Item 1. Business
Overview
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”). MSC and AAL operate in support of our airline subsidiaries in areas such as the procurement of aviation fuel and insurance. US Airways Group was formed in 1982, and its origins trace back to the formation of All American Aviation in 1939. US Airways, a Delaware corporation, was formed in 1982. Effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005, US Airways Group merged with America West Holdings Corporation (“America West Holdings”), with US Airways Group as the surviving corporation.
Our principal executive offices are located at 111 West Rio Salado Parkway, Tempe, Arizona 85281. Our telephone number is (480) 693-0800, and our internet address is www.usairways.com. Information contained on our website is not and should not be deemed a part of this report or any other report or filing filed with or furnished to the Securities and Exchange Commission (“SEC”).
Available Information
A copy of this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge at www.usairways.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Recent Developments
Merger Agreement with AMR Corporation
On February 13, 2013, AMR Corporation, a Delaware corporation (“AMR”), US Airways Group, and AMR Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of AMR (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), providing for a business combination of AMR and US Airways Group. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into US Airways Group (the “Merger”), with US Airways Group as the surviving corporation and as a wholly owned subsidiary of AMR. The Merger Agreement and the transactions contemplated thereby, including the Merger, are subject to the approval of the Bankruptcy Court (as defined below), and are to be effected pursuant to a plan of reorganization (the “Plan”) of AMR and certain of its direct and indirect domestic subsidiaries (the “Debtors”) in connection with their currently pending cases under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. Sections 101 et seq. (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Plan is subject to confirmation and consummation in accordance with the requirements of the Bankruptcy Code.
Subject to the terms and conditions of the Merger Agreement, which has been approved by the boards of directors of the respective parties, if the Merger is completed, US Airways Group stockholders will receive one share of common stock of AMR (“New American Common Stock”) for each share of US Airways Group common stock. The aggregate number of shares of New American Common Stock issuable to holders of US Airways Group equity instruments (including stockholders, holders of convertible notes, optionees and holders of restricted stock units) will represent 28% of the diluted capitalization of AMR after giving effect to the Plan. The remaining 72% equity ownership of AMR will be distributable, pursuant to the Plan, to the Debtors’ stakeholders, labor unions and certain employees.
All of the equity interests in the reorganized AMR will be issued solely pursuant to the Merger Agreement or the Plan. All existing AMR common stock and other equity interests in AMR will be cancelled pursuant to the Plan, although such AMR equity holders are expected to receive a recovery in the form of New American Common Stock.
The Merger is intended to qualify, for federal income tax purposes, as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
The Merger Agreement provides that, upon consummation of the Merger, the board of directors of the combined company will initially consist of 12 members, composed of (i) Thomas W. Horton, AMR’s current chairman, chief executive officer and president, who will serve as chairman of the combined company until the earlier of (A) one year after the closing of the Merger and (B) the day immediately prior to the first annual meeting of stockholders of the combined company (provided that such meeting will not occur prior to May 1, 2014), (ii) W. Douglas Parker, US Airways Group’s current chief executive officer, who will serve as chief executive officer of the combined company and will serve as chairman of the combined company following the end of Mr. Horton’s term, (iii) two independent directors designated by AMR, (iv) three independent directors designated by US Airways Group, and (v) five independent directors designated by a search committee consisting of representatives of the Official Committee of Unsecured Creditors of the Debtors and certain representatives of creditors signatory to support agreements with AMR, one of whom will serve as lead independent director. Subject to applicable law, prior to the Merger, Messrs. Horton and Parker will engage in a planning process for integration purposes. The combined company will have its corporate headquarters at AMR’s current corporate headquarters in Ft. Worth, Texas. Immediately after the effective time of the Merger, AMR will change its name to “American Airlines Group Inc.”
AMR and US Airways Group have each made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (i) to conduct their businesses in the ordinary and usual course between the execution of the Merger Agreement and the consummation of the Merger and (ii) not to solicit alternative business combination transactions. In addition, the Merger Agreement contains “no shop” provisions that restrict each party’s ability to initiate, solicit or knowingly encourage or facilitate competing third-party proposals for any transaction involving a merger of such party or the acquisition of a significant portion of its stock or assets, although each party may consider competing, unsolicited proposals and enter into discussions or negotiations regarding such proposals, if its board of directors determines that any such acquisition proposal constitutes, or is reasonably likely to lead to, a superior proposal and that the failure to take such action is reasonably likely to be inconsistent with its fiduciary duties under applicable law.
US Airways Group has agreed to certain additional customary covenants in the Merger Agreement, including, among others, subject to certain exceptions, (i) to cause a stockholder meeting to be held to consider adoption of the Merger Agreement and (ii) for its board of directors to recommend adoption of the Merger Agreement by US Airways Group’s stockholders. AMR has also agreed to certain additional customary covenants in the Merger Agreement, including, among others, subject to certain exceptions, (i) to pursue confirmation of the Plan and (ii) for its board of directors to recommend adoption of the Merger Agreement by the Debtors’ stakeholders.
Consummation of the Merger is subject to customary conditions, including, among others, (i) approval of the stockholders of US Airways Group, (ii) expiration or termination of the applicable Hart-Scott-Rodino Act waiting period and the receipt of certain other regulatory approvals, (iii) absence of any order or injunction prohibiting the consummation of the Merger, (iv) Bankruptcy Court confirmation of the Plan, which shall contain certain specified provisions agreed to pursuant to the Merger Agreement, (v) subject to certain exceptions, the accuracy of representations and warranties with respect to the business of AMR or US Airways Group, as applicable, (vi) each of AMR and US Airways Group having performed their respective obligations pursuant to the Merger Agreement, and (vii) receipt by each of AMR and US Airways Group of a customary tax opinion.
The Merger Agreement contains certain termination rights for AMR and US Airways Group, and further provides that, upon termination of the Merger Agreement under specified circumstances, (i) AMR may be required to pay US Airways Group a termination fee of $135 million in the event it terminates the agreement to enter into a superior proposal and $195 million if US Airways Group terminates the Merger Agreement in the event of a knowing and deliberate breach of the Merger Agreement by AMR and (ii) US Airways Group may be required to pay AMR a termination fee of $55 million in the event it terminates the agreement to enter into a superior proposal and $195 million if AMR terminates the Merger Agreement in the event of a knowing and deliberate breach of the Merger Agreement by US Airways Group.
The foregoing description of the Merger Agreement is not a complete description of all of the parties’ rights and obligations under the Merger Agreement and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 hereto and is incorporated herein by reference. The representations, warranties and covenants contained in the Merger Agreement were made only for purposes of that agreement and as of specific dates; were solely for the benefit of the parties to the Merger Agreement; may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made by each contracting party to the other for the purposes of allocating contractual risk between them that differ from those applicable to investors. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of AMR, US Airways Group or any of their respective subsidiaries, affiliates or businesses. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in public disclosures by AMR or US Airways Group. Accordingly, investors should read the representations and warranties in the Merger Agreement not in isolation but only in conjunction with the other information about AMR or US Airways Group and their respective subsidiaries that the respective companies include in reports, statements and other filings they make with the SEC.
Tax Benefit Preservation Plan
In conjunction with execution of the Merger Agreement, US Airways Group also adopted a tax benefit preservation plan designed to help preserve the value of the net operating losses and other deferred tax benefits of US Airways Group and the combined enterprise resulting from the Merger with AMR. As part of the plan, the US Airways Group’s board of directors declared a dividend of one common stock purchase right, which are referred to as “rights,” for each outstanding share of US Airways Group common stock. The rights will be exercisable if a person or group, without the approval of the US Airways Group board or other permitted exception, acquires beneficial ownership of 4.9% or more of US Airways Group’s outstanding common stock. The rights also will be exercisable if a person or group that already beneficially owns 4.9% or more of the common stock of US Airways Group, without board approval or other permitted exception, acquires additional shares (other than as a result of a dividend or a stock split).
US Airways Group stockholders with ownership positions near or above the 4.9% threshold specified in the tax benefit preservation plan are urged to review its terms carefully. The foregoing description of the tax benefit preservation plan is not a complete description of all of the parties’ rights and obligations under the plan and is qualified in its entirety by reference to the Tax Benefit Preservation Plan which is filed as Exhibit 4.10 hereto and is incorporated herein by reference.
The U.S. Airline Industry
Even against a backdrop of uncertain economic conditions and high fuel prices, most of the U.S. industry experienced a profitable 2012 as consumer demand remained strong.
In its most recent data available, Airlines for America, the trade association for U.S. airlines, reported that annual U.S. industry passenger revenues and yields increased 3.8% and 3.2%, respectively, as compared to 2011. Year-over-year growth rates were lower than experienced in 2011 due primarily to more difficult year-over-year comparisons. With respect to international versus domestic revenue performance, Airlines for America reported domestic markets outperformed international markets, which experienced weaker demand due to the economic uncertainty in Europe during 2012.
Throughout 2012, jet fuel prices followed the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. On average, fuel costs were up slightly in 2012 as compared to 2011. The Brent crude oil average daily spot price was $112 per barrel during 2012 as compared to $111 in 2011. However, on a daily basis, prices continued to be volatile. Throughout 2012, daily spot prices fluctuated between a high of $128 per barrel in March to a low of $89 per barrel in June and closed the year at $111 per barrel on December 31, 2012.
While the U.S. airline industry is currently benefiting from a favorable revenue environment and moderating fuel price increases as described above, uncertainty exists regarding the economic conditions driving these factors. See Part I, Item 1A, Risk Factors - “Downturns in economic conditions adversely affect our business” and “Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.”
Airline Operations
We operate the fifth largest airline in the United States as measured by domestic revenue passenger miles (“RPMs”) and available seat miles (“ASMs”). We have hubs in Charlotte, Philadelphia and Phoenix and a focus city in Washington, D.C. at Ronald Reagan Washington National Airport (“Washington National”). We offer scheduled passenger service on more than 3,000 flights daily to 198 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, and Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service. We had approximately 54 million passengers boarding our mainline flights in 2012. During 2012, our mainline operation provided regularly scheduled service or seasonal service at 130 airports while the US Airways Express network served 157 airports in the United States, Canada, Mexico and the Caribbean, including 78 airports also served by our mainline operation. US Airways Express air carriers had approximately 28 million passengers boarding their planes in 2012. As of December 31, 2012, we operated 340 mainline jets and were supported by our regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 238 regional jets and 44 turboprops. Our prorate carriers operated four regional jets at December 31, 2012.
In December 2011, we closed our slot transaction with Delta Air Lines, Inc. (“Delta”). With all of the schedule changes resulting from our agreement with Delta, over 99 percent of our capacity now touches our hubs in Phoenix, Philadelphia and Charlotte, our focus city at Washington National or our hourly shuttle service between Boston, New York LaGuardia and Washington National.
Refer to the “Customer Service” section in Part I for discussion of US Airways’ operating performance as reported to the U.S. Department of Transportation (“DOT”).
For information regarding US Airways Group’s and US Airways’ operating segments and operating revenue in principal geographic areas, see Note 10 to their respective consolidated financial statements included in Part II, Items 8A and 8B of this report.
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 2012, the US Airways Express network served 157 airports in the continental United States, Canada, Mexico and the Caribbean, including 78 airports also served by our mainline operation. During 2012, approximately 28 million passengers boarded US Airways Express air carriers’ planes, approximately 44% of whom connected to or from our mainline flights. Of these 28 million passengers, approximately 8 million were enplaned by our wholly owned regional airlines Piedmont and PSA, approximately 20 million were enplaned by third-party carriers operating under capacity purchase agreements and less than 1 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. Our prorate carrier, Trans States Airlines, Inc., operated three regional jets and SkyWest Airlines, Inc. operated one regional jet under a prorate agreement at December 31, 2012. All US Airways Express carriers have logos, service marks, aircraft paint schemes and uniforms similar to our mainline operation.
The following table sets forth our US Airways Express capacity purchase agreements and the number and type of aircraft operated under those agreements at December 31, 2012.
(1) PSA and Piedmont are wholly owned subsidiaries of US Airways Group.
(2) In February 2013, we executed an amendment to our capacity purchase agreement with Chautauqua which removes the nine Embraer 145 regional jets they currently operate from our express fleet by July 2013. In addition, we executed an amendment to our capacity purchase agreement with Mesa Airlines to add nine CRJ 900 aircraft.
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. Through frequent flyer arrangements, members are provided 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.
US Airways is a member of the Star Alliance, the world’s largest airline alliance, which now has 27 member airlines serving 1,329 airports in 194 countries. 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, 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 Aegean, Air China, Air New Zealand, ANA, Asiana, AviancaTaca, Brussels Airlines, Croatia Airlines, Lufthansa, Singapore Airlines, South African Airways, Swiss International, TAM, TAP Portugal, Turkish Airlines and United. Other international code sharing partners include EVA Airways, Qatar Airways, Royal Jordanian Airlines and Virgin Atlantic Airways. Each of these code share agreements funnel international traffic onto our domestic flights or support specific European and Caribbean markets in which we operate. Domestically, we code share with Hawaiian Airlines on intra-Hawaii flights.
Competition in the Airline Industry
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, when they begin service to new cities or when they have excess capacity, to generate cash flow and maximize revenue per ASM and to establish, increase or preserve market share. 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 manage effectively our operating costs. Some of our competitors have greater financial resources and/or lower cost structures than we do. In addition, recent years have seen the growth of low-fare, low-cost competitors in many of the markets in which we operate. These competitors include Southwest, JetBlue, Allegiant, Frontier, Virgin America and Spirit. These low cost carriers generally have lower cost structures than US Airways.
In addition to price competition, airlines compete for market share by increasing the size of their route system and the number of markets they serve. Airlines with international operations are less exposed to domestic economic conditions and may be able to offset less profitable domestic fares with more profitable international fares. 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.
Additionally, 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. Surface competition can be more significant during economic downturns when consumers cut back on discretionary spending.
Industry Regulation and Airport Access
General
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 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. The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions. Some FAA requirements cover, among other things, retirement and maintenance of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement, other environmental concerns, fuel tank inerting, crew scheduling, aircraft operation and safety and increased inspections and maintenance procedures to be conducted on older aircraft. Our failure to timely comply with these requirements has in the past and could in the future result in fines and other enforcement actions by the FAA or other regulators. Additionally, the FAA recently finalized rules on pilot flight and duty times, and has proposed new rules on minimum requirements for all pilots operating commercial aircraft. Both rules could increase our costs and reduce staffing flexibility.
Our airline subsidiaries are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation. Our airline subsidiaries collect the ticket tax, along with certain other U.S. and foreign taxes and user fees on air transportation, and pass along the collected amounts to the appropriate governmental agencies. Although these taxes are not our operating expenses, they represent an additional cost to our customers. There are a number of efforts in Congress and in other countries to raise different portions of the various taxes imposed on airlines and their passengers.
Most major U.S. airports impose a passenger facility charge (“PFC”). The ability of airlines to contest increases in this charge is restricted by federal legislation, DOT regulations and judicial decisions. With certain exceptions, air carriers pass these charges on to passengers. However, our ability to pass through PFCs to our customers is subject to various factors, including market conditions and competitive factors. The current cap on the PFC is $4.50 per passenger, but the industry faces regular efforts in Congress to raise the cap to a higher level.
DOT consumer rules that took effect on April 29, 2010 require procedures for customer handling during long onboard delays, as well as additional reporting requirements for airlines that have increased the cost of airline operations and reduced revenues. The DOT has been aggressively investigating alleged violations of these rules. In addition, the DOT finalized a second set of rules that further regulate airline interactions with passengers through the reservations process, at the airport and on board the aircraft. US Airways is in compliance with these rules, which took effect in August 2011, and others which took effect in January 2012. These rules require airlines to display all fares in an “all in” basis, with the price of the air travel and all taxes and government imposed fees rolled into the displayed fare. Enhanced disclosure of ancillary fees such as baggage fees is also required. Other rules apply to post-ticket purchase price increases and an expansion of tarmac delay regulations to international carriers.
We anticipate a third set of consumer rules to be issued by the DOT in mid-2013. We continue to see other efforts by the DOT to further regulate airlines through increased data reporting requirements, expansion of the Air Carrier Access Act, and greater oversight of the ways that airlines describe and sell air transportation and other products and services. Each additional regulation or other form of regulatory oversight increases costs and adds greater complexity to our operation. We cannot assure you that compliance with these new rules, anticipated rules or other forms of regulatory oversight will not have a material adverse effect on our business.
On February 6, 2012, Congress passed the FAA Reauthorization legislation, formally titled as “FAA Modernization and Reform Act of 2012” (H.R.658). From the perspective of the airline industry, highlights include:
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No increase in airline ticket or fuel taxes;
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No increase in PFCs;
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No taxation of ancillary fees and revenue;
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Authorized eight additional daily flights beyond the 1,250 mile perimeter restricting flights to and from Washington National. Four flights were allocated to new entrant and limited incumbents, and four were set aside for incumbent carriers as of the date of enactment (that is, one for each of American, Delta, United and US Airways);
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Dedicated title of the legislation is intended to help accelerate implementation of the NextGeneration air traffic control system. Among the provisions included were mandated performance metrics, as well as a requirement that modernization projects at 35 major airports are to receive streamlined environmental review; and
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Sunset line checks for pilots over 60.
In addition, the Transportation Security Administration (the “TSA”) mandates the federalization of certain airport security procedures and imposes additional security requirements on airports and airlines, most of which are funded by a per-ticket tax on passengers and a tax on airlines. The federal government has on several occasions proposed a significant increase in the per-ticket tax. We anticipate additional proposals to raise the ticket tax could happen in future budget and revenue raising proposals in Congress. A ticket tax increase, if implemented, could negatively impact our financial results.
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 service 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 adopt similar noise regulations.
International
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 removed bilateral restrictions on the number of flights between the U.S. and EU. One result of the Open Skies Agreement has been applications before the DOT for antitrust immunity between various domestic and international airlines. The DOT approved two such transatlantic immunities in 2010 involving other carriers. Presently, none of our international operations benefit from antitrust immunity.
Security
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 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. The TSA may lift this cap at any time and set a new higher fee for air carriers.
In 2012, we incurred expenses of $50 million for the ASIF, including amounts paid by our wholly owned regional subsidiaries, PSA and Piedmont, and amounts attributable to our other regional carriers. Implementation of and compliance with the requirements of the Aviation Security Act have resulted and will continue to result in increased costs for us and our passengers and have resulted 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.
Civil Reserve Air Fleet
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.
Environmental
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.
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. The U.S. Congress is currently considering legislation on climate change. Although no federal legislation was passed in the last Congress on climate change, several states have adopted or are in the process of adopting greenhouse gas reporting or cap-and-trade programs.
Even without further federal legislation, the U.S. Environmental Protection Agency (“EPA”) may act to regulate greenhouse gas emissions. In December 2009, the EPA issued its final Endangerment and Cause or Contribute Findings for Greenhouse Gases, which became effective in January 2010. This regulatory finding sets the foundation for future EPA greenhouse gas regulation under the Clean Air Act. The EPA also promulgated a new greenhouse gas reporting rule, which became effective in December 2009, and which requires facilities that emit more than 25,000 tons per year of carbon dioxide-equivalent emissions to prepare and file certain emission reports. While some of our facilities may be covered by this rule in the future, currently none of our facilities meet the threshold for reporting. On February 3, 2009, the EPA adopted regulations implementing changes to the renewable fuel standard program, which require an increasing amount of renewable fuels in the nation’s transportation fuel mix. The EPA is also considering additional regulatory programs. Depending on the final outcome of this rulemaking, some of our facilities may be subject to additional operating and other permit requirements. As a result of these various regulatory initiatives, our operating costs may increase in compliance with these programs, although we are not situated differently in this respect from our competitors in the industry.
The EU’s Emissions Trading Scheme (“ETS”) was scheduled to take full effect in 2012. This scheme has the ability to appreciably raise costs associated with flights to and from EU countries as airlines will have to purchase emissions credits on the open market to cover some percentage of a carrier’s European operations. US Airways has met all the regulatory milestones associated with the program to date. In November 2012, the EU announced plans to suspend payments and other aspects of the ETS through October 2013 for flights between the EU and countries outside the EU. US Airways does not anticipate any significant emissions credit expenditures in 2013. In addition, President Obama recently signed legislation that will allow the Secretary of Transportation to prohibit U.S. airlines from participating in the ETS. Whether US Airways will ever be required to purchase and redeem emissions credits under the EU scheme is still unknown. However, it is increasingly likely that in the future we will be subject to some form of regulation governing aircraft emissions. How such regulations are implemented or what the impact on us will be is unknown at this time. For more discussion of environmental regulation, see Part I, Item 1A, Risk Factors - “We are subject to many forms of environmental regulation and may incur substantial costs as a result.”
Employees and Labor Relations
Our business is labor intensive. In 2012, wages, salaries and benefits were one of our largest expenses and represented approximately 22% of our operating expenses. As of December 31, 2012, US Airways employed approximately 31,200 active full-time equivalent employees, including approximately 4,000 pilots, 7,000 flight attendants, 3,200 maintenance personnel, 5,400 fleet service personnel, 6,100 passenger service personnel and 5,500 personnel in administrative and various other job categories. In addition, our express subsidiaries, Piedmont and PSA, employed approximately 5,300 active full-time equivalent employees, including approximately 800 pilots, 400 flight attendants, 400 maintenance personnel, 2,500 passenger service personnel and 1,200 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, 2012, approximately 83% of our active employees were represented by various labor unions. Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act (“RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”).
If no agreement is reached during direct negotiations between the parties, either party may request the NMB to appoint a federal mediator. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to the parties. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30-day “cooling off” period commences. During or after that period, a Presidential Emergency Board (“PEB”) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another 30-day “cooling off” period. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self-help,” such as a strike, and the airline may resort to its own “self-help,” including the imposition of any or all of its proposed amendments and the hiring of new employees to replace any striking workers.
US Airways employees are covered by labor agreements as set forth below. With the exception of the tentative agreements that have been reached since the beginning of 2013, all labor contracts that are amendable as of December 31, 2012 are currently being negotiated.
(1) Approximate number of active full-time equivalent employees covered by the contract as of December 31, 2012.
(2) Pilots continue to work under the terms of their separate US Airways and America West collective bargaining agreements, as modified by the transition agreements reached in connection with the merger in 2005. On April 18, 2008, the NMB certified USAPA as the collective bargaining representative for the pilots of the combined company, including pilot groups from both pre-merger America West and US Airways. On February 8, 2013, the pilots voted to ratify a memorandum of understanding (“MOU”) that will become effective in the event a merger with AMR is consummated. If the merger is completed, the MOU provides a six-year agreement for the pilots of the combined post-merger carrier.
(3) In January 2013, we reached a tentative agreement with the AFA for a single labor agreement applicable to both premerger US Airways and America West flight attendants. This tentative agreement is subject to ratification by the AFA membership.
(4) In February 2013, Piedmont Airlines reached a tentative agreement with its pilots, represented by ALPA. This tentative agreement is subject to ratification by the ALPA membership.
(5) In June 2012, fleet and passenger service employees at Piedmont Airlines, represented by the CWA, voted to ratify a new four and a half year collective bargaining agreement.
(6) In February 2013, PSA Airlines reached a tentative agreement with its pilots, represented by ALPA. This tentative agreement is subject to ratification by the ALPA membership.
(7) In March 2012, flight attendants at PSA Airlines, represented by the AFA Council 75, voted to ratify a new five-year collective bargaining agreement.
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 Part I, Item 1A, Risk Factors - “Union disputes, employee strikes and other labor-related disruptions may adversely affect our operations.”
Aviation Fuel
The average cost of a gallon of aviation fuel for our mainline and express operations increased 2.0% from 2011 to 2012, and our total mainline and express fuel expense increased $131 million, or 2.9%, from 2011 to 2012. We estimate that a one cent per gallon increase in aviation fuel prices would result in a $15 million increase in annual expense based on our 2013 forecasted mainline and express fuel consumption. We have not entered into any transactions to hedge our fuel consumption. As a result, we fully realize the effects of any increase or decrease in fuel prices.
The following table shows annual aircraft fuel consumption and costs for our mainline operations for 2010 through 2012 (gallons and aircraft fuel expense in millions):
(1) Includes fuel taxes.
In addition, we incur fuel expenses related to our express operations. Total fuel expenses for US Airways Group’s wholly owned regional airlines and affiliate regional airlines operating under capacity purchase agreements as US Airways Express for the years ended December 31, 2012, 2011 and 2010 were $1.10 billion, $1.06 billion and $769 million, respectively.
Fuel prices have fluctuated substantially over the past several years. We cannot predict the future availability, price volatility or cost of aircraft fuel. Natural disasters, political disruptions or wars involving oil-producing countries, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, additional fuel price volatility and cost increases in the future. See Part I, Item 1A, Risk Factors - “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.”
Insurance
We maintain insurance of the types that we believe are customary in the airline industry. Principal coverage includes liability for injury to members of the public, including passengers, damage to property of US Airways Group, its subsidiaries and others, and loss of or damage to flight equipment, whether on the ground or in flight. We also maintain other types of insurance such as workers’ compensation and employer’s liability, with limits and deductibles that we believe are standard within the industry.
Since September 11, 2001, we 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 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 September 30, 2013. 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 consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation.
During 2012 we continued our work to enhance our customers’ experience. We are continuing our fleet replacement program as we replaced 15 Boeing 737 aircraft with 12 larger gauge, more modern and fuel-efficient new Airbus A321 aircraft. Additionally, we completed the installation of the Envoy Suite, the airline’s fully lie-flat business-class seats with an on-demand in-flight entertainment system, on our fleet of wide-body Airbus A330-300 aircraft, expanded our Wi-Fi internet service to more than 80% of our domestic Embraer and Airbus narrow body fleet, and launched our PreferredAccess program, which gives our customers priority check in and boarding. In 2012, we also launched DineFresh, a premium meal option for customers flying in Economy class to Europe, the Middle East and South America, and we are the only U.S.-based carrier to offer this service.
Outstanding efforts from our employees drove record operational performance in 2012, as we achieved our best on-time performance, highest completion factor and lowest mishandled baggage ratio in our Company’s history. During 2012 we also earned three first place monthly rankings for on-time performance and three first place monthly rankings for baggage handling among the big hub-and-spoke carriers as reported by the DOT Air Travel Consumer Report.
We reported the following operating statistics to the DOT for mainline operations for the years ended December 31, 2012 and 2011:
(a) Percentage of reported flight operations arriving on time as defined by the DOT.
(b) Percentage of scheduled flight operations completed.
(c) Rate of mishandled baggage reports per 1,000 passengers.
(d) Rate of customer complaints filed with the DOT per 100,000 enplanements.
Frequent Traveler Program
All major 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, hotels, car rental agencies and others that participate in the Dividend Miles program. Mileage credits can be redeemed for travel awards on US Airways, Star Alliance carriers or other participating airlines.
We and the other participating airline partners limit the number of seats per flight that are available for redemption by award recipients by using various inventory management techniques. Award travel is generally not permitted on blackout dates, which correspond to certain holiday periods or peak travel dates. We charge various fees for issuing awards dependent upon destination and booking method and for issuing awards within 21 days of the travel date. 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.
Ticket Distribution
Passengers can book tickets for travel on US Airways through several distribution channels including our direct website (www.usairways.com), our reservations centers and third party distribution channels, including those provided by or through global distribution systems (e.g., Amadeus, Sabre and Travelport), conventional travel agents and online travel agents (e.g., Expedia, Orbitz and Travelocity). In 2012, internal channels of distribution accounted for 36% of our ticketed passenger segments. Internet sites accounted for 61% of our ticketed passenger segments, of which 31% originated from our website, while 30% originated from online travel agent sites. To remain competitive, we will need to manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of third party distribution channels, while maintaining an industry-competitive cost structure. For more discussion, see Part 1, Item 1A, Risk Factors - “We rely on third party distribution channels and must manage effectively the costs, rights and functionality of these channels.”
Seasonality
Our results are seasonal. 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.
Item 1A.
Item 1A. Risk Factors
Below are certain risk factors that may affect our business, results of operations or financial condition, or the trading price of our common stock or other securities. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot predict such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business.
Risk Factors Relating to the Company and Industry-Related Risks
US Airways Group could experience significant operating losses in the future.
For a number of reasons, including those addressed in these risk factors, US Airways Group might fail to achieve profitability and might experience significant losses. In particular, the condition of the economy and the high volatility of fuel prices have had and continue to have an impact on our operating results, and increase the risk that we will experience losses.
Downturns in economic conditions adversely affect our business.
Due to the discretionary nature of business and leisure travel spending, airline industry revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel and changes in booking practices, both of which in turn have had, and may have in the future, a strong negative effect on our revenues. In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our revenues. See “The airline industry is intensely competitive and dynamic” below. Certain labor agreements to which we are a party limit our ability to reduce the number of aircraft in operation, and the utilization of such aircraft, below certain levels. As a result, we may not be able to optimize the number of aircraft in operation in response to a decrease in passenger demand for air travel.
Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.
Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business. Jet fuel market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $1.87 per gallon to a high of approximately $3.38 per gallon during the period from January 1, 2010 to December 31, 2012.
Because of the amount of fuel needed to operate our airline, even a relatively small increase in the price of fuel can have a material adverse aggregate effect on our costs and liquidity. Due to the competitive nature of the airline industry and unpredictability of the market, we can offer no assurance that we may be able to increase our fares, impose fuel surcharges or otherwise increase revenues sufficiently to offset fuel price increases.
Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price volatility or cost of aircraft fuel. Natural disasters, political disruptions or wars involving oil-producing countries, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, additional fuel price volatility and cost increases in the future.
Historically, we have from time to time entered into hedging arrangements designed to protect against rising fuel costs. Currently, we are not a party to any transactions to hedge our fuel consumption. Our ability to hedge in the future may be limited, particularly if our financial condition provides insufficient liquidity to meet counterparty collateral requirements. Our future fuel hedging arrangements, if any, may not completely protect us against price increases and may be limited in both volume of fuel and duration. Also, a rapid decline in the projected price of fuel at a time when we have fuel hedging contracts in place could adversely impact our short-term liquidity, because hedge counterparties could require that we post collateral in the form of cash or letters of credit. See also the discussion in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”
The airline industry is intensely competitive and dynamic.
Our competitors include other major domestic airlines and foreign, regional and new entrant airlines, many of which have more financial resources or lower cost structures than ours, as well as other forms of transportation, including rail and private automobiles. In many of our markets we compete with at least one low-cost air carrier. Our revenues are sensitive to the actions of other carriers in many areas including pricing, scheduling, capacity and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues. These factors may become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near-term survival rather than long-term viability. In addition, because a significant portion of our traffic is short-haul travel, we are more susceptible than other major airlines to competition from surface transportation such as automobiles and trains.
Low-cost carriers have a profound impact on industry revenues. Using the advantage of low unit costs, these carriers offer lower fares in order to shift demand from larger, more-established airlines. Some low-cost carriers, which have cost structures lower than ours, have better financial performance and significant numbers of aircraft on order for delivery in the next few years. These low-cost carriers are expected to continue to increase their market share through growth and, potentially, consolidation, and could continue to have an impact on our overall performance.
Additionally, as mergers and other forms of industry consolidation, including antitrust immunity grants, take place, we might or might not be included as a participant. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with such combinations, our competitive position relative to the post-combination carriers or other carriers that acquire such assets could be harmed. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks will grow, and that growth will result in greater overlap with our network, which in turn could result in lower overall market share and revenues for us. Such consolidation is not limited to the U.S., but could include further consolidation among international carriers in Europe and elsewhere.
Also see the risk factors provided under the caption “Risk Factors Relating to the Merger.”
Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, operating expenses and results.
Concerns about the systemic impact of inflation, the availability and cost of credit, energy costs and geopolitical issues, combined with continued changes in business activity levels and consumer confidence, increased unemployment and volatile oil prices, have contributed to unprecedented levels of volatility in the capital markets. As a result of these market conditions, the cost and availability of credit have been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. These changes in the domestic and global financial markets may increase our costs of financing and adversely affect our ability to obtain financing needed for the acquisition of aircraft that we have contractual commitments to purchase and for other types of financings we may seek in order to refinance debt maturities, raise capital or fund other types of obligations. Any downgrades to our credit rating may likewise increase the cost and reduce the availability of financing.
In addition, we have substantial non-cancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines. We have not yet secured financing commitments for four Airbus aircraft scheduled for delivery after November 2013, and cannot assure you of the availability or cost of that financing. If we are not able to arrange financing for such aircraft at customary advance rates and on terms and conditions acceptable to us, we expect we would seek to negotiate deferrals of aircraft deliveries with the manufacturer or financing at lower than customary advance rates, or, if required, use cash from operations or other sources to purchase the aircraft.
Further, a substantial portion of our indebtedness bears interest at fluctuating interest rates, primarily based on the London interbank offered rate for deposits of U.S. dollars (“LIBOR”). LIBOR tends to fluctuate based on general economic conditions, general interest rates, Federal Reserve rates and the supply of and demand for credit in the London interbank market. We have not hedged our interest rate exposure and, accordingly, our interest expense for any particular period may fluctuate based on LIBOR and other variable interest rates. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected. See also the discussion of interest rate risk in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”
Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions.
We have a significant amount of fixed obligations, including debt, aircraft leases and financings, aircraft purchase commitments, leases and developments of airport and other facilities and other cash obligations. We also have certain guaranteed costs associated with our express operations. Our existing indebtedness is secured by substantially all of our assets.
As a result of the substantial fixed costs associated with these obligations:
•
a decrease in revenues results in a disproportionately greater percentage decrease in earnings;
•
we may not have sufficient liquidity to fund all of these fixed costs if our revenues decline or costs increase; and
•
we may have to use our working capital to fund these fixed costs instead of funding general corporate requirements, including capital expenditures.
These obligations also impact our ability to obtain additional financing, if needed, and our flexibility in the conduct of our business.
Any failure to comply with the liquidity covenants contained in our financing arrangements would likely have a material adverse effect on our business, financial condition and results of operations.
The terms of our Citicorp credit facility and certain of our other financing arrangements require us to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements.
Our ability to comply with these covenants while paying the fixed costs associated with our contractual obligations and our other expenses will depend on our operating performance and cash flow, which are seasonal, as well as factors including fuel costs and general economic and political conditions.
The factors affecting our liquidity (and our ability to comply with related covenants) will remain subject to significant fluctuations and uncertainties, many of which are outside our control. Any breach of our liquidity covenants or failure to timely pay our obligations could result in a variety of adverse consequences, including the acceleration of our indebtedness, the withholding of credit card proceeds by our credit card processors and the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our contractual obligations, repay the accelerated indebtedness, make required lease payments or otherwise cover our fixed costs.
If our financial condition worsens, provisions in our credit card processing and other commercial agreements may adversely affect our liquidity.
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) equal to some or all of the advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. We are currently subject to certain holdback requirements. These holdback requirements can be modified at the discretion of the processing companies upon the occurrence of specific events, including material adverse changes in our financial condition. An increase in the current holdback balances to higher percentages up to and including 100% of relevant advanced ticket sales could materially reduce our liquidity. Likewise, other of our commercial agreements contain provisions that allow other entities to impose less favorable terms, including the acceleration of amounts due, in the event of material adverse changes in our financial condition.
Union disputes, employee strikes and other labor-related disruptions may adversely affect our operations.
Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act (“RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”).
If no agreement is reached during direct negotiations between the parties, either party may request that the NMB appoint a federal mediator. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to the parties. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30-day “cooling off” period commences. During or after that period, a Presidential Emergency Board (“PEB”) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another 30-day “cooling off” period. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self-help”, such as a strike, which could materially adversely affect our ability to conduct our business and our financial performance.
We are currently in negotiations with the unions representing our fleet service employees, our passenger service employees, our mechanic, stock clerk and related employees, our maintenance training instructors, our flight crew training instructors and our flight simulator engineers. On February 8, 2013, the US Airways pilots represented by USAPA voted to ratify a memorandum of understanding (“MOU”) that will become effective in the event a merger with AMR is consummated. If the merger is completed, the MOU provides a six-year agreement for the pilots of the combined post-merger carrier. In addition, our express subsidiary, Piedmont, is in negotiations with the unions representing its flight attendants and its mechanics. All negotiations except those involving the Piedmont mechanics are being overseen by the NMB. None of these unions presently may lawfully engage in concerted refusals to work, such as strikes, slow-downs, sick-outs or other similar activity, against us. Nonetheless, there is a risk that disgruntled employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our financial performance. For example, on September 28, 2011, the U.S. District Court in Charlotte granted a preliminary injunction, which was subsequently converted to a permanent injunction, enjoining the labor union representing our pilots from engaging in an illegal work slowdown.
The inability to maintain labor costs at competitive levels would harm our financial performance.
Currently, our labor costs are very competitive relative to the other hub-and-spoke carriers. However, we cannot provide assurance that labor costs going forward will remain competitive because some of our agreements are amendable now and others may become amendable, competitors may significantly reduce their labor costs or we may agree to higher-cost provisions in our current or future labor negotiations. Approximately 83% of the employees within US Airways Group are represented for collective bargaining purposes by labor unions. Some of our unions have brought and may continue to bring grievances to binding arbitration, including related to wages. Unions may also bring court actions and may seek to compel us to engage in bargaining processes where we believe we have no such obligation. If successful, there is a risk these judicial or arbitral avenues could create material additional costs that we did not anticipate.
Interruptions or disruptions in service at one of our hub airports or our focus city could have a material adverse impact on our operations.
We operate principally through hubs in Charlotte, Philadelphia and Phoenix, and our focus city, Washington, D.C. Substantially all of our flights either originate in or fly into one of these locations. A significant interruption or disruption in service at one of our hubs or in Washington, D.C. resulting from air traffic control delays, weather conditions, natural disasters, growth constraints, relations with third-party service providers, failure of computer systems, facility disruptions, labor relations, fuel supplies, terrorist activities or otherwise could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, operations and financial performance.
Regulatory changes affecting the allocation of slots could have a material adverse impact on our operations.
Operations at four major domestic airports, certain smaller domestic airports and certain foreign airports served by us are regulated by governmental entities through the use of “slots” or similar regulatory mechanisms which limit the rights of carriers to conduct operations at those airports. Each slot represents the authorization to land at or take off from the particular airport during a specified time period and may have other operational restrictions as well. In the United States, the Federal Aviation Administration (“FAA”) currently regulates the allocation of slot or slot exemptions at Washington National and three New York City airports: Newark, JFK and LaGuardia. Our operations at these airports generally require the allocation of slots or similar regulatory authority. Similarly, our operations at international airports in Frankfurt, London Heathrow, Paris and other airports outside the United States are regulated by local slot authorities pursuant to the International Air Transport Association’s Worldwide Scheduling Guidelines and applicable local law.
We currently have sufficient slots or similar authority to operate our existing flight schedule and have generally been able to acquire the necessary rights to expand flights and to change our schedules, although some airports are more challenging than others in terms of the cost and availability of additional authority necessary to expand operations. There is no assurance, however, that we will be able to do so in the future because, among other reasons, such allocations are subject to changes in government policy. The FAA is planning a new rulemaking in 2013 to update the current rules governing the New York City airports. As the new proposal has not been released yet, we cannot state that the new proposed rules, if finalized, would not have a material impact on our operations.
If we incur problems with any of our third-party regional operators or third-party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services.
A significant portion of our regional operations are conducted by third-party operators on our behalf, primarily under capacity purchase agreements. Due to our reliance on third parties to provide these essential services, we are subject to the risks of disruptions to their operations, which may result from many of the same risk factors disclosed in this report, such as the impact of adverse economic conditions, and other risk factors, such as a bankruptcy restructuring of any of the regional operators. We may also experience disruption to our regional operations if we terminate the capacity purchase agreement with one or more of our current operators and transition the services to another provider. As our regional segment provides revenues to us directly and indirectly (by providing flow traffic to our hubs), any significant disruption to our regional operations would have a material adverse effect on our business, results of operations and financial performance.
In addition, our reliance upon others to provide essential services on behalf of our operations may result in our relative inability to control the efficiency and timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our operations, including express flight operations, aircraft maintenance, ground services and facilities, reservations and baggage handling. Similar agreements may be entered into in any new markets we decide to serve. These agreements are generally subject to termination after notice by the third-party service provider. We are also at risk should one of these service providers cease operations, and there is no guarantee that we could replace these providers on a timely basis with comparably priced providers. Recent volatility in fuel prices, disruptions to capital markets and the current economic downturn in general have subjected certain of these third-party service providers to strong financial pressures. Any material problems with the efficiency and timeliness of contract services, resulting from financial hardships or otherwise, could have a material adverse effect on our business, financial condition and results of operations.
We rely on third party distribution channels and must manage effectively the costs, rights and functionality of these channels.
We rely on third party distribution channels, including those provided by or through global distribution systems, or GDSs (e.g., Amadeus, Sabre and Travelport), conventional travel agents and online travel agents, or OTAs (e.g., Expedia, Orbitz and Travelocity), to distribute a significant portion of our airline tickets and we expect in the future to continue to rely on these channels and hope to expand their ability to distribute and collect revenues for ancillary products (e.g., fees for selective seating). These distribution channels are more expensive and at present have less functionality in respect of ancillary product offerings than those we operate ourselves, such as our call centers and our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we will need to manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of third party distribution channels, while maintaining an industry-competitive cost structure. Any inability to manage our third party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our competitive position and our results of operations.
Further, on April 21, 2011, we filed an antitrust lawsuit against Sabre in Federal District Court for the Southern District of New York. The lawsuit, as amended to date, alleges, among other things, that Sabre has engaged in anticompetitive practices to preserve its monopoly power by restricting our ability to distribute our products to our customers. The lawsuit also alleges that these actions have prevented us from employing new competing technologies and has allowed Sabre to continue to charge us supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011, allowing two of the four counts in the complaint to proceed. On January 18, 2013, Sabre filed a motion for leave to file a counterclaim, alleging that US Airways and other airlines conspired among themselves and with a third-party technology firm to boycott Sabre and other global distribution systems. If permitted to proceed, Sabre would be seeking monetary damages and injunctive relief. We intend to pursue our claims against Sabre vigorously and to vigorously defend any claims Sabre is permitted to file against us, but there can be no assurance of the outcome of this litigation.
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 U.S. Department of Transportation (“DOT”), the FAA, the Transportation Security Administration (“TSA”) and the Department of Homeland Security have issued a number of directives and other regulations. These requirements impose substantial costs on airlines.
The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures or operational restrictions. Some FAA requirements cover, among other things, retirement and maintenance of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement, other environmental concerns, fuel tank inerting, crew scheduling, aircraft operation and safety and increased inspections and maintenance procedures to be conducted on older aircraft. Our failure to timely comply with these requirements has in the past and could in the future result in fines and other enforcement actions by the FAA or other regulators. Additionally, the FAA recently finalized rules on pilot flight and duty times, and has proposed new rules on minimum requirements for all pilots operating commercial aircraft. Both rules could increase our costs and reduce staffing flexibility.
Our airline subsidiaries are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation. Our airline subsidiaries collect the ticket tax, along with certain other U.S. and foreign taxes and user fees on air transportation, and pass along the collected amounts to the appropriate governmental agencies. Although these taxes are not our operating expenses, they represent an additional cost to our customers. There are a number of efforts in Congress and in other countries to raise different portions of the various taxes imposed on airlines and their passengers.
Most major U.S. airports impose a passenger facility charge (“PFC”). The ability of airlines to contest increases in this charge is restricted by federal legislation, DOT regulations and judicial decisions. With certain exceptions, air carriers pass these charges on to passengers. However, our ability to pass through PFCs to our customers is subject to various factors, including market conditions and competitive factors. The current cap on the PFC is $4.50 per passenger, but the industry faces regular efforts in Congress to raise the cap to a higher level.
DOT consumer rules that took effect on April 29, 2010 require procedures for customer handling during long onboard delays, as well as additional reporting requirements for airlines that have increased the cost of airline operations and reduced revenues. The DOT has been aggressively investigating alleged violations of these rules. In addition, the DOT finalized a second set of rules that further regulate airline interactions with passengers through the reservations process, at the airport and on board the aircraft. US Airways is in compliance with these rules, which took effect in August 2011, and others which took effect in January 2012. These rules require airlines to display all fares in an “all in” basis, with the price of the air travel and all taxes and government imposed fees rolled into the displayed fare. Enhanced disclosure of ancillary fees such as baggage fees is also required. Other rules apply to post-ticket purchase price increases and an expansion of tarmac delay regulations to international carriers.
We anticipate a third set of consumer rules to be issued by the DOT in mid-2013. We continue to see other efforts by the DOT to further regulate airlines through increased data reporting requirements, expansion of the Air Carrier Access Act, and greater oversight of the ways that airlines describe and sell air transportation and other products and services. Each additional regulation or other form of regulatory oversight increases costs and adds greater complexity to our operation. We cannot assure you that compliance with these new rules, anticipated rules or other forms of regulatory oversight will not have a material adverse effect on our business.
On February 6, 2012, Congress passed the FAA Reauthorization legislation, formally titled as “FAA Modernization and Reform Act of 2012” (H.R.658). From the perspective of the airline industry, highlights include:
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No increase in airline ticket or fuel taxes;
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No increase in PFCs;
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No taxation of ancillary fees and revenue;
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Authorized eight additional daily flights beyond the 1,250 mile perimeter restricting flights to and from Washington National. Four flights were allocated to new entrant and limited incumbents, and four were set aside for incumbent carriers as of the date of enactment (that is, one for each of American, Delta, United and US Airways);
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Dedicated title of the legislation is intended to help accelerate implementation of the NextGeneration air traffic control system. Among the provisions included were mandated performance metrics, as well as a requirement that modernization projects at 35 major airports are to receive streamlined environmental review; and
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Sunset line checks for pilots over 60.
In addition, the TSA mandates the federalization of certain airport security procedures and imposes additional security requirements on airports and airlines, most of which are funded by a per-ticket tax on passengers and a tax on airlines. The federal government has on several occasions proposed a significant increase in the per-ticket tax. We anticipate additional proposals to raise the ticket tax could happen in future budget and revenue raising proposals in Congress. A ticket tax increase, if implemented, could negatively impact our financial results.
Finally, the ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the U.S. and foreign governments may be amended from time to time, or because appropriate slots or facilities may not be available. We cannot assure you that laws or regulations enacted in the future will not adversely affect our operating costs. In addition, increased environmental regulation, particularly in the European Union (“EU”), may increase costs or restrict our operations. The EU’s Emissions Trading Scheme (“ETS”) was scheduled to take full effect in 2012. This scheme has the ability to appreciably raise costs associated with flights to and from EU countries as airlines will have to purchase emissions credits on the open market to cover some percentage of a carrier’s European operations. US Airways has met all the regulatory milestones associated with the program to date. While we are complying with the regulations under protest, we have also been supportive of the efforts of the U.S. government and other countries to delay the implementation and financial effects of the new regulations. In November 2012, the EU announced plans to suspend payments and other aspects of the ETS through October 2013 for flights between the EU and countries outside the EU. US Airways does not anticipate any significant emissions credit expenditures in 2013. In addition, President Obama recently signed legislation that will allow the Secretary of Transportation to prohibit U.S. airlines from participating in the ETS. Whether US Airways will ever be required to purchase and redeem emissions credits under the EU scheme is still unknown. However, it is increasingly likely that in the future we will be subject to some form of regulation governing aircraft emissions. How such regulations are implemented or what the impact on us will be is unknown at this time. See “We are subject to many forms of environmental regulation and may incur substantial costs as a result” below.
Changes to our business model that are designed to increase revenues may not be successful and may cause operational difficulties or decreased demand.
We have implemented several new measures designed to increase revenue and offset costs. These measures include charging separately for services that had previously been included within the price of a ticket and increasing other pre-existing fees. We may introduce additional initiatives in the future; however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives. We cannot assure you that these new measures or any future initiatives will be successful in increasing our revenues. Additionally, the implementation of these initiatives creates logistical challenges that could harm the operational performance of our airline. Also, the new and increased fees might reduce the demand for air travel on our airline or across the industry in general, particularly if weakened economic conditions continue to make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers that determine not to institute similar charges.
The loss of key personnel upon whom we depend to operate our business or the inability to attract additional qualified personnel could adversely affect the results of our operations or our financial performance.
We believe that our future success will depend in large part on our ability to attract and retain highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting and retaining other highly qualified personnel. Any inability to retain or attract significant numbers of qualified management and other personnel could adversely affect our business.
We may be adversely affected by conflicts overseas or terrorist attacks; the travel industry continues to face ongoing security concerns.
Acts of terrorism or fear of such attacks, including elevated national threat warnings, wars or other military conflicts, may depress air travel, particularly on international routes, and cause declines in revenues and increases in costs. The attacks of September 11, 2001 and continuing terrorist threats and attempted attacks materially impacted and continue to impact air travel. Increased security procedures introduced at airports since the attacks and other such measures as may be introduced in the future generate higher operating costs for airlines. The Aviation and Transportation Security Act mandated improved flight deck security, deployment of federal air marshals on board flights, improved airport perimeter access security, airline crew security training, enhanced security screening of passengers, baggage, cargo, mail, employees and vendors, enhanced training and qualifications of security screening personnel, additional provision of passenger data to U.S. Customs and enhanced background checks. A concurrent increase in airport security charges and procedures, such as restrictions on carry-on baggage, has also had and may continue to have a disproportionate impact on short-haul travel, which constitutes a significant portion of our flying and revenue.
Our ability to operate and grow our route network in the future is dependent on the availability of adequate facilities and infrastructure throughout our system.
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. The nation’s aging air traffic control infrastructure presents challenges as well. The ability of the air traffic control system to handle traffic in high-density areas where we have a large concentration of flights is critical to our ability to operate our existing schedule. Also, as airports around the world become more congested, we cannot always be sure that our plans for new service can be implemented in a commercially viable manner given operating constraints at airports throughout our network.
We are subject to many forms of environmental regulation and may incur substantial costs as a result.
We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. Compliance with all environmental laws and regulations can require significant expenditures.
The U.S. Environmental Protection Agency (“EPA”) has proposed effluent limitation guidelines for airport de-icing fluid. This proposed technology-based rule would require the mitigation of spent de-icing fluid (glycol) discharges through collection and treatment. Airports meeting threshold requirements would have to construct or reconfigure de-icing facilities to capture and treat the fluid. Additionally, the EPA has proposed changes to underground storage tank regulations that could affect certain airport fuel hydrant systems. Airport systems that fall within threshold requirements would need to be modified to meet regulations. Neither rule has been finalized, and cost estimates have not been defined, but US Airways along with other airlines would share a portion of these costs at applicable airports. In addition to the proposed EPA regulations, several U.S. airport authorities are actively engaged in efforts to limit discharges of de-icing fluid to local groundwater, often by requiring airlines to participate in the building or reconfiguring of airport de-icing facilities. Such efforts are likely to impose additional costs and restrictions on airlines using those airports. We do not believe, however, that such environmental developments will have a material impact on our capital expenditures or otherwise adversely affect our operations, operating costs or competitive position.
We are also subject to other environmental laws and regulations, including those that require us to remediate soil or groundwater to meet certain objectives. Under federal law, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws is often strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to us. We have liability for such costs at various sites, although the future costs associated with the remediation efforts are currently not expected to have a material adverse effect on our business.
We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators. Under these leases and agreements, we have agreed to indemnify the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, even if we are not the party responsible for the initial event that caused the environmental damage. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines.
There is increasing global regulatory focus on climate change and greenhouse gas emissions. For example, the EU has established the ETS, the mechanism by which emissions of CO2 are currently regulated in the EU. Since the beginning of 2012, the ETS has required airlines to have emission allowances equal to the amount of carbon dioxide emissions from flights to and from EU member states. In November 2012, the EU announced an intent to suspend payments and other aspects of the ETS through October 2013 for flights between the EU and countries outside the EU. In addition, President Obama recently signed legislation that will allow the Secretary of Transportation to prohibit U.S. airlines from participating in the ETS. Although the details of the suspension and prohibition have not yet been finalized, US Airways does not anticipate any significant emissions credit expenditures in 2013. Beyond 2013, compliance with the EU ETS could significantly increase our operating costs. However, whether US Airways will ever be required to purchase and redeem emissions credits under the EU scheme is still unknown. Further, the potential impact of ETS on costs will ultimately depend on a number of factors, including baseline emissions, the price of emission credits and the number of future flights subject to ETS. These costs have not been completely defined and will fluctuate. In the U.S., there is an increasing trend toward regulating greenhouse gas emissions directly under the Clean Air Act, and while the EPA’s recent regulatory activity in this area has focused on industries other than aviation, it is possible that future EPA regulations or new legislation could impact airlines. Several states are also considering initiatives to regulate emissions of greenhouse gases, primarily through the planned development of greenhouse gas emissions inventories and/or regional greenhouse gas cap and trade programs. These regulatory efforts, both internationally and in the U.S. at the federal and state levels, are still developing and we cannot yet determine what the final regulatory programs will be in the U.S., the EU or in other areas in which we do business. However, such climate change-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or otherwise pay for our emissions. Such activity may also impact us indirectly by increasing our operating costs, including fuel costs.
Governmental authorities in several U.S. and foreign cities are also considering or have already implemented aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.
We rely heavily on technology and automated systems to operate our business, and any failure of these technologies or systems could harm our business, financial condition or results of operations.
We are highly dependent on technology and automated systems to operate and achieve low operating costs. These technologies and systems include our computerized airline reservation system, flight operations system, financial planning, management and accounting systems, telecommunications systems, website, maintenance systems and check-in kiosks. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. Substantially all of our tickets are issued to passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained under a long-term contract by a third-party service provider, to be able to issue, track and accept these electronic tickets. If our automated systems are not functioning or if our third-party service providers were to fail to adequately provide technical support, system maintenance or timely software upgrades for any one of our key existing systems, we could experience service disruptions or delays, which could harm our business and result in the loss of important data, increase our expenses and decrease our revenues. In the event that one or more of our primary technology or systems vendors goes into bankruptcy, ceases operations or fails to perform as promised, replacement services may not be readily available on a timely basis, at competitive rates or at all, and any transition time to a new system may be significant. Our automated systems cannot be completely protected against other events that are beyond our control, including natural disasters, computer viruses or telecommunications failures. Substantial or sustained system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines. We cannot assure you that our security measures, change control procedures or disaster recovery plans are adequate to prevent disruptions or delays. Disruption in or changes to these systems could result in a disruption to our business and the loss of important data. Any of the foregoing could result in a material adverse effect on our business, results of operations or financial condition.
Ongoing data security compliance requirements could increase our costs, and any significant data breach could harm our business, financial condition or results of operations.
Our business requires the appropriate and secure utilization of customer and other sensitive information. We cannot be certain that advances in criminal capabilities (including cyber attacks or cyber intrusions over the Internet, malware, computer viruses and the like), discovery of new vulnerabilities or attempts to exploit existing vulnerabilities in our systems, other data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting the networks that access and store sensitive information. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad (particularly in the EU), including requirements for varying levels of customer notification in the event of a data breach.
In addition, many of our commercial partners, including credit card companies, have imposed data security standards that we must meet. In particular, we are required by the Payment Card Industry Security Standards Council, founded by the credit card companies, to comply with their highest level of data security standards. While we continue our efforts to meet these standards, new and revised standards may be imposed that may be difficult for us to meet and could increase our costs.
Failure to comply with the Payment Card Industry Standards discussed above or other privacy and data use and security requirements of our partners or related laws, rules and regulations to which we are subject may expose us to claims for contract breach, fines, sanctions or other penalties, which could materially and adversely affect our results of operations and overall business. In addition, failure to address appropriately these issues could also give rise to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur further related costs and expenses.
We are at risk of losses and adverse publicity stemming from any accident involving any of our aircraft or the aircraft of our regional operators.
If one of our aircraft, an aircraft that is operated under our brand by one of our regional operators or an aircraft that is operated by an airline that is one of our codeshare partners were to be involved in an accident, we could be exposed to significant tort liability. The insurance we carry to cover damages arising from any future accidents may be inadequate. In the event that our insurance is not adequate, we may be forced to bear substantial losses from an accident. In addition, any accident involving an aircraft that we operate, an aircraft that is operated under our brand by one of our regional operators or an aircraft that is operated by an airline that is one of our codeshare partners could create a public perception that our aircraft or those of our regional operators or codeshare partners are not safe or reliable, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft or those of our regional operators or codeshare partners and adversely impact our financial condition and operations.
Delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity may adversely impact our operations and financial results.
The success of our business depends on, among other things, the ability to operate an optimum number and type of aircraft. In many cases, the aircraft we intend to operate are not yet in our fleet, but we have contractual commitments to purchase or lease them. If for any reason we were unable to accept or secure deliveries of new aircraft on contractually scheduled delivery dates, this could have a negative impact on our business, operations and financial performance. Our failure to integrate newly purchased aircraft into our fleet as planned might require us to seek extensions of the terms for some leased aircraft. Such unanticipated extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs. If new aircraft orders are not filled on a timely basis, we could face higher monthly rental rates.
We are dependent on a limited number of suppliers for aircraft, aircraft engines and parts.
We are dependent on a limited number of suppliers for aircraft, aircraft engines and many aircraft and engine parts. As a result, we are vulnerable to any problems associated with the supply of those aircraft, parts and engines, including design defects, mechanical problems, contractual performance by the suppliers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft.
Our inability to operate profitably out of Philadelphia International Airport, which is one of our hubs, could harm our business, financial condition and results of operations.
