XNYS:LCC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark one)

  

þ

   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   For the quarterly period ended March 31, 2012
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 þ 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 þ 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 þ    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨
US Airways, Inc.    Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer þ    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                   þ

US Airways, Inc.

   Yes    ¨                  No                   þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

US Airways Group, Inc.

   Yes    þ    No                ¨

US Airways, Inc.

   Yes    þ    No                ¨

As of April 20, 2012, there were approximately 162,326,704 shares of US Airways Group, Inc. common stock outstanding.

As of April 20, 2012, 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 March 31, 2012

Table of Contents

 

     Page  

Part I. Financial Information

  

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

  

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 Consolidated Financial Statements of US Airways, Inc.

  

Condensed Consolidated Statements of Operations

     13   

Condensed Consolidated Statements of Comprehensive Income

     14   

Condensed Consolidated Balance Sheets

     15   

Condensed Consolidated Statements of Cash Flows

     16   

Notes to the Condensed Consolidated Financial Statements

     17   

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

     21   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     41   

Item 4. Controls and Procedures

     41   

Part II. Other Information

  

Item 1. Legal Proceedings

     42   

Item 1A. Risk Factors

     42   

Item 5. Other Information

     56  

Item 6. Exhibits

     56   

Signatures

  


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 and their impact on passenger demand, booking practices and related revenues;

 

   

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

 

   

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 or our focus city;

 

   

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;

 

   

changes in government regulation;

 

   

the impact of changes to our business model;

 

   

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

 

   

the loss of key personnel or our ability to attract and retain qualified personnel;

 

   

the impact of conflicts overseas or terrorist attacks, and the impact of ongoing security concerns;

 

   

our ability to operate and grow our route network;

 

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the impact of environmental 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;

 

   

our ability to operate profitably out of Philadelphia International Airport;

 

   

the impact of weather conditions and seasonality of airline travel;

 

   

the impact of possible future increases in insurance costs or reductions in available insurance coverage;

 

   

the impact of global events that affect travel behavior, such as an outbreak of a contagious disease;

 

   

the impact of foreign currency exchange rate fluctuations;

 

   

our ability to use NOLs and certain other tax attributes; and

 

   

other risks and uncertainties listed from time to time in our reports to and filings with the Securities and Exchange Commission.

All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. There may be other factors of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update or supplement any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these estimates other than as required by law. Any forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or as of the dates indicated in the statements.

Part I. Financial Information

This combined Quarterly Report on Form 10-Q is filed by US Airways Group and US Airways and includes the condensed consolidated financial statements of each company in Item 1A and Item 1B, respectively.

 

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

US Airways Group, Inc.

Condensed Consolidated Statements of Operations

(In millions, except share and per share amounts)

(Unaudited)

 

    

Three Months

Ended March 31,

 
     2012     2011  

Operating revenues:

    

Mainline passenger

   $ 2,117      $ 1,900   

Express passenger

     764        685   

Cargo

     40        43   

Other

     345        333   
  

 

 

   

 

 

 

Total operating revenues

     3,266        2,961   

Operating expenses:

    

Aircraft fuel and related taxes

     859        734   

Salaries and related costs

     606        573   

Express expenses

     802        770   

Aircraft rent

     162        164   

Aircraft maintenance

     163        163   

Other rent and landing fees

     140        129   

Selling expenses

     111        100   

Special items, net

     3        3   

Depreciation and amortization

     61        60   

Other

     300        304   
  

 

 

   

 

 

 

Total operating expenses

     3,207        3,000   
  

 

 

   

 

 

 

Operating income (loss)

     59        (39

Nonoperating income (expense):

    

Interest income

     —          1   

Interest expense, net

     (82     (77

Other, net

     71        1   
  

 

 

   

 

 

 

Total nonoperating expense, net

     (11     (75
  

 

 

   

 

 

 

Income (loss) before income taxes

     48        (114

Income tax provision

     —          —     
  

 

 

   

 

 

 

Net income (loss)

   $ 48      $ (114
  

 

 

   

 

 

 

Earnings (loss) per common share:

    

Basic earnings (loss) per common share

   $ 0.30      $ (0.71

Diluted earnings (loss) per common share

   $ 0.28      $ (0.71

Shares used for computation (in thousands):

    

Basic

     162,130        161,890   

Diluted

     201,814        161,890   

See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In millions)

(Unaudited)

 

    

Three Months

Ended March 31,

 
     2012      2011  

Net income (loss)

   $         48       $     (114)   

Other comprehensive loss:

     

Pension and other postretirement benefits

     —           (1)   
  

 

 

    

 

 

 

Total other comprehensive loss

     —           (1)   
  

 

 

    

 

 

 

Total comprehensive income (loss)

   $ 48       $ (115)   
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.

Condensed Consolidated Balance Sheets

(In millions, except share and per share amounts)

(Unaudited)

 

     March 31,
2012
    December 31,
2011
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 2,190      $ 1,947   

Accounts receivable, net

     449        327   

Materials and supplies, net

     294        235   

Prepaid expenses and other

     631        540   
  

 

 

   

 

 

 

Total current assets

     3,564        3,049   

Property and equipment

    

Flight equipment

     4,605        4,591   

Ground property and equipment

     923        907   

Less accumulated depreciation and amortization

     (1,556     (1,501
  

 

 

   

 

 

 
     3,972        3,997   

Equipment purchase deposits

     200        153   
  

 

 

   

 

 

 

Total property and equipment

     4,172        4,150   

Other assets

    

Other intangibles, net of accumulated amortization of $140 million and $134 million, respectively

     539        543   

Restricted cash

     347        365   

Other assets

     226        228   
  

 

 

   

 

 

 

Total other assets

     1,112        1,136   
  

 

 

   

 

 

 

Total assets

   $ 8,848      $ 8,335   
  

 

 

   

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Current maturities of debt and capital leases

   $ 453      $ 436   

Accounts payable

     415        386   

Air traffic liability

     1,416        910   

Accrued compensation and vacation

     187        176   

Accrued taxes

     239        163   

Other accrued expenses

     1,031        1,089   
  

 

 

   

 

 

 

Total current liabilities

     3,741        3,160   

Noncurrent liabilities and deferred credits

    

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

     3,984        4,130   

Deferred gains and credits, net

     325        307   

Postretirement benefits other than pensions

     162        160   

Employee benefit liabilities and other

     436        428   
  

 

 

   

 

 

 

Total noncurrent liabilities and deferred credits

     4,907        5,025   

Commitments and contingencies

    

Stockholders’ equity

    

Common stock, $0.01 par value; 400,000,000 shares authorized, 162,137,378 shares issued and outstanding at March 31, 2012; 162,116,902 shares issued and outstanding at December 31, 2011

     2        2   

Additional paid-in capital

     2,124        2,122   

Accumulated other comprehensive income

     2        2   

Accumulated deficit

     (1,928     (1,976
  

 

 

   

 

 

 

Total stockholders’ equity

     200        150   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 8,848      $ 8,335   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

    

Three Months

Ended March 31,

 
     2012     2011  

Net cash provided by operating activities

   $ 417      $ 345   

Cash flows from investing activities:

    

Purchases of property and equipment

     (87     (40

Sales of marketable securities

            12   

Decrease in long-term restricted cash

     18        19   
  

 

 

   

 

 

 

Net cash used in investing activities

     (69     (9

Cash flows from financing activities:

    

Repayments of debt and capital lease obligations

     (115     (128

Proceeds from issuance of debt

            6   

Other

     10          
  

 

 

   

 

 

 

Net cash used in financing activities

     (105     (122
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     243        214   

Cash and cash equivalents at beginning of period

     1,947        1,859   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 2,190      $ 2,073   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Interest payable converted to debt

   $ 6      $ 9   

Supplemental information:

    

Interest paid, net of amounts capitalized

   $ 45      $ 57   

Income taxes paid

              

See accompanying notes to the condensed consolidated financial statements.

 

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US Airways Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of US Airways Group, Inc. (“US Airways Group” or the “Company”) should be read in conjunction with the consolidated financial statements contained in US Airways Group’s Annual Report on Form 10-K for the year ended December 31, 2011. 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 income balances at March 31, 2012 and December 31, 2011 related to pension and other postretirement benefits.

2. Earnings (Loss) Per Common Share

Basic earnings (loss) per common share (“EPS”) is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of potentially dilutive shares of common stock outstanding during the period using the treasury stock method. Potentially dilutive shares include outstanding employee stock options, employee stock appreciation rights (“SARs”), employee restricted stock units (“RSUs”) and convertible debt. The following table presents the computation of basic and diluted EPS (in millions, except share and per share amounts):

 

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Basic EPS:

     

Net income (loss)

   $ 48       $ (114
  

 

 

    

 

 

 

Weighted average common shares outstanding (in thousands)

     162,130         161,890   
  

 

 

    

 

 

 

Basic EPS

   $ 0.30       $ (0.71
  

 

 

    

 

 

 

Diluted EPS:

     

Net income (loss)

   $ 48       $ (114

Interest expense on 7.25% convertible senior notes

     8           
  

 

 

    

 

 

 

Net income (loss) for purposes of computing diluted EPS

   $ 56       $ (114
  

 

 

    

 

 

 

Share computation for diluted EPS (in thousands):

     

Weighted average common shares outstanding

     162,130         161,890   

Dilutive effect of stock awards

     1,938           

Assumed conversion of 7.25% convertible senior notes

     37,746           
  

 

 

    

 

 

 

Weighted average common shares outstanding as adjusted

     201,814         161,890   
  

 

 

    

 

 

 

Diluted EPS

   $ 0.28       $ (0.71
  

 

 

    

 

 

 

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

     

Stock options, SARs and RSUs

     1,544         1,457   

7% senior convertible notes

     199         199   

7.25% convertible senior notes

             37,746   

 

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3. Debt

The following table details the Company’s debt (in millions). Variable interest rates listed are the rates as of March 31, 2012.

 

 

     March 31,
2012
    December 31,
2011
 

Secured

    

Citicorp North America loan, variable interest rate of 2.74%, installments due through 2014

   $ 1,120      $ 1,136   

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.64% to 10.56%, maturing from 2012 to 2029

     1,682        1,729   

Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 6.25% to 11%, maturing from 2014 to 2023

     1,247        1,279   

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

     29        30   
  

 

 

   

 

 

 
     4,078        4,174   

Unsecured

    

Barclays prepaid miles, variable interest rate of 4.99%, interest only payments

     200        200   

Airbus advance, repayments through 2018

     129        142   

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

     172        172   

7% senior convertible notes, interest only payments until due in 2020

     5        5   

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

     29        29   

Other unsecured obligations, maturing in 2012

     10        10   
  

 

 

   

 

 

 
     545        558   
  

 

 

   

 

 

 

Total long-term debt and capital lease obligations

     4,623        4,732   

Less: Total unamortized discount on debt

     (186     (166

Current maturities

     (453     (436
  

 

 

   

 

 

 

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

   $ 3,984      $ 4,130   
  

 

 

   

 

 

 

The Company was in compliance with the covenants in its debt agreements at March 31, 2012.

2012 Barclays Amendment

In February 2012, US Airways Group amended its co-branded credit card agreement with Barclays Bank Delaware. This amendment provides that the $200 million pre-purchase of frequent flier miles previously scheduled to reduce commencing in January 2012 will now be reduced commencing in January 2014 over a period of up to approximately two years.

Fair Value of Debt

The fair value of the Company’s long-term debt was approximately $4.16 billion and $4.23 billion at March 31, 2012 and December 31, 2011, respectively. The fair values were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using a discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 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.

