| • FORM 10-Q • CERTIFICATION OF US AIRWAYS GROUP'S CEO • CERTIFICATION OF US AIRWAYS GROUP'S CFO • CERTIFICATION OF US AIRWAYS' CEO • CERTIFICATION OF US AIRWAYS' CFO • CERTIFICATION OF US AIRWAYS GROUP'S CEO & CFO • CERTIFICATION OF US AIRWAYS' CEO & CFO • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark one)
For the quarterly period ended June 30, 2012 or
For the transition period from to
US Airways Group, Inc. (Exact name of registrant as specified in its charter) (Commission File No. 1-8444) 54-1194634 (IRS Employer Identification No.) 111 West Rio Salado Parkway, Tempe, Arizona 85281 (Address of principal executive offices, including zip code) US Airways, Inc. (Exact name of registrant as specified in its charter) (Commission File No. 1-8442) 53-0218143 (IRS Employer Identification No.) 111 West Rio Salado Parkway, Tempe, Arizona 85281 (Address of principal executive offices, including zip code) (480) 693-0800 (Registrants’ telephone number, including area code) Delaware (State of Incorporation of all Registrants)
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether each registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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.
As of July 20, 2012, there were approximately 162,397,506 shares of US Airways Group, Inc. common stock outstanding. As of July 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 ContentsUS Airways Group, Inc. US Airways, Inc. Form 10-Q Quarterly Period Ended June 30, 2012
2
Table of ContentsThis 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 statements 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:
3
Table of Contents
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. This combined Quarterly Report on Form 10-Q is filed by US Airways Group and US Airways and includes the condensed consolidated financial statements of each company in Item 1A and Item 1B, respectively.
4
Table of ContentsItem 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)
See accompanying notes to the condensed consolidated financial statements.
5
Table of ContentsUS Airways Group, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
6
Table of ContentsUS Airways Group, Inc. Condensed Consolidated Balance Sheets (In millions, except share and per share amounts) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
7
Table of ContentsUS Airways Group, Inc. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
8
Table of ContentsUS 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 conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, the frequent traveler program and the deferred tax asset valuation allowance. The Company’s accumulated other comprehensive income balances at June 30, 2012 and December 31, 2011 related to pension and other postretirement benefits. 2. Special Items, Net Special items, net as shown on the condensed consolidated statements of operations included the following charges for the three and six months ended June 30, 2012 and 2011 (in millions):
9
Table of Contents3. 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):
10
Table of Contents4. Debt The following table details the Company’s debt (in millions). Variable interest rates listed are the rates as of June 30, 2012.
The Company was in compliance with the covenants in its debt agreements at June 30, 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. 2012 Slot Financing 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. The loan is collateralized by certain airport take-off and landing slots. 2012-1 EETC Financing Transactions In May 2012, US Airways created three pass-through trusts which issued approximately $623 million aggregate face amount of Series 2012-1 Class A, Class B and Class C Enhanced Equipment Trust Certificates in connection with the refinancing of two Airbus aircraft owned by US Airways and the financing of 12 Airbus aircraft scheduled to be delivered from September 2012 to March 2013 (the “2012 EETCs”). The 2012 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ condensed consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets.
11
Table of ContentsAs of June 30, 2012, $78 million of the escrowed proceeds from the 2012 EETCs have been used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in an aggregate principal amount of $48 million bearing interest at 5.90% per annum, Series B equipment notes in an aggregate principal amount of $15 million bearing interest at 8% per annum and Series C equipment notes in an aggregate principal amount of $15 million bearing interest at 9.125% per annum. Interest on the equipment notes is payable semiannually in April and October of each year, beginning in October 2012. Principal payments on the equipment notes are scheduled to begin in April 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in October 2024, October 2019 and October 2015, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used in part to repay the existing debt associated with the two Airbus aircraft, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $545 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered. Fair Value of Debt The fair value of the Company’s long-term debt was approximately $4.38 billion and $4.23 billion at June 30, 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. 5. 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 and six month periods ended June 30, 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. When profitable, the Company is ordinarily subject to Alternative Minimum Tax (“AMT”). However as the result of a special tax election made in 2009, the Company was able to utilize AMT NOLs to fully offset its AMT taxable income in each of the three and six month periods ended June 30, 2012.
