US Airways Group (LCC)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

US Airways Group, Inc.

(Exact name of registrant as specified in its charter)

(Commission File No. 1-8444)

 

 

111 West Rio Salado Parkway, Tempe, Arizona 85281

(Address of principal executive offices, including zip code)

 

(480) 693-0800

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act: None

US Airways, Inc.

(Exact name of registrant as specified in its charter)

(Commission File No. 1-8442)

 

111 West Rio Salado Parkway, Tempe, Arizona 85281

(Address of principal executive offices, including zip code)

 

(480) 693-0800

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

 

Indicate by check mark whether each registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

The aggregate market value of common stock held by non-affiliates of US Airways Group, Inc. as of June 30, 2009 was approximately $319 million.

 

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

 

 

As of February 12, 2010, there were 161,118,427 shares of US Airways Group, Inc. common stock outstanding.

 

As of February 12, 2010, US Airways, Inc. had 1,000 shares of common stock outstanding, all of which were held by US Airways Group, Inc.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the proxy statement related to US Airways Group, Inc.’s 2010 Annual Meeting of Stockholders, which proxy statement will be filed under the Securities Exchange Act of 1934 within 120 days of the end of US Airways Group, Inc.’s fiscal year ended December 31, 2009, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

US Airways Group, Inc.
US Airways, Inc.
Form 10-K
Year Ended December 31, 2009

Table of Contents

 

This combined Annual Report on Form 10-K is filed by US Airways Group, Inc. (“US Airways Group”) and its wholly owned subsidiary US Airways, Inc. (“US Airways”). References in this Annual Report on Form 10-K to “we,” “us,” “our” and the “Company” refer to US Airways Group and its consolidated subsidiaries.

 

Note Concerning Forward-Looking Statements

 

Certain of the statements contained in this report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” and “continue” and similar terms used in connection with statements regarding, among others, our outlook, expected fuel costs, the revenue environment, and our expected financial performance. These statements include, but are not limited to, statements about future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts. These statements are based upon the current beliefs and expectations of management and are subject to significant risks and uncertainties that could cause our actual results and financial position to differ materially from these statements. These risks and uncertainties include, but are not limited to, those described below under Part I, Item 1A, “Risk Factors” and the following:

 

 

 

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

 

 

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

 

You may read and copy any materials US Airways Group or US Airways files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. A copy of this Annual Report on Form 10-K, 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 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.

 

The U.S. Airline Industry

 

The airline industry in the United States was severely impacted in 2009 by the global economic recession. Passenger demand, as reported by the Air Transport Association (“ATA”), declined severely in 2009 as compared to 2008. Despite capacity cuts put in place to help offset the decline in demand for air travel, industry revenues were adversely affected by severe fare discounting by carriers to stimulate demand. Business bookings, which typically drive stronger yields, declined sharply in 2009 as companies cut costs by reducing their travel budgets in response to the economic recession. ATA reported yields for U.S. airlines declined by 13% in 2009 as compared to 2008 while U.S. airline passenger revenues were down 18% for fiscal year 2009, which represented the largest decline on record, exceeding the 14% decline observed from 2000 to 2001.

 

International markets were more severely impacted by the economic slowdown than domestic markets. This was a result of international traffic’s greater reliance on business travel, particularly premium business and first class seating, to drive profitability. Additionally, there was capacity expansion overseas during the past several years, which the U.S. industry reduced by only 6% in 2009 as compared to domestic capacity reductions of 7%. The contraction of business spending also significantly impacted cargo demand.

 

During times of weak travel demand, falling fuel prices have historically served as a natural hedge. Although the price of crude oil was down substantially in 2009 from its record high of $147 per barrel in July 2008, it remained volatile and did not fully offset the negative economic impact to passenger demand. During 2009, the price of crude oil on a per barrel basis ranged from a high of $81.03 to a low of $34.03, and closed at $79.39 on December 31, 2009. The volatility in oil prices made the use of hedging positions by airlines to contain fuel costs either expensive (call options) or risky due to counterparty cash collateral requirements (collars and swaps).

 

Accordingly, in 2009 the industry focused on conserving and building cash and matching capacity to demand. In the latter part of 2009, credit and equity markets were increasingly open to airlines and several U.S. airlines raised

cash to enhance liquidity through a number of initiatives such as traditional public stock and debt issuances, asset sales, asset sale-leasebacks and transactions with co-branded credit card issuers.

 

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 at Ronald Reagan Washington National Airport. We offer scheduled passenger service on more than 3,000 flights daily to more than 190 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service, with a substantial presence at Washington National Airport. We had approximately 51 million passengers boarding our mainline flights in 2009. During 2009, our mainline operation provided regularly scheduled service or seasonal service at 138 airports while the US Airways Express network served 152 airports in the United States, Canada and Mexico, including 75 airports also served by our mainline operation. US Airways Express air carriers had approximately 27 million passengers boarding their planes in 2009. As of December 31, 2009, we operated 349 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express either under capacity purchase or prorate agreements, which operated approximately 236 regional jets and 60 turboprops.

 

For information regarding US Airways Group’s and US Airways’ operating segments and operating revenue in principal geographic areas, see Notes 13 and 12, respectively, to their respective financial statements included in Items 8A and 8B of this Annual Report on Form 10-K.

 

In October 2009, we announced the realignment of our operations to focus on our core network strengths, which include our hubs in Charlotte, Philadelphia and Phoenix and our focus city at Washington National Airport. These four cities, as well as our popular hourly Shuttle service between LaGuardia, Boston and Washington National airports, will serve as the cornerstone of our network and by the end of 2010 are expected to represent 99% of our ASMs versus approximately 93% in 2009. Changes to facilitate this strategy include reducing daily departures from Las Vegas, closing stations in Colorado Springs and Wichita, redeploying our E190 fleet to routes between Boston and Philadelphia and the Boston-LaGuardia leg of the Shuttle, suspending five European destinations, returning our Philadelphia-Beijing route authority, rightsizing our crew bases at our hubs and focus city and closing crew bases in Boston, LaGuardia and Las Vegas. In connection with the realignment of our operations, we will reduce staffing by approximately 1,000 positions across our system during the first half of 2010. These reductions include approximately 600 airport passenger and ramp service positions, approximately 200 pilot positions and approximately 150 flight attendant positions. We believe that by concentrating on our strengths and eliminating unprofitable flying we will be better positioned to return US Airways to profitability.

 

In August 2009, US Airways Group and US Airways entered into a mutual asset purchase and sale agreement with Delta Air Lines, Inc. (“Delta”). Pursuant to the agreement, US Airways would transfer to Delta certain assets related to flight operations at LaGuardia Airport in New York, including 125 pairs of slots currently used to provide US Airways Express service at LaGuardia. Delta would transfer to US Airways certain assets related to flight operations at Washington National Airport, including 42 pairs of slots, and the authority to serve Sao Paulo, Brazil and Tokyo, Japan. One slot equals one take-off or landing, and each pair of slots equals one roundtrip flight. The agreement is structured as two simultaneous asset sales and is expected to be cash neutral to US Airways. The closing of the transactions under the agreement is subject to certain closing conditions, including approvals from a number of government agencies, including the U.S. Department of Justice, the U.S. Department of Transportation (“DOT”), the Federal Aviation Administration (“FAA”) and The Port Authority of New York and New Jersey. If approved, this transaction will significantly increase our capacity in the Washington, D.C. market and improve profitability.

