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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark one)
For the quarterly period ended September 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 October 19, 2012, there were approximately 162,442,970 shares of US Airways Group, Inc. common stock outstanding. As of October 19, 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 September 30, 2012
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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:
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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.
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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.
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Table of ContentsUS Airways Group, Inc. Condensed Consolidated Statements of Comprehensive Income (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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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.
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Table of ContentsUS Airways Group, Inc. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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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 September 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 nine months ended September 30, 2012 and 2011 (in millions):
The 2012 and 2011 third quarter and nine month periods consisted primarily of corporate transaction and auction rate securities arbitration costs.
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Table of Contents3. Earnings Per Common Share Basic earnings per common share (“EPS”) is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of potentially dilutive shares of common stock outstanding during the period using the treasury stock method. Potentially dilutive shares include outstanding employee stock options, employee stock appreciation rights (“SARs”), employee restricted stock units (“RSUs”) and convertible debt. The following table presents the computation of basic and diluted EPS (in millions, except share and per share amounts):
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Table of Contents4. Debt The following table details the Company’s debt (in millions). Variable interest rates listed are the rates as of September 30, 2012.
The Company was in compliance with the covenants in its debt agreements at September 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.
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Table of ContentsAs of September 30, 2012, $168 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 $103 million bearing interest at 5.90% per annum, Series B equipment notes in an aggregate principal amount of $34 million bearing interest at 8% per annum and Series C equipment notes in an aggregate principal amount of $31 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 and to finance two Airbus aircraft delivered in September 2012, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $455 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered. Other 2012 Financing Transactions In the third quarter of 2012, US Airways borrowed $85 million to finance new Airbus aircraft deliveries. These financings bear interest at a rate of LIBOR plus an applicable margin and contain default provisions and other covenants that are typical in the industry. In the third quarter of 2012, US Airways entered into an agreement to acquire five Embraer 190 aircraft from Republic Airline, Inc. (“Republic”). In October 2012, US Airways took delivery of the first aircraft and the remaining four aircraft are scheduled to be delivered in the fourth quarter of 2012 through the first quarter of 2013. In connection with this agreement, US Airways will assume the outstanding debt on these aircraft and Republic will be released from its obligations associated with the principal due under the debt. Fair Value of Debt The fair value of the Company’s long-term debt was approximately $4.42 billion and $4.23 billion at September 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 nine month periods ended September 30, 2012 and 2011, the Company did not record federal income tax expense. In each of the three and nine month periods ended September 30, 2012, the Company recorded $1 million of state income tax expense related to certain states where NOLs were limited. 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 nine month periods ended September 30, 2012 and 2011. In connection with the sale of the Company’s final remaining investment in auction rate securities, the Company recorded a special non-cash tax charge of $21 million in the third quarter of 2011. In the fourth quarter of 2009, the Company had recorded in other comprehensive income (“OCI”), a subset of stockholders’ equity, a non-cash tax provision of $21 million. This provision resulted from $56 million of unrealized gains recorded in OCI due to an increase in the fair value of certain investments in auction rate securities.
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Table of ContentsThe Company has a net deferred tax asset that is subject to a full valuation allowance. Typically, in accordance with GAAP, the reversal of a valuation allowance on a net deferred tax asset reduces any tax provision generated. However, under GAAP, an exception to the above described tax accounting is applicable when a company has the following: (1) a net deferred tax asset that is subject to valuation allowance, (2) an income statement loss and (3) net gains in OCI. In this situation, tax benefits derived from the presence of net gains held in OCI are required to be included in income from operations. The Company met all three of these conditions in the fourth quarter of 2009. As a result, the $21 million tax benefit resulting from the reversal of the valuation allowance was recorded in income from operations rather than as an offset to the $21 million tax provision recorded in OCI. Accordingly, in connection with the sale of the Company’s final remaining investment in auction rate securities, the Company recorded a $21 million special non-cash tax charge in the third quarter of 2011, which recognized in the statement of operations the tax provision recorded in OCI. 6. Express Expenses Expenses associated with the Company’s wholly owned regional airlines and affiliate regional airlines operating as US Airways Express are classified as express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):
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.
