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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 September 30, 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 October 21, 2011, there were approximately 162,112,185 shares of US Airways Group, Inc. common stock outstanding.
As of October 21, 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 September 30, 2011
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 EX-31.1
 EX-31.2
 EX-31.3
 EX-31.4
 EX-32.1
 EX-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,” “would”, “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, booking practices 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 or our focus city;
 
   
our reliance on third-party regional operators or third-party service providers;
 
   
our reliance on and costs, rights and functionality of third-party distribution channels, including those provided by global distribution systems, conventional travel agents 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 or reductions in available insurance coverage;
 
   
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     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Operating revenues:
                               
Mainline passenger
  $ 2,267     $ 2,066     $ 6,447     $ 5,800  
Express passenger
    796       746       2,316       2,114  
Cargo
    40       37       126       107  
Other
    333       330       1,011       980  
 
                       
Total operating revenues
    3,436       3,179       9,900       9,001  
Operating expenses:
                               
Aircraft fuel and related taxes
    905       625       2,587       1,775  
Salaries and related costs
    577       579       1,726       1,708  
Express expenses
    794       694       2,376       2,027  
Aircraft rent
    160       168       486       508  
Aircraft maintenance
    163       160       508       479  
Other rent and landing fees
    144       143       418       413  
Selling expenses
    123       118       343       320  
Special items, net
    13       3       22       (1 )
Depreciation and amortization
    58       65       178       189  
Other
    319       309       938       907  
 
                       
Total operating expenses
    3,256       2,864       9,582       8,325  
 
                       
Operating income
    180       315       318       676  
Nonoperating income (expense):
                               
Interest income
    1       2       4       11  
Interest expense, net
    (85 )     (83 )     (241 )     (252 )
Other, net
    1       7       (7 )     41  
 
                       
Total nonoperating expense, net
    (83 )     (74 )     (244 )     (200 )
 
                       
Income before income taxes
    97       241       74       476  
Income tax provision
    21       1       21       1  
 
                       
Net income
  $ 76     $ 240     $ 53     $ 475  
 
                       
Earnings per common share:
                               
Basic earnings per common share
  $ 0.47     $ 1.49     $ 0.33     $ 2.94  
Diluted earnings per common share
  $ 0.41     $ 1.22     $ 0.33     $ 2.45  
Shares used for computation (in thousands):
                               
Basic
    162,090       161,464       161,999       161,290  
Diluted
    201,278       204,535       163,916       200,775  
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share and per share amounts)
(Unaudited)
                 
    September 30,     December 31,  
    2011     2010  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 2,043     $ 1,859  
Accounts receivable, net
    390       311  
Materials and supplies, net
    279       231  
Prepaid expenses and other
    591       508  
 
           
Total current assets
    3,303       2,909  
Property and equipment
               
Flight equipment
    4,326       4,134  
Ground property and equipment
    896       843  
Less accumulated depreciation and amortization
    (1,462 )     (1,304 )
 
           
 
    3,760       3,673  
Equipment purchase deposits
    179       123  
 
           
Total property and equipment
    3,939       3,796  
Other assets
               
Other intangibles, net of accumulated amortization of $157 million and $139 million, respectively
    459       477  
Restricted cash
    384       364  
Investments in marketable securities
          57  
Other assets
    232       216  
 
           
Total other assets
    1,075       1,114  
 
           
Total assets
  $ 8,317     $ 7,819  
 
           
 
               
LIABILITIES & STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Current maturities of debt and capital leases
  $ 484     $ 397  
Accounts payable
    414       386  
Air traffic liability
    1,116       861  
Accrued compensation and vacation
    189       245  
Accrued taxes
    157       149  
Other accrued expenses
    922       802  
 
           
Total current liabilities
    3,282       2,840  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    3,987       4,003  
Deferred gains and credits, net
    313       336  
Postretirement benefits other than pensions
    143       141  
Employee benefit liabilities and other
    433       415  
 
           
Total noncurrent liabilities and deferred credits
    4,876       4,895  
Commitments and contingencies
               
Stockholders’ equity
               
Common stock, $0.01 par value; 400,000,000 shares authorized, 162,112,185 shares issued and outstanding at September 30, 2011; 161,874,756 shares issued and outstanding at December 31, 2010
    2       2  
Additional paid-in capital
    2,121       2,115  
Accumulated other comprehensive income
    30       14  
Accumulated deficit
    (1,994 )     (2,047 )
 
           
Total stockholders’ equity
    159       84  
 
           
Total liabilities and stockholders’ equity
  $ 8,317     $ 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)
                 
    Nine Months  
    Ended September 30,  
    2011     2010  
Net cash provided by operating activities
  $ 465     $ 789  
Cash flows from investing activities:
               
Purchases of property and equipment
    (316 )     (133 )
Purchases of marketable securities
    (30 )     (180 )
Sales of marketable securities
    82       268  
Decrease (increase) in long-term restricted cash
    (20 )     91  
Proceeds from sale-leaseback transactions and dispositions of property and equipment
    1       3  
 
           
Net cash provided by (used in) investing activities
    (283 )     49  
Cash flows from financing activities:
               
Repayments of debt and capital lease obligations
    (516 )     (367 )
Proceeds from issuance of debt
    531       120  
Deferred financing costs
    (13 )     (5 )
 
           
Net cash provided by (used in) financing activities
    2       (252 )
 
           
Net increase in cash and cash equivalents
    184       586  
Cash and cash equivalents at beginning of period
    1,859       1,299  
 
           
Cash and cash equivalents at end of period
  $ 2,043     $ 1,885  
 
           
Non-cash investing and financing activities:
               
Interest payable converted to debt
  $ 25     $ 33  
Note payables issued for aircraft purchases
          111  
Net unrealized loss on available-for-sale securities
          1  
Deposit applied to principal repayment on debt
          (31 )
Supplemental information:
               
Interest paid, net of amounts capitalized
  $ 151     $ 181  
Income taxes paid
          1  
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 most significant areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, 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.
In May 2011, the FASB issued ASU 2011-4, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. The guidance clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, addresses the concept of valuation premise and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy and requires additional disclosures. ASU 2011-4 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company is currently evaluating the requirements of ASU 2011-4 and has not yet determined its impact on the Company’s condensed consolidated financial statements.

 

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2. Special Items, Net
Special items, net as shown on the condensed consolidated statements of operations included the following charges (credits) for the three and nine months ended September 30, 2011 and 2010 (in millions):
                                 
    Three Months     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Other costs (a)
  $ 11     $ 3     $ 19     $ 10  
Severance costs
    2             3        
Aviation Security Infrastructure Fee (“ASIF”) refund (b)
                      (16 )
Aircraft costs (c)
                      5  
 
                       
Special items, net
  $ 13     $ 3     $ 22     $ (1 )
 
                       
 
     
(a)  
In the three and nine months ended September 30, 2011, the Company recorded net special charges of $11 million and $19 million, respectively, primarily related to legal costs incurred in connection with the slot transaction with Delta Air Lines, Inc. (“Delta”) that is described in Note 10 below and auction rate securities arbitration.
 
   
In the three months ended September 30, 2010, the Company recorded $3 million in other net special charges. In the nine months ended September 30, 2010, the Company recorded net special charges of $10 million, which included a settlement and corporate transaction costs.
 
(b)  
In the nine months ended September 30, 2010, the Company recorded a $16 million refund of ASIF previously paid to the Transportation Security Administration (“TSA”) during the years 2005 to 2009.
 
(c)  
In the nine months ended September 30, 2010, the Company recorded $5 million in aircraft costs as a result of capacity reductions.

 

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3. Earnings Per Common Share
Basic earnings 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     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Basic earnings per share:
                               
Net income
  $ 76     $ 240     $ 53     $ 475  
 
                       
Weighted average common shares outstanding (in thousands)
    162,090       161,464       161,999       161,290  
 
                       
Basic earnings per share
  $ 0.47     $ 1.49     $ 0.33     $ 2.94  
 
                       
Diluted earnings per share:
                               
Net income
  $ 76     $ 240     $ 53     $ 475  
Interest expense on 7.25% convertible senior notes
    7       6             17  
Interest expense on 7% senior convertible notes
          3              
 
                       
Net income for purposes of computing diluted earnings per share
  $ 83     $ 249     $ 53     $ 492  
 
                       
Share computation (in thousands):
                               
Weighted average common shares outstanding
    162,090       161,464       161,999       161,290  
Dilutive effect of stock awards
    1,243       2,307       1,917       1,739  
Assumed conversion of 7.25% convertible senior notes
    37,746       37,746             37,746  
Assumed conversion of 7% senior convertible notes
    199       3,018              
 
                       
Weighted average common shares outstanding as adjusted
    201,278       204,535       163,916       200,775  
 
                       
Diluted earnings per share
  $ 0.41     $ 1.22     $ 0.33     $ 2.45  
 
                       
For the three and nine months ended September 30, 2011, 1,795,513 and 1,578,361 shares, respectively, underlying stock options, SARs and RSUs were not included in the computation of diluted EPS because inclusion of such shares would be antidilutive. For the nine months ended September 30, 2011, 37,746,174 and 199,379 incremental shares, respectively, from the assumed conversion of the 7.25% Convertible Senior Notes (the “7.25% notes”) and the 7% Senior Convertible Notes (the “7% notes”) were excluded from the computation of diluted EPS because inclusion of such shares would be antidilutive.
For the three and nine months ended September 30, 2010, 1,873,853 and 1,857,322 shares, respectively, underlying stock options, SARs and RSUs were not included in the computation of diluted EPS because inclusion of such shares would be antidilutive. For the nine months ended September 30, 2010, 3,038,590 incremental shares from the assumed conversion of the 7% notes were excluded from the computation of diluted EPS because inclusion of such shares would be antidilutive.

 

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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 September 30, 2011.
                 
    September 30,     December 31,  
    2011     2010  
Secured
               
Citicorp North America loan, variable interest rate of 2.74%, installments due through 2014
  $ 1,136     $ 1,152  
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.62% to 10.30%, maturing from 2012 to 2029
    1,609       1,920  
Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 6.25% to 11%, maturing from 2014 to 2023
    1,245       809  
Other secured obligations, fixed interest rate of 8%, maturing from 2015 to 2021
    77       85  
 
           
 
    4,067       3,966  
Unsecured
               
Barclays prepaid miles, variable interest rate of 4.99%, interest only payments
    200       200  
Airbus advance, repayments through 2018
    165       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
    13       23  
 
           
 
    584       651  
 
           
Total long-term debt and capital lease obligations
    4,651       4,617  
Less: Total unamortized discount on debt
    (180 )     (217 )
Current maturities
    (484 )     (397 )
 
           
Long-term debt and capital lease obligations, net of current maturities
  $ 3,987     $ 4,003  
 
           
     
   
The Company was in compliance with the covenants in its debt agreements at September 30, 2011.
2011 EETC Transactions
In June 2011, US Airways created three pass-through trusts which issued approximately $471 million aggregate face amount of Series 2011-1 Class A, Class B and Class C Enhanced Equipment Trust Certificates in connection with the refinancing of five Airbus aircraft owned by US Airways and the financing of four Airbus aircraft scheduled to be delivered from September to October 2011 (the “2011 EETCs”). The 2011 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ condensed consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets.
As of September 30, 2011, $425 million of the escrowed proceeds from the 2011 EETCs have been used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in an aggregate principal amount of $265 million bearing interest at 7.125% per annum, Series B equipment notes in an aggregate principal amount of $85 million bearing interest at 9.75% per annum and Series C equipment notes in an aggregate principal amount of $75 million bearing interest at 10.875% per annum. Interest on the equipment notes is payable semiannually in April and October of each year, beginning in October 2011. Principal payments on the equipment notes are scheduled to begin in April 2012. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in October 2023, October 2018 and October 2014, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used to repay the existing debt associated with the five Airbus aircraft and to finance three Airbus aircraft delivered in September 2011, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $46 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered.

