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13: EX-21.1 Subsidiaries of the Registrant HTML 9K
14: EX-23.1 Consent of Experts or Counsel HTML 13K
15: EX-24.1 Power of Attorney HTML 28K
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Portions of the proxy statement related to US Airways Group,
Inc.’s 2009 Annual Meeting of Stockholders, which proxy
statement will be filed under the Securities Exchange Act of
1934 within 120 days of the end of US Airways Group,
Inc.’s fiscal year ended December 31, 2008, are
incorporated by reference into Part III of this Annual
Report on
Form 10-K.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined by Rule 405 of the Securities
Act.
US Airways Group, Inc.
Yes
þ
No
o
US Airways, Inc.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
US Airways Group, Inc.
Yes
o
No
þ
US Airways, Inc.
Yes
o
No
þ
Indicate by check mark whether each registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,”“accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
US Airways Group, Inc.
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
US Airways, Inc.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
US Airways Group, Inc.
Yes
o
No
þ
US Airways, Inc.
Yes
o
No
þ
The aggregate market value of common stock held by
non-affiliates of US Airways Group, Inc. as of June 30,2008 was approximately $229 million.
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a court.
US Airways Group, Inc.
Yes
þ
No
o
US Airways, Inc.
Yes
þ
No
o
As of February 12, 2009, there were 114,135,100 shares
of US Airways Group, Inc. common stock outstanding.
As of February 12, 2009, US Airways, Inc. had
1,000 shares of common stock outstanding, all of which were
held by US Airways Group, Inc.
This combined Annual Report on
Form 10-K
is filed by US Airways Group, Inc. (“US Airways
Group”) and its wholly owned subsidiary US Airways, Inc.
(“US Airways”). References in this
Form 10-K
to “we,”“us,”“our” and the
“Company” refer to US Airways Group and its
consolidated subsidiaries.
Note
Concerning Forward-Looking Statements
Certain of the statements contained in this report should be
considered “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements may be identified by words such
as “may,”“will,”“expect,”“intend,”“anticipate,”“believe,”“estimate,”“plan,”“project,”“could,”“should,” and “continue”
and similar terms used in connection with statements regarding
our outlook, expected fuel costs, the revenue environment, and
our expected financial performance. These statements include,
but are not limited to, statements about the benefits of the
business combination transaction involving America West Holdings
Corporation (“America West Holdings”) and US Airways
Group, including 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
Item 1A. “Risk Factors” and the following:
•
the impact of future significant operating losses;
•
economic conditions;
•
changes in prevailing interest rates, a reduction in the
availability of financing and increased costs of financing;
•
our high level of fixed obligations and our ability to obtain
and maintain financing for operations and other purposes and
operate pursuant to the terms of our financing facilities
(particularly the financial covenants);
•
our ability to maintain adequate liquidity;
•
labor costs and relations with unionized employees generally and
the impact and outcome of labor negotiations, including our
ability to complete the integration of the labor groups of US
Airways Group and America West Holdings;
•
our reliance on vendors and service providers and our ability to
obtain and maintain commercially reasonable terms with those
vendors and service providers;
•
the impact of fuel price volatility, significant disruptions in
the supply of aircraft fuel and further significant increases in
fuel prices;
•
our reliance on automated systems and the impact of any failure
or disruption of these systems;
•
the impact of the integration of our business units;
•
the impact of changes in our business model;
•
competitive practices in the industry, including significant
fare restructuring activities, capacity reductions and in court
or out of court restructuring by major airlines;
•
the impact of industry consolidation;
•
our ability to attract and retain qualified personnel;
•
the impact of global instability, including the current
instability in the Middle East, the continuing impact of the
military presence in Iraq and Afghanistan and the terrorist
attacks of September 11, 2001 and the potential impact of
future hostilities, terrorist attacks, infectious disease
outbreaks or other global events that affect travel behavior;
our ability to obtain and maintain adequate facilities and
infrastructure to operate and grow our route network;
•
the impact of environmental laws and regulations;
•
costs of ongoing data security compliance requirements and the
impact of any data security breach;
•
interruptions or disruptions in service at one or more of our
hub airports;
•
the impact of any accident involving our aircraft;
•
delays in scheduled aircraft deliveries or other loss of
anticipated fleet capacity;
•
the impact of possible future increases in insurance costs and
disruptions to insurance markets;
•
weather conditions;
•
the cyclical nature of the airline industry;
•
the impact of foreign currency exchange rate fluctuations;
•
our ability to use pre-merger NOLs and certain other tax
attributes;
•
our ability to maintain contracts that are critical to our
operations;
•
our ability to attract and retain customers; and
•
other risks and uncertainties listed from time to time in our
reports to the Securities and Exchange Commission.
All of the forward-looking statements are qualified in their
entirety by reference to the factors discussed below under
Item 1A. “Risk Factors.” There may be other
factors not identified above, or in Item 1A, 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 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
Form 10-K.
US Airways Group, a Delaware corporation, 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”). US Airways Group was formed in 1982, and its
origins trace back to the formation of All American Aviation in
1939. US Airways Group’s principal executive offices are
located at 111 West Rio Salado Parkway, Tempe, Arizona85281. US Airways Group’s telephone number is
(480) 693-0800,
and its internet address is www.usairways.com.
On May 19, 2005, US Airways Group signed a merger agreement
with America West Holdings Corporation (“America West
Holdings”) pursuant to which America West Holdings merged
with a wholly owned subsidiary of US Airways Group. The merger
agreement was amended by a letter of agreement on July 7,2005. The merger became effective upon US Airways Group’s
emergence from bankruptcy on September 27, 2005.
We operate the fifth largest airline in the United States as
measured by domestic mainline revenue passenger miles
(“RPMs”) and available seat miles (“ASMs”).
For the years ended December 31, 2008, 2007 and 2006,
passenger revenues accounted for approximately 91%, 93% and 93%,
respectively, of our operating revenues. Cargo revenues and
other sources accounted for 9%, 7% and 7% of our operating
revenues in 2008, 2007 and 2006, respectively. We have primary
hubs in Charlotte, Philadelphia and Phoenix and secondary
hubs/focus cities in New York, Washington, D.C.,
Boston and Las Vegas. We offer scheduled passenger service on
more than 3,100 flights daily to 200 communities in the United
States, Canada, Europe, the Caribbean and Latin America. We also
have an established East Coast route network, including the US
Airways Shuttle service, with a substantial presence at capacity
constrained airports including New York’s LaGuardia Airport
and the Washington, D.C. area’s Ronald Reagan
Washington National Airport. We had approximately
55 million passengers boarding our mainline flights in
2008. During 2008, our mainline operation provided regularly
scheduled service or seasonal service at 135 airports. During
2008, the US Airways Express network served 187 airports in the
United States, Canada and Latin America, including 77 airports
also served by our mainline operation. During 2008, US Airways
Express air carriers had approximately 27 million
passengers boarding their planes. As of December 31, 2008,
we operated 354 mainline jets and are supported by our regional
airline subsidiaries and affiliates operating as US Airways
Express either under capacity purchase or prorate agreements,
which operate approximately 238 regional jets and 74 turboprops.
Our results are seasonal. Operating results are typically
highest in the second and third quarters due to greater demand
for air and leisure travel during the summer months and our
combination of business traffic and North-South leisure traffic
in the eastern and western United States during those periods.
For information regarding operating revenue in US Airways
Group’s and US Airways’ principal geographic areas,
see Notes 13 and 12 to their respective financial
statements included in Items 8A and 8B of this
Form 10-K.
MSC and AAL operate in support of our airline subsidiaries in
areas such as the procurement of aviation fuel and insurance.
Available
Information
You may read and copy any materials US Airways Group or US
Airways files with the Securities and Exchange Commission
(“SEC”) at the SEC’s Public Reference Room at
100 F Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
A copy of this Annual Report on
Form 10-K,
as well as other Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports are accessible free of charge at
www.usairways.comand at the SEC’s website at
www.sec.govas soon as reasonably possible after the
report is filed with or furnished to the SEC.
In 2008, the U.S. airline industry faced an extraordinarily
challenging environment. Airlines incurred significant losses as
they faced staggering increases in the price of fuel throughout
most of 2008. The quarterly average cost per barrel of oil below
depicts the runaway nature of fuel prices during 2008:
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
2008
$
98
$
124
$
118
$
59
2007
58
65
75
90
Period over period increase (decrease)
68
%
91
%
57
%
(35
%)
Given the industry capacity levels and continued intense
competition, U.S. airlines were unable to sufficiently
raise ticket prices to cover their largest cost item, jet fuel.
As a result, most U.S. airlines were generating sizeable
losses. These factors served as a catalyst for some airlines to
take the following unprecedented measures to support growth in
ticket prices and preserve liquidity:
•
Substantial capacity reductions. Domestic ASMs are expected to
be down approximately 10% in 2009 as compared to 2008 for the
U.S. airline industry. These capacity cuts are expected to
minimize the impact of reduced passenger demand on revenue,
reduce costs and minimize cash burn.
•
Development and implementation of new revenue initiatives to
supplement existing sources of revenue.
•
Implementation of cost containment strategies to minimize
non-essential expenditures and conserve cash.
•
Enhancement of near-term liquidity through a number of
cash-raising initiatives such as traditional capital market
issuances, asset sales, sale and leaseback transactions and
prepaid sales of frequent flyer program miles to affinity card
issuers.
The then rapid and severe increases in fuel prices, which
appeared to have no end as oil hit an all time high of $147 per
barrel in July 2008, prompted some airlines to contain costs by
increasing their fuel hedge positions. With the industry facing
a liquidity crisis, many airlines’ hedge positions took the
form of no premium collars and swaps, as the cost of traditional
call options to lock in fuel cost became too expensive due to
the volatility in oil prices. By the end of the third quarter,
the rapid climb in oil prices was quickly replaced by an equally
rapid decline in oil prices, driven by a global economic
downturn. While the industry welcomed relief in the price of
fuel, hedges entered into earlier in the year, ahead of
fuel’s rapid decline, generated losses and a near term
drain on liquidity as airlines were forced to post significant
amounts of collateral with their fuel hedging counterparties.
As the industry enters 2009, moderating oil prices are expected
to offset at least some of the effects on passenger demand of
the corresponding weakening economy. Additionally, we believe
the unprecedented industry actions described above to reduce
capacity, support ticket prices and implement new sources of
revenue will further mitigate the impacts of the economic
downturn.
See Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” for our
response to the industry conditions discussed above.
Airline
Operations
We operate a
hub-and-spoke
network with major hubs in Charlotte, Philadelphia and Phoenix
and secondary hubs/focus cities in New York,
Washington, D.C., Boston and Las Vegas.
We dramatically improved our on-time performance and mishandled
baggage ratio. For the year 2008, our 80.1% on-time performance
ranked first among the big six hub and spoke carriers and second
among the ten largest U.S. airlines as measured by the
DOT’s Consumer Air Travel Report. See the “Customer
Service” section below for further discussion.
As a result of the challenging 2008 industry environment, we
reduced our fourth quarter 2008 total mainline capacity by 5.9%
and our Express capacity by 1.3% on a year-over-year basis. In
addition, we plan to reduce our total mainline 2009 capacity by
four to six percent and our Express capacity by five to seven
percent from 2008
levels. We anticipate that these capacity reductions will enable
us to minimize the impact of reduced passenger demand on revenue
and reduce costs.
Despite the capacity reductions in 2008, we were able to
increase service in certain markets. Domestically, we added new
non-stop service from our Charlotte hub to Montreal, Quebec;
Austin and San Antonio, Texas; Fort Walton Beach and
Daytona Beach, Florida; Gulfport, Mississippi and Sacramento,
California, and from our Philadelphia hub to Sacramento,
California. In January 2009, we began service from Washington
National to Akron/Canton, Ohio. In 2008, we also added new
transatlantic service from our Philadelphia hub to London’s
Heathrow Airport and announced three new transatlantic flights
to begin in Spring 2009, including service from our Philadelphia
hub to Birmingham, U.K. and Oslo, Norway as well as service from
our Charlotte hub to Paris, France. We also announced additional
non-stop service from Boston’s Logan International Airport
to eight destinations in Latin America and the Caribbean to
operate in January-March 2009. In addition, we received
Department of Transportation (“DOT”) approval to
operate daily non-stop service from our Philadelphia hub to Tel
Aviv, Israel. Service, which is awaiting Israeli government
approval, is slated to begin in July 2009 utilizing a new
A330-200 aircraft.
In 2007, US Airways and Airbus executed definitive purchase
agreements for the acquisition of 97 aircraft, including 60
single-aisle A320 family aircraft and 37 widebody aircraft
comprised of 22 A350 Xtra Wide Body (“XWB”) aircraft
and 15 A330-200 aircraft. These were in addition to orders for
37 single-aisle A320 family aircraft from a previous Airbus
purchase agreement. The A320 aircraft will be used to replace
older narrowbody aircraft in our fleet. In 2008, we took
delivery of five A321 aircraft. In 2009, we plan to take
delivery of 18 A321 aircraft and two A320 aircraft, with
deliveries of the remaining 72 A320 family aircraft to continue
from 2010 through 2012. We also plan to take delivery of five
A330-200 aircraft in 2009, with the remaining ten A330-200
aircraft to be delivered in
2010-2011.
In October 2008, we amended the terms of the A350 XWB Purchase
Agreement for deliveries of the 22 firm order A350 XWB aircraft
to begin in 2015 rather than 2014 and extending through 2018. We
plan to use the A330-200 and A350 XWB aircraft to replace older
widebody aircraft in our fleet and to facilitate international
growth. In 2008, we also took delivery of the 14 remaining firm
Embraer 190 aircraft on order under our Amended and Restated
Purchase Agreement with Embraer.
Express
Operations
Certain air carriers have code share arrangements with us to
operate under the trade name “US Airways Express.”
Typically, under a code share arrangement, one air carrier
places its designator code and sells tickets on the flights of
another air carrier, which is referred to generically as its
code share partner. US Airways Express carriers are an integral
component of our operating network. We rely heavily on feeder
traffic from our US Airways Express partners, which carry
passengers to our hubs from low-density markets that are
uneconomical for us to serve with large jets. In addition, US
Airways Express operators offer complementary service in our
existing mainline markets by operating flights during off-peak
periods between mainline flights. During 2008, the
US Airways Express network served 187 airports in the
continental United States, Canada and Latin America, including
77 airports also served by our mainline operation. During 2008,
approximately 27 million passengers boarded US Airways
Express air carriers’ planes, approximately 43% of whom
connected to mainline flights. Of these 27 million
passengers, approximately 8 million were enplaned by our
wholly owned regional airlines Piedmont and PSA, approximately
19 million were enplaned by third-party carriers operating
under capacity purchase agreements and less than one million
were enplaned by carriers operating under prorate agreements, as
described below.
The US Airways Express code share arrangements are in the form
of either capacity purchase or prorate agreements. The capacity
purchase agreements provide that all revenues, including
passenger, mail and freight revenues, go to us. In return, we
agree to pay predetermined fees to these airlines for operating
an
agreed-upon
number of aircraft, without regard to the number of passengers
on board. In addition, these agreements provide that certain
variable costs, such as airport landing fees and passenger
liability insurance, will be reimbursed 100% by us. We control
marketing, scheduling, ticketing, pricing and seat inventories.
Under the prorate agreements, the prorate carriers receive a
prorated share of ticket revenue and pay certain service fees to
us. The prorate carrier is responsible for pricing the local,
point to point markets to the extent that we do not have
competing existing service in that market. We are responsible
for pricing all other prorate carrier tickets. The prorate
carrier is also responsible
for all costs incurred operating the aircraft. All US Airways
Express carriers use our reservation systems and have logos,
service marks, aircraft paint schemes and uniforms similar to
our mainline operation.
The following table sets forth our US Airways Express code share
agreements and the number and type of aircraft operated under
those agreements at December 31, 2008. On June 30,2008, Air Midwest, Inc., a US Airways Express prorate carrier
for the first six months of 2008, ceased all operations. Air
Midwest contributed less than 1% to our total Express ASMs.
Number/Type
Carrier
Agreement Type
of Aircraft
PSA(1)
Capacity Purchase
49 regional jets
Piedmont(1)
Capacity Purchase
55 turboprops
Air Wisconsin Airlines Corporation
Capacity Purchase
70 regional jets
Mesa Airlines, Inc.
Capacity Purchase
49 regional jets and 6 turboprops
Chautauqua Airlines, Inc.
Capacity Purchase
9 regional jets
Republic Airways
Capacity Purchase
58 regional jets
Colgan Airlines, Inc.
Prorate
13 turboprops
Trans States Airlines, Inc.
Prorate
3 regional jets
(1)
PSA and Piedmont are wholly owned subsidiaries of US Airways
Group.
Marketing
and Alliance Agreements with Other Airlines
We maintain alliance agreements with several leading domestic
and international carriers to give customers a greater choice of
destinations. Airline alliance agreements provide an array of
benefits that vary by partner. By code sharing, each airline is
able to offer additional destinations to its customers under its
flight designator code without materially increasing operating
expenses and capital expenditures. Frequent flyer arrangements
provide members with extended networks for earning and redeeming
miles on partner carriers. US Airways Club members also have
access to certain partner carriers’ airport lounges. We
also benefit from the distribution strengths of each of our
partner carriers.
In May 2004, US Airways joined the Star Alliance, the
world’s largest airline alliance, which now has 21 member
airlines serving approximately 912 destinations in 159
countries. Three additional carriers are scheduled to join the
Star Alliance in late 2009 or early 2010. Membership in the Star
Alliance further enhances the value of our domestic and
international route network by allowing customers wide access to
the global marketplace. Expanded benefits for customers include
network expansion through code share service, frequent flyer
program benefits, airport lounge access, convenient
single-ticket pricing with electronic tickets, one-stop check-in
and coordinated baggage handling. We also have bilateral
marketing/code sharing agreements with Star Alliance members
Lufthansa, Spanair, bmi, TAP Portugal, Swiss International,
Asiana, Air New Zealand, Air China and Singapore Airlines. Other
international code sharing partners include Italy’s Air
One, Royal Jordanian Airlines, EVA Airways and Virgin Atlantic
Airways. Marketing/code sharing agreements are maintained with
two smaller regional carriers in the Caribbean that operate
collectively as the “GoCaribbean” network. Each of
these code share agreements funnel international traffic onto
our domestic flights or support specific markets operated by us
in Europe and the Caribbean. Domestically, we code share with
Hawaiian Airlines on intra-Hawaii flights.
In addition, we have comprehensive marketing and code sharing
agreements with United Airlines, a member of the Star Alliance,
which began in July 2002. In February 2008, US Airways and
United reached final agreement on amendments to the contracts
governing their relationship, following each carrier’s
reorganization through bankruptcy. Following the June 2008
announcement of the United-Continental Airlines marketing
agreements and Continental’s plans to join the Star
Alliance, we reaffirmed our code share agreements with United
and our continued participation in the Star Alliance.
Most of the markets in which we operate are highly competitive.
Price competition occurs on a
market-by-market
basis through price discounts, changes in pricing structures,
fare matching, target promotions and frequent flyer initiatives.
Airlines typically use discount fares and other promotions to
stimulate traffic during normally slack travel periods to
generate cash flow and to maximize revenue per ASM. Discount and
promotional fares are generally non-refundable and may be
subject to various restrictions such as minimum stay
requirements, advance ticketing, limited seating and change
fees. We have often elected to match discount or promotional
fares initiated by other air carriers in certain markets in
order to compete in those markets. Most airlines will quickly
match price reductions in a particular market. Our ability to
compete on the basis of price is limited by our fixed costs and
depends on our ability to maintain our operating costs. In
addition, recent years have seen the entrance and growth of
low-fare, low-cost competitors in many of the markets in which
we operate. These competitors include Southwest Airlines Co.,
AirTran Airways, Inc., Frontier Airlines, Inc. and JetBlue
Airways. Some of these low cost carriers have lower operating
cost structures than US Airways.
We also compete on the basis of scheduling (frequency and flight
times), availability of nonstop flights, on-time performance,
type of equipment, cabin configuration, amenities provided to
passengers, frequent flyer programs, the automation of travel
agent reservation systems, on-board products, markets served and
other services. We compete with both major full service airlines
and low-cost airlines throughout our network of hubs and focus
cities.
In addition, because we operate a significant number of flights
in the eastern United States, our average trip distance, or
stage length, is shorter than those of other major airlines.
This makes us more susceptible than other major airlines to
competition from surface transportation such as automobiles and
trains.
Industry
Regulation and Airport Access
Our airline subsidiaries operate under certificates of public
convenience and necessity or certificates of commuter authority,
both of which are issued by the DOT. These certificates may be
altered, amended, modified or suspended by the DOT if the public
convenience and necessity so require, or may be revoked for
failure to comply with the terms and conditions of the
certificates.
Airlines are also regulated by the Federal Aviation
Administration (“FAA”), primarily in the areas of
flight operations, maintenance, ground facilities and other
operational and safety areas. Pursuant to these regulations, our
airline subsidiaries have FAA-approved maintenance programs for
each type of aircraft they operate. The programs provide for the
ongoing maintenance of such aircraft, ranging from periodic
routine inspections to major overhauls. From time to time, the
FAA issues airworthiness directives and other regulations
affecting our airline subsidiaries or one or more of the
aircraft types they operate. In recent years, for example, the
FAA has issued or proposed mandates relating to, among other
things, enhanced ground proximity warning systems, fuselage
pressure bulkhead reinforcement, fuselage lap joint inspection
rework, increased inspections and maintenance procedures to be
conducted on certain aircraft, increased cockpit security, fuel
tank flammability reductions and domestic reduced vertical
separation. Regulations of this sort tend to enhance safety and
increase operating costs.
The DOT allows local airport authorities to implement procedures
designed to abate special noise problems, provided such
procedures do not unreasonably interfere with interstate or
foreign commerce or the national transportation system. Certain
locales, including Boston, Washington, D.C., Chicago,
San Diego and San Francisco, among others, have
established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the
number of hourly or daily operations or the time of these
operations. In some instances these restrictions have caused
curtailments in services or increases in operating costs, and
these restrictions could limit the ability of our airline
subsidiaries to expand their operations at the affected
airports. Authorities at other airports may consider adopting
similar noise regulations.
The airline industry is also subject to increasingly stringent
federal, state and local laws aimed at protecting the
environment. Future regulatory developments and actions could
affect operations and increase operating costs for the airline
industry, including our airline subsidiaries. For more
discussion of environmental regulation, see
Item 1A. “Risk Factors — Risk Factors
Relating to the Company and Industry Related Risks —
We are subject to many forms of environmental regulation and
may incur substantial costs as a result.”
Our airline subsidiaries are obligated to collect a federal
excise tax, commonly referred to as the “ticket tax,”
on domestic and international air transportation. Our airline
subsidiaries collect the ticket tax, along with certain other
U.S. and foreign taxes and user fees on air transportation,
and pass along the collected amounts to the appropriate
governmental agencies. Although these taxes are not our
operating expenses, they represent an additional cost to our
customers. There are a number of efforts in Congress to raise
different portions of the various taxes imposed on airlines and
their passengers.
The Aviation and Transportation Security Act (the “Aviation
Security Act”) was enacted in November 2001. Under the
Aviation Security Act, substantially all aspects of civil
aviation security screening were federalized, and a new
Transportation Security Administration (the “TSA”)
under the DOT was created. The TSA was then transferred to the
Department of Homeland Security pursuant to the Homeland
Security Act of 2002. The Aviation Security Act, among other
matters, mandates improved flight deck security; carriage at no
charge of federal air marshals; enhanced security screening of
passengers, baggage, cargo, mail, employees and vendors;
enhanced security training; fingerprint-based background checks
of all employees and vendor employees with access to secure
areas of airports pursuant to regulations issued in connection
with the Aviation Security Act; and the provision of certain
passenger data to U.S. Customs and Border Protection.
Funding for the TSA is provided by a combination of air-carrier
fees, passenger fees and taxpayer monies. A “passenger
security fee,” which is collected by air carriers from
their passengers, is currently set at a rate of $2.50 per flight
segment but not more than $10 per round trip. An air-carrier
fee, or Aviation Security Infrastructure Fee (“ASIF”),
has also been imposed with an annual cap equivalent to the
amount that an individual air carrier paid in calendar year 2000
for the screening of passengers and property. TSA may lift this
cap at any time and set a new higher fee for air carriers.
In 2008, we incurred expenses of $53 million for the ASIF,
including amounts paid by US Airways Group’s wholly owned
regional subsidiaries and amounts attributable to regional
carriers. Implementation of the requirements of the Aviation
Security Act have resulted and will continue to result in
increased costs for us and our passengers and has and will
likely continue to result in service disruptions and delays. As
a result of competitive pressure, US Airways and other airlines
may be unable to recover all of these additional security costs
from passengers through increased fares. In addition, we cannot
forecast what new security and safety requirements may be
imposed in the future or the costs or financial impact of
complying with any such requirements.
Most major U.S. airports impose a passenger facility
charge. The ability of airlines to contest increases in this
charge is restricted by federal legislation, DOT regulations and
judicial decisions. With certain exceptions, air carriers pass
these charges on to passengers. However, our ability to pass
through passenger facility charges to our customers is subject
to various factors, including market conditions and competitive
factors. The current cap on the passenger facility charge is
$4.50 per passenger.
At John F. Kennedy International, LaGuardia, Newark Liberty
International and Reagan National Airports, which are designated
“High Density Airports” by the FAA, there are
restrictions that limit the number of departure and arrival
slots available to air carriers during peak hours. In April
2000, legislation was enacted that eliminated slot restrictions
in January 2007 at LaGuardia and Kennedy. The FAA proposed a
comprehensive final rule for LaGuardia in August 2006. The
proposed rule would require a minimum number of seats on certain
operations to/from LaGuardia. Failure to comply with the minimum
seat requirement would lead to the withdrawal of operating
authority until compliance is achieved. The proposed rule also
introduces a finite lifespan for “operating
authorizations” of no more than ten years. The FAA intends
to seek Congressional approval for the introduction of market
based mechanisms for allocating expiring operating
authorizations. We filed extensive comments with the FAA in
December 2006 detailing the numerous concerns we have with the
proposed rule. Other than making some technical corrections to
the current operating restrictions at LaGuardia, no other action
concerning the level of operations at LaGuardia was taken by the
federal government in 2007. The DOT and FAA convened an Aviation
Rulemaking Committee (“ARC”) to address congestion and
delays in the New York region.
On October 10, 2008, the FAA finalized new rules governing
flight operations at the three major New York airports. The new
rules were scheduled to take effect in December 2008. However,
on December 8, 2008, at the request of the Air Transport
Association (“ATA”) and others, the U.S. Court of
Appeals for the Washington D.C. Circuit issued a stay order
prohibiting the new rules from taking effect. The litigation
surrounding the legality of the final rules will continue
forward in 2009. If the new rules are upheld, the FAA will
withdraw approximately 15% of the industry slots at LaGuardia.
If deemed legal, the rules will reduce the number of flights US
Airways can offer at LaGuardia over a five year period.
Additionally, the DOT recently finalized a policy change that
will permit airports to charge differentiated landing fees
during congested periods, which could impact our ability to
serve certain markets in the future. This policy change is also
the source of pending litigation.
The FAA is now pursuing a voluntary return of slots at LaGuardia
in an effort to reduce the current number of scheduled
operations from 75 per hour to 71 per hour in order to reduce
congestion. In addition, the government capped operations at
both Kennedy and Newark starting during the first quarter of
2008. Thus, airlines will not be able to add flights at
LaGuardia, Kennedy or Newark without acquiring operating rights
from another carrier. In the future, takeoff and landing time
restrictions and other restrictions on the use of various
airports and their facilities may result in further curtailment
of services by, and increased operating costs for, individual
airlines, including our airline subsidiaries, particularly in
light of the increase in the number of airlines operating at
these airports.
The availability of international routes to domestic air
carriers is regulated by agreements between the U.S. and
foreign governments. Changes in U.S. or foreign government
aviation policy could result in the alteration or termination of
these agreements and affect our international operations. We
could continue to see significant changes in terms of air
service between the United States and Europe as a result of the
implementation of the U.S. and the EU Air Transport
Agreement, generally referred to as the Open Skies Agreement,
which took effect in March 2008. The Open Skies Agreement
removes bilateral restrictions on the number of flights between
the U.S. and EU. One result of the Open Skies Agreement has
been the application before the DOT for antitrust immunity
between Star Alliance members and Continental, and oneworld
members and American Airlines. If granted, antitrust immunity
permits carriers to coordinate schedules, pricing and other
competitive aspects on international routes to/from the United
States. It is possible that the grant of these immunities could
have an impact on our international operations.
The DOT has proposed several new initiatives concerning airline
obligations toward passengers. During 2008, the DOT finalized
rules pertaining to denied boarding compensation requiring
additional consumer disclosure and higher payments to
passengers. In addition, the DOT established a task force on
long on-board delays that resulted in the issuance of a final
report suggesting model contingency plans for long on-board
delays. Contemporaneous with the end of the task force, the DOT
issued additional proposed rules that would place additional
requirements on airlines concerning service irregularities,
consumer rights and contract of carriage obligations.
The New York State Passenger Bill of Rights law, which requires
airlines to provide certain services to passengers on flights
within the state that undergo extended on-board ground delays,
was overturned in the U.S. Court of Appeals for the
2nd Circuit, but new passenger bill of rights legislation
has been introduced in the current session of Congress.
Employees
and Labor Relations
Our businesses are labor intensive. In 2008, wages, salaries and
benefits represented approximately 18% of our operating
expenses. As of December 31, 2008, we employed
approximately 37,500 active full-time equivalent employees. Of
this amount, US Airways employed approximately 32,700 active
full-time equivalent employees including approximately 4,200
pilots, 7,100 flight attendants, 6,800 passenger service
personnel, 6,600 fleet service personnel, 3,100 maintenance
personnel and 4,900 personnel in administrative and various
other job categories. US Airways Group’s remaining
subsidiaries employed approximately 4,800 active full-time
equivalent employees including approximately 800 pilots, 500
flight attendants, 2,600 passenger service personnel, 500
maintenance personnel and 400 personnel in administrative
and various other job categories.
A large majority of the employees of the major airlines in the
United States are represented by labor unions. As of
December 31, 2008, approximately 87% of our active
employees were represented by various labor unions.
Since the merger, we have been in the process of integrating the
labor agreements of US Airways and America West Airlines
(“AWA”). Listed below are the integrated labor
agreements and the status of the US Airways and AWA labor
agreements that remain separate with their major domestic
employee groups.
Contract
Union
Class or Craft
Employees(1)
Amendable
Integrated labor agreements:
International Association of Machinists & Aerospace
Workers (“IAM”)
Fleet Service
6,600
12/31/2011
(2)
Airline Customer Service Employee
Association — IBT and CWA (the “Association”)
Passenger Service
6,800
12/31/2011
IAM
Mechanics, Stock Clerks and
Related
3,100
12/31/2011
(3)
IAM
Maintenance Training Instructors
30
12/31/2011
(4)
Transport Workers Union (“TWU”)
Dispatch
200
12/31/2009
TWU
Flight Crew Training Instructors
100
12/31/2011
TWU
Flight Simulator Engineers
50
12/31/2011
US Airways:
Air Line Pilots Association (“ALPA”)
Pilots
2,700
12/31/2009
(5)
Association of Flight Attendants-CWA (“AFA”)
Flight Attendants
4,800
12/31/2011
(6)
AWA:
ALPA
Pilots
1,500
12/30/2006
(5)
AFA
Flight Attendants
2,300
05/04/2004
(6)
(1)
Approximate number of active full-time equivalent employees
covered by the contract as of December 31, 2008.
(2)
In May 2008, US Airways and IAM District 141 ratified a new
unified agreement that moved all US Airways’ fleet service
employees to one labor contract. The new contract moved
pre-merger AWA fleet service employees to the terms of the
pre-merger US Airways contract and modified the existing US
Airways agreement in ways that were mutually beneficial to the
employees and US Airways.
(3)
In April 2008, US Airways and IAM District 142 ratified a new
unified agreement that moved all US Airways’ maintenance
and related employees to one labor contract. The new contract
moved pre-merger AWA maintenance, stock clerk and related
employees to the higher pay scales of the pre-merger US Airways
labor contract and modified the existing US Airways labor
agreement in ways that were mutually beneficial to the employees
and US Airways.
(4)
In May 2008, US Airways and IAM District 142 ratified a new
agreement that moved all US Airways’ maintenance training
instructors to one labor contract.
(5)
Pilots continue to work under the terms of their separate US
Airways and AWA collective bargaining agreements, as modified by
the transition agreements reached in connection with the merger.
(6)
In negotiations for a single labor agreement applicable to both
US Airways and AWA. On December 15, 2005, the National
Mediation Board recessed AFA’s separate contract
negotiations with AWA indefinitely. Flight attendants continue
to work under the terms of their separate US Airways and AWA
collective bargaining agreements, as modified by the transition
agreements reached in connection with the merger.
On April 18, 2008, the National Mediation Board certified
the US Airline Pilots Association (“USAPA”) as the
collective bargaining representative for the pilots of the
combined company, including pilot groups from both pre-merger
AWA and US Airways. Since that time, we have been engaged in
negotiations with USAPA over the terms of a single labor
agreement covering both groups. In the meantime, while those
negotiations are underway, each of the pilot groups continues to
be covered by the ALPA collective bargaining agreements
referenced above.
On November 21, 2008, the National Mediation Board notified
us that an application for representation of the Customer
Service Training Instructors had been filed by the TWU. We
responded that the appropriate craft or class should also
include the Fleet Service Training Instructors. The National
Mediation Board conducted an investigation and determined that
the craft or class includes both Customer Service and Fleet
Service Training Instructors. Further, the National Mediation
Board ordered a representation election with voting beginning on
January 29, 2009 and concluding on February 20, 2009.
There are few remaining unrepresented employee groups that could
engage in organization efforts. We cannot predict the outcome of
any future efforts to organize those remaining employees or the
terms of any future labor agreements or the effect, if any, on
US Airways’ operations or financial performance. For more
discussion, see Item 1A. “Risk Factors —
Risk Factors Relating to the Company and Industry Related
Risks — Union disputes, employee strikes and other
labor-related disruptions may adversely affect our
operations.”
Aviation
Fuel
In 2008, aviation fuel was our largest expense. The average cost
of a gallon of aviation fuel for our mainline and Express
operations increased 44.1% from 2007 to 2008, and our total
mainline and Express fuel expense increased $1.36 billion
or 40.1% from 2007 to 2008. We estimate that a one cent per
gallon change in fuel prices will result in a $14 million
increase/decrease in annual fuel expense. While there has been
recent relief in the price of oil, the cost of fuel remains
volatile. Because the operations of our airline are dependent
upon aviation fuel, increases in aviation fuel costs could
materially and adversely affect liquidity, results of operations
and financial condition.
We currently utilize heating-oil based derivative instruments to
hedge a portion of our exposure to oil price increases. As of
December 31, 2008, we had entered into fuel hedging
transactions using no premium collars, which establish an upper
and lower limit on heating oil futures prices. These
transactions are in place with respect to approximately 14% of
our 2009 fuel consumption requirements. Since the third quarter
of 2008, we have not entered into any new transactions as part
of our fuel hedging program due to the impact collateral
requirements could have on our liquidity resulting from the
significant decline in the price of oil and counterparty credit
risk arising from global economic uncertainty. During 2008, 2007
and 2006, we recognized a net loss of $356 million, a net
gain of $245 million and a net loss of $79 million,
respectively, related to fuel hedging activities. The
2008 net loss on our fuel hedging derivatives was driven by
the significant decline in the price of oil in the latter part
of 2008.
The following table shows annual aircraft fuel consumption and
costs for our mainline operations for 2006 through 2008 (gallons
and aircraft fuel expense in millions):
Average Price
Aircraft Fuel
Percentage of Total
Year
Gallons
per Gallon(1)
Expense(1)
Operating Expenses
2008
1,142
$
3.17
$
3,618
33.3
%
2007
1,195
2.20
2,630
30.7
%
2006
1,210
2.08
2,518
29.8
%
(1)
Includes fuel taxes and excludes the impact of fuel hedges. The
impact of fuel hedges is described in Item 7 under “US
Airways Group’s Results of Operations” and “US
Airways’ Results of Operations.”
In addition, we incur fuel expenses related to our Express
operations. For the years ended December 31, 2008, 2007 and
2006, total fuel expenses for US Airways Group’s wholly
owned regional airlines, affiliate regional airlines operating
under capacity purchase agreements as US Airways Express, and US
Airways’ former MidAtlantic division was
$1.14 billion, $765 million and $764 million,
respectively.
Prices and availability of all petroleum products are subject to
political, economic and market factors that are generally
outside of our control. Accordingly, the price and availability
of aviation fuel, as well as other petroleum products, can be
unpredictable. Prices may be affected by many factors, including:
•
the impact of global political instability on crude production;
•
unexpected changes to the availability of petroleum products due
to disruptions in distribution systems or refineries, as
evidenced in the third quarter of 2005 when Hurricane Katrina
and Hurricane Rita caused
widespread disruption to oil production, refinery operations and
pipeline capacity along certain portions of the U.S. Gulf
Coast. As a result of these disruptions, the price of jet fuel
increased significantly and the availability of jet fuel
supplies was diminished;
•
unpredictable increases to oil demand due to weather or the pace
of economic growth;
•
inventory levels of crude, refined products and natural
gas; and
•
other factors, such as the relative fluctuation in value between
the U.S. dollar and other major currencies and the
influence of speculative positions on the futures exchanges.
Insurance
US Airways Group and its subsidiaries maintain insurance of the
types and in amounts deemed adequate to protect themselves and
their property. Principal coverage includes:
•
liability for injury to members of the public, including
passengers;
•
damage to property of US Airways Group, its subsidiaries and
others;
•
loss of or damage to flight equipment, whether on the ground or
in flight;
•
fire and extended coverage;
•
directors’ and officers’ liability;
•
travel agents’ errors and omissions;
•
advertiser and media liability;
•
cyber risk liability;
•
fiduciary; and
•
workers’ compensation and employer’s liability.
Since September 11, 2001, US Airways Group and other
airlines have been unable to obtain coverage for liability to
persons other than employees and passengers for claims resulting
from acts of terrorism, war or similar events, which coverage is
called war risk coverage, at reasonable rates from the
commercial insurance market. US Airways, therefore,
purchased its war risk coverage through a special program
administered by the FAA, as have most other U.S. airlines.
The Emergency Wartime Supplemental Appropriations Act extended
this insurance protection until August 2005. The program was
subsequently extended, with the same conditions and premiums,
until March 31, 2009. If the federal insurance program
terminates, we would likely face a material increase in the cost
of war risk coverage, and because of competitive pressures in
the industry, our ability to pass this additional cost to
passengers may be limited.
Customer
Service
We are committed to running a successful airline. One of the
important ways we do this is by taking care of our customers. We
believe that our focus on excellent customer service in every
aspect of our operations, including personnel, flight equipment,
inflight and ancillary amenities, on-time performance, flight
completion ratios and baggage handling, will strengthen customer
loyalty and attract new customers.
Throughout 2007 and 2008, we implemented several ongoing
initiatives to improve operational performance, including
lengthening the operating day at our hubs, lowering utilization,
increasing the number of designated spare aircraft and
implementing new baggage handling software and handheld baggage
scanners in order to ensure operational reliability. The
implementation of these initiatives along with other performance
improvement initiatives resulted in an improved trend in
operational performance.
For the year 2008, our 80.1% on-time performance ranked first
among the big six hub and spoke carriers and second among the
ten largest U.S. airlines as measured by the DOT’s
Consumer Air Travel Report. In addition, our mishandled baggage
ratio per 1,000 passengers improved dramatically to 4.77,
representing more than a 40%
improvement from our 2007 rate of 8.47. Our rate of customer
complaints filed with the DOT per 100,000 passengers also
improved, decreasing to 2.01 in 2008 from 3.16 in 2007.
We reported the following combined operating statistics to the
DOT for mainline operations for the years ended
December 31, 2008, 2007 and 2006:
Full Year
2008
2007
2006
On-time performance(a)
80.1
68.7
76.9
Completion factor(b)
98.5
98.2
98.9
Mishandled baggage(c)
4.77
8.47
7.88
Customer complaints(d)
2.01
3.16
1.36
(a)
Percentage of reported flight operations arriving on time as
defined by the DOT.
(b)
Percentage of scheduled flight operations completed.
(c)
Rate of mishandled baggage reports per 1,000 passengers.
(d)
Rate of customer complaints filed with the DOT per 100,000
passengers.
Frequent
Traveler Program
All major United States airlines offer frequent flyer programs
to encourage travel on their respective airlines and customer
loyalty. Our Dividend Miles frequent flyer program allows
participants to earn mileage credits for each paid flight
segment on US Airways, Star Alliance carriers and certain other
airlines that participate in the program. Participants flying in
first class or Envoy class may receive additional mileage
credits. Participants can also receive mileage credits through
special promotions that we periodically offer and may also earn
mileage credits by utilizing certain credit cards and purchasing
services from non-airline partners such as hotels and rental car
agencies. We sell mileage credits to credit card companies,
telephone companies, hotels, car rental agencies and others that
participate in the Dividend Miles program. Mileage credits can
be redeemed for a travel award or first class upgrades on US
Airways, Star Alliance carriers or other participating airlines.
We and the other participating airline partners limit the number
of seats allocated per flight for award recipients by using
various inventory management techniques. Award travel for all
but the highest-level Dividend Miles participants is
generally not permitted on blackout dates, which correspond to
certain holiday periods or peak travel dates. We reserve the
right to terminate Dividend Miles or portions of the program at
any time. Program rules, partners, special offers, blackout
dates, awards and requisite mileage levels for awards are
subject to change. In 2008, we implemented processing fees for
issuing awards ranging from $25 to $50 depending on destination,
as well as a $50 to $75 fee for redeeming awards within
14 days of the travel date depending on booking method.
Ticket
Distribution
Passengers can book tickets for travel on US Airways through
several distribution channels including our direct website
(www.usairways.com), online travel agent sites (e.g.,
Orbitz, Travelocity, Expedia and others), traditional travel
agents, reservations centers and airline ticket offices.
Traditional travel agencies use Global Distribution Systems
(“GDSs”), such as Sabre Travel
Network®,
to obtain their fare and inventory data from airlines. Bookings
made through these agencies result in a fee, referred to as a
“GDS fee,” that is charged to the airline. Bookings
made directly with an airline, through its reservation call
centers or website, do not generate a GDS fee. Travel agent
sites that connect directly to airline host systems, effectively
by-passing the traditional connection via GDSs, help us reduce
distribution costs. In 2008, we received 57% of our sales from
internet sites. Our website accounted for 25% of our sales,
while other internet sites accounted for 32% of our sales.
During 2008, electronic tickets represented 99% of all tickets
issued to customers flying US Airways. Electronic tickets serve
to enhance customer service and control costs for ticketing
services supported by the airline and its distribution partners.
Our $50 surcharge to most customers requiring paper tickets has
allowed us to continue to support exceptional requests, while
offsetting any cost variance associated with the issuance and
postal fulfillment of paper tickets.
In an effort to further reduce distribution costs through
internal channels, we have instituted service fees for customer
interaction, which were increased in 2008, in the following
internal distribution channels: reservation call centers ($25
per domestic ticket, $35 per international ticket), airport
ticket offices ($35 per domestic ticket, $45 per international
ticket) and city ticket offices ($35 per domestic ticket, $45
per international ticket). Other services provided through these
channels remain available with no extra fees. The goals of these
service fees are to reduce the cost to us of providing customer
service as required by the traveler and to promote the continued
goal of shifting customers to our lowest cost distribution
channel, www.usairways.com. Other airlines have
instituted similar fee structures. Internal channels of
distribution account for 33% of our sales.
US
Airways Vacations
Through US Airways Vacations (“USV”), we sell
individual and group travel packages including air
transportation on US Airways, US Airways Express and all US
Airways codeshare partners, hotel accommodations, car rentals
and other travel products. USV packages are marketed directly to
consumers and through retail travel agencies in several
countries and include travel to destinations throughout the
U.S., Latin America, the Caribbean and Europe.
USV is focused on high-volume leisure travel products that have
traditionally provided high profit margins. USV has negotiated
several strategic partnerships with hotels, internet travel
sites and media companies to capitalize on the continued growth
in online travel sales. USV sells vacation packages and hotel
rooms through its call center; via the internet and its
websites, www.usairwaysvacations.comand
www.usvtravelagents.com; through global distribution
systems Sabre Vacations, Amadeus AgentNet and VAX; and through
third-party websites on a co-branded or private-label basis. In
2008, approximately 84% of USV’s total bookings were made
electronically, compared to 78% in 2007.
During 2008, USV operated co-branded websites for nine partner
companies, including Costco Travel, Vegas.com, LasVegas.com and
BestFares.com. These co-branded sites provide a retail presence
via distribution channels such as Costco wholesale warehouses
and other company websites where we and USV may not otherwise be
a part of the consumer’s consideration set. USV intends to
continue to add new co-branded websites as opportunities present
themselves.
Pre-merger
US Airways Group’s Chapter 11 Bankruptcy
Proceedings
On September 12, 2004, US Airways Group and its domestic
subsidiaries, US Airways, Piedmont, PSA and MSC (collectively,
the “Debtors”), which at the time accounted for
substantially all of the operations of US Airways Group, filed
voluntary petitions for relief under Chapter 11 of the
U.S. Bankruptcy Code (the “Bankruptcy Code”) in
the United States Bankruptcy Court for the Eastern District of
Virginia, Alexandria Division (the “Bankruptcy
Court”). On September 16, 2005, the Bankruptcy Court
issued an order confirming the Debtors’ plan of
reorganization. The plan of reorganization, which was based upon
the completion of the merger, among other things, set forth a
revised capital structure and established the corporate
governance for US Airways Group following the merger and
subsequent to emergence from bankruptcy. Under the plan of
reorganization, the Debtors’ general unsecured creditors
received 8.2 million shares of the new common stock of US
Airways Group, which represented approximately 10% of our common
stock outstanding as of the completion of the merger. The
holders of US Airways Group common stock outstanding prior to
the merger received no distribution on account of their
interests, and their existing stock was canceled.
In accordance with the Bankruptcy Code, the plan of
reorganization classified claims into classes according to their
relative priority and other criteria and provided for the
treatment of each class of claims. Pursuant to the bankruptcy
process, the Debtors’ claims agent received timely-filed
proofs of claims totaling approximately $26.4 billion in
the aggregate, exclusive of approximately $13.6 billion in
claims filed by governmental entities. The Debtors continue to
be responsible for administering and resolving claims related to
the bankruptcy process. The administrative claims objection
deadline passed on September 15, 2006. As of
December 31, 2008, there were approximately
$157 million of unresolved claims. The ultimate resolution
of certain of the claims asserted against the Debtors in the
Chapter 11 cases will be subject to negotiations, elections
and Bankruptcy Court procedures. The recovery to individual
creditors ultimately distributed to any particular general
unsecured creditor under the plan of reorganization will depend
on a number of variables, including the agreed value of any
general unsecured claims filed by that creditor, the aggregate
value of all resolved general unsecured claims and the value of
shares of the new common stock of US Airways Group in
the marketplace at the time of distribution. The effects of
these distributions were reflected in US Airways’ financial
statements upon emergence and will not have any further impact
on the results of operations.
Item 1A.
Risk
Factors
Below are a series of risk factors that may affect our results
of operations or financial performance. We caution the reader
that these risk factors may not be exhaustive. We operate in a
continually changing business environment, and new risk factors
emerge from time to time. Management cannot predict such new
risk factors, nor can it assess the impact, if any, of these
risk factors on our business or the extent to which any factor
or combination of factors may impact our business.
Risk
Factors Relating to the Company and Industry Related
Risks
US
Airways Group could experience significant operating losses in
the future.
There are several reasons, including those addressed in these
risk factors, why US Airways Group might fail to achieve
profitability and might in fact experience significant losses.
In particular, the weakened condition of the economy and the
high volatility of fuel prices have had and continue to have an
impact on our operating results, and overall worsening economic
conditions increase the risk that we will experience losses.
Our
business may be adversely affected by a downturn in economic
conditions.
Due to the discretionary nature of business and leisure travel
spending, airline industry revenues are heavily influenced by
the condition of the U.S. economy and the economies in
other regions of the world. Unfavorable conditions in these
broader economies can result in decreased passenger demand for
air travel and changes in booking practices, both of which in
turn can have a strong negative effect on our revenues. In
addition, during challenging economic times, actions by our
competitors to increase their revenues can have an adverse
impact on our revenues. See “The airline industry isintensely competitive and dynamic” below. Certain
contractual obligations limit our ability to shrink the number
of aircraft in operation below certain levels. As a result, we
may not be able to optimize the number of aircraft in operation
compared to a decrease in passenger demand for air travel.
Increased
costs of financing, a reduction in the availability of financing
and fluctuations in interest rates could adversely affect our
liquidity, operating expenses and results.
Changes in the domestic and global financial markets may
increase our costs and adversely affect our ability to obtain
financing needed for the acquisition of aircraft that we have
contractual commitments to purchase and for other types of
financings we may seek in order to raise capital or fund other
types of obligations. Any downgrades to our credit rating may
likewise increase the cost and reduce the availability of
financings.
Further, a substantial portion of our indebtedness bears
interest at fluctuating interest rates. These are primarily
based on the London interbank offered rate for deposits of
U.S. dollars, or “LIBOR.” LIBOR tends to
fluctuate based on general economic conditions, general interest
rates, federal reserve rates and the supply of and demand for
credit in the London interbank market. We have not hedged our
interest rate exposure and, accordingly, our interest expense
for any particular period may fluctuate based on LIBOR and other
variable interest rates. To the extent these interest rates
increase, our interest expense will increase, in which event we
may have difficulties making interest payments and funding our
other fixed costs, and our available cash flow for general
corporate requirements may be adversely affected. See also the
discussion of interest rate risk in Part II, Item 7A.
Our
high level of fixed obligations limits our ability to fund
general corporate requirements and obtain additional financing,
limits our flexibility in responding to competitive developments
and increases our vulnerability to adverse economic and industry
conditions.
We have a significant amount of fixed obligations, including
debt, aircraft leases and financings, aircraft purchase
commitments, leases and developments of airport and other
facilities and other cash obligations. We also
have certain guaranteed costs associated with our regional
alliances. As a result of the substantial fixed costs associated
with these obligations:
•
A decrease in revenues results in a disproportionately greater
percentage decrease in earnings.
•
We may not have sufficient liquidity to fund all of these fixed
costs if our revenues decline or costs increase.
•
We may have to use our working capital to fund these fixed costs
instead of funding general corporate requirements, including
capital expenditures.
•
We may not have sufficient liquidity to respond to competitive
developments and adverse economic conditions.
Our obligations also impact our ability to obtain additional
financing, if needed, and our flexibility in the conduct of our
business. Our existing indebtedness is secured by substantially
all of our assets. Moreover, the terms of our Citicorp credit
facility and certain of our other financing arrangements require
us to maintain consolidated unrestricted cash and cash
equivalents of not less than $850 million, with not less
than $750 million (subject to partial reductions upon
certain reductions in the outstanding principal amount of the
loan) of that amount held in accounts subject to control
agreements.
Our ability to pay the fixed costs associated with our
contractual obligations depends on our operating performance and
cash flow, which in turn depend on general economic and
political conditions. A failure to pay our fixed costs or a
breach of the contractual obligations could result in a variety
of adverse consequences, including the acceleration of our
indebtedness, the withholding of credit card proceeds by the
credit card servicers and the exercise of remedies by our
creditors and lessors. In such a situation, it is unlikely that
we would be able to fulfill our contractual obligations, repay
the accelerated indebtedness, make required lease payments or
otherwise cover our fixed costs.
If our
financial condition worsens, provisions in our credit card
processing and other commercial agreements may adversely affect
our liquidity.
We have agreements with companies that process customer credit
card transactions for the sale of air travel and other services.
These agreements allow these processing companies, under certain
conditions, to hold an amount of our cash (referred to as a
“holdback”) equal to a portion of advance ticket sales
that have been processed by that company, but for which we have
not yet provided the air transportation. These holdback
requirements can be modified at the discretion of the processing
companies upon the occurrence of specific events, including
material adverse changes in our financial condition. An increase
in the current holdback balances to higher percentages up to and
including 100% of relevant advanced ticket sales could
materially reduce our liquidity. Likewise, other of our
commercial agreements contain provisions that allow other
entities to impose less favorable terms, including an
acceleration of amounts due, in the event of material adverse
changes in our financial condition.
Union
disputes, employee strikes and other labor-related disruptions
may adversely affect our operations.
Relations between air carriers and labor unions in the United
States are governed by the Railway Labor Act (the
“RLA”). Under the RLA, collective bargaining
agreements generally contain “amendable dates” rather
than expiration dates, and the RLA requires that a carrier
maintain the existing terms and conditions of employment
following the amendable date through a multi-stage and usually
lengthy series of bargaining processes overseen by the National
Mediation Board. These processes do not apply to our current and
ongoing negotiations for post-merger integrated labor
agreements, and this means unions may not lawfully engage in
concerted refusals to work, such as strikes, slow-downs,
sick-outs or other similar activity. Nonetheless, after more
than three years of negotiations without a resolution to the
bargaining issues that arose from the merger, there is a risk
that disgruntled employees, either with or without union
involvement, could engage in one or more concerted refusals to
work that could individually or collectively harm the operation
of the airline and impair its financial performance. Likewise,
employees represented by unions that have reached post-merger
integrated agreements could engage in improper actions that
disrupt our operations.
If we
incur problems with any of our third party service providers,
our operations could be adversely affected by a resulting
decline in revenue or negative public perception about our
services.
Our reliance upon others to provide essential services on behalf
of our operations may result in the relative inability to
control the efficiency and timeliness of contract services. We
have entered into agreements with contractors to provide various
facilities and services required for our operations, including
Express flight operations, aircraft maintenance, ground services
and facilities, reservations and baggage handling. Similar
agreements may be entered into in any new markets we decide to
serve. These agreements are generally subject to termination
after notice by the third party service provider. We are also at
risk should one of these service providers cease operations, and
there is no guarantee that we could replace these providers on a
timely basis with comparably priced providers. Recent volatility
in fuel prices, disruptions to capital markets and the current
economic downturn in general have subjected certain of these
third party service providers to strong financial pressures. Any
material problems with the efficiency and timeliness of contract
services, resulting from financial hardships or otherwise, could
have a material adverse effect on our business, financial
condition and results of operations.
Our
business is dependent on the price and availability of aircraft
fuel. Continued periods of high volatility in fuel costs,
increased fuel prices and significant disruptions in the supply
of aircraft fuel could have a significant negative impact on our
operating results and liquidity.
Our operating results are significantly impacted by changes in
the availability, price volatility and the cost of aircraft
fuel, which represents the largest single cost item in our
business. Fuel prices have fluctuated substantially over the
past several years and sharply in the last year.
Because of the amount of fuel needed to operate the airline,
even a relatively small increase in the price of fuel can have a
significant adverse aggregate effect on our costs. Due to the
competitive nature of the airline industry and unpredictability
of the market, we can offer no assurance that we may be able to
increase our fares or otherwise increase revenues sufficiently
to offset fuel prices.
Although we are currently able to obtain adequate supplies of
aircraft fuel, we cannot predict the future availability, price
volatility or cost of aircraft fuel. Natural disasters,
political disruptions or wars involving oil-producing countries,
changes in fuel-related governmental policy, changes in aircraft
fuel production capacity, environmental concerns and other
unpredictable events may result in fuel supply shortages and
additional fuel price volatility and cost increases in the
future.