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Table of ContentsThe 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 that was initially projected as $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 gain on the transaction was recognized as the DOT restrictions lapsed in 2012. The Company recognized $73 million of the gain in the first quarter of 2012 and the remaining gain, which approximated $69 million, in the third quarter of 2012. The third quarter 2012 gain is less than originally projected due to higher than anticipated facility and relocation costs incurred during the quarter. The gain is classified as a special credit and is included within other nonoperating expense, net on the accompanying condensed consolidated statement of operations. 8. 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 two decisions in the Company’s favor, and the union has requested a meeting with the arbitrator to address those decisions. 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.
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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.
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Table of ContentsUS Airways, Inc. Condensed Consolidated Statements of Comprehensive Income (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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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.
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Table of ContentsUS Airways, Inc. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited)
See accompanying notes to the condensed consolidated financial statements.
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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 September 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 nine months ended September 30, 2012 and 2011 (in millions):
The 2012 and 2011 third quarter and nine month periods consisted primarily of corporate transaction and auction rate securities arbitration costs.
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Table of Contents3. Debt The following table details US Airways’ debt (in millions). Variable interest rates listed are the rates as of September 30, 2012.
US Airways was in compliance with the covenants in its debt agreements at September 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 September 30, 2012, $168 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 $103 million bearing interest at 5.90% per annum, Series B equipment notes in an aggregate principal amount of $34 million bearing interest at 8% per annum and Series C equipment notes in an aggregate principal amount of $31 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 and to finance two Airbus aircraft delivered in September 2012, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $455 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered.
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Table of ContentsOther 2012 Financing Transactions In the third quarter of 2012, US Airways borrowed $85 million to finance new Airbus aircraft deliveries. These financings bear interest at a rate of LIBOR plus an applicable margin and contain default provisions and other covenants that are typical in the industry. In the third quarter of 2012, US Airways entered into an agreement to acquire five Embraer 190 aircraft from Republic Airline, Inc. (“Republic”). In October 2012, US Airways took delivery of the first aircraft and the remaining four aircraft are scheduled to be delivered in the fourth quarter of 2012 through the first quarter of 2013. In connection with this agreement, US Airways will assume the outstanding debt on these aircraft and Republic will be released from its obligations associated with the principal due under the debt. Fair Value of Debt The fair value of US Airways’ long-term debt was approximately $2.93 billion and $2.92 billion at September 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 nine month periods ended September 30, 2012 and 2011, US Airways did not record federal income tax expense. In each of the three and nine month periods ended September 30, 2012, US Airways recorded $1 million of state income tax expense related to certain states where NOLs were limited. 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 nine month periods ended September 30, 2012 and 2011.
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Table of ContentsIn connection with the sale of US Airways’ final remaining investment in auction rate securities, US Airways recorded a special non-cash tax charge of $21 million in the third quarter of 2011. In the fourth quarter of 2009, US Airways had recorded in other comprehensive income (“OCI”), a subset of stockholder’s equity, a non-cash tax provision of $21 million. This provision resulted from $56 million of unrealized gains recorded in OCI due to an increase in the fair value of certain investments in auction rate securities. US Airways has a net deferred tax asset that is subject to a full valuation allowance. Typically, in accordance with GAAP, the reversal of a valuation allowance on a net deferred tax asset reduces any tax provision generated. However, under GAAP, an exception to the above described tax accounting is applicable when a company has the following: (1) a net deferred tax asset that is subject to valuation allowance, (2) an income statement loss and (3) net gains in OCI. In this situation, tax benefits derived from the presence of net gains held in OCI are required to be included in income from operations. US Airways met all three of these conditions in the fourth quarter of 2009. As a result, the $21 million tax benefit resulting from the reversal of the valuation allowance was recorded in income from operations rather than as an offset to the $21 million tax provision recorded in OCI. Accordingly, in connection with the sale of US Airways’ final remaining investment in auction rate securities, US Airways recorded a $21 million special non-cash tax charge in the third quarter of 2011, which recognized in the statement of operations the tax provision recorded in OCI. 6. Express Expenses Expenses associated with affiliate regional airlines operating as US Airways Express are classified as express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):
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.