Markets served from Philadelphia International Airport (“PHL”), which is one of our hubs and our international gateway, are important to our operations. In fiscal year 2012, more than a third of our daily available seat miles (“ASMs”) and more than half of our international ASMs were flown through PHL. PHL plans to embark on a multi-billion dollar runway and terminal expansion project called the “Capacity Enhancement Program” that will, if undertaken as planned, result in huge cost increases for airlines serving PHL, including US Airways. The project has been approved by the FAA, and expenditures have already begun. US Airways has recently agreed with the Philadelphia Division of Aviation to a two-year extension of its PHL-Airport Use and Lease Agreement through June 30, 2015; this extension is subject to the Philadelphia City Council approval. Significant expenditures related to the runway can be made only with the consent of US Airways and the new lease does not provide for such expenditures. We cannot guarantee that the fees and other costs related to operating out of PHL will not increase should this or other significant expansion projects be implemented by the airport authority after expiration of the pending lease extension. In addition, if we are unable to operate profitably from PHL, we may need to significantly reduce our business at Philadelphia or move that business to another of our hubs, either of which actions could be costly. Our business, financial condition and results of operations could be harmed by an increase in airport rates and fees charged by PHL in connection with and following the airport expansion.
Our business is subject to weather factors and seasonal variations in airline travel, which cause our results to fluctuate.
Our operations are vulnerable to severe weather conditions in parts of our network that could disrupt service, create air traffic control problems, decrease revenue and increase costs, such as during hurricane season in the Caribbean and Southeast United States, snow and severe winter weather in the Northeast United States and thunderstorms in the Eastern United States. In addition, the air travel business historically fluctuates on a seasonal basis. Due to the greater demand for air and leisure travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year. Our results of operations will likely reflect weather factors and seasonality, and therefore quarterly results are not necessarily indicative of those for an entire year, and our prior results are not necessarily indicative of our future results.
Increases in insurance costs or reductions in insurance coverage may adversely impact our operations and financial results.
The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease in the insurance coverage available to commercial air carriers. Accordingly, our insurance costs increased significantly and our ability to continue to obtain insurance even at current prices remains uncertain. In addition, we have obtained third-party war risk (terrorism) insurance through a special program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial insurance market. The program has been extended, with the same conditions and premiums, until September 30, 2013. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk insurance. The failure of one or more of our insurers could result in a lack of coverage for a period of time. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the claims paying ability of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. Because of competitive pressures in our industry, our ability to pass additional insurance costs to passengers is limited. As a result, further increases in insurance costs or reductions in available insurance coverage could have an adverse impact on our financial results.
We may be adversely affected by global events that affect travel behavior.
Our revenue and results of operations may be adversely affected by global events beyond our control. An outbreak of a contagious disease such as Severe Acute Respiratory Syndrome (“SARS”), H1N1 influenza virus, avian flu, or any other influenza-type illness, if it were to persist for an extended period, could again materially affect the airline industry and us by reducing revenues and impacting travel behavior.
We are exposed to foreign currency exchange rate fluctuations.
As a result of our international operations, we have significant operating revenues and expenses, as well as assets and liabilities, denominated in foreign currencies. Fluctuations in foreign currencies can significantly affect our operating performance and the value of our assets and liabilities located outside of the United States.
The use of US Airways Group’s net operating losses and certain other tax attributes could be limited in the future.
When a corporation undergoes an ownership change, as defined in Section 382 of the Internal Revenue Code (“Section 382”), a limitation is imposed on the corporation’s future ability to utilize any net operating losses (“NOLs”) generated before the ownership change and certain subsequently recognized “built-in” losses and deductions, if any, existing as of the date of the ownership change. We believe an “ownership change” as defined in Section 382 occurred for US Airways Group in February 2007. Since February 2007, there have been additional changes in the ownership of US Airways Group that, if combined with sufficiently large future changes in ownership, could result in another “ownership change” as defined in Section 382. Until US Airways Group has used all of its existing NOLs, future shifts in ownership of US Airways Group’s common stock could result in new Section 382 limitations on the use of our NOLs as of the date of an additional ownership change. An additional ownership change will occur upon consummation of the Merger with AMR.
Risk Factors Relating to the Merger
On February 13, 2013, US Airways Group and AMR entered into the Merger Agreement, as more fully described under Item 1 “Business - Recent Developments.”
The Merger is subject to a number of conditions to the obligations of both us and AMR that may not be fulfilled, which could cause the termination of the Merger Agreement.
The Merger Agreement contains a number of customary conditions to consummation of the Merger, such as the accuracy of representations and warranties in all material respects, the fulfillment of obligations set out in covenants, that certain consents and regulatory approvals have been obtained, that there are no legal prohibitions against consummation of the Merger, that approval of the US Airways Group stockholders has been received, that an order from the Bankruptcy Court confirming AMR’s plan of reorganization is in effect, that the plan of reorganization conforms with the requirements of the Merger Agreement, that secured indebtedness of the Debtors and certain other claims against the Debtors not exceed specified levels, and other customary conditions. AMR has the right to unilaterally terminate the Merger Agreement under certain conditions. Many of the conditions to consummation of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied. If any of these conditions are not fulfilled or waived prior to the termination date set forth in the Merger Agreement (October 14, 2013, as it may be extended), it is possible that the Merger will not be consummated.
The Merger is subject to the receipt of consents and clearances from certain domestic and foreign regulatory authorities that may impose conditions that could have a material and adverse effect on the surviving company, or that could delay or, if not obtained, prevent the completion of the Merger.
Before the Merger can be completed, applicable waiting periods must expire or terminate under antitrust laws and various approvals, consents or clearances must be obtained from certain domestic and foreign regulatory entities, including those regulating the provision of commercial aviation services. In deciding whether to grant antitrust or regulatory clearances, the relevant antitrust authorities will consider the effect of the Merger on competition within their relevant jurisdictions. The terms and conditions of approvals that are granted may impose requirements, limitations, costs or restrictions on the conduct of the surviving company’s business following the Merger. There can be no assurance that regulators will not impose terms, conditions, requirements, limitations, costs or restrictions that would delay completion of the Merger, impose additional material costs on or limit the revenues of the surviving company, or limit some or all of the synergies and other benefits we anticipate following the Merger. In addition, we cannot provide assurance that any such terms, conditions, requirements, limitations, costs or restrictions will not result in a material delay in, or the abandonment of, the Merger.
The Merger is subject to the receipt of numerous approvals, including approvals from US Airways Group’s stockholders and confirmation of our plan of reorganization by the Bankruptcy Court. Failure to obtain any of these approvals would prevent the completion of the Merger.
The Merger Agreement will not be binding on either us or AMR until the Bankruptcy Court enters an order approving its enforceability. In addition, before the Merger can be completed, US Airways Group must submit the Merger to a vote of its stockholders, US Airways Group’s stockholders must have approved the Merger, AMR must obtain the approval of the plan of reorganization contemplating the Merger by the requisite percentage of each class of claimholder (as determined pursuant to the Bankruptcy Code), and the Bankruptcy Court must enter an order confirming our plan of reorganization and consummation of the Merger. There can be no assurance that any of these approvals will occur. Failure to obtain these required approvals within the expected time frame, or having to make significant changes to the structure, terms or conditions of the Merger to obtain such approvals, may result in a material delay in, or the abandonment of, the Merger.
Any delay in completing the Merger may reduce or eliminate the benefits expected to be achieved thereunder.
In addition to the required regulatory clearances and approvals discussed above, the Merger is subject to a number of other conditions beyond our control that may prevent, delay or otherwise materially and adversely affect its completion. We cannot predict when or if these other conditions will be satisfied. Furthermore, the requirements for obtaining the required clearances and approvals could delay the completion of the Merger for a significant period of time or prevent it from occurring. Any delay in completing the Merger could cause the surviving company to fail to realize some or all of the synergies and other benefits that we anticipate if the Merger is successfully completed within its expected time frame.
Failure to complete the Merger could adversely affect our business.
If the Merger is not completed, our ongoing business may be adversely affected, and we will be subject to several risks, including the following:
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we may be required to pay termination fees of $55 million or $195 million under certain circumstances provided in the Merger Agreement;
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unless and until it is terminated, we will be prohibited by the Merger Agreement from seeking certain strategic alternatives, such as transactions with third parties other than AMR, and could therefore miss attractive alternatives to the Merger;
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our operations will be restricted by the terms of the Merger Agreement, which may cause us to forego otherwise attractive business opportunities;
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we will be required to pay certain costs relating to the Merger, whether or not it is consummated, such as legal, accounting, financial advisor and printing fees, which costs could be substantial; and
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our management will have focused its attention on negotiating and preparing for the Merger instead of on pursuing other opportunities that could have been beneficial to us.
If the Merger is not completed, there can be no assurance that these risks will not materialize and will not adversely affect our business.
The Merger Agreement contains customary restrictions on our ability to seek other strategic alternatives.
The Merger Agreement contains “no shop” provisions that restrict our ability to initiate, solicit, or knowingly encourage or facilitate competing third-party proposals for any business combination transaction involving a merger of us with another entity or the acquisition of a significant portion of our stock or assets, although we may consider competing, unsolicited proposals and enter into discussions or negotiations regarding such proposals if our board of directors determines that any such acquisition proposal constitutes, or is reasonably likely to lead to, a superior proposal and that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of the board of directors to us and our stockholders under applicable law. In addition, AMR generally has an opportunity to offer to modify the terms of the Merger in response to any competing acquisition proposal. If we were to terminate the Merger Agreement to accept a superior proposal, we would be required to pay a termination fee of $55 million to AMR.
These provisions, although customary for these types of transactions, could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of our company from proposing any such acquisition, even if the potential third-party acquirer were prepared to pay consideration with a higher cash or market value than the market value proposed to be received or realized in the Merger or might result in a potential third-party acquirer proposing to pay a lower consideration to our stockholders than it might otherwise have proposed to pay because of the added expense of the $55 million termination fee that will become payable in connection with the termination of the Merger Agreement by us.
If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.
The surviving company may be unable to integrate our and AMR’s businesses successfully and realize the anticipated benefits of the Merger.
The Merger involves the combination of two companies that currently operate as independent public companies, each of which operates its own international network airline. Historically, the integration of separate airlines has often proven to be more time consuming and require more resources than initially estimated. The surviving company will be required to devote significant management attention and resources to integrating our and AMR’s business practices, cultures and operations. Potential difficulties the surviving company may encounter as part of the integration process include the following:
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the inability to successfully combine our business with that of AMR in a manner that permits the surviving company to achieve the synergies and other benefits anticipated to result from the Merger;
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the challenge of integrating complex systems, operating procedures, regulatory compliance programs, technology, aircraft fleets, networks and other assets of the two companies in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies;
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the challenge of integrating the workforces of the two companies while maintaining focus on providing consistent, high quality customer service and running an efficient operation; and
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potential unknown liabilities, liabilities that are significantly larger than we currently anticipate and unforeseen increased expenses or delays associated with the Merger, including one-time cash costs to integrate the two businesses that may exceed the approximately $1.2 billion of one-time cash costs that we currently anticipate.
Accordingly, even if the Merger is consummated, the contemplated benefits may not be realized fully, or at all, or may take longer to realize than expected.
In addition, both AMR and we have operated and, until the completion of the Merger, will continue to operate independently. It is possible that the integration process could result in:
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diversion of the attention of the surviving company’s management and other employees; and
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the disruption of, or the loss of momentum in, the surviving company’s ongoing business or inconsistencies in standards, controls, procedures and policies,
any of which could materially and adversely affect the surviving company’s ability to maintain relationships with customers, suppliers, employees and other constituencies or the surviving company’s ability to achieve the anticipated benefits of the Merger.
Risks Relating to Our Common Stock
The price of our common stock has recently been and may in the future be volatile.
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:
• our operating results failing to meet the expectations of securities analysts or investors;
• changes in financial estimates or recommendations by securities analysts;
• material announcements by us or our competitors;
• movements in fuel prices;
• new regulatory pronouncements and changes in regulatory guidelines;
• general and industry-specific economic conditions;
• public sales of a substantial number of shares of our common stock; and
• general market conditions.
Conversion of our convertible notes will dilute the ownership interest of existing stockholders and could adversely affect the market price of our common stock.
The conversion of some or all of US Airways Group’s 7.25% convertible senior notes due 2014 will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the convertible notes may encourage short selling by market participants executing hedging strategies.
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group make it difficult for stockholders to change the composition of our board of directors and may discourage takeover attempts that some of our stockholders might consider beneficial.
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of US Airways Group and its stockholders. These provisions include, among other things, the following:
• a classified board of directors with three-year staggered terms;
• advance notice procedures for stockholder proposals to be considered at stockholders’ meetings;
• the ability of US Airways Group’s board of directors to fill vacancies on the board;
• a prohibition against stockholders taking action by written consent;
• a prohibition against stockholders calling special meetings of stockholders;
• a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve any amendment of our amended and restated bylaws submitted to stockholders for approval; and
• super-majority voting requirements to modify or amend specified provisions of US Airways Group’s amended and restated certificate of incorporation.
These provisions are not intended to prevent a takeover, but are intended to protect and maximize the value of US Airways Group’s stockholders’ interests. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable our board of directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, US Airways Group is subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders. Interested stockholders do not include stockholders whose acquisition of US Airways Group’s securities is approved by the board of directors prior to the investment under Section 203.
Our charter documents include provisions limiting voting and ownership of our equity interests, which includes our common stock and our convertible notes, by foreign owners.
Our charter documents provide that, consistent with the requirements of Subtitle VII of Title 49 of the United States Code, as amended, or as the same may be from time to time amended (the “Aviation Act”), any person or entity who is not a “citizen of the United States” (as defined under the Aviation Act and administrative interpretations issued by the DOT, its predecessors and successors, from time to time), including any agent, trustee or representative of such person or entity (a “non-citizen”), shall not own (beneficially or of record) and/or control more than (a) 24.9% of the aggregate votes of all of our outstanding equity securities (as defined, which definition includes our capital stock, securities convertible into or exchangeable for shares of our capital stock, including our outstanding convertible notes, and any options, warrants or other rights to acquire capital stock) (the “voting cap amount”) or (b) 49.9% of our outstanding equity securities (the “absolute cap amount”). If non-citizens nonetheless at any time own and/or control more than the voting cap amount, the voting rights of the equity securities in excess of the voting cap amount shall be automatically suspended in accordance with the provisions of our bylaws. Voting rights of equity securities, if any, owned (beneficially or of record) by non-citizens shall be suspended in reverse chronological order based upon the date of registration in the foreign stock record. Further, if at any time a transfer of equity securities to a non-citizen would result in non-citizens owning more than the absolute cap amount, such transfer shall be void and of no effect, in accordance with provisions of our bylaws. Certificates for our equity securities must bear a legend set forth in our amended and restated certificate of incorporation stating that such equity securities are subject to the foregoing restrictions. Under our bylaws, it is the duty of each stockholder who is a non-citizen to register his, her or its equity securities on our foreign stock record. In addition, our bylaws provide that in the event that non-citizens shall own (beneficially or of record) or have voting control over any equity securities, the voting rights of such persons shall be subject to automatic suspension to the extent required to ensure that we are in compliance with applicable provisions of law and regulations relating to ownership or control of a United States air carrier. In the event that we determine that the equity securities registered on the foreign stock record or the stock records of the Company exceed the absolute cap amount, sufficient shares shall be removed from the foreign stock record and the stock records of the Company so that the number of shares entered therein does not exceed the absolute cap amount. Shares of equity securities shall be removed from the foreign stock record and the stock records of the Company in reverse chronological order based on the date of registration in the foreign stock record and the stock records of the Company.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Flight Equipment
At December 31, 2012, we operated a mainline fleet of 340 aircraft. During 2012, we took delivery of 12 new A321 aircraft from Airbus and three ERJ 190 aircraft that were purchased from Republic. During 2012, we removed seven leased Boeing 737-300 aircraft and eight leased Boeing 737-400 aircraft from our mainline operating fleet. We are also supported by our regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 238 regional jets and 44 turboprops at December 31, 2012. Our prorate carriers operated four regional jets at December 31, 2012.
US Airways has definitive purchase agreements with Airbus for the acquisition of 134 aircraft, including 97 single-aisle A320 family aircraft and 37 widebody aircraft (comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft). Since 2008, when deliveries commenced under the purchase agreements, we have taken delivery of 58 aircraft through December 31, 2012 which includes four A320 aircraft, 47 A321 aircraft and seven A330-200 aircraft.
US Airways plans to take delivery of 16 A321 aircraft in 2013, with the remaining 30 A320 family aircraft scheduled to be delivered between 2014 and 2015. In addition, US Airways plans to take delivery of five A330-200 aircraft in 2013, with the remaining three A330-200 aircraft scheduled to be delivered in 2014. Deliveries of the 22 A350 XWB aircraft are scheduled to begin in 2017 and extend through 2019. US Airways has financing commitments for all future Airbus aircraft deliveries except for four aircraft scheduled for delivery after November 2013.
In addition, we have two ERJ 190 aircraft to be purchased from Republic scheduled for delivery in the first quarter of 2013.
As of December 31, 2012, our mainline operating fleet consisted of the following aircraft:
(1) All owned aircraft are pledged as collateral for various secured financing agreements.
(2) The terms of the leases expire between 2013 and 2024.
As of December 31, 2012, our wholly owned regional airline subsidiaries operated the following regional jet and turboprop aircraft:
(1) The terms of the leases expire between 2017 and 2022.
We maintain inventories of spare engines, spare parts, accessories and other maintenance supplies sufficient to support our operating requirements.
The following table illustrates our committed orders and scheduled lease expirations at December 31, 2012:
See Notes 8 and 7, “Commitments and Contingencies” in Part II, Items 8A and 8B, respectively, for additional information on aircraft purchase commitments.
Ground Facilities
At each airport where we conduct flight operations, we lease passenger, operations and baggage handling space, generally from the airport operator, but in some cases on a subleased basis from other airlines. Our main operational facilities are associated with our hubs and focus city, which are located at the following airports: Charlotte Douglas International, Philadelphia International, Phoenix Sky Harbor International and Washington National. At those locations and in other cities we serve, we maintain administrative offices, terminal, catering, cargo, training facilities, maintenance facilities and other facilities, in each case as necessary to support our operations in the particular city. Our Operations Control Center is located near Pittsburgh, Pennsylvania, in a facility leased from the Allegheny County Airport Authority.
Our corporate headquarters building is located in Tempe, Arizona, and we have satellite facilities housing various headquarter support functions in the surrounding metropolitan area. The leases on these office facilities have expiration dates ranging from 2014 to 2024.
Terminal Construction Projects
We use public airports for our flight operations under lease agreements with the government entities that own or control these airports. From time to time, airports undertake projects to improve or construct new facilities, which are typically funded through proceeds from special or general purpose bond offerings made by the respective airport governmental entity. Our airport lease and operating agreements typically provide that any costs for these new or improved airport facilities are passed through to us in the form of higher occupancy costs based on our relative percentage of occupancy at the airport. In certain circumstances, we agree to manage these airport projects.
In 2010, the airlines and the City of Philadelphia approved a project to make certain improvements to the Terminal F facilities at the Philadelphia International Airport, which will be funded with proceeds from the issuance of General Airport Revenue Bonds issued by the City of Philadelphia. We have agreed to manage this project that commenced in 2011, which is expected to be complete by 2016 and cost approximately $130 million.
Item 3.
Item 3. Legal Proceedings
We are party to an arbitration proceeding relating to a grievance brought by our pilots union to the effect that, retroactive to January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. The arbitrator has issued two decisions in our favor, and a subsequent meeting requested by the union has been held with the arbitrator to address those decisions. We believe that the union’s position is without merit and that the possibility of an adverse outcome is remote.
On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices that illegally restrain US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011, allowing two of the four counts in the complaint to proceed. On January 18, 2013, Sabre filed a motion for leave to file a counterclaim, alleging that US Airways and other airlines conspired among themselves and with a third-party technology firm to boycott Sabre and other global distribution systems. If permitted to proceed, Sabre would be seeking monetary damages and injunctive relief. We intend to pursue our claims against Sabre vigorously and to vigorously defend any claims Sabre is permitted to file against us, but there can be no assurance of the outcome of this litigation.
We are defendants in various other pending lawsuits and proceedings, and from time to time are subject to other claims arising in the normal course of our business, many of which are covered in whole or in part by insurance. The outcome of those matters cannot be predicted with certainty at this time, but we, having consulted with outside counsel, believe that the ultimate disposition of these contingencies will not materially affect our consolidated financial position or results of operations.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. 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 15, 2013, the closing price of our common stock on the NYSE was $14.50. As of February 15, 2013, there were 1,662 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:
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.
Stock Performance Graph
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 the Exchange Act, 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 December 31, 2007 through December 31, 2012. The comparison assumes $100 was invested on December 31, 2007 in US Airways Group 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.
Item 6.
Item 6. Selected Financial Data
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” for the years ended December 31, 2012, 2011 and 2010 and as of December 31, 2012 and 2011 are derived from US Airways Group’s audited consolidated financial statements included elsewhere in this report. The selected consolidated financial data for the years ended December 31, 2009 and 2008 and as of December 31, 2010, 2009 and 2008 are derived from US Airways Group’s audited consolidated financial statements not included in this report. The selected consolidated financial data should be read in conjunction with US Airways Group’s consolidated financial statements for the respective periods, the related notes and the related reports of KPMG LLP, an independent registered public accounting firm.
(a) Includes debt, capital leases, postretirement benefits other than pensions and employee benefit liabilities and other.
(b) See reconciliation of GAAP to non-GAAP financial measures below.
Reconciliation of GAAP to Non-GAAP Financial Measures
We are providing disclosure of the reconciliation of reported non-GAAP financial measures to their comparable financial measures on a GAAP basis. We believe that the non-GAAP financial measures provide investors the ability to measure financial performance excluding special items, which is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines.
(a) Includes the following operating special charges (credits):
The 2012 period included $34 million of charges primarily related to corporate transaction and auction rate securities arbitration costs as well as $3 million of express special charges related to ratification of a new Piedmont fleet and passenger services contract.
The 2011 period included $24 million of charges primarily related to corporate transaction and auction rate securities arbitration costs as well as $2 million in express other special charges.
The 2010 period included a $6 million non-cash charge related to the decline in value of certain spare parts, $5 million in aircraft costs related to capacity reductions and other net special charges of $10 million, which included a settlement and corporate transaction costs. These costs were offset in part by a $16 million refund of ASIF and a $1 million refund of ASIF for our express subsidiaries previously paid to the TSA during the years 2005 to 2009.
The 2009 period included $375 million of net unrealized gains on fuel hedging instruments, offset in part by $22 million in aircraft costs as a result of capacity reductions, $16 million in non-cash impairment charges due to the decline in value of certain indefinite lived intangible assets associated with international routes, $11 million in severance and other charges, $6 million in costs incurred related to the 2009 liquidity improvement program and $3 million in non-cash charges related to the decline in value of certain express spare parts.
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 value of certain spare parts associated with our Boeing 737 aircraft fleet and, as a result of capacity reductions, $14 million in aircraft costs and $9 million in severance charges.
(b) Includes the following nonoperating special charges (credits):
The 2012 period primarily included a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.
The 2011 period included a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million of losses related to investments in auction rate securities.
The 2010 period included $53 million of net realized gains related to the sale of certain investments in auction rate securities as well as an $11 million settlement gain, offset in part by $5 million in non-cash charges related to the write off of debt issuance costs.
The 2009 period included $49 million in non-cash charges associated with the sale of 10 Embraer 190 aircraft and write off of related debt discount and issuance costs, $10 million in other-than-temporary non-cash impairment charges for investments in auction rate securities and a $2 million non-cash asset impairment charge.
The 2008 period included $214 million in other-than-temporary non-cash impairment charges for investments in auction rate securities 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, offset in part by $8 million in gains on forgiveness of debt.
(c) Includes the following income tax special charges (credits):
The 2011 period included a non-cash tax charge of $21 million as a result of the sale of our final remaining investment in auction rate securities in July 2011. This charge recognized in the statement of operations the tax provision that was recorded in other comprehensive income, a subset of stockholders’ equity, in the fourth quarter of 2009 as described below.
The 2009 period included a tax benefit of $38 million. Of this amount, $21 million was due to a non-cash income tax benefit related to gains recorded within other comprehensive income during 2009. In addition, we recorded a $14 million tax benefit related to a legislation change allowing us to carry back 100% of 2008 Alternative Minimum Tax liability (“AMT”) net operating losses, resulting in the recovery of AMT amounts paid in prior years. We also recognized a $3 million tax benefit related to the reversal of the deferred tax liability associated with the indefinite lived intangible assets that were impaired during 2009.
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” for the years ended December 31, 2012, 2011 and 2010 and as of December 31, 2012 and 2011 are derived from US Airways’ audited consolidated financial statements included elsewhere in this report. The selected consolidated financial data for the years ended December 31, 2009 and 2008 and as of December 31, 2010, 2009 and 2008 are derived from US Airways’ audited consolidated financial statements not included in this report. The selected consolidated financial data should be read in conjunction with US Airways’ consolidated financial statements for the respective periods, the related notes and the related reports of KPMG LLP, an independent registered public accounting firm.
(a) Includes debt, capital leases, postretirement benefits other than pensions and employee benefit liabilities and other.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Background
US Airways Group is a holding company whose primary business activity is the operation of a major network air carrier through its wholly owned subsidiaries US Airways, Piedmont, PSA, MSC and AAL. Effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005, US Airways Group merged with America West Holdings, with US Airways Group as the surviving corporation.
We operate the fifth largest airline in the United States as measured by domestic RPMs and ASMs. We have hubs in Charlotte, Philadelphia and Phoenix and a focus city in Washington, D.C. at Ronald Reagan Washington National Airport. We offer scheduled passenger service on more than 3,000 flights daily to 198 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, and Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service. We had approximately 54 million passengers boarding our mainline flights in 2012. As of December 31, 2012, we operated 340 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 238 regional jets and 44 turboprops. Our prorate carriers operated four regional jets at December 31, 2012.
2012 Year in Review
The U.S. Airline Industry
Even against a backdrop of uncertain economic conditions and high fuel prices, most of the U.S. industry experienced a profitable 2012 as consumer demand remained strong.
In its most recent data available, Airlines for America, the trade association for U.S. airlines, reported that annual U.S. industry passenger revenues and yields increased 3.8% and 3.2%, respectively, as compared to 2011. Year-over-year growth rates were lower than experienced in 2011 due primarily to more difficult year-over-year comparisons. With respect to international versus domestic revenue performance, Airlines for America reported domestic markets outperformed international markets, which experienced weaker demand due to the economic uncertainty in Europe during 2012.
Throughout 2012, jet fuel prices followed the price of Brent crude oil more closely than the price of West Texas Intermediate crude oil. On average, fuel costs were up slightly in 2012 as compared to 2011. The Brent crude oil average daily spot price was $112 per barrel during 2012 as compared to $111 in 2011. However, on a daily basis, prices continued to be volatile. Throughout 2012, daily spot prices fluctuated between a high of $128 per barrel in March to a low of $89 per barrel in June and closed the year at $111 per barrel on December 31, 2012.
While the U.S. airline industry is currently benefiting from a favorable revenue environment and moderating fuel price increases as described above, uncertainty exists regarding the economic conditions driving these factors. See Part I, Item 1A, Risk Factors - “Downturns in economic conditions adversely affect our business” and “Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.”
US Airways Group
For the year ending December 31, 2012, we reported our largest annual net profit and achieved our best operational performance in the Company’s history.
Driven by strong year-over-year growth in revenues, we realized net income of $637 million in 2012, which represents a 797% increase over net income of $71 million in 2011. Operating income was $856 million as compared to $426 million in 2011, an increase of 101%. Our 2012 net profit included net special credits of $100 million, while 2011 included net special charges of $40 million. See “Reconciliation of GAAP to Non-GAAP Financial Measures” included in Part II, Item 6 of this report for more information on net special items. As described in more detail below, these outstanding financial results were coupled with record annual operational results in on-time performance, completion factor and baggage handling.
For the fourth quarter, a period in which passenger demand has been historically low and our results were negatively impacted by an estimated $35 million due to Hurricane Sandy, we realized net income of $37 million, which represents a 106% increase over net income of $18 million in 2011. Operating income was $125 million, as compared to operating income of $108 million in 2011, an increase of 16%.
Revenue
Mainline and express passenger revenues increased $743 million, or 6.4%, as compared to 2011. The growth in revenues was driven by a 2.8% increase in revenue passenger miles and a 3.5% increase in yield, as total capacity increased 2.0% as compared to 2011. Our mainline and express passenger revenue per available seat mile (“PRASM”) was 13.92 cents in 2012, a 4.3% increase, as compared to 13.34 cents in 2011. Total revenue per available seat mile (“RASM”) was 15.64 cents in 2012, a 3.9% increase, as compared to 15.06 cents in 2011. Total revenues include our ancillary revenue initiatives, which generated $585 million in revenues in 2012, an increase of $48 million over 2011 principally related to our Choice Seats Program.