4. Income Taxes

At December 31, 2011, the Company had approximately $1.95 billion of gross net operating losses (“NOLs”) to reduce future federal taxable income. All of the Company’s NOLs are expected to be available to reduce federal taxable income in the calendar year 2012. The NOLs expire during the years 2024 through 2031. The Company’s net deferred tax assets, which include $1.87 billion of the NOLs, are subject to a full valuation allowance. The Company also had approximately $82 million of tax-effected state NOLs at December 31, 2011. At December 31, 2011, the federal and state valuation allowances were $347 million and $61 million, respectively. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), utilization of the NOLs will result in a corresponding decrease in the valuation allowance and offset the Company’s tax provision dollar for dollar.

For each of the three months ended March 31, 2012 and 2011, the Company did not record federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs may be limited or unavailable to be used.

 

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5. Express Expenses

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

 

 

     Three Months Ended
March  31,
 
     2012      2011  

Aircraft fuel and related taxes

   $ 277       $ 242   

Salaries and related costs

     73         70   

Capacity purchases

     277         266   

Aircraft rent

     13         13   

Aircraft maintenance

     32         47   

Other rent and landing fees

     34         34   

Selling expenses

     40         41   

Special items, net

             1   

Depreciation and amortization

     7         6   

Other expenses

     49         50   
  

 

 

    

 

 

 

Express expenses

   $ 802       $ 770   
  

 

 

    

 

 

 

6. Slot Transaction

In May 2011, US Airways Group and US Airways entered into an Amended and Restated Mutual Asset Purchase and Sale Agreement (the “Mutual APA”) with Delta Air Lines, Inc. (“Delta”). The Mutual APA amended and restated the Mutual Asset Purchase and Sale Agreement dated August 11, 2009 by and among the parties. Pursuant to the Mutual APA, Delta agreed to acquire 132 slot pairs at LaGuardia from US Airways and US Airways agreed to acquire from Delta 42 slot pairs at Washington National and the rights to operate additional daily service to Sao Paulo, Brazil in 2015, and Delta agreed to pay US Airways $66.5 million in cash. One slot equals one take-off or landing, and each pair of slots equals one round-trip flight. The Mutual APA was structured as two simultaneous asset sales.

On October 11, 2011, the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration each granted their approval to the transaction. The DOT’s approval was conditioned on the divestiture of 16 slot pairs at LaGuardia and eight slot pairs at Washington National to airlines with limited or no service at those airports as well as the full cooperation of US Airways and Delta to enable the startup of the operations by the airlines purchasing the divested slots. Additionally, to allow the airlines who purchased the divested slots to establish competitive service, the DOT prohibited US Airways and Delta from operating any of the newly acquired slots during the first 90 days after the closing date of the sale of the divested slots and from operating more than 50 percent of the total number of slots between the 91st day and 210th day following the closing date of the sale of the divested slots.

In December 2011, the slot divestitures described above were completed by Delta and on December 13, 2011, the transaction closed and ownership of the respective slots was transferred between the airlines. Accordingly as of December 31, 2011, the Company’s balance sheet reflected the transfer of the LaGuardia slots to Delta and the receipt of the Washington National slots, which were included within other intangible assets on the accompanying condensed consolidated balance sheet. The newly acquired Washington National slots serve as collateral under the Company’s Citicorp credit facility.

The fair value of the LaGuardia slots transferred to Delta in exchange for the Washington National slots and related cash payment was $223 million, which resulted in a $147 million gain. Due to the DOT restrictions preventing operating use of the LaGuardia slots acquired by Delta, the gain was fully deferred as of December 31, 2011 and was included within other current liabilities on the accompanying condensed consolidated balance sheet. The Company will recognize the $147 million gain in the periods in which the DOT operating restrictions lapse. During the three months ended March 31, 2012, the Company recognized approximately $73 million of the gain, which is included within other nonoperating expense, net on the accompanying condensed consolidated statement of operations. The Company expects to recognize the remaining $74 million of the gain in the third quarter of 2012.

 

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7. Legal Proceedings

The Company is party to an arbitration proceeding relating to a grievance brought by its pilots union to the effect that, retroactive to January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. The arbitrator has issued a decision in the Company’s favor, and supplemental briefs concerning a collateral issue involving a smaller wage increase have been filed. The Company believes that the union’s position is without merit and that the possibility of an adverse outcome is remote.

On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices that illegally restrain US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four counts in the complaint to proceed. The Company intends to pursue these claims vigorously, but there can be no assurance of the outcome of this litigation.

The Company and/or its subsidiaries are defendants in various other pending lawsuits and proceedings, and from time to time are subject to other claims arising in the normal course of its business, many of which are covered in whole or in part by insurance. The outcome of those matters cannot be predicted with certainty at this time, but the Company, having consulted with outside counsel, believes that the ultimate disposition of these contingencies will not materially affect its consolidated financial position or results of operations.

8. Subsequent Event

In April 2012, US Airways entered into a loan agreement, pursuant to which US Airways borrowed an aggregate principal amount of $100 million. The net proceeds after fees were approximately $98 million. The loan is payable in full at maturity on March 23, 2014. The loan bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR plus an applicable LIBOR margin. US Airways has agreed to maintain a level of unrestricted cash in the same amount required by the Citicorp credit facility and has also agreed to maintain certain collateral coverage ratios. At closing, the loan was collateralized by certain airport take-off and landing slots.

 

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

US Airways, Inc.

Condensed Consolidated Statements of Operations

(In millions)

(Unaudited)

 

    

Three Months

Ended March 31,

 
     2012     2011  

Operating revenues:

    

Mainline passenger

   $ 2,117      $ 1,900   

Express passenger

     764        685   

Cargo

     40        43   

Other

     383        366   
  

 

 

   

 

 

 

Total operating revenues

     3,304        2,994   

Operating expenses:

    

Aircraft fuel and related taxes

     859        734   

Salaries and related costs

     606        573   

Express expenses

     830        787   

Aircraft rent

     162        164   

Aircraft maintenance

     163        163   

Other rent and landing fees

     140        129   

Selling expenses

     111        100   

Special items, net

     3        3   

Depreciation and amortization

     63        62   

Other

     311        309   
  

 

 

   

 

 

 

Total operating expenses

     3,248        3,024   
  

 

 

   

 

 

 

Operating income (loss)

     56        (30

Nonoperating income (expense):

    

Interest income

     —          1   

Interest expense, net

     (57     (53

Other, net

     72        (1
  

 

 

   

 

 

 

Total nonoperating income (expense), net

     15        (53
  

 

 

   

 

 

 

Income (loss) before income taxes

     71        (83

Income tax provision

     —          —     
  

 

 

   

 

 

 

Net income (loss)

   $ 71      $
(83

  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In millions)

(Unaudited)

 

    

Three Months

Ended March 31,

 
     2012      2011  

Net income (loss)

   $ 71       $ (83

Other comprehensive loss:

     

Other postretirement benefits

     —           (1
  

 

 

    

 

 

 

Total other comprehensive loss

     —           (1
  

 

 

    

 

 

 

Total comprehensive income (loss)

   $ 71       $ (84
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.

Condensed Consolidated Balance Sheets

(In millions, except share and per share amounts)

(Unaudited)

 

     March 31,
2012
    December 31,
2011
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 2,187      $ 1,940   

Accounts receivable, net

     448        325   

Materials and supplies, net

     257        199   

Prepaid expenses and other

     623        527   
  

 

 

   

 

 

 

Total current assets

     3,515        2,991   

Property and equipment

    

Flight equipment

     4,454        4,441   

Ground property and equipment

     888        873   

Less accumulated depreciation and amortization

     (1,480     (1,428
  

 

 

   

 

 

 
     3,862        3,886   

Equipment purchase deposits

     200        153   
  

 

 

   

 

 

 

Total property and equipment

     4,062        4,039   

Other assets

    

Other intangibles, net of accumulated amortization of $129 million and $124 million, respectively

     509        512   

Restricted cash

     347        365   

Other assets

     208        209   
  

 

 

   

 

 

 

Total other assets

     1,064        1,086   
  

 

 

   

 

 

 

Total assets

   $ 8,641      $ 8,116   
  

 

 

   

 

 

 

LIABILITIES & STOCKHOLDER’S EQUITY

    

Current liabilities

    

Current maturities of debt and capital leases

   $ 437      $ 420   

Accounts payable

     344        305   

Payables to related parties, net

     579        601   

Air traffic liability

     1,416        910   

Accrued compensation and vacation

     176        167   

Accrued taxes

     241        165   

Other accrued expenses

     995        1,058   
  

 

 

   

 

 

 

Total current liabilities

     4,188        3,626   

Noncurrent liabilities and deferred credits

    

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

     2,590        2,698   

Deferred gains and credits, net

     269        280   

Postretirement benefits other than pensions

     160        158   

Employee benefit liabilities and other

     401        392   
  

 

 

   

 

 

 

Total noncurrent liabilities and deferred credits

     3,420        3,528   

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

     22        22   

Accumulated deficit

     (1,434     (1,505
  

 

 

   

 

 

 

Total stockholder’s equity

     1,033        962   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 8,641      $ 8,116   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

    

Three Months

Ended March 31,

 
     2012     2011  

Net cash provided by operating activities

   $ 402      $ 324   

Cash flows from investing activities:

    

Purchases of property and equipment

     (84     (38

Sales of marketable securities

            12   

Decrease in long-term restricted cash

     18        19   
  

 

 

   

 

 

 

Net cash used in investing activities

     (66     (7

Cash flows from financing activities:

    

Repayments of debt and capital lease obligations

     (99     (112

Proceeds from issuance of debt

            6   

Other

     10          
  

 

 

   

 

 

 

Net cash used in financing activities

     (89     (106
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     247        211   

Cash and cash equivalents at beginning of period

     1,940        1,856   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 2,187      $ 2,067   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Interest payable converted to debt

   $ 6      $ 9   

Supplemental information:

    

Interest paid, net of amounts capitalized

   $ 35      $ 41   

Income taxes paid

              

See accompanying notes to the condensed consolidated financial statements.

 

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US Airways, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of US Airways, Inc. (“US Airways”) should be read in conjunction with the consolidated financial statements contained in US Airways’ Annual Report on Form 10-K for the year ended December 31, 2011. 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 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. US Airways’ accumulated other comprehensive income balances at March 31, 2012 and December 31, 2011 related to other postretirement benefits.

2. Debt

The following table details US Airways’ debt (in millions). Variable interest rates listed are the rates as of March 31, 2012.

 

 

     March 31,
2012
    December 31,
2011
 

Secured

    

Equipment loans and other notes payable, fixed and variable interest rates ranging from 1.64% to 10.56%, maturing from 2012 to 2021

   $ 1,652      $ 1,699   

Aircraft enhanced equipment trust certificates (“EETCs”), fixed interest rates ranging from 6.25% to 11%, maturing from 2014 to 2023

     1,247        1,279   

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

     29        30   
  

 

 

   

 

 

 
     2,928        3,008   

Unsecured

    

Airbus advance, repayments through 2018

     129        142   

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

     29        29   

Other unsecured obligations, maturing in 2012

     10        10   
  

 

 

   

 

 

 
     168        181   
  

 

 

   

 

 

 

Total long-term debt and capital lease obligations

     3,096        3,189   

Less: Total unamortized discount on debt

     (69     (71

Current maturities

     (437     (420
  

 

 

   

 

 

 

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

   $ 2,590      $ 2,698   
  

 

 

   

 

 

 

US Airways was in compliance with the covenants in its debt agreements at March 31, 2012.

Fair Value of Debt

The fair value of US Airways’ long-term debt was approximately $2.79 billion and $2.92 billion at March 31, 2012 and December 31, 2011, respectively. The fair values were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using a discounted cash flow analysis based on US Airways’ current incremental borrowing rates for similar types of borrowing arrangements. If US Airways’ 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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3. Related Party Transactions

The following represents the net payable balances to related parties (in millions):

 

 

     March 31, 2012      December 31, 2011  

US Airways Group

   $ 495       $ 514   

US Airways Group’s wholly owned subsidiaries

     84         87   
  

 

 

    

 

 

 
   $ 579       $ 601   
  

 

 

    

 

 

 

US Airways Group has the ability to move funds freely between its operating subsidiaries to support operations. These transfers are recognized as intercompany transactions.