 

On February 9, 2010, the DOT issued a proposed order conditionally approving the transaction. The proposed order, which is subject to a 30-day comment period, would require the airlines to divest 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. Delta and we are currently reviewing the DOT’s proposed order to determine next steps. However, we expect that if this order is implemented as proposed the transaction will not go forward.

 

To address the weak revenue environment in 2009, we continued to focus on matching capacity to demand and, as a result, our total RPMs decreased 4.2% on 4.5% lower capacity as compared to 2008. We achieved our 2009 capacity reductions through the sale of aircraft, return of aircraft to lessors and reductions in aircraft utilization. Despite the capacity reductions in 2009, we increased service in certain markets. Domestically, we added new non-stop service from our Charlotte hub to Honolulu, Hawaii. Internationally, we added new service from our Philadelphia hub to Oslo, Norway and Tel Aviv, Israel, service from our Charlotte hub to Paris, France and Rio de Janeiro, Brazil and service from our Phoenix hub to Montego Bay, Jamaica.

 

We continued our strong operational performance in 2009. Our 2009 on-time performance rate was 80.9% and ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. Our mishandled baggage ratio for 2009 improved 36.5% as compared to 2008. Our 2009 mishandled baggage ratio of 3.03 also ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. The combination of continued strong on-time performance and fewer mishandled bags contributed to 34.8% fewer reported customer complaints to the DOT in 2009 as compared to 2008.

 

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 2009, the US Airways Express network served 152 airports in the continental United States, Canada and Mexico, including 75 airports also served by our mainline operation. During 2009, approximately 27 million passengers boarded US Airways Express air carriers’ planes, approximately 42% of whom connected to or from our mainline flights. Of these 27 million passengers, approximately 8 million were enplaned by our wholly owned regional airlines Piedmont and PSA, approximately 19 million were enplaned by third-party carriers operating under capacity purchase agreements and less than 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. All US Airways Express carriers use our reservation systems and have logos, service marks, aircraft paint schemes and uniforms similar to our mainline operation.

 

In January 2010, Mesa Air Group Inc. (“Mesa”) and its subsidiary Mesa Airlines filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. At December 31, 2009, Mesa Airlines operated 53 aircraft for our Express passenger operations, representing over $450 million in annual passenger revenues to us in 2009. Mesa Airlines continues to operate aircraft on behalf of US Airways Express in accordance with its capacity purchase agreement. Mesa has stated publicly that it intends to operate as normal during the pendency of its Chapter 11 case, including its code share agreements with its partners including US Airways. For more discussion, see Part 1, Item 1A, “Risk Factors — 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.”

The following table sets forth our US Airways Express code share agreements and the number and type of aircraft operated under those agreements at December 31, 2009.

 

 

 

 

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 26 member airlines serving approximately 1,077 destinations in 175 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 United, Lufthansa, Spanair, bmi, TAP Portugal, Swiss International, Asiana, Air New Zealand, Air China, Japan’s ANA, Singapore Airlines and TACA. Other international code sharing partners include Royal Jordanian Airlines, EVA Airways, Qatar Airways and Virgin Atlantic Airways. Marketing/code sharing agreements are maintained with two smaller regional carriers in the Caribbean that operate collectively as the “GoCaribbean” network. Each of these code share agreements funnel international traffic onto our domestic flights or support specific 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, or when they begin service to new cities or 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 maintain 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 entrance and growth of low-fare, low-cost competitors in many of the markets in which we operate. These competitors include Southwest, AirTran, JetBlue, Allegiant, Frontier and Virgin America. 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 FAA, primarily in the areas of flight operations, maintenance, ground facilities and other operational and safety areas. Pursuant to these regulations, our airline subsidiaries have FAA-approved maintenance programs for each type of aircraft they operate. The programs provide for the ongoing maintenance of such aircraft, ranging from periodic routine inspections to major overhauls. From time to time, the FAA issues airworthiness directives and other regulations affecting our airline subsidiaries or one or more of the aircraft types they operate. In recent years, for example, the FAA has issued or proposed mandates relating to, among other things, enhanced ground proximity warning systems, fuselage pressure bulkhead reinforcement, fuselage lap joint inspection rework, increased inspections and maintenance procedures to be conducted on certain aircraft, increased cockpit security, fuel tank flammability reductions and domestic reduced vertical separation. Regulations of this sort tend to enhance safety and increase operating costs.

 

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

 

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

 

On October 10, 2008, the FAA finalized new rules governing flight operations at the three major New York airports. These rules did not take effect because of a legal challenge, but the FAA has pushed forward with a reduction in the number of flights per hour at LaGuardia. Additionally, the DOT recently finalized a policy change that will permit airports to charge differentiated landing fees during congested periods, which could impact our ability to serve certain markets in the future. The new rule was challenged in court by the industry and ultimately withdrawn by the FAA. The Obama Administration has not yet articulated its policy concerning the New York area airports. Depending on that policy, our ability to operate at those airports or other constrained airports could be impacted.

 

The DOT has proposed several new initiatives concerning airline obligations toward passengers. During 2008, the DOT finalized rules pertaining to denied boarding compensation requiring additional consumer disclosure and higher payments to passengers. In addition, the DOT established a task force on long on-board delays that resulted in

the issuance of a final report suggesting model contingency plans for long on-board delays. Contemporaneous with the end of the task force, the DOT issued proposed rules that would place additional requirements on airlines concerning service irregularities, consumer rights and contract of carriage obligations. These new rules were recently finalized by the DOT and take effect in April 2010. While we are preparing for the implementation of these new rules, we are still evaluating what the full impact of these rules will be on our operations.

 

Additional laws, regulations, taxes and policies have been proposed or discussed from time to time, including recently introduced federal legislation on a “passenger bill of rights,” that, if adopted, could significantly further increase the cost of airline operations or reduce revenues.

 

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 removes bilateral restrictions on the number of flights between the U.S. and EU. One result of the Open Skies Agreements has been applications before the DOT for antitrust immunity between various domestic and international airlines. If granted, antitrust immunity permits carriers to coordinate schedules, pricing and other competitive aspects on international routes to/from the United States. It is possible that the grant of these immunities could have an impact on our international operations.

 

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 Transportation Security Administration (the “TSA”) under the DOT was created. The TSA was then transferred to the Department of Homeland Security pursuant to the Homeland Security Act of 2002. The Aviation Security Act, among other matters, mandates improved flight deck security; carriage at no charge of federal air marshals; enhanced security screening of passengers, baggage, cargo, mail, employees and vendors; enhanced security training; fingerprint-based background checks of all employees and vendor employees with access to secure areas of airports pursuant to regulations issued in connection with the Aviation Security Act; and the provision of certain passenger data to U.S. Customs and Border Protection.

 

Funding for the TSA is provided by a combination of air carrier fees, passenger fees and taxpayer monies. A “passenger security fee,” which is collected by air carriers from their passengers, is currently set at a rate of $2.50 per flight segment but not more than $10 per round trip. An air carrier fee, or Aviation Security Infrastructure Fee (“ASIF”), has also been imposed with an annual cap equivalent to the amount that an individual air carrier paid in calendar year 2000 for the screening of passengers and property. The TSA may lift this cap at any time and set a new higher fee for air carriers.