From time to time we enter into hedging arrangements to protect
against rising fuel costs. Our ability to hedge in the future,
however, may be limited, particularly if the financial condition
of the airline worsens. Also, our fuel hedging arrangements do
not completely protect us against price increases and are
limited in both volume of fuel and duration. Finally, a rapid
decline in the price of fuel can adversely impact our short-term
liquidity as our hedge counterparties require that we post
collateral in the form of cash or letters of credit when the
projected future market price of fuel drops below the strike
price on existing hedging arrangements. See also the discussion
in Part II, Item 7A. “Quantitative and
Qualitative Disclosures About Market Risk.”
We
rely heavily on automated systems to operate our business and
any failure or disruption of these systems could harm our
business.
To operate our business, we depend on automated systems,
including our computerized airline reservation systems, our
flight operations systems, our telecommunication systems, our
airport customer self-service kiosks and our websites. Our
website and reservation systems must be able to accommodate a
high volume of traffic and deliver important flight information
on a timely and reliable basis. Substantial or repeated
disruptions or failures of any of these automated systems could
impair our operations, reduce the attractiveness of our services
and could result in lost revenues and increased costs. In
addition, these automated systems require periodic maintenance,
upgrades and replacements, and our business may be harmed if we
fail to properly maintain, upgrade or replace such systems.
The
integration of our business units following the merger continues
to present significant challenges.
We continue to face significant challenges relating to our
merger in consolidating functions and integrating diverse
organizations, information technology systems, processes,
procedures, operations and training and maintenance programs, in
a timely and efficient manner. This integration has been and
will continue to be costly, complex and time consuming. Failure
to successfully complete the integration may adversely affect
our business and results from operations.
Changes
to our business model that are designed to increase revenues may
not be successful and may cause operational difficulties or
decreased demand.
We have implemented several new measures designed to increase
revenue and offset costs. These measures include charging
separately for services that had previously been included within
the price of a ticket and increasing other pre-existing fees. We
may introduce additional initiatives in the future. The
implementation of these initiatives creates logistical
challenges that could harm the operational performance of the
airline. Also, the new and increased fees might reduce the
demand for air travel on our airline or across the industry in
general, particularly as weakening economic conditions make our
customers more sensitive to increased travel costs.
The
airline industry is intensely competitive and
dynamic.
Our competitors include other major domestic airlines as well as
foreign, regional and new entrant airlines, some of which have
more financial resources or lower cost structures than ours, and
other forms of transportation, including rail and private
automobiles. In many of our markets we compete with at least one
low cost air carrier. Our revenues are sensitive to numerous
factors, and the actions of other carriers in the areas of
pricing, scheduling and promotions can have a substantial
adverse impact on overall industry revenues. These factors may
become even more significant in periods when the industry
experiences large losses, as airlines under financial stress, or
in bankruptcy, may institute pricing structures intended to
achieve near-term survival rather than long-term viability. In
addition, because a significant portion of our traffic is
short-haul travel, we are more susceptible than other major
airlines to competition from surface transportation such as
automobiles and trains.
Low cost carriers have a profound impact on industry revenues.
Using the advantage of low unit costs, these carriers offer
lower fares, particularly those targeted at business passengers,
in order to shift demand from larger, more-established airlines.
Some low cost carriers, which have cost structures lower than
ours, have better financial performance and significant numbers
of aircraft on order for delivery in the next few years. These
low-cost carriers are expected to continue to increase their
market share through growth and could continue to have an impact
on the overall performance of US Airways Group.
Industry
consolidation could weaken our competitive
position.
If mergers or other forms of industry consolidation including
antitrust immunity grants take place, we might or might not be
included as a participant. Depending on which carriers combine
and which assets, if any, are sold or otherwise transferred to
other carriers in connection with such combinations, our
competitive position relative to the post-combination carriers
or other carriers that obtain assets could be harmed. In
addition, as carriers combine through traditional mergers or
antitrust immunity grants, their route networks might grow and
result in greater overlap with our network, which in turn could
result in lower overall market share and revenues for us. Such
consolidation is not limited to the U.S., but could include
further consolidation among international carriers in Europe and
elsewhere.
The
loss of key personnel upon whom we depend to operate our
business or the inability to attract additional qualified
personnel could adversely affect the results of our operations
or our financial performance.
We believe that our future success will depend in large part on
our ability to attract and retain highly qualified management,
technical and other personnel, particularly in light of
reductions in headcount associated with cost-saving measures
implemented during 2008. We may not be successful in retaining
key personnel or in attracting and retaining other highly
qualified personnel. Any inability to retain or attract
significant numbers of qualified management and other personnel
could adversely affect our business.
The
travel industry continues to face ongoing security
concerns.
The attacks of September 11, 2001 and continuing terrorist
threats materially impacted and continue to impact air travel.
The Aviation and Transportation Security Act mandates improved
flight deck security; deployment of federal air marshals on
board flights; improved airport perimeter access security;
airline crew security training; enhanced security screening of
passengers, baggage, cargo, mail, employees and vendors;
enhanced training and qualifications of security screening
personnel; additional provision of passenger data to
U.S. Customs and enhanced background checks. These
increased security procedures introduced at airports since the
attacks and other such measures as may be introduced in the
future generate higher operating costs for airlines. A
concurrent increase in airport security charges and procedures,
such as restrictions on carry-on baggage, has also had and may
continue to have a disproportionate impact on short-haul travel,
which constitutes a significant portion of our flying and
revenue. We would also be materially impacted in the event of
further terrorist attacks or perceived terrorist threats.
Changes
in government regulation could increase our operating costs and
limit our ability to conduct our business.
Airlines are subject to extensive regulatory requirements. In
the last several years, Congress has passed laws, and the DOT,
the FAA, the TSA and the Department of Homeland Security have
issued a number of directives and other regulations. These
requirements impose substantial costs on airlines. On
October 10, 2008, the FAA finalized new rules governing
flight operations at the three major New York airports. These
rules did not take effect because of a legal challenge, but the
FAA has pushed forward with a reduction in the number of flights
per hour at LaGuardia. Currently, the FAA is attempting to work
with airlines to implement its new operations cap at LaGuardia
through voluntary methods. If this is not successful, the FAA
may resort to other methods to reduce congestion in New York.
Additionally, the DOT recently finalized a policy change that
will permit airports to charge differentiated landing fees
during congested periods, which could impact our ability to
serve certain markets in the future. The new rule is being
challenged in court by the industry.
Additional laws, regulations, taxes and policies have been
proposed or discussed from time to time, including recently
introduced federal legislation on a “passenger bill of
rights,” that, if adopted, could significantly increase the
cost of airline operations or reduce revenues. The state of New
York’s attempt to adopt such a measure has been
successfully challenged by the airline industry. Other states,
however, are contemplating similar legislation. The DOT also has
a rulemaking pending and recently completed a stakeholder task
force working on various initiatives that could lead to
additional expansion of airline obligations in the customer
service area and increase our costs.
Finally, the ability of U.S. carriers to operate
international routes is subject to change because the applicable
arrangements between the U.S. and foreign governments may
be amended from time to time, or because appropriate slots or
facilities may not be available. We cannot assure you that laws
or regulations enacted in the future will not adversely affect
our operating costs. In addition, increased environmental
regulation may increase costs or restrict our operations. The EU
has been particularly aggressive in this area.
The
inability to maintain labor costs at competitive levels could
harm our financial performance.
Our business plan includes assumptions about labor costs going
forward. Currently, our labor costs are very competitive.
However, we cannot assure you that labor costs going forward
will remain competitive, because some of our agreements are
amendable now and others may become amendable, because
competitors may significantly reduce their labor costs or
because we may agree to higher-cost provisions in our current
labor negotiations. Approximately 87% of the employees within US
Airways Group are represented for collective bargaining purposes
by labor unions, including unionized groups of our employees
abroad.
Some of our unions have brought and may continue to bring
grievances to binding arbitration. Unions may also bring court
actions and may seek to compel us to engage in the bargaining
processes where we believe we have no such obligation. If
successful, there is a risk these judicial or arbitral avenues
could create additional costs that we did not anticipate.
Our
ability to operate and grow our route network in the future is
dependent on the availability of adequate facilities and
infrastructure throughout our system.
In order to operate our existing flight schedule and, where
appropriate, add service along new or existing routes, we must
be able to obtain adequate gates, ticketing facilities,
operations areas, slots (where applicable) and office space. For
example, at our largest hub airport, we are seeking to increase
international service despite challenging airport space
constraints. The nation’s aging air traffic control
infrastructure presents challenges as well. The ability of the
air traffic control system to handle traffic in high-density
areas where we have a large concentration of flights is critical
to our ability to operate our existing schedule. Also, as
airports around the world become more congested, we cannot
always be sure that our plans for new service can be implemented
in a commercially viable manner given operating constraints at
airports throughout our network.
We are
subject to many forms of environmental regulation and may incur
substantial costs as a result.
We are subject to increasingly stringent federal, state, local
and foreign laws, regulations and ordinances relating to the
protection of the environment, including those relating to
emissions to the air, discharges to surface and subsurface
waters, safe drinking water, and the management of hazardous
substances, oils and waste materials. Compliance with all
environmental laws and regulations can require significant
expenditures.
Several U.S. airport authorities are actively engaged in
efforts to limit discharges of de-icing fluid (glycol) to local
groundwater, often by requiring airlines to participate in the
building or reconfiguring of airport de-icing facilities. Such
efforts are likely to impose additional costs and restrictions
on airlines using those airports. We do not believe, however,
that such environmental developments will have a material impact
on our capital expenditures or otherwise adversely affect our
operations, operating costs or competitive position.
We are also subject to other environmental laws and regulations,
including those that require us to remediate soil or groundwater
to meet certain objectives. Under federal law, generators of
waste materials, and owners or operators of facilities, can be
subject to liability for investigation and remediation costs at
locations that have been identified as requiring response
actions. We have liability for such costs at various sites,
although the future costs associated with the remediation
efforts are currently not expected to have a material adverse
affect on our business.
We have various leases and agreements with respect to real
property, tanks and pipelines with airports and other operators.
Under these leases and agreements, we have agreed to standard
language indemnifying the lessor or operator against
environmental liabilities associated with the real property or
operations described under the agreement, even if we are not the
party responsible for the initial event that caused the
environmental damage. We also participate in leases with other
airlines in fuel consortiums and fuel committees at airports,
where such indemnities are generally joint and several among the
participating airlines.
Recently, climate change issues and greenhouse gas emissions
(including carbon) have attracted international and domestic
regulatory interest that may result in the imposition of
additional regulation on airlines. Any such regulatory activity
in the future may adversely affect our business and financial
results.
California is in the process of implementing environmental
provisions aimed at limiting emissions from off-road
diesel-powered vehicles, which may include some airline belt
loaders and tugs and require a change of ground service
vehicles. The future costs associated with replacing some or all
of our ground fleets in California cities are currently not
expected to have a material adverse affect on our business.
Governmental authorities in several U.S. and foreign cities
are also considering or have already implemented aircraft noise
reduction programs, including the imposition of nighttime
curfews and limitations on daytime take-offs and landings. We
have been able to accommodate local noise restrictions imposed
to date, but our operations could be adversely affected if
locally-imposed regulations become more restrictive or
widespread.
Ongoing
data security compliance requirements could increase our costs,
and any significant data breach could harm our business,
financial condition or results of operations.
Our business requires the appropriate and secure utilization of
customer and other sensitive information. We cannot be certain
that advances in criminal capabilities, discovery of new
vulnerabilities, attempts to exploit
existing vulnerabilities in our systems, data thefts, physical
system or network break-ins or inappropriate access, or other
developments will not compromise or breach the technology
protecting the networks that access and store database
information. Furthermore, there has been heightened legislative
and regulatory focus on data security in the U.S. and
abroad (particularly in the EU), including requirements for
varying levels of customer notification in the event of a data
breach.
Many of our commercial partners, including credit card
companies, have imposed certain data security standards that we
must meet. In particular, we were required by the Payment Card
Industry Security Standards Council, founded by the credit card
companies, to comply with their highest level of data security
standards. While we currently meet these standards, new and
revised standards may be imposed that may be difficult for us to
meet.
In addition to the Payment Card Industry Standards discussed
above, failure to comply with the other privacy and data use and
security requirements of our partners or related laws and
regulations to which we are subject may expose us to fines,
sanctions or other penalties, which could materially and
adversely affect our results of operations and overall business.
In addition, failure to address appropriately these issues could
also give rise to additional legal risks, which, in turn, could
increase the size and number of litigation claims and damages
asserted or subject us to enforcement actions, fines and
penalties and cause us to incur further related costs and
expenses.
Interruptions
or disruptions in service at one of our hub airports could have
a material adverse impact on our operations.
We operate principally through primary hubs in Charlotte,
Philadelphia and Phoenix and secondary hubs/focus cities in New
York, Washington, D.C., Boston and Las Vegas. A majority of
our flights either originate in or fly into one of these
locations. A significant interruption or disruption in service
at one of our hubs could result in the cancellation or delay of
a significant portion of our flights and, as a result, could
have a severe impact on our business, operations and financial
performance.
We are
at risk of losses and adverse publicity stemming from any
accident involving any of our aircraft.
If one of our aircraft were to be involved in an accident, we
could be exposed to significant tort liability. The insurance we
carry to cover damages arising from any future accidents may be
inadequate. In the event that our insurance is not adequate, we
may be forced to bear substantial losses from an accident. In
addition, any accident involving an aircraft that we operate
could create a public perception that our aircraft are not safe
or reliable, which could harm our reputation, result in air
travelers being reluctant to fly on our aircraft and adversely
impact our financial condition and operations.
Delays
in scheduled aircraft deliveries or other loss of anticipated
fleet capacity may adversely impact our operations and financial
results.
The success of our business depends on, among other things, the
ability to operate a certain number and type of aircraft. In
many cases, the aircraft we intend to operate are not yet in our
fleet, but we have contractual commitments to purchase or lease
them. If for any reason we were unable to secure deliveries of
new aircraft on contractually scheduled delivery dates, this
could have a negative impact on our business, operations and
financial performance. Our failure to integrate newly purchased
aircraft into our fleet as planned might require us to seek
extensions of the terms for some leased aircraft. Such
unanticipated extensions may require us to operate existing
aircraft beyond the point at which it is economically optimal to
retire them, resulting in increased maintenance costs. If new
aircraft orders are not filled on a timely basis, we could face
higher monthly rental rates.
Increases
in insurance costs or reductions in insurance coverage may
adversely impact our operations and financial
results.
The terrorist attacks of September 11, 2001 led to a
significant increase in insurance premiums and a decrease in the
insurance coverage available to commercial air carriers.
Accordingly, our insurance costs increased significantly and our
ability to continue to obtain insurance even at current prices
remains uncertain. In addition, we have obtained third party war
risk (terrorism) insurance through a special program
administered by the FAA, resulting in lower premiums than if we
had obtained this insurance in the commercial insurance market.
The
program has been extended, with the same conditions and
premiums, until March 31, 2009. If the federal insurance
program terminates, we would likely face a material increase in
the cost of war risk insurance. The failure of one or more of
our insurers could result in a lack of coverage for a period of
time. Additionally, severe disruptions in the domestic and
global financial markets could adversely impact the ratings and
survival of some insurers. Future downgrades in the ratings of
enough insurers could adversely impact both the availability of
appropriate insurance coverage and its cost. Because of
competitive pressures in our industry, our ability to pass
additional insurance costs to passengers is limited. As a
result, further increases in insurance costs or reductions in
available insurance coverage could have an adverse impact on our
financial results.
Our
business is subject to weather factors and seasonal variations
in airline travel, which cause our results to
fluctuate.
Our operations are vulnerable to severe weather conditions in
parts of our network that could disrupt service, create air
traffic control problems, decrease revenue and increase costs,
such as during hurricane season in the Caribbean and Southeast
United States, snow and severe winters in the Northeast United
States and thunderstorms in the Eastern United States. In
addition, the air travel business historically fluctuates on a
seasonal basis. Due to the greater demand for air and leisure
travel during the summer months, revenues in the airline
industry in the second and third quarters of the year tend to be
greater than revenues in the first and fourth quarters of the
year. Our results of operations will likely reflect weather
factors and seasonality, and therefore quarterly results are not
necessarily indicative of those for an entire year, and our
prior results are not necessarily indicative of our future
results.
We may
be adversely affected by global events that affect travel
behavior.
Our revenue and results of operations may be adversely affected
by global events beyond our control. Acts of terrorism, wars or
other military conflicts, including the war in Iraq, may depress
air travel, particularly on international routes. An outbreak of
a contagious disease such as Severe Acute Respiratory Syndrome
(“SARS”), avian flu, or any other influenza-type
illness, if it were to persist for an extended period, could
again materially affect the airline industry and us by reducing
revenues and impacting travel behavior.
We are
exposed to foreign currency exchange rate
fluctuations.
As we expand our international operations, we will have
significant operating revenues and expenses, as well as assets
and liabilities, denominated in foreign currencies. Fluctuations
in foreign currencies can significantly affect our operating
performance and the value of our assets and liabilities located
outside of the United States.
The
use of US Airways Group’s pre-merger NOLs and certain other
tax attributes could be limited in the future.
From the time of the merger until the first half of 2007, a
significant portion of US Airways Group’s common stock was
beneficially owned by a small number of equity investors. Since
the merger, some of the equity investors have sold portions of
their holdings and other investors have purchased US Airways
Group stock, and, as a result, we believe an “ownership
change” as defined in Internal Revenue Code
Section 382 occurred for US Airways Group in February 2007.
When a company undergoes such an ownership change,
Section 382 limits the future ability to utilize any net
operating losses, or NOL, generated before the ownership change
and certain subsequently recognized “built-in” losses
and deductions, if any, existing as of the date of the ownership
change. A company’s ability to utilize new NOL arising
after the ownership change is not affected. Until US Airways
Group has used all of its existing NOL, future significant
shifts in ownership of US Airways Group’s common stock
could result in a new Section 382 limit on our NOL as of
the date of an additional ownership change.
Our
common stock has limited trading history and its market price
may be volatile.
Our common stock began trading on the NYSE on September 27,2005 upon the effectiveness of our merger. The market price of
our common stock may fluctuate substantially due to a variety of
factors, many of which are beyond our control, including:
•
our operating results failing to meet the expectations of
securities analysts or investors;
•
changes in financial estimates or recommendations by securities
analysts;
•
material announcements by us or our competitors;
•
movements in fuel prices;
•
new regulatory pronouncements and changes in regulatory
guidelines;
•
general and industry-specific economic conditions;
•
public sales of a substantial number of shares of our common
stock; and
•
general market conditions.
Conversion
of our convertible notes will dilute the ownership interest of
existing stockholders and could adversely affect the market
price of our common stock.
The conversion of some or all of US Airways Group’s
7% senior convertible notes due 2020 will dilute the
ownership interests of existing shareholders. Any sales in the
public market of the common stock issuable upon such conversion
could adversely affect prevailing market prices of our common
stock. In addition, the existence of the notes may encourage
short selling by market participants because the conversion of
the notes could depress the price of our common stock.
Certain
provisions of the amended and restated certificate of
incorporation and amended and restated bylaws of US Airways
Group make it difficult for stockholders to change the
composition of our board of directors and may discourage
takeover attempts that some of our stockholders might consider
beneficial.
Certain provisions of the amended and restated certificate of
incorporation and amended and restated bylaws of US Airways
Group may have the effect of delaying or preventing changes in
control if our board of directors determines that such changes
in control are not in the best interests of US Airways Group and
its stockholders. These provisions include, among other things,
the following:
•
a classified board of directors with three-year staggered terms;
•
advance notice procedures for stockholder proposals to be
considered at stockholders’ meetings;
•
the ability of US Airways Group’s board of directors to
fill vacancies on the board;
•
a prohibition against stockholders taking action by written
consent;
•
a prohibition against stockholders calling special meetings of
stockholders;
•
a requirement that holders of at least 80% of the voting power
of the shares entitled to vote in the election of directors
approve amendment of the amended and restated bylaws; and
•
super-majority voting requirements to modify or amend specified
provisions of US Airways Group’s amended and restated
certificate of incorporation.
These provisions are not intended to prevent a takeover, but are
intended to protect and maximize the value of US Airways
Group’s stockholders’ interests. While these
provisions have the effect of encouraging persons seeking to
acquire control of our company to negotiate with our board of
directors, they could enable our board of directors to prevent a
transaction that some, or a majority, of our stockholders might
believe to be in their best interests and, in that case, may
prevent or discourage attempts to remove and replace incumbent
directors. In addition, US Airways Group is subject to the
provisions of Section 203 of the Delaware General
Corporation Law, which prohibits
business combinations with interested stockholders. Interested
stockholders do not include stockholders, such as our equity
investors at the time of the merger, whose acquisition of US
Airways Group’s securities is approved by the board of
directors prior to the investment under Section 203.
Our
charter documents include provisions limiting voting and
ownership by foreign owners.
Our amended and restated certificate of incorporation provides
that shares of capital stock may not be voted by or at the
direction of persons who are not citizens of the United States
if the number of shares held by such persons would exceed 24.9%
of the voting stock of our company. In addition, any attempt to
transfer equity securities to a
non-U.S. citizen
in excess of 49.9% of our outstanding equity securities will be
void and of no effect.
Item 1B.
Unresolved
Staff Comments
None.
Item 2.
Properties
Flight
Equipment
We operated a mainline fleet of 354 aircraft at the end of 2008,
down from a total of 356 mainline aircraft at the end of 2007.
During 2008, we removed 17 Boeing
737-300
aircraft and four Boeing
757-200
aircraft from our mainline operating fleet and took delivery of
14 Embraer 190 aircraft and five Airbus A321 aircraft. We are
also supported by our regional airline subsidiaries and
affiliates operating as US Airways Express either under capacity
purchase or prorate agreements, which operate approximately 238
regional jets and 74 turboprops.
In 2007, US Airways and Airbus executed definitive purchase
agreements for the acquisition of 97 aircraft, including 60
single-aisle A320 family aircraft and 37 widebody aircraft
(comprised of 22 A350 XWB and
15 A330-200 aircraft).
These are in addition to the 37 single-aisle A320 family
aircraft from the previous Airbus purchase agreement. As
described above, we took delivery of five A321 aircraft under
our Amended and Restated Airbus A320 Family Aircraft Purchase
Agreement in 2008.
In 2009, we expect to take delivery of 18 A321 aircraft, five
A330-200 aircraft and two A320 aircraft. Between 2010 and 2012,
we expect to take delivery of 82 Airbus aircraft, consisting of
72 A320 family and 10 A330-200 aircraft under the purchase
agreements. Deliveries of the 22 A350 XWB aircraft are expected
to begin in 2015.
We plan to reduce our total mainline capacity in 2009 by four to
six percent compared to 2008. This will be accomplished by a
combination of lower utilization and returning certain aircraft
in 2009 upon lease expiration. At December 31, 2008, we had
91 aircraft with lease expirations prior to the end of 2011.
These include lease expirations for 30 Boeing
737-300 and
14 Boeing
737-400
aircraft that are being replaced by Airbus A320 family aircraft
to be delivered under the Airbus purchase agreement discussed
above. The 47 remaining lease expirations are for Boeing 757,
Boeing 767, Airbus A319 and Airbus A320 aircraft.
As of December 31, 2008, our mainline operating fleet
consisted of the following aircraft:
Owned/
Aircraft Type
Avg. Seats
Mortgaged(1)
Leased(2)
Total
Avg. Age
A330-300
293
4
5
9
8.3
A321
183
20
13
33
6.4
A320
150
8
67
75
10.7
A319
124
3
90
93
8.2
B767-200ER
204
—
10
10
19.4
B757-200
189
3
36
39
18.7
B737-400
144
—
40
40
18.8
B737-300
131
—
30
30
21.0
ERJ 190
99
25
—
25
1.0
Total
150
63
291
354
11.8
(1)
All owned aircraft are pledged as collateral for various secured
financing agreements.
(2)
The terms of the leases expire between 2009 and 2024.
As of December 31, 2008, our wholly owned regional airline
subsidiaries operated the following regional jet and turboprop
aircraft:
Average Seat
Average
Aircraft Type
Capacity
Owned
Leased(1)
Total
Age (years)
CRJ-700
70
7
7
14
4.3
CRJ-200
50
12
23
35
4.8
De Havilland Dash 8-300
50
—
11
11
17.3
De Havilland Dash 8-100
37
33
11
44
18.3
Total
47
52
52
104
11.8
(1)
The terms of the leases expire between 2009 and 2022.
We maintain inventories of spare engines, spare parts,
accessories and other maintenance supplies sufficient to meet
our current operating requirements.
The following table illustrates our committed orders, scheduled
lease expirations, and lessor put options at December 31,2008:
See Notes 9 and 8, “Commitments and
Contingencies” in Part II, Items 8A and 8B
respectively, for additional information on aircraft purchase
commitments.
We are a participant in the Civil Reserve Air Fleet program,
which is a voluntary program administered by the U.S. Air
Force Air Mobility Command. The General Services Administration
of the U.S. Government requires that airlines participate
in the Civil Reserve Air Fleet program in order to receive
U.S. Government business. We are reimbursed at compensatory
rates if aircraft are activated under the Civil Reserve Air
Fleet program or when participating in Department of Defense
business.
Ground
Facilities
We lease the majority of our ground facilities, including:
•
executive and administrative offices in Tempe, Arizona;
•
our principal operating, overhaul and maintenance bases at the
Pittsburgh International, Charlotte Douglas International and
Phoenix Sky Harbor International Airports;
•
training facilities in Phoenix and Charlotte;
•
central reservations offices in Winston-Salem, North Carolina,
Tempe, Arizona, Reno, Nevada, and Liverpool, U.K.; and
•
line maintenance bases and local ticket, cargo and
administrative offices throughout our system.
Maintenance and technical support facility at Phoenix Sky Harbor
International Airport
Four hangar bays, hangar shops, office space, warehouse and
commissary facilities
375,000
Lease expires September 2019.
Training facility — Charlotte, NC
Classroom training facilities and twelve full flight simulator
bays
159,000
Lease expires June 2017.
Flight Training and Systems Operations Control Center, Phoenix,
AZ
Complex accommodates training facilities, systems operation
control and crew scheduling functions
164,000
Lease expires February 2031.
Operations Control Center — Pittsburgh, PA
Complex accommodates systems operation control and crew
scheduling functions
70,000
Facility owned, land lease
expires March 2029.
In addition, we lease an aggregate of approximately
217,000 square feet of data center, office and warehouse
space in Tempe and Phoenix, AZ.
Space for ticket counters, gates and back offices has been
obtained at each of the other airports in which we operate,
either by lease from the airport operator or by sublease or
handling agreement from another airline.
Terminal
Construction Projects
We use public airports for our flight operations under lease
arrangements with the government entities that own or control
these airports. Airport authorities frequently require airlines
to execute long-term leases to assist in obtaining financing for
terminal and facility construction. Any future requirements for
new or improved airport facilities and passenger terminals at
airports in which our airline subsidiaries operate could result
in additional occupancy costs and long-term commitments.
Item 3.
Legal
Proceedings
On September 12, 2004, US Airways Group and its domestic
subsidiaries (collectively, the “Reorganized Debtors”)
filed voluntary petitions for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for
the Eastern District of Virginia, Alexandria Division (Case Nos.
04-13819-SSM
through
03-13823-SSM)
(the “2004 Bankruptcy”). On September 16, 2005,
the Bankruptcy Court issued an order confirming the plan of
reorganization submitted by the Reorganized Debtors and on
September 27, 2005, the Reorganized Debtors emerged from
the 2004 Bankruptcy. The Bankruptcy Court’s order
confirming the plan included a provision called the plan
injunction, which forever bars other parties from pursuing most
claims against the Reorganized Debtors that arose prior to
September 27, 2005 in any forum other than the Bankruptcy
Court. The great majority of these claims are pre-petition
claims that, if paid out at all, will be paid out in common
stock of the post-bankruptcy US Airways Group at a fraction of
the actual claim amount.
Item 4.
Submission
of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of 2008.
Market
for US Airways Group’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Stock
Exchange Listing
Our common stock trades on the NYSE under the symbol
“LCC.” As of February 12, 2009, the closing price
of our common stock on the NYSE was $4.73. As of
February 12, 2009, there were 2,733 holders of record of
our common stock.
Market
Prices of Common Stock
The following table sets forth, for the periods indicated, the
high and low sale prices of our common stock on the NYSE:
Year Ended
December 31
Period
High
Low
2008
Fourth Quarter
$
11.24
$
3.16
Third Quarter
10.46
1.45
Second Quarter
9.94
2.30
First Quarter
16.44
7.24
2007
Fourth Quarter
$
33.45
$
14.41
Third Quarter
36.81
24.26
Second Quarter
48.30
26.78
First Quarter
62.50
44.01
US Airways Group, organized under the laws of the State of
Delaware, is subject to Sections 160 and 170 of the
Delaware General Corporation Law, which govern the payment of
dividends on or the repurchase or redemption of its capital
stock. US Airways Group is restricted from engaging in any of
these activities unless it maintains a capital surplus.
US Airways Group has not declared or paid cash or other
dividends on its common stock since 1990 and currently does not
intend to do so. Under the provisions of certain debt
agreements, including our secured loans, our ability to pay
dividends on or repurchase our common stock is restricted. Any
future determination to pay cash dividends will be at the
discretion of our board of directors, subject to applicable
limitations under Delaware law, and will depend upon our results
of operations, financial condition, contractual restrictions and
other factors deemed relevant by our board of directors.
Foreign
Ownership Restrictions
Under current federal law,
non-U.S. citizens
cannot own or control more than 25% of the outstanding voting
securities of a domestic air carrier. We believe that we were in
compliance with this statute during the time period covered by
this report.
The following stock performance graph and related information
shall not be deemed “soliciting material” or
“filed” with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filings under the Securities Act of 1933 or Securities
Act of 1934, each as amended, except to the extent that we
specifically incorporate it by reference into such filing.
The following stock performance graph compares our cumulative
total shareholder return on an annual basis on our common stock
with the cumulative total return on the Standard and Poor’s
500 Stock Index and the AMEX Airline Index from
September 27, 2005 (the date our stock began trading on the
NYSE under the symbol LCC after the completion of the merger)
through December 31, 2008. The comparison assumes $100 was
invested on September 27, 2005 in US Airways Group’s
common stock and in each of the foregoing indices and assumes
reinvestment of dividends. The stock performance shown on the
graph below represents historical stock performance and is not
necessarily indicative of future stock price performance.
Selected
Consolidated Financial Data of US Airways Group
The selected consolidated financial data presented below under
the captions “Consolidated Statements of Operations
Data” and “Consolidated Balance Sheet Data” as of
and for the years ended December 31, 2008, 2007, 2006, 2005
and 2004 are derived from the audited consolidated financial
statements of US Airways Group. The full years 2008, 2007 and
2006 are comprised of the consolidated financial data of US
Airways Group. The 2005 consolidated financial data presented
includes the consolidated results of America West Holdings for
the 269 days through September 27, 2005, the effective
date of the merger, and the consolidated results of US Airways
Group and its subsidiaries, including US Airways, America West
Holdings and AWA, for the 96 days from September 27,2005 to December 31, 2005. For 2004, the consolidated
financial data for US Airways Group reflects only the
consolidated results of America West Holdings. The selected
consolidated financial data should be read in conjunction with
the consolidated financial statements for the respective
periods, the related notes and the related reports of US Airways
Group’s independent registered public accounting firm.
Income (loss) before cumulative effect of change in accounting
principle(b)
(2,210
)
427
303
(335
)
(89
)
Cumulative effect of change in accounting principle, net(c)
—
—
1
(202
)
—
Net income (loss)
$
(2,210
)
$
427
$
304
$
(537
)
$
(89
)
Earnings (loss) per common share before cumulative effect of
change in accounting principle:
Basic
$
(22.06
)
$
4.66
$
3.50
$
(10.65
)
$
(5.99
)
Diluted
(22.06
)
4.52
3.32
(10.65
)
(5.99
)
Cumulative effect of change in accounting principle:
Basic
$
—
$
—
$
0.01
$
(6.41
)
$
—
Diluted
—
—
0.01
(6.41
)
—
Earnings (loss) per common share:
Basic
$
(22.06
)
$
4.66
$
3.51
$
(17.06
)
$
(5.99
)
Diluted
(22.06
)
4.52
3.33
(17.06
)
(5.99
)
Shares used for computation (in thousands):
Basic
100,168
91,536
86,447
31,488
14,861
Diluted
100,168
95,603
93,821
31,488
14,861
Consolidated balance sheet data (at end of period):
Total assets
$
7,214
$
8,040
$
7,576
$
6,964
$
1,475
Long-term obligations, less current maturities(d)
4,352
3,732
3,539
3,481
640
Total stockholders’ equity (deficit)
(505
)
1,439
970
420
36
(a)
The 2008 period included a $622 million non-cash charge to
write off all of the goodwill created by the merger of US
Airways Group and America West Holdings in September 2005, as
well as $496 million of net unrealized losses on fuel
hedging instruments. In addition, the 2008 period included
$35 million of merger related
transition expenses, $18 million in non-cash charges
related to the decline in fair value of certain spare parts
associated with our Boeing 737 aircraft fleet and as a result of
our capacity reductions, $14 million in lease return costs
and penalties related to certain Airbus aircraft and
$9 million in charges related to involuntary furloughs as
well as terminations of non-union administrative and management
staff.
The 2007 period included $187 million of net unrealized
gains on fuel hedging instruments, $7 million in tax
credits due to an IRS rule change allowing us to recover tax
amounts for years
2003-2006
for certain fuel usage, $9 million of insurance settlement
proceeds related to business interruption and property damages
incurred as a result of Hurricane Katrina in 2005 and a
$5 million Piedmont pilot pension curtailment gain related
to the FAA mandated pilot retirement age change. These credits
were offset by $99 million of merger related transition
expenses, a $99 million charge for an increase to long-term
disability obligations for US Airways’ pilots as a result
of the FAA mandated pilot retirement age change and
$5 million in charges for certain separation packages and
lease termination costs related to reduced flying from
Pittsburgh.
The 2006 period included $131 million of merger related
transition expenses and $70 million of net unrealized
losses on fuel hedging instruments, offset by a $90 million
gain associated with the return of equipment deposits upon
forgiveness of a loan and $14 million of gains associated
with the settlement of bankruptcy claims.
The 2005 period included $28 million of merger related
transition expenses, a $27 million loss on the
sale-leaseback of six Boeing
737-300
aircraft and two Boeing 757 aircraft, $7 million of power
by the hour program penalties associated with the return of
certain leased aircraft, $1 million of severance for
terminated employees resulting from the merger, a
$1 million charge related to aircraft removed from service
and a $50 million charge related to an amended Airbus
purchase agreement, along with the write off of $7 million
in capitalized interest. The $50 million charge was paid by
means of set-off against existing equipment purchase deposits
held by Airbus. The 2005 period also included $4 million of
net unrealized gains on fuel hedging instruments.
The 2004 period included a $16 million net credit
associated with the termination of the rate per engine hour
agreement with General Electric Engine Services for overhaul
maintenance services on V2500-A1 engines. This credit was
partially offset by $2 million of net charges related to
the return of certain Boeing
737-200
aircraft, which included termination payments of
$2 million, the write down of leasehold improvements and
deferred rent of $3 million, offset by the net reversal of
maintenance reserves of $3 million related to the returned
aircraft. The 2004 period also included $2 million of net
unrealized losses on fuel hedging instruments.
(b)
The 2008 period included $214 million in non-cash charges
to record other than temporary impairments for our investments
in auction rate securities primarily driven by the length of
time and extent to which the fair values have been less than
cost as well as $7 million in write offs of debt discount
and debt issuance costs in connection with the refinancing of
certain aircraft equipment notes and certain loan prepayments in
connection with our 2008 financing transactions, offset by
$8 million in gains on forgiveness of debt.
The 2007 period included a non-cash expense for income taxes of
$7 million related to the utilization of net operating loss
carryforwards (“NOL”) acquired from US Airways. The
valuation allowance associated with these acquired NOL was
recognized as a reduction of goodwill rather than a reduction in
tax expense. In addition, the period also included an
$18 million write off of debt issuance costs in connection
with the refinancing of the $1.25 billion senior secured
credit facility with General Electric Capital Corporation
(“GECC”), referred to as the GE loan, in March 2007
and a $10 million non-cash charge to record other than
temporary impairment for our investments in auction rate
securities, offset by a $17 million gain recognized on the
sale of stock in ARINC Incorporated.
The 2006 period included a non-cash expense for income taxes of
$85 million related to the utilization of NOL acquired from
US Airways. In addition, the period included $6 million of
prepayment penalties and $5 million in accelerated
amortization of debt issuance costs in connection with the
refinancing of the loan previously guaranteed by the Air
Transportation Stabilization Board (“ATSB”) and two
loans previously provided to AWA by GECC, $17 million in
payments in connection with the inducement to convert
$70 million of US Airways Group’s 7% Senior
Convertible Notes to common stock and a $2 million write
off of debt issuance costs associated with those converted
notes, offset by $8 million of interest income earned by
AWA on certain prior year federal income tax refunds.
The 2005 period included an $8 million charge related to
the write off of the unamortized value of the ATSB warrants upon
their repurchase in October 2005 and an aggregate
$2 million write off of debt issuance costs
associated with the exchange of AWA’s 7.25% Senior
Exchangeable Notes due 2023 and retirement of a portion of the
loan formerly guaranteed by the ATSB. In the fourth quarter 2005
period, which was subsequent to the effective date of the
merger, US Airways recorded $4 million of mark-to-market
gains attributable to stock options in Sabre Inc.
(“Sabre”) and warrants in a number of
e-commerce
companies.
The 2004 period included a $1 million gain on the
disposition of property and equipment due principally to the
sale of one Boeing
737-200
aircraft and a $1 million charge for the write off of debt
issuance costs in connection with the refinancing of a term loan.
(c)
The 2006 period included a $1 million benefit which
represents the cumulative effect on the accumulated deficit of
the adoption of Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based
Payment.” The adjustment reflects the impact of estimating
future forfeitures for previously recognized compensation
expense.
The 2005 period included a $202 million adjustment which
represents the cumulative effect on the accumulated deficit of
the adoption of the direct expense method of accounting for
major scheduled airframe, engine and certain component overhaul
costs as of January 1, 2005.
(d)
Includes debt, capital leases, postretirement benefits other
than pensions and employee benefit liabilities and other.
Selected
Consolidated Financial Data of US Airways
The selected consolidated financial data presented below under
the captions “Consolidated Statements of Operations
Data” and “Consolidated Balance Sheet Data” as of
and for the years ended December 31, 2008, 2007, 2006,
three months ended December 31, 2005, nine months ended
September 30, 2005 and year ended December 31, 2004
are derived from the audited consolidated financial statements
of US Airways. In 2007, US Airways Group contributed 100% if its
equity interest in America West Holdings, the parent company of
AWA, to US Airways in connection with the combination of all
mainline operations under one FAA operating certificate. This
contribution is reflected in US Airways’ consolidated
financial statements as though the transfer had occurred at the
time of US Airways’ emergence from bankruptcy at the end of
September 2005. Thus, the full years 2008, 2007 and 2006 and
three months ended December 31, 2005 are comprised of the
consolidated financial data of US Airways and America West
Holdings. The nine months ended September 30, 2005 and full
year 2004 consolidated financial data presented include the
results of only US Airways. The selected consolidated financial
data should be read in conjunction with the consolidated
financial statements for the respective periods, the related
notes and the related reports of US Airways’ independent
registered public accounting firm.
Consolidated balance sheet data (at end of period):
Total assets
$
6,954
$
7,787
$
7,351
$
6,763
$
8,250
Long-term obligations, less current maturities(e)
2,925
2,073
2,194
3,306
4,815
Total stockholder’s equity (deficit)
(221
)
1,850
(461
)
(810
)
(501
)
(a)
In connection with emergence from bankruptcy in September 2005,
US Airways adopted fresh-start reporting in accordance with
AICPA Statement of Position
90-7,
“Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code.” As a result of the application of
fresh-start reporting, the financial statements after
September 30, 2005 are not comparable with the financial
statements from periods prior to September 30, 2005.
References to “Successor Company” refer to US Airways
on and after September 30, 2005, after the application of
fresh-start reporting for the bankruptcy.
(b)
The 2008 period included a $622 million non-cash charge to
write off all of the goodwill created by the merger of US
Airways Group and America West Holdings in September 2005, as
well as $496 million of net unrealized losses on fuel
hedging instruments. In addition, the 2008 period included
$35 million of merger related transition expenses,
$18 million in non-cash charges related to the decline in
fair value of certain spare parts associated with US
Airways’ Boeing 737 aircraft fleet and as a result of US
Airways’ capacity reductions, $14 million in lease
return costs and penalties related to certain Airbus aircraft
and $9 million in charges related to involuntary furloughs
as well as terminations of non-union administrative and
management staff.
The 2007 period included $187 million of net unrealized
gains on fuel hedging instruments, $7 million in tax
credits due to an IRS rule change allowing US Airways to recover
tax amounts for years
2003-2006
for certain fuel usage and $9 million of insurance
settlement proceeds related to business interruption and
property damages incurred as a result of Hurricane Katrina in
2005. These credits were offset by $99 million of merger
related transition expenses, a $99 million charge for an
increase to long-term disability obligations for US
Airways’ pilots as a result of the FAA mandated pilot
retirement age change and $4 million in charges for certain
separation packages and lease termination costs related to
reduced flying from Pittsburgh.
The 2006 period included $131 million of merger related
transition expenses and $70 million of net unrealized
losses on fuel hedging instruments, offset by a $90 million
gain associated with the return of equipment deposits upon
forgiveness of a loan and $3 million of gains associated
with the settlement of bankruptcy claims.
The period for the three months ended December 31, 2005
included $69 million of net unrealized losses on fuel
hedging instruments, $28 million of merger related
transition expenses, $7 million of power by the hour
program penalties associated with the return of certain leased
aircraft and $1 million of severance costs for terminated
employees resulting from the merger.
(c)
The 2008 period included $214 million in non-cash charges
to record other than temporary impairments for US Airways’
investments in auction rate securities primarily driven by the
length of time and extent to which the fair values have been
less than cost as well as $6 million in write offs of debt
discount and debt issuance costs in connection with the
refinancing of certain aircraft equipment notes and a loan
prepayment in connection with US Airways’ 2008 financing
transactions, offset by $8 million in gains on forgiveness
of debt.
The 2007 period included a non-cash expense for income taxes of
$7 million related to the utilization of NOL that was
generated prior to the merger. The decrease in the corresponding
valuation allowance was recognized as a reduction of goodwill
rather than a reduction in tax expense. In addition, the period
also included a $17 million gain recognized on the sale of
stock in ARINC Incorporated, offset by a $10 million
non-cash charge to record other than temporary impairment for US
Airways’ investments in auction rate securities.
The 2006 period included a non-cash expense for income taxes of
$85 million related to the utilization of NOL that was
generated prior to the merger. In addition, the period included
$6 million of prepayment penalties and $5 million in
accelerated amortization of debt issuance costs in connection
with the refinancing of the loan
previously guaranteed by the ATSB and two loans previously
provided to AWA by GECC, offset by $8 million of interest
income earned by AWA on certain prior year federal income tax
refunds.
The period for the three months ended December 31, 2005
included an $8 million charge related to the write off of
the unamortized value of the ATSB warrants upon their repurchase
in October 2005 and an aggregate $2 million write off of
debt issuance costs associated with the exchange of AWA’s
7.25% Senior Exchangeable Notes due 2023 and retirement of
a portion of the loan formerly guaranteed by the ATSB. US
Airways also recorded in this period $4 million of
mark-to-market gains attributable to stock options in Sabre and
warrants in a number of
e-commerce
companies.
The nine months ended September 30, 2005 and the year ended
December 31, 2004 included reorganization items which
amounted to a $636 million net gain and a $32 million
expense, respectively.
(d)
The 2006 period included a $1 million benefit which
represents the cumulative effect on the accumulated deficit of
the adoption of SFAS No. 123R. The adjustment reflects the
impact of estimating future forfeitures for previously
recognized compensation expense.
(e)
Includes debt, capital leases, postretirement benefits other
than pensions and employee benefit liabilities and other. Also
includes liabilities subject to compromise at December 31,2004.
Item 7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Background
US Airways Group, a Delaware corporation, 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, PSA, MSC and AAL. On May 19, 2005, US
Airways Group signed a merger agreement with America West
Holdings pursuant to which America West Holdings merged with a
wholly owned subsidiary of US Airways Group. The merger
agreement was amended by a letter of agreement on July 7,2005. The merger became effective upon US Airways Group’s
emergence from bankruptcy on September 27, 2005.
We operate the fifth largest airline in the United States as
measured by domestic mainline RPMs and ASMs. We have primary
hubs in Charlotte, Philadelphia and Phoenix and secondary
hubs/focus cities in New York, Washington, D.C., Boston and
Las Vegas. We offer scheduled passenger service on more than
3,100 flights daily to 200 communities in the United States,
Canada, Europe, the Caribbean and Latin America. We also have an
established East Coast route network, including the US Airways
Shuttle service, with a substantial presence at capacity
constrained airports including New York’s LaGuardia Airport
and the Washington, D.C. area’s Ronald Reagan
Washington National Airport. We had approximately
55 million passengers boarding our mainline flights in
2008. As of December 31, 2008, we operated 354 mainline
jets and are supported by our regional airline subsidiaries and
affiliates operating as US Airways Express either under capacity
purchase or prorate agreements, which operate approximately 238
regional jets and 74 turboprops.
2008
Overview
Industry
Environment
In 2008, the U.S. airline industry faced an extraordinarily
challenging environment. Airlines incurred significant losses as
they faced staggering increases in the price of fuel throughout
most of 2008. The quarterly average cost per barrel of oil below
depicts the runaway nature of fuel prices during 2008:
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
2008
$
98
$
124
$
118
$
59
2007
58
65
75
90
Period over period increase (decrease)
68
%
91
%
57
%
(35
%)
Given the industry capacity levels and continued intense
competition, U.S. airlines were unable to sufficiently
raise ticket prices to cover their largest cost item, jet fuel.
As a result, most U.S. airlines were generating sizeable
losses. These factors served as a catalyst for some airlines to
take the following unprecedented measures to support growth in
ticket prices and preserve liquidity:
•
Substantial capacity reductions. Domestic ASMs are expected to
be down approximately 10% in 2009 as compared to 2008 for the
U.S. airline industry. These capacity cuts are expected to
minimize the impact of reduced passenger demand on revenue,
reduce costs and minimize cash burn.
•
Development and implementation of new revenue initiatives to
supplement existing sources of revenue.
•
Implementation of cost containment strategies to minimize
non-essential expenditures and conserve cash.
•
Enhancement of near-term liquidity through a number of
cash-raising initiatives such as traditional capital market
issuances, asset sales, sale and leaseback transactions and
prepaid sales of miles to affinity card issuers.
The then rapid and severe increases in fuel prices, which
appeared to have no end as oil hit an all time high of $147 per
barrel in July 2008, prompted some airlines to contain costs by
increasing their fuel hedge positions. With the industry facing
a liquidity crisis, many airlines’ hedge positions took the
form of no premium collars and swaps, as the cost of traditional
call options to lock in fuel cost became too expensive due to
the volatility in oil prices. By the end of the third quarter,
the rapid climb in oil prices was quickly replaced by an equally
rapid decline in oil prices, driven by a global economic
downturn. While the industry welcomed relief in the price of
fuel, hedges entered into earlier in the year, ahead of
fuel’s rapid decline, generated losses and a near term
drain on liquidity as airlines were forced to post significant
amounts of collateral with their fuel hedging counterparties.
As the industry enters 2009, moderating oil prices are expected
to offset at least some of the effects on passenger demand of
the corresponding weakening economy. Additionally, we believe
the unprecedented industry actions described above to reduce
capacity, support ticket prices and implement new sources of
revenue will further mitigate the impacts of the economic
downturn.
US
Airways’ Response
As described above, the industry was profoundly challenged by
the economic environment in 2008. We participated in the
industry’s response to the then record high fuel prices and
took action to operate a strong and competitive airline by
implementing initiatives as discussed below.
Capacity
and Fleet Reductions
We reduced our fourth quarter 2008 total mainline capacity by
5.9% and our Express capacity by 1.3% on a year-over-year basis.
In addition, we plan to reduce our total mainline 2009 capacity
by four to six percent and our Express capacity by five to seven
percent from 2008 levels. We anticipate that these capacity
reductions will enable us to minimize the impact of reduced
passenger demand on revenue and reduce costs.
We have taken the following steps to achieve our capacity
reduction goals:
•
Fleet Reduction: We announced the return of ten
aircraft to lessors, which included six Boeing
737-300
aircraft returned in 2008 and early 2009 as well as four Airbus
A320 aircraft to be returned in the first half of 2009. We have
also cancelled the leases of two A330-200 wide-body aircraft
that had been scheduled for delivery in the second half of 2009.
Further, we plan to reduce additional aircraft in 2009 and 2010.
•
Las Vegas Flight Reduction: We closed our Las Vegas
night operation, except for limited night service to the East
Coast, in early September 2008. In the current environment, the
revenue generated from the Las Vegas night operation no longer
exceeded the incremental cost of that flying. Overall, daily
departures from Las Vegas, which were as high as 141 during
September 2007, have been reduced to 77 as of the end of 2008.
New
Revenue Initiatives
We implemented several new revenue initiatives in 2008 in order
to generate additional revenue. These include a first and second
checked bag service fee, a new beverage purchase program,
processing fees for travel awards issued through our Dividend
Miles frequent traveler program, our new Choice Seats program,
increases to the cost
of call center/airport ticketing fees and increases to certain
preexisting service fees. We anticipate that these new services
and fees will generate in excess of $400 million annually
in additional revenue.
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. As a result of our
capacity reductions and our commitment to exercise tight cost
controls, the following cost initiatives were completed in 2008:
•
Employee Reduction: As a result of the reduced flying, we
required approximately 2,200 fewer positions across the system,
including approximately 300 pilots, 400 flight attendants, 800
airport employees and 700 non-union administrative management
and staff. These headcount reductions were implemented through a
combination of voluntary and involuntary furloughs and attrition.
•
Reduced Capital Expenditures: We reduced our 2008 planned
non-aircraft capital expenditures by $80 million, while
maintaining critical operational projects such as our
Reliability, Convenience and Appearance (“RCA”)
initiative, which includes cabin refurbishments, improved and
additional check-in kiosks, airport club refurbishments,
facility upgrades, new gate reading technology and the
completion of our next generation website.
•
Closed Certain Facilities: The US Airways Club in the
Baltimore/Washington International Airport, arrivals lounges in
Munich, Rome and Zurich, and cargo stations in Burbank, Colorado
Springs and Reno were closed during 2008.
•
Reduced Partner Costs: We have revised our wholesale programs
for cruise lines, tour operators and consolidators, which
included the reduction of the number of agency partners,
decreased discounts, tighter restrictions on travel rules, and a
reduction in commissions.
Most importantly, we controlled costs by running a good
operation. We dramatically improved our on-time performance and
mishandled baggage ratio. For the year 2008, our 80.1% on-time
performance ranked first among the big six hub and spoke
carriers and second among the ten largest U.S. airlines as
measured by the DOT’s Consumer Air Travel Report. See the
“Customer Service” section below for further
discussion.
Liquidity
In 2008, we took the following actions to improve our liquidity
position:
•
In August 2008, we completed an underwritten public stock
offering of 19 million common shares, as well as the full
exercise of 2.85 million common shares included in an
overallotment option, at an offering price of $8.50 per share.
Net proceeds from the offering, after underwriting discounts and
commissions, were $179 million. We used the proceeds from
the offering for general corporate purposes.
•
On October 20, 2008, we completed a series of financial
transactions which raised approximately $810 million in
gross proceeds and included a $400 million paydown at par
of our $1.6 billion credit facility administered by
Citicorp North America. In exchange for this prepayment, the
unrestricted cash covenant contained in the Citicorp credit
facility was reduced from $1.25 billion to
$850 million. The credit facility’s term remained the
same at seven years with substantially all of the remaining
principal amount payable at maturity in March 2014. Our net
proceeds after transaction fees were approximately
$370 million.
•
On December 5, 2008, we prepaid $100 million of the
indebtedness incurred in October 2008 related to a loan secured
by certain spare parts. On January 16, 2009, we exercised
our right to obtain new loan commitments under the same
agreement and raised $50 million.
In addition, to plan for a highly cyclical and volatile
industry, we had already refinanced $1.6 billion of debt
during 2007. This improved our liquidity by extending the due
dates of principal payments.
As of December 31, 2008, our cash, cash equivalents,
investments in marketable securities and restricted cash were
$1.97 billion, of which $1.24 billion was
unrestricted. This compares to December 31, 2007, when we
had
cash, cash equivalents, investments in marketable securities and
restricted cash of $3 billion, of which $2.53 billion
was unrestricted. The components of our cash and investments
balances as of December 31, 2008 and 2007 are as follows
(in millions):
2008
2007
Cash, cash equivalents and short-term investments in marketable
securities
$
1,054
$
2,174
Short and long-term restricted cash
726
468
Long-term investments in marketable securities
187
353
Total cash, cash equivalents, investments in marketable
securities and restricted cash
$
1,967
$
2,995
The 2008 financing transactions described above, which, net of
paydowns, contributed $450 million to our unrestricted
liquidity position, were more than offset by the following:
•
Cash used in operations to fund losses resulting from record
high fuel costs in 2008.
•
$461 million that we posted in collateral in the form of
$276 million of cash deposits and $185 million in
restricted cash related to letters of credit collateralizing
certain counterparties to our fuel hedging transactions.
•
$430 million in cash, net of debt financings, for the
acquisition of new aircraft along with non-aircraft capital
expenditures to support our RCA initiatives.
•
Additional holdback requirements, reflected in the increase in
restricted cash, by certain credit card processors for advance
ticket sales for which we have not yet provided air
transportation.
Our long-term investments in marketable securities consist of
investments in auction rate securities. During 2008, we recorded
a decline in the fair value of our auction rate securities of
$166 million due to the significant deterioration in the
financial markets in 2008. See “Liquidity and Capital
Resources” for further discussion of our investments in
auction rate securities.
Current
Financial Results and Outlook
The net loss for 2008 was $2.21 billion or a loss of $22.06
per share. The average mainline and Express price per gallon of
fuel increased 44.1% to $3.18 in 2008 from $2.21 in 2007. As a
result, our mainline and Express fuel expense in 2008 was
$4.76 billion, an increase of $1.36 billion or 40.1%
higher than 2007 on 1% lower capacity. Our mainline and Express
fuel costs during 2008 represented 34% of our total operating
expenses.
The 2008 results included $356 million of net losses
associated with fuel hedging transactions. This included
$496 million of net unrealized losses resulting from the
application of mark-to-market accounting for changes in the fair
value of fuel hedging instruments, offset by $140 million
of net realized gains on settled fuel hedge transactions. At
December 31, 2008, we have no premium collar fuel hedge
transactions in place with respect to 14% of our 2009 projected
mainline and Express fuel requirements at a weighted average
collar range of $3.41 to $3.61 per gallon of heating oil or
$131.15 to $139.55 per barrel of estimated crude oil equivalent.
Since the third quarter of 2008, we have not entered into any
new transactions as part of our fuel hedging program due to the
impact collateral requirements could have on our liquidity
resulting from the significant decline in the price of oil and
counterparty credit risk arising from global economic
uncertainty.
The 2008 results also included a non-cash charge of
$622 million to write off all of the goodwill created by
the merger of US Airways Group and America West Holdings in
September 2005. The goodwill impairment charge is discussed in
more detail under “Critical Accounting Policies and
Estimates.” We also recorded a $214 million non-cash
charge for the other than temporary impairment of our
investments in auction rate securities due to the extended
period of time that the fair values have been less than cost,
which included the $166 million decline in 2008 discussed
above as well as $48 million of previously deemed temporary
declines recorded to other comprehensive income now deemed other
than temporary. See “Liquidity and Capital Resources”
for further discussion of our investments in marketable
securities.