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Table of ContentsIn 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 that was initially projected as $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 gain on the transaction was recognized as the DOT restrictions lapsed in 2012. US Airways recognized $73 million of the gain in the first quarter of 2012 and the remaining gain, which approximated $69 million, in the third quarter of 2012. The third quarter 2012 gain is less than originally projected due to higher than anticipated facility and relocation costs incurred during the quarter. The gain is classified as a special credit and is included within other nonoperating expense, net on the accompanying condensed consolidated statement of operations. 8. 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 two decisions in US Airways’ favor, and the union has requested a meeting with the arbitrator to address those decisions. 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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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 3,000 flights daily to 195 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, and Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service. For the nine months ended September 30, 2012, we had approximately 41 million passengers boarding our mainline flights. As of September 30, 2012, we operated 338 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 238 regional jets and 44 turboprops. Our prorate carriers operated four regional jets at September 30, 2012. The U.S. Airline Industry During the third quarter of 2012, the U.S. airline industry experienced moderate year-over-year growth in passenger revenues driven by ongoing industry capacity discipline and consumer demand for air travel. Additionally, the industry benefited from a slight decline in the average price of fuel during the quarter. In its most recent data available, Airlines for America, the trade association for U.S. airlines, reported the following changes in U.S. industry passenger revenues and yields. Year-over-year growth continued during the third quarter of 2012 although at lower rates due to moderating demand, particularly for business travel, and more difficult year-over-year comparisons. The temporary expiration in August 2011 of certain Federal Aviation Administration (“FAA”) ticket taxes on domestic and international air travel contributed in part to the difficult year-over-year comparisons.
With respect to international versus domestic revenue performance, Airlines for America reported that in the third quarter of 2012, Latin and Pacific international markets outperformed domestic markets. However, domestic markets outperformed the Atlantic international market which experienced weaker demand due to the economic uncertainty in Europe. Jet fuel prices continue to follow the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. On a daily basis, Brent crude oil prices continue to be volatile. In the third quarter of 2012, daily spot prices fluctuated between a low of $95 per barrel in July 2012 to a high of $117 in September 2012, and closed the quarter at $111 per barrel on September 28, 2012. However despite this volatility, for the third quarter of 2012 fuel prices declined slightly overall. The average daily spot price for Brent crude oil during the third quarter of 2012 was $110 per barrel as compared to an average daily spot price of $113 per barrel during the third quarter of 2011.
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Table of ContentsWhile the U.S. airline industry is currently benefiting from a favorable revenue environment and fuel prices that declined slightly during the period 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 The significant actions we have taken over the last few years 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 have positioned us well. As described in more detail below, we are reporting strong profits and achieving our best operational performance in the Company’s history. For the full year 2012, we expect to be profitable. In the third quarter of 2012, we realized operating income of $268 million driven by year-over-year growth in revenues. Income before income taxes was $246 million in the third quarter of 2012 and included the recognition of a $69 million non-operating special gain related to the slot transaction with Delta Air Lines, Inc. (“Delta”). See Note 7 to the condensed consolidated financial statements included in Part I, Item 1A of this report for more information on the Delta transaction. This compares to operating income of $180 million and income before income taxes of $97 million in the 2011 period. Revenue Mainline and express passenger revenues increased $100 million, or 3.3% as compared to the 2011 period. The growth in revenues was driven by a 2.6% increase in revenue passenger miles and a 0.6% increase in yield, as total capacity increased 2.7% as compared to the 2011 period. Our mainline and express passenger revenue per available seat mile (“PRASM”) was 13.63 cents in the third quarter of 2012, a 0.5% increase, as compared to 13.56 cents in the 2011 period. Total revenue per available seat mile (“RASM”) was relatively flat versus the prior period at 15.22 cents in the third quarter of 2012. Total revenues include our ancillary revenue initiatives, which generated $146 million in revenues for the third quarter of 2012, an increase of $10 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. Mainline and express fuel expense decreased $13 million to $1.17 billion for the third quarter of 2012, which was 1.1% lower than the 2011 period, on a 1.3% increase in consumption. The average mainline and express price per gallon of fuel was $3.07 for the third quarter of 2012 as compared to an average cost per gallon of $3.14 in the third quarter of 2011, a decrease of 2.4%. Capacity Total system capacity for the third quarter of 2012 increased 2.7% as compared to the third quarter of 2011. The increase in capacity is driven by our strong operating performance, which has led to higher completion factors, and larger gauge Airbus A321 aircraft replacing smaller gauge legacy Boeing 737-300 aircraft. For the full year 2012, total system capacity is expected to be up approximately 2% versus 2011. Domestic capacity is expected to be up approximately 2% and international capacity is expected to be up approximately 1%. 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 decreased 0.11 cents, or 1.4%, from 8.06 cents in the third quarter of 2011 to 7.95 cents in the third quarter of 2012.