 

In 2009, we incurred expenses of $53 million for the ASIF, including amounts paid by our wholly owned regional subsidiaries, PSA and Piedmont, and amounts attributable to the 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 has and will likely continue to result in service disruptions and delays. As a result of competitive pressure, US Airways and other airlines may be unable to recover all of these additional security costs from passengers through increased fares. In addition, we cannot forecast what new security and safety requirements may be imposed in the future or the costs or financial impact of complying with any such requirements.

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. In June 2009, the U.S. House of Representatives passed a comprehensive clean energy and climate bill (H.R. 2454, also known as “Waxman-Markey”). In the Senate, the Boxer-Kerry climate bill has been reported out of the Senate Environment and Public Works Committee. These bills have a variety of provisions and differences, but in substance they both propose a “cap and trade” approach to greenhouse gas regulation. Under such an approach, companies would be required to hold sufficient emission allowances to cover their greenhouse gas emissions. Over time, the total number of allowances would be reduced or expire, thereby relying on market-based incentives to allocate investment in emission reductions across the economy. As the number of available allowances declines, the cost would presumably increase. In addition to the prospect of federal legislation, 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. Some of our facilities may be covered by this rule. 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.

 

In addition, the EU has adopted legislation to include aviation within the EU’s existing greenhouse gas emission trading scheme effective in 2012. This legislation has been legally challenged in the EU but we have had to begin to comply and incurred additional compliance costs as a result of this legislation. While we cannot yet determine what the final regulatory scheme will be in the United States or in other areas in which we do business, such climate change-related regulatory activity in the future may adversely affect our business and financial results.

 

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 businesses are labor intensive. In 2009, wages, salaries and benefits were one of our largest expenses and represented approximately 23% of our operating expenses. As of December 31, 2009, US Airways employed approximately 31,300 active full-time equivalent employees, including approximately 4,100 pilots, 6,800 flight attendants, 6,200 passenger service personnel, 6,100 fleet service personnel, 3,300 maintenance personnel and

4,800 personnel in administrative and various other job categories. Our Express subsidiaries, Piedmont and PSA, employed approximately 4,700 active full-time equivalent employees, including approximately 800 pilots, 400 flight attendants, 2,700 passenger service personnel, 400 maintenance personnel and 400 personnel in administrative and various other job categories.

 

A large majority of the employees of the major airlines in the United States are represented by labor unions. As of December 31, 2009, approximately 87% 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 (the “RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“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.

 

Since the merger, we have been in the process of integrating the labor agreements of US Airways and America West Airlines, Inc. (“AWA”). Listed below are the integrated labor agreements and the status of the US Airways and AWA labor agreements that remain separate with their major domestic employee groups.

 

 

 

 

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 AWA and US Airways. Since that time, we have been engaged in negotiations with USAPA over the terms of a single labor agreement covering both groups. In the meantime, while those negotiations are underway, each of the pilot groups continues to be covered by the USAPA collective bargaining agreements referenced above.

 

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 decreased 44.8% from 2008 to 2009, and our total mainline and Express fuel expense decreased $2.28 billion, or 48%, from 2008 to 2009. We estimate that a one cent per gallon increase in aviation fuel prices would result in a $14 million increase in annual fuel expense based on our 2010 forecasted mainline and Express fuel consumption.

 

Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts. During 2009, 2008 and 2007, we recognized a net loss of $7 million, a net loss of $356 million and a net gain of $245 million, respectively, related to our fuel hedging program.

 

The following table shows annual aircraft fuel consumption and costs for our mainline operations for 2007 through 2009 (gallons and aircraft fuel expense in millions):

 

 

 

 

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, 2009, 2008 and 2007 were $609 million, $1.14 billion and $765 million, respectively.

 

Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of our control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices and availability may be affected by many factors, including:

 

 

 

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 August 31, 2010. 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

 

In 2009, we continued our commitment to running a successful airline. One of the important ways we do this is by taking care of our customers. We believe that our focus on excellent customer service in every aspect of our operations, including personnel, flight equipment, in-flight and ancillary amenities, on-time performance, flight completion ratios and baggage handling, will strengthen customer loyalty and attract new customers.

 

Our 2009 on-time performance rate was 80.9% and ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. Our mishandled baggage ratio for 2009 improved 36.5% as compared to 2008. Our 2009 mishandled baggage ratio of 3.03 also ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. The combination of continued strong on-time performance and fewer mishandled bags contributed to 34.8% fewer reported customer complaints to the DOT in 2009 as compared to 2008.

 

We reported the following combined operating statistics to the DOT for mainline operations for the years ended December 31, 2009, 2008 and 2007:

 

 

 

 

Frequent Traveler Program

 

All major United States airlines offer frequent flyer programs to encourage travel on their respective airlines and customer loyalty. Our Dividend Miles frequent flyer program allows participants to earn mileage credits for each paid flight segment on US Airways, Star Alliance carriers and certain other airlines that participate in the program. Participants flying in first class or Envoy class may receive additional mileage credits. Participants can also receive mileage credits through special promotions that we periodically offer and may also earn mileage credits by utilizing

certain credit cards and purchasing services from non-airline partners such as hotels and rental car agencies. We sell mileage credits to credit card companies, telephone companies, hotels, car rental agencies and others that participate in the Dividend Miles program. Mileage credits can be redeemed for 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 for all but the highest-level Dividend Miles participants is generally not permitted on blackout dates, which correspond to certain holiday periods or peak travel dates. We charge various fees for issuing awards dependent upon destination and booking method and for issuing awards within 14 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.

 

In 2009, we launched the new Dividend Miles Select program in conjunction with certain of our co-branded credit cards. Participants in this program are eligible to receive discounted award travel and award processing fee waivers.

 

Ticket Distribution

 

Passengers can book tickets for travel on US Airways through several distribution channels including our direct website (www.usairways.com), online travel agent sites (e.g., Orbitz, Travelocity, Expedia and others), traditional travel agents, reservations centers and airline ticket offices. Traditional travel agencies use Global Distribution Systems (“GDSs”), such as Sabre Travel Network^®, to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee, referred to as a “GDS fee,” that is charged to the airline. Bookings made directly with an airline, through its reservation call centers or website, do not generate a GDS fee. Travel agent sites that connect directly to airline host systems, effectively by-passing the traditional connection via GDSs, help us reduce distribution costs. In 2009, we received 63% of our sales from internet sites. Our website accounted for 27% of our sales, while other internet sites accounted for 36% of our sales. Internal channels of distribution account for 32% of our sales.

 

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.

 

Pre-merger US Airways Group’s Chapter 11 Bankruptcy Proceedings

 

On September 12, 2004, US Airways Group and its domestic subsidiaries, US Airways, Piedmont, PSA and MSC (collectively, the “Debtors”), filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (the “Bankruptcy Court”). On September 16, 2005, the Bankruptcy Court confirmed the Debtors’ plan of reorganization. Substantially all of the claims in the 2004 bankruptcy have been settled and the remaining claims, if paid at all, will be paid out in common stock of the post-bankruptcy US Airways Group at a small fraction of the actual claim amount. However, the effects of these common stock distributions were already reflected in our financial statements upon emergence from bankruptcy and will not have any further impact on our financial position or results of operations. We presently expect the bankruptcy case to be closed during 2010.