12
Table of Contents6. 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):
7. 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 gain of approximately $147 million. 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 gain in the periods in which the DOT operating restrictions lapse (March 2012 and July 2012). In March 2012, the Company recognized $73 million of the gain, which is included within other nonoperating expense, net on the accompanying condensed consolidated statement of operations. The Company will recognize the remaining gain (expected to approximate $74 million) in the third quarter of 2012.
13
Table of Contents8. 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.
14
Table of ContentsItem 1B. Condensed Consolidated Financial Statements of US Airways, Inc. US Airways, Inc. Condensed Consolidated Statements of Operations (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
15
Table of ContentsUS Airways, Inc. Condensed Consolidated Statements of Comprehensive Income (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
16
Table of ContentsUS Airways, Inc. Condensed Consolidated Balance Sheets (In millions, except share and per share amounts) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
17
Table of ContentsUS Airways, Inc. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
18
Table of ContentsUS 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 conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, the frequent traveler program and the deferred tax asset valuation allowance. US Airways’ accumulated other comprehensive income balances at June 30, 2012 and December 31, 2011 related to other postretirement benefits. 2. Special Items, Net Special items, net as shown on the condensed consolidated statements of operations included the following charges for the three and six months ended June 30, 2012 and 2011 (in millions):
19
Table of Contents3. Debt The following table details US Airways’ debt (in millions). Variable interest rates listed are the rates as of June 30, 2012.
US Airways was in compliance with the covenants in its debt agreements at June 30, 2012. 2012 Slot Financing 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. The loan is collateralized by certain airport take-off and landing slots. 2012-1 EETC Financing Transactions In May 2012, US Airways created three pass-through trusts which issued approximately $623 million aggregate face amount of Series 2012-1 Class A, Class B and Class C Enhanced Equipment Trust Certificates in connection with the refinancing of two Airbus aircraft owned by US Airways and the financing of 12 Airbus aircraft scheduled to be delivered from September 2012 to March 2013 (the “2012 EETCs”). The 2012 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ condensed consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets. As of June 30, 2012, $78 million of the escrowed proceeds from the 2012 EETCs have been used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in an aggregate principal amount of $48 million bearing interest at 5.90% per annum, Series B equipment notes in an aggregate principal amount of $15 million bearing interest at 8% per annum and Series C equipment notes in an aggregate principal amount of $15 million bearing interest at 9.125% per annum. Interest on the equipment notes is payable semiannually in April and October of each year, beginning in October 2012. Principal payments on the equipment notes are scheduled to begin in April 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in October 2024, October 2019 and October 2015, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used in part to repay the existing debt associated with the two Airbus aircraft, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $545 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered.
20
Table of ContentsFair Value of Debt The fair value of US Airways’ long-term debt was approximately $2.90 billion and $2.92 billion at June 30, 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. 4. Related Party Transactions The following represents the net payable balances to related parties (in millions):
US Airways Group has the ability to move funds freely between its operating subsidiaries to support operations. These transfers are recognized as intercompany transactions. The net payable to US Airways Group’s wholly owned subsidiaries consists of amounts due under regional capacity agreements with the other airline subsidiaries and fuel purchase arrangements with a non-airline subsidiary. 5. Income Taxes US Airways 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 and six month periods ended June 30, 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. When profitable, US Airways is ordinarily subject to Alternative Minimum Tax (“AMT”). However as the result of a special tax election made in 2009, US Airways was able to utilize AMT NOLs to fully offset its AMT taxable income in each of the three and six month periods ended June 30, 2012.
21
Table of Contents6. 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):
7. 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 gain of approximately $147 million. 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 gain in the periods in which the DOT operating restrictions lapse (March 2012 and July 2012). In March 2012, US Airways recognized $73 million of the gain, which is included within other nonoperating expense, net on the accompanying condensed consolidated statement of operations. US Airways will recognize the remaining gain (expected to approximate $74 million) in the third quarter of 2012.
22
Table of Contents8. 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.