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

4. Income Taxes

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

At December 31, 2011, US Airways had approximately $1.85 billion of gross net operating losses (“NOLs”) to reduce future federal taxable income. All of US Airways’ NOLs are expected to be available to reduce federal taxable income in the calendar year 2012. The NOLs expire during the years 2024 through 2031. US Airways’ net deferred tax assets, which include $1.78 billion of the NOLs, are subject to a full valuation allowance. US Airways also had approximately $79 million of tax-effected state NOLs at December 31, 2011. At December 31, 2011, the federal and state valuation allowances were $349 million and $61 million, respectively. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), utilization of the NOLs will result in a corresponding decrease in the valuation allowance and offset US Airways’ tax provision dollar for dollar.

For each of the three months ended March 31, 2012 and 2011, US Airways did not record federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs may be limited or unavailable to be used.

5. Express Expenses

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

 

 

     Three Months Ended
March  31,
 
     2012      2011  

Aircraft fuel and related taxes

   $ 277       $ 243   

Salaries and related costs

     6         6   

Capacity purchases

     455         447   

Other rent and landing fees

     28         28   

Selling expenses

     40         41   

Depreciation and amortization

     2           

Other expenses

     22         22   
  

 

 

    

 

 

 

Express expenses

   $ 830       $ 787   
  

 

 

    

 

 

 

 

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6. Slot Transaction

In May 2011, US Airways Group and US Airways entered into an Amended and Restated Mutual Asset Purchase and Sale Agreement (the “Mutual APA”) with Delta Air Lines, Inc. (“Delta”). The Mutual APA amended and restated the Mutual Asset Purchase and Sale Agreement dated August 11, 2009 by and among the parties. Pursuant to the Mutual APA, Delta agreed to acquire 132 slot pairs at LaGuardia from US Airways and US Airways agreed to acquire from Delta 42 slot pairs at Washington National and the rights to operate additional daily service to Sao Paulo, Brazil in 2015, and Delta agreed to pay US Airways $66.5 million in cash. One slot equals one take-off or landing, and each pair of slots equals one round-trip flight. The Mutual APA was structured as two simultaneous asset sales.

On October 11, 2011, the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration each granted their approval to the transaction. The DOT’s approval was conditioned on the divestiture of 16 slot pairs at LaGuardia and eight slot pairs at Washington National to airlines with limited or no service at those airports as well as the full cooperation of US Airways and Delta to enable the startup of the operations by the airlines purchasing the divested slots. Additionally, to allow the airlines who purchased the divested slots to establish competitive service, the DOT prohibited US Airways and Delta from operating any of the newly acquired slots during the first 90 days after the closing date of the sale of the divested slots and from operating more than 50 percent of the total number of slots between the 91st day and 210th day following the closing date of the sale of the divested slots.

In December 2011, the slot divestitures described above were completed by Delta and on December 13, 2011, the transaction closed and ownership of the respective slots was transferred between the airlines. Accordingly as of December 31, 2011, US Airways’ balance sheet reflected the transfer of the LaGuardia slots to Delta and the receipt of the Washington National slots, which were included within other intangible assets on the accompanying condensed consolidated balance sheet. The newly acquired Washington National slots serve as collateral under US Airways Group’s Citicorp credit facility.

The fair value of the LaGuardia slots transferred to Delta in exchange for the Washington National slots and related cash payment was $223 million, which resulted in a $147 million gain. Due to the DOT restrictions preventing operating use of the LaGuardia slots acquired by Delta, the gain was fully deferred as of December 31, 2011 and was included within other current liabilities on the accompanying condensed consolidated balance sheet. US Airways will recognize the $147 million gain in the periods in which the DOT operating restrictions lapse. During the three months ended March 31, 2012, US Airways recognized approximately $73 million of the gain, which is included within other nonoperating expense, net on the accompanying condensed consolidated statement of operations. US Airways expects to recognize the remaining $74 million of the gain in the third quarter of 2012.

7. Legal Proceedings

US Airways is party to an arbitration proceeding relating to a grievance brought by its pilots union to the effect that, retroactive to January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. The arbitrator has issued a decision in US Airways’ favor, and supplemental briefs concerning a collateral issue involving a smaller wage increase have been filed. US Airways believes that the union’s position is without merit and that the possibility of an adverse outcome is remote.

On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices that illegally restrain US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four counts in the complaint to proceed. US Airways intends to pursue these claims vigorously, but there can be no assurance of the outcome of this litigation.

US Airways is a defendant in various other pending lawsuits and proceedings, and from time to time is subject to other claims arising in the normal course of its business, many of which are covered in whole or in part by insurance. The outcome of those matters cannot be predicted with certainty at this time, but US Airways, having consulted with outside counsel, believes that the ultimate disposition of these contingencies will not materially affect its consolidated financial position or results of operations.

 

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8. Subsequent Event

In April 2012, US Airways entered into a loan agreement, pursuant to which US Airways borrowed an aggregate principal amount of $100 million. The net proceeds after fees were approximately $98 million. The loan is payable in full at maturity on March 23, 2014. The loan bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR plus an applicable LIBOR margin. US Airways has agreed to maintain a level of unrestricted cash in the same amount required by US Airways Group’s Citicorp credit facility and has also agreed to maintain certain collateral coverage ratios. At closing, the loan was collateralized by certain airport take-off and landing slots.

 

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

Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of US Airways Group, Inc.’s and US Airways, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 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 2011 Form 10-K.

Background

US Airways Group is a holding company whose primary business activity is the operation of a major network air carrier through its wholly owned subsidiaries US Airways, Piedmont Airlines, Inc. (“Piedmont”), PSA Airlines, Inc. (“PSA”), Material Services Company, Inc. (“MSC”) and Airways Assurance Limited (“AAL”).

We operate the fifth largest airline in the United States as measured by domestic revenue passenger miles (“RPMs”) and available seat miles (“ASMs”). We have hubs in Charlotte, Philadelphia and Phoenix and a focus city in Washington, D.C. at Ronald Reagan Washington National Airport. We offer scheduled passenger service on more than 3,200 flights daily to more than 200 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, and Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service. For the three months ended March 31, 2012, we had approximately 13 million passengers boarding our mainline flights. As of March 31, 2012, we operated 340 mainline jets and were supported by our regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 241 regional jets and 47 turboprops. Our prorate carriers operated four turboprops and four regional jets at March 31, 2012.

The U.S. Airline Industry

During the first quarter of 2012, the U.S. airline industry continued to experience year-over-year growth in passenger revenues. Growth was driven by ongoing industry capacity discipline and strong consumer demand for air travel. The revenue environment remained strong and continued to allow the industry to mitigate the effects of high fuel costs.

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 which indicate continued strong growth despite more difficult year-over-year comparisons.

2012 vs. 2011

      January   February   March

Passenger Revenues

   8.6%   10.8%   7.2%

Yields

   8.9%   5.7%   5.2%

2011 vs. 2010

      January   February   March

Passenger Revenues

   9.9%   13.5%   13.4%

Yields

   6.2%   10.0%   11.1%

With respect to international versus domestic performance, Airlines for America reported that in the first quarter of 2012, international markets slightly outperformed domestic markets. Latin American markets led the stronger international performance.

Fuel costs continued to be significant for the industry. During the first quarter of 2012, jet fuel prices followed 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 during the first quarter of 2012 was $119 per barrel. This compares to an average daily spot price of $105 per barrel for Brent crude oil during the first quarter of 2011. Brent crude oil prices were volatile in the first quarter of 2012, with daily spot prices fluctuating between a low of $108 per barrel in January 2012 to a high of $128 per barrel in March 2012, and closing the quarter at $123 per barrel on March 30, 2012.

 

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Significant uncertainty continues to exist regarding the economic conditions driving passenger demand and whether airlines will have the ability to maintain or increase fares at levels sufficient to absorb high fuel prices. See Part II, Item 1A, Risk Factors – “Downturns in economic conditions adversely affect our business” and “Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.

US Airways Group

In the first quarter of 2012, the year-over-year growth in revenues driven by the strong demand environment for air travel offset higher fuel costs. In the three months ended March 31, 2012, we realized operating income of $59 million as compared to an operating loss of $39 million in the 2011 period.

Revenue

Mainline and express passenger revenues increased $296 million, or 11.5%, as compared to the 2011 period. The increase in passenger revenues was driven by a 6.5% increase in yield as compared to the 2011 period. Our mainline and express passenger revenue per available seat mile (“PRASM”) was 13.62 cents in the first quarter of 2012, an 8.2% increase, as compared to 12.59 cents in the 2011 period. Total revenue per available seat mile (“RASM”) was 15.45 cents in the first quarter of 2012 as compared to 14.42 cents in the 2011 period, representing a 7.1% improvement. Total revenues include our ancillary revenue initiatives, which generated $138 million in revenues for the first quarter of 2012, an increase of $12 million over the 2011 period principally related to our Choice Seats program.

Fuel

The average mainline and express price per gallon of fuel was $3.27 for the first quarter of 2012 as compared to an average cost per gallon of $2.88 in the first quarter of 2011, an increase of 13.2%. Accordingly, our mainline and express fuel expense increased $160 million to $1.14 billion for the first quarter of 2012, which was 16.3% higher than the 2011 period, on a 3.0% increase in total system capacity.

We have not entered into any new transactions to hedge our fuel consumption, and we have not had any fuel hedging contracts outstanding since the third quarter of 2009.

Capacity

Total system capacity for the first quarter of 2012 increased 3.0% as compared to the first quarter of 2011. The improvement in our completion factor to 99.4% in the first quarter of 2012 from 97.4% in the first quarter of 2011 as well as the leap year in 2012 contributed to this increase. For the full year, total system capacity is expected to be up approximately one percent versus 2011 with domestic capacity and international capacity each expected to be up approximately one percent.

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 and fuel decreased 0.05 cents, or 0.6%, from 8.76 cents in the first quarter of 2011 to 8.71 cents in the first quarter of 2012.

 

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The following table details our mainline CASM for the three months ended March 31, 2012 and 2011:

 

     2012     2011     Percent
Increase
(Decrease)
 
     (In cents)        

Mainline CASM excluding special items and fuel:

      

Total mainline CASM

     13.57        13.09        3.7   

Special items, net

     (0.01     (0.02     (14.9

Aircraft fuel and related taxes

     (4.85     (4.31     12.5   
  

 

 

   

 

 

   

Total mainline CASM excluding special items and fuel (1)

     8.71        8.76        (0.6
  

 

 

   

 

 

   

 

 

 

  (1)

We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

Customer Service

We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation. Mild weather conditions throughout the United States as well as outstanding efforts from our employees drove very strong operational performance in the first quarter of 2012. We delivered our best March and best first quarter operational performance in the history of the Company. Additionally through February 2012, the most recent period for which the Department of Transportation (“DOT”) has published its Air Travel Consumer Report, we ranked first in baggage handling for the month of February among the big hub-and-spoke carriers.

We reported the following operating statistics to the DOT for mainline operations for the first quarter of 2012 and 2011:

 

     2012      2011      Better (Worse) 2012-2011  
     January      February      March (e)      January      February      March      January      February      March  

On-time performance (a)

     85.0         89.3         87.3         78.6         80.5         82.8         6.4 pts         8.8  pts         4.5  pts   

Completion factor (b)

     99.2         99.7         99.4         95.0         97.9         99.3         4.2 pts         1.8  pts         0.1  pts   

Mishandled baggage (c)

     2.49         1.85         2.17         3.04         2.52         2.42         18.1 %          26.6  %          10.3  %    

Customer complaints (d)

     1.79         1.30         1.55         1.51         1.59         1.15         (18.5)%          17.9  %          (34.4)%     

 

  (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)

March 2012 operating statistics are preliminary as the DOT has not issued its March 2012 Air Travel Consumer Report as of the date of this filing.