 

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Series 2010-1 EETC Offering
In July 2011, US Airways completed an offering of Class C certificates in the aggregate principal amount of $53 million under its Series 2010-1 EETCs. The 2010-1 Class A and B certificates originally closed in December 2010 in connection with the refinancing of owned Airbus aircraft. Also in July 2011, US Airways issued $53 million in additional equipment notes bearing interest at 11% per annum. The net proceeds from the offering will be used for general corporate purposes.
Fair Value of Debt
The fair value of the Company’s long-term debt and capital lease obligations was approximately $3.99 billion and $4.37 billion at September 30, 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.
During the three and nine months ended September 30, 2011 and 2010, the Company utilized NOLs to reduce its income tax obligation. Utilization of these NOLs results in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in the valuation allowance offsets the tax provision dollar for dollar. During the three and nine months ended September 30, 2010, the Company recorded $1 million of state income tax expense related to certain states where NOLs were either limited or not available to be used.
In connection with the sale of the Company’s remaining investment in auction rate securities (refer to Note 7), the Company recorded a special non-cash tax charge of $21 million in the third quarter of 2011. In the fourth quarter of 2009, the Company had recorded in other comprehensive income (“OCI”), a subset of stockholders’ equity, a non-cash tax provision of $21 million. This provision resulted from $56 million of unrealized gains recorded in OCI due to an increase in the fair value of certain investments in auction rate securities.
The Company has a net deferred tax asset that is subject to a valuation allowance. Typically, in accordance with Generally Accepted Accounting Principles (“GAAP”), the reversal of a valuation allowance on a net deferred tax asset reduces any tax provision generated. However, under GAAP, an exception to the above described tax accounting is applicable when a company has the following: (1) a net deferred tax asset that is subject to valuation allowance, (2) an income statement loss and (3) net gains in OCI. In this situation, tax benefits derived from the presence of net gains held in OCI are required to be included in income from operations.
The Company met all three of these conditions in the fourth quarter of 2009. As a result, the $21 million tax benefit resulting from the reversal of the valuation allowance was recorded in income from operations rather than as an offset to the $21 million tax provision recorded in OCI. Accordingly, in connection with the sale of the Company’s final investment in auction rate securities, the Company recorded a $21 million special non-cash tax charge in the third quarter of 2011, which recognizes in the statement of operations the tax provision recorded in OCI.

 

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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     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Aircraft fuel and related taxes
  $ 273     $ 197     $ 803     $ 562  
Salaries and related costs
    67       63       204       189  
Capacity purchases
    255       272       782       809  
Aircraft rent
    13       13       39       39  
Aircraft maintenance
    55       19       151       55  
Other rent and landing fees
    35       33       104       96  
Selling expenses
    45       48       135       128  
Special items, net
                1       (1 )
Depreciation and amortization
    6       6       18       18  
Other expenses
    45       43       139       132  
 
                       
Express expenses
  $ 794     $ 694     $ 2,376     $ 2,027  
 
                       
7. Investments in Marketable Securities
In the three months ended September 30, 2011, the Company sold its remaining investment in auction rate securities for cash proceeds of $19 million, the carrying amount of the investment. With this sale, the Company has now liquidated its entire investment in auction rate securities.
In the nine months ended September 30, 2011, the Company sold certain investments in auction rate securities for proceeds of $52 million, resulting in the reversal of $3 million of prior period net unrealized gains from other comprehensive income and $2 million of realized losses recorded in nonoperating expense, net.
In the nine months ended September 30, 2010, the Company sold certain investments in auction rate securities for proceeds of $143 million, resulting in $53 million of net realized gains recorded in nonoperating expense, net, of which $52 million represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. Additionally, in the nine months ended September 30, 2010, the Company recorded net unrealized losses of $1 million in other comprehensive income, all of which was recognized in the first quarter of 2010 and offset previously recognized unrealized gains, related to the decline in fair value of certain investments in auction rate securities.
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 September 30, 2011
                                       
Investments in marketable securities (current)
  $     $     $     $       (1)
At December 31, 2010
                                       
Investments in marketable securities (noncurrent)
  $ 57     $     $     $ 57       (1)
     
(1)  
At December 31, 2010, 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. As of September 30, 2011, the Company has liquidated its entire investment in auction rate securities. Refer to Note 7 for further discussion of the Company’s investments in marketable securities.

 

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Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (in millions):
         
    Investments in  
    Marketable  
    Securities  
Balance at December 31, 2010
  $ 57  
Sales of marketable securities
    (52 )
Reversal of net unrealized gains recorded to other comprehensive income
    (3 )
Losses recorded to other nonoperating expense, net
    (2 )
 
     
Balance at September 30, 2011
  $  
 
     
9. Other Comprehensive Income
The Company’s other comprehensive income consisted of the following (in millions):
                                 
    Three Months     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Net income
  $ 76     $ 240     $ 53     $ 475  
Reversal of tax provision in other comprehensive income
    21             21        
Reversal of net unrealized gains on available-for-sale securities
                (3 )      
Recognition of net realized gains on sale of available-for-sale securities
                      (52 )
Net unrealized losses on available-for-sale securities
                      (1 )
Pension and other postretirement benefits
    (1 )     (1 )     (2 )     (3 )
 
                       
Total comprehensive income
  $ 96     $ 239     $ 69     $ 419  
 
                       
The components of accumulated other comprehensive income were as follows (in millions):
                 
    September 30,     December 31,  
    2011     2010  
Pension and other postretirement benefits
  $ 30     $ 32  
Available-for-sale securities
          (18 )
 
           
Accumulated other comprehensive income
  $ 30     $ 14  
 
           
10. Slot Transaction
In May 2011, US Airways Group and US Airways entered into an Amended and Restated Mutual Asset Purchase and Sale Agreement (the “Mutual APA”) with Delta. The Mutual APA amends and restates the Mutual Asset Purchase and Sale Agreement dated as of August 11, 2009 by and among the parties. Upon the terms and subject to the conditions provided for in the Mutual APA, Delta would acquire 265 slots at LaGuardia from US Airways and US Airways would acquire from Delta 42 slot pairs at Washington National and the rights to operate additional daily service to Sao Paulo, Brazil in 2015, and Delta would pay US Airways $66.5 million in cash. One slot equals one take-off or landing, and each pair of slots equals one roundtrip flight. The Mutual APA is structured as two simultaneous asset sales. The closing of the transactions contemplated by the Mutual APA is subject to the receipt of customary and necessary closing conditions, including approvals from a number of government agencies. On October 11, 2011, the U.S. Department of Transportation and the Federal Aviation Administration each granted their approval, with certain conditions, to the transactions.

 

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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 case was closed in June 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, Sabre Inc. and Sabre Travel International Limited (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 that illegally restrain 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 have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four counts in the complaint to proceed. Sabre subsequently filed another motion to dismiss relating to one of the two remaining counts. This second motion to dismiss remains pending. US Airways intends to pursue its 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     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Operating revenues:
                               
Mainline passenger
  $ 2,267     $ 2,066     $ 6,447     $ 5,800  
Express passenger
    796       746       2,316       2,114  
Cargo
    40       37       126       107  
Other
    373       368       1,124       1,089  
 
                       
Total operating revenues
    3,476       3,217       10,013       9,110  
Operating expenses:
                               
Aircraft fuel and related taxes
    905       625       2,587       1,775  
Salaries and related costs
    577       579       1,726       1,708  
Express expenses
    824       727       2,449       2,123  
Aircraft rent
    160       168       486       508  
Aircraft maintenance
    163       160       508       479  
Other rent and landing fees
    144       143       418       413  
Selling expenses
    123       118       343       320  
Special items, net
    13       3       22       (1 )
Depreciation and amortization
    61       67       185       196  
Other
    329       316       963       927  
 
                       
Total operating expenses
    3,299       2,906       9,687       8,448  
 
                       
Operating income
    177       311       326       662  
Nonoperating income (expense):
                               
Interest income
    1       2       4       11  
Interest expense, net
    (58 )     (59 )     (166 )     (179 )
Other, net
    1       10       (7 )     42  
 
                       
Total nonoperating expense, net
    (56 )     (47 )     (169 )     (126 )
 
                       
Income before income taxes
    121       264       157       536  
Income tax provision
    21       1       21       1  
 
                       
Net income
  $ 100     $ 263     $ 136     $ 535  
 
                       
See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share and per share amounts)
(Unaudited)
                 
    September 30,     December 31,  
    2011     2010  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 2,041     $ 1,856  
Accounts receivable, net
    388       309  
Materials and supplies, net
    231       184  
Prepaid expenses and other
    567       480  
 
           
Total current assets
    3,227       2,829  
Property and equipment
               
Flight equipment
    4,176       3,985  
Ground property and equipment
    862       812  
Less accumulated depreciation and amortization
    (1,392 )     (1,238 )
 
           
 
    3,646       3,559  
Equipment purchase deposits
    179       123  
 
           
Total property and equipment
    3,825       3,682  
Other assets
               
Other intangibles, net of accumulated amortization of $147 million and $130 million, respectively
    426       443  
Restricted cash
    384       364  
Investments in marketable securities
          57  
Other assets
    212       190  
 
           
Total other assets
    1,022       1,054  
 
           
Total assets
  $ 8,074     $ 7,565  
 
           
 
               
LIABILITIES & STOCKHOLDER’S EQUITY
               
Current liabilities
               
Current maturities of debt and capital leases
  $ 393     $ 381  
Accounts payable
    319       343  
Payables to related parties, net
    617       626  
Air traffic liability
    1,116       861  
Accrued compensation and vacation
    180       236  
Accrued taxes
    157       149  
Other accrued expenses
    884       766  
 
           
Total current liabilities
    3,666       3,362  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    2,641       2,596  
Deferred gains and credits, net
    283       293  
Postretirement benefits other than pensions
    142       140  
Employee benefit liabilities and other
    410       394  
 
           
Total noncurrent liabilities and deferred credits
    3,476       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
    36       20  
Accumulated deficit
    (1,549 )     (1,685 )
 
           
Total stockholder’s equity
    932       780  
 
           
Total liabilities and stockholder’s equity
  $ 8,074     $ 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)
                 