Fuel
Mainline and express fuel expense increased $131 million to $4.59 billion in 2012, which was 2.9% higher than 2011, on a 0.9% increase in consumption. The average mainline and express price per gallon of fuel was $3.17 in 2012 as compared to an average price per gallon of $3.11 in 2011, an increase of 2.0%. We have not entered into any transactions to hedge our fuel consumption.
Capacity
Total system capacity for 2012 increased 2.0% as compared to 2011. The increase in capacity was driven by our strong operating performance, which led to higher completion factors, and our fleet replacement program. During 2012 we replaced 15 Boeing 737 aircraft with 12 larger gauge, more modern and fuel-efficient new Airbus A321 aircraft.
Cost Control
We remain committed to maintaining a low cost structure, which we believe is necessary in an industry whose economic prospects are heavily dependent upon two variables we cannot control: the health of the economy and the price of fuel. Our mainline costs per available seat mile (“CASM”) excluding special items, fuel and profit sharing increased 0.04 cents, or 0.5%, from 8.35 cents in 2011 to 8.39 cents in 2012. This increase was primarily due to higher costs associated with other variable compensation programs driven by our record profitability and a 166% increase in the price of our common stock from $5.07 to $13.50 during 2012.
The following table details our mainline CASM for the years ended December 31, 2012 and 2011:
(1) We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Customer Service
We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation.
During 2012 we continued our work to enhance our customers’ experience. As described above in our discussion of capacity, we are continuing our fleet replacement program and replacing older aircraft with larger more modern and fuel-efficient new Airbus aircraft. Additionally, we completed the installation of the Envoy Suite, the airline’s fully lie-flat business-class seats with an on-demand in-flight entertainment system, on our fleet of wide-body Airbus A330-300 aircraft, expanded our Wi-Fi internet service to more than 80% of our domestic Embraer and Airbus narrow body fleet, and launched our PreferredAccess program, which gives our customers priority check in and boarding. In 2012, we also launched DineFresh, a premium meal option for customers flying in Economy class to Europe, the Middle East and South America, and we are the only U.S.-based carrier to offer this service.
Outstanding efforts from our employees drove record operational performance in 2012, as we achieved our best on-time performance, highest completion factor and lowest mishandled baggage ratio in our Company’s history. During 2012 we also earned three first place monthly rankings for on-time performance and three first place monthly rankings for baggage handling among the big hub-and-spoke carriers as reported by the DOT Air Travel Consumer Report.
We reported the following operating statistics to the DOT for mainline operations for the years ended December 31, 2012 and 2011:
(a) Percentage of reported flight operations arriving on time as defined by the DOT.
(b) Percentage of scheduled flight operations completed.
(c) Rate of mishandled baggage reports per 1,000 passengers.
(d) Rate of customer complaints filed with the DOT per 100,000 enplanements.
Liquidity Position
As of December 31, 2012, our total cash, cash equivalents, investments in marketable securities and restricted cash was $2.71 billion, of which $336 million was restricted.
The improvement in our liquidity in 2012 was due primarily to our record profitability resulting from the strong revenue environment. An April 2012 loan agreement, pursuant to which US Airways borrowed an aggregate principal amount of $100 million, also contributed to the improvement.
Long-term restricted cash primarily includes cash collateral to secure workers’ compensation claims and credit card processing holdback requirements for advance ticket sales for which US Airways has not yet provided air transportation.
2013 Outlook
We have taken significant actions over the last few years to align capacity with demand, focus our network on our four key markets, introduce new ancillary revenue streams, control costs and continue our exceptional operating reliability. Although it is difficult to predict the price of oil, the strength of the economy or the capacity actions of other airlines, we believe that we are positioned well.
US Airways Group’s Results of Operations
In 2012, we realized operating income of $856 million and income before income taxes of $637 million. We experienced growth in revenues in 2012 due to a strong pricing environment resulting from ongoing industry capacity discipline and consumer demand for air travel. Our 2012 results were also impacted by recognition of $100 million in net special credits.
In 2011, we realized operating income of $426 million and income before income taxes of $90 million. We experienced higher revenues in 2011 due to the strong pricing environment resulting from ongoing industry capacity discipline and robust consumer demand for air travel, which substantially offset a significant increase in fuel costs. Our 2011 results were also impacted by recognition of $19 million in net special charges.
In 2010, we realized operating income of $781 million and income before income taxes of $502 million. We experienced growth in revenues in 2010 driven by higher yields as a result of the improved economy and industry capacity discipline. Our 2010 results were also impacted by recognition of $55 million in net special credits.
The table below presents our pre-tax special charges (credits) (in millions):
(a) The 2012 and 2011 periods consisted primarily of corporate transaction and auction rate securities arbitration costs.
The 2010 period consisted of a $6 million non-cash charge related to the decline in value of certain spare parts, $5 million in aircraft costs related to capacity reductions and other net special charges of $10 million, which included a settlement and corporate transaction costs. These costs were offset in part by a $16 million refund of Aviation Security Infrastructure Fee (“ASIF”) previously paid to the TSA during the years 2005 to 2009.
(b) The 2012 period primarily consisted of a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.
The 2011 period consisted of a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs as well as $2 million of losses related to investments in auction rate securities.
The 2010 period consisted of $53 million of net realized gains related to the sale of certain investments in auction rate securities as well as an $11 million settlement gain, offset in part by $5 million in non-cash charges related to the write off of debt issuance costs.
At December 31, 2012, we had approximately $1.50 billion of gross NOLs to reduce future federal taxable income. To the extent profitable, all of our NOLs are expected to be available to reduce federal taxable income in the calendar year 2013. The NOLs expire during the years 2025 through 2031. Our net deferred tax assets, which include $1.42 billion of the NOLs, are subject to a full valuation allowance. At December 31, 2012, the federal and state valuation allowances were $118 million and $42 million, respectively, which includes $32 million allocated to certain capital loss carryforwards. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), utilization of the NOLs will result in a corresponding decrease in the valuation allowance and offset our tax provision dollar for dollar.
When profitable, we are ordinarily subject to AMT. However as the result of a special tax election made in 2009, we were able to utilize AMT NOLs to fully offset our AMT taxable income for each of the years ended 2012, 2011 and 2010.
For the year ended December 31, 2012, we recognized an AMT credit of $2 million resulting from our elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In addition, we did not record federal income tax expense and recorded $2 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
For the year ended December 31, 2011, we recorded a special non-cash tax charge of $21 million in connection with the sale of our final remaining investment in auction rate securities in July 2011. This charge recognized in the statement of operations the tax provision that was recorded in other comprehensive income, a subset of stockholders’ equity, in the fourth quarter of 2009. In addition, we recognized an AMT credit of $2 million resulting from our elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. We did not record any additional federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
For the year ended December 31, 2010, we did not record federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
The table below sets forth our selected mainline and express operating data:
(a) Revenue passenger mile (“RPM”) - A basic measure of sales volume. One RPM represents one passenger flown one mile.
(b) Available seat mile (“ASM”) - A basic measure of production. One ASM represents one seat flown one mile.
(c) Passenger load factor - The percentage of available seats that are filled with revenue passengers.
(d) Yield - A measure of airline revenue derived by dividing passenger revenue by RPMs.
(e) Passenger revenue per available seat mile (“PRASM”) - Passenger revenues divided by ASMs.
(f) Operating cost per available seat mile (“CASM”) - Operating expenses divided by ASMs.
(g) Passenger enplanements - The number of passengers on board an aircraft, including local, connecting and through passengers.
(h) Block hours - The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down.
(i) Average stage length - The average of the distances flown on each segment of every route.
(j) Average passenger journey - The average one-way trip measured in miles for one passenger origination.
(k) Express statistics include Piedmont and PSA, as well as operating and financial results from capacity purchase agreements with Air Wisconsin Airlines Corporation, Republic Airline, Inc., Mesa Airlines, Inc., Chautauqua Airlines, Inc. and SkyWest Airlines, Inc.
(l) Total revenue per available seat mile (“RASM”) - Total revenues divided by total mainline and express ASMs.
2012 Compared With 2011
Operating Revenues:
Total operating revenues in 2012 were $13.83 billion as compared to $13.06 billion in 2011, an increase of $776 million, or 5.9%. Significant changes in the components of operating revenues are as follows:
•
Mainline passenger revenues were $8.98 billion in 2012 as compared to $8.50 billion in 2011. Mainline RPMs increased 2.7% as mainline capacity, as measured by ASMs, increased 2.2%, resulting in a 0.4 point increase in load factor to 84.1%. Mainline passenger yield increased 2.8% to 14.38 cents in 2012 from 13.99 cents in 2011. Mainline PRASM increased 3.3% to 12.10 cents in 2012 from 11.71 cents in 2011. These increases in mainline yield and PRASM were due principally to the strong revenue environment resulting from ongoing industry capacity discipline and consumer demand for air travel.
•
Express passenger revenues were $3.33 billion in 2012 as compared to $3.06 billion in 2011. Express RPMs increased 3.2% as express capacity, as measured by ASMs, increased 1.0%, resulting in a 1.7 point increase in load factor to 76.6%. Express passenger yield increased by 5.3% to 30.56 cents in 2012 from 29.03 cents in 2011. Express PRASM increased 7.6% to 23.40 cents in 2012 from 21.75 cents in 2011. These increases in express yield and PRASM were the result of the same strong revenue environment discussed in mainline passenger revenues above. The availability of first class seating on certain US Airways Express regional jets during 2012 also contributed to the increase.
•
Cargo revenues were $155 million in 2012, a decrease of $15 million, or 8.4%, from 2011. The decrease in cargo revenues was primarily due to decreases in international freight volumes driven by uncertainty surrounding the European economy.
•
Other revenues were $1.37 billion in 2012, an increase of $48 million, or 3.6%, from 2011. The increase in other revenues was driven primarily by higher revenues associated with our frequent flyer program and increases in the volume of passenger ticketing change fees.
Operating Expenses:
Total operating expenses were $12.98 billion in 2012, an increase of $346 million, or 2.7%, compared to 2011. The increase in operating expenses was primarily driven by a $216 million, or 9.5%, increase in salaries and related costs as well as a $131 million, or 2.9%, increase in mainline and express fuel costs. The increase in salaries and related costs was primarily due to profit sharing and other variable compensation programs driven by our record profitability and the 166% increase in the price of our common stock during 2012. Fuel costs increased as the average price per gallon of fuel increased 2.0% to $3.17 in 2012 from $3.11 in 2011, on a 0.9% increase in consumption.
Mainline Operating Expenses per ASM:
Our mainline CASM increased 0.13 cents, or 1.1%, from 13.09 cents in 2011 to 13.22 cents in 2012. Excluding special items, fuel and profit sharing, our mainline CASM increased 0.04 cents, or 0.5%, from 8.35 cents in 2011 to 8.39 cents in 2012, while mainline capacity increased 2.2%.
The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the years ended December 31, 2012 and 2011:
(1) We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Significant changes in the components of mainline operating expense per ASM are as follows:
•
Aircraft fuel and related taxes per ASM increased 0.4% primarily due to a 2.0% increase in the average price per gallon of fuel to $3.17 in 2012 from $3.11 in 2011.
•
Salaries and related costs per ASM increased 7.1% primarily due to profit sharing and other variable compensation programs driven by our record profitability and a 166% increase in the price of our common stock from $5.07 to $13.50 during 2012.
Express Operating Expenses:
Total express expenses increased $35 million, or 1.1%, in 2012 to $3.16 billion from $3.13 billion in 2011. The year-over-year increase was primarily driven by a $42 million, or 3.9%, increase in fuel costs. The average price per gallon of fuel increased 2.0% to $3.19 in 2012 from $3.12 in 2011, on a 1.9% increase in fuel consumption.
Nonoperating Income (Expense):
Other nonoperating income of $122 million in 2012 consisted primarily of a $142 million special gain related to the slot transaction with Delta. See Note 14 to the consolidated financial statements included in Part II, Item 8A of this report for more information on the Delta transaction. This gain was offset in part by $10 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in 2012 and $3 million in special charges for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.
Other nonoperating expense of $13 million in 2011 consisted primarily of $17 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in 2011, offset by $7 million in net special credits. The net special credits included a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million for losses related to investments in auction rate securities.
2011 Compared With 2010
Operating Revenues:
Total operating revenues in 2011 were $13.06 billion as compared to $11.91 billion in 2010, an increase of $1.15 billion, or 9.6%. Significant changes in the components of operating revenues are as follows:
•
Mainline passenger revenues were $8.50 billion in 2011 as compared to $7.65 billion in 2010. Mainline RPMs increased 3.1% as mainline capacity, as measured by ASMs, increased 1.4%, resulting in a 1.3 point increase in load factor to 83.7%. Mainline passenger yield increased 7.9% to 13.99 cents in 2011 from 12.96 cents in 2010. Mainline PRASM increased 9.6% to 11.71 cents in 2011 from 10.68 cents in 2010. These increases in mainline yield and PRASM were due principally to the strong pricing environment resulting from ongoing industry capacity discipline and robust consumer demand.
•
Express passenger revenues were $3.06 billion in 2011 as compared to $2.82 billion in 2010. Express RPMs decreased 0.7% as express capacity, as measured by ASMs, decreased 1.1%, resulting in a 0.3 point increase in load factor to 74.9%. Express passenger yield increased by 9.3% to 29.03 cents in 2011 from 26.57 cents in 2010. Express PRASM increased 9.7% to 21.75 cents in 2011 from 19.83 cents in 2010. These increases in express yield and PRASM were the result of the same strong pricing environment discussed in mainline passenger revenues above.
•
Cargo revenues were $170 million in 2011, an increase of $21 million, or 13.8%, from 2010. The increase in cargo revenues was driven primarily by an increase in yield due to fuel surcharges.
•
Other revenues were $1.32 billion in 2011, an increase of $30 million, or 2.4%, from 2010. The increase in other revenues was driven primarily by increases in the volume of passenger ticketing change fees.
Operating Expenses:
Total operating expenses were $12.63 billion in 2011, an increase of $1.50 billion, or 13.5%, compared to 2010. The 2011 increase in operating expenses was driven by a $1.28 billion, or 40.5%, increase in mainline and express fuel costs on a 1.0% increase in total system capacity. The average price per gallon of fuel increased 38.2% to $3.11 in 2011 from $2.25 in 2010.
Mainline Operating Expenses per ASM:
Our mainline CASM increased 1.36 cents, or 11.6%, from 11.73 cents in 2010 to 13.09 cents in 2011. Excluding special items, fuel and profit sharing, our mainline CASM increased 0.05 cents, or 0.6%, from 8.30 cents in 2010 to 8.35 cents in 2011, while mainline capacity increased 1.4%.
The table below sets forth the major components of our total mainline CASM and our mainline CASM excluding special items, fuel and profit sharing for the years ended December 31, 2011 and 2010:
(1) We believe that the presentation of mainline CASM excluding fuel is useful to investors as both the cost and availability of fuel are subject to many economic and political factors beyond our control, and excluding special items and profit sharing provides investors the ability to measure financial performance in a way that is more indicative of our ongoing performance and is more comparable to measures reported by other major airlines. Management uses mainline CASM excluding special items, fuel and profit sharing to evaluate our operating performance. Amounts may not recalculate due to rounding.
Significant changes in the components of mainline operating expense per ASM are as follows:
•
Aircraft fuel and related taxes per ASM increased 39.5% primarily due to a 38.7% increase in the average price per gallon of fuel to $3.11 in 2011 from $2.24 in 2010.
•
Selling expenses per ASM increased 6.2% primarily due to higher credit card fees as a result of the increase in passenger revenues in 2011.
•
Depreciation and amortization expense per ASM decreased 5.8% primarily due to a significant portion of merger-related property and equipment additions becoming fully amortized and not subject to further depreciation expense in the 2011 period as well as a 1.4% increase in capacity.
Express Operating Expenses:
Total express expenses increased $398 million, or 14.6%, in 2011 to $3.13 billion from $2.73 billion in 2010. The year-over-year increase was primarily due to a $287 million, or 37.4%, increase in fuel costs. The average price per gallon of fuel increased 36.7% to $3.12 in 2011 from $2.29 in 2010. Other express expenses increased $111 million, or 5.6%, while express capacity decreased 1.1%. This increase in other express expenses was driven by a $99 million increase in maintenance costs related to the PSA CRJ-200 fleet. Express capacity decreased in 2011 primarily due to the installation of a dedicated First Class cabin on 110 US Airways Express regional jets.
Nonoperating Income (Expense):
Other nonoperating expense of $13 million in 2011 consisted primarily of $17 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in 2011, offset by $7 million in net special credits. The net special credits included a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million for losses related to investments in auction rate securities.
Other nonoperating income of $37 million in 2010 consisted primarily of $53 million of net realized gains related to the sale of certain investments in auction rate securities as well as an $11 million settlement gain. These gains were offset in part by $17 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in 2010 and $5 million in non-cash write offs of certain debt issuance costs.
US Airways’ Results of Operations
In 2012, US Airways realized operating income of $822 million and income before income taxes of $701 million. US Airways experienced growth in revenues in 2012 due to a strong pricing environment resulting from ongoing industry capacity discipline and consumer demand for air travel. US Airways’ 2012 results were also impacted by recognition of $103 million in net special credits.
In 2011, US Airways realized operating income of $434 million and income before income taxes of $199 million. US Airways experienced higher revenues in 2011 due to the strong pricing environment resulting from ongoing industry capacity discipline and robust consumer demand for air travel, which substantially offset a significant increase in fuel costs. US Airways’ 2011 results were also impacted by recognition of $17 million in net special charges.
In 2010, US Airways realized operating income of $781 million and income before income taxes of $600 million. US Airways experienced growth in revenues in 2010 driven by higher yields as a result of the improved economy and industry capacity discipline. US Airways’ 2010 results were also impacted by recognition of $54 million in net special credits.
The table below presents US Airways’ pre-tax special charges (credits) (in millions):
(a) The 2012 and 2011 periods consisted primarily of corporate transaction and auction rate securities arbitration costs.
The 2010 period consisted of a $6 million non-cash charge related to the decline in value of certain spare parts, $5 million in aircraft costs related to capacity reductions and other net special charges of $10 million, which included a settlement and corporate transaction costs. These costs were offset in part by a $16 million refund of ASIF previously paid to the TSA during the years 2005 to 2009.
(b) The 2012 period primarily consisted of a $142 million gain related to the slot transaction with Delta, offset in part by $3 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.
The 2011 period consisted of a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million in debt prepayment penalties and non-cash write offs of certain debt issuance costs as well as $2 million of losses related to investments in auction rate securities.
The 2010 period consisted of $53 million of net realized gains related to the sale of certain investments in auction rate securities as well as an $11 million settlement gain, offset in part by $5 million in non-cash charges related to the write off of debt issuance costs.
At December 31, 2012, US Airways had approximately $1.44 billion of gross NOLs to reduce future federal taxable income. To the extent profitable, all of US Airways’ NOLs are expected to be available to reduce federal taxable income in the calendar year 2013. The NOLs expire during the years 2025 through 2031. US Airways’ net deferred tax assets, which include $1.38 billion of the NOLs, are subject to a full valuation allowance. At December 31, 2012, the federal and state valuation allowances were $126 million and $42 million, respectively, which includes $32 million allocated to certain capital loss carryforwards. In accordance with GAAP, utilization of the NOLs will result in a corresponding decrease in the valuation allowance and offset US Airways’ tax provision dollar for dollar.
When profitable, US Airways is ordinarily subject to AMT. However as the result of a special tax election made in 2009, US Airways was able to utilize AMT NOLs to fully offset its AMT taxable income for each of the years ended 2012, 2011 and 2010.
For the year ended December 31, 2012, US Airways recognized an AMT credit of $2 million resulting from its elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In addition, US Airways did not record federal income tax expense and recorded $1 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
For the year ended December 31, 2011, US Airways recorded a special non-cash tax charge of $21 million in connection with the sale of its final remaining investment in auction rate securities in July 2011. This charge recognized in the statement of operations the tax provision that was recorded in other comprehensive income, a subset of stockholder’s equity, in the fourth quarter of 2009. In addition, US Airways recognized an AMT credit of $2 million resulting from its elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. US Airways did not record any additional federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
For the year ended December 31, 2010, US Airways did not record federal income tax expense and recorded $1 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
The table below sets forth US Airways’ selected mainline and express operating data:
(a) Revenue passenger mile (“RPM”) - A basic measure of sales volume. One RPM represents one passenger flown one mile.
(b) Available seat mile (“ASM”) - A basic measure of production. One ASM represents one seat flown one mile.
(c) Passenger load factor - The percentage of available seats that are filled with revenue passengers.
(d) Yield - A measure of airline revenue derived by dividing passenger revenue by RPMs.
(e) Passenger revenue per available seat mile (“PRASM”) - Passenger revenues divided by ASMs.
(f) Express statistics include Piedmont and PSA, as well as operating and financial results from capacity purchase agreements with Air Wisconsin Airlines Corporation, Republic Airline, Inc., Mesa Airlines, Inc., Chautauqua Airlines, Inc. and SkyWest Airlines, Inc.
(g) Total revenue per available seat mile (“RASM”) - Total revenues divided by total mainline and express ASMs.
2012 Compared With 2011
Operating Revenues:
Total operating revenues in 2012 were $13.99 billion as compared to $13.21 billion in 2011, an increase of $784 million, or 5.9%. Significant changes in the components of operating revenues are as follows:
•
Mainline passenger revenues were $8.98 billion in 2012 as compared to $8.50 billion in 2011. Mainline RPMs increased 2.7% as mainline capacity, as measured by ASMs, increased 2.2%, resulting in a 0.4 point increase in load factor to 84.1%. Mainline passenger yield increased 2.8% to 14.38 cents in 2012 from 13.99 cents in 2011. Mainline PRASM increased 3.3% to 12.10 cents in 2012 from 11.71 cents in 2011. These increases in mainline yield and PRASM were due principally to the strong revenue environment resulting from ongoing industry capacity discipline and consumer demand for air travel.
•
Express passenger revenues were $3.33 billion in 2012 as compared to $3.06 billion in 2011. Express RPMs increased 3.2% as express capacity, as measured by ASMs, increased 1.0%, resulting in a 1.7 point increase in load factor to 76.6%. Express passenger yield increased by 5.3% to 30.56 cents in 2012 from 29.03 cents in 2011. Express PRASM increased 7.6% to 23.40 cents in 2012 from 21.75 cents in 2011. These increases in express yield and PRASM were the result of the same strong revenue environment discussed in mainline passenger revenues above. The availability of first class seating on certain US Airways Express regional jets during 2012 also contributed to the increase.
•
Cargo revenues were $155 million in 2012, a decrease of $15 million, or 8.4%, from 2011. The decrease in cargo revenues was primarily due to decreases in international freight volumes driven by uncertainty surrounding the European economy.
•
Other revenues were $1.53 billion in 2012, an increase of $56 million, or 3.7%, from 2011. The increase in other revenues was driven primarily by higher revenues associated with US Airways’ frequent flyer program and increases in the volume of passenger ticketing change fees.
Operating Expenses:
Total operating expenses were $13.17 billion in 2012, an increase of $396 million, or 3.1%, compared to 2011. The increase in operating expenses was primarily driven by a $216 million, or 9.5%, increase in salaries and related costs as well as a $130 million, or 2.9%, increase in mainline and express fuel costs. The increase in salaries and related costs was primarily due to profit sharing and other variable compensation programs driven by US Airways’ record profitability and the 166% increase in the price of US Airways Group’s common stock during 2012. Fuel costs increased as the average price per gallon of fuel increased 1.9% to $3.17 in 2012 from $3.11 in 2011, on a 0.9% increase in consumption.
Mainline Operating Expenses:
Significant changes in the components of mainline operating expense are as follows:
•
Aircraft fuel and related taxes increased 2.6% primarily due to a 2.0% increase in the average price per gallon of fuel to $3.17 in 2012 from $3.11 in 2011.
•
Salaries and related costs increased 9.5% primarily due to profit sharing and other variable compensation programs driven by US Airways’ record profitability and a 166% increase in the price of US Airways Group’s common stock from $5.07 to $13.50 during 2012.
Express Operating Expenses:
Total express expenses increased $80 million, or 2.5%, in 2012 to $3.31 billion from $3.23 billion in 2011. The year-over-year increase was primarily driven by a $41 million, or 3.8%, increase in fuel costs and a $39 million, or 1.8%, increase in other express expenses. The average price per gallon of fuel increased 1.9% to $3.19 in 2012 from $3.13 in 2011, on a 1.9% increase in fuel consumption. The increase in other express expenses was driven by higher amounts paid under capacity purchase agreements.
Nonoperating Income (Expense):
Other nonoperating income of $121 million in 2012 consisted primarily of a $142 million special gain related to the slot transaction with Delta. See Note 13 to the consolidated financial statements included in Part II, Item 8B of this report for more information on the Delta transaction. This gain was offset in part by $10 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in 2012 and $3 million in special charges for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of two Airbus aircraft.
Other nonoperating expense of $14 million in 2011 consisted primarily of $17 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in 2011, offset by $7 million in net special credits. The net special credits included a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million for losses related to investments in auction rate securities.
2011 Compared With 2010
Operating Revenues:
Total operating revenues in 2011 were $13.21 billion as compared to $12.06 billion in 2010, an increase of $1.15 billion, or 9.6%. Significant changes in the components of operating revenues are as follows:
•
Mainline passenger revenues were $8.50 billion in 2011 as compared to $7.65 billion in 2010. Mainline RPMs increased 3.1% as mainline capacity, as measured by ASMs, increased 1.4%, resulting in a 1.3 point increase in load factor to 83.7%. Mainline passenger yield increased 7.9% to 13.99 cents in 2011 from 12.96 cents in 2010. Mainline PRASM increased 9.6% to 11.71 cents in 2011 from 10.68 cents in 2010. These increases in mainline yield and PRASM were due principally to the strong pricing environment resulting from ongoing industry capacity discipline and robust consumer demand.
•
Express passenger revenues were $3.06 billion in 2011 as compared to $2.82 billion in 2010. Express RPMs decreased 0.7% as express capacity, as measured by ASMs, decreased 1.1%, resulting in a 0.3 point increase in load factor to 74.9%. Express passenger yield increased by 9.3% to 29.03 cents in 2011 from 26.57 cents in 2010. Express PRASM increased 9.7% to 21.75 cents in 2011 from 19.83 cents in 2010. These increases in express yield and PRASM were the result of the same strong pricing environment discussed in mainline passenger revenues above.
•
Cargo revenues were $170 million in 2011, an increase of $21 million, or 13.8%, from 2010. The increase in cargo revenues was driven primarily by an increase in yield due to fuel surcharges.
•
Other revenues were $1.48 billion in 2011, an increase of $36 million, or 2.6%, from 2010. The increase in other revenues was driven primarily by increases in the volume of passenger ticketing change fees.
Operating Expenses:
Total operating expenses were $12.77 billion in 2011, an increase of $1.50 billion, or 13.3%, compared to 2010. The 2011 increase in operating expenses was driven by a $1.28 billion, or 40.4%, increase in mainline and express fuel costs on a 1.0% increase in total system capacity. The average price per gallon of fuel increased 38.2% to $3.11 in 2011 from $2.25 in 2010.
Mainline Operating Expenses:
Significant changes in the components of mainline operating expense are as follows:
•
Aircraft fuel and related taxes increased 41.4% primarily due to a 38.7% increase in the average price per gallon of fuel to $3.11 in 2011 from $2.24 in 2010.
•
Selling expenses increased 7.7% primarily due to higher credit card fees as a result of the increase in passenger revenues in 2011.
Express Operating Expenses:
Total express expenses increased $388 million, or 13.7%, in 2011 to $3.23 billion from $2.84 billion in 2010. The year-over-year increase was primarily due to a $288 million, or 37.3%, increase in fuel costs. The average price per gallon of fuel increased 36.6% to $3.13 in 2011 from $2.29 in 2010. Other express expenses increased $100 million, or 4.9%, while express capacity decreased 1.1%. This increase in other express expenses was driven by higher amounts paid under capacity purchase agreements due to increased maintenance costs related to the PSA CRJ-200 fleet. Express capacity decreased in 2011 primarily due to the installation of a dedicated First Class cabin on 110 US Airways Express regional jets.
Nonoperating Income (Expense):
Other nonoperating expense of $14 million in 2011 consisted primarily of $17 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in 2011, offset by $7 million in net special credits. The net special credits included a $15 million credit in connection with an award received in an arbitration involving investments in auction rate securities, offset in part by $6 million for debt prepayment penalties and non-cash write offs of certain debt issuance costs related to the refinancing of five Airbus aircraft as well as $2 million for losses related to investments in auction rate securities.
Other nonoperating income of $39 million in 2010 consisted primarily of $53 million of net realized gains related to the sale of certain investments in auction rate securities as well as an $11 million settlement gain. These gains were offset in part by $17 million in net foreign currency losses as a result of the overall strengthening of the U.S. dollar in 2010 and $5 million in non-cash write offs of certain debt issuance costs.