In April 2012, we also ranked second among the big hub-and-spoke carriers in the annual Airline Quality Report (“AQR”), an industry benchmark that measures airline reliability and service. Domestic airlines’ ratings were the highest in this year’s report since the AQR began 22 years ago, which illustrates the industry’s focus on reliability and service excellence. US Airways’ overall AQR score has continued to improve year over year for the past three years.

 

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During the first quarter of 2012, we continued to work to enhance our customers’ experience. In March we announced the expansion of our Wi-Fi in-flight Internet service to our fleet of Airbus A319, A320 and Embraer 190 aircraft. With this expansion, 90 percent of our mainline domestic fleet will be equipped with Wi-Fi Internet access. Additionally in the first quarter as a result of our slot transaction with Delta Air Lines, Inc. (“Delta”), we launched service to eleven new communities from Ronald Reagan Washington National Airport and announced service to six additional new communities commencing in June and July of this year. These new flights are a part of our plan to focus on our core service areas of Charlotte, Philadelphia, Phoenix and Washington, D.C.

Liquidity Position

As of March 31, 2012, our total cash, cash equivalents and restricted cash was $2.54 billion, of which $347 million was restricted.

 

     March 31,
2012
     December 31,
2011
 
     (In millions)  

Cash and cash equivalents

   $ 2,190       $ 1,947   

Long-term restricted cash

     347         365   
  

 

 

    

 

 

 

Total cash, cash equivalents and restricted cash

   $ 2,537       $ 2,312   
  

 

 

    

 

 

 

In the first quarter of 2012, the strong revenue environment and seasonal factors drove a $225 million improvement in our liquidity position.

Long-term restricted cash primarily includes cash collateral to secure workers’ compensation claims and credit card processing holdback requirements for advance ticket sales for which US Airways has not yet provided air transportation.

In April 2012, US Airways entered into a loan agreement, pursuant to which US Airways borrowed an aggregate principal amount of $100 million. The net proceeds after fees were approximately $98 million.

2012 Outlook

Looking forward it is difficult to predict the price of oil, the strength of the economy or the capacity actions of other airlines. Over the past few years we have taken significant actions to align capacity with demand, focus our network on our four key markets, introduce new revenue streams, control costs and continue our exceptional operating reliability. We believe that these actions have positioned us well for the coming year.

 

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US Airways Group’s Results of Operations

In the three months ended March 31, 2012, we realized operating income of $59 million. The period-over-period growth in revenues driven by the strong demand environment for air travel offset higher fuel costs. Income before income taxes was $48 million, which included $70 million in net special credits as discussed below.

In the three months ended March 31, 2011, we realized an operating loss of $39 million and a loss before income taxes of $114 million. Our first quarter 2011 results were also impacted by recognition of $4 million in net special charges.

The table below presents our pre-tax special charges (credits) (in millions):

 

     Three Months Ended
March  31,
 
     2012     2011  

Mainline operating special items, net

   $ 3      $ 3   

Express operating special items, net

     —          1   

Nonoperating special items, net (a)

     (73     —     
  

 

 

   

 

 

 

Total

   $ (70   $ 4   
  

 

 

   

 

 

 

 

(a)

The first quarter 2012 period consisted of a $73 million gain relating to the slot transaction with Delta. See Note 6 to the condensed consolidated financial statements included in Part I, Item 1A of this report for more information on this transaction.

At December 31, 2011, we had approximately $1.95 billion of gross net operating losses (“NOLs”) to reduce future federal taxable income. All of our NOLs are expected to be available to reduce federal taxable income in the calendar year 2012. The NOLs expire during the years 2024 through 2031. Our net deferred tax assets, which include $1.87 billion of the NOLs, are subject to a full valuation allowance. We also had approximately $82 million of tax-effected state NOLs at December 31, 2011. At December 31, 2011, the federal and state valuation allowances were $347 million and $61 million, respectively. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), utilization of the NOLs will result in a corresponding decrease in the valuation allowance and offset our tax provision dollar for dollar.

For each of the three months ended March 31, 2012 and 2011, we did not record federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs may be limited or unavailable to be used.

 

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

 

     Three Months Ended
March  31,
     Increase  
     2012      2011      (Decrease)  

Mainline

        

Revenue passenger miles (millions) (a)

     14,300         13,570         5.4  

Available seat miles (millions) (b)

     17,718         17,035         4.0  

Passenger load factor (percent) (c)

     80.7         79.7         1.0   pts 

Yield (cents) (d)

     14.80         14.00         5.7  

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

     11.95         11.15         7.1  

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

     13.57         13.09         3.7  

Passenger enplanements (thousands) (g)

     13,286         12,504         6.3  

Departures (thousands)

     115         112         2.0  

Aircraft at end of period

     340         340         —  

Block hours (thousands) (h)

     299         294         1.8  

Average stage length (miles) (i)

     954         946         0.9  

Average passenger journey (miles) (j)

     1,606         1,593         0.8  

Fuel consumption (gallons in millions)

     264         256         3.2  

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

     3.26         2.87         13.4  

Full-time equivalent employees at end of period

     31,186         30,621         1.8  

Express (k)

        

Revenue passenger miles (millions) (a)

     2,459         2,438         0.9  

Available seat miles (millions) (b)

     3,429         3,492         (1.8)  

Passenger load factor (percent) (c)

     71.7         69.8         1.9   pts 

Yield (cents) (d)

     31.06         28.08         10.6  

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

     22.28         19.60         13.7  

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

     23.39         22.06         6.0  

Passenger enplanements (thousands) (g)

     6,536         6,347         3.0  

Aircraft at end of period

     288         281         2.5  

Fuel consumption (gallons in millions)

     84         83         1.3  

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

     3.29         2.92         12.7  

Total Mainline and Express

        

Revenue passenger miles (millions) (a)

     16,759         16,008         4.7  

Available seat miles (millions) (b)

     21,147         20,527         3.0  

Passenger load factor (percent) (c)

     79.3         78.0         1.3   pts 

Yield (cents) (d)

     17.19         16.14         6.5  

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

     13.62         12.59         8.2  

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

     15.45         14.42         7.1  

Passenger enplanements (thousands) (g)

     19,822         18,851         5.2  

Aircraft at end of period

     628         621         1.1  

Fuel consumption (gallons in millions)

     348         339         2.7  

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

     3.27         2.88         13.2  

 

  (a)

Revenue passenger mile (“RPM”) — A basic measure of sales volume. One RPM represents one passenger flown one mile.

 

  (b)

Available seat mile (“ASM”) — A basic measure of production. One ASM represents one seat flown one mile.

 

  (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)

Operating cost per available seat mile (“CASM”) — Operating expenses divided by ASMs.

 

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(g)

Passenger enplanements — The number of passengers on board an aircraft, including local, connecting and through passengers.

 

(h)

Block hours — The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down.

 

(i)

Average stage length — The average of the distances flown on each segment of every route.

 

(j)

Average passenger journey — The average one-way trip measured in miles for one passenger origination.

 

(k)

Express statistics include Piedmont and PSA, as well as operating and financial results from capacity purchase agreements with Air Wisconsin Airlines Corporation, Republic Airline Inc., Mesa Airlines, Inc., 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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Three Months Ended March 31, 2012

Compared with the

Three Months Ended March 31, 2011

Operating Revenues:

 

     2012      2011      Percent
Increase
(Decrease)
 
     (In millions)         

Operating revenues:

        

Mainline passenger

   $ 2,117       $ 1,900         11.4   

Express passenger

     764         685         11.6   

Cargo

     40         43         (6.0

Other

     345         333         3.6   
  

 

 

    

 

 

    

Total operating revenues

   $ 3,266       $ 2,961         10.3   
  

 

 

    

 

 

    

Total operating revenues in the first quarter of 2012 were $3.27 billion as compared to $2.96 billion in the 2011 period, an increase of $305 million, or 10.3%. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $2.12 billion in the first quarter of 2012 as compared to $1.90 billion in the 2011 period. Mainline RPMs increased 5.4% as mainline capacity, as measured by ASMs, increased 4.0%, resulting in a 1.0 point increase in load factor to 80.7%. Mainline passenger yield increased 5.7% to 14.80 cents in the first quarter of 2012 from 14.00 cents in the 2011 period. Mainline PRASM increased 7.1% to 11.95 cents in the first quarter of 2012 from 11.15 cents in the 2011 period. These increases in mainline yield and PRASM were due principally to the strong revenue environment resulting from ongoing industry capacity discipline and strong consumer demand for air travel.

 

   

Express passenger revenues were $764 million in the first quarter of 2012 as compared to $685 million in the 2011 period. Express RPMs increased 0.9% as express capacity, as measured by ASMs, decreased 1.8%, resulting in a 1.9 point increase in load factor to 71.7%. Express passenger yield increased 10.6% to 31.06 cents in the first quarter of 2012 from 28.08 cents in the 2011 period. Express PRASM increased 13.7% to 22.28 cents in the first quarter of 2012 from 19.60 cents in the 2011 period. These increases in express yield and PRASM were the result of the same strong revenue environment discussed in mainline passenger revenues above as well as the installation of first class seating on certain US Airways Express regional jets.

 

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Operating Expenses:

 

     2012      2011      Percent
Increase
(Decrease)
 
     (In millions)         

Operating expenses:

        

Aircraft fuel and related taxes

   $ 859       $ 734         17.0   

Salaries and related costs

     606         573         5.8   

Aircraft rent

     162         164         (1.3

Aircraft maintenance

     163         163         (0.2

Other rent and landing fees

     140         129         8.5   

Selling expenses

     111         100         10.9   

Special items, net

     3         3         (11.4

Depreciation and amortization

     61         60         1.7   

Other

     300         304         (0.7
  

 

 

    

 

 

    

Total mainline operating expenses

     2,405         2,230         7.9   

Express expenses:

        

Fuel

     277         242         14.1   

Other

     525         528         (0.5
  

 

 

    

 

 

    

Total express expenses

     802         770         4.1   
  

 

 

    

 

 

    

Total operating expenses

   $ 3,207       $ 3,000         6.9   
  

 

 

    

 

 

    

Total operating expenses were $3.21 billion in the first quarter of 2012, an increase of $207 million, or 6.9%, compared to the 2011 period. The increase in operating expenses was driven by a $160 million, or 16.3%, increase in mainline and express fuel costs on a 3.0% increase in total system capacity. The average price per gallon of fuel increased 13.2% to $3.27 in the first quarter of 2012 from $2.88 in the 2011 period.

Mainline Operating Expenses per ASM:

Our mainline CASM increased 0.48 cents, or 3.7%, from 13.09 cents in the first quarter of 2011 to 13.57 cents in the first quarter of 2012. Excluding special items and fuel, our mainline CASM decreased 0.05 cents, or 0.6%, from 8.76 cents in the first quarter of 2011 to 8.71 cents in the first quarter of 2012, while mainline capacity increased 4.0%.

The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items and fuel for the three months ended March 31, 2012 and 2011:

 

     2012     2011     Percent
Increase
(Decrease)
 
     (In cents)        

Mainline CASM:

      

Aircraft fuel and related taxes

     4.85        4.31        12.5   

Salaries and related costs

     3.42        3.36        1.7   

Aircraft rent

     0.91        0.96        (5.2

Aircraft maintenance

     0.92        0.96        (4.1

Other rent and landing fees

     0.79        0.76        4.3   

Selling expenses

     0.63        0.59        6.6   

Special items, net

     0.01        0.02        (14.9

Depreciation and amortization

     0.34        0.35        (2.2

Other

     1.70        1.78        (4.6
  

 

 

   

 

 

   

Total mainline CASM

     13.57        13.09        3.7   

Special items, net

     (0.01     (0.02  

Aircraft fuel and related taxes

     (4.85     (4.31  
  

 

 

   

 

 

   

Total mainline CASM excluding special items and fuel (1)

     8.71        8.76        (0.6
  

 

 

   

 

 

   

 

 

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  (1)

We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items and fuel to evaluate our operating performance. Amounts may not recalculate due to rounding.