23
Table of ContentsItem 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 six months ended June 30, 2012, we had approximately 27 million passengers boarding our mainline flights. As of June 30, 2012, we operated 339 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 241 regional jets and 47 turboprops. Our prorate carriers operated four regional jets at June 30, 2012. The U.S. Airline Industry During the second quarter of 2012, the U.S. airline industry experienced year-over-year growth in passenger revenues as well as a decline in the price of fuel. Passenger revenue growth was driven by ongoing industry capacity discipline and strong consumer demand for air travel. In its most recent data available, Airlines for America, the trade association for U.S. airlines, reported the following increases in U.S. industry passenger revenues and yields, which indicate continued growth despite more difficult year-over-year comparisons. 2012 vs. 2011
2011 vs. 2010
With respect to international versus domestic performance, Airlines for America reported that in the second quarter of 2012, domestic market yields outperformed international market yields. International markets experienced weaker demand due to global economic uncertainty. Jet fuel prices continue to follow the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. The average daily spot price for Brent crude oil during the second quarter of 2012 was $108 per barrel as compared to an average daily spot price of $117 per barrel during the second quarter of 2011. The price of Brent crude oil fell throughout the second quarter amid uncertainty surrounding the European economy and slower worldwide economic growth. The daily spot price for Brent crude oil averaged $120 per barrel in April 2012, $110 per barrel in May 2012, $95 per barrel in June 2012, and closed the quarter at $94 per barrel on June 29, 2012.
24
Table of ContentsWhile the U.S. airline industry is currently benefiting from a favorable revenue environment and lower fuel prices described above, uncertainty exists regarding the economic conditions driving these factors. 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 For the second quarter of 2012, we reported our largest ever quarterly profit on both an operating income and net income basis. Driven by year-over-year growth in revenues and a decrease in our fuel costs, we realized operating income of $404 million and net income of $306 million in the second quarter of 2012. This compares to operating income of $177 million and net income of $92 million in the second quarter of 2011. Revenue Mainline and express passenger revenues increased $247 million, or 7.9%, as compared to the 2011 period driven by a 7.4% increase in yield as compared to the 2011 period. Our mainline and express passenger revenue per available seat mile (“PRASM”) was 14.59 cents in the second quarter of 2012, a 6.8% increase, as compared to 13.66 cents in the 2011 period. Total revenue per available seat mile (“RASM”) was 16.30 cents in the second quarter of 2012 as compared to 15.36 cents in the 2011 period, representing a 6.1% improvement. Total revenues include our ancillary revenue initiatives, which generated $154 million in revenues for the second quarter of 2012, an increase of $14 million over the 2011 period principally related to our Choice Seats program. Fuel We have not entered into any transactions to hedge our fuel consumption and as a result we fully realized the benefits of the decline in fuel prices during the second quarter of 2012. The average mainline and express price per gallon of fuel was $3.18 for the second quarter of 2012 as compared to an average cost per gallon of $3.29 in the second quarter of 2011, a decrease of 3.5%. Accordingly, our mainline and express fuel expense decreased $47 million to $1.19 billion for the second quarter of 2012, which was 3.8% lower than the 2011 period, on a 0.4% decrease in consumption. Capacity Total system capacity for the second quarter of 2012 increased 1.0% as compared to the second quarter of 2011 due primarily to our strong operational performance, which led to a record completion factor for the second quarter of 2012. For the full year 2012, total system capacity is expected to be up approximately two percent versus 2011. Domestic capacity is expected to be up approximately two percent and international capacity is 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, fuel and profit sharing increased 0.09 cents, or 1.1%, from 8.16 cents in the second quarter of 2011 to 8.25 cents in the second quarter of 2012. The following table details our mainline CASM for the three months ended June 30, 2012 and 2011:
25
Table of ContentsCustomer Service We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation. Outstanding efforts from our 32,000 employees drove very strong operational performance in the second quarter of 2012 as we achieved our best-ever quarter performance in on-time arrivals and baggage handling and our best-ever second quarter performance in completion factor. We reported the following operating statistics to the Department of Transportation (“DOT”) for mainline operations for the second quarter of 2012 and 2011:
Liquidity Position As of June 30, 2012, our total cash, cash equivalents and restricted cash was $2.91 billion, of which $393 million was restricted.
The improvement in our liquidity in the first half of 2012 was due primarily to the strong revenue environment and seasonal factors. An April 2012 loan agreement, pursuant to which US Airways borrowed an aggregate principal amount of $100 million, also contributed to the improvement. 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. 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.