While the impact of the weakening economic environment on future
passenger demand remains uncertain, we believe that the current
decline in aviation fuel prices will offset at least some of the
potential impacts. We estimate that a one cent per gallon
decrease in fuel prices results in a $14 million decrease
in our annual fuel expense. As discussed above, we have taken
numerous actions to increase revenue, reduce costs and preserve
liquidity. We believe these actions have positioned us well for
a difficult global economy in 2009.
Customer
Service
We are committed to running a successful airline. One of the
important ways we do this is by taking care of our customers. We
believe that our focus on excellent customer service in every
aspect of our operations, including personnel, flight equipment,
inflight and ancillary amenities, on-time performance, flight
completion ratios and baggage handling, will strengthen customer
loyalty and attract new customers.
Throughout 2007 and 2008, we implemented several ongoing
initiatives to improve operational performance, including
lengthening the operating day at our hubs, lowering utilization,
increasing the number of designated spare aircraft in order to
ensure operational reliability and implementing new baggage
handling software and handheld baggage scanners. The
implementation of these initiatives along with other performance
improvement initiatives resulted in an improved trend in
operational performance.
For the year 2008, our 80.1% on-time performance ranked first
among the big six hub and spoke carriers and second among the
ten largest U.S. airlines as measured by the DOT’s
Consumer Air Travel Report. In addition, our mishandled baggage
ratio per 1,000 passengers improved dramatically to 4.77,
representing more than a 40% improvement from our 2007 rate of
8.47. Our rate of customer complaints filed with the DOT per
100,000 passengers also improved, decreasing to 2.01 in 2008
from 3.16 in 2007.
We reported the following combined operating statistics to the
DOT for mainline operations for the years ended
December 31, 2008, 2007 and 2006:
Full Year
2008
2007
2006
On-time performance(a)
80.1
68.7
76.9
Completion factor(b)
98.5
98.2
98.9
Mishandled baggage(c)
4.77
8.47
7.88
Customer complaints(d)
2.01
3.16
1.36
(a)
Percentage of reported flight operations arriving on time as
defined by the DOT.
(b)
Percentage of scheduled flight operations completed.
(c)
Rate of mishandled baggage reports per 1,000 passengers.
(d)
Rate of customer complaints filed with the DOT per 100,000
passengers.
US
Airways Group’s Results of Operations
In 2008, we realized an operating loss of $1.8 billion and
a loss before income taxes of $2.21 billion. The 2008 loss
was driven by record high fuel prices as the average mainline
and Express price per gallon of fuel was 44.1% higher in 2008 as
compared to 2007. Our 2008 results were also impacted by
recognition of the following items:
•
a $622 million non-cash charge to write off all of the
goodwill created by the merger of US Airways Group and America
West Holdings in September 2005.
•
$214 million in other than temporary non-cash impairment
charges included in nonoperating expense for our investments in
auction rate securities primarily driven by the length of time
and extent to which the fair value has been less than cost for
these securities.
•
$496 million of net unrealized losses resulting from the
application of mark-to-market accounting for changes in the fair
value of fuel hedging instruments, offset by $140 million
of net realized gains on settled fuel hedge transactions. The
net unrealized losses were primarily driven by the significant
decrease in the
price of oil in the latter part of 2008. We are required to use
mark-to-market accounting as our existing fuel hedging
instruments do not meet the requirements for hedge accounting
established by SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” If these
instruments had qualified for hedge accounting treatment, any
unrealized gains or losses, including the $496 million
discussed above, would have been deferred in other comprehensive
income, a component of stockholders’ equity, until the jet
fuel is purchased and the underlying fuel hedging instrument is
settled. Given the market volatility of jet fuel, the fair value
of these fuel hedging instruments is expected to change until
settled.
•
$76 million of net special charges, consisting of
$35 million of merger related transition expenses,
$18 million in non-cash charges related to the decline in
fair value of certain spare parts associated with our Boeing 737
aircraft fleet and as a result of our capacity reductions,
$14 million in lease return costs and penalties related to
certain Airbus aircraft and $9 million in severance charges.
•
$8 million in gains on forgiveness of debt, offset by
$7 million in write offs of debt discount and debt issuance
costs due to the refinancing of certain aircraft equipment notes
and certain loan prepayments in connection with our 2008
financing transactions, all included in nonoperating expense.
In 2007, we realized operating income of $533 million and
income before income taxes of $434 million. Our 2007
results were impacted by recognition of the following items:
•
$187 million of net unrealized gains resulting from the
application of mark-to-market accounting for changes in the fair
value of fuel hedging instruments as well as $58 million of
net realized gains on settled fuel hedge transactions.
•
$99 million of net special charges due to merger related
transition expenses.
•
a $99 million charge for an increase to long-term
disability obligations for US Airways’ pilots as a result
of a change in the FAA mandated retirement age for pilots from
60 to 65.
•
$7 million in tax credits due to an IRS rule change
allowing us to recover certain fuel usage tax amounts for years
2003-2006,
$9 million of insurance settlement proceeds related to
business interruption and property damages incurred as a result
of Hurricane Katrina in 2005 and a $5 million Piedmont
pilot pension curtailment gain related to the FAA mandated pilot
retirement age change discussed above. These gains were offset
in part by $5 million in charges related to reduced flying
from Pittsburgh.
•
an $18 million write off of debt issuance costs in
connection with the refinancing of the $1.25 billion GE
loan in March 2007 and $10 million in other than temporary
impairment charges for our investments in auction rate
securities, offset by a $17 million gain recognized on the
sale of stock in ARINC Incorporated, all included in
nonoperating expense.
In 2006, we realized operating income of $558 million and
income before income taxes and cumulative effect of change in
accounting principle of $404 million. Our 2006 results were
impacted by recognition of the following items:
•
$70 million of net unrealized losses resulting from the
application of mark-to-market accounting for changes in the fair
value of fuel hedging instruments as well as $9 million of
net realized losses on settled fuel hedge transactions.
•
$27 million of net special charges, consisting of
$131 million of merger related transition expenses, offset
by a $90 million credit related to the restructuring of the
then existing Airbus aircraft order and $14 million of
credits related to the settlement of certain bankruptcy-related
claims.
•
$6 million of expense related to prepayment penalties and
$5 million in accelerated amortization of debt issuance
costs in connection with the refinancing of the loan previously
guaranteed by the ATSB and two loans previously provided to AWA
by GECC, $17 million in payments in connection with the
inducement to convert $70 million of the 7% Senior
Convertible Notes to common stock and a $2 million write
off of debt issuance costs associated with those converted
notes, offset by $8 million of interest income earned by
AWA on certain prior year federal income tax refunds, all
included in nonoperating expense.
We reported a loss in 2008, which increased our net operating
loss carryforwards (“NOL”), and have not recorded a
tax provision for 2008. As of December 31, 2008, we have
approximately $1.49 billion of gross NOL to reduce
future federal taxable income. Of this amount, approximately
$1.44 billion is available to reduce federal taxable income
in the calendar year 2009. The NOL expires during the years 2022
through 2028. Our deferred tax asset, which includes
$1.41 billion of the NOL discussed above, has been subject
to a full valuation allowance. We also have approximately
$77 million of tax-effected state NOL at December 31,2008.
At December 31, 2008, the federal valuation allowance is
$568 million, all of which will reduce future tax expense
when recognized. The state valuation allowance is
$82 million, of which $58 million was established
through the recognition of tax expense. The remaining
$24 million was established in purchase accounting.
Effective January 1, 2009, we adopted
SFAS No. 141R, “Business Combinations.” In
accordance with SFAS No. 141R, all future decreases in
the valuation allowance established in purchase accounting will
be recognized as a reduction in tax expense. In addition, we
have $23 million and $2 million, respectively, of
unrealized federal and state tax benefit related to amounts
recorded in other comprehensive income.
For the year ended December 31, 2007, we utilized NOL to
reduce our income tax obligation. Utilization of this NOL
results in a corresponding decrease in the valuation allowance.
As this valuation allowance was established through the
recognition of tax expense, the decrease in valuation allowance
offsets our tax provision dollar for dollar. We recognized
$7 million of non-cash state income tax expense for the
year ended December 31, 2007, as we utilized NOL that was
generated by US Airways prior to the merger. As this was
acquired NOL, the decrease in the valuation allowance associated
with this NOL reduced goodwill instead of the provision for
income taxes.
For the year ended December 31, 2006, we recognized
$85 million of non-cash income tax expense, as we utilized
NOL that was generated by US Airways prior to the merger. We
also recorded Alternative Minimum Tax liability
(“AMT”) tax expense of $10 million. In most
cases, the recognition of AMT does not result in tax expense.
However, as discussed above, since our NOL was subject to a full
valuation allowance, any liability for AMT is recorded as tax
expense. We also recorded $2 million of state income tax
provision in 2006 related to certain states where NOL was not
available to be used.
The table below sets forth our selected mainline operating data:
Percent
Percent
Year Ended December 31,
Change
Change
2008
2007
2006
2008-2007
2007-2006
Revenue passenger miles (millions)(a)
60,570
61,262
60,689
(1.1
)
0.9
Available seat miles (millions)(b)
74,151
75,842
76,983
(2.2
)
(1.5
)
Passenger load factor (percent)(c)
81.7
80.8
78.8
0.9
pts
2.0
pts
Yield (cents)(d)
13.51
13.28
13.13
1.7
1.2
Passenger revenue per available seat mile (cents)(e)
11.04
10.73
10.35
2.9
3.7
Operating cost per available seat mile (cents)(f)
14.66
11.30
10.96
29.7
3.1
Passenger enplanements (thousands)(g)
54,820
57,871
57,345
(5.3
)
0.9
Departures (thousands)
496
525
542
(5.5
)
(3.1
)
Aircraft at end of period
354
356
359
(0.6
)
(0.8
)
Block hours (thousands)(h)
1,300
1,343
1,365
(3.3
)
(1.6
)
Average stage length (miles)(i)
955
925
927
3.3
(0.3
)
Average passenger journey (miles)(j)
1,554
1,489
1,478
4.4
0.7
Fuel consumption (gallons in millions)
1,142
1,195
1,210
(4.4
)
(1.3
)
Average aircraft fuel price including related taxes (dollars per
gallon)
3.17
2.20
2.08
43.9
5.8
Full-time equivalent employees at end of period
32,671
34,437
34,077
(5.1
)
1.1
(a)
Revenue passenger mile (“RPM”) — A basic
measure of sales volume. A RPM represents one passenger flown
one mile.
(b)
Available seat mile (“ASM”) — A basic
measure of production. An ASM represents one seat flown one mile.
Passenger load factor — The percentage of available
seats that are filled with revenue passengers.
(d)
Yield — A measure of airline revenue derived by
dividing passenger revenue by revenue passenger miles and
expressed in cents per mile.
(e)
Passenger revenue per available seat mile
(“PRASM”) — Total passenger revenues divided
by total available seat miles.
(f)
Operating cost per available seat mile
(“CASM”) — Total mainline operating expenses
divided by total available seat miles.
(g)
Passenger enplanements — The number of passengers on
board an aircraft including local, connecting and through
passengers.
(h)
Block hours — The hours measured from the moment an
aircraft first moves under its own power, including taxi time,
for the purposes of flight until the aircraft is docked at the
next point of landing and its power is shut down.
(i)
Average stage length — The average of the distances
flown on each segment of every route.
(j)
Average passenger journey — The average one-way trip
measured in statute miles for one passenger origination.
2008
Compared With 2007
Operating
Revenues:
Percent
2008
2007
Change
(In millions)
Operating revenues:
Mainline passenger
$
8,183
$
8,135
0.6
Express passenger
2,879
2,698
6.7
Cargo
144
138
3.7
Other
912
729
25.3
Total operating revenues
$
12,118
$
11,700
3.6
Total operating revenues in 2008 were $12.12 billion as
compared to $11.7 billion in 2007. Mainline passenger
revenues were $8.18 billion in 2008, as compared to
$8.14 billion in 2007. RPMs decreased 1.1% as mainline
capacity, as measured by ASMs, decreased 2.2%, resulting in a
0.9 point increase in load factor to 81.7%. Passenger yield
increased 1.7% to 13.51 cents in 2008 from 13.28 cents in 2007.
PRASM increased 2.9% to 11.04 cents in 2008 from 10.73 cents in
2007. Yield and PRASM increased in 2008 due principally to
strong passenger demand, continued capacity and pricing
discipline and fare increases in substantially all markets
during 2008.
Express passenger revenues were $2.88 billion in 2008, an
increase of $181 million from the 2007 period. Express
capacity, as measured by ASMs, increased 5.6% in 2008 due
principally to the year-over-year increase in capacity purchased
from an affiliate Express carrier. Express RPMs increased by
5.1% on this higher capacity resulting in a 0.4 point decrease
in load factor to 72.6%. Passenger yield increased by 1.6% to
26.52 cents in 2008 from 26.12 cents in 2007. PRASM increased 1%
to 19.26 cents in 2008 from 19.06 cents in 2007. The increase in
Express yield and PRASM are the result of the same favorable
industry pricing environment discussed in the mainline
operations above.
Other revenues were $912 million in 2008, an increase of
$183 million from 2007 due primarily to our new revenue
initiatives, principally our first and second checked bag fees,
which were implemented in the third quarter of 2008.
Total operating expenses were $13.92 billion in 2008, an
increase of $2.75 billion or 24.6% compared to 2007.
Mainline operating expenses were $10.87 billion in 2008, an
increase of $2.3 billion or 26.8% from 2007, while ASMs
decreased 2.2%. Mainline CASM increased 29.7% to 14.66 cents in
2008 from 11.3 cents in 2007. The 2008 period included a
$622 million non-cash charge to write off all of the
goodwill created by the merger of US Airways Group and America
West Holdings in September 2005, which contributed 0.84 cents to
our mainline CASM for 2008. The remaining period over period
increase in CASM was driven principally by increases in aircraft
fuel costs ($988 million or 1.41 cents per ASM) and a net
loss on fuel hedging instruments ($356 million) in 2008
compared to a net gain ($245 million) in 2007, which
accounted for 0.8 cents per ASM. The net unrealized losses
during 2008 were driven by the significant decline in the price
of oil in the latter part of 2008.
The 2008 period also included $76 million of net special
charges, consisting of $35 million of merger related
transition expenses, $18 million in non-cash charges
related to the decline in fair value of certain spare parts
associated with our Boeing 737 aircraft fleet and as a result of
our capacity reductions, $14 million in lease return costs
and penalties related to certain Airbus aircraft and
$9 million in charges related to involuntary furloughs as
well as terminations of non-union administrative and management
staff. This compares to net special charges of $99 million
in the 2007 period due to merger related transition expenses.
The table below sets forth the major components of our mainline
CASM for the years ended December 31, 2008 and 2007:
Year Ended
December 31,
Percent
2008
2007
Change
(In cents)
Mainline CASM:
Aircraft fuel and related taxes
4.88
3.47
40.7
Loss (gain) on fuel hedging instruments, net
0.48
(0.32
)
nm
Salaries and related costs
3.01
3.03
(0.8
)
Aircraft rent
0.98
0.96
2.2
Aircraft maintenance
1.05
0.84
25.4
Other rent and landing fees
0.76
0.70
7.6
Selling expenses
0.59
0.60
(1.2
)
Special items, net
0.10
0.13
(23.2
)
Depreciation and amortization
0.29
0.25
16.4
Goodwill impairment
0.84
—
nm
Other
1.68
1.64
2.2
Total mainline CASM
14.66
11.30
29.7
Significant changes in the components of mainline operating
expense per ASM are as follows:
•
Aircraft fuel and related taxes per ASM increased 40.7% due
primarily to a 43.9% increase in the average price per gallon of
fuel to a record high $3.17 in 2008 from $2.20 in 2007, offset
by a 4.4% decrease in gallons consumed.
•
Loss (gain) on fuel hedging instruments, net per ASM fluctuated
from a gain of 0.32 cents in 2007 to a loss of 0.48 cents in
2008. The net loss in the 2008 period is the result of net
unrealized losses of $496 million on open fuel hedge
transactions, offset by $140 million of net realized gains
on settled fuel hedge transactions. Our fuel hedging program
uses no premium collars, which establish an upper and lower
limit on heating oil futures prices, to provide protection from
fuel price risks. We use heating oil as it is a commodity with
prices that are generally highly correlated with jet fuel
prices. We recognized net gains from our fuel hedging program in
the first half of 2008 as the price of heating oil exceeded the
upper limit on certain of our collar transactions. However, the
significant decline in the price of oil in the latter part of
2008 generated unrealized losses on certain open fuel hedge
transactions as the price of heating oil fell below the lower
limit of those collar transactions.
•
Aircraft maintenance expense per ASM increased 25.4% due
principally to increases in the number of engine and landing
gear overhauls performed in 2008 as compared to 2007.
•
Other rent and landing fees per ASM increased 7.6% due primarily
to increases in rental rates at certain airports in the 2008
period as compared to the 2007 period.
•
Depreciation and amortization per ASM increased 16.4% due to the
acquisition of 14 Embraer aircraft and five Airbus aircraft in
2008, which increased depreciation expense on owned aircraft.
Total Express expenses increased 17.5% in 2008 to
$3.05 billion from $2.59 billion in 2007. Express fuel
costs increased $372 million as the average fuel price per
gallon increased 44.8% from $2.23 in 2007 to a record high $3.23
in 2008. Other Express operating expenses increased
$83 million year-over-year as a result of the 5.6% increase
in Express capacity in 2008.
Net nonoperating expense was $410 million in 2008 as
compared to $99 million in 2007. Interest income decreased
$89 million in 2008 due to lower average investment
balances and lower rates of return. Interest expense, net
decreased $20 million due primarily to reductions in
average interest rates associated with variable rate debt,
partially offset by an increase in the average debt balance
outstanding as compared to the 2007 period.
Other nonoperating expense, net in 2008 included
$214 million in other than temporary impairment charges for
our investments in auction rate securities primarily due to the
length of time and extent to which the fair value has been less
than cost for these securities. We also recognized
$25 million in foreign currency losses related to
transactions denominated in foreign currencies and
$7 million in write offs of debt discount and debt issuance
costs in connection with the refinancing of certain aircraft
equipment notes and certain loan prepayments in connection with
our 2008 financing transactions, offset in part by
$8 million in gains on forgiveness of debt. Other
nonoperating expense, net in 2007 included an $18 million
write off of debt issuance costs in connection with the
refinancing of the GE loan in March 2007 as well as a
$10 million other than temporary impairment charge for our
investments in auction rate securities, offset by a
$17 million gain on the sale of stock in ARINC Incorporated
and $7 million in foreign currency gains related to
transactions denominated in foreign currencies. The impairment
charges on auction rate securities are discussed in more detail
under “Liquidity and Capital Resources.”
2007
Compared With 2006
Operating
Revenues:
Percent
2007
2006
Change
(In millions)
Operating revenues:
Mainline passenger
$
8,135
$
7,966
2.1
Express passenger
2,698
2,744
(1.7
)
Cargo
138
153
(9.4
)
Other
729
694
4.9
Total operating revenues
$
11,700
$
11,557
1.2
Total operating revenues in 2007 were $11.7 billion as
compared to $11.56 billion in 2006. Mainline passenger
revenues were $8.14 billion in 2007, as compared to
$7.97 billion in 2006. RPMs increased 0.9% as mainline
capacity, as measured by ASMs, decreased 1.5%, resulting in a
2.0 point increase in load factor to 80.8%. Passenger yield
increased 1.2% to 13.28 cents in 2007 from 13.13 cents in 2006.
PRASM increased 3.7% to 10.73 cents in 2007 from 10.35 cents in
2006. The increases in yield and PRASM are due principally to
the strong revenue environment in 2007 resulting from reductions
in industry capacity and continued capacity and pricing
discipline, industry wide fare increases during the 2007 period
and higher passenger demand.
Express passenger revenues were $2.7 billion in 2007, a
decrease of $46 million from the 2006 period. Express
capacity, as measured by ASMs, decreased 5% in 2007, due
primarily to planned reductions in Express flying during 2007.
Express RPMs decreased by 2.6% on lower capacity resulting in a
1.8 point increase in load factor to 73%. Passenger yield
increased by 1% to 26.12 cents in 2007 from 25.86 cents in 2006.
PRASM increased 3.5% to 19.06 cents in 2007 from 18.42 cents in
2006.
Cargo revenues were $138 million in 2007, a decrease of
$15 million from the 2006 period due to decreases in
domestic mail and freight volumes. Other revenues were
$729 million in 2007, an increase of $35 million from
the 2006 period. The increase in other revenues was primarily
driven by an increase in revenue associated with higher fuel
sales to pro-rate carriers through MSC.
Operating
Expenses:
Percent
2007
2006
Change
(In millions)
Operating expenses:
Aircraft fuel and related taxes
$
2,630
$
2,518
4.4
Loss (gain) on fuel hedging instruments, net:
Realized
(58
)
9
nm
Unrealized
(187
)
70
nm
Salaries and related costs
2,302
2,090
10.1
Aircraft rent
727
732
(0.6
)
Aircraft maintenance
635
582
9.1
Other rent and landing fees
536
568
(5.7
)
Selling expenses
453
446
1.6
Special items, net
99
27
nm
Depreciation and amortization
189
175
8.2
Other
1,247
1,223
2.0
Total mainline operating expenses
8,573
8,440
1.6
Express expenses:
Fuel
765
764
0.1
Other
1,829
1,795
1.9
Total Express operating expenses
2,594
2,559
1.4
Total operating expenses
$
11,167
$
10,999
1.5
Total operating expenses were $11.17 billion in 2007, an
increase of $168 million or 1.5% compared to 2006. Mainline
operating expenses were $8.57 billion in 2007, an increase
of $133 million or 1.6% from 2006, while ASMs decreased
1.5%. Mainline CASM increased 3.1% to 11.3 cents in 2007 from
10.96 cents in 2006. The period over period increase in CASM was
driven principally by higher salaries and related costs
($212 million or 0.32 cents per ASM), due primarily to
increased headcount associated with our operational improvement
plan and a $99 million charge to increase our obligation
for long-term disability as a result of a change in the FAA
mandated retirement age for certain pilots, and an increase in
aircraft fuel costs ($112 million or 0.2 cents per ASM),
due to a 5.8% increase in the average price per gallon of fuel
in 2007. These increases were offset in part by gains on fuel
hedging instruments ($245 million) in the 2007 period as
compared to losses in the 2006 period ($79 million), which
accounted for 0.42 cents per ASM.
The 2007 period also included net charges from special items of
$99 million, primarily due to merger related transition
expenses. This compares to net charges from special items of
$27 million in 2006, which included $131 million of
merger related transition expenses, offset by a $90 million
credit related to the restructuring of the then existing Airbus
aircraft order and $14 million of credits related to the
settlement of certain bankruptcy-related claims.
Significant changes in the components of mainline operating
expense per ASM are as follows:
•
Aircraft fuel and related taxes per ASM increased 6% due
primarily to a 5.8% increase in the average price per gallon of
fuel to $2.20 in 2007 from $2.08 in 2006.
•
Loss (gain) on fuel hedging instruments, net per ASM fluctuated
from a loss of 0.10 cents in 2006 to a gain of 0.32 cents in
2007. The net gain in the 2007 period is the result of net
unrealized gains of $187 million on open fuel hedge
transactions as well as $58 million of net realized gains
on settled fuel hedge transactions. We recognized net gains from
our fuel hedging program in 2007 as the price of heating oil
exceeded the upper limit on certain of our collar transactions.
•
Salaries and related costs per ASM increased 11.8% due to a
$99 million charge for an increase to long-term disability
obligations for US Airways’ pilots as a result of a change
in the FAA mandated retirement age for pilots from 60 to 65 as
well as a period over period increase in headcount, principally
in fleet and passenger service employees as part of our
initiative to improve operational performance, and increases in
employee benefits as a result of higher medical claims due to
general inflationary cost increases.
•
Aircraft maintenance expense per ASM increased 10.8% due
principally to an increase in the number of overhauls performed
on engines not subject to power by the hour maintenance
agreements as well as an increase in the volume of seat
overhauls and thrust reverser repairs in the 2007 period
compared to the 2006 period.
•
Depreciation and amortization per ASM increased 9.9% due to the
acquisition of nine Embraer 190 aircraft and equipment to
support flight operations in 2007, which increased depreciation
expense on owned aircraft and equipment.
Total Express expenses increased 1.4% in 2007 to
$2.59 billion from $2.56 billion in 2006, as other
Express operating expenses increased $34 million. Express
fuel costs remained consistent period over period as the average
fuel price per gallon increased 4.2% from $2.14 in the 2006
period to $2.23 in the 2007 period, which was offset by a 4%
decrease in gallons consumed as block hours were down 6.2% in
the 2007 period due to planned reductions in Express flying.
Other Express operating expenses increased as a result of higher
rates paid under certain capacity purchase agreements due to
contractually scheduled rate changes.
Net nonoperating expense was $99 million in 2007 as
compared to $154 million in 2006. Interest income increased
$19 million in 2007 due to higher average cash balances and
higher average rates of return on investments. Interest expense,
net decreased $22 million due to the full year effect in
2007 of refinancing the loan formerly guaranteed by the ATSB at
lower average interest rates in March 2006, as well as the
refinancing of the GE loan at lower average interest rates and
the repayment of the Barclays Bank Delaware prepaid miles loan
in March 2007.
Other nonoperating income, net in 2007 of $2 million
included an $18 million write off of debt issuance costs in
connection with the refinancing of the GE loan in March 2007 as
well as a $10 million other than temporary impairment
charge for our investments in auction rate securities, offset by
a $17 million gain on the sale of stock in ARINC
Incorporated and $7 million in foreign currency gains
related to transactions denominated in foreign currencies. Other
nonoperating expense, net in 2006 of $12 million included
$6 million of nonoperating expense related to prepayment
penalties and $5 million in accelerated amortization of
debt issuance costs in connection with the refinancing of the
loan formerly guaranteed by the ATSB and two loans previously
provided to AWA by GECC as well as $17 million in payments
in connection with the inducement to convert $70 million of
the 7% Senior Convertible Notes to common stock and a
$2 million write off of debt issuance costs associated with
those converted notes, offset by $11 million of derivative
gains attributable to stock options in Sabre and warrants in a
number of companies and $2 million in foreign currency
gains related to transactions denominated in foreign currencies.
US
Airways’ Results of Operations
On September 26, 2007, as part of the integration efforts
following the merger, AWA surrendered its FAA operating
certificate. As a result, all mainline airline operations are
now being conducted under US Airways’ FAA operating
certificate. In connection with the combination of all mainline
airline operations under one FAA operating certificate, US
Airways Group contributed 100% of its equity interest in America
West Holdings, the parent company of AWA, to US Airways. As a
result, America West Holdings and AWA are now wholly owned
subsidiaries of US Airways. In addition, AWA transferred
substantially all of its assets and liabilities to US Airways.
All off-balance sheet commitments of AWA were also transferred
to US Airways.
Transfers of assets between entities under common control are
accounted for similar to the pooling of interests method of
accounting. Under this method, the carrying amount of net assets
recognized in the balance sheets of each combining entity are
carried forward to the balance sheet of the combined entity, and
no other assets or liabilities are recognized as a result of the
contribution of shares. This management’s discussion and
analysis of financial condition and results of operations is
presented as though the transfer had occurred at the time of US
Airways’ emergence from bankruptcy in September 2005.
In 2008, US Airways realized an operating loss of
$1.77 billion and a loss before income taxes of
$2.15 billion. The 2008 loss was driven by record high fuel
prices as the average mainline and Express price per gallon of
fuel was 44.1% higher in 2008 as compared to 2007. US
Airways’ 2008 results were also impacted by recognition of
the following items:
•
a $622 million non-cash charge to write off all of the
goodwill created by the merger of US Airways Group and America
West Holdings in September 2005.
$214 million in other than temporary non-cash impairment
charges included in nonoperating expense for its investments in
auction rate securities primarily driven by the length of time
and extent to which the fair value has been less than cost for
these securities.
•
$496 million of net unrealized losses resulting from the
application of mark-to-market accounting for changes in the fair
value of fuel hedging instruments, offset by $140 million
of net realized gains on settled fuel hedge transactions. The
net unrealized losses were primarily driven by the significant
decrease in the price of oil in the latter part of 2008. US
Airways is required to use mark-to-market accounting as its
existing fuel hedging instruments do not meet the requirements
for hedge accounting established by SFAS No. 133. If
these instruments had qualified for hedge accounting treatment,
any unrealized gains or losses, including the $496 million
discussed above, would have been deferred in other comprehensive
income, a component of stockholder’s equity, until the jet
fuel is purchased and the underlying fuel hedging instrument is
settled. Given the market volatility of jet fuel, the fair value
of these fuel hedging instruments is expected to change until
settled.
•
$76 million of net special charges, consisting of
$35 million of merger related transition expenses,
$18 million in non-cash charges related to the decline in
fair value of certain spare parts associated with US
Airways’ Boeing 737 aircraft fleet and as a result of US
Airways’ capacity reductions, $14 million in lease
return costs and penalties related to certain Airbus aircraft
and $9 million in severance charges.
•
$8 million in gains on forgiveness of debt, offset by
$6 million in write offs of debt discount and debt issuance
costs due to the refinancing of certain aircraft equipment notes
and a loan prepayment in connection with US Airways’ 2008
financing transactions, all included in nonoperating expense.
In 2007, US Airways realized operating income of
$524 million and income before income taxes of
$485 million. US Airways’ results were impacted by
recognition of the following items:
•
$187 million of net unrealized gains resulting from the
application of mark-to-market accounting for changes in the fair
value of fuel hedging instruments as well as $58 million of
net realized gains on settled fuel hedge transactions.
•
$99 million of net special charges due to merger related
transition expenses.
•
a $99 million charge for an increase to long-term
disability obligations for US Airways’ pilots as a result
of a change in the FAA mandated retirement age for pilots from
60 to 65.
•
$7 million in tax credits due to an IRS rule change
allowing US Airways to recover certain fuel usage tax amounts
for years
2003-2006
and $9 million of insurance settlement proceeds related to
business interruption and property damages incurred as a result
of Hurricane Katrina in 2005. These gains were offset in part by
$4 million in charges related to reduced flying from
Pittsburgh.
•
a $17 million gain recognized on the sale of stock in ARINC
Incorporated, offset by $10 million in other than temporary
impairment charges for US Airways’ investments in auction
rate securities, all included in nonoperating expense.
In 2006, US Airways realized operating income of
$557 million and income before income taxes and cumulative
effect of change in accounting principle of $446 million.
US Airways’ results were impacted by recognition of the
following items:
•
$70 million of net unrealized losses resulting from the
application of mark-to-market accounting for changes in the fair
value of fuel hedging instruments as well as $9 million of
net realized losses on settled fuel hedge transactions.
•
$38 million of net special charges, consisting of
$131 million of merger related transition expenses, offset
by a $90 million credit related to the restructuring of the
then existing Airbus aircraft order and $3 million of
credits related to the settlement of certain bankruptcy-related
claims.
•
$6 million of expense related to prepayment penalties and
$5 million in accelerated amortization of debt issuance
costs in connection with the refinancing of the loan previously
guaranteed by the ATSB and two
loans previously provided to AWA by GECC, offset by
$8 million of interest income earned by AWA on certain
prior year federal income tax refunds, all included in
nonoperating expense.
US Airways reported a loss in 2008, which increased its NOL, and
has not recorded a tax provision for 2008. As of
December 31, 2008, US Airways has approximately
$1.41 billion of gross NOL to reduce future federal
taxable income. Of this amount, approximately $1.37 billion
is available to reduce federal taxable income in the calendar
year 2009. The NOL expires during the years 2022 through 2028.
US Airways’ deferred tax asset, which includes
$1.33 billion of the NOL discussed above, has been subject
to a full valuation allowance. US Airways also has approximately
$72 million of tax-effected state NOL at December 31,2008.
At December 31, 2008, the federal valuation allowance is
$563 million, all of which will reduce future tax expense
when recognized. The state valuation allowance is
$80 million, of which $56 million was established
through the recognition of tax expense. The remaining
$24 million was established in purchase accounting.
Effective January 1, 2009, US Airways adopted
SFAS No. 141R, “Business Combinations.” In
accordance with SFAS No. 141R, all future decreases in
the valuation allowance established in purchase accounting will
be recognized as a reduction in tax expense. In addition, US
Airways has $28 million and $2 million, respectively,
of unrealized federal and state tax benefit related to amounts
recorded in other comprehensive income.
For the year ended December 31, 2007, US Airways utilized
NOL to reduce its income tax obligation. Utilization of this NOL
results in a corresponding decrease in the valuation allowance.
As this valuation allowance was established through the
recognition of tax expense, the decrease in valuation allowance
offsets the tax provision dollar for dollar. US Airways
recognized $7 million of non-cash state income tax expense
for the year ended December 31, 2007, as it utilized NOL
that was generated prior to the merger. As this was acquired
NOL, the decrease in the valuation allowance associated with
this NOL reduced goodwill instead of the provision for income
taxes.
For the year ended December 31, 2006, US Airways recognized
$85 million of non-cash income tax expense, as it utilized
NOL that was generated prior to the merger. US Airways also
recorded AMT tax expense of $10 million. In most cases, the
recognition of AMT does not result in tax expense. However, as
discussed above, since US Airways’ NOL was subject to a
full valuation allowance, any liability for AMT is recorded as
tax expense. US Airways also recorded $2 million of state
income tax provision in 2006 related to certain states where NOL
was not available to be used.
The table below sets forth US Airways’ selected mainline
operating data:
Percent
Percent
Year Ended December 31,
Change
Change
2008
2007
2006
2008-2007
2007-2006
Revenue passenger miles (millions)(a)
60,570
61,262
60,689
(1.1
)
0.9
Available seat miles (millions)(b)
74,151
75,842
76,983
(2.2
)
(1.5
)
Passenger load factor (percent)(c)
81.7
80.8
78.8
0.9
pts
2.0
pts
Yield (cents)(d)
13.51
13.28
13.13
1.7
1.2
Passenger revenue per available seat mile (cents)(e)
11.04
10.73
10.35
2.9
3.7
Aircraft at end of period
354
356
359
(0.6
)
(0.8
)
(a)
Revenue passenger mile (“RPM”) — A basic
measure of sales volume. A RPM represents one passenger flown
one mile.
(b)
Available seat mile (“ASM”) — A basic
measure of production. An ASM represents one seat flown one mile.
(c)
Passenger load factor — The percentage of available
seats that are filled with revenue passengers.
(d)
Yield — A measure of airline revenue derived by
dividing passenger revenue by revenue passenger miles and
expressed in cents per mile.
(e)
Passenger revenue per available seat mile
(“PRASM”) — Total passenger revenues divided
by total available seat miles.
Total operating revenues in 2008 were $12.24 billion as
compared to $11.81 billion in 2007. Mainline passenger
revenues were $8.18 billion in 2008, as compared to
$8.14 billion in 2007. RPMs decreased 1.1% as mainline
capacity, as measured by ASMs, decreased 2.2%, resulting in a
0.9 point increase in load factor to 81.7%. Passenger yield
increased 1.7% to 13.51 cents in 2008 from 13.28 cents in 2007.
PRASM increased 2.9% to 11.04 cents in 2008 from 10.73 cents in
2007. Yield and PRASM increased in 2008 due principally to
strong passenger demand, continued capacity and pricing
discipline and fare increases in substantially all markets
during 2008.
Express passenger revenues were $2.88 billion in 2008, an
increase of $181 million from the 2007 period. Express
capacity, as measured by ASMs, increased 5.6% in 2008 due
principally to the year-over-year increase in capacity purchased
from an affiliate Express carrier. Express RPMs increased by
5.1% on this higher capacity resulting in a 0.4 point decrease
in load factor to 72.6%. Passenger yield increased by 1.6% to
26.52 cents in 2008 from 26.12 cents in 2007. PRASM increased 1%
to 19.26 cents in 2008 from 19.06 cents in 2007. The increase in
Express yield and PRASM are the result of the same favorable
industry pricing environment discussed in the mainline
operations above.
Other revenues were $1.04 billion in 2008, an increase of
$196 million from 2007 due primarily to US Airways’
new revenue initiatives, principally its first and second
checked bag fees, which were implemented in the third quarter of
2008.
Total operating expenses were $14.02 billion in 2008, an
increase of $2.73 billion or 24.2% compared to 2007.
Mainline operating expenses were $10.88 billion in 2008, an
increase of $2.32 billion or 27.1% from 2007. The 2008
period included a $622 million non-cash charge to write off
all of the goodwill created by the merger of US Airways Group
and America West Holdings in September 2005. The remaining
period over period increase in mainline operating expenses was
driven principally by increases in aircraft fuel costs
($988 million) and a net loss on fuel hedging instruments
($356 million) in 2008 compared to a net gain
($245 million) in 2007. The net unrealized losses during
2008 were driven by the significant decline in the price of oil
in the latter part of 2008.
The 2008 period also included $76 million of net special
charges, consisting of $35 million of merger related
transition expenses, $18 million in non-cash charges
related to the decline in fair value of certain spare parts
associated with US Airways’ Boeing 737 aircraft fleet and
as a result of US Airways’ capacity reductions,
$14 million in lease return costs and penalties related to
certain Airbus aircraft and $9 million in charges related
to involuntary furloughs as well as terminations of non-union
administrative and management staff. This compares to net
special charges of $99 million in the 2007 period due to
merger related transition expenses.
Significant changes in the components of mainline operating
expenses are as follows:
•
Aircraft fuel and related taxes increased 37.6% due primarily to
a 43.9% increase in the average price per gallon of fuel to a
record high $3.17 in 2008 from $2.20 in 2007, offset by a 4.4%
decrease in gallons consumed.
•
Loss (gain) on fuel hedging instruments, net fluctuated from a
net gain of $245 million in 2007 to a net loss of
$356 million in 2008. The net loss in the 2008 period is
the result of net unrealized losses of $496 million on open
fuel hedge transactions, offset by $140 million of net
realized gains on settled fuel hedge transactions. US
Airways’ fuel hedging program uses no premium collars,
which establish an upper and lower limit on heating oil futures
prices, to provide protection from fuel price risks. US Airways
uses heating
oil as it is a commodity with prices that are generally highly
correlated with jet fuel prices. US Airways recognized net gains
from its fuel hedging program in the first half of 2008 as the
price of heating oil exceeded the upper limit on certain of its
collar transactions. However, the significant decline in the
price of oil in the latter part of 2008 generated unrealized
losses on certain open fuel hedge transactions as the price of
heating oil fell below the lower limit of those collar
transactions.
•
Aircraft maintenance expense increased 23.2% due principally to
increases in the number of engine and landing gear overhauls
performed in 2008 as compared to 2007.
•
Other rent and landing fees increased 4.9% due primarily to
increases in rental rates at certain airports in the 2008 period
as compared to the 2007 period.
•
Depreciation and amortization increased 13.1% due to the
acquisition of 14 Embraer aircraft and five Airbus aircraft in
2008, which increased depreciation expense on owned aircraft.
Total Express expenses increased 15.1% in 2008 to
$3.14 billion from $2.73 billion in 2007. Express fuel
costs increased $372 million as the average fuel price per
gallon increased 44.8% from $2.23 in 2007 to a record high $3.23
in 2008. Other Express operating expenses increased
$40 million year-over year as a result of the 5.6% increase
in Express capacity in 2008, partially offset by a decrease in
amounts paid under capacity purchases with US Airways
Group’s wholly owned Express carriers.
Nonoperating
Income (Expense):
Percent
2008
2007
Change
(In millions)
Nonoperating income (expense):
Interest income
$
83
$
172
(51.6
)
Interest expense, net
(218
)
(229
)
(5.1
)
Other, net
(240
)
18
nm
Total nonoperating expense, net
$
(375
)
$
(39
)
nm
Net nonoperating expense was $375 million in 2008 as
compared to $39 million in 2007. Interest income decreased
$89 million in 2008 due to lower average investment
balances and lower rates of return. Interest expense, net
decreased $11 million due primarily to reductions in
average interest rates associated with variable rate debt,
partially offset by an increase in the average debt balance
outstanding as compared to the 2007 period.
Other nonoperating expense, net in 2008 included
$214 million in other than temporary impairment charges for
US Airways’ investments in auction rate securities
primarily due to the length of time and extent to which the fair
value has been less than cost for these securities. US Airways
also recognized $25 million in foreign currency losses
related to transactions denominated in foreign currencies and
$6 million in write offs of debt discount and debt issuance
costs in connection with the refinancing of certain aircraft
equipment notes and a loan prepayment in connection with US
Airways’ 2008 financing transactions, offset in part by
$8 million in gains on forgiveness of debt. Other
nonoperating expense, net in 2007 included a $17 million
gain on the sale of stock in ARINC Incorporated as well as
$7 million in foreign currency gains related to
transactions denominated in foreign currencies, offset by a
$10 million other than temporary impairment charge for US
Airways’ investments in auction rate securities. The
impairment charges on auction rate securities are discussed in
more detail under “Liquidity and Capital Resources.”
Total operating revenues in 2007 were $11.81 billion as
compared to $11.69 billion in 2006. Mainline passenger
revenues were $8.14 billion in 2007, as compared to
$7.97 billion in 2006. RPMs increased 0.9% as mainline
capacity, as measured by ASMs, decreased 1.5%, resulting in a
2.0 point increase in load factor to 80.8%. Passenger yield
increased 1.2% to 13.28 cents in 2007 from 13.13 cents in 2006.
PRASM increased 3.7% to 10.73 cents in 2007 from 10.35 cents in
2006. The increases in yield and PRASM are due principally to
the strong revenue environment in 2007 resulting from reductions
in industry capacity and continued capacity and pricing
discipline, industry wide fare increases during the 2007 period
and higher passenger demand.
Express passenger revenues were $2.7 billion in 2007, a
decrease of $46 million from the 2006 period. Express
capacity, as measured by ASMs, decreased 5% in 2007, due
primarily to planned reductions in Express flying during 2007.
Express RPMs decreased by 2.6% on lower capacity resulting in a
1.8 point increase in load factor to 73%. Passenger yield
increased by 1% to 26.12 cents in 2007 from 25.86 cents in 2006.
PRASM increased 3.5% to 19.06 cents in 2007 from 18.42 cents in
2006.
Cargo revenues were $138 million in 2007, a decrease of
$15 million from the 2006 period due to decreases in
domestic mail and freight volumes.
Total operating expenses were $11.29 billion in 2007, an
increase of $154 million or 1.4% compared to 2006. Mainline
operating expenses were $8.56 billion in 2007, an increase
of $97 million or 1.1% from 2006. The period over period
increase in mainline operating expenses was driven principally
by higher salaries and related costs ($212 million),
aircraft fuel costs ($112 million) and aircraft maintenance
($53 million). These increases were offset in part by gains
on fuel hedging instruments ($245 million) in the 2007
period as compared to losses in the 2006 period
($79 million).
The 2007 period included net charges from special items of
$99 million, primarily due to merger related transition
expenses. This compares to net charges from special items of
$38 million in 2006, which included $131 million of
merger related transition expenses, offset by a $90 million
credit related to the restructuring of the then existing Airbus
aircraft order and $3 million of credits related to the
settlement of certain bankruptcy-related claims.
Significant changes in the components of mainline operating
expenses are as follows:
•
Aircraft fuel and related taxes increased 4.4% due primarily to
a 5.8% increase in the average price per gallon of fuel to $2.20
in 2007 from $2.08 in 2006.
•
Loss (gain) on fuel hedging instruments, net fluctuated from a
loss of $79 million in 2006 to a gain of $245 million
in 2007. The net gain in the 2007 period is the result of net
unrealized gains of $187 million on open fuel hedge
transactions as well as $58 million of net realized gains
on settled fuel hedge transactions. US Airways recognized net
gains from its fuel hedging program in 2007 as the price of
heating oil exceeded the upper limit on certain of its collar
transactions.
•
Salaries and related costs increased 10.1% due to a
$99 million charge for an increase to long-term disability
obligations for US Airways’ pilots as a result of a change
in the FAA mandated retirement age for pilots from 60 to 65 as
well as a period over period increase in headcount, principally
in fleet and passenger service
employees as part of US Airways’ initiative to improve
operational performance, and increases in employee benefits as a
result of higher medical claims due to general inflationary cost
increases.
•
Aircraft maintenance expense increased 9.1% due principally to
an increase in the number of overhauls performed on engines not
subject to power by the hour maintenance agreements as well as
an increase in the volume of seat overhauls and thrust reverser
repairs in the 2007 period compared to the 2006 period.
•
Depreciation and amortization increased 8.1% due to the
acquisition of nine Embraer 190 aircraft and equipment to
support flight operations in 2007, which increased depreciation
expense on owned aircraft and equipment.
Total Express expenses increased 2.1% in 2007 to
$2.73 billion from $2.67 billion in 2006, as other
Express operating expenses increased $56 million. Express
fuel costs remained consistent period over period as the average
fuel price per gallon increased 4.2% from $2.14 in the 2006
period to $2.23 in the 2007 period, which was offset by a 4%
decrease in gallons consumed as block hours were down 6.2% in
the 2007 period due to planned reductions in Express flying.
Other Express operating expenses increased as a result of higher
rates paid under certain capacity purchase agreements due to
contractually scheduled rate changes.
Nonoperating
Income (Expense):
Percent
2007
2006
Change
(In millions)
Nonoperating income (expense):
Interest income
$
172
$
153
12.5
Interest expense, net
(229
)
(268
)
(14.4
)
Other, net
18
4
nm
Total nonoperating expense, net
$
(39
)
$
(111
)
(64.7
)
Net nonoperating expense was $39 million in 2007 as
compared to $111 million in 2006. Interest income increased
$19 million in 2007 due to higher average cash balances and
higher average rates of returns on investments. Interest
expense, net decreased $39 million due to the full year
effect in 2007 of the refinancing by US Airways Group of the
loan formerly guaranteed by the ATSB at lower average interest
rates in March 2006. The refinanced debt is no longer held by US
Airways. Also contributing to lower interest expense was the
repayment by US Airways Group of the Barclays Bank Delaware
prepaid miles loan in March 2007.
Other nonoperating income, net in 2007 of $18 million
included a $17 million gain on the sale of stock in ARINC
Incorporated as well as $7 million in foreign currency
gains related to transactions denominated in foreign currencies,
offset by a $10 million other than temporary impairment
charge for US Airways’ investments in auction rate
securities. Other nonoperating income, net in 2006 of
$4 million included $11 million of derivative gains
attributable to stock options in Sabre and warrants in a number
of companies and $2 million in foreign currency gains
related to transactions denominated in foreign currencies,
offset by $6 million of nonoperating expense related to
prepayment penalties and $5 million in accelerated
amortization of debt issuance costs in connection with the
refinancing of the loan formerly guaranteed by the ATSB and two
loans previously provided to AWA by GECC.
Liquidity
and Capital Resources
As of December 31, 2008, our cash, cash equivalents,
investments in marketable securities and restricted cash were
$1.97 billion, of which $1.24 billion was
unrestricted. Our investments in marketable securities included
$187 million of investments in auction rate securities at
fair value ($411 million par value) that are classified as
noncurrent assets on our consolidated balance sheets.
Investments
in Marketable Securities
As of December 31, 2008, we held auction rate securities
totaling $411 million at par value, which are classified as
available for sale securities and noncurrent assets on our
consolidated balance sheets. Contractual
maturities for these auction rate securities range from eight to
44 years, with 62% of our portfolio maturing within the
next ten years, 10% maturing within the next 20 years, 16%
maturing within the next 30 years and 12% maturing
thereafter through 2052. The interest rates are reset
approximately every 28 days, except one security for which
the auction process is currently suspended. Current yields range
from 1.76% to 6.08%. With the liquidity issues experienced in
the global credit and capital markets, all of our auction rate
securities have experienced failed auctions since August 2007.
The estimated fair value of these auction rate securities no
longer approximates par value. However, we have not experienced
any defaults and continue to earn and receive interest at the
maximum contractual rates.
We estimated the fair value of these auction rate securities
based on the following: (i) the underlying structure of
each security; (ii) the present value of future principal
and interest payments discounted at rates considered to reflect
current market conditions; (iii) consideration of the
probabilities of default, passing a future auction, or
repurchase at par for each period; and (iv) estimates of
the recovery rates in the event of default for each security.
These estimated fair values could change significantly based on
future market conditions.
At December 31, 2007, the $411 million par value
auction rate securities had a fair value of $353 million, a
$58 million decline from par. Of this decline in fair
value, $48 million was deemed temporary and an unrealized
loss in this amount was recorded to other comprehensive income.
We concluded $10 million of the decline was an other than
temporary impairment as a single security with subprime exposure
experienced a severe decline in fair value during the period.
Accordingly, the $10 million impairment charge was recorded
to other nonoperating expense, net in the fourth quarter of 2007.
At December 31, 2008, the fair value of our auction rate
securities was $187 million, representing a decline in fair
value of $166 million from December 31, 2007. The
decline in fair value was caused by the significant
deterioration in the financial markets in 2008. We concluded
that the 2008 decline in fair value of $166 million as well
as the previously deemed temporary declines recorded to other
comprehensive income of $48 million were now other than
temporary. Our conclusion for the other than temporary
impairment was due to the length of time and extent to which the
fair value has been less than cost for certain securities. All
of these securities have experienced failed auctions for a
period greater than one year, and there has been no recovery in
their fair value. Accordingly, we recorded $214 million in
impairment charges in other nonoperating expense, net related to
the other than temporary impairment of our auction rate
securities. We continue to monitor the market for auction rate
securities and consider its impact (if any) on the fair value of
our investments. If the current market conditions deteriorate
further, we may be required to record additional impairment
charges in other nonoperating expense, net in future periods.
We do not anticipate having to sell these securities in order to
operate our business. We believe that, based on our current
unrestricted cash, cash equivalents and short-term marketable
securities balances of $1.05 billion as of
December 31, 2008, the current lack of liquidity in our
investments in auction rate securities will not have a material
impact on our liquidity, our cash flow or our ability to fund
our operations.
Aviation
Fuel and Derivative Instruments
Because our operations are dependent upon aviation fuel,
significant increases in aviation fuel costs materially and
adversely affect our liquidity, results of operations and
financial condition. Our 2009 forecasted mainline and Express
fuel consumption is approximately 1.44 billion gallons, and
a one cent per gallon increase in aviation fuel price results in
a $14 million annual increase in expense, excluding the
impact of hedge transactions.
As of December 31, 2008, we have entered into no premium
collars, which establish an upper and lower limit on heating oil
futures prices, to protect us from fuel price risks. These
transactions are in place with respect to approximately 14% of
our projected mainline and Express 2009 fuel requirements at a
weighted average collar range of $3.41 to $3.61 per gallon of
heating oil or $131.15 to $139.55 per barrel of estimated crude
oil equivalent.
The use of such hedging transactions in our fuel hedging program
could result in us not fully benefiting from certain declines in
heating oil futures prices. As of December 31, 2008, the
fair value of our fuel hedging instruments was a net liability
of $375 million. Further, these instruments do not provide
protection from future price increases unless heating oil prices
exceed the call option price of the no premium collar. Although
heating oil
prices are generally highly correlated with those of jet fuel,
the prices of jet fuel may change more or less than heating oil,
resulting in a change in fuel expense that is not fully offset
by the hedge transactions. As of December 31, 2008, we
estimate that a 10% increase in heating oil futures prices would
increase the fair value of the hedge transactions by
approximately $30 million. We estimate that a 10% decrease
in heating oil futures prices would decrease the fair value of
the hedge transactions by approximately $30 million. Since
we have not entered into any new fuel hedge transactions since
the third quarter of 2008, the impact of changes in heating oil
futures prices will decrease as existing hedges are settled.
When our fuel hedging derivative instruments are in a net asset
position, we are exposed to credit losses in the event of
non-performance by counterparties to our fuel hedging
derivatives. The amount of such credit exposure is limited to
the unrealized gains, if any, on our fuel hedging derivatives.
To manage credit risks, we carefully select counterparties,
conduct transactions with multiple counterparties which limits
our exposure to any single counterparty, and monitor the market
position of the program and our relative market position with
each counterparty. We also maintain industry-standard security
agreements with all of our counterparties which may require the
counterparty to post collateral if the value of the fuel hedging
derivatives exceeds specified thresholds related to the
counterparty’s credit ratings.
When our fuel hedging derivative instruments are in a net
liability position, we are exposed to credit risks related to
the return of collateral in situations in which we have posted
collateral with counterparties for unrealized losses. As of
December 31, 2008, we were in a net liability position of
$375 million based on the fair value of our fuel hedging
derivative instruments due to the significant decline in the
price of oil in the latter part of 2008. When possible, in order
to mitigate the risk of posting collateral, we provide letters
of credit to certain counterparties in lieu of cash. At
December 31, 2008, $185 million related to letters of
credit collateralizing certain counterparties to our fuel
hedging transactions is included in short-term restricted cash.
In addition, at December 31, 2008, we had $276 million
in cash deposits held by counterparties to our fuel hedging
transactions. Since the third quarter of 2008, we have not
entered into any new transactions as part of our fuel hedging
program due to the impact collateral requirements could have on
our liquidity resulting from the significant decline in the
price of oil and counterparty credit risk arising from global
economic uncertainty.
Further declines in heating oil prices would result in
additional collateral requirements with our counterparties,
unrealized losses on our existing fuel hedging derivative
instruments and realized losses at the time of settlement of
these fuel hedging derivative instruments. See also
Item 7A. “Quantitative and Qualitative Disclosures
About Market Risk.”
Sources
and Uses of Cash
US
Airways Group
2008
Compared to 2007
Net cash used in operating activities was $980 million in
2008 as compared to net cash provided by operating activities of
$451 million in 2007. The period over period decrease of
$1.43 billion is due principally to our net loss for 2008,
which was driven by record high fuel prices. Our mainline and
Express fuel expense, net of realized gains on fuel hedging
transactions, was $1.28 billion higher in 2008 than in 2007
on slightly lower capacity. Additionally, the substantial
decrease in the price of fuel in the latter part of 2008, while
a significant positive development, had the near term liquidity
impact of reducing our operating cash flow by $461 million
as we were required to post collateral in the form of cash
deposits and letters of credit we issued in connection with no
premium collars entered into as part of our fuel hedging
program. This compares to the same period in 2007 when we
received the return of fuel hedging collateral of
$48 million from our counterparties. The increase in fuel
costs and fuel hedge collateral was partially offset by an
increase in revenue of $418 million due to a 3.1% increase
in mainline and Express PRASM and our new revenue initiatives
that went into effect in 2008.
Net cash used in investing activities was $915 million in
2008 as compared to net cash provided by investing activities of
$269 million in 2007. Principal investing activities in
2008 included expenditures for property and equipment totaling
$929 million, including the purchase of 14 Embraer 190
aircraft and five Airbus A321 aircraft, a $139 million
increase in equipment purchase deposits for certain aircraft on
order and a $74 million increase in
restricted cash, offset in part by net sales of investments in
marketable securities of $206 million. The change in the
restricted cash balance for the 2008 period was due to changes
in the amount of holdback held by certain credit card processors
for advance ticket sales for which we had not yet provided air
transportation. Principal investing activities in 2007 included
net sales of investments in marketable securities of
$612 million, a decrease in restricted cash of
$200 million and $56 million in proceeds from the sale
of investments in ARINC and Sabre, offset in part by
expenditures for property and equipment totaling
$523 million, including the purchase of nine Embraer 190
aircraft, and an increase in equipment purchase deposits of
$80 million. The net sales of investments in marketable
securities in the 2007 period were primarily certain auction
rate securities sold at par value in the third quarter of 2007.
The change in the restricted cash balances for the 2007 period
was due to changes in the amounts of holdback held by certain
credit card processors.