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

 

   

Aircraft fuel and related taxes per ASM increased 12.5% primarily due to a 13.4% increase in the average price per gallon of fuel to $3.26 in the first quarter of 2012 from $2.87 in the 2011 period.

 

   

Aircraft rent per ASM decreased 5.2% over the 2011 period due to the higher ASMs in the first quarter of 2012 and the fixed nature of aircraft rent.

 

   

Selling expenses per ASM increased 6.6% primarily due to higher credit card fees as a result of the increase in passenger revenues in the 2012 period.

Express Operating Expenses:

Total express expenses increased $32 million, or 4.1%, in the first quarter of 2012 to $802 million from $770 million in the 2011 period. The period-over-period increase was primarily due to a $35 million, or 14.1%, increase in fuel costs. The average price per gallon of fuel increased 12.7% to $3.29 in the first quarter of 2012 from $2.92 in the 2011 period.

Nonoperating Income (Expense):

 

     2012     2011     Percent
Increase
(Decrease)
 
     (In millions)  

Nonoperating income (expense):

      

Interest income

   $      $ 1        (72.6

Interest expense, net

     (82     (77     6.8   

Other, net (a)

     71        1        nm   
  

 

 

   

 

 

   

Total nonoperating expense, net

   $ (11   $ (75     (86.0
  

 

 

   

 

 

   

 

  (a)

Other nonoperating income of $71 million in the first quarter of 2012 consisted primarily of a special $73 million gain relating to the slot transaction with Delta. See Note 6 to the condensed consolidated financial statements included in Part I, Item 1A of this report for more information on this transaction.

 

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Table of Contents

US Airways’ Results of Operations

In the three months ended March 31, 2012, US Airways realized operating income of $56 million. The period-over-period growth in revenues driven by the strong demand environment for air travel offset higher fuel costs. Income before income taxes was $71 million, which included $70 million in net special credits as discussed below.

In the three months ended March 31, 2011, US Airways realized an operating loss of $30 million and a loss before income taxes of $83 million. US Airways’ first quarter 2011 results were also impacted by recognition of $3 million in net special charges.

The table below presents US Airways’ pre-tax special charges (credits) (in millions):

 

     Three Months Ended
March  31,
 
     2012     2011  

Mainline operating special items, net

   $ 3      $ 3   

Nonoperating special items, net (a)

     (73       
  

 

 

   

 

 

 

Total

   $ (70   $ 3   
  

 

 

   

 

 

 

 

 

  (a) The first quarter 2012 period consisted of a $73 million gain relating to the slot transaction with Delta. See Note 6 to the condensed consolidated financial statements included in Part I, Item 1B of this report for more information on this transaction.

At December 31, 2011, US Airways had approximately $1.85 billion of gross NOLs to reduce future federal taxable income. All of US Airways’ NOLs are expected to be available to reduce federal taxable income in the calendar year 2012. The NOLs expire during the years 2024 through 2031. US Airways’ net deferred tax assets, which include $1.78 billion of the NOLs, are subject to a full valuation allowance. US Airways also had approximately $79 million of tax-effected state NOLs at December 31, 2011. At December 31, 2011, the federal and state valuation allowances were $349 million and $61 million, respectively. In accordance with GAAP, utilization of the NOLs will result in a corresponding decrease in the valuation allowance and offset US Airways’ tax provision dollar for dollar.

For each of the three months ended March 31, 2012 and 2011, US Airways did not record federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs may be limited or unavailable to be used.

 

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

 

     Three Months Ended
March  31,
     Increase  
     2012      2011      (Decrease)  

Mainline

        

Revenue passenger miles (millions) (a)

     14,300         13,570         5.4  

Available seat miles (millions) (b)

     17,718         17,035         4.0  

Passenger load factor (percent) (c)

     80.7         79.7         1.0    pts 

Yield (cents) (d)

     14.80         14.00         5.7  

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

     11.95         11.15         7.1  

Aircraft at end of period

     340         340         —  

Fuel consumption (gallons in millions)

     264         256         3.2  

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

     3.26         2.87         13.4  

Express (f)

        

Revenue passenger miles (millions) (a)

     2,459         2,438         0.9  

Available seat miles (millions) (b)

     3,429         3,492         (1.8)   % 

Passenger load factor (percent) (c)

     71.7         69.8         1.9   pts 

Yield (cents) (d)

     31.06         28.08         10.6  

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

     22.28         19.60         13.7  

Aircraft at end of period

     288         281         2.5  

Fuel consumption (gallons in millions)

     84         83         1.3  

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

     3.29         2.92         12.6  

Total Mainline and Express

        

Revenue passenger miles (millions) (a)

     16,759         16,008         4.7  

Available seat miles (millions) (b)

     21,147         20,527         3.0  

Passenger load factor (percent) (c)

     79.3         78.0         1.3   pts 

Yield (cents) (d)

     17.19         16.14         6.5  

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

     13.62         12.59         8.2  

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

     15.62         14.58         7.1  

Aircraft at end of period

     628         621         1.1  

Fuel consumption (gallons in millions)

     348         339         2.7  

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

     3.27         2.89         13.2  

 

 

  (a)

Revenue passenger mile (“RPM”) — A basic measure of sales volume. One RPM represents one passenger flown one mile.

 

  (b)

Available seat mile (“ASM”) — A basic measure of production. One ASM represents one seat flown one mile.

 

  (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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Three Months Ended March 31, 2012

Compared with the

Three Months Ended March 31, 2011

Operating Revenues:

 

         2012             2011          Percent
Increase
(Decrease)
 
     (In millions)         

Operating revenues:

       

Mainline passenger

   $ 2,117      $ 1,900         11.4   

Express passenger

     764        685         11.6   

Cargo

     40        43         (6.0

Other

     383        366         4.5   
  

 

 

   

 

 

    

Total operating revenues

   $ 3,304      $ 2,994         10.4   
  

 

 

   

 

 

    

Total operating revenues in the first quarter of 2012 were $3.30 billion as compared to $2.99 billion in the 2011 period, an increase of $310 million, or 10.4%. Significant changes in the components of operating revenues are as follows:

 

   

Mainline passenger revenues were $2.12 billion in the first quarter of 2012 as compared to $1.90 billion in the 2011 period. Mainline RPMs increased 5.4% as mainline capacity, as measured by ASMs, increased 4.0%, resulting in a 1.0 point increase in load factor to 80.7%. Mainline passenger yield increased 5.7% to 14.80 cents in the first quarter of 2012 from 14.00 cents in the 2011 period. Mainline PRASM increased 7.1% to 11.95 cents in the first quarter of 2012 from 11.15 cents in the 2011 period. These increases in mainline yield and PRASM were due principally to the strong revenue environment resulting from ongoing industry capacity discipline and strong consumer demand for air travel.

 

   

Express passenger revenues were $764 million in the first quarter of 2012 as compared to $685 million in the 2011 period. Express RPMs increased 0.9% as express capacity, as measured by ASMs, decreased 1.8%, resulting in a 1.9 point increase in load factor to 71.7%. Express passenger yield increased 10.6% to 31.06 cents in the first quarter of 2012 from 28.08 cents in the 2011 period. Express PRASM increased 13.7% to 22.28 cents in the first quarter of 2012 from 19.60 cents in the 2011 period. These increases in express yield and PRASM were the result of the same strong revenue environment discussed in mainline passenger revenues above as well as the installation of first class seating on certain US Airways Express regional jets.

 

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Table of Contents

Operating Expenses:

 

     2012      2011      Percent
Increase
(Decrease)
 
     (In millions)  

Operating expenses:

        

Aircraft fuel and related taxes

   $ 859       $ 734         17.0   

Salaries and related costs

     606         573         5.8   

Aircraft rent

     162         164         (1.3

Aircraft maintenance

     163         163         (0.2

Other rent and landing fees

     140         129         8.5   

Selling expenses

     111         100         10.9   

Special items, net

     3         3         (11.4

Depreciation and amortization

     63         62         1.7   

Other

     311         309         0.7   
  

 

 

    

 

 

    

Total mainline operating expenses

     2,418         2,237         8.1   

Express expenses:

        

Fuel

     277         243         14.1   

Other

     553         544         1.6   
  

 

 

    

 

 

    

Total express expenses

     830         787         5.5   
  

 

 

    

 

 

    

Total operating expenses

   $ 3,248       $ 3,024         7.4   
  

 

 

    

 

 

    

Total operating expenses were $3.25 billion in the first quarter of 2012, an increase of $224 million, or 7.4%, compared to the 2011 period. The increase in operating expenses was driven by a $159 million, or 16.3%, increase in mainline and express fuel costs on a 3.0% increase in total system capacity. The average price per gallon of fuel increased 13.2% to $3.27 in the first quarter of 2012 from $2.89 in the 2011 period.

Mainline Operating Expenses:

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

 

   

Aircraft fuel and related taxes increased 17.0% primarily due to a 13.4% increase in the average price per gallon of fuel to $3.26 in the first quarter of 2012 from $2.87 in the 2011 period.

 

   

Selling expenses increased 10.9% primarily due to higher credit card fees as a result of the increase in passenger revenues in the 2012 period.

Express Operating Expenses:

Total express expenses increased $43 million, or 5.5%, in the first quarter of 2012 to $830 million from $787 million in the 2011 period. The period-over-period increase was primarily due to a $34 million, or 14.1%, increase in fuel costs. The average price per gallon of fuel increased 12.6% to $3.29 in the first quarter of 2012 from $2.92 in the 2011 period.

 

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Nonoperating Income (Expense):

 

     2012     2011     Percent
Increase
(Decrease)
 
     (In millions)  

Nonoperating income (expense):

      

Interest income

   $      $ 1        (72.8

Interest expense, net

     (57     (53     7.3   

Other, net (a)

     72        (1     nm   
  

 

 

   

 

 

   

Total nonoperating income (expense), net

   $ 15      $ (53     nm   
  

 

 

   

 

 

   

 

 

  (a)

Other nonoperating income of $72 million in the first quarter of 2012 consisted primarily of a special $73 million gain relating to the slot transaction with Delta. See Note 6 to the condensed consolidated financial statements included in Part I, Item 1B of this report for more information on this transaction.

 

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Liquidity and Capital Resources

As of March 31, 2012, our total cash, cash equivalents and restricted cash was $2.54 billion, of which $347 million was restricted.

Sources and Uses of Cash

US Airways Group

Operating Activities

Net cash provided by operating activities was $417 million and $345 million for the first three months of 2012 and 2011, respectively, a period-over-period improvement of $72 million. The increase in operating cash flows was due to improved profitability in the first quarter of 2012 as the growth in revenues driven by the strong demand environment for air travel offset higher fuel costs.

Investing Activities

Net cash used in investing activities was $69 million and $9 million for the first three months of 2012 and 2011, respectively. Principal investing activities in the 2012 period included expenditures of $40 million for property and equipment and $47 million for aircraft pre-delivery deposits, offset in part by an $18 million decrease in restricted cash. Expenditures for property and equipment included costs related to the installation of the Envoy Suite on wide-body Airbus A330-300 aircraft. Principal investing activities in the 2011 period included expenditures of $30 million for property and equipment and $10 million for aircraft pre-delivery deposits, offset in part by a $19 million decrease in restricted cash and proceeds from sales of auction rate securities of $12 million. Restricted cash decreased primarily due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation.

Financing Activities

Net cash used in financing activities was $105 million and $122 million for the first three months of 2012 and 2011, respectively. Principal financing activities in the 2012 and 2011 periods included debt repayments of $115 million and $128 million, respectively.