Liquidity and Capital Resources
As of December 31, 2012, our total cash, cash equivalents, investments in marketable securities and restricted cash was $2.71 billion, of which $336 million was restricted.
Sources and Uses of Cash
US Airways Group
2012 Compared to 2011
Operating Activities
Net cash provided by operating activities was $1.02 billion and $472 million in 2012 and 2011, respectively, a year-over-year improvement of $545 million. This increase was due principally to our record profits in 2012 resulting from the growth in revenues driven by ongoing industry capacity discipline and consumer demand for air travel.
Investing Activities
Net cash used in investing activities was $844 million and $472 million in 2012 and 2011, respectively.
Principal investing activities in 2012 included expenditures of $610 million for property and equipment and consisted primarily of the purchase of 10 Airbus aircraft and costs related to the installation of the Envoy Suite on wide-body Airbus A330-300 aircraft. Investing activities also included expenditures of $165 million for pre-delivery deposits for 34 Airbus aircraft on order and purchases of marketable securities of $100 million. These cash outflows were offset in part by a $29 million decrease in restricted cash. Restricted cash decreased primarily due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation.
Principal investing activities in 2011 included expenditures of $493 million for property and equipment and consisted primarily of the purchase of eight Airbus aircraft and various additions related to information technology, rotable parts, ground service and other flight equipment. Investing activities also included expenditures of $100 million for pre-delivery deposits for 24 Airbus aircraft on order and purchases of marketable securities of $30 million. These cash outflows were offset in part by cash proceeds of $82 million from sales of marketable securities, which included $52 million related to the liquidation of our final remaining investments in auction rate securities, and net cash proceeds of $63 million obtained in the slot transaction with Delta.
Financing Activities
Net cash provided by financing activities was $156 million and $88 million in 2012 and 2011, respectively.
Principal financing activities in 2012 included proceeds of $674 million and consisted primarily of the issuance of debt of $634 million. This included $441 million related to the issuance of equipment notes associated with the May 2012 EETC transactions and $100 million related to the slot financing transaction completed in April 2012. These cash inflows were offset in part by debt repayments of $495 million, including the repayment of $60 million in existing debt associated with two Airbus aircraft refinanced by the May 2012 EETC issuance.
Principal financing activities in 2011 included proceeds of $777 million and consisted primarily of $471 million and $53 million related to the issuance of equipment notes associated with the June 2011 and July 2011 EETC transactions, respectively. These proceeds were offset in part by debt repayments of $675 million, including the repayment of $206 million in existing debt associated with five Airbus aircraft refinanced by the June 2011 EETC issuance.
2011 Compared to 2010
Operating Activities
Net cash provided by operating activities was $472 million and $804 million in 2011 and 2010, respectively, a year-over-year decrease of $332 million. The decline in operating cash flows was driven by lower net income in 2011 as mainline and express fuel costs increased $1.28 billion, or 40.5%, on a 1.0% increase in total system capacity. The increase in fuel costs was offset in part by growth in total operating revenues of $1.15 billion, or 9.6%, due principally to the strong pricing environment resulting from ongoing industry capacity discipline and robust consumer demand. A $99 million increase in express maintenance costs related to the PSA CRJ-200 fleet also contributed to the decline in 2011 operating cash flows.
Investing Activities
Net cash used in investing activities was $472 million in 2011 as compared to net cash provided by investing activities of $63 million in 2010.
Principal investing activities in 2011 included expenditures of $493 million for property and equipment and consisted primarily of the purchase of eight Airbus aircraft and various additions related to information technology, rotable parts, ground service and other flight equipment. Investing activities also included expenditures of $100 million for pre-delivery deposits for 24 Airbus aircraft on order and purchases of marketable securities of $30 million. These cash outflows were offset in part by cash proceeds of $82 million from sales of marketable securities, which included $52 million related to the liquidation of our final remaining investments in auction rate securities, and net cash proceeds of $63 million obtained in the slot transaction with Delta.
Principal investing activities in 2010 included net proceeds from sales of marketable securities of $325 million, including sales of certain auction rate securities of $145 million, and a $116 million decrease in restricted cash. Restricted cash decreased primarily due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation. These cash inflows were offset in part by expenditures of $114 million for property and equipment and included the purchase of two Airbus aircraft. Investing activities also included expenditures of $87 million for pre-delivery deposits for 13 Airbus aircraft on order and purchases of marketable securities of $180 million.
Financing Activities
Net cash provided by financing activities was $88 million in 2011 as compared to net cash used in financing activities of $307 million in 2010.
Principal financing activities in 2011 included proceeds of $777 million and consisted primarily of $471 million and $53 million related to the issuance of equipment notes associated with the June 2011 and July 2011 EETC transactions, respectively. These proceeds were offset in part by debt repayments of $675 million, including the repayment of $206 million in existing debt associated with five Airbus aircraft refinanced by the June 2011 EETC issuance.
Principal financing activities in 2010 included debt repayments of $764 million including the repayment of existing debt associated with eight Airbus aircraft refinanced by the December 2010 EETC issuance and the repurchase of $69 million aggregate principal amount of our 7% senior convertible notes. These cash outflows were offset in part by proceeds from the issuance of debt of $467 million, which included $340 million related to the issuance of equipment notes associated with the December 2010 EETC transactions.
US Airways
2012 Compared to 2011
Operating Activities
Net cash provided by operating activities was $995 million and $440 million in 2012 and 2011, respectively, a year-over-year improvement of $555 million. This increase was due principally to US Airways’ record profits in 2012 resulting from the growth in revenues driven by ongoing industry capacity discipline and consumer demand for air travel.
Investing Activities
Net cash used in investing activities was $836 million and $460 million in 2012 and 2011, respectively.
Principal investing activities in 2012 included expenditures of $601 million for property and equipment and consisted primarily of the purchase of 10 Airbus aircraft and costs related to the installation of the Envoy Suite on wide-body Airbus A330-300 aircraft. Investing activities also included expenditures of $165 million for pre-delivery deposits for 34 Airbus aircraft on order and purchases of marketable securities of $100 million. These cash outflows were offset in part by a $29 million decrease in restricted cash. Restricted cash decreased primarily due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation.
Principal investing activities in 2011 included expenditures of $481 million for property and equipment and consisted primarily of the purchase of eight Airbus aircraft and various additions related to information technology, rotable parts, ground service and other flight equipment. Investing activities also included expenditures of $100 million for pre-delivery deposits for 24 Airbus aircraft on order and purchases of marketable securities of $30 million. These cash outflows were offset in part by cash proceeds of $82 million from sales of marketable securities, which included $52 million related to the liquidation of US Airways’ final remaining investments in auction rate securities, and net cash proceeds of $63 million obtained in the slot transaction with Delta.
Financing Activities
Net cash provided by financing activities was $172 million and $104 million in 2012 and 2011, respectively.
Principal financing activities in 2012 included proceeds of $674 million and consisted primarily of the issuance of debt of $634 million. This included $441 million related to the issuance of equipment notes associated with the May 2012 EETC transactions and $100 million related to the slot financing transaction completed in April 2012. These cash inflows were offset in part by debt repayments of $479 million, including the repayment of $60 million in existing debt associated with two Airbus aircraft refinanced by the May 2012 EETC issuance.
Principal financing activities in 2011 included proceeds of $777 million and consisted primarily of $471 million and $53 million related to the issuance of equipment notes associated with the June 2011 and July 2011 EETC transactions, respectively. These proceeds were offset in part by debt repayments of $659 million, including the repayment of $206 million in existing debt associated with five Airbus aircraft refinanced by the June 2011 EETC issuance.
2011 Compared to 2010
Operating Activities
Net cash provided by operating activities was $440 million and $821 million in 2011 and 2010, respectively, a year-over-year decrease of $381 million. The decline in operating cash flows was driven by lower net income in 2011 as mainline and express fuel costs increased $1.29 billion, or 40.4%, on a 1.0% increase in total system capacity. The increase in fuel costs was offset in part by growth in total operating revenues of $1.15 billion, or 9.6%, due principally to the strong pricing environment resulting from ongoing industry capacity discipline and robust consumer demand. Higher amounts paid under capacity purchase agreements due to increased maintenance costs related to the PSA CRJ-200 fleet also contributed to the decline in 2011 operating cash flows.
Investing Activities
Net cash used in investing activities was $460 million in 2011 as compared to net cash provided by investing activities of $77 million in 2010.
Principal investing activities in 2011 included expenditures of $481 million for property and equipment and consisted primarily of the purchase of eight Airbus aircraft and various additions related to information technology, rotable parts, ground service and other flight equipment. Investing activities also included expenditures of $100 million for pre-delivery deposits for 24 Airbus aircraft on order and purchases of marketable securities of $30 million. These cash outflows were offset in part by cash proceeds of $82 million from sales of marketable securities, which included $52 million related to the liquidation of US Airways’ final remaining investments in auction rate securities, and net cash proceeds of $63 million obtained in the slot transaction with Delta.
Principal investing activities in 2010 included net proceeds from sales of marketable securities of $325 million, including sales of certain auction rate securities of $145 million, and a $116 million decrease in restricted cash. Restricted cash decreased primarily due to a change in the amount of holdback held by certain credit card processors for advance ticket sales for which US Airways had not yet provided air transportation. These cash inflows were offset in part by expenditures of $100 million for property and equipment and included the purchase of two Airbus aircraft. Investing activities also included expenditures of $87 million for pre-delivery deposits for 13 Airbus aircraft on order and purchases of marketable securities of $180 million.
Financing Activities
Net cash provided by financing activities was $104 million in 2011 as compared to net cash used in financing activities of $251 million in 2010.
Principal financing activities in 2011 included proceeds of $777 million and consisted primarily of $471 million and $53 million related to the issuance of equipment notes associated with the June 2011 and July 2011 EETC transactions, respectively. These proceeds were offset in part by debt repayments of $659 million, including the repayment of $206 million in existing debt associated with five Airbus aircraft refinanced by the June 2011 EETC issuance.
Principal financing activities in 2010 included debt repayments of $679 million including the repayment of existing debt associated with eight Airbus aircraft refinanced by the December 2010 EETC issuance. These cash outflows were offset in part by proceeds from the issuance of debt of $437 million, which included $340 million related to the issuance of equipment notes associated with the December 2010 EETC transactions.
Commitments
As of December 31, 2012, we had $4.94 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 (the “Citicorp credit facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways Group borrowed an aggregate principal amount of $1.6 billion. US Airways and certain other subsidiaries of US Airways Group are guarantors of the Citicorp credit facility.
The Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at our option, LIBOR plus an applicable LIBOR margin for interest periods of one, two, three or six months. The applicable index margin, subject to adjustment, is 1.00%, 1.25% or 1.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. The applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25% or 2.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. In addition, interest on the Citicorp credit facility may be adjusted based on the credit rating for the Citicorp credit facility as follows: (i) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least one subgrade better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be the lower of 2.25% and the rate otherwise applicable based upon the adjusted Citicorp credit facility balance and (B) the applicable index margin will be the lower of 1.25% and the rate otherwise applicable based upon the Citicorp credit facility principal balance, and (ii) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least two subgrades better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be 2.00% and (B) the applicable index margin will be 1.00%. As of December 31, 2012, the interest rate on the Citicorp credit facility was 2.71% based on a 2.50% LIBOR margin.
The Citicorp credit facility matures on March 23, 2014, and is repayable in seven annual installments with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.
In addition, the Citicorp credit facility requires certain mandatory prepayments upon the occurrence of specified events, establishes certain financial covenants, including minimum cash requirements and maintenance of certain minimum ratios, contains customary affirmative covenants and negative covenants and contains customary events of default. The Citicorp credit facility requires us to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements, which would become restricted for use by us if certain adverse events occur per the terms of the agreement. In addition, the Citicorp credit facility provides that we may issue debt in the future with a second lien on the assets pledged as collateral under the Citicorp credit facility. The principal amount outstanding under the Citicorp credit facility was $1.12 billion as of December 31, 2012. As of December 31, 2012, we were in compliance with all debt covenants under the Citicorp credit facility.
2012 EETC Transactions
In May 2012, US Airways created three pass-through trusts which issued approximately $623 million aggregate face amount of Series 2012-1 Class A, Class B and Class C Enhanced Equipment Trust Certificates in connection with the refinancing of two Airbus aircraft owned by US Airways and the financing of 12 Airbus aircraft scheduled to be delivered from September 2012 to March 2013 (the “2012-1 EETCs”). The 2012-1 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets.
As of December 31, 2012, $441 million of the escrowed proceeds from the 2012-1 EETCs have been used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in an aggregate principal amount of $269 million bearing interest at 5.90% per annum, Series B equipment notes in an aggregate principal amount of $88 million bearing interest at 8% per annum and Series C equipment notes in an aggregate principal amount of $84 million bearing interest at 9.125% per annum. Interest on the equipment notes is payable semiannually in April and October of each year and began in October 2012. Principal payments on the equipment notes are scheduled to begin in April 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in October 2024, October 2019 and October 2015, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used in part to repay the existing debt associated with the two Airbus aircraft and to finance eight Airbus aircraft delivered in 2012, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $182 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered in 2013.
In December 2012, US Airways created two pass-through trusts which issued approximately $546 million aggregate face amount of Series 2012-2 Class A and Class B Enhanced Equipment Trust Certificates in connection with the financing of 11 Airbus aircraft scheduled to be delivered from May 2013 to October 2013 (the “2012-2 EETCs”). The 2012-2 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets. The escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered in 2013.
2012 Other Financing Transactions
In February 2012, US Airways Group amended its co-branded credit card agreement with Barclays Bank Delaware. This amendment provides that the $200 million pre-purchase of frequent flier miles previously scheduled to reduce commencing in January 2012 will now be reduced commencing in January 2014 over a period of up to approximately two years. Refer to Note 4(d) to US Airways Group’s consolidated financial statements in Item 8A of this report for additional information on this agreement.
In April 2012, US Airways entered into a loan agreement pursuant to which US Airways borrowed an aggregate principal amount of $100 million. The net proceeds after fees were approximately $98 million. The loan is payable in full at maturity on March 23, 2014. The loan bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR plus an applicable LIBOR margin. US Airways has agreed to maintain a level of unrestricted cash in the same amount required by our Citicorp credit facility and has also agreed to maintain certain collateral coverage ratios. The loan is collateralized by certain airport take-off and landing slots.
In the third quarter of 2012, US Airways entered into an agreement to acquire five Embraer 190 aircraft from Republic. In 2012, US Airways took delivery of three aircraft and the remaining two aircraft are scheduled to be delivered in the first quarter of 2013. In connection with this agreement, US Airways assumes the outstanding debt on these aircraft upon delivery and Republic is released from its obligations associated with the principal due under the debt.
In the third quarter of 2012, US Airways borrowed $85 million to finance new Airbus aircraft deliveries. These financings bear interest at a rate of LIBOR plus an applicable margin and contain default provisions and other covenants that are typical in the industry.
Credit Card Processing Agreements
We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. Credit card processors have financial risk associated with tickets purchased for travel because, although the processor generally forwards the cash related to the purchase to us soon after the purchase is completed, the air travel generally occurs after that time, and the processor may have liability if we do not ultimately provide the air travel. Our agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. These holdback requirements can be modified at the discretion of the processing companies, up to the estimated liability for future air travel purchased with the respective credit cards, upon the occurrence of specified events, including material adverse changes in our financial condition. The amount that the processing companies may withhold also varies as a result of changes in financial risk due to seasonal fluctuations in ticket volume. Additional holdback requirements will reduce our liquidity in the form of unrestricted cash by the amount of the holdbacks. These holdback amounts are reflected on our consolidated balance sheet as restricted cash.
Aircraft and Engine Purchase Commitments
US Airways has definitive purchase agreements with Airbus for the acquisition of 134 aircraft, including 97 single-aisle A320 family aircraft and 37 widebody aircraft (comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft). Since 2008, when deliveries commenced under the purchase agreements, US Airways has taken delivery of 58 aircraft through December 31, 2012, which includes four A320 aircraft, 47 A321 aircraft and seven A330-200 aircraft. US Airways plans to take delivery of 16 A321 aircraft in 2013, with the remaining 30 A320 family aircraft scheduled to be delivered between 2014 and 2015. In addition, US Airways plans to take delivery of five A330-200 aircraft in 2013, with the remaining three A330-200 aircraft scheduled to be delivered in 2014. Deliveries of the 22 A350 XWB aircraft are scheduled to begin in 2017 and extend through 2019.
US Airways has agreements for the purchase of eight new IAE V2500-A5 spare engines scheduled for delivery through 2014 for use on the A320 family fleet, three new Trent 700 spare engines scheduled for delivery through 2013 for use on the A330-200 fleet and three new Trent XWB spare engines scheduled for delivery in 2017 through 2019 for use on the A350 XWB aircraft. US Airways has taken delivery of two of the Trent 700 spare engines and four of the V2500-A5 spare engines through December 31, 2012.
Under all of our aircraft and engine purchase agreements, our total future commitments as of December 31, 2012 are expected to be approximately $4.92 billion through 2019 as follows: $1.27 billion in 2013, $1.02 billion in 2014, $448 million in 2015, $107 million in 2016, $817 million in 2017 and $1.26 billion thereafter, which includes predelivery deposits and payments. We have financing commitments for all future Airbus aircraft deliveries except for four aircraft scheduled for delivery after November 2013. See Part I, Item 1A, Risk Factors - “Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, operating expenses and results” and “Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions.”
Covenants and Credit Rating
In addition to the minimum cash balance requirements, our long-term debt agreements contain various negative covenants that restrict or limit our actions, including our ability to pay dividends or make other restricted payments. Our long-term debt agreements also generally contain cross-default provisions, which may be triggered by defaults by us under other agreements relating to indebtedness. See Part I, Item 1A, Risk Factors - “Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions” and “Any failure to comply with the liquidity covenants contained in our financing arrangements would likely have a material adverse effect on our business, financial condition and results of operations.” As of December 31, 2012, we and our subsidiaries were in compliance with the covenants in our long-term debt agreements.
The following table details our credit ratings as of December 31, 2012:
(*) The credit agency does not rate this category for US Airways.
In November 2012, Moody’s upgraded US Airways Group from Caa1 to B3.
A decrease in our credit ratings could cause our borrowing costs to increase, which would increase our interest expense and could affect our net income, and our credit ratings could adversely affect our ability to obtain additional financing. If our financial performance or industry conditions worsen, we may face future downgrades, which could negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a decline in our business and in our ability to satisfy our obligations under our indebtedness.
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 our financial condition, liquidity or results of operations are disclosed in Note 8(f) to the consolidated financial statements of US Airways Group included in Item 8A of this report and Note 7(f) to the consolidated financial statements of US Airways included in Item 8B of this report.
Pass Through Trusts
US Airways has 46 owned aircraft, 114 leased aircraft and three leased engines, which were financed with pass through trust certificates, or EETCs, issued by pass through trusts. These trusts are off-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment. Rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allowed US Airways to raise the financing for several aircraft at one time and place such funds in escrow pending the purchase, delivery or refinancing 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 or refinanced 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, 2012, $1.60 billion 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. US Airways concluded the leasing entities met the criteria for variable interest entities. US Airways generally is not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates US Airways to absorb decreases in value or entitles US Airways to participate in increases in the value of the aircraft. 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. US Airways’ total future obligations under these leveraged lease financings are $2.35 billion as of December 31, 2012.
Contractual Obligations
The following table provides details of our future cash contractual obligations as of December 31, 2012 (in millions):
(1) These commitments represent those entered into by US Airways Group.
(2) Excludes $87 million of unamortized debt discount as of December 31, 2012.
(3) For variable-rate debt, future interest obligations are shown above using interest rates in effect as of December 31, 2012.
(4) These commitments represent those entered into by US Airways.
(5) Excludes $62 million of unamortized debt discount as of December 31, 2012.
(6) Includes $1.60 billion of future principal payments and $589 million of future interest payments as of December 31, 2012, respectively, related to pass through trust certificates or EETCs associated with mortgage financings for the purchase of certain aircraft as described under “Off-Balance Sheet Arrangements” and in Note 8(c) to US Airways Group’s and Note 7(c) to US Airways’ consolidated financial statements in Item 8A and 8B of this report, respectively.
(7) Includes $2.35 billion of future minimum lease payments related to EETC leveraged leased financings of certain aircraft as of December 31, 2012, as described under “Off-Balance Sheet Arrangements” and in Note 8(c) to US Airways Group’s and Note 7(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. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and our actual payments could differ materially.
(9) Represents operating lease commitments entered into by US Airways Group’s other airline subsidiaries, Piedmont and PSA.
In light of our significant financial commitments related to, among other things, new aircraft and the servicing and amortization of existing debt and equipment leasing arrangements, we regularly consider and enter into negotiations related to capital raising activity, which may include the entry into leasing transactions and future issuances of secured or unsecured debt obligations or additional equity securities, in public or private offerings or otherwise. The cash available to us from operations and these sources, however, may not be sufficient to cover these cash obligations because economic factors may reduce the amount of cash generated by operations or increase our costs. For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks and natural disasters could reduce the demand for air travel, which would reduce the amount of cash generated by operations. An increase in our costs, either due to an increase in borrowing costs caused by a reduction in our credit rating or a general increase in interest rates or due to an increase in the cost of fuel, maintenance, aircraft and aircraft engines and parts, could decrease the amount of cash available to cover the cash obligations. Moreover, the Citicorp credit facility, our amended credit card agreement with Barclays Bank Delaware and certain of our other financing arrangements contain significant minimum cash balance requirements. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. 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 consolidated financial statements under Items 8A and 8B of this Annual Report on Form 10-K for additional discussion of the application of these estimates and other accounting policies.
Passenger Revenue Recognition
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 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 balance in the air traffic liability fluctuates throughout the year based on seasonal travel patterns and fare sale activity. Our air traffic liability was $1.05 billion and $910 million as of December 31, 2012 and 2011, respectively.
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 our historical data. We 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 our 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.
Impairment of Long-Lived and Intangible Assets
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. With respect to long-lived assets, 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.
We performed the annual impairment test on our international route authorities and trademarks during the fourth quarter of 2012. The fair values of 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 our annual impairment test on international route authorities and trademarks, no impairment was indicated.
Frequent Traveler Program
The Dividend Miles frequent traveler program awards mileage credits to passengers who fly on US Airways and Star Alliance carriers and certain other partner airlines that participate in the program. Mileage credits can be redeemed for travel on US Airways or other participating partner airlines, in which case we pay a fee. We use the incremental cost method to account for the portion of the frequent traveler program liability related to mileage credits earned by Dividend Miles members through purchased flights. We have an obligation to provide future travel when these mileage credits are redeemed and therefore have recognized an expense and recorded a liability for mileage credits outstanding.
The liability for outstanding mileage credits earned by Dividend Miles members through purchased flights includes all mileage credits that are expected to be redeemed, including mileage credits earned by members whose mileage account balances have not yet reached the minimum mileage credit level required to redeem an award. Additionally, outstanding mileage credits are subject to expiration if unused. In calculating the liability, we estimate how many mileage credits will never be redeemed for travel and exclude those mileage credits from the estimate of the liability. Estimates are also made for the number of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines. These estimates are based on historical program experience as well as consideration of enacted program changes, as applicable. Changes in the liability resulting from members earning additional mileage credits or changes in estimates are recorded in the statement of operations.
The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger. Incremental cost includes unit costs incurred for fuel, credit card fees, insurance, denied boarding compensation, food and beverages as well as fees incurred when travel awards are redeemed on partner airlines. In addition, we also include in the determination of incremental cost the amount of certain fees related to redemptions expected to be collected from Dividend Miles members. These redemption fees reduce incremental cost. No profit or overhead margin is included in the accrual of incremental cost.
As of December 31, 2012 and 2011, the incremental cost liability for outstanding mileage credits expected to be redeemed for future travel awards accrued on the consolidated balance sheets within other accrued expenses was $177 million, representing 133.6 billion mileage credits, and $164 million, representing 133.5 billion mileage credits, respectively.
A change to certain estimates used in the calculation of incremental cost could have a material impact on the liability. At December 31, 2012, we have assumed 9.5% of future travel award redemptions will be on partner airlines. A 1% increase or decrease in the percentage of travel awards redeemed on partner airlines would have a $13 million impact on the liability as of December 31, 2012. A 10% increase or decrease in the assumed price per gallon of fuel would have an $8 million impact on the liability as of December 31, 2012.
We also sell frequent flyer program mileage credits to participating airline partners and non-airline business partners. Sales of mileage credits to business partners is comprised of two components, transportation and marketing. While we did adopt Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements” on January 1, 2011, as of December 31, 2012, we have not materially modified any of our significant agreements to sell frequent flyer program mileage credits and continue to use the residual method of accounting to determine the values of each component. The transportation component represents the fair value of future travel awards and is determined based on the equivalent value of purchased tickets that have similar restrictions as frequent traveler awards. The determination of the transportation component requires estimates and assumptions that require management judgment. Significant estimates and assumptions include:
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the number of awards expected to be redeemed on US Airways;
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the number of awards expected to be redeemed on partner airlines;
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the class of service for which the award is expected to be redeemed; and
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the geographic region of travel for which the award is expected to be redeemed.
These estimates and assumptions are based on historical program experience. The transportation component is deferred and amortized into passenger revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel, which is currently estimated to be 36 months.
Under the residual method, the total mileage sale proceeds less the transportation component is the marketing component. The marketing component represents services provided by us to our business partners and relates primarily to the use of our logo and trademarks along with access to our list of Dividend Miles members. The marketing services are provided periodically, but no less than monthly. Accordingly, the marketing component is considered earned and recognized in other revenues in the period of the mileage sale.
As of December 31, 2012 and 2011, we had $258 million and $196 million, respectively, in deferred revenue from the sale of mileage credits included in other accrued expenses on the consolidated balance sheets. For the years ended December 31, 2012, 2011 and 2010, the marketing component of mileage sales recognized at the time of sale in other revenues was approximately $141 million, $133 million and $144 million, respectively.
A change to the estimated fair value of the transportation component could have a significant impact on revenue. A 10% increase or decrease in the estimated fair value of the transportation component would have a $15 million impact on revenue recognized in 2012.
The number of travel award redemptions during the year ended December 31, 2012 was approximately 0.8 million, representing approximately 4% of US Airways’ total mainline and express RPMs during that period. The use of inventory management techniques minimizes the displacement of revenue passengers by passengers traveling on award tickets.
Deferred Tax Asset Valuation Allowance
At December 31, 2012, 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. 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.
Item 7A.
Item 7A. 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 aircraft fuel) and interest rate risk. The potential impact of adverse increases in these risks is 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
Fuel prices have fluctuated substantially over the past several years. We cannot predict the future availability, price volatility or cost of aircraft fuel. Natural disasters, political disruptions or wars involving oil-producing countries, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, additional fuel price volatility and cost increases in the future. See Part I, Item 1A, Risk Factors - “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 2013 forecasted mainline and express fuel consumption is presently approximately 1.46 billion gallons, and based on this forecast, a one cent per gallon increase in aviation fuel price results in a $15 million increase in annual expense. We have not entered into any transactions to hedge our fuel consumption. As a result, we fully realize the effects of any increase or decrease in fuel prices.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our variable-rate debt obligations. At December 31, 2012, our variable-rate long-term debt obligations of approximately $2.76 billion represented approximately 56% of our total long-term debt. If interest rates increased 10% in 2012, the impact on our results of operations would have been approximately $9 million of additional interest expense. Additional information regarding our debt obligations as of December 31, 2012 is as follows (dollars in millions):
US Airways Group and US Airways have total future aircraft and spare engine purchase commitments of approximately $4.92 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.
Item 8A. Consolidated Financial Statements and Supplementary Data of US Airways Group, Inc.
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, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2012. 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 financial position of US Airways Group, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
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, 2012, based on criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 19, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Phoenix, Arizona
February 19, 2013
US Airways Group, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2012, 2011 and 2010
(In millions, except share and per share amounts)
See accompanying notes to consolidated financial statements.
US Airways Group, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2012, 2011 and 2010
(In millions)
See accompanying notes to consolidated financial statements.
US Airways Group, Inc.
Consolidated Balance Sheets
December 31, 2012 and 2011
(In millions, except share and per share amounts)
See accompanying notes to consolidated financial statements.
US Airways Group, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012, 2011 and 2010
(In millions)
See accompanying notes to consolidated financial statements.
US Airways Group, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Years Ended December 31, 2012, 2011 and 2010
(In millions, except share amounts)
See accompanying notes to consolidated financial statements.
US Airways Group, Inc.
Notes to Consolidated Financial Statements
1. 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”), 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, Inc. (“US Airways”), Piedmont Airlines, Inc. (“Piedmont”), PSA Airlines, Inc. (“PSA”), Material Services Company, Inc. (“MSC”) and Airways Assurance Limited (“AAL”).