 

Below are a series of risk factors that may affect our results of operations or financial performance. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of these risk factors on our business or the extent to which any factor or combination of factors may impact our business.

 

Risk Factors Relating to the Company and Industry Related Risks

 

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

 

There are several reasons, including those addressed in these risk factors, why US Airways Group might fail to achieve profitability and might experience significant losses. In particular, the weakened condition of the economy and the high volatility of fuel prices have had and continue to have an impact on our operating results, and overall worsening economic conditions increase the risk that we will experience losses.

 

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 continue to result, in decreased passenger demand for air travel and changes in booking practices, both of which in turn have had, and may continue to have, a strong negative effect on our revenues. In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our revenues. See “The airline industry is intensely competitive and dynamic” below. Certain contractual obligations limit our ability to reduce the number of aircraft in operation below certain levels. As a result, we may not be able to optimize the number of aircraft in operation in response to a decrease in passenger demand for air travel.

 

Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could adversely affect our liquidity, operating expenses and results.

 

Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions. Continued concerns about the systemic impact of inflation, the availability and cost of credit, energy costs and geopolitical issues, combined with declining 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 raise capital or fund other types of obligations. Any downgrades to our credit rating may likewise increase the cost and reduce the availability of financings.

 

In addition, we have substantial non-cancelable commitments for capital expenditures, including the acquisition of new aircraft and related spare engines. Although we have in place financing for the four aircraft scheduled for delivery in 2010 and backstop financing for the remaining narrow body aircraft we have on order, we have not yet secured financing commitments or backstop financing for some of the widebody aircraft we have on order, commencing with deliveries scheduled for 2013, and cannot assure you of the availability or cost of that financing. If we are not able to arrange financing for such aircraft at customary advance rates and on terms and conditions acceptable to us, we expect we would seek to negotiate deferrals of aircraft deliveries with the manufacturer or financing at lower than customary advance rates, or, if required, use cash from operations or other sources to purchase the aircraft.

 

Further, a substantial portion of our indebtedness bears interest at fluctuating interest rates. These are primarily based on the London interbank offered rate for deposits of U.S. dollars, or “LIBOR.” LIBOR tends to fluctuate based on general economic conditions, general interest rates, federal reserve rates and the supply of and demand for

credit in the London interbank market. We have not hedged our interest rate exposure and, accordingly, our interest expense for any particular period may fluctuate based on LIBOR and other variable interest rates. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected. See also the discussion of interest rate risk in Part II, Item 7A, “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 regional alliances. Our existing indebtedness is secured by substantially all of our assets.

 

As a result of the substantial fixed costs associated with these obligations:

 

 

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.

 

Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.

 

Our operating results are significantly impacted by changes in the availability, price volatility and the cost of aircraft fuel, which represents one of the largest single cost items in our business. Fuel prices have fluctuated substantially over the past several years and sharply in the last year.

Because of the amount of fuel needed to operate our airline, even a relatively small increase in the price of fuel can have a significant adverse aggregate effect on our costs and liquidity. Due to the competitive nature of the airline industry and unpredictability of the market, we can offer no assurance that we may be able to increase our fares, impose fuel surcharges or otherwise increase revenues sufficiently to offset fuel price increases.

 

Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price volatility or cost of aircraft fuel. Natural disasters, political disruptions or wars involving oil-producing countries, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, additional fuel price volatility and cost increases in the future.

 

Historically, from time to time, we have entered into hedging arrangements designed to protect against rising fuel costs. Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts. Our ability to hedge in the future may be limited, particularly if our financial condition provides insufficient liquidity to meet counterparty collateral requirements. Our future fuel hedging arrangements, if any, may not completely protect us against price increases and may be limited in both volume of fuel and duration. Also, a rapid decline in the price of fuel can adversely impact our short-term liquidity as our hedge counterparties require that we post collateral in the form of cash or letters of credit when the projected future market price of fuel drops below the strike price. See also the discussion in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

 

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

 

We have agreements with companies that process customer credit card transactions for the sale of air travel and other services. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) equal to a portion of advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. These holdback requirements can be modified at the discretion of the processing companies upon the occurrence of specific events, including material adverse changes in our financial condition. An increase in the current holdback balances to higher percentages up to and including 100% of relevant advanced ticket sales could materially reduce our liquidity. Likewise, other of our commercial agreements contain provisions that allow other entities to impose less favorable terms, including 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 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 NMB.

 

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

 

Additionally, these processes do not apply to our current and ongoing negotiations for post-merger integrated labor agreements, and this means unions may not lawfully engage in concerted refusals to work, such as strikes, slow-downs, sick-outs or other similar activity, against us. Nonetheless, after more than four years of negotiations

without a resolution to the bargaining issues that arose from the merger, there is a risk that disgruntled employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our financial performance. Likewise, employees represented by unions that have reached post-merger integrated agreements could engage in improper actions that disrupt our operations. We are also involved in binding arbitrations regarding grievances under our collective bargaining agreements, including but not limited to issues related to wages and working conditions, which if determined adversely against us could negatively affect our ability to conduct our business and our financial performance.

 

The inability to maintain labor costs at competitive levels could harm our financial performance.

 

Currently, our labor costs are very competitive relative to the other big five hub-and-spoke carriers. However, we cannot assure you that labor costs going forward will remain competitive because some of our agreements are amendable now and others may become amendable, competitors may significantly reduce their labor costs or we may agree to higher-cost provisions in our current labor negotiations. Approximately 87% of the employees within US Airways Group are represented for collective bargaining purposes by labor unions, including unionized groups of our employees abroad. Some of our unions have brought and may continue to bring grievances to binding arbitration. Unions may also bring court actions and may seek to compel us to engage in the bargaining processes where we believe we have no such obligation. If successful, there is a risk these judicial or arbitral avenues could create additional costs that we did not anticipate.

 

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 current economic conditions, and other risk factors, such as a bankruptcy restructuring of the regional operators. For example, in January 2010, Mesa Air Group Inc. and its subsidiary Mesa Airlines filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. We cannot predict whether Mesa Airlines will be successfully reorganized or any other aspect of the pending bankruptcy case. At December 31, 2009, Mesa Airlines operated 53 aircraft for our Express passenger operations, representing over $450 million in annual passenger revenues to us in 2009. In addition, 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, financial condition and results of operations.

 

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 heavily on automated systems to operate our business and any failure or disruption of these systems could harm our business.

 

To operate our business, we depend on automated systems, including our computerized airline reservation systems, flight operations systems, telecommunication systems, airport customer self-service kiosks and websites. Our website and reservation systems must be able to accommodate a high volume of traffic, process transactions and deliver important flight information on a timely and reliable basis. Substantial or repeated disruptions or failures of any of these automated systems could impair our operations, reduce the attractiveness of our services and could result in lost revenues and increased costs. In addition, these automated systems require periodic maintenance, upgrades and replacements, and our business may be harmed if we fail to properly maintain, upgrade or replace such systems.

 

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 as weakening economic conditions make our customers more sensitive to increased travel costs.

 

The airline industry is intensely competitive and dynamic.

 

Our competitors include other major domestic airlines as well as foreign, regional and new entrant airlines, some of which have more financial resources or lower cost structures than ours, and other forms of transportation, including rail and private automobiles. In many of our markets we compete with at least one low cost air carrier. Our revenues are sensitive to numerous factors, and the actions of other carriers in the areas of pricing, scheduling and promotions can have a substantial adverse impact 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 could continue to have an impact on the overall performance of US Airways Group.