US Airways

Operating Activities

Net cash provided by operating activities was $402 million and $324 million for the first three months of 2012 and 2011, respectively, a period-over-period improvement of $78 million. The increase in operating cash flows was due to improved profitability in the first quarter of 2012 as the growth in revenues driven by the strong demand environment for air travel offset higher fuel costs.

Investing Activities

Net cash used in investing activities was $66 million and $7 million for the first three months of 2012 and 2011, respectively. Principal investing activities in the 2012 period included expenditures of $37 million for property and equipment and $47 million for aircraft pre-delivery deposits, offset in part by an $18 million decrease in restricted cash. Expenditures for property and equipment included costs related to the installation of the Envoy Suite on wide-body Airbus A330-300 aircraft. Principal investing activities in the 2011 period included expenditures of $28 million for property and equipment and $10 million for aircraft pre-delivery deposits, offset in part by a $19 million decrease in restricted cash and proceeds from sales of auction rate securities of $12 million. Restricted cash decreased primarily due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation.

Financing Activities

Net cash used in financing activities was $89 million and $106 million for the first three months of 2012 and 2011, respectively. Principal financing activities in the 2012 and 2011 periods included debt repayments of $99 million and $112 million, respectively.

 

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Commitments

As of March 31, 2012, we had $4.62 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 2011 Form 10-K.

Citicorp Credit Facility

On March 23, 2007, US Airways Group entered into a term loan credit facility (the “Citicorp credit facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways Group borrowed an aggregate principal amount of $1.6 billion. US Airways and certain other subsidiaries of US Airways Group are guarantors of the Citicorp credit facility.

The Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at our option, LIBOR plus an applicable LIBOR margin for interest periods of one, two, three or six months. The applicable index margin, subject to adjustment, is 1.00%, 1.25% or 1.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. The applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25% or 2.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. In addition, interest on the Citicorp credit facility may be adjusted based on the credit rating for the Citicorp credit facility as follows: (i) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least one subgrade better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be the lower of 2.25% and the rate otherwise applicable based upon the adjusted Citicorp credit facility balance and (B) the applicable index margin will be the lower of 1.25% and the rate otherwise applicable based upon the Citicorp credit facility principal balance, and (ii) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least two subgrades better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be 2.00% and (B) the applicable index margin will be 1.00%. As of March 31, 2012, the interest rate on the Citicorp credit facility was 2.74% based on a 2.50% LIBOR margin.

The Citicorp credit facility matures on March 23, 2014, and is repayable in seven annual installments with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.

In addition, the Citicorp credit facility requires certain mandatory prepayments upon the occurrence of specified events, establishes certain financial covenants, including minimum cash requirements and maintenance of certain minimum ratios, contains customary affirmative covenants and negative covenants and contains customary events of default. The Citicorp credit facility requires us to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements, which would become restricted for use by us if certain adverse events occur per the terms of the agreement. In addition, the Citicorp credit facility provides that we may issue debt in the future with a second lien on the assets pledged as collateral under the Citicorp credit facility. The principal amount outstanding under the Citicorp credit facility was $1.12 billion as of March 31, 2012. As of March 31, 2012, we were in compliance with all debt covenants under the Citicorp credit facility.

2012 Financing Transactions

In February 2012, US Airways Group amended its co-branded credit card agreement with Barclays Bank Delaware. This amendment provides that the $200 million pre-purchase of frequent flier miles previously scheduled to reduce commencing in January 2012 will now be reduced commencing in January 2014 over a period of up to approximately two years.

In April 2012, US Airways entered into a loan agreement, pursuant to which US Airways borrowed an aggregate principal amount of $100 million. The net proceeds after fees were approximately $98 million. The loan is payable in full at maturity on March 23, 2014. The loan bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR plus an applicable LIBOR margin. US Airways has agreed to maintain a level of unrestricted cash in the same amount required by our Citicorp credit facility and has also agreed to maintain certain collateral coverage ratios. At closing, the loan was collateralized by certain airport take-off and landing slots.

 

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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 46 aircraft through March 31, 2012, which includes four A320 aircraft, 35 A321 aircraft and seven A330-200 aircraft. US Airways plans to take delivery of 12 A321 aircraft in the second half of 2012, with the remaining 46 A320 family aircraft scheduled to be delivered between 2013 and 2015. In addition, US Airways plans to take delivery of the eight remaining A330-200 aircraft in 2013 and 2014. Deliveries of the 22 A350 XWB aircraft are scheduled to begin in 2017 and extend through 2019.

US Airways has agreements for the purchase of eight new IAE V2500-A5 spare engines scheduled for delivery through 2014 for use on the A320 family fleet, three new Trent 700 spare engines scheduled for delivery through 2013 for use on the A330-200 fleet and three new Trent XWB spare engines scheduled for delivery in 2017 through 2019 for use on the A350 XWB aircraft. US Airways has taken delivery of two of the Trent 700 spare engines and two of the V2500-A5 spare engines through March 31, 2012.

Under all of our aircraft and engine purchase agreements, our total future commitments as of March 31, 2012 are expected to be approximately $5.40 billion through 2019, which includes predelivery deposits and payments. We have financing commitments for all Airbus aircraft scheduled for delivery in 2012. See Part II, Item 1A, Risk Factors – “Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, operating expenses and results” and “Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions.

Covenants and Credit Rating

In addition to the minimum cash balance requirements, our long-term debt agreements contain various negative covenants that restrict or limit our actions, including our ability to pay dividends or make other restricted payments. Our long-term debt agreements also generally contain cross-default provisions, which may be triggered by defaults by us under other agreements relating to indebtedness. See Part II, Item 1A, Risk Factors – “Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions” and “Any failure to comply with the liquidity covenants contained in our financing arrangements would likely have a material adverse effect on our business, results of operations or financial condition.” As of March 31, 2012, we and our subsidiaries were in compliance with the covenants in our long-term debt agreements.

 

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The following table details our credit ratings as of March 31, 2012:

 

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

US Airways Group

   B-    CCC    Caa1

US Airways

   B-    *    *

(*) The credit agencies do not rate these categories for US Airways.

In April 2012, Fitch upgraded US Airways Group to B- from CCC and assigned an Issuer Default Rating of B- to 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 January 2012, we reached a tentative agreement with the Association of Flight Attendants-CWA for a single labor agreement applicable to both premerger US Airways and America West flight attendants. In March 2012, the flight attendants voted to not ratify the proposed five-year collective bargaining agreement. The flight attendants will continue to work under the terms of their respective US Airways or America West collective bargaining agreements, as modified by transition agreements reached in connection with the merger, until a new agreement has been reached with the union and ratified by the flight attendants.

Also in March 2012, flight attendants at PSA Airlines, a wholly owned subsidiary of US Airways Group, represented by the Association of Flight Attendants Council 75, voted to ratify a new five-year collective bargaining agreement. This agreement is not expected to have a material impact on our results of operations.

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 2011 Form 10-K.

 

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Contractual Obligations

The following table provides details of our future cash contractual obligations as of March 31, 2012 (in millions):

 

     Payments Due by Period  
     2012      2013      2014      2015      2016      Thereafter      Total  

US Airways Group (1)

                    

Debt (2)

   $ —         $ 16       $ 1,376       $ 100       $ —         $ 35       $ 1,527   

Interest obligations (3)

     42         56         32         5         3         20         158   

US Airways (4)

                    

Debt and capital lease obligations (5) (6)

     321         364         385         276         281         1,469         3,096   

Interest obligations (3) (6)

     127         148         123         102         131         268         899   

Aircraft purchase and operating lease commitments (7)

     1,269         2,070         1,669         1,078         680         4,309         11,075   

Regional capacity purchase agreements (8)

     807         1,006         1,003         860         526         739         4,941   

Other US Airways Group subsidiaries (9)

     8         8         6         1         —           —           23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,574       $ 3,668       $ 4,594       $ 2,422       $ 1,621       $ 6,840       $ 21,719   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

These commitments represent those entered into by US Airways Group.

 

(2)

Excludes $117 million of unamortized debt discount as of March 31, 2012.

 

(3)

For variable-rate debt, future interest obligations are shown above using interest rates in effect as of March 31, 2012.

 

(4)

These commitments represent those entered into by US Airways.

 

(5)

Excludes $69 million of unamortized debt discount as of March 31, 2012.

 

(6)

Includes $1.25 billion of future principal payments and $488 million of future interest payments as of March 31, 2012, respectively, related to pass through trust certificates, or EETCs, associated with mortgage financings for the purchase of certain aircraft.

 

(7)

Includes $2.51 billion of future minimum lease payments related to EETC leveraged leased financings of certain aircraft as of March 31, 2012.

 

(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 Citicorp credit facility, our amended credit card agreement with Barclays Bank Delaware and certain of our other financing arrangements contain significant minimum cash balance requirements. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements.

 

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Critical Accounting Policies and Estimates

In the first quarter of 2012, 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 2011 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 2011 Form 10-K except as updated below.

Commodity price risk

Our 2012 forecasted mainline and express fuel consumption is presently approximately 1.46 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. Since the third quarter of 2008, we have not entered into any new transactions to hedge our fuel consumption, and we have not had any fuel hedging contracts outstanding since the third quarter of 2009.

Interest rate risk

Our exposure to interest rate risk relates primarily to our variable-rate debt obligations. At March 31, 2012, our variable-rate long-term debt obligations of approximately $2.71 billion represented approximately 59% of our total long-term debt. If interest rates increased 10% in 2012, the impact on our results of operations would be approximately $10 million of additional interest expense.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

An evaluation was performed under the supervision and with the participation of US Airways Group’s and US Airways’ management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) as of March 31, 2012. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2012.

Changes in internal control over financial reporting.

There has been no change to US Airways Group’s or US Airways’ internal control over financial reporting that occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, US Airways Group’s or US Airways’ internal control over financial reporting.

Limitation on the effectiveness of controls.

We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO believe that our disclosure controls and procedures were effective at the “reasonable assurance” level as of March 31, 2012.

 

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Part II. Other Information

Item 1. Legal Proceedings

We are party to an arbitration proceeding relating to a grievance brought by our pilots union to the effect that, retroactive to January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. The arbitrator has issued a decision in our favor, and supplemental briefs concerning a collateral issue involving a smaller wage increase have been filed. We believe that the union’s position is without merit and that the possibility of an adverse outcome is remote.

On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices that illegally restrain US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four counts in the complaint to proceed. We intend to pursue these claims vigorously, but there can be no assurance of the outcome of this litigation.

We are defendants in various other pending lawsuits and proceedings, and from time to time are subject to other claims arising in the normal course of our business, many of which are covered in whole or in part by insurance. The outcome of those matters cannot be predicted with certainty at this time, but we, having consulted with outside counsel, believe that the ultimate disposition of these contingencies will not materially affect our consolidated financial position or results of operations.

Item 1A. Risk Factors

Below are 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

US Airways Group could experience significant operating losses in the future.

For a number of reasons, including those addressed in these risk factors, US Airways Group might fail to achieve profitability and might experience significant losses. In particular, the condition of the economy and the high volatility of fuel prices have had and continue to have an impact on our operating results, and increase the risk that we will experience losses.

Downturns in economic conditions adversely affect our business.

Due to the discretionary nature of business and leisure travel spending, airline industry revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel and changes in booking practices, both of which in turn have had, and may have in the future, a strong negative effect on our revenues. In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our revenues. See “The airline industry is intensely competitive and dynamic” below. Certain labor agreements to which we are a party limit our ability to reduce the number of aircraft in operation, and the utilization of such aircraft, below certain levels. As a result, we may not be able to optimize the number of aircraft in operation in response to a decrease in passenger demand for air travel.

 

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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. Fuel prices have fluctuated substantially over the past several years with jet fuel 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 March 31, 2012.

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, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, additional fuel price volatility and cost increases in the future.