The Company operates the fifth largest airline in the United States as measured by domestic revenue passenger miles (“RPMs”) and available seat miles (“ASMs”). US Airways has hubs in Charlotte, Philadelphia and Phoenix and a focus city in Washington, D.C. at Ronald Reagan Washington National Airport (“Washington National”). US Airways offers scheduled passenger service on more than 3,000 flights daily to 198 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, and Central and South America. US Airways also has an established East Coast route network, including the US Airways Shuttle service. US Airways had approximately 54 million passengers boarding its mainline flights in 2012. During 2012, US Airways’ mainline operation provided regularly scheduled service or seasonal service at 130 airports, while the US Airways Express network served 157 airports in the United States, Canada, Mexico and the Caribbean, including 78 airports also served by the mainline operation. US Airways Express air carriers had approximately 28 million passengers boarding their planes in 2012. As of December 31, 2012, US Airways operated 340 mainline jets and is supported by the Company’s regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 238 regional jets and 44 turboprops. The Company’s prorate carriers operated four regional jets at December 31, 2012.
As of December 31, 2012, US Airways employed approximately 31,200 active full-time equivalent employees. The Company’s express subsidiaries, Piedmont and PSA, employed approximately 5,300 active full-time equivalent employees. Approximately 83% of 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 America West Airlines, Inc. (“AWA”) collective bargaining agreements, as modified by transition agreements reached in connection with the merger in 2005. In January 2013, US Airways reached a tentative agreement with the Association of Flight Attendants (“AFA”) for a single labor agreement applicable to both premerger US Airways and AWA flight attendants. This tentative agreement is subject to ratification by the AFA membership.
(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 accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, the frequent traveler program and the deferred tax asset valuation allowance. The Company’s accumulated other comprehensive income (loss) balances at December 31, 2012 and 2011 related to pension and other postretirement benefits.
(c) Cash and Cash Equivalents
Cash equivalents consist of cash in money market securities and treasury bills. 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.
(d) Investments in Marketable Securities
All other highly liquid investments with original maturities greater than three months but less than one year are classified as current investments in marketable securities. The Company’s current investments in marketable securities consist of treasury bills that are classified as held to maturity and are carried at amortized cost, which approximates fair value.
(e) Restricted Cash
Restricted cash primarily includes cash collateral to secure workers’ compensation claims and credit card processing holdback requirements for advance ticket sales for which US Airways has not yet provided air transportation.
(f) Materials and Supplies, Net
Materials and supplies, net includes aircraft fuel, which is recorded on a first-in, first-out basis, and aircraft spare parts and supplies, which are recorded at net realizable value based on average costs. These items are expensed when used. An allowance for obsolescence is provided for aircraft spare parts and supplies.
(g) Property and Equipment
Property and equipment are recorded at cost. Interest expense related to the acquisition of certain property and equipment, including aircraft purchase deposits, is capitalized as an additional cost of the asset. Interest capitalized for the years ended December 31, 2012, 2011 and 2010 was $12 million, $8 million and $4 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, other flight equipment and rotable parts range from five to 30 years. Leasehold improvements relating to flight equipment and other property subject to operating leases are amortized over the life of the lease or the life of the asset or improvement, 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. 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.
(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) Other Intangibles, Net
Other intangible assets consist primarily of trademarks, international route authorities, airport take-off and landing slots and airport gates. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The following table provides information relating to the Company’s intangible assets subject to amortization as of December 31, 2012 and 2011 (in millions):
In 2011, the Company completed a slot transaction with Delta Air Lines, Inc. (“Delta”). Refer to Note 14 for additional information on the accounting for this transaction.
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, 2012, 2011 and 2010, the Company recorded amortization expense of $24 million, $23 million and $26 million, respectively, related to its intangible assets. The Company expects to record annual amortization expense of $24 million in year 2013, $24 million in year 2014, $24 million in year 2015, $24 million in year 2016, $24 million in year 2017 and $350 million thereafter related to these intangible assets.
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, 2012 and 2011, the Company had $39 million of international route authorities and $30 million of trademarks on its balance sheets.
The Company performed the annual impairment test on its international route authorities and trademarks during the fourth quarter of 2012. The fair values of 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 the Company’s annual impairment test on international route authorities and trademarks, no impairment was indicated.
(j) Frequent Traveler Program
The Dividend Miles frequent traveler program awards mileage credits to passengers who fly on US Airways and Star Alliance carriers and certain other partner airlines that participate in the program. Mileage credits can be redeemed for travel on US Airways or other participating partner airlines, in which case the Company pays a fee. The Company uses the incremental cost method to account for the portion of the frequent traveler program liability related to mileage credits earned by Dividend Miles members through purchased flights. The Company has an obligation to provide future travel when these mileage credits are redeemed and therefore has recognized an expense and recorded a liability for mileage credits outstanding.
The liability for outstanding mileage credits earned by Dividend Miles members through purchased flights includes all mileage credits that are expected to be redeemed, including mileage credits earned by members whose mileage account balances have not yet reached the minimum mileage credit level required to redeem an award. Additionally, outstanding mileage credits are subject to expiration if unused. In calculating the liability, the Company estimates how many mileage credits will never be redeemed for travel and excludes those mileage credits from the estimate of the liability. Estimates are also made for the number of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines. These estimates are based on historical program experience as well as consideration of enacted program changes, as applicable. Changes in the liability resulting from members earning additional mileage credits or changes in estimates are recorded in the statement of operations.
The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger. Incremental cost includes unit costs incurred for fuel, credit card fees, insurance, denied boarding compensation, food and beverages as well as fees incurred when travel awards are redeemed on partner airlines. In addition, the Company also includes in the determination of incremental cost the amount of certain fees related to redemptions expected to be collected from Dividend Miles members. These redemption fees reduce incremental cost. No profit or overhead margin is included in the accrual of incremental cost.
As of December 31, 2012 and 2011, the incremental cost liability for outstanding mileage credits expected to be redeemed for future travel awards accrued on the consolidated balance sheets within other accrued expenses was $177 million, representing 133.6 billion mileage credits, and $164 million, representing 133.5 billion mileage credits, respectively.
The Company also sells frequent flyer program mileage credits to participating airline partners and non-airline business partners. Sales of mileage credits to business partners is comprised of two components, transportation and marketing. While the Company did adopt Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements” on January 1, 2011, as of December 31, 2012, the Company has not materially modified any of its significant agreements to sell frequent flyer program mileage credits and continues to use the residual method of accounting to determine the values of each component. The transportation component represents the fair value of future travel awards and is determined based on the equivalent value of purchased tickets that have similar restrictions as frequent traveler awards. The determination of the transportation component requires estimates and assumptions that require management judgment. Significant estimates and assumptions include:
•
the number of awards expected to be redeemed on US Airways;
•
the number of awards expected to be redeemed on partner airlines;
•
the class of service for which the award is expected to be redeemed; and
•
the geographic region of travel for which the award is expected to be redeemed.
These estimates and assumptions are based on historical program experience. The transportation component is deferred and amortized into passenger revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel, which is currently estimated to be 36 months.
Under the residual method, the total mileage sale proceeds less the transportation component is the marketing component. The marketing component represents services provided by the Company to its business partners and relates primarily to the use of the Company’s logo and trademarks along with access to the Company’s list of Dividend Miles members. The marketing services are provided periodically, but no less than monthly. Accordingly, the marketing component is considered earned and recognized in other revenues in the period of the mileage sale.
As of December 31, 2012 and 2011, the Company had $258 million and $196 million, respectively, in deferred revenue from the sale of mileage credits included in other accrued expenses on the consolidated balance sheets. For the years ended December 31, 2012, 2011 and 2010, the marketing component of mileage sales recognized at the time of sale in other revenues was approximately $141 million, $133 million and $144 million, respectively.
(k) Derivative Instruments
The Company has not entered into any transactions to hedge its fuel consumption. As a result, the Company fully realizes the effects of any increase or decrease in fuel prices.
(l) Deferred Gains and Credits, Net
Included within deferred gains and credits, net are amounts deferred and amortized into future periods associated with the sale and leaseback of property and equipment, the adjustment of leases to fair value in connection with prior period fresh-start and purchase accounting and certain vendor incentives.
(m) Revenue Recognition
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 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.
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 Corporation (“Air Wisconsin”), Republic Airline, Inc. (“Republic”), Mesa Airlines, Inc. (“Mesa”), Chautauqua Airlines, Inc. (“Chautauqua”) and SkyWest Airlines, Inc. (“SkyWest”) in certain markets. The Company’s wholly owned regional air carriers, Air Wisconsin, Republic, Mesa, Chautauqua and SkyWest operate regional aircraft in these markets as part of US Airways Express. The Company classifies revenues generated from transportation on these carriers as express passenger revenues. Liabilities related to tickets sold by the Company 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 taxes and fees on its ticket sales. These taxes and fees are remitted to governmental authorities and 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(j).
(n) Maintenance and Repair Costs
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred.
(o) 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, 2012, 2011 and 2010 were $11 million, $11 million and $10 million, respectively.
(p) Stock-based Compensation
The Company accounts for its stock-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the 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 12 for further discussion of stock-based compensation.
(q) Foreign Currency Gains and Losses
Foreign currency gains and losses are recorded as part of other nonoperating expense, net in the Company’s consolidated statements of operations. Foreign currency losses for the years ended December 31, 2012, 2011 and 2010 were $10 million, $17 million and $17 million, respectively.
(r) Other Operating Expenses
Other operating expenses includes expenses associated with ground and cargo handling, crew travel, aircraft food and catering, US Airways’ frequent flier program, passenger reaccommodation, airport security, international navigation fees and certain general and administrative expenses.
(s) Express Expenses
Expenses associated with the Company’s wholly owned regional airlines and affiliate regional airlines operating as US Airways Express are classified as express expenses on the consolidated statements of operations. Express expenses consist of the following (in millions):
(a) For the years ended December 31, 2012, 2011 and 2010, the component of capacity purchase expenses related to aircraft deemed to be leased was approximately $300 million, $300 million and $320 million, respectively.
(t) Recent Accounting Pronouncements
In 2011, the Financial Accounting Standards Board (“FASB”) issued two Accounting Standards Updates (“ASUs”), which amend the guidance for the presentation of comprehensive income. The amended guidance eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Upon adoption, other comprehensive income must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in comprehensive income. The Company adopted these ASUs in 2012 using two separate but consecutive statements.
2. Special Items, Net
Special items, net as shown on the consolidated statements of operations include the following charges (credits) (in millions):
(a) In 2012 and 2011, the Company recorded net special charges primarily related to corporate transaction and auction rate securities arbitration costs. In 2010, the Company recorded net special charges primarily related to corporate transaction costs and a settlement.
(b) In 2010, the Company recorded a refund of ASIF previously paid to the TSA during the years 2005 to 2009.
(c) In 2010, the Company recorded a non-cash charge related to the decline in value of certain spare parts.
(d) In 2010, the Company recorded aircraft costs as a result of capacity reductions.
3. Earnings Per Common Share
Basic earnings per common share (“EPS”) is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of potentially dilutive shares of common stock outstanding during the period using the treasury stock method. Potentially dilutive shares include outstanding employee stock options, employee stock appreciation rights (“SARs”), employee restricted stock units (“RSUs”) and convertible debt. The following table presents the computation of basic and diluted EPS (in millions, except share and per share amounts):
The following were excluded from the computation of diluted EPS because inclusion of shares would be antidilutive (in thousands):
4. Debt
The following table details the Company’s debt (in millions). Variable interest rates listed are the rates as of December 31, 2012.
(a) On March 23, 2007, US Airways Group entered into a term loan credit facility (the “Citicorp credit facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways Group borrowed an aggregate principal amount of $1.6 billion. US Airways and certain other subsidiaries of US Airways Group are guarantors of the Citicorp credit facility.
The Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at 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 greater than $1 billion, respectively. The applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25% or 2.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or greater than $1 billion, respectively. In addition, interest on the Citicorp credit facility may be adjusted based on the credit rating for the Citicorp credit facility as follows: (i) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least one subgrade better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be the lower of 2.25% and the rate otherwise applicable based upon the adjusted Citicorp credit facility balance and (B) the applicable index margin will be the lower of 1.25% and the rate otherwise applicable based upon the Citicorp credit facility principal balance, and (ii) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least two subgrades better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be 2.00% and (B) the applicable index margin will be 1.00%. As of December 31, 2012, the interest rate on the Citicorp credit facility was 2.71% based on a 2.50% LIBOR margin.
The Citicorp credit facility matures on March 23, 2014, and is repayable in seven annual installments with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.
In addition, the Citicorp credit facility requires certain mandatory prepayments upon the occurrence of specified events, establishes certain financial covenants, including minimum cash requirements and maintenance of certain minimum ratios, contains customary affirmative covenants and negative covenants and contains customary events of default. The Citicorp credit facility requires the Company to maintain consolidated unrestricted cash and cash equivalents of not less than $850 million, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements, which would become restricted for use by the Company if certain adverse events occur per the terms of the agreement. In addition, the Citicorp credit facility provides that the Company may issue debt in the future with a second lien on the assets pledged as collateral under the Citicorp credit facility.
(b) The following are the significant equipment financing agreements entered into in 2012:
US Airways entered into a loan agreement pursuant to which US Airways borrowed an aggregate principal amount of $100 million. The net proceeds after fees were approximately $98 million. The loan is payable in full at maturity on March 23, 2014. The loan bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR plus an applicable LIBOR margin. US Airways has agreed to maintain a level of unrestricted cash in the same amount required by the Citicorp credit facility and has also agreed to maintain certain collateral coverage ratios. The loan is collateralized by certain airport take-off and landing slots.
US Airways entered into an agreement to acquire five Embraer 190 aircraft from Republic. In 2012, US Airways took delivery of three aircraft and the remaining two aircraft are scheduled to be delivered in the first quarter of 2013. In connection with this agreement, US Airways assumes the outstanding debt on these aircraft upon delivery and Republic is released from its obligations associated with the principal due under the debt.
US Airways borrowed $85 million to finance new Airbus aircraft deliveries. These financings bear interest at a rate of LIBOR plus an applicable margin and contain default provisions and other covenants that are typical in the industry.
(c) The equipment notes underlying these EETCs are the direct obligations of US Airways and cover the financing of 46 aircraft. See Note 8(c) for further discussion.
In May 2012, US Airways created three pass-through trusts which issued approximately $623 million aggregate face amount of Series 2012-1 Class A, Class B and Class C Enhanced Equipment Trust Certificates in connection with the refinancing of two Airbus aircraft owned by US Airways and the financing of 12 Airbus aircraft scheduled to be delivered from September 2012 to March 2013 (the “2012-1 EETCs”). The 2012-1 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets.
As of December 31, 2012, $441 million of the escrowed proceeds from the 2012-1 EETCs have been used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in an aggregate principal amount of $269 million bearing interest at 5.90% per annum, Series B equipment notes in an aggregate principal amount of $88 million bearing interest at 8% per annum and Series C equipment notes in an aggregate principal amount of $84 million bearing interest at 9.125% per annum. Interest on the equipment notes is payable semiannually in April and October of each year and began in October 2012. Principal payments on the equipment notes are scheduled to begin in April 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in October 2024, October 2019 and October 2015, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used in part to repay the existing debt associated with the two Airbus aircraft and to finance eight Airbus aircraft delivered in 2012, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $182 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered in 2013.
In December 2012, US Airways created two pass-through trusts which issued approximately $546 million aggregate face amount of Series 2012-2 Class A and Class B Enhanced Equipment Trust Certificates in connection with the financing of 11 Airbus aircraft scheduled to be delivered from May 2013 to October 2013 (the “2012-2 EETCs”). The 2012-2 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets. The escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered in 2013.
(d) US Airways Group is a party to a co-branded credit card agreement with Barclays Bank Delaware. The co-branded credit card agreement provides for, among other things, the pre-purchase of frequent flyer miles in the aggregate amount of $200 million, which amount was paid by Barclays in October 2008. The Company pays 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.
Barclays has agreed that for each month that specified conditions are met it 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. Among the conditions to this monthly purchase of miles is a requirement that US Airways Group maintain an unrestricted cash balance, as defined in the agreement, of at least $1.35 billion for the months of March through November and $1.25 billion for the months of January, February and December. The Company may repurchase any or all of the pre-purchased miles at any time, from time to time, without penalty. The agreement expires in 2017. In February 2012, US Airways Group amended its co-branded credit card agreement with Barclays. This amendment provides that the $200 million previously scheduled to reduce commencing in January 2012 will now be reduced commencing in January 2014 over a period of up to approximately two years.
(e) 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.
(f) In May 2009, US Airways Group issued $172 million aggregate principal amount of the 7.25% notes for net proceeds of approximately $168 million. The 7.25% notes bear interest at a rate of 7.25% per annum, which shall be payable semi-annually in arrears on each May 15 and November 15. The 7.25% notes mature on May 15, 2014.
Holders may convert their 7.25% notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date for the 7.25% notes. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of US Airways Group common stock or a combination thereof at the Company’s election. The initial conversion rate for the 7.25% notes is 218.8184 shares of US Airways Group common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of $4.57 per share). Such conversion rate is subject to adjustment in certain events.
If the Company undergoes a fundamental change, holders may require the Company to purchase all or a portion of their 7.25% notes for cash at a price equal to 100% of the principal amount of the 7.25% notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. A fundamental change includes a person or group (other than the Company or its subsidiaries) becoming the beneficial owner of more than 50% of the voting power of the Company’s capital stock, certain merger or combination transactions, a substantial turnover of the Company’s directors, stockholder approval of the liquidation or dissolution of the Company and the Company’s common stock ceasing to be listed on at least one national securities exchange.
The 7.25% notes rank equal in right of payment to all of the Company’s other existing and future unsecured senior debt and senior in right of payment to the Company’s debt that is expressly subordinated to the 7.25% notes, if any. The 7.25% notes impose no limit on the amount of debt the Company or its subsidiaries may incur. The 7.25% notes are structurally subordinated to all debt and other liabilities and commitments (including trade payables) of the Company’s subsidiaries. The 7.25% notes are also effectively junior to the Company’s secured debt, if any, to the extent of the value of the assets securing such debt.
As the 7.25% notes can be settled in cash upon conversion, for accounting purposes, the 7.25% notes were bifurcated into a debt component that was initially recorded at fair value and an equity component. The following table details the debt and equity components recognized related to the 7.25% notes (in millions):
At December 31, 2012, the remaining period over which the unamortized discount will be recognized is 1.4 years.
The following table details interest expense recognized related to the 7.25% notes (in millions):
At December 31, 2012, the if-converted value of the 7.25% notes exceeded the principal amount by $337 million.
(g) The industrial development revenue bonds are due April 2023. Interest at 6.30% is payable semiannually on April 1 and October 1. The bonds are subject to optional redemption prior to the maturity date, in whole or in part, on any interest payment date at a redemption price of 100%.
Secured financings are collateralized by assets, primarily aircraft, engines, simulators, rotable aircraft parts, hangar and maintenance facilities and airport take-off and landing slots. At December 31, 2012, the maturities of long-term debt and capital leases are as follows (in millions):
Certain of the Company’s long-term debt agreements contain significant minimum cash balance requirements and other covenants with which the Company was in compliance at December 31, 2012. 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.
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 (“NOLs”) 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.
At December 31, 2012, the Company had approximately $1.50 billion of gross NOLs to reduce future federal taxable income. To the extent profitable, all of the Company’s NOLs are expected to be available to reduce federal taxable income in the calendar year 2013. The NOLs expire during the years 2025 through 2031. The Company’s net deferred tax assets, which include $1.42 billion of the NOLs, are subject to a full valuation allowance. The Company also had approximately $69 million of tax-effected state NOLs at December 31, 2012. At December 31, 2012, the federal and state valuation allowances were $118 million and $42 million, respectively, which includes $32 million allocated to certain capital loss carryforwards. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), utilization of the NOLs will result in a corresponding decrease in the valuation allowance and offset the Company’s tax provision dollar for dollar.
When profitable, the Company is ordinarily subject to Alternative Minimum Tax (“AMT”). However as the result of a special tax election made in 2009, the Company was able to utilize AMT NOLs to fully offset its AMT taxable income for each of the years ended 2012, 2011 and 2010.
For the year ended December 31, 2012, the Company recognized an AMT credit of $2 million resulting from its elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In addition, the Company did not record federal income tax expense and recorded $2 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
For the year ended December 31, 2011, the Company recorded a special non-cash tax charge of $21 million in connection with the sale of its final remaining investment in auction rate securities in July 2011. This charge recognized in the statement of operations the tax provision that was recorded in other comprehensive income, a subset of stockholders’ equity, in the fourth quarter of 2009. In addition, the Company recognized an AMT credit of $2 million resulting from its elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The Company did not record any additional federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
For the year ended December 31, 2010, the Company did not record federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
The components of the provision for income taxes are as follows (in millions):
Income tax expense differs from amounts computed at the federal statutory income tax rate as follows (in millions):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows (in millions):
The reason for significant differences between taxable and pre-tax 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, 2011 have been timely filed. There are currently no federal audits and two state audits in process. The Company’s federal income tax year 2008 was closed by operation of the statute of limitations expiring and there were no extensions filed. 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 2007 for these state tax jurisdictions are closed by operation of the statute of limitations expiring. An extension for one state has been 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 accruals for uncertain income tax positions have been recorded.
6. Risk Management and Financial Instruments
The Company’s 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 economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel and changes in booking practices, both of which in turn have had, and may have in the future, a strong negative effect on the Company’s revenues. Similarly, significant uncertainty continues to exist regarding the economic conditions driving passenger demand and whether airlines will have the ability to maintain or increase fares at levels sufficient to absorb high fuel prices.
The Company’s operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in the Company’s business. Because of the amount of fuel needed to operate the Company’s airline, even a relatively small increase in the price of fuel can have a material adverse aggregate effect on the Company’s costs and liquidity. Jet fuel market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $1.87 per gallon to a high of approximately $3.38 per gallon during the period from January 1, 2010 to December 31, 2012. The Company has not entered into any transactions to hedge its fuel consumption. As a result, the Company fully realizes the effects of any increase or decrease in fuel prices.
These factors could impact the Company’s results of operations, financial performance and liquidity.
(a) Credit Risk
Investments in Marketable Securities
At December 31, 2012, the Company’s investments in marketable securities consisted of short-term treasury bills.
During 2011, the Company sold its final remaining investments in auction rate securities for cash proceeds of $52 million, resulting in the reversal of $3 million of prior period net unrealized gains from OCI and $2 million of realized losses recorded in other nonoperating expense, net. With this sale, the Company has now liquidated its entire investment in auction rate securities.
During 2010, the Company sold certain investments in auction rate securities for cash proceeds of $145 million, resulting in $53 million of net realized gains recorded in other nonoperating expense, net, of which $52 million represents the reclassification of prior period net unrealized gains from OCI as determined on a specific-identification basis. Additionally, the Company recorded net unrealized losses of $1 million in OCI related to the decline in fair value of certain investments in auction rate securities, which offset previously recognized unrealized gains.
Accounts Receivable
Most of the Company’s receivables relate 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 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.
(b) 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 $2.76 billion principal amount of long-term debt as of December 31, 2012 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 3.40% at December 31, 2012.
The fair value of the Company’s long-term debt and capital lease obligations was approximately $5.02 billion and $4.23 billion at December 31, 2012 and 2011, respectively. The fair values were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. If the Company’s long-term debt was measured at fair value, it would have been categorized as Level 2 in the fair value hierarchy.
7. 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, 2012 and 2011 (in millions).
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 fair value of plan assets were $74 million, $80 million and $43 million as of December 31, 2012 and $68 million, $74 million and $39 million as of December 31, 2011, respectively.
The following table presents the weighted average assumptions used to determine benefit obligations:
As of December 31, 2012 and 2011, 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 corporate bonds denominated in U.S. currency (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, 2012, the assumed health care cost trend rates were 8% in 2013 and 7.5% in 2014, decreasing to 5% in 2019 and thereafter. As of December 31, 2011, the assumed health care cost trend rates were 8.5% in 2012 and 8% in 2013, decreasing to 5% in 2019 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, 2012 (in millions):
Weighted average assumptions used to determine net periodic benefit cost were as follows:
Components of the net and total periodic cost for pension and other postretirement benefits are as follows (in millions):
(1) The estimated net actuarial loss for defined benefit and other postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2013 is $1 million.
In 2013, the Company expects to contribute $13 million to its other postretirement plans and less than $1 million to its 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):
The Company assumed that its pension plans’ assets would generate a long-term rate of return of 7% at December 31, 2012. 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 Company’s overall investment strategy is to achieve long-term investment growth. The Company’s targeted asset allocation as of December 31, 2012 was approximately 65% equity securities and 35% fixed-income securities. Equity securities primarily include mutual funds invested in large-cap, mid-cap and small-cap U.S. and international companies. Fixed-income securities primarily include mutual funds invested in U.S. treasuries and corporate bonds. 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.
The fair value of pension plan assets by asset category is as follows (in millions):
As of December 31, 2012, the plan’s mutual funds were invested 45% in equity securities of large-cap, mid-cap and small-cap U.S. companies, 35% in U.S. treasuries and corporate bonds and 20% in equity securities of international companies.
As of December 31, 2011, the plan’s mutual funds were invested 53% in equity securities of large-cap, mid-cap and small cap U.S. companies, 35% in U.S. treasuries and corporate bonds and 12% in equity securities of international companies.
The mutual fund shares are classified as Level 1 instruments and valued at quoted prices in an active market exchange, which represents the net asset value of shares held by the pension plan.
(b) Defined Contribution and Multiemployer 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, eligible earnings and employee group. Expenses related to these plans were $80 million, $79 million and $81 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Pursuant to the Company’s collective bargaining agreements with the International Association of Machinists & Aerospace Workers (“IAM”), the Company makes contributions for eligible employees to the IAM National Pension Fund, Employer Identification No. 51-6031295 and Plan No. 002 (the “IAM Pension Fund”). The IAM Pension Fund reported that its Pension Protection Act of 2006 certification filed in March 2012 with the IRS shows that it qualified for Green Zone Status, as it was at least 80% funded. Expenses related to contributions to this plan were $24 million, $24 million and $21 million for the years ended December 31, 2012, 2011 and 2010, respectively. The Company’s contributions for the year ended December 31, 2011, the most recent period for which annual IAM Pension Fund information was available, represented approximately 7% of total employer plan contributions. The Company’s collective bargaining agreements with the IAM became amendable on December 31, 2011.
(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.
(d) Profit Sharing Plans
Most non-executive employees of US Airways are eligible to participate in a profit sharing plan. Awards are paid as a lump sum after the end of each fiscal year. The Company recorded $61 million, $12 million and $47 million for profit sharing in 2012, 2011 and 2010, respectively, which is recorded in salaries and related costs on the consolidated statement of operations and included in accrued compensation and vacation on the consolidated balance sheet.
8. Commitments and Contingencies
(a) Aircraft and Engine Purchase Commitments
US Airways has definitive purchase agreements with Airbus for the acquisition of 134 aircraft, including 97 single-aisle A320 family aircraft and 37 widebody aircraft (comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft). Since 2008, when deliveries commenced under the purchase agreements, US Airways has taken delivery of 58 aircraft through December 31, 2012, which includes four A320 aircraft, 47 A321 aircraft and seven A330-200 aircraft. US Airways plans to take delivery of 16 A321 aircraft in 2013, with the remaining 30 A320 family aircraft scheduled to be delivered between 2014 and 2015. In addition, US Airways plans to take delivery of five A330-200 aircraft in 2013, with the remaining three A330-200 aircraft scheduled to be delivered in 2014. Deliveries of the 22 A350 XWB aircraft are scheduled to begin in 2017 and extend through 2019.
US Airways has agreements for the purchase of eight new IAE V2500-A5 spare engines scheduled for delivery through 2014 for use on the A320 family fleet, three new Trent 700 spare engines scheduled for delivery through 2013 for use on the A330-200 fleet and three new Trent XWB spare engines scheduled for delivery in 2017 through 2019 for use on the A350 XWB aircraft. US Airways has taken delivery of two of the Trent 700 spare engines and four of the V2500-A5 spare engines through December 31, 2012.
Under all of the Company’s aircraft and engine purchase agreements, the Company’s total future commitments as of December 31, 2012 are expected to be approximately $4.92 billion through 2019 as follows: $1.27 billion in 2013, $1.02 billion in 2014, $448 million in 2015, $107 million in 2016, $817 million in 2017 and $1.26 billion thereafter, which includes predelivery deposits and payments. The Company has financing commitments for all future Airbus aircraft deliveries except for four aircraft scheduled for delivery after November 2013.
(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, 2012, the Company had 281 aircraft under operating leases, with remaining terms ranging from two months to approximately 11 years. 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, 2012, obligations under noncancellable operating leases for future minimum lease payments were as follows (in millions):
For the years ended December 31, 2012, 2011 and 2010, rental expense under operating leases was $1.22 billion, $1.24 billion and $1.26 billion, respectively.