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Table of ContentsThe following table details our mainline CASM for the three months ended September 30, 2012 and 2011:
Customer 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 continue to drive very strong operational performance. On a year-to-date basis through September 2012, we have achieved our best on-time performance, completion factor and baggage handling performance in our Company’s history. For the third quarter of 2012, we achieved our best ever third quarter performance in baggage handling. Additionally, for the month of July we ranked first in on-time performance among the big hub-and-spoke carriers as reported by the Department of Transportation (“DOT”) Air Travel Consumer Report. This marked our third monthly first place DOT ranking for on-time performance during 2012. We reported the following operating statistics to the DOT for mainline operations for the third quarter of 2012 and 2011:
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Table of ContentsLiquidity Position As of September 30, 2012, our total cash, cash equivalents and restricted cash was $2.78 billion, of which $347 million was restricted.
The improvement in our liquidity in the first nine months 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.
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Table of ContentsUS Airways Group’s Results of Operations In the third quarter of 2012, we realized operating income of $268 million and income before income taxes of $246 million. This compares to operating income of $180 million and income before income taxes of $97 million in the 2011 period. In the first nine months of 2012, we realized operating income of $731 million and income before income taxes of $601 million. This compares to operating income of $318 million and income before income taxes of $74 million in the 2011 period. Our results for the third quarter and first nine months of 2012 were driven by year-over-year growth in revenues resulting from ongoing industry capacity discipline and consumer demand for air travel. Our results have been impacted by the following pre-tax net special charges (credits) (in millions):
The 2012 nine month period primarily consisted of a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft. The 2011 third quarter and nine month periods each consisted of a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities. The 2011 nine month period also included $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 nine month periods ended September 30, 2012 and 2011, we did not record federal income tax expense. In each of the three and nine month periods ended September 30, 2012, we recorded $1 million of state income tax expense related to certain states where NOLs were limited. 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 nine month periods ended September 30, 2012 and 2011.
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Table of ContentsIn the third quarter of 2011, we completed the liquidation of our entire investment in auction rate securities. As a result of the sale of the final remaining investment in auction rate securities, we recorded a special non-cash tax charge of $21 million which recognized in the statement of operations for the three and nine month periods ended September 30, 2011, the tax provision that was recorded in other comprehensive income, a subset of stockholders’ equity, in the fourth quarter of 2009. The table below sets forth our selected mainline and express operating data:
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Table of ContentsThree Months Ended September 30, 2012 Compared with the Three Months Ended September 30, 2011 Operating Revenues:
Total operating revenues in the third quarter of 2012 were $3.53 billion as compared to $3.44 billion in the 2011 period, an increase of $97 million, or 2.8%. Significant changes in the components of operating revenues are as follows:
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Table of ContentsOperating Expenses:
Total operating expenses were relatively flat at $3.27 billion in the third quarter of 2012, an increase of $9 million, or 0.3%, compared to the 2011 period. Mainline Operating Expenses per ASM: Our mainline CASM decreased 0.23 cents, or 1.8%, from 12.93 cents in the third quarter of 2011 to 12.70 cents in the third quarter of 2012. Excluding special items, fuel and profit sharing our mainline CASM decreased 0.11 cents, or 1.4%, from 8.06 cents in the third quarter of 2011 to 7.95 cents in the third quarter of 2012, while mainline capacity increased 2.8%. The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the three months ended September 30, 2012 and 2011:
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Table of ContentsSignificant changes in the components of mainline operating expense per ASM are as follows:
Express Operating Expenses: Total express expenses decreased $13 million, or 1.6%, in the third quarter of 2012 to $781 million from $794 million in the 2011 period. The period-over-period decrease included a $12 million, or 2.2%, decrease in other express expenses and a $1 million, or 0.5%, decrease in fuel costs. The decrease in other express expenses was driven by lower maintenance costs primarily due to fewer engine overhauls performed in the 2012 period. Nonoperating Income (Expense):
Other nonoperating income of $67 million in the third quarter of 2012 consisted primarily of a $69 million special gain related to the slot transaction with Delta. See Note 7 to the condensed consolidated financial statements included in Part I, Item 1A of this report for more information on the Delta transaction. Other nonoperating income of $1 million in the third quarter of 2011 consisted primarily of a $15 million special credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $14 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar during the third quarter of 2011.