Net cash provided by financing activities was $981 million
and $112 million in 2008 and 2007, respectively. Principal
financing activities in 2008 included proceeds from the issuance
of debt of $1.59 billion, of which $800 million was
from the series of financing transactions completed in October
2008. See further discussion of these transactions under
“Commitments.” Proceeds also included
$521 million to finance the acquisition of 14 Embraer 190
aircraft and five Airbus A321 aircraft and $145 million in
proceeds from the refinancing of certain aircraft equipment
notes. Debt repayments were $734 million, including a
$400 million paydown at par of our Citicorp credit
facility, a $100 million prepayment of certain indebtedness
incurred as part of our financing transactions completed in
October 2008 and $97 million related to the
$145 million aircraft equipment note refinancing discussed
above. Proceeds from the issuance of common stock, net were
$179 million as we completed an underwritten public stock
offering of 21.85 million common shares issued at an
offering price of $8.50 per share during the third quarter of
2008. Principal financing activities in 2007 included proceeds
from the issuance of debt of $1.8 billion, including
$1.6 billion generated from the Citicorp credit facility
and proceeds from property and equipment financings. Debt
repayments were $1.68 billion and, using the proceeds from
the Citicorp credit facility, included the repayment in full of
the balances outstanding on the $1.25 billion GE loan, the
Barclays Bank Delaware prepaid miles loan of $325 million
and a GECC credit facility of $19 million.
2007
Compared to 2006
Net cash provided by operating activities was $451 million
and $643 million in 2007 and 2006, respectively, a decrease
of $192 million. The period over period decrease was due
principally to higher expenses in 2007 compared to 2006 related
to an increase in salaries and benefits of $212 million,
aircraft maintenance of $53 million and mainline and
Express fuel costs, net of realized fuel hedging gains and
losses, of $46 million, offset by an increase in revenue of
$143 million.
Net cash provided by investing activities in 2007 was
$269 million as compared to net cash used in investing
activities of $903 million in 2006. Principal investing
activities in 2007 included net sales of investments in
marketable securities of $612 million, a decrease in
restricted cash of $200 million and $56 million in
proceeds from the sale of investments in ARINC and Sabre, offset
in part by expenditures for property and equipment totaling
$523 million, including the purchase of nine Embraer 190
aircraft, and an increase in equipment purchase deposits of
$80 million. The net sales of investments in marketable
securities in the 2007 period were primarily certain auction
rate securities sold at par value in the third quarter of 2007.
Principal investing activities in 2006 included net purchases of
investments in marketable securities of $798 million,
expenditures for property and equipment totaling
$232 million, including the purchase of three Boeing
757-200 and
two Embraer 190 aircraft, and a decrease in restricted cash of
$128 million. Changes in the restricted cash balances for
the 2007 and 2006 periods are due to changes in the amounts of
holdback held by certain credit card processors.
Net cash provided by financing activities was $112 million
and $251 million in 2007 and 2006, respectively. Principal
financing activities in 2007 included proceeds from the issuance
of debt of $1.8 billion, including $1.6 billion
generated from the Citicorp credit facility and proceeds from
property and equipment financings. Debt repayments were
$1.68 billion and, using the proceeds from the Citicorp
credit facility, included the repayment in full of the balances
outstanding on the $1.25 billion GE loan, the Barclays Bank
Delaware prepaid miles loan of $325 million and a GECC
credit facility of $19 million. Principal financing
activities in 2006 included proceeds from the issuance of debt
of $1.42 billion, which included borrowings of
$1.25 billion under the GE loan, a $64 million draw on
an Airbus loan and $92 million of equipment notes issued to
finance the acquisition of property
and equipment. Debt repayments totaled $1.19 billion and,
using the proceeds from the GE loan, included the repayment in
full of the balances outstanding on the ATSB loans of
$801 million, Airbus loans of $161 million and two
GECC term loans of $110 million. We also made a
$17 million payment in 2006 related to the partial
conversion of the 7% Senior Convertible Notes.
US
Airways
2008
Compared to 2007
Net cash used in operating activities was $1.03 billion in
2008 as compared to net cash provided by operating activities of
$433 million in 2007. The period over period decrease of
$1.46 billion is due principally to US Airways’ net
loss for 2008, which was driven by record high fuel prices. US
Airways’ mainline and Express fuel expense, net of realized
gains on fuel hedging transactions, was $1.28 billion
higher in 2008 than in 2007 on slightly lower capacity.
Additionally, the substantial decrease in the price of fuel in
the latter part of 2008, while a significant positive
development, had the near term liquidity impact of reducing US
Airways’ operating cash flow by $461 million as US
Airways was required to post collateral in the form of cash
deposits and letters of credit it issued in connection with no
premium collars entered into as part of its fuel hedging
program. This compares to the same period in 2007 when US
Airways received the return of fuel hedging collateral of
$48 million from its counterparties. The increase in fuel
costs and fuel hedge collateral was partially offset by an
increase in revenue of $431 million due to a 3.1% increase
in mainline and Express PRASM and US Airways’ new revenue
initiatives that went into effect in 2008.
Net cash used in investing activities was $889 million in
2008 as compared to net cash provided by investing activities of
$306 million in 2007. Principal investing activities in
2008 included expenditures for property and equipment totaling
$902 million, including the purchase of 14 Embraer 190
aircraft and five Airbus A321 aircraft, a $139 million
increase in equipment purchase deposits for certain aircraft on
order and a $74 million increase in restricted cash, offset
in part by net sales of investments in marketable securities of
$206 million. The change in the restricted cash balance for
the 2008 period was due to changes in the amount of holdback
held by certain credit card processors for advance ticket sales
for which US Airways had not yet provided air transportation.
Principal investing activities in 2007 included net sales of
investments in marketable securities of $612 million, a
decrease in restricted cash of $200 million and
$56 million in proceeds from the sale of investments in
ARINC and Sabre, offset in part by expenditures for property and
equipment totaling $486 million, including the purchase of
nine Embraer 190 aircraft, and an increase in equipment purchase
deposits of $80 million. The net sales of investments in
marketable securities in the 2007 period were primarily certain
auction rate securities sold at par value in the third quarter
of 2007. The change in the restricted cash balances for the 2007
period was due to changes in the amounts of holdback held by
certain credit card processors.
Net cash provided by financing activities was $1 billion
and $90 million in 2008 and 2007, respectively. Principal
financing activities in 2008 included proceeds from the issuance
of debt of $1.39 billion, of which $600 million was
from the series of financing transactions completed in October
2008. See further discussion of these transactions under
“Commitments.” Proceeds also included
$521 million to finance the acquisition of 14 Embraer 190
aircraft and five Airbus A321 aircraft and $145 million in
proceeds from the refinancing of certain aircraft equipment
notes. Debt repayments were $318 million, including a
$100 million prepayment of certain indebtedness incurred as
part of US Airways’ financing transactions completed in
October 2008 and $97 million related to the
$145 million aircraft equipment note refinancing discussed
above. Principal financing activities in 2007 included proceeds
from the issuance of debt of $198 million to finance the
acquisition of property and equipment and total debt repayments
of $105 million.
2007
Compared to 2006
Net cash provided by operating activities was $433 million
and $652 million in 2007 and 2006, respectively, a decrease
of $219 million. The period over period decrease was due
principally to higher expenses in 2007 compared to 2006 related
to an increase in salaries and benefits of $212 million,
aircraft maintenance of $53 million and mainline and
Express fuel costs, net of realized fuel hedging gains and
losses, of $46 million, offset by an increase in revenue of
$121 million.
Net cash provided by investing activities in 2007 was
$306 million as compared to net cash used in investing
activities of $893 million in 2006. Principal investing
activities in 2007 included net sales of investments in
marketable securities of $612 million, a decrease in
restricted cash of $200 million and $56 million in
proceeds from the sale of investments in ARINC and Sabre, offset
in part by expenditures for property and equipment totaling
$486 million, including the purchase of nine Embraer 190
aircraft, and an increase in equipment purchase deposits of
$80 million. The net sales of investments in marketable
securities in the 2007 period were primarily certain auction
rate securities sold at par value in the third quarter of 2007.
Principal investing activities in 2006 included net purchases of
investments in marketable securities of $798 million,
expenditures for property and equipment totaling
$222 million, including the purchase of three Boeing
757-200 and
two Embraer 190 aircraft, and a decrease in restricted cash of
$128 million. Changes in the restricted cash balances for
the 2007 and 2006 periods are due to changes in the amounts of
holdback held by certain credit card processors.
Net cash provided by financing activities was $90 million
and $236 million in 2007 and 2006, respectively. Principal
financing activities in 2007 included proceeds from the issuance
of debt of $198 million to finance the acquisition of
property and equipment and total debt repayments of
$105 million. Principal financing activities in 2006
included a net increase in payables to related parties of
$247 million, the issuance of $92 million of equipment
notes to finance the acquisition of property and equipment and
total debt repayments of $100 million.
Commitments
As of December 31, 2008, we had $4.15 billion of
long-term debt and capital leases (including current maturities
and before discount on debt).
Citicorp
Credit Facility
On March 23, 2007, US Airways Group entered into a term
loan credit facility with Citicorp North America, Inc., as
administrative agent, and a syndicate of lenders pursuant to
which US Airways Group borrowed an aggregate principal amount of
$1.6 billion. US Airways, AWA and certain other
subsidiaries of US Airways Group are guarantors of the Citicorp
credit facility.
The Citicorp credit facility bears interest at an index rate
plus an applicable index margin or, at our option, LIBOR plus an
applicable LIBOR margin for interest periods of one, two, three
or six months. The applicable index margin, subject to
adjustment, is 1.00%, 1.25% or 1.50% if the adjusted loan
balance is less than $600 million, between
$600 million and $1 billion, or between
$1 billion and $1.6 billion, respectively. The
applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25%
or 2.50% if the adjusted loan balance is less than
$600 million, between $600 million and
$1 billion, or between $1 billion and
$1.6 billion, respectively. In addition, interest on the
Citicorp credit facility may be adjusted based on the credit
rating for the Citicorp credit facility as follows: (i) if
the credit ratings of the Citicorp credit facility by
Moody’s and S&P in effect as of the last day of the
most recently ended fiscal quarter are both at least one
subgrade better than the credit ratings in effect on
March 23, 2007, then (A) the applicable LIBOR margin
will be the lower of 2.25% and the rate otherwise applicable
based upon the adjusted Citicorp credit facility balance and
(B) the applicable index margin will be the lower of 1.25%
and the rate otherwise applicable based upon the Citicorp credit
facility principal balance, and (ii) if the credit ratings
of the Citicorp credit facility by Moody’s and S&P in
effect as of the last day of the most recently ended fiscal
quarter are both at least two subgrades better than the credit
ratings in effect on March 23, 2007, then (A) the
applicable LIBOR margin will be 2.00% and (B) the
applicable index margin will be 1.00%. As of December 31,2008, the interest rate on the Citicorp credit facility was
2.97% based on a 2.50% LIBOR margin.
The Citicorp credit facility matures on March 23, 2014, and
is repayable in seven annual installments with each of the first
six installments to be paid on each anniversary of the closing
date in an amount equal to 1% of the initial aggregate principal
amount of the loan and the final installment to be paid on the
maturity date in the amount of the full remaining balance of the
loan.
In addition, the Citicorp credit facility requires certain
mandatory prepayments upon the occurrence of certain events,
establishes certain financial covenants, including minimum cash
requirements and maintenance of certain minimum ratios, contains
customary affirmative covenants and negative covenants and
contains customary events of default. Prior to the amendment
discussed below, the Citicorp credit facility required us to
maintain consolidated
unrestricted cash and cash equivalents of not less than
$1.25 billion, with not less than $750 million
(subject to partial reductions upon certain reductions in the
outstanding principal amount of the loan) of that amount held in
accounts subject to control agreements, which would become
restricted for use by us if certain adverse events occur per the
terms of the agreement.
On October 20, 2008, US Airways Group entered into an
amendment to the Citicorp credit facility. Pursuant to the
amendment, we repaid $400 million of indebtedness under the
credit facility, reducing the principal amount outstanding under
the credit facility to approximately $1.18 billion as of
December 31, 2008. The Citicorp credit facility amendment
also provides for a reduction in the amount of unrestricted cash
required to be held by us from $1.25 billion to
$850 million, and we may, prior to September 30, 2009,
further reduce that minimum requirement to a minimum of
$750 million on a dollar-for-dollar basis for any
additional repayments of up to $100 million of indebtedness
under the credit facility. The Citicorp credit facility
amendment also provides that we may sell, finance or otherwise
pledge assets that were pledged as collateral under the credit
facility, so long as we prepay the indebtedness under the credit
facility in an amount equal to 75% of the appraised value of the
collateral sold or financed or assigned or 75% of the collateral
value of eligible accounts (determined in accordance with the
credit facility) sold or financed in such transaction. In
addition, the Citicorp credit facility amendment provides that
we may issue debt in the future with a silent second lien on the
assets pledged as collateral under the Citicorp credit facility.
As of December 31, 2008, we were in compliance with all
debt covenants under the amended credit facility.
Credit
Card Processing Agreements
We have agreements with companies that process customer credit
card transactions for the sale of air travel and other services.
Credit card processors have financial risk associated with
tickets purchased for travel because, although the processor
generally forwards the cash related to the purchase to us soon
after the purchase is completed, the air travel generally occurs
after that time, and the processor may have liability if we do
not ultimately provide the air travel. Our agreements allow
these processing companies, under certain conditions, to hold an
amount of our cash (referred to as a “holdback”) equal
to a portion of advance ticket sales that have been processed by
that company, but for which we have not yet provided the air
transportation. These holdback requirements can be modified at
the discretion of the processing companies, up to the estimated
liability for future air travel purchased with the respective
credit cards, upon the occurrence of specified events, including
material adverse changes in our financial condition. The amount
that the processing companies may withhold also varies as a
result of changes in financial risk due to seasonal fluctuations
in ticket volume. Additional holdback requirements will reduce
our liquidity in the form of unrestricted cash and short-term
investments by the amount of the holdbacks.
October
2008 Financing Transactions
On October 20, 2008, we completed a series of financial
transactions which raised approximately $810 million in
gross proceeds. Below is a discussion of the significant
transactions comprising this amount.
Effective as of October 20, 2008, US Airways Group entered
into an amendment to its co-branded credit card agreement with
Barclays Bank Delaware. The amendment provides for, among other
things, the pre-purchase of frequent flyer miles in an amount
totaling $200 million, which amount was paid by Barclays in
October 2008. The amendment also provides that so long as any
pre-purchased miles are outstanding, we will pay interest to
Barclays on the outstanding dollar amount of the pre-purchased
miles at the rate of LIBOR plus a margin.
The amendment to the co-branded credit card agreement provides
that Barclays will compensate us for fees earned using
pre-purchased miles. In addition, the amendment provides that
for each month that certain conditions are met, Barclays will
pre-purchase additional miles on a monthly basis in an amount
equal to the difference between $200 million and the amount
of unused miles then outstanding. The conditions include a
requirement that we maintain an unrestricted cash balance,
subject to certain circumstances, of at least $1.5 billion
each month, which was reduced to $1.4 billion for January
2009 and $1.45 billion for February 2009, with the
unrestricted cash balance in all cases including certain fuel
hedge collateral. The reductions addressed the impact on our
unrestricted cash of our obligations to post significant amounts
of collateral with our fuel hedging counterparties due to recent
rapid declines in fuel prices.
Prior to the second anniversary of the date of the amendment,
the $200 million cap on Barclays’ pre-purchase
obligation may be reduced if certain conditions are not met.
Commencing on that second anniversary, the $200 million cap
will be reduced over a period of approximately two years until
such time as no pre-purchased miles remain; however, the time of
reduction of the cap may be accelerated if certain conditions
are not met. We may repurchase any or all of the pre-purchased
miles at any time, from time to time, without penalty.
Pursuant to the amendment to the co-branded credit card
agreement, the expiration date of the agreement was extended to
2017.
On October 20, 2008, US Airways and Airbus entered into
amendments to the A320 Family Aircraft Purchase Agreement, the
A330 Aircraft Purchase Agreement, and the A350 XWB Purchase
Agreement. In exchange for US Airways’ agreement to enter
into these amendments, Airbus advanced US Airways
$200 million in consideration of aircraft deliveries under
the various related purchase agreements. Under the terms of each
of the amendments, US Airways has agreed to maintain a level of
unrestricted cash in the same amount required by the Citicorp
credit facility.
On October 20, 2008, US Airways entered into a
$270 million spare parts loan agreement and a
$85 million engines loan agreement. The proceeds of the
term loans made under these loan agreements were used to repay a
portion of the outstanding indebtedness pursuant to the Citicorp
credit facility amendment previously discussed.
US Airways’ obligations under the spare parts loan
agreement are secured by a first priority security interest in
substantially all of US Airways’ rotable, repairable and
expendable aircraft spare parts. The obligations under the
engines loan agreement are secured by a first priority security
interest in 36 of US Airways’ aircraft engines. US Airways
has also agreed that other obligations owed by it or its
affiliates to the administrative agent for the loan agreements
or its affiliates (including the loans under these loan
agreements held by such administrative agent or its affiliates)
will be secured on a second priority basis by the collateral for
both loan agreements and certain other engines and aircraft.
The term loans under these loan agreements will bear interest at
a rate equal to LIBOR plus a margin per annum, subject to
adjustment in certain circumstances.
These loan agreements contain customary representations and
warranties, events of default and covenants for financings of
this nature, including obligations to maintain compliance with
covenants tied to the appraised value of US Airways’ spare
parts and the appraised value and maintenance condition of US
Airways’ engines, respectively.
The spare parts loan agreement matures on the sixth anniversary
of the closing date, and is subject to quarterly amortization in
amounts ranging from $8 million to $15 million. The
spare parts loan agreement may not be voluntarily prepaid during
the first three years of the term; however, the loan agreement
provided that in certain circumstances US Airways could prepay
$100 million of the loans under the agreement. The engines
loan agreement, which may not be voluntarily prepaid prior to
the third anniversary of the closing date, matures on the sixth
anniversary of the closing date, and is subject to amortization
in 24 equal quarterly installments.
On December 5, 2008, US Airways prepaid $100 million
of principal outstanding under the spare parts loan agreement.
In connection with this prepayment and pursuant to an amendment
to the spare parts loan agreement, subject to certain
conditions, US Airways obtained the right to incur up to
$100 million in new loans. The right to incur new loans
expires on April 1, 2009.
On January 16, 2009, US Airways exercised its right to
obtain new loan commitments and incur additional loans under the
spare parts loan agreement. In connection with the exercise of
that right, Airbus Financial Services funded $50 million in
satisfaction of a previous commitment. This loan will mature on
October 20, 2014, will bear interest at a rate of LIBOR
plus a margin and will be secured by the collateral securing
loans under the spare parts loan agreement. In addition, in
connection with the incurrence of this loan, US Airways and
Airbus entered into amendments to the A320 Family Aircraft
Purchase Agreement, the A330 Aircraft Purchase Agreement and the
A350 XWB Purchase Agreement. Pursuant to these amendments, the
existing cross-default provisions of the applicable aircraft
purchase agreements were amended and restated to, among other
things, specify the circumstances under which a default under
the loan would constitute a default under the applicable
aircraft purchase agreement.
On February 1, 2008, US Airways entered into a loan
agreement for $145 million, secured by six Bombardier
CRJ-700 aircraft, three Boeing 757 aircraft and one spare
engine. The loan bears interest at a rate of LIBOR plus an
applicable margin and is amortized over ten years. The proceeds
of the loan were used to repay $97 million of the equipment
notes previously secured by the six Bombardier CRJ-700 aircraft
and three Boeing 757 aircraft.
On February 29, 2008, US Airways entered into a credit
facility agreement for $88 million to finance certain
pre-delivery payments required by US Airways’ purchase
agreements with Airbus. As of December 31, 2008, the
outstanding balance of this credit facility agreement is
$73 million. The remaining amounts under this facility will
be drawn as pre-delivery payments come due. The loan bears
interest at a rate of LIBOR plus an applicable margin and is
repaid as the related aircraft are delivered with a final
maturity date of the loan in November 2010.
In the second quarter of 2008, US Airways entered into facility
agreements with three lenders in the amounts of
$199 million, $198 million, and $119 million to
finance the acquisition of certain Airbus A320 family aircraft
deliveries starting in the second half of 2008. The loans bear
interest at a rate of LIBOR plus an applicable margin, contain
default and other covenants that are typical in the industry for
similar financings, and are amortized over twelve years with
balloon payments at maturity.
Aircraft
and Engine Purchase Commitments
During 2008, we took delivery of 14 Embraer 190 aircraft under
our Amended and Restated Purchase Agreement with Embraer, which
we financed through an existing facility agreement. As of
December 31, 2008, we have no remaining firm orders with
Embraer. Under the terms of the Amended and Restated Purchase
Agreement, we have 32 additional Embraer 190 aircraft on order,
which are conditional and subject to our notification to
Embraer. In 2008, we amended the Amended and Restated Purchase
Agreement to revise the delivery schedule for these 32
additional Embraer 190 aircraft.
In 2007, US Airways and Airbus executed definitive purchase
agreements for the acquisition of 97 aircraft, including 60
single-aisle A320 family aircraft and 37 widebody aircraft
(comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft).
These were in addition to orders for 37 single-aisle A320 family
aircraft from a previous Airbus purchase agreement. In 2008, US
Airways and Airbus entered into Amendment No. 1 to the
Amended and Restated Airbus A320 Family Aircraft Purchase
Agreement. The amendment provides for the conversion of 13 A319
aircraft to A320 aircraft, one A319 aircraft to an A321 aircraft
and 11 A320 aircraft to A321 aircraft for deliveries during 2009
and 2010.
Deliveries of the A320 family aircraft commenced during 2008
with the delivery of five A321 aircraft, which were financed
through an existing facility agreement. Deliveries of the A320
family aircraft will continue in 2009 through 2012. Deliveries
of the A330-200 aircraft will begin in 2009. In 2008, US Airways
amended the terms of the A350 XWB Purchase Agreement for
deliveries of the 22 firm order A350 XWB aircraft to begin in
2015 rather than 2014 and extending through 2018.
In 2007, US Airways agreed to terms with an aircraft lessor to
lease two used A330-200 aircraft. In 2008, US Airways terminated
the two leases and did not take delivery of the two used
A330-200 aircraft. Related to this termination, US Airways
recorded a $2 million lease cancellation charge.
In 2008, US Airways executed purchase agreements for the
purchase of eight new IAE V2500-A5 spare engines scheduled for
delivery through 2014 for use on the Airbus A320 family fleet,
three new Trent 700 spare engines scheduled for delivery through
2011 for use on the Airbus A330-200 fleet and three new Trent
XWB spare engines scheduled for delivery in 2015 through 2017
for use on the Airbus A350 XWB aircraft.
Under all of our aircraft and engine purchase agreements, our
total future commitments as of December 31, 2008 are
expected to be approximately $6.83 billion through 2018,
which includes predelivery deposits and payments. We expect to
fund these payments through future financings.
In addition to the minimum cash balance requirements, our
long-term debt agreements contain various negative covenants
that restrict or limit our actions, including our ability to pay
dividends or make other restricted payments. Certain long-term
debt agreements also contain cross-default provisions, which may
be triggered by defaults by us under other agreements relating
to indebtedness. See “Risk Factors — Our high
level of fixed obligations limits our ability to fund general
corporate requirements and obtain additional financing, limits
our flexibility in responding to competitive developments and
increases our vulnerability to adverse economic and industry
conditions” in Item 1A. “Risk Factors.” As
of December 31, 2008, we and our subsidiaries were in
compliance with the covenants in our long-term debt agreements.
Our credit ratings, like those of most airlines, are relatively
low. The following table details our credit ratings as of
December 31, 2008:
S&P
Fitch
Moody’s
Local Issuer
Issuer Default
Corporate
credit rating
credit rating
Family rating
US Airways Group
B-
CCC
Caa1
US Airways
B-
*
*
(*)
The credit agencies do not rate these categories for US Airways.
A decrease in our credit ratings could cause our borrowing costs
to increase, which would increase our interest expense and could
affect our net income, and our credit ratings could adversely
affect our ability to obtain additional financing. If our
financial performance or industry conditions do not improve, we
may face future downgrades, which could further negatively
impact our borrowing costs and the prices of our equity or debt
securities. In addition, any downgrade of our credit ratings may
indicate a decline in our business and in our ability to satisfy
our obligations under our indebtedness.
Off-Balance
Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement
or other contractual arrangement involving an unconsolidated
entity under which a company has (1) made guarantees,
(2) a retained or a contingent interest in transferred
assets, (3) an obligation under derivative instruments
classified as equity or (4) any obligation arising out of a
material variable interest in an unconsolidated entity that
provides financing, liquidity, market risk or credit risk
support to us, or that engages in leasing, hedging or research
and development arrangements with us.
We have no off-balance sheet arrangements of the types described
in the first three categories above that we believe may have a
material current or future effect on financial condition,
liquidity or results of operations. Certain guarantees that we
do not expect to have a material current or future effect on
financial condition, liquidity or results of operations are
disclosed in Note 9(f) to the consolidated financial
statements of US Airways Group included in Item 8A of this
report and Note 8(f) to the consolidated financial
statements of US Airways included in Item 8B of this report.
Pass
Through Trusts
US Airways has obligations with respect to pass through trust
certificates, also known as “Enhanced Equipment
Trust Certificates” or EETCs, issued by pass through
trusts to cover the financing of 19 owned aircraft, 116 leased
aircraft and three leased engines. These trusts are off-balance
sheet entities, the primary purpose of which is to finance the
acquisition of aircraft. Rather than finance each aircraft
separately when such aircraft is purchased or delivered, these
trusts allowed US Airways to raise the financing for several
aircraft at one time and place such funds in escrow pending the
purchase or delivery of the relevant aircraft. The trusts were
also structured to provide for certain credit enhancements, such
as liquidity facilities to cover certain interest payments, that
reduce the risks to the purchasers of the trust certificates
and, as a result, reduce the cost of aircraft financing to US
Airways.
Each trust covered a set amount of aircraft scheduled to be
delivered within a specific period of time. At the time of each
covered aircraft financing, the relevant trust used the funds in
escrow to purchase equipment notes relating to the financed
aircraft. The equipment notes were issued, at US Airways’
election in connection with a mortgage financing of the aircraft
or by a separate owner trust in connection with a leveraged
lease financing of the aircraft. In the case of a leveraged
lease financing, the owner trust then leased the aircraft to US
Airways. In both cases, the equipment notes are secured by a
security interest in the aircraft. The pass through trust
certificates are not direct obligations of, nor are they
guaranteed by, US Airways Group or US Airways. However, in the
case of mortgage financings, the equipment notes issued to the
trusts are direct obligations of US Airways. As of
December 31, 2008, $540 million associated with these
mortgage financings is reflected as debt in the accompanying
consolidated balance sheet.
With respect to leveraged leases, US Airways evaluated whether
the leases had characteristics of a variable interest entity as
defined by FASB Interpretation (“FIN”) No. 46(R),
“Consolidation of Variable Interest Entities — An
Interpretation of ARB No. 51.” US Airways concluded
the leasing entities met the criteria for variable interest
entities. US Airways then evaluated whether or not it was the
primary beneficiary by evaluating whether or not it was exposed
to the majority of the risks (expected losses) or whether it
receives the majority of the economic benefits (expected
residual returns) from the trusts’ activities. US Airways
does not provide residual value guarantees to the bondholders or
equity participants in the trusts. Each lease does have a fixed
price purchase option that allows US Airways to purchase the
aircraft near the end of the lease term. However, the option
price approximates an estimate of the aircraft’s fair value
at the option date. Under this feature, US Airways does not
participate in any increases in the value of the aircraft. US
Airways concluded it was not the primary beneficiary under these
arrangements. Therefore, US Airways accounts for its EETC
leveraged lease financings as operating leases under the
criteria of SFAS No. 13, “Accounting for
Leases.” US Airways’ total obligations under these
leveraged lease financings are $3.57 billion as of
December 31, 2008.
Special
Facility Revenue Bonds
US Airways guarantees the payment of principal and interest on
certain special facility revenue bonds issued by municipalities
to build or improve certain airport and maintenance facilities
which are leased to US Airways. Under such leases, US Airways is
required to make rental payments through 2023, sufficient to pay
maturing principal and interest payments on the related bonds.
As of December 31, 2008, the principal amount outstanding
on these bonds was $90 million. Remaining lease payments
guaranteeing the principal and interest on these bonds are
$145 million.
US Airways has long-term operating leases at a number of
airports, including leases where US Airways is also the
guarantor of the underlying debt. Such leases are typically with
municipalities or other governmental entities. The arrangements
are not required to be consolidated based on the provisions of
FIN No. 46(R).
Jet
Service Agreements
Certain entities with which US Airways has capacity purchase
agreements are considered variable interest entities under
FIN No. 46(R). In connection with its restructuring
and emergence from bankruptcy, US Airways contracted with Air
Wisconsin and Republic Airways to purchase a significant portion
of these companies’ regional jet capacity for a period of
ten years. US Airways has determined that it is not the primary
beneficiary of these variable interest entities, based on cash
flow analyses. Additionally, US Airways has analyzed the
arrangements with other carriers with which US Airways has
long-term capacity purchase agreements and has concluded that it
is not required to consolidate any of the entities.
The following table provides details of our future cash
contractual obligations as of December 31, 2008 (in
millions):
Payments Due by Period
2009
2010
2011
2012
2013
Thereafter
Total
US Airways Group(1)
Debt(2)
$
16
$
33
$
116
$
99
$
16
$
1,178
$
1,458
Interest obligations(3)
50
50
46
41
38
50
275
US Airways(4)
Debt and capital lease obligations(5)(6)
356
221
257
246
192
1,423
2,695
Interest obligations(3)(6)
146
148
157
129
87
415
1,082
Aircraft purchase and operating lease commitments(7)
2,408
2,312
2,138
1,537
664
5,315
14,374
Regional capacity purchase agreements(8)
1,008
1,013
1,031
902
731
2,712
7,397
Other US Airways Group subsidiaries(9)
10
2
1
1
1
—
15
Total
$
3,994
$
3,779
$
3,746
$
2,955
$
1,729
$
11,093
$
27,296
(1)
These commitments represent those specifically entered into by
US Airways Group or joint commitments entered into by US Airways
Group and US Airways under which each entity is jointly and
severally liable.
(2)
Excludes $44 million of unamortized debt discount as of
December 31, 2008.
(3)
For variable-rate debt, future interest obligations are shown
above using interest rates in effect as of December 31,2008.
(4)
Commitments listed separately under US Airways and its wholly
owned subsidiaries represent commitments under agreements
entered into separately by those companies.
(5)
Excludes $113 million of unamortized debt discount as of
December 31, 2008.
(6)
Includes $540 million of future principal payments and
$260 million of future interest payments as of
December 31, 2008, respectively, related to pass through
trust certificates or EETCs associated with mortgage financings
for the purchase of certain aircraft as described above under
“Off-Balance Sheet Arrangements” and in Note 9(c)
to US Airways Group’s and Note 8(c) to US
Airways’ consolidated financial statements in Item 8A
and 8B of this report, respectively.
(7)
Includes $3.57 billion of future minimum lease payments
related to EETC leveraged leased financings of certain aircraft
as of December 31, 2008, as described above under
“Off-Balance Sheet Arrangements” and in Note 9(c)
to US Airways Group’s and Note 8(c) to US
Airways’ consolidated financial statements in Item 8A
and 8B of this report, respectively.
(8)
Represents minimum payments under capacity purchase agreements
with third-party Express carriers.
(9)
Represents operating lease commitments entered into by US
Airways Group’s other airline subsidiaries Piedmont and PSA.
We expect to fund these cash obligations from funds provided by
operations and future financings, if necessary. The cash
available to us from these sources, however, may not be
sufficient to cover these cash obligations because economic
factors outside our control may reduce the amount of cash
generated by operations or increase our costs. For instance, an
economic downturn or general global instability caused by
military actions, terrorism, disease outbreaks and natural
disasters could reduce the demand for air travel, which would
reduce the amount of cash generated by operations. An increase
in our costs, either due to an increase in borrowing costs
caused by a reduction in our credit rating or a general increase
in interest rates or due to an increase in the cost of fuel,
maintenance, aircraft and aircraft engines and parts, could
decrease the amount of cash available to cover the cash
obligations.
Moreover, the Citicorp credit facility, our amended credit card
agreement with Barclays and certain of our other financing
arrangements contain minimum cash balance requirements. As a
result, we cannot use all of our available cash to fund
operations, capital expenditures and cash obligations without
violating these requirements.
Critical
Accounting Policies and Estimates
The preparation of our consolidated financial statements in
accordance with accounting principles generally accepted in the
United States requires that we make certain estimates and
assumptions that affect the reported amount of assets and
liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities at the date of our financial
statements. We believe our estimates and assumptions are
reasonable; however, actual results could differ from those
estimates. Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties
and potentially result in materially different results under
different assumptions and conditions. We have identified the
following critical accounting policies that impact the
preparation of our consolidated financial statements. See also
the summary of significant accounting policies included in the
notes to the financial statements under Items 8A and 8B of
this
Form 10-K
for additional discussion of the application of these estimates
and other accounting policies.
Passenger
Revenue
Passenger revenue is recognized when transportation is provided.
Ticket sales for transportation that has not yet been provided
are initially deferred and recorded as air traffic liability on
the balance sheet. The air traffic liability represents tickets
sold for future travel dates and estimated future refunds and
exchanges of tickets sold for past travel dates. The balance in
the air traffic liability fluctuates throughout the year based
on seasonal travel patterns and fare sale activity. Our air
traffic liability was $698 million and $832 million as
of December 31, 2008 and 2007, respectively.
The majority of our tickets sold are nonrefundable. A small
percentage of tickets, some of which are partially used tickets,
expire unused. Due to complex pricing structures, refund and
exchange policies, and interline agreements with other airlines,
certain amounts are recognized in revenue using estimates
regarding both the timing of the revenue recognition and the
amount of revenue to be recognized. These estimates are
generally based on the analysis of our historical data. We
routinely evaluate estimated future refunds and exchanges
included in the air traffic liability based on subsequent
activity to validate the accuracy of our estimates. Holding
other factors constant, a 10% change in our estimate of the
amount refunded, exchanged or forfeited for 2008 would result in
a $38 million change in our passenger revenue, which
represents less than 1% of our passenger revenue.
Passenger traffic commissions and related fees are expensed when
the related revenue is recognized. Passenger traffic commissions
and related fees not yet recognized are included as a prepaid
expense.
Impairment
of Goodwill
SFAS No. 142, “Goodwill and Other Intangible
Assets,” requires that goodwill be tested for impairment at
the reporting unit level on an annual basis and between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of the reporting unit
below its carrying value. Goodwill represents the purchase price
in excess of the net amount assigned to assets acquired and
liabilities assumed by America West Holdings on
September 27, 2005. We have two reporting units consisting
of our mainline and Express operations. All of our goodwill was
allocated to the mainline reporting unit.
In accordance with SFAS No. 142, we concluded that
events had occurred and circumstances had changed during the
second quarter of 2008 which required us to perform an interim
period goodwill impairment test. Subsequent to the first quarter
of 2008, we experienced a significant decline in market
capitalization due to overall airline industry conditions driven
by record high fuel prices. The price of fuel became less
volatile in the second quarter of 2008, and there was a
sustained surge in fuel prices. On May 21, 2008, the price
per barrel of oil hit a then record high of $133 per barrel and
from that date through June 30, 2008 stayed at an average
daily price of $133 per barrel. Our average mainline fuel price
during the second quarter of 2008 was $3.63 as compared to $2.88
per gallon in the first quarter of 2008 and $2.20 for the full
year 2007. This increase in the price per gallon of fuel
represented an increase of 26% and 65% as compared to the first
quarter of 2008 and full year 2007, respectively. Our average
stock price in the second quarter of 2008 was $6.13 as compared
to an average of $12.15 in the first quarter of 2008, a decline
of 50%. In addition, we announced in June 2008 that in response
to the record high fuel prices, we planned to reduce fourth
quarter 2008 and full year 2009 domestic mainline capacity.
During the second quarter of 2008, we performed the first step
of the two-step impairment test and compared the fair value of
the mainline reporting unit to its carrying value. Consistent
with our approach in our annual impairment testing, in assessing
the fair value of the reporting unit, we considered both the
market approach and income approach. Under the market approach,
the fair value of the reporting unit is based on quoted market
prices and the number of shares outstanding for our common
stock. Under the income approach, the fair value of the
reporting unit is based on the present value of estimated future
cash flows. The income approach is dependent on a number of
significant management assumptions, including estimates of
future capacity, passenger yield, traffic, fuel, other operating
costs and discount rates. Due to current market conditions,
greater weighting was attributed to the market approach, which
was weighted 67% while the income approach was weighted 33% in
arriving at the fair value of the reporting unit. We determined
that the fair value of the mainline reporting unit was less than
the carrying value of the net assets of the reporting unit, and
thus we performed step two of the impairment test.
In step two of the impairment test, we determined the implied
fair value of the goodwill and compared it to the carrying value
of the goodwill. We allocated the fair value of the reporting
unit to all of our assets and liabilities as if the reporting
unit had been acquired in a business combination and the fair
value of the mainline reporting unit was the price paid to
acquire the reporting unit. The excess of the fair value of the
reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. Our step two
analysis resulted in no implied fair value of goodwill, and
therefore, we recognized an impairment charge of
$622 million in the second quarter of 2008, representing a
write off of the entire amount of our previously recorded
goodwill.
The following table reflects the change in the carrying amount
of goodwill from December 31, 2007 (in millions):
We assess the impairment of long-lived assets and intangible
assets whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. In addition, our
international route authorities and trademark intangible assets
are classified as indefinite lived assets and are reviewed for
impairment annually. Factors which could trigger an impairment
review include the following: significant changes in the manner
of use of the assets; significant underperformance relative to
historical or projected future operating results; or significant
negative industry or economic trends. An impairment has occurred
when the future undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of
those items. Cash flow estimates are based on historical results
adjusted to reflect management’s best estimate of future
market and operating conditions. The net carrying value of
assets not recoverable is reduced to fair value. Estimates of
fair value represent management’s best estimate based on
appraisals, industry trends and reference to market rates and
transactions. Changes in industry capacity and demand for air
transportation can significantly impact the fair value of
aircraft and related assets.
In connection with completing step two of our goodwill
impairment analysis in the second quarter of 2008, we assessed
the fair values of our significant intangible assets. Our other
intangible assets of $558 million as of June 30, 2008
consisted principally of airport take-off and landing slots and
airport gate leasehold rights of $473 million which are
subject to amortization and $85 million of international
route authorities and trademarks which are classified as
indefinite lived assets under SFAS No. 142. We
considered the potential impairment of these other intangible
assets in accordance with SFAS No. 142 and
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” as applicable. The fair
values of airport take-off and landing slots and international
route authorities were assessed using the market approach. The
market approach took into consideration relevant supply
and demand factors at the related airport locations as well as
available market sale and lease data. For trademarks, we
utilized a form of the income approach known as the
relief-from-royalty method. As a result of these assessments, no
impairment was indicated. In addition, we performed the annual
impairment test on our international route authorities and
trademarks during the fourth quarter of 2008, at which time we
concluded that no impairment exists. We will perform our next
annual impairment test on October 1, 2009.
In connection with completing step two of our goodwill
impairment analysis in the second quarter of 2008, we also
assessed the current fair values of our other significant assets
including owned aircraft, aircraft leases, and aircraft spare
parts. We concluded that the only additional impairment
indicated was associated with the decline in fair value of
certain spare parts associated with our Boeing 737 fleet. Due to
record high fuel prices and the industry environment in 2008,
demand for the Boeing 737 aircraft type declined given its lower
fuel efficiency as compared to other aircraft types. The fair
value of these spare parts was determined using a market
approach on the premise of continued use of the aircraft through
our final scheduled lease return.
In accordance with SFAS No. 144, we determined that
the carrying amount of the Boeing 737 spare parts classified as
long-lived assets was not recoverable as the carrying amount of
the Boeing 737 assets was greater than the sum of the
undiscounted cash flows expected from the use and disposition of
these assets. As a result of this impairment analysis, we
recorded a $13 million impairment charge in the second
quarter of 2008 related to Boeing 737 rotable parts included in
flight equipment on our consolidated balance sheet. We also
recorded a $5 million write down in the second quarter of
2008 related to our Boeing 737 spare parts inventory included in
materials and supplies, net on our consolidated balance sheet to
reflect lower of cost or market.
Investments
in Marketable Securities
We account for investments in marketable securities in
accordance with the provisions of SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities.” Management determines the appropriate
classification of securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. As
of December 31, 2008, all current investments in marketable
securities were classified as held to maturity and all
noncurrent investments in marketable securities, consisting
entirely of auction rate securities, are classified as available
for sale.
We determine the fair value of our available for sale securities
using the criteria of SFAS No. 157, “Fair Value
Measurements,” which we adopted on January 1, 2008.
SFAS No. 157, among other things, defines fair value,
establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category
measured at fair value on either a recurring or nonrecurring
basis. SFAS No. 157 clarifies that fair value is an
exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions,
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
Level 1.
Observable inputs such as quoted prices in active markets;
Level 2.
Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level 3.
Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
We estimate the fair value of our auction rate securities based
on the following: (i) the underlying structure of each
security; (ii) the present value of future principal and
interest payments discounted at rates considered to reflect
current market conditions; (iii) consideration of the
probabilities of default, passing a future auction, or
repurchase at par for each period; and (iv) estimates of
the recovery rates in the event of default for each security.
These estimated fair values could change significantly based on
future market conditions.
We review declines in the fair value of our investments in
marketable securities in accordance with Financial Accounting
Standards Board (“FASB”) Staff Position
(“FSP”)
SFAS 115-1
and 124-1,
“The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,” to determine the
classification of the
impairment as temporary or other than temporary. A temporary
impairment charge results in an unrealized loss being recorded
in the other comprehensive income component of
stockholders’ equity. Unrealized losses are recognized in
our consolidated statement of operations when a decline in fair
value is determined to be other than temporary. We review our
investments on an ongoing basis for indications of possible
impairment, and if impairment is identified, we determine
whether the impairment is temporary or other than temporary.
Determination of whether the impairment is temporary or other
than temporary requires significant judgment. The primary
factors that we consider in classifying the impairment include
the extent and period of time the fair value of each investment
has declined below its cost basis, the expected holding or
recovery period for each investment, and our intent and ability
to hold each investment until recovery.
Refer to the “Liquidity and Capital Resources” section
for further discussion of our investments in marketable
securities.
Frequent
Traveler Program
The Dividend Miles frequent traveler program awards miles to
passengers who fly on US Airways and Star Alliance carriers and
certain other airlines that participate in the program. We use
the incremental cost method to account for the portion of our
frequent flyer liability incurred when Dividend Miles members
earn mileage credits. We have an obligation to provide this
future travel and have therefore recognized an expense and
recorded a liability for mileage awards. Outstanding miles may
be redeemed for travel on any airline that participates in the
program, in which case we pay a designated amount to the
transporting carrier.
Members may not reach the threshold necessary for a travel award
and outstanding miles may not be redeemed. Therefore, in
calculating the liability we estimate how many miles will never
be used for an award and exclude those miles from the estimate
of the liability. Estimates are also made for the number of
miles that will be used per award and the number of awards that
will be redeemed on partner airlines. These estimates are based
on past customer behavior. Estimated future travel awards for
travel on US Airways are valued at the combined estimated
average incremental cost of carrying one additional passenger.
Incremental costs include unit costs for fuel, credit card fees,
insurance, denied boarding compensation and food and beverages.
No profit or overhead margin is included in the accrual for
incremental costs. For travel awards on partner airlines, the
liability is based upon the gross payment to be paid to the
other airline for redemption on the other airline. A change to
these cost estimates, actual redemption activity or award
redemption level could have a material impact on the liability
in the year of change as well as future years. Incremental
changes in the liability resulting from participants earning or
redeeming mileage credits or changes in assumptions used for the
related calculations are recorded in the statement of operations
as part of the regular review process. At December 31,2008, we have assumed 10% of our future travel awards accrued
will be redeemed on partner airlines. A 1% increase or decrease
in the percentage of awards redeemed on partner airlines would
have a $5 million impact on the liability as of
December 31, 2008.
As of December 31, 2008, Dividend Miles members had
accumulated mileage credits for approximately 2.6 million
awards. The liability for the future travel awards accrued on
our balance sheet within other accrued expenses was
$151 million as of December 31, 2008. The number of
awards redeemed for travel during the year ended
December 31, 2008 was approximately 0.9 million,
representing approximately 4% of US Airways’ RPMs during
that period. The use of certain inventory management techniques
minimizes the displacement of revenue passengers by passengers
traveling on award tickets.
US Airways also sells frequent flyer program mileage credits to
participating airline partners and non-airline business
partners. Revenue earned from selling these mileage credits to
other companies is recognized in two components. A portion of
the revenue from these sales is deferred, representing the
estimated fair value of the transportation component of the sold
mileage credits. The deferred revenue for the transportation
component is amortized on a straight-line basis over the period
in which the credits are expected to be redeemed for travel as
passenger revenue, which is currently estimated to be
28 months. The marketing component, which is earned at the
time the miles are sold, is recognized in other revenues at the
time of the sale. As of December 31, 2008, we had
$240 million in deferred revenue from the sale of mileage
credits included in other accrued expenses on our balance sheet.
A change to either the period over which the credits are used or
the estimated fair value of credits sold could have a
significant impact on revenue in the year of change as well as
future years.
At December 31, 2008, US Airways Group has a full valuation
allowance against its net deferred tax assets. In assessing the
realizability of the deferred tax assets, we considered whether
it was more likely than not that some portion or all of the
deferred tax assets will be realized, in accordance with
SFAS No. 109, “Accounting for Income Taxes.”
We generated NOL in 2008, which was reserved by this full
valuation allowance.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” This standard defines fair
value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of
America, and expands disclosure about fair value measurements.
This pronouncement applies to other accounting standards that
require or permit fair value measurements. Accordingly, this
statement does not require any new fair value measurement. This
statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. In December 2007, the FASB agreed to a one year deferral
of SFAS No. 157’s fair value measurement
requirements for nonfinancial assets and liabilities that are
not required or permitted to be measured at fair value on a
recurring basis. As such, we did not apply the fair value
measurement requirements of SFAS No. 157 for
nonfinancial assets and liabilities when performing our goodwill
and other assets impairment test as discussed above in
“Critical Accounting Policies.” We adopted
SFAS No. 157 on January 1, 2008, which had no
effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), “Business Combinations.”
SFAS No. 141R is effective for fiscal years beginning
after December 15, 2008 and adjusts certain guidance
related to recording nearly all transactions where one company
gains control of another. The statement revises the measurement
principle to require fair value measurements on the acquisition
date for recording acquired assets and liabilities. It also
changes the requirements for recording acquisition-related costs
and liabilities. Additionally, the statement revises the
treatment of valuation allowance adjustments related to income
tax benefits in existence prior to a business combination. The
current standard, SFAS No. 141, requires that
adjustments to these valuation allowances be recorded as
adjustments to goodwill or intangible assets if no goodwill
exists, while the new standard will require companies to adjust
current income tax expense. Effective January 1, 2009, we
adopted the provisions of SFAS No. 141R and all future
decreases in the valuation allowance established in purchase
accounting as a result of the merger will be recognized as a
reduction to income tax expense.
On January 1, 2008, we adopted the measurement date
provisions of SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R).” The measurement date provisions require plan
assets and obligations to be measured as of the employer’s
balance sheet date. We previously measured our other
postretirement benefit obligations as of September 30 each year.
As a result of the adoption of the measurement date provisions,
we recorded a $2 million increase to our postretirement
benefit liability and a $2 million increase to accumulated
deficit, representing the net periodic benefit cost for the
period between the measurement date utilized in 2007 and the
beginning of 2008. The adoption of the measurement provisions of
SFAS No. 158 had no effect on our consolidated
statements of operations.
In May 2008, the FASB issued FSP Accounting Principles Board
(“APB”)
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FSP APB
14-1 applies
to convertible debt instruments that, by their stated terms, may
be settled in cash (or other assets) upon conversion, including
partial cash settlement of the conversion option. FSP APB
14-1
requires bifurcation of the instrument into a debt component
that is initially recorded at fair value and an equity
component. The difference between the fair value of the debt
component and the initial proceeds from issuance of the
instrument is recorded as a component of equity. The liability
component of the debt instrument is accreted to par using the
effective yield method; accretion is reported as a component of
interest expense. The equity component is not subsequently
re-valued as long as it continues to qualify for equity
treatment. FSP APB
14-1 must be
applied retrospectively to previously issued cash-settleable
convertible instruments as well as prospectively to newly issued
instruments. FSP APB
14-1 is
effective for fiscal years beginning after December 15,2008, and interim periods within those fiscal years. The
adoption of FSP APB
14-1 will
result in increased non-cash interest expense in future periods
related to
our 7% senior convertible notes issued in 2005. Upon
retrospective application in 2009, the adoption will also result
in increases to 2005 through 2008 non-cash interest expense as
well as non-cash losses on debt extinguishment related to the
partial conversion of certain notes to common stock in 2006. We
do not believe the adoption of FSP APB
14-1 will
materially impact our consolidated financial statements.
In October 2008, the FASB issued FSP
FAS 157-3,
“Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.” FSP
FAS 157-3
clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
FSP
FAS 157-3
is effective upon issuance, including prior periods for which
financial statements have not been issued. Revisions resulting
from a change in the valuation technique or its application
should be accounted for as a change in accounting estimate
following the guidance in SFAS No. 154,
“Accounting Changes and Error Corrections.” FSP
FAS 157-3
is effective as of October 10, 2008, and the application of
FSP
FAS 157-3
had no impact on our consolidated financial statements.
Quantitative
and Qualitative Disclosures About Market Risk
Market
Risk Sensitive Instruments
Our primary market risk exposures include commodity price risk
(i.e., the price paid to obtain aviation fuel) and interest rate
risk. The potential impact of adverse increases in these risks
and general strategies that we employ to manage these risks are
discussed below. The following sensitivity analyses do not
consider the effects that an adverse change may have on the
overall economy nor do they consider additional actions we may
take to mitigate our exposure to these changes. Actual results
of changes in prices or rates may differ materially from the
following hypothetical results.
Commodity
Price Risk
Prices and availability of all petroleum products are subject to
political, economic and market factors that are generally
outside of our control. Accordingly, the price and availability
of aviation fuel, as well as other petroleum products, can be
unpredictable. Prices may be affected by many factors, including:
•
the impact of global political instability on crude production;
•
unexpected changes to the availability of petroleum products due
to disruptions in distribution systems or refineries as
evidenced in the third quarter of 2005 when Hurricane Katrina
and Hurricane Rita caused widespread disruption to oil
production, refinery operations and pipeline capacity along
certain portions of the U.S. Gulf Coast. As a result of
these disruptions, the price of jet fuel increased significantly
and the availability of jet fuel supplies was diminished;
•
unpredicted increases to oil demand due to weather or the pace
of economic growth;
•
inventory levels of crude, refined products and natural
gas; and
•
other factors, such as the relative fluctuation in value between
the U.S. dollar and other major currencies and influence of
speculative positions on the futures exchanges.
Because our operations are dependent upon aviation fuel,
significant increases in aviation fuel costs materially and
adversely affect our liquidity, results of operations and
financial condition. Our 2009 forecasted mainline and Express
fuel consumption is approximately 1.44 billion gallons, and
a one cent per gallon increase in aviation fuel price results in
a $14 million annual increase in expense, excluding the
impact of hedge transactions.
As of December 31, 2008, we have entered into no premium
collars, which establish an upper and lower limit on heating oil
futures prices, to protect us from fuel price risks. These
transactions are in place with respect to approximately 14% of
our projected mainline and Express 2009 fuel requirements at a
weighted average collar range of $3.41 to $3.61 per gallon of
heating oil or $131.15 to $139.55 per barrel of estimated crude
oil equivalent.
The use of such hedging transactions in our fuel hedging program
could result in us not fully benefiting from certain declines in
heating oil futures prices. As of December 31, 2008, the
fair value of our fuel hedging instruments was a net liability
of $375 million. Further, these instruments do not provide
protection from future price increases unless heating oil prices
exceed the call option price of the no premium collar. Although
heating oil prices are generally highly correlated with those of
jet fuel, the prices of jet fuel may change more or less than
heating oil, resulting in a change in fuel expense that is not
fully offset by the hedge transactions. At December 31,2008, we estimate that a 10% increase in heating oil futures
prices would increase the fair value of the hedge transactions
by approximately $30 million. We estimate that a 10%
decrease in heating oil futures prices would decrease the fair
value of the hedging transactions by approximately
$30 million. Since we have not entered into any new fuel
hedge transactions since the third quarter of 2008, the impact
of changes in heating oil futures prices will decrease as
existing hedges are settled.
When our fuel hedging derivative instruments are in a net asset
position, we are exposed to credit losses in the event of
non-performance by counterparties to our fuel hedging
derivatives. The amount of such credit exposure is limited to
the unrealized gains, if any, on our fuel hedging derivatives.
To manage credit risks, we carefully select counterparties,
conduct transactions with multiple counterparties which limits
our exposure to any single counterparty, and monitor the market
position of the program and our relative market position with
each counterparty. We
also maintain industry-standard security agreements with all of
our counterparties which may require the counterparty to post
collateral if the value of the fuel hedging derivatives exceeds
specified thresholds related to the counterparty’s credit
ratings.
When our fuel hedging derivative instruments are in a net
liability position, we are exposed to credit risks related to
the return of collateral in situations in which we have posted
collateral with counterparties for unrealized losses. As of
December 31, 2008, we were in a net liability position of
$375 million based on the fair value of our fuel hedging
derivative instruments due to the significant decline in the
price of oil in the latter part of 2008. When possible, in order
to mitigate the risk of posting collateral, we provide letters
of credit to certain counterparties in lieu of cash. At
December 31, 2008, $185 million related to letters of
credit collateralizing certain counterparties to our fuel
hedging transactions is included in short-term restricted cash.
In addition, at December 31, 2008, we had $276 million
in cash deposits held by counterparties to our fuel hedging
transactions. Since the third quarter of 2008, we have not
entered into any new transactions as part of our fuel hedging
program due to the impact collateral requirements could have on
our liquidity resulting from the significant decline in the
price of oil and counterparty credit risk arising from global
economic uncertainty.
Further declines in heating oil prices would result in
additional collateral requirements with our counterparties,
unrealized losses on our existing fuel hedging derivative
instruments and realized losses at the time of settlement of
these fuel hedging derivative instruments.
Interest
Rate Risk
Our exposure to interest rate risk relates primarily to our cash
equivalents, investment portfolios and variable rate debt
obligations. At December 31, 2008, our variable-rate
long-term debt obligations of approximately $2.8 billion
represented approximately 67% of our total long-term debt. If
interest rates increased 10% in 2008, the impact on our results
of operations would be approximately $12 million of
additional interest expense. Additional information regarding
our debt obligations as of December 31, 2008 is as follows
(dollars in millions):
Expected Maturity Date
2009
2010
2011
2012
2013
Thereafter
Total
Fixed-rate debt
$
123
$
105
$
140
$
139
$
78
$
771
$
1,356
Weighted avg. interest rate
9.5
%
9.5
%
9.1
%
8.6
%
8.3
%
7.5
%
Variable-rate debt
$
249
$
149
$
233
$
206
$
130
$
1,830
$
2,797
Weighted avg. interest rate
4.2
%
4.1
%
3.9
%
3.7
%
3.5
%
2.4
%
US Airways Group and US Airways have total future aircraft and
spare engine purchase commitments of approximately
$6.83 billion. We expect to finance such commitments either
by entering into leases or debt agreements. Changes in interest
rates will impact the cost of such financings.