 

Additionally, if mergers or other forms of industry consolidation including antitrust immunity grants take place, we might or might not be included as a participant. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with such combinations, our competitive position relative to the post-combination carriers or other carriers that acquire such assets could be harmed. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks might grow and result in greater overlap with our network, which in turn could result in lower overall market share and revenues for us. Such consolidation is not limited to the U.S., but could include further consolidation among international carriers in Europe and elsewhere.

The loss of key personnel upon whom we depend to operate our business or the inability to attract additional qualified personnel could adversely affect the results of our operations or our financial performance.

 

We believe that our future success will depend in large part on our ability to attract and retain highly qualified management, technical and other personnel, particularly in light of reductions in headcount associated with cost-saving measures that we have implemented. 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, including the wars in Iraq and Afghanistan, 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 Security Act mandates improved flight deck security; deployment of federal air marshals on board flights; improved airport perimeter access security; airline crew security training; enhanced security screening of passengers, baggage, cargo, mail, employees and vendors; enhanced training and qualifications of security screening personnel; additional provision of passenger data to U.S. Customs and enhanced background checks. A concurrent increase in airport security charges and procedures, such as restrictions on carry-on baggage, has also had and may continue to have a disproportionate impact on short-haul travel, which constitutes a significant portion of our flying and revenue. We would also be materially impacted in the event of further terrorist attacks or perceived terrorist threats.

 

Changes in government regulation could increase our operating costs and limit our ability to conduct our business.

 

Airlines are subject to extensive regulatory requirements. In the last several years, Congress has passed laws, and the DOT, the FAA, the TSA and the Department of Homeland Security have issued a number of directives and other regulations. These requirements impose substantial costs on airlines. On October 10, 2008, the FAA finalized new rules governing flight operations at the three major New York airports. These rules did not take effect because of a legal challenge, but the FAA has pushed forward with a reduction in the number of flights per hour at LaGuardia. The FAA is attempting to work with carriers on a voluntary basis to implement its new lower operations cap at LaGuardia. If this is not successful, the FAA may resort to other methods to reduce congestion in New York. Additionally, the DOT recently finalized a policy change that will permit airports to charge differentiated landing fees during congested periods, which could impact our ability to serve certain markets in the future. The new rule is being challenged in court by the industry. The Obama Administration has not yet indicated how it intends to move forward on the issue of congestion management in the New York region.

 

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 of older aircraft, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement, fuel tank inerting, crew scheduling and other environmental concerns, aircraft operation and safety and increased inspections and maintenance procedures to be conducted on older aircraft. Our failure to timely comply with these requirements can result in fines and other enforcement actions by the FAA or other regulators. For example, on October 14, 2009, the FAA proposed a fine of $5.4 million with respect to certain alleged violations and we are in discussions with the agency regarding resolution of this matter. Additionally, new proposals by the FAA to further regulate flight crew duty times could increase our costs and reduce staffing flexibility.

 

Additional laws, regulations, taxes and policies have been proposed or discussed from time to time, including recently introduced federal legislation on a “passenger bill of rights,” that, if adopted, could significantly increase the cost of airline operations or reduce revenues. The state of New York’s attempt to adopt such a measure has been successfully challenged by the airline industry. Other states, however, are contemplating similar legislation. The

DOT finalized rules requiring new procedures for customer handling during long onboard delays, as well as additional reporting requirements for airlines.

 

Finally, the ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the U.S. and foreign governments may be amended from time to time, or because appropriate slots or facilities may not be available. We cannot assure you that laws or regulations enacted in the future will not adversely affect our operating costs. In addition, increased environmental regulation, particularly in the EU, may increase costs or restrict our operations.

 

Our ability to operate and grow our route network in the future is dependent on the availability of adequate facilities and infrastructure throughout our system.

 

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

 

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

 

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

 

Several U.S. airport authorities are actively engaged in efforts to limit discharges of de-icing fluid (glycol) to local groundwater, often by requiring airlines to participate in the building or reconfiguring of airport de-icing facilities. Such efforts are likely to impose additional costs and restrictions on airlines using those airports. We do not believe, however, that such environmental developments will have a material impact on our capital expenditures or otherwise adversely affect our operations, operating costs or competitive position.

 

We are also subject to other environmental laws and regulations, including those that require us to remediate soil or groundwater to meet certain objectives. Under federal law, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. We have liability for such costs at various sites, although the future costs associated with the remediation efforts are currently not expected to have a material adverse affect on our business.

 

We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators. Under these leases and agreements, we have agreed to standard language indemnifying the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, even if we are not the party responsible for the initial event that caused the environmental damage. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines.

 

There is increasing global regulatory focus on climate change and greenhouse gas emissions. In particular, the United States and the EU have developed regulatory requirements that may affect our business. The U.S. Congress is considering climate-related legislation to reduce emissions of greenhouse gases. Several states have also developed measures 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. In late 2009 and early 2010, the U.S. EPA adopted regulations requiring reporting of greenhouse gas emissions from certain facilities, updating the renewable fuels standard and is considering additional regulation of greenhouse gases under the existing federal Clean Air Act. In addition, the EU has adopted legislation to include aviation within the EU’s existing greenhouse gas emission trading scheme effective in 2012. This legislation has been legally challenged in the EU but we have had to begin complying and incurred additional costs as a result of this legislation.

While we cannot yet determine what the final regulatory programs will be in the United States, the EU or in other areas in which we do business, such climate change-related regulatory activity in the future may adversely affect our business and financial results.

 

California is in the process of implementing environmental provisions aimed at limiting emissions from motorized vehicles, which may include some airline belt loaders and tugs and require a change of ground service vehicles. The future costs associated with replacing some or all of our ground fleets in California cities are currently not expected to have a material adverse affect on our business.

 

Governmental authorities in several U.S. and foreign cities are also considering or have already implemented aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.

 

Ongoing data security compliance requirements could increase our costs, and any significant data breach could harm our business, financial condition or results of operations.

 

Our business requires the appropriate and secure utilization of customer and other sensitive information. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit existing vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting the networks that access and store database information. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad (particularly in the EU), including requirements for varying levels of customer notification in the event of a data breach.

 

Many of our commercial partners, including credit card companies, have imposed certain data security standards that we must meet. In particular, we 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.

 

In addition to the Payment Card Industry Standards discussed above, failure to comply with the other privacy and data use and security requirements of our partners or related laws and regulations to which we are subject may expose us to fines, sanctions or other penalties, which could materially and adversely affect our results of operations and overall business. In addition, failure to address appropriately these issues could also give rise to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur further related costs and expenses.

 

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

 

We operate principally through hubs in Charlotte, Philadelphia and Phoenix and a focus city at Washington National Airport. 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 resulting from air traffic control delays, weather conditions, natural disasters, growth constraints, relations with third-party service providers, failure of computer systems, 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.

 

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 a certain number and type of aircraft. In many cases, the aircraft we intend to operate are not yet in our fleet, but we have contractual commitments to purchase or lease them. If for any reason we were unable to 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.