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Table of ContentsNine Months Ended September 30, 2012 Compared with the Nine Months Ended September 30, 2011 Operating Revenues:
Total operating revenues in the first nine months of 2012 were $10.55 billion as compared to $9.90 billion in the 2011 period, an increase of $653 million, or 6.6%. Significant changes in the components of operating revenues are as follows:
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Table of ContentsOperating Expenses:
Total operating expenses were $9.82 billion in the first nine months of 2012, an increase of $240 million, or 2.5%, compared to the 2011 period. The increase in operating expenses was primarily driven by a $162 million, or 9.4%, increase in salaries and related costs as well as a $99 million, or 2.9%, increase in mainline and express fuel costs. The increase in salaries and related costs was primarily due to profit sharing and other incentive compensation costs driven by our profitability and the 106% increase in the price of our common stock during the first nine months of 2012. Fuel costs increased as the average price per gallon of fuel increased 1.7% to $3.17 in the first nine months of 2012 from $3.11 in the 2011 period, on a 1.2% increase in consumption. Mainline Operating Expenses per ASM: Our mainline CASM increased 0.06 cents, or 0.5%, from 13.06 cents in the first nine months of 2011 to 13.12 cents in the first nine months of 2012. Excluding special items, fuel and profit sharing our mainline CASM decreased 0.02 cents, or 0.3%, from 8.31 cents in the first nine months of 2011 to 8.29 cents in the first nine months of 2012, while mainline capacity increased 2.7%. The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the nine months ended September 30, 2012 and 2011:
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Significant changes in the components of mainline operating expense per ASM are as follows:
Express Operating Expenses: Total express expenses increased $10 million, or 0.4%, in the first nine months of 2012 to $2.39 billion from $2.38 billion in the 2011 period. The period-over-period increase included a $27 million, or 3.4%, increase in fuel costs, offset in part by a $17 million, or 1.1%, decrease in other express expenses. The average price per gallon of fuel increased 1.8% to $3.18 in the first nine months of 2012 from $3.13 in the 2011 period, on a 1.5% increase in fuel consumption. The decrease in other express expenses was driven by lower maintenance costs primarily due to fewer engine overhauls performed in the 2012 period. Nonoperating Income (Expense):
Other nonoperating income of $125 million in the first nine months of 2012 consisted primarily of a $142 million special gain related to the slot transaction with Delta. See Note 7 to the condensed consolidated financial statements included in Part I, Item 1A of this report for more information on the Delta transaction. This gain was offset in part by $8 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in the first nine months of 2012 and $3 million in special charges for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft. Other nonoperating expense of $7 million in the first nine months of 2011 consisted primarily of $13 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar during the 2011 period, offset by $7 million in net special credits. The net special credits included a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million 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.
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Table of ContentsUS Airways’ Results of Operations In the third quarter of 2012, US Airways realized operating income of $262 million and income before income taxes of $264 million. This compares to operating income of $177 million and income before income taxes of $121 million in the 2011 period. In the first nine months of 2012, US Airways realized operating income of $713 million and income before income taxes of $657 million. This compares to operating income of $326 million and income before income taxes of $157 million in the 2011 period. US Airways’ results for the third quarter and first nine months of 2012 were driven by year-over-year growth in revenues resulting from ongoing industry capacity discipline and consumer demand for air travel. US Airways’ results have been impacted by the following pre-tax net special charges (credits) (in millions):
The 2012 nine month period primarily consisted of a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft. The 2011 third quarter and nine month periods each consisted of a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities. The 2011 nine month period also included $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 nine month periods ended September 30, 2012 and 2011, US Airways did not record federal income tax expense. In each of the three and nine month periods ended September 30, 2012, US Airways recorded $1 million of state income tax expense related to certain states where NOLs were limited. 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 nine month periods ended September 30, 2012 and 2011. In the third quarter of 2011, US Airways completed the liquidation of its entire investment in auction rate securities. As a result of the sale of the final remaining investment in auction rate securities, US Airways recorded a special non-cash tax charge of $21 million which recognized in the statement of operations for the three and nine month periods ended September 30, 2011, the tax provision that was recorded in other comprehensive income, a subset of stockholder’s equity, in the fourth quarter of 2009.
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Table of ContentsThe table below sets forth US Airways’ selected mainline and express operating data:
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Table of ContentsThree Months Ended September 30, 2012 Compared with the Three Months Ended September 30, 2011 Operating Revenues:
Total operating revenues in the third quarter of 2012 were $3.58 billion as compared to $3.48 billion in the 2011 period, an increase of $99 million, or 2.8%. Significant changes in the components of operating revenues are as follows:
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Table of ContentsOperating Expenses:
Total operating expenses were relatively flat at $3.31 billion in the third quarter of 2012, an increase of $14 million, or 0.4%, compared to the 2011 period. Mainline Operating Expenses: Significant changes in the components of mainline operating expenses are as follows:
Express Operating Expenses: Total express expenses decreased $7 million, or 1.0%, in the third quarter of 2012 to $817 million from $824 million in the 2011 period. The period-over-period decrease included a $1 million, or 0.8%, decrease in fuel costs.
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Table of ContentsNonoperating Income (Expense):
Other nonoperating income of $67 million in the third quarter of 2012 consisted primarily of a $69 million special gain related to the slot transaction with Delta. See Note 7 to the condensed consolidated financial statements included in Part I, Item 1B of this report for more information on the Delta transaction. Other nonoperating income of $1 million in the third quarter of 2011 consisted primarily of a $15 million special credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $14 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar during the third quarter of 2011.
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Table of ContentsNine Months Ended September 30, 2012 Compared with the Nine Months Ended September 30, 2011 Operating Revenues:
Total operating revenues in the first nine months of 2012 were $10.67 billion as compared to $10.01 billion in the 2011 period, an increase of $660 million, or 6.6%. Significant changes in the components of operating revenues are as follows:
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Table of ContentsOperating Expenses:
Total operating expenses were $9.96 billion in the first nine months of 2012, an increase of $273 million, or 2.8%, compared to the 2011 period. The increase in operating expenses was primarily driven by a $162 million, or 9.4%, increase in salaries and related costs as well as a $98 million, or 2.9%, increase in mainline and express fuel costs. The increase in salaries and related costs was primarily due to profit sharing and other incentive compensation costs driven by US Airways’ profitability and the 106% increase in the price of US Airways Group’s common stock during the first nine months of 2012. Fuel costs increased as the average price per gallon of fuel increased 1.7% to $3.17 in the first nine months of 2012 from $3.11 in the 2011 period, on a 1.2% increase in consumption. Mainline Operating Expenses: Significant changes in the components of mainline operating expenses are as follows:
Express Operating Expenses: Total express expenses increased $38 million, or 1.6%, in the first nine months of 2012 to $2.49 billion from $2.45 billion in the 2011 period. The period-over-period increase included a $26 million, or 3.3%, increase in fuel costs. The average price per gallon of fuel increased 1.7% to $3.19 in the first nine months of 2012 from $3.13 in the 2011 period, on a 1.5% increase in fuel consumption.
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Table of ContentsNonoperating Income (Expense):
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