Historically, we have from time to time entered into hedging arrangements designed to protect against rising fuel costs. Since the third quarter of 2008, we have not entered into any new transactions to hedge our fuel consumption, and we have not had any fuel hedging contracts outstanding since the third quarter of 2009. Our ability to hedge in the future may be limited, particularly if our financial condition provides insufficient liquidity to meet counterparty collateral requirements. Our future fuel hedging arrangements, if any, may not completely protect us against price increases and may be limited in both volume of fuel and duration. Also, a rapid decline in the price of fuel 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 when the projected future market price of fuel drops below the strike price. See also the discussion in Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”

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 not yet secured financing commitments for some of the aircraft we have on order, commencing with deliveries scheduled for 2013, and cannot assure you of the availability or cost of that financing. If we are not able to arrange financing for such aircraft at customary advance rates and on terms and conditions acceptable to us, we expect we would seek to negotiate deferrals of aircraft deliveries with the manufacturer or financing at lower than customary advance rates, or, if required, use cash from operations or other sources to purchase the aircraft.

 

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Further, a substantial portion of our indebtedness bears interest at fluctuating interest rates, primarily based on the London interbank offered rate for deposits of U.S. dollars (“LIBOR”). LIBOR tends to fluctuate based on general economic conditions, general interest rates, Federal Reserve rates and the supply of and demand for credit in the London interbank market. We have not hedged our interest rate exposure and, accordingly, our interest expense for any particular period may fluctuate based on LIBOR and other variable interest rates. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected. See also the discussion of interest rate risk in Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”

Our 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, results of operations or financial condition.

The terms of our Citicorp credit facility and certain of our other financing arrangements require us to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements.

Our ability to comply with these covenants while paying the fixed costs associated with our contractual obligations and our other expenses will depend on our operating performance and cash flow, which are seasonal, as well as factors including fuel costs and general economic and political conditions.

The factors affecting our liquidity (and our ability to comply with related covenants) will remain subject to significant fluctuations and uncertainties, many of which are outside our control. Any breach of our liquidity covenants or failure to timely pay our obligations could result in a variety of adverse consequences, including the acceleration of our indebtedness, the withholding of credit card proceeds by our credit card processors and the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our contractual obligations, repay the accelerated indebtedness, make required lease payments or otherwise cover our fixed costs.

 

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If our financial condition worsens, provisions in our credit card processing and other commercial agreements may adversely affect our liquidity.

We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) equal to 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.

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

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

If no agreement is reached during direct negotiations between the parties, either party may request the NMB to appoint a federal mediator. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to the parties. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30-day “cooling off” period commences. During or after that period, a Presidential Emergency Board (“PEB”) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another 30-day “cooling off” period. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self-help,” such as a strike, which could materially adversely affect our ability to conduct our business and our financial performance.

We are currently in negotiations with the unions representing our pilots, our flight attendants, 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, all of which are being overseen by the NMB. One of our express subsidiaries, PSA, recently reached a new ratified collective bargaining agreement covering its flight attendants and is in negotiations with the union representing its pilots, and our other express subsidiary, Piedmont, is in negotiations with the unions representing its pilots, its flight attendants and its passenger service employees. All of the negotiations are being overseen by the NMB. As a result, these unions presently may not lawfully engage in concerted refusals to work, such as strikes, slow-downs, sick-outs or other similar activity, against us. Nonetheless, after more than six years of negotiations without a full resolution to the bargaining issues that arose from the merger, there is a risk that disgruntled employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our financial performance. For example, the U.S. District Court in Charlotte on September 28, 2011 granted a preliminary injunction, 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 labor negotiations. Approximately 85% of the employees within US Airways Group are represented for collective bargaining purposes by labor unions. Some of our unions have brought and may continue to bring grievances to binding arbitration, including related to wages. Unions may also bring court actions and may seek to compel us to engage in the bargaining processes where we believe we have no such obligation. If successful, there is a risk these judicial or arbitral avenues could create material additional costs that we did not anticipate.

 

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Interruptions or disruptions in service at one of our hub airports or our focus city could have a material adverse impact on our operations.

We operate principally through hubs in Charlotte, Philadelphia and Phoenix, and our focus city, 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 or at Washington, D.C. resulting from air traffic control delays, weather conditions, natural disasters, growth constraints, relations with third-party service providers, failure of computer systems, facility disruptions, labor relations, fuel supplies, terrorist activities or otherwise could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, operations and financial performance.

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 FAA currently regulates the allocation of slot or slot exemptions at Reagan National serving Washington, D.C., 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, 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 later this year 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, 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.

 

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We rely on third party distribution channels and must manage effectively the costs, rights and functionality of these channels.

We rely on third party distribution channels, including those provided by or through global distribution systems, or GDSs (e.g., Amadeus, Sabre and Travelport), conventional travel agents and online travel agents, or OTAs (e.g., Expedia, Orbitz and Travelocity), to distribute a significant portion of our airline tickets and we expect in the future to continue to rely on these channels and hope eventually to use them to distribute and collect revenues for ancillary products (e.g., fees for selective seating). These distribution channels are more expensive and at present have less functionality in respect of ancillary product offerings than those we operate ourselves, such as our call centers and our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we will need to manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of third party distribution channels, while maintaining an industry-competitive cost structure. Any inability to manage our third party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our competitive position and our results of operations.

Further, on April 21, 2011, we filed an antitrust lawsuit against Sabre in Federal District Court for the Southern District of New York. The lawsuit, 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 these claims vigorously, but there can be no assurance of the outcome of this litigation.

Changes in government regulation could increase our operating costs and otherwise harm our business.

Airlines are subject to extensive regulatory requirements. In the last several years, Congress has passed laws, and the DOT, the FAA, the TSA and the Department of Homeland Security have issued a number of directives and other regulations. These requirements impose substantial costs on airlines.

The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions. Some FAA requirements cover, among other things, retirement and maintenance of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement, other environmental concerns, fuel tank inerting, crew scheduling, aircraft operation and safety and increased inspections and maintenance procedures to be conducted on older aircraft. Our failure to timely comply with these requirements has in the past and could in the future result in fines and other enforcement actions by the FAA or other regulators. Additionally, the FAA recently finalized rules on pilot flight and duty times, and has proposed new rules on minimum requirements for all pilots operating commercial aircraft. Both rules could increase our costs and reduce staffing flexibility.

Our airline subsidiaries are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation. Our airline subsidiaries collect the ticket tax, along with certain other U.S. and foreign taxes and user fees on air transportation, and pass along the collected amounts to the appropriate governmental agencies. Although these taxes are not our operating expenses, they represent an additional cost to our customers. There are a number of efforts in Congress and in other countries to raise different portions of the various taxes imposed on airlines and their passengers.

Most major U.S. airports impose a passenger facility charge (“PFC”). The ability of airlines to contest increases in this charge is restricted by federal legislation, DOT regulations and judicial decisions. With certain exceptions, air carriers pass these charges on to passengers. However, our ability to pass through PFCs to our customers is subject to various factors, including market conditions and competitive factors. The current cap on the PFC is $4.50 per passenger, although there are efforts to raise the cap to a higher level before Congress.

 

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DOT consumer rules, that took effect on April 29, 2010, require new procedures for customer handling during long onboard delays, as well as additional reporting requirements for airlines that have increased the cost of airline operations and reduced revenues. The DOT has been aggressively investigating alleged violations of the new rules. In addition, the DOT finalized a second set of rules that further regulate airline interactions with passengers through the reservations process, at the airport and on board the aircraft. US Airways is in compliance with these rules which took effect in August 2011 and others which took effect in January 2012. These rules require airlines to display all fares in an “all in” basis with the price of the air travel and all taxes and government imposed fees rolled into the displayed fare. Enhanced disclosure of ancillary fees such as baggage fees is also required. Other rules apply to post-ticket purchase price increases and an expansion of tarmac delay regulations to international carriers.

We anticipate a third set of consumer rules to be issued by the DOT in 2012. We continue to see other efforts by the DOT to further regulate airlines through increased data reporting requirements, expansion of the Air Carrier Access Act, and greater oversight of the ways that airlines describe and sell air transportation and other products and services. Each additional regulation or other form of regulatory oversight increases costs and adds greater complexity to our operation. We cannot assure you that compliance with these new rules, anticipated rules or other forms of regulatory oversight will not have a material adverse effect on our business.

On February 6, 2012, Congress passed the FAA Reauthorization legislation, formally titled as “FAA Modernization and Reform Act of 2012” (H.R.658). From the perspective of the airline industry, highlights include:

 

   

No increase in airline ticket or fuel taxes;

 

   

No increase in PFCs;

 

   

No taxation of ancillary fees and revenue;

 

   

Authorizes eight additional daily flights beyond the 1,250 mile perimeter restricting flights to and from Reagan Washington National Airport. Four flights are allocated to new entrant and limited incumbents, and four are set aside for incumbent carriers serving DCA as of the date of enactment (that is, one for each of American, Delta, United and US Airways);

 

   

Dedicated title of the legislation is intended to help accelerate implementation of the NextGeneration air traffic control system. Among the provisions included are mandated performance metrics, as well as a requirement that modernization projects at 35 major airports are to receive streamlined environmental review; and

 

   

Sunsets costly and redundant line checks for pilots over 60.

In addition, the TSA 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 federal government has on several occasions proposed a significant increase in the per ticket tax, including most recently in the Administration’s proposed fiscal year 2013 budget. The proposed ticket tax increase, if implemented, could negatively impact our financial results.

Finally, the ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the U.S. and foreign governments may be amended from time to time, or because appropriate slots or facilities may not be available. We cannot assure you that laws or regulations enacted in the future will not adversely affect our operating costs. In addition, increased environmental regulation, particularly in the EU, may increase costs or restrict our operations. The EU’s Emissions Trading Scheme is scheduled to take full effect in 2012. This scheme has the ability to appreciably raise costs associated with flights to EU countries as airlines will have to purchase emissions credits on the open market to cover some percentage of a carrier’s European operations. US Airways has met all the regulatory milestones associated with the program to date. While we are complying with the regulations under protest, we have also been supportive of the efforts of the U.S. government and other countries to delay the implementation and financial effects of the new regulations.

Whether US Airways is ever required to purchase and redeem emissions credits under the EU scheme is still unknown. However, it is increasingly likely that in the future we will be subject to some form of regulation governing aircraft emissions. How such regulations are implemented or what the impact on us will be is unknown at this time.

 

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

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

The airline industry is intensely competitive and dynamic.

Our competitors include other major domestic airlines as well as foreign, regional and new entrant airlines, many of which have more financial resources or lower cost structures than ours, and other forms of transportation, including rail and private automobiles. In many of our markets we compete with at least one low cost air carrier. Our revenues are sensitive to the actions of other carriers in many areas including pricing, scheduling, capacity and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues. These factors may become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near-term survival rather than long-term viability. In addition, because a significant portion of our traffic is short-haul travel, we are more susceptible than other major airlines to competition from surface transportation such as automobiles and trains.

Low cost carriers have a profound impact on industry revenues. Using the advantage of low unit costs, these carriers offer lower fares in order to shift demand from larger, more-established airlines. Some low cost carriers, which have cost structures lower than ours, have better financial performance and significant numbers of aircraft on order for delivery in the next few years. These low-cost carriers are expected to continue to increase their market share through growth and, potentially, further consolidation, and could continue to have an impact on 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.

We continue to study AMR Corporation, the parent of American Airlines, and have concluded that a merger with AMR Corporation, while it is undergoing its bankruptcy restructuring, represents a unique opportunity for our company. On April 20, 2012, we announced that we had reached agreements for collective bargaining agreements that would govern the American Airlines employees represented by the Transport Workers Union, Association of Professional Flight Attendants and Allied Pilots Association. The effectiveness of these agreements is contingent upon a business combination involving the Company and AMR Corporation in connection with the pending bankruptcy case of AMR Corporation. No agreement for that business combination has been reached and there can be no assurance that any such business combination will be agreed to or implemented.