At December 31, 2008, included within our investment
portfolio are $187 million ($411 million par value) of
investments in auction rate securities. With the liquidity
issues experienced in the global credit and capital markets, all
of our auction rate securities have experienced failed auctions
since August 2007. The estimated fair value of these auction
rate securities no longer approximates par value. However, we
have not experienced any defaults and continue to earn and
receive interest at the maximum contractual rates. As of
December 31, 2008, the full decline in value from the par
value of our investments in auction rate securities of
$224 million has been recorded as an other than temporary
impairment, of which $214 million was recorded in 2008. The
decline in fair value was caused by the significant
deterioration in the financial markets in 2008. We continue to
monitor the market for auction rate securities and consider its
impact (if any) on the fair value of our investments. If the
current market conditions deteriorate further, we may be
required to record additional impairment charges in other
nonoperating expense, net in future periods.
We do not anticipate having to sell these securities in order to
operate our business. We believe that, based on our current
unrestricted cash, cash equivalents and short-term marketable
securities balances of $1.05 billion at December 31,2008, the current lack of liquidity in our investments in
auction rate securities will not have a material impact on our
liquidity, cash flow, or our ability to fund our operations. See
Notes 6(b) and 5(b) in Items 8A and 8B, respectively,
of this report for additional information.
Consolidated
Financial Statements and Supplementary Data of US Airways Group,
Inc.
Management’s
Annual Report on Internal Control over Financial
Reporting
Management of US Airways Group, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended. US
Airways Group’s internal control over financial reporting
is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. US Airways
Group’s internal control over financial reporting includes
those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of US Airways Group;
•
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of US Airways Group are being
made only in accordance with authorizations of management and
directors of US Airways Group; and
•
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of US
Airways Group’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of US Airways Group’s
internal control over financial reporting as of
December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management concludes
that US Airways Group maintained effective internal control over
financial reporting as of December 31, 2008.
US Airways Group’s independent registered public accounting
firm has issued an audit report on the effectiveness of US
Airways Group’s internal control over financial reporting.
That report has been included herein.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
US Airways Group, Inc.:
We have audited US Airways Group, Inc.’s (“US Airways
Group” or the “Company”) internal control over
financial reporting as of December 31, 2008 based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
management’s annual report on internal control over
financial reporting. Our responsibility is to express an opinion
on the effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control over
financial reporting based on the assessed risk. Our audit also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. A
company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, US Airways Group, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control — Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of US Airways Group and subsidiaries
as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity
(deficit), and cash flows for each of the years in the
three-year period ended December 31, 2008, and our report
dated February 17, 2009 expressed an unqualified opinion on
those consolidated financial statements.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
US Airways Group, Inc.:
We have audited the accompanying consolidated balance sheets of
US Airways Group, Inc. and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity (deficit),
and cash flows for each of the years in the three-year period
ended December 31, 2008. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of US Airways Group, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2008, in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2008, the Company adopted
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements, and the
measurement date provisions of SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 17, 2009
expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Other intangibles, net of accumulated amortization of
$87 million and $62 million, respectively
545
553
Restricted cash
540
466
Investments in marketable securities
187
353
Goodwill
—
622
Other assets, net
238
211
Total other assets
1,510
2,205
Total assets
$
7,214
$
8,040
LIABILITIES & STOCKHOLDERS’ EQUITY
(DEFICIT)
Current liabilities
Current maturities of debt and capital leases
$
362
$
117
Accounts payable
797
366
Air traffic liability
698
832
Accrued compensation and vacation
158
225
Accrued taxes
142
152
Other accrued expenses
887
859
Total current liabilities
3,044
2,551
Noncurrent liabilities and deferred credits
Long-term debt and capital leases, net of current maturities
3,634
3,031
Deferred gains and credits, net
323
318
Postretirement benefits other than pensions
108
138
Employee benefit liabilities and other
610
563
Total noncurrent liabilities and deferred credits
4,675
4,050
Commitments and contingencies (Note 9)
Stockholders’ equity (deficit)
Common stock, $0.01 par value; 200,000,000 shares
authorized, 114,527,377 and 114,113,384 shares issued and
outstanding at December 31, 2008; 92,278,557 and
91,864,564 shares issued and outstanding at
December 31, 2007
Basis of
presentation and summary of significant accounting
policies
(a)
Nature
of Operations and Operating Environment
US Airways Group, Inc. (“US Airways Group” or the
“Company”) is a Delaware corporation whose primary
business activity is the operation of a major network air
carrier through its ownership of the common stock of
US Airways, Inc. (“US Airways”), Piedmont
Airlines, Inc. (“Piedmont”), PSA Airlines, Inc.
(“PSA”), Material Services Company, Inc.
(“MSC”) and Airways Assurance Limited, LLC
(“AAL”). On May 19, 2005, US Airways Group signed
a merger agreement with America West Holdings Corporation
(“America West Holdings”) pursuant to which America
West Holdings merged with a wholly owned subsidiary of US
Airways Group. The merger agreement was amended by a letter of
agreement on July 7, 2005. The merger became effective upon
US Airways Group’s emergence from bankruptcy on
September 27, 2005.
Most of the airline operations are in competitive markets.
Competitors include other air carriers along with other modes of
transportation. The Company operates the fifth largest airline
in the United States as measured by domestic mainline revenue
passenger miles (“RPMs”) and available seat miles
(“ASMs”). US Airways has primary hubs in Charlotte,
Philadelphia and Phoenix and secondary hubs/focus cities in New
York, Washington, D.C., Boston and Las Vegas. US Airways
offers scheduled passenger service on more than 3,100 flights
daily to 200 communities in the United States, Canada, Europe,
the Caribbean and Latin America. US Airways also has an
established East Coast route network, including the US Airways
Shuttle service, with a substantial presence at capacity
constrained airports including New York’s LaGuardia Airport
and the Washington, D.C. area’s Ronald Reagan
Washington National Airport. US Airways had approximately
55 million passengers boarding its mainline flights in
2008. During 2008, US Airways’ mainline operation provided
regularly scheduled service or seasonal service at 135 airports.
During 2008, the US Airways Express network served 187 airports
in the United States, Canada and Latin America, including 77
airports also served by the mainline operation. During 2008, US
Airways Express air carriers had approximately 27 million
passengers boarding their planes. As of December 31, 2008,
US Airways operated 354 mainline jets and is supported by
the Company’s regional airline subsidiaries and affiliates
operating as US Airways Express either under capacity purchase
or prorate agreements, which operate approximately 238 regional
jets and 74 turboprops.
As of December 31, 2008, the Company employed approximately
37,500 active full-time equivalent employees. Approximately 87%
of the Company’s employees are covered by collective
bargaining agreements with various labor unions. The
Company’s pilots and flight attendants are currently
working under the terms of their respective US Airways or
America West Airlines (“AWA”) collective bargaining
agreements, as modified by transition agreements reached in
connection with the merger. In 2008, the Company reached final
single labor agreements covering fleet service employees,
maintenance and related employees and maintenance training
instructors, each represented by the International Association
of Machinists & Aerospace Workers.
(b)
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of US Airways Group and its wholly owned subsidiaries.
The Company has the ability to move funds freely between its
operating subsidiaries to support operations. These transfers
are recognized as intercompany transactions. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. The principal areas of judgment
relate to passenger revenue recognition, impairment of goodwill,
impairment of long-lived and intangible assets, valuation of
investments in marketable securities, the frequent traveler
program and the deferred tax valuation allowance.
Notes to
Consolidated Financial
Statements — (Continued)
Certain prior year amounts have been reclassified to conform
with the 2008 presentation.
(c)
Cash
and Cash Equivalents
Cash equivalents consist primarily of cash in money market
securities and highly liquid debt instruments. All highly liquid
investments purchased within three months of maturity are
classified as cash equivalents. Cash equivalents are stated at
cost, which approximates fair value due to the highly liquid
nature and short-term maturities of the underlying securities.
As of December 31, 2008 and 2007, the Company’s cash
and cash equivalents are as follows (in millions):
2008
2007
Cash and money market funds
$
1,024
$
1,858
Corporate bonds
10
90
Total cash and cash equivalents
$
1,034
$
1,948
(d)
Investments
in Marketable Securities
All highly liquid investments with maturities greater than three
months but less than one year are classified as current
investments in marketable securities. Investments in marketable
securities classified as noncurrent assets on the Company’s
balance sheet represent investments expected to be converted to
cash after 12 months. Debt securities, other than auction
rate securities, are classified as held to maturity in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” Held to
maturity investments are carried at amortized cost, which
approximates fair value. Investments in auction rate securities
are classified as available for sale and recorded at fair value.
As of December 31, 2008 and 2007, the Company’s
investments in marketable securities are classified as follows
(in millions):
2008
2007
Held to maturity securities:
Corporate bonds
$
20
$
125
U.S. government sponsored enterprises
—
81
Certificates of deposit
—
20
Total investments in marketable securities-current
$
20
$
226
Available for sale securities:
Auction rate securities
187
353
Total investments in marketable securities-noncurrent
$
187
$
353
See Note 6(b) for more information on the Company’s
investments in marketable securities.
(e)
Restricted
Cash
Restricted cash includes deposits in trust accounts primarily to
fund certain taxes and fees and workers’ compensation
claims, deposits securing certain letters of credit and surety
bonds and deposits held by institutions that process credit card
sales transactions. Restricted cash is stated at cost, which
approximates fair value.
Notes to
Consolidated Financial
Statements — (Continued)
(f)
Materials
and Supplies, Net
Inventories of materials and supplies are valued at the lower of
cost or fair value. Costs are determined using average costing
methods. An allowance for obsolescence is provided for flight
equipment expendable and repairable parts. These items are
generally charged to expense when issued for use. During 2008,
the Company recorded a $5 million write down related to its
Boeing 737 spare parts inventory to reflect lower of cost or
fair value. See Note 1(g) below for further discussion of
the decline in value of Boeing 737 parts.
(g)
Property
and Equipment
Property and equipment are recorded at cost. Interest expense
related to the acquisition of certain property and equipment is
capitalized as an additional cost of the asset or as a leasehold
improvement if the asset is leased. Interest capitalized for the
years ended December 31, 2008, 2007 and 2006 was
$6 million, $4 million and $2 million,
respectively. Property and equipment is depreciated and
amortized to residual values over the estimated useful lives or
the lease term, whichever is less, using the straight-line
method. Costs of major improvements that enhance the usefulness
of the asset are capitalized and depreciated over the estimated
useful life of the asset or the modifications, whichever is less.
The estimated useful lives of owned aircraft, jet engines,
flight equipment and rotable parts range from five to
30 years. Leasehold improvements relating to flight
equipment and other property on operating leases are amortized
over the life of the lease or the life of the asset, whichever
is shorter, on a straight-line basis. The estimated useful lives
for other owned property and equipment range from three to
12 years and range from 18 to 30 years for training
equipment and buildings.
The Company records impairment losses on long-lived assets used
in operations when events and circumstances indicate that the
assets might be impaired as defined by SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets.” Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell.
In connection with completing step two of the Company’s
interim goodwill impairment analysis in the second quarter of
2008 as further discussed in Note 1(i) below, the Company
also assessed the current fair values of its other significant
assets including owned aircraft, aircraft leases and aircraft
spare parts. The Company concluded that the only impairment
indicated was associated with the decline in fair value of
certain spare parts associated with its Boeing 737 fleet. Due to
record high fuel prices and the industry environment in 2008,
demand for the Boeing 737 aircraft type declined given its lower
fuel efficiency as compared to other aircraft types. The fair
value of these spare parts was determined using a market
approach on the premise of continued use of the aircraft through
the Company’s final scheduled lease return.
In accordance with SFAS No. 144, the Company
determined that the carrying amount of the Boeing 737 spare
parts classified as long-lived assets was not recoverable as the
carrying amount of the Boeing 737 assets was greater than the
sum of the undiscounted cash flows expected from the use and
disposition of these assets. As a result of this impairment
analysis, the Company recorded a $13 million impairment
charge in 2008 related to Boeing 737 rotable parts included in
flight equipment on its consolidated balance sheet. The Company
recorded no impairment charges in the years ended
December 31, 2007 and 2006.
(h)
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit
Notes to
Consolidated Financial
Statements — (Continued)
carryforwards. A valuation allowance is established, if
necessary, for the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
(i)
Goodwill
and Other Intangibles, Net
Goodwill
SFAS No. 142, “Goodwill and Other Intangible
Assets,” requires that goodwill be tested for impairment at
the reporting unit level on an annual basis and between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of the reporting unit
below its carrying value. Goodwill represents the purchase price
in excess of the net amount assigned to assets acquired and
liabilities assumed by America West Holdings on
September 27, 2005. The Company has two reporting units
consisting of its mainline and Express operations. All of the
Company’s goodwill was allocated to the mainline reporting
unit.
In accordance with SFAS No. 142, the Company concluded
that events had occurred and circumstances had changed during
the second quarter of 2008 which required the Company to perform
an interim period goodwill impairment test. Subsequent to the
first quarter of 2008, the Company experienced a significant
decline in market capitalization due to overall airline industry
conditions driven by record high fuel prices. The price of fuel
became less volatile in the second quarter of 2008, and there
was a sustained surge in fuel prices. On May 21, 2008, the
price per barrel of oil hit a then record high of $133 per
barrel and from that date through June 30, 2008 stayed at
an average daily price of $133 per barrel. The Company’s
average mainline fuel price during the second quarter of 2008
was $3.63 as compared to $2.88 per gallon in the first quarter
of 2008 and $2.20 for the full year 2007. This increase in the
price per gallon of fuel represented an increase of 26% and 65%
as compared to the first quarter of 2008 and full year 2007,
respectively. The Company’s average stock price in the
second quarter of 2008 was $6.13 as compared to an average of
$12.15 in the first quarter of 2008, a decline of 50%. In
addition, the Company announced in June 2008 that in response to
the record high fuel prices, it planned to reduce fourth quarter
2008 and full year 2009 domestic mainline capacity.
During the second quarter of 2008, the Company performed the
first step of the two-step impairment test and compared the fair
value of the mainline reporting unit to its carrying value.
Consistent with the Company’s approach in its annual
impairment testing, in assessing the fair value of the reporting
unit, the Company considered both the market approach and income
approach. Under the market approach, the fair value of the
reporting unit is based on quoted market prices and the number
of shares outstanding for the Company’s common stock. Under
the income approach, the fair value of the reporting unit is
based on the present value of estimated future cash flows. The
income approach is dependent on a number of significant
management assumptions, including estimates of future capacity,
passenger yield, traffic, fuel, other operating costs and
discount rates. Due to current market conditions, greater
weighting was attributed to the market approach, which was
weighted 67% while the income approach was weighted 33% in
arriving at the fair value of the reporting unit. The Company
determined that the fair value of the mainline reporting unit
was less than the carrying value of the net assets of the
reporting unit, and thus the Company performed step two of the
impairment test.
In step two of the impairment test, the Company determined the
implied fair value of the goodwill and compared it to the
carrying value of the goodwill. The Company allocated the fair
value of the reporting unit to all of its assets and liabilities
as if the reporting unit had been acquired in a business
combination and the fair value of the mainline reporting unit
was the price paid to acquire the reporting unit. The excess of
the fair value of the reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of
goodwill. The Company’s step two analysis resulted in no
implied fair value of goodwill, and therefore, the Company
recognized an impairment charge of $622 million in the
second quarter of 2008, representing a write off of the entire
amount of the Company’s previously recorded goodwill.
Other intangible assets consist primarily of trademarks,
international route authorities and airport take-off and landing
slots and airport gates.
SFAS No. 142 requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairments in accordance with
SFAS No. 144. The following table provides information
relating to the Company’s intangible assets subject to
amortization as of December 31, 2008 and 2007 (in millions):
2008
2007
Airport take-off and landing slots
$
495
$
478
Airport gate leasehold rights
52
52
Accumulated amortization
(87
)
(62
)
Total
$
460
$
468
The intangible assets subject to amortization generally are
amortized over 25 years for airport take-off and landing
slots and over the term of the lease for airport gate leasehold
rights on a straight-line basis and are included in depreciation
and amortization on the consolidated statements of operations.
For the years ended December 31, 2008, 2007 and 2006, the
Company recorded amortization expense of $25 million,
$25 million and $28 million, respectively, related to
its intangible assets. The Company expects to record annual
amortization expense of $26 million in 2009,
$26 million in year 2010, $23 million in year 2011,
$22 million in year 2012, $22 million in year 2013 and
$341 million thereafter related to these intangible assets.
Under SFAS No. 142, indefinite lived assets are not
amortized but instead are reviewed for impairment annually and
more frequently if events or circumstances indicate that the
asset may be impaired. As of December 31, 2008 and 2007,
the Company had $55 million of international route
authorities and $30 million of trademarks on its balance
sheets, which are classified as indefinite lived assets.
In connection with completing step two of the Company’s
goodwill impairment analysis in the second quarter of 2008, the
Company assessed the fair values of its significant intangible
assets. The Company considered the potential impairment of these
other intangible assets in accordance with
SFAS No. 142 and SFAS No. 144, as
applicable. The fair values of airport take-off and landing
slots and international route authorities were assessed using
the market approach. The market approach took into consideration
relevant supply and demand factors at the related airport
locations as well as available market sale and lease data. For
trademarks, the Company utilized a form of the income approach
known as the relief-from-royalty method. As a result of these
assessments, no impairment was indicated.
In addition, the Company performed the annual impairment test on
its international route authorities and trademarks during the
fourth quarter of 2008, at which time it concluded that no
impairment exists. The Company will perform its next annual
impairment test on October 1, 2009.
Notes to
Consolidated Financial
Statements — (Continued)
(j)
Other
Assets, Net
Other assets, net consists of the following as of
December 31, 2008 and 2007 (in millions):
2008
2007
Deposits
$
40
$
46
Debt issuance costs, net
57
14
Long term investments
11
12
Deferred rent
46
48
Aircraft leasehold interest, net
83
89
Other
1
2
Total other assets, net
$
238
$
211
In connection with fresh-start reporting for US Airways
following its emergence from bankruptcy in September 2005,
aircraft operating leases were adjusted to fair value and
$101 million of assets were established for leasehold
interests in aircraft for aircraft leases with rental rates
deemed to be below market rates. These leasehold interests are
amortized on a straight-line basis as an increase to aircraft
rent expense over the applicable remaining lease periods. The
Company expects to amortize $6 million per year in
2009-2013
and $53 million thereafter to aircraft rent expense related
to these leasehold interests.
The Company capitalized $50 million in debt issuance costs
in 2008 as a result of its current year financing transactions.
(k)
Frequent
Traveler Program
Members of the Dividend Miles program, the US Airways frequent
traveler program, can redeem miles on US Airways or other
members of the Star Alliance. The estimated cost of providing
the travel award, using the incremental cost method as adjusted
for estimated redemption rates, is recognized as a liability and
charged to operations as program members accumulate mileage. For
travel awards on partner airlines, the liability is based on the
average contractual amount to be paid to the other airline per
redemption. As of December 31, 2008, Dividend Miles members
had accumulated mileage credits for approximately
2.6 million awards. The liability for the future travel
awards accrued on the Company’s consolidated balance sheets
within other accrued expenses was $151 million and
$161 million as of December 31, 2008 and 2007,
respectively.
The Company sells mileage credits to participating airline and
non-airline business partners. Revenue earned from selling
mileage credits to other companies is recognized in two
components. A portion of the revenue from these sales is
deferred, representing the estimated fair value of the
transportation component of the sold mileage credits. The
deferred revenue for the transportation component is amortized
on a straight-line basis over the period in which the credits
are expected to be redeemed for travel as passenger revenue,
which is currently estimated to be 28 months. The marketing
component, which is earned at the time the miles are sold, is
recognized in other revenues at the time of the sale. As of
December 31, 2008 and 2007, the Company had
$240 million and $241 million, respectively, in
deferred revenue from the sale of mileage credits included in
other accrued expenses on its consolidated balance sheets.
(l)
Derivative
Instruments
The Company currently utilizes heating oil-based derivative
instruments to hedge a portion of its exposure to jet fuel price
increases. These instruments consist of no premium collars.
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” requires that all
derivatives be marked to fair value and recorded on the balance
sheet. Derivatives that do not qualify for hedge accounting must
be adjusted to fair value through the income statement. The
Company does not purchase or hold any derivative financial
instruments for trading
Notes to
Consolidated Financial
Statements — (Continued)
purposes. As of December 31, 2008 and 2007, the Company had
open fuel hedging instruments in place, which do not currently
qualify for hedge accounting under SFAS No. 133.
Accordingly, the derivative hedging instruments are recorded as
an asset or liability on the consolidated balance sheets at fair
value and any changes in fair value are recorded as gains or
losses on fuel hedging instruments, net in operating expenses in
the accompanying consolidated statements of operations in the
period of change. See Note 6(a) for additional information
on the Company’s fuel hedging instruments.
(m)
Deferred
Gains and Credits, Net
In 2005, the Company’s affinity credit card provider,
Barclays Bank Delaware, formerly Juniper Bank, paid AWA
$150 million in bonuses, consisting of a $20 million
bonus pursuant to AWA’s original credit card agreement with
Juniper and a $130 million bonus following the
effectiveness of the merger, subject to certain conditions.
In the event Barclays, at its option, terminates the amended
agreement prior to April 1, 2009 due to the Company’s
breach of its obligations under the amended credit card
agreement, or upon the occurrence of certain other events, then
the Company must repay all of the bonus payments. If Barclays
terminates the amended agreement any time thereafter through
March 31, 2013 for the same reasons, the Company must repay
a reduced amount that declines monthly according to a formula.
The Company will have no obligation to repay any portion of the
bonus payments after March 31, 2013.
At the time of payment, the entire $150 million was
recorded as deferred revenue. The Company will begin recognizing
revenue from the bonus payments on April 1, 2009. The
revenue from the bonus payments will be recognized on a
straight-line basis through March 31, 2017, the expiration
date of the amended Barclays co-branded credit card agreement.
In connection with fresh-start reporting and purchase accounting
for US Airways’ in 2005 and fresh-start reporting for AWA
upon emergence from bankruptcy in 1994, aircraft operating
leases were adjusted to fair value and deferred credits were
established in the accompanying consolidated balance sheets,
which represented the net present value of the difference
between the stated lease rates and the fair market rates. These
deferred credits will be amortized on a straight-line basis as a
reduction in rent expense over the applicable lease periods. At
December 31, 2008 and 2007, the unamortized balance of the
deferred credits was $93 million and $134 million,
respectively. The Company expects to amortize $21 million
in 2009, $13 million in 2010, $9 million in 2011,
$8 million in 2012, $7 million in 2013 and
$35 million thereafter to aircraft rent expense related to
these leasehold interests.
(n)
Revenue
Recognition
Passenger
Revenue
Passenger revenue is recognized when transportation is provided.
Ticket sales for transportation that has not yet been provided
are initially recorded as air traffic liability on the
consolidated balance sheets. The air traffic liability
represents tickets sold for future travel dates and estimated
future refunds and exchanges of tickets sold for past travel
dates. The majority of tickets sold are nonrefundable. A small
percentage of tickets, some of which are partially used tickets,
expire unused. Due to complex pricing structures, refund and
exchange policies, and interline agreements with other airlines,
certain amounts are recognized in revenue using estimates
regarding both the timing of the revenue recognition and the
amount of revenue to be recognized. These estimates are
generally based on the analysis of the Company’s historical
data. The Company and members of the airline industry have
consistently applied this accounting method to estimate revenue
from forfeited tickets at the date travel was to be provided.
Estimated future refunds and exchanges included in the air
traffic liability are routinely evaluated based on subsequent
activity to validate the accuracy of the Company’s
estimates. Any adjustments resulting from periodic evaluations
of the estimated air traffic liability are included in results
of operations during the period in which the evaluations are
completed.
Notes to
Consolidated Financial
Statements — (Continued)
Passenger traffic commissions and related fees are expensed when
the related revenue is recognized. Passenger traffic commissions
and related fees not yet recognized are included as a prepaid
expense.
The Company purchases capacity, or ASMs, generated by the
Company’s wholly owned regional air carriers and the
capacity of Air Wisconsin Airlines Corp. (“Air
Wisconsin”), Republic Airways Holdings
(“Republic”), Mesa Airlines, Inc. (“Mesa”)
and Chautauqua Airlines, Inc. (“Chautauqua”) in
certain markets. Air Wisconsin, Republic, Mesa and Chautauqua
operate regional jet aircraft in these markets as part of US
Airways Express. The Company classifies revenues related to
capacity purchase arrangements as Express passenger revenues.
Liabilities related to tickets sold for travel on these air
carriers are also included in the Company’s air traffic
liability and are subsequently relieved in the same manner as
described above.
The Company collects various excise taxes on its ticket sales,
which are accounted for on a net basis.
Cargo
Revenue
Cargo revenue is recognized when shipping services for mail and
other cargo are provided.
Other
Revenue
Other revenue includes checked and excess baggage charges,
beverage sales, ticket change and service fees, commissions
earned on tickets sold for flights on other airlines and sales
of tour packages by the US Airways Vacations division, which are
recognized when the services are provided. Other revenues also
include processing fees for travel awards issued through the
Dividend Miles frequent traveler program and the marketing
component earned from selling mileage credits to partners, as
discussed in Note 1(k).
(o)
Maintenance
and Repair Costs
Maintenance and repair costs for owned and leased flight
equipment are charged to operating expense as incurred.
(p)
Selling
Expenses
Selling expenses include commissions, credit card fees,
computerized reservations systems fees, advertising and
promotional expenses. Advertising and promotional expenses are
expensed when incurred. Advertising and promotional expenses for
the years ended December 31, 2008, 2007 and 2006 were
$10 million, $16 million and $16 million,
respectively.
(q)
Stock-based
Compensation
The Company accounts for its stock-based compensation plans in
accordance with SFAS No. 123(R), “Share-Based
Payment.” Compensation expense is based on the fair value
of the stock award at the time of grant and is recognized
ratably over the respective vesting period of the stock award.
The fair value of stock options and stock appreciation rights is
estimated using a Black-Scholes option pricing model. The fair
value of restricted stock units is based on the market price of
the underlying shares of common stock on the date of grant. See
Note 15 for further discussion of stock-based compensation.
(r)
Express
Expenses
Expenses associated with the Company’s wholly owned
regional airlines, affiliate regional airlines operating as US
Airways Express and US Airways’ former MidAtlantic division
are classified as Express expenses on the consolidated
statements of operations. Effective May 27, 2006, the
transfer of certain MidAtlantic assets to
Notes to
Consolidated Financial
Statements — (Continued)
Republic was complete, and Republic assumed the operations of
the aircraft as a US Airways affiliate Express carrier. Express
expenses consist of the following (in millions):
The Company determined that certain entities with which the
Company has capacity purchase agreements are considered variable
interest entities under Financial Accounting Standards Board
(“FASB”) Interpretation (“FIN”)
No. 46(R), “Consolidation of Variable Interest
Entities — An Interpretation of ARB No. 51.”
The Company has determined that it is not the primary
beneficiary of any of these variable interest entities and,
accordingly, does not consolidate any of the entities with which
it has jet service agreements. See Note 9(d) for further
discussion.
(t)
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” This standard defines fair
value, establishes a framework for measuring fair value in
accounting principles generally accepted in the
United States of America, and expands disclosure about fair
value measurements. This pronouncement applies to other
accounting standards that require or permit fair value
measurements. Accordingly, this statement does not require any
new fair value measurement. This statement is effective for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. In December 2007, the FASB
agreed to a one year deferral of SFAS No. 157’s
fair value measurement requirements for nonfinancial assets and
liabilities that are not required or permitted to be measured at
fair value on a recurring basis. As such, the Company did not
apply the fair value measurement requirements of
SFAS No. 157 for nonfinancial assets and liabilities
when performing its goodwill and other assets impairment test as
discussed in Note 1(i). The Company adopted
SFAS No. 157 on January 1, 2008, which had no
effect on the Company’s consolidated financial statements.
Refer to Note 7 for additional information related to the
adoption of SFAS No. 157.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), “Business Combinations.”
SFAS No. 141R is effective for fiscal years beginning
after December 15, 2008 and adjusts certain guidance
related to recording nearly all transactions where one company
gains control of another. The statement revises the measurement
principle to require fair value measurements on the acquisition
date for recording acquired assets and liabilities. It also
changes the requirements for recording acquisition-related costs
and liabilities. Additionally, the statement revises the
treatment of valuation allowance adjustments related to income
tax benefits in existence prior to a business combination. The
current standard, SFAS No. 141, requires that
adjustments to these valuation allowances be recorded as
adjustments to goodwill or intangible assets if no goodwill
exists, while the new standard will require companies to adjust
current income tax expense. Effective January 1, 2009, the
Company adopted the provisions of SFAS No. 141R and
all future decreases in the valuation allowance established in
purchase accounting as a result of the merger will be recognized
as a reduction to income tax expense.
Notes to
Consolidated Financial
Statements — (Continued)
On January 1, 2008, the Company adopted the measurement
date provisions of SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R).” The measurement date provisions require plan
assets and obligations to be measured as of the employer’s
balance sheet date. The Company previously measured its other
postretirement benefit obligations as of September 30 each year.
As a result of the adoption of the measurement date provisions,
the Company recorded a $2 million increase to its
postretirement benefit liability and a $2 million increase
to accumulated deficit, representing the net periodic benefit
cost for the period between the measurement date utilized in
2007 and the beginning of 2008. The adoption of the measurement
provisions of SFAS No. 158 had no effect on the
Company’s consolidated statements of operations.
In May 2008, the FASB issued FASB Staff Position
(“FSP”) Accounting Principles Board (“APB”)
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FSP APB
14-1 applies
to convertible debt instruments that, by their stated terms, may
be settled in cash (or other assets) upon conversion, including
partial cash settlement of the conversion option. FSP APB
14-1
requires bifurcation of the instrument into a debt component
that is initially recorded at fair value and an equity
component. The difference between the fair value of the debt
component and the initial proceeds from issuance of the
instrument is recorded as a component of equity. The liability
component of the debt instrument is accreted to par using the
effective yield method; accretion is reported as a component of
interest expense. The equity component is not subsequently
re-valued as long as it continues to qualify for equity
treatment. FSP APB
14-1 must be
applied retrospectively to previously issued cash-settleable
convertible instruments as well as prospectively to newly issued
instruments. FSP APB
14-1 is
effective for fiscal years beginning after December 15,2008, and interim periods within those fiscal years. The
adoption of FSP APB
14-1 will
result in increased non-cash interest expense in future periods
related to the Company’s 7% senior convertible notes
issued in 2005. Upon retrospective application in 2009, the
adoption will also result in increases to 2005 through 2008
non-cash interest expense as well as non-cash losses on debt
extinguishment related to the partial conversion of certain
notes to common stock in 2006. The Company does not believe the
adoption of FSP APB
14-1 will
materially impact the Company’s consolidated financial
statements.
In October 2008, the FASB issued FSP
FAS 157-3,
“Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.” FSP
FAS 157-3
clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
FSP
FAS 157-3
is effective upon issuance, including prior periods for which
financial statements have not been issued. Revisions resulting
from a change in the valuation technique or its application
should be accounted for as a change in accounting estimate
following the guidance in SFAS No. 154,
“Accounting Changes and Error Corrections.” FSP
FAS 157-3
is effective October 10, 2008, and the application of FSP
FAS 157-3
had no impact on the Company’s consolidated financial
statements.
2.
Special
items, net
Special items, net as shown on the consolidated statements of
operations include the following charges (credits) (in millions):
Notes to
Consolidated Financial
Statements — (Continued)
(a)
In 2008, in connection with the effort to consolidate functions
and integrate the Company’s organizations, procedures and
operations, the Company incurred $35 million of merger
related transition expenses. These expenses included
$12 million in uniform costs to transition employees to the
new US Airways uniforms; $5 million in applicable
employment tax expenses related to contractual benefits granted
to certain current and former employees as a result of the
merger; $6 million in compensation expenses for equity
awards granted in connection with the merger to retain key
employees through the integration period; $5 million of
aircraft livery costs; $4 million in professional and
technical fees related to the integration of the Company’s
airline operations systems and $3 million in other expenses.
In 2007, the Company incurred $99 million of merger related
transition expenses. These expenses included $13 million in
training and related expenses; $19 million in compensation
expenses for equity awards granted in connection with the merger
to retain key employees through the integration period;
$20 million of aircraft livery costs; $37 million in
professional and technical fees related to the integration of
the Company’s airline operations systems; $1 million
in employee moving expenses; $4 million related to
reservation system migration expenses and $5 million of
other expenses.
In 2006, the Company incurred $131 million of merger
related transition expenses. These items included
$6 million in training and related expenses;
$41 million in compensation expenses primarily for
severance, retention payments and equity awards granted in
connection with the merger to retain key employees through the
integration period; $17 million of aircraft livery costs;
$38 million in professional and technical fees, including
continuing professional fees associated with US Airways’
bankruptcy proceedings and fees related to the integration of
the Company’s airline operations systems; $7 million
of employee moving expenses; $11 million of net costs
associated with the integration of the AWA FlightFund and US
Airways Dividend Miles frequent traveler programs;
$2 million in merger related aircraft lease return expenses
and $9 million of other expenses.
(b)
In 2008, the Company recorded $18 million in non-cash
charges related to the decline in fair value of certain spare
parts associated with the Company’s Boeing 737 aircraft
fleet. See Note 1(f) and (g) for further discussion of
these charges.
(c)
In 2008, the Company recorded $14 million in charges for
lease return costs and penalties related to certain Airbus
aircraft as a result of the planned fleet reductions.
(d)
In 2008, in connection with planned capacity reductions, the
Company recorded $9 million in charges related to
involuntary furloughs as well as terminations of non-union
administrative and management staff. Of this amount,
$6 million was paid out in 2008. The Company expects that
the remaining $3 million will be substantially paid by the
end of the first quarter of 2009.
(e)
In connection with the merger and the Airbus Memorandum of
Understanding (the “Airbus MOU”) executed between AVSA
S.A.R.L., an affiliate of Airbus S.A.S. (“Airbus”), US
Airways Group, US Airways and AWA, certain aircraft firm orders
were restructured. In connection with the Airbus MOU, US Airways
and AWA entered into two loan agreements with aggregate
commitments of up to $161 million and $89 million. On
March 31, 2006, the outstanding principal and accrued
interest on the $89 million loan was forgiven upon
repayment in full of the $161 million loan in accordance
with terms of the Airbus loans. As a result, in 2006, the
Company recognized a gain associated with the return of these
equipment deposits upon forgiveness of the loan totaling
$90 million, consisting of the $89 million in
equipment deposits and accrued interest of $1 million.
(f)
In 2006, the Company recognized $14 million in gains in
connection with the settlement of bankruptcy claims, which
includes $11 million related to a settlement with
Bombardier.
Notes to
Consolidated Financial
Statements — (Continued)
3.
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 dilutive potential common
shares outstanding during the period using the treasury stock
method. Dilutive potential common shares include outstanding
employee stock options, employee stock appreciation rights,
employee restricted stock units and convertible debt. The
following table presents the computation of basic and diluted
EPS (in millions, except share and per share amounts):
Income (loss) before cumulative effect of change in accounting
principle
$
(2,210
)
$
427
$
303
Cumulative effect of change in accounting principle
—
—
1
Net income (loss)
$
(2,210
)
$
427
$
304
Weighted average common shares outstanding (in thousands)
100,168
91,536
86,447
Basic earnings (loss) per share:
Before cumulative effect of change in accounting principle
$
(22.06
)
$
4.66
$
3.50
Cumulative effect of change in accounting principle
—
—
0.01
Basic earnings (loss) per share
$
(22.06
)
$
4.66
$
3.51
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting
principle
$
(2,210
)
$
427
$
303
Cumulative effect of change in accounting principle
—
—
1
Net income (loss)
(2,210
)
427
304
Interest expense on 7.0% senior convertible notes
—
5
9
Income (loss) for purposes of computing diluted net income
(loss) per share
$
(2,210
)
$
432
$
313
Share computation (in thousands):
Weighted average common shares outstanding
100,168
91,536
86,447
Dilutive effect of stock awards
—
1,017
2,058
Assumed conversion of 7.0% senior convertible notes
—
3,050
5,316
Weighted average common shares outstanding as adjusted
100,168
95,603
93,821
Diluted earnings (loss) per share:
Before cumulative effect of change in accounting principle
$
(22.06
)
$
4.52
$
3.32
Cumulative effect of change in accounting principle
—
—
0.01
Diluted earnings (loss) per share
$
(22.06
)
$
4.52
$
3.33
For the year ended December 31, 2008, 8,181,340 shares
underlying stock options, stock appreciation rights and
restricted stock units were not included in the computation of
diluted EPS because inclusion of such shares would be
antidilutive or because the exercise prices were greater than
the average market price of common stock for the period. In
addition, 3,050,148 incremental shares from assumed conversion
of the 7% senior convertible notes were excluded from the
computation of diluted EPS due to their antidilutive effect.
For the year ended December 31, 2007, 2,916,762 shares
underlying stock options, stock appreciation rights and
restricted stock units were not included in the computation of
diluted EPS because inclusion of such shares would be
antidilutive or because the exercise prices were greater than
the average market price of common stock for the period.
Notes to
Consolidated Financial
Statements — (Continued)
For the year ended December 31, 2006, 1,254,960 shares
underlying stock options and stock appreciation rights were not
included in the computation of diluted EPS because inclusion of
such shares would be antidilutive or because the exercise prices
were greater than the average market price of common stock for
the period. Also, 34,650 performance-based restricted stock unit
awards were excluded as the performance-based provision had not
been met as of December 31, 2006. In addition, 1,054,692
incremental shares from assumed conversion of the 7.5%
convertible senior notes are not included in the computation of
diluted EPS due to their antidilutive effect.
4.
Debt
The following table details the Company’s debt as of
December 31, 2008 and 2007 (in millions). Variable interest
rates listed are the rates as of December 31, 2008 unless
noted.
Citicorp North America loan, variable interest rate of 2.97%,
installments due through 2014(a)
$
1,184
$
1,600
Equipment loans, aircraft pre-delivery payment financings and
other notes payable, fixed and variable interest rates ranging
from 1.87% to 12.15%, averaging 5.75% as of December 31,2008, maturing from 2010 to 2020(b)
1,674
802
Aircraft enhanced equipment trust certificates
(“EETCs”), fixed interest rates ranging from 7.08% to
9.01%, averaging 7.79% as of December 31, 2008, maturing
from 2015 to 2022(c)
540
576
Slot financing, fixed interest rate of 8.08%, interest only
payments until due in 2015(d)
47
47
Capital lease obligations, interest rate of 8%, installments due
through 2021(e)
39
41
Senior secured discount notes, variable interest rate of 5.34%,
due in 2009(f)
32
32
Capital lease obligations, computer software
—
1
3,516
3,099
Unsecured
Barclays prepaid miles, variable interest rate of 5.19%,
interest only payments(g)
200
—
Airbus advance, repayments beginning in 2010 through 2018(h)
207
—
7% senior convertible notes, interest only payments until
due in 2020(i)
74
74
Engine maintenance notes(j)
72
57
Industrial development bonds, fixed interest rate of 6.3%,
interest only payments until due in 2023(k)
29
29
Note payable to Pension Benefit Guaranty Corporation, fixed
interest rate of 6%, interest only payments until due in 2012(l)
10
10
Other notes payable, due in 2009
45
—
637
170
Total long-term debt and capital lease obligations
4,153
3,269
Less: Total unamortized discount on debt
(157
)
(121
)
Current maturities, less $10 million of unamortized
discount on debt at December 31, 2008
(362
)
(117
)
Long-term debt and capital lease obligations, net of current
maturities
$
3,634
$
3,031
(a)
On March 23, 2007, US Airways Group entered into a term
loan credit facility with Citicorp North America, Inc., as
administrative agent, and a syndicate of lenders pursuant to
which the Company borrowed an aggregate
Notes to
Consolidated Financial
Statements — (Continued)
principal amount of $1.6 billion. US Airways, AWA and
certain other subsidiaries of the Company are guarantors of the
Citicorp credit facility.
The Citicorp credit facility bears interest at an index rate
plus an applicable index margin or, at the Company’s
option, LIBOR plus an applicable LIBOR margin for interest
periods of one, two, three or six months. The applicable index
margin, subject to adjustment, is 1.00%, 1.25% or 1.50% if the
adjusted loan balance is less than $600 million, between
$600 million and $1 billion, or between
$1 billion and $1.6 billion, respectively. The
applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25%
or 2.50% if the adjusted loan balance is less than
$600 million, between $600 million and
$1 billion, or between $1 billion and
$1.6 billion, respectively. In addition, interest on the
Citicorp credit facility may be adjusted based on the credit
rating for the Citicorp credit facility as follows: (i) if
the credit ratings of the Citicorp credit facility by
Moody’s and S&P in effect as of the last day of the
most recently ended fiscal quarter are both at least one
subgrade better than the credit ratings in effect on
March 23, 2007, then (A) the applicable LIBOR margin
will be the lower of 2.25% and the rate otherwise applicable
based upon the adjusted Citicorp credit facility balance and
(B) the applicable index margin will be the lower of 1.25%
and the rate otherwise applicable based upon the Citicorp credit
facility principal balance, and (ii) if the credit ratings
of the Citicorp credit facility by Moody’s and S&P in
effect as of the last day of the most recently ended fiscal
quarter are both at least two subgrades better than the credit
ratings in effect on March 23, 2007, then (A) the
applicable LIBOR margin will be 2.00% and (B) the
applicable index margin will be 1.00%. As of December 31,2008, the interest rate on the Citicorp credit facility was
2.97% based on a 2.50% LIBOR margin.
The Citicorp credit facility matures on March 23, 2014, and
is repayable in seven annual installments with each of the first
six installments to be paid on each anniversary of the closing
date in an amount equal to 1% of the initial aggregate principal
amount of the loan and the final installment to be paid on the
maturity date in the amount of the full remaining balance of the
loan.
In addition, the Citicorp credit facility requires certain
mandatory prepayments upon the occurrence of certain events,
establishes certain financial covenants, including minimum cash
requirements and maintenance of certain minimum ratios, contains
customary affirmative covenants and negative covenants and
contains customary events of default. Prior to the amendment
discussed below, the Citicorp credit facility required the
Company to maintain consolidated unrestricted cash and cash
equivalents of not less than $1.25 billion, with not less
than $750 million (subject to partial reductions upon
certain reductions in the outstanding principal amount of the
loan) of that amount held in accounts subject to control
agreements, which would become restricted for use by the Company
if certain adverse events occur per the terms of the agreement.
On October 20, 2008, US Airways Group entered into an
amendment to the Citicorp credit facility. Pursuant to the
amendment, the Company repaid $400 million of indebtedness
under the credit facility, reducing the principal amount
outstanding under the credit facility to approximately
$1.18 billion as of December 31, 2008. The Citicorp
credit facility amendment also provides for a reduction in the
amount of unrestricted cash required to be held by the Company
from $1.25 billion to $850 million, and the Company
may, prior to September 30, 2009, further reduce that
minimum requirement to a minimum of $750 million on a
dollar-for-dollar basis for any additional repayments of up to
$100 million of indebtedness under the credit facility. The
Citicorp credit facility amendment also provides that the
Company may sell, finance or otherwise pledge assets that were
pledged as collateral under the credit facility, so long as the
Company prepays the indebtedness under the credit facility in an
amount equal to 75% of the appraised value of the collateral
sold or financed or assigned or 75% of the collateral value of
eligible accounts (determined in accordance with the credit
facility) sold or financed in such transaction. In addition, the
Citicorp credit facility amendment provides that the Company may
issue debt in the future with a silent second lien on the assets
pledged as collateral under the Citicorp credit facility.
(b)
The following are the significant secured financing agreements
entered into in 2008:
On February 1, 2008, US Airways entered into a loan
agreement for $145 million, secured by six Bombardier
CRJ-700 aircraft, three Boeing 757 aircraft and one spare
engine. The loan bears interest at a rate of LIBOR
Notes to
Consolidated Financial
Statements — (Continued)
plus an applicable margin and is amortized over ten years. The
proceeds of the loan were used to repay $97 million of the
equipment notes previously secured by the six Bombardier CRJ-700
aircraft and three Boeing 757 aircraft.
On February 29, 2008, US Airways entered into a credit
facility agreement for $88 million to finance certain
pre-delivery payments required by US Airways’ purchase
agreements with Airbus. As of December 31, 2008, the
outstanding balance of this credit facility agreement is
$73 million. The remaining amounts under this facility will
be drawn as pre-delivery payments come due. The loan bears
interest at a rate of LIBOR plus an applicable margin and is
repaid as the related aircraft are delivered with a final
maturity date of the loan in November 2010.
In the second quarter of 2008, US Airways entered into facility
agreements with three lenders in the amounts of
$199 million, $198 million, and $119 million to
finance the acquisition of certain Airbus A320 family aircraft
deliveries starting in the second half of 2008. The loans bear
interest at a rate of LIBOR plus an applicable margin, contain
default and other covenants that are typical in the industry for
similar financings, and are amortized over twelve years with
balloon payments at maturity.
On October 20, 2008, US Airways entered into a
$270 million spare parts loan agreement and an
$85 million engines loan agreement. The proceeds of the
term loans made under these loan agreements were used to repay a
portion of the outstanding indebtedness pursuant to the Citicorp
credit facility amendment discussed in (a) above.
US Airways’ obligations under the spare parts loan
agreement are secured by a first priority security interest in
substantially all of US Airways’ rotable, repairable and
expendable aircraft spare parts. The obligations under the
engines loan agreement are secured by a first priority security
interest in 36 of US Airways’ aircraft engines. US Airways
has also agreed that other obligations owed by it or its
affiliates to the administrative agent for the loan agreements
or its affiliates (including the loans under these loan
agreements held by such administrative agent or its affiliates)
will be secured on a second priority basis by the collateral for
both loan agreements and certain other engines and aircraft.
The term loans under these loan agreements will bear interest at
a rate equal to LIBOR plus a margin per annum, subject to
adjustment in certain circumstances.
These loan agreements contain customary representations and
warranties, events of default and covenants for financings of
this nature, including obligations to maintain compliance with
covenants tied to the appraised value of US Airways’ spare
parts and the appraised value and maintenance condition of US
Airways’ engines, respectively.
The spare parts loan agreement matures on the sixth anniversary
of the closing date, and is subject to quarterly amortization in
amounts ranging from $8 million to $15 million. The
spare parts loan agreement may not be voluntarily prepaid during
the first three years of the term; however, the loan agreement
provided that in certain circumstances US Airways could prepay
$100 million of the loans under the agreement. The engines
loan agreement, which may not be voluntarily prepaid prior to
the third anniversary of the closing date, matures on the sixth
anniversary of the closing date, and is subject to amortization
in 24 equal quarterly installments.
On December 5, 2008, US Airways prepaid $100 million
of principal outstanding under the spare parts loan agreement.
In connection with this prepayment and pursuant to an amendment
to the spare parts loan agreement, subject to certain
conditions, US Airways obtained the right to incur up to
$100 million in new loans. The right to incur new loans
expires on April 1, 2009.
(c)
The equipment notes underlying the EETCs are the direct
obligations of US Airways and cover the financing of 19
aircraft. See Note 9(c) for further discussion.
(d)
In September 2005, US Airways entered into an agreement with
Republic to sell and leaseback certain of its commuter slots at
Ronald Reagan Washington National Airport and New York LaGuardia
Airport. US Airways continues to hold the right to repurchase
the slots anytime after the second anniversary of the slot
sale-leaseback
Notes to
Consolidated Financial
Statements — (Continued)
transaction. These transactions were accounted for as secured
financings. Installments are due monthly through 2015. In
December 2006, Republic and US Airways modified terms of the
agreement to conform to subsequent regulatory changes at
LaGuardia, and the LaGuardia slots were returned to US Airways.
The need for a subsequent modification was fully contemplated in
the original agreement.
(e)
Capital lease obligations consist principally of certain airport
maintenance and facility leases which expire in 2018 and 2021.
(f)
On December 27, 2004, AWA raised additional capital by
financing its Phoenix maintenance facility and flight training
center. The flight training center was previously unencumbered,
and the maintenance facility became unencumbered earlier in 2004
when AWA refinanced its term loan. Using its leasehold interest
in these two facilities as collateral, AWA, through a wholly
owned subsidiary named FTCHP LLC, raised $31 million
through the issuance of senior secured discount notes. The notes
were issued by FTCHP at a discount pursuant to the terms of a
senior secured term loan agreement among AWA, FTCHP, Heritage
Bank SSB, as administrative agent, Citibank, N.A., as the
initial lender, and the other lenders from time to time party
thereto. Citibank, N.A. subsequently assigned all of its
interests in the notes to third party lenders.
AWA fully and unconditionally guaranteed the payment and
performance of FTCHP’s obligations under the notes and the
loan agreement. The notes require aggregate principal payments
of $36 million with principal payments of $2 million
due on each of the first two anniversary dates and the remaining
principal amount due on the fifth anniversary date. The notes
may be prepaid in full at any time (subject to customary LIBOR
breakage costs) and in partial amounts of $2 million on the
third and fourth anniversary dates. The unpaid principal amount
of the notes bears interest based on LIBOR plus a margin subject
to adjustment based on a loan to collateral value ratio.
The loan agreement contains customary covenants applicable to
loans of this type, including obligations relating to the
preservation of the collateral and restrictions on the
activities of FTCHP. In addition, the loan agreement contains
events of default, including payment defaults, cross-defaults to
other debt of FTCHP, if any, breach of covenants, bankruptcy and
insolvency defaults and judgment defaults.
In connection with this financing, AWA sold all of its leasehold
interests in the maintenance facility and flight training center
to FTCHP and entered into subleases for the facilities with
FTCHP at lease rates expected to approximate the interest
payments due under the notes. In addition, AWA agreed to make
future capital contributions to FTCHP in amounts sufficient to
cover principal payments and other amounts owing pursuant to the
notes and the loan agreement. As part of the transfer of
substantially all of AWA’s assets and liabilities to US
Airways in connection with the combination of all mainline
airline operations under one FAA operating certificate on
September 26, 2007, AWA assigned its subleases for the
facilities with FTCHP to US Airways. In addition, US Airways
assumed all of the obligations of AWA in connection with the
financing and joined the guarantee of the payment and
performance of FTCHP’s obligations under the notes and the
loan agreement.
(g)
Effective as of October 20, 2008, US Airways Group entered
into an amendment to its co-branded credit card agreement with
Barclays Bank Delaware. The amendment provides for, among other
things, the pre-purchase of frequent flyer miles in an amount
totaling $200 million, which amount was paid by Barclays in
October 2008. The amendment also provides that so long as any
pre-purchased miles are outstanding, the Company will pay
interest to Barclays on the outstanding dollar amount of the
pre-purchased miles at the rate of LIBOR plus a margin. This
transaction was treated as a financing transaction for
accounting purposes using an effective interest rate
commensurate with the Company’s credit rating.
The amendment to the co-branded credit card agreement provides
that Barclays will compensate us for fees earned using
pre-purchased miles. In addition, the amendment provides that
for each month that certain conditions are met, Barclays will
pre-purchase additional miles on a monthly basis in an amount
equal to the difference between $200 million and the amount
of unused miles then outstanding. The conditions include a
requirement that the Company maintains an unrestricted cash
balance, subject to certain circumstances, of at least
$1.5 billion each month, which was reduced to
$1.4 billion for January 2009 and $1.45 billion for
Notes to
Consolidated Financial
Statements — (Continued)
February 2009, with the unrestricted cash balance in all cases
including certain fuel hedge collateral. The reductions
addressed the impact on the Company’s unrestricted cash of
its obligations to post significant amounts of collateral with
its fuel hedging counterparties due to recent rapid declines in
fuel prices.
Prior to the second anniversary of the date of the amendment,
the $200 million cap on Barclays’ pre-purchase
obligation may be reduced if certain conditions are not met.
Commencing on that second anniversary, the $200 million cap
will be reduced over a period of approximately two years until
such time as no pre-purchased miles remain; however, the time of
reduction of the cap may be accelerated if certain conditions
are not met. The Company may repurchase any or all of the
pre-purchased miles at any time, from time to time, without
penalty.
Pursuant to the amendment to the co-branded credit card
agreement, the expiration date of the agreement was extended to
2017.
(h)
On October 20, 2008, US Airways and Airbus entered into
amendments to the A320 Family Aircraft Purchase Agreement, the
A330 Aircraft Purchase Agreement, and the A350 XWB Purchase
Agreement. In exchange for US Airways’ agreement to enter
into these amendments, Airbus advanced US Airways
$200 million in consideration of aircraft deliveries under
the various related purchase agreements. Under the terms of each
of the amendments, US Airways has agreed to maintain a level of
unrestricted cash in the same amount required by the Citicorp
credit facility. This transaction was treated as a financing
transaction for accounting purposes using an effective interest
rate commensurate with US Airways’ credit rating. There are
no stated interest payments.
(i)
On September 30, 2005, US Airways Group issued
$144 million aggregate principal amount of 7% Senior
Convertible Notes due 2020 (the “7% Senior Convertible
Notes”) for proceeds, net of expenses, of approximately
$139 million. The 7% Senior Convertible Notes are US
Airways Group’s senior unsecured obligations and rank
equally in right of payment to its other senior unsecured and
unsubordinated indebtedness and are effectively subordinated to
its secured indebtedness to the extent of the value of assets
securing such indebtedness. The 7% Senior Convertible Notes
are fully and unconditionally guaranteed, jointly and severally
and on a senior subordinated basis, by US Airways and AWA. The
guarantees are the guarantors’ unsecured obligations and
rank equally in right of payment to the other senior unsecured
and unsubordinated indebtedness of the guarantors and are
effectively subordinated to the guarantors’ secured
indebtedness to the extent of the value of assets securing such
indebtedness.
The 7% Senior Convertible Notes bear interest at the rate
of 7% per year payable in cash semiannually in arrears on March
30 and September 30 of each year, beginning March 30, 2006.
The 7% Senior Convertible Notes mature on
September 30, 2020.
Holders may convert, at any time on or prior to maturity or
redemption, any outstanding notes (or portions thereof) into
shares of US Airways Group’s common stock, initially at a
conversion rate of 41.4508 shares of US Airways
Group’s common stock per $1,000 principal amount of notes
(equivalent to an initial conversion price of approximately
$24.12 per share of US Airways Group’s common stock). If a
holder elects to convert its notes in connection with certain
specified fundamental changes that occur prior to
October 5, 2015, the holder will be entitled to receive
additional shares of US Airways Group’s common stock as a
make whole premium upon conversion. In lieu of delivery of
shares of US Airways Group’s common stock upon conversion
of all or any portion of the notes, US Airways Group may elect
to pay holders surrendering notes for conversion, cash or a
combination of shares and cash.
Holders may require US Airways Group to purchase for cash or
shares or a combination thereof, at US Airways Group’s
election, all or a portion of their 7% Senior Convertible
Notes on September 30, 2010 and September 30, 2015 at
a purchase price equal to 100% of the principal amount of the
7% Senior Convertible Notes to be repurchased plus accrued
and unpaid interest, if any, to the purchase date. In addition,
if US Airways Group experiences a specified fundamental change,
holders may require US Airways Group to purchase for cash,
shares or a combination thereof, at its election, all or a
portion of their 7% Senior Convertible Notes, subject to
specified exceptions, at a price equal to 100% of the principal
amount of the
Notes to
Consolidated Financial
Statements — (Continued)
7% Senior Convertible Notes plus accrued and unpaid
interest, if any, to the purchase date. Prior to October 5,2010, the 7% Senior Convertible Notes will not be
redeemable at US Airways Group’s option. US Airways Group
may redeem all or a portion of the 7% Senior Convertible
Notes at any time on or after October 5, 2010, at a price
equal to 100% of the principal amount of the 7% Senior
Convertible Notes plus accrued and unpaid interest, if any, to
the redemption date if the closing price of US Airways
Group’s common stock has exceeded 115% of the conversion
price for at least 20 trading days in the 30 consecutive trading
day period ending on the trading day before the date on which US
Airways Group mails the optional redemption notice.