(c) Off-balance Sheet Arrangements
US Airways has 46 owned aircraft, 114 leased aircraft and three leased engines, which were financed with pass through trust certificates, or EETCs, issued by pass through trusts. These trusts are off-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment. Rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allowed US Airways to raise the financing for several aircraft at one time and place such funds in escrow pending the purchase, delivery or refinancing 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 or refinanced 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, 2012, $1.60 billion 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. US Airways concluded the leasing entities met the criteria for variable interest entities. US Airways generally is not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates US Airways to absorb decreases in value or entitles US Airways to participate in increases in the value of the aircraft. 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. US Airways’ total future obligations under these leveraged lease financings are $2.35 billion as of December 31, 2012, 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, including passenger, mail and freight revenues, go to US Airways. In return, US Airways agrees 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 Airways. US Airways controls marketing, scheduling, ticketing, pricing and seat inventories. The regional jet capacity purchase agreements have expirations from 2014 to 2020. The future minimum noncancellable commitments under the regional jet capacity purchase agreements are $1.07 billion in 2013, $985 million in 2014, $844 million in 2015, $523 million in 2016, $382 million in 2017 and $353 million thereafter. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and the Company’s actual payments could differ materially. These commitments include the portion of the Company’s future obligations related to aircraft deemed to be leased of approximately $295 million in 2013, $289 million in 2014, $248 million in 2015, $143 million in 2016, $109 million in 2017 and $118 million thereafter.
(e) Legal Proceedings
The Company is party to an arbitration proceeding relating to a grievance brought by its pilots union to the effect that, retroactive to January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. The arbitrator has issued two decisions in the Company’s favor, and a subsequent meeting requested by the union has been held with the arbitrator to address those decisions. The Company believes that the union’s position is without merit and that the possibility of an adverse outcome is remote.
On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices that illegally restrain US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011, allowing two of the four counts in the complaint to proceed. On January 18, 2013, Sabre filed a motion for leave to file a counterclaim, alleging that US Airways and other airlines conspired among themselves and with a third-party technology firm to boycott Sabre and other global distribution systems. If permitted to proceed, Sabre would be seeking monetary damages and injunctive relief. The Company intends to pursue its claims against Sabre vigorously and to vigorously defend any claims Sabre is permitted to file against the Company, but there can be no assurance of the outcome of this litigation.
The Company and/or its subsidiaries are defendants in various other pending lawsuits and proceedings, and from time to time are subject to other claims arising in the normal course of its business, many of which are covered in whole or in part by insurance. The outcome of those matters cannot be predicted with certainty at this time, but the Company, having consulted with outside counsel, believes that the ultimate disposition of these contingencies will not materially affect its consolidated financial position or results of operations.
(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, 2012, the remaining lease payments guaranteeing the principal and interest on these bonds are $104 million, of which $25 million of these obligations are reflected as debt in the accompanying consolidated balance sheet.
US Airways assigned to Delta a lease agreement with the Port Authority of New York and New Jersey related to the East End Terminal at LaGuardia airport. A portion of the rental payments under the lease are used to repay special revenue bonds issued by the Port Authority. The revenue bonds have a final scheduled maturity in 2015 and had an outstanding principal amount of approximately $62 million at December 31, 2012. Pursuant to the terms of the lease assignment, US Airways remains contingently liable for Delta’s obligations, as assignee, under the lease agreement in the event Delta fails to perform such obligations including, without limitation, the payment of all rentals and other amounts due under the lease agreement. US Airways has the right to cure any failure by Delta to perform its obligations under the lease agreement and, in addition, US Airways has the right to reoccupy the terminal if it so chooses to cure any such default.
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 leveraged leases, the Company typically indemnifies the lessor with respect to adverse changes in U.S. tax laws.
9. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information and non-cash investing and financing activities are as follows (in millions):
10. 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.
Information concerning operating revenues in principal geographic areas is as follows (in millions):
The Company attributes operating revenues by geographic region based upon the origin and destination of each ticket. The Company’s tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated.
11. 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.
12. Stock-based Compensation
In June 2011, the stockholders of the Company approved the 2011 Incentive Award Plan (the “2011 Plan”). The 2011 Plan replaces and supersedes the 2008 Equity Incentive Plan (the “2008 Plan”). No additional awards will be made under the 2008 Plan. Awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalents award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right.
The 2011 Plan authorizes the grant of awards for the issuance of 15,157,626 shares plus any shares that are forfeited or lapse unexercised from the 2008 Plan and the 2005 Equity Incentive Plan (collectively “Prior Plans”) after June 10, 2011. Further, no more than 12,500,000 shares plus any full value shares that are forfeited from the Prior Plans may be granted as full value awards. A full value award is any award other than an option, stock appreciation right or award for which the intrinsic value is paid upon exercise. Cash-settled awards do not reduce the number of shares available for issuance under the 2011 Plan. Shares underlying stock awards granted under the 2011 Plan that are forfeited or expire without the shares being issued are again available to be issued under the 2011 Plan. Any shares (i) tendered by a participant or withheld by the Company for payment of the exercise price under an option (ii) tendered by a participant or withheld by the Company to satisfy any tax withholding obligation with respect to an award and (iii) subject to a stock appreciation right that are not issued upon exercise will not be available for future grants of awards under the 2011 Plan. In addition, the cash proceeds from option exercises will not be used to repurchase shares on the open market for reuse under the 2011 Plan.
The Company’s net income for the years ended December 31, 2012, 2011 and 2010 included $51 million, $5 million and $31 million, respectively, of stock-based compensation costs. Stock-based compensation costs related to stock-settled awards were $12 million, $8 million and $13 million in 2012, 2011 and 2010, respectively. Stock-based compensation costs related to cash-settled awards were an expense of $39 million in 2012, a credit of $3 million in 2011 and an expense of $18 million in 2010.
Restricted Stock Unit Awards - As of December 31, 2012, the Company has outstanding restricted stock unit awards with service conditions and a three-year vesting period. The grant-date fair value of restricted stock unit awards is equal to the market price of the underlying shares of common stock on the date of grant and is expensed on a straight-line basis over the vesting period for the entire award. Stock-settled restricted stock unit awards (“RSUs”) are classified as equity awards as the vesting results in the issuance of shares of the Company’s common stock. Cash-settled restricted stock unit awards (“CRSUs”) are classified as liability awards as the vesting results in payment of cash by the Company.
RSU award activity for all plans for the years ending December 31, 2012, 2011 and 2010 is as follows (shares in thousands):
As of December 31, 2012, there were $13 million of total unrecognized compensation costs related to RSUs. These costs are expected to be recognized over a weighted average period of 1.2 years. The total fair value of RSUs vested during each of 2012, 2011 and 2010 was $2 million, respectively.
CRSU award activity for all plans for the years ending December 31, 2012 and 2011 is as follows (shares in thousands):
As of December 31, 2012, the liability related to CRSUs was $3 million, which will continue to be remeasured at fair value at each reporting date until all awards are vested. As of December 31, 2012, the total unrecognized compensation expense for CRSUs was $6 million and is expected to be recognized over a weighted average period of 0.8 years. The total cash paid for CRSUs vested during 2012 was $3 million.
Stock Options and Stock Appreciation Rights - Stock options and stock appreciation rights are granted with an exercise price equal to the underlying common stock’s fair value at the date of each grant. Stock options and stock appreciation rights have service conditions, become exercisable over a three-year vesting period and expire if unexercised at the end of their term, which ranges from seven to 10 years. Stock options and stock-settled stock appreciation rights (“SARs”) are classified as equity awards as the exercise results in the issuance of shares of the Company’s common stock. Cash-settled stock appreciation rights (“CSARs”) are classified as liability awards as the exercise results in payment of cash by the Company.
Stock option and SAR award activity for all plans for the years ending December 31, 2012, 2011 and 2010 is as follows (stock options and SARs in thousands):
CSAR award activity for all plans for the years ending December 31, 2012, 2011 and 2010 is as follows (CSARs in thousands):
The fair value of stock options and stock appreciation rights 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 award at the time of grant. The dividend yield is assumed to be zero as 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 award. The expected term of the award is based on the historical experience of the Company. Stock options and stock appreciation rights are expensed on a straight-line basis over the vesting period for the entire award.
The per share weighted-average grant-date fair value of stock appreciation rights granted and the weighted-average assumptions used for the years ended December 31, 2012, 2011 and 2010 were as follows:
As of December 31, 2012, there were $13 million of total unrecognized compensation costs related to SARs. These costs are expected to be recognized over a weighted average period of 1.1 years. The total intrinsic value of stock options and SARs exercised during the years ended December 31, 2012, 2011 and 2010 was $1 million, $0.2 million and $5 million, respectively.
As of December 31, 2012, the weighted average fair value of outstanding CSARs was $8.73 per share and the related liability was $40 million. These CSARs will continue to be remeasured at fair value at each reporting date until all awards are settled. As of December 31, 2012, the total unrecognized compensation expense for CSARs was $5 million and is expected to be recognized over a weighted average period of 0.6 years. Total cash paid for CSARs exercised during the years ended December 31, 2012, 2011 and 2010 was $4 million, $2 million and $6 million, respectively.
Agreements with the Pilot Union - As of December 31, 2012, there were 0.3 million pilot stock options outstanding pursuant to a letter of agreement with US Airways’ pilot union. These stock options had an exercise price of $12.50 and expired on January 31, 2013 if unexercised.
13. Valuation and Qualifying Accounts (in millions)
14. Slot Transaction
In May 2011, US Airways Group and US Airways entered into an Amended and Restated Mutual Asset Purchase and Sale Agreement (the “Mutual APA”) with Delta. The Mutual APA amended and restated the Mutual Asset Purchase and Sale Agreement dated August 11, 2009 by and among the parties. Pursuant to the Mutual APA, Delta agreed to acquire 132 slot pairs at LaGuardia from US Airways and US Airways agreed to acquire from Delta 42 slot pairs at Washington National and the rights to operate additional daily service to Sao Paulo, Brazil in 2015, and Delta agreed to pay US Airways $66.5 million in cash. One slot equals one take-off or landing, and each pair of slots equals one round-trip flight. The Mutual APA was structured as two simultaneous asset sales.
On October 11, 2011, the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration each granted their approval to the transaction. The DOT’s approval was conditioned on the divestiture of 16 slot pairs at LaGuardia and eight slot pairs at Washington National to airlines with limited or no service at those airports as well as the full cooperation of US Airways and Delta to enable the startup of the operations by the airlines purchasing the divested slots. Additionally, to allow the airlines who purchased the divested slots to establish competitive service, the DOT prohibited US Airways and Delta from operating any of the newly acquired slots during the first 90 days after the closing date of the sale of the divested slots and from operating more than 50 percent of the total number of slots between the 91st day and 210th day following the closing date of the sale of the divested slots.
In December 2011, the slot divestitures described above were completed by Delta and on December 13, 2011, the transaction closed and ownership of the respective slots was transferred between the airlines. Accordingly as of December 31, 2011, the Company’s balance sheet reflected the transfer of the LaGuardia slots to Delta and the receipt of the Washington National slots, which were included within other intangible assets on the accompanying consolidated balance sheet. The newly acquired Washington National slots serve as collateral under the Company’s Citicorp credit facility. See Note 4(a) for discussion on the Citicorp credit facility.
The fair value of the LaGuardia slots transferred to Delta in exchange for the Washington National slots and related cash payment was $223 million, which resulted in a gain. Due to the DOT restrictions preventing operating use of the LaGuardia slots acquired by Delta, the gain was fully deferred as of December 31, 2011 and was included within other current liabilities on the accompanying consolidated balance sheet. The gain on the transaction was recognized as the DOT restrictions lapsed in 2012. The Company recognized $73 million of the gain in the first quarter of 2012 and the remaining gain, which approximated $69 million, in the third quarter of 2012. The $142 million gain is classified as a special credit and is included within other nonoperating expense, net on the accompanying consolidated statement of operations.
15. Selected Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for 2012 and 2011 is as follows (in millions, except share and per share amounts):
The Company’s 2012 and 2011 fourth quarter results were impacted by recognition of the following net special items:
Fourth quarter 2012 operating expenses included $9 million of charges primarily related to corporate transaction and auction rate securities arbitration costs.
Fourth quarter 2011 operating expenses included $2 million of charges related to auction rate securities arbitration costs and $1 million in express other special charges.
16. Subsequent Events
In January 2013, US Airways was awarded $30 million in compensatory damages by a Financial Industry Regulation Authority (“FINRA”) arbitration panel related to losses previously realized on investments in auction rate securities. US Airways has filed an action in federal court in Phoenix to confirm the award. Accordingly, the award will be recognized upon receipt as a nonoperating special credit.
On February 14, 2013, US Airways Group announced its intention to merge with AMR Corporation (“AMR”), the parent company of American Airlines, Inc. Under the terms of the merger agreement, US Airways Group will become a wholly owned subsidiary of AMR and the merged company will be operated under the single brand name of American Airlines. The merger is to be effected pursuant to a plan of reorganization in AMR’s currently pending cases under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The merger is conditioned on the approval by the U.S. Bankruptcy Court, regulatory approvals, approval by US Airways Group shareholders, other customary closing conditions, and confirmation and consummation of the plan of reorganization.
Item 8B. Consolidated Financial Statements and Supplementary Data of US Airways, Inc.
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, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2012. 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, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
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, 2012, based on criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 19, 2013 expressed an unqualified opinion on the effectiveness of US Airways’ internal control over financial reporting.
/s/ KPMG LLP
Phoenix, Arizona
February 19, 2013
US Airways, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2012, 2011 and 2010
(In millions)
See accompanying notes to consolidated financial statements.
US Airways, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2012, 2011 and 2010
(In millions)
See accompanying notes to consolidated financial statements.
US Airways, Inc.
Consolidated Balance Sheets
December 31, 2012 and 2011
(In millions, except share and per share amounts)
See accompanying notes to consolidated financial statements.
US Airways, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012, 2011 and 2010
(In millions)
See accompanying notes to consolidated financial statements.
US Airways, Inc.
Consolidated Statements of Stockholder’s Equity
For the Years Ended December 31, 2012, 2011 and 2010
(In millions)
See accompanying notes to consolidated financial statements.
US Airways, Inc.
Notes to Consolidated Financial Statements
1. 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.
US Airways operates the fifth largest airline in the United States as measured by domestic revenue passenger miles (“RPMs”) and available seat miles (“ASMs”). US Airways has hubs in Charlotte, Philadelphia and Phoenix and a focus city in Washington, D.C. at Ronald Reagan Washington National Airport (“Washington National”). US Airways offers scheduled passenger service on more than 3,000 flights daily to 198 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, and Central and South America. US Airways also has an established East Coast route network, including the US Airways Shuttle service. US Airways had approximately 54 million passengers boarding its mainline flights in 2012. During 2012, US Airways’ mainline operation provided regularly scheduled service or seasonal service at 130 airports, while the US Airways Express network served 157 airports in the United States, Canada, Mexico and the Caribbean, including 78 airports also served by the mainline operation. US Airways Express air carriers had approximately 28 million passengers boarding their planes in 2012. As of December 31, 2012, US Airways operated 340 mainline jets and is supported by US Airways Group’s regional airline subsidiaries and affiliates operating as US Airways Express under capacity purchase agreements, which operated 238 regional jets and 44 turboprops. US Airways’ prorate carriers operated four regional jets at December 31, 2012.
As of December 31, 2012, US Airways employed approximately 31,200 active full-time equivalent employees. Approximately 84% of 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 America West Airlines, Inc. (“AWA”) collective bargaining agreements, as modified by transition agreements reached in connection with the merger in 2005. In January 2013, US Airways reached a tentative agreement with the Association of Flight Attendants (“AFA”) for a single labor agreement applicable to both premerger US Airways and AWA flight attendants. This tentative agreement is subject to ratification by the AFA membership.
(b) Basis of Presentation
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.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of long-lived and intangible assets, the frequent traveler program and the deferred tax asset valuation allowance. US Airways’ accumulated other comprehensive income balances at December 31, 2012 and 2011 related to other postretirement benefits.
(c) Cash and Cash Equivalents
Cash equivalents consist of cash in money market securities and treasury bills. 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.
(d) Investments in Marketable Securities
All other highly liquid investments with original maturities greater than three months but less than one year are classified as current investments in marketable securities. US Airways’ current investments in marketable securities consist of treasury bills that are classified as held to maturity and are carried at amortized cost, which approximates fair value.
(e) Restricted Cash
Restricted cash primarily includes cash collateral to secure workers’ compensation claims and credit card processing holdback requirements for advance ticket sales for which US Airways has not yet provided air transportation.
(f) Materials and Supplies, Net
Materials and supplies, net includes aircraft fuel, which is recorded on a first-in, first-out basis, and aircraft spare parts and supplies, which are recorded at net realizable value based on average costs. These items are expensed when used. An allowance for obsolescence is provided for aircraft spare parts and supplies.
(g) Property and Equipment
Property and equipment are recorded at cost. Interest expense related to the acquisition of certain property and equipment, including aircraft purchase deposits, is capitalized as an additional cost of the asset. Interest capitalized for the years ended December 31, 2012, 2011 and 2010 was $12 million, $8 million and $4 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, other flight equipment and rotable parts range from five to 30 years. Leasehold improvements relating to flight equipment and other property subject to operating leases are amortized over the life of the lease or the life of the asset or improvement, 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. 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.
(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) Other Intangibles, Net
Other intangible assets consist primarily of trademarks, international route authorities, airport take-off and landing slots and airport gates. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The following table provides information relating to US Airways’ intangible assets subject to amortization as of December 31, 2012 and 2011 (in millions):
In 2011, US Airways completed a slot transaction with Delta Air Lines, Inc. (“Delta”). Refer to Note 13 for additional information on the accounting for this transaction.
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, 2012, 2011 and 2010, US Airways recorded amortization expense of $22 million, $21 million and $24 million, respectively, related to its intangible assets. US Airways expects to record annual amortization expense of $23 million in year 2013, $23 million in year 2014, $23 million in year 2015, $22 million in year 2016, $22 million in year 2017 and $328 million thereafter related to these intangible assets.
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, 2012 and 2011, US Airways had $39 million of international route authorities and $30 million of trademarks on its balance sheets.
US Airways performed the annual impairment test on its international route authorities and trademarks during the fourth quarter of 2012. The fair values of 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 US Airways’ annual impairment test on international route authorities and trademarks, no impairment was indicated.
(j) Frequent Traveler Program
The Dividend Miles frequent traveler program awards mileage credits to passengers who fly on US Airways and Star Alliance carriers and certain other partner airlines that participate in the program. Mileage credits can be redeemed for travel on US Airways or other participating partner airlines, in which case US Airways pays a fee. US Airways uses the incremental cost method to account for the portion of the frequent traveler program liability related to mileage credits earned by Dividend Miles members through purchased flights. US Airways has an obligation to provide future travel when these mileage credits are redeemed and therefore has recognized an expense and recorded a liability for mileage credits outstanding.
The liability for outstanding mileage credits earned by Dividend Miles members through purchased flights includes all mileage credits that are expected to be redeemed, including mileage credits earned by members whose mileage account balances have not yet reached the minimum mileage credit level required to redeem an award. Additionally, outstanding mileage credits are subject to expiration if unused. In calculating the liability, US Airways estimates how many mileage credits will never be redeemed for travel and excludes those mileage credits from the estimate of the liability. Estimates are also made for the number of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines. These estimates are based on historical program experience as well as consideration of enacted program changes, as applicable. Changes in the liability resulting from members earning additional mileage credits or changes in estimates are recorded in the statement of operations.
The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger. Incremental cost includes unit costs incurred for fuel, credit card fees, insurance, denied boarding compensation, food and beverages as well as fees incurred when travel awards are redeemed on partner airlines. In addition, US Airways also includes in the determination of incremental cost the amount of certain fees related to redemptions expected to be collected from Dividend Miles members. These redemption fees reduce incremental cost. No profit or overhead margin is included in the accrual of incremental cost.
As of December 31, 2012 and 2011, the incremental cost liability for outstanding mileage credits expected to be redeemed for future travel awards accrued on the consolidated balance sheets within other accrued expenses was $177 million, representing 133.6 billion mileage credits, and $164 million, representing 133.5 billion mileage credits, respectively.
US Airways also sells frequent flyer program mileage credits to participating airline partners and non-airline business partners. Sales of mileage credits to business partners is comprised of two components, transportation and marketing. While US Airways did adopt Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements” on January 1, 2011, as of December 31, 2012, US Airways has not materially modified any of its significant agreements to sell frequent flyer program mileage credits and continues to use the residual method of accounting to determine the values of each component. The transportation component represents the fair value of future travel awards and is determined based on the equivalent value of purchased tickets that have similar restrictions as frequent traveler awards. The determination of the transportation component requires estimates and assumptions that require management judgment. Significant estimates and assumptions include:
•
the number of awards expected to be redeemed on US Airways;
•
the number of awards expected to be redeemed on partner airlines;
•
the class of service for which the award is expected to be redeemed; and
•
the geographic region of travel for which the award is expected to be redeemed.
These estimates and assumptions are based on historical program experience. The transportation component is deferred and amortized into passenger revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel, which is currently estimated to be 36 months.
Under the residual method, the total mileage sale proceeds less the transportation component is the marketing component. The marketing component represents services provided by US Airways to its business partners and relates primarily to the use of US Airways’ logo and trademarks along with access to US Airways’ list of Dividend Miles members. The marketing services are provided periodically, but no less than monthly. Accordingly, the marketing component is considered earned and recognized in other revenues in the period of the mileage sale.
As of December 31, 2012 and 2011, US Airways had $258 million and $196 million, respectively, in deferred revenue from the sale of mileage credits included in other accrued expenses on the consolidated balance sheets. For the years ended December 31, 2012, 2011 and 2010, the marketing component of mileage sales recognized at the time of sale in other revenues was approximately $141 million, $133 million and $144 million, respectively.
(k) Derivative Instruments
US Airways has not entered into any transactions to hedge its fuel consumption. As a result, US Airways fully realizes the effects of any increase or decrease in fuel prices.
(l) Deferred Gains and Credits, Net
Included within deferred gains and credits, net are amounts deferred and amortized into future periods associated with the sale and leaseback of property and equipment, the adjustment of leases to fair value in connection with prior period fresh-start and purchase accounting and certain vendor incentives.
(m) Revenue Recognition
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 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 Corporation (“Air Wisconsin”), Republic Airline, Inc. (“Republic”), Mesa Airlines, Inc. (“Mesa”), Chautauqua Airlines, Inc. (“Chautauqua”) and SkyWest Airlines, Inc. (“SkyWest”) in certain markets. US Airways Group’s wholly owned regional air carriers, Air Wisconsin, Republic, Mesa, Chautauqua and SkyWest operate regional aircraft in these markets as part of US Airways Express. US Airways classifies revenues generated from transportation on these carriers as express passenger revenues. Liabilities related to tickets sold by US Airways 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 taxes and fees on its ticket sales. These taxes and fees are remitted to governmental authorities and 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(j).
(n) Maintenance and Repair Costs
Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred.
(o) 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, 2012, 2011 and 2010 were $11 million, $11 million and $10 million, respectively.
(p) Stock-based Compensation
US Airways accounts for its stock-based compensation expense based on the fair value of the stock award at the time of grant, which is recognized ratably over the 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 11 for further discussion of stock-based compensation.
(q) Foreign Currency Gains and Losses
Foreign currency gains and losses are recorded as part of other nonoperating expense, net in US Airways’ consolidated statements of operations. Foreign currency losses for the years ended December 31, 2012, 2011 and 2010 were $10 million, $17 million and $17 million, respectively.
(r) Other Operating Expenses
Other operating expenses includes expenses associated with ground and cargo handling, crew travel, aircraft food and catering, US Airways’ frequent flier program, passenger reaccommodation, airport security, international navigation fees and certain general and administrative expenses.
(s) Express Expenses
Expenses associated with affiliate regional airlines operating as US Airways Express are classified as express expenses on the consolidated statements of operations. Express expenses consist of the following (in millions):
(a) For the years ended December 31, 2012, 2011 and 2010, the component of capacity purchase expenses related to aircraft deemed to be leased was approximately $300 million, $300 million and $320 million, respectively.
(t) Recent Accounting Pronouncements
In 2011, the Financial Accounting Standards Board (“FASB”) issued two Accounting Standards Updates (“ASUs”), which amend the guidance for the presentation of comprehensive income. The amended guidance eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Upon adoption, other comprehensive income must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in comprehensive income. US Airways adopted these ASUs in 2012 using two separate but consecutive statements.
2. Special Items, Net
Special items, net as shown on the consolidated statements of operations include the following charges (credits) (in millions):
(a) In 2012 and 2011, US Airways recorded net special charges primarily related to corporate transaction and auction rate securities arbitration costs. In 2010, US Airways recorded net special charges primarily related to corporate transaction costs and a settlement.
(b) In 2010, US Airways recorded a refund of ASIF previously paid to the TSA during the years 2005 to 2009.
(c) In 2010, US Airways recorded a non-cash charge related to the decline in value of certain spare parts.
(d) In 2010, US Airways recorded aircraft costs as a result of capacity reductions.
3. Debt
The following table details US Airways’ debt (in millions). Variable interest rates listed are the rates as of December 31, 2012.
(a) The following are the significant equipment financing agreements entered into in 2012:
US Airways entered into a loan agreement pursuant to which US Airways borrowed an aggregate principal amount of $100 million. The net proceeds after fees were approximately $98 million. The loan is payable in full at maturity on March 23, 2014. The loan bears interest at an index rate plus an applicable index margin or, at US Airways’ option, LIBOR plus an applicable LIBOR margin. US Airways has agreed to maintain a level of unrestricted cash in the same amount required by US Airways Group’s Citicorp credit facility and has also agreed to maintain certain collateral coverage ratios. The loan is collateralized by certain airport take-off and landing slots.
US Airways entered into an agreement to acquire five Embraer 190 aircraft from Republic. In 2012, US Airways took delivery of three aircraft and the remaining two aircraft are scheduled to be delivered in the first quarter of 2013. In connection with this agreement, US Airways assumes the outstanding debt on these aircraft upon delivery and Republic is released from its obligations associated with the principal due under the debt.
US Airways borrowed $85 million to finance new Airbus aircraft deliveries. These financings bear interest at a rate of LIBOR plus an applicable margin and contain default provisions and other covenants that are typical in the industry.
(b) The equipment notes underlying these EETCs are the direct obligations of US Airways and cover the financing of 46 aircraft. See Note 7(c) for further discussion.
In May 2012, US Airways created three pass-through trusts which issued approximately $623 million aggregate face amount of Series 2012-1 Class A, Class B and Class C Enhanced Equipment Trust Certificates in connection with the refinancing of two Airbus aircraft owned by US Airways and the financing of 12 Airbus aircraft scheduled to be delivered from September 2012 to March 2013 (the “2012-1 EETCs”). The 2012-1 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets.
As of December 31, 2012, $441 million of the escrowed proceeds from the 2012-1 EETCs have been used to purchase equipment notes issued by US Airways in three series: Series A equipment notes in an aggregate principal amount of $269 million bearing interest at 5.90% per annum, Series B equipment notes in an aggregate principal amount of $88 million bearing interest at 8% per annum and Series C equipment notes in an aggregate principal amount of $84 million bearing interest at 9.125% per annum. Interest on the equipment notes is payable semiannually in April and October of each year and began in October 2012. Principal payments on the equipment notes are scheduled to begin in April 2013. The final payments on the Series A equipment notes, Series B equipment notes and Series C equipment notes will be due in October 2024, October 2019 and October 2015, respectively. US Airways’ payment obligations under the equipment notes are fully and unconditionally guaranteed by US Airways Group. The net proceeds from the issuance of these equipment notes were used in part to repay the existing debt associated with the two Airbus aircraft and to finance eight Airbus aircraft delivered in 2012, with the balance used for general corporate purposes. The equipment notes are secured by liens on aircraft. The remaining $182 million of escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered in 2013.
In December 2012, US Airways created two pass-through trusts which issued approximately $546 million aggregate face amount of Series 2012-2 Class A and Class B Enhanced Equipment Trust Certificates in connection with the financing of 11 Airbus aircraft scheduled to be delivered from May 2013 to October 2013 (the “2012-2 EETCs”). The 2012-2 EETCs represent fractional undivided interests in the respective pass-through trusts and are not obligations of US Airways. Proceeds received from the sale of EETCs are initially held by a depository in escrow for the benefit of the certificate holders until US Airways issues equipment notes to the trust, which purchases the notes with a portion of the escrowed funds. These escrowed funds are not guaranteed by US Airways and are not reported as debt on US Airways’ consolidated balance sheet because the proceeds held by the depositary are not US Airways’ assets. The escrowed proceeds will be used to purchase equipment notes as the new aircraft are delivered in 2013.
(c) 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 US Airways Group’s 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.