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.

 

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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.

In order to operate our existing flight schedule and, where appropriate, add service along new or existing routes, we must be able to obtain adequate gates, ticketing facilities, operations areas, slots (where applicable) and office space. For example, at our largest hub airport, we are seeking to increase international service despite challenging airport space constraints. The nation’s aging air traffic control infrastructure presents challenges as well. The ability of the air traffic control system to handle traffic in high-density areas where we have a large concentration of flights is critical to our ability to operate our existing schedule. Also, as airports around the world become more congested, we cannot always be sure that our plans for new service can be implemented in a commercially viable manner given operating constraints at airports throughout our network.

We are subject to many forms of environmental regulation and may incur substantial costs as a result.

We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. Compliance with all environmental laws and regulations can require significant expenditures.

The U.S. Environmental Protection Agency (“EPA”) has proposed effluent limitation guidelines for airport deicing fluid. This proposed technology-based rule would require the mitigation of spent deicing fluid (glycol) discharges through collection and treatment. Airports meeting threshold requirements would have to construct or reconfigure deicing facilities to capture and treat the fluid. Additionally, the 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. Neither rule has 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 regulations, several U.S. airport authorities are actively engaged in efforts to limit discharges of deicing fluid to local groundwater, often by requiring airlines to participate in the building or reconfiguring of airport deicing 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.

 

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There is increasing global regulatory focus on climate change and greenhouse gas emissions. For example, the EU has established the European Union Emissions Trading Scheme (“ETS”), the mechanism by which emissions of CO2 are currently regulated in the EU. Beginning in 2012, the ETS will require airlines to have emission allowances equal to the amount of carbon dioxide emissions from flights to and from the EU member states. Compliance with the EU ETS could significantly increase our operating costs. The potential impact of ETS on costs will ultimately depend on a number of factors, including baseline emissions, the price of emission allowances, and the number of future flights subject to ETS, and these costs have not been completely defined. In the U.S., there is an increasing trend toward regulating greenhouse gas emissions directly under the Clean Air Act, and while 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.

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.

 

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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.

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 inability to operate profitably out of Philadelphia International Airport, which is one of our hubs, could harm our business, financial condition and results of operations.

Markets served from Philadelphia International Airport (“PHL”), which is one of our hubs and our international gateway, are important to our operations. In fiscal 2011, more than a third of our daily ASMs and more than half of our international ASMs were flown through PHL. PHL plans to embark on a multi-billion dollar runway and terminal expansion project called the Capacity Enhancement Program that will, if undertaken as planned, result in huge cost increases for airlines serving PHL, including US Airways. The project has been approved by the FAA, and expenditures have already begun. We cannot guarantee that the fees and other costs related to operating out of PHL will not increase should this or other significant expansion projects be implemented by the airport authority. In addition, if we are unable to operate profitably from PHL, we may need to significantly reduce our business at Philadelphia or move that business to another of our hubs, either of which actions could be costly. Our business, financial condition and results of operations could be harmed by an increase in airport rates and fees charged by PHL in connection with and following the airport expansion.

 

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Our business is subject to weather factors and seasonal variations in airline travel, which cause our results to fluctuate.

Our operations are vulnerable to severe weather conditions in parts of our network that could disrupt service, create air traffic control problems, decrease revenue and increase costs, such as during hurricane season in the Caribbean and Southeast United States, snow and severe winter weather in the Northeast United States and thunderstorms in the Eastern United States. In addition, the air travel business historically fluctuates on a seasonal basis. Due to the greater demand for air and leisure travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year. Our results of operations will likely reflect weather factors and seasonality, and therefore quarterly results are not necessarily indicative of those for an entire year, and our prior results are not necessarily indicative of our future results.

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

The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease in the insurance coverage available to commercial air carriers. Accordingly, our insurance costs increased significantly and our ability to continue to obtain insurance even at current prices remains uncertain. In addition, we have obtained third-party war risk (terrorism) insurance through a special program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial insurance market. The program has been extended, with the same conditions and premiums, until September 30, 2012. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk insurance. The failure of one or more of our insurers could result in a lack of coverage for a period of time. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the claims paying ability of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. Because of competitive pressures in our industry, our ability to pass additional insurance costs to passengers is limited. As a result, further increases in insurance costs or reductions in available insurance coverage could have an adverse impact on our financial results.

We may be adversely affected by global events that affect travel behavior.

Our revenue and results of operations may be adversely affected by global events beyond our control. An outbreak of a contagious disease such as Severe Acute Respiratory Syndrome (“SARS”), H1N1 influenza virus, avian flu, or any other influenza-type illness, if it were to persist for an extended period, could again materially affect the airline industry and us by reducing revenues and impacting travel behavior.

We are exposed to foreign currency exchange rate fluctuations.

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

The use of US Airways Group’s net operating losses and certain other tax attributes could be limited in the future.

When a corporation undergoes an ownership change, as defined in Section 382 of the Internal Revenue Code (“Section 382”), a limitation is imposed on the corporation’s future ability to utilize any net operating losses (“NOLs”) generated before the ownership change and certain subsequently recognized “built-in” losses and deductions, if any, existing as of the date of the ownership change. We believe an “ownership change” as defined in Section 382 occurred for US Airways Group in February 2007. Since February 2007, there have been additional changes in the ownership of US Airways Group that, if combined with sufficiently large future changes in ownership, could result in another “ownership change” as defined in Section 382. Until US Airways Group has used all of its existing NOLs, future shifts in ownership of US Airways Group’s common stock could result in new Section 382 limitations on the use of our NOLs as of the date of an additional ownership change.

 

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Risks Relating to Our Common Stock

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

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

 

   

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

 

   

changes in financial estimates or recommendations by securities analysts;

 

   

material announcements by us or our competitors;

 

   

movements in fuel prices;

 

   

new regulatory pronouncements and changes in regulatory guidelines;

 

   

general and industry-specific economic conditions;

 

   

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

 

   

general market conditions.

Conversion of our convertible notes will dilute the ownership interest of existing stockholders and could adversely affect the market price of our common stock.

The conversion of some or all of US Airways Group’s 7.25% convertible senior notes due 2014 will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the convertible notes may encourage short selling by market participants executing hedging strategies.

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

Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of US Airways Group and its stockholders. These provisions include, among other things, the following:

 

   

a classified board of directors with three-year staggered terms;

 

   

advance notice procedures for stockholder proposals to be considered at stockholders’ meetings;

 

   

the ability of US Airways Group’s board of directors to fill vacancies on the board;

 

   

a prohibition against stockholders taking action by written consent;

 

   

a prohibition against stockholders calling special meetings of stockholders;

 

   

a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve any amendment of our amended and restated bylaws submitted to stockholders for approval; and

 

   

super-majority voting requirements to modify or amend specified provisions of US Airways Group’s amended and restated certificate of incorporation.

 

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These provisions are not intended to prevent a takeover, but are intended to protect and maximize the value of US Airways Group’s stockholders’ interests. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable our board of directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, US Airways Group is subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders. Interested stockholders do not include stockholders whose acquisition of US Airways Group’s securities is approved by the board of directors prior to the investment under Section 203.

Our charter documents include provisions limiting voting and ownership of our equity interests, which includes our common stock and our convertible notes, by foreign owners.

Our charter documents provide that, consistent with the requirements of Subtitle VII of Title 49 of the United States Code, as amended, or as the same may be from time to time amended (the “Aviation Act”), any person or entity who is not a “citizen of the United States” (as defined under the Aviation Act and administrative interpretations issued by the DOT, its predecessors and successors, from time to time), including any agent, trustee or representative of such person or entity (a “non-citizen”), shall not own (beneficially or of record) and/or control more than (a) 24.9% of the aggregate votes of all of our outstanding equity securities (as defined, which definition includes our capital stock, securities convertible into or exchangeable for shares of our capital stock, including our outstanding convertible notes, and any options, warrants or other rights to acquire capital stock) (the “voting cap amount”) or (b) 49.9% of our outstanding equity securities (the “absolute cap amount”). If non-citizens nonetheless at any time own and/or control more than the voting cap amount, the voting rights of the equity securities in excess of the voting cap amount shall be automatically suspended in accordance with the provisions of our bylaws. Voting rights of equity securities, if any, owned (beneficially or of record) by non-citizens shall be suspended in reverse chronological order based upon the date of registration in the foreign stock record. Further, if at any time a transfer of equity securities to a non-citizen would result in non-citizens owning more than the absolute cap amount, such transfer shall be void and of no effect, in accordance with provisions of our bylaws. Certificates for our equity securities must bear a legend set forth in our amended and restated certificate of incorporation stating that such equity securities are subject to the foregoing restrictions. Under our bylaws, it is the duty of each stockholder who is a non-citizen to register his, her or its equity securities on our foreign stock record. In addition, our bylaws provide that in the event that non-citizens shall own (beneficially or of record) or have voting control over any equity securities, the voting rights of such persons shall be subject to automatic suspension to the extent required to ensure that we are in compliance with applicable provisions of law and regulations relating to ownership or control of a United States air carrier. In the event that we determine that the equity securities registered on the foreign stock record or the stock records of the Company exceed the absolute cap amount, sufficient shares shall be removed from the foreign stock record and the stock records of the Company so that the number of shares entered therein does not exceed the absolute cap amount. Shares of equity securities shall be removed from the foreign stock record and the stock records of the Company in reverse chronological order based on the date of registration in the foreign stock record and the stock records of the Company.

 

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Item 5. Other Information

On April 20, 2012, US Airways entered into a term loan agreement with Citicorp North America Inc., as Administrative Agent and as a lender and each of Barclays Bank PLC, Goldman Sachs Bank USA and Morgan Stanley Senior Funding, Inc., as lenders. The aggregate principal amount of the loan is $100 million and the net proceeds received after fees were approximately $98 million. The loan bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR plus an applicable LIBOR margin. At closing, the loan was secured by certain airport take-off and landing slots at Reagan National Airport. However, the loan provides for the ability to add other types of collateral that are acceptable to the Administrative Agent in its reasonable discretion in order to ensure satisfaction of the collateral coverage ratios. The loan does not amortize and is payable in full at maturity on March 23, 2014. The loan will also mature and be payable in full on the second business day following the first date on which US Airways Group and its subsidiaries maintains an unrestricted cash balance of less than $850 million. The loan contains customary representations and warranties and customary affirmative and negative covenants, including covenants requiring US Airways to maintain an overall collateral coverage ratio and a collateral coverage ratio solely with respect to collateral consisting of airport take-off and landing slots and gates. The loan contains mandatory prepayment provisions which are triggered by, among other things, a change of control or a failure to maintain either collateral coverage ratio. The loan is subject to customary event of default and remediation provisions.

Item 6. Exhibits

The exhibits listed in the Exhibit Index following the signature pages to this report are filed as part of this report.

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

 

  US Airways Group, Inc. (Registrant)
Date: April 24, 2012   By:  

/s/ Derek J. Kerr

    Derek J. Kerr
    Executive Vice President and
    Chief Financial Officer
    (Duly Authorized Officer and Principal Financial Officer)
 
  US Airways, Inc. (Registrant)
Date: April 24, 2012   By:  

/s/ Derek J. Kerr

    Derek J. Kerr
    Executive Vice President and
    Chief Financial Officer
    (Duly Authorized Officer and Principal Financial Officer)


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Exhibit Index

 

Exhibit No.

  

Description

31.1   

Certification of US Airways Group’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.2   

Certification of US Airways Group’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.3   

Certification of US Airways’ Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.4   

Certification of US Airways’ Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.

32.1   

Certification of US Airways Group’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2   

Certification of US Airways’ Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101   

Interactive data files pursuant to Rule 405 of Regulation S-T.

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