26
Table of ContentsUS Airways Group’s Results of Operations Driven by year-over-year growth in revenues and a decrease in our fuel costs, we realized operating income of $404 million in the second quarter of 2012, representing our largest ever quarterly operating profit. We realized income before income taxes of $306 million in the second quarter of 2012. This compares to operating income of $177 million and income before income taxes of $92 million in the 2011 period. In the first six months of 2012, we realized operating income of $463 million and income before income taxes of $355 million. This compares to operating income of $138 million and a loss before income taxes of $23 million in the 2011 period. The six month period year-over-year increase in our income was driven primarily by our strong second quarter 2012 performance. Our results have been impacted by the following net special charges (credits) (in millions):
The 2011 second quarter and six month periods each consisted of $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million of losses related to investments in auction rate securities. 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 and six month periods ended June 30, 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. When profitable, we are ordinarily subject to Alternative Minimum Tax (“AMT”). However as the result of a special tax election made in 2009, we were able to utilize AMT NOLs to fully offset our AMT taxable income in each of the three and six month periods ended June 30, 2012.
27
Table of ContentsThe table below sets forth our selected mainline and express operating data:
28
Table of Contents
Three Months Ended June 30, 2012 Compared with the Three Months Ended June 30, 2011 Operating Revenues:
Total operating revenues in the second quarter of 2012 were $3.75 billion as compared to $3.50 billion in the 2011 period, an increase of $251 million, or 7.2%. Significant changes in the components of operating revenues are as follows:
29
Table of ContentsOperating Expenses:
Total operating expenses were $3.35 billion in the second quarter of 2012, an increase of $24 million, or 0.7%, compared to the 2011 period. The increase in operating expenses was primarily driven by a $97 million, or 16.8%, increase in salaries and related costs, primarily due to our record profitability and the 76% increase in the price of our common stock during the second quarter of 2012. This increase was partially offset by a $47 million, or 3.8%, decrease in mainline and express fuel costs as the average price per gallon of fuel decreased 3.5% to $3.18 in the second quarter of 2012 from $3.29 in the 2011 period, on a 0.4% decrease in consumption. Mainline Operating Expenses per ASM: Our mainline CASM decreased 0.01 cents, or 0.1%, from 13.15 cents in the second quarter of 2011 to 13.14 cents in the second quarter of 2012. Excluding special items, fuel and profit sharing our mainline CASM increased 0.09 cents, or 1.1%, from 8.16 cents in the second quarter of 2011 to 8.25 cents in the second quarter of 2012, while mainline capacity increased 1.4%. The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the three months ended June 30, 2012 and 2011:
30
Table of ContentsSignificant changes in the components of mainline operating expense per ASM are as follows:
Express Operating Expenses: Total express expenses decreased $8 million, or 1.1%, in the second quarter of 2012 to $803 million from $811 million in the 2011 period. The period-over-period decrease included a $5 million, or 2.0%, decrease in fuel costs. The average price per gallon of fuel decreased 2.2% to $3.20 in the second quarter of 2012 from $3.28 in the 2011 period. Nonoperating Income (Expense):
Other nonoperating expense of $7 million in the second quarter of 2011 consisted primarily of special charges including $6 million for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million for losses related to investments in auction rate securities.