(d) The industrial development revenue bonds are due April 2023. Interest at 6.30% is payable semiannually on April 1 and October 1. The bonds are subject to optional redemption prior to the maturity date, in whole or in part, on any interest payment date at a redemption price of 100%.
Secured financings are collateralized by assets, primarily aircraft, engines, simulators, rotable aircraft parts, hangar and maintenance facilities and airport take-off and landing slots. At December 31, 2012, the maturities of long-term debt and capital leases are as follows (in millions):
Certain of US Airways’ long-term debt agreements contain significant minimum cash balance requirements and other covenants with which US Airways was in compliance at December 31, 2012. 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 is part of the US Airways Group consolidated income tax return. US Airways Group allocates tax and tax items, such as net operating losses (“NOLs”) 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.
At December 31, 2012, US Airways had approximately $1.44 billion of gross NOLs to reduce future federal taxable income. To the extent profitable, all of US Airways’ NOLs are expected to be available to reduce federal taxable income in the calendar year 2013. The NOLs expire during the years 2025 through 2031. US Airways’ net deferred tax assets, which include $1.38 billion of the NOLs, are subject to a full valuation allowance. US Airways also had approximately $67 million of tax-effected state NOLs at December 31, 2012. At December 31, 2012, the federal and state valuation allowances were $126 million and $42 million, respectively, which includes $32 million allocated to certain capital loss carryforwards. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), utilization of the NOLs will result in a corresponding decrease in the valuation allowance and offset US Airways’ tax provision dollar for dollar.
When profitable, US Airways is ordinarily subject to Alternative Minimum Tax (“AMT”). However as the result of a special tax election made in 2009, US Airways was able to utilize AMT NOLs to fully offset its AMT taxable income for each of the years ended 2012, 2011 and 2010.
For the year ended December 31, 2012, US Airways recognized an AMT credit of $2 million resulting from its elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In addition, US Airways did not record federal income tax expense and recorded $1 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
For the year ended December 31, 2011, US Airways recorded a special non-cash tax charge of $21 million in connection with the sale of its final remaining investment in auction rate securities in July 2011. This charge recognized in the statement of operations the tax provision that was recorded in other comprehensive income, a subset of stockholder’s equity, in the fourth quarter of 2009. In addition, US Airways recognized an AMT credit of $2 million resulting from its elections under applicable sections of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. US Airways did not record any additional federal income tax expense and recorded a nominal amount of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
For the year ended December 31, 2010, US Airways did not record federal income tax expense and recorded $1 million of state income tax expense related to certain states where NOLs were limited or unavailable to be used.
The components of the provision (benefit) for income taxes are as follows (in millions):
Income tax expense (benefit) differs from amounts computed at the federal statutory income tax rate as follows (in millions):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2012 and 2011 are as follows (in millions):
The reason for significant differences between taxable and pre-tax book income primarily relates to depreciation on fixed assets, employee 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 for fiscal years through December 31, 2011 have been timely filed. There are currently no federal audits and two state audits in process. US Airways’ federal income tax year 2008 was closed by operation of the statute of limitations expiring and there were no extensions filed. 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 2007 for these state tax jurisdictions are closed by operation of the statute of limitations expiring. An extension for one state has been 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 accruals for uncertain income tax positions have been recorded.
5. Risk Management and Financial Instruments
US Airways’ 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 economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel and changes in booking practices, both of which in turn have had, and may have in the future, a strong negative effect on US Airways’ revenues. Similarly, significant uncertainty continues to exist regarding the economic conditions driving passenger demand and whether airlines will have the ability to maintain or increase fares at levels sufficient to absorb high fuel prices.
US Airways’ operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in US Airways’ business. Because of the amount of fuel needed to operate US Airways’ airline, even a relatively small increase in the price of fuel can have a material adverse aggregate effect on US Airways’ costs and liquidity. Jet fuel market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $1.87 per gallon to a high of approximately $3.38 per gallon during the period from January 1, 2010 to December 31, 2012. US Airways has not entered into any transactions to hedge its fuel consumption. As a result, US Airways fully realizes the effects of any increase or decrease in fuel prices.
These factors could impact the US Airways’ results of operations, financial performance and liquidity.
(a) Credit Risk
Investments in Marketable Securities
At December 31, 2012, US Airways’ investments in marketable securities consisted of short-term treasury bills.
During 2011, US Airways sold its final remaining investments in auction rate securities for cash proceeds of $52 million, resulting in the reversal of $3 million of prior period net unrealized gains from OCI and $2 million of realized losses recorded in other nonoperating expense, net. With this sale, US Airways has now liquidated its entire investment in auction rate securities.
During 2010, US Airways sold certain investments in auction rate securities for cash proceeds of $145 million, resulting in $53 million of net realized gains recorded in other nonoperating expense, net, of which $52 million represents the reclassification of prior period net unrealized gains from OCI as determined on a specific-identification basis. Additionally, US Airways recorded net unrealized losses of $1 million in OCI related to the decline in fair value of certain investments in auction rate securities, which offset previously recognized unrealized gains.
Accounts Receivable
Most of US Airways’ receivables relate 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 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.
(b) 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 $1.44 billion principal amount of long-term debt as of December 31, 2012 are subject to adjustment to reflect changes in floating interest rates. The weighted average effective interest rate on US Airways’ variable rate debt was 3.72% at December 31, 2012.
The fair value of US Airways’ long-term debt and capital lease obligations was approximately $3.30 billion and $2.92 billion at December 31, 2012 and 2011, respectively. The fair values were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using a discounted cash flow analysis, based on US Airways’ current incremental borrowing rates for similar types of borrowing arrangements. If US Airways’ long-term debt was measured at fair value, it would have been categorized as Level 2 in the fair value hierarchy.
6. Employee Pension and Benefit Plans
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, 2012 and 2011 (in millions).
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 corporate bonds denominated in U.S. currency (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, 2012, the assumed health care cost trend rates were 8% in 2013 and 7.5% in 2014, decreasing to 5% in 2019 and thereafter. As of December 31, 2011, the assumed health care cost trend rates were 8.5% in 2012 and 8% in 2013, decreasing to 5% in 2019 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, 2012 (in millions):
Weighted average assumptions used to determine net periodic benefit cost were as follows:
Components of the net and total periodic cost for other postretirement benefits are as follows (in millions):
(1) The estimated net actuarial gain for other postretirement benefits that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2013 is less than $1 million.
In 2013, US Airways expects to contribute $13 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 benefits plan (in millions):
(b) Defined Contribution and Multiemployer 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 $77 million, $76 million and $77 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Pursuant to US Airways’ collective bargaining agreements with the International Association of Machinists & Aerospace Workers (“IAM”), US Airways makes contributions for eligible employees to the IAM National Pension Fund, Employer Identification No. 51-6031295 and Plan No. 002 (the “IAM Pension Fund”). The IAM Pension Fund reported that its Pension Protection Act of 2006 certification filed in March 2012 with the IRS shows that it qualified for Green Zone Status, as it was at least 80% funded. Expenses related to contributions to this plan were $24 million, $24 million and $21 million for the years ended December 31, 2012, 2011 and 2010, respectively. US Airways’ contributions for the year ended December 31, 2011, the most recent period for which annual IAM Pension Fund information was available, represented approximately 7% of total employer plan contributions. US Airways’ collective bargaining agreements with the IAM became amendable on December 31, 2011.
(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.
(d) Profit Sharing Plans
Most non-executive employees of US Airways are eligible to participate in a profit sharing plan. Awards are paid as a lump sum after the end of each fiscal year. US Airways recorded $61 million, $12 million and $47 million for profit sharing in 2012, 2011 and 2010, respectively, which is recorded in salaries and related costs on the consolidated statement of operations and included in accrued compensation and vacation on the consolidated balance sheet.
7. Commitments and Contingencies
(a) Aircraft and Engine Purchase Commitments
US Airways has definitive purchase agreements with Airbus for the acquisition of 134 aircraft, including 97 single-aisle A320 family aircraft and 37 widebody aircraft (comprised of 22 A350 XWB aircraft and 15 A330-200 aircraft). Since 2008, when deliveries commenced under the purchase agreements, US Airways has taken delivery of 58 aircraft through December 31, 2012, which includes four A320 aircraft, 47 A321 aircraft and seven A330-200 aircraft. US Airways plans to take delivery of 16 A321 aircraft in 2013, with the remaining 30 A320 family aircraft scheduled to be delivered between 2014 and 2015. In addition, US Airways plans to take delivery of five A330-200 aircraft in 2013, with the remaining three A330-200 aircraft scheduled to be delivered in 2014. Deliveries of the 22 A350 XWB aircraft are scheduled to begin in 2017 and extend through 2019.
US Airways has agreements for the purchase of eight new IAE V2500-A5 spare engines scheduled for delivery through 2014 for use on the A320 family fleet, three new Trent 700 spare engines scheduled for delivery through 2013 for use on the A330-200 fleet and three new Trent XWB spare engines scheduled for delivery in 2017 through 2019 for use on the A350 XWB aircraft. US Airways has taken delivery of two of the Trent 700 spare engines and four of the V2500-A5 spare engines through December 31, 2012.
Under all of US Airways’ aircraft and engine purchase agreements, US Airways’ total future commitments as of December 31, 2012 are expected to be approximately $4.92 billion through 2019 as follows: $1.27 billion in 2013, $1.02 billion in 2014, $448 million in 2015, $107 million in 2016, $817 million in 2017 and $1.26 billion thereafter, which includes predelivery deposits and payments. US Airways has financing commitments for all future Airbus aircraft deliveries except for four aircraft scheduled for delivery after November 2013.
(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, 2012, US Airways had 270 aircraft under operating leases, with remaining terms ranging from two months to approximately 11 years. 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, 2012, obligations under noncancellable operating leases for future minimum lease payments were as follows (in millions):
For the years ended December 31, 2012, 2011 and 2010, rental expense under operating leases was $1.21 billion, $1.23 billion and $1.25 billion, respectively.
US Airways leases certain flight equipment to related parties (see Note 9(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 2013, $78 million in 2014, $74 million in 2015, $73 million in 2016, $73 million in 2017 and $165 million thereafter. The following amounts relate to owned aircraft leased under such agreements as reflected in flight equipment as of December 31, 2012 and 2011 (in millions):
(c) Off-balance Sheet Arrangements
US Airways has 46 owned aircraft, 114 leased aircraft and three leased engines, which were financed with pass through trust certificates, or EETCs, issued by pass through trusts. These trusts are off-balance sheet entities, the primary purpose of which is to finance the acquisition of flight equipment. Rather than finance each aircraft separately when such aircraft is purchased, delivered or refinanced, these trusts allowed US Airways to raise the financing for several aircraft at one time and place such funds in escrow pending the purchase, delivery or refinancing 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 or refinanced 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, 2012, $1.60 billion 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. US Airways concluded the leasing entities met the criteria for variable interest entities. US Airways generally is not the primary beneficiary of the leasing entities if the lease terms are consistent with market terms at the inception of the lease and do not include a residual value guarantee, fixed-price purchase option or similar feature that obligates US Airways to absorb decreases in value or entitles US Airways to participate in increases in the value of the aircraft. 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. US Airways’ total future obligations under these leveraged lease financings are $2.35 billion as of December 31, 2012, 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, including passenger, mail and freight revenues, go to US Airways. In return, US Airways agrees 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 Airways. US Airways controls marketing, scheduling, ticketing, pricing and seat inventories. The regional jet capacity purchase agreements have expirations from 2014 to 2020. The future minimum noncancellable commitments under the regional jet capacity purchase agreements are $1.07 billion in 2013, $985 million in 2014, $844 million in 2015, $523 million in 2016, $382 million in 2017 and $353 million thereafter. These commitments are estimates of costs based on assumed minimum levels of flying under the capacity purchase agreements and US Airways’ actual payments could differ materially. These commitments include the portion of US Airways’ future obligations related to aircraft deemed to be leased of approximately $295 million in 2013, $289 million in 2014, $248 million in 2015, $143 million in 2016, $109 million in 2017 and $118 million thereafter.
(e) Legal Proceedings
US Airways is party to an arbitration proceeding relating to a grievance brought by its pilots union to the effect that, retroactive to January 1, 2010, this work group was entitled to a significant increase in wages by operation of the applicable collective bargaining agreement. The arbitrator has issued two decisions in US Airways’ favor, and a subsequent meeting requested by the union has been held with the arbitrator to address those decisions. US Airways believes that the union’s position is without merit and that the possibility of an adverse outcome is remote.
On April 21, 2011, US Airways filed an antitrust lawsuit against Sabre Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit alleges, among other things, that Sabre has engaged in anticompetitive practices that illegally restrain US Airways’ ability to distribute its products to its customers. The lawsuit also alleges that these actions have prevented US Airways from employing new competing technologies and have allowed Sabre to continue to charge US Airways supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011, allowing two of the four counts in the complaint to proceed. On January 18, 2013, Sabre filed a motion for leave to file a counterclaim, alleging that US Airways and other airlines conspired among themselves and with a third-party technology firm to boycott Sabre and other global distribution systems. If permitted to proceed, Sabre would be seeking monetary damages and injunctive relief. US Airways intends to pursue its claims against Sabre vigorously and to vigorously defend any claims Sabre is permitted to file against US Airways, but there can be no assurance of the outcome of this litigation.
US Airways is a defendant in various other pending lawsuits and proceedings, and from time to time is subject to other claims arising in the normal course of its business, many of which are covered in whole or in part by insurance. The outcome of those matters cannot be predicted with certainty at this time, but US Airways, having consulted with outside counsel, believes that the ultimate disposition of these contingencies will not materially affect its consolidated financial position or results of operations.
(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, 2012, the remaining lease payments guaranteeing the principal and interest on these bonds are $104 million, of which $25 million of these obligations are reflected as debt in the accompanying consolidated balance sheet.
US Airways assigned to Delta a lease agreement with the Port Authority of New York and New Jersey related to the East End Terminal at LaGuardia airport. A portion of the rental payments under the lease are used to repay special revenue bonds issued by the Port Authority. The revenue bonds have a final scheduled maturity in 2015 and had an outstanding principal amount of approximately $62 million at December 31, 2012. Pursuant to the terms of the lease assignment, US Airways remains contingently liable for Delta’s obligations, as assignee, under the lease agreement in the event Delta fails to perform such obligations including, without limitation, the payment of all rentals and other amounts due under the lease agreement. US Airways has the right to cure any failure by Delta to perform its obligations under the lease agreement and, in addition, US Airways has the right to reoccupy the terminal if it so chooses to cure any such default.
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 is a guarantor of US Airways Group’s Citicorp credit facility, 7% senior convertible notes and $30 million loan to finance airport construction activities in Philadelphia.
8. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information and non-cash investing and financing activities are as follows (in millions):
9. Related Party Transactions
The following represents net payable balances to related parties (in millions):
(a) Parent Company
US Airways Group has the ability to move funds freely between its operating subsidiaries to support operations. These transfers are recognized as intercompany transactions.
US Airways recorded interest expense for the years ended December 31, 2012, 2011 and 2010 of $5 million, $6 million and $9 million, respectively, related to its intercompany payable balance to US Airways Group. 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 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 express capacity purchase expense for the years ended December 31, 2012, 2011 and 2010 of $534 million, $566 million and $460 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, 2012, 2011 and 2010 of $90 million, $88 million and $89 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, 2012, 2011 and 2010 of $195 million, $176 million and $158 million, respectively. US Airways also leases or subleases certain aircraft to these regional airline subsidiaries. US Airways recognized other operating revenues of $78 million related to these arrangements for each of the years ended December 31, 2012, 2011 and 2010, 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, 2012, 2011 and 2010, MSC sold fuel totaling $1.23 billion, $1.34 billion and $879 million, respectively, used by US Airways’ mainline and express flights.
10. 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, US Airways Group’s wholly owned regional air carriers 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.
Information concerning operating revenues in principal geographic areas is as follows (in millions):
US Airways attributes operating revenues by geographic region based upon the origin and destination of each ticket. US Airways’ tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated.
11. Stock-based Compensation
In June 2011, the stockholders of US Airways Group approved the 2011 Incentive Award Plan (the “2011 Plan”). The 2011 Plan replaces and supersedes the 2008 Equity Incentive Plan (the “2008 Plan”). No additional awards will be made under the 2008 Plan. Awards may be in the form of an option, restricted stock award, restricted stock unit award, performance award, dividend equivalents award, deferred stock award, deferred stock unit award, stock payment award or stock appreciation right.
The 2011 Plan authorizes the grant of awards for the issuance of 15,157,626 shares plus any shares that are forfeited or lapse unexercised from the 2008 Plan and the 2005 Equity Incentive Plan (collectively “Prior Plans”) after June 10, 2011. Further, no more than 12,500,000 shares plus any full value shares that are forfeited from the Prior Plans may be granted as full value awards. A full value award is any award other than an option, stock appreciation right or award for which the intrinsic value is paid upon exercise. Cash-settled awards do not reduce the number of shares available for issuance under the 2011 Plan. Shares underlying stock awards granted under the 2011 Plan that are forfeited or expire without the shares being issued are again available to be issued under the 2011 Plan. Any shares (i) tendered by a participant or withheld by US Airways Group for payment of the exercise price under an option (ii) tendered by a participant or withheld by US Airways Group to satisfy any tax withholding obligation with respect to an award and (iii) subject to a stock appreciation right that are not issued upon exercise will not be available for future grants of awards under the 2011 Plan. In addition, the cash proceeds from option exercises will not be used to repurchase shares on the open market for reuse under the 2011 Plan.
US Airways’ net income for the years ended December 31, 2012, 2011 and 2010 included $51 million, $5 million and $31 million, respectively, of stock-based compensation costs. Stock-based compensation costs related to stock-settled awards were $12 million, $8 million and $13 million in 2012, 2011 and 2010, respectively. Stock-based compensation costs related to cash-settled awards were an expense of $39 million in 2012, a credit of $3 million in 2011 and an expense of $18 million in 2010.
Restricted Stock Unit Awards - As of December 31, 2012, US Airways Group has outstanding restricted stock unit awards with service conditions and a three-year vesting period. The grant-date fair value of restricted stock unit awards is equal to the market price of the underlying shares of US Airways Group’s common stock on the date of grant and is expensed on a straight-line basis over the vesting period for the entire award. Stock-settled restricted stock unit awards (“RSUs”) are classified as equity awards as the vesting results in the issuance of shares of US Airways Group’s common stock. Cash-settled restricted stock unit awards (“CRSUs”) are classified as liability awards as the vesting results in payment of cash by US Airways.
RSU award activity for all plans for the years ending December 31, 2012, 2011 and 2010 is as follows (shares in thousands):
As of December 31, 2012, there were $13 million of total unrecognized compensation costs related to RSUs. These costs are expected to be recognized over a weighted average period of 1.2 years. The total fair value of RSUs vested during each of 2012, 2011 and 2010 was $2 million, respectively.
CRSU award activity for all plans for the years ending December 31, 2012 and 2011 is as follows (shares in thousands):
As of December 31, 2012, the liability related to CRSUs was $3 million, which will continue to be remeasured at fair value at each reporting date until all awards are vested. As of December 31, 2012, the total unrecognized compensation expense for CRSUs was $6 million and is expected to be recognized over a weighted average period of 0.8 years. The total cash paid for CRSUs vested during 2012 was $3 million.
Stock Options and Stock Appreciation Rights - Stock options and stock appreciation rights are granted with an exercise price equal to the underlying common stock’s fair value at the date of each grant. Stock options and stock appreciation rights have service conditions, become exercisable over a three-year vesting period and expire if unexercised at the end of their term, which ranges from seven to 10 years. Stock options and stock-settled stock appreciation rights (“SARs”) are classified as equity awards as the exercise results in the issuance of shares of US Airways Group’s common stock. Cash-settled stock appreciation rights (“CSARs”) are classified as liability awards as the exercise results in payment of cash by US Airways.
Stock option and SAR award activity for all plans for the years ending December 31, 2012, 2011 and 2010 is as follows (stock options and SARs in thousands):
CSAR award activity for all plans for the years ending December 31, 2012, 2011 and 2010 is as follows (CSARs in thousands):
The fair value of stock options and stock appreciation rights 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 award at the time of grant. The dividend yield is assumed to be zero as 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 award. The expected term of the award is based on the historical experience of US Airways. Stock options and stock appreciation rights are expensed on a straight-line basis over the vesting period for the entire award.
The per share weighted-average grant-date fair value of stock appreciation rights granted and the weighted-average assumptions used for the years ended December 31, 2012, 2011 and 2010 were as follows:
As of December 31, 2012, there were $13 million of total unrecognized compensation costs related to SARs. These costs are expected to be recognized over a weighted average period of 1.1 years. The total intrinsic value of stock options and SARs exercised during the years ended December 31, 2012, 2011 and 2010 was $1 million, $0.2 million and $5 million, respectively.
As of December 31, 2012, the weighted average fair value of outstanding CSARs was $8.73 per share and the related liability was $40 million. These CSARs will continue to be remeasured at fair value at each reporting date until all awards are settled. As of December 31, 2012, the total unrecognized compensation expense for CSARs was $5 million and is expected to be recognized over a weighted average period of 0.6 years. Total cash paid for CSARs exercised during the years ended December 31, 2012, 2011 and 2010 was $4 million, $2 million and $6 million, respectively.
Agreements with the Pilot Union - As of December 31, 2012, there were 0.3 million pilot stock options outstanding pursuant to a letter of agreement with US Airways’ pilot union. These stock options had an exercise price of $12.50 and expired on January 31, 2013 if unexercised.
12. Valuation and Qualifying Accounts (in millions)
13. Slot Transaction
In May 2011, US Airways Group and US Airways entered into an Amended and Restated Mutual Asset Purchase and Sale Agreement (the “Mutual APA”) with Delta. The Mutual APA amended and restated the Mutual Asset Purchase and Sale Agreement dated August 11, 2009 by and among the parties. Pursuant to the Mutual APA, Delta agreed to acquire 132 slot pairs at LaGuardia from US Airways and US Airways agreed to acquire from Delta 42 slot pairs at Washington National and the rights to operate additional daily service to Sao Paulo, Brazil in 2015, and Delta agreed to pay US Airways $66.5 million in cash. One slot equals one take-off or landing, and each pair of slots equals one round-trip flight. The Mutual APA was structured as two simultaneous asset sales.
On October 11, 2011, the U.S. Department of Transportation (“DOT”) and the Federal Aviation Administration each granted their approval to the transaction. The DOT’s approval was conditioned on the divestiture of 16 slot pairs at LaGuardia and eight slot pairs at Washington National to airlines with limited or no service at those airports as well as the full cooperation of US Airways and Delta to enable the startup of the operations by the airlines purchasing the divested slots. Additionally, to allow the airlines who purchased the divested slots to establish competitive service, the DOT prohibited US Airways and Delta from operating any of the newly acquired slots during the first 90 days after the closing date of the sale of the divested slots and from operating more than 50 percent of the total number of slots between the 91st day and 210th day following the closing date of the sale of the divested slots.
In December 2011, the slot divestitures described above were completed by Delta and on December 13, 2011, the transaction closed and ownership of the respective slots was transferred between the airlines. Accordingly as of December 31, 2011, US Airways’ balance sheet reflected the transfer of the LaGuardia slots to Delta and the receipt of the Washington National slots, which were included within other intangible assets on the accompanying consolidated balance sheet. The newly acquired Washington National slots serve as collateral under US Airways Group’s Citicorp credit facility. See Note 4(a) to the consolidated financial statements of US Airways Group included in Item 8A of this report for discussion on the Citicorp credit facility.
The fair value of the LaGuardia slots transferred to Delta in exchange for the Washington National slots and related cash payment was $223 million, which resulted in a gain. Due to the DOT restrictions preventing operating use of the LaGuardia slots acquired by Delta, the gain was fully deferred as of December 31, 2011 and was included within other current liabilities on the accompanying consolidated balance sheet. The gain on the transaction was recognized as the DOT restrictions lapsed in 2012. US Airways recognized $73 million of the gain in the first quarter of 2012 and the remaining gain, which approximated $69 million, in the third quarter of 2012. The $142 million gain is classified as a special credit and is included within other nonoperating expense, net on the accompanying consolidated statement of operations.
14. Selected Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for 2012 and 2011 is as follows (in millions):
US Airways’ 2012 and 2011 fourth quarter results were impacted by recognition of the following net special items:
Fourth quarter 2012 operating expenses included $9 million of charges primarily related to corporate transaction and auction rate securities arbitration costs.
Fourth quarter 2011 operating expenses included $2 million of charges related to auction rate securities arbitration costs.
15. Subsequent Events
In January 2013, US Airways was awarded $30 million in compensatory damages by a Financial Industry Regulation Authority (“FINRA”) arbitration panel related to losses previously realized on investments in auction rate securities. US Airways has filed an action in federal court in Phoenix to confirm the award. Accordingly, the award will be recognized upon receipt as a nonoperating special credit.
On February 14, 2013, US Airways Group announced its intention to merge with AMR Corporation (“AMR”), the parent company of American Airlines, Inc. Under the terms of the merger agreement, US Airways Group will become a wholly owned subsidiary of AMR and the merged company will be operated under the single brand name of American Airlines. The merger is to be effected pursuant to a plan of reorganization in AMR’s currently pending cases under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The merger is conditioned on the approval by the U.S. Bankruptcy Court, regulatory approvals, approval by US Airways Group shareholders, other customary closing conditions, and confirmation and consummation of the plan of reorganization.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
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 included herein.
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, 2012. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2012.
Changes in Internal Control over Financial Reporting
There has been no change to US Airways Group’s or US Airways’ internal control over financial reporting that occurred during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, US Airways Group’s or US Airways’ internal control over financial reporting.
Limitation on the Effectiveness of Controls
We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO believe that our disclosure controls and procedures were effective at the “reasonable assurance” level as of December 31, 2012.
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 Exchange Act. 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, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 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, 2012.
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. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2012, 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 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 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 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 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. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 19, 2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Phoenix, Arizona
February 19, 2013
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 Exchange Act. 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, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 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, 2012.
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) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). US Airways’ 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 US Airways’ 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 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 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 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, 2012, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 19, 2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Phoenix, Arizona
February 19, 2013
Item 9B.
Item 9B. Other Information
None.
PART III
The information required by Part III of this Annual Report on Form 10-K, pursuant to General Instruction G(3) of Form 10-K, will, except as otherwise set forth below in Item 10, be set forth in US Airways Group’s definitive Proxy Statement (the “Proxy Statement”) to be filed pursuant to Regulation 14A relating to US Airways Group’s 2013 Annual Meeting of Stockholders and is incorporated herein by reference. US Airways Group will file the Proxy Statement or an appropriate amendment to this report with the SEC within 120 days of the end of its fiscal year.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Except as stated below, information regarding US Airways Group’s and US Airways’ directors and executive officers required by this Item will be set forth under the captions “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 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. 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 Annual Report on 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.
Item 11.
Item 11. Executive Compensation
Information required by this Item will be set forth in US Airways Group’s Proxy Statement under the captions “Information About Our Board of Directors and Corporate Governance,” “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation” and “Compensation and Human Resources Committee Report” and is incorporated by reference into this Annual Report on Form 10-K.
Item 12.
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 Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated by reference into this Annual Report on Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information required by this Item will be set forth in US Airways Group’s Proxy Statement under the captions “Certain Relationships and Related Party Transactions” and “Information About Our Board of Directors and Corporate Governance” and is incorporated by reference into this Annual Report on Form 10-K.
Item 14.
Item 14. Principal Accountant Fees and Services
Information required by this Item will be set forth in US Airways Group’s Proxy Statement under the caption “Proposal 2 - Ratification of Appointment of Independent Registered Public Accounting Firm” and is incorporated by reference into this Annual Report on Form 10-K.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
Consolidated Financial Statements
The following consolidated financial statements of US Airways Group, Inc. are included in Part II, Item 8A of this report:
•
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010
•
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
•
Consolidated Balance Sheets as of December 31, 2012 and 2011
•
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
•
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2012, 2011 and 2010
•
Notes to Consolidated Financial Statements
The following consolidated financial statements of US Airways, Inc. are included in Part II, Item 8B of this report:
•
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010
•
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
•
Consolidated Balance Sheets as of December 31, 2012 and 2011
•
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
•
Consolidated Statements of Stockholder’s Equity for the years ended December 31, 2012, 2011 and 2010
•
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 consolidated financial statements or notes thereto included in this report.
Exhibits
The exhibits listed in the Exhibit Index following the signature pages to this report are filed as part of, or incorporated by reference into, this report.
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.
SIGNATURES
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, hereunto 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, 2012, 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 on behalf of the registrants and in the capacities and on the dates indicated.
EXHIBIT INDEX
# Pursuant to Item 601(b)(2) of Regulation S-K promulgated by the Securities and Exchange Commission, certain exhibits and schedules to this agreement have been omitted. Such exhibits and schedules are described in the referenced agreement. US Airways Group and US Airways hereby agree to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules.
* Confidential treatment has been granted with respect to certain portions of this agreement.
 Management contract or compensatory plan or arrangement.