    Nine Months  
    Ended September 30,  
    2011     2010  
Net cash provided by operating activities
  $ 439     $ 749  
Cash flows from investing activities:
               
Purchases of property and equipment
    (305 )     (122 )
Purchases of marketable securities
    (30 )     (180 )
Sales of marketable securities
    82       268  
Decrease (increase) in long-term restricted cash
    (20 )     91  
Proceeds from sale-leaseback transactions and dispositions of property and equipment
    1       3  
 
           
Net cash provided by (used in) investing activities
    (272 )     60  
Cash flows from financing activities:
               
Repayments of debt and capital lease obligations
    (500 )     (282 )
Proceeds from issuance of debt
    531       90  
Deferred financing costs
    (13 )     (3 )
 
           
Net cash provided by (used in) financing activities
    18       (195 )
 
           
Net increase in cash and cash equivalents
    185       614  
Cash and cash equivalents at beginning of period
    1,856       1,209  
 
           
Cash and cash equivalents at end of period
  $ 2,041     $ 1,823  
 
           
Non-cash investing and financing activities:
               
Interest payable converted to debt
  $ 25     $ 33  
Note payables issued for aircraft purchases
          111  
Net unrealized loss on available-for-sale securities
          1  
Deposit applied to principal repayment on debt
          (31 )
Supplemental information:
               
Interest paid, net of amounts capitalized
  $ 107     $ 132  
Income taxes paid
          1  
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 most significant areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, 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.
In May 2011, the FASB issued ASU 2011-4, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. The guidance clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, addresses the concept of valuation premise and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy and requires additional disclosures. ASU 2011-4 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. US Airways is currently evaluating the requirements of ASU 2011-4 and has not yet determined its impact on US Airways’ condensed consolidated financial statements.

 

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2. Special Items, Net
Special items, net as shown on the condensed consolidated statements of operations included the following charges (credits) for the three and nine months ended September 30, 2011 and 2010 (in millions):
                                 
    Three Months     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Other costs (a)
  $ 11     $ 3     $ 19     $ 10  
Severance costs
    2             3        
Aviation Security Infrastructure Fee (“ASIF”) refund (b)
                      (16 )
Aircraft costs (c)
                      5  
 
                       
Special items, net
  $ 13     $ 3     $ 22     $ (1 )
 
                       
 
     
(a)  
In the three and nine months ended September 30, 2011, US Airways recorded net special charges of $11 million and $19 million, respectively, primarily related to legal costs incurred in connection with the slot transaction with Delta Air Lines, Inc. (“Delta”) that is described in Note 10 below and auction rate securities arbitration.
 
   
In the three months ended September 30, 2010, US Airways recorded $3 million in other net special charges. In the nine months ended September 30, 2010, US Airways recorded net special charges of $10 million, which included a settlement and corporate transaction costs.
 
(b)  
In the nine months ended September 30, 2010, US Airways recorded a $16 million refund of ASIF previously paid to the Transportation Security Administration (“TSA”) during the years 2005 to 2009.
 
(c)  
In the nine months ended September 30, 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 September 30, 2011.
                 
    September 30,     December 31,  
    2011     2010  
Secured
               
Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.62% to 10.30%, maturing from 2012 to 2021
  $ 1,579     $ 1,890  
Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 6.25% to 11%, maturing from 2014 to 2023
    1,245       809  
Other secured obligations, fixed interest rate of 8%, maturing from 2015 to 2021
    77       85  
 
           
 
    2,901       2,784  
Unsecured
               
Airbus advance, repayments through 2018
    165       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
    13       23  
 
           
 
    207       274  
 
           
Total long-term debt and capital lease obligations
    3,108       3,058  
Less: Total unamortized discount on debt
    (74 )     (81 )
Current maturities
    (393 )     (381 )
 
           
Long-term debt and capital lease obligations, net of current maturities
  $ 2,641     $ 2,596  
 
           
     
   
US Airways was in compliance with the covenants in its debt agreements at September 30, 2011.
2011 EETC Transactions
In June 2011, US Airways created three pass-through trusts which issued approximately $471 million aggregate face amount of Series 2011-1 Class A, Class B and Class C Enhanced Equipment Trust Certificates in connection with the refinancing of five Airbus aircraft owned by US Airways and the financing of four Airbus aircraft scheduled to be delivered from September to October 2011 (the “2011 EETCs”). The 2011 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ condensed consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets.
As of September 30, 2011, $425 million of the escrowed proceeds from the 2011 EETCs have been used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in an aggregate principal amount of $265 million bearing interest at 7.125% per annum, Series B equipment notes in an aggregate principal amount of $85 million bearing interest at 9.75% per annum and Series C equipment notes in an aggregate principal amount of $75 million bearing interest at 10.875% per annum. Interest on the equipment notes is payable semiannually in April and October of each year, beginning in October 2011. Principal payments on the equipment notes are scheduled to begin in April 2012. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in October 2023, October 2018 and October 2014, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used to repay the existing debt associated with the five Airbus aircraft and to finance three Airbus aircraft delivered in September 2011, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $46 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered.
Series 2010-1 EETC Offering
In July 2011, US Airways completed an offering of Class C certificates in the aggregate principal amount of $53 million under its Series 2010-1 EETCs. The 2010-1 Class A and B certificates originally closed in December 2010 in connection with the refinancing of owned Airbus aircraft. Also in July 2011, US Airways issued $53 million in additional equipment notes bearing interest at 11% per annum. The net proceeds from the offering will be used for general corporate purposes.

 

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Fair Value of Debt
The fair value of US Airways’ long-term debt and capital lease obligations was approximately $2.71 billion and $2.85 billion at September 30, 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):
                 
    September 30,     December 31,  
    2011     2010  
US Airways Group
  $ 519     $ 571  
US Airways Group’s wholly owned subsidiaries
    98       55  
 
           
 
  $ 617     $ 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.
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.
During the three and nine months ended September 30, 2011 and 2010, US Airways utilized NOLs to reduce its income tax obligation. Utilization of these NOLs results in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in the valuation allowance offsets the tax provision dollar for dollar. During the three and nine months ended September 30, 2010, US Airways recorded $1 million of state income tax expense related to certain states where NOLs were either limited or not available to be used.
In connection with the sale of US Airways’ remaining investment in auction rate securities (refer to Note 7), US Airways recorded a special non-cash tax charge of $21 million in the third quarter of 2011. In the fourth quarter of 2009, US Airways had recorded in other comprehensive income (“OCI”), a subset of stockholder’s equity, a non-cash tax provision of $21 million. This provision resulted from $56 million of unrealized gains recorded in OCI due to an increase in the fair value of certain investments in auction rate securities.
US Airways has a net deferred tax asset that is subject to a valuation allowance. Typically, in accordance with Generally Accepted Accounting Principles (“GAAP”), the reversal of a valuation allowance on a net deferred tax asset reduces any tax provision generated. However, under GAAP, an exception to the above described tax accounting is applicable when a company has the following: (1) a net deferred tax asset that is subject to valuation allowance, (2) an income statement loss and (3) net gains in OCI. In this situation, tax benefits derived from the presence of net gains held in OCI are required to be included in income from operations.
US Airways met all three of these conditions in the fourth quarter of 2009. As a result, the $21 million tax benefit resulting from the reversal of the valuation allowance was recorded in income from operations rather than as an offset to the $21 million tax provision recorded in OCI. Accordingly, in connection with the sale of US Airways’ final investment in auction rate securities, US Airways recorded a $21 million special non-cash tax charge in the third quarter of 2011, which recognizes in the statement of operations the tax provision recorded in OCI.

 

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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     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Aircraft fuel and related taxes
  $ 273     $ 197     $ 804     $ 563  
Salaries and related costs
    6       6       18       18  
Capacity purchases
    450       428       1,342       1,267  
Other rent and landing fees
    29       27       86       80  
Selling expenses
    45       48       135       128  
Other expenses
    21       21       64       67  
 
                       
Express expenses
  $ 824     $ 727     $ 2,449     $ 2,123  
 
                       
7. Investments in Marketable Securities
In the three months ended September 30, 2011, US Airways sold its remaining investment in auction rate securities for cash proceeds of $19 million, the carrying amount of the investment. With this sale, US Airways has now liquidated its entire investment in auction rate securities.
In the nine months ended September 30, 2011, US Airways sold certain investments in auction rate securities for proceeds of $52 million, resulting in the reversal of $3 million of prior period net unrealized gains from other comprehensive income and $2 million of realized losses recorded in nonoperating expense, net.
In the nine months ended September 30, 2010, US Airways sold certain investments in auction rate securities for proceeds of $143 million, resulting in $53 million of net realized gains recorded in nonoperating expense, net, of which $52 million represents the reclassification of prior period net unrealized gains from other comprehensive income as determined on a specific-identification basis. Additionally, in the nine months ended September 30, 2010, US Airways recorded net unrealized losses of $1 million in other comprehensive income, all of which was recognized in the first quarter of 2010 and offset previously recognized unrealized gains, related to the decline in fair value of certain investments in auction rate securities.
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 September 30, 2011
                                       
Investments in marketable securities (current)
  $     $     $     $         (1)
At December 31, 2010
                                       
Investments in marketable securities (noncurrent)
  $ 57     $     $     $ 57         (1)
     
(1)  
At December 31, 2010, 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. As of September 30, 2011, US Airways has liquidated its entire investment in auction rate securities. Refer to Note 7 for further discussion of US Airways’ investments in marketable securities.

 

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Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (in millions):
         
    Investments in  
    Marketable  
    Securities  
Balance at December 31, 2010
  $ 57  
Sales of marketable securities
    (52 )
Reversal of net unrealized gains recorded to other comprehensive income
    (3 )
Losses recorded to other nonoperating expense, net
    (2 )
 
     
Balance at September 30, 2011
  $  
 
     
9. Other Comprehensive Income
US Airways’ other comprehensive income consisted of the following (in millions):
                                 
    Three Months     Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Net income
  $ 100     $ 263     $ 136     $ 535  
Reversal of tax provision in other comprehensive income
    21             21        
Reversal of net unrealized gains on available-for-sale securities
                (3 )      
Recognition of net realized gains on sale of available-for-sale securities
                      (52 )
Net unrealized losses on available-for-sale securities
                      (1 )
Other postretirement benefits
    (1 )     (1 )     (2 )     (3 )
 
                       
Total comprehensive income
  $ 120     $ 262     $ 152     $ 479  
 
                       
The components of accumulated other comprehensive income were as follows (in millions):
                 
    September 30,     December 31,  
    2011     2010  
Other postretirement benefits
  $ 36     $ 38  
Available-for-sale securities
          (18 )
 
           
Accumulated other comprehensive income
  $ 36     $ 20  
 
           
10. Slot Transaction
In May 2011, US Airways Group and US Airways entered into an Amended and Restated Mutual Asset Purchase and Sale Agreement (the “Mutual APA”) with Delta. The Mutual APA amends and restates the Mutual Asset Purchase and Sale Agreement dated as of August 11, 2009 by and among the parties. Upon the terms and subject to the conditions provided for in the Mutual APA, Delta would acquire 265 slots at LaGuardia from US Airways and US Airways would acquire from Delta 42 slot pairs at Washington National and the rights to operate additional daily service to Sao Paulo, Brazil in 2015, and Delta would pay US Airways $66.5 million in cash. One slot equals one take-off or landing, and each pair of slots equals one roundtrip flight. The Mutual APA is structured as two simultaneous asset sales. The closing of the transactions contemplated by the Mutual APA is subject to the receipt of customary and necessary closing conditions, including approvals from a number of government agencies. On October 11, 2011, the U.S. Department of Transportation and the Federal Aviation Administration each granted their approval, with certain conditions, to the transactions.