31
Table of ContentsSix Months Ended June 30, 2012 Compared with the Six Months Ended June 30, 2011 Operating Revenues:
Total operating revenues in the first six months of 2012 were $7.02 billion as compared to $6.46 billion in the 2011 period, an increase of $557 million, or 8.6%. Significant changes in the components of operating revenues are as follows:
32
Table of ContentsOperating Expenses:
Total operating expenses were $6.56 billion in the first six months of 2012, an increase of $232 million, or 3.7%, compared to the 2011 period. The increase in operating expenses was primarily driven by a $130 million, or 11.3%, increase in salaries and related costs as well as a $112 million, or 5.1%, increase in mainline and express fuel costs. The increase in salaries and related costs was primarily due to our second quarter 2012 record profitability and the 163% increase in the price of our common stock during the first six months of 2012. Fuel costs increased as the average price per gallon of fuel increased 3.9% to $3.22 in the first six months of 2012 from $3.10 in the 2011 period, on a 1.1% increase in consumption. Mainline Operating Expenses per ASM: Our mainline CASM increased 0.23 cents, or 1.7%, from 13.12 cents in the first six months of 2011 to 13.35 cents in the first six months of 2012. Excluding special items, fuel and profit sharing our mainline CASM increased 0.03 cents, or 0.3%, from 8.44 cents in the first six months of 2011 to 8.47 cents in the first six months of 2012, while mainline capacity increased 2.6%. The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the six months ended June 30, 2012 and 2011:
33
Table of ContentsSignificant changes in the components of mainline operating expense per ASM are as follows:
Express Operating Expenses: Total express expenses increased $22 million, or 1.4%, in the first six months of 2012 to $1.61 billion from $1.58 billion in the 2011 period. The period-over-period increase included a $28 million, or 5.4%, increase in fuel costs. The average price per gallon of fuel increased 4.6% to $3.25 in the first six months of 2012 from $3.10 in the 2011 period. Nonoperating Income (Expense):
Other nonoperating expense of $7 million in the first six months of 2011 consisted primarily of special charges including $6 million for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million for losses related to investments in auction rate securities.
34
Table of ContentsUS Airways’ Results of Operations Driven by year-over-year growth in revenues and a decrease in its fuel costs, US Airways realized operating income of $395 million in the second quarter of 2012, representing US Airways’ largest ever quarterly operating profit. US Airways realized income before income taxes of $322 million in the second quarter of 2012. This compares to operating income of $179 million and income before income taxes of $119 million in the 2011 period. In the first six months of 2012, US Airways realized operating income of $451 million and income before income taxes of $393 million. This compares to operating income of $149 million and income before income taxes of $36 million in the 2011 period. The six month period year-over-year increase in US Airways’ income was driven primarily by its strong second quarter 2012 performance. US Airways’ results have been impacted by the following net special charges (credits) (in millions):
The 2011 second quarter and six month periods each consisted of $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million of losses related to investments in auction rate securities. 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 and six month periods ended June 30, 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. When profitable, US Airways is ordinarily subject to AMT. However as the result of a special tax election made in 2009, US Airways was able to utilize AMT NOLs to fully offset its AMT taxable income in each of the three and six month periods ended June 30, 2012.
35
Table of ContentsThe table below sets forth US Airways’ selected mainline and express operating data:
36
Table of ContentsThree Months Ended June 30, 2012 Compared with the Three Months Ended June 30, 2011 Operating Revenues:
Total operating revenues in the second quarter of 2012 were $3.80 billion as compared to $3.54 billion in the 2011 period, an increase of $251 million, or 7.1%. Significant changes in the components of operating revenues are as follows:
37
Table of ContentsOperating Expenses:
Total operating expenses were $3.40 billion in the second quarter of 2012, an increase of $35 million, or 1.1%, compared to the 2011 period. The increase in operating expenses was primarily driven by a $97 million, or 16.8%, increase in salaries and related costs, primarily due to US Airways’ record profitability and the 76% increase in the price of US Airways Group’s common stock during the second quarter of 2012. This increase was partially offset by a $48 million, or 3.8%, decrease in mainline and express fuel costs as the average price per gallon of fuel decreased 3.5% to $3.18 in the second quarter of 2012 from $3.29 in the 2011 period on a 0.4% decrease in consumption. Mainline Operating Expenses: Significant changes in the components of mainline operating expenses are as follows:
38
Table of ContentsExpress Operating Expenses: Total express expenses increased $3 million, or 0.4%, in the second quarter of 2012 to $841 million from $838 million in the 2011 period. Nonoperating Income (Expense):
Other nonoperating expense of $8 million in the second quarter of 2011 consisted primarily of special charges including $6 million for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million for losses related to investments in auction rate securities.
39
Table of ContentsSix Months Ended June 30, 2012 Compared with the Six Months Ended June 30, 2011 Operating Revenues:
Total operating revenues in the first six months of 2012 were $7.10 billion as compared to $6.54 billion in the 2011 period, an increase of $562 million, or 8.6%. Significant changes in the components of operating revenues are as follows:
40
Table of ContentsOperating Expenses:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||