.4 %
Passenger load factor (percent) (c)
    78.0       77.2     0.8 pts
Yield (cents) (d)
    16.14       15.01       7.6 %
Passenger revenue per available seat mile (cents) (e)
    12.59       11.58       8.7 %
Total revenue per available seat mile (cents) (l)
    14.42       13.35       8.1 %
Passenger enplanements (thousands) (g)
    18,851       17,931       5.1 %
Aircraft at end of period
    621       629       (1.3 )%
Fuel consumption (gallons in millions)
    339       324       4.6 %
Average aircraft fuel price including related taxes (dollars per gallon)
    2.88       2.18       32.5 %
 
     
(a)  
Revenue passenger mile (“RPM”) — A basic measure of sales volume. One RPM represents one passenger flown one mile.
 
(b)  
Available seat mile (“ASM”) — A basic measure of production. One ASM represents one seat flown one mile.
 
(c)  
Passenger load factor — The percentage of available seats that are filled with revenue passengers.
 
(d)  
Yield — A measure of airline revenue derived by dividing passenger revenue by RPMs and expressed in cents per mile.
 
(e)  
Passenger revenue per available seat mile (“PRASM”) — Passenger revenues divided by ASMs.
 
(f)  
Operating cost per available seat mile (“CASM”) — Operating expenses divided by ASMs.

 

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(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 Airline Inc., Mesa Airlines, Inc. and Chautauqua Airlines, Inc.
 
(l)  
Total revenue per available seat mile (“RASM”) — Total revenues divided by total mainline and Express ASMs.
Three Months Ended March 31, 2011
Compared with the
Three Months Ended March 31, 2010
Operating Revenues:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating revenues:
                       
Mainline passenger
  $ 1,900     $ 1,698       11.9  
Express passenger
    685       601       13.8  
Cargo
    43       33       30.2  
Other
    333       319       4.9  
 
                   
Total operating revenues
  $ 2,961     $ 2,651       11.7  
 
                   
Total operating revenues in the first quarter of 2011 were $2.96 billion as compared to $2.65 billion in the 2010 period, an increase of $310 million, or 11.7%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $1.90 billion in the first quarter of 2011 as compared to $1.70 billion in the 2010 period. Mainline RPMs increased 4.0% as mainline capacity, as measured by ASMs, increased 2.8%, resulting in a 1.0 point increase in load factor to 79.7%. Mainline passenger yield increased 7.6% to 14.00 cents in the first quarter of 2011 from 13.01 cents in the 2010 period. Mainline PRASM increased 8.9% to 11.15 cents in the first quarter of 2011 from 10.24 cents in the 2010 period. These increases in mainline yield and PRASM were due principally to the strong pricing environment driven by the economic recovery and continued industry capacity discipline.
   
Express passenger revenues were $685 million in the first quarter of 2011, an increase of $84 million from the 2010 period. Express RPMs increased 7.4% as Express capacity, as measured by ASMs, increased 6.5%, resulting in a 0.6 point increase in load factor to 69.8%. Express passenger yield increased by 6.0% to 28.08 cents in the first quarter of 2011 from 26.49 cents in the 2010 period. Express PRASM increased 6.9% to 19.60 cents in the first quarter of 2011 from 18.34 cents in the 2010 period. The increases in Express yield and PRASM were the result of the same strong pricing environment discussed in mainline passenger revenues above.
   
Cargo revenues were $43 million in the first quarter of 2011, an increase of $10 million, or 30.2%, from the 2010 period. The increase in cargo revenues was driven primarily by an increase in yield as well as an increase in international freight volume as a result of the improved economic environment.