 

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 August 31, 2010. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk insurance. The failure of one or more of our insurers could result in a lack of coverage for a period of time. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. Because of competitive pressures in our industry, our ability to pass additional insurance costs to passengers is limited. As a result, further increases in insurance costs or reductions in available insurance coverage could have an adverse impact on our financial results.

 

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

The use of US Airways Group’s 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, or Section 382, a limitation is imposed on the corporation’s future ability to utilize any net operating losses, or 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. For purposes of determining if an ownership change has occurred, the right to convert convertible notes into stock may be treated as if US Airways Group had issued the underlying stock.

 

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:

 

 

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

 

The conversion of some or all of US Airways Group’s 7% senior convertible notes due 2020 or 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 because the conversion of the notes could depress the price of our common stock.

 

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

 

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

 

 

 

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

 

Our charter documents include provisions limiting voting and ownership 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 Department of Transportation, 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.

 

 

None.

 

Flight Equipment

 

We operated a mainline fleet of 349 aircraft at the end of 2009, down from a total of 354 mainline aircraft at the end of 2008. During 2009, we removed 11 leased Boeing 757-200 aircraft, six leased Boeing 737-300 aircraft, seven leased Airbus A320 aircraft and six owned Embraer 190 aircraft from our mainline operating fleet. We sold 10 of our Embraer 190 aircraft to Republic in 2009 and are currently leasing back four of these aircraft for periods ranging from one to five months. During 2009, we took delivery of 18 Airbus A321 aircraft, five Airbus A330-200 aircraft and two Airbus A320 aircraft. We are also supported by our regional airline subsidiaries and affiliates operating as US Airways Express either under capacity purchase or prorate agreements, which operate approximately 236 regional jets and 60 turboprops.

 

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), of which 30 aircraft have been delivered through December 31, 2009. Deliveries of the A320 family aircraft commenced during 2008 with the delivery of five A321 aircraft. As described above, in 2009 we took delivery of 18 Airbus A321 aircraft and two Airbus A320 aircraft under our Amended and Restated Airbus A320 Family Aircraft Purchase Agreement and five Airbus A330-200 aircraft under our Airbus A330 Aircraft Purchase Agreement.

 

In November 2009, US Airways amended its purchase agreements with Airbus to defer 54 aircraft originally scheduled for delivery between 2010 and 2012 to 2013 and beyond. US Airways now plans to take delivery of 28 Airbus aircraft between 2010 and 2012, consisting of four aircraft in 2010 (two A320 aircraft and two A330 aircraft) and 24 A320 family aircraft in 2011-2012. US Airways has financing commitments in place for all 28 of these aircraft. In addition, commencement of US Airways’ Airbus A350 XWB operations, with aircraft deliveries originally scheduled to start in 2015, will now be postponed to 2017. The aircraft deferrals will not significantly alter our capacity as we are currently in the process of extending leases for certain aircraft originally scheduled to be replaced during 2010-2012. We intend to retain these aircraft until the rescheduled new aircraft delivery dates.

 

As of December 31, 2009, our mainline operating fleet consisted of the following aircraft:

 

 

 

 

As of December 31, 2009, our wholly owned regional airline subsidiaries operated the following regional jet and turboprop aircraft:

 

 

 

 

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, 2009:

 

 

See Notes 9 and 8, “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 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 located at our hubs and focus city at the following airports: Charlotte, Philadelphia, Phoenix and Washington National airports. At those locations and in other cities we serve, we maintain administrative offices, terminal, catering, cargo and other airport facilities, 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 in 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 2013 to 2015.

 

Terminal Construction Projects

 

We use public airports for our flight operations under lease arrangements with the government entities that own or control these airports. Airport authorities frequently require airlines to execute long-term leases to assist in obtaining financing for terminal and facility construction. Any future requirements for new or improved airport facilities and passenger terminals at airports in which our airline subsidiaries operate could result in additional occupancy costs and long-term commitments.

 

 

On September 12, 2004, US Airways Group and its domestic subsidiaries (collectively, the “Reorganized Debtors”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (Case Nos. 04-13819-SSM through 03-13823-SSM) (the “2004 Bankruptcy”). On September 16, 2005, the Bankruptcy Court issued an order confirming the plan of reorganization submitted by the Reorganized Debtors and on September 27, 2005, the Reorganized Debtors emerged from the 2004 Bankruptcy. The Bankruptcy Court’s order confirming the plan included a provision called the plan injunction, which forever bars other parties from pursuing most claims against the Reorganized Debtors that arose prior to September 27, 2005 in any forum other than the Bankruptcy Court. Substantially all of the claims in the 2004 Bankruptcy have been settled and the remaining claims, if paid at all, will be paid out in common stock of the post-bankruptcy US Airways Group at a small fraction of the actual claim amount. However, the effects of these common stock distributions were already reflected in our financial statements upon emergence from bankruptcy and will not have any further impact on our financial position or results of operations. We presently expect the bankruptcy case to be closed during 2010.

 

The Company and/or its subsidiaries are defendants in various 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 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.

 

 

No matters were submitted to a vote of security holders during the fourth quarter of 2009.

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 12, 2010, the closing price of our common stock on the NYSE was $6.81. As of February 12, 2010, there were 1,927 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 Securities Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

 

The following stock performance graph compares our cumulative total shareholder return on an annual basis on our common stock with the cumulative total return on the Standard and Poor’s 500 Stock Index and the AMEX Airline Index from September 27, 2005 (the date our stock began trading on the NYSE under the symbol LCC after the merger) through December 31, 2009. The comparison assumes $100 was invested on September 27, 2005 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. 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” as of and for the years ended December 31, 2005 to 2009 are derived from the consolidated financial statements of US Airways Group, which have been audited by KPMG LLP, an independent registered public accounting firm. The full years 2009, 2008, 2007 and 2006 are comprised of the consolidated financial data of US Airways Group. The 2005 consolidated financial data presented includes the consolidated results of America West Holdings for the 269 days through September 27, 2005, the effective date of the merger, and the consolidated results of US Airways Group and its subsidiaries, including US Airways, America West Holdings and AWA, for the 96 days from September 27, 2005 to December 31, 2005. The selected consolidated financial data should be read in conjunction with the consolidated financial statements for the respective periods, the related notes and the related reports of US Airways Group’s independent registered public accounting firm.

 

 

 

 

 

Selected Consolidated Financial Data of US Airways

 

The selected consolidated financial data presented below under the captions “Consolidated statements of operations data” and “Consolidated balance sheet data” as of and for the years ended December 31, 2009, 2008, 2007 and 2006, three months ended December 31, 2005 and nine months ended September 30, 2005 are derived from the consolidated financial statements of US Airways, which have been audited by KPMG LLP, an independent registered public accounting firm. In 2007, US Airways Group contributed 100% of its equity interest in America West Holdings, the parent company of AWA, to US Airways in connection with the combination of all mainline operations under one FAA operating certificate. This contribution is reflected in US Airways’ consolidated financial statements as though the transfer had occurred at the time of US Airways’ emergence from bankruptcy at the end of September 2005. Thus, the full years 2009, 2008, 2007 and 2006 and three months ended December 31, 2005 are comprised of the consolidated financial data of US Airways and America West Holdings. The nine months ended September 30, 2005 consolidated financial data presented include the results of only US Airways. The selected consolidated financial data should be read in conjunction with the consolidated financial statements for the respective periods, the related notes and the related reports of US Airways’ independent registered public accounting firm.