 

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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 case was closed in June 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, Sabre Inc. and Sabre Travel International Limited (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 that illegally restrain 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 have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four counts in the complaint to proceed. Sabre subsequently filed another motion to dismiss relating to one of the two remaining counts. This second motion to dismiss remains pending. US Airways intends to pursue its 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 3,000 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 nine months ended September 30, 2011, we had approximately 40 million passengers boarding our mainline flights. As of September 30, 2011, we operated 339 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 seven regional jets at September 30, 2011.
The U.S. Airline Industry
Despite reports of a weakened U.S. and global economic environment, the U.S. airline industry continued to report year-over-year growth in passenger revenues during the third quarter of 2011. Growth was driven by a strong pricing environment resulting from ongoing industry capacity discipline and consumer demand for air travel. In its most recent data available, the Air Transport Association (“ATA”) reported the following year-over-year increases in U.S. industry passenger revenues and yields:
                         
    July     August     September  
Passenger Revenues
    9.4 %     9.7 %     11.3 %
Yields
    7.7 %     10.1 %     11.3 %
With respect to international versus domestic performance, international markets continued to outperform domestic markets in year-over-year improvements in passenger revenues in July and August 2011. In September 2011, international and domestic market performance was relatively consistent. ATA reported the following year-over-year increases in U.S. industry domestic and international passenger revenues:
                         
    July     August     September  
International
    12.2 %     12.2 %     11.0 %
Domestic (includes Express operations)
    7.9 %     8.4 %     11.5 %
For the three months ended September 30, 2011, the daily spot price averaged $90 per barrel for West Texas Intermediate (“WTI”) crude oil and $113 per barrel for Brent crude oil. This compares to an average daily spot price of $102 and $117 per barrel for WTI and Brent crude oil, respectively, during the second quarter of 2011. While fuel costs declined somewhat during the third quarter of 2011, they remain high. For the same period during 2010, the average daily spot price for WTI and Brent crude oil was $76 and $77 per barrel, respectively.
Through the third quarter of 2011, the U.S. airline industry has been able to pass on at least some of these higher fuel costs to customers through higher ticket prices; however, significant uncertainty exists regarding the economic conditions driving passenger demand and whether airlines will have the ability to maintain or increase fares at levels sufficient to absorb high fuel prices. See Part II, Item 1A, Risk Factors – “Downturns in economic conditions adversely affect our business” and “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 three months ended September 30, 2011, we realized operating income of $180 million. This compares to operating income of $315 million in the 2010 period. The year-over-year decline in operating income was due to significantly higher fuel costs in the 2011 period, which were offset in part by higher revenues resulting from the strong pricing environment.
Fuel
The average mainline and Express price per gallon of fuel was $3.14 for the third quarter of 2011 as compared to an average cost per gallon of $2.18 in the third quarter of 2010, an increase of 44%. Accordingly, our mainline and Express fuel expense was $1.18 billion for the third quarter of 2011, which was $356 million, or 43.3%, higher than the 2010 period on a 1.2% decrease 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.
Revenue
Mainline and Express passenger revenues increased $251 million, or 8.9%, as compared to the 2010 period. The increase in passenger revenues was driven by a 7.8% increase in yield as compared to the 2010 period. Our mainline and Express passenger revenue per available seat mile (“PRASM”) was 13.56 cents in 2011, a 10.2% increase as compared to 12.30 cents in the 2010 period. Total revenue per available seat mile (“RASM”) was 15.21 cents in 2011 as compared to 13.90 cents in the 2010 period, representing a 9.4% improvement. Total revenues include our ancillary revenue initiatives, which generated $136 million in revenues for the third quarter of 2011 and were relatively flat when compared to the 2010 period.
Capacity
We are maintaining our capacity discipline. For the full year 2011, total system capacity is expected to be up approximately 1% versus 2010. Domestic capacity is expected to be up slightly and international capacity up approximately 3%.
Cost Control
We remain committed to maintaining a low cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel. Our mainline costs per available seat mile (“CASM”) excluding special items, fuel and profit sharing increased 0.13 cents, or 1.7%, from 7.93 cents in third quarter of 2010 to 8.06 cents in the third quarter of 2011.
The following table details our mainline CASM for the three months ended September 30, 2011 and 2010:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In cents)        
Mainline CASM excluding special items, fuel and profit sharing:
                       
Total mainline CASM
    12.93       11.34       14.1  
Special items, net
    (0.07 )     (0.01 )   nm  
Aircraft fuel and related taxes
    (4.75 )     (3.26 )     45.7  
Profit sharing
    (0.05 )     (0.13 )     (60.0 )
 
                   
Total mainline CASM excluding special items, fuel and profit sharing (1)
    8.06       7.93       1.7  
 
                   
     
(1)  
We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.

 

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Customer Service
We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation.
Our third quarter 2011 operations were affected by a pilot job action campaign in the form of increased taxi times and maintenance write ups, adverse weather conditions including Hurricane Irene, and runway construction at our largest hub in Charlotte. Combined, these factors drove significant deterioration in key operating metrics as compared to the prior year. In July 2011, we filed a lawsuit in federal district court in Charlotte seeking an injunction against the US Airline Pilots Association (“USAPA”), the labor union that represents our pilots. On September 28, 2011, the U.S. District Court in Charlotte granted a preliminary injunction prohibiting USAPA from interfering with airline operations by conducting an illegal work slowdown. Additionally, we expect the Charlotte runway to return to operation in October, and we are focusing efforts and resources to restore our performance to prior levels.
Despite these challenges, we achieved a first place ranking in baggage handling among the big five hub-and-spoke carriers as measured by the Department of Transportation (“DOT”) for the month of July 2011. This marked our sixth monthly first place baggage handling ranking during 2011.
The following table details our monthly operating performance metrics reported to the DOT for the third quarters of 2011 and 2010.
                                                                         
    2011     2010     Percent Better (Worse) 2011-2010  
    July     August     September (e)     July     August     September     July     August     September  
On-time performance (a)
    75.5       74.2       80.7       82.1       84.9       87.1       (8.0 )     (12.6 )     (7.3 )
Completion factor (b)
    98.3       96.5       99.1       98.9       99.2       99.4       (0.6 )     (2.7 )     (0.3 )
Mishandled baggage (c)
    3.14       3.21       2.66       2.60       2.36       1.96       (20.8 )     (36.0 )     (35.7 )
Customer complaints (d)
    2.32       3.01       2.22       1.71       1.92       1.31       (35.7 )     (56.8 )     (69.6 )
 
     
(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)  
September 2011 operating statistics are preliminary as the DOT has not issued its September 2011 Air Travel Consumer Report as of the date of this filing.

 

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Liquidity Position
As of September 30, 2011, our total cash, cash equivalents and restricted cash was $2.43 billion, of which $384 million was restricted.
                 
    September 30,     December 31,  
    2011     2010  
    (In millions)  
Cash and cash equivalents
  $ 2,043     $ 1,859  
Long-term restricted cash
    384       364  
Investments in marketable securities
          57  
 
           
Total cash, cash equivalents, investments in marketable securities and restricted cash
  $ 2,427     $ 2,280  
 
           
In June 2011, we completed an offering of Series 2011-1 Class A, Class B, and Class C Enhanced Equipment Trust Certificates (“EETCs”) in the aggregate face amount of approximately $471 million. The net proceeds from the offering were used in part to refinance five Airbus aircraft owned by US Airways and three Airbus aircraft delivered in September 2011, and will otherwise be used to finance one Airbus aircraft scheduled to be delivered in October 2011 and for general corporate purposes. Additionally, in July 2011, we completed a $53 million offering of Class C certificates under the Series 2010-1 EETCs with proceeds to be used for general corporate purposes. The 2010-1 Class A and B certificates originally closed in December 2010 in connection with the refinancing of owned Airbus aircraft.
These EETC financing transactions along with a new $40 million credit facility to finance certain aircraft pre-delivery payments contributed approximately $180 million to our liquidity position at September 30, 2011.
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.
In July 2011, we sold our final investment in auction rate securities. We have now liquidated our entire investment in auction rate securities. Proceeds from our 2011 sales were $52 million.
See the notes to the condensed consolidated financial statements included in Part I, Items 1A and 1B, respectively, of this report for additional information on these transactions.
2011 Outlook
Looking forward it is difficult to predict the price of oil, the strength of the economy or the capacity actions of other airlines, which will impact our ability to be profitable in 2011. Over the past few years we have taken significant 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 intend to continue to maintain our cost and capacity discipline 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 September 30, 2011, we realized operating income of $180 million and income before income taxes of $97 million. We experienced year-over-year declines in operating income due to significantly higher fuel costs, which were offset in part by higher revenues resulting from the strong pricing environment. Our third quarter 2011 results were also impacted by recognition of $2 million in net special credits as follows:
   
$13 million of operating net special charges primarily consisting of $11 million in legal costs incurred in connection with the Delta Slot transaction and auction rate securities arbitration as well as $2 million in severance costs; and
 
   
a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, included in nonoperating expense, net.
In the three months ended September 30, 2010, we realized operating income of $315 million and income before income taxes of $241 million. Our third quarter 2010 results were also impacted by recognition of $3 million in other operating net special charges.
In the first nine months of 2011, we realized operating income of $318 million and income before income taxes of $74 million. We experienced year-over-year declines in operating income due to significantly higher fuel costs, which were offset in part by higher revenues resulting from the strong pricing environment. Our results for the first nine months of 2011 were also impacted by recognition of $16 million in net special charges as follows:
   
$23 million of operating net special charges primarily consisting of $19 million in legal costs incurred in connection with the Delta Slot transaction and auction rate securities arbitration as well as $3 million in severance costs; and
 
   
a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs as well as $2 million of losses related to investments in auction rate securities, all included in nonoperating expense, net.
In the first nine months of 2010, we realized operating income of $676 million and income before income taxes of $476 million. Our results for the first nine months of 2010 were also impacted by recognition of $55 million in net special credits as follows:
   
$1 million of operating net special credits consisting of a $16 million refund of ASIF previously paid to the TSA during the years 2005 to 2009, offset by other net special charges of $10 million, which included a settlement and corporate transaction costs, and $5 million in aircraft costs as a result of capacity reductions;
 
   
$1 million refund for our Express subsidiaries of ASIF paid to the TSA during the years 2005 to 2009; and
 
   
$53 million of net realized gains related to 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.
During the three and nine months ended September 30, 2011 and 2010, we utilized NOLs to reduce our income tax obligation. Utilization of these NOLs results in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in the valuation allowance offsets the tax provision dollar for dollar.
During the three and nine months ended September 30, 2011, we recorded a special non-cash tax charge of $21 million in connection with the sale of our final investment in auction rate securities in July 2011. This charge recognizes in the statement of operations the tax provision that was recorded in other comprehensive income, a subset of stockholders’ equity, in the fourth quarter of 2009.

 

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During the three and nine months ended September 30, 2010, we recorded $1 million of state income tax expense related to certain states where NOLs were either limited or not available to be used.
The table below sets forth our selected mainline and Express operating data:
                                                 
    Three Months Ended             Nine Months Ended        
    September 30,     Increase     September 30,     Increase  
    2011     2010     (Decrease)     2011     2010     (Decrease)  
Mainline
                                               
Revenue passenger miles (millions) (a)
    16,471       16,159       1.9 %     46,301       44,742       3.5 %
Available seat miles (millions) (b)
    19,033       19,143       (0.6 )%     55,184       54,162       1.9 %
Passenger load factor (percent) (c)
    86.5       84.4     2.1 pts     83.9       82.6     1.3 pts
Yield (cents) (d)
    13.76       12.79       7.6 %     13.92       12.96       7.4 %
Passenger revenue per available seat mile (cents) (e)
    11.91       10.79       10.4 %     11.68       10.71       9.1 %
Operating cost per available seat mile (cents) (f)
    12.93       11.34       14.1 %     13.06       11.63       12.3 %
Passenger enplanements (thousands) (g)
    13,520       13,487       0.2 %     39,823       38,853       2.5 %
Departures (thousands)
    112       115       (2.4 )%     340       337       0.9 %
Aircraft at end of period
    339       339       %     339       339       %
Block hours (thousands) (h)
    311       311       %     925       902       2.5 %
Average stage length (miles) (i)
    1,033       1,014       1.8 %     999       990       0.9 %
Average passenger journey (miles) (j)
    1,808       1,779       1.7 %     1,710       1,697       0.8 %
Fuel consumption (gallons in millions)
    289       288       0.3 %     833       811       2.6 %
Average aircraft fuel price including related taxes (dollars per gallon)
    3.13       2.17       44.5 %     3.11       2.19       42.0 %
Full-time equivalent employees at end of period
    31,327       30,455       2.9 %     31,327       30,455       2.9 %
 
                                               
Express (k)
                                               
Revenue passenger miles (millions) (a)
    2,737       2,858       (4.2 )%     8,025       7,906       1.5 %
Available seat miles (millions) (b)
    3,559       3,729       (4.6 )%     10,739       10,639       0.9 %
Passenger load factor (percent) (c)
    76.9       76.6     0.3 pts     74.7       74.3     0.4 pts
Yield (cents) (d)
    29.07       26.11       11.3 %     28.86       26.74       7.9 %
Passenger revenue per available seat mile (cents) (e)
    22.35       20.01       11.7 %     21.56       19.87       8.5 %
Operating cost per available seat mile (cents) (f)
    22.29       18.61       19.8 %     22.12       19.05       16.1 %
Passenger enplanements (thousands) (g)
    7,135       7,381       (3.3 )%     20,892       20,589       1.5 %
Aircraft at end of period
    281       281       %     281       281       %
Fuel consumption (gallons in millions)
    86       88       (2.9 )%     257       251       2.2 %
Average aircraft fuel price including related taxes (dollars per gallon)
    3.18       2.23       42.6 %     3.13       2.24       39.8 %
 
                                               
Total Mainline and Express
                                               
Revenue passenger miles (millions) (a)
    19,208       19,017       1.0 %     54,326       52,648       3.2 %
Available seat miles (millions) (b)
    22,592       22,872       (1.2 )%     65,923       64,801       1.7 %
Passenger load factor (percent) (c)
    85.0       83.1     1.9 pts     82.4       81.2     1.2 pts
Yield (cents) (d)
    15.94       14.79       7.8 %     16.13       15.03       7.3 %
Passenger revenue per available seat mile (cents) (e)
    13.56       12.30       10.2 %     13.29       12.21       8.8 %
Total revenue per available seat mile (cents) (l)
    15.21       13.90       9.4 %     15.02       13.89       8.1 %
Passenger enplanements (thousands) (g)
    20,655       20,868       (1.0 )%     60,715       59,442       2.1 %
Aircraft at end of period
    620       620       %     620       620       %
Fuel consumption (gallons in millions)
    375       376       (0.5 )%     1,090       1,062       2.5 %
Average aircraft fuel price including related taxes (dollars per gallon)
    3.14       2.18       44.0 %     3.11       2.20       41.5 %
 
     
(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.

 

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

 

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Three Months Ended September 30, 2011
Compared with the
Three Months Ended September 30, 2010
Operating Revenues:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating revenues:
                       
Mainline passenger
  $ 2,267     $ 2,066       9.7  
Express passenger
    796       746       6.6  
Cargo
    40       37       8.0  
Other
    333       330       1.0  
 
                 
Total operating revenues
  $ 3,436     $ 3,179       8.1  
 
                 
Total operating revenues in the third quarter of 2011 were $3.44 billion as compared to $3.18 billion in the 2010 period, an increase of $257 million, or 8.1%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $2.27 billion in the third quarter of 2011 as compared to $2.07 billion in the 2010 period. Mainline RPMs increased 1.9% as mainline capacity, as measured by ASMs, decreased 0.6%, resulting in a 2.1 point increase in load factor to 86.5%. Mainline passenger yield increased 7.6% to 13.76 cents in the third quarter of 2011 from 12.79 cents in the 2010 period. Mainline PRASM increased 10.4% to 11.91 cents in the third quarter of 2011 from 10.79 cents in the 2010 period. These increases in mainline yield and PRASM were due principally to the strong pricing environment resulting from ongoing industry capacity discipline and consumer demand.
 
   
Express passenger revenues were $796 million in the third quarter of 2011 as compared to $746 million in the 2010 period. Express RPMs decreased 4.2% as Express capacity, as measured by ASMs, decreased 4.6%, resulting in a 0.3 point increase in load factor to 76.9%. Express passenger yield increased by 11.3% to 29.07 cents in the third quarter of 2011 from 26.11 cents in the 2010 period. Express PRASM increased 11.7% to 22.35 cents in the third quarter of 2011 from 20.01 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 $40 million in the third quarter of 2011, an increase of $3 million, or 8.0%, from the 2010 period. The increase in cargo revenues was driven primarily by an increase in yield.

 

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Operating Expenses:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 905     $ 625       44.9  
Salaries and related costs
    577       579       (0.3 )
Aircraft rent
    160       168       (4.9 )
Aircraft maintenance
    163       160       2.3  
Other rent and landing fees
    144       143       0.5  
Selling expenses
    123       118       4.1  
Special items, net
    13       3     nm  
Depreciation and amortization
    58       65       (10.1 )
Other
    319       309       3.0  
 
                   
Total mainline operating expenses
    2,462       2,170       13.4  
Express expenses:
                       
Fuel
    273       197       38.4  
Other
    521       497       4.8  
 
                   
Total Express expenses
    794       694       14.3  
 
                   
Total operating expenses
  $ 3,256     $ 2,864       13.7  
 
                   
Total operating expenses were $3.26 billion in the third quarter of 2011, an increase of $392 million, or 13.7%, compared to the 2010 period.
Mainline Operating Expenses:
Mainline operating expenses were $2.46 billion in the third quarter of 2011, an increase of $292 million, or 13.4%, from the 2010 period, while mainline capacity decreased 0.6%.
Our mainline CASM excluding special items, fuel and profit sharing, increased 0.13 cents, or 1.7%, from 7.93 cents in the third quarter of 2010 to 8.06 cents in the third quarter of 2011.
The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the three months ended September 30, 2011 and 2010:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In cents)        
Mainline CASM:
                       
Aircraft fuel and related taxes
    4.75       3.26       45.7  
Salaries and related costs
    3.03       3.03        
Aircraft rent
    0.84       0.88       (4.4 )
Aircraft maintenance
    0.86       0.83       2.9  
Other rent and landing fees
    0.76       0.75       1.0  
Selling expenses
    0.65       0.62       4.7  
Special items, net
    0.07       0.01     nm  
Depreciation and amortization
    0.31       0.34       (9.6 )
Other
    1.68       1.62       3.6  
 
                   
Total mainline CASM
    12.93       11.34       14.1  
Special items, net
    (0.07 )     (0.01 )        
Aircraft fuel and related taxes
    (4.75 )     (3.26 )        
Profit sharing
    (0.05 )     (0.13 )        
 
                   
Total mainline CASM excluding special items, fuel and profit sharing (1)
    8.06       7.93       1.7  
 
                   

 

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(1)  
We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Significant changes in the components of mainline operating expense per ASM are as follows:
   
Aircraft fuel and related taxes per ASM increased 45.7% primarily due to a 44.5% increase in the average price per gallon of fuel to $3.13 in the third quarter of 2011 from $2.17 in the 2010 period.
 
   
Depreciation and amortization expense per ASM decreased 9.6% primarily due to the impact of reduced capital spending.
Express Operating Expenses:
Total Express expenses increased $100 million, or 14.3%, in the third quarter of 2011 to $794 million from $694 million in the 2010 period. The period-over-period increase was primarily due to a $76 million, or 38.4%, increase in fuel costs. The average price per gallon of fuel increased 42.6% to $3.18 in the third quarter of 2011 from $2.23 in the 2010 period. Other Express expenses increased $24 million, or 4.8%, while Express capacity decreased 4.6%. This increase in other Express expenses was driven by higher maintenance expenses due principally to increases in the number of engine overhauls performed in the 2011 period.
Nonoperating Income (Expense):
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Nonoperating income (expense):
                       
Interest income
  $ 1     $ 2       (52.9 )
Interest expense, net
    (85 )     (83 )     0.9  
Other, net
    1       7       (91.9 )
 
                   
Total nonoperating expense, net
  $ (83 )   $ (74 )     11.6  
 
                   
Net nonoperating expense increased $9 million in the third quarter of 2011 to $83 million from $74 million in the 2010 period. Other nonoperating income of $1 million in the 2011 period included a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $14 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar during the third quarter of 2011. Other nonoperating income of $7 million in the 2010 period primarily included $9 million in net foreign currency gains as a result of the overall weakening of the U.S. dollar during the third quarter of 2010.

 

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Nine Months Ended September 30, 2011
Compared with the
Nine Months Ended September 30, 2010
Operating Revenues:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating revenues:
                       
Mainline passenger
  $ 6,447     $ 5,800       11.1  
Express passenger
    2,316       2,114       9.5  
Cargo
    126       107       18.4  
Other
    1,011       980       3.2  
 
                   
Total operating revenues
  $ 9,900     $ 9,001       10.0  
 
                   
Total operating revenues in the first nine months of 2011 were $9.90 billion as compared to $9.00 billion in the 2010 period, an increase of $899 million, or 10.0%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $6.45 billion in the first nine months of 2011 as compared to $5.80 billion in the 2010 period. Mainline RPMs increased 3.5% as mainline capacity, as measured by ASMs, increased 1.9%, resulting in a 1.3 point increase in load factor to 83.9%. Mainline passenger yield increased 7.4% to 13.92 cents in the first nine months of 2011 from 12.96 cents in the 2010 period. Mainline PRASM increased 9.1% to 11.68 cents in the first nine months of 2011 from 10.71 cents in the 2010 period. These increases in mainline yield and PRASM were due principally to the strong pricing environment resulting from ongoing industry capacity discipline and consumer demand.
 
   
Express passenger revenues were $2.32 billion in the first nine months of 2011 as compared to $2.11 billion in the 2010 period. Express RPMs increased 1.5% as Express capacity, as measured by ASMs, increased 0.9%, resulting in a 0.4 point increase in load factor to 74.7%. Express passenger yield increased by 7.9% to 28.86 cents in the first nine months of 2011 from 26.74 cents in the 2010 period. Express PRASM increased 8.5% to 21.56 cents in the first nine months of 2011 from 19.87 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 $126 million in the first nine months of 2011, an increase of $19 million, or 18.4%, from the 2010 period. The increase in cargo revenues was driven primarily by an increase in yield.
 
   
Other revenues were $1.01 billion in the first nine months of 2011, an increase of $31 million, or 3.2%, from the 2010 period. The increase in other revenues was driven primarily by increases in the volume of passenger ticketing change fees.

 

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Operating Expenses:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 2,587     $ 1,775       45.7  
Salaries and related costs
    1,726       1,708       1.1  
Aircraft rent
    486       508       (4.2 )
Aircraft maintenance
    508       479       6.1  
Other rent and landing fees
    418       413       1.2  
Selling expenses
    343       320       7.4  
Special items, net
    22       (1 )   nm  
Depreciation and amortization
    178       189       (6.0 )
Other
    938       907       3.2  
 
                   
Total mainline operating expenses
    7,206       6,298       14.4  
Express expenses:
                       
Fuel
    803       562       42.8  
Other
    1,573       1,465       7.4  
 
                   
Total Express expenses
    2,376       2,027       17.2  
 
                   
Total operating expenses
  $ 9,582     $ 8,325       15.1  
 
                   
Total operating expenses were $9.58 billion in the first nine months of 2011, an increase of $1.26 billion, or 15.1%, compared to the 2010 period.
Mainline Operating Expenses:
Mainline operating expenses were $7.21 billion in the first nine months of 2011, an increase of $908 million, or 14.4%, from the 2010 period, while mainline capacity increased 1.9%.
Our mainline CASM excluding special items, fuel and profit sharing, increased 0.04 cents, or 0.5%, from 8.27 cents in the first nine months of 2010 to 8.31 cents in the first nine months of 2011.
The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the nine months ended September 30, 2011 and 2010:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In cents)        
Mainline CASM:
                       
Aircraft fuel and related taxes
    4.69       3.28       43.0  
Salaries and related costs
    3.13       3.15       (0.8 )
Aircraft rent
    0.88       0.94       (6.0 )
Aircraft maintenance
    0.92       0.88       4.1  
Other rent and landing fees
    0.76       0.76        
Selling expenses
    0.62       0.59       5.4  
Special items, net
    0.04           nm  
Depreciation and amortization
    0.32       0.35       (7.8 )
Other
    1.70       1.68       1.3  
 
                   
Total mainline CASM
    13.06       11.63       12.3  
Special items, net
    (0.04 )              
Aircraft fuel and related taxes
    (4.69 )     (3.28 )        
Profit sharing
    (0.02 )     (0.08 )        
 
                   
Total mainline CASM excluding special items, fuel and profit sharing (1)
    8.31       8.27       0.5  
 
                   

 

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(1)  
We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Significant changes in the components of mainline operating expense per ASM are as follows:
   
Aircraft fuel and related taxes per ASM increased 43.0% primarily due to a 42.0% increase in the average price per gallon of fuel to $3.11 in the first nine months of 2011 from $2.19 in the 2010 period.
 
   
Aircraft rent per ASM decreased 6.0% primarily due to a decrease in average rental rates and a decrease in the average number of leased aircraft in the first nine months of 2011 as compared to the 2010 period.
 
   
Selling expenses per ASM increased 5.4% primarily due to higher credit card fees as a result of the increase in passenger revenues in the 2011 period.
 
   
Depreciation and amortization expense per ASM decreased 7.8% primarily due to the impact of reduced capital spending and a 1.9% increase in capacity.
Express Operating Expenses:
Total Express expenses increased $349 million, or 17.2%, in the first nine months of 2011 to $2.38 billion from $2.03 billion in the 2010 period. The period-over-period increase was primarily due to a $241 million, or 42.8%, increase in fuel costs. The average price per gallon of fuel increased 39.8% to $3.13 in the first nine months of 2011 from $2.24 in the 2010 period. Other Express expenses increased $108 million, or 7.4%, while Express capacity increased 0.9%. This increase in other Express expenses was driven by higher maintenance expenses due principally to increases in the number of engine overhauls performed in the 2011 period.
Nonoperating Income (Expense):
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Nonoperating income (expense):
                       
Interest income
  $ 4     $ 11       (65.6 )
Interest expense, net
    (241 )     (252 )     (4.4 )
Other, net
    (7 )     41     nm  
 
                   
Total nonoperating expense, net
  $ (244 )   $ (200 )     21.5  
 
                   
Net nonoperating expense increased $44 million in the first nine months of 2011 to $244 million from $200 million in the 2010 period. Other nonoperating expense of $7 million in the 2011 period included $13 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in the first nine months of 2011, $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs and $2 million of losses related to investments in auction rate securities. These nonoperating expenses in the 2011 period were offset in part by a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities. Other nonoperating income of $41 million in the 2010 period included $53 million of net realized gains related to the sale of certain investments in auction rate securities, offset by $12 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar during the first nine months of 2010.

 

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US Airways’ Results of Operations
In the three months ended September 30, 2011, US Airways realized operating income of $177 million and income before income taxes of $121 million. US Airways experienced year-over-year declines in operating income due to significantly higher fuel costs, which were offset in part by higher revenues resulting from the strong pricing environment. US Airways’ third quarter 2011 results were also impacted by recognition of $2 million in net special credits as follows:
   
$13 million of operating net special charges primarily consisting of $11 million in legal costs incurred in connection with the Delta Slot transaction and auction rate securities arbitration as well as $2 million in severance costs; and
 
   
a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, included in nonoperating expense, net.
In the three months ended September 30, 2010, US Airways realized operating income of $311 million and income before income taxes of $264 million. US Airways’ third quarter 2010 results were also impacted by recognition of $3 million in other operating net special charges.
In the first nine months of 2011, US Airways realized operating income of $326 million and income before income taxes of $157 million. US Airways experienced year-over-year declines in operating income due to significantly higher fuel costs, which were offset in part by higher revenues resulting from the strong pricing environment. US Airways’ results for the first nine months of 2011 were also impacted by recognition of $15 million in net special charges as follows:
   
$22 million of operating net special charges primarily consisting of $19 million in legal costs incurred in connection with the Delta Slot transaction and auction rate securities arbitration as well as $3 million in severance costs; and
 
   
a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs as well as $2 million of losses related to investments in auction rate securities, all included in nonoperating expense, net.
In the first nine months of 2010, US Airways realized operating income of $662 million and income before income taxes of $536 million. US Airways’ results for the first nine months of 2010 were also impacted by recognition of $54 million in net special credits as follows:
   
$1 million of operating net special credits consisting of a $16 million refund of ASIF previously paid to the TSA during the years 2005 to 2009, offset by other net special charges of $10 million, which included a settlement and corporate transaction costs, and $5 million in aircraft costs as a result of capacity reductions; and
 
   
$53 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.
During the three and nine months ended September 30, 2011 and 2010, US Airways utilized NOLs to reduce its income tax obligation. Utilization of these NOLs results in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in the valuation allowance offsets the tax provision dollar for dollar.
During the three and nine months ended September 30, 2011, US Airways recorded a special non-cash tax charge of $21 million in connection with the sale of its final investment in auction rate securities in July 2011. This charge recognizes in the statement of operations the tax provision that was recorded in other comprehensive income, a subset of stockholder’s equity, in the fourth quarter of 2009.

 

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During the three and nine months ended September 30, 2010, US Airways recorded $1 million of state income tax expense related to certain states where NOLs were either limited or not available to be used.
The table below sets forth US Airways’ selected mainline and Express operating data:
                                                 
    Three Months Ended             Nine Months Ended        
    September 30,     Increase     September 30,     Increase  
    2011     2010     (Decrease)     2011     2010     (Decrease)  
Mainline
                                               
Revenue passenger miles (millions) (a)
    16,471       16,159       1.9 %     46,301       44,742       3.5 %
Available seat miles (millions) (b)
    19,033       19,143       (0.6 )%     55,184       54,162       1.9 %
Passenger load factor (percent) (c)
    86.5       84.4     2.1 pts     83.9       82.6     1.3 pts
Yield (cents) (d)
    13.76       12.79       7.6 %     13.92       12.96       7.4 %
Passenger revenue per available seat mile (cents) (e)
    11.91       10.79       10.4 %     11.68       10.71       9.1 %
Aircraft at end of period
    339       339       %     339       339       %
Fuel consumption (gallons in millions)
    289       288       0.3 %     833       811       2.6 %
Average aircraft fuel price including related taxes (dollars per gallon)
    3.13       2.17       44.5 %     3.11       2.19       42.0 %
 
                                               
Express (f)
                                               
Revenue passenger miles (millions) (a)
    2,737       2,858       (4.2 )%     8,025       7,906       1.5 %
Available seat miles (millions) (b)
    3,559       3,729       (4.6 )%     10,739       10,639       0.9 %
Passenger load factor (percent) (c)
    76.9       76.6     0.3 pts     74.7       74.3     0.4 pts
Yield (cents) (d)
    29.07       26.11       11.3 %     28.86       26.74       7.9 %
Passenger revenue per available seat mile (cents) (e)
    22.35       20.01       11.7 %     21.56       19.87       8.5 %
Aircraft at end of period
    281       281       %     281       281       %
Fuel consumption (gallons in millions)
    86       88       (2.9 )%     257       251       2.2 %
Average aircraft fuel price including related taxes (dollars per gallon)
    3.18       2.23       42.5 %     3.13       2.24       39.7 %
 
                                               
Total Mainline and Express
                                               
Revenue passenger miles (millions) (a)
    19,208       19,017       1.0 %     54,326       52,648       3.2 %
Available seat miles (millions) (b)
    22,592       22,872       (1.2 )%     65,923       64,801       1.7 %
Passenger load factor (percent) (c)
    85.0       83.1     1.9 pts     82.4       81.2     1.2 pts
Yield (cents) (d)
    15.94       14.79       7.8 %     16.13       15.03       7.3 %
Passenger revenue per available seat mile (cents) (e)
    13.56       12.30       10.2 %     13.29       12.21       8.8 %
Total revenue per available seat mile (cents) (g)
    15.38       14.06       9.4 %     15.19       14.06       8.0 %
Aircraft at end of period
    620       620       %     620       620       %
Fuel consumption (gallons in millions)
    375       376       (0.5 )%     1,090       1,062       2.5 %
Average aircraft fuel price including related taxes (dollars per gallon)
    3.14       2.18       44.0 %     3.11       2.20       41.4 %
 
     
(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.
 
(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 September 30, 2011
Compared with the
Three Months Ended September 30, 2010
Operating Revenues:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating revenues:
                       
Mainline passenger
  $ 2,267     $ 2,066       9.7  
Express passenger
    796       746       6.6  
Cargo
    40       37       8.0  
Other
    373       368       1.6  
 
                   
Total operating revenues
  $ 3,476     $ 3,217       8.1  
 
                   
Total operating revenues in the third quarter of 2011 were $3.48 billion as compared to $3.22 billion in the 2010 period, an increase of $259 million, or 8.1%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $2.27 billion in the third quarter of 2011 as compared to $2.07 billion in the 2010 period. Mainline RPMs increased 1.9% as mainline capacity, as measured by ASMs, decreased 0.6%, resulting in a 2.1 point increase in load factor to 86.5%. Mainline passenger yield increased 7.6% to 13.76 cents in the third quarter of 2011 from 12.79 cents in the 2010 period. Mainline PRASM increased 10.4% to 11.91 cents in the third quarter of 2011 from 10.79 cents in the 2010 period. These increases in mainline yield and PRASM were due principally to the strong pricing environment resulting from ongoing industry capacity discipline and consumer demand.
 
   
Express passenger revenues were $796 million in the third quarter of 2011 as compared to $746 million in the 2010 period. Express RPMs decreased 4.2% as Express capacity, as measured by ASMs, decreased 4.6%, resulting in a 0.3 point increase in load factor to 76.9%. Express passenger yield increased by 11.3% to 29.07 cents in the third quarter of 2011 from 26.11 cents in the 2010 period. Express PRASM increased 11.7% to 22.35 cents in the third quarter of 2011 from 20.01 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 $40 million in the third quarter of 2011, an increase of $3 million, or 8.0%, from the 2010 period. The increase in cargo revenues was driven primarily by an increase in yield.

 

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Operating Expenses:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 905     $ 625       44.9  
Salaries and related costs
    577       579       (0.3 )
Aircraft rent
    160       168       (4.9 )
Aircraft maintenance
    163       160       2.3  
Other rent and landing fees
    144       143       0.5  
Selling expenses
    123       118       4.1  
Special items, net
    13       3     nm  
Depreciation and amortization
    61       67       (9.7 )
Other
    329       316       4.2  
 
                   
Total mainline operating expenses
    2,475       2,179       13.6  
Express expenses:
                       
Fuel
    273       197       38.4  
Other
    551       530       3.9  
 
                   
Total Express expenses
    824       727       13.3  
 
                   
Total operating expenses
  $ 3,299     $ 2,906       13.5  
 
                   
Total operating expenses were $3.30 billion in the third quarter of 2011, an increase of $393 million, or 13.5%, compared to the 2010 period.
Mainline Operating Expenses:
Mainline operating expenses were $2.48 billion in the third quarter of 2011, an increase of $296 million, or 13.6%, from the 2010 period, while mainline capacity decreased 0.6%.
Significant changes in the components of mainline operating expenses are as follows:
   
Aircraft fuel and related taxes increased 44.9% primarily due to a 44.5% increase in the average price per gallon of fuel to $3.13 in the third quarter of 2011 from $2.17 in the 2010 period.
 
   
Depreciation and amortization expense decreased 9.7% primarily due to the impact of reduced capital spending.
Express Operating Expenses:
Total Express expenses increased $97 million, or 13.3%, in the third quarter of 2011 to $824 million from $727 million in the 2010 period. The period-over-period increase was primarily due to a $76 million, or 38.4%, increase in fuel costs. The average price per gallon of fuel increased 42.5% to $3.18 in the third quarter of 2011 from $2.23 in the 2010 period. Other Express expenses increased $21 million, or 3.9%, while Express capacity decreased 4.6%. This increase in other Express expenses was driven by higher amounts paid under capacity purchase agreements, due principally to increased maintenance activity in the 2011 period.

 

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Nonoperating Income (Expense):
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Nonoperating income (expense):
                       
Interest income
  $ 1     $ 2       (53.0 )
Interest expense, net
    (58 )     (59 )     (1.6 )
Other, net
    1       10       (91.8 )
 
                   
Total nonoperating expense, net
  $ (56 )   $ (47 )     18.8  
 
                   
Net nonoperating expense increased $9 million in the third quarter of 2011 to $56 million from $47 million in the 2010 period. Other nonoperating income of $1 million in the 2011 period included a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $14 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar during the third quarter of 2011. Other nonoperating income of $10 million in the 2010 period primarily included $9 million in net foreign currency gains as a result of the overall weakening of the U.S. dollar during the third quarter of 2010.

 

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Nine Months Ended September 30, 2011
Compared with the
Nine Months Ended September 30, 2010
Operating Revenues:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating revenues:
                       
Mainline passenger
  $ 6,447     $ 5,800       11.1  
Express passenger
    2,316       2,114       9.5  
Cargo
    126       107       18.4  
Other
    1,124       1,089       3.3  
 
                   
Total operating revenues
  $ 10,013     $ 9,110       9.9  
 
                   
Total operating revenues in the first nine months of 2011 were $10.01 billion as compared to $9.11 billion in the 2010 period, an increase of $903 million, or 9.9%. Significant changes in the components of operating revenues are as follows:
   
Mainline passenger revenues were $6.45 billion in the first nine months of 2011 as compared to $5.80 billion in the 2010 period. Mainline RPMs increased 3.5% as mainline capacity, as measured by ASMs, increased 1.9%, resulting in a 1.3 point increase in load factor to 83.9%. Mainline passenger yield increased 7.4% to 13.92 cents in the first nine months of 2011 from 12.96 cents in the 2010 period. Mainline PRASM increased 9.1% to 11.68 cents in the first nine months of 2011 from 10.71 cents in the 2010 period. These increases in mainline yield and PRASM were due principally to the strong pricing environment resulting from ongoing industry capacity discipline and consumer demand.
 
   
Express passenger revenues were $2.32 billion in the first nine months of 2011 as compared to $2.11 billion in the 2010 period. Express RPMs increased 1.5% as Express capacity, as measured by ASMs, increased 0.9%, resulting in a 0.4 point increase in load factor to 74.7%. Express passenger yield increased by 7.9% to 28.86 cents in the first nine months of 2011 from 26.74 cents in the 2010 period. Express PRASM increased 8.5% to 21.56 cents in the first nine months of 2011 from 19.87 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 $126 million in the first nine months of 2011, an increase of $19 million, or 18.4%, from the 2010 period. The increase in cargo revenues was driven primarily by an increase in yield.
 
   
Other revenues were $1.12 billion in the first nine months of 2011, an increase of $35 million, or 3.3%, from the 2010 period. The increase in other revenues was driven primarily by increases in the volume of passenger ticketing change fees.

 

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Operating Expenses:
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 2,587     $ 1,775       45.7  
Salaries and related costs
    1,726       1,708       1.1  
Aircraft rent
    486       508       (4.2 )
Aircraft maintenance
    508       479       6.1  
Other rent and landing fees
    418       413       1.2  
Selling expenses
    343       320       7.4  
Special items, net
    22       (1 )   nm  
Depreciation and amortization
    185       196       (5.8 )
Other
    963       927       3.8  
 
                   
Total mainline operating expenses
    7,238       6,325       14.4  
Express expenses:
                       
Fuel
    804       563       42.7  
Other
    1,645       1,560       5.5  
 
                   
Total Express expenses
    2,449       2,123       15.3  
 
                   
Total operating expenses
  $ 9,687     $ 8,448       14.7  
 
                   
Total operating expenses were $9.69 billion in the first nine months of 2011, an increase of $1.24 billion, or 14.7%, compared to the 2010 period.
Mainline Operating Expenses:
Mainline operating expenses were $7.24 billion in the first nine months of 2011, an increase of $913 million, or 14.4%, from the 2010 period, while mainline capacity increased 1.9%.
Significant changes in the components of mainline operating expenses are as follows:
   
Aircraft fuel and related taxes increased 45.7% primarily due to a 42.0% increase in the average price per gallon of fuel to $3.11 in the first nine months of 2011 from $2.19 in the 2010 period.
 
   
Aircraft maintenance expense increased 6.1% primarily due to an increase in the number of airframe overhauls performed in the 2011 period.
 
   
Selling expenses increased 7.4% primarily due to higher credit card fees as a result of the increase in passenger revenues in the 2011 period.
 
   
Depreciation and amortization expense decreased 5.8% primarily due to the impact of reduced capital spending and a 1.9% increase in capacity.
Express Operating Expenses:
Total Express expenses increased $326 million, or 15.3%, in the first nine months of 2011 to $2.45 billion from $2.12 billion in the 2010 period. The period-over-period increase was primarily due to a $241 million, or 42.7%, increase in fuel costs. The average price per gallon of fuel increased 39.7% to $3.13 in the first nine months of 2011 from $2.24 in the 2010 period. Other Express expenses increased $85 million, or 5.5%, while Express capacity increased 0.9%. This increase in other Express expenses was driven by higher amounts paid under capacity purchase agreements, due principally to increased maintenance activity in the 2011 period.

 

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Nonoperating Income (Expense):
                         
                    Percent  
                    Increase  
    2011     2010     (Decrease)  
    (In millions)        
Nonoperating income (expense):
                       
Interest income
  $ 4     $ 11       (65.6 )
Interest expense, net
    (166 )     (179 )     (8.0 )
Other, net
    (7 )     42     nm  
 
                   
Total nonoperating expense, net
  $ (169 )   $ (126 )     33.2  
 
                   
Net nonoperating expense increased $43 million in the first nine months of 2011 to $169 million from $126 million in the 2010 period. Other nonoperating expense of $7 million in the 2011 period included $13 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in the first nine months of 2011, $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs and $2 million of losses related to investments in auction rate securities. These nonoperating expenses in the 2011 period were offset in part by a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities. Other nonoperating income of $42 million in the 2010 period included $53 million of net realized gains related to the sale of certain investments in auction rate securities, offset by $12 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar during the first nine months of 2010.

 

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Liquidity and Capital Resources
As of September 30, 2011, our total cash, cash equivalents and restricted cash was $2.43 billion, of which $384 million was restricted. Our final investment in marketable securities was liquidated in July 2011. Refer to Note 7, “Investments in Marketable Securities” in Part I, Items 1A and 1B, respectively, of this report for additional information.
Sources and Uses of Cash
US Airways Group
Net cash provided by operating activities was $465 million and $789 million for the first nine months of 2011 and 2010, respectively, a period-over-period decrease of $324 million. The decrease in net cash provided by operating activities was due to lower net income in the 2011 period as a result of increased operating costs, principally higher fuel costs.
Net cash used in investing activities was $283 million for the first nine months of 2011 as compared to net cash provided by investing activities of $49 million for the first nine months of 2010. Principal investing activities in the 2011 period included expenditures of $238 million for property and equipment, including the purchase of three Airbus aircraft, and $78 million for aircraft pre-delivery deposits, as well as purchases of marketable securities of $30 million and a $20 million increase in restricted cash. These cash outflows were offset in part by proceeds from sales of marketable securities of $82 million. Principal investing activities in the 2010 period included net proceeds from sales of marketable securities of $268 million, including sales of certain auction rate securities of $143 million, and a $91 million decrease in restricted cash. These cash inflows were offset in part by purchases of marketable securities of $180 million and expenditures for property and equipment totaling $133 million. Expenditures for property and equipment related primarily to the purchase of Airbus aircraft. Changes in restricted cash reflect adjustments to the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways has not yet provided air transportation.
Net cash provided by financing activities was $2 million for the first nine months of 2011 as compared to net cash used in financing activities of $252 million for the first nine months of 2010. Principal financing activities in the 2011 period included proceeds from the issuance of debt of $531 million, which included $478 million of proceeds from the issuance of equipment notes associated with the EETC transactions. Debt repayments were $516 million, which included the repayment of existing debt associated with five Airbus aircraft refinanced by the 2011 EETC issuance. Principal financing activities in the 2010 period included debt repayments of $367 million, including the repurchase of $69 million aggregate principal amount of our 7% senior convertible notes. Proceeds from the issuance of debt were $120 million, which primarily included the financing associated with the purchase of Airbus aircraft.
US Airways
Net cash provided by operating activities was $439 million and $749 million for the first nine months of 2011 and 2010, respectively, a period-over-period decrease of $310 million. The decrease in net cash provided by operating activities was due to lower net income in the 2011 period as a result of increased operating costs, principally higher fuel costs.
Net cash used in investing activities was $272 million for the first nine months of 2011 as compared to net cash provided by investing activities of $60 million for the first nine months of 2010. Principal investing activities in the 2011 period included expenditures of $227 million for property and equipment, including the purchase of three Airbus aircraft, and $78 million for aircraft pre-delivery deposits, as well as purchases of marketable securities of $30 million and a $20 million increase in restricted cash. These cash outflows were offset in part by proceeds from sales of marketable securities of $82 million. Principal investing activities in the 2010 period included net proceeds from sales of marketable securities of $268 million, including sales of certain auction rate securities of $143 million, and a $91 million decrease in restricted cash. These cash inflows were offset in part by purchases of marketable securities of $180 million and expenditures for property and equipment totaling $122 million. Expenditures for property and equipment related primarily to the purchase of Airbus aircraft. Changes in restricted cash reflect adjustments to the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways has not yet provided air transportation.
Net cash provided by financing activities was $18 million for the first nine months of 2011 as compared to net cash used in financing activities of $195 million for the first nine months of 2010. Principal financing activities in the 2011 period included proceeds from the issuance of debt of $531 million, which included $478 million of proceeds from the issuance of equipment notes associated with the EETC transactions. Debt repayments were $500 million, which included the repayment of existing debt associated with five Airbus aircraft refinanced by the 2011 EETC issuance. Principal financing activities in the 2010 period included debt repayments of $282 million and proceeds from the issuance of debt of $90 million, which primarily included the financing associated with the purchase of Airbus aircraft.

 

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Commitments
As of September 30, 2011, we had $4.65 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 September 30, 2011, the interest rate on the Citicorp credit facility was 2.74% 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 September 30, 2011. As of September 30, 2011, we were in compliance with all debt covenants under the Citicorp credit facility.
2011 Financing Transactions
In June 2011, US Airways created three pass-through trusts which issued approximately $471 million aggregate face amount of Series 2011-1 Class A, Class B and Class C Enhanced Equipment Trust Certificates in connection with the refinancing of five Airbus aircraft owned by US Airways and the financing of four Airbus aircraft scheduled to be delivered from September to October 2011 (the “2011 EETCs”). The 2011 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ condensed consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets.

 

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As of September 30, 2011, $425 million of the escrowed proceeds from the 2011 EETCs have been used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in an aggregate principal amount of $265 million bearing interest at 7.125% per annum, Series B equipment notes in an aggregate principal amount of $85 million bearing interest at 9.75% per annum and Series C equipment notes in an aggregate principal amount of $75 million bearing interest at 10.875% per annum. Interest on the equipment notes is payable semiannually in April and October of each year, beginning in October 2011. Principal payments on the equipment notes are scheduled to begin in April 2012. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in October 2023, October 2018 and October 2014, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used to repay the existing debt associated with the five Airbus aircraft and to finance three Airbus aircraft delivered in September 2011, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $46 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered.
In July 2011, US Airways completed an offering of Class C certificates in the aggregate principal amount of $53 million under its Series 2010-1 EETCs. The 2010-1 Class A and B certificates originally closed in December 2010 in connection with the refinancing of owned Airbus aircraft. Also in July 2011, US Airways issued $53 million in additional equipment notes bearing interest at 11% per annum. The net proceeds from the offering will be used for general corporate purposes.
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.
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 37 aircraft through September 30, 2011, which includes four A320 aircraft, 26 A321 aircraft and seven A330-200 aircraft. US Airways plans to take delivery of nine A321 aircraft in the fourth quarter 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 September 30, 2011.
Under all of our aircraft and engine purchase agreements, our total future commitments as of September 30, 2011 are expected to be approximately $5.77 billion through 2019, which includes predelivery deposits and payments. We have financing commitments for all Airbus aircraft scheduled for delivery in 2011 and 2012. See Part II, Item 1A, Risk Factors – “Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, operating expenses and results” and “Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions.

 

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Covenants and Credit Rating
In addition to the minimum cash balance requirements, our long-term debt agreements contain various negative covenants that restrict or limit our actions, including our ability to pay dividends or make other restricted payments. Our long-term debt agreements also generally contain cross-default provisions, which may be triggered by defaults by us under other agreements relating to indebtedness. See Part II, Item 1A, Risk Factors – “Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions” and “Any failure to comply with the liquidity covenants contained in our financing arrangements would likely have a material adverse effect on our business, financial condition and results of operations.” As of September 30, 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 September 30, 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.
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 September 30, 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)
    14       53       48       24       3       23       165  
US Airways (4)
                                                       
Debt and capital lease obligations (5) (6)
    111       388       342       360       293       1,614       3,108  
Interest obligations (3) (6)
    44       161       140       116       102       376       939  
Aircraft purchase and operating lease commitments (7)
    582       1,634       1,983       1,655       1,063       4,844       11,761  
Regional capacity purchase agreements (8)
    201       1,013       990       996       880       1,364       5,444  
Other US Airways Group subsidiaries (9)
    3       9       8       6       1             27  
 
                                         
Total
  $ 955     $ 3,374     $ 3,627     $ 4,433     $ 2,342     $ 8,256     $ 22,987  
 
                                         
 
     
(1)  
These commitments represent those entered into by US Airways Group.
 
(2)  
Excludes $106 million of unamortized debt discount as of September 30, 2011.
 
(3)  
For variable-rate debt, future interest obligations are shown above using interest rates in effect as of September 30, 2011.
 
(4)  
These commitments represent those entered into by US Airways.
 
(5)  
Excludes $74 million of unamortized debt discount as of September 30, 2011.
 
(6)  
Includes $1.25 billion of future principal payments and $515 million of future interest payments as of September 30, 2011, respectively, related to pass through trust certificates, or EETCs, associated with mortgage financings for the purchase of certain aircraft.
 
(7)  
Includes $2.69 billion of future minimum lease payments related to EETC leveraged leased financings of certain aircraft as of September 30, 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.
In light of our significant financial commitments related to, among other things, new aircraft and the servicing and amortization of existing debt and equipment leasing arrangements, we regularly consider and enter into negotiations related to capital raising activity, which may include the entry into leasing transactions and future issuances of secured or unsecured debt obligations or additional equity securities, in public or private offerings or otherwise. The cash available to us from operations and 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 third 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.
In May 2011, the FASB issued ASU 2011-4, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. The guidance clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risks, addresses the concept of valuation premise and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy and requires additional disclosures. ASU 2011-4 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. We are currently evaluating the requirements of ASU 2011-4 and have not yet determined its impact on our condensed consolidated financial statements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments
Our primary market risk exposures include commodity price risk (i.e., the price paid to obtain aviation fuel) and interest rate risk. Our exposure to market risk from changes in commodity prices and interest rates has not changed materially from our exposure discussed in our 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 September 30, 2011, our variable-rate long-term debt obligations of approximately $2.65 billion represented approximately 57% of our total long-term debt. If interest rates increased 10% in 2011, the impact on our results of operations would be approximately $9 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 September 30, 2011. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 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 September 30, 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 September 30, 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 case was closed in June 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, Sabre Inc. and Sabre Travel International Limited (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 that illegally restrain 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 have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four counts in the complaint to proceed. Sabre subsequently filed another motion to dismiss relating to one of the two remaining counts. This second motion to dismiss remains pending. US Airways intends to pursue its 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 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 Express operations. 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. For example, the U.S. District Court in Charlotte on September 28, 2011 granted a preliminary injunction enjoining the labor union representing our pilots from engaging in an illegal work slowdown, and that union also has a lawsuit pending against us in the U.S. District Court for the Eastern District of New York alleging that we breached our obligations under the RLA.
Likewise, employees represented by other unions 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, facility disruptions, 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 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. 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.
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 and change training requirements 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 finalized a second set of rules that further regulate airline interactions with passengers through the reservations process, at the airport and on board the aircraft. US Airways is working to comply with the implementation deadlines of these rules, some of which took effect in August 2011 and others which take effect in January 2012. We anticipate a third set of consumer rules to be issued by the DOT in 2012. We continue to see other efforts by the DOT to further regulate airlines through increased data reporting requirements, expansion of the Air Carrier Access Act, and greater oversight of the ways that airlines describe and sell air transportation and other products and services. Each additional regulation increases costs and adds greater complexity to our operation.
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. The EU’s Emissions Trading Scheme is scheduled to take full effect in 2012. This scheme, which is subject to a legal challenge in the European Court of Justice, has the ability to appreciably raise costs associated with flights to EU countries as airlines will have to purchase emissions credits on the open market to cover some percentage of a carrier’s European operations. US Airways has met all the regulatory milestones associated with the program to date.
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.
The U.S. EPA has proposed effluent limitation guidelines for airport deicing fluid. This proposed technology-based rule would require the mitigation of spent deicing fluid discharges through collection and treatment. Airports meeting threshold requirements would have to construct or reconfigure deicing facilities to capture and treat the fluid. Cost estimates have not been defined, but US Airways along with other airlines will share a portion of these costs at each airport.
In addition to the proposed EPA regulation, several U.S. airport authorities are actively engaged in efforts to limit discharges of deicing 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. 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, 2012. 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 executing hedging strategies.

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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: October 26, 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: October 26, 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
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.

 

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