 

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Operating Expenses:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 734     $ 534       37.4  
Salaries and related costs
    573       556       3.1  
Aircraft rent
    164       171       (4.1 )
Aircraft maintenance
    163       157       4.2  
Other rent and landing fees
    129       134       (4.2 )
Selling expenses
    100       95       5.8  
Special items, net
    3       5       (41.2 )
Depreciation and amortization
    60       61       (1.2 )
Other
    304       298       1.5  
 
                   
Total mainline operating expenses
    2,230       2,011       10.8  
Express expenses:
                       
Fuel
    242       170       42.7  
Other
    528       480       10.2  
 
                   
Total Express expenses
    770       650       18.7  
 
                   
Total operating expenses
  $ 3,000     $ 2,661       12.8  
 
                   
Total operating expenses were $3.00 billion in the first quarter of 2011, an increase of $339 million, or 12.8%, compared to the 2010 period.
Mainline Operating Expenses:
Mainline operating expenses were $2.23 billion in the first quarter of 2011, an increase of $219 million, or 10.8%, from the 2010 period, while mainline capacity increased 2.8%.
Our mainline CASM excluding special items and fuel decreased 0.12 cents, or 1.3%, from 8.88 cents in the first quarter of 2010 to 8.76 cents in the first quarter of 2011. The decrease in the 2011 period was primarily due to our strong operational performance and continued cost diligence.
The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the three months ended March 31, 2011 and 2010:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In cents)        
Mainline CASM:
                       
Aircraft fuel and related taxes
    4.31       3.22       33.7  
Salaries and related costs
    3.36       3.35       0.3  
Aircraft rent
    0.96       1.03       (6.7 )
Aircraft maintenance
    0.96       0.95       1.4  
Other rent and landing fees
    0.76       0.81       (6.7 )
Selling expenses
    0.59       0.57       3.0  
Special items, net
    0.02       0.03       (42.8 )
Depreciation and amortization
    0.35       0.37       (3.9 )
Other
    1.78       1.80       (1.2 )
 
                   
Total mainline CASM
    13.09       12.13       7.9  
Special items, net
    (0.02 )     (0.03 )        
Aircraft fuel and related taxes
    (4.31 )     (3.22 )        
 
                   
Total mainline CASM excluding special items and fuel (1)
    8.76       8.88       (1.3 )
 
                   
     
(1)  
We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

 

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Significant changes in the components of mainline operating expense per ASM are as follows:
   
Aircraft fuel and related taxes per ASM increased 33.7% primarily due to a 32.5% increase in the average price per gallon of fuel to $2.87 in the first quarter of 2011 from $2.17 in the 2010 period.
   
Aircraft rent per ASM decreased 6.7% primarily due to a decrease in the average number of leased aircraft in the first quarter of 2011 as compared to the 2010 period.
   
Other rent and landing fees per ASM decreased 6.7% primarily due to the timing of annually determined rent credits received at certain airport stations.
Express Operating Expenses:
Total Express expenses increased $120 million, or 18.7%, in the first quarter of 2011 to $770 million from $650 million in the 2010 period. The period-over-period increase was primarily due to a $72 million, or 42.7%, increase in fuel costs. Increased fuel costs were primarily the result of a 32.6% increase in the average price per gallon of fuel to $2.92 in the first quarter of 2011 from $2.20 in the 2010 period. Other Express expenses increased $48 million, or 10.2%, while Express capacity increased 6.5%, due primarily to an increase in maintenance expenses due principally to increases in the number of engine overhauls performed.
Nonoperating Income (Expense):
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Nonoperating income (expense):
                       
Interest income
  $ 1     $ 5       (74.6 )
Interest expense, net
    (77 )     (82 )     (6.0 )
Other, net
    1       42       (98.8 )
 
                   
Total nonoperating expense, net
  $ (75 )   $ (35 )   nm  
 
                   
Net nonoperating expense increased $40 million in the first quarter of 2011 to $75 million from $35 million in the 2010 period. The period-over-period increase was primarily due to $49 million of net realized gains related to the sale of certain investments in auction rate securities recorded in the 2010 period.