 

 

 

 

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 at Ronald Reagan Washington National Airport. We offer scheduled passenger service on more than 3,000 flights daily to more than 190 communities in the United States, Canada, Mexico, Europe, the Middle East, the Caribbean, Central and South America. We also have an established East Coast route network, including the US Airways Shuttle service, with a substantial presence at Washington National Airport. We had approximately 51 million passengers boarding our mainline flights in 2009. As of December 31, 2009, we operated 349 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express either under capacity purchase or prorate agreements, which operated approximately 236 regional jets and 60 turboprops.

 

2009 Year in Review

 

The U.S. Airline Industry

 

The airline industry in the United States was severely impacted in 2009 by the global economic recession. Passenger demand, as reported by the Air Transport Association (“ATA”), declined severely in 2009 as compared to 2008. Despite capacity cuts put in place to help offset the decline in demand for air travel, industry revenues were adversely affected by severe fare discounting by carriers to stimulate demand. Business bookings, which typically drive stronger yields, declined sharply in 2009 as companies cut costs by reducing their travel budgets in response to

the economic recession. ATA reported yields for U.S. airlines declined by 13% in 2009 as compared to 2008 while U.S. airline passenger revenues were down 18% for fiscal year 2009, which represented the largest decline on record, exceeding the 14% decline observed from 2000 to 2001.

 

International markets were more severely impacted by the economic slowdown than domestic markets. This was a result of international traffic’s greater reliance on business travel, particularly premium business and first class seating, to drive profitability. Additionally, there was capacity expansion overseas during the past several years, which the U.S. industry reduced by only 6% in 2009 as compared to domestic capacity reductions of 7%. The contraction of business spending also significantly impacted cargo demand.

 

During times of weak travel demand, falling fuel prices have historically served as a natural hedge. Although the price of crude oil was down substantially in 2009 from its record high of $147 per barrel in July 2008, it remained volatile and did not fully offset the negative economic impact to passenger demand. During 2009, the price of crude oil on a per barrel basis ranged from a high of $81.03 to a low of $34.03, and closed at $79.39 on December 31, 2009. The volatility in oil prices made the use of hedging positions by airlines to contain fuel costs either expensive (call options) or risky due to counterparty cash collateral requirements (collars and swaps).

 

Accordingly, in 2009 the industry focused on conserving and building cash and matching capacity to demand. In the latter part of 2009, credit and equity markets were increasingly open to airlines and several U.S. airlines raised cash to enhance liquidity through a number of initiatives such as traditional public stock and debt issuances, asset sales, asset sale-leasebacks and transactions with co-branded credit card issuers.

 

US Airways

 

Financial Results

 

US Airways Group’s net loss for 2009 was $205 million, or a loss of $1.54 per share, as compared to a net loss of $2.22 billion, or $22.11 per share, in 2008. Similar to other carriers in the U.S. airline industry, we experienced significant declines in revenues as a result of the global economic recession, which more than offset the benefits of reduced fuel costs during 2009.

 

Revenue

 

The weak demand environment caused by the economic recession resulted in a $1.81 billion, or 16.3%, decrease in mainline and Express passenger revenues in 2009 on lower capacity as compared to 2008. Our decline in passenger revenues was lower than the U.S. industry average of 18% reported by ATA as relative to the other U.S. legacy or big five hub-and-spoke carriers, our larger domestic presence meant our revenues were less exposed to the more adverse effects of the economic recession experienced in international markets. Our international capacity represents approximately 22% of our total ASMs. The industry took more aggressive corrective capacity reductions domestically than it did internationally in 2009.

 

Our revenues also benefited from our new revenue initiatives which generated $424 million in ancillary revenues for 2009. Given our shorter length of haul and domestic focus, we believe these initiatives provided greater benefit to us than our competitors. Ancillary revenues include first and second checked bag service fees, processing fees for travel awards issued through our Dividend Miles frequent traveler program, our new Choice Seats program, and call center/airport ticketing fees. As a result of new ancillary revenues, while our mainline and Express PRASM was 10.88 cents in 2009, a 12.4% decline as compared to 12.42 cents in 2008, our total revenue per available seat mile (“RASM”) declined by a lower amount. RASM was 12.29 cents in 2009, as compared to 13.6 cents in 2008, representing only a 9.6% decline.

 

Fuel

 

The average mainline and Express price per gallon of fuel decreased 44.8% to $1.76 in 2009 from $3.18 in 2008. As a result, our mainline and Express fuel expense for 2009 was $2.28 billion, or 48%, lower than the 2008 period on 4.5% lower capacity. Since the third quarter of 2008, we have not entered into any new fuel hedging transactions and, as of December 31, 2009, we had no remaining outstanding fuel hedging contracts. Net losses associated with fuel hedging transactions were $7 million in 2009, a decline of $349 million from 2008. The year ended

December 31, 2009 included $382 million of net realized losses, offset by $375 million of net unrealized gains. The 2009 net unrealized gains represent the reversal of prior year unrealized losses related to the hedge transactions settling during the current year.

 

Capacity and Cost Control

 

We remain committed to maintaining our 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. In 2009, we continued our practice of minimizing and deferring discretionary expenditures whenever possible. We also controlled costs by continuing to run a good operation. See the “Customer Service” section below for a further discussion. Although there are significant ongoing fixed costs that do not vary with changes in capacity, we effectively managed our mainline operating cost per available seat mile (“CASM”). Excluding the effects of fuel and fuel hedging transactions as well as the $622 million non-cash charge recorded in 2008 to write off all of the goodwill created by the merger of US Airways Group and America West Holdings, our mainline CASM was relatively constant year over year. Mainline CASM decreased 3.6 cents, or 24.6%, to 11.06 cents in 2009 from 14.66 cents in 2008. Decreases in fuel and fuel hedging costs represented 2.71 cents, or 75.4%, of the CASM decrease, while the non-cash charge to write off goodwill represented 0.84 cents, or 23.3%, of the year-over-year decline.

 

To address the weak revenue environment in 2009, we continued to focus on matching capacity to demand and, as a result, our total RPMs decreased 4.2% on 4.5% lower capacity as compared to 2008. We achieved our 2009 capacity reductions through the sale of aircraft, return of aircraft to lessors and reductions in aircraft utilization. As a result of this reduced flying, we eliminated approximately 1,000 positions, including 400 flight attendants and 600 airport employees, thereby reducing salary expense in 2009 and going forward.

 

Customer Service

 

In 2009, we continued our commitment to running a successful airline. One of the important ways we do this is by taking care of our customers. We believe that our focus on excellent customer service in every aspect of our operations, including personnel, flight equipment, in-flight and ancillary amenities, on-time performance, flight completion ratios and baggage handling, will strengthen customer loyalty and attract new customers.

 

Our 2009 on-time performance rate was 80.9% and ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. Our mishandled baggage ratio for 2009 improved 36.5% as compared to 2008. Our 2009 mishandled baggage ratio of 3.03 also ranked second among the big five hub-and-spoke carriers as measured by the DOT Air Travel Consumer Report. The combination of continued strong on-time performance and fewer mishandled bags contributed to 34.8% fewer reported customer complaints to the DOT in 2009 as compared to 2008.

