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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

or

 

¨

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  x    No  ¨

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  x    No  ¨

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  x   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨
US Airways, Inc.   Large accelerated filer  ¨   Accelerated filer  ¨   Non-accelerated filer  x   Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

US Airways Group, Inc.

     Yes                       ¨           No                       x     

US Airways, Inc.

     Yes                       ¨           No                       x     

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                       x           No                       ¨     

US Airways, Inc.

     Yes                       x           No                       ¨     

As of October 18, 2013, there were approximately 196,979,624 shares of US Airways Group, Inc. common stock outstanding.

As of October 18, 2013, US Airways, Inc. had 1,000 shares of common stock outstanding, all of which were held by US Airways Group, Inc.

 

 

 


Table of Contents

US Airways Group, Inc.

US Airways, Inc.

Form 10-Q

Quarterly Period Ended September 30, 2013

Table of Contents

 

     Page  

Part I. Financial Information

  

Item 1A. Condensed Consolidated Financial Statements of US Airways Group, Inc.

     5   

Condensed Consolidated Statements of Operations

     5   

Condensed Consolidated Statements of Comprehensive Income

     6   

Condensed Consolidated Balance Sheets

     7   

Condensed Consolidated Statements of Cash Flows

     8   

Notes to the Condensed Consolidated Financial Statements

     9   

Item 1B. Condensed Financial Statements of US Airways, Inc.

     16   

Condensed Statements of Operations

     16   

Condensed Statements of Comprehensive Income

     17   

Condensed Balance Sheets

     18   

Condensed Statements of Cash Flows

     19   

Notes to the Condensed Financial Statements

     20   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     55   

Item 4. Controls and Procedures

     55   

Part II. Other Information

  

Item 1. Legal Proceedings

     56   

Item 1A. Risk Factors

     57   

Item 6. Exhibits

     78   

Signatures

     79   

 

2


Table of Contents

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 that adversely affect our business;

 

   

the impact of the price and availability of fuel and significant disruptions in the supply of aircraft fuel;

 

   

competitive practices in the industry, including the impact of industry consolidation;

 

   

increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates;

 

   

our high level of fixed obligations and our ability to fund general corporate requirements, obtain additional financing and respond to competitive developments;

 

   

any failure to comply with the liquidity covenants contained in our financing arrangements;

 

   

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;

 

   

regulatory changes affecting the allocation of slots;

 

   

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;

 

   

the impact of extensive government regulation;

 

   

the impact of heavy taxation;

 

   

the impact of changes to our business model;

 

   

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;

 

3


Table of Contents
   

our ability to operate and grow our route network;

 

   

the impact of environmental regulation;

 

   

our reliance on technology and automated systems and the impact of any failure or disruption of, or delay in, these technologies or systems;

 

   

costs of ongoing data security compliance requirements and the impact of any significant 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;

 

   

our dependence on a limited number of suppliers for aircraft, aircraft engines and parts;

 

   

the impact of changing economic and other conditions and the seasonality of our business;

 

   

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 net operating losses (“NOLs”) and certain other tax attributes;

 

   

risks relating to our proposed merger with AMR Corporation (“AMR”);

 

   

risks relating to our common stock, market factors affecting the price of our common stock, and the rights of stockholders; and

 

   

other risks and uncertainties listed from time to time in our reports to and filings with the Securities and Exchange Commission (the “SEC”).

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.

 

4


Table of Contents

Item 1A. Condensed Consolidated Financial Statements of US Airways Group, Inc.

US Airways Group, Inc.

Condensed Consolidated Statements of Operations

(In millions, except share and per share amounts)

(Unaudited)

 

    

Three Months

Ended September 30,

   

Nine Months

Ended September 30,

 
     2013     2012     2013     2012  

Operating revenues:

        

Mainline passenger

   $ 2,601      $ 2,319      $ 7,364      $ 6,881   

Express passenger

     857        844        2,497        2,523   

Cargo

     37        35        114        114   

Other

     360        335        1,125        1,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     3,855        3,533        11,100        10,553   

Operating expenses:

        

Aircraft fuel and related taxes

     915        893        2,648        2,659   

Salaries and related costs

     681        609        2,018        1,888   

Express expenses

     772        781        2,350        2,386   

Aircraft rent

     150        160        457        483   

Aircraft maintenance

     170        171        512        506   

Other rent and landing fees

     166        148        467        419   

Selling expenses

     129        122        366        359   

Special items, net

     40        14        103        25   

Depreciation and amortization

     73        60        210        182   

Other

     331        307        957        915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,427        3,265        10,088        9,822   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     428        268        1,012        731   

Nonoperating income (expense):

        

Interest income

     —          —          1        1   

Interest expense, net

     (88     (89     (263     (256

Other, net

     (4     67        (16     125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating expense, net

     (92     (22     (278     (130
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     336        246        734        601   

Income tax provision

     120        1        187        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 216      $ 245      $ 547      $ 600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic earnings per common share

   $ 1.12      $ 1.51      $ 3.10      $ 3.70   

Diluted earnings per common share

   $ 1.04      $ 1.24      $ 2.69      $ 3.06   

Shares used for computation (in thousands):

        

Basic

     193,416        162,418        176,511        162,286   

Diluted

     208,403        204,603        207,760        203,532   

See accompanying notes to the condensed consolidated financial statements.

 

5


Table of Contents

US Airways Group, Inc.

Condensed Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)

 

    

Three Months

Ended September 30,

    

Nine Months

Ended September 30,

 
     2013      2012      2013      2012  

Net income

   $ 216       $ 245       $ 547       $ 600   

Total other comprehensive income

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income

   $ 216       $ 245       $ 547       $ 600   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

US Airways Group, Inc.

Condensed Consolidated Balance Sheets

(In millions, except share and per share amounts)

(Unaudited)

 

     September 30,
2013
    December 31,
2012
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 3,319      $ 2,276   

Investments in marketable securities

     202        100   

Accounts receivable, net

     412        298   

Materials and supplies, net

     360        300   

Prepaid expenses and other

     1,033        608   
  

 

 

   

 

 

 

Total current assets

     5,326        3,582   

Property and equipment

    

Flight equipment

     6,202        5,188   

Ground property and equipment

     1,070        1,005   

Less accumulated depreciation and amortization

     (1,932     (1,733
  

 

 

   

 

 

 
     5,340        4,460   

Equipment purchase deposits

     252        244   
  

 

 

   

 

 

 

Total property and equipment

     5,592        4,704   

Other assets

    

Other intangibles, net of accumulated amortization of $176 million and $158 million, respectively

     521        539   

Restricted cash

     350        336   

Other assets

     277        235   
  

 

 

   

 

 

 

Total other assets

     1,148        1,110   
  

 

 

   

 

 

 

Total assets

   $ 12,066      $ 9,396   
  

 

 

   

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Current maturities of debt and capital leases

   $ 405      $ 417   

Accounts payable

     361        366   

Air traffic liability

     1,356        1,054   

Accrued compensation and vacation

     328        258   

Accrued taxes

     191        181   

Other accrued expenses

     1,013        1,027   
  

 

 

   

 

 

 

Total current liabilities

     3,654        3,303   

Noncurrent liabilities and deferred credits

    

Long-term debt and capital leases, net of current maturities

     5,506        4,376   

Deferred gains and credits, net

     258        290   

Postretirement benefits other than pensions

     173        172   

Employee benefit liabilities and other

     971        465   
  

 

 

   

 

 

 

Total noncurrent liabilities and deferred credits

     6,908        5,303   

Commitments and contingencies

    

Stockholders’ equity

    

Common stock, $0.01 par value; 400,000,000 shares authorized, 196,922,908 shares issued and outstanding at September 30, 2013; 162,502,692 shares issued and outstanding at December 31, 2012

     2        2   

Additional paid-in capital

     2,301        2,134   

Accumulated other comprehensive loss

     (7     (7

Accumulated deficit

     (792     (1,339
  

 

 

   

 

 

 

Total stockholders’ equity

     1,504        790   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 12,066      $ 9,396   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

7


Table of Contents

US Airways Group, Inc.

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

    

Nine Months

Ended September 30,

 
     2013     2012  

Net cash provided by operating activities

   $ 1,150      $ 887   

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,075     (428

Purchases of marketable securities

     (202     —     

Sales of marketable securities

     100        —     

Decrease (increase) in long-term restricted cash

     (14     18   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,191     (410

Cash flows from financing activities:

    

Repayments of debt and capital lease obligations

     (1,792     (370

Proceeds from issuance of debt

     2,922        353   

Proceeds from issuance of common stock

     3        —     

Deferred financing costs

     (61     (14

Airport construction obligation

     12        42   
  

 

 

   

 

 

 

Net cash provided by financing activities

     1,084        11   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,043        488   

Cash and cash equivalents at beginning of period

     2,276        1,947   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,319      $ 2,435   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Conversion of 7.25% convertible senior notes

   $ 149      $ —     

Note payables issued for aircraft purchases

     35        —     

Interest payable converted to debt

     12        15   

Supplemental information:

    

Interest paid, net of amounts capitalized

   $ 161      $ 157   

Income taxes paid

     4        1   

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

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, 2012. 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 accordance 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. The Company’s accumulated other comprehensive loss balances at September 30, 2013 and December 31, 2012 related to pension and other postretirement benefits.

2. Merger Agreement

On February 13, 2013, AMR Corporation, a Delaware corporation (“AMR”), US Airways Group, and AMR Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of AMR (“Merger Sub”), entered into an Agreement and Plan of Merger (as subsequently amended, the “Merger Agreement”), providing for a business combination of AMR and US Airways Group. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into US Airways Group (the “Merger”), with US Airways Group as the surviving corporation and as a wholly owned subsidiary of AMR. The Merger Agreement and the transactions contemplated thereby are to be effected pursuant to a plan of reorganization of AMR and certain of its direct and indirect domestic subsidiaries (the “Debtors”) in connection with their currently pending cases under Chapter 11 of Title 11 of U.S. Code, 11 U.S.C. Sections 101 et seq. (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). Consummation of the Merger is subject to customary closing conditions, including certain regulatory approvals. The Merger was approved by US Airways Group’s shareholders on July 12, 2013. On August 13, 2013, the United States government, along with certain states and the District of Columbia filed a lawsuit to enjoin the Merger under federal antitrust law. For more information, see Note 8 to these condensed consolidated financial statements. On October 21, 2013, AMR’s plan of reorganization was confirmed by the Bankruptcy Court in accordance with the requirements of the Bankruptcy Code.

3. Special Items

Special items included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 (in millions) were as follows:

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2013     2012     2013     2012  

Mainline operating special items, net (a)

   $ 40      $ 14      $ 103      $ 25   

Express operating special items, net (b)

     (14     —          (12     3   

Nonoperating special items, net (c)

     5        (67     6        (137
  

 

 

   

 

 

   

 

 

   

 

 

 

Total special items

   $ 31      $ (53   $ 97      $ (109
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The 2013 third quarter consisted primarily of merger related costs. The 2013 nine month period consisted primarily of merger related costs and charges related to the ratification of the US Airways flight attendant collective bargaining agreement.

The 2012 third quarter and nine month periods consisted primarily of merger related costs and auction rate securities arbitration costs.

 

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(b)

The 2013 third quarter and nine month periods consisted primarily of a credit due to a favorable arbitration ruling related to a vendor contract.

 

(c)

The 2013 third quarter consisted of $5 million in charges primarily related to non-cash write offs of debt discount in connection with conversions of 7.25% convertible senior notes. The 2013 nine month period consisted of $36 million in charges primarily related to non-cash write offs of debt discount and debt issuance costs in connection with conversions of 7.25% convertible senior notes and repayment of the former Citicorp North America term loan. These charges were offset in part by a $30 million credit in connection with an award received in an arbitration related to previous investments in auction rate securities.

The 2012 third quarter consisted primarily of a $69 million gain related to the slot transaction with Delta Air Lines, Inc. (“Delta”). The 2012 nine month period consisted primarily of a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.

4. 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
Ended September 30,
     Nine Months
Ended September 30,
 
     2013      2012      2013      2012  

Basic EPS:

           

Net income

   $ 216       $ 245       $ 547       $ 600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding (in thousands)

     193,416         162,418         176,511         162,286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

   $ 1.12       $ 1.51       $ 3.10       $ 3.70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS:

           

Net income

   $ 216       $ 245       $ 547       $ 600   

Interest expense on 7.25% convertible senior notes

     1         8         12         23   

Interest expense on 7% senior convertible notes

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income for purposes of computing diluted EPS

   $ 217       $ 253       $ 559       $ 623   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share computation for diluted EPS (in thousands):

           

Weighted average common shares outstanding

     193,416         162,418         176,511         162,286   

Dilutive effect of stock awards

     6,368         4,240         6,169         3,301   

Assumed conversion of 7.25% convertible senior notes

     8,619         37,746         24,966         37,746   

Assumed conversion of 7% senior convertible notes

     —           199         114         199   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding as adjusted

     208,403         204,603         207,760         203,532   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 1.04       $ 1.24       $ 2.69       $ 3.06   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following were excluded from the computation of diluted EPS because inclusion of shares would be antidilutive (in thousands):

  

Stock options, SARs and RSUs

     469         1,626         472         1,641   

 

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5. Debt

The following table details the Company’s debt (in millions). Variable interest rates listed are the rates as of September 30, 2013.

 

     September 30,
2013
    December 31,
2012
 

Secured

    

2013 Citicorp credit facility tranche B-1, variable interest rate of 4.25%, installments due through 2019

   $ 1,000      $ —     

2013 Citicorp credit facility tranche B-2, variable interest rate of 3.50%, installments due through 2016

     600        —     

Citicorp North America loan

     —          1,120   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.58% to 8.48%, maturing from 2013 to 2029

     1,370        1,708   

Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 3.95% to 11%, maturing from 2014 to 2025

     2,328        1,598   

Other secured obligations, fixed interest rate of 8%, maturing from 2018 to 2021

     24        27   
  

 

 

   

 

 

 
     5,322        4,453   

Unsecured

    

6.125% senior notes, interest only payments until due in 2018

     500        —     

Barclays prepaid miles

     —          200   

7.25% convertible senior notes, interest only payments until due in 2014

     23        172   

Airbus advance, repayments through 2018

     95        83   

Industrial development bonds, fixed interest rate of 6.30%, interest only payments until due in 2023

     29        29   

7% senior convertible notes

     —          5   
  

 

 

   

 

 

 
     647        489   
  

 

 

   

 

 

 

Total long-term debt and capital lease obligations

     5,969        4,942   

Less: Total unamortized discount on debt

     (58     (149

Current maturities

     (405     (417
  

 

 

   

 

 

 

Long-term debt and capital lease obligations, net of current maturities

   $ 5,506      $ 4,376   
  

 

 

   

 

 

 

The Company was in compliance with the covenants in its debt agreements at September 30, 2013.

2013 Citicorp Credit Facility

On May 23, 2013, US Airways entered into a term loan credit facility (the “2013 Citicorp credit facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways borrowed an aggregate principal amount of $1.6 billion. Approximately $1.3 billion of the net proceeds were applied to repay US Airways Group’s former Citicorp North America loan and certain other secured debt of US Airways with remaining net proceeds to be used for general corporate purposes. As a result of the repayment of this loan, the Company recorded approximately $8 million in special debt extinguishment charges which are included within other nonoperating expense, net on the accompanying condensed consolidated statement of operations. US Airways Group and certain other subsidiaries of US Airways Group are guarantors of the 2013 Citicorp credit facility.

The 2013 Citicorp credit facility consists of $1.0 billion of tranche B-1 term loans (“Tranche B-1”) and $600 million of tranche B-2 term loans (“Tranche B-2”). The 2013 Citicorp credit facility is prepayable at any time with a premium of 1% applicable to certain prepayments made prior to November 23, 2013.

The 2013 Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR (subject to a floor) plus an applicable LIBOR margin. As of September 30, 2013, the interest rate was 4.25% based on a 3.25% LIBOR margin for Tranche B-1 and 3.50% based on a 2.50% LIBOR margin for Tranche B-2.

Tranche B-1 and Tranche B-2 mature on May 23, 2019 and November 23, 2016, respectively, and each is repayable in annual 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 loans with any unpaid balance due on the maturity date of the respective tranche.

 

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The obligations of US Airways under the 2013 Citicorp credit facility are secured by liens on certain route authorities to operate between certain specified cities, certain take-off and landing rights at certain airports and certain other assets of US Airways.

The 2013 Citicorp credit facility includes covenants that, among other things, (a) require US Airways to maintain (i) unrestricted liquidity of not less than $850 million prior to the Merger and AMR (or its successor) to maintain unrestricted liquidity of not less than $2 billion following the Merger, in both cases with not less than $750 million held in accounts subject to control agreements, and (ii) a minimum ratio of appraised value of collateral to the outstanding loans under the facility of 1.5 to 1.0 and (b) restrict the ability of US Airways Group and its subsidiaries party to the 2013 Citicorp credit facility (and after the Merger AMR, or its successor, and its subsidiaries party to the 2013 Citicorp credit facility) to make certain investments and restricted payments. The 2013 Citicorp credit facility contains events of default customary for similar financings, including a cross-acceleration provision to certain other material indebtedness of US Airways and the guarantors.

6.125% Senior Notes

On May 24, 2013, US Airways Group issued $500 million aggregate principal amount of 6.125% Senior Notes due 2018 (the “6.125% senior notes”), the net proceeds of which will be used for general corporate purposes. These notes bear interest at a rate of 6.125% per annum, which is payable semi-annually on each June 1 and December 1, beginning December 1, 2013. The 6.125% senior notes mature on June 1, 2018 and are fully and unconditionally guaranteed by US Airways. The 6.125% senior notes are general unsecured senior obligations of the Company.

The 6.125% senior notes may be accelerated upon the occurrence of events of default, which are customary for securities of this nature. The Company, at its option, may redeem some or all of the 6.125% senior notes at any time at a redemption price equal to the greater of (1) 100% of the principal amount of the 6.125% senior notes to be redeemed and (2) a make-whole amount based on the sum of the present values of the remaining scheduled payments of principal and interest on the 6.125% senior notes discounted to the redemption date using a rate based on comparable U.S. Treasury securities plus 50 basis points, plus in either case accrued and unpaid interest to the redemption date. In the event of a specified change in control (not including the Merger), each holder may require the Company to repurchase all or a portion of their 6.125% senior notes for cash at a price equal to 101% of the principal amount of the 6.125% senior notes to be repurchased plus any accrued and unpaid interest, if any, to (but not including) the repurchase date.

2013-1 EETCs

In April 2013, US Airways created two pass-through trusts which issued approximately $820 million aggregate face amount of Series 2013-1 Class A and Class B EETCs in connection with the financing of 18 Airbus aircraft scheduled to be delivered from September 2013 to June 2014. The 2013-1 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 balance sheet because the proceeds held by the depository are not US Airways’ assets.

As of September 30, 2013, $77 million of the escrowed proceeds from the 2013-1 EETCs have been used to purchase equipment notes issued by US Airways in two series: Series A equipment notes in the amount of $58 million bearing interest at 3.95% per annum and Series B equipment notes in the amount of $19 million bearing interest at 5.375% per annum. Interest on the equipment notes is payable semiannually in May and November of each year, beginning in November 2013. Principal payments on the equipment notes are scheduled to begin in November 2014. The final payments on the Series A and Series B equipment notes will be due in November 2025 and November 2021, 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 finance two Airbus aircraft delivered in September 2013. The equipment notes are secured by liens on aircraft. The remaining $743 million of escrowed proceeds will be used to purchase equipment notes as new aircraft are delivered.

 

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Table of Contents

2012-2 EETCs

In June 2013, US Airways created a new pass-through trust and issued a new class of its US Airways Pass Through Certificates, Series 2012-2: Class C in the aggregate face amount of $100 million. US Airways previously issued two classes of US Airways Pass Through Certificates, Series 2012-2: Class A and Class B in the aggregate face amount of $546 million, pursuant to separate trusts established for each of the Class A certificates and Class B certificates at the time of the issuance thereof in December 2012.

As of September 30, 2013, US Airways has issued $563 million of equipment notes in three series under its 2012-2 EETCs: Series A equipment notes in the amount of $365 million bearing interest at 4.625% per annum, Series B equipment notes in the amount of $112 million bearing interest at 6.75% per annum and Series C equipment notes in the amount of $86 million bearing interest at 5.45% per annum. Interest on the equipment notes is payable semiannually in June and December of each year and began in June 2013 for Series A and Series B, and will begin in December 2013 for Series C. Principal payments on the Series A and Series B equipment notes are scheduled to begin in December 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in June 2025, June 2021 and June 2018, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The only principal payments due on the Series C equipment notes are the principal payments that will be due on the final payment date. The net proceeds from the issuance of these equipment notes were used to finance 10 Airbus aircraft delivered from May 2013 through August 2013. The equipment notes are secured by liens on aircraft. The remaining $83 million of escrowed proceeds will be used to purchase equipment notes as new aircraft are delivered.

Other Aircraft Financing Transactions

In the first quarter of 2013, US Airways issued $183 million of equipment notes in three series under its 2012-1 EETCs completed in May 2012: Series A equipment notes in the amount of $111 million bearing interest at 5.90% per annum, Series B equipment notes in the amount of $37 million bearing interest at 8% per annum and Series C equipment notes in the amount of $35 million bearing interest at 9.125% per annum. The equipment notes are secured by liens on aircraft.

In the third quarter of 2012, US Airways entered into an agreement to acquire five Embraer 190 aircraft from Republic Airline, Inc. (“Republic”). US Airways took delivery of three aircraft in 2012 and the remaining two aircraft in the first quarter of 2013. In connection with this agreement, US Airways assumed the outstanding debt on these aircraft upon delivery and Republic was released from its obligations associated with the principal due under the debt.

7.25% Convertible Senior Notes

In the first nine months of 2013, holders converted approximately $149 million principal amount of the 7.25% convertible senior notes, resulting in the issuance of approximately 32.6 million shares of the Company’s common stock. In connection with the conversion of these notes, the Company recorded approximately $28 million in special debt extinguishment charges which are included within other nonoperating expense, net on the accompanying condensed consolidated statement of operations.

Barclays Prepaid Miles

In July 2013, the Company repaid in full the Barclays prepaid miles loan at its face amount of $200 million plus accrued interest.

Fair Value of Debt

The carrying value and estimated fair value of the Company’s long-term debt was (in millions):

 

     September 30, 2013      December 31, 2012  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 5,911       $ 5,984       $ 4,793       $ 5,021   

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. If the Company’s long-term debt was measured at fair value, it would have been categorized as Level 2 in the fair value hierarchy.

 

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6. Income Taxes

At December 31, 2012, gross net operating losses (“NOLs”) available for use by the Company were approximately $1.5 billion for federal income tax purposes. All of the Company’s NOLs are expected to be available for use in 2013 and expire during the years 2025 through 2031. The Company will use these NOLs to reduce its cash tax obligations when profitable going forward. The Company also had approximately $69 million of tax-effected state NOLs at December 31, 2012.

At December 31, 2012, the Company was in a net deferred tax asset position for financial reporting purposes, which included the NOLs, and was subject to a full valuation allowance. The federal and state valuation allowances were $118 million and $42 million, respectively, which included $32 million allocated primarily to certain federal capital loss carryforwards.

For each of the three and nine months ended September 30, 2013, the Company utilized NOLs to offset its taxable income. Historically, utilization of NOLs reduced the Company’s net deferred tax asset and in turn resulted in the release of its valuation allowance, which offset the Company’s tax provision dollar for dollar. In the second quarter of 2013, the Company’s pre-tax income and NOL utilization resulted in the use of its remaining valuation allowance associated with federal income taxes. Accordingly, with no remaining valuation allowance to release, the Company recorded $118 million and $183 million of non-cash federal income tax expense in the three and nine months ended September 30, 2013, respectively. The Company also recorded $2 million and $4 million of state income tax expense in the three and nine months ended September 30, 2013, respectively, related to certain states where NOLs were limited or unavailable to be used. As of September 30, 2013, the Company had approximately $1.2 billion of NOLs remaining for federal income tax purposes.

For each of the three and nine months ended September 30, 2012, NOL usage and release of valuation allowance offset the Company’s tax provision. As a result, the Company did not record federal income tax expense and recorded $1 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.

When profitable, the Company is ordinarily subject to Alternative Minimum Tax (“AMT”). However as the result of a special tax election made in 2009, the Company was able to utilize AMT NOLs to fully offset its AMT taxable income for each of the three and nine months ended September 30, 2013 and 2012.

7. Express Expenses

Expenses associated with the Company’s wholly owned regional airlines and affiliate regional airlines operating as US Airways Express are classified as express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
     2013     2012      2013     2012  

Aircraft fuel and related taxes

   $ 265      $ 272       $ 797      $ 830   

Salaries and related costs

     79        72         232        223   

Capacity purchases

     266        267         809        819   

Aircraft rent

     13        13         39        39   

Aircraft maintenance

     29        28         83        83   

Other rent and landing fees

     35        33         100        100   

Selling expenses

     44        45         129        132   

Special items, net (a)

     (14             (12     3   

Depreciation and amortization

     8        8         24        23   

Other expenses

     47        43         149        134   
  

 

 

   

 

 

    

 

 

   

 

 

 

Express expenses

   $ 772      $ 781       $ 2,350      $ 2,386   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a)

The 2013 third quarter and nine month periods consisted primarily of a credit due to a favorable arbitration ruling related to a vendor contract.

 

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8. Legal Proceedings

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. The Company intends to pursue its claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.

On March 1, 2013, a complaint captioned Plumbers & Steamfitters Local Union No. 248 Pension Fund v. US Airways Group, Inc., et al., No. CV2013-051605, was filed as a putative class action on behalf of the shareholders of US Airways Group in the Superior Court for Maricopa County, Arizona. On July 3, 2013, an amended complaint, captioned Dennis Palkon, et al. v. US Airways Group, Inc., et al., No. CV2013-051605, was filed with the same court. The amended complaint names as defendants US Airways Group and the members of its board of directors, and alleges that the directors failed to maximize the value of US Airways Group in connection with the Merger and that US Airways Group aided and abetted those breaches of fiduciary duty. The relief sought in the amended complaint includes an injunction against the Merger, or rescission in the event it has been consummated. The court in the above-referenced action denied the plaintiff’s motion for a temporary restraining order that had sought to enjoin the Company’s Annual Meeting of Stockholders. The above-referenced action has been stayed pending the outcome of the antitrust lawsuit filed by the United States government and various states on August 13, 2013 (described below). The Company believes this lawsuit is without merit and intends to vigorously defend against the allegations.

On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint names as defendants US Airways Group and US Airways, and alleges that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint includes an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American Airlines, Inc. as defendants, and on October 2, 2013, dismissed the initial California action. The Company believes this lawsuit is without merit and intends to vigorously defend against the allegations.

On August 13, 2013, the United States government (acting under the U.S. Attorney General), along with the states of Arizona, Florida, Tennessee and Texas, the commonwealths of Pennsylvania and Virginia, and the District of Columbia, acting by and through their respective Attorneys General, filed a complaint against US Airways Group and AMR in the U.S. District Court for the District of Columbia. The plaintiffs allege, among other things, that the proposed Merger would substantially lessen competition in violation of Section 7 of the Clayton Act and seek to permanently enjoin the transaction. On September 5, 2013, the plaintiffs filed an amended complaint, adding the state of Michigan (by and through its Attorney General) as a plaintiff. On October 1, 2013, the state of Texas entered into an agreement with US Airways Group and AMR that resolved the state’s objections to the Merger, and its claims were dismissed with prejudice on October 7, 2013. The U.S. District Court has set a trial date of November 25, 2013. The Company believes this lawsuit is without merit and intends to vigorously defend against the allegations.

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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Table of Contents

Item 1B. Condensed Financial Statements of US Airways, Inc.

US Airways, Inc.

Condensed Statements of Operations

(In millions)

(Unaudited)

 

    

Three Months

Ended September 30,

   

Nine Months

Ended September 30,

 
     2013     2012     2013     2012  

Operating revenues:

        

Mainline passenger

   $ 2,601      $ 2,319      $ 7,364      $ 6,881   

Express passenger

     857        844        2,497        2,523   

Cargo

     37        35        114        114   

Other

     400        377        1,242        1,155   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     3,895        3,575        11,217        10,673   

Operating expenses:

        

Aircraft fuel and related taxes

     915        893        2,648        2,659   

Salaries and related costs

     681        609        2,018        1,888   

Express expenses

     806        817        2,443        2,487   

Aircraft rent

     150        160        457        483   

Aircraft maintenance

     170        171        512        506   

Other rent and landing fees

     166        148        467        419   

Selling expenses

     129        122        366        359   

Special items, net

     40        14        103        25   

Depreciation and amortization

     76        62        217        190   

Other

     341        317        986        944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,474        3,313        10,217        9,960   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     421        262        1,000        713   

Nonoperating income (expense):

        

Interest income

     2        —          4        1   

Interest expense, net

     (76     (65     (201     (182

Other, net

     1        67        18        125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense), net

     (73     2        (179     (56
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     348        264        821        657   

Income tax provision

     128        1        207        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 220      $ 263      $ 614      $ 656   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed financial statements.

 

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Table of Contents

US Airways, Inc.

Condensed Statements of Comprehensive Income

(In millions)

(Unaudited)

 

    

Three Months

Ended September 30,

    

Nine Months

Ended September 30,

 
     2013      2012      2013      2012  

Net income

   $ 220       $ 263       $ 614       $ 656   

Other comprehensive loss:

           

Other postretirement benefits

     —           —           —           (1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive loss

     —           —           —           (1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income

   $ 220       $ 263       $ 614       $ 655   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to the condensed financial statements.

 

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Table of Contents

US Airways, Inc.

Condensed Balance Sheets

(In millions, except share and per share amounts)

(Unaudited)

 

     September 30,
2013
    December 31,
2012
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 3,314      $ 2,271   

Investments in marketable securities

     202        100   

Accounts receivable, net

     409        297   

Receivables from related parties, net

     383        —     

Materials and supplies, net

     325        247   

Prepaid expenses and other

     1,006        601   
  

 

 

   

 

 

 

Total current assets

     5,639        3,516   

Property and equipment

    

Flight equipment

     6,048        5,035   

Ground property and equipment

     1,028        968   

Less accumulated depreciation and amortization

     (1,840     (1,648
  

 

 

   

 

 

 
     5,236        4,355   

Equipment purchase deposits

     252        244   
  

 

 

   

 

 

 

Total property and equipment

     5,488        4,599   

Other assets

    

Other intangibles, net of accumulated amortization of $163 million and $146 million, respectively

     494        510   

Restricted cash

     350        336   

Other assets

     267        223   
  

 

 

   

 

 

 

Total other assets

     1,111        1,069   
  

 

 

   

 

 

 

Total assets

   $ 12,238      $ 9,184   
  

 

 

   

 

 

 

LIABILITIES & STOCKHOLDER’S EQUITY

    

Current liabilities

    

Current maturities of debt and capital leases

   $ 384      $ 401   

Accounts payable

     335        331   

Payables to related parties, net

     66        521   

Air traffic liability

     1,356        1,054   

Accrued compensation and vacation

     317        246   

Accrued taxes

     192        183   

Other accrued expenses

     985        995   
  

 

 

   

 

 

 

Total current liabilities

     3,635        3,731   

Noncurrent liabilities and deferred credits

    

Long-term debt and capital leases, net of current maturities

     4,977        2,952   

Deferred gains and credits, net

     246        247   

Postretirement benefits other than pensions

     171        170   

Employee benefit liabilities and other

     940        429   
  

 

 

   

 

 

 

Total noncurrent liabilities and deferred credits

     6,334        3,798   

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

     13        13   

Accumulated deficit

     (189     (803
  

 

 

   

 

 

 

Total stockholder’s equity

     2,269        1,655   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 12,238      $ 9,184   
  

 

 

   

 

 

 

See accompanying notes to the condensed financial statements.

 

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US Airways, Inc.

Condensed Statements of Cash Flows

(In millions)

(Unaudited)

 

    

Nine Months

Ended September 30,

 
     2013     2012  

Net cash provided by operating activities

   $ 1,115      $ 867   

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,065     (421

Purchases of marketable securities

     (202     —     

Sales of marketable securities

     100        —     

Decrease (increase) in long-term restricted cash

     (14     18   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,181     (403

Cash flows from financing activities:

    

Repayments of debt and capital lease obligations

     (467     (354

Proceeds from issuance of debt

     2,422        353   

Deferred financing costs

     (54     (14

Decrease in payables to related parties, net

     (804     —     

Airport construction obligation

     12        42   
  

 

 

   

 

 

 

Net cash provided by financing activities

     1,109        27   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,043        491   

Cash and cash equivalents at beginning of period

     2,271        1,940   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,314      $ 2,431   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Note payables issued for aircraft purchases

   $ 35      $ —     

Interest payable converted to debt

     12        15   

Supplemental information:

    

Interest paid, net of amounts capitalized

   $ 135      $ 118   

Income taxes paid

     2        1   

See accompanying notes to the condensed financial statements.

 

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US Airways, Inc.

Notes to Condensed Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed 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, 2012. US Airways is a wholly owned subsidiary of US Airways Group, Inc. (“US Airways Group”).

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed financial statements for the interim periods presented. The preparation of financial statements in accordance 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. US Airways’ accumulated other comprehensive income balances at September 30, 2013 and December 31, 2012 related to other postretirement benefits.

2. Merger Agreement

On February 13, 2013, AMR Corporation, a Delaware corporation (“AMR”), US Airways Group, and AMR Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of AMR (“Merger Sub”), entered into an Agreement and Plan of Merger (as subsequently amended, the “Merger Agreement”), providing for a business combination of AMR and US Airways Group. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into US Airways Group (the “Merger”), with US Airways Group as the surviving corporation and as a wholly owned subsidiary of AMR. The Merger Agreement and the transactions contemplated thereby are to be effected pursuant to a plan of reorganization of AMR and certain of its direct and indirect domestic subsidiaries (the “Debtors”) in connection with their currently pending cases under Chapter 11 of Title 11 of U.S. Code, 11 U.S.C. Sections 101 et seq. (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). Consummation of the Merger is subject to customary closing conditions, including certain regulatory approvals. The Merger was approved by US Airways Group’s shareholders on July 12, 2013. On August 13, 2013, the United States government along with certain states and the District of Columbia filed a lawsuit to enjoin the Merger under federal antitrust law. For more information, see Note 8 to these condensed financial statements. On October 21, 2013, AMR’s plan of reorganization was confirmed by the Bankruptcy Court in accordance with the requirements of the Bankruptcy Code.

3. Special Items

Special items included in the condensed statements of operations for the three and nine months ended September 30, 2013 and 2012 (in millions) were as follows:

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2013     2012     2013     2012  

Mainline operating special items, net (a)

   $ 40      $ 14      $ 103      $ 25   

Express operating special items, net (b)

     (14     —          (14     —     

Nonoperating special items, net (c)

     —          (67     (28     (137
  

 

 

   

 

 

   

 

 

   

 

 

 

Total special items

   $ 26      $ (53   $ 61      $ (112
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The 2013 third quarter consisted primarily of merger related costs. The 2013 nine month period consisted primarily of merger related costs and charges related to the ratification of the US Airways flight attendant collective bargaining agreement.

The 2012 third quarter and nine month periods consisted primarily of merger related costs and auction rate securities arbitration costs.

 

(b)

The 2013 third quarter and nine month periods consisted of a credit due to a favorable arbitration ruling related to a vendor contract.

 

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(c)

The 2013 nine month period consisted of a $30 million credit in connection with an award received in an arbitration related to previous investments in auction rate securities, offset in part by $2 million in charges primarily related to non-cash write offs of debt issuance costs.

The 2012 third quarter consisted primarily of a $69 million gain related to the slot transaction with Delta Air Lines, Inc. (“Delta”). The 2012 nine month period consisted primarily of a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.

4. Debt

The following table details US Airways’ debt (in millions). Variable interest rates listed are the rates as of September 30, 2013.

 

     September 30,
2013
    December 31,
2012
 

Secured

    

2013 Citicorp credit facility tranche B-1, variable interest rate of 4.25%, installments due through 2019

   $ 1,000      $ —     

2013 Citicorp credit facility tranche B-2, variable interest rate of 3.50%, installments due through 2016

     600        —     

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.58% to 8.48%, maturing from 2013 to 2022

     1,340        1,678   

Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 3.95% to 11%, maturing from 2014 to 2025

     2,328        1,598   

Other secured obligations, fixed interest rate of 8%, maturing from 2018 to 2021

     24        27   
  

 

 

   

 

 

 
     5,292        3,303   

Unsecured

    

Airbus advance, repayments through 2018

     95        83   

Industrial development bonds, fixed interest rate of 6.30%, interest only payments until due in 2023

     29        29   
  

 

 

   

 

 

 
     124        112   
  

 

 

   

 

 

 

Total long-term debt and capital lease obligations

     5,416        3,415   

Less: Total unamortized discount on debt

     (55     (62

Current maturities

     (384     (401
  

 

 

   

 

 

 

Long-term debt and capital lease obligations, net of current maturities

   $ 4,977      $ 2,952   
  

 

 

   

 

 

 

US Airways was in compliance with the covenants in its debt agreements at September 30, 2013.

2013 Citicorp Credit Facility

On May 23, 2013, US Airways entered into a term loan credit facility (the “2013 Citicorp credit facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways borrowed an aggregate principal amount of $1.6 billion. Approximately $1.3 billion of the net proceeds were applied to repay US Airways Group’s former Citicorp North America loan and certain other secured debt of US Airways with remaining net proceeds to be used for general corporate purposes. As a result of the repayment of this loan, US Airways recorded approximately $2 million in special debt extinguishment charges which are included within other nonoperating expense, net on the accompanying condensed statement of operations. US Airways Group and certain other subsidiaries of US Airways Group are guarantors of the 2013 Citicorp credit facility.

The 2013 Citicorp credit facility consists of $1.0 billion of tranche B-1 term loans (“Tranche B-1”) and $600 million of tranche B-2 term loans (“Tranche B-2”). The 2013 Citicorp credit facility is prepayable at any time with a premium of 1% applicable to certain prepayments made prior to November 23, 2013.

The 2013 Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR (subject to a floor) plus an applicable LIBOR margin. As of September 30, 2013, the interest rate was 4.25% based on a 3.25% LIBOR margin for Tranche B-1 and 3.50% based on a 2.50% LIBOR margin for Tranche B-2.

 

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Tranche B-1 and Tranche B-2 mature on May 23, 2019 and November 23, 2016, respectively, and each is repayable in annual 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 loans with any unpaid balance due on the maturity date of the respective tranche.

The obligations of US Airways under the 2013 Citicorp credit facility are secured by liens on certain route authorities to operate between certain specified cities, certain take-off and landing rights at certain airports and certain other assets of US Airways.

The 2013 Citicorp credit facility includes covenants that, among other things, (a) require US Airways to maintain (i) unrestricted liquidity of not less than $850 million prior to the Merger and AMR (or its successor) to maintain unrestricted liquidity of not less than $2 billion following the Merger, in both cases with not less than $750 million held in accounts subject to control agreements, and (ii) a minimum ratio of appraised value of collateral to the outstanding loans under the facility of 1.5 to 1.0 and (b) restrict the ability of US Airways Group and its subsidiaries party to the 2013 Citicorp credit facility (and after the Merger AMR, or its successor, and its subsidiaries party to the 2013 Citicorp credit facility) to make certain investments and restricted payments. The 2013 Citicorp credit facility contains events of default customary for similar financings, including a cross-acceleration provision to certain other material indebtedness of US Airways and the guarantors.

2013-1 EETCs

In April 2013, US Airways created two pass-through trusts which issued approximately $820 million aggregate face amount of Series 2013-1 Class A and Class B EETCs in connection with the financing of 18 Airbus aircraft scheduled to be delivered from September 2013 to June 2014. The 2013-1 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 balance sheet because the proceeds held by the depository are not US Airways’ assets.

As of September 30, 2013, $77 million of the escrowed proceeds from the 2013-1 EETCs have been used to purchase equipment notes issued by US Airways in two series: Series A equipment notes in the amount of $58 million bearing interest at 3.95% per annum and Series B equipment notes in the amount of $19 million bearing interest at 5.375% per annum. Interest on the equipment notes is payable semiannually in May and November of each year, beginning in November 2013. Principal payments on the equipment notes are scheduled to begin in November 2014. The final payments on the Series A and Series B equipment notes will be due in November 2025 and November 2021, 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 finance two Airbus aircraft delivered in September 2013. The equipment notes are secured by liens on aircraft. The remaining $743 million of escrowed proceeds will be used to purchase equipment notes as new aircraft are delivered.

2012-2 EETCs

In June 2013, US Airways created a new pass-through trust and issued a new class of its US Airways Pass Through Certificates, Series 2012-2: Class C in the aggregate face amount of $100 million. US Airways previously issued two classes of US Airways Pass Through Certificates, Series 2012-2: Class A and Class B in the aggregate face amount of $546 million, pursuant to separate trusts established for each of the Class A certificates and Class B certificates at the time of the issuance thereof in December 2012.

As of September 30, 2013, US Airways has issued $563 million of equipment notes in three series under its 2012-2 EETCs: Series A equipment notes in the amount of $365 million bearing interest at 4.625% per annum, Series B equipment notes in the amount of $112 million bearing interest at 6.75% per annum and Series C equipment notes in the amount of $86 million bearing interest at 5.45% per annum. Interest on the equipment notes is payable semiannually in June and December of each year and began in June 2013 for Series A and Series B, and will begin in December 2013 for Series C. Principal payments on the Series A and Series B equipment notes are scheduled to begin in December 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in June 2025, June 2021 and June 2018, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The only principal payments due on the Series C equipment notes are the principal payments that will be due on the final payment date. The net proceeds from the issuance of these equipment notes were used to finance 10 Airbus aircraft delivered from May 2013 through August 2013. The equipment notes are secured by liens on aircraft. The remaining $83 million of escrowed proceeds will be used to purchase equipment notes as new aircraft are delivered.

 

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Other Aircraft Financing Transactions

In the first quarter of 2013, US Airways issued $183 million of equipment notes in three series under its 2012-1 EETCs completed in May 2012: Series A equipment notes in the amount of $111 million bearing interest at 5.90% per annum, Series B equipment notes in the amount of $37 million bearing interest at 8% per annum and Series C equipment notes in the amount of $35 million bearing interest at 9.125% per annum. The equipment notes are secured by liens on aircraft.

In the third quarter of 2012, US Airways entered into an agreement to acquire five Embraer 190 aircraft from Republic Airline, Inc. (“Republic”). US Airways took delivery of three aircraft in 2012 and the remaining two aircraft in the first quarter of 2013. In connection with this agreement, US Airways assumed the outstanding debt on these aircraft upon delivery and Republic was released from its obligations associated with the principal due under the debt.

Fair Value of Debt

The carrying value and estimated fair value of US Airways’ long-term debt was (in millions):

 

     September 30, 2013      December 31, 2012  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term debt, including current maturities

   $ 5,361       $ 5,374       $ 3,353       $ 3,304   

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. If US Airways’ long-term debt was measured at fair value, it would have been categorized as Level 2 in the fair value hierarchy.

5. Related Party Transactions

The following represents the net receivables from (payables to) related parties (in millions):

 

     September 30,
2013
    December 31,
2012
 

US Airways Group

   $ 383      $ (453

US Airways Group’s wholly owned subsidiaries

     (66     (68
  

 

 

   

 

 

 
   $ 317      $ (521
  

 

 

   

 

 

 

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 decrease in the intercompany payable to US Airways Group primarily resulted from the repayment of US Airways Group’s former Citicorp North America term loan and Barclays prepaid miles loan, offset in part by proceeds from the issuance of US Airways Group’s 6.125% Senior Notes.

The net payable to US Airways Group’s wholly owned subsidiaries consists of amounts due under regional capacity agreements with the other airline subsidiaries and fuel purchase arrangements with a non-airline subsidiary.

 

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6. Income Taxes

US Airways is part of the US Airways Group consolidated income tax return.

At December 31, 2012, gross net operating losses (“NOLs”) available for use by US Airways were approximately $1.4 billion for federal income tax purposes. All of US Airways’ NOLs are expected to be available for use in 2013 and expire during the years 2025 through 2031. US Airways will use these NOLs to reduce its cash tax obligations when profitable going forward. US Airways also had approximately $67 million of tax-effected state NOLs at December 31, 2012.

At December 31, 2012, US Airways was in a net deferred tax asset position for financial reporting purposes, which included the NOLs, and was subject to a full valuation allowance. The federal and state valuation allowances were $126 million and $42 million, respectively, which included $32 million allocated primarily to certain federal capital loss carryforwards.

For each of the three and nine months ended September 30, 2013, US Airways utilized NOLs to offset its taxable income. Historically, utilization of NOLs reduced US Airways’ net deferred tax asset and in turn resulted in the release of its valuation allowance, which offset US Airways’ tax provision dollar for dollar. In the second quarter of 2013, US Airways’ pre-tax income and NOL utilization resulted in the use of its remaining valuation allowance associated with federal income taxes. Accordingly, with no remaining valuation allowance to release, US Airways recorded $127 million and $205 million of non-cash federal income tax expense in the three and nine months ended September 30, 2013, respectively. US Airways also recorded $1 million and $2 million of state income tax expense in the three and nine months ended September 30, 2013, respectively, related to certain states where NOLs were limited or unavailable to be used.

For each of the three and nine months ended September 30, 2012, NOL usage and release of valuation allowance offset US Airways’ tax provision. As a result, US Airways did not record federal income tax expense and recorded $1 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.

When profitable, US Airways is ordinarily subject to Alternative Minimum Tax (“AMT”). However as the result of a special tax election made in 2009, US Airways was able to utilize AMT NOLs to fully offset its AMT taxable income for each of the three and nine months ended September 30, 2013 and 2012.

7. Express Expenses

Expenses associated with affiliate regional airlines operating as US Airways Express are classified as express expenses on the condensed statements of operations. Express expenses consist of the following (in millions):

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
     2013     2012      2013     2012  

Aircraft fuel and related taxes

   $ 265      $ 272       $ 797      $ 830   

Salaries and related costs

     9        6         26        18   

Capacity purchases

     449        445         1,348        1,356   

Other rent and landing fees

     29        27         84        83   

Selling expenses

     44        45         129        132   

Special items, net (a)

     (14     —           (14     —     

Depreciation and amortization

     2        2         6        6   

Other expenses

     22        20         67        62   
  

 

 

   

 

 

    

 

 

   

 

 

 

Express expenses

   $ 806      $ 817       $ 2,443      $ 2,487   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a)

The 2013 third quarter and nine month periods consisted of a credit due to a favorable arbitration ruling related to a vendor contract.

 

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8. Legal Proceedings

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. US Airways intends to pursue its claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.

On March 1, 2013, a complaint captioned Plumbers & Steamfitters Local Union No. 248 Pension Fund v. US Airways Group, Inc., et al., No. CV2013-051605, was filed as a putative class action on behalf of the shareholders of US Airways Group in the Superior Court for Maricopa County, Arizona. On July 3, 2013, an amended complaint, captioned Dennis Palkon, et al. v. US Airways Group, Inc., et al., No. CV2013-051605, was filed with the same court. The amended complaint names as defendants US Airways Group and the members of its board of directors, and alleges that the directors failed to maximize the value of US Airways Group in connection with the Merger and that US Airways Group aided and abetted those breaches of fiduciary duty. The relief sought in the amended complaint includes an injunction against the Merger, or rescission in the event it has been consummated. The court in the above-referenced action denied the plaintiff’s motion for a temporary restraining order that had sought to enjoin US Airways Group’s Annual Meeting of Stockholders. The above-referenced action has been stayed pending the outcome of the antitrust lawsuit filed by the United States government and various states on August 13, 2013 (described below). US Airways Group believes this lawsuit is without merit and intends to vigorously defend against the allegations.

On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint names as defendants US Airways Group and US Airways, and alleges that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint includes an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American Airlines, Inc. as defendants, and on October 2, 2013, dismissed the initial California action. US Airways Group believes this lawsuit is without merit and intends to vigorously defend against the allegations.

On August 13, 2013, the United States government (acting under the U.S. Attorney General), along with the states of Arizona, Florida, Tennessee and Texas, the commonwealths of Pennsylvania and Virginia, and the District of Columbia, acting by and through their respective Attorneys General, filed a complaint against US Airways Group and AMR in the U.S. District Court for the District of Columbia. The plaintiffs allege, among other things, that the proposed Merger would substantially lessen competition in violation of Section 7 of the Clayton Act and seek to permanently enjoin the transaction. On September 5, 2013, the plaintiffs filed an amended complaint, adding the state of Michigan (by and through its Attorney General) as a plaintiff. On October 1, 2013, the state of Texas entered into an agreement with US Airways Group and AMR that resolved the state’s objections to the Merger, and its claims were dismissed with prejudice on October 7, 2013. The U.S. District Court has set a trial date of November 25, 2013. US Airways Group believes this lawsuit is without merit and intends to vigorously defend against the allegations.

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 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’s and US Airways’ Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 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 2012 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, Phoenix and Washington, D.C. at Ronald Reagan Washington National Airport. We offer scheduled passenger service on more than 3,200 flights daily to 203 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, and 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, 2013, we had approximately 43 million passengers boarding our mainline flights. As of September 30, 2013, we operated 344 mainline jets and were supported by our regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 238 regional jets and 43 turboprops. Our prorate carriers operated four regional jets at September 30, 2013.

Merger Agreement with AMR Corporation; Tax Benefit Preservation Plan

On February 13, 2013, AMR, US Airways Group, and AMR Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of AMR (“Merger Sub”), entered into an Agreement and Plan of Merger (as subsequently amended, the “Merger Agreement”), providing for a business combination of AMR and US Airways Group. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into US Airways Group (the “Merger”), with US Airways Group as the surviving corporation and as a wholly owned subsidiary of AMR. The Merger Agreement and the transactions contemplated thereby are to be effected pursuant to a plan of reorganization of AMR and certain of its direct and indirect domestic subsidiaries (the “Debtors”) in connection with their currently pending cases under Chapter 11 of Title 11 of U.S. Code, 11 U.S.C. Sections 101 et seq. (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). Consummation of the Merger is subject to customary closing conditions, including certain regulatory approvals. The Merger was approved by US Airways Group’s shareholders on July 12, 2013. On August 13, 2013, the United States government along with certain states and the District of Columbia filed a lawsuit to enjoin the Merger under federal antitrust law (the “DOJ Action”). For more information, see Note 8 to the respective condensed consolidated financial statements of US Airways Group and US Airways included in Part I, Items 1A and 1B of this report. On October 21, 2013, AMR’s plan of reorganization was confirmed by the Bankruptcy Court in accordance with the requirements of the Bankruptcy Code.

In conjunction with execution of the Merger Agreement, US Airways Group also adopted a tax benefit preservation plan designed to help preserve the value of the net operating losses and other deferred tax benefits of US Airways Group and the combined enterprise resulting from the Merger with AMR. As part of the plan, the US Airways Group’s board of directors declared a dividend of one common stock purchase right, which are referred to as “rights,” for each outstanding share of US Airways Group common stock. The rights will be exercisable if a person or group, without the approval of the US Airways Group board or other permitted exception, acquires beneficial ownership of 4.9% or more of US Airways Group’s outstanding common stock. The rights also will be exercisable if a person or group that already beneficially owns 4.9% or more of the common stock of US Airways Group, without board approval or other permitted exception, acquires additional shares (other than as a result of a dividend or a stock split). US Airways Group stockholders with ownership positions near or above the 4.9% threshold specified in the tax benefit preservation plan are urged to review its terms carefully. The foregoing description of the tax benefit preservation plan is not a complete description of all of the parties’ rights and obligations under the plan and is qualified in its entirety by reference to the Tax Benefit Preservation Plan, which is filed as Exhibit 4.10 to the 2012 Form 10-K.

 

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The U.S. Airline Industry

During the third quarter of 2013, the U.S. airline industry experienced year-over-year growth in passenger revenues driven by strong demand for air travel.

In its most recent data available, Airlines for America, the trade association for U.S. airlines, reported the following increases in U.S. industry passenger revenues and yields.

 

2013 vs. 2012

   July     August     September  

Passenger Revenues

     5.5     6.1     5.3

Yields

     3.7     4.1     3.5

 

2012 vs. 2011

   July     August     September  

Passenger Revenues

     1.3     2.1     (1.8 )% 

Yields

     2.5     0.5     (0.8 )% 

Jet fuel prices continue to follow the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. The average daily spot price for Brent crude oil was $110 per barrel in each of the third quarters of 2013 and 2012. During the third quarter of 2013, Brent crude oil prices fluctuated between a low of $103 per barrel in July to a high of $117 per barrel in September and closed the quarter at $108 per barrel on September 30, 2013.

While on average the U.S. airline industry experienced moderating fuel prices in the third quarter of 2013 as described above, fuel prices remain volatile and subject to uncertainty, principally due to unrest in the Middle East. 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.

US Airways Group

Driven by our highest third quarter operating revenues in our Company’s history, we realized our highest third quarter operating income and income before income taxes of $428 million and $336 million, respectively, in the third quarter of 2013. Net income for the quarter was $216 million which included a $120 million income tax provision. This compares to operating income of $268 million, income before income taxes of $246 million and net income of $245 million in the third quarter of 2012. The tax provision in the third quarter of 2012 was $1 million. In the 2012 period, utilization of NOLs reduced our net deferred tax asset and in turn resulted in the release of our valuation allowance, which offset our federal tax provision dollar for dollar. In the second quarter of 2013, our pre-tax income and NOL utilization resulted in the use of our remaining valuation allowance associated with federal income taxes. Accordingly, with no remaining valuation allowance to release, we recorded non-cash federal income tax expense in the third quarter of 2013.

Our third quarter 2013 results also included net special charges of $31 million compared to $53 million of net special credits in the third quarter of 2012. Net special charges in the third quarter of 2013 consisted primarily of merger related costs, which were offset in part by a special credit for a favorable arbitration ruling related to a vendor contract. Excluding the effects of net special items, we recognized income before income taxes of $367 million and net income of $241 million in the third quarter of 2013. This compares to income before income taxes of $193 million and net income of $192 million in the third quarter of 2012. See “US Airways Group’s Results of Operations” included in Part I, Item 2 of this report for more information on net special items.

Capacity

Total system capacity for the third quarter of 2013 increased 4.1% as compared to the third quarter of 2012 primarily due to our continued replacement of smaller legacy Boeing 737 aircraft with new larger gauge Airbus A321 aircraft and more international long haul flying. For the full year, total system capacity is expected to be up approximately 3.5%. Domestic capacity is expected to be up approximately 3.5% and international is expected to be up approximately 3.5% versus 2012.

 

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Revenue

In the third quarter of 2013, we reported operating revenues of $3.86 billion. Mainline and express passenger revenues increased $295 million, or 9.4%, as compared to the 2012 period. The growth in revenues was driven by a 4.7% increase in revenue passenger miles and a 4.4% increase in yield. Our mainline and express passenger revenue per available seat mile (“PRASM”) was 14.32 cents in the third quarter of 2013, a Company third quarter record and a 5.1% increase, as compared to 13.63 cents in the 2012 period. Total revenue per available seat mile (“RASM”), which includes our ancillary revenues, was 15.97 cents in the third quarter of 2013, a Company third quarter record and a 4.9% increase, as compared to 15.22 cents in the 2012 period. Ancillary revenue initiatives generated $154 million in revenues for the third quarter of 2013, an increase of $8 million over the 2012 period.

Fuel

Mainline and express fuel expense was $1.18 billion for the third quarter of 2013, which was $15 million, or 1.3%, higher as compared to the third quarter of 2012 due to a 3.2% increase in consumption driven by 4.1% higher capacity. This increase was offset in part by a 1.9% decrease in the average price per gallon to $3.01 for the third quarter of 2013 from an average price per gallon of $3.07 for the third quarter of 2012. We have not entered into any transactions to hedge our fuel consumption.

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 7.95 cents in the third quarter of 2012 to 8.08 cents in the third quarter of 2013. The increase was primarily due to higher salaries and related costs for our new flight attendant collective bargaining agreement and certain stock-based compensation programs.

The following table details our mainline CASM for the three months ended September 30, 2013 and 2012:

 

     2013     2012     Percent
Increase
(Decrease)
 
     (In cents)        

Mainline CASM excluding special items, fuel and profit sharing:

      

Total mainline CASM

     12.94        12.70        1.9   

Special items, net

     (0.20     (0.07     nm   

Aircraft fuel and related taxes

     (4.46     (4.57     (2.3

Profit sharing

     (0.20     (0.11     86.7   
  

 

 

   

 

 

   

Total mainline CASM excluding special items, fuel and profit sharing (1)

     8.08        7.95        1.7   
  

 

 

   

 

 

   

 

(1)

We believe that the presentation of mainline CASM excluding fuel is useful to investors because both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of 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 that 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 2013 operating performance was negatively impacted by more severe weather conditions in our Charlotte and Philadelphia hubs as compared to the third quarter of 2012. Weather-related delays experienced in the month of July were some of the highest in our Company’s history. In Charlotte, rain fell for 19 consecutive days from late June through mid-July, and in Philadelphia, July storms disrupted power and flooded portions of the airport. Weather-related delays continued into August, however they were much less severe, and by September, our operating performance significantly improved delivering the Company’s best September on-time performance.

We reported the following operating statistics to the Department of Transportation (“DOT”) for mainline operations for the third quarter of 2013 and 2012.

 

     2013      2012      Better (Worse) 2013-2012  
     July      August      September (e)      July      August      September      July     August     September  

On-time performance (a)

     74.0         81.1         88.3         82.0         83.5         87.3         (8.0 ) pts      (2.4 ) pts      1.0  pts 

Completion factor (b)

     98.8         99.4         99.3         99.1         99.0         99.6         (0.3 ) pts      0.4  pts      (0.3 ) pts 

Mishandled baggage (c)

     3.20         2.52         2.12         2.46         2.26         1.83         (30.1 )%      (11.5 )%      (15.8 )% 

Customer complaints (d)

     2.05         1.57         1.59         2.77         2.05         1.08         26.0     23.4     (47.2 )% 

 

(a)

Percentage of reported flight operations arriving on time as defined by the DOT.

(b)

Percentage of scheduled flight operations completed.

(c)

Rate of mishandled baggage reports per 1,000 passengers.

(d)

Rate of customer complaints filed with the DOT per 100,000 enplanements.

(e)

September 2013 operating statistics are preliminary as the DOT has not issued its September 2013 Air Travel Consumer Report as of the date of this filing.

Liquidity Position

As of September 30, 2013, our total cash, cash equivalents, investments in marketable securities and restricted cash was $3.87 billion, of which $350 million was restricted.

 

     September 30,
2013
     December 31,
2012
 
     (In millions)  

Cash, cash equivalents and investments in marketable securities

   $ 3,521       $ 2,376   

Long-term restricted cash

     350         336   
  

 

 

    

 

 

 

Total cash, cash equivalents, investments in marketable securities and restricted cash

   $ 3,871       $ 2,712   
  

 

 

    

 

 

 

The improvement in our liquidity in the first nine months of 2013 was due in part to our operating profitability thus far in 2013. Additionally, financing transactions have generated approximately $550 million of net proceeds. In the second quarter of 2013, we issued $500 million aggregate principal 6.125% Senior Notes. We also entered into a new $1.6 billion term loan, of which $1.3 billion of the net proceeds were used to repay our former Citicorp North America term loan and certain other higher cost secured debt. In July 2013, we repaid in full the Barclays prepaid miles loan at its face amount of $200 million.

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.

 

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US Airways Group’s Results of Operations

Driven by our highest third quarter operating revenues in our Company’s history, we realized our highest third quarter operating income and income before income taxes of $428 million and $336 million, respectively, in the third quarter of 2013. Net income for the quarter was $216 million which included a $120 million income tax provision. This compares to operating income of $268 million, income before income taxes of $246 million and net income of $245 million in the third quarter of 2012. The tax provision in the third quarter of 2012 was $1 million.

Our third quarter 2013 results included net special charges of $31 million, while the third quarter of 2012 included $53 million of net special credits. Excluding the effects of net special items for the third quarter of 2013, we recognized income before income taxes of $367 million, a Company third quarter record, and net income of $241 million. This compares to income before income taxes of $193 million and net income of $192 million in the third quarter of 2012 excluding the effects of net special items.

In the nine months ended September 30, 2013, we realized operating income of $1.01 billion and income before income taxes of $734 million. Net income in the 2013 nine month period was $547 million which included a $187 million income tax provision. This compares to operating income of $731 million, income before income taxes of $601 million and net income of $600 million in the 2012 nine month period. The tax provision in the 2012 nine month period was $1 million.

Our 2013 nine month period results included net special charges of $97 million, while the 2012 nine month period included $109 million of net special credits. Excluding the effects of net special items for the 2013 nine month period, we recognized income before income taxes of $831 million and net income of $619 million. This compares to income before income taxes of $492 million and net income of $491 million in the 2012 nine month period excluding the effects of net special items.

The following table details our income before income taxes and net income excluding special items (in millions):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Income before income taxes

   $ 336      $ 246      $ 734      $ 601   

Special items:

        

Mainline operating special items, net (a)

     40        14        103        25   

Express operating special items, net (b)

     (14     —          (12     3   

Nonoperating special items, net (c)

     5        (67     6        (137
  

 

 

   

 

 

   

 

 

   

 

 

 

Total special items

     31        (53     97        (109
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes excluding special items

   $ 367      $ 193      $ 831      $ 492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 216      $ 245      $ 547      $ 600   

Total special items

     31        (53     97        (109

Net tax effect of special items

     (6     —          (25     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding special items

   $ 241      $ 192      $ 619      $ 491   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The 2013 third quarter consisted primarily of merger related costs. The 2013 nine month period consisted primarily of merger related costs and charges related to the ratification of the US Airways flight attendant collective bargaining agreement.

The 2012 third quarter and nine month periods consisted primarily of merger related costs and auction rate securities arbitration costs.

 

(b)

The 2013 third quarter and nine month periods consisted primarily of a credit due to a favorable arbitration ruling related to a vendor contract.

 

(c)

The 2013 third quarter consisted of $5 million in charges primarily related to non-cash write offs of debt discount in connection with conversions of 7.25% convertible senior notes. The 2013 nine month period consisted of $36 million in charges primarily related to non-cash write offs of debt discount and debt issuance costs in connection with conversions of 7.25% convertible senior notes and repayment of the former Citicorp North America term loan. These charges were offset in part by a $30 million credit in connection with an award received in an arbitration related to previous investments in auction rate securities.

 

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The 2012 third quarter consisted primarily of a $69 million gain related to the slot transaction with Delta Air Lines, Inc. (“Delta”). The 2012 nine month period consisted primarily of a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.

At December 31, 2012, gross net operating losses (“NOLs”) available for use by us were approximately $1.5 billion for federal income tax purposes. All of our NOLs are expected to be available for use in 2013 and expire during the years 2025 through 2031. We will use these NOLs to reduce our cash tax obligations when profitable going forward.

At December 31, 2012, we were in a net deferred tax asset position for financial reporting purposes, which included the NOLs, and were subject to a full valuation allowance. The federal and state valuation allowances were $118 million and $42 million, respectively, which included $32 million allocated primarily to certain federal capital loss carryforwards.

For each of the three and nine months ended September 30, 2013, we utilized NOLs to offset our taxable income. Historically, utilization of NOLs reduced our net deferred tax asset and in turn resulted in the release of our valuation allowance, which offset our tax provision dollar for dollar. In the second quarter of 2013, our pre-tax income and NOL utilization resulted in the use of our remaining valuation allowance associated with federal income taxes. Accordingly, with no remaining valuation allowance to release, we recorded $118 million and $183 million of non-cash federal income tax expense in the three and nine months ended September 30, 2013, respectively. We also recorded $2 million and $4 million of state income tax expense in the three and nine months ended September 30, 2013, respectively, related to certain states where NOLs were limited or unavailable to be used. As of September 30, 2013, we had approximately $1.2 billion of NOLs remaining for federal income tax purposes.

For each of the three and nine months ended September 30, 2012, NOL usage and release of valuation allowance offset our tax provision. As a result, we did not record federal income tax expense and recorded $1 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.

When profitable, we are ordinarily subject to Alternative Minimum Tax (“AMT”). However as the result of a special tax election made in 2009, we were able to utilize AMT NOLs to fully offset our AMT taxable income for each of the three and nine months ended September 30, 2013 and 2012.

 

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The table below sets forth our selected mainline and express operating data:

 

     Three Months Ended
September 30,
     Increase     Nine Months Ended
September 30,
     Increase  
     2013      2012      (Decrease)     2013      2012      (Decrease)  

Mainline

                

Revenue passenger miles (millions) (a)

     17,809         16,860         5.6     50,068         47,564         5.3

Available seat miles (millions) (b)

     20,513         19,560         4.9     58,667         56,665         3.5

Passenger load factor (percent) (c)

     86.8         86.2         0.6  pts      85.3         83.9         1.4  pts 

Yield (cents) (d)

     14.61         13.75         6.2     14.71         14.47         1.7

Passenger revenue per available seat mile (cents) (e)

     12.68         11.85         7.0     12.55         12.14         3.4

Operating cost per available seat mile (cents) (f)

     12.94         12.70         1.9     13.19         13.12         0.5

Passenger enplanements (thousands) (g)

     14,543         13,739         5.9     42,781         40,927         4.5

Departures (thousands)

     115         112         3.1     345         341         1.0

Aircraft at end of period

     344         338         1.8     344         338         1.8

Block hours (thousands) (h)

     320         310         3.4     944         922         2.5

Average stage length (miles) (i)

     1,050         1,051         (0.1 )%      1,021         1,010         1.2

Average passenger journey (miles) (j)

     1,821         1,829         (0.4 )%      1,724         1,726         (0.1 )% 

Fuel consumption (gallons in millions)

     304         291         4.3     868         841         3.2

Average aircraft fuel price including related taxes (dollars per gallon)

     3.01         3.06         (1.8 )%      3.05         3.16         (3.5 )% 

Full-time equivalent employees at end of period

     31,964         30,845         3.6     31,964         30,845         3.6

Express (k)

                

Revenue passenger miles (millions) (a)

     2,837         2,850         (0.5 )%      8,343         8,112         2.8

Available seat miles (millions) (b)

     3,630         3,644         (0.4 )%      10,723         10,722         —  

Passenger load factor (percent) (c)

     78.1         78.2         (0.1 ) pts      77.8         75.7         2.1  pts 

Yield (cents) (d)

     30.22         29.59         2.1     29.93         31.10         (3.8 )% 

Passenger revenue per available seat mile (cents) (e)

     23.61         23.15         2.0     23.29         23.54         (1.1 )% 

Operating cost per available seat mile (cents) (f)

     21.27         21.42         (0.7 )%      21.91         22.25         (1.5 )% 

Passenger enplanements (thousands) (g)

     7,252         7,326         (1.0 )%      21,285         21,166         0.6

Aircraft at end of period

     281         282         (0.4 )%      281         282         (0.4 )% 

Fuel consumption (gallons in millions)

     88         89         (0.5 )%      260         261         (0.1 )% 

Average aircraft fuel price including related taxes (dollars per gallon)

     3.00         3.07         (2.1 )%      3.06         3.18         (3.9 )% 

Total Mainline and Express

                

Revenue passenger miles (millions) (a)

     20,646         19,710         4.7     58,411         55,676         4.9

Available seat miles (millions) (b)

     24,143         23,204         4.1     69,390         67,387         3.0

Passenger load factor (percent) (c)

     85.5         84.9         0.6  pts      84.2         82.6         1.6  pts 

Yield (cents) (d)

     16.75         16.04         4.4     16.88         16.89         (0.1 )% 

Passenger revenue per available seat mile (cents) (e)

     14.32         13.63         5.1     14.21         13.96         1.8

Total revenue per available seat mile (cents) (l)

     15.97         15.22         4.9     16.00         15.66         2.1

Passenger enplanements (thousands) (g)

     21,795         21,065         3.5     64,066         62,093         3.2

Aircraft at end of period

     625         620         0.8     625         620         0.8

Fuel consumption (gallons in millions)

     392         380         3.2     1,128         1,102         2.4

Average aircraft fuel price including related taxes (dollars per gallon)

     3.01         3.07         (1.9 )%      3.05         3.17         (3.6 )% 

 

(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.

 

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(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., Chautauqua Airlines, Inc. and SkyWest Airlines, Inc.

(l)

Total revenue per available seat mile (“RASM”) — Total revenues divided by total mainline and express ASMs.

 

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Table of Contents

Three Months Ended September 30, 2013

Compared with the

Three Months Ended September 30, 2012

Operating Revenues:

 

     2013      2012      Percent
Increase
(Decrease)
 
     (In millions)         

Operating revenues:

        

Mainline passenger

   $ 2,601       $ 2,319         12.2   

Express passenger

     857         844         1.6   

Cargo

     37         35         5.5   

Other

     360         335         7.3   
  

 

 

    

 

 

    

Total operating revenues

   $ 3,855       $ 3,533         9.1   
  

 

 

    

 

 

    

Total operating revenues in the third quarter of 2013 were $3.86 billion, a Company third quarter record and compares to $3.53 billion in the 2012 period, an increase of $322 million, or 9.1%. The growth in revenues was driven by strong demand for air travel. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $2.60 billion in the third quarter of 2013 as compared to $2.32 billion in the 2012 period. Mainline RPMs increased 5.6% as mainline capacity, as measured by ASMs, increased 4.9%, resulting in a 0.6 point increase in load factor to 86.8%, a Company third quarter record. Mainline passenger yield increased 6.2% to 14.61 cents in the third quarter of 2013 from 13.75 cents in the 2012 period. Mainline PRASM increased 7.0% to 12.68 cents in the third quarter of 2013 from 11.85 cents in the 2012 period.

 

   

Express passenger revenues were $857 million in the third quarter of 2013 as compared to $844 million in the 2012 period. Express RPMs decreased 0.5% as express capacity, as measured by ASMs, decreased 0.4%, resulting in a 0.1 point decrease in load factor to 78.1%. Express passenger yield increased 2.1% to 30.22 cents in the third quarter of 2013 from 29.59 cents in the 2012 period. Express PRASM increased 2.0% to 23.61 cents in the third quarter of 2013 from 23.15 cents in the 2012 period.

 

   

Other revenues were $360 million in the third quarter of 2013, an increase of $25 million, or 7.3%, from the 2012 period. The increase in other revenues was driven primarily by higher revenues associated with our frequent flyer program, including increased mileage sales to business partners, and an increase in passenger ticketing change fees as a result of increases in rates charged.

 

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Table of Contents

Operating Expenses:

 

     2013      2012      Percent
Increase
(Decrease)
 
     (In millions)         

Operating expenses:

        

Aircraft fuel and related taxes

   $ 915       $ 893         2.4   

Salaries and related costs

     681         609         11.7   

Aircraft rent

     150         160         (6.2

Aircraft maintenance

     170         171         (0.8

Other rent and landing fees

     166         148         12.5   

Selling expenses

     129         122         5.6   

Special items, net

     40         14         nm   

Depreciation and amortization

     73         60         22.7   

Other

     331         307         7.8   
  

 

 

    

 

 

    

Total mainline operating expenses

     2,655         2,484         6.9   

Express expenses:

        

Fuel

     265         272         (2.5

Other

     507         509         (0.3
  

 

 

    

 

 

    

Total express expenses

     772         781         (1.1
  

 

 

    

 

 

    

Total operating expenses

   $ 3,427       $ 3,265         5.0   
  

 

 

    

 

 

    

Total operating expenses were $3.43 billion in the third quarter of 2013, an increase of $162 million, or 5.0%, compared to the 2012 period. The increase in operating expenses was primarily due to higher salaries and related costs as well as merger expenses. Higher salaries and related costs were driven by the March 2013 new flight attendant collective bargaining agreement, profit sharing and certain stock-based compensation programs. See detailed explanations below relating to the other changes in operating expenses.

Mainline Operating Expenses per ASM:

Our mainline CASM increased 0.24 cents, or 1.9%, from 12.70 cents in the third quarter of 2012 to 12.94 cents in the third quarter of 2013. Excluding special items, fuel and profit sharing our mainline CASM increased 0.13 cents, or 1.7%, from 7.95 cents in the third quarter of 2012 to 8.08 cents in the third quarter of 2013, while mainline capacity increased 4.9%.

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, 2013 and 2012:

 

     2013     2012     Percent
Increase
(Decrease)
 
     (In cents)        

Mainline CASM:

      

Aircraft fuel and related taxes

     4.46        4.57        (2.3

Salaries and related costs

     3.32        3.11        6.5   

Aircraft rent

     0.73        0.82        (10.5

Aircraft maintenance

     0.83        0.87        (5.4

Other rent and landing fees

     0.81        0.75        7.2   

Selling expenses

     0.63        0.62        0.7   

Special items, net

     0.20        0.07        nm   

Depreciation and amortization

     0.36        0.31        17.0   

Other

     1.62        1.57        2.8   
  

 

 

   

 

 

   

Total mainline CASM

     12.94        12.70        1.9   

Special items, net

     (0.20     (0.07  

Aircraft fuel and related taxes

     (4.46     (4.57  

Profit sharing

     (0.20     (0.11  
  

 

 

   

 

 

   

Total mainline CASM excluding special items, fuel and profit sharing (1)

     8.08        7.95        1.7   
  

 

 

   

 

 

   

 

(1)

We believe that the presentation of mainline CASM excluding fuel is useful to investors because both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of 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 that is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.

 

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Significant changes in the components of mainline operating expense per ASM are as follows:

 

   

Aircraft fuel and related taxes per ASM decreased 2.3% primarily due to a 1.8% decrease in the average price per gallon of fuel to $3.01 in the third quarter of 2013 from $3.06 in the 2012 period.

 

   

Salaries and related costs per ASM increased 6.5% primarily due to increased costs associated with the March 2013 new flight attendant collective bargaining agreement, profit sharing and certain stock-based compensation programs.

 

   

Aircraft rent per ASM decreased 10.5% due to recent lease extensions of 29 aircraft at lower average rental rates. The average number of leased aircraft in the third quarter of 2013 decreased as compared to the 2012 period as we continue to purchase new replacement Airbus aircraft.

 

   

Other rent and landing fees per ASM increased 7.2% primarily due to rate increases at certain domestic airport locations.

 

   

Depreciation and amortization per ASM increased 17.0% primarily due to an increase in owned aircraft driven by the acquisition of 22 Airbus aircraft since the third quarter of 2012.

Express Operating Expenses:

Total express expenses decreased $9 million, or 1.1%, in the third quarter of 2013 to $772 million from $781 million in the 2012 period. The period-over-period decrease was primarily due to a $7 million, or 2.5%, decrease in fuel costs. The average price per gallon of fuel decreased 2.1% to $3.00 in the third quarter of 2013 from $3.07 in the 2012 period, on a 0.5% decrease in consumption.

Nonoperating Income (Expense):

 

     2013     2012     Percent
Increase
(Decrease)
 
     (In millions)        

Nonoperating income (expense):

      

Interest income

   $ —        $ —          24.2   

Interest expense, net

     (88     (89     (0.8

Other, net

     (4     67        nm   
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (92   $ (22     nm   
  

 

 

   

 

 

   

Interest income was less than $1 million in each of the third quarters of 2013 and 2012. Our cash equivalents and investments in marketable securities in each period consisted of highly liquid investments, principally money market securities and treasury bills, which provided nominal returns.

Other nonoperating expense of $4 million in the third quarter of 2013 consisted primarily of $5 million in special charges related to non-cash write offs of debt discount in connection with conversions of 7.25% convertible senior notes.

Other nonoperating income of $67 million in the third quarter of 2012 consisted primarily of a $69 million special gain related to the slot transaction with Delta.

 

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Nine Months Ended September 30, 2013

Compared with the

Nine Months Ended September 30, 2012

Operating Revenues:

 

     2013      2012      Percent
Increase
(Decrease)
 
     (In millions)         

Operating revenues:

        

Mainline passenger

   $ 7,364       $ 6,881         7.0   

Express passenger

     2,497         2,523         (1.0

Cargo

     114         114         0.3   

Other

     1,125         1,035         8.6   
  

 

 

    

 

 

    

Total operating revenues

   $ 11,100       $ 10,553         5.2   
  

 

 

    

 

 

    

Total operating revenues in the first nine months of 2013 were $11.10 billion as compared to $10.55 billion in the 2012 period, an increase of $547 million, or 5.2%. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $7.36 billion in the first nine months of 2013 as compared to $6.88 billion in the 2012 period. Mainline RPMs increased 5.3% as mainline capacity, as measured by ASMs, increased 3.5%, resulting in a 1.4 point increase in load factor to 85.3%. Mainline passenger yield increased 1.7% to 14.71 cents in the first nine months of 2013 from 14.47 cents in the 2012 period. Mainline PRASM increased 3.4% to 12.55 cents in the first nine months of 2013 from 12.14 cents in the 2012 period.

 

   

Express passenger revenues were $2.50 billion in the first nine months of 2013 as compared to $2.52 billion in the 2012 period. Express RPMs increased 2.8% as express capacity, as measured by ASMs, was flat versus the 2012 period, resulting in a 2.1 point increase in load factor to 77.8%. Express passenger yield decreased 3.8% to 29.93 cents in the first nine months of 2013 from 31.10 cents in the 2012 period. Express PRASM decreased 1.1% to 23.29 cents in the first nine months of 2013 from 23.54 cents in the 2012 period.

 

   

Other revenues were $1.13 billion in the first nine months of 2013, an increase of $90 million, or 8.6%, from the 2012 period. The increase in other revenues was driven primarily by higher revenues associated with our frequent flyer program, including increased mileage sales to business partners, an increase in passenger ticketing change fees as a result of increases in rates charged, checked bag fees as well as the PreferredAccess program which was implemented in the second quarter of 2012.

 

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Operating Expenses:

 

     2013      2012      Percent
Increase
(Decrease)
 
     (In millions)         

Operating expenses:

        

Aircraft fuel and related taxes

   $ 2,648       $ 2,659         (0.4

Salaries and related costs

     2,018         1,888         6.9   

Aircraft rent

     457         483         (5.4

Aircraft maintenance

     512         506         1.1   

Other rent and landing fees

     467         419         11.3   

Selling expenses

     366         359         2.1   

Special items, net

     103         25         nm   

Depreciation and amortization

     210         182         15.2   

Other

     957         915         4.8   
  

 

 

    

 

 

    

Total mainline operating expenses

     7,738         7,436         4.1   

Express expenses:

        

Fuel

     797         830         (4.0

Other

     1,553         1,556         (0.2
  

 

 

    

 

 

    

Total express expenses

     2,350         2,386         (1.5
  

 

 

    

 

 

    

Total operating expenses

   $ 10,088       $ 9,822         2.7   
  

 

 

    

 

 

    

Total operating expenses were $10.09 billion in the first nine months of 2013, an increase of $266 million, or 2.7%, compared to the 2012 period. The increase in operating expenses was primarily due to higher salaries and related costs as well as merger expenses. Higher salaries and related costs were driven by the March 2013 new flight attendant collective bargaining agreement and profit sharing. See detailed explanations below relating to the other changes in operating expenses.

Mainline Operating Expenses per ASM:

Our mainline CASM increased 0.07 cents, or 0.5%, from 13.12 cents in the first nine months of 2012 to 13.19 cents in the first nine months of 2013. Excluding special items, fuel and profit sharing our mainline CASM increased 0.05 cents, or 0.6%, from 8.29 cents in the first nine months of 2012 to 8.34 cents in the first nine months of 2013, while mainline capacity increased 3.5%.

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, 2013 and 2012:

 

     2013     2012     Percent
Increase
(Decrease)
 
     (In cents)        

Mainline CASM:

      

Aircraft fuel and related taxes

     4.51        4.69        (3.8

Salaries and related costs

     3.44        3.33        3.2   

Aircraft rent

     0.78        0.85        (8.6

Aircraft maintenance

     0.87        0.89        (2.3

Other rent and landing fees

     0.80        0.74        7.5   

Selling expenses

     0.62        0.63        (1.4

Special items, net

     0.18        0.04        nm   

Depreciation and amortization

     0.36        0.32        11.3   

Other

     1.63        1.61        1.2   
  

 

 

   

 

 

   

Total mainline CASM

     13.19        13.12        0.5   

Special items, net

     (0.18     (0.04  

Aircraft fuel and related taxes

     (4.51     (4.69  

Profit sharing

     (0.16     (0.10  
  

 

 

   

 

 

   

Total mainline CASM excluding special items, fuel and profit sharing (1)

     8.34        8.29        0.6   
  

 

 

   

 

 

   

 

(1)

We believe that the presentation of mainline CASM excluding fuel is useful to investors because both the cost and availability of fuel are subject to many economic and political factors beyond our control, and the exclusion of 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 that is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.

 

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Significant changes in the components of mainline operating expense per ASM are as follows:

 

   

Aircraft fuel and related taxes per ASM decreased 3.8% primarily due to a 3.5% decrease in the average price per gallon of fuel to $3.05 in the first nine months of 2013 from $3.16 in the 2012 period.

 

   

Salaries and related costs per ASM increased 3.2% primarily due to increased costs associated with the March 2013 new flight attendant collective bargaining agreement and profit sharing.

 

   

Aircraft rent per ASM decreased 8.6% due to recent lease extensions of 36 aircraft at lower average rental rates. The average number of leased aircraft in the first nine months of 2013 decreased as compared to the 2012 period as we continue to purchase new replacement Airbus aircraft.

 

   

Other rent and landing fees per ASM increased 7.5% primarily due to rate increases at certain domestic airport locations.

 

   

Depreciation and amortization per ASM increased 11.3% primarily due to an increase in owned aircraft driven by the acquisition of 22 Airbus aircraft since the third quarter of 2012.

Express Operating Expenses:

Total express expenses decreased $36 million, or 1.5%, in the first nine months of 2013 to $2.35 billion from $2.39 billion in the 2012 period. The period-over-period decrease was primarily due to a $33 million, or 4.0%, decrease in fuel costs. The average price per gallon of fuel decreased 3.9% to $3.06 in the first nine months of 2013 from $3.18 in the 2012 period, on a 0.1% decrease in consumption.

Nonoperating Income (Expense):

 

     2013     2012     Percent
Increase
(Decrease)
 
     (In millions)        

Nonoperating income (expense):

      

Interest income

   $ 1      $ 1        36.0   

Interest expense, net

     (263     (256     2.5   

Other, net

     (16     125        nm   
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (278   $ (130     nm   
  

 

 

   

 

 

   

Interest income was $1 million in each of the nine month periods of 2013 and 2012. Our cash equivalents and investments in marketable securities in each period consisted of highly liquid investments, principally money market securities and treasury bills, which provided nominal returns.

Other nonoperating expense of $16 million in the first nine months of 2013 consisted primarily of $36 million in special charges principally related to non-cash write offs of debt discount and debt issuance costs in connection with conversions of 7.25% convertible senior notes and repayment of the former Citicorp North America term loan. We also incurred $10 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in the first nine months of 2013. These charges were offset in part by a special $30 million credit in connection with an award received in an arbitration related to previous investments in auction rate securities.

Other nonoperating income of $125 million in the first nine months of 2012 consisted primarily of a $142 million special gain related to the slot transaction with Delta, offset in part by $8 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in the first nine months of 2012 and $3 million in special charges for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.

 

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Table of Contents

US Airways’ Results of Operations

In the three months ended September 30, 2013, US Airways realized operating income of $421 million and income before income taxes of $348 million, driven by US Airways’ highest third quarter operating revenues in its history. Net income for the quarter was $220 million which included a $128 million income tax provision. This compares to operating income of $262 million, income before income taxes of $264 million and net income of $263 million in the third quarter of 2012. The tax provision in the third quarter of 2012 was $1 million.

In the nine months ended September 30, 2013, US Airways realized operating income of $1.00 billion and income before income taxes of $821 million. Net income in the 2013 nine month period was $614 million which included a $207 million income tax provision. This compares to operating income of $713 million, income before income taxes of $657 million and net income of $656 million in the 2012 nine month period. The tax provision in the 2012 nine month period was $1 million.

US Airways’ results have been impacted by the following net special charges (credits) (in millions):

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2013     2012     2013     2012  

Mainline operating special items, net (a)

   $ 40      $ 14      $ 103      $ 25   

Express operating special items, net (b)

     (14     —          (14     —     

Nonoperating special items, net (c)

     —          (67     (28     (137
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 26      $ (53   $ 61      $ (112
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

The 2013 third quarter consisted primarily of merger related costs. The 2013 nine month period consisted primarily of merger related costs and charges related to the ratification of the US Airways flight attendant collective bargaining agreement.

The 2012 third quarter and nine month periods consisted primarily of merger related costs and auction rate securities arbitration costs.

 

(b)

The 2013 third quarter and nine month periods consisted of a credit due to a favorable arbitration ruling related to a vendor contract.

 

(c)

The 2013 nine month period consisted of a $30 million credit in connection with an award received in an arbitration related to previous investments in auction rate securities, offset in part by $2 million in charges primarily related to non-cash write offs of debt issuance costs.

The 2012 third quarter consisted primarily of a $69 million gain related to the slot transaction with Delta. The 2012 nine month period consisted primarily of a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.

At December 31, 2012, gross NOLs available for use by US Airways were approximately $1.4 billion for federal income tax purposes. All of US Airways’ NOLs are expected to be available for use in 2013 and expire during the years 2025 through 2031. US Airways will use these NOLs to reduce its cash tax obligations when profitable going forward.

At December 31, 2012, US Airways was in a net deferred tax asset position for financial reporting purposes, which included the NOLs, and was subject to a full valuation allowance. The federal and state valuation allowances were $126 million and $42 million, respectively, which included $32 million allocated primarily to certain federal capital loss carryforwards.

For each of the three and nine months ended September 30, 2013, US Airways utilized NOLs to offset its taxable income. Historically, utilization of NOLs reduced US Airways’ net deferred tax asset and in turn resulted in the release of its valuation allowance, which offset US Airways’ tax provision dollar for dollar. In the second quarter of 2013, US Airways’ pre-tax income and NOL utilization resulted in the use of its remaining valuation allowance associated with federal income taxes. Accordingly, with no remaining valuation allowance to release, US Airways recorded $127 million and $205 million of non-cash federal income tax expense in the three and nine months ended September 30, 2013, respectively. US Airways also recorded $1 million and $2 million of state income tax expense in the three and nine months ended September 30, 2013, respectively, related to certain states where NOLs were limited or unavailable to be used.

 

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Table of Contents

For each of the three and nine months ended September 30, 2012, NOL usage and release of valuation allowance offset US Airways’ tax provision. As a result, US Airways did not record federal income tax expense and recorded $1 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.

When profitable, US Airways is ordinarily subject to AMT. However as the result of a special tax election made in 2009, US Airways was able to utilize AMT NOLs to fully offset its AMT taxable income for each of the three and nine months ended September 30, 2013 and 2012.

The table below sets forth US Airways’ selected mainline and express operating data:

 

     Three Months Ended
September 30,
     Increase     Nine Months Ended
September 30,
     Increase  
     2013      2012      (Decrease)     2013      2012      (Decrease)  

Mainline

                

Revenue passenger miles (millions) (a)

     17,809         16,860         5.6     50,068         47,564         5.3

Available seat miles (millions) (b)

     20,513         19,560         4.9     58,667         56,665         3.5

Passenger load factor (percent) (c)

     86.8         86.2         0.6  pts      85.3         83.9         1.4  pts 

Yield (cents) (d)

     14.61         13.75         6.2     14.71         14.47         1.7

Passenger revenue per available seat mile (cents) (e)

     12.68         11.85         7.0     12.55         12.14         3.4

Aircraft at end of period

     344         338         1.8     344         338         1.8

Fuel consumption (gallons in millions)

     304         291         4.3     868         841         3.2

Average aircraft fuel price including related taxes (dollars per gallon)

     3.01         3.06         (1.8 )%      3.05         3.16         (3.5 )% 

Express (f)

                

Revenue passenger miles (millions) (a)

     2,837         2,850         (0.5 )%      8,343         8,112         2.8

Available seat miles (millions) (b)

     3,630         3,644         (0.4 )%      10,723         10,722         —   

Passenger load factor (percent) (c)

     78.1         78.2         (0.1 ) pts      77.8         75.7         2.1  pts 

Yield (cents) (d)

     30.22         29.59         2.1     29.93         31.10         (3.8 )% 

Passenger revenue per available seat mile (cents) (e)

     23.61         23.15         2.0     23.29         23.54         (1.1 )% 

Aircraft at end of period

     281         282         (0.4 )%      281         282         (0.4 )% 

Fuel consumption (gallons in millions)

     88         89         (0.5 )%      260         261         (0.1 )% 

Average aircraft fuel price including related taxes (dollars per gallon)

     3.00         3.07         (2.2 )%      3.06         3.19         (3.9 )% 

Total Mainline and Express

                

Revenue passenger miles (millions) (a)

     20,646         19,710         4.7     58,411         55,676         4.9

Available seat miles (millions) (b)

     24,143         23,204         4.1     69,390         67,387         3.0

Passenger load factor (percent) (c)

     85.5         84.9         0.6  pts      84.2         82.6         1.6  pts 

Yield (cents) (d)

     16.75         16.04         4.4     16.88         16.89         (0.1 )% 

Passenger revenue per available seat mile (cents) (e)

     14.32         13.63         5.1     14.21         13.96         1.8

Total revenue per available seat mile (cents) (g)

     16.13         15.40         4.7     16.16         15.84         2.1

Aircraft at end of period

     625         620         0.8     625         620         0.8

Fuel consumption (gallons in millions)

     392         380         3.2     1,128         1,102         2.4

Average aircraft fuel price including related taxes (dollars per gallon)

     3.01         3.07         (2.1 )%      3.05         3.17         (3.6 )% 

 

(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., Chautauqua Airlines, Inc. and SkyWest Airlines, Inc.

(g)

Total revenue per available seat mile (“RASM”) — Total revenues divided by total mainline and express ASMs.

 

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Table of Contents

Three Months Ended September 30, 2013

Compared with the

Three Months Ended September 30, 2012

Operating Revenues:

 

     2013      2012      Percent
Increase
(Decrease)
 
     (In millions)         

Operating revenues:

        

Mainline passenger

   $ 2,601       $ 2,319         12.2   

Express passenger

     857         844         1.6   

Cargo

     37         35         5.5   

Other

     400         377         5.9   
  

 

 

    

 

 

    

Total operating revenues

   $ 3,895       $ 3,575         9.0   
  

 

 

    

 

 

    

Total operating revenues in the third quarter of 2013 were $3.90 billion as compared to $3.58 billion in the 2012 period, an increase of $320 million, or 9.0%. The growth in revenues was driven by strong demand for air travel. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $2.60 billion in the third quarter of 2013 as compared to $2.32 billion in the 2012 period. Mainline RPMs increased 5.6% as mainline capacity, as measured by ASMs, increased 4.9%, resulting in a 0.6 point increase in load factor to 86.8%. Mainline passenger yield increased 6.2% to 14.61 cents in the third quarter of 2013 from 13.75 cents in the 2012 period. Mainline PRASM increased 7.0% to 12.68 cents in the third quarter of 2013 from 11.85 cents in the 2012 period.

 

   

Express passenger revenues were $857 million in the third quarter of 2013 as compared to $844 million in the 2012 period. Express RPMs decreased 0.5% as express capacity, as measured by ASMs, decreased 0.4%, resulting in a 0.1 point decrease in load factor to 78.1%. Express passenger yield increased 2.1% to 30.22 cents in the third quarter of 2013 from 29.59 cents in the 2012 period. Express PRASM increased 2.0% to 23.61 cents in the third quarter of 2013 from 23.15 cents in the 2012 period.

 

   

Other revenues were $400 million in the third quarter of 2013, an increase of $23 million, or 5.9%, from the 2012 period. The increase in other revenues was driven primarily by higher revenues associated with US Airways’ frequent flyer program, including increased mileage sales to business partners, and an increase in passenger ticketing change fees as a result of increases in rates charged.

 

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Table of Contents

Operating Expenses:

 

     2013      2012      Percent
Increase
(Decrease)
 
     (In millions)         

Operating expenses:

        

Aircraft fuel and related taxes

   $ 915       $ 893         2.4   

Salaries and related costs

     681         609         11.7   

Aircraft rent

     150         160         (6.2

Aircraft maintenance

     170         171         (0.8

Other rent and landing fees

     166         148         12.5   

Selling expenses

     129         122         5.6   

Special items, net

     40         14         nm   

Depreciation and amortization

     76         62         21.8   

Other

     341         317         7.5   
  

 

 

    

 

 

    

Total mainline operating expenses

     2,668         2,496         6.9   

Express expenses:

        

Fuel

     265         272         (2.3

Other

     541         545         (0.6
  

 

 

    

 

 

    

Total express expenses

     806         817         (1.2
  

 

 

    

 

 

    

Total operating expenses

   $ 3,474       $ 3,313         4.9   
  

 

 

    

 

 

    

Total operating expenses were $3.47 billion in the third quarter of 2013, an increase of $161 million, or 4.9%, compared to the 2012 period. The increase in operating expenses was primarily due to higher salaries and related costs as well as merger expenses. Higher salaries and related costs were driven by the March 2013 new flight attendant collective bargaining agreement, profit sharing and certain stock-based compensation programs. See detailed explanations below relating to the other changes in operating expenses.

Mainline Operating Expenses:

Significant changes in the components of mainline operating expenses are as follows:

 

   

Aircraft fuel and related taxes increased 2.4% primarily due to a 4.3% increase in consumption, offset in part by a 1.8% decrease in the average price per gallon of fuel to $3.01 in the third quarter of 2013 from $3.06 in the 2012 period.

 

   

Salaries and related costs increased 11.7% primarily due to increased costs associated with the March 2013 new flight attendant collective bargaining agreement, profit sharing and certain stock-based compensation programs.

 

   

Aircraft rent decreased 6.2% due to recent lease extensions of 29 aircraft at lower average rental rates. The average number of leased aircraft in the third quarter of 2013 decreased as compared to the 2012 period as US Airways continues to purchase new replacement Airbus aircraft.

 

   

Other rent and landing fees increased 12.5% primarily due to rate increases at certain domestic airport locations.

 

   

Depreciation and amortization increased 21.8% primarily due to an increase in owned aircraft driven by the acquisition of 22 Airbus aircraft since the third quarter of 2012.

Express Operating Expenses:

Total express expenses decreased $11 million, or 1.2%, in the third quarter of 2013 to $806 million from $817 million in the 2012 period. The period-over-period decrease was primarily due to a $7 million, or 2.3%, decrease in fuel costs. The average price per gallon of fuel decreased 2.2% to $3.00 in the third quarter of 2013 from $3.07 in the 2012 period, on a 0.5% decrease in consumption.

 

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Table of Contents

Nonoperating Income (Expense):

 

     2013     2012     Percent
Increase
(Decrease)
 
     (In millions)        

Nonoperating income (expense):

      

Interest income

   $ 2      $ —          nm   

Interest expense, net

     (76     (65     18.0   

Other, net

     1        67        (98.9
  

 

 

   

 

 

   

Total nonoperating income (expense), net

   $ (73   $ 2        nm   
  

 

 

   

 

 

   

Interest income was $2 million and less than $1 million in the third quarter of 2013 and 2012, respectively. US Airways’ cash equivalents and investments in marketable securities in each period consisted of highly liquid investments, principally money market securities and treasury bills, which provided nominal returns.

Other nonoperating income of $67 million in the third quarter of 2012 consisted primarily of a $69 million special gain related to the slot transaction with Delta.

 

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Nine Months Ended September 30, 2013

Compared with the

Nine Months Ended September 30, 2012

Operating Revenues:

 

     2013      2012      Percent
Increase
(Decrease)
 
     (In millions)         

Operating revenues:

        

Mainline passenger

   $ 7,364       $ 6,881         7.0   

Express passenger

     2,497         2,523         (1.0

Cargo

     114         114         0.3   

Other

     1,242         1,155         7.5   
  

 

 

    

 

 

    

Total operating revenues

   $ 11,217       $ 10,673         5.1   
  

 

 

    

 

 

    

Total operating revenues in the first nine months of 2013 were $11.22 billion as compared to $10.67 billion in the 2012 period, an increase of $544 million, or 5.1%. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $7.36 billion in the first nine months of 2013 as compared to $6.88 billion in the 2012 period. Mainline RPMs increased 5.3% as mainline capacity, as measured by ASMs, increased 3.5%, resulting in a 1.4 point increase in load factor to 85.3%. Mainline passenger yield increased 1.7% to 14.71 cents in the first nine months of 2013 from 14.47 cents in the 2012 period. Mainline PRASM increased 3.4% to 12.55 cents in the first nine months of 2013 from 12.14 cents in the 2012 period.

 

   

Express passenger revenues were $2.50 billion in the first nine months of 2013 as compared to $2.52 billion in the 2012 period. Express RPMs increased 2.8% as express capacity, as measured by ASMs, was flat versus the 2012 period, resulting in a 2.1 point increase in load factor to 77.8%. Express passenger yield decreased 3.8% to 29.93 cents in the first nine months of 2013 from 31.10 cents in the 2012 period. Express PRASM decreased 1.1% to 23.29 cents in the first nine months of 2013 from 23.54 cents in the 2012 period.

 

   

Other revenues were $1.24 billion in the first nine months of 2013, an increase of $87 million, or 7.5%, from the 2012 period. The increase in other revenues was driven primarily by higher revenues associated with US Airways’ frequent flyer program, including increased mileage sales to business partners, an increase in passenger ticketing change fees as a result of increases in rates charged, checked bag fees as well as the PreferredAccess program which was implemented in the second quarter of 2012.

 

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Operating Expenses:

 

     2013      2012      Percent
Increase
(Decrease)
 
     (In millions)         

Operating expenses:

        

Aircraft fuel and related taxes

   $ 2,648       $ 2,659         (0.4

Salaries and related costs

     2,018         1,888         6.9   

Aircraft rent

     457         483         (5.4

Aircraft maintenance

     512         506         1.1   

Other rent and landing fees

     467         419         11.3   

Selling expenses

     366         359         2.1   

Special items, net

     103         25         nm   

Depreciation and amortization

     217         190         14.7   

Other

     986         944         4.6   
  

 

 

    

 

 

    

Total mainline operating expenses

     7,774         7,473         4.0   

Express expenses:

        

Fuel

     797         830         (4.0

Other

     1,646         1,657         (0.7
  

 

 

    

 

 

    

Total express expenses

     2,443         2,487         (1.8
  

 

 

    

 

 

    

Total operating expenses

   $ 10,217       $ 9,960         2.6   
  

 

 

    

 

 

    

Total operating expenses were $10.22 billion in the first nine months of 2013, an increase of $257 million, or 2.6%, compared to the 2012 period. The increase in operating expenses was primarily due to higher salaries and related costs as well as merger expenses. Higher salaries and related costs were driven by the March 2013 new flight attendant collective bargaining agreement and profit sharing. See detailed explanations below relating to the other changes in operating expenses.

Mainline Operating Expenses:

Significant changes in the components of mainline operating expenses are as follows:

 

   

Aircraft fuel and related taxes decreased 0.4% primarily due to a 3.5% decrease in the average price per gallon of fuel to $3.05 in the first nine months of 2013 from $3.16 in the 2012 period, offset in part by a 3.2% increase in consumption.

 

   

Salaries and related costs increased 6.9% primarily due to increased costs associated with the March 2013 new flight attendant collective bargaining agreement and profit sharing.

 

   

Aircraft rent decreased 5.4% due to recent lease extensions of 36 aircraft at lower average rental rates. The average number of leased aircraft in the first nine months of 2013 decreased as compared to the 2012 period as US Airways continues to purchase new replacement Airbus aircraft.

 

   

Other rent and landing fees increased 11.3% primarily due to rate increases at certain domestic airport locations.

 

   

Depreciation and amortization increased 14.7% primarily due to an increase in owned aircraft driven by the acquisition of 22 Airbus aircraft since the third quarter of 2012.

Express Operating Expenses:

Total express expenses decreased $44 million, or 1.8%, in the first nine months of 2013 to $2.44 billion from $2.49 billion in the 2012 period. The period-over-period decrease was primarily due to a $33 million, or 4.0%, decrease in fuel costs. The average price per gallon of fuel decreased 3.9% to $3.06 in the first nine months of 2013 from $3.19 in the 2012 period, on a 0.1% decrease in consumption.

 

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Nonoperating Income (Expense):

 

     2013     2012     Percent
Increase
(Decrease)
 
     (In millions)        

Nonoperating income (expense):

      

Interest income

   $ 4      $ 1        nm   

Interest expense, net

     (201     (182     10.4   

Other, net

     18        125        (85.2
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (179   $ (56     nm   
  

 

 

   

 

 

   

Interest income was $4 million and $1 million in the first nine months of 2013 and 2012, respectively. US Airways’ cash equivalents and investments in marketable securities in each period consisted of highly liquid investments, principally money market securities and treasury bills, which provided nominal returns.

Other nonoperating income of $18 million in the first nine months of 2013 consisted primarily of a special $30 million credit in connection with an award received in an arbitration related to previous investments in auction rate securities, offset in part by $2 million in special charges principally related to non-cash write offs of debt issuance costs. US Airways also incurred $10 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in the first nine months of 2013.

Other nonoperating income of $125 million in the first nine months of 2012 consisted primarily of a $142 million special gain related to the slot transaction with Delta, offset in part by $8 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in the first nine months of 2012 and $3 million in special charges for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.

 

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Liquidity and Capital Resources

As of September 30, 2013, our total cash, cash equivalents, investments in marketable securities and restricted cash was $3.87 billion, of which $350 million was restricted.

Sources and Uses of Cash

US Airways Group

Operating Activities

Net cash provided by operating activities was $1.15 billion and $887 million for the first nine months of 2013 and 2012, respectively, a period-over-period improvement of $263 million. This increase in cash flows during the 2013 period was due principally to our operating profitability resulting from the growth in revenues driven by strong demand for air travel.

Investing Activities

Net cash used in investing activities was $1.19 billion and $410 million for the first nine months of 2013 and 2012, respectively.

Principal investing activities in the 2013 period included expenditures of $937 million for property and equipment and consisted primarily of the purchase of 16 Airbus aircraft. Investing activities also included $202 million in purchases of marketable securities, expenditures of $138 million for pre-delivery deposits for 30 Airbus aircraft on order and a $14 million increase in restricted cash. Restricted cash increased primarily due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation. These expenditures were offset in part by $100 million in sales of marketable securities.

Principal investing activities in the 2012 period included expenditures of $310 million for property and equipment and consisted primarily of the purchase of four aircraft and costs related to the installation of the Envoy Suite on wide-body Airbus A330-300 aircraft. Investing activities also included expenditures of $118 million for pre-delivery deposits for 29 Airbus aircraft on order. These expenditures were offset in part by an $18 million decrease in restricted cash due to a change in the amount of holdback held by certain credit card processors.

Financing Activities

Net cash provided by financing activities was $1.08 billion and $11 million for the first nine months of 2013 and 2012, respectively.

Principal financing activities in the 2013 period included proceeds from the issuance of debt of $2.92 billion, consisting of $1.60 billion from our 2013 Citicorp credit facility, $823 million from Enhanced Equipment Trust Certificate (“EETC”) equipment notes associated with aircraft deliveries in the first nine months of 2013 and $500 million from our 6.125% senior notes. These cash inflows were offset in part by debt repayments of $1.79 billion, including the $1.10 billion repayment of our former Citicorp North America term loan and $200 million repayment of our Barclays prepaid miles loan.

Principal financing activities in the 2012 period included proceeds of $395 million primarily from the issuance of debt, which included $168 million from equipment notes associated with EETC transactions and $100 million from a slot financing transaction. These cash inflows were offset in part by debt repayments of $370 million, including the repayment of $60 million in existing debt associated with two Airbus aircraft refinanced by the May 2012 EETC issuance.

 

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US Airways

Operating Activities

Net cash provided by operating activities was $1.12 billion and $867 million for the first nine months of 2013 and 2012, respectively, a period-over-period improvement of $248 million. This increase in cash flows during the 2013 period was due principally to US Airways’ operating profitability resulting from the growth in revenues driven by strong demand for air travel.

Investing Activities

Net cash used in investing activities was $1.18 billion and $403 million for the first nine months of 2013 and 2012, respectively.

Principal investing activities in the 2013 period included expenditures of $927 million for property and equipment and consisted primarily of the purchase of 16 Airbus aircraft. Investing activities also included $202 million in purchases of marketable securities, expenditures of $138 million for pre-delivery deposits for 30 Airbus aircraft on order and a $14 million increase in restricted cash. Restricted cash increased primarily due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation. These expenditures were offset in part by $100 million in sales of marketable securities.

Principal investing activities in the 2012 period included expenditures of $303 million for property and equipment and consisted primarily of the purchase of four aircraft and costs related to the installation of the Envoy Suite on wide-body Airbus A330-300 aircraft. Investing activities also included expenditures of $118 million for pre-delivery deposits for 29 Airbus aircraft on order. These expenditures were offset in part by an $18 million decrease in restricted cash due to a change in the amount of holdback held by certain credit card processors.

Financing Activities

Net cash provided by financing activities was $1.11 billion and $27 million for the first nine months of 2013 and 2012, respectively.

Principal financing activities in the 2013 period included proceeds from the issuance of debt of $2.42 billion, consisting of $1.60 billion from US Airways’ 2013 Citicorp credit facility and $823 million from EETC equipment notes associated with aircraft deliveries in the first nine months of 2013. These cash inflows were offset in part by a $804 million decrease in the intercompany payable to US Airways Group, consisting of the repayment of US Airways Group’s former Citicorp North America term loan and Barclays prepaid miles loan offset in part by proceeds from the issuance of US Airways Group’s 6.125% senior notes, and debt repayments of $467 million.

Principal financing activities in the 2012 period included proceeds of $395 million primarily from the issuance of debt, which included $168 million from equipment notes associated with EETC transactions and $100 million from a slot financing transaction. These cash inflows were offset in part by debt repayments of $354 million, including the repayment of $60 million in existing debt associated with two Airbus aircraft refinanced by the May 2012 EETC issuance.

 

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Commitments

As of September 30, 2013, we had $5.97 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 2012 Form 10-K.

2013 Citicorp Credit Facility

On May 23, 2013, US Airways entered into a term loan credit facility (the “2013 Citicorp credit facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways borrowed an aggregate principal amount of $1.6 billion. Approximately $1.3 billion of the net proceeds were applied to repay our former Citicorp North America loan and certain other secured debt of US Airways with remaining net proceeds to be used for general corporate purposes. As a result of the repayment of this loan, we recorded approximately $8 million in special debt extinguishment charges which are included within other nonoperating expense, net on the condensed consolidated statement of operations included in Part I, Item 1A of this report. US Airways Group and certain other subsidiaries of US Airways Group are guarantors of the 2013 Citicorp credit facility.

The 2013 Citicorp credit facility consists of $1.0 billion of tranche B-1 term loans (“Tranche B-1”) and $600 million of tranche B-2 term loans (“Tranche B-2”). The 2013 Citicorp credit facility is prepayable at any time with a premium of 1% applicable to certain prepayments made prior to November 23, 2013.

The 2013 Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR (subject to a floor) plus an applicable LIBOR margin. As of September 30, 2013, the interest rate was 4.25% based on a 3.25% LIBOR margin for Tranche B-1 and 3.50% based on a 2.50% LIBOR margin for Tranche B-2.

Tranche B-1 and Tranche B-2 mature on May 23, 2019 and November 23, 2016, respectively, and each is repayable in annual 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 loans with any unpaid balance due on the maturity date of the respective tranche.

The obligations of US Airways under the 2013 Citicorp credit facility are secured by liens on certain route authorities to operate between certain specified cities, certain take-off and landing rights at certain airports and certain other assets of US Airways.

The 2013 Citicorp credit facility includes covenants that, among other things, (a) require US Airways to maintain (i) unrestricted liquidity of not less than $850 million prior to the Merger and AMR (or its successor) to maintain unrestricted liquidity of not less than $2 billion following the Merger, in both cases with not less than $750 million held in accounts subject to control agreements, and (ii) a minimum ratio of appraised value of collateral to the outstanding loans under the facility of 1.5 to 1.0 and (b) restrict the ability of US Airways Group and its subsidiaries party to the 2013 Citicorp credit facility (and after the Merger AMR, or its successor, and its subsidiaries party to the 2013 Citicorp credit facility) to make certain investments and restricted payments. The 2013 Citicorp credit facility contains events of default customary for similar financings, including a cross-acceleration provision to certain other material indebtedness of US Airways and the guarantors.

6.125% Senior Notes

On May 24, 2013, US Airways Group issued $500 million aggregate principal amount of 6.125% Senior Notes due 2018 (the “6.125% senior notes”), the net proceeds of which will be used for general corporate purposes. These notes bear interest at a rate of 6.125% per annum, which is payable semi-annually on each June 1 and December 1, beginning December 1, 2013. The 6.125% senior notes mature on June 1, 2018 and are fully and unconditionally guaranteed by US Airways. The 6.125% senior notes are general unsecured senior obligations of US Airways Group.

The 6.125% senior notes may be accelerated upon the occurrence of events of default, which are customary for securities of this nature. We, at our option, may redeem some or all of the 6.125% senior notes at any time at a redemption price equal to the greater of (1) 100% of the principal amount of the 6.125% senior notes to be redeemed and (2) a make-whole amount based on the sum of the present values of the remaining scheduled payments of principal and interest on the 6.125% senior notes discounted to the redemption date using a rate based on comparable U.S. Treasury securities plus 50 basis points, plus in either case accrued and unpaid interest to the redemption date. In the event of a specified change in control (not including the Merger), each holder may require us to repurchase all or a portion of their 6.125% senior notes for cash at a price equal to 101% of the principal amount of the 6.125% senior notes to be repurchased plus any accrued and unpaid interest, if any, to (but not including) the repurchase date.

 

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2013-1 EETCs

In April 2013, US Airways created two pass-through trusts which issued approximately $820 million aggregate face amount of Series 2013-1 Class A and Class B EETCs in connection with the financing of 18 Airbus aircraft scheduled to be delivered from September 2013 to June 2014. The 2013-1 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 balance sheet because the proceeds held by the depository are not US Airways’ assets.

As of September 30, 2013, $77 million of the escrowed proceeds from the 2013-1 EETCs have been used to purchase equipment notes issued by US Airways in two series: Series A equipment notes in the amount of $58 million bearing interest at 3.95% per annum and Series B equipment notes in the amount of $19 million bearing interest at 5.375% per annum. Interest on the equipment notes is payable semiannually in May and November of each year, beginning in November 2013. Principal payments on the equipment notes are scheduled to begin in November 2014. The final payments on the Series A and Series B equipment notes will be due in November 2025 and November 2021, 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 finance two Airbus aircraft delivered in September 2013. The equipment notes are secured by liens on aircraft. The remaining $743 million of escrowed proceeds will be used to purchase equipment notes as new aircraft are delivered.

2012-2 EETCs

In June 2013, US Airways created a new pass-through trust and issued a new class of its US Airways Pass Through Certificates, Series 2012-2: Class C in the aggregate face amount of $100 million. US Airways previously issued two classes of US Airways Pass Through Certificates, Series 2012-2: Class A and Class B in the aggregate face amount of $546 million, pursuant to separate trusts established for each of the Class A certificates and Class B certificates at the time of the issuance thereof in December 2012.

As of September 30, 2013, US Airways has issued $563 million of equipment notes in three series under its 2012-2 EETCs: Series A equipment notes in the amount of $365 million bearing interest at 4.625% per annum, Series B equipment notes in the amount of $112 million bearing interest at 6.75% per annum and Series C equipment notes in the amount of $86 million bearing interest at 5.45% per annum. Interest on the equipment notes is payable semiannually in June and December of each year and began in June 2013 for Series A and Series B, and will begin in December 2013 for Series C. Principal payments on the Series A and Series B equipment notes are scheduled to begin in December 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in June 2025, June 2021 and June 2018, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The only principal payments due on the Series C equipment notes are the principal payments that will be due on the final payment date. The net proceeds from the issuance of these equipment notes were used to finance 10 Airbus aircraft delivered from May 2013 through August 2013. The equipment notes are secured by liens on aircraft. The remaining $83 million of escrowed proceeds will be used to purchase equipment notes as new aircraft are delivered.

Other Aircraft Financing Transactions

In the first quarter of 2013, US Airways issued $183 million of equipment notes in three series under its 2012-1 EETCs completed in May 2012: Series A equipment notes in the amount of $111 million bearing interest at 5.90% per annum, Series B equipment notes in the amount of $37 million bearing interest at 8% per annum and Series C equipment notes in the amount of $35 million bearing interest at 9.125% per annum. The equipment notes are secured by liens on aircraft.

In the third quarter of 2012, US Airways entered into an agreement to acquire five Embraer 190 aircraft from Republic Airline, Inc. (“Republic”). US Airways took delivery of three aircraft in 2012 and the remaining two aircraft in the first quarter of 2013. In connection with this agreement, US Airways assumed the outstanding debt on these aircraft upon delivery and Republic was released from its obligations associated with the principal due under the debt.

 

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7.25% Convertible Senior Notes

In the first nine months of 2013, holders converted approximately $149 million principal amount of the 7.25% convertible senior notes, resulting in the issuance of approximately 32.6 million shares of our common stock. In connection with the conversion of these notes, we recorded approximately $28 million in special debt extinguishment charges which are included within other nonoperating expense, net on the condensed consolidated statement of operations included in Part I, Item 1A of this report.

Barclays Prepaid Miles

In July 2013, we repaid in full the Barclays prepaid miles loan at its face amount of $200 million plus accrued interest.

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 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, US Airways has taken delivery of 74 aircraft through September 30, 2013, which includes four A320 aircraft, 60 A321 aircraft and 10 A330-200 aircraft. US Airways plans to take delivery of three A321 aircraft in the remainder of 2013, with the remaining 30 A320 family aircraft scheduled to be delivered between 2014 and 2015. In addition, US Airways plans to take delivery of two A330-200 aircraft in the remainder of 2013, with the remaining three A330-200 aircraft scheduled to be delivered in 2014. Deliveries of the 22 A350 XWB family aircraft are presently 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 family aircraft. US Airways has taken delivery of two of the Trent 700 spare engines and four of the V2500-A5 spare engines through September 30, 2013.

Under all of our aircraft and engine purchase agreements, our total future commitments as of September 30, 2013 are expected to be approximately $4.05 billion through 2019, which includes predelivery deposits and payments. We have financing commitments for all future Airbus aircraft deliveries. 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 may restrict or limit our actions, including our ability to make certain investments and restricted payments and incur additional indebtedness. 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, 2013, 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, 2013:

 

     S&P    Fitch    Moody’s
     Local Issuer
Credit Rating
   Issuer Default
Credit Rating
   Corporate
Family Rating

US Airways Group

   B    B+    B3

US Airways

   B    B+    (1)

 

(1)

The credit agency does not rate this category 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.

Labor Agreements

In February 2013, the US Airways pilots represented by US Airline Pilots Association voted to ratify a memorandum of understanding (“MOU”) that will become effective in the event a merger with AMR is consummated. If the Merger is completed, the MOU provides a six-year agreement for the pilots of the combined post-Merger carrier.

In February 2013, the US Airways flight attendants represented by the Association of Flight Attendants voted to ratify a new collective bargaining agreement. We estimate that over the five-year term of the contract, the economic cost is approximately $40 million per year compared to the prior agreement.

In March 2013, pilots at Piedmont Airlines and PSA Airlines, represented by the Air Line Pilots Association (“ALPA”), each voted to ratify a new five-year collective bargaining agreement. These agreements are not expected to have a material impact on our results of operations. In September 2013, pilots at PSA Airlines, represented by ALPA, voted to ratify a Letter of Agreement (“LOA”) that amends their existing collective bargaining agreement ratified in March 2013. The LOA will only become effective in the event a merger with AMR is consummated.

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 2012 Form 10-K.

 

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Contractual Obligations

The following table provides details of our future cash contractual obligations as of September 30, 2013 (in millions):

 

     Payments Due by Period  
     2013      2014      2015      2016      2017      Thereafter      Total  

US Airways Group (1)

                    

Debt (2)

   $ —         $ 23       $ —         $ —         $ —         $ 530       $ 553   

Interest obligations (3)

     9         34         33         33         33         31         173   

US Airways (4)

                    

Debt and capital lease obligations (5) (6)

     117         451         442         979         383         3,044         5,416   

Interest obligations (3) (6)

     68         253         225         213         195         407         1,361   

Aircraft purchase and operating lease commitments (7)

     488         1,828         1,276         719         1,384         3,051         8,746   

Regional capacity purchase agreements (8)

     266         1,024         902         580         441         563         3,776   

Other US Airways Group subsidiaries (9)

     3         10         8         8         7         6         42   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 951       $ 3,623       $ 2,886       $ 2,532       $ 2,443       $ 7,632       $ 20,067   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

These commitments represent those entered into by US Airways Group.

(2)

Excludes $3 million of unamortized debt discount as of September 30, 2013.

(3)

For variable-rate debt, future interest obligations are shown above using interest rates in effect as of September 30, 2013.

(4)

These commitments represent those entered into by US Airways.

(5)

Excludes $55 million of unamortized debt discount as of September 30, 2013.

(6)

Includes $2.33 billion of future principal payments and $786 million of future interest payments as of September 30, 2013, respectively, related to EETCs associated with mortgage financings for the purchase of certain aircraft.

(7)

Includes $2.09 billion of future minimum lease payments related to EETC leveraged leased financings of certain aircraft as of September 30, 2013.

(8)

Represents minimum payments under capacity purchase agreements with third-party express carriers. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and our actual payments could differ materially.

(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 2013 Citicorp credit facility 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 2013, 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 2012 Form 10-K.

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 2012 Form 10-K except as updated below.

Commodity price risk

Our 2013 forecasted mainline and express fuel consumption is presently approximately 1.49 billion gallons, and based on this forecast, a one cent per gallon increase in aviation fuel price results in a $15 million increase in annual expense. We have not entered into any transactions to hedge our fuel consumption. As a result, we fully realize the effects of any increase or decrease in fuel prices.

Interest rate risk

Our exposure to interest rate risk relates primarily to our variable-rate debt obligations. At September 30, 2013, our variable-rate long-term debt obligations of approximately $2.72 billion represented approximately 46% of our total long-term debt. If interest rates increased 10% in 2013, the impact on our results of operations would be approximately $10 million of additional interest expense.

Item 4. Controls and Procedures

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, 2013. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2013.

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, 2013 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, 2013.

 

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Part II. Other Information

Item 1. Legal Proceedings

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. We intend to pursue our claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.

On March 1, 2013, a complaint captioned Plumbers & Steamfitters Local Union No. 248 Pension Fund v. US Airways Group, Inc., et al., No. CV2013-051605, was filed as a putative class action on behalf of the shareholders of US Airways Group in the Superior Court for Maricopa County, Arizona. On July 3, 2013, an amended complaint, captioned Dennis Palkon, et al. v. US Airways Group, Inc., et al., No. CV2013-051605, was filed with the same court. The amended complaint names as defendants US Airways Group and the members of its board of directors, and alleges that the directors failed to maximize the value of US Airways Group in connection with the Merger and that US Airways Group aided and abetted those breaches of fiduciary duty. The relief sought in the amended complaint includes an injunction against the Merger, or rescission in the event it has been consummated. The court in the above-referenced action denied the plaintiff’s motion for a temporary restraining order that had sought to enjoin our Annual Meeting of Stockholders. The above-referenced action has been stayed pending the outcome of the antitrust lawsuit filed by the United States government and various states on August 13, 2013 (described below). We believe this lawsuit is without merit and intend to vigorously defend against the allegations.

On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint names as defendants US Airways Group and US Airways, and alleges that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint includes an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American Airlines, Inc. as defendants, and on October 2, 2013, dismissed the initial California action. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.

On August 13, 2013, the United States government (acting under the U.S. Attorney General), along with the states of Arizona, Florida, Tennessee and Texas, the commonwealths of Pennsylvania and Virginia, and the District of Columbia, acting by and through their respective Attorneys General, filed a complaint against US Airways Group and AMR in the U.S. District Court for the District of Columbia. The plaintiffs allege, among other things, that the proposed Merger would substantially lessen competition in violation of Section 7 of the Clayton Act and seek to permanently enjoin the transaction. On September 5, 2013, the plaintiffs filed an amended complaint, adding the state of Michigan (by and through its Attorney General) as a plaintiff. On October 1, 2013, the state of Texas entered into an agreement with US Airways Group and AMR that resolved the state’s objections to the Merger, and its claims were dismissed with prejudice on October 7, 2013. The U.S. District Court has set a trial date of November 25, 2013. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.

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.

 

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Item 1A. Risk Factors

Below are certain risk factors that may affect our business, results of operations or financial condition, or the trading price of our common stock or other securities. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot predict such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business.

Risk Factors Relating to the Company and Industry-Related Risks

We could experience significant operating losses in the future.

For a number of reasons, including those addressed in these risk factors, we 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.

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 materially 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. Jet fuel market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $1.87 per gallon to a high of approximately $3.38 per gallon during the period from January 1, 2010 to September 30, 2013.

Because of the amount of fuel needed to operate our airline, even a relatively small increase in the price of fuel can have a material 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, changes in access to petroleum product pipelines and terminals, 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. Currently, we are not a party to any transactions to hedge our fuel consumption. 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 projected price of fuel at a time when we have fuel hedging contracts in place could adversely impact our short-term liquidity, because hedge counterparties could require that we post collateral in the form of cash or letters of credit. See also the discussion in Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”

 

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The airline industry is intensely competitive and dynamic.

Our competitors include other major domestic airlines and foreign, regional and new entrant airlines, many of which have more financial resources or lower cost structures than ours, as well as 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, consolidation, and could continue to have an impact on our overall performance.

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.

See also the risk factors provided under the caption “Risk Factors Relating to the Merger and the Combined Company.”

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 continued changes in 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 financing commitments for all future Airbus aircraft deliveries.

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.”

 

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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 2013 Citicorp credit facility require us to maintain consolidated unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities in an aggregate amount not less than $850 million prior to the Merger and $2.0 billion following the Merger, in each case, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding 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 some or all of the 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.

 

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Union disputes, employee strikes and other labor-related disruptions may adversely affect our operations.

Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act (“RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”).

If no agreement is reached during direct negotiations between the parties, either party may request that the NMB 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 the unions representing our fleet service employees, our passenger service employees, our mechanic, stock clerk and related employees, our maintenance training instructors, our flight crew training instructors and our flight simulator engineers. On February 8, 2013, the US Airways pilots represented by the US Airline Pilots Association voted to ratify a memorandum of understanding (“MOU”) that will become effective in the event the Merger is consummated. If the Merger is completed, the MOU provides a six-year agreement for the pilots of the combined post-Merger carrier. In addition, our express subsidiary, Piedmont, is in negotiations with the unions representing its flight attendants and its mechanics. All negotiations except those involving the Piedmont mechanics are being overseen by the NMB. None of these unions presently may lawfully engage in concerted refusals to work, such as strikes, slow-downs, sick-outs or other similar activity, against us. Nonetheless, 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, on September 28, 2011, the U.S. District Court in Charlotte granted a preliminary injunction, which was subsequently converted to a permanent injunction, enjoining the labor union representing our pilots from engaging in an illegal work slowdown.

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 or future labor negotiations. Approximately 83% 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 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 could have a material adverse impact on our operations.

We operate principally through hubs in Charlotte, Philadelphia, Phoenix and Washington, D.C. Substantially all of our flights either originate in or fly into one of these locations. A significant interruption or disruption in service at one of our hubs resulting from air traffic control delays, weather conditions, natural disasters, growth constraints, relations with third-party service providers, failure of computer systems, 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.

 

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Regulatory changes affecting the allocation of slots could have a material adverse impact on our operations.

Operations at four major domestic airports, certain smaller domestic airports and certain foreign airports served by us are regulated by governmental entities through the use of “slots” or similar regulatory mechanisms which limit the rights of carriers to conduct operations at those airports. Each slot represents the authorization to land at or take off from the particular airport during a specified time period and may have other operational restrictions as well. In the United States, the Federal Aviation Administration (“FAA”) currently regulates the allocation of slot or slot exemptions at Ronald Reagan Washington National Airport and three New York City airports: Newark, JFK and LaGuardia. Our operations at these airports generally require the allocation of slots or similar regulatory authority. Similarly, our operations at international airports in Frankfurt, London Heathrow, Paris and other airports outside the United States are regulated by local slot authorities pursuant to the International Air Transport Association’s Worldwide Scheduling Guidelines and applicable local law.

We currently have sufficient slots or similar authority to operate our existing flight schedule and have generally been able to acquire the necessary rights to expand flights and to change our schedules, although some airports are more challenging than others in terms of the cost and availability of additional authority necessary to expand operations. There is no assurance, however, that we will be able to do so in the future because, among other reasons, such allocations are subject to changes in government policy. The FAA is planning a new rulemaking in 2013 to update the current rules governing the New York City airports. As the new proposal has not been released yet, we cannot state that the new proposed rules, if finalized, would not have a material impact on our operations.

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 adverse 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, results of operations and financial performance.

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 to expand their ability 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.

 

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Further, on April 21, 2011, we 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, as amended to date, 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. 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. We intend to pursue our claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.

Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages.

Airlines are subject to extensive domestic and international regulatory requirements. In the last several years, Congress has passed laws, and the U.S. Department of Transportation (“DOT”), the FAA, the Transportation Security Administration (“TSA”) and the Department of Homeland Security have issued a number of directives and other regulations that affect the airline industry. These requirements impose substantial costs on us and restrict the ways we may conduct our business.

For example, 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. Our failure to timely comply with these requirements has in the past and may in the future result in fines and other enforcement actions by the FAA or other regulators. In addition, the FAA recently issued its final regulations governing pilot rest periods and work hours for all airlines certificated under Part 121 of the Federal Aviation Regulations. The rule, which becomes effective on January 4, 2014, impacts the required amount and timing of rest periods for pilots between work assignments and modifies duty and rest requirements based on the time of day, number of scheduled segments, flight types, time zones, and other factors. These regulations, or other regulations, could have a material adverse effect on us and the industry upon implementation.

Recent DOT consumer rules require new procedures for customer handling during long onboard delays, further regulate airline interactions with passengers through the reservations process, at the airport, and on board the aircraft, and require new disclosures concerning airline fares and ancillary fees such as baggage fees. The DOT has been aggressively investigating alleged violations of these new rules. Other DOT rules apply to post-ticket purchase price increases and an expansion of tarmac delay regulations to international airlines.

The Aviation and Transportation Security Act mandates the federalization of certain airport security procedures and imposes additional security requirements on airports and airlines, most of which are funded by a per-ticket tax on passengers and a tax on airlines.

The results of our operations, demand for air travel, and the manner in which we conduct business each may be affected by changes in law and future actions taken by governmental agencies, including:

 

   

changes in law which affect the services that can be offered by airlines in particular markets and at particular airports, or the types of fees that can be charged to passengers;

 

   

the granting and timing of certain governmental approvals (including antitrust or foreign government approvals) needed for codesharing alliances and other arrangements with other airlines;

 

   

restrictions on competitive practices (for example, court orders, or agency regulations or orders, that would curtail an airline’s ability to respond to a competitor);

 

   

the adoption of new passenger security standards or regulations that impact customer service standards (for example, a “passenger bill of rights”);

 

   

restrictions on airport operations, such as restrictions on the use of takeoff and landing slots at airports or the auction or reallocation of slot rights currently held by US Airways Group; and

 

   

the adoption of more restrictive locally-imposed noise restrictions.

 

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Each additional regulation or other form of regulatory oversight increases costs and adds greater complexity to airline operations and, in some cases, may reduce the demand for air travel. There can be no assurance that our compliance with new rules, anticipated rules or other forms of regulatory oversight will not have a material adverse effect on us.

In April 2013, the FAA announced the imposition of furloughs that resulted in reduced staffing, including among air traffic controllers, in connection with its implementation of budget reductions related to the federal government’s response to the so-called “sequester” of government funding. These furloughs have been suspended as a result of Congressional legislation. However, we cannot predict whether there will be further furloughs or the impact of any such furloughs on our business. Any significant reduction in air traffic capacity at key airports in the U.S. could have a material adverse effect on our operations and financial results.

In addition, the air traffic control system is not successfully managing the growing demand for U.S. air travel. Air traffic controllers rely on outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes. On February 14, 2012, the FAA Modernization and Reform Act of 2012 was signed. The law provides funding for the FAA to rebuild its air traffic control system, including switching from radar to a GPS-based system. It is uncertain when any improvements to the air traffic control system will take effect. Failure to update the air traffic control system in a timely manner and the substantial funding requirements that may be imposed on airlines of a modernized air traffic control system may have a material adverse effect on our business. We also experienced delays in routine non-operational interactions with the FAA as a result of the government shut down.

The ability of U.S. airlines 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 and appropriate slots or facilities may not be made available. We currently operate on a number of international routes under government arrangements that limit the number of airlines permitted to operate on the route, the capacity of the airlines providing services on the route, or the number of airlines allowed access to particular airports. If an open skies policy were to be adopted for any of these routes, such an event could have a material adverse impact on us and could result in the impairment of material amounts of our related tangible and intangible assets. In addition, competition from revenue-sharing joint ventures, joint business agreements, and other alliance arrangements by and among other airlines could impair the value of our business and assets on the open skies routes. For example, the open skies air services agreement between the U.S. and the European Union (“EU”), which took effect in March 2008, provides airlines from the U.S. and EU member states open access to each other’s markets, with freedom of pricing and unlimited rights to fly from the U.S. to any airport in the EU, including London’s Heathrow Airport. As a result of the agreement, we face increased competition in these markets, including Heathrow Airport. In addition, the open skies agreement between the U.S. and Brazil, which was signed in 2010 and takes full effect in 2015, has resulted in increased competition in the U.S./Brazil market.

The airline industry is heavily taxed.

The airline industry is subject to extensive government fees and taxation that will negatively impact our revenue. The U.S. airline industry is one of the most heavily taxed of all industries. These fees and taxes have grown significantly in the past decade for domestic flights, and various U.S. fees and taxes also are assessed on international flights. For example, as permitted by federal legislation, most major U.S. airports impose a passenger facility charge per passenger on us. In addition, the governments of foreign countries in which we operate impose on U.S. airlines, including us, various fees and taxes, and these assessments have been increasing in number and amount in recent years. Moreover, we are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation. We will collect the excise tax, along with certain other U.S. and foreign taxes and user fees on air transportation (such as a per-ticket tax on passengers to fund the TSA), and pass along the collected amounts to the appropriate governmental agencies. Although these taxes are not operating expenses, they represent an additional cost to our customers. There are continuing efforts in Congress and in other countries to raise different portions of the various taxes, fees, and charges imposed on airlines and their passengers. Increases in such taxes, fees, and charges could negatively impact our business, financial condition, and results of operations.

Under recent DOT regulations, all governmental taxes and fees must be included in the fares we quote or advertise to our customers. Due to the competitive revenue environment, many increases in these fees and taxes have been absorbed by the airline industry rather than being passed on to the customer. Further increases in fees and taxes may reduce demand for air travel, and thus our revenues.

 

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Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand.

We have implemented several new measures designed to increase revenue and offset costs. These measures include charging separately for services that had previously been included within the price of a ticket and increasing other pre-existing fees. We may introduce additional initiatives in the future; however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives. We cannot assure you that these new measures or any future initiatives will be successful in increasing our revenues. Additionally, the implementation of these initiatives creates logistical challenges that could harm the operational performance of our airline. Also, the new and increased fees might reduce the demand for air travel on our airline or across the industry in general, particularly if weakened economic conditions continue to make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers that determine not to institute similar charges.

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, 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 and, at some airports, adequate slots.

In order to operate our existing and proposed flight schedule and, where appropriate, add service along new or existing routes, we must be able to maintain and/or obtain adequate gates, ticketing facilities, operations areas, slots (where applicable), and office space. Also, as airports around the world become more congested, we will not 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. Further, our operating costs at airports at which we operate, including our hubs, may increase significantly because of capital improvements at such airports that we may be required to fund, directly or indirectly. In some circumstances, such costs could be imposed by the relevant airport authority without our approval.

Access to slots at several major U.S. and foreign airports to be served by us is subject to government regulation. There is no assurance that we will be able to retain or acquire the necessary rights to operate our desired schedule and change our schedule in the future because, among other reasons, such allocations are subject to changes in government policy. For example, the FAA is planning a new rulemaking in 2013 to modify the current rules limiting flight operations at New York City’s JFK and LaGuardia airports. Any limitation on our ability to acquire or maintain adequate gates, ticketing facilities, operations areas, slots (where applicable), or office space could severely constrain our operations and have a material adverse effect on us.

 

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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, and violations can lead to significant fines and penalties.

The U.S. Environmental Protection Agency (“EPA”) has proposed changes to underground storage tank regulations that could affect certain airport fuel hydrant systems. Airport systems that fall within threshold requirements would need to be modified to meet regulations. Additionally, the EPA has proposed the Draft National Pollutant Discharge Elimination System General Permit for Stormwater Discharges from Industrial Activities. This rule would require new limitations on certain discharges along with mandatory best management practices. Concurrently, California has proposed the State Final Draft Industrial General Permit for stormwater discharges. This rule employs the use of benchmark values to trigger response actions when exceeding those limits and eliminates group monitoring. These rules have not been finalized, and cost estimates have not been defined, but US Airways along with other airlines would share a portion of these costs at applicable airports. In addition to the proposed EPA and state regulations, several U.S. airport authorities are actively engaged in efforts to limit discharges of de-icing fluid to local groundwater, often by requiring airlines to participate in the building or reconfiguring of airport de-icing facilities. Such efforts are likely to impose additional costs and restrictions on airlines using those airports. We do not believe, however, that such environmental developments will have a material impact on our capital expenditures or otherwise adversely affect our operations, operating costs or competitive position.

We are also subject to other environmental laws and regulations, including those that require us to remediate soil or groundwater to meet certain objectives. Under federal law, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws is often strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to us. 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 indemnify 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. For example, the EU has established the Emissions Trading Scheme (“ETS”), the mechanism by which emissions of CO2 are currently regulated in the EU. Since the beginning of 2012, the ETS required airlines to have emission allowances equal to the amount of carbon dioxide emissions from flights to and from EU member states but, except for flights within and between EU states, this mandate was stayed for one year by the EU in November 2012 pending developments at the International Civil Aviation Organization (“ICAO”). In addition, President Obama signed legislation in November 2012 which encourages the DOT to seek an international solution through the ICAO, and if necessary, will allow the Secretary of Transportation to prohibit U.S. airlines from participating in the ETS. In October 2013, the ICAO General Assembly reaffirmed goals for reduced aviation emissions, including CO2-neutral collective industry growth from 2020, and a commitment to try to implement an appropriate global emissions trading scheme before 2020. The EU proposed in October 2013 to apply ETS to operations within its airspace (an expansion of the current ETS application, which, due to the stay, only affects flights within and between EU states). Ultimately, the scope and application of ETS or other emissions trading schemes to US Airways, now or in the near future, remains uncertain. US Airways does not anticipate any significant emissions allowance expenditures in 2013. Beyond 2013, compliance with the ETS or similar emissions-related requirements could significantly increase our operating costs. Further, the potential impact of ETS or other emissions-related requirements on our costs will ultimately depend on a number of factors, including baseline emissions, the price of emission credits and the number of future flights subject to ETS or other emissions-related requirements. These costs have not been completely defined and could fluctuate. Similarly, within the U.S., there is an increasing trend toward regulating greenhouse gas emissions directly under the Clean Air Act, and while the EPA’s recent regulatory activity in this area has focused on industries other than aviation, it is possible that future EPA regulations or new legislation could impact airlines. Several states are also considering initiatives 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. These regulatory efforts, both internationally and in the U.S. at the federal and state levels, are still developing and 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. However, such climate change-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or otherwise pay for our emissions. Such activity may also impact us indirectly by increasing our operating costs, including fuel costs.

 

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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.

We rely heavily on technology and automated systems to operate our business, and any failure of these technologies or systems could harm our business, financial condition or results of operations.

We are highly dependent on technology and automated systems to operate and achieve low operating costs. These technologies and systems include our computerized airline reservation system, flight operations system, financial planning, management and accounting systems, telecommunications systems, website, maintenance systems and check-in kiosks. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. Substantially all of our tickets are issued to passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained under a long-term contract by a third-party service provider, to be able to issue, track and accept these electronic tickets. If our automated systems are not functioning or if our third-party service providers were to fail to adequately provide technical support, system maintenance or timely software upgrades for any one of our key existing systems, we could experience service disruptions or delays, which could harm our business and result in the loss of important data, increase our expenses and decrease our revenues. In the event that one or more of our primary technology or systems vendors goes into bankruptcy, ceases operations or fails to perform as promised, replacement services may not be readily available on a timely basis, at competitive rates or at all, and any transition time to a new system may be significant. Our automated systems cannot be completely protected against other events that are beyond our control, including natural disasters, computer viruses or telecommunications failures. Substantial or sustained system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines. We cannot assure you that our security measures, change control procedures or disaster recovery plans are adequate to prevent disruptions or delays. Disruption in or changes to these systems could result in a disruption to our business and the loss of important data. Any of the foregoing could result in a material adverse effect on our business, results of operations or financial condition.

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 (including cyber attacks or cyber intrusions over the Internet, malware, computer viruses and the like), discovery of new vulnerabilities or attempts to exploit existing vulnerabilities in our systems, other 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 sensitive information. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. 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.

In addition, 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.

Failure to comply with the Payment Card Industry Standards discussed above or other privacy and data use and security requirements of our partners or related laws, rules and regulations to which we are subject may expose us to claims for contract breach, 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.

We are dependent on a limited number of suppliers for aircraft, aircraft engines and parts.

We are dependent on a limited number of suppliers for aircraft, aircraft engines and many aircraft and engine parts. As a result, we are vulnerable to any problems associated with the supply of those aircraft, parts and engines, including design defects, mechanical problems, contractual performance by the suppliers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft.

Our business will be affected by many changing economic and other conditions beyond our control, and our results of operations could be volatile and fluctuate due to seasonality.

Our business, financial condition, and results of operations will be affected by many changing economic and other conditions beyond our control, including, among others:

 

   

actual or potential changes in international, national, regional, and local economic, business and financial conditions, including recession, inflation, higher interest rates, wars, terrorist attacks, or political instability;

 

   

changes in consumer preferences, perceptions, spending patterns, or demographic trends;

 

   

changes in the competitive environment due to industry consolidation, changes in airline alliance affiliations, and other factors;

 

   

actual or potential disruptions to the air traffic control systems, including as a result of “sequestration” or any other interruption in government funding;

 

   

increases in costs of safety, security, and environmental measures;

 

   

outbreaks of diseases that affect travel behavior; and

 

   

weather and natural disasters.

 

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Thus, our results of operations could be volatile and subject to rapid and unexpected change. In addition, due to generally weaker demand for air travel during the winter, our revenues in the first and fourth quarters of the year could be weaker than revenues in the second and third quarters of the year.

Increases in insurance costs or reductions in insurance coverage may adversely impact our operations and financial results.

The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease in the insurance coverage available to commercial air carriers. Accordingly, our insurance costs increased significantly and our ability to continue to obtain insurance even at current prices remains uncertain. In addition, we have obtained third-party war risk (terrorism) insurance through a special program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial insurance market. The program has been extended, with the same conditions and premiums, until December 31, 2013. 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, H1N1 influenza virus, avian flu, or any other influenza-type illness, if it were to persist for an extended period, could again materially affect the airline industry and us by reducing revenues and impacting travel behavior.

We are exposed to foreign currency exchange rate fluctuations.

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

The use of our 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 (“Section 382”) of the Internal Revenue Code of 1986, as amended (the “Code”), 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 US Airways Group underwent an “ownership change” as defined in Section 382 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.” US Airways Group expects to undergo an ownership change in connection with the Merger with AMR.

See also “Risk Factors Relating to the Merger and the Combined Company – The use of AMR’s and our respective pre-Merger NOL carryforwards and certain other tax attributes may be limited following the consummation of the Merger.”

 

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Risk Factors Relating to the Merger and the Combined Company

On February 13, 2013, US Airways Group and AMR entered into the Merger Agreement, as described in Note 2 to the respective condensed consolidated financial statements of US Airways Group and US Airways included in Part I, Items 1A and 1B of this report.

The DOJ Action has delayed, and could ultimately prevent, the consummation of the Merger.

On August 13, 2013, the United States government along with certain states and the District of Columbia filed the DOJ Action seeking to permanently enjoin our pending Merger with AMR. The filing of the DOJ Action has delayed and, if we and AMR are unsuccessful in defending against or settling the DOJ Action, could ultimately prevent, the consummation of the Merger. There can be no assurance that we will be successful in defending against or settling the DOJ Action or that the Merger will be consummated by any particular time, if at all.

In addition, even if we enter into a settlement with respect to the DOJ Action, there can be no assurance that we will not be required to agree to terms, conditions, requirements, limitations, costs or restrictions that could further delay completion of the Merger, impose additional material costs on or limit the revenues of the combined company, or limit some of the synergies and other benefits we presently anticipate to realize following the Merger. We cannot provide any assurance that any such terms, conditions, requirements, limitations, costs or restrictions will not result in a material delay in, or the abandonment of, the Merger, or that the Bankruptcy Court will approve of such terms, conditions, requirements, limitations, costs or restrictions. Any such settlement may require that AMR give additional notice to its creditors or re-solicit them for acceptance of AMR’s plan of reorganization, which would further delay the consummation of the Merger and could result in changes to the structure of the Merger. In addition, there are no assurances that AMR’s creditors would not challenge AMR’s plan of reorganization, as amended, or that they would vote in favor of an amended plan of reorganization.

Delays in completing the Merger have delayed, and could continue to delay, the benefits expected to be achieved by the Merger.

The need to satisfy conditions and obtain consents, clearances, and approvals for the Merger, as well as the pendency of the DOJ Action, have delayed, and could continue to delay, the consummation of the Merger for a significant period of time or prevent it from occurring. Even if ultimately consummated, the delay in the consummation of the Merger could cause the combined company to be delayed or limited in realizing some of the synergies and other benefits that the parties anticipated had the Merger been successfully completed within its originally expected time frame.

The Merger is subject to a number of conditions to our and AMR’s obligations, including the receipt of certain consents and approvals, which, if not fulfilled or received, may result in the termination of the Merger Agreement.

The Merger Agreement contains a number of conditions to consummation of the Merger, including that certain representations and warranties be materially accurate, that certain covenants be fulfilled, that certain consents and regulatory approvals have been obtained, that there are no legal prohibitions against consummation of the Merger (which will require, among other things, a favorable resolution of the DOJ Action), that an order from the Bankruptcy Court confirming AMR’s plan of reorganization is in effect, and that secured indebtedness of the Debtors and certain other claims against the Debtors not exceed specified levels. Many of the conditions to consummation of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied.

If any of the conditions to the consummation of the Merger are not satisfied or waived prior to the earlier of (A) the later of (i) January 18, 2014 and (ii) the 15th day after the United States District Court for the District of Columbia enters an order in the trial related to the DOJ Action in favor of AMR and US Airways Group, provided that such order is entered on or prior to January 17, 2014, and (B) five days after the United States District Court for the District of Columbia enters a final, but appealable, order permanently restraining, enjoining or otherwise prohibiting consummation of the Merger following the trial in the DOJ Action, either AMR or US Airways Group may unilaterally terminate the Merger Agreement and abandon the Merger.

 

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Lawsuits, in addition to the DOJ Action, have been filed challenging the Merger, and an adverse ruling may prevent the Merger from being completed.

US Airways Group, as well as the members of US Airways Group’s board of directors, were named as defendants in a lawsuit brought by a purported class of US Airways Group’s stockholders challenging the Merger and seeking a declaration that the Merger Agreement is unenforceable, an injunction against the Merger (or rescission in the event it has been consummated), imposition of a constructive trust, an award of fees and costs, including attorneys’ and experts’ fees, and other relief.

US Airways Group and US Airways were also named as defendants in a lawsuit brought by US Airways’ and/or American Airlines’ consumers. The complaint alleges that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint includes an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American Airlines as defendants, and on October 2, 2013 dismissed the initial California action.

Even if we successfully resolve the DOJ Action, the courts in these private lawsuits could enjoin the Merger, or could further materially delay its consummation. If such private lawsuits are not successfully resolved, it is possible that the Merger Agreement may be terminated and the Merger abandoned. Even if successfully resolved, such private lawsuits could result in terms, conditions, requirements, limitations, costs or restrictions that would delay completion of the Merger, impose additional material costs on or materially limit the revenues of us or the combined company, or materially limit some of the synergies and other benefits we anticipate following the Merger.

Additional lawsuits may be filed against us, AMR, and/or our or AMR’s directors in connection with the Merger. One of the conditions to the closing of the Merger is that no order, writ, injunction, decree, or any other legal rules, regulations, directives, or policies will be in effect that prevent completion of the Merger. Consequently, if a settlement or other resolution is not reached in the current and potential lawsuits referenced above, and such other potential lawsuits, if any, and the plaintiffs secure injunctive or other relief prohibiting, delaying, or otherwise adversely affecting the defendants’ ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming effective within the expected time frame or at all.

Failure to complete the Merger could negatively impact our stock price and our future business and financial results.

If the Merger is not completed, our ongoing business may be adversely affected, and we will be subject to certain risks, including the following:

 

   

we may be required to pay termination fees of $55 million or $195 million under certain circumstances provided in the Merger Agreement;

 

   

unless and until it is terminated, we will be prohibited by the Merger Agreement from seeking certain strategic alternatives, such as transactions with third parties other than AMR, and could therefore miss attractive alternatives to the Merger;

 

   

prior to any termination of the Merger Agreement, our operations will be restricted by the terms of the Merger Agreement, which may cause us to forego otherwise attractive business opportunities;

 

   

we will be required to pay certain costs relating to the Merger, whether or not it is consummated, such as legal, accounting, financial adviser and printing fees, which costs could be substantial; and

 

   

our management will have focused its attention on negotiating and preparing for the Merger instead of on pursuing other opportunities that could have been beneficial to us.

If the Merger is not completed, we cannot assure you that these risks will not materialize and will not materially and adversely affect our business, financial results, and stock price.

 

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The Merger Agreement contains customary restrictions on our ability to seek other strategic alternatives.

The Merger Agreement contains “no shop” provisions that restrict our ability to initiate, solicit, or knowingly encourage or facilitate competing third-party proposals for any business combination transaction involving a merger of us with another entity or the acquisition of a significant portion of our stock or assets. In addition, AMR generally has an opportunity to offer to modify the terms of the Merger in response to any competing acquisition proposal. If we were to terminate the Merger Agreement to accept a superior proposal, we would be required to pay a termination fee of $55 million to AMR.

These provisions, although customary for these types of transactions, would, prior to the termination of the Merger Agreement, prevent a potential third-party acquirer that might have an interest in acquiring all or a significant portion of our company from proposing any such acquisition, even if the potential third-party acquirer were prepared to pay consideration with a higher cash or market value than the market value proposed to be received or realized in the Merger.

The combined company may be unable to integrate our and AMR’s businesses successfully and realize the anticipated benefits of the Merger.

The Merger involves the combination of two companies that currently operate as independent public companies, each of which operates its own international network airline. Historically, the integration of separate airlines has often proven to be more time consuming and to require more resources than initially estimated. The combined company will be required to devote significant management attention and resources to integrating our and AMR’s business practices, cultures, and operations. Potential difficulties the combined company may encounter as part of the integration process include the following:

 

   

the inability to successfully combine our business with that of AMR in a manner that permits the combined company to achieve the synergies and other benefits anticipated to result from the Merger;

 

   

the challenge of integrating complex systems, operating procedures, regulatory compliance programs, technology, aircraft fleets, networks, and other assets of the two companies in a manner that minimizes any adverse impact on customers, suppliers, employees, and other constituencies;

 

   

diversion of the attention of the combined company’s management and other key employees;

 

   

the challenge of integrating the workforces of the two companies while maintaining focus on providing consistent, high quality customer service and running an efficient operation;

 

   

disruption of, or the loss of momentum in, the combined company’s ongoing business; and

 

   

potential unknown liabilities, liabilities that are significantly larger than we currently anticipate and unforeseen increased expenses or delays associated with the Merger, including transition costs to integrate the two businesses that may exceed the approximately $1.2 billion of cash transition costs that we currently anticipate.

We and AMR have submitted to the FAA a transition plan for merging the day-to-day operations of American and US Airways under a single operating certificate. The issuance of a single operating certificate will occur when the FAA agrees that the combined company has achieved a level of integration that can be safely managed under one certificate. While the parties currently believe that such approval can be obtained within two years from the closing of the Merger, the actual time required and cost incurred to receive this approval cannot be predicted. Any delay in the grant of such approval or increase in costs beyond those presently expected could have a material adverse effect on the completion date of the combined company’s integration plan and receipt of the benefits expected from that plan.

Accordingly, even if the Merger is consummated, the contemplated benefits may not be realized fully, or at all, or may take longer to realize than expected.

 

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The combined company may face challenges in integrating our and AMR’s computer, communications and other technology systems.

Among the principal risks of integrating our business and operations with those of AMR are the risks relating to integrating various computer, communications and other technology systems, including designing and implementing an integrated customer reservations system, that will be necessary to operate US Airways and American as a single airline and to achieve cost synergies by eliminating redundancies in the two companies’ businesses. The integration of these systems in a number of prior airline mergers has taken longer, been more disruptive and cost more than originally forecast. The implementation process to integrate these various systems will involve a number of risks that could adversely impact the combined company’s business operations, financial condition and results of operations. New systems will replace multiple legacy systems and the related implementation will be a complex and time-consuming project involving substantial expenditures for implementation consultants, system hardware, software and implementation activities, as well as the transformation of business and financial processes.

As with any large project, there will be many factors that may materially affect the schedule, cost and execution of the integration of our and AMR’s computer, communications and other technology systems. These factors include, among others: problems during the design, implementation and testing phases; systems delays and/or malfunctions; the risk that suppliers and contractors will not perform as required under their contracts; the diversion of management attention from daily operations to the project; reworks due to unanticipated changes in business processes; challenges in simultaneously activating new systems throughout our global network; difficulty in training employees in the operations of new systems; the risk of security breach or disruption; and other unexpected events beyond our control. We cannot assure you that our, AMR’s or the combined company’s security measures, change control procedures or disaster recovery plans will be adequate to prevent disruptions or delays. Disruptions in or changes to these systems could result in a disruption to the combined company’s business and the loss of important data. Any of the foregoing could result in a material adverse effect on the combined company’s business, results of operations or financial condition.

The use of AMR’s and our respective pre-Merger NOL carryforwards and certain other tax attributes may be limited following the consummation of the Merger.

Under the Code, a corporation is generally allowed a deduction in any taxable year for NOL carryforwards. As of December 31, 2012, AMR had available NOL carryforwards of approximately $6.6 billion for regular U.S. federal income tax purposes, which will expire, if unused, beginning in 2022, and for state income tax purposes of $3.6 billion, which will expire, if unused, between 2013 and 2027. The amount of AMR’s NOL carryforwards for state income tax purposes that will expire, if unused, in 2013 is $105 million. AMR’s NOL carryforwards could be subject to limitation as a result of the Chapter 11 bankruptcy cases and certain related transactions. As of December 31, 2012, we had available NOL carryforwards of approximately $1.5 billion for regular U.S. federal income tax purposes, which will expire, if unused, beginning in 2025, and for state income tax purposes, of approximately $722 million, which will expire, if unused, in 2013 through 2031. The amount of our NOL carryforwards for state income tax purposes that will expire, if unused, in 2013 is $13 million. Our NOL carryforwards may also be subject to limitation as a result of the Merger. In addition, both our and AMR’s NOL carryforwards are subject to adjustment on audit by the IRS.

A corporation’s ability to deduct its federal NOL carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code if it undergoes an “ownership change” as defined in Section 382 of the Code (generally where cumulative stock ownership changes among certain shareholders exceed 50 percentage points during a rolling three-year period). We and AMR each expect to undergo an “ownership change” in connection with AMR’s emergence from its Chapter 11 bankruptcy cases and the Merger, respectively. The general limitation rules for a debtor in a bankruptcy case such as AMR are liberalized where the ownership change occurs upon emergence from bankruptcy. In addition, under certain circumstances, special rules may apply to allow AMR to utilize substantially all of its pre-emergence NOL carryforwards without regard to the general limitations of Section 382 of the Code, and similar rules also may apply to state NOL carryforwards. However, there can be no assurance that these special rules under Section 382 of the Code (or any similar rules under applicable state law) will apply to AMR’s ownership change. Accordingly, the utilization of each of AMR’s and our respective NOL carryforwards and certain other tax attributes could be significantly constrained following AMR’s emergence from its Chapter 11 bankruptcy cases and the Merger. Moreover, an ownership change subsequent to consummation of the Merger could further limit or effectively eliminate the combined company’s ability to utilize such NOL carryforwards and other tax attributes.

The combined company’s ability to use NOL carryforwards will also depend on the amount of taxable income generated in future periods. The NOL carryforwards may expire before the combined company can generate sufficient taxable income to use the NOL carryforwards.

 

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The combined company will require significant liquidity to fund its emergence from Chapter 11 and to achieve successful integration and achieve targeted synergies post-closing.

At emergence from Chapter 11, AMR will pay approximately $1.4 billion in cash to settle certain obligations in connection with its plan of reorganization. In addition, the transition costs to integrate the two businesses may exceed the approximately $1.2 billion of cash transition costs that we and AMR currently anticipate. An inability to obtain necessary funding on acceptable terms would have a material adverse impact on the combined company and on its ability to sustain its operations.

Each of our and AMR’s indebtedness and other obligations are, and the combined company’s indebtedness and other obligations following the consummation of the Merger will continue to be, substantial and could adversely affect the combined company’s business and liquidity.

We and AMR each have, and the combined company will continue to have, significant amounts of indebtedness and other obligations, including pension obligations, obligations to make future payments on aircraft equipment and property leases, and obligations under aircraft purchase agreements. Moreover, currently all but a very limited quantity of our and AMR’s assets are pledged to secure their respective indebtedness. The combined company’s substantial indebtedness and other obligations could have important consequences. For example, they may:

 

   

limit the combined company’s ability to obtain additional funding for working capital, to withstand operating risks that are customary in the industry, capital expenditures, acquisitions, investments, integration costs, and general corporate purposes, and adversely affect the terms on which such funding can be obtained;

 

   

require the combined company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness and other obligations, thereby reducing the funds available for other purposes;

 

   

make the combined company more vulnerable to economic downturns and catastrophic external events;

 

   

contain restrictive covenants that could:

 

   

limit the combined company’s ability to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments and pay dividends; and

 

   

significantly constrain the combined company’s ability to respond, or respond quickly, to unexpected disruptions in its own operations, the U.S. or global economy, or the businesses in which it operates, or to take advantage of opportunities that would improve its business, operations, or competitive position versus other airlines; and

 

   

limit the combined company’s ability to withstand competitive pressures and reduce its flexibility in responding to changing business and economic conditions.

In addition, increases in the cost of financing could adversely affect the combined company’s liquidity, business, financial condition, and results of operations.

AMR has not yet secured financing for all of its scheduled aircraft deliveries, which will be utilized in the fleet of the combined company after the Merger.

AMR has not yet secured financing commitments for some of the aircraft that it has on order, and AMR cannot be assured of the availability or the cost of that financing. If AMR is unable to arrange financing for such aircraft at customary advance rates and on terms and conditions acceptable to it, AMR, prior to the Merger, and the combined company thereafter, may need to use cash from operations to purchase such aircraft or may seek to negotiate deferrals for such aircraft with the aircraft manufacturers.

 

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The combined company will have significant pension and other post-employment benefit funding obligations, which may adversely affect its liquidity, financial condition, and results of operations.

The combined company will have significant pension funding obligations, the amount of which will be dependent on the performance of investments held in trust by the pension plans, interest rates for determining liabilities, and actuarial experience. Currently, the combined company’s minimum funding obligation for its pension plans is subject to temporary, favorable rules that are scheduled to expire at the end of 2017. Upon the expiration of those rules, the combined company’s funding obligations are likely to increase materially. In addition, the combined company may have significant obligations for other post-employment benefits depending on the outcome of the adversary proceeding related to the retiree medical and life insurance obligations filed in the Chapter 11 cases. The foregoing post-employment benefit obligations could materially adversely affect the combined company’s liquidity, financial condition, and results of operations.

The combined company will need to obtain sufficient financing or other capital to operate successfully.

We and AMR currently plan to increase the combined company’s revenue in part by investing heavily in renewing and optimizing the combined company’s fleet and integrating the companies. Significant capital resources will be required to achieve these goals and, as a result, we and AMR estimate that the combined company’s planned aggregate capital expenditures on a consolidated basis for calendar years 2013-2017 would be approximately $20 billion. Accordingly, the combined company will need substantial financing or other capital resources, some of which may be obtained prior to AMR’s emergence from the Chapter 11 cases and thus may be subject to Bankruptcy Court approval. Depending on numerous factors, many of which are out of our and AMR’s control, and will be out of the combined company’s control, such as the state of the domestic and global economy, the credit market’s view of the combined company’s prospects and the airline industry in general, and the general availability of debt and equity capital at the time the combined company seeks capital, the financing and other capital that the combined company will need may not be available to it, or may only be available on onerous terms and conditions. There can be no assurance that the combined company will be successful in obtaining financing or other needed sources of capital to operate successfully.

 

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Risks Relating to Our Common Stock

The price of our common stock has recently been and may in the future be volatile.

The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

 

   

our operating results failing to meet the expectations of securities analysts or investors;

 

   

changes in financial estimates or recommendations by securities analysts;

 

   

material announcements by us or our competitors;

 

   

movements in fuel prices;

 

   

new regulatory pronouncements and changes in regulatory guidelines;

 

   

general and industry-specific economic conditions;

 

   

public sales of a substantial number of shares of our common stock; and

 

   

general market conditions.

The market price of the combined company’s common stock may be volatile.

The combined company’s common stock will be a new issue of securities, which issue is expected to be approved for listing on the NYSE or NASDAQ to be effective upon issuance of the combined company’s common stock. However, an active public market for the combined company’s common stock may not develop or be sustained after the consummation of the Merger, and no assurance can be given that there will be any liquidity in any such market. If a market for the combined company’s common stock develops, the price at which a holder of the combined company’s common stock could sell its shares may be higher or lower than the implied valuation for the combined company’s common stock provided in the Registration Statement on Form S-4 filed with the SEC by AMR on April 15, 2013, as amended. The market price of the combined company’s common stock may fluctuate significantly in response to a number of factors, some of which are beyond our and AMR’s control, including:

 

   

variations in operating results;

 

   

changes in financial estimates by securities analysts;

 

   

changes in market values of airline companies;

 

   

announcements by the combined company’s competitors of significant acquisitions, strategic partnerships, changes in routes, or capital commitments;

 

   

the success or failure in managing the combined company, including the integration of our and AMR’s separate operations;

 

   

increases or decreases in reported holdings by insiders or other significant stockholders;

 

   

additions or departures of key personnel;

 

   

future sales of the combined company’s common stock or issuance of the combined company’s common stock upon the exercise or conversion of convertible securities, options, warrants, RSUs, SARs, or similar rights, including common stock issuable upon conversion of shares of the combined company’s convertible preferred stock that will be issued pursuant to AMR’s plan of reorganization; and

 

   

fluctuations in trading volume.

 

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Certain provisions of US Airways Group’s amended and restated certificate of incorporation and amended and restated bylaws make it difficult for stockholders to change the composition of US Airways Group’s board of directors and may discourage takeover attempts that some of US Airways Group’s 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 US Airways Group’s 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 the interests of US Airways Group’s stockholders. 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.

The market price of the combined company’s common stock after the Merger may be affected by factors different from those currently affecting US Airways Group’s shares.

Upon the consummation of the Merger, holders of US Airways Group’s common stock will become holders of the combined company’s common stock. Our businesses prior to the Merger differ from those of the combined company, and accordingly the results of operations of the combined company may be affected by factors different from those currently affecting our results of operations, including the uncertainty of the market’s ability to value the combined company as it emerges from the Chapter 11 cases.

The percentage ownership interests of US Airways Group stockholders will be reduced as a result of the Merger and, accordingly, US Airways Group stockholders will have less influence on the management and policies of the combined company than they now have on the management and policies of US Airways Group.

The aggregate number of shares of the combined company’s common stock issuable to holders of US Airways Group’s equity instruments (including stockholders, holders of convertible notes, optionees, and holders of stock-settled SARs and RSUs) in the Merger will represent 28% of the diluted equity ownership of the combined company. The remaining 72% equity ownership of the combined company will be distributable, pursuant to AMR’s reorganization plan, to stakeholders, labor unions, and certain employees of AMR and the other Debtors. Therefore, each of the US Airways Group stockholders will have a percentage ownership of the combined company that is smaller than the stockholder’s prior percentage ownership of US Airways Group. As a result, the US Airways Group stockholders will have less influence on the management and policies of the combined company than they now have on the management and policies of US Airways Group.

 

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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.

In connection with AMR’s emergence from the Chapter 11 cases, the combined company will establish certain limitations on acquisitions, dispositions and voting of its common stock, which may serve to limit the post-emergence liquidity of its common stock.

To reduce the risk of a potential adverse effect of an “ownership change” as defined in Section 382 of the Code on the combined company’s ability to use its NOL carryforwards and certain other tax attributes and to avoid violation of federal statutory limitations on equity ownership of U.S. commercial airlines by foreign nationals, the combined company’s Certificate of Incorporation and Bylaws will contain certain restrictions on the acquisition, disposition and voting of the combined company’s common stock. These restrictions may adversely affect the ability of certain holders of the combined company’s common stock to dispose of, acquire or vote shares of the combined company’s common stock. No assurance can be given that an ownership change will not occur even with tax-related and other restrictions in place or that these provisions will assure compliance with the applicable restrictions on foreign ownership.

 

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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 22, 2013

 

By:

 

/s/ Derek J. Kerr

   

Derek J. Kerr

   

Executive Vice President and

   

Chief Financial Officer

   

(Duly Authorized Officer and Principal Financial Officer)