 

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US Airways’ Results of Operations
In the three months ended March 31, 2011, US Airways realized an operating loss of $30 million and a loss before income taxes of $83 million. US Airways experienced year-over-year growth in revenues driven by the strong pricing environment, which substantially offset higher costs, primarily rising fuel costs. US Airways’ first quarter 2011 results were also impacted by recognition of $3 million in special charges.
In the three months ended March 31, 2010, US Airways realized an operating loss of $10 million and a loss before income taxes of $23 million. US Airways’ first quarter 2010 results were also impacted by recognition of $44 million in net special credits as follows:
   
$5 million of net special charges for aircraft costs as a result of capacity reductions; and
   
$49 million of net realized gains related to the sale of certain investments in auction rate securities, included in nonoperating expense, net.
At December 31, 2010, US Airways had approximately $1.84 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 2011. The NOLs expire during the years 2024 through 2029. US Airways’ net deferred tax assets, which include $1.77 billion of the NOLs, are subject to a full valuation allowance. US Airways also had approximately $78 million of tax-effected state NOLs at December 31, 2010. At December 31, 2010, the federal and state valuation allowances were $388 million and $62 million, respectively.
US Airways reported a loss before income taxes in the first quarter of each of 2011 and 2010, and US Airways did not record a tax provision in either period.

 

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The table below sets forth US Airways’ selected mainline and Express operating data:
                         
    Three Months Ended        
    March 31,     Increase  
    2011     2010     (Decrease)  
Mainline
                       
Revenue passenger miles (millions) (a)
    13,570       13,053       4.0 %
Available seat miles (millions) (b)
    17,035       16,579       2.8 %
Passenger load factor (percent) (c)
    79.7       78.7     1.0 pts
Yield (cents) (d)
    14.00       13.01       7.6 %
Passenger revenue per available seat mile (cents) (e)
    11.15       10.24       8.9 %
Aircraft at end of period
    340       347       (2.0 )%
Fuel consumption (gallons in millions)
    256       247       3.7 %
Average aircraft fuel price including related taxes (dollars per gallon)
    2.87       2.17       32.5 %
 
                       
Express (f)
                       
Revenue passenger miles (millions) (a)
    2,438       2,270       7.4 %
Available seat miles (millions) (b)
    3,492       3,279       6.5 %
Passenger load factor (percent) (c)
    69.8       69.2     0.6 pts
Yield (cents) (d)
    28.08       26.49       6.0 %
Passenger revenue per available seat mile (cents) (e)
    19.60       18.34       6.9 %
Aircraft at end of period
    281       282       (0.4 )%
Fuel consumption (gallons in millions)
    83       77       7.6 %
Average aircraft fuel price including related taxes (dollars per gallon)
    2.92       2.20       32.5 %
 
                       
Total Mainline and Express
                       
Revenue passenger miles (millions) (a)
    16,008       15,323       4.5 %
Available seat miles (millions) (b)
    20,527       19,858       3.4 %
Passenger load factor (percent) (c)
    78.0       77.2     0.8 pts
Yield (cents) (d)
    16.14       15.01       7.6 %
Passenger revenue per available seat mile (cents) (e)
    12.59       11.58       8.7 %
Total revenue per available seat mile (cents) (g)
    14.58       13.52       7.9 %
Aircraft at end of period
    621       629       (1.3 )%
Fuel consumption (gallons in millions)
    339       324       4.6 %
Average aircraft fuel price including related taxes (dollars per gallon)
    2.89       2.18       32.5 %
 
     
(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 Airline Inc., Mesa Airlines, Inc. and Chautauqua Airlines, Inc.
 
(g)  
Total revenue per available seat mile (“RASM”) — Total revenues divided by total mainline and Express ASMs.

 

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Three Months Ended March 31, 2011
Compared with the
Three Months Ended March 31, 2010
Operating Revenues:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)          
Operating revenues:
                       
Mainline passenger
  $ 1,900     $ 1,698       11.9  
Express passenger
    685       601       13.8  
Cargo
    43       33       30.2  
Other
    366       353       4.1  
 
                   
Total operating revenues
  $ 2,994     $ 2,685       11.5  
 
                   
Total operating revenues in the first quarter of 2011 were $2.99 billion as compared to $2.69 billion in the 2010 period, an increase of $309 million, or 11.5%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $1.90 billion in the first quarter of 2011 as compared to $1.70 billion in the 2010 period. Mainline RPMs increased 4.0% as mainline capacity, as measured by ASMs, increased 2.8%, resulting in a 1.0 point increase in load factor to 79.7%. Mainline passenger yield increased 7.6% to 14.00 cents in the first quarter of 2011 from 13.01 cents in the 2010 period. Mainline PRASM increased 8.9% to 11.15 cents in the first quarter of 2011 from 10.24 cents in the 2010 period. These increases in mainline yield and PRASM were due principally to the strong pricing environment driven by the economic recovery and continued industry capacity discipline.
   
Express passenger revenues were $685 million in the first quarter of 2011, an increase of $84 million from the 2010 period. Express RPMs increased 7.4% as Express capacity, as measured by ASMs, increased 6.5%, resulting in a 0.6 point increase in load factor to 69.8%. Express passenger yield increased by 6.0% to 28.08 cents in the first quarter of 2011 from 26.49 cents in the 2010 period. Express PRASM increased 6.9% to 19.60 cents in the first quarter of 2011 from 18.34 cents in the 2010 period. The increases in Express yield and PRASM were the result of the same strong pricing environment discussed in mainline passenger revenues above.
   
Cargo revenues were $43 million in the first quarter of 2011, an increase of $10 million, or 30.2%, from the 2010 period. The increase in cargo revenues was driven primarily by an increase in yield as well as an increase in international freight volume as a result of the improved economic environment.

 

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Operating Expenses:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)    
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 734     $ 534       37.4  
Salaries and related costs
    573       556       3.1  
Aircraft rent
    164       171       (4.1 )
Aircraft maintenance
    163       157       4.2  
Other rent and landing fees
    129       134       (4.2 )
Selling expenses
    100       95       5.8  
Special items, net
    3       5       (41.2 )
Depreciation and amortization
    62       63       (1.2 )
Other
    309       305       1.0  
 
                   
Total mainline operating expenses
    2,237       2,020       10.7  
Express expenses:
                       
Fuel
    243       170       42.6  
Other
    544       505       7.9  
 
                   
Total Express expenses
    787       675       16.7  
 
                   
Total operating expenses
  $ 3,024     $ 2,695       12.2  
 
                   
Total operating expenses were $3.02 billion in the first quarter of 2011, an increase of $329 million, or 12.2%, compared to the 2010 period.
Mainline Operating Expenses:
Mainline operating expenses were $2.24 billion in the first quarter of 2011, an increase of $217 million, or 10.7%, from the 2010 period, while mainline capacity increased 2.8%.
Significant changes in the components of mainline operating expenses are as follows:
   
Aircraft fuel and related taxes increased 37.4% primarily due to a 32.5% increase in the average price per gallon of fuel to $2.87 in the first quarter of 2011 from $2.17 in the 2010 period.
   
Selling expenses increased 5.8% primarily due to higher credit card fees and commissions paid as a result of the increase in passenger revenues in 2011.
Express Operating Expenses:
Total Express expenses increased $112 million, or 16.7%, in the first quarter of 2011 to $787 million from $675 million in the 2010 period. The period-over-period increase was primarily due to a $73 million, or 42.6%, increase in fuel costs. Increased fuel costs were primarily the result of a 32.5% increase in the average price per gallon of fuel to $2.92 in the first quarter of 2011 from $2.20 in the 2010 period. Other Express expenses increased $39 million, or 7.9%, while Express capacity increased 6.5%, due primarily to an increase in amounts paid under capacity purchase agreements with US Airways Group’s wholly owned Express carriers.

 

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Nonoperating Income (Expense):
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)          
Nonoperating income (expense):
                       
Interest income
  $ 1     $ 5       (74.6 )
Interest expense, net
    (53 )     (59 )     (9.5 )
Other, net
    (1 )     41     nm  
 
                   
Total nonoperating expense, net
  $ (53 )   $ (13 )   nm  
 
                   
Net nonoperating expense increased $40 million in the first quarter of 2011 to $53 million from $13 million in the 2010 period. The period-over-period increase was primarily due to $49 million of net realized gains related to the sale of certain investments in auction rate securities recorded in the 2010 period.

 

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Liquidity and Capital Resources
As of March 31, 2011, our cash, cash equivalents, investments in marketable securities and restricted cash were $2.46 billion, of which $345 million was restricted. Our investments in marketable securities included $45 million of auction rate securities at fair value ($69 million par value) that are classified as noncurrent assets on our condensed consolidated balance sheets. Refer to Note 7, “Investments in Marketable Securities” in Part I, Items 1A and 1B, respectively, of this report for additional information on our auction rate securities.
Sources and Uses of Cash
US Airways Group
Net cash provided by operating activities was $345 million and $199 million for the first three months of 2011 and 2010, respectively, a period-over-period improvement of $146 million. A strong pricing environment and seasonal factors drove the improvement in operating cash flows.
Net cash used in investing activities was $9 million for the first three months of 2011 as compared to net cash provided by investing activities of $92 million for the first three months of 2010. Principal investing activities in the 2011 period included expenditures for property and equipment totaling $40 million, offset in part by a $19 million decrease in restricted cash and proceeds from sales of auction rate securities of $12 million. Principal investing activities in the 2010 period included proceeds from sales of auction rate securities of $132 million and a $38 million decrease in restricted cash. These cash inflows were offset in part by expenditures for property and equipment totaling $78 million, primarily related to the purchase of Airbus aircraft. 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 had not yet provided air transportation.
Net cash used in financing activities was $122 million and $58 million for the first three months of 2011 and 2010, respectively. Principal financing activities in the 2011 period included debt repayments of $128 million. Principal financing activities in the 2010 period included debt repayments of $135 million and proceeds from the issuance of debt of $80 million, which primarily included the financing associated with the purchase of Airbus aircraft.
US Airways
Net cash provided by operating activities was $324 million and $231 million for the first three months of 2011 and 2010, respectively, a period-over-period improvement of $93 million. A strong pricing environment and seasonal factors drove the improvement in operating cash flows. US Airways’ operating cash flow was also impacted by net intercompany cash transfers to US Airways Group.
Net cash used in investing activities was $7 million for the first three months of 2011 as compared to net cash provided by investing activities of $96 million for the first three months of 2010. Principal investing activities in the 2011 period included expenditures for property and equipment totaling $38 million, offset in part by a $19 million decrease in restricted cash and proceeds from sales of auction rate securities of $12 million. Principal investing activities in the 2010 period included proceeds from sales of auction rate securities of $132 million and a $38 million decrease in restricted cash. These cash inflows were offset in part by expenditures for property and equipment totaling $74 million, primarily related to the purchase of Airbus aircraft. 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 had not yet provided air transportation.
Net cash used in financing activities was $106 million and $42 million for the first three months of 2011 and 2010, respectively. Principal financing activities in the 2011 period included debt repayments of $112 million. Principal financing activities in the 2010 period included debt repayments of $119 million and proceeds from the issuance of debt of $80 million, which primarily included the financing associated with the purchase of Airbus aircraft.

 

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Commitments
As of March 31, 2011, we had $4.50 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 2010 Form 10-K.
Citicorp Credit Facility
On March 23, 2007, US Airways Group entered into a term loan credit facility (the “Citicorp credit facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways Group borrowed an aggregate principal amount of $1.6 billion. US Airways and certain other subsidiaries of US Airways Group are guarantors of the Citicorp credit facility.
The Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at our option, LIBOR plus an applicable LIBOR margin for interest periods of one, two, three or six months. The applicable index margin, subject to adjustment, is 1.00%, 1.25% or 1.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. The applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25% or 2.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. In addition, interest on the Citicorp credit facility may be adjusted based on the credit rating for the Citicorp credit facility as follows: (i) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least one subgrade better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be the lower of 2.25% and the rate otherwise applicable based upon the adjusted Citicorp credit facility balance and (B) the applicable index margin will be the lower of 1.25% and the rate otherwise applicable based upon the Citicorp credit facility principal balance, and (ii) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least two subgrades better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be 2.00% and (B) the applicable index margin will be 1.00%. As of March 31, 2011, the interest rate on the Citicorp credit facility was 2.75% based on a 2.50% LIBOR margin.
The Citicorp credit facility matures on March 23, 2014, and is repayable in seven annual installments with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.
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 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 $1.14 billion as of March 31, 2011. As of March 31, 2011, we were in compliance with all debt covenants under the Citicorp credit facility.
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. These holdback amounts are reflected on our condensed consolidated balance sheet as restricted cash.

 

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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). Since 2008, when deliveries commenced under the purchase agreements, we have taken delivery of 34 aircraft through March 31, 2011, which includes four A320 aircraft, 23 A321 aircraft and seven A330-200 aircraft. US Airways plans to take delivery of 12 A320 family aircraft in the second half of 2011 and an additional 12 A320 family aircraft in 2012. The remaining 46 A320 family aircraft are 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 A320 family fleet, three new Trent 700 spare engines scheduled for delivery through 2013 for use on the A330-200 fleet and three new Trent XWB spare engines scheduled for delivery in 2017 through 2019 for use on the 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 March 31, 2011.
Under all of our aircraft and engine purchase agreements, our total future commitments as of March 31, 2011 are expected to be approximately $5.94 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 March 31, 2011, we and our subsidiaries were in compliance with the covenants in our long-term debt agreements.
The following table details our credit ratings as of March 31, 2011:
             
    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 worsen, we may face future downgrades, which could 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.

 

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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 2010 Form 10-K.

 

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Contractual Obligations
The following table provides details of our future cash contractual obligations as of March 31, 2011 (in millions):
                                                         
    Payments Due by Period  
    2011     2012     2013     2014     2015     Thereafter     Total  
US Airways Group (1)
                                                       
Debt (2)
  $     $ 116     $ 116     $ 1,276     $     $ 35     $ 1,543  
Interest obligations (3)
    42       54       48       24       3       23       194  
US Airways (4)
                                                       
Debt and capital lease obligations (5) (6)
    269       348       307       279       279       1,474       2,956  
Interest obligations (3) (6)
    111       138       117       99       101       308       874  
Aircraft purchase and operating lease commitments (7)
    1,225       1,563       1,902       1,608       1,021       4,766       12,085  
Regional capacity purchase agreements (8)
    739       993       995       1,000       882       1,361       5,970  
Other US Airways Group subsidiaries (9)
    8       9       8       6       1             32  
 
                                         
Total
  $ 2,394     $ 3,221     $ 3,493     $ 4,292     $ 2,287     $ 7,967     $ 23,654  
 
                                         
 
     
(1)  
These commitments represent those entered into by US Airways Group.
 
(2)  
Excludes $127 million of unamortized debt discount as of March 31, 2011.
 
(3)  
For variable-rate debt, future interest obligations are shown above using interest rates in effect as of March 31, 2011.
 
(4)  
These commitments represent those entered into by US Airways.
 
(5)  
Excludes $79 million of unamortized debt discount as of March 31, 2011.
 
(6)  
Includes $783 million of future principal payments and $323 million of future interest payments as of March 31, 2011, respectively, related to pass through trust certificates, or EETCs, associated with mortgage financings for the purchase of certain aircraft.
 
(7)  
Includes $2.83 billion of future minimum lease payments related to EETC leveraged leased financings of certain aircraft as of March 31, 2011.
 
(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 Bank Delaware and certain of our other financing arrangements contain significant minimum cash balance requirements. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements.

 

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Critical Accounting Policies and Estimates
In the first quarter of 2011, 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 2010 Form 10-K.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. Our multiple-deliverable revenue arrangements consist principally of sales of frequent flyer program mileage credits to business partners, which are comprised of two components, transportation and marketing. We were required to adopt and apply ASU No. 2009-13 to any new or materially modified multiple deliverable revenue arrangements entered into on or after January 1, 2011. We adopted ASU No. 2009-13 on January 1, 2011, and its application has had no material 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 2010 Form 10-K except as updated below.
Commodity price risk
Our 2011 forecasted mainline and Express fuel consumption is approximately 1.43 billion gallons, and based on this forecast, a one cent per gallon increase in aviation fuel price results in a $14 million increase in annual expense. Since the third quarter of 2008, we have not entered into any new transactions to hedge our fuel consumption, 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 March 31, 2011, our variable-rate long-term debt obligations of approximately $2.90 billion represented approximately 65% of our total long-term debt. If interest rates increased 10% in 2011, the impact on our results of operations would be approximately $11 million of additional interest expense.

 

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Item 4.  
Controls and Procedures
Evaluation of disclosure controls and procedures.
An evaluation was performed under the supervision and with the participation of US Airways Group’s and US Airways’ management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) as of March 31, 2011. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2011.
Changes in internal control over financial reporting.
There has been no change to US Airways Group’s or US Airways’ internal control over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, US Airways Group’s or US Airways’ internal control over financial reporting.
Limitation on the effectiveness of controls.
We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO believe that our disclosure controls and procedures were effective at the “reasonable assurance” level as of March 31, 2011.

 

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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 allowed claims have been 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 consolidated 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 2011.
We are party to an arbitration proceeding relating to a grievance brought by our pilots union to the effect that, effective January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. A hearing was conducted and the parties are awaiting the ruling of the arbitrator. An adverse ruling by the arbitrator could require a material increase in the wages of our pilots and a material back payment to make the wage increase retroactive to January 1, 2010. We believe that the union’s position is without merit and that the possibility of an adverse outcome is remote.
On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation and certain of its affiliates (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices to preserve its monopoly power by restricting US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and has allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. US Airways intends to pursue these claims vigorously, but there can be no assurance of the outcome of this litigation.
We are defendants in various other pending lawsuits and proceedings, and from time to time are subject to other claims arising in the normal course of our business, many of which are covered in whole or in part by insurance. The outcome of those matters cannot be predicted with certainty at this time, but we, having consulted with outside counsel, believe that the ultimate disposition of these contingencies will not materially affect our 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 result in the future, in decreased passenger demand for air travel and changes in booking practices, both of which in turn have had, and may have in the future, 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.

 

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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.
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.
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 (“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 three 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 transactions to hedge our fuel consumption, and we have not had any fuel hedging contracts outstanding since the third quarter of 2009. 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. We are currently subject to certain holdback requirements. 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”).

 

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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 materially adversely affect our ability to conduct our business and our financial performance.
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 five 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 materially adversely affect our ability to conduct our business and our financial performance and create material liability for back pay.
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 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 86% 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, including related to wages. 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 material additional costs that we did not anticipate.
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 Washington, D.C. is a focus city. 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 or at Washington, D.C. 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.
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 any of the regional operators. 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.

 

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In January 2010, Mesa Air Group, Inc. and certain of its subsidiaries, including Mesa Airlines, Inc., filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. At December 31, 2010, Mesa operated 51 aircraft for our Express passenger operations, representing over $500 million in annual passenger revenues to us in 2010. In November 2010, we signed an agreement for an extension of 39 months on average from the current scheduled expiration of June 30, 2012, for the operation of 38 CRJ900 aircraft by Mesa under the companies’ codeshare and revenue sharing agreement, which agreement was approved by the U.S. Bankruptcy Court. The remaining 13 aircraft were not extended. Mesa Air Group, Inc. emerged from bankruptcy in March 2011.
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 on third party distribution channels and must manage effectively the costs, rights and functionality of these channels.
We rely on third party distribution channels, including those provided by or through global distribution systems, or GDSs (e.g., Amadeus, Sabre and Travelport), conventional travel agents and online travel agents, or OTAs (e.g., Expedia, Orbitz and Travelocity), to distribute a significant portion of our airline tickets and we expect in the future to continue to rely on these channels and hope eventually to use them to distribute and collect revenues for ancillary products (e.g., fees for selective seating). These distribution channels are more expensive and at present have less functionality in respect of ancillary product offerings than those we operate ourselves, such as our call centers and our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we will need to manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of third party distribution channels, while maintaining an industry-competitive cost structure. Several of our distribution agreements with key GDSs and OTAs are due to expire in the relatively near term and will therefore require that we negotiate renewals or extensions. These negotiations have in the past and could in the future be contentious, result in diminished or less favorable terms for the distribution of our tickets and ancillary products, and not result in our obtaining the functionality we require to maximize ancillary revenues. Any inability to manage our third party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our competitive position and our results of operations.
Further, on April 21, 2011, we filed an antitrust lawsuit against Sabre in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices to preserve its monopoly power by restricting our ability to distribute our products to our customers. The lawsuit also alleges that these actions have prevented us from employing new competing technologies and has allowed Sabre to continue to charge us supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. We intend to pursue these claims vigorously, but there can be no assurance of the outcome of this litigation.
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, although we expect new proposed rules to be issued later this year.
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 and maintenance 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.

 

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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 ended in September 2010. 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.
We rely heavily on automated systems to operate our business and any failure or disruption of these systems could harm our business.
To operate our business, we depend on automated systems, including our computerized airline reservation systems, flight operations systems, telecommunication systems, airport customer self-service kiosks and websites. Our website and reservation systems must be able to accommodate a high volume of traffic, process transactions and deliver important flight information on a timely and reliable basis. Substantial or repeated disruptions or failures of any of these automated systems could impair our operations, reduce the attractiveness of our services and could result in lost revenues and increased costs. In addition, these automated systems require periodic maintenance, upgrades and replacements, and our business may be harmed if we fail to properly maintain, upgrade or replace such systems.
Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand.
We have implemented several new measures designed to increase revenue and offset costs. These measures include charging separately for services that had previously been included within the price of a ticket and increasing other pre-existing fees. We may introduce additional initiatives in the future, however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives. We cannot assure you that these new measures or any future initiatives will be successful in increasing our revenues. Additionally, the implementation of these initiatives creates logistical challenges that could harm the operational performance of our airline. Also, the new and increased fees might reduce the demand for air travel on our airline or across the industry in general, particularly 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 the actions of other carriers in many areas including pricing, scheduling, capacity and promotions, which 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, potentially, further consolidation, and could continue to have an impact on the overall performance of US Airways Group.

 

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Additionally, as mergers and 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 will grow and that growth will 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. 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 and Transportation Security Act mandated 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.
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.

 

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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 effect on our business.
We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators. Under these leases and agreements, we have agreed to standard language indemnifying the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, even if we are not the party responsible for the initial event that caused the environmental damage. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines.
There is increasing global regulatory focus on climate change and greenhouse gas emissions. In particular, the United States and the EU have developed regulatory requirements that may affect our business. The U.S. Congress is considering climate-related legislation to reduce emissions of greenhouse gases. Several states have also developed measures to regulate emissions of greenhouse gases, primarily through the planned development of greenhouse gas emissions inventories and/or regional greenhouse gas cap and trade programs. In late 2009 and early 2010, the U.S. EPA adopted regulations requiring reporting of greenhouse gas emissions from certain facilities 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 effect 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 and could increase our costs.
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.

 

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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 September 30, 2011. 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.

 

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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.
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 (“Section 382”), a limitation is imposed on the corporation’s future ability to utilize any net operating losses (“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.
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 7.25% 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.

 

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Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group make it difficult for stockholders to change the composition of our board of directors and may discourage takeover attempts that some of our stockholders might consider beneficial.
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of US Airways Group and its stockholders. These provisions include, among other things, the following:
   
a classified board of directors with three-year staggered terms;
   
advance notice procedures for stockholder proposals to be considered at stockholders’ meetings;
   
the ability of US Airways Group’s board of directors to fill vacancies on the board;
   
a prohibition against stockholders taking action by written consent;
   
a prohibition against stockholders calling special meetings of stockholders;
   
a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve 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 6.  
Exhibits
The exhibits listed in the Exhibit Index following the signature pages to this report are filed as part of this report.

 

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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
         
  US Airways Group, Inc. (Registrant)
 
 
Date: April 25, 2011  By:   /s/ Derek J. Kerr    
    Derek J. Kerr   
    Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 
 
 
  US Airways, Inc. (Registrant)
 
 
Date: April 25, 2011  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    
2011 Annual Incentive Program Under 2008 Equity Incentive Plan.†
       
 
  10.2    
2011 Long Term Incentive Performance Program Under 2008 Equity Incentive Plan.†
       
 
  31.1    
Certification of US Airways Group’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.2    
Certification of US Airways Group’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.3    
Certification of US Airways’ Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  31.4    
Certification of US Airways’ Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
 
  32.1    
Certification of US Airways Group’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of US Airways’ Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  101    
Interactive data files pursuant to Rule 405 of Regulation S-T.
 
     
 
Management contract or compensatory plan or arrangement.

 

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