In 2006, $70 million of the $144 million outstanding
principal amount was converted into 2,909,636 shares of
common stock. In connection with the conversion, the Company
paid a premium of $17 million to the holders of the
converted notes, which was recorded in other nonoperating
expenses.
(j)
In December 2004, deferred charges under US Airways’
maintenance agreements with GE Engine Services, Inc. were
converted into an unsecured term note. Interest on the note
accrues at LIBOR plus 4%, and became payable beginning in
January 2008, with principal and interest payments due in
48 monthly installments through 2011. The outstanding
balance on the note at December 31, 2008 was
$39 million at an interest rate of 6.6%.
In October 2008, US Airways entered into a promissory note with
GE Engine Services, Inc. pursuant to which maintenance payments
up to $40 million due from October 2008 through March 2009
under US Airways’ Engine Service Agreement are deferred.
Interest on the note accrues at 14%, and becomes payable
beginning in April 2009, at which time principal and interest
payments are due in 12 monthly installments. The deferred
balance on the note at December 31, 2008 was
$33 million.
(k)
The industrial development revenue bonds are due April 2023.
Interest at 6.3% is payable semiannually on April 1 and
October 1. The bonds are subject to optional redemption
prior to the maturity date on or after April 1, 2008, in
whole or in part, on any interest payment date at the following
redemption prices: 102% on April 1 or October 1, 2008; 101%
on April 1 or October 1, 2009; and 100% on April 1,2010 and thereafter.
(l)
In connection with US Airways Group’s emergence from
bankruptcy in September 2005, it reached a settlement with the
Pension Benefit Guaranty Corporation (“PBGC”) related
to the termination of three of its defined benefit pension
plans. The settlement included the issuance of a
$10 million note which matures in 2012 and bears interest
at 6% payable annually in arrears.
Secured financings are collateralized by assets, primarily
aircraft, engines, simulators, rotable aircraft parts and hangar
and maintenance facilities. At December 31, 2008, the
estimated maturities of long-term debt and capital leases are as
follows (in millions):
2009
$
372
2010
254
2011
373
2012
345
2013
208
Thereafter
2,601
$
4,153
Certain of the Company’s long-term debt agreements contain
minimum cash balance requirements and other covenants with which
the Company was in compliance at December 31, 2008. Certain
of the Company’s long-term debt agreements contain
cross-default provisions, which may be triggered by defaults by
US Airways or US Airways Group under other agreements relating
to indebtedness.
Notes to
Consolidated Financial
Statements — (Continued)
5.
Income
taxes
The Company accounts for income taxes using the asset and
liability method. The Company files a consolidated federal
income tax return with its wholly owned subsidiaries. The
Company and its wholly owned subsidiaries allocate tax and tax
items, such as net operating losses (“NOL”) and net
tax credits, between members of the group based on their
proportion of taxable income and other items. Accordingly, the
Company’s tax expense is based on taxable income, taking
into consideration allocated tax loss carryforwards/carrybacks
and tax credit carryforwards.
The Company reported a loss for 2008, which increased its NOL,
and has not recorded a tax provision for 2008. As of
December 31, 2008, the Company has approximately
$1.49 billion of gross NOL to reduce future federal
taxable income. Of this amount, approximately $1.44 billion
is available to reduce federal taxable income in the calendar
year 2009. The NOL expires during the years 2022 through 2028.
The Company’s deferred tax asset, which includes
$1.41 billion of the NOL discussed above, has been subject
to a full valuation allowance. The Company also has
approximately $77 million of tax-effected state NOL as of
December 31, 2008.
In assessing the realizability of the deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The Company has recorded a valuation allowance against its net
deferred tax asset. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income
(including reversals of deferred tax liabilities) during the
periods in which those temporary differences will become
deductible.
At December 31, 2008, the federal valuation allowance is
$568 million, all of which will reduce future tax expense
when recognized. The state valuation allowance is
$82 million, of which $58 million was established
through the recognition of tax expense. The remaining
$24 million was established in purchase accounting.
Effective January 1, 2009, the Company adopted
SFAS No. 141R. In accordance with
SFAS No. 141R, all future decreases in the valuation
allowance established in purchase accounting will be recognized
as a reduction of tax expense. In addition, the Company has
$23 million and $2 million, respectively, of
unrealized federal and state tax benefit related to amounts
recorded in other comprehensive income.
Throughout 2006 and 2007, the Company utilized NOL that was
generated by US Airways prior to the merger. Utilization of the
NOL results in a corresponding decrease in the valuation
allowance. As this valuation allowance was established through
the recognition of tax expense, the decrease in valuation
allowance offsets the Company’s tax provision dollar for
dollar. The Company recognized $7 million and
$85 million of non-cash tax expense for the years ended
December 31, 2007 and 2006, respectively, as the Company
utilized NOL that was generated by US Airways prior to the
merger. As this was acquired NOL, the decrease in the valuation
allowance associated with this NOL reduced goodwill instead of
the provision for income taxes.
The Company is subject to Alternative Minimum Tax liability
(“AMT”). In most cases, the recognition of AMT does
not result in tax expense. However, since the Company’s net
deferred tax asset is subject to a full valuation allowance, any
liability for AMT is recorded as tax expense. The Company
recorded AMT expense of $1 million and $10 million for
the years ended December 31, 2007 and 2006, respectively.
The Company also recorded $1 million and $2 million of
state income tax related to certain states where NOL was not
available or limited, for the years ended December 31, 2007
and 2006, respectively.
Notes to
Consolidated Financial
Statements — (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
as of December 31, 2008 and 2007 are as follows (in
millions):
2008
2007
Deferred tax assets:
Net operating loss carryforwards
$
546
$
282
Property, plant and equipment
22
22
Investments
95
19
Financing transactions
25
18
Employee benefits
352
347
Dividend Miles awards
144
153
AMT credit carryforward
38
38
Other deferred tax assets
199
16
Valuation allowance
(650
)
(77
)
Net deferred tax assets
771
818
Deferred tax liabilities:
Depreciation and amortization
563
519
Sale and leaseback transactions and deferred rent
144
146
Leasing transactions
47
59
Long-lived intangibles
31
31
Other deferred tax liabilities
5
84
Total deferred tax liabilities
790
839
Net deferred tax liabilities
19
21
Less: current deferred tax liabilities
—
—
Non-current deferred tax liabilities
$
19
$
21
The reason for significant differences between taxable and
pretax book income primarily relates to depreciation on fixed
assets, employee pension and postretirement benefit costs,
employee-related accruals and leasing transactions.
The Company files tax returns in the U.S. federal
jurisdiction, and in various states and foreign jurisdictions.
All federal and state tax filings for US Airways Group and its
subsidiaries for fiscal years through December 31, 2007
have been timely filed. There are currently no federal audits
and one state audit in process. The Company’s federal
income tax year 2004 was closed by operation of the statute of
limitations expiring, and there were no extensions filed. The
Company is not currently under IRS examination. The Company
files tax returns in 44 states, and its major state tax
jurisdictions are Arizona, California, Pennsylvania and North
Carolina. Tax years up to 2003 for these state tax jurisdictions
are closed by operation of the statute of limitations expiring,
and there were no extensions filed.
The Company believes that its income tax filing positions and
deductions related to tax periods subject to examination will be
sustained upon audit and does not anticipate any adjustments
that will result in a material adverse effect on the
Company’s financial condition, results of operations, or
cash flow. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to FIN 48,
“Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.”
Notes to
Consolidated Financial
Statements — (Continued)
6.
Risk
management and financial instruments
The Company operates in an industry whose economic prospects are
heavily dependent upon two variables it cannot control: the
health of the economy and the price of fuel. Due to the
discretionary nature of business and leisure travel spending,
airline industry revenues are heavily influenced by the
condition of the U.S. economy and the economies in other
regions of the world. Unfavorable economic conditions may result
in decreased passenger demand for air travel, which in turn
could have a negative effect on the Company’s revenues.
Similarly, the airline industry may not be able to sufficiently
raise ticket prices to offset increases in aviation jet fuel
prices. These factors could impact the Company’s results of
operations, financial performance and liquidity.
(a)
Fuel
Price Risk
Because the Company’s operations are dependent upon
aviation fuel, significant increases in aviation fuel costs
materially and adversely affect its liquidity, results of
operations and financial condition. To manage the risk of
changes in aviation fuel prices, the Company periodically enters
into derivative contracts comprised of heating oil-based
derivative instruments to hedge a portion of its projected jet
fuel requirements. As of December 31, 2008, the Company had
entered into no premium collars to hedge approximately 14% of
its projected mainline and Express 2009 jet fuel requirements at
a weighted average collar range of $3.41 to $3.61 per gallon of
heating oil or $131.15 to $139.55 per barrel of estimated crude
oil equivalent.
The fair value of the Company’s fuel hedging derivative
instruments at December 31, 2008 was a liability of
$375 million recorded in accounts payable. The fair value
of the Company’s fuel hedging derivative instruments at
December 31, 2007 was an asset of $121 million
recorded in prepaid expenses and other. Refer to Note 7 for
discussion on how the Company determines the fair value of its
fuel hedging derivative instruments. The net change in the fair
value from an asset of $121 million to a liability of
$375 million represents the unrealized loss of
$496 million for 2008. The unrealized loss was due to the
significant decline in the price of oil in the latter part of
2008. The following table details the Company’s loss (gain)
on fuel hedging instruments, net (in millions):
When the Company’s fuel hedging derivative instruments are
in a net asset position, the Company is exposed to credit losses
in the event of non-performance by counterparties to its fuel
hedging derivatives. The amount of such credit exposure is
limited to the unrealized gains, if any, on the Company’s
fuel hedging derivatives. To manage credit risks, the Company
carefully selects counterparties, conducts transactions with
multiple counterparties which limits its exposure to any single
counterparty, and monitors the market position of the program
and its relative market position with each counterparty. The
Company also maintains industry-standard security agreements
with all of its counterparties which may require the
counterparty to post collateral if the value of the fuel hedging
derivatives exceeds specified thresholds related to the
counterparty’s credit ratings.
When the Company’s fuel hedging derivative instruments are
in a net liability position, the Company is exposed to credit
risks related to the return of collateral in situations in which
the Company has posted collateral with counterparties for
unrealized losses. When possible, in order to mitigate this
risk, the Company provides letters
Notes to
Consolidated Financial
Statements — (Continued)
of credit to certain counterparties in lieu of cash. At
December 31, 2008, $185 million related to letters of
credit collateralizing certain counterparties to the
Company’s fuel hedging transactions is included in
short-term restricted cash. In addition, at December 31,2008, the Company had $276 million in cash deposits held by
counterparties to its fuel hedging transactions. Since the third
quarter of 2008, the Company has not entered into any new
transactions as part of its fuel hedging program due to the
impact collateral requirements could have on its liquidity
resulting from the significant decline in the price of oil and
counterparty credit risk arising from global economic
uncertainty.
Further declines in heating oil prices would result in
additional collateral requirements with the Company’s
counterparties, unrealized losses on its existing fuel hedging
derivative instruments and realized losses at the time of
settlement of these fuel hedging derivative instruments.
Cash,
Cash Equivalents and Investments in Marketable
Securities
The Company invests available cash in money market securities
and highly liquid debt instruments.
As of December 31, 2008, the Company held auction rate
securities totaling $411 million at par value, which are
classified as available for sale securities and noncurrent
assets on the Company’s consolidated balance sheets.
Contractual maturities for these auction rate securities range
from eight to 44 years, with 62% of the Company’s
portfolio maturing within the next ten years, 10% maturing
within the next 20 years, 16% maturing within the next
30 years and 12% maturing thereafter through 2052. The
interest rates are reset approximately every 28 days,
except one security for which the auction process is currently
suspended. Current yields range from 1.76% to 6.08%. With the
liquidity issues experienced in the global credit and capital
markets, all of the Company’s auction rate securities have
experienced failed auctions since August 2007. The estimated
fair value of these auction rate securities no longer
approximates par value. However, the Company has not experienced
any defaults and continues to earn and receive interest at the
maximum contractual rates. See Note 7 for discussion on how
the Company determines the fair value of its investments in
auction rate securities.
At December 31, 2007, the $411 million par value
auction rate securities had a fair value of $353 million, a
$58 million decline from par. Of this decline in fair
value, $48 million was deemed temporary and an unrealized
loss in this amount was recorded to other comprehensive income.
The Company concluded $10 million of the decline was an
other than temporary impairment as a single security with
subprime exposure experienced a severe decline in fair value
during the period. Accordingly, the $10 million impairment
charge was recorded to other nonoperating expense, net in the
fourth quarter of 2007.
At December 31, 2008, the fair value of the Company’s
auction rate securities was $187 million, representing a
decline in fair value of $166 million from
December 31, 2007. The decline in fair value was caused by
the significant deterioration in the financial markets in 2008.
The Company concluded that the 2008 decline in fair value of
$166 million as well as the previously deemed temporary
declines recorded to other comprehensive income of
$48 million were now other than temporary. The
Company’s conclusion for the other than temporary
impairment was due to the length of time and extent to which the
fair value has been less than cost for certain securities. All
of these securities have experienced failed auctions for a
period greater than one year, and there has been no recovery in
their fair value. Accordingly, the Company recorded
$214 million in impairment charges in other nonoperating
expense, net related to the other than temporary impairment of
its auction rate securities. The Company continues to monitor
the market for auction rate securities and consider its impact
(if any) on the fair value of its investments. If the current
market conditions deteriorate further, the Company may be
required to record additional impairment charges in other
nonoperating expense, net in future periods.
Accounts
Receivable
As of December 31, 2008, most of the Company’s
receivables related to tickets sold to individual passengers
through the use of major credit cards or to tickets sold by
other airlines and used by passengers on US Airways or its
Notes to
Consolidated Financial
Statements — (Continued)
regional airline affiliates. These receivables are short-term,
mostly being settled within seven days after sale. Bad debt
losses, which have been minimal in the past, have been
considered in establishing allowances for doubtful accounts. The
Company does not believe it is subject to any significant
concentration of credit risk.
(c)
Interest
Rate Risk
The Company has exposure to market risk associated with changes
in interest rates related primarily to its variable rate debt
obligations. Interest rates on $2.8 billion principal
amount of long-term debt as of December 31, 2008 are
subject to adjustment to reflect changes in floating interest
rates. The weighted average effective interest rate on the
Company’s variable rate debt was 4.33% at December 31,2008.
The fair value of the Company’s long-term debt was
approximately $3.31 billion and $3.23 billion at
December 31, 2008 and 2007, 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.
7.
Fair
value measurements
As described in Note 1(s), the Company adopted
SFAS No. 157 on January 1, 2008.
SFAS No. 157, among other things, defines fair value,
establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category
measured at fair value on either a recurring or nonrecurring
basis. SFAS No. 157 clarifies that fair value is an
exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions,
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
Level 1.
Observable inputs such as quoted prices in active markets;
Level 2.
Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level 3.
Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
Assets measured at fair value on a recurring basis are as
follows (in millions):
Quoted Prices in
Significant Other
Significant
Fair Value
Active Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
Valuation
2008
(Level 1)
(Level 2)
(Level 3)
Technique
Investments in marketable securities (noncurrent)
$
187
$
—
$
—
$
187
(1
)
Fuel hedging derivatives
(375
)
—
(375
)
—
(2
)
(1)
The Company estimated the fair value of these auction rate
securities based on the following: (i) the underlying
structure of each security; (ii) the present value of
future principal and interest payments discounted at rates
considered to reflect current market conditions;
(iii) consideration of the probabilities of default,
passing a future auction, or repurchase at par for each period;
and (iv) estimates of the recovery rates in the event of
default for each security. These estimated fair values could
change significantly based on future market conditions. Refer to
Note 6(b) for further discussion of the Company’s
investments in marketable securities.
Notes to
Consolidated Financial
Statements — (Continued)
(2)
Since the Company’s fuel hedging derivative instruments are
not traded on a market exchange, the fair values are determined
using valuation models which include assumptions about commodity
prices based on those observed in the underlying markets. The
fair value of fuel hedging derivatives is recorded in accounts
payable on the consolidated balance sheets. Refer to
Note 6(a) for further discussion of the Company’s fuel
hedging derivatives.
Assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) are as
follows (in millions):
Notes to
Consolidated Financial
Statements — (Continued)
8.
Employee
pension and benefit plans
Substantially all of the Company’s employees meeting
certain service and other requirements are eligible to
participate in various pension, medical, dental, life insurance,
disability and survivorship plans.
(a)
Defined
Benefit and Other Postretirement Benefit Plans
The following table sets forth changes in the fair value of plan
assets, benefit obligations and the funded status of the plans
and the amounts recognized in the Company’s consolidated
balance sheets as of December 31, 2008 and 2007 (in
millions).
Liability recognized in consolidated balance sheet
$
(26
)
$
(4
)
$
(122
)
$
(157
)
Net actuarial loss (gain) recognized in accumulated other
comprehensive income
$
15
$
(9
)
$
(80
)
$
(49
)
(1)
The Company maintains two defined benefit pension plans
sponsored by Piedmont. Piedmont closed one plan to new
participants in 2002 and froze the accrued benefits for the
other plan for all participants in 2003. The aggregate
accumulated benefit obligations, projected benefit obligations
and plan assets were $54 million, $59 million and
$33 million, as of December 31, 2008 and
$46 million, $50 million and $46 million, as of
December 31, 2007, respectively.
Notes to
Consolidated Financial
Statements — (Continued)
(2)
For the year ended December 31, 2007, the Company
recognized a $5 million curtailment gain related to the
elimination of a social security supplemental benefit as a
result of the federally mandated change in the pilot retirement
age from age 60 to 65.
Defined benefit plans are measured as of December 31, 2008
and 2007. As described in Note 1(s), the Company adopted
the measurement provisions of SFAS No. 158 on
January 1, 2008. The change in the Company’s other
postretirement benefit obligation reflects a $4 million
reduction for the adoption of SFAS No. 158 which
includes $6 million of benefit payments, offset by
$2 million of net periodic benefit costs for the period
between the measurement date utilized in 2007,
September 30, and the beginning of 2008. The
$2 million of net periodic benefit costs was recorded as an
adjustment to accumulated deficit.
The following table presents the weighted average assumptions
used to determine benefit obligations:
As of December 31, 2008 and 2007, the Company discounted
its pension obligations based on the current rates earned on
high quality Aa rated long-term bonds.
The Company assumed discount rates for measuring its other
postretirement benefit obligations, based on a hypothetical
portfolio of high quality publicly traded U.S. bonds (Aa
rated, non-callable or callable with make-whole provisions), for
which the timing and cash outflows approximate the estimated
benefit payments of the other postretirement benefit plans.
As of December 31, 2008, the assumed health care cost trend
rates are 9% in 2009 and 8% in 2010, decreasing to 5.5% in 2015
and thereafter. As of September 30, 2007, the assumed
health care cost trend rates are 10% in 2008 and 9% in 2009,
decreasing to 5.5% in 2013 and thereafter. The assumed health
care cost trend rates could have a significant effect on amounts
reported for retiree health care plans. A one-percentage point
change in the health care cost trend rates would have the
following effects on other postretirement benefits as of
December 31, 2008 (in millions):
1% Increase
1% Decrease
Effect on total service and interest costs
$
1
$
(1
)
Effect on postretirement benefit obligation
6
(5
)
Weighted average assumptions used to determine net periodic
benefit cost were as follows:
In 2009, the Company expects to contribute $14 million to
its other postretirement plans. No contributions are expected in
2009 for the Company’s defined benefit plans. The following
benefits, which reflect expected future service, as appropriate,
are expected to be paid from the defined benefit and other
postretirement plans (in millions):
Other
Postretirement
Defined Benefit
Benefits before
Pension Plans
Medicare Subsidy
Medicare Subsidy
2009
$
2
$
14
$
—
2010
2
12
—
2011
2
12
—
2012
2
11
—
2013
2
12
—
2014 to 2018
13
60
2
The Company assumed that its pension plans’ assets would
generate a long-term rate of return of 8% at December 31,2008. The expected long-term rate of return assumption was
developed by evaluating input from the plans’ investment
consultants, including their review of asset class return
expectations and long-term inflation assumptions.
The weighted average asset allocation as of December 31 by asset
category is as follows:
2008
2007
Equity securities
69
%
69
%
Debt securities
30
30
Other
1
1
Total
100
%
100
%
The Company’s targeted asset allocation as of
December 31, 2008 is approximately 65% equity securities
and 35% debt securities. The Company believes that its long-term
asset allocation on average will approximate the targeted
allocation. The Company regularly reviews its actual asset
allocation and periodically rebalances its investments to its
targeted allocation when considered appropriate.
(b)
Defined
Contribution Plans
The Company sponsors several defined contribution plans which
cover a majority of its employee groups. The Company makes
contributions to these plans based on the individual plan
provisions, including an employer non-discretionary contribution
and an employer match. These contributions are generally made
based upon eligibility,
Notes to
Consolidated Financial
Statements — (Continued)
eligible earnings and employee group. Expenses related to these
plans were $96 million, $81 million and
$92 million for the years ended December 31, 2008,
2007, and 2006, respectively.
(c)
Postemployment
Benefits
The Company provides certain postemployment benefits to its
employees. These benefits include disability-related and
workers’ compensation benefits for certain employees. The
Company accrues for the cost of such benefit expenses once an
appropriate triggering event has occurred. In 2007, the Company
recorded a $99 million charge to increase long-term
disability obligations for US Airways’ pilots as a result
of a change in the FAA mandated retirement age for pilots from
60 to 65.
(d)
Profit
Sharing Plans
Most non-executive employees of US Airways are eligible to
participate in the 2005 Profit Sharing Plan, an annual bonus
program. Annual bonus awards are paid from a profit-sharing pool
equal to (i) ten percent of the annual profits of US
Airways Group (excluding unusual items) for pre-tax profit
margins up to ten percent, plus (ii) 15% of the annual
profits of US Airways Group (excluding unusual items) for
pre-tax profit margins greater than ten percent. Awards are paid
as a lump sum no later than March 15 after the end of each
fiscal year. The Company recorded no amounts in 2008 for profit
sharing as the Company had a net loss in 2008 excluding unusual
items and recorded $49 million and $59 million for
profit sharing in 2007 and 2006, respectively, which is recorded
in salaries and related costs.
9.
Commitments
and contingencies
(a)
Commitments
to Purchase Flight Equipment and Maintenance
Services
Aircraft
and Engine Purchase Commitments
During 2008, the Company took delivery of 14 Embraer 190
aircraft under its Amended and Restated Purchase Agreement with
Embraer, which it financed through an existing facility
agreement. As of December 31, 2008, the Company has no
remaining firm orders with Embraer. Under the terms of the
Amended and Restated Purchase Agreement, the Company has 32
additional Embraer 190 aircraft on order, which are conditional
and subject to its notification to Embraer. In 2008, the Company
amended the Amended and Restated Purchase Agreement to revise
the delivery schedule for these 32 additional Embraer 190
aircraft.
In 2007, US Airways and Airbus executed definitive purchase
agreements for the acquisition of 97 aircraft, including 60
single-aisle A320 family aircraft and 37 widebody aircraft
(comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft).
These were in addition to orders for 37 single-aisle A320 family
aircraft from a previous Airbus purchase agreement. In 2008, US
Airways and Airbus entered into Amendment No. 1 to the
Amended and Restated Airbus A320 Family Aircraft Purchase
Agreement. The amendment provides for the conversion of 13 A319
aircraft to A320 aircraft, one A319 aircraft to an A321 aircraft
and 11 A320 aircraft to A321 aircraft for deliveries during 2009
and 2010.
Deliveries of the A320 family aircraft commenced during 2008
with the delivery of five A321 aircraft, which were financed
through an existing facility agreement. Deliveries of the A320
family aircraft will continue in 2009 through 2012. Deliveries
of the A330-200 aircraft will begin in 2009. In 2008, US Airways
amended the terms of the A350 XWB Purchase Agreement for
deliveries of the 22 firm order A350 XWB aircraft to begin in
2015 rather than 2014 and extending through 2018.
In 2007, US Airways agreed to terms with an aircraft lessor to
lease two used A330-200 aircraft. In 2008, US Airways terminated
the two leases and did not take delivery of the two used
A330-200 aircraft. Related to this termination, US Airways
recorded a $2 million lease cancellation charge.
Notes to
Consolidated Financial
Statements — (Continued)
In 2008, US Airways executed purchase agreements for the
purchase of eight new IAE V2500-A5 spare engines scheduled for
delivery through 2014 for use on the Airbus A320 family fleet,
three new Trent 700 spare engines scheduled for delivery through
2011 for use on the Airbus A330-200 fleet and three new Trent
XWB spare engines scheduled for delivery in 2015 through 2017
for use on the Airbus A350 XWB aircraft.
Under all of the Company’s aircraft and engine purchase
agreements, the Company’s total future commitments as of
December 31, 2008 are expected to be approximately
$6.83 billion through 2018 as follows: $1.31 billion
in 2009, $1.34 billion in 2010, $1.29 billion in 2011,
$768 million in 2012, $36 million in 2013 and
$2.09 billion thereafter, which includes predelivery
deposits and payments. The Company expects to fund these
payments through future financings.
Engine
Maintenance Commitments
In connection with the merger, US Airways and AWA restructured
their rate per engine hour agreements with General Electric
Engine Services for overhaul maintenance services. Under the
restructured agreements, the minimum monthly payment on account
of accrued engine flight hours for both of the agreements
together will equal $3 million as long as both agreements
remain in effect through October 2009. In September 2007, all
engines covered under the AWA agreement were transferred to the
US Airways agreement, and the AWA agreement was terminated. The
minimum monthly payment of $3 million remains unchanged.
(b)
Leases
The Company leases certain aircraft, engines, and ground
equipment, in addition to the majority of its ground facilities
and terminal space. As of December 31, 2008, the Company
had 343 aircraft under operating leases, with remaining terms
ranging from one month to approximately 15 years. Ground
facilities include executive offices, maintenance facilities and
ticket and administrative offices. Public airports are utilized
for flight operations under lease arrangements with the
municipalities or agencies owning or controlling such airports.
Substantially all leases provide that the lessee must pay taxes,
maintenance, insurance and certain other operating expenses
applicable to the leased property. Some leases also include
renewal and purchase options.
As of December 31, 2008, obligations under noncancellable
operating leases for future minimum lease payments were as
follows (in millions):
2009
$
1,075
2010
976
2011
851
2012
770
2013
629
Thereafter
3,227
Total minimum lease payments
$
7,528
For the years ended December 31, 2008, 2007 and 2006,
rental expense under operating leases was $1.33 billion,
$1.29 billion and $1.29 billion, respectively.
(c)
Off-balance
Sheet Arrangements
US Airways has obligations with respect to pass through trust
certificates, or EETCs, issued by pass through trusts to cover
the financing of 19 owned aircraft, 116 leased aircraft and
three leased engines. These trusts are off-balance sheet
entities, the primary purpose of which is to finance the
acquisition of aircraft. Rather than finance each aircraft
separately when such aircraft is purchased or delivered, these
trusts allowed US Airways to raise the financing for several
aircraft at one time and place such funds in escrow pending the
purchase or delivery of the
Notes to
Consolidated Financial
Statements — (Continued)
relevant aircraft. The trusts were also structured to provide
for certain credit enhancements, such as liquidity facilities to
cover certain interest payments, that reduce the risks to the
purchasers of the trust certificates and, as a result, reduce
the cost of aircraft financing to US Airways.
Each trust covered a set amount of aircraft scheduled to be
delivered within a specific period of time. At the time of each
covered aircraft financing, the relevant trust used the funds in
escrow to purchase equipment notes relating to the financed
aircraft. The equipment notes were issued, at US Airways’
election in connection with a mortgage financing of the aircraft
or by a separate owner trust in connection with a leveraged
lease financing of the aircraft. In the case of a leveraged
lease financing, the owner trust then leased the aircraft to US
Airways. In both cases, the equipment notes are secured by a
security interest in the aircraft. The pass through trust
certificates are not direct obligations of, nor are they
guaranteed by, the Company or US Airways. However, in the case
of mortgage financings, the equipment notes issued to the trusts
are direct obligations of US Airways. As of December 31,2008, $540 million associated with these mortgage
financings is reflected as debt in the accompanying consolidated
balance sheet.
With respect to leveraged leases, US Airways evaluated whether
the leases had characteristics of a variable interest entity as
defined by FIN No. 46(R). US Airways concluded the
leasing entities met the criteria for variable interest
entities. US Airways then evaluated whether or not it was the
primary beneficiary by evaluating whether or not it was exposed
to the majority of the risks (expected losses) or whether it
receives the majority of the economic benefits (expected
residual returns) from the trusts’ activities. US Airways
does not provide residual value guarantees to the bondholders or
equity participants in the trusts. Each lease does have a fixed
price purchase option that allows US Airways to purchase the
aircraft near the end of the lease term. However, the option
price approximates an estimate of the aircraft’s fair value
at the option date. Under this feature, US Airways does not
participate in any increases in the value of the aircraft. US
Airways concluded it was not the primary beneficiary under these
arrangements. Therefore, US Airways accounts for its EETC
leverage lease financings as operating leases under the criteria
of SFAS No. 13, “Accounting for Leases.” US
Airways’ total obligations under these leveraged lease
financings are $3.57 billion as of December 31, 2008,
which are included in the future minimum lease payments table in
(b) above.
(d)
Regional
Jet Capacity Purchase Agreements
US Airways has entered into capacity purchase agreements with
certain regional jet operators. The capacity purchase agreements
provide that all revenues (passenger, mail and freight) go to US
Airways. In return, US Airways agrees to pay predetermined fees
to the regional airlines for operating an agreed upon number of
aircraft, without regard to the number of passengers onboard. In
addition, these agreements provide that certain variable costs,
such as airport landing fees and passenger liability insurance,
will be reimbursed 100% by US Airways. US Airways controls
marketing, scheduling, ticketing, pricing and seat inventories.
The regional jet capacity purchase agreements have expirations
from 2012 to 2020 and provide for optional extensions at US
Airways’ discretion. The future minimum noncancellable
commitments under the regional jet capacity purchase agreements
are $1.01 billion in 2009, $1.01 billion in 2010,
$1.03 billion in 2011, $902 million in 2012,
$731 million in 2013 and $2.71 billion thereafter.
Certain entities with which US Airways has capacity purchase
agreements are considered variable interest entities under
FIN No. 46(R). In connection with its restructuring
and emergence from bankruptcy, US Airways contracted with Air
Wisconsin and Republic Airways to purchase a significant portion
of these companies’ regional jet capacity for a period of
ten years. US Airways has determined that it is not the primary
beneficiary of these variable interest entities, based on cash
flow analyses. Additionally, US Airways has analyzed the
arrangements with other carriers with which US Airways has
long-term capacity purchase agreements and has concluded it is
not required to consolidate any of the entities.
Notes to
Consolidated Financial
Statements — (Continued)
(e)
Legal
Proceedings
On September 12, 2004, US Airways Group and its domestic
subsidiaries (collectively, the “Reorganized Debtors”)
filed voluntary petitions for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for
the Eastern District of Virginia, Alexandria Division (Case Nos.
04-13819-SSM
through
03-13823-SSM)
(the “2004 Bankruptcy”). On September 16, 2005,
the Bankruptcy Court issued an order confirming the plan of
reorganization submitted by the Reorganized Debtors and on
September 27, 2005, the Reorganized Debtors emerged from
the 2004 Bankruptcy. The Bankruptcy Court’s order
confirming the plan included a provision called the plan
injunction, which forever bars other parties from pursuing most
claims against the Reorganized Debtors that arose prior to
September 27, 2005 in any forum other than the Bankruptcy
Court. The great majority of these claims are pre-petition
claims that, if paid out at all, will be paid out in common
stock of the post-bankruptcy US Airways Group at a fraction of
the actual claim amount.
(f)
Guarantees
and Indemnifications
US Airways guarantees the payment of principal and interest on
certain special facility revenue bonds issued by municipalities
to build or improve certain airport and maintenance facilities
which are leased to US Airways. Under such leases, US Airways is
required to make rental payments through 2023, sufficient to pay
maturing principal and interest payments on the related bonds.
As of December 31, 2008, the principal amount outstanding
on these bonds was $90 million. Remaining lease payments
guaranteeing the principal and interest on these bonds are
$145 million.
The Company enters into real estate leases in substantially all
cities that it serves. It is common in such commercial lease
transactions for the Company as the lessee to agree to indemnify
the lessor and other related third parties for tort liabilities
that arise out of or relate to the use or occupancy of the
leased premises. In some cases, this indemnity extends to
related liabilities arising from the negligence of the
indemnified parties, but usually excludes any liabilities caused
by their gross negligence or willful misconduct. With respect to
certain special facility bonds, the Company agreed to indemnify
the municipalities for any claims arising out of the issuance
and sale of the bonds and use or occupancy of the concourses
financed by these bonds. Additionally, the Company typically
indemnifies such parties for any environmental liability that
arises out of or relates to its use or occupancy of the leased
premises.
The Company is the lessee under many aircraft financing
agreements (including leveraged lease financings of aircraft
under pass through trusts). It is common in such transactions
for the Company as the lessee to agree to indemnify the lessor
and other related third parties for the manufacture, design,
ownership, financing, use, operation and maintenance of the
aircraft, and for tort liabilities that arise out of or relate
to the Company’s use or occupancy of the leased asset. In
some cases, this indemnity extends to related liabilities
arising from the negligence of the indemnified parties, but
usually excludes any liabilities caused by their gross
negligence or willful misconduct. In aircraft financing
agreements structured as leverage leases, the Company typically
indemnifies the lessor with respect to adverse changes in
U.S. tax laws.
US Airways has long-term operating leases at a number of
airports, including leases where US Airways is also the
guarantor of the underlying debt. Such leases are typically with
municipalities or other governmental entities. The arrangements
are not required to be consolidated based on the provisions of
FIN No. 46(R).
Accumulated net unrealized losses on available for sale
securities
$
—
$
(48
)
Adjustment to initially apply the recognition provisions of
SFAS No. 158
3
3
Actuarial gains associated with pension and other postretirement
benefits, net of amortization
62
55
Accumulated other comprehensive income
$
65
$
10
The accumulated other comprehensive income is not presented net
of tax as any tax effects resulting from the items above have
been immediately offset by the recording of a valuation
allowance through the same financial statement caption.
Conversion of 7% convertible notes into common stock
—
—
70
Conversion of 7.5% convertible senior notes, net of discount of
$17 million to common stock
—
—
95
Notes payable canceled under the aircraft purchase agreement
—
—
4
Equipment purchases financed by capital lease
—
—
3
Cash transactions:
Interest paid, net of amounts capitalized
216
248
264
Income taxes paid
1
4
12
12.
Related
party transactions
Richard A. Bartlett, a member of the Company’s board of
directors until June 2008, is a greater than 10% owner of Air
Wisconsin. US Airways and Air Wisconsin also entered into a
regional jet services agreement under which Air Wisconsin may,
but is not required to, provide regional jet service under a US
Airways Express code share arrangement. On April 8, 2005,
Air Wisconsin notified the Company of its intention to deploy 70
regional jets, the maximum number provided for in the agreement,
into the US Airways Express network. The amount paid to Air
Wisconsin in 2008 was approximately $344 million.
Mr. Bartlett became a member of the board of directors
pursuant to certain stockholder agreements, which by their terms
expired in June 2008.
Edward L. Shapiro, a member of the Company’s board of
directors until June 2008, is a Vice President and partner of
PAR Capital Management, the general partner of PAR. PAR received
10,768,485 shares of US Airways Group common stock,
including shares received pursuant to Participation Agreements
with America West Holdings, for a total investment of
$160 million at the time of the merger. As of
December 31, 2007, PAR has sold substantially all of its
investment in the Company. Mr. Shapiro became a member of
the board of directors pursuant to certain stockholder
agreements, which by their terms expired in June 2008.
13.
Operating
segments and related disclosures
The Company is managed as a single business unit that provides
air transportation for passengers and cargo. This allows it to
benefit from an integrated revenue pricing and route network
that includes US Airways, Piedmont, PSA and third-party carriers
that fly under capacity purchase or prorate agreements as part
of the Company’s Express operations. The flight equipment
of all these carriers is combined to form one fleet that is
deployed through a single route scheduling system. When making
resource allocation decisions, the chief operating decision
maker evaluates flight profitability data, which considers
aircraft type and route economics, but gives no weight to the
financial impact of the resource allocation decision on an
individual carrier basis. The objective in making resource
allocation decisions is to maximize consolidated financial
results, not the individual results of US Airways, Piedmont and
PSA.
The Company attributes operating revenues by geographic region
based upon the origin and destination of each flight segment.
The Company’s tangible assets consist primarily of flight
equipment, which are mobile across geographic markets and,
therefore, have not been allocated.
14.
Stockholders’
equity
Holders of common stock are entitled to one vote per share on
all matters submitted to a vote of common shareholders, except
that voting rights of
non-U.S. citizens
are limited to the extent that the shares of common stock held
by such
non-U.S. persons
would otherwise be entitled to more than 24.9% of the aggregate
votes of all outstanding equity securities of US Airways Group.
Holders of common stock have no right to cumulate their votes.
Holders of common stock participate equally as to any dividends
or distributions on the common stock.
In August 2008, the Company completed an underwritten public
stock offering of 19 million common shares, as well as the
full exercise of 2.85 million common shares included in an
overallotment option, at an offering price of $8.50 per share.
Net proceeds from the offering, after underwriting discounts and
commissions, were $179 million.
15.
Stock-based
compensation
In June 2008, the stockholders of the Company approved the 2008
Equity Incentive Plan (the “2008 Plan”). The 2008 Plan
replaces and supersedes the 2005 Equity Incentive Plan (the
“2005 Plan”). No additional awards will be made under
the 2005 Plan, although outstanding awards previously made under
the 2005 Plan will continue to be governed by the terms and
conditions of the 2005 Plan. Any shares subject to an award
under the 2005 Plan outstanding as of the date on which the 2008
Plan was approved by the Board that expire, are forfeited or
otherwise terminate unexercised will increase the shares
reserved for issuance under the 2008 Plan by (i) one share
for each share of stock issued pursuant to a stock option and
stock appreciation right and (ii) three shares for each
share of stock issued pursuant to a restricted stock unit, which
corresponds to the reduction originally made with respect to
each award in the 2005 Plan.
The 2008 Plan authorizes the grant of awards for the issuance of
up to a maximum of 6,700,000 shares of the Company’s
common stock. Awards may be in the form of performance grants,
bonus awards, performance shares, restricted stock awards,
vested shares, restricted stock units, vested units, incentive
stock options, nonstatutory stock options and stock appreciation
rights. The number of shares of the Company’s common stock
available for issuance under the 2008 Plan is reduced by
(i) one share for each share of stock issued pursuant to a
stock option or a stock appreciation right, and (ii) one
and one-half (1.5) shares for each share of stock issued
pursuant to all other stock awards. Stock awards that are
terminated, forfeited or repurchased result in an increase in
the share reserve of the 2008 Plan corresponding to the
reduction originally made in respect of the award. Any shares of
the Company’s stock tendered or exchanged by a participant
as full or partial payment to the Company of the exercise price
under an option and any shares retained or withheld by the
Company in satisfaction of an employee’s obligations to pay
applicable withholding taxes with respect to any award will not
be available for reissuance, subjected to new awards or
otherwise used to increase the share reserve under the 2008
Plan. The cash proceeds from option exercises will not be used
to repurchase shares on the open market for reuse under the 2008
Plan.
Notes to
Consolidated Financial
Statements — (Continued)
The Company’s net income (loss) for the years ended
December 31, 2008, 2007 and 2006 includes $34 million,
$32 million and $34 million, respectively, of
compensation costs related to share-based payments. Upon
adoption of SFAS No. 123R, “Share-Based
Payment,” the Company recorded a cumulative benefit from
the accounting change of $1 million, which reflects the
impact of estimating future forfeitures for previously
recognized compensation expense. No income tax effect related to
share-based payments or cumulative effect has been recorded as
the effects have been immediately offset by the recording of a
valuation allowance through the same financial statement caption.
Restricted Stock Unit Awards — As of
December 31, 2008, the Company has outstanding restricted
stock unit awards (“RSUs”) with service conditions
(vesting periods) and RSUs with service and performance
conditions (which the performance condition of obtaining a
combined operating certificate for AWA and US Airways was met on
September 26, 2007). SFAS No. 123R requires that
the grant-date fair value of RSUs be equal to the market price
of the underlying shares of common stock on the date of grant if
vesting is based on a service or a performance condition. The
grant-date fair value of RSU awards that are subject to both a
service and a performance condition are being expensed over the
vesting period, as the performance condition has been met.
Vesting periods for RSU awards range from three to four years.
RSUs are classified as equity awards.
RSU award activity for the years ending December 31, 2008,
2007 and 2006 is as follows (shares in thousands):
As of December 31, 2008, there were $8 million of
total unrecognized compensation costs related to RSUs. These
costs are expected to be recognized over a weighted average
period of 1.1 years. The total fair value of RSUs vested
during 2008, 2007 and 2006 was $3 million, $14 million
and $3 million, respectively.
Notes to
Consolidated Financial
Statements — (Continued)
Stock Options and Stock Appreciation Rights —
Stock options and stock appreciation rights (“SARs”)
are granted with an exercise price equal to the underlying
common stock’s fair market value at the date of each grant,
generally become exercisable over a three to four year period
and expire if unexercised at the end of their term, which ranges
from seven to ten years. Stock options and SARs are classified
as equity awards. The exercise of SARs will be settled with the
issuance of shares of the Company’s common stock.
Stock option and SARs activity for the years ending
December 31, 2008, 2007 and 2006 is as follows (stock
options and SARs in thousands):
The fair value of stock options and SARs is determined at the
grant date using a Black-Scholes option pricing model, which
requires several assumptions. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect for the
expected term of the stock option or SAR at the time of grant.
The dividend yield is assumed to be zero since the Company does
not pay dividends and has no current plans to do so in the
future. The volatility is based on the historical volatility of
the Company’s common stock over a time period equal to the
expected term of the stock option or SAR. The expected life of
stock options and SARs is based on the historical experience of
the Company.
The per share weighted-average grant-date fair value of stock
options and SARs granted and the weighted-average assumptions
used for the years ended December 31, 2008, 2007 and 2006
were as follows:
Notes to
Consolidated Financial
Statements — (Continued)
As of December 31, 2008, there were $20 million of
total unrecognized compensation costs related to stock options
and SARs. These costs are expected to be recognized over a
weighted average period of 1.3 years.
The total intrinsic value of stock options and SARs exercised
during the years ended December 31, 2008, 2007 and 2006 was
$0.1 million, $4 million and $68 million,
respectively. Cash received from stock option and SAR exercises
during the years ended December 31, 2008, 2007 and 2006 was
$0.1 million, $2 million and $31 million,
respectively.
Agreements with the Air Line Pilots Association
(“ALPA”) — US Airways Group and US
Airways have a letter of agreement with ALPA, the US
Airways’ pilot union through April 18, 2008, that
provides that US Airways’ pilots designated by ALPA receive
stock options to purchase 1.1 million shares of the
Company’s common stock. The first tranche of 500,000 stock
options was granted on January 31, 2006 with an exercise
price of $33.65. The second tranche of 300,000 stock options was
granted on January 31, 2007 with an exercise price of
$56.90. The third and final tranche of 300,000 stock options was
granted on January 31, 2008 with an exercise price of
$12.50. The stock options granted to ALPA pilots do not reduce
the shares available for grant under any equity incentive plan.
Any of these ALPA stock options that are forfeited or that
expire without being exercised will not become available for
grant under any of the Company’s plans.
The per share fair value of the ALPA pilot stock options and
assumptions used for the January 31, 2008, 2007 and 2006
grants were as follows:
As of December 31, 2008, there were no unrecognized
compensation costs related to stock options granted to ALPA
pilots as the stock options were fully vested on the grant date.
No ALPA stock options were exercised in 2008. There were 25,029
and 315,390 ALPA stock options exercised during 2007 and 2006,
respectively, pursuant to this agreement. The total intrinsic
value of ALPA stock options exercised during 2007 and 2006 was
$1 million and $5 million, respectively. Cash received
from ALPA stock options exercised during the years ended
December 31, 2007 and 2006 totaled $1 million and
$10 million, respectively.
Notes to
Consolidated Financial
Statements — (Continued)
18.
Subsequent
events
On January 15, 2009, US Airways flight 1549 was involved in
an accident in New York that resulted in the aircraft landing in
the Hudson River. The Airbus A320 aircraft was en route to
Charlotte from LaGuardia with 150 passengers and a crew of 5 (2
pilots and 3 flight attendants) onboard. All aboard survived and
there were no serious injuries. US Airways has insurance
coverage for this aircraft (which is a total loss) as well as
costs resulting from the accident, and there are no applicable
deductibles.
On January 16, 2009, US Airways exercised its right to
obtain new loan commitments and incur additional loans under the
spare parts loan agreement. In connection with the exercise of
that right, Airbus Financial Services funded $50 million in
satisfaction of a previous commitment. This loan will mature on
October 20, 2014, will bear interest at a rate of LIBOR
plus a margin and will be secured by the collateral securing
loans under the spare parts loan agreement. In addition, in
connection with the incurrence of this loan, US Airways and
Airbus entered into amendments to the A320 Family Aircraft
Purchase Agreement, the A330 Aircraft Purchase Agreement and the
A350 XWB Purchase Agreement. Pursuant to these amendments, the
existing cross-default provisions of the applicable aircraft
purchase agreements were amended and restated to, among other
things, specify the circumstances under which a default under
the loan would constitute a default under the applicable
aircraft purchase agreement.
Consolidated
Financial Statements and Supplementary Data of US Airways,
Inc.
Management’s
Annual Report on Internal Control over Financial
Reporting
Management of US Airways, Inc. is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended. US
Airways’ internal control over financial reporting is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. US Airways’
internal control over financial reporting includes those
policies and procedures that:
•
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of US Airways;
•
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of US Airways are being made only
in accordance with authorizations of management and directors of
US Airways; and
•
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of US
Airways’ assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of US Airways’
internal control over financial reporting as of
December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management concludes
that US Airways maintained effective internal control over
financial reporting as of December 31, 2008.
US Airways’ independent registered public accounting firm
has issued an audit report on the effectiveness of US
Airways’ internal control over financial reporting. That
report has been included herein.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
US Airways, Inc.:
We have audited US Airways, Inc. and subsidiaries’ (US
Airways or the Company) internal control over financial
reporting as of December 31, 2008 based on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
management’s annual report on internal control over
financial reporting. Our responsibility is to express an opinion
on the effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control over
financial reporting based on the assessed risk. Our audit also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. A
company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, US Airways, Inc. and subsidiaries maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control — Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of US Airways, Inc. and subsidiaries
as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholder’s equity
(deficit) and cash flows for each of the years in the three-year
period ended December 31, 2008, and our report dated
February 17, 2009 expressed an unqualified opinion on those
consolidated financial statements.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
US Airways, Inc.:
We have audited the accompanying consolidated balance sheets of
US Airways, Inc. and subsidiaries (US Airways) as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholder’s equity (deficit),
and cash flows for each of the years in the three-year period
ended December 31, 2008. These consolidated financial
statements are the responsibility of US Airways’
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of US Airways, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2008, US Airways adopted
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements, and the
measurement date provisions of SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), US
Airways’ internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 17, 2009
expressed an unqualified opinion on the effectiveness of US
Airways’ internal control over financial reporting.
Basis of
presentation and summary of significant accounting
policies
(a)
Nature
of Operations and Operating Environment
US Airways, Inc. (“US Airways”) is a Delaware
corporation whose primary business activity is the operation of
a major network air carrier. US Airways is a wholly owned
subsidiary of US Airways Group, Inc. (“US Airways
Group”), which owns all of US Airways’ outstanding
common stock, par value $1 per share. On May 19, 2005, US
Airways Group signed a merger agreement with America West
Holdings Corporation (“America West Holdings”)
pursuant to which America West Holdings merged with a wholly
owned subsidiary of US Airways Group. The merger agreement was
amended by a letter of agreement on July 7, 2005. The
merger became effective upon US Airways Group’s emergence
from bankruptcy on September 27, 2005.
On September 26, 2007, as part of the integration efforts
following the merger, America West Airlines (“AWA”)
surrendered its Federal Aviation Administration
(“FAA”) operating certificate. As a result, all
mainline airline operations are now being conducted under US
Airways’ FAA operating certificate. In connection with the
combination of all mainline airline operations under one FAA
operating certificate, US Airways Group contributed 100% of its
equity interest in America West Holdings, the parent company of
AWA, to US Airways. As a result, America West Holdings and AWA
are now wholly owned subsidiaries of US Airways. In addition,
AWA transferred substantially all of its assets and liabilities
to US Airways. All off-balance sheet commitments of AWA were
also transferred to US Airways.
Most of US Airways’ operations are in competitive markets.
Competitors include other air carriers along with other modes of
transportation. US Airways operates the fifth largest airline in
the United States as measured by domestic mainline revenue
passenger miles (“RPMs”) and available seat miles
(“ASMs”). US Airways has primary hubs in Charlotte,
Philadelphia and Phoenix and secondary hubs/focus cities in New
York, Washington, D.C., Boston and Las Vegas. US Airways
offers scheduled passenger service on more than 3,100 flights
daily to 200 communities in the United States, Canada, Europe,
the Caribbean and Latin America. US Airways also has an
established East Coast route network, including the US Airways
Shuttle service, with a substantial presence at capacity
constrained airports including New York’s LaGuardia Airport
and the Washington, D.C. area’s Ronald Reagan
Washington National Airport. US Airways had approximately
55 million passengers boarding its mainline flights in
2008. During 2008, US Airways’ mainline operation provided
regularly scheduled service or seasonal service at 135 airports.
During 2008, the US Airways Express network served 187 airports
in the United States, Canada and Latin America, including 77
airports also served by the mainline operation. During 2008, US
Airways Express air carriers had approximately 27 million
passengers boarding their planes. As of December 31, 2008,
US Airways operated 354 mainline jets and is supported by US
Airways Group’s regional airline subsidiaries and
affiliates operating as US Airways Express either under capacity
purchase or prorate agreements, which operate approximately 238
regional jets and 74 turboprops.
As of December 31, 2008, US Airways employed approximately
32,700 active full-time equivalent employees. Approximately 86%
of US Airways’ employees are covered by collective
bargaining agreements with various labor unions. US
Airways’ pilots and flight attendants are currently working
under the terms of their respective US Airways or AWA collective
bargaining agreements, as modified by transition agreements
reached in connection with the merger. In 2008, US Airways
reached final single labor agreements covering fleet service
employees, maintenance and related employees and maintenance
training instructors, each represented by the International
Association of Machinists & Aerospace Workers.
(b)
Basis
of Presentation
The transfer of assets between US Airways and AWA described
above constitutes a transfer of assets between entities under
common control and was accounted for in a manner similar to the
pooling of interests method of accounting. Under this method,
the carrying amount of net assets recognized in the balance
sheets of each combining entity are carried forward to the
balance sheet of the combined entity, and no other assets or
liabilities are
Notes to
Consolidated Financial
Statements — (Continued)
recognized as a result of the contribution of shares. The
accompanying consolidated financial statements in this annual
report on
Form 10-K
are presented as though the transfer had occurred at the time of
US Airways emergence from bankruptcy in September 2005.
The accompanying consolidated financial statements include the
accounts of US Airways and its wholly owned subsidiaries. US
Airways Group has the ability to move funds freely between its
operating subsidiaries to support operations. These transfers
are recognized as intercompany transactions. In the accompanying
consolidated statements of cash flows, these intercompany
transactions are designated as payables to related parties, net
and are classified as operating or financing activities
depending upon the nature of the transaction. All significant
intercompany accounts and transactions between US Airways and
its wholly owned subsidiaries have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. The principal areas of judgment
relate to passenger revenue recognition, impairment of goodwill,
impairment of long-lived and intangible assets, valuation of
investments in marketable securities, the frequent traveler
program and the deferred tax valuation allowance.
Certain prior year amounts have been reclassified to conform
with the 2008 presentation.
(c)
Cash
and Cash Equivalents
Cash equivalents consist primarily of cash in money market
securities and highly liquid debt instruments. All highly liquid
investments purchased within three months of maturity are
classified as cash equivalents. Cash equivalents are stated at
cost, which approximates fair value due to the highly liquid
nature and short-term maturities of the underlying securities.
As of December 31, 2008 and 2007, US Airways’ cash and
cash equivalents are as follows (in millions):
2008
2007
Cash and money market funds
$
1,016
$
1,850
Corporate bonds
10
90
Total cash and cash equivalents
$
1,026
$
1,940
(d)
Investments
in Marketable Securities
All highly liquid investments with maturities greater than three
months but less than one year are classified as current
investments in marketable securities. Investments in marketable
securities classified as noncurrent assets on US Airways’
balance sheet represent investments expected to be converted to
cash after 12 months. Debt securities, other than auction
rate securities, are classified as held to maturity in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” Held to
maturity investments are carried at amortized cost, which
approximates fair value. Investments in auction rate securities
are classified as available for sale and recorded at fair value.
Notes to
Consolidated Financial
Statements — (Continued)
As of December 31, 2008 and 2007, US Airways’
investments in marketable securities are classified as follows
(in millions):
2008
2007
Held to maturity securities:
Corporate bonds
$
20
$
125
U.S. government sponsored enterprises
—
81
Certificates of deposit
—
20
Total investments in marketable securities-current
$
20
$
226
Available for sale securities:
Auction rate securities
187
353
Total investments in marketable securities-noncurrent
$
187
$
353
See Note 5(b) for more information on US Airways’
investments in marketable securities.
(e)
Restricted
Cash
Restricted cash includes deposits in trust accounts primarily to
fund certain taxes and fees and workers’ compensation
claims, deposits securing certain letters of credit and surety
bonds and deposits held by institutions that process credit card
sales transactions. Restricted cash is stated at cost, which
approximates fair value.
(f)
Materials
and Supplies, Net
Inventories of materials and supplies are valued at the lower of
cost or fair value. Costs are determined using average costing
methods. An allowance for obsolescence is provided for flight
equipment expendable and repairable parts. These items are
generally charged to expense when issued for use. During 2008,
US Airways recorded a $5 million write down related to its
Boeing 737 spare parts inventory to reflect lower of cost or
fair value. See Note 1(g) below for further discussion of
the decline in value of Boeing 737 parts.
(g)
Property
and Equipment
Property and equipment are recorded at cost. Interest expense
related to the acquisition of certain property and equipment is
capitalized as an additional cost of the asset or as a leasehold
improvement if the asset is leased. Interest capitalized for the
years ended December 31, 2008, 2007 and 2006 was
$6 million, $4 million and $2 million,
respectively. Property and equipment is depreciated and
amortized to residual values over the estimated useful lives or
the lease term, whichever is less, using the straight-line
method. Costs of major improvements that enhance the usefulness
of the asset are capitalized and depreciated over the estimated
useful life of the asset or the modifications, whichever is less.
The estimated useful lives of owned aircraft, jet engines,
flight equipment and rotable parts range from five to
30 years. Leasehold improvements relating to flight
equipment and other property on operating leases are amortized
over the life of the lease or the life of the asset, whichever
is shorter, on a straight-line basis. The estimated useful lives
for other owned property and equipment range from three to
12 years and range from 18 to 30 years for training
equipment and buildings.
US Airways records impairment losses on long-lived assets used
in operations when events and circumstances indicate that the
assets might be impaired as defined by SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets.” Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying
Notes to
Consolidated Financial
Statements — (Continued)
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
In connection with completing step two of US Airways’
interim goodwill impairment analysis in the second quarter of
2008 as further discussed in Note 1(i) below, US Airways
also assessed the current fair values of its other significant
assets including owned aircraft, aircraft leases and aircraft
spare parts. US Airways concluded that the only impairment
indicated was associated with the decline in fair value of
certain spare parts associated with its Boeing 737 fleet. Due to
record high fuel prices and the industry environment in 2008,
demand for the Boeing 737 aircraft type declined given its lower
fuel efficiency as compared to other aircraft types. The fair
value of these spare parts was determined using a market
approach on the premise of continued use of the aircraft through
US Airways’ final scheduled lease return.
In accordance with SFAS No. 144, US Airways determined
that the carrying amount of the Boeing 737 spare parts
classified as long-lived assets was not recoverable as the
carrying amount of the Boeing 737 assets was greater than the
sum of the undiscounted cash flows expected from the use and
disposition of these assets. As a result of this impairment
analysis, US Airways recorded a $13 million impairment
charge in 2008 related to Boeing 737 rotable parts included in
flight equipment on its consolidated balance sheet. US Airways
recorded no impairment charges in the years ended
December 31, 2007 and 2006.
(h)
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. A valuation allowance is
established, if necessary, for the amount of any tax benefits
that, based on available evidence, are not expected to be
realized.
(i)
Goodwill
and Other Intangibles, Net
Goodwill
SFAS No. 142, “Goodwill and Other Intangible
Assets,” requires that goodwill be tested for impairment at
the reporting unit level on an annual basis and between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of the reporting unit
below its carrying value. Goodwill represents the purchase price
in excess of the net amount assigned to assets acquired and
liabilities assumed by America West Holdings on
September 27, 2005. US Airways has two reporting units
consisting of its mainline and Express operations. All of US
Airways’ goodwill was allocated to the mainline reporting
unit.
In accordance with SFAS No. 142, US Airways concluded
that events had occurred and circumstances had changed during
the second quarter of 2008 which required US Airways to perform
an interim period goodwill impairment test. Subsequent to the
first quarter of 2008, US Airways experienced a significant
decline in market capitalization due to overall airline industry
conditions driven by record high fuel prices. The price of fuel
became less volatile in the second quarter of 2008, and there
was a sustained surge in fuel prices. On May 21, 2008, the
price per barrel of oil hit a then record high of $133 per
barrel and from that date through June 30, 2008 stayed at
an average daily price of $133 per barrel. US Airways’
average mainline fuel price during the second quarter of 2008
was $3.63 as compared to $2.88 per gallon in the first quarter
of 2008 and $2.20 for the full year 2007. This increase in the
price per gallon of fuel represented an increase of 26% and 65%
as compared to the first quarter of 2008 and full year 2007,
respectively. US Airways Group’s average stock price in the
second quarter of 2008 was $6.13 as compared to an average of
$12.15 in the first quarter of 2008, a decline of 50%. In
addition, US Airways announced in June 2008 that in response to
the record high fuel prices, it planned to reduce fourth quarter
2008 and full year 2009 domestic mainline capacity.
Notes to
Consolidated Financial
Statements — (Continued)
During the second quarter of 2008, US Airways performed the
first step of the two-step impairment test and compared the fair
value of the mainline reporting unit to its carrying value.
Consistent with US Airways’ approach in its annual
impairment testing, in assessing the fair value of the reporting
unit, US Airways considered both the market approach and income
approach. Under the market approach, the fair value of the
reporting unit is based on quoted market prices and the number
of shares outstanding for US Airways Group’s common stock.
Under the income approach, the fair value of the reporting unit
is based on the present value of estimated future cash flows.
The income approach is dependent on a number of significant
management assumptions, including estimates of future capacity,
passenger yield, traffic, fuel, other operating costs and
discount rates. Due to current market conditions, greater
weighting was attributed to the market approach, which was
weighted 67% while the income approach was weighted 33% in
arriving at the fair value of the reporting unit. US Airways
determined that the fair value of the mainline reporting unit
was less than the carrying value of the net assets of the
reporting unit, and thus US Airways performed step two of the
impairment test.
In step two of the impairment test, US Airways determined the
implied fair value of the goodwill and compared it to the
carrying value of the goodwill. US Airways allocated the fair
value of the reporting unit to all of its assets and liabilities
as if the reporting unit had been acquired in a business
combination and the fair value of the mainline reporting unit
was the price paid to acquire the reporting unit. The excess of
the fair value of the reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of
goodwill. US Airways’ step two analysis resulted in no
implied fair value of goodwill, and therefore, US Airways
recognized an impairment charge of $622 million in the
second quarter of 2008, representing a write off of the entire
amount of US Airways’ previously recorded goodwill.
The following table reflects the change in the carrying amount
of goodwill from December 31, 2007 (in millions):
Other intangible assets consist primarily of trademarks,
international route authorities and airport take-off and landing
slots and airport gates.
SFAS No. 142 requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairments in accordance with
SFAS No. 144. The following table provides information
relating to US Airways’ intangible assets subject to
amortization as of December 31, 2008 and 2007 (in millions):
2008
2007
Airport take-off and landing slots
$
452
$
435
Airport gate leasehold rights
52
52
Accumulated amortization
(81
)
(58
)
Total
$
423
$
429
The intangible assets subject to amortization generally are
amortized over 25 years for airport take-off and landing
slots and over the term of the lease for airport gate leasehold
rights on a straight-line basis and are included in depreciation
and amortization on the consolidated statements of operations.
For the years ended December 31, 2008, 2007 and 2006, US
Airways recorded amortization expense of $23 million,
$23 million and $27 million, respectively, related to
its intangible assets. US Airways expects to record annual
amortization expense of
Notes to
Consolidated Financial
Statements — (Continued)
$24 million in 2009, $24 million in year 2010,
$21 million in year 2011, $20 million in year 2012,
$20 million in year 2013 and $314 million thereafter
related to these intangible assets.
Under SFAS No. 142, indefinite lived assets are not
amortized but instead are reviewed for impairment annually and
more frequently if events or circumstances indicate that the
asset may be impaired. As of December 31, 2008 and 2007, US
Airways had $55 million of international route authorities
and $30 million of trademarks on its balance sheets, which
are classified as indefinite lived assets.
In connection with completing step two of US Airways’
goodwill impairment analysis in the second quarter of 2008, US
Airways assessed the fair values of its significant intangible
assets. US Airways considered the potential impairment of these
other intangible assets in accordance with
SFAS No. 142 and SFAS No. 144, as
applicable. The fair values of airport take-off and landing
slots and international route authorities were assessed using
the market approach. The market approach took into consideration
relevant supply and demand factors at the related airport
locations as well as available market sale and lease data. For
trademarks, US Airways utilized a form of the income approach
known as the relief-from-royalty method. As a result of these
assessments, no impairment was indicated.
In addition, US Airways performed the annual impairment test on
its international route authorities and trademarks during the
fourth quarter of 2008, at which time it concluded that no
impairment exists. US Airways will perform its next annual
impairment test on October 1, 2009.
(j)
Other
Assets, Net
Other assets, net consists of the following as of
December 31, 2008 and 2007 (in millions):
2008
2007
Deposits
$
40
$
46
Debt issuance costs, net
19
7
Long term investments
11
12
Deferred rent
46
48
Aircraft leasehold interest, net
83
89
Total other assets, net
$
199
$
202
In connection with fresh-start reporting for US Airways
following its emergence from bankruptcy in September 2005,
aircraft operating leases were adjusted to fair value and
$101 million of assets were established for leasehold
interests in aircraft for aircraft leases with rental rates
deemed to be below market rates. These leasehold interests are
amortized on a straight-line basis as an increase to aircraft
rent expense over the applicable remaining lease periods. US
Airways expects to amortize $6 million per year in
2009-2013
and $53 million thereafter to aircraft rent expense related
to these leasehold interests.
(k)
Frequent
Traveler Program
Members of the Dividend Miles program, the US Airways frequent
traveler program, can redeem miles on US Airways or other
members of the Star Alliance. The estimated cost of providing
the travel award, using the incremental cost method as adjusted
for estimated redemption rates, is recognized as a liability and
charged to operations as program members accumulate mileage. For
travel awards on partner airlines, the liability is based on the
average contractual amount to be paid to the other airline per
redemption. As of December 31, 2008, Dividend Miles members
had accumulated mileage credits for approximately
2.6 million awards. The liability for the future travel
awards accrued on US Airways’ consolidated balance sheets
within other accrued expenses was $151 million and
$161 million as of December 31, 2008 and 2007,
respectively.
US Airways sells mileage credits to participating airline and
non-airline business partners. Revenue earned from selling
mileage credits to other companies is recognized in two
components. A portion of the revenue from
Notes to
Consolidated Financial
Statements — (Continued)
these sales is deferred, representing the estimated fair value
of the transportation component of the sold mileage credits. The
deferred revenue for the transportation component is amortized
on a straight-line basis over the period in which the credits
are expected to be redeemed for travel as passenger revenue,
which is currently estimated to be 28 months. The marketing
component, which is earned at the time the miles are sold, is
recognized in other revenues at the time of the sale. As of
December 31, 2008 and 2007, US Airways had
$240 million and $241 million, respectively, in
deferred revenue from the sale of mileage credits included in
other accrued expenses on its consolidated balance sheets.
(l)
Derivative
Instruments
US Airways currently utilizes heating oil-based derivative
instruments to hedge a portion of its exposure to jet fuel price
increases. These instruments consist of no premium collars.
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” requires that all
derivatives be marked to fair value and recorded on the balance
sheet. Derivatives that do not qualify for hedge accounting must
be adjusted to fair value through the income statement. US
Airways does not purchase or hold any derivative financial
instruments for trading purposes. As of December 31, 2008
and 2007, US Airways had open fuel hedging instruments in place,
which do not currently qualify for hedge accounting under
SFAS 133. Accordingly, the derivative hedging instruments
are recorded as an asset or liability on the consolidated
balance sheets at fair value and any changes in fair value are
recorded as gains or losses on fuel hedging instruments, net in
operating expenses in the accompanying consolidated statements
of operations in the period of change. See Note 5(a) for
additional information on US Airways’ fuel hedging
instruments.
(m)
Deferred
Gains and Credits, Net
In 2005, US Airways’ affinity credit card provider,
Barclays Bank Delaware, formerly Juniper Bank, paid AWA
$150 million in bonuses, consisting of a $20 million
bonus pursuant to AWA’s original credit card agreement with
Juniper and a $130 million bonus following the
effectiveness of the merger, subject to certain conditions.
In the event Barclays, at its option, terminates the amended
agreement prior to April 1, 2009 due to US Airways’
breach of its obligations under the amended credit card
agreement, or upon the occurrence of certain other events, then
US Airways must repay all of the bonus payments. If Barclays
terminates the amended agreement any time thereafter through
March 31, 2013 for the same reasons, US Airways must repay
a reduced amount that declines monthly according to a formula.
US Airways will have no obligation to repay any portion of the
bonus payments after March 31, 2013.
At the time of payment, the entire $150 million was
recorded as deferred revenue. US Airways will begin recognizing
revenue from the bonus payments on April 1, 2009. The
revenue from the bonus payments will be recognized on a
straight-line basis through March 31, 2017, the expiration
date of the amended Barclays co-branded credit card agreement.
In connection with fresh-start reporting and purchase accounting
for US Airways’ in 2005 and fresh-start reporting for AWA
upon emergence from bankruptcy in 1994, aircraft operating
leases were adjusted to fair value and deferred credits were
established in the accompanying consolidated balance sheets,
which represented the net present value of the difference
between the stated lease rates and the fair market rates. These
deferred credits will be amortized on a straight-line basis as a
reduction in rent expense over the applicable lease periods. At
December 31, 2008 and 2007, the unamortized balance of the
deferred credits was $93 million and $134 million,
respectively. US Airways expects to amortize $21 million in
2009, $13 million in 2010, $9 million in 2011,
$8 million in 2012, $7 million in 2013 and
$35 million thereafter to aircraft rent expense related to
these leasehold interests.
Notes to
Consolidated Financial
Statements — (Continued)
(n)
Revenue
Recognition
Passenger
Revenue
Passenger revenue is recognized when transportation is provided.
Ticket sales for transportation that has not yet been provided
are initially recorded as air traffic liability on the
consolidated balance sheets. The air traffic liability
represents tickets sold for future travel dates and estimated
future refunds and exchanges of tickets sold for past travel
dates. The majority of tickets sold are nonrefundable. A small
percentage of tickets, some of which are partially used tickets,
expire unused. Due to complex pricing structures, refund and
exchange policies, and interline agreements with other airlines,
certain amounts are recognized in revenue using estimates
regarding both the timing of the revenue recognition and the
amount of revenue to be recognized. These estimates are
generally based on the analysis of US Airways’ historical
data. US Airways and members of the airline industry have
consistently applied this accounting method to estimate revenue
from forfeited tickets at the date travel was to be provided.
Estimated future refunds and exchanges included in the air
traffic liability are routinely evaluated based on subsequent
activity to validate the accuracy of US Airways’ estimates.
Any adjustments resulting from periodic evaluations of the
estimated air traffic liability are included in results of
operations during the period in which the evaluations are
completed.
Passenger traffic commissions and related fees are expensed when
the related revenue is recognized. Passenger traffic commissions
and related fees not yet recognized are included as a prepaid
expense.
US Airways purchases capacity, or ASMs, generated by US Airways
Group’s wholly owned regional air carriers and the capacity
of Air Wisconsin Airlines Corp. (“Air Wisconsin”),
Republic Airways Holdings (“Republic”), Mesa Airlines,
Inc. (“Mesa”) and Chautauqua Airlines, Inc.
(“Chautauqua”) in certain markets. Air Wisconsin,
Republic, Mesa and Chautauqua operate regional jet aircraft in
these markets as part of US Airways Express. US Airways
classifies revenues related to capacity purchase arrangements as
Express passenger revenues. Liabilities related to tickets sold
for travel on these air carriers are also included in US
Airways’ air traffic liability and are subsequently
relieved in the same manner as described above.
US Airways collects various excise taxes on its ticket sales,
which are accounted for on a net basis.
Cargo
Revenue
Cargo revenue is recognized when shipping services for mail and
other cargo are provided.
Other
Revenue
Other revenue includes checked and excess baggage charges,
beverage sales, ticket change and service fees, commissions
earned on tickets sold for flights on other airlines and sales
of tour packages by the US Airways Vacations division, which are
recognized when the services are provided. Other revenues also
include processing fees for travel awards issued through the
Dividend Miles frequent traveler program and the marketing
component earned from selling mileage credits to partners, as
discussed in Note 1(k).
(o)
Maintenance
and Repair Costs
Maintenance and repair costs for owned and leased flight
equipment are charged to operating expense as incurred.
(p)
Selling
Expenses
Selling expenses include commissions, credit card fees,
computerized reservations systems fees, advertising and
promotional expenses. Advertising and promotional expenses are
expensed when incurred. Advertising and promotional expenses for
the years ended December 31, 2008, 2007 and 2006 were
$10 million, $16 million and $16 million,
respectively.
Notes to
Consolidated Financial
Statements — (Continued)
(q)
Stock-based
Compensation
US Airways accounts for its stock-based compensation plans in
accordance with SFAS No. 123(R), “Share-Based
Payment.” Compensation expense is based on the fair value
of the stock award at the time of grant and is recognized
ratably over the respective vesting period of the stock award.
The fair value of stock options and stock appreciation rights is
estimated using a Black-Scholes option pricing model. The fair
value of restricted stock units is based on the market price of
the underlying shares of common stock on the date of grant. See
Note 13 for further discussion of stock-based compensation.
(r)
Express
Expenses
Expenses associated with US Airways Group’s wholly owned
regional airlines, affiliate regional airlines operating as US
Airways Express and US Airways’ former MidAtlantic division
are classified as Express expenses on the consolidated
statements of operations. Effective May 27, 2006, the
transfer of certain MidAtlantic assets to Republic was complete,
and Republic assumed the operations of the aircraft as a US
Airways affiliate Express carrier. Express expenses consist of
the following (in millions):
US Airways determined that certain entities with which US
Airways has capacity purchase agreements are considered variable
interest entities under Financial Accounting Standards Board
(“FASB”) Interpretation (“FIN”)
No. 46(R), “Consolidation of Variable Interest
Entities — An Interpretation of ARB No. 51.”
US Airways has determined that it is not the primary beneficiary
of any of these variable interest entities and, accordingly,
does not consolidate any of the entities with which it has jet
service agreements. See Note 8(d) for further discussion.
(t)
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” This standard defines fair
value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of
America, and expands disclosure about fair value measurements.
This pronouncement applies to other accounting standards that
require or permit fair value measurements. Accordingly, this
statement does not require any new fair value measurement. This
statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. In December of 2007, the FASB agreed to a one year
deferral of SFAS No. 157’s fair value measurement
requirements for nonfinancial assets and liabilities that are
not required or permitted to be measured at fair value on a
recurring basis. As such, US Airways did not apply the fair
value measurement requirements of SFAS No. 157 for
nonfinancial assets and liabilities when performing its goodwill
and other assets impairment test as discussed in Note 1(i).
US Airways adopted SFAS No. 157 on January 1,2008,
Notes to
Consolidated Financial
Statements — (Continued)
which had no effect on US Airways’ consolidated financial
statements. Refer to Note 6 for additional information
related to the adoption of SFAS No. 157.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), “Business Combinations.”
SFAS No. 141R is effective for fiscal years beginning
after December 15, 2008 and adjusts certain guidance
related to recording nearly all transactions where one company
gains control of another. The statement revises the measurement
principle to require fair value measurements on the acquisition
date for recording acquired assets and liabilities. It also
changes the requirements for recording acquisition-related costs
and liabilities. Additionally, the statement revises the
treatment of valuation allowance adjustments related to income
tax benefits in existence prior to a business combination. The
current standard, SFAS No. 141, requires that
adjustments to these valuation allowances be recorded as
adjustments to goodwill or intangible assets if no goodwill
exists, while the new standard will require companies to adjust
current income tax expense. Effective January 1, 2009, US
Airways adopted the provisions of SFAS No. 141R and
all future decreases in the valuation allowance established in
purchase accounting as a result of the merger will be recognized
as a reduction to income tax expense.
On January 1, 2008, US Airways adopted the measurement date
provisions of SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R).” The measurement date provisions require plan
assets and obligations to be measured as of the employer’s
balance sheet date. US Airways previously measured its other
postretirement benefit obligations as of September 30 each year.
As a result of the adoption of the measurement date provisions,
US Airways recorded a $2 million increase to its
postretirement benefit liability and a $2 million increase
to accumulated deficit, representing the net periodic benefit
cost for the period between the measurement date utilized in
2007 and the beginning of 2008. The adoption of the measurement
provisions of SFAS No. 158 had no effect on US
Airways’ consolidated statements of operations.
In October 2008, the FASB issued FASB Staff Position
(“FSP”)
FAS 157-3,
“Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.” FSP
FAS 157-3
clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
FSP
FAS 157-3
is effective upon issuance, including prior periods for which
financial statements have not been issued. Revisions resulting
from a change in the valuation technique or its application
should be accounted for as a change in accounting estimate
following the guidance in SFAS No. 154,
“Accounting Changes and Error Corrections.” FSP
FAS 157-3
is effective October 10, 2008, and the application of FSP
FAS 157-3
had no impact on US Airways’ consolidated financial
statements.
2.
Special
items, net
Special items, net as shown on the consolidated statements of
operations include the following charges (credits) (in millions):
Notes to
Consolidated Financial
Statements — (Continued)
(a)
In 2008, in connection with the effort to consolidate functions
and integrate organizations, procedures and operations with AWA,
US Airways incurred $35 million of merger related
transition expenses. These expenses included $12 million in
uniform costs to transition employees to the new US Airways
uniforms; $5 million in applicable employment tax expenses
related to contractual benefits granted to certain current and
former employees as a result of the merger; $6 million in
compensation expenses for equity awards granted in connection
with the merger to retain key employees through the integration
period; $5 million of aircraft livery costs;
$4 million in professional and technical fees related to
the integration of airline operations systems and
$3 million in other expenses.
In 2007, US Airways incurred $99 million of merger related
transition expenses. These expenses included $13 million in
training and related expenses; $19 million in compensation
expenses for equity awards granted in connection with the merger
to retain key employees through the integration period;
$20 million of aircraft livery costs; $37 million in
professional and technical fees related to the integration of
airline operations systems; $1 million in employee moving
expenses; $4 million related to reservation system
migration expenses and $5 million of other expenses.
In 2006, US Airways incurred $131 million of merger related
transition expenses. These items included $6 million in
training and related expenses; $41 million in compensation
expenses primarily for severance, retention payments and equity
awards granted in connection with the merger to retain key
employees through the integration period; $17 million of
aircraft livery costs; $38 million in professional and
technical fees, including continuing professional fees
associated with US Airways’ bankruptcy proceedings and fees
related to the integration of airline operations systems;
$7 million of employee moving expenses; $11 million of
net costs associated with the integration of the AWA FlightFund
and US Airways Dividend Miles frequent traveler programs;
$2 million in merger related aircraft lease return expenses
and $9 million of other expenses.
(b)
In 2008, US Airways recorded $18 million in non-cash
charges related to the decline in fair value of certain spare
parts associated with its Boeing 737 aircraft fleet. See
Note 1(f) and (g) for further discussion of these
charges.
(c)
In 2008, US Airways recorded $14 million in charges for
lease return costs and penalties related to certain Airbus
aircraft as a result of the planned fleet reductions.
(d)
In 2008, in connection with planned capacity reductions, US
Airways recorded $9 million in charges related to
involuntary furloughs as well as terminations of non-union
administrative and management staff. Of this amount,
$6 million was paid out in 2008. US Airways expects that
the remaining $3 million will be substantially paid by the
end of the first quarter of 2009.
(e)
In connection with the merger and the Airbus Memorandum of
Understanding (the “Airbus MOU”) executed between AVSA
S.A.R.L., an affiliate of Airbus S.A.S. (“Airbus”), US
Airways Group, US Airways and AWA, certain aircraft firm orders
were restructured. In connection with the Airbus MOU, US Airways
and AWA entered into two loan agreements with aggregate
commitments of up to $161 million and $89 million. On
March 31, 2006, the outstanding principal and accrued
interest on the $89 million loan was forgiven upon
repayment in full of the $161 million loan in accordance
with terms of the Airbus loans. As a result, in 2006, US Airways
recognized a gain associated with the return of these equipment
deposits upon forgiveness of the loan totaling $90 million,
consisting of the $89 million in equipment deposits and
accrued interest of $1 million.
(f)
In 2006, US Airways recognized $3 million in gains in
connection with the settlement of bankruptcy claims.
Notes to
Consolidated Financial
Statements — (Continued)
3.
Debt
The following table details US Airways’ debt as of
December 31, 2008 and 2007 (in millions). Variable interest
rates listed are the rates as of December 31, 2008 unless
noted.
Equipment loans, aircraft pre-delivery payment financings and
other notes payable, fixed and variable interest rates ranging
from 1.87% to 12.15%, averaging 5.75% as of December 31,2008, maturing from 2010 to 2020(a)
$
1,674
$
802
Aircraft enhanced equipment trust certificates
(“EETCs”), fixed interest rates ranging from 7.08% to
9.01%, averaging 7.79% as of December 31, 2008, maturing
from 2015 to 2022(b)
540
576
Slot financing, fixed interest rate of 8.08%, interest only
payments until due in 2015(c)
47
47
Capital lease obligations, interest rate of 8%, installments due
through 2021(d)
39
41
Senior secured discount notes, variable interest rate of 5.34%,
due in 2009(e)
32
32
Capital lease obligations, computer software
—
1
2,332
1,499
Unsecured
Airbus advance, repayments beginning in 2010 through 2018(f)
207
—
Engine maintenance notes(g)
72
57
Industrial development bonds, fixed interest rate of 6.3%,
interest only payments until due in 2023(h)
29
29
Note payable to Pension Benefit Guaranty Corporation, fixed
interest rate of 6%, interest only payments until due in 2012(i)
10
10
Other notes payable, due in 2009
45
—
363
96
Total long-term debt and capital lease obligations
2,695
1,595
Less: Total unamortized discount on debt
(113
)
(121
)
Current maturities, less $10 million of unamortized
discount on debt at December 31, 2008
(346
)
(101
)
Long-term debt and capital lease obligations, net of current
maturities
$
2,236
$
1,373
(a)
The following are the significant secured financing agreements
entered into in 2008:
On February 1, 2008, US Airways entered into a loan
agreement for $145 million, secured by six Bombardier
CRJ-700 aircraft, three Boeing 757 aircraft and one spare
engine. The loan bears interest at a rate of LIBOR plus an
applicable margin and is amortized over ten years. The proceeds
of the loan were used to repay $97 million of the equipment
notes previously secured by the six Bombardier CRJ-700 aircraft
and three Boeing 757 aircraft.
On February 29, 2008, US Airways entered into a credit
facility agreement for $88 million to finance certain
pre-delivery payments required by US Airways’ purchase
agreements with Airbus. As of December 31, 2008, the
outstanding balance of this credit facility agreement is
$73 million. The remaining amounts under this facility will
be drawn as pre-delivery payments come due. The loan bears
interest at a rate of LIBOR plus an applicable margin and is
repaid as the related aircraft are delivered with a final
maturity date of the loan in November 2010.
In the second quarter of 2008, US Airways entered into facility
agreements with three lenders in the amounts of
$199 million, $198 million, and $119 million to
finance the acquisition of certain Airbus A320 family aircraft
deliveries starting in the second half of 2008. The loans bear
interest at a rate of LIBOR plus an applicable
Notes to
Consolidated Financial
Statements — (Continued)
margin, contain default and other covenants that are typical in
the industry for similar financings, and are amortized over
twelve years with balloon payments at maturity.
On October 20, 2008, US Airways entered into a
$270 million spare parts loan agreement and an
$85 million engines loan agreement. The proceeds of the
term loans made under these loan agreements were used to repay a
portion of the outstanding indebtedness of US Airways Group
under its Citicorp credit facility.
US Airways’ obligations under the spare parts loan
agreement are secured by a first priority security interest in
substantially all of US Airways’ rotable, repairable and
expendable aircraft spare parts. The obligations under the
engines loan agreement are secured by a first priority security
interest in 36 of US Airways’ aircraft engines. US Airways
has also agreed that other obligations owed by it or its
affiliates to the administrative agent for the loan agreements
or its affiliates (including the loans under these loan
agreements held by such administrative agent or its affiliates)
will be secured on a second priority basis by the collateral for
both loan agreements and certain other engines and aircraft.
The term loans under these loan agreements will bear interest at
a rate equal to LIBOR plus a margin per annum, subject to
adjustment in certain circumstances.
These loan agreements contain customary representations and
warranties, events of default and covenants for financings of
this nature, including obligations to maintain compliance with
covenants tied to the appraised value of US Airways’ spare
parts and the appraised value and maintenance condition of US
Airways’ engines, respectively.
The spare parts loan agreement matures on the sixth anniversary
of the closing date, and is subject to quarterly amortization in
amounts ranging from $8 million to $15 million. The
spare parts loan agreement may not be voluntarily prepaid during
the first three years of the term; however, the loan agreement
provided that in certain circumstances US Airways could prepay
$100 million of the loans under the agreement. The engines
loan agreement, which may not be voluntarily prepaid prior to
the third anniversary of the closing date, matures on the sixth
anniversary of the closing date, and is subject to amortization
in 24 equal quarterly installments.
On December 5, 2008, US Airways prepaid $100 million
of principal outstanding under the spare parts loan agreement.
In connection with this prepayment and pursuant to an amendment
to the spare parts loan agreement, subject to certain
conditions, US Airways obtained the right to incur up to
$100 million in new loans. The right to incur new loans
expires on April 1, 2009.
(b)
The equipment notes underlying the EETCs are the direct
obligations of US Airways and cover the financing of 19
aircraft. See Note 8(c) for further discussion.
(c)
In September 2005, US Airways entered into an agreement with
Republic to sell and leaseback certain of its commuter slots at
Ronald Reagan Washington National Airport and New York LaGuardia
Airport. US Airways continues to hold the right to repurchase
the slots anytime after the second anniversary of the slot
sale-leaseback transaction. These transactions were accounted
for as secured financings. Installments are due monthly through
2015. In December 2006, Republic and US Airways modified terms
of the agreement to conform to subsequent regulatory changes at
LaGuardia, and the LaGuardia slots were returned to US Airways.
The need for a subsequent modification was fully contemplated in
the original agreement.
(d)
Capital lease obligations consist principally of certain airport
maintenance and facility leases which expire in 2018 and 2021.
(e)
On December 27, 2004, AWA raised additional capital by
financing its Phoenix maintenance facility and flight training
center. The flight training center was previously unencumbered,
and the maintenance facility became unencumbered earlier in 2004
when AWA refinanced its term loan. Using its leasehold interest
in these two facilities as collateral, AWA, through a wholly
owned subsidiary named FTCHP LLC, raised $31 million
through the issuance of senior secured discount notes. The notes
were issued by FTCHP at a discount pursuant to the terms of a
senior secured term loan agreement among AWA, FTCHP, Heritage
Bank SSB, as administrative agent, Citibank, N.A., as the
initial lender, and the other lenders from time to time party
thereto. Citibank, N.A. subsequently assigned all of its
interests in the notes to third party lenders.
Notes to
Consolidated Financial
Statements — (Continued)
AWA fully and unconditionally guaranteed the payment and
performance of FTCHP’s obligations under the notes and the
loan agreement. The notes require aggregate principal payments
of $36 million with principal payments of $2 million
due on each of the first two anniversary dates and the remaining
principal amount due on the fifth anniversary date. The notes
may be prepaid in full at any time (subject to customary LIBOR
breakage costs) and in partial amounts of $2 million on the
third and fourth anniversary dates. The unpaid principal amount
of the notes bears interest based on LIBOR plus a margin subject
to adjustment based on a loan to collateral value ratio.
The loan agreement contains customary covenants applicable to
loans of this type, including obligations relating to the
preservation of the collateral and restrictions on the
activities of FTCHP. In addition, the loan agreement contains
events of default, including payment defaults, cross-defaults to
other debt of FTCHP, if any, breach of covenants, bankruptcy and
insolvency defaults and judgment defaults.
In connection with this financing, AWA sold all of its leasehold
interests in the maintenance facility and flight training center
to FTCHP and entered into subleases for the facilities with
FTCHP at lease rates expected to approximate the interest
payments due under the notes. In addition, AWA agreed to make
future capital contributions to FTCHP in amounts sufficient to
cover principal payments and other amounts owing pursuant to the
notes and the loan agreement. As part of the transfer of
substantially all of AWA’s assets and liabilities to US
Airways in connection with the combination of all mainline
airline operations under one FAA operating certificate on
September 26, 2007, AWA assigned its subleases for the
facilities with FTCHP to US Airways. In addition, US Airways
assumed all of the obligations of AWA in connection with the
financing and joined the guarantee of the payment and
performance of FTCHP’s obligations under the notes and the
loan agreement.
(f)
On October 20, 2008, US Airways and Airbus entered into
amendments to the A320 Family Aircraft Purchase Agreement, the
A330 Aircraft Purchase Agreement, and the A350 XWB Purchase
Agreement. In exchange for US Airways’ agreement to enter
into these amendments, Airbus advanced US Airways
$200 million in consideration of aircraft deliveries under
the various related purchase agreements. Under the terms of each
of the amendments, US Airways has agreed to maintain a level of
unrestricted cash in the same amount required by the US Airways
Group Citicorp credit facility. This transaction was treated as
a financing transaction for accounting purposes with an
effective interest rate commensurate with US Airways’
credit rating. There are no stated interest payments.
(g)
In December 2004, deferred charges under US Airways’
maintenance agreements with GE Engine Services, Inc. were
converted into an unsecured term note. Interest on the note
accrues at LIBOR plus 4%, and became payable beginning in
January 2008, with principal and interest payments due in
48 monthly installments through 2011. The outstanding
balance on the note at December 31, 2008 was
$39 million at an interest rate of 6.6%.
In October 2008, US Airways entered into a promissory note with
GE Engine Services, Inc. pursuant to which maintenance payments
up to $40 million due from October 2008 through March 2009
under US Airways’ Engine Service Agreement are deferred.
Interest on the note accrues at 14%, and becomes payable
beginning in April 2009, at which time principal and interest
payments are due in 12 monthly installments. The deferred
balance on the note at December 31, 2008 was
$33 million.
(h)
The industrial development revenue bonds are due April 2023.
Interest at 6.3% is payable semiannually on April 1 and
October 1. The bonds are subject to optional redemption
prior to the maturity date on or after April 1, 2008, in
whole or in part, on any interest payment date at the following
redemption prices: 102% on April 1 or October 1, 2008; 101%
on April 1 or October 1, 2009; and 100% on April 1,2010 and thereafter.
(i)
In connection with US Airways’ emergence from bankruptcy in
September 2005, it reached a settlement with the Pension Benefit
Guaranty Corporation (“PBGC”) related to the
termination of three of its defined benefit pension plans. The
settlement included the issuance of a $10 million note
which matures in 2012 and bears interest at 6% payable annually
in arrears.
Notes to
Consolidated Financial
Statements — (Continued)
Secured financings are collateralized by assets, primarily
aircraft, engines, simulators, rotable aircraft parts and hangar
and maintenance facilities. At December 31, 2008, the
estimated maturities of long-term debt and capital leases are as
follows (in millions):
2009
$
356
2010
221
2011
257
2012
246
2013
192
Thereafter
1,423
$
2,695
Certain of US Airways’ long-term debt agreements contain
minimum cash balance requirements and other covenants with which
US Airways was in compliance at December 31, 2008. Certain
of US Airways’ long-term debt agreements contain
cross-default provisions, which may be triggered by defaults by
US Airways under other agreements relating to indebtedness.
4.
Income
taxes
US Airways accounts for income taxes using the asset and
liability method. US Airways and its wholly owned subsidiaries
are part of the US Airways Group consolidated income tax return.
US Airways Group allocates tax and tax items, such as net
operating losses (“NOL”) and net tax credits, between
members of the group based on their proportion of taxable income
and other items. Accordingly, US Airways’ tax expense is
based on taxable income, taking into consideration allocated tax
loss carryforwards/carrybacks and tax credit carryforwards.
US Airways reported a loss for 2008, which increased its NOL,
and has not recorded a tax provision for 2008. As of
December 31, 2008, US Airways has approximately
$1.41 billion of gross NOL to reduce future federal taxable
income. Of this amount, approximately $1.37 billion is
available to reduce federal taxable income in the calendar year
2009. The NOL expires during the years 2022 through 2028. US
Airways’ deferred tax asset, which includes
$1.33 billion of the NOL discussed above, has been subject
to a full valuation allowance. US Airways also has approximately
$72 million of tax-effected state NOL as of
December 31, 2008.
In assessing the realizability of the deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
US Airways has recorded a valuation allowance against its net
deferred tax asset. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income
(including reversals of deferred tax liabilities) during the
periods in which those temporary differences will become
deductible.
At December 31, 2008, the federal valuation allowance is
$563 million, all of which will reduce future tax expense
when recognized. The state valuation allowance is
$80 million, of which $56 million was established
through the recognition of tax expense. The remaining
$24 million was established in purchase accounting.
Effective January 1, 2009, US Airways adopted
SFAS No. 141R. In accordance with
SFAS No. 141R, all future decreases in the valuation
allowance established in purchase accounting will be recognized
as a reduction of tax expense. In addition, US Airways has
$28 million and $2 million, respectively, of
unrealized federal and state tax benefit related to amounts
recorded in other comprehensive income.
Throughout 2006 and 2007, US Airways utilized NOL that was
generated prior to the merger. Utilization of the NOL results in
a corresponding decrease in the valuation allowance. As this
valuation allowance was established through the recognition of
tax expense, the decrease in valuation allowance offsets US
Airways’ tax provision dollar for dollar. US Airways
recognized $7 million and $85 million of non-cash
income tax expense for the years ended December 31, 2007
and 2006, respectively, as US Airways utilized NOL that was
generated prior to the merger. As
Notes to
Consolidated Financial
Statements — (Continued)
this was acquired NOL, the decrease in the valuation allowance
associated with this NOL reduced goodwill instead of the
provision for income taxes.
US Airways is subject to Alternative Minimum Tax liability
(“AMT”). In most cases, the recognition of AMT does
not result in tax expense. However, since US Airways’ net
deferred tax asset is subject to a full valuation allowance, any
liability for AMT is recorded as tax expense. US Airways
recorded AMT expense of $1 million and $10 million for
the years ended December 31, 2007 and 2006, respectively.
US Airways also recorded $1 million and $2 million of
state income tax related to certain states where NOL was not
available or limited, for the years ended December 31, 2007
and 2006, respectively.
The components of the provision for income taxes are as follows
(in millions):
Notes to
Consolidated Financial
Statements — (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
as of December 31, 2008 and 2007 are as follows (in
millions):
2008
2007
Deferred tax assets:
Net operating loss carryforwards
$
515
$
263
Property, plant and equipment
21
21
Investments
95
19
Financing transactions
25
18
Employee benefits
338
335
Dividend Miles awards
144
153
AMT credit carryforward
38
38
Other deferred tax assets
197
15
Valuation allowance
(643
)
(83
)
Net deferred tax assets
730
779
Deferred tax liabilities:
Depreciation and amortization
522
478
Sale and leaseback transactions and deferred rent
144
146
Leasing transactions
47
59
Long-lived intangibles
31
31
Other deferred tax liabilities
4
84
Total deferred tax liabilities
748
798
Net deferred tax liabilities
18
19
Less: current deferred tax liabilities
—
—
Non-current deferred tax liabilities
$
18
$
19
The reason for significant differences between taxable and
pretax book income primarily relates to depreciation on fixed
assets, employee pension and postretirement benefit costs,
employee-related accruals and leasing transactions.
US Airways files tax returns in the U.S. federal
jurisdiction, and in various states and foreign jurisdictions.
All federal and state tax filings for US Airways and AWA for
fiscal years through December 31, 2007 have been timely
filed. There are currently no federal audits and one state audit
in process. US Airways’ federal income tax year 2004 was
closed by operation of the statute of limitations expiring, and
there were no extensions filed. US Airways is not currently
under IRS examination. US Airways files tax returns in
44 states, and its major state tax jurisdictions are
Arizona, California, Pennsylvania and North Carolina. Tax years
up to 2003 for these state tax jurisdictions are closed by
operation of the statute of limitations expiring, and there were
no extensions filed.
US Airways believes that its income tax filing positions and
deductions related to tax periods subject to examination will be
sustained upon audit and does not anticipate any adjustments
that will result in a material adverse effect on US
Airways’ financial condition, results of operations, or
cash flow. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to FIN 48,
“Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.”
Notes to
Consolidated Financial
Statements — (Continued)
5.
Risk
management and financial instruments
US Airways operates in an industry whose economic prospects are
heavily dependent upon two variables it cannot control: the
health of the economy and the price of fuel. Due to the
discretionary nature of business and leisure travel spending,
airline industry revenues are heavily influenced by the
condition of the U.S. economy and the economies in other
regions of the world. Unfavorable economic conditions may result
in decreased passenger demand for air travel, which in turn
could have a negative effect on US Airways’ revenues.
Similarly, the airline industry may not be able to sufficiently
raise ticket prices to offset increases in aviation jet fuel
prices. These factors could impact US Airways’ results of
operations, financial performance and liquidity.
(a)
Fuel
Price Risk
Because US Airways’ operations are dependent upon aviation
fuel, significant increases in aviation fuel costs materially
and adversely affect its liquidity, results of operations and
financial condition. To manage the risk of changes in aviation
fuel prices, US Airways periodically enters into derivative
contracts comprised of heating oil-based derivative instruments
to hedge a portion of its projected jet fuel requirements. As of
December 31, 2008, US Airways had entered into no premium
collars to hedge approximately 14% of its projected mainline and
Express 2009 jet fuel requirements at a weighted average collar
range of $3.41 to $3.61 per gallon of heating oil or $131.15 to
$139.55 per barrel of estimated crude oil equivalent.
The fair value of US Airways’ fuel hedging derivative
instruments at December 31, 2008 was a liability of
$375 million recorded in accounts payable. The fair value
of US Airways’ fuel hedging derivative instruments at
December 31, 2007 was an asset of $121 million
recorded in prepaid expenses and other. Refer to Note 6 for
discussion on how US Airways determines the fair value of its
fuel hedging derivative instruments. The net change in the fair
value from an asset of $121 million to a liability of
$375 million represents the unrealized loss of
$496 million for 2008. The unrealized loss was due to the
significant decline in the price of oil in the latter part of
2008. The following table details US Airways’ loss (gain)
on fuel hedging instruments, net (in millions):
When US Airways’ fuel hedging derivative instruments are in
a net asset position, US Airways is exposed to credit losses in
the event of non-performance by counterparties to its fuel
hedging derivatives. The amount of such credit exposure is
limited to the unrealized gains, if any, on US Airways’
fuel hedging derivatives. To manage credit risks, US Airways
carefully selects counterparties, conducts transactions with
multiple counterparties which limits its exposure to any single
counterparty, and monitors the market position of the program
and its relative market position with each counterparty. US
Airways also maintains industry-standard security agreements
with all of its counterparties which may require the
counterparty to post collateral if the value of the fuel hedging
derivatives exceeds specified thresholds related to the
counterparty’s credit ratings.
When US Airways’ fuel hedging derivative instruments are in
a net liability position, US Airways is exposed to credit risks
related to the return of collateral in situations in which US
Airways has posted collateral with counterparties for unrealized
losses. When possible, in order to mitigate this risk, US
Airways provides letters of credit to certain counterparties in
lieu of cash. At December 31, 2008, $185 million
related to letters of credit
Notes to
Consolidated Financial
Statements — (Continued)
collateralizing certain counterparties to US Airways’ fuel
hedging transactions is included in short-term restricted cash.
In addition, at December 31, 2008, US Airways had
$276 million in cash deposits held by counterparties to its
fuel hedging transactions. Since the third quarter of 2008, US
Airways has not entered into any new transactions as part of its
fuel hedging program due to the impact collateral requirements
could have on its liquidity resulting from the significant
decline in the price of oil and counterparty credit risk arising
from global economic uncertainty.
Further declines in heating oil prices would result in
additional collateral requirements with US Airways’
counterparties, unrealized losses on its existing fuel hedging
derivative instruments and realized losses at the time of
settlement of these fuel hedging derivative instruments.
Cash,
Cash Equivalents and Investments in Marketable
Securities
US Airways invests available cash in money market securities and
highly liquid debt instruments.
As of December 31, 2008, US Airways held auction rate
securities totaling $411 million at par value, which are
classified as available for sale securities and noncurrent
assets on US Airways’ consolidated balance sheets.
Contractual maturities for these auction rate securities range
from eight to 44 years, with 62% of US Airways’
portfolio maturing within the next ten years, 10% maturing
within the next 20 years, 16% maturing within the next
30 years and 12% maturing thereafter through 2052. The
interest rates are reset approximately every 28 days,
except one security for which the auction process is currently
suspended. Current yields range from 1.76% to 6.08%. With the
liquidity issues experienced in the global credit and capital
markets, all of US Airways’ auction rate securities have
experienced failed auctions since August 2007. The estimated
fair value of these auction rate securities no longer
approximates par value. However, US Airways has not experienced
any defaults and continues to earn and receive interest at the
maximum contractual rates. See Note 6 for discussion on how
US Airways determines the fair value of its investments in
auction rate securities.
At December 31, 2007, the $411 million par value
auction rate securities had a fair value of $353 million, a
$58 million decline from par. Of this decline in fair
value, $48 million was deemed temporary and an unrealized
loss in this amount was recorded to other comprehensive income.
US Airways concluded $10 million of the decline was an
other than temporary impairment as a single security with
subprime exposure experienced a severe decline in fair value
during the period. Accordingly, the $10 million impairment
charge was recorded to other nonoperating expense, net in the
fourth quarter of 2007.
At December 31, 2008, the fair value of US Airways’
auction rate securities was $187 million, representing a
decline in fair value of $166 million from
December 31, 2007. The decline in fair value was caused by
the significant deterioration in the financial markets in 2008.
US Airways concluded that the 2008 decline in fair value of
$166 million as well as the previously deemed temporary
declines recorded to other comprehensive income of
$48 million were now other than temporary. US Airways’
conclusion for the other than temporary impairment was due to
the length of time and extent to which the fair value has been
less than cost for certain securities. All of these securities
have experienced failed auctions for a period greater than one
year, and there has been no recovery in their fair value.
Accordingly, US Airways recorded $214 million in impairment
charges in other nonoperating expense, net related to the other
than temporary impairment of its auction rate securities. US
Airways continues to monitor the market for auction rate
securities and consider its impact (if any) on the fair value of
its investments. If the current market conditions deteriorate
further, US Airways may be required to record additional
impairment charges in other nonoperating expense, net in future
periods.
Accounts
Receivable
As of December 31, 2008, most of US Airways’
receivables related to tickets sold to individual passengers
through the use of major credit cards or to tickets sold by
other airlines and used by passengers on US Airways or its
regional airline affiliates. These receivables are short-term,
mostly being settled within seven days after sale. Bad
Notes to
Consolidated Financial
Statements — (Continued)
debt losses, which have been minimal in the past, have been
considered in establishing allowances for doubtful accounts. US
Airways does not believe it is subject to any significant
concentration of credit risk.
(c)
Interest
Rate Risk
US Airways has exposure to market risk associated with changes
in interest rates related primarily to its variable rate debt
obligations. Interest rates on $1.42 billion principal
amount of long-term debt as of December 31, 2008 are
subject to adjustment to reflect changes in floating interest
rates. The weighted average effective interest rate on US
Airways’ variable rate debt was 5.34% at December 31,2008.
The fair value of US Airways’ long-term debt was
approximately $2.28 billion and $1.55 billion at
December 31, 2008 and 2007, 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.
6.
Fair
value measurements
As described in Note 1(s), US Airways adopted
SFAS No. 157 on January 1, 2008.
SFAS No. 157, among other things, defines fair value,
establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category
measured at fair value on either a recurring or nonrecurring
basis. SFAS No. 157 clarifies that fair value is an
exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions,
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
Level 1.
Observable inputs such as quoted prices in active markets;
Level 2.
Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level 3.
Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
Assets measured at fair value on a recurring basis are as
follows (in millions):
Quoted Prices in
Significant Other
Significant
Fair Value
Active Markets for
Observable
Unobservable
December 31,
Identical Assets
Inputs
Inputs
Valuation
2008
(Level 1)
(Level 2)
(Level 3)
Technique
Investments in marketable securities (noncurrent)
$
187
$
—
$
—
$
187
(1
)
Fuel hedging derivatives
(375
)
—
(375
)
—
(2
)
(1)
US Airways estimated the fair value of these auction rate
securities based on the following: (i) the underlying
structure of each security; (ii) the present value of
future principal and interest payments discounted at rates
considered to reflect current market conditions;
(iii) consideration of the probabilities of default,
passing a future auction, or repurchase at par for each period;
and (iv) estimates of the recovery rates in the event of
default for each security. These estimated fair values could
change significantly based on future market conditions. Refer to
Note 5(b) for further discussion of US Airways’
investments in marketable securities.
(2)
Since US Airways’ fuel hedging derivative instruments are
not traded on a market exchange, the fair values are determined
using valuation models which include assumptions about commodity
prices based on those observed in the underlying markets. The
fair value of fuel hedging derivatives is recorded in accounts
payable
Substantially all of US Airways’ employees meeting certain
service and other requirements are eligible to participate in
various pension, medical, dental, life insurance, disability and
survivorship plans.
(a)
Other
Postretirement Benefits Plan
The following table sets forth changes in the fair value of plan
assets, benefit obligations and the funded status of the plans
and the amounts recognized in US Airways’ consolidated
balance sheets as of December 31, 2008 and 2007 (in
millions).
Liability recognized in the consolidated balance sheet
$
(121
)
$
(156
)
Net actuarial gain recognized in accumulated other comprehensive
income
$
78
$
47
As described in Note 1(s), US Airways adopted the
measurement provisions of SFAS No. 158 on
January 1, 2008. The change in US Airways’ other
postretirement benefit obligation reflects a $4 million
reduction for the
Notes to
Consolidated Financial
Statements — (Continued)
adoption of SFAS No. 158, which includes
$6 million of benefit payments, offset by $2 million
of net periodic benefit costs for the period between the
measurement date utilized in 2007, September 30, and the
beginning of 2008. The $2 million of net periodic benefit
costs was recorded as an adjustment to accumulated deficit.
The following table presents the weighted average assumptions
used to determine benefit obligations:
US Airways assumed discount rates for measuring its other
postretirement benefit obligations, based on a hypothetical
portfolio of high quality publicly traded U.S. bonds (Aa
rated, non-callable or callable with make-whole provisions), for
which the timing and cash outflows approximate the estimated
benefit payments of the other postretirement benefit plans.
As of December 31, 2008, the assumed health care cost trend
rates are 9% in 2009 and 8% in 2010, decreasing to 5.5% in 2015
and thereafter. As of September 30, 2007, the assumed
health care cost trend rates are 10% in 2008 and 9% in 2009,
decreasing to 5.5% in 2013 and thereafter. The assumed health
care cost trend rates could have a significant effect on amounts
reported for retiree health care plans. A one-percentage point
change in the health care cost trend rates would have the
following effects on other postretirement benefits as of
December 31, 2008 (in millions):
1% Increase
1% Decrease
Effect on total service and interest costs
$
1
$
(1
)
Effect on postretirement benefit obligation
6
(5
)
Weighted average assumptions used to determine net periodic
benefit cost were as follows:
Notes to
Consolidated Financial
Statements — (Continued)
In 2009, US Airways expects to contribute $14 million to
its other postretirement plans. The following benefits, which
reflect expected future service, as appropriate, are expected to
be paid from the other postretirement plans (in millions):
Other
Postretirement
Benefits before
Medicare Subsidy
Medicare Subsidy
2009
$
14
$
—
2010
12
—
2011
12
—
2012
11
—
2013
12
—
2014 to 2018
60
2
(b)
Defined
Contribution Plans
US Airways sponsors several defined contribution plans which
cover a majority of its employee groups. US Airways makes
contributions to these plans based on the individual plan
provisions, including an employer non-discretionary contribution
and an employer match. These contributions are generally made
based upon eligibility, eligible earnings and employee group.
Expenses related to these plans were $92 million,
$78 million and $89 million for the years ended
December 31, 2008, 2007, and 2006, respectively.
(c)
Postemployment
Benefits
US Airways provides certain postemployment benefits to its
employees. These benefits include disability-related and
workers’ compensation benefits for certain employees. US
Airways accrues for the cost of such benefit expenses once an
appropriate triggering event has occurred. In 2007, US Airways
recorded a $99 million charge to increase long-term
disability obligations for US Airways’ pilots as a result
of a change in the FAA mandated retirement age for pilots from
60 to 65.
(d)
Profit
Sharing Plans
Most non-executive employees of US Airways are eligible to
participate in the 2005 Profit Sharing Plan, an annual bonus
program. Annual bonus awards are paid from a profit-sharing pool
equal to (i) ten percent of the annual profits of US
Airways Group (excluding unusual items) for pre-tax profit
margins up to ten percent, plus (ii) 15% of the annual
profits of US Airways Group (excluding unusual items) for
pre-tax profit margins greater than ten percent. Awards are paid
as a lump sum no later than March 15 after the end of each
fiscal year. US Airways recorded no amounts in 2008 for profit
sharing as US Airways had a net loss in 2008 excluding unusual
items and recorded $49 million and $59 million for
profit sharing in 2007 and 2006, respectively, which is recorded
in salaries and related costs.
8.
Commitments
and contingencies
(a)
Commitments
to Purchase Flight Equipment and Maintenance
Services
Aircraft
and Engine Purchase Commitments
During 2008, US Airways took delivery of 14 Embraer 190 aircraft
under its Amended and Restated Purchase Agreement with Embraer,
which it financed through an existing facility agreement. As of
December 31, 2008, US Airways has no remaining firm orders
with Embraer. Under the terms of the Amended and Restated
Purchase Agreement, US Airways has 32 additional Embraer 190
aircraft on order, which are conditional and subject to its
Notes to
Consolidated Financial
Statements — (Continued)
notification to Embraer. In 2008, US Airways amended the Amended
and Restated Purchase Agreement to revise the delivery schedule
for these 32 additional Embraer 190 aircraft.
In 2007, US Airways and Airbus executed definitive purchase
agreements for the acquisition of 97 aircraft, including 60
single-aisle A320 family aircraft and 37 widebody aircraft
(comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft).
These were in addition to orders for 37 single-aisle A320 family
aircraft from the previous Airbus purchase agreement. In 2008,
US Airways and Airbus entered into Amendment No. 1 to the
Amended and Restated Airbus A320 Family Aircraft Purchase
Agreement. The amendment provides for the conversion of 13 A319
aircraft to A320 aircraft, one A319 aircraft to an A321 aircraft
and 11 A320 aircraft to A321 aircraft for deliveries during 2009
and 2010.
Deliveries of the A320 family aircraft commenced during 2008
with the delivery of five A321 aircraft, which were financed
through an existing facility agreement. Deliveries of the A320
family aircraft will continue in 2009 through 2012. Deliveries
of the A330-200 aircraft will begin in 2009. In 2008, US Airways
amended the terms of the A350 XWB Purchase Agreement for
deliveries of the 22 firm order A350 XWB aircraft to begin in
2015, rather than 2014, and extending through 2018.
In 2007, US Airways agreed to terms with an aircraft lessor to
lease two used A330-200 aircraft. In 2008, US Airways terminated
the two leases and did not take delivery of the two used
A330-200 aircraft. Related to this termination, US Airways
recorded a $2 million lease cancellation charge.
In 2008, US Airways executed purchase agreements for the
purchase of eight new IAE V2500-A5 spare engines scheduled for
delivery through 2014 for use on the Airbus A320 family fleet,
three new Trent 700 spare engines scheduled for delivery through
2011 for use on the Airbus A330-200 fleet and three new Trent
XWB spare engines scheduled for delivery in 2015 through 2017
for use on the Airbus A350 XWB aircraft.
Under all of US Airways’ aircraft and engine purchase
agreements, US Airways’ total future commitments as of
December 31, 2008 are expected to be approximately
$6.83 billion through 2018 as follows: $1.31 billion
in 2009, $1.34 billion in 2010, $1.29 billion in 2011,
$768 million in 2012, $36 million in 2013 and
$2.09 billion thereafter, which includes predelivery
deposits and payments. US Airways expects to fund these payments
through future financings.
Engine
Maintenance Commitments
In connection with the merger, US Airways and AWA restructured
their rate per engine hour agreements with General Electric
Engine Services for overhaul maintenance services. Under the
restructured agreements, the minimum monthly payment on account
of accrued engine flight hours for both of the agreements
together will equal $3 million as long as both agreements
remain in effect through October 2009. In September 2007, all
engines covered under the AWA agreement were transferred to the
US Airways agreement, and the AWA agreement was terminated. The
minimum monthly payment of $3 million remains unchanged.
(b)
Leases
US Airways leases certain aircraft, engines, and ground
equipment, in addition to the majority of its ground facilities
and terminal space. As of December 31, 2008, US Airways had
291 mainline aircraft under operating leases, with remaining
terms ranging from one month to approximately 15 years.
Ground facilities include executive offices, maintenance
facilities and ticket and administrative offices. Public
airports are utilized for flight operations under lease
arrangements with the municipalities or agencies owning or
controlling such airports. Substantially all leases provide that
the lessee must pay taxes, maintenance, insurance and certain
other operating expenses applicable to the leased property. Some
leases also include renewal and purchase options.
Notes to
Consolidated Financial
Statements — (Continued)
As of December 31, 2008, obligations under noncancellable
operating leases for future minimum lease payments were as
follows (in millions):
2009
$
1,065
2010
974
2011
850
2012
769
2013
628
Thereafter
3,227
Total minimum lease payments
7,513
Less sublease rental receipts
(860
)
Total minimum lease payments
$
6,653
For the years ended December 31, 2008, 2007 and 2006,
rental expense under operating leases was $1.32 billion,
$1.28 billion and $1.28 billion, respectively.
US Airways leases certain flight equipment to related parties
(see Note 11(b)) under noncancellable operating leases
expiring in various years through year 2022. The future minimum
rental receipts associated with these leases are
$78 million in each year 2009 through 2013 and
$470 million thereafter. The following amounts relate to
owned aircraft leased under such agreements as reflected in
flight equipment as of December 31, 2008 and 2007 (in
millions):
2008
2007
Flight equipment
$
286
$
286
Less accumulated amortization
(33
)
(23
)
$
253
$
263
(c)
Off-Balance
Sheet Arrangements
US Airways has obligations with respect to pass through trust
certificates, also known as “Enhanced Equipment
Trust Certificates” or EETCs, issued by pass through
trusts to cover the financing of 19 owned aircraft, 116 leased
aircraft and three leased engines. These trusts are off-balance
sheet entities, the primary purpose of which is to finance the
acquisition of aircraft. Rather than finance each aircraft
separately when such aircraft is purchased or delivered, these
trusts allowed US Airways to raise the financing for several
aircraft at one time and place such funds in escrow pending the
purchase or delivery of the relevant aircraft. The trusts were
also structured to provide for certain credit enhancements, such
as liquidity facilities to cover certain interest payments, that
reduce the risks to the purchasers of the trust certificates
and, as a result, reduce the cost of aircraft financing to US
Airways.
Each trust covered a set amount of aircraft scheduled to be
delivered within a specific period of time. At the time of each
covered aircraft financing, the relevant trust used the funds in
escrow to purchase equipment notes relating to the financed
aircraft. The equipment notes were issued, at US Airways’
election in connection with a mortgage financing of the aircraft
or by a separate owner trust in connection with a leveraged
lease financing of the aircraft. In the case of a leveraged
lease financing, the owner trust then leased the aircraft to US
Airways. In both cases, the equipment notes are secured by a
security interest in the aircraft. The pass through trust
certificates are not direct obligations of, nor are they
guaranteed by, US Airways. However, in the case of mortgage
financings, the equipment notes issued to the trusts are direct
obligations of US Airways. As of December 31, 2008,
$540 million associated with these mortgage financings is
reflected as debt in the accompanying consolidated balance sheet.
Notes to
Consolidated Financial
Statements — (Continued)
With respect to leveraged leases, US Airways evaluated whether
the leases had characteristics of a variable interest entity as
defined by FIN No. 46(R). US Airways concluded the
leasing entities met the criteria for variable interest
entities. US Airways then evaluated whether or not it was the
primary beneficiary by evaluating whether or not it was exposed
to the majority of the risks (expected losses) or whether it
receives the majority of the economic benefits (expected
residual returns) from the trusts’ activities. US Airways
does not provide residual value guarantees to the bondholders or
equity participants in the trusts. Each lease does have a fixed
price purchase option that allows US Airways to purchase the
aircraft near the end of the lease term. However, the option
price approximates an estimate of the aircraft’s fair value
at the option date. Under this feature, US Airways does not
participate in any increases in the value of the aircraft. US
Airways concluded it was not the primary beneficiary under these
arrangements. Therefore, US Airways accounts for its EETC
leverage lease financings as operating leases under the criteria
of SFAS No. 13, “Accounting for Leases.” US
Airways’ total obligations under these leveraged lease
financings are $3.57 billion as of December 31, 2008,
which are included in the future minimum lease payments table in
(b) above.
(d)
Regional
Jet Capacity Purchase Agreements
US Airways has entered into capacity purchase agreements with
certain regional jet operators. The capacity purchase agreements
provide that all revenues (passenger, mail and freight) go to US
Airways. In return, US Airways agrees to pay predetermined fees
to the regional airlines for operating an agreed upon number of
aircraft, without regard to the number of passengers onboard. In
addition, these agreements provide that certain variable costs,
such as airport landing fees and passenger liability insurance,
will be reimbursed 100% by US Airways. US Airways controls
marketing, scheduling, ticketing, pricing and seat inventories.
The regional jet capacity purchase agreements have expirations
from 2012 to 2020 and provide for optional extensions at US
Airways’ discretion. The future minimum noncancellable
commitments under the regional jet capacity purchase agreements
are $1.01 billion in 2009, $1.01 billion in 2010,
$1.03 billion in 2011, $902 million in 2012,
$731 million in 2013 and $2.71 billion thereafter.
Certain entities with which US Airways has capacity purchase
agreements are considered variable interest entities under
FIN No. 46(R). In connection with its restructuring
and emergence from bankruptcy, US Airways contracted with Air
Wisconsin and Republic Airways to purchase a significant portion
of these companies’ regional jet capacity for a period of
ten years. US Airways has determined that it is not the primary
beneficiary of these variable interest entities, based on cash
flow analyses. Additionally, US Airways has analyzed the
arrangements with other carriers with which US Airways has
long-term capacity purchase agreements and has concluded it is
not required to consolidate any of these entities.
(e)
Legal
Proceedings
On September 12, 2004, US Airways Group and its domestic
subsidiaries (collectively, the “Reorganized Debtors”)
filed voluntary petitions for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for
the Eastern District of Virginia, Alexandria Division (Case Nos.
04-13819-SSM
through
03-13823-SSM)
(the “2004 Bankruptcy”). On September 16, 2005,
the Bankruptcy Court issued an order confirming the plan of
reorganization submitted by the Reorganized Debtors and on
September 27, 2005, the Reorganized Debtors emerged from
the 2004 Bankruptcy. The Bankruptcy Court’s order
confirming the plan included a provision called the plan
injunction, which forever bars other parties from pursuing most
claims against the Reorganized Debtors that arose prior to
September 27, 2005 in any forum other than the Bankruptcy
Court. The great majority of these claims are pre-petition
claims that, if paid out at all, will be paid out in common
stock of the post-bankruptcy US Airways Group at a fraction of
the actual claim amount.
Notes to
Consolidated Financial
Statements — (Continued)
(f)
Guarantees
and Indemnifications
US Airways guarantees the payment of principal and interest on
certain special facility revenue bonds issued by municipalities
to build or improve certain airport and maintenance facilities
which are leased to US Airways. Under such leases, US Airways is
required to make rental payments through 2023, sufficient to pay
maturing principal and interest payments on the related bonds.
As of December 31, 2008, the principal amount outstanding
on these bonds was $90 million. Remaining lease payments
guaranteeing the principal and interest on these bonds are
$145 million.
US Airways enters into real estate leases in substantially all
cities that it serves. It is common in such commercial lease
transactions for US Airways as the lessee to agree to indemnify
the lessor and other related third parties for tort liabilities
that arise out of or relate to the use or occupancy of the
leased premises. In some cases, this indemnity extends to
related liabilities arising from the negligence of the
indemnified parties, but usually excludes any liabilities caused
by their gross negligence or willful misconduct. With respect to
certain special facility bonds, US Airways agreed to indemnify
the municipalities for any claims arising out of the issuance
and sale of the bonds and use or occupancy of the concourses
financed by these bonds. Additionally, US Airways typically
indemnifies such parties for any environmental liability that
arises out of or relates to its use or occupancy of the leased
premises.
US Airways is the lessee under many aircraft financing
agreements (including leveraged lease financings of aircraft
under pass through trusts). It is common in such transactions
for US Airways as the lessee to agree to indemnify the lessor
and other related third parties for the manufacture, design,
ownership, financing, use, operation and maintenance of the
aircraft, and for tort liabilities that arise out of or relate
to US Airways’ use or occupancy of the leased asset. In
some cases, this indemnity extends to related liabilities
arising from the negligence of the indemnified parties, but
usually excludes any liabilities caused by their gross
negligence or willful misconduct. In aircraft financing
agreements structured as leveraged leases, US Airways typically
indemnifies the lessor with respect to adverse changes in
U.S. tax laws.
US Airways has long-term operating leases at a number of
airports, including leases where US Airways is also the
guarantor of the underlying debt. Such leases are typically with
municipalities or other governmental entities. The arrangements
are not required to be consolidated based on the provisions of
FIN No. 46(R).
US Airways Group’s 7% Senior Convertible Notes are
fully and unconditionally guaranteed, jointly and severally and
on a senior unsecured basis, by US Airways and AWA. In addition,
US Airways is a guarantor of US Airways Group’s Citicorp
credit facility.
9.
Other
comprehensive income (loss)
US Airways’ other comprehensive income (loss) consisted of
the following (in millions):
Accumulated net unrealized losses on available for sale
securities
$
—
$
(48
)
Actuarial gains associated with pension and other postretirement
benefits, net of amortization
78
47
Accumulated other comprehensive income
$
78
$
(1
)
The accumulated other comprehensive income is not presented net
of tax as any tax effects resulting from the items above have
been immediately offset by the recording of a valuation
allowance through the same financial statement caption.
10.
Supplemental
cash flow information
Supplemental disclosure of cash flow information and non-cash
investing and financing activities were as follows (in millions):
Notes to
Consolidated Financial
Statements — (Continued)
(a)
Parent
Company
The decrease in the net payable to US Airways Group was the
result of the 2008 financing transactions and US Airways
Group’s August 2008 equity offering.
US Airways recorded interest expense for the years ended
December 31, 2008, 2007 and 2006 of $61 million,
$86 million and $70 million, respectively, related to
the above transactions and other transactions with wholly owned
subsidiaries of US Airways Group as described below. Interest is
calculated at market rates, which are reset quarterly.
(b)
Subsidiaries
of US Airways Group
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.
US Airways purchases all of the capacity (ASMs) generated by US
Airways Group’s wholly owned regional airline subsidiaries
at a rate per ASM that is periodically determined by US Airways
and, concurrently, recognizes revenues that result primarily
from passengers being carried by these affiliated companies. The
rate per ASM that US Airways pays is based on estimates of the
costs incurred to supply the capacity. US Airways recognized US
Airways Express capacity purchase expense for the years ended
December 31, 2008, 2007 and 2006 of $417 million,
$455 million and $433 million, respectively, related
to this program.
US Airways provides various services to these regional airlines,
including passenger handling, maintenance and catering. US
Airways recognized other operating revenues for the years ended
December 31, 2008, 2007 and 2006 of $89 million,
$95 million and $96 million, respectively, related to
these services. These regional airlines also perform passenger
and ground handling services for US Airways at certain airports,
for which US Airways recognized other operating expenses for the
years ended December 31, 2008, 2007 and 2006 of
$154 million, $156 million and $145 million,
respectively. US Airways also leases or subleases certain
aircraft to these regional airline subsidiaries. US Airways
recognized other operating revenues related to these
arrangements for the years ended December 31, 2008, 2007
and 2006 of $78 million, $78 million and
$80 million, respectively.
US Airways purchases a portion of its aviation fuel from US
Airways Group’s wholly owned subsidiary, MSC, which acts as
a fuel wholesaler to US Airways in certain circumstances. For
the years ended December 31, 2008, 2007 and 2006, MSC sold
fuel totaling $1.33 billion, $1.02 billion and
$810 million, respectively, used by US Airways’
mainline and Express flights.
12.
Operating
segments and related disclosures
US Airways is managed as a single business unit that provides
air transportation for passengers and cargo. This allows it to
benefit from an integrated revenue pricing and route network
that includes US Airways, Piedmont, PSA and third-party carriers
that fly under capacity purchase or prorate agreements as part
of US Airways’ Express operations. The flight equipment of
all these carriers is combined to form one fleet that is
deployed through a single route scheduling system. When making
resource allocation decisions, the chief operating decision
maker evaluates flight profitability data, which considers
aircraft type and route economics, but gives no weight to the
financial impact of the resource allocation decision on an
individual carrier basis. The objective in making resource
allocation decisions is to maximize consolidated financial
results, not the individual results of US Airways and US Airways
Express.
US Airways attributes operating revenues by geographic region
based upon the origin and destination of each flight segment. US
Airways’ tangible assets consist primarily of flight
equipment, which are mobile across geographic markets and,
therefore, have not been allocated.
13.
Stock-based
compensation
In June 2008, the stockholders of US Airways Group approved the
2008 Equity Incentive Plan (the “2008 Plan”). The 2008
Plan replaces and supersedes the 2005 Equity Incentive Plan (the
“2005 Plan”). No additional awards will be made under
the 2005 Plan, although outstanding awards previously made under
the 2005 Plan will continue to be governed by the terms and
conditions of the 2005 Plan. Any shares subject to an award
under the 2005 Plan outstanding as of the date on which the 2008
Plan was approved by the Board that expire, are forfeited or
otherwise terminate unexercised will increase the shares
reserved for issuance under the 2008 Plan by (i) one share
for each share of stock issued pursuant to a stock option or
stock appreciation right and (ii) three shares for each
share of stock issued pursuant to a restricted stock unit, which
corresponds to the reduction originally made with respect to
each award in the 2005 Plan.
The 2008 Plan authorizes the grant of awards for the issuance of
up to a maximum of 6,700,000 shares of US Airways
Group’s common stock. Awards may be in the form of
performance grants, bonus awards, performance shares, restricted
stock awards, vested shares, restricted stock units, vested
units, incentive stock options, nonstatutory stock options and
stock appreciation rights. The number of shares of US Airways
Group’s common stock available for issuance under the 2008
Plan is reduced by (i) one share for each share of stock
issued pursuant to a stock option or a stock appreciation right,
and (ii) one and one-half (1.5) shares for each share of
stock issued pursuant to all other stock awards. Stock awards
that are terminated, forfeited or repurchased result in an
increase in the share reserve of the 2008 Plan corresponding to
the reduction originally made in respect of the award. Any
shares of the US Airways Group’s stock tendered or
exchanged by a participant as full or partial payment to US
Airways Group of the exercise price under an option and any
shares retained or withheld by US Airways Group in satisfaction
of an employee’s obligations to pay applicable withholding
taxes with respect to any award will not be available for
reissuance, subjected to new awards or otherwise used to
increase the share reserve under the 2008 Plan. The cash
proceeds from option exercises will not be used to repurchase
shares on the open market for reuse under the 2008 Plan.
US Airways’ net income (loss) for the years ended
December 31, 2008, 2007 and 2006 includes $34 million,
$32 million and $34 million, respectively, of
compensation costs related to share-based payments. Upon
adoption of SFAS No. 123R, “Share-Based
Payment,” US Airways Group recorded a cumulative benefit
from the accounting change of $1 million, which reflects
the impact of estimating future forfeitures for previously
recognized compensation expense. No income tax effect related to
share-based payments or cumulative effect has been recorded as
the effects have been immediately offset by the recording of a
valuation allowance through the same financial statement caption.
Restricted Stock Unit Awards — As of
December 31, 2008, US Airways Group has outstanding
restricted stock unit awards (“RSUs”) with service
conditions (vesting periods) and RSUs with service and
performance conditions (which the performance condition of
obtaining a combined operating certificate for AWA and US
Airways was met on September 26, 2007).
SFAS No. 123R requires that the grant-date fair value
of RSUs be equal
Notes to
Consolidated Financial
Statements — (Continued)
to the market price of the underlying shares of US Airways
Group’s common stock on the date of grant if vesting is
based on a service or a performance condition. The grant-date
fair value of RSU awards that are subject to both a service and
a performance condition are being expensed over the vesting
period, as the performance condition has been met. Vesting
periods for RSU awards range from three to four years. RSUs are
classified as equity awards.
RSU award activity for the years ending December 31, 2008,
2007 and 2006 is as follows (shares in thousands):
As of December 31, 2008, there were $8 million of
total unrecognized compensation costs related to RSUs. These
costs are expected to be recognized over a weighted average
period of 1.1 years. The total fair value of RSUs vested
during 2008, 2007 and 2006 was $3 million, $14 million
and $3 million, respectively.
Stock Options and Stock Appreciation Rights —
Stock options and stock appreciation rights (“SARs”)
are granted with an exercise price equal to the fair market
value of US Airways Group’s common stock at the date of
each grant, generally become exercisable over a three to four
year period and expire if unexercised at the end of their term,
which ranges from seven to ten years. Stock options and SARs are
classified as equity awards. The exercise of SARs will be
settled with the issuance of shares of US Airways Group’s
common stock.
The fair value of stock options and SARs is determined at the
grant date using a Black-Scholes option pricing model, which
requires several assumptions. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect for the
expected term of the stock option or SAR at the time of grant.
The dividend yield is assumed to be zero since US Airways Group
does not pay dividends and has no current plans to do so in the
future. The volatility is based on the historical volatility of
US Airways Group’s common stock over a time period equal to
the expected term of the stock option or SAR. The expected life
of stock options and SARs is based on the historical experience
of US Airways Group.
Notes to
Consolidated Financial
Statements — (Continued)
The per share weighted-average grant-date fair value of stock
options and SARs granted and the weighted-average assumptions
used for the years ended December 31, 2008, 2007 and 2006
were as follows:
As of December 31, 2008, there were $20 million of
total unrecognized compensation costs related to stock options
and SARs. These costs are expected to be recognized over a
weighted average period of 1.3 years.
The total intrinsic value of stock options and SARs exercised
during the years ended December 31, 2008, 2007 and 2006 was
$0.1 million, $4 million and $68 million,
respectively. Cash received from stock option and SAR exercises
during the years ended December 31, 2008, 2007 and 2006 was
$0.1 million, $2 million and $31 million,
respectively.
Agreements with the Air Line Pilots Association
(“ALPA”) — US Airways Group and US
Airways have a letter of agreement with ALPA, the US
Airways’ pilot union through April 18, 2008, that
provides that US Airways’ pilots designated by ALPA receive
stock options to purchase 1.1 million shares of US Airways
Group’s common stock. The first tranche of 500,000 stock
options was granted on January 31, 2006 with an exercise
price of $33.65. The second tranche of 300,000 stock options was
granted on January 31, 2007 with an exercise price of
$56.90. The third and final tranche of 300,000 stock options was
granted on January 31, 2008 with an exercise price of
$12.50. The stock options granted to ALPA pilots do not reduce
the shares available for grant under any equity incentive plan.
Any of these ALPA stock options that are forfeited or that
expire without being exercised will not become available for
grant under any of US Airways’ plans.
The per share fair value of the ALPA pilot stock options and
assumptions used for the January 31, 2008, 2007 and 2006
grants were as follows:
As of December 31, 2008, there were no unrecognized
compensation costs related to stock options granted to ALPA
pilots as the stock options were fully vested on the grant date.
No ALPA stock options were exercised in 2008. There were 25,029
and 315,390 ALPA stock options exercised during 2007 and 2006,
respectively, pursuant to this agreement. The total intrinsic
value of ALPA stock options exercised during 2007 and 2006 was
$1 million and $5 million, respectively. Cash received
from ALPA stock options exercised during the years ended
December 31, 2007 and 2006 totaled $1 million and
$10 million, respectively.
Selected
quarterly financial information (unaudited)
Summarized quarterly financial information for 2008 and 2007 is
as follows (in millions):
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2008
Operating revenues
$
2,867
$
3,287
$
3,293
$
2,797
Operating expenses
3,060
3,825
3,981
3,151
Operating loss
(193
)
(538
)
(688
)
(354
)
Nonoperating expenses, net
(31
)
(21
)
(164
)
(159
)
Income tax provision (benefit)
—
—
3
(3
)
Net loss
(224
)
(559
)
(855
)
(510
)
2007
Operating revenues
$
2,761
$
3,185
$
3,065
$
2,802
Operating expenses
2,631
2,890
2,863
2,905
Operating income (loss)
130
295
202
(103
)
Nonoperating expenses, net
(23
)
(4
)
(10
)
(2
)
Income tax provision (benefit)
3
8
5
(9
)
Net income (loss)
104
283
187
(96
)
16.
Subsequent
events
On January 15, 2009, US Airways flight 1549 was involved in
an accident in New York that resulted in the aircraft landing in
the Hudson River. The Airbus A320 aircraft was en route to
Charlotte from LaGuardia with 150 passengers and a crew of 5 (2
pilots and 3 flight attendants) onboard. All aboard survived and
there were no serious
Notes to
Consolidated Financial
Statements — (Continued)
injuries. US Airways has insurance coverage for this aircraft
(which is a total loss) as well as costs resulting from the
accident, and there are no applicable deductibles.
On January 16, 2009, US Airways exercised its right to
obtain new loan commitments and incur additional loans under the
spare parts loan agreement. In connection with the exercise of
that right, Airbus Financial Services funded $50 million in
satisfaction of a previous commitment. This loan will mature on
October 20, 2014, will bear interest at a rate of LIBOR
plus a margin and will be secured by the collateral securing
loans under the spare parts loan agreement. In addition, in
connection with the incurrence of this loan, US Airways and
Airbus entered into amendments to the A320 Family Aircraft
Purchase Agreement, the A330 Aircraft Purchase Agreement and the
A350 XWB Purchase Agreement. Pursuant to these amendments, the
existing cross-default provisions of the applicable aircraft
purchase agreements were amended and restated to, among other
things, specify the circumstances under which a default under
the loan would constitute a default under the applicable
aircraft purchase agreement.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A.
Controls
and Procedures
Section 404 of the Sarbanes-Oxley Act of 2002 requires
management to include in this Annual Report on
Form 10-K
a report on management’s assessment of the effectiveness of
US Airways Group’s and US Airways’ internal control
over financial reporting, as well as an attestation report from
US Airways Group’s and US Airways’ independent
registered public accounting firm on the effectiveness of US
Airways Group’s and US Airways’ internal control over
financial reporting. Management’s annual report on internal
control over financial reporting and the related attestation
report from US Airways Group’s and US Airways’
independent registered public accounting firm are located in
Item 8A. “Consolidated Financial Statements and
Supplementary Data of US Airways Group, Inc.” and
Item 8B. “Consolidated Financial Statements and
Supplementary Data of US Airways, Inc.” and are
incorporated herein by reference.
Disclosure
Controls and Procedures
An evaluation was performed under the supervision and with the
participation of US Airways Group’s and US Airways’
management, including the Chief Executive Officer (the
“CEO”) and Chief Financial Officer (the
“CFO”), of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in the rules promulgated under the Exchange Act) as of
December 31, 2008. Based on that evaluation, our
management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective as of
December 31, 2008.
Changes
in Internal Control over Financial Reporting
There has been no change to US Airways Group’s or US
Airways’ internal control over financial reporting that
occurred during the quarter ended December 31, 2008 that
has materially affected, or is reasonably likely to materially
affect, US Airways Group’s or US Airways’ internal
control over financial reporting.
Limitation
on the Effectiveness of Controls
We believe that a controls system, no matter how well designed
and operated, cannot provide absolute assurance that the
objectives of the controls system are met and no evaluation of
controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been
detected. Our disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives, and
the CEO and CFO believe that our disclosure controls and
procedures were effective at the “reasonable
assurance” level as of December 31, 2008.
Item 9B.
Other
Information
On February 17, 2009, we entered into an amendment to our
co-branded credit card agreement with Barclays Bank Delaware.
The amendment reduced the unrestricted cash balance condition to
Barclays’ on-going obligation under the agreement to
pre-purchase additional miles on a monthly basis to
$1.4 billion for January 2009 and $1.45 billion for
February 2009, with the balance in each case including certain
fuel hedge collateral. The reductions addressed the impact on
our unrestricted cash of our obligations to post significant
amounts of collateral with our fuel hedging counterparties due
to recent rapid declines in fuel prices.
The information required by Part III of this
Form 10-K,
pursuant to General Instruction G(3) of
Form 10-K,
will be set forth in US Airways Group’s definitive Proxy
Statement to be filed pursuant to Regulation 14A relating
to US Airways Group’s Annual Meeting of Stockholders on
June 10, 2009 and is incorporated herein by reference. US
Airways Group will, within 120 days of the end of its
fiscal year, file with the SEC a definitive proxy statement
pursuant to Regulation 14A.
Directors,
Executive Officers and Corporate Governance
Information regarding US Airways Group’s and US
Airways’ directors and executive officers required by this
Item will be set forth under the caption
“Proposal 1 — Election of Directors,”“Executive Officers,”“Section 16(a)
Beneficial Ownership Reporting Compliance” and
“Information About Our Board of Directors and Corporate
Governance” in US Airways Group’s definitive Proxy
Statement and is incorporated by reference into this Annual
Report on
Form 10-K.
US Airways Group has adopted a Code of Business Conduct and
Ethics (“Code”) within the meaning of Item 406(b)
of
Regulation S-K.
The Code applies to the officers, directors and employees of US
Airways Group and its subsidiaries. The Code, US Airways
Group’s Corporate Governance Guidelines and the charters of
our Board committees are publicly available on US Airways
Group’s website at www.usairways.com. Printed copies
of the Code, the Corporate Governance Guidelines and the
charters of the Board committees are available at no charge to
any stockholder upon request to our Corporate Secretary at US
Airways, 111 West Rio Salado Parkway, Tempe, Arizona85281.
If US Airways Group makes substantive amendments to the Code or
grants any waiver, including any implicit waiver, to its
principal executive officer, principal financial officer,
principal accounting officer or controller, and persons
performing similar functions, US Airways Group will disclose the
nature of such amendment or waiver on its website or in a
Current Report on
Form 8-K
in accordance with applicable rules and regulations. The
information contained on or connected to US Airways Group’s
website is not incorporated by reference into this
Form 10-K
and should not be considered part of this or any other report
that US Airways Group files or furnishes with the SEC.
US Airways Group’s stock is listed on the NYSE. As a
result, its Chief Executive Officer is required to make and will
make a CEO’s Annual Certification to the New York Stock
Exchange in accordance with Section 303A.12 of the New York
Stock Exchange Listed Company Manual stating that he was not
aware of any violations by US Airways Group of the NYSE
corporate governance listing standards.
Item 11.
Executive
Compensation
Information required by this Item will be set forth in US
Airways Group’s definitive Proxy Statement under the
captions “Information About Our Board of Directors and
Corporate Governance,”“Executive Compensation”
and “Director Compensation” in the definitive Proxy
Statement and is incorporated by reference into this Annual
Report on
Form 10-K.
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information required by this Item will be set forth in US
Airways Group’s definitive Proxy Statement under the
captions “Security Ownership of Certain Beneficial Owners
and Management” and “Equity Compensation Plan
Information” in the Proxy Statement and is incorporated by
reference into this Annual Report on
Form 10-K.
Item 13.
Certain
Relationships and Related Transactions and Director
Independence
Information required by this Item will be set forth in US
Airways Group’s definitive Proxy Statement under the
captions “Certain Relationships and Related Party
Transactions” and “Information About Our Board of
Directors and Corporate Governance” in the Proxy Statement
and is incorporated by reference into this Annual Report on
Form 10-K.
Item 14.
Principal
Accountant Fees and Services
Information required by this Item will be set forth in US
Airways Group’s definitive Proxy Statement under the
caption “Information about Our Independent Registered
Public Accounting Firm” in the Proxy Statement and is
incorporated by reference into this Annual Report on
Form 10-K.
Consolidated Statements of Stockholder’s Equity (Deficit)
for the years ended December 31, 2008, 2007 and 2006
—
Notes to Consolidated Financial Statements
Consolidated
Financial Statement Schedules
All financial statement schedules have been omitted because they
are not applicable or not required, or because the required
information is either incorporated herein by reference or
included in the financial statements or notes thereto included
in this report.
Exhibits
Exhibits required to be filed by Item 601 of
Regulation S-K.
Where the amount of securities authorized to be issued under any
of the Company’s long-term debt agreements does not exceed
10 percent of the Company’s assets, pursuant to
paragraph (b)(4)(iii) of Item 601 of
Regulation S-K,
in lieu of filing such as an exhibit, the Company hereby agrees
to furnish to the Commission upon request a copy of any
agreement with respect to such long-term debt.
Exhibit
Number
Description
2
.1
Agreement and Plan of Merger, dated May 19, 2005, by and
among US Airways Group and America West Holdings Corporation
(incorporated by reference to Exhibit 2.1 to US Airways
Group’s Registration Statement on
Form S-4
filed on June 28, 2005) (Pursuant to item 601(b)(2) of
Regulation S-K
promulgated by the SEC, the exhibits and schedules to the
Agreement and Plan of Merger have been omitted. Such exhibits
and schedules are described in the Agreement and Plan of Merger.
US Airways Group hereby agrees to furnish to the SEC, upon its
request, any or all of such omitted exhibits or schedules)
(Registration
No. 333-126162).
2
.2
Letter Agreement, dated July 7, 2005 by and among US
Airways Group, America West Holdings Corporation, Barbell
Acquisition Corp., ACE Aviation America West Holdings, Inc.,
Eastshore Aviation, LLC, Par Investment Partners, L.P.,
Peninsula Investment Partners, L.P. and Wellington Management
Company, LLP (incorporated by reference to Exhibit 2.2 to
Amendment No. 1 to US Airways Group’s Registration
Statement on
Form S-4
filed on August 8, 2005) (Registration
No. 333-126162).
2
.3
Joint Plan of Reorganization of US Airways, Inc. and Its
Affiliated Debtors and
Debtors-in-Possession
(incorporated by reference to Exhibit 2.1 to US Airways
Group’s Current Report on
Form 8-K
filed on September 22, 2005).
Findings of Fact, Conclusions of Law and Order Under 11 USC
Sections 1129(a) and(b) of Fed. R. Bankr. P. 3020
Confirming the Joint Plan of Reorganization of US Airways, Inc.
and Its Affiliated Debtors and
Debtors-in-Possession
(incorporated by reference to Exhibit 2.2 to US Airways
Group’s Current Report on
Form 8-K
filed on September 22, 2005).
3
.1
Amended and Restated Certificate of Incorporation of US Airways
Group, effective as of September 27, 2005 (incorporated by
reference to Exhibit 3.1 to US Airways Group’s Current
Report on
Form 8-K
filed on October 3, 2005).
Amended and Restated Certificate of Incorporation of US Airways,
effective as of March 31, 2003 (incorporated by reference
to Plan
Exhibit C-2
to the First Amended Joint Plan of Reorganization of US Airways
Group and Its Affiliated Debtors and
Debtors-in-Possession,
As Modified (incorporated by reference to Exhibit 2.1 to US
Airways’ Current Report on
Form 8-K
dated March 18, 2003).
Indenture, dated as of September 30, 2005, between US
Airways Group, the guarantors listed therein and U.S. Bank
National Association, as trustee (incorporated by reference to
Exhibit 4.1 to US Airways Group’s Current Report on
Form 8-K
filed on October 3, 2005).
4
.2
Registration Rights Agreement, dated as of September 30,2005, between US Airways Group, AWA and US Airways, as
guarantors, and the initial purchaser named therein
(incorporated by reference to Exhibit 4.2 to US Airways
Group’s Current Report on
Form 8-K
filed on October 3, 2005).
10
.1
Master Memorandum of Understanding, dated as of
November 24, 2004, among US Airways Group, US Airways,
and General Electric Capital Corporation acting through its
agent GE Capital Aviation Services, Inc. and General Electric
Company, GE Transportation Component (incorporated by reference
to Exhibit 10.9 to US Airways Group’s Annual Report on
Form 10-K/A
for the year ended December 31, 2004).*
10
.2
Master Merger Memorandum of Understanding, dated as of
June 13, 2005, among US Airways, US Airways Group,
America West Holdings, Inc., AWA, General Electric Capital
Corporation, acting through its agent GE Commercial Aviation
Services LLC, GE Engine Services, Inc., GE Engine
Services — Dallas, LP and General Electric Company, GE
Transportation Component (incorporated by reference to
Exhibit 10.9 to US Airways Group’s Quarterly Report on
Form 10-Q/A
for the quarter ended June 30, 2005).*
10
.3
Amended and Restated Airbus A320 Agreement dated as of
October 2, 2007 between US Airways, Inc. and Airbus S.A.S.
(incorporated by reference to Exhibit 10.3 to US Airways
Group’s Annual Report on
Form 10-K
for the year ended December 31, 2007).*
10
.4
Amendment No. 1 dated as of January 11, 2008 to the
Amended and Restated Airbus A320 Family Aircraft Purchase
Agreement dated as of October 2, 2007 between US Airways,
Inc. and Airbus S.A.S. (incorporated by reference to
Exhibit 10.1 to US Airways Group’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2008).*
10
.5
Amendment No. 2 dated as of October 20, 2008 to the
Amended and Restated Airbus A320 Family Aircraft Purchase
Agreement dated as of October 2, 2007 between US Airways,
Inc. and Airbus S.A.S., including Amended and Restated Letter
Agreement No. 3, Amended and Restated Letter Agreement
No. 5, and Amended and Restated Letter Agreement No. 9
to the Purchase Agreement.*
Amendment No. 2 dated as of October 20, 2008 to A330
Purchase Agreement dated as of October 2, 2007 between US
Airways, Inc. and Airbus S.A.S., including Amended and Restated
Letter Agreement No. 5 and Amended and Restated Letter
Agreement No. 9 to the Purchase Agreement.*
10
.9
A330/A340 Purchase Agreement dated as of November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.5 to US Airways Group’s Annual
Report on
Form 10-K
for the year ended December 31, 1998).*
10
.10
Amendment No. 1 dated as of March 23, 2000 to
A330/A340 Purchase Agreement dated November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.2 to US Airways Group’s
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2000).*
10
.11
Amendment No. 2 dated as of June 29, 2000 to A330/A340
Purchase Agreement dated November 24, 1998 between US
Airways Group and AVSA, S.A.R.L. (incorporated by reference to
Exhibit 10.2 to US Airways Group’s Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2000).*
10
.12
Amendment No. 3 dated as of November 27, 2000 to
A330/A340 Purchase Agreement dated November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.14 to US Airways Group’s
Annual Report on
Form 10-K
for the year ended December 31, 2000).*
10
.13
Amendment No. 4 dated as of September 20, 2001 to
A330/A340 Purchase Agreement dated November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.16 to US Airways Group’s
Annual Report on
Form 10-K
for the year ended December 31, 2001).*
10
.14
Amendment No. 5 dated as of July 17, 2002 to A330/A340
Purchase Agreement dated November 24, 1998 between US
Airways Group and AVSA, S.A.R.L. (incorporated by reference to
Exhibit 10.2 to US Airways Group’s Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2002).*
10
.15
Amendment No. 6 dated as of March 29, 2003 to
A330/A340 Purchase Agreement dated November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.2 to US Airways Group’s
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2003).*
10
.16
Amendment No. 7 dated August 30, 2004 to the Airbus
A330/A340 Purchase Agreement dated November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.3 to US Airways’ Group’s
Quarterly Report on
Form 10-Q/A
for the quarter ended September 30, 2004).*
10
.17
Amendment No. 8 dated December 22, 2004 to the Airbus
A330/A340 Purchase Agreement dated as of November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.6 to US Airways Group’s
Quarterly Report on
Form 10-Q/A
for the quarter ended March 31, 2005).*
10
.18
Amendment No. 9 dated January 2005 to the Airbus A330/A340
Purchase Agreement dated November 24, 1998 between US
Airways Group and AVSA, S.A.R.L. (incorporated by reference to
Exhibit 10.7 to US Airways Group’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005).*
10
.19
Letter Agreement dated December 17, 2004 between US Airways
Group and US Airways and Airbus North America Sales Inc.
(incorporated by reference to Exhibit 99.1 to US Airways
Group’s Current Report on
Form 8-K
filed on February 9, 2005).
10
.20
Amendment No. 10 dated September 2005 to the Airbus
A330/A340 Purchase Agreement dated November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.7 to US Airways Group’s
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005).*
10
.21
Amendment No. 11 dated as of October 2, 2007 to the
Airbus A330/A340 Purchase Agreement dated November 24, 1998
between US Airways Group and AVSA, S.A.R.L. (incorporated by
reference to Exhibit 10.18 to US Airways Group’s
Annual Report on
Form 10-K
for the year ended December 31, 2007).*
Amended and Restated Airbus A350 XWB Purchase Agreement, dated
as of October 2, 2007, among AVSA, S.A.R.L. and US Airways,
Inc., AWA and US Airways Group (incorporated by reference to
Exhibit 10.19 to US Airways Group’s Annual Report on
Form 10-K
for the year ended December 31, 2007).*
10
.23
Amendment No. 1 dated as of October 20, 2008 to the
Amended and Restated Airbus A350 XWB Purchase Agreement, dated
as of October 2, 2007, between US Airways, Inc. and Airbus
S.A.S., including Amended and Restated Letter Agreement
No. 3, Amended and Restated Letter Agreement No. 5,
and Amended and Restated Letter Agreement No. 9 to the
Purchase Agreement.*
10
.24
Amended and Restated Embraer Aircraft Purchase Agreement dated
as of June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.
(incorporated by reference to Exhibit 10.3 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).*
10
.25
Amendment No. 1 dated as of June 1, 2007 to Amended
and Restated Embraer Aircraft Purchase Agreement dated
June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.
(incorporated by reference to Exhibit 10.1 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007).*
10
.26
Amendment No. 2 dated as of June 6, 2007 to Amended
and Restated Embraer Aircraft Purchase Agreement dated
June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.
(incorporated by reference to Exhibit 10.2 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007).*
10
.27
Amendment No. 3 dated as of August 15, 2007 to Amended
and Restated Embraer Aircraft Purchase Agreement dated as of
June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.
(incorporated by reference to Exhibit 10.2 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007).*
10
.28
Amendment No. 4 dated as of March 14, 2008 to Amended
and Restated Embraer Aircraft Purchase Agreement dated as of
June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.
(incorporated by reference to Exhibit 10.2 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2008).*
10
.29
Amendment No. 5 dated as of June 30, 2008 to Amended
and Restated Embraer Aircraft Purchase Agreement dated as of
June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.
(incorporated by reference to Exhibit 10.3 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2008).*
10
.30
Amendment No. 6 dated as of October 22, 2008 to
Amended and Restated Embraer Aircraft Purchase Agreement dated
as of June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.*
10
.31
Amendment No. 1 dated as of August 15, 2007 to Amended
and Restated Letter Agreement DCT-022/33 dated as of
June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.
(incorporated by reference to Exhibit 10.3 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007).*
10
.32
Amendment No. 2 dated as of March 14, 2008 to Amended
and Restated Letter Agreement DCT-022/33 dated as of
June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.
(incorporated by reference to Exhibit 10.3 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2008).*
10
.33
Bombardier CRJ Aircraft Master Purchase Agreement dated as of
May 9, 2003 between US Airways Group and Bombardier, Inc.
(incorporated by reference to Exhibit 10.2 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003).*
10
.34
Contract Change Order 1 dated January 27, 2004 to
Bombardier CRJ Aircraft Master Purchase Agreement dated as of
May 9, 2003 between US Airways Group and Bombardier, Inc.
(incorporated by reference to Exhibit 10.6 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004).*
Contract Change Order 2 dated February 9, 2004 to
Bombardier CRJ Aircraft Master Purchase Agreement dated as of
May 9, 2003 between US Airways Group and Bombardier, Inc.
(incorporated by reference to Exhibit 10.7 to US Airways
Group’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004).*
Letter Agreement dated September 16, 2005 by and among US
Airways Group, America West Holdings Corporation, Barbell
Acquisition Corp., ACE Aviation America West Holdings, Inc.,
Eastshore Aviation, LLC, Par Investment Partners, L.P.,
Peninsula Investment Partners, L.P. and Wellington Management
Company, LLP (incorporated by reference to Exhibit 10.11 to
US Airways Group’s Quarterly Report on Form
10-Q for the
quarter ended September 30, 2005).
10
.39
Merchant Services Bankcard Agreement, dated as of April 16,2003, between AWA, The Leisure Company, JPMorgan Chase Bank, and
Chase Merchant Services L.L.C. (incorporated by reference to
Exhibit 10.113 to Amendment No. 2 to the Registration
Statement on
Form S-4
filed by US Airways Group on August 11, 2005) (Registration
No. 333-126162).*
10
.40
First Amendment to Merchant Services Bankcard Agreement, dated
as of August 8, 2005, among AWA, JPMorgan Chase Bank, N.A.,
and Chase Merchant Services, L.L.C. (incorporated by reference
to Exhibit 10.111 to Amendment No. 2 to the
Registration Statement on
Form S-4
filed by US Airways Group on August 11, 2005) (Registration
No. 333-126162).*
10
.41
Second Amendment to Merchant Services Bankcard Agreement, dated
as of April 11, 2008, between US Airways Group, US
Airways, Chase Alliance Partners, LLC, as successor to Chase
Merchant Services, LLC, and JPMorgan Chase Bank, N.A.
(incorporated by reference to Exhibit 10.2 to
US Airways Group’s Quarterly Report on Form
10-Q for the
quarter ended June 30, 2008).*
10
.42
America West Co-Branded Card Agreement, dated as of
January 25, 2005, between AWA and Juniper Bank
(incorporated by reference to Exhibit 10.112 to Amendment
No. 2 to the Registration Statement on
Form S-4
filed by US Airways Group on August 11, 2005) (Registration
No. 333-126162).*
10
.43
Assignment and First Amendment to America West Co-Branded Card
Agreement, dated as of August 8, 2005, between AWA, US
Airways Group and Juniper Bank (incorporated by reference to
Exhibit 10.110 to Amendment No. 2 to the Registration
Statement on
Form S-4
filed by US Airways Group on August 11, 2005) (Registration
No. 333-126162).*
10
.44
Amendment No. 2 to America West Co-Branded Credit Card
Agreement, dated as of September 26, 2005, between AWA, US
Airways Group and Juniper Bank (incorporated by reference to
Exhibit 10.45 to US Airways Group’s Annual Report
on
Form 10-K
for the year ended December 31, 2007).*
10
.45
Amendment No. 3 to America West Co-Branded Credit Card
Agreement, dated as of December 29, 2006, between US
Airways Group and Barclays Bank Delaware (incorporated by
reference to Exhibit 10.46 to US Airways Group’s
Annual Report on
Form 10-K
for the year ended December 31, 2007).*
10
.46
Amendment No. 4 to America West Co-Branded Credit Card
Agreement, dated as of December 5, 2007, between US Airways
Group and Barclays Bank Delaware (incorporated by reference to
Exhibit 10.47 to US Airways Group’s Annual Report on
Form 10-K
for the year ended December 31, 2007).*
10
.47
Amendment No. 5 to America West Co-Branded Credit Card
Agreement, dated as of August 28, 2008, between US Airways
Group and Barclays Bank Delaware (incorporated by reference to
Exhibit 10.4 to US Airways Group’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2008).*
10
.48
Amendment No. 6 to America West Co-Branded Credit Card
Agreement, dated as of October 17, 2008, between US Airways
Group and Barclays Bank Delaware.*
10
.49
Loan Agreement [Spare Parts], dated as of October 20, 2008,
among US Airways, Inc., GECC, as administrative agent,
collateral agent and original lender, and the lenders from time
to time party thereto.*
Amendment No. 1 to Loan Agreement [Spare Parts], dated as
of December 5, 2008, among US Airways, Inc., GECC, as
administrative agent, collateral agent and original lender, and
the lenders from time to time party thereto.*
10
.51
Loan Agreement, dated March 23, 2007, among US Airways
Group as Borrower, certain subsidiaries of US Airways Group
party to the agreement from time to time, Citicorp North
America, Inc., as Administrative Agent, the lenders party to the
agreement from time to time, Citigroup Global Markets Inc., as
Joint Lead Arranger and Bookrunner, Morgan Stanley Senior
Funding, Inc., as Joint Lead Arranger and Bookrunner and
Syndication Agent, and General Electric Capital Corporation, as
Documentation Agent (incorporated by reference to
Exhibit 4.1 to US Airways Group’s Current Report on
Form 8-K
filed on March 26, 2007).
10
.52
Amendment No. 2 to Loan Agreement, dated as of
January 14, 2008, between US Airways Group, Inc., as
Borrower, and Citicorp North America, Inc., as Administrative
Agent and Collateral Agent (incorporated by reference to
Exhibit 10.3 to US Airways Group’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2008).
10
.53
Amendment No. 3 to Loan Agreement, dated as of
October 20, 2008, between US Airways Group, Inc., as
Borrower, and Citigroup North America, Inc. as Administrative
Agent and Collateral Agent.
10
.54
Amended and Restated Loan Agreement, dated as of April 7,2006, among US Airways Group, General Electric Capital
Corporation, as Administrative Agent, the lenders party to the
agreement from time to time, and certain subsidiaries of US
Airways Group party to the agreement from time to time
(incorporated by reference to Exhibit 4.1 to US Airways
Group’s Current Report on
Form 8-K
dated April 7, 2006, filed on April 10, 2006).
10
.55
Stockholders’ Agreement, dated as of September 27,2005, among US Airways Group and ACE Aviation America West
Holdings Inc. (incorporated by reference to Exhibit 10.1 to
US Airways Group’s Current Report on
Form 8-K
filed on October 3, 2005).
Stockholders’ Agreement, dated as of September 27,2005, among US Airways Group and Par Investment Partners, L.P.
(incorporated by reference to Exhibit 10.3 to US Airways
Group’s Current Report on
Form 8-K
filed on October 3, 2005).
10
.58
Stockholders’ Agreement, dated as of September 27,2005, among US Airways Group and Peninsula Investment Partners,
L.P. (incorporated by reference to Exhibit 10.4 to US
Airways Group’s Current Report on
Form 8-K
filed on October 3, 2005).
10
.59
Stockholders’ Agreement, dated as of September 27,2005, among US Airways Group and the group of investors named
therein under the management of Wellington Management Company,
LLP (incorporated by reference to Exhibit 10.5 to US
Airways Group’s Current Report on
Form 8-K
filed on October 3, 2005).
10
.60
Stockholders’ Agreement, dated as of September 27,2005, among US Airways Group, Tudor Proprietary Trading L.L.C.
and the group of investors named therein for which Tudor
Investment Corp. acts as investment advisor (incorporated by
reference to Exhibit 10.6 to US Airways Group’s
Current Report on
Form 8-K
filed on October 3, 2005).
10
.61
US Airways Funded Executive Defined Contribution Plan
(incorporated by reference to Exhibit 10.1 to US
Airways’ Annual Report on
Form 10-K
for the year ended December 31, 2003).†
10
.62
First Amendment to the US Airways Funded Executive Defined
Contribution Plan dated January 26, 2004 (incorporated by
reference to Exhibit 10.4 to US Airways’ Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004).†
10
.63
Second Amendment to the US Airways Funded Executive Defined
Contribution Plan dated May 20, 2004 (incorporated by
reference to Exhibit 10.5 to US Airways’ Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004).†
Third Amendment to the US Airways Funded Executive Defined
Contribution Plan dated June 24, 2004 (incorporated by
reference to Exhibit 10.6 to US Airways’ Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004).†
10
.65
US Airways Unfunded Executive Defined Contribution Plan
(incorporated by reference to Exhibit 10.2 to US
Airways’ Annual Report on
Form 10-K
for the year ended December 31, 2003).†
10
.66
First Amendment to the US Airways Unfunded Executive Defined
Contribution Plan dated January 26, 2004 (incorporated by
reference to Exhibit 10.7 to US Airways’ Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004).†
10
.67
Second Amendment to the US Airways Unfunded Executive Defined
Contribution Plan dated May 20, 2004 (incorporated by
reference to Exhibit 10.8 to US Airways’ Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004).†
10
.68
Third Amendment to the US Airways Unfunded Executive Defined
Contribution Plan dated June 24, 2004 (incorporated by
reference to Exhibit 10.9 to US Airways’ Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004).†
10
.69
US Airways Group 2005 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to US Airways Group’s
Current Report on
Form 8-K
filed on October 3, 2005).†
10
.70
Stock Unit Award Agreement, dated as of September 27, 2005,
between US Airways Group and W. Douglas Parker (incorporated by
reference to Exhibit 10.6 to US Airways Group’s
Current Report on
Form 8-K
filed on October 3, 2005).†
10
.71
Form of Stock Unit Agreement under US Airways Group’s 2005
Equity Incentive Plan (incorporated by reference to
Exhibit 10.2 to US Airways Group’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).†
10
.72
Form of Stock Appreciation Rights Award Agreement under US
Airways Group’s 2005 Equity Incentive Plan (incorporated by
reference to Exhibit 10.75 to US Airways Group’s
Annual Report on
Form 10-K
for the year ended December 31, 2005).†
10
.73
Form of Nonstatutory Stock Option Award Agreement under US
Airways Group’s 2005 Equity Incentive Plan (incorporated by
reference to Exhibit 10.5 to US Airways Group’s
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006).†
10
.74
Form of Stock Bonus Award Agreement for Non-Employee Directors
under US Airways Group’s 2005 Equity Incentive Plan
(incorporated by reference to Exhibit 10.96 to US Airways
Group’s Annual Report on
Form 10-K
for the year ended December 31, 2007).†
10
.75
US Airways Group, Inc. 2008 Equity Incentive Plan (incorporated
by reference to Exhibit 4.1 to US Airways Group’s
Registration Statement on
Form S-8
filed on June 30, 2008 (Registration
No. 333-152033)).†
10
.76
Form of Restricted Stock Unit Award Agreement under the US
Airways Group, Inc. 2008 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to US Airways Group’s
Current Report on
Form 8-K
filed August 7, 2008).†
10
.77
Form of Stock Appreciation Right Award Agreement under the US
Airways Group, Inc. 2008 Equity Incentive Plan (incorporated by
reference to Exhibit 10.2 to US Airways Group’s
Current Report on
Form 8-K
filed August 7, 2008).†
10
.78
Form of Director Vested Share Award Agreement under the US
Airways Group 2008 Equity Incentive Plan.†
Amended and Restated America West 1994 Incentive Equity Plan
(incorporated by reference to Exhibit 10.21 to AWA’s
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2001).†
America West Holdings 2002 Incentive Equity Plan as amended
through May 23, 2002 (incorporated by reference to
Exhibit 10.1 to US Airways Group’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).†
10
.83
2007 Performance-Based Award Program under the US Airways Group
2005 Equity Incentive Plan (incorporated by reference to
Exhibit 10.2 to US Airways Group’s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).†
10
.84
2008 Long Term Incentive Program under the US Airways Group 2005
Equity Incentive Plan.†
10
.85
Form of Executive Change in Control Agreement for Presidents
(incorporated by reference to Exhibit 10.2 to US Airways
Group’s Current Report on
Form 8-K
filed on November 29, 2007).†
10
.86
Form of Executive Change in Control Agreement for Executive Vice
Presidents (incorporated by reference to Exhibit 10.3 to US
Airways Group’s Current Report on
Form 8-K
filed on November 29, 2007).†
10
.87
Form of Executive Change in Control Agreement for Senior Vice
Presidents (incorporated by reference to Exhibit 10.4 to US
Airways Group’s Current Report on
Form 8-K
filed on November 29, 2007).†
10
.88
Summary of Director Compensation and Benefits.†
10
.89
Form of Letter Agreement for Directors Travel Program
(incorporated by reference to Exhibit 10.106 to US Airways
Group’s Annual Report on
Form 10-K
for the year ended December 31, 2007).†
10
.90
Amended and Restated Employment Agreement dated as of
November 28, 2007 by and among US Airways Group, US
Airways, Inc. and W. Douglas Parker (incorporated by reference
to Exhibit 10.1 to US Airways Group’s Current Report
on
Form 8-K
filed on November 29, 2007).†
10
.91
Annual Incentive Bonus Plan (incorporated by reference to
Exhibit 10.1 to America West Holdings’ and America
West Airlines, Inc.’s Quarterly Report on
form 10-Q
for the quarter ending March 31, 2005).†
10
.92
US Airways Group Incentive Compensation Plan (incorporated by
reference to Exhibit 10.1 to US Airways Group’s
Current Report on
Form 8-K
filed on January 23, 2006).†
21
.1
Subsidiaries of US Airways Group.
23
.1
Consents of KPMG LLP, Independent Registered Public Accounting
Firm of US Airways Group.
24
.1
Powers of Attorney.
31
.1
Certification of US Airways Group’s Chief Executive Officer
pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.
31
.2
Certification of US Airways Group’s Chief Financial Officer
pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.
31
.3
Certification of US Airways’ Chief Executive Officer
pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.
31
.4
Certification of US Airways’ Chief Financial Officer
pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.
32
.1
Certification of US Airways Group’s Chief Executive Officer
and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32
.2
Certification of US Airways’ Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*
Portions of this exhibit have been omitted under a request for
confidential treatment and filed separately with the United
States Securities and Exchange Commission.
†
Management contract or compensatory plan or arrangement.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrants
have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
KNOW ALL MEN BY THESE PRESENTS, that each individual whose
signature appears below constitutes and appoints W. Douglas
Parker and Derek J. Kerr and each or any of them, his or her
true and lawful attorneys and agents, with full power of
substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign
any and all amendments to the Registrants’ Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, and to file
the same with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys and agents, and each or
any of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully
to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys
and agents, and each of them, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ W.
Douglas Parker
W.
Douglas Parker
Chairman and Chief Executive Officer (Principal Executive
Officer)
Amendment No. 2 dated as of October 20, 2008 to the
Amended and Restated Airbus A320 Family Aircraft Purchase
Agreement dated as of October 2, 2007 between US Airways,
Inc. and Airbus S.A.S., including Amended and Restated Letter
Agreement No. 3, Amended and Restated Letter Agreement
No. 5, and Amended and Restated Letter Agreement No. 9
to the Purchase Agreement.*
10
.8
Amendment No. 2 dated as of October 20, 2008 to A330
Purchase Agreement dated as of October 2, 2007 between US
Airways, Inc. and Airbus S.A.S., including Amended and Restated
Letter Agreement No. 5 and Amended and Restated Letter
Agreement No. 9 to the Purchase Agreement.*
10
.23
Amendment No. 1 dated as of October 20, 2008 to the
Amended and Restated Airbus A350 XWB Purchase Agreement, dated
as of October 2, 2007, between US Airways, Inc. and Airbus
S.A.S., including Amended and Restated Letter Agreement
No. 3, Amended and Restated Letter Agreement No. 5,
and Amended and Restated Letter Agreement No. 9 to the
Purchase Agreement.*
10
.30
Amendment No. 6 dated as of October 22, 2008 to
Amended and Restated Embraer Aircraft Purchase Agreement dated
as of June 13, 2006 between US Airways Group and
Embraer — Empresa Brasileira de Aeronautica S.A.*
10
.48
Amendment No. 6 to America West Co-Branded Credit Card
Agreement, dated as of October 17, 2008, between US Airways
Group and Barclays Bank Delaware.*
10
.49
Loan Agreement [Spare Parts], dated as of October 20, 2008,
among US Airways, Inc., GECC, as administrative agent,
collateral agent and original lender, and the lenders from time
to time party thereto.*
10
.50
Amendment No. 1 to Loan Agreement [Spare Parts], dated as
of December 5, 2008, among US Airways, Inc., GECC, as
administrative agent, collateral agent and original lender, and
the lenders from time to time party thereto.*
10
.53
Amendment No. 3 to Loan Agreement, dated as of
October 20, 2008, between US Airways Group, Inc., as
Borrower, and Citigroup North America, Inc. as Administrative
Agent and Collateral Agent.
10
.78
Form of Director Vested Share Award Agreement under the US
Airways Group 2008 Equity Incentive Plan.†
10
.84
2008 Long Term Incentive Program under the US Airways Group 2005
Equity Incentive Plan.†
10
.88
Summary of Director Compensation and Benefits.†
21
.1
Subsidiaries of US Airways Group.
23
.1
Consents of KPMG LLP, Independent Registered Public Accounting
Firm of US Airways Group.
24
.1
Powers of Attorney.
31
.1
Certification of US Airways Group’s Chief Executive Officer
pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.
31
.2
Certification of US Airways Group’s Chief Financial Officer
pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.
31
.3
Certification of US Airways’ Chief Executive Officer
pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.
31
.4
Certification of US Airways’ Chief Financial Officer
pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.
32
.1
Certification of US Airways Group’s Chief Executive Officer
and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32
.2
Certification of US Airways’ Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*
Portions of this exhibit have been omitted under a request for
confidential treatment and filed separately with the United
States Securities and Exchange Commission.
†
Management contract or compensatory plan or arrangement.
180
Dates Referenced Herein and Documents Incorporated by Reference