 

We reported the following combined operating statistics to the DOT for mainline operations for the years ended December 31, 2009, 2008 and 2007:

 

 

 

 

Liquidity Position

 

As of December 31, 2009, our cash, cash equivalents, investments in marketable securities and restricted cash were $1.98 billion, of which $480 million was restricted. Our investments in marketable securities included $203 million of auction rate securities that are classified as noncurrent assets on our consolidated balance sheets.

 

 

In addition to our capacity and cost control initiatives described above, we took further action in 2009 to strengthen and preserve our liquidity position. In the first nine months of 2009, we completed financing transactions generating $486 million. These transactions included net proceeds from public offerings of common stock and convertible notes of $66 million and $168 million, respectively, in May, and $137 million from an additional public offering of common stock in September. The remaining $115 million included proceeds from additional loans under a spare parts loan agreement, a loan secured by certain airport landing slots and an unsecured financing with one of our third-party Express carriers.

 

In November 2009, we completed a series of transactions with key business partners designed to improve our near-term and future liquidity. Our actions included the deferral of 54 Airbus aircraft previously scheduled for delivery between 2010 and 2012 that are now to be delivered in 2013 and beyond. These deferral arrangements will reduce our aircraft capital expenditures over the next three years by approximately $2.5 billion and reduce near- and medium-term obligations to Airbus and others by approximately $132 million. In addition to the aircraft deferral, we arranged credit facilities in the amount of $95 million and $180 million of aircraft financing commitments for the 2010 deliveries. Also, we agreed with Barclays Bank Delaware, our co-branded credit card provider, to permanently lower the monthly unrestricted cash condition precedent for the advance purchase of frequent flyer miles and defer for 14 months the amortization of $200 million advanced in connection with the previous purchase of miles. In the aggregate, these transactions improved year-end 2009 liquidity by approximately $150 million and will generate approximately $450 million of projected liquidity improvements by the end of 2010.

 

Strategic Initiatives

 

In 2009, we took the following actions which we believe will position us for success and help return us to profitability as the economy improves:

 

Delta Slot Transaction

 

In August 2009, US Airways Group and US Airways entered into a mutual asset purchase and sale agreement with Delta. Pursuant to the agreement, US Airways would transfer to Delta certain assets related to flight operations at LaGuardia Airport in New York, including 125 pairs of slots currently used to provide US Airways Express service at LaGuardia. Delta would transfer to US Airways certain assets related to flight operations at Washington National Airport, including 42 pairs of slots, and the authority to serve Sao Paulo, Brazil and Tokyo, Japan. One slot equals one take-off or landing, and each pair of slots equals one roundtrip flight. The agreement is structured as two simultaneous asset sales and is expected to be cash neutral to US Airways. The closing of the transactions under the agreement is subject to certain closing conditions, including approvals from a number of government agencies, including the U.S. Department of Justice, the DOT, the FAA and The Port Authority of New York and New Jersey. If approved, this transaction will significantly increase our capacity in the Washington, D.C. market and improve profitability.

 

On February 9, 2010, the DOT issued a proposed order conditionally approving the transaction. The proposed order, which is subject to a 30-day comment period, would require the airlines to divest 20 of the 125 slot pairs involved at LaGuardia and 14 of the 42 slot pairs at Washington National. Delta and we are currently reviewing the

DOT’s proposed order to determine next steps. However, we expect that if this order is implemented as proposed the transaction will not go forward.

 

Operational Realignment

 

In October 2009, we announced the realignment of our operations to focus on our core network strengths, which include our hubs in Charlotte, Philadelphia and Phoenix and our focus city at Washington National Airport. These four cities, as well as our popular hourly Shuttle service between LaGuardia, Boston and Washington National airports, will serve as the cornerstone of our network and by the end of 2010 are expected to represent 99% of our ASMs versus approximately 93% in 2009. Changes to facilitate this strategy include reducing daily departures from Las Vegas, closing stations in Colorado Springs and Wichita, redeploying our E190 fleet to routes between Boston and Philadelphia and the Boston-LaGuardia leg of the Shuttle, suspending five European destinations, returning our Philadelphia-Beijing route authority, rightsizing our crew bases at our hubs and focus city and closing crew bases in Boston, LaGuardia and Las Vegas. In connection with the realignment of our operations, we will reduce staffing by approximately 1,000 positions across our system during the first half of 2010. These reductions include approximately 600 airport passenger and ramp service positions, approximately 200 pilot positions and approximately 150 flight attendant positions. We believe that by concentrating on our strengths and eliminating unprofitable flying we will be better positioned to return US Airways to profitability.

 

2010 Outlook

 

As we begin 2010, it is difficult to predict the ongoing effects of the global economic recession. We have taken numerous actions to strengthen our current and future liquidity position. We have significantly reduced our required capital expenditures for 2010 through 2012 and eliminated our need to access aircraft finance markets in 2010. We believe that these actions coupled with our operational realignment have well positioned us as the economy recovers.

 

US Airways Group’s Results of Operations

 

In 2009, we realized operating income of $118 million and a loss before income taxes of $243 million. We experienced significant declines in revenues as a result of the global economic recession, which more than offset the benefits of reduced fuel costs during 2009. Our 2009 results were also impacted by recognition of the following items:

 

 

In 2008, we realized an operating loss of $1.8 billion and a loss before income taxes of $2.22 billion. The 2008 loss was driven by an average mainline and Express price per gallon of fuel of $3.18 as well as 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. Our 2008 results were also impacted by recognition of the following items:

 

 

In 2007, we realized operating income of $533 million and income before income taxes of $430 million. Our 2007 results were impacted by recognition of the following items:

 

 

We reported a loss in 2009, which increased our NOLs. As of December 31, 2009, we have approximately $2.13 billion of gross NOLs to reduce future federal taxable income. All of our NOLs are available to reduce federal taxable income in the calendar year 2010. The NOLs expire during the years 2022 through 2029.

 

Our net deferred tax assets, which include $2.06 billion of the NOLs, have been subject to a full valuation allowance. We also have approximately $90 million of tax-effected state NOLs at December 31, 2009. At December 31, 2009, the federal and state valuation allowance is $546 million and $77 million, respectively, all of which will reduce future tax expense when recognized.

 

For the year ended December 31, 2009, we recorded 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. In addition, we recorded a $14 million tax benefit related to a legislation change allowing us to carry back 100% of 2008 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.

 

For the year ended December 31, 2008, we reported a loss, which increased our NOLs, and we did not record a tax provision.

For the year ended December 31, 2007, we utilized NOLs to reduce our income tax obligation. Utilization of these NOLs resulted in a corresponding decrease in the valuation allowance. As this valuation allowance was established through the recognition of tax expense, the decrease in valuation allowance offsets the tax provision dollar for dollar. We recognized $7 million of non-cash state income tax expense for the year ended December 31, 2007, as we utilized NOLs that were generated by US Airways prior to the merger. As these were acquired NOLs, the accounting rules in place at that time required that the decrease in the valuation allowance associated with these NOLs reduce goodwill instead of the provision for income taxes.

 

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

 

 

 

2009 Compared With 2008

 

Operating Revenues:

 

 

Total operating revenues in 2009 were $10.46 billion as compared to $12.12 billion in 2008, a decline of $1.66 billion or 13.7%. Significant changes in the components of operating revenues are as follows:

 

 

 

Operating Expenses: