10-K 1 p75006e10vk.htm 10-K e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
(Mark One)    
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2007
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from to
US Airways Group, Inc.
(Exact name of registrant as specified in its charter)
(Commission File No. 1-8444)
 
     
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
  54-1194634
(IRS Employer
Identification No.)
 
111 West Rio Salado Parkway, Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(480) 693-0800
(Registrants telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $0.01 par value   New York Stock Exchange
 
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)
 
     
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
  54-0218143
(IRS Employer
Identification No.)
111 West Rio Salado Parkway, Tempe, Arizona 85281
(Address of principal executive offices, including zip code)
(480) 693-0800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the proxy statement related to US Airways Group, Inc.’s 2008 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, 2007, are incorporated by reference into Part III of this Annual Report on Form 10-K.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
 
                 
US Airways Group, Inc. 
    Yes þ       No o  
US Airways, Inc. 
    Yes o       No þ  
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
                 
US Airways Group, Inc. 
    Yes o       No þ  
US Airways, Inc. 
    Yes o       No þ  
 
Indicate by check mark whether each registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
                             
US Airways Group, Inc. 
  Large accelerated filer þ     Accelerated filer o       Non-accelerated filer o       Smaller reporting company o  
US Airways, Inc. 
  Large accelerated filer o     Accelerated filer o       Non-accelerated filer þ       Smaller reporting company o  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
                 
US Airways Group, Inc. 
    Yes o       No þ  
US Airways, Inc. 
    Yes o       No þ  
 
The aggregate market value of common stock held by non-affiliates of US Airways Group, Inc. as of June 30, 2007 was approximately $2.7 billion.
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
                 
US Airways Group, Inc. 
    Yes þ       No o  
US Airways, Inc. 
    Yes þ       No o  
 
As of February 15, 2008, there were 91,868,160 shares of US Airways Group, Inc. common stock outstanding.
 
As of February 15, 2008, US Airways, Inc. had 1,000 shares of common stock outstanding, all of which were held by US Airways Group, Inc.


 

 
US Airways Group, Inc.
 
US Airways, Inc.
 
Form 10-K
 
Year Ended December 31, 2007
 
Table of Contents
 
                 
        Page
 
      Business     5  
      Risk Factors     16  
      Unresolved Staff Comments     24  
      Properties     24  
      Legal Proceedings     28  
      Submission of Matters to a Vote of Security Holders     28  
 
PART II
      Market for US Airways Group’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     29  
      Selected Financial Data     30  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     34  
      Quantitative and Qualitative Disclosures About Market Risk     65  
      Consolidated Financial Statements and Supplementary Data of US Airways Group, Inc.      67  
      Consolidated Financial Statements and Supplementary Data of US Airways, Inc.      127  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     180  
      Controls and Procedures     180  
      Other Information     180  
 
PART III
      Directors, Executive Officers and Corporate Governance     180  
      Executive Compensation     181  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     181  
      Certain Relationships and Related Transactions and Director Independence     181  
      Principal Accountant Fees and Services     181  
 
PART IV
      Exhibits and Financial Statement Schedules     182  
      SIGNATURES
 EX-10.3
 EX-10.4
 EX-10.5
 EX-10.18
 EX-10.19
 EX-10.45
 EX-10.46
 EX-10.47
 EX-10.96
 EX-10.106
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-31.3
 EX-31.4
 EX-32.1
 EX-32.2


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This combined Annual Report on Form 10-K is filed by US Airways Group, Inc. (“US Airways Group”) and its wholly owned subsidiary US Airways, Inc. (“US Airways”). References in this Form 10-K to “we,” “us,” “our” and the “Company” refer to US Airways Group and its consolidated subsidiaries.
 
Note Concerning Forward-Looking Statements
 
Certain of the statements contained in this report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” and “continue” and similar terms used in connection with statements regarding our outlook, expected fuel costs, the revenue environment, and our expected financial performance. These statements include, but are not limited to, statements about the benefits of the business combination transaction involving America West Holdings Corporation (“America West Holdings”) and US Airways Group, including future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts. These statements are based upon the current beliefs and expectations of management and are subject to significant risks and uncertainties that could cause our actual results and financial position to differ materially from these statements. These risks and uncertainties include, but are not limited to, those described below under Item 1A. “Risk Factors” and the following:
 
  •  the impact of high fuel costs, significant disruptions in the supply of aircraft fuel and further significant increases to fuel prices;
 
  •  our ability to integrate the management, operations and labor groups of US Airways Group and America West Holdings;
 
  •  labor costs and relations with unionized employees generally and the impact and outcome of labor negotiations;
 
  •  the impact of global instability, including the current instability in the Middle East, the continuing impact of the military presence in Iraq and Afghanistan, the terrorist attacks of September 11, 2001 and the potential impact of future hostilities, terrorist attacks, infectious disease outbreaks or other global events that affect travel behavior;
 
  •  reliance on automated systems and the impact of any failure or disruption of these systems;
 
  •  the impact of future significant operating losses;
 
  •  changes in prevailing interest rates;
 
  •  our high level of fixed obligations and our ability to obtain and maintain financing for operations and other purposes;
 
  •  our ability to obtain and maintain commercially reasonable terms with vendors and service providers and our reliance on those vendors and service providers;
 
  •  security-related and insurance costs;
 
  •  changes in government legislation and regulation;
 
  •  competitive practices in the industry, including significant fare restructuring activities, capacity reductions and in court or out of court restructuring by major airlines;
 
  •  interruptions or disruptions in service at one or more of our hub airports;
 
  •  weather conditions;
 
  •  our ability to use pre-merger NOLs and certain other tax attributes;
 
  •  our ability to maintain adequate liquidity;
 
  •  our ability to maintain contracts that are critical to our operations;


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  •  our ability to operate pursuant to the terms of our financing facilities (particularly the financial covenants);
 
  •  our ability to attract and retain customers;
 
  •  the cyclical nature of the airline industry;
 
  •  our ability to attract and retain qualified personnel;
 
  •  economic conditions; and
 
  •  other risks and uncertainties listed from time to time in our reports to the Securities and Exchange Commission.
 
All of the forward-looking statements are qualified in their entirety by reference to the factors discussed below under Item 1A. “Risk Factors.” There may be other factors not identified above, or in Item 1A, of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these estimates other than as required by law. Any forward-looking statements speak only as of the date of this Form 10-K.


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PART I
 
Item 1.   Business
 
Overview
 
US Airways Group, a Delaware corporation, is a holding company formed in 1982 and whose origins trace back to the formation of All American Aviation in 1939. US Airways Group’s principal executive offices are located at 111 West Rio Salado Parkway, Tempe, Arizona 85281. US Airways Group’s telephone number is (480) 693-0800, and its internet address is www.usairways.com. US Airways Group is a holding company whose primary business activity is the operation of a major network air carrier through its wholly owned subsidiaries US Airways, Piedmont Airlines, Inc. (“Piedmont”), PSA Airlines, Inc. (“PSA”), Material Services Company, Inc. (“MSC”), and Airways Assurance Limited. On September 12, 2004, US Airways Group and its domestic subsidiaries, US Airways, Piedmont, PSA and MSC (collectively, the “Debtors”), which at the time accounted for substantially all of the operations of US Airways Group, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (the “Bankruptcy Court”). On May 19, 2005, US Airways Group signed a merger agreement with America West Holdings Corporation (“America West Holdings”) pursuant to which America West Holdings merged with a wholly owned subsidiary of US Airways Group. The merger agreement was amended by a letter of agreement on July 7, 2005. The merger became effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005.
 
As a result of the merger, we operate the fifth largest airline in the United States as measured by domestic revenue passenger miles (“RPMs”) and available seat miles (“ASMs”). For the years ended December 31, 2007, 2006 and 2005, passenger revenues accounted for approximately 93%, 93% and 92%, respectively, of our operating revenues. Cargo revenues and other sources accounted for 7%, 7% and 8% of our operating revenues in 2007, 2006 and 2005, respectively. We have primary hubs in Charlotte, Philadelphia and Phoenix and secondary hubs/focus cities in Las Vegas, New York, Washington, D.C. and Boston. We are a low-cost carrier offering scheduled passenger service on approximately 3,800 flights daily to 230 communities in the continental United States, Hawaii, Alaska, Canada, the Caribbean, Latin America and Europe, making us the only U.S. based low-cost carrier with a significant international route presence. We are also the only low-cost carrier with an established East Coast route network, including the US Airways Shuttle service, with substantial presence at capacity constrained airports including New York’s LaGuardia Airport and the Washington, D.C. area’s Ronald Reagan Washington National Airport. We had approximately 58 million passengers boarding our mainline flights in 2007. During 2007, we provided regularly scheduled service or seasonal service at 137 airports. During 2007, the US Airways Express network served 201 airports in the United States, Canada, the Caribbean and Latin America, including approximately 82 airports also served by our mainline operation. During 2007, US Airways Express air carriers had approximately 27 million passengers boarding their planes. As of December 31, 2007, we operated 356 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express, which operate approximately 232 regional jets and 104 turboprops.
 
On September 26, 2007, as part of the integration efforts following the merger of US Airways Group and America West Holdings, America West Airlines, Inc. (“AWA”) surrendered its Federal Aviation Administration (“FAA”) operating certificate. As a result, all mainline airline operations are now being conducted under US Airways’ FAA operating certificate. In connection with the combination of all mainline airline operations under one FAA operating certificate, US Airways Group contributed 100% of its equity interest in America West Holdings, the parent company of AWA, to US Airways. As a result, America West Holdings and AWA are now wholly owned subsidiaries of US Airways. In addition, AWA transferred substantially all of its assets and liabilities to US Airways. All off-balance sheet commitments of AWA were also transferred to US Airways. Pilots, flight attendants, and ground and maintenance employees continue to work under the terms of their respective collective bargaining agreements, including, in some cases, transition agreements reached in connection with the merger.
 
Our results are seasonal. Operating results are typically highest in the second and third quarters due to greater demand for air and leisure travel during the summer months and US Airways’ combination of business traffic and North-South leisure traffic in the eastern and western United States during those periods. For information regarding


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operating revenue in US Airways Group’s and US Airways’ principal geographic areas, see Notes 15 and 12 to their respective financial statements included in Items 8A and 8B of this Form 10-K.
 
Material Services Company and Airways Assurance Limited operate in support of our airline subsidiaries in areas such as the procurement of aviation fuel and insurance.
 
Available Information
 
You may read and copy any materials US Airways Group or US Airways files with the Securities and Exchange Commission (“SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. A copy of this Annual Report on Form 10-K, as well as other Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are accessible free of charge at www.usairways.com and at the SEC’s website at www.sec.gov as soon as reasonably possible after the report is filed with or furnished to the SEC.
 
Airline Industry
 
A number of structural changes in the industry have taken shape over the past three years, including restructuring through the Chapter 11 process by four legacy carriers, including US Airways. While domestic capacity continues to rationalize through fleet reductions and the redeployment of aircraft to international markets, whether demand can remain at historically high levels in the face of rising fares is unclear.
 
Despite rising fuel costs throughout the year, the airline industry reported an annual profit in 2007, excluding special items and bankruptcy-related costs. While fares have increased over the prior year absorbing some of the fuel cost increase, they still remain at historically low levels on an inflation-adjusted basis.
 
As we begin 2008, the airline industry appears to be headed for another challenging period due to extremely high oil prices and a potential economic slowdown. Current fuel prices remain high by historical standards and significant increases in fuel price can materially and adversely affect operating costs within the industry. A softening economy also makes realizing increases in yield within the industry difficult.
 
Airline Operations
 
We operate a hub-and-spoke network with major hubs in Charlotte, Philadelphia and Phoenix and secondary hubs/focus cities in Las Vegas, New York, Washington, D.C. and Boston.
 
In 2007, we were able to increase service in certain markets. We added new transatlantic service from Philadelphia to Athens, Greece; Brussels, Belgium; and Zurich, Switzerland. Beginning in March 2008, we will start new service to London’s Heathrow Airport from Philadelphia. Finally, in 2007, we received approval for the right to fly to Beijing, China from our Philadelphia hub.
 
We continued to enhance our fleet in 2007. We took delivery of nine Embraer 190 aircraft during 2007 and expect to take delivery of the remaining 14 Embraer 190 aircraft in 2008 under our Amended and Restated Purchase Agreement with Embraer. We announced an agreement with Airbus S.A.S for the firm order of 60 A320 family aircraft, in addition to the 37 aircraft from the previous A319/A320 Purchase Agreement, which we plan to use to replace older Boeing 737 aircraft in the airline’s fleet. In addition, as part of that same order, we announced plans to add 32 widebody aircraft, which includes ten Airbus A330-200 aircraft and 22 Airbus A350 Xtra Wide Body (“XWB”) aircraft. We expect to use these aircraft for both replacements of older widebody aircraft in the fleet and to facilitate international growth. We are scheduled to begin taking delivery of the A320 family and A330 family of aircraft beginning in 2009 and the A350-XWB family of aircraft in 2014. Finally, we subsequently modified our agreement with Airbus to add five additional A330-200 aircraft to our existing order, and also agreed to terms with an aircraft lessor to lease two more A330-200 aircraft, bringing the total number of widebody aircraft we are set to take delivery of to 39.


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Express Operations
 
Certain air carriers have code share arrangements with US Airways 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. US Airways relies heavily on feeder traffic from its US Airways Express partners, which carry passengers to US Airways’ hubs from low-density markets that are uneconomical for US Airways to serve with large jets. In addition, US Airways Express operators offer complementary service in existing US Airways mainline markets by operating flights during off-peak periods between US Airways mainline flights. During 2007, the US Airways Express network served 201 airports in the continental United States, Canada, the Caribbean and Latin America, including 82 airports also served by US Airways. During 2007, approximately 27 million passengers boarded US Airways Express air carriers’ planes, approximately 40% of whom connected to US Airways’ flights. Of these 27 million passengers, approximately 8 million were enplaned by our wholly owned regional airlines Piedmont and PSA, approximately 18 million were enplaned by third-party carriers operating under capacity purchase agreements and approximately 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 Airways. In return, US Airways agrees to pay predetermined fees to these airlines for operating an agreed-upon number of aircraft, without regard to the number of passengers on board. In addition, these agreements provide that certain variable costs, such as airport landing fees, will be reimbursed 100% by US Airways. US Airways controls marketing, scheduling, ticketing, pricing and seat inventories. Under the prorate agreements, the prorate carriers pay certain service fees to US Airways and receive a prorated share of ticket revenue paid for connecting customers. US Airways is responsible for the pricing and marketing of connecting services to and from the prorate carrier. The prorate carrier is responsible for pricing and marketing the local, point to point markets, and is responsible for all costs incurred operating the aircraft. All US Airways Express carriers use US Airways’ reservation systems and have logos, service marks, aircraft paint schemes and uniforms similar to those of US Airways.
 
The following table sets forth US Airways Express code share agreements and the number and type of aircraft operated under those agreements at December 31, 2007.
 
         
        Number/Type
Carrier
 
Agreement Type
 
of Aircraft
 
PSA(1)
  Capacity Purchase   49 regional jets
Piedmont(1)
  Capacity Purchase   55 turboprops
Air Wisconsin Airlines Corporation
  Capacity Purchase   70 regional jets
Mesa Airlines
  Capacity Purchase   51 regional jets and 6 turboprops
Chautauqua Airlines, Inc. 
  Capacity Purchase   9 regional jets
Republic Airways(2)
  Capacity Purchase   46 regional jets
Colgan Airlines, Inc. 
  Prorate   29 turboprops
Air Midwest, Inc. 
  Prorate   14 turboprops
Trans States Airlines, Inc. 
  Prorate   7 regional jets
 
 
(1) PSA and Piedmont are wholly owned subsidiaries of US Airways Group.
 
(2) We are committed to purchasing capacity from Republic Airways on an additional 11 regional jets in 2008.
 
Marketing and Alliance Agreements with Other Airlines
 
US Airways maintains alliance agreements with several leading domestic and international carriers to give customers a greater choice of destinations. Airline alliance agreements provide an array of benefits that vary by partner. By code sharing, each airline is able to offer additional destinations to its customers under its flight designator code without materially increasing operating expenses and capital expenditures. Frequent flyer


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arrangements provide members with extended networks for earning and redeeming miles on partner carriers. Our US Airways Club members also have access to certain partner carriers’ airport lounges. We also benefit from the distribution strengths of each of the partner carriers.
 
In May 2004, US Airways joined the Star Alliance, the world’s largest airline alliance, with 19 member airlines serving approximately 897 destinations in 160 countries. Two additional international carriers based in Egypt and Turkey, respectively, are scheduled to join in 2008. Membership in the Star Alliance further enhances the value of US Airways’ domestic and international route network by allowing customers wide access to the global marketplace. Expanded benefits for customers include network expansion through code share service, frequent flyer program benefits, airport lounge access, convenient single-ticket pricing, one-stop check-in and coordinated baggage handling. US Airways also has bilateral marketing/code sharing agreements with Star Alliance members Lufthansa, Spanair, bmi, TAP Portugal, Asiana, Air New Zealand, and Singapore Airlines. Other international code sharing partners include Italy’s Air One, Royal Jordanian Airlines, EVA Airways and Virgin Atlantic Airways. Marketing/code sharing agreements are maintained with two smaller regional carriers in the Caribbean that operate collectively as the “GoCaribbean” network. Each of these code share agreements funnel international traffic onto US Airways’ domestic flights or support specific markets operated by US Airways in Europe and the Caribbean. Domestically, US Airways code shares with Hawaiian Airlines on intra-Hawaii flights.
 
In addition, US Airways has comprehensive marketing and code sharing agreements with United Airlines, a member of the Star Alliance, which began in July 2002. United, as well as its parent company, UAL Corporation, and certain of its affiliates, filed for protection under Chapter 11 of the Bankruptcy Code on December 9, 2002 and emerged on February 1, 2006. United assumed these marketing agreements in its bankruptcy proceedings. In February 2008, US Airways and United reached final agreement on amendments to the contracts governing their relationship, and approval of these agreements by the Bankruptcy Court is expected by the end of February.
 
Competition in the Airline Industry
 
Most of the markets in which we operate are highly competitive. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, target promotions and frequent flyer initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slack travel periods to generate cash flow and to maximize revenue per ASM. Discount and promotional fares are generally non-refundable and may be subject to various restrictions such as minimum stay requirements, advance ticketing, limited seating and change fees. We have often elected to match discount or promotional fares initiated by other air carriers in certain markets in order to compete in those markets. Most airlines will quickly match price reductions in a particular market. Our ability to compete on the basis of price is limited by our fixed costs and depends on our ability to maintain our operating costs.
 
We also compete on the basis of scheduling (frequency and flight times), availability of nonstop flights, on-time performance, type of equipment, cabin configuration, amenities provided to passengers, frequent flyer programs, the automation of travel agent reservation systems, on-board products, markets served and other services. We compete with both major full service airlines and low-cost airlines throughout our network of hubs and focus cities.
 
We believe the growth of low-fare low-cost competition will continue. Recent years have seen the entrance and growth of low-fare low-cost competitors in many of the markets in which we operate. These competitors include Southwest Airlines Co., AirTran Airways, Inc., Frontier Airlines, Inc. and JetBlue Airways. Some of these low cost carriers have lower operating cost structures than we have.
 
In addition, because we operate a significant number of flights in the eastern United States, our average trip distance, or stage length, is shorter than those of other major airlines. This makes us more susceptible than other major airlines to competition from surface transportation such as automobiles and trains.
 
Industry Regulation and Airport Access
 
Our airline subsidiaries operate under certificates of public convenience and necessity or certificates of commuter authority, both of which are issued by the Department of Transportation (the “DOT”). These certificates


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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. As of September 26, 2007, US Airways and AWA are operating under a single certificate of public convenience and necessity in the name of US Airways.
 
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.
 
The DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate or foreign commerce or the national transportation system. Certain locales, including Boston, Washington, D.C., Chicago, San Diego and San Francisco, among others, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of these operations. In some instances these restrictions have caused curtailments in services or increases in operating costs, and these restrictions could limit the ability of our airline subsidiaries to expand their operations at the affected airports. Authorities at other airports may consider adopting similar noise regulations.
 
The airline industry is also subject to increasingly stringent federal, state and local laws aimed at protecting the environment. Future regulatory developments and actions could affect operations and increase operating costs for the airline industry, including our airline subsidiaries.
 
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 operating expenses of the Company, they represent an additional cost to our customers. There are a number of efforts in Congress to raise different portions of the various taxes imposed on airlines and their passengers.
 
The Aviation and Transportation Security Act (the “Aviation Security Act”) was enacted in November 2001. Under the Aviation Security Act, substantially all aspects of civil aviation security screening were federalized, and a new Transportation Security Administration (the “TSA”) under the DOT was created. 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 passenger data to U.S. Customs and Border Protection.
 
Funding for TSA is provided by a combination of air-carrier fees, passenger fees and taxpayer monies. The air-carrier fee, or Aviation Security Infrastructure Fee (“ASIF”), has an annual cap equivalent to the amount that an individual air carrier paid in calendar year 2000 for the screening of passengers and property. TSA may lift this cap at any time and set a new higher fee for air carriers. In 2005, TSA assessed additional ASIF liability on 43 air carriers, including US Airways, Piedmont, PSA and non-owned affiliates for whom US Airways pay ASIF. The passenger fee, which is collected by air carriers from their passengers, is currently set at $2.50 per flight segment but not more than $10.00 per round trip.
 
In 2007, we incurred expenses of $52 million for the ASIF, including amounts paid by US Airways Group’s wholly owned regional subsidiaries and amounts attributable to regional carriers. Implementation of the


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requirements of the Aviation Security Act have resulted and will continue to result in increased costs for us and our passengers and has and will likely continue to result in service disruptions and delays. As a result of competitive pressure, US Airways and other airlines may be unable to recover all of these additional security costs from passengers through increased fares. In addition, we cannot forecast what new security and safety requirements may be imposed in the future or the costs or financial impact of complying with any such requirements.
 
Most major U.S. airports impose passenger facility charges. The ability of airlines to contest increases in these charges 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 passenger facility charges is $4.50; however, there is legislation in Congress to raise the cap on passenger facility charges to $7.00 per passenger.
 
At John F. Kennedy International Airport, LaGuardia, Newark Liberty International and Reagan National, which are designated “High Density Airports” by the FAA, there are restrictions that limit the number of departure and arrival slots available to air carriers during peak hours. In April 2000, legislation was enacted that eliminated slot restrictions in January 2007 at LaGuardia and Kennedy. On December 20, 2006, the FAA implemented an interim rule to maintain the number of hourly operations at LaGuardia until a final rule is adopted. The FAA proposed a comprehensive final rule for LaGuardia in August 2006. The proposed rule would require a minimum number of seats on certain operations to/from LaGuardia. Failure to comply with the minimum seat requirement would lead to the withdrawal of operating authority until compliance is achieved. The proposed rule also introduces a finite lifespan for “operating authorizations” of no more than ten years. The FAA intends to seek Congressional approval for the introduction of market based mechanisms for allocating expiring operating authorizations. We filed extensive comments with the FAA in December 2006 detailing the numerous concerns we have with the proposed rule. Other than making some technical corrections to the current operating restrictions at LaGuardia, no other action concerning the level of operations at LaGuardia was taken by the federal government in 2007. The DOT and FAA convened an Aviation Rulemaking Committee (“ARC”) to address congestion and delays in the New York region. While the short-term changes associated with the ARC relate to technical improvements to increase air space efficiency, we anticipate that the DOT will issue a proposed rulemaking addressing other issues discussed in the ARC, including technical operations issues and competition issues.
 
In addition, the government intends to cap operations at both Kennedy and Newark starting later in the first quarter of 2008. Thus, airlines will not be able to add flights at LaGuardia, Kennedy or Newark without acquiring operating rights from another carrier. In the future, takeoff and landing time restrictions and other restrictions on the use of various airports and their facilities may result in further curtailment of services by, and increased operating costs for, individual airlines, including our airline subsidiaries, particularly in light of the increase in the number of airlines operating at these airports.
 
The availability of international routes to domestic air carriers is regulated by agreements between the U.S. and foreign governments. Changes in U.S. or foreign government aviation policy could result in the alteration or termination of these agreements and affect our international operations. We could 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 Open Skies Agreement, which takes effect in March 2008. The Open Skies Agreement removes bilateral restrictions on the number of flights between the U.S. and EU.
 
The DOT has proposed several new initiatives concerning airline obligations toward passengers. These regulations involve increases in the denied boarding compensation that airlines must pay for passengers involuntarily denied travel. In addition, new regulations addressing how airlines handle irregular operations also are under consideration.
 
The industry also faces increased state government activity such as the recently implemented New York State Passenger Bill of Rights law that requires airlines to provide certain services to passengers on flights within the state that undergo extended on-board ground delays. Several other states have indicated a desire to move ahead with similar legislation.


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Employees and Labor Relations
 
Our businesses are labor intensive. In 2007, wages, salaries and benefits represented approximately 23% of our operating expenses. As of December 31, 2007, we employed approximately 39,600 active full-time equivalent employees. Of this amount, US Airways employed approximately 34,400 active full-time equivalent employees including approximately 4,200 pilots, 7,300 flight attendants, 7,100 passenger service personnel, 7,500 fleet service personnel, 2,900 maintenance personnel and 5,400 personnel in administrative and various other job categories. US Airways Group’s remaining subsidiaries employed approximately 5,200 active full-time equivalent employees including approximately 900 pilots, 500 flight attendants, 2,400 passenger service personnel, 400 maintenance personnel and 1,000 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, 2007, approximately 85% of our active employees were represented by various labor unions.
 
Since the merger, we have been in the process of integrating the labor agreements of US Airways and AWA. Listed below are the integrated labor agreements and the status of the US Airways and AWA labor agreements that remain separate with their major domestic employee groups.
 
                     
              Contract
 
Union
 
Class or Craft
  Employees(1)     Amendable  
 
Integrated labor agreements:
                   
Airline Customer Service Employee Association — IBT and CWA (the “Association”)
  Passenger Service     7,100       12/31/2011  
Transport Workers Union (“TWU”)
  Dispatch     200       12/31/2009  
TWU
  Flight Simulator Engineers     30       12/31/2011  
TWU
  Flight Crew Training Instructors     80       12/31/2011  
US Airways:
                   
Air Line Pilots Association (“ALPA”)
  Pilots     2,700       12/31/2009 (2)
Association of Flight Attendants-CWA (“AFA”)
  Flight Attendants     4,900       12/31/2011 (3)
International Association of Machinists & Aerospace Workers (“IAM”)
  Mechanic and Related     2,100       12/31/2009 (4)
IAM
  Fleet Service     4,500       12/31/2009 (5)
IAM
  Maintenance Training Specialists     30       12/31/2009  
AWA:
                   
ALPA
  Pilots     1,500       12/30/2006 (2)
AFA
  Flight Attendants     2,400       05/04/2004 (3)
IAM
  Mechanic and Related     800       10/07/2003 (4)
IAM
  Fleet Service     3,000       06/12/2005 (5)
IAM
  Stock Clerks     60       04/04/2008 (4)
 
 
(1) Approximate number of active full-time equivalent employees covered by the contract as of December 31, 2007.
 
(2) Pilots continue to work under the terms of their separate US Airways and AWA collective bargaining agreements.
 
(3) In negotiations for a single labor agreement applicable to both US Airways and AWA. On December 15, 2005, the National Mediation Board recessed AFA’s separate contract negotiations with AWA indefinitely.
 
(4) Mechanics and stock clerks continue to work under the terms of their separate US Airways and AWA collective bargaining agreements.
 
(5) Fleet service agents continue to work under the terms of their separate US Airways and AWA collective bargaining agreements.


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On November 14, 2007, the National Mediation Board notified the Company that an application for representation of the pilots of US Airways had been filed by the US Airline Pilots Association (“USAPA”). An investigation by the Board is now underway to determine whether USAPA, ALPA or neither union should be the certified representative of the pilots. We cannot predict the outcome of the investigation by the National Mediation Board or the effect, if any, on US Airways’ operational or financial performance.
 
There are few remaining unrepresented employee groups that could engage in organization efforts. We cannot predict the outcome of any future efforts to organize those remaining employees or the terms of any future labor agreements or the effect, if any, on US Airways’ operations or financial performance. For more discussion, see Item 1A. “Risk Factors, Risk Factors Relating to the Company and Industry Related Risks — Union disputes, employee strikes and other labor-related disruptions may adversely affect our operations.
 
Aviation Fuel
 
In 2007 and 2006, aviation fuel was our largest expense. The average cost of a gallon of aviation fuel for our mainline operations increased 6% from 2006 to 2007 after increasing 8% from 2005 to 2006. Because the operations of our airline are dependent upon aviation fuel, increases in aviation fuel costs could materially and adversely affect liquidity, results of operations and financial condition.
 
We maintain an active fuel hedging program. As part of our fuel hedging program, we have periodically entered into certain fixed price swaps, collar structures and other similar derivative contracts. As of December 31, 2007, we had entered into hedging transactions using costless collars, which establish an upper and lower limit on heating oil futures prices. These transactions are in place with respect to approximately 22% of our 2008 fuel consumption requirements. During 2007, 2006 and 2005, we recognized a net gain of $245 million, a net loss of $79 million and a net gain of $75 million, respectively, related to hedging activities.
 
The following table shows annual aircraft fuel consumption and costs for mainline for 2005 through 2007 (gallons and aircraft fuel expense in millions):
 
                                 
          Average Price
    Aircraft Fuel
    Percentage of Total
 
Year
  Gallons     per Gallon(1)     Expense(1)     Operating Expenses  
 
2007
    1,195     $ 2.20     $ 2,630       30.7 %
2006
    1,210       2.08       2,518       29.8 %
2005(2)
    628       1.93       1,214       28.8 %
 
 
(1) Includes fuel taxes and excludes the impact of fuel hedges. The impact of fuel hedges is described in Item 7 under “US Airways Group’s Results of Operations.”
 
(2) The 2005 data includes AWA for the 269 days through September 27, 2005, the effective date of the merger, and consolidated data for AWA and US Airways for the 96 days from September 27, 2005 to December 31, 2005.
 
In addition, we incur fuel expense related to our US Airways Express operations. For the years ended December 31, 2007, 2006 and 2005, total fuel expense for US Airways’ former MidAtlantic division, US Airways Group’s wholly owned regional airlines and affiliate regional airlines operating as US Airways Express was $765 million, $764 million, and $327 million, respectively.
 
Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of our control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices may be affected by many factors, including:
 
  •  the impact of global political instability on crude production;
 
  •  unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries, as evidenced in the third quarter of 2005 when Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations and pipeline capacity along certain portions of the U.S. Gulf Coast. As a result of these disruptions, the price of jet fuel increased significantly and the availability of jet fuel supplies was diminished;
 
  •  unpredictable increases to oil demand due to weather or the pace of economic growth;


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  •  inventory levels of crude, refined products and natural gas; and
 
  •  other factors, such as the relative fluctuation in value between the U.S. dollar and other major currencies and the influence of speculative positions on the futures exchanges.
 
Insurance
 
US Airways Group and its subsidiaries maintain insurance of the types and in amounts deemed adequate to protect themselves and their property. Principal coverage includes:
 
  •  liability for injury to members of the public, including passengers;
 
  •  damage to property of US Airways Group, its subsidiaries and others;
 
  •  loss of or damage to flight equipment, whether on the ground or in flight;
 
  •  fire and extended coverage;
 
  •  directors’ and officers’ liability;
 
  •  travel agents’ errors and omissions;
 
  •  advertiser and media liability;
 
  •  fiduciary; and
 
  •  workers’ compensation and employer’s liability.
 
Since September 11, 2001, US Airways Group and other airlines have been unable to obtain coverage for liability to persons other than employees and passengers for claims resulting from acts of terrorism, war or similar events, which coverage is called war risk coverage, at reasonable rates from the commercial insurance market. US Airways, therefore, purchased its war risk coverage through a special program administered by the FAA, as have most other U.S. airlines. The Emergency Wartime Supplemental Appropriations Act extended this insurance protection until August 2005. The program was subsequently extended, with the same conditions and premiums, until March 31, 2008. Under the Vision 100 — Century of Aviation Reauthorization Act, the President may continue the insurance program until December 31, 2008. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk coverage, and because of competitive pressures in the industry, our ability to pass this additional cost to passengers may be limited.
 
Customer Service
 
We are committed to building a successful combined airline by taking care of our customers. We believe that our focus on excellent customer service in every aspect of our operations, including personnel, flight equipment, inflight and ancillary amenities, on-time performance, flight completion ratios and baggage handling, will strengthen customer loyalty and attract new customers.
 
We reported the following combined operating statistics to the DOT for mainline operations for the years ended December 31, 2007, 2006 and 2005:
 
                         
    Full Year  
    2007     2006     2005  
 
On-time performance(a)
    68.7       76.9       77.8  
Completion factor(b)
    98.2       98.9       98.2  
Mishandled baggage(c)
    8.47       7.88       7.68  
Customer complaints(d)
    3.16       1.36       1.55  
 
 
(a) Percentage of reported flight operations arriving on time as defined by the DOT.
 
(b) Percentage of scheduled flight operations completed.
 
(c) Rate of mishandled baggage reports per 1,000 passengers.


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(d) Rate of customer complaints filed with the DOT per 100,000 passengers.
 
We faced major operational challenges during the first half of 2007 resulting from adverse weather conditions in the northeast, heavy air traffic congestion in many of our hubs and difficulties associated with the migration to a single reservation system in early March 2007. All of these factors contributed to a difficult operating environment. During 2007, we implemented several initiatives to improve operational performance as follows:
 
  •  We hired approximately 1,000 new employees system-wide to boost airport customer service.
 
  •  Starting with the June 1, 2007 schedule, we lengthened the operating day at our hubs, lowered utilization, and increased the number of designated spare aircraft in order to ensure operational reliability.
 
  •  We established Passenger Operations Control (POC) centers at our Philadelphia and Charlotte hubs and at Reagan National airport. These POC centers monitor all inbound flight activity and identify customers who are on flights that for whatever reason (weather, air traffic congestion, etc.) might miss their connecting flights. The POC center professionals interact closely with the airline’s System Support Center to rebook passengers who may misconnect even before the inbound flight lands.
 
  •  We announced in the third quarter of 2007 the appointment of Robert Isom as the new Chief Operating Officer to head up the airline’s operations including flight operations, inflight services, maintenance and engineering, airport customer service, reservations, and cargo. Mr. Isom has over ten years of airline experience at Northwest Airlines, Inc. and AWA.
 
The implementation of our initiatives resulted in an improved trend in operational performance since the second quarter of 2007. In the fourth quarter of 2007, our on-time performance improved to 76.9% as compared to 64.3% in the second quarter of 2007. In the month of December 2007, our on-time performance was ranked first amongst the ten largest U.S. airlines. Our rate of customer complaints filed with the DOT per 100,000 passengers improved, decreasing to 2.27 in the fourth quarter of 2007 from 3.64 in the second quarter of 2007. Our rate of mishandled baggage reports per 1,000 passengers was 7.28 in the fourth quarter of 2007, an improvement from 8.57 in the second quarter of 2007.
 
Frequent Traveler Program
 
All major United States airlines offer frequent flyer programs to encourage travel on their respective airlines and customer loyalty. US Airways’ 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 on first class or Envoy class tickets 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 free, discounted or upgraded travel awards on US Airways, Star Alliance carriers or other participating airlines.
 
US Airways and the other participating airline partners limit the number of seats allocated per flight for award recipients by using various inventory management techniques. Award travel for all but the highest-level Dividend Miles participants is generally not permitted on blackout dates, which correspond to certain holiday periods or peak travel dates. US Airways reserves 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. On January 31, 2007, we changed our program regarding active membership status to require members to have either earned or redeemed miles within a consecutive 18 month period to maintain active membership status. Prior to the change in the program, members were granted a 36 month period to maintain active status.
 
Ticket Distribution
 
The now common usage of electronic tickets within North America, and the rapid expansion of electronic ticketing in Europe and elsewhere, have allowed for the streamlining of processes and the increased efficiency of customer servicing and support. During 2007, electronic tickets represented 99% of all tickets issued to customers


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flying US Airways. The addition of a $50 surcharge to most customers requiring paper tickets has allowed US Airways to continue to support exceptional requests, while offsetting any cost variance associated with the issuance and postal fulfillment of paper tickets. Airlines based in North America have recently proposed a mandate that airlines move to 100% electronic ticketing over the next couple of years, which we believe would, if enacted, serve to enhance customer service and control costs for ticketing services supported by the airline and distribution partners.
 
The shift of consumer bookings that began several years ago from traditional travel agents, airline ticket offices and reservation centers to online travel agent sites (e.g., Orbitz, Travelocity, Expedia and others) as well as airline direct websites (e.g., www.usairways.com) has continued to occur within the industry. Historically, traditional and online travel agencies used 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. The growth of the airline direct websites and travel agent sites that connect directly to airline host systems, effectively by-passing the traditional connection via GDSs, helps US Airways reduce distribution costs. In 2007, we received 55% of our sales from internet sites. Our website, www.usairways.com, accounted for 26% of our sales, while other internet sites accounted for 29% of our sales.
 
Due to the continued pressure on legacy airlines to lower distribution fees more aggressively than in the past in order to compete with low-cost airlines, many new companies have entered the distribution industry, such as ITA Software, G2 Switchworks, Navitaire and others, which provide low-cost GDSs. These new entrants are providing airlines with alternative economic models to do business with traditional travel agents by charging substantially lower GDS fees.
 
In an effort to further reduce distribution costs through internal channels, US Airways has instituted service fees for customer interaction in the following internal distribution channels: reservation call centers ($10.00 per ticket), airline ticket offices ($20.00 per ticket) and city ticket offices ($20.00 per ticket). Other services provided through these channels remain available with no extra fees. The goals of these service fees are to reduce the cost to us of providing customer service as required by the traveler and to promote the continued goal of shifting customers to our lowest cost distribution channel, www.usairways.com. Other airlines have instituted similar fee structures. Internal channels of distribution account for 37% of our sales.
 
US Airways Vacations
 
Through US Airways Vacations (“USV”), we sell individual and group travel packages including air transportation on US Airways, US Airways Express, and all US Airways codeshare partners, hotel accommodations, car rentals and other travel products. USV packages are marketed directly to consumers and through retail travel agencies in several countries and include travel to destinations throughout the U.S., Latin America, the Caribbean and Europe.
 
USV is focused on high-volume leisure travel products that have traditionally provided high profit margins. USV has negotiated several strategic partnerships with hotels, Internet travel sites and media companies to capitalize on the continued growth in online travel sales. USV sells vacation packages and hotel rooms through its call center; via the Internet and its websites, www.usairwaysvacations.com and www.usvtravelagents.com; through global distribution systems Sabre Vacations, Amadeus AgentNet and VAX; and through third-party websites on a co-branded or private-label basis. In 2007, approximately 78% of USV’s total bookings were made electronically, compared to 71% in 2006.
 
During 2007, USV operated co-branded websites for ten partner companies, including Costco Travel, Vegas.com, BestFares.com and MandalayBay.com. These co-branded sites provide a retail presence via distribution channels such as Costco wholesale warehouses and other company websites where we and USV may not otherwise be a part of the consumer’s consideration set. USV intends to continue to add new co-branded websites as opportunities present themselves.


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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, which at the time accounted for substantially all of the operations of US Airways Group, filed voluntary petitions for relief under the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division. On September 16, 2005, the Bankruptcy Court issued an order confirming the Debtors’ plan of reorganization. The plan of reorganization, which was based upon the completion of the merger, among other things, set forth a revised capital structure and established the corporate governance for US Airways Group following the merger and subsequent to emergence from bankruptcy. Under the plan of reorganization, the Debtors’ general unsecured creditors received 8.2 million shares of the new common stock of US Airways Group, which represented approximately 10% of our common stock outstanding as of the completion of the merger. The holders of US Airways Group common stock outstanding prior to the merger received no distribution on account of their interests, and their existing stock was canceled.
 
In accordance with the Bankruptcy Code, the plan of reorganization classified claims into classes according to their relative priority and other criteria and provided for the treatment of each class of claims. Pursuant to the bankruptcy process, the Debtors’ claims agent received timely-filed proofs of claims totaling approximately $26.4 billion in the aggregate, exclusive of approximately $13.6 billion in claims by governmental entities. The Debtors continue to be responsible for administering and resolving claims related to the bankruptcy process. The administrative claims objection deadline passed on September 15, 2006. As of December 31, 2007, there were approximately $267 million of unresolved claims. The ultimate resolution of certain of the claims asserted against the Debtors in the Chapter 11 cases will be subject to negotiations, elections and Bankruptcy Court procedures. The recovery to individual creditors ultimately distributed to any particular general unsecured creditor under the plan of reorganization will depend on a number of variables, including the agreed value of any general unsecured claims filed by that creditor, the aggregate value of all resolved general unsecured claims and the value of shares of the new common stock of US Airways Group in the marketplace at the time of distribution. The effects of these distributions were reflected in US Airways’ financial statements upon emergence and will not have any further impact on the results of operations.
 
Item 1A.   Risk Factors
 
Below are a series of risk factors that may affect our results of operations or financial performance. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of these risk factors on our business or the extent to which any factor or combination of factors may impact our business.
 
Risk Factors Relating to the Company and Industry Related Risks
 
Our business is dependent on the price and availability of aircraft fuel. Continued periods of historically high fuel costs, significant disruptions in the supply of aircraft fuel or further increases in fuel costs could have a significant negative impact on our operating results.
 
Our operating results are significantly impacted by changes in the availability or price of aircraft fuel, which in turn are often affected by global events. Fuel prices have increased substantially over the past several years and sharply in the last quarter of 2007. Because of the amount of fuel needed to operate the airline, even a relatively small increase in the price of fuel can have a significant aggregate effect on our costs. Due to the competitive nature of the airline industry and market forces, we can offer no assurance that we may be able to increase our fares or otherwise increase revenues sufficiently to offset fuel prices. Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability or price of aircraft fuel. In addition, from time to time we enter into hedging arrangements to protect against rising fuel costs. Our ability to hedge in the future, however, may be limited. See also the discussion in Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”


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US Airways Group could experience significant operating losses in the future.
 
Although US Airways Group reported operating profits in 2006 and in 2007, there is no guarantee of future profitability. There are several reasons, including those addressed in these risk factors, why US Airways Group might fail to achieve profitability and might in fact experience significant losses. In particular, the condition of the economy and historic high fuel prices have an impact on our operating results, and overall worsening economic conditions increase the risk that we will experience losses.
 
Since early 2001, the U.S. airline industry’s revenue performance has fallen short of what would have been expected based on historical growth trends. This shortfall has been caused by a number of factors discussed in these risk factors.
 
Union disputes, employee strikes and other labor-related disruptions may adversely affect our operations.
 
Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act (the “RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board. These processes do not apply to our current and ongoing negotiations for post-merger integrated labor agreements, and this means unions may not lawfully engage in concerted refusals to work, such as strikes, slow-downs, sick-outs or other similar activity. Nonetheless, there is a risk that disgruntled employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of the airline and impair its financial performance.
 
We rely heavily on automated systems to operate our business and any failure or disruption of these systems could harm our business.
 
To operate our business, we depend on automated systems, including our computerized airline reservation systems, our flight operations systems, our telecommunication systems and our websites. Our website and reservation systems must be able to accommodate a high volume of traffic and deliver important flight information on a timely and reliable basis. Substantial or repeated website, reservations systems or telecommunication systems failures could reduce the attractiveness of our services and could cause our customers to purchase tickets from another airline.
 
The inability to maintain labor costs at competitive levels could harm our financial performance.
 
Our business plan includes assumptions about labor costs going forward. Currently, the labor costs of both US Airways and AWA are very competitive and very similar; however, we cannot assure you that labor costs going forward will remain competitive, because some of our agreements are amendable now and others may become amendable, because competitors may significantly reduce their labor costs or because we may agree to higher-cost provisions in our current labor negotiations. Approximately 85% of the employees within US Airways Group are represented for collective bargaining purposes by labor unions. In the United States, there are nine labor groups at US Airways and AWA, and they are represented by five different unions. Some of these labor groups are fully integrated, but others, including the pilots, flight attendants, mechanics, and fleet service agents, are not. There are also five labor groups represented by four different unions at Piedmont, and five labor groups represented by five different unions at PSA. There are additional unionized groups of US Airways 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.


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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.
 
Delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity may adversely impact our operations and financial results.
 
The success of our business depends on, among other things, the ability to operate a certain number and type of aircraft. In many cases, the aircraft we intend to operate are not yet in our fleet, but we have contractual commitments to purchase or lease them. If for any reason we were unable to secure deliveries of new aircraft on contractually scheduled delivery dates, this could have a negative impact on our business, operations and financial performance. Our failure to integrate newly purchased aircraft into our fleet as planned might require us to seek extensions of the terms for some leased aircraft. Such unanticipated extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs. If new aircraft orders are not filled on a timely basis, we could face higher monthly rental rates.
 
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 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 its operations, operating costs or competitive position.
 
We are also subject to other environmental laws and regulations, including those that require us to remediate soil or groundwater to meet certain objectives. Under federal law, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. We have liability for such costs at various sites, although the future costs associated with the remediation efforts are currently not expected to have a material adverse affect on our business.
 
We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators. Under these leases and agreements, we have agreed to standard language indemnifying the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, even if we are not the party responsible for the initial event that caused the environmental damage. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines.
 
Recently, climate change issues and greenhouse gas emissions (including carbon) have attracted international and domestic regulatory interest that may result in the imposition of additional regulation on airlines. Any such regulatory activity in the future may adversely affect our business and financial results.
 
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-


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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.
 
The travel industry continues to face ongoing security concerns.
 
The attacks of September 11, 2001 and continuing terrorist threats materially impacted and continue to impact air travel. The Aviation and Transportation Security Act mandates improved flight deck security; deployment of federal air marshals on board flights; improved airport perimeter access security; airline crew security training; enhanced security screening of passengers, baggage, cargo, mail, employees and vendors; enhanced training and qualifications of security screening personnel; additional provision of passenger data to U.S. Customs and enhanced background checks. These increased security procedures introduced at airports since the attacks and other such measures as may be introduced in the future generate higher operating costs for airlines. A concurrent increase in airport security charges and procedures, such as restrictions on carry-on baggage, has also had and may continue to have a disproportionate impact on short-haul travel, which constitutes a significant portion of US Airways’ flying and revenue. We would also be materially impacted in the event of further terrorist attacks or perceived terrorist threats.
 
If we incur problems with any of our third party service providers, our operations could be adversely affected by a resulting decline in revenue or negative public perception about our services.
 
Our reliance upon others to provide essential services on behalf of our operations may result in the relative inability to control the efficiency and timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our operations, including Express 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. Any material problems with the efficiency and timeliness of contract services could have a material adverse effect on our business, financial condition and results of operations.
 
Fluctuations in interest rates and increased costs of financing could adversely affect our liquidity, operating expenses and results.
 
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. Also, changes in the financial markets may increase our costs to obtain funding needed for the acquisition of aircraft that we have contractual commitments to purchase.
 
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 guaranteed costs associated with our regional alliances and commitments to purchase aircraft. As a result of the substantial fixed costs associated with these obligations:
 
  •  A decrease in revenues results in a disproportionately greater percentage decrease in earnings.
 
  •  We may not have sufficient liquidity to fund all of these fixed costs if our revenues decline or costs increase.


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  •  We may have to use our working capital to fund these fixed costs instead of funding general corporate requirements, including capital expenditures.
 
  •  We may not have sufficient liquidity to respond to competitive developments and adverse economic conditions.
 
Our obligations also impact our ability to obtain additional financing, if needed, and our flexibility in the conduct of our business. Our existing indebtedness is secured by substantially all of our assets. Moreover, the terms of our Citicorp credit facility require us to maintain consolidated unrestricted cash and cash equivalents of not less than $1.25 billion, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements.
 
Our ability to pay the fixed costs associated with our contractual obligations depends on our operating performance and cash flow, which in turn depend on general economic and political conditions. A failure to pay our fixed costs or a breach of the contractual obligations could result in a variety of adverse consequences, including the acceleration of our indebtedness, the withholding of credit card proceeds by the credit card servicers and the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our contractual obligations, repay the accelerated indebtedness, make required lease payments or otherwise cover our fixed costs.
 
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. The FAA has proposed a far-reaching set of rules governing flight operations at New York LaGuardia Airport. The new rules could result in dramatic changes to the type and number of services that we offer in the future at LaGuardia. Additional laws, regulations, taxes and airport rates and charges have been proposed or discussed from time to time, including by the current Congress, including recent discussions about a “passenger bill of rights,” and, if adopted, these could significantly increase the cost of airline operations or reduce revenues. The state of New York has already adopted such a measure, and other states are contemplating legislation. Also, the ability of U.S. carriers to operate international routes is subject to change because the applicable arrangements between the U.S. and foreign governments may be amended from time to time, or because appropriate slots or facilities may not be available. We cannot assure you that laws or regulations enacted in the future will not adversely affect our operating costs. In addition, increased environmental regulation may increase costs or restrict our operations.
 
Ongoing data security compliance requirements could increase our costs, and any significant data breach could harm our business, financial condition or results of operations.
 
Our business requires the appropriate and secure utilization of customer and other sensitive information. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit existing vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting the networks that access and store database information. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S., and abroad (particularly in the EU), including requirements for varying levels of customer notification in the event of a data breach.
 
Many of our commercial partners, including credit card companies, have imposed certain data security standards that we must meet. In particular, we were required by the Payment Card Industry Security Standards Council, founded by the credit card companies, to comply by September 30, 2007 with their highest level of data security standards. While we have made substantial progress, we did not fully meet these standards as of September 30, 2007, and we are continuing diligently to implement the remaining requirements.
 
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


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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.
 
Increases in insurance costs or reductions in insurance coverage may adversely impact our operations and financial results.
 
The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease in the insurance coverage available to commercial air carriers. Accordingly, our insurance costs increased significantly and our ability to continue to obtain insurance even at current prices remains uncertain. In addition, we have obtained third party war risk (terrorism) insurance through a special program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial insurance market. The program has been extended, with the same conditions and premiums, until March 31, 2008. Under Vision 100 - Century of Aviation Reauthorization Act, the President may continue the insurance program until December 31, 2008. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk insurance. 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.
 
The airline industry is intensely competitive and dynamic.
 
Our competitors include other major domestic airlines as well as foreign, regional and new entrant airlines, some of which have more financial resources or lower cost structures than ours, and other forms of transportation, including rail and private automobiles. In many of our markets we compete with at least one low-cost air carrier. Our revenues are sensitive to numerous factors, and the actions of other carriers in the areas of pricing, scheduling and promotions can have a substantial adverse impact on overall industry revenues. These factors may become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near-term survival rather than long-term viability. In addition, because a significant portion of US Airways’ traffic is short-haul travel, US Airways is more susceptible than other major airlines to competition from surface transportation such as automobiles and trains.
 
Low cost carriers have a profound impact on industry revenues. Using the advantage of low unit costs, these carriers offer lower fares, particularly those targeted at business passengers, in order to shift demand from larger, more-established airlines. Some low cost carriers, which have cost structures lower than ours, have better financial performance and significant numbers of aircraft on order for delivery in the next few years. These low-cost carriers are expected to continue to increase their market share through growth and could continue to have an impact on the overall performance of US Airways Group.
 
Industry consolidation could weaken our competitive position.
 
If mergers or other forms of industry consolidation take place, US Airways Group might or might not be included as a participant. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with such combinations, our competitive position relative to the post-combination carriers or other carriers that obtain assets could be harmed.
 
The loss of key personnel upon whom we depend to operate our business or the inability to attract additional qualified personnel could adversely affect the results of our operations or our financial performance.
 
We believe that our future success will depend in large part on our ability to attract and retain highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting and retaining other highly qualified personnel. Any inability to retain or attract significant numbers of qualified management and other personnel could adversely affect our business.


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Interruptions or disruptions in service at one of our hub airports could have a material adverse impact on our operations.
 
We operate principally through primary hubs in Charlotte, Philadelphia and Phoenix and secondary hubs/focus cities in Las Vegas, New York, Washington, D.C. and Boston. A majority of our flights either originate in or fly into one of these locations. A significant interruption or disruption in service at one of our hubs could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, operations and financial performance.
 
We are at risk of losses and adverse publicity stemming from any accident involving any of our aircraft.
 
If one of our aircraft were to be involved in an accident, we could be exposed to significant tort liability. The insurance we carry to cover damages arising from any future accidents may be inadequate. In the event that our insurance is not adequate, we may be forced to bear substantial losses from an accident. In addition, any accident involving an aircraft that we operate could create a public perception that our aircraft are not safe or reliable, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft and adversely impact our financial condition and operations.
 
Our business is subject to weather factors and seasonal variations in airline travel, which cause our results to fluctuate.
 
Our operations are vulnerable to severe weather conditions in parts of our network that could disrupt service, create air traffic control problems, decrease revenue, and increase costs, such as during hurricane season in the Caribbean and Southeast United States, snow and severe winters in the Northeast United States and thunderstorms in the Eastern United States. In addition, the air travel business historically fluctuates on a seasonal basis. Due to the greater demand for air and leisure travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year. Our results of operations will likely reflect weather factors and seasonality, and therefore quarterly results are not necessarily indicative of those for an entire year, and the prior results of US Airways Group are not necessarily indicative of our future results.
 
We may be adversely affected by global events that affect travel behavior.
 
Our revenue and results of operations may be adversely affected by global events beyond our control. Wars or other military conflicts, including the war in Iraq may depress air travel, particularly on international routes. An outbreak of a contagious disease such as Severe Acute Respiratory Syndrome (“SARS”), avian flu, or an other influenza-type illness, if it were to persist for an extended period, could again materially affect the airline industry and us by reducing revenues and impacting travel behavior.
 
We are exposed to foreign currency exchange rate fluctuations.
 
As we expand our international operations, we will have significant operating revenues and expenses, as well as assets and liabilities, denominated in foreign currencies. Fluctuations in foreign currencies can significantly affect our operating performance and the value of our assets and liabilities located outside of the United States.
 
The use of US Airways Group’s pre-merger NOLs and certain other tax attributes could be limited in the future.
 
From the time of the merger until the first half of 2007, a significant portion of US Airways Group’s common stock was beneficially owned by a small number of equity investors. Since the merger, some of the equity investors have sold portions of their holdings and other investors have purchased US Airways Group stock, and, as a result, we believe an “ownership change” as defined in Internal Revenue Code Section 382 occurred for US Airways Group in February 2007. When a company undergoes such an ownership change, Section 382 limits the future ability to utilize any net operating losses, or NOL, generated before the ownership change and certain subsequently recognized “built-in” losses and deductions, if any, existing as of the date of the ownership change. A company’s ability to utilize new NOL arising after the ownership change is not affected. Until US Airways Group has used all


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of its existing NOL, future significant shifts in ownership of US Airways Group’s common stock could result in a new Section 382 limit on our NOL as of the date of an additional ownership change.
 
Risks Related to Our Common Stock
 
Our common stock has limited trading history and its market price may be volatile.
 
Our common stock began trading on the NYSE on September 27, 2005 upon the effectiveness of our merger. The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:
 
  •  our operating results failing to meet the expectations of securities analysts or investors;
 
  •  changes in financial estimates or recommendations by securities analysts;
 
  •  material announcements by us or our competitors;
 
  •  movements in fuel prices;
 
  •  new regulatory pronouncements and changes in regulatory guidelines;
 
  •  general and industry-specific economic conditions;
 
  •  public sales of a substantial number of shares of our common stock; and
 
  •  general market conditions.
 
Conversion of our convertible notes will dilute the ownership interest of existing stockholders and could adversely affect the market price of our common stock.
 
The conversion of some or all of US Airways Group’s 7% senior convertible notes due 2020 will dilute the ownership interests of existing shareholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could depress the price of our common stock.
 
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group make it difficult for stockholders to change the composition of our board of directors and may discourage takeover attempts that some of our stockholders might consider beneficial.
 
Certain provisions of the amended and restated certificate of incorporation and amended and restated bylaws of US Airways Group may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of US Airways Group and its stockholders. These provisions include, among other things, the following:
 
  •  a classified board of directors with three-year staggered terms;
 
  •  advance notice procedures for stockholder proposals to be considered at stockholders’ meetings;
 
  •  the ability of US Airways Group’s board of directors to fill vacancies on the board;
 
  •  a prohibition against stockholders taking action by written consent;
 
  •  a prohibition against stockholders calling special meetings of stockholders;
 
  •  a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve amendment of the amended and restated bylaws; and
 
  •  super-majority voting requirements to modify or amend specified provisions of US Airways Group’s amended and restated certificate of incorporation.
 
These provisions are not intended to prevent a takeover, but are intended to protect and maximize the value of US Airways Group’s stockholders’ interests. While these provisions have the effect of encouraging persons seeking


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to acquire control of our company to negotiate with our board of directors, they could enable our board of directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, US Airways Group is subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders. Interested stockholders do not include stockholders, such as our equity investors at the time of the merger, whose acquisition of US Airways Group’s securities is approved by the board of directors prior to the investment under Section 203.
 
Our charter documents include provisions limiting voting and ownership by foreign owners.
 
Our amended and restated certificate of incorporation provides that shares of capital stock may not be voted by or at the direction of persons who are not citizens of the United States if the number of shares held by such persons would exceed 24.9% of the voting stock of our company. In addition, any attempt to transfer equity securities to a non-U.S. citizen in excess of 49.9% of our outstanding equity securities will be void and of no effect.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
Flight Equipment
 
We operated a mainline fleet of 356 aircraft at the end of 2007 (supported by approximately 232 regional jets and approximately 104 turboprops that provide passenger feed into the mainline system), down from a total of 359 mainline aircraft at the end of 2006. During 2007, we removed nine Boeing 737-300 aircraft and three Boeing 757-200 aircraft from our mainline fleet and took delivery of nine Embraer E190 aircraft.
 
On October 2, 2007, US Airways and Airbus executed definitive purchase agreements for the acquisition of 92 aircraft, including 60 single-aisle A320 family aircraft and 32 wide-body aircraft, including 22 A350 Xtra Wide Body (“XWB”) aircraft and ten A330-200 aircraft. These are in addition to the 37 single-aisle A320 family aircraft from the previous Airbus purchase agreement. On November 15, 2007, US Airways and Airbus amended the A330 Purchase Agreement, adding an additional five firm A330-200 aircraft.
 
In 2008, we expect to take delivery of an additional 14 Embraer E190 aircraft and five Airbus A321 aircraft. Between 2009 and 2011, we expect to take delivery of 83 Airbus aircraft, consisting of 68 Airbus A320 family and 15 A330-200 aircraft under the purchase agreements as well as lease two A330-200 aircraft in accordance with a letter of intent with an aircraft lessor.
 
As of December 31, 2007, we had 94 aircraft that have lease expirations prior to the end of 2010. This includes lease expirations for 41 Boeing 737-300 and eight Boeing 737-400 aircraft that are being replaced by Airbus A320 family aircraft to be delivered under the Airbus purchase agreement discussed above. The 45 remaining lease expirations are for Boeing 757, Boeing 767, Airbus A319 and Airbus A320 aircraft, which provides some flexibility to decrease capacity and related aircraft obligations in the event of an industry downturn or an operational need for different aircraft.


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As of December 31, 2007, US Airways Group had the following jet and regional jet aircraft:
 
                                         
          Owned/
                   
Aircraft Type
  Avg. Seats     Mortgaged(1)     Leased(2)     Total     Avg. Age  
 
A330-300
    293       4       5       9       7.3  
A321
    183       15       13       28       6.5  
A320
    150       8       67       75       9.7  
A319
    124       3       90       93       7.2  
B767-200
    203             10       10       18.4  
B757-200
    189       3       40       43       17.8  
B737-400
    144             40       40       17.8  
B737-300
    130             47       47       19.7  
ERJ 190
    99       11             11       0.5  
                                         
Total
    151       44       312       356       11.9  
 
 
(1) All owned aircraft are pledged as collateral for various secured financing agreements.
 
(2) The terms of the leases expire between 2008 and 2024.
 
As of December 31, 2007, US Airways Group’s wholly owned regional airline subsidiaries operated the following turboprop and regional jet aircraft:
 
                                         
    Average Seat
                      Average
 
Aircraft Type
  Capacity     Owned     Leased(1)     Total     Age (years)  
 
CRJ-700
    70       7       7       14       3.3  
CRJ-200
    50       12       23       35       3.8  
De Havilland Dash 8-300
    50             11       11       16.3  
De Havilland Dash 8-100
    37       33       11       44       17.2  
                                         
Total
    47       52       52       104       10.8  
 
 
(1) The terms of the leases expire between 2008 and 2022.
 
As discussed in Item 1. “Business — Express Operations,” we have code share agreements with certain regional jet affiliate operators. Collectively, wholly owned regional airline subsidiaries and affiliate operators flew 225 regional jet aircraft and 61 turboprop aircraft (excluding affiliate carriers operating under pro-rate agreements) as part of US Airways Express as of December 31, 2007.
 
We maintain inventories of spare engines, spare parts, accessories and other maintenance supplies sufficient to meet its current operating requirements.
 
The following table illustrates our committed orders, scheduled lease expirations, and lessor put options as of December 31, 2007.
 
                                                 
    2008     2009     2010     2011     2012     Thereafter  
 
Firm orders remaining
    19       25       25       33       24       22  
Scheduled mainline lease expirations
    35       23       36       20       24       174  
Scheduled wholly owned subsidiary lease expirations
          15       7                   30  
Lessor put options
                            1        
 
See Notes 10 and 8, “Commitments and Contingencies” in Part II, Items 8A and 8B respectively, for additional information on aircraft purchase commitments.
 
We are a participant in the Civil Reserve Air Fleet, 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 Civil Reserve Air Fleet, if activated, in order to receive U.S. Government business. We are reimbursed at


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compensatory rates when aircraft are activated under Civil Reserve Air Fleet or when participating in Department of Defense business.
 
Ground Facilities
 
We lease the majority of our ground facilities, including:
 
  •  executive and administrative offices in Tempe, Arizona;
 
  •  our principal operating, overhaul and maintenance bases at the Pittsburgh International, Charlotte Douglas International and Phoenix Sky Harbor International Airports;
 
  •  training facilities in Phoenix and Charlotte;
 
  •  central reservations offices in Winston-Salem, North Carolina, Tempe, Arizona, Reno, Nevada, and Liverpool, U.K.; and
 
  •  line maintenance bases and local ticket, cargo and administrative offices throughout our system.
 
The following table describes our principal properties:
 
                 
        Approximate
     
        Internal Floor
     
Principal Properties
 
Description
  Area (sq. ft.)    
Nature of Ownership
 
Tempe, AZ Headquarters
  Nine story complex housing headquarters for US Airways Group     218,000     Lease expires April 2014.
Tempe, AZ
  Administrative office complex     203,000     Lease expires May 2013.
Philadelphia International Airport
  68 preferential gates, exclusive ticket counter space, clubs, support space and concourse areas     550,000     Lease expires June 2011.
Charlotte Douglas International Airport
  36 exclusive gates, ticket counter space and concourse areas     226,000     Lease expires June 2016.
Phoenix Sky Harbor International Airport
  42 exclusive gates, ticket counter space and administrative offices     330,000     Airport Use Agreement expires June 2016. Gate use governed by month-to-month rates and charges program.
Pittsburgh International Airport
  10 exclusive gates, ticket counter space and concourse areas     122,000     Lease expires May 2018.
Las Vegas McCarran International Airport
  19 preferential gates, exclusive club, ticket counter space, support space and concourse areas     115,000     Lease expires June 2008.
Ronald Reagan Washington National Airport
  15 gates, ticket counter space and concourse areas     80,000     Lease expires September 2014.


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        Approximate
     
        Internal Floor
     
Principal Properties
 
Description
  Area (sq. ft.)    
Nature of Ownership
 
Maintenance facility — Charlotte, NC
  Hangar bays, hangar shops, ground service equipment shops, cargo, catering and warehouse     847,000     Facilities and land leased from the City of Charlotte. Lease expires June 2017.
Maintenance facility — Pittsburgh, PA
  Hangar bays, hangar shops, ground service equipment shops, cargo, catering and warehouse     649,000     Facilities and land leased from Allegheny County Airport Authority. Lease expires December 2010.
Maintenance and technical support facility at Phoenix Sky Harbor International Airport
  Four hangar bays, hangar shops, office space, warehouse and commissary facilities     375,000     Facilities and land leased from the City of Phoenix. Lease expires September 2019.
Training facility — Charlotte, NC
  Classroom training facilities and ten full flight simulator bays     159,000     Facilities and land leased from the City of Charlotte. Lease expires June 2017.
Flight Training and Systems Operations Control Center, Phoenix, AZ
  Complex accommodates training facilities, systems operation control and crew scheduling functions     164,000     Facilities and land leased from the City of Phoenix. Lease expires February 2031.
Operations Control Center — Pittsburgh, PA
  Complex accommodates systems operation control and crew scheduling functions     61,000     Lease expires March 2009.
 
In addition, we lease an aggregate of approximately 217,000 square feet of data center, office and warehouse space in Tempe and Phoenix, AZ as well as 27,000 square feet of data center in Winston-Salem, NC.
 
Space for ticket counters, gates and back offices has been obtained at each of the other airports in which we operate, either by lease from the airport operator or by sublease or handling agreement from another airline.
 
In September 2007, we broke ground for a new 72,000 square foot state-of-the-art operations control center near Pittsburgh International Airport. The new facility will hold 600 employees, with completion slated for early 2009.
 
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.

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Item 3.   Legal Proceedings
 
On September 12, 2004, US Airways Group and its domestic subsidiaries (collectively, the “Reorganized Debtors”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (Case Nos. 04-13819-SSM through 03-13823-SSM) (the “2004 Bankruptcy”). On September 16, 2005, the Bankruptcy Court issued an order confirming the plan of reorganization submitted by the Reorganized Debtors and on September 27, 2005, the Reorganized Debtors emerged from the 2004 Bankruptcy. The Bankruptcy Court’s order confirming the plan included a provision called the plan injunction, which forever bars other parties from pursuing most claims against the Reorganized Debtors that arose prior to September 27, 2005 in any forum other than the Bankruptcy Court. The great majority of these claims are pre-petition claims that, if paid out at all, will be paid out in common stock of the post-bankruptcy US Airways Group at a fraction of the actual claim amount.
 
On February 9, 2007, passengers Daphne Renard and Todd Robins filed a class action suit against US Airways in San Francisco Superior Court. The complaint, which was later amended to include only Robins as a lead plaintiff, alleges that US Airways breached its contract of carriage by charging additional fares and fees, after the purchase of tickets on the usairways.com website, for passengers under two years of age who travel as “lap children,” meaning that the child does not occupy his or her own seat but travels instead on the lap of an accompanying adult. The named plaintiffs allege that he and his wife purchased international tickets through the website for themselves and a lap child. Plaintiffs allege that after initially receiving an electronic confirmation that there would be no charge for the lap child, they were later charged an additional $242.50. The complaint alleges a class period from February 9, 2002 to the present. We were served with an amended complaint in early March 2007 that continued the same allegations, but dropped plaintiff’s wife as a class representative. On May 1, 2007, US Airways filed an Answer to the complaint and also asked the court for a “complex case” designation, which the court granted on May 11, 2007. On September 25, 2007, the parties reached a settlement for an immaterial amount. That agreement must be approved by the court in order to become final.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of security holders during the fourth quarter of 2007.


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PART II
 
Item 5.   Market for US Airways Group’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Stock Exchange Listing
 
On September 27, 2005, the effective date of the merger, our common stock began trading on the NYSE under the symbol “LCC.” As of February 15, 2008, the closing price of our common stock on the NYSE was $14.41. As of February 15, 2008, there were 2,752 holders of record of the common stock.
 
Market Prices of Common Stock
 
The following table sets forth, for the periods indicated, the high and low sale prices of our common stock on the NYSE:
 
                         
Year Ended
                 
December 31
   
Period
  High     Low  
 
  2007     Fourth Quarter   $ 33.45     $ 14.41  
        Third Quarter     36.81       24.26  
        Second Quarter     48.30       26.78  
        First Quarter     62.50       44.01  
  2006     Fourth Quarter   $ 63.27     $ 43.81  
        Third Quarter     56.41       36.80  
        Second Quarter     52.18       36.19  
        First Quarter     40.60       28.30  
 
US Airways Group, organized under the laws of the State of Delaware, is subject to Sections 160 and 170 of the Delaware General Corporation Law, which govern the payment of dividends on or the repurchase or redemption of its capital stock. US Airways Group is restricted from engaging in any of these activities unless it maintains a capital surplus.
 
US Airways Group has not declared or paid cash or other dividends on its common stock since 1990 and currently does not intend to do so. Under the provisions of certain debt agreements, including our secured loans, our ability to pay dividends on or repurchase our common stock is restricted. Any future determination to pay cash dividends will be at the discretion of our board of directors, subject to applicable limitations under Delaware law, and will depend upon our results of operations, financial condition, contractual restrictions and other factors deemed relevant by our board of directors. See “Liquidity and Capital Resources” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Item 7 below for more information, including information related to dividend restrictions associated with our secured loans.
 
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.


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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, 2007, 2006, 2005, 2004 and 2003 are derived from the audited consolidated financial statements of US Airways Group. The full years 2007 and 2006 are comprised of the consolidated financial data of US Airways Group. The 2005 consolidated financial data presented includes the consolidated results of America West Holdings for the 269 days through September 27, 2005, the effective date of the merger, and the consolidated results of US Airways Group and its subsidiaries, including US Airways, America West Holdings and AWA, for the 96 days from September 27, 2005 to December 31, 2005. For periods prior to 2005, the consolidated financial data for US Airways Group reflect only the consolidated results of America West Holdings. The selected consolidated financial data should be read in conjunction with the consolidated financial statements for the respective periods, the related notes and the related reports of US Airways Group’s independent registered public accounting firm.
 
                                         
    Year Ended December 31,  
    2007     2006     2005     2004     2003  
    (In millions except share data)  
 
Consolidated statements of operations data:
                                       
Operating revenues
  $ 11,700     $ 11,557     $ 5,069     $ 2,757     $ 2,572  
Operating expenses(a)
    11,167       10,999       5,286       2,777       2,539  
Operating income (loss)(a)
    533       558       (217 )     (20 )     33  
Income (loss) before cumulative effect of change in accounting principle(b)
    427       303       (335 )     (89 )     57  
Cumulative effect of change in accounting principle, net(c)
          1       (202 )            
Net income (loss)
    427       304       (537 )     (89 )     57  
Earnings (loss) per common share before cumulative effect of change in accounting principle:
                                       
Basic
    4.66       3.50       (10.65 )     (5.99 )     4.03  
Diluted
    4.52       3.32       (10.65 )     (5.99 )     3.07  
Cumulative effect of change in accounting principle:
                                       
Basic
          0.01       (6.41 )            
Diluted
          0.01       (6.41 )            
Earnings (loss) per common share:
                                       
Basic
    4.66       3.51       (17.06 )     (5.99 )     4.03  
Diluted
    4.52       3.33       (17.06 )     (5.99 )     3.07  
Shares used for computation (in thousands):
                                       
Basic
    91,536       86,447       31,488       14,861       14,252  
Diluted
    95,603       93,821       31,488       14,861       23,147  
Consolidated balance sheet data (at end of period):
                                       
Total assets
  $ 8,040     $ 7,576     $ 6,964     $ 1,475     $ 1,614  
Long-term obligations, less current maturities(d)
    3,882       3,689       3,631       640       697  
Total stockholders’ equity
    1,439       970       420       36       126  
 
 
(a) The 2007 period includes $99 million of merger related transition expenses, a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of a change in the FAA mandated


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retirement age for pilots from 60 to 65 and $5 million in charges for certain separation packages and lease termination costs related to the announced plans to reduce flying from Pittsburgh. These charges were offset by $7 million in tax credits due to an IRS rule change allowing the Company to recover tax amounts for years 2003-2006 for certain fuel usage, $9 million of insurance settlement proceeds related to business interruption and property damages incurred as a result of Hurricane Katrina and a $5 million Piedmont pilot pension curtailment gain related to the FAA mandated retirement age change discussed above.
 
The 2006 period includes $131 million of merger related transition expenses, offset by a $90 million gain associated with the return of equipment deposits upon forgiveness of a loan and $14 million of gains associated with the settlement of bankruptcy claims.
 
The 2005 period includes $28 million of merger related transition expenses, a $27 million loss on the sale-leaseback of six Boeing 737-300 aircraft and two Boeing 757 aircraft, $7 million of power by the hour program penalties associated with the return of certain leased aircraft, $1 million of severance for terminated employees resulting from the merger, a $1 million charge related to aircraft removed from service and a $50 million charge related to an amended Airbus purchase agreement, along with the write off of $7 million in capitalized interest. The $50 million charge was paid by means of set-off against existing equipment purchase deposits held by Airbus.
 
The 2004 period includes a $16 million net credit associated with the termination of the rate per engine hour agreement with General Electric Engine Services for overhaul maintenance services on V2500-A1 engines. This credit was partially offset by $2 million of net charges related to the return of certain Boeing 737-200 aircraft, which includes termination payments of $2 million, the write-down of leasehold improvements and deferred rent of $3 million, offset by the net reversal of maintenance reserves of $3 million related to the returned aircraft.
 
The 2003 period includes $11 million of expenses resulting from the elimination of AWA’s hub operations in Columbus, Ohio, $2 million in charges related to the reduction-in-force of certain management, professional and administrative employees and $3 million in impairment charges on certain owned Boeing 737-200 aircraft that were grounded, which was offset by a $1 million reduction due to a revision of the estimated costs related to the early termination of certain aircraft leases and a $1 million reduction related to the revision of estimated costs associated with the sale and leaseback of certain aircraft.
 
(b) The 2007 period includes a non-cash expense for income taxes of $7 million related to the utilization of NOL acquired from US Airways. The valuation allowance associated with these acquired NOL was recognized as a reduction of goodwill rather than a reduction in tax expense. In addition, the period also includes an $18 million write-off of debt issuance costs in connection with the refinancing of the $1.25 billion senior secured credit facility with General Electric Capital Corporation (“GECC”), referred to as the GE Loan, in March 2007 and $10 million in impairment losses on certain available for sale auction rate securities considered to be other than temporary, offset by a $17 million gain recognized on the sale of stock in ARINC Incorporated.
 
The 2006 period includes a non-cash expense for income taxes of $85 million related to the utilization of NOL acquired from US Airways. In addition, the period includes $6 million of prepayment penalties and $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan previously guaranteed by the Air Transportation Stabilization Board (“ATSB”) and two loans previously provided to AWA by GECC, $17 million in payments in connection with the inducement to convert $70 million of US Airways Group’s 7% Senior Convertible Notes to common stock and a $2 million write-off of debt issuance costs associated with those converted notes, offset by $8 million of interest income earned by AWA on certain prior year Federal income tax refunds.
 
The 2005 period includes an $8 million charge related to the write-off of the unamortized value of the ATSB warrants upon their repurchase in October 2005 and an aggregate $2 million write-off of debt issuance costs associated with the exchange of AWA’s 7.25% Senior Exchangeable Notes due 2023 and retirement of a portion of the loan formerly guaranteed by the ATSB. In the fourth quarter 2005 period, which was subsequent to the effective date of the merger, US Airways recorded $4 million of mark-to-market gains attributable to stock options in Sabre Inc. (“Sabre”) and warrants in a number of e-commerce companies.


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The 2004 period includes a $1 million gain at AWA on the disposition of property and equipment due principally to the sale of one Boeing 737-200 aircraft and a $1 million charge for the write-off of debt issuance costs in connection with the refinancing of a term loan.
 
The 2003 period includes federal government assistance of $81 million recognized as nonoperating income under the Emergency Wartime Supplemental Appropriations Act.
 
(c) The 2006 period includes a $1 million benefit which represents the cumulative effect on the accumulated deficit of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R. The adjustment reflects the impact of estimating future forfeitures for previously recognized compensation expense.
 
The 2005 period includes a $202 million adjustment which represents the cumulative effect on the accumulated deficit of the adoption of the direct expense method of accounting for major scheduled airframe, engine and certain component overhaul costs as of January 1, 2005. (See Part II, Item 8A, Note 3 “Change in Accounting Policy for Maintenance Costs”).
 
(d) Includes debt, capital leases, postretirement benefits other than pensions and employee benefit liabilities and other.
 
Selected Consolidated Financial Data of US Airways, Inc.
 
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, 2007, 2006, three months ended December 31, 2005, nine months ended September 30, 2005, year ended December 31, 2004, nine months ended December 31, 2003 and three months ended March 31, 2003 are derived from the audited consolidated financial statements of US Airways. In connection with the combination of all mainline airline operations under one FAA operating certificate discussed further in Item 7, US Airways Group contributed 100% of its equity interest in America West Holdings, the parent company of AWA, to US Airways. As a result, America West Holdings and AWA are now wholly owned subsidiaries of US Airways. This contribution is reflected in the 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 2007, 2006 and three months ended December 31, 2005 are comprised of the consolidated financial data of US Airways and America West Holdings. For periods prior to September 30, 2005, the financial data reflects only the results of 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.
 
                                                         
    Successor Company(a)     Predecessor Company(a)  
                Three Months
    Nine Months
          Nine Months
    Three Months
 
    Year Ended
    Year Ended
    Ended
    Ended
    Year Ended
    Ended
    Ended
 
    December 31,
    December 31,
    December 31,
    September 30,
    December 31,
    December 31,
    March 31,
 
    2007     2006     2005     2005     2004     2003     2003  
    (In millions)  
 
Consolidated statements of operations data:
                                                       
Operating revenues
  $ 11,813     $ 11,692     $ 2,589     $ 5,452     $ 7,068     $ 5,250     $ 1,512  
Operating expenses(b)
    11,289       11,135       2,772       5,594       7,416       5,292       1,714  
                                                         
Operating income (loss)(b)
    524       557       (183 )     (142 )     (348 )     (42 )     (202 )
Income (loss) before cumulative effect of change in accounting principle(c)
    478       348       (256 )     280       (578 )     (160 )     1,613  
Cumulative effect of change in accounting principle, net(d)
          1                                
Net income (loss)
  $ 478     $ 349     $ (256 )   $ 280     $ (578 )   $ (160 )   $ 1,613  
                                                         
 


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          Predecessor
 
    Successor Company(a)     Company (a)  
    December 31,  
    2007     2006     2005     2004     2003  
    (In millions)  
 
Consolidated balance sheet data (at end of period):
                                       
Total assets
  $ 7,787     $ 7,351     $ 6,763     $ 8,250     $ 8,349  
Long-term obligations, less current maturities(e)
    2,223       2,344       3,456       4,815       4,591  
Total stockholder’s equity (deficit)
    1,850       (461 )     (810 )     (501 )     89  
 
 
(a) In connection with emergence from the first bankruptcy in March 2003 and the second bankruptcy in September 2005, US Airways adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” As a result of the application of fresh-start reporting, the financial statements prior to March 31, 2003 are not comparable with the financial statements for the period April 1, 2003 to September 30, 2005, nor is either period comparable to periods after September 30, 2005. References to “Successor Company” refer to US Airways on and after September 30, 2005, after the application of fresh-start reporting for the second bankruptcy.
 
(b) The 2007 period includes $99 million of merger related transition expenses, a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of a change in the FAA mandated retirement age for pilots from 60 to 65 and $4 million in charges for certain separation packages and lease termination costs related to the announced plans to reduce flying from Pittsburgh, which was offset by $7 million in tax credits due to an IRS rule change allowing US Airways to recover tax amounts for years 2003-2006 for certain fuel usage and $9 million of insurance settlement proceeds related to business interruption and property damages incurred as a result of Hurricane Katrina.
 
The 2006 period includes $131 million of merger related transition expenses, offset by a $90 million gain associated with the return of equipment deposits upon forgiveness of a loan and $3 million of gains associated with the settlement of bankruptcy claims.
 
The period for the three months ended December 31, 2005 includes $28 million of merger related transition costs, $7 million of power by the hour program penalties associated with the return of certain leased aircraft and $1 million of severance costs for terminated employees resulting from the merger.
 
The period for the nine months ended December 31, 2003 includes a $212 million reduction in operating expenses, net of amounts due to certain affiliates, in connection with the reimbursement for certain aviation-related security expenses in connection with the Emergency Wartime Supplemental Appropriations Act and a $35 million charge in connection with US Airways’ intention not to take delivery of certain aircraft scheduled for future delivery.
 
(c) The 2007 period includes a non-cash expense for income taxes of $7 million related to the utilization of NOL that was generated prior to the merger. The decrease in the corresponding valuation allowance was recognized as a reduction of goodwill rather than a reduction in tax expense. In addition, the period also includes a $17 million gain recognized on the sale of stock in ARINC Incorporated offset by a $10 million in impairment losses on certain available for sale auction rate securities considered to be other than temporary.
 
The 2006 period includes a non-cash expense for income taxes of $85 million related to the utilization of NOL that was generated prior to the merger. In addition, the period includes $6 million of prepayment penalties and $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan previously guaranteed by the ATSB and two loans previously provided to AWA by GECC, which was offset by $8 million of interest income earned by AWA on certain prior year Federal income tax refunds.
 
The period for the three months ended December 31, 2005 includes an $8 million charge related to the write-off of the unamortized value of the ATSB warrants upon their repurchase in October 2005 and an aggregate $2 million write-off of debt issuance costs associated with the exchange of AWA’s 7.25% Senior Exchangeable Notes due 2023 and retirement of a portion of the loan formerly guaranteed by the ATSB. US Airways also recorded in this period $4 million of mark-to-market gains attributable to stock options in Sabre and warrants in a number of e-commerce companies.

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The nine months ended September 30, 2005 and the year ended December 31, 2004 include reorganization items which amounted to a $636 million net gain and a $32 million expense, respectively.
 
The nine months ended December 31, 2003 include a $30 million gain on the sale of US Airways’ investment in Hotwire, Inc. In connection with US Airways’ first bankruptcy, a $1.89 billion gain is included for the three months ended March 31, 2003.
 
(d) The 2006 period includes a $1 million benefit which represents the cumulative effect on the accumulated deficit of the adoption of SFAS No. 123R. The adjustment reflects the impact of estimating future forfeitures for previously recognized compensation expense.
 
(e) Includes debt, capital leases, postretirement benefits other than pensions and employee benefit liabilities and other. Also includes liabilities subject to compromise at December 31, 2004.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Background
 
US Airways Group 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 Airways Assurance Limited. On September 12, 2004, US Airways Group and its domestic subsidiaries, US Airways, Piedmont, PSA and MSC, which at the time accounted for substantially all of the operations of US Airways Group, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division. On May 19, 2005, US Airways Group signed a merger agreement with America West Holdings pursuant to which America West Holdings merged with a wholly owned subsidiary of US Airways Group. The merger agreement was amended by a letter of agreement on July 7, 2005. The merger became effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005.
 
As a result of the merger, we operate the fifth largest airline in the United States as measured by domestic RPMs and ASMs. We have primary hubs in Charlotte, Philadelphia and Phoenix and secondary hubs/focus cities in Las Vegas, New York, Washington, D.C. and Boston. We are a low-cost carrier offering scheduled passenger service on approximately 3,800 flights daily to 230 communities in the U.S., Canada, the Caribbean, Latin America and Europe, making us the only U.S. based low-cost carrier with a significant international route presence. We are also the only low-cost carrier with an established East Coast route network, including the US Airways Shuttle service, with substantial presence at capacity constrained airports including New York’s LaGuardia Airport and the Washington, D.C. area’s Ronald Reagan Washington National Airport. As of December 31, 2007, we operated 356 mainline jets and are supported by our regional airline subsidiaries and affiliates operating as US Airways Express, which operate approximately 232 regional jets and 104 turboprops. In 2007, we generated passenger revenues of $10.83 billion.
 
The merger was accounted for as a reverse acquisition using the purchase method of accounting. As a result, although the merger was structured such that America West Holdings became a wholly owned subsidiary of US Airways Group, America West Holdings was treated as the acquiring company for accounting purposes due to the following factors: (1) America West Holdings’ stockholders received the largest share of US Airways Group’s common stock in the merger in comparison to unsecured creditors of US Airways Group; (2) America West Holdings received a larger number of designees to the board of directors; and (3) America West Holdings’ Chairman and Chief Executive Officer prior to the merger became the Chairman and Chief Executive Officer of the combined company. As a result of the reverse acquisition, the 2005 consolidated statement of operations for the new US Airways Group presented in this report is comprised of the results of America West Holdings for the 269 days through September 27, 2005 and consolidated results of US Airways Group for the 96 days from September 27, 2005 through December 31, 2005.
 
On September 26, 2007, as part of the integration efforts following the merger, AWA surrendered its FAA operating certificate. As a result, all mainline airline operations are now being conducted under US Airways’ FAA operating certificate. In connection with the combination of all mainline airline operations under one FAA operating certificate, US Airways Group contributed 100% of its equity interest in America West Holdings, the parent company of AWA, to US Airways. As a result, America West Holdings and AWA are now wholly owned subsidiaries of US Airways. In addition, AWA transferred substantially all of its assets and liabilities to US Airways.


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All off-balance sheet commitments of AWA were also transferred to US Airways. This transaction constituted a transfer of assets between entities under common control and was accounted for at historical cost. The contribution had no effect on the US Airways Group consolidated financial statements. Pilots, flight attendants, and ground and maintenance employees continue to work under the terms of their respective collective bargaining agreements, including, in some cases, transition agreements reached in connection with the merger.
 
As part of the transfer of assets and liabilities to US Airways, all of AWA’s obligations with respect to certain pass through trusts and the leases of related aircraft and engines were transferred to US Airways. The pass through trusts had issued pass through trust certificates (also known as “Enhanced Equipment Trust Certificates” or “EETCs”), of which AWA was the deemed issuer for SEC reporting purposes. Because US Airways has assumed all of AWA’s obligations with respect to the pass through trusts, US Airways is now the deemed issuer of these EETCs. As a result, AWA no longer has an obligation to file separate financial statements or reports with the SEC and has filed a Form 15 with the SEC terminating its reporting obligations.
 
2007 Overview
 
Solid Financial Results
 
In 2007, we earned net income of $427 million, the second profitable year since our merger in 2005 and the fourth highest level of annual earnings in our combined history. Diluted earnings per share for the year was $4.52, compared to $3.33 in 2006. These financial results were achieved during a year that saw record fuel prices and higher costs driven by implementation of our operational improvement plan to increase reliability as well as the rationalization of our capacity.
 
Merger Integration Update
 
For 2007, our operational accomplishments included the following:
 
  •  Merged two reservations systems onto one platform, which provides a single system for reservation and airport customer service agents that enables us to simplify ticketing processes, remove redundant systems and provide a consistent product to our passengers.
 
  •  Marked a significant milestone by moving all of our mainline operations to a single operating certificate from the FAA, as described above. The single certificate allows us to operate as one US Airways with one set of policies, procedures, computer systems, maintenance and flight control systems.
 
  •  Broke ground for our new 72,000 square foot state-of-the-art operations control center near Pittsburgh International Airport. The new facility will house 600 employees, with completion slated for early 2009.
 
  •  Completed the consolidation of operations at Chicago O’Hare, the last of 38 cities where both US Airways and AWA had operated at the time of the merger.
 
  •  Reached final single labor agreements covering the flight crew training instructors and the flight simulator engineers, each represented by the Transport Workers Union (“TWU”). Additionally, we are continuing to negotiate with the pilot, flight attendant, fleet service and mechanic labor groups in hopes of reaching final agreements with these unions.
 
Maintained Liquidity Position and Reduced Near-term Debt Amortizations
 
As of December 31, 2007, we had cash, cash equivalents and investments totaling $3 billion, of which $2.53 billion was unrestricted. Investments include $353 million of auction rate securities that are classified as noncurrent assets on our balance sheet.
 
In March 2007, we completed a $1.6 billion debt refinancing, which we used to extinguish three separate debt obligations: a $1.25 billion senior secured credit facility, $325 million of unsecured debt in the form of pre-paid miles and a $19 million secured credit facility. The refinancing improves liquidity by reducing debt amortization payments until 2014 and lowering near-term interest expense.


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Fleet
 
In October 2007, US Airways entered into an agreement with Airbus S.A.S for the firm order of 60 A320 family aircraft, which will be used to replace older Boeing 737 aircraft in our fleet. In addition, as part of that same order, we announced plans to add 32 widebody aircraft to our fleet, which include ten Airbus A330-200 aircraft and 22 Airbus A350-XWB aircraft. We plan to use these aircraft for both replacements of older widebody aircraft in the fleet and to facilitate international growth. We subsequently modified our agreement with Airbus to add five additional A330-200 aircraft to our existing order, and also agreed to terms with an aircraft lessor to lease two more A330-200 aircraft, bringing the total number of widebody aircraft we are set to take delivery of to 39.
 
During 2007, we also committed capital to invest in our product. We have a $50 million aircraft appearance initiative currently underway to refurbish the interiors of nearly 300 mainline aircraft, including common interior branding and all leather seats through out our coach cabins. To enhance the onboard experience we plan to upgrade domestic meals and beverage selections, as well as our transatlantic Envoy product.
 
Revenue Pricing Environment
 
The revenue environment remained strong during 2007, as our mainline passenger revenue per available seat mile (“PRASM”) was 10.73 cents, a 3.7% improvement as compared to PRASM in 2006 of 10.35 cents. This improvement in mainline PRASM was driven by: (1) reductions in industry capacity and continued capacity discipline, which has better matched supply with passenger demand; (2) a rational industry pricing environment; (3) industry-wide fare increases; and (4) continued rationalization of our route network that eliminated capacity on our weakest routes.
 
Cost Control
 
During 2007, our mainline cost per available seat mile (“CASM”) increased 3.1% to 11.30 cents from 10.96 cents in 2006. The increase was largely due to higher costs associated with the implementation of our operational improvement plan to improve reliability and the impact on costs of our continued reduction in capacity, which decreased 1.5% year over year. See “US Airways Group’s Results of Operations” below for analysis related to CASM. While up year over year, we believe our mainline CASM will remain competitive with the low cost carriers and among the lowest of the traditional legacy carriers.
 
We remain committed to maintaining a low cost structure, which we believe is necessary to compete effectively with other airlines and in an industry whose economic prospects are heavily dependent upon two variables it cannot control: the health of the economy and the price of fuel. We will continue to exercise tight cost controls and minimize unnecessary capital expenditures to drive down expenses.
 
First Quarter 2008 Outlook
 
As we begin 2008, the airline industry appears to be headed for another challenging period due to extremely high fuel prices and a potential economic slowdown. Current fuel prices remain high by historical standards. Significant increases in fuel price can materially and adversely affect our operating costs. We estimate that a one cent per gallon increase in fuel prices results in a $16 million increase in annual expense. A softening economy makes realizing increases in yield difficult.
 
In this environment, we currently expect to post a loss for the first quarter of 2008. In the event this environment continues through 2008, we believe we are well positioned due to our current cash position and the debt restructurings completed over the past two years.
 
Customer Service
 
We are committed to building a successful combined airline by taking care of our customers. We believe that our focus on excellent customer service in every aspect of our operations, including personnel, flight equipment, inflight and ancillary amenities, on-time performance, flight completion ratios and baggage handling, will strengthen customer loyalty and attract new customers.


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We reported the following combined operating statistics to the DOT for mainline operations for the years ended December 31, 2007, 2006 and 2005:
 
                         
    Full Year  
    2007     2006     2005  
 
On-time performance(a)
    68.7       76.9       77.8  
Completion factor(b)
    98.2       98.9       98.2  
Mishandled baggage(c)
    8.47       7.88       7.68  
Customer complaints(d)
    3.16       1.36       1.55  
 
 
(a) Percentage of reported flight operations arriving on time as defined by the DOT.
 
(b) Percentage of scheduled flight operations completed.
 
(c) Rate of mishandled baggage reports per 1,000 passengers.
 
(d) Rate of customer complaints filed with the DOT per 100,000 passengers.
 
We faced major operational challenges during the first half of 2007 resulting from adverse weather conditions in the northeast, heavy air traffic congestion in many of our hubs and difficulties associated with the migration to a single reservation system in early March 2007. All of these factors contributed to a difficult operating environment. During 2007, we implemented several initiatives to improve operational performance as follows:
 
  •  We hired approximately 1,000 new employees system-wide to boost airport customer service.
 
  •  Starting with the June 1, 2007 schedule, we lengthened the operating day at our hubs, lowered utilization, and increased the number of designated spare aircraft in order to ensure operational reliability.
 
  •  We established Passenger Operations Control (POC) centers at our Philadelphia and Charlotte hubs and at Reagan National airport. These POC centers monitor all inbound flight activity and identify customers who are on flights that for whatever reason (weather, air traffic congestion, etc.) might miss their connecting flights. The POC center professionals interact closely with the airline’s System Support Center to rebook passengers who may misconnect even before the inbound flight lands.
 
  •  We announced in the third quarter of 2007 the appointment of Robert Isom as the new Chief Operating Officer to head up the airline’s operations including flight operations, inflight services, maintenance and engineering, airport customer service, reservations, and cargo. Mr. Isom has over ten years of airline experience at Northwest Airlines, Inc. and AWA.
 
The implementation of our initiatives resulted in an improved trend in operational performance since the second quarter of 2007. In the fourth quarter of 2007, our on-time performance improved to 76.9% as compared to 64.3% in the second quarter of 2007. In the month of December 2007, our on-time performance was ranked first amongst the ten largest U.S. airlines. Our rate of customer complaints filed with the DOT per 100,000 passengers improved, decreasing to 2.27 in the fourth quarter of 2007 from 3.64 in the second quarter of 2007. Our rate of mishandled baggage reports per 1,000 passengers was 7.28 in the fourth quarter of 2007, an improvement from 8.57 in the second quarter of 2007.
 
US Airways Group’s Results of Operations
 
The full years 2007 and 2006 include the consolidated results of US Airways Group and its subsidiaries. As noted above, the 2005 statement of operations 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 the new US Airways Group for the 96 days from September 27, 2005 to December 31, 2005.
 
In 2007, we realized operating income of $533 million and income before income taxes of $434 million. Included in these results is $245 million of net gains associated with fuel hedging transactions. This includes $187 million of unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments as well as $58 million of net realized gains on settled hedge transactions. We are required to use mark-to-market accounting as our existing fuel hedging instruments do not meet the requirements


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for hedge accounting established by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” If these instruments had qualified for hedge accounting treatment, any unrealized gains or losses, including the $187 million discussed above, would have been deferred in other comprehensive income, a component of stockholders’ equity, until the jet fuel is purchased and the underlying fuel hedging instrument is settled. Given the market volatility of jet fuel, the fair value of these fuel hedging instruments is expected to change until settled. Operating results in the 2007 period also include $99 million of net special charges due to merger related transition expenses, as well as a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of a change in the FAA mandated retirement age for pilots from 60 to 65 and $5 million in charges related to our plans to reduce flying from Pittsburgh. These charges were offset by $7 million in tax credits due to an IRS rule change allowing the Company to recover certain fuel usage tax amounts for years 2003-2006, $9 million of insurance settlement proceeds related to business interruption and property damages incurred as a result of Hurricane Katrina and a $5 million Piedmont pilot pension curtailment gain related to the FAA mandated pilot retirement age change discussed above.
 
Nonoperating expense in the 2007 period includes an $18 million write-off of debt issuance costs in connection with the refinancing of the $1.25 billion GE loan in March 2007 and $10 million in impairment losses on certain available for sale auction rate securities considered to be other than temporary, offset by a $17 million gain recognized on the sale of stock in ARINC Incorporated. The refinancing of the GE loan is discussed in more detail under “Liquidity and Capital Resources — Commitments.”
 
In 2006, we realized operating income of $558 million and income before income taxes and cumulative effect of change in accounting principle of $404 million. Included in these results is $79 million of net losses associated with fuel hedging transactions. This includes $70 million of unrealized losses resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments as well as $9 million of net realized losses on settled hedge transactions. Operating results in the 2006 period also include $27 million of net special charges, consisting of $131 million of merger related transition expenses, offset by a $90 million credit related to the restructuring of the then existing Airbus aircraft order and $14 million of credits related to the settlement of certain bankruptcy-related claims.
 
Nonoperating expense in the 2006 period includes $6 million of expense related to prepayment penalties and $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan previously guaranteed by the ATSB and two loans previously provided to AWA by GECC, as well as $17 million in payments in connection with the inducement to convert $70 million of the 7% Senior Convertible Notes to common stock, a $2 million write off of debt issuance costs associated with those converted notes and $8 million of interest income earned by AWA on certain prior year federal income tax refunds.
 
In 2005, we realized operating losses of $217 million and a loss before income taxes and cumulative effect of change in accounting principle of $335 million. In 2005, America West Holdings changed its accounting policy for certain maintenance costs from the deferral method to the direct expense method as if that change occurred January 1, 2005. This resulted in a $202 million loss from the cumulative effect of a change in accounting principle, or $6.41 per common share. See Note 3, “Change in Accounting Policy for Maintenance Costs,” to the consolidated financial statements in Item 8A of this report.
 
Included in the 2005 results is $75 million of net gains associated with fuel hedging transactions. This includes $71 million of net realized gains on settled hedge transactions as well as $4 million of unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments. Operating results in the 2005 period also include $121 million of special charges, including $28 million of merger related transition expenses, a $27 million loss on the sale-leaseback of six Boeing 737-300 aircraft and two Boeing 757 aircraft, $7 million of power by the hour program penalties associated with the return of certain leased aircraft, $1 million of severance payments for terminated employees resulting from the merger, a $1 million charge related to certain aircraft removed from service and a $50 million charge related to an amended Airbus purchase agreement, along with the write off of $7 million in capitalized interest. The Airbus restructuring fee was paid by means of set-off against existing equipment purchase deposits held by Airbus.
 
Nonoperating expense in the 2005 period includes $8 million of expenses related to the write-off of the unamortized value of the ATSB warrants upon their repurchase in October 2005 and an aggregate $2 million write


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off of debt issuance costs associated with the exchange of the 7.25% Senior Exchangeable Notes due 2023 and retirement of a portion of the loan formerly guaranteed by the ATSB.
 
As of December 31, 2007, we have approximately $761 million of gross net operating loss carryforwards (“NOL”) to reduce future federal taxable income. Of this amount, approximately $649 million is available to reduce federal taxable income in the calendar year 2008. Our deferred tax asset, which includes the $649 million of NOL discussed above, has been subject to a full valuation allowance.
 
For the year ended December 31, 2007, we utilized NOL to reduce our income tax obligation. Utilization of this NOL results in a corresponding decrease in the valuation allowance. In accordance with SFAS No. 109, “Accounting for Income Taxes,” as this valuation allowance was established through the recognition of tax expense, the decrease in valuation allowance offsets our tax provision dollar for dollar. We recognized $7 million of non-cash state income tax expense for the year ended December 31, 2007, as we used NOL that was generated by US Airways prior to the merger. In accordance with SFAS No. 109, as this was acquired NOL, the decrease in the valuation allowance associated with this NOL reduced goodwill instead of the provision for income taxes. At December 31, 2007, the remaining federal valuation allowance is $32 million, all of which was established through the recognition of tax expense. In addition, we have $37 million and $4 million, respectively, of unrealized federal and state tax benefit related to amounts recorded in other comprehensive income. At December 31, 2007, the remaining state valuation allowance is $45 million, of which $21 million was established through the recognition of tax expense and $24 million is associated with acquired NOL.
 
For the year ended December 31, 2006, we recognized $85 million of non-cash income tax expense, as we utilized NOL that was generated by US Airways prior to the merger. In accordance with SFAS No. 109, as this valuation allowance was established through the recognition of tax expense, the decrease in valuation allowance offsets our tax provision dollar for dollar. We also recorded Alternative Minimum Tax liability (“AMT”) tax expense of $10 million. In most cases, the recognition of AMT does not result in tax expense. However, as discussed above, since our NOL was subject to a full valuation allowance, any liability for AMT is recorded as tax expense. We also recorded $2 million of state income tax provision in 2006 related to certain states where NOL was not available to be used.
 
For the year ended December 31, 2005, we did not record an income tax benefit and recorded a full valuation allowance on any future tax benefits generated during that period as we had yet to achieve several consecutive quarters of profitable results coupled with an expectation of continued profitability.
 
The table below sets forth our selected mainline operating data. The 2005 full year operating statistics, which consist of 269 days of AWA results and 96 days of consolidated US Airways Group results, do not provide a meaningful comparison and have been omitted.
 
                         
                Percent
 
    Year Ended December 31,     Change
 
    2007     2006     2007-2006  
 
Revenue passenger miles (millions)(a)
    61,262       60,689       0.9  
Available seat miles (millions)(b)
    75,842       76,983       (1.5 )
Load factor (percent)(c)
    80.8       78.8       2.0 pts  
Yield (cents)(d)
    13.28       13.13       1.2  
Passenger revenue per available seat mile (cents)(e)
    10.73       10.35       3.7  
Cost per available seat mile (cents)(f)
    11.30       10.96       3.1  
Passenger enplanements (thousands)(g)
    57,871       57,345       0.9  
Departures (thousands)
    524.8       541.7       (3.1 )
Aircraft at end of period
    356       359       (0.8 )
Block hours (thousands)(h)
    1,343       1,365       (1.6 )
Average stage length (miles)(i)
    925       927       (0.3 )
Average passenger journey (miles)(j)
    1,489       1,478       0.7  
Gallons of aircraft fuel consumed (millions)
    1,195       1,210       (1.3 )
Average aircraft fuel price including tax (dollars per gallon)
    2.20       2.08       5.8  
Full time equivalent employees (end of period)
    34,437       34,077       1.1  
 
 
(a) Revenue passenger mile (“RPM”) — A basic measure of sales volume. A RPM represents one passenger flown one mile.


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(b) Available seat mile (“ASM”) — A basic measure of production. An ASM represents one seat flown one mile.
 
(c) Load factor — The percentage of available seats that are filled with revenue passengers.
 
(d) Yield — A measure of airline revenue derived by dividing passenger revenue by revenue passenger miles and expressed in cents per mile.
 
(e) Passenger revenue per available seat mile (“PRASM”) — Total passenger revenues divided by total available seat miles.
 
(f) Cost per available seat mile (“CASM”) — Total mainline operating expenses divided by total available seat miles.
 
(g) Passenger enplanements — The number of passengers on board an aircraft including local, connecting and through passengers.
 
(h) Block hours — The hours measured from the moment an aircraft first moves under its own power, including taxi time, for the purposes of flight until the aircraft is docked at the next point of landing and its power is shut down.
 
(i) Average stage length — The average of the distances flown on each segment of every route.
 
(j) Average passenger journey — The average one-way trip measured in statute miles for one passenger origination.
 
2007 Compared With 2006
 
Operating Revenues:
 
                         
                Percent
 
    2007     2006     Change  
    (In millions)        
 
Operating revenues:
                       
Mainline passenger
  $ 8,135     $ 7,966       2.1  
Express passenger
    2,698       2,744       (1.7 )
Cargo
    138       153       (9.4 )
Other
    729       694       4.9  
                         
Total operating revenues
  $ 11,700     $ 11,557       1.2  
                         
 
Total operating revenues for 2007 were $11.7 billion as compared to $11.56 billion in 2006. Mainline passenger revenues were $8.14 billion in 2007, as compared to $7.97 billion in 2006. RPMs increased 0.9% as mainline capacity, as measured by ASMs, decreased 1.5%, resulting in a 2.0 point increase in load factor to 80.8%. Passenger yield increased 1.2% to 13.28 cents in 2007 from 13.13 cents in 2006. PRASM increased 3.7% to 10.73 cents in 2007 from 10.35 cents in 2006. The increases in yield and PRASM are due principally to the strong revenue environment in 2007 resulting from reductions in industry capacity and continued capacity and pricing discipline, industry wide fare increases during the 2007 period and higher passenger demand.
 
Express passenger revenues were $2.7 billion for 2007, a decrease of $46 million from the 2006 period. Express capacity, as measured by ASMs, decreased 5.0% in the 2007 period, due primarily to planned reductions in Express flying during 2007. Express RPMs decreased by 2.6% on lower capacity resulting in a 1.8 point increase in load factor to 73.0%. Passenger yield increased by 1% to 26.12 cents in 2007 from 25.86 cents in 2006.
 
Cargo revenues were $138 million in 2007, a decrease of $15 million from the 2006 period due to decreases in domestic mail and freight volumes. Other revenues were $729 million in 2007, an increase of $35 million from the 2006 period. The increase in other revenues was primarily driven by an increase in revenue associated with higher fuel sales to pro-rate carriers through MSC.


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Operating Expenses:
 
                         
                Percent
 
    2007     2006     Change  
    (In millions)        
 
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 2,630     $ 2,518       4.4  
Loss (gain) on fuel hedging instruments, net:
                       
Realized
    (58 )     9       nm  
Unrealized
    (187 )     70       nm  
Salaries and related costs
    2,302       2,090       10.1  
Aircraft rent
    727       732       (0.6 )
Aircraft maintenance
    635       582       9.1  
Other rent and landing fees
    536       568       (5.7 )
Selling expenses
    453       446       1.6  
Special items, net
    99       27       nm  
Depreciation and amortization
    189       175       8.2  
Other
    1,247       1,223       2.0  
                         
Total mainline operating expenses
    8,573       8,440       1.6  
Express expenses:
                       
Fuel
    765       764       0.1  
Other
    1,829       1,795       1.9  
                         
Total operating expenses
  $ 11,167     $ 10,999       1.5  
                         
 
Total operating expenses were $11.17 billion in 2007, an increase of $168 million or 1.5% compared to the 2006 period. Mainline operating expenses were $8.57 billion in the 2007 period, an increase of $133 million from the 2006 period, while ASMs decreased 1.5%. The 2007 period included net charges from special items of $99 million, primarily due to merger related transition expenses. This compares to net charges from special items of $27 million in 2006, which included $131 million of merger related transition expenses, offset by a $90 million credit related to the restructuring of the then existing Airbus aircraft order and $14 million of credits related to the settlement of certain bankruptcy-related claims. Mainline CASM increased 3.1% to 11.30 cents in 2007 from 10.96 cents in 2006. The period over period increase in CASM was driven principally by higher salaries and related costs ($212 million), due primarily to increased headcount associated with our operational improvement plan and a $99 million charge to increase our obligation for long-term disability as a result of a change in the FAA mandated retirement age for certain pilots, and aircraft fuel costs ($112 million), due to a 5.8% increase in the average price per gallon of fuel in 2007. These increases were offset in part by gains on fuel hedging instruments ($245 million) in the 2007 period as compared to losses in the 2006 period ($79 million).


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The table below sets forth the major components of our mainline CASM for the years ended December 31, 2007 and 2006:
 
                                 
    Year Ended
             
    December 31,     Percent
       
    2007     2006     Change        
    (In cents)              
 
Mainline:
                               
Aircraft fuel and related taxes
    3.47       3.27       6.0          
Loss (gain) on fuel hedging instruments, net
    (0.32 )     0.10       nm          
Salaries and related costs
    3.03       2.71       11.8          
Aircraft rent
    0.96       0.95       0.9          
Aircraft maintenance
    0.84       0.75       10.8          
Other rent and landing fees
    0.70       0.74       (4.3 )        
Selling expenses
    0.60       0.58       3.1          
Special items, net
    0.13       0.04       nm          
Depreciation and amortization
    0.25       0.23       9.9          
Other
    1.64       1.59       3.5          
                                 
      11.30       10.96       3.1          
                                 
 
Significant changes in the components of mainline operating expense per ASM are as follows:
 
  •  Aircraft fuel and related taxes per ASM increased 6% due primarily to a 5.8% increase in the average price per gallon of fuel to $2.20 in 2007 from $2.08 in 2006.
 
  •  Loss (gain) on fuel hedging instruments, net per ASM fluctuated from a loss of 0.10 cents in 2006 to a gain of 0.32 cents in 2007 as a result of a period over period increase in the volume of barrels hedged during a period in which the fair market value of the costless collar transactions increased.
 
  •  Salaries and related costs per ASM increased 11.8% due to a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of a change in the FAA mandated retirement age for pilots from 60 to 65 as well as a period over period increase in headcount, principally in fleet and passenger service employees as part of our initiative to improve operational performance, and increases in employee benefits as a result of higher medical claims due to general inflationary cost increases.
 
  •  Aircraft maintenance expense per ASM increased 10.8% due principally to an increase in the number of overhauls performed on engines not subject to power by the hour maintenance agreements as well as an increase in the volume of seat overhauls and thrust reverser repairs in the 2007 period compared to the 2006 period.
 
  •  Depreciation and amortization per ASM increased 9.9% due to an increase in capital expenditures in 2007, specifically the acquisition of Embraer 190 aircraft and equipment to support flight operations.
 
Total Express expenses increased 1.4% in the 2007 period to $2.59 billion from $2.56 billion in the 2006 period, as other Express operating expenses increased $34 million. Fuel costs remained consistent period over period as the average fuel price per gallon increased 4.2% from $2.14 in the 2006 period to $2.23 in the 2007 period, which was offset by a 4% decrease in gallons consumed as block hours were down 6.2% in the 2007 period due to planned reductions in Express flying. The increase in other Express operating expenses is a result of higher rates paid under certain capacity purchase agreements due to contractually scheduled rate changes.


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Nonoperating Income (Expense):
 
                         
                Percent
 
    2007     2006     Change  
    (In millions)        
 
Nonoperating income (expense):
                       
Interest income
  $ 172     $ 153       12.5  
Interest expense, net
    (273 )     (295 )     (7.5 )
Other, net
    2       (12 )     nm  
                         
Total nonoperating expense, net
  $ (99 )   $ (154 )     (35.7 )
                         
 
We had net nonoperating expense of $99 million in 2007 as compared to $154 million in 2006. Interest income increased $19 million to $172 million in 2007 due to higher average cash balances and higher average rates of return on investments. Interest expense decreased $22 million to $273 million due to the full year effect in 2007 of refinancing the loan formerly guaranteed by the ATSB at lower average interest rates in March 2006, as well as the refinancing of the GE loan at lower average interest rates and the repayment of the Barclays Bank of Delaware prepaid miles loan in March 2007.
 
The 2007 period includes other nonoperating income of $2 million primarily related to the $18 million write off of debt issuance costs in connection with the refinancing of the GE loan in March 2007 as well as a $10 million impairment on auction rate securities considered to be other than temporary, offset by a $17 million gain on the sale of stock in ARINC Incorporated and $7 million in foreign currency gains related to sales transactions denominated in foreign currencies. The 2006 period includes $6 million of nonoperating expense related to prepayment penalties and $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan formerly guaranteed by the ATSB and two loans previously provided to AWA by GECC as well as $17 million in payments in connection with the inducement to convert $70 million of the 7% Senior Convertible Notes to common stock and a $2 million write off of debt issuance costs associated with those converted notes, offset by $11 million of derivative gains attributable to stock options in Sabre and warrants in a number of companies.
 
2006 Compared With 2005
 
As discussed above, the full year 2006 includes the consolidated results of US Airways Group and its subsidiaries, including US Airways, America West Holdings and AWA. The 2005 statement of operations 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 the new US Airways Group for the 96 days from September 27, 2005 to December 31, 2005. The table below shows the consolidated results (in millions):
 
                                 
    2006     2005  
    Consolidated
    Consolidated
          America
 
    US Airways
    US Airways
    96 Days
    West
 
    Group     Group     US Airways(1)     Holdings  
 
Operating revenues
  $ 11,557     $ 5,069     $ 1,805     $ 3,264  
Operating expenses
    10,999       5,286       1,897       3,389  
                                 
Operating income (loss)
    558       (217 )     (92 )     (125 )
Nonoperating expense, net
    (154 )     (118 )     (44 )     (74 )
Income tax provision
    101                    
                                 
Income (loss) before cumulative effect of a change in accounting principle
  $ 303     $ (335 )   $ (136 )   $ (199 )
                                 
Diluted earnings (loss) per common share before cumulative effect of a change in accounting principle
  $ 3.32     $ (10.65 )   $ n/a     $ n/a  
                                 
 
 
(1) Includes US Airways and US Airways Group’s wholly owned subsidiaries, PSA, Piedmont and MSC.


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Total revenue in 2006 was $11.56 billion compared to $5.07 billion in 2005. The majority of the increase in revenue resulted from the inclusion of the results of US Airways Group as a result of the merger. In addition, an increase of $373 million, or 11.4%, was driven by an increase in passenger yield of 12.8% due to improvements in the revenue environment from increased demand and reductions in industry capacity.
 
Total operating expenses in 2006 were $11 billion compared to $5.29 billion in 2005, primarily reflecting the impact of the merger. The remaining increase in operating expense of $288 million or 8.5% was driven by the following factors:
 
  •  Aircraft fuel and related tax expense increased $99 million or 12.2% due primarily to a 16.5% increase in the average price per gallon of fuel to $2.09 in 2006 from $1.80 in 2005.
 
  •  Loss (gain) on fuel hedging instruments, net fluctuated from a gain of $75 million in 2005 to a loss of $79 million in 2006 as a result of a period over period increase in the volume of barrels hedged during a period in which the fair market value of the costless collar transactions decreased.
 
  •  Other operating expenses increased $36 million or 11.3% in 2006 primarily due to the transition from the FlightFund frequent flyer program to the Dividend Miles program, which resulted in higher costs due to the Dividend Miles program allowing members to redeem awards on Star Alliance partner airlines.
 
Total nonoperating expense increased $36 million or 31% from 2005 to 2006, primarily reflecting the results of the merger. Interest income increased $123 million to $153 million in 2006 due to higher average cash balances as a result of the merger and higher average rates of return on investments as well as $8 million of interest income earned by AWA in 2006 on certain prior year federal tax refunds. Interest expense increased $148 million to $295 million due to higher average debt balances as a result of the merger.
 
The 2006 period includes $6 million of nonoperating expense related to prepayment penalties and $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan formerly guaranteed by the ATSB and two loans previously provided to AWA by GECC, as well as $17 million in payments in connection with the inducement to convert $70 million of the 7% Senior Convertible Notes to common stock and a $2 million write off of debt issuance costs associated with those converted notes. These expenses were offset by $11 million of derivative gains attributable to stock options in Sabre and warrants in a number of companies. The 2005 period includes nonoperating expense of $8 million related to the write-off of the unamortized value of the ATSB warrants upon their repurchase in October 2005 and an aggregate $2 million write-off of debt issuance costs associated with the exchange of the 7.25% Senior Exchangeable Notes due 2023 and retirement of a portion of the loan formerly guaranteed by the ATSB.
 
US Airways’ Results of Operations
 
In connection with emergence from bankruptcy in September 2005, US Airways adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” As a result of the application of fresh-start reporting, the financial statements prior to September 30, 2005 are not comparable with the financial statements for the periods after September 30, 2005. While the effective date of the plan of reorganization and the merger was September 27, 2005, the results of operations for US Airways during the four day period from September 27 through September 30, 2005 are not material to the financial statement presentation. References to “Successor Company” refer to US Airways on or after September 30, 2005, after giving effect to the application of fresh-start reporting for bankruptcy. References to “Predecessor Company” refer to US Airways prior to September 30, 2005.
 
On September 26, 2007, as part of the integration efforts following the merger of US Airways Group and America West Holdings in September 2005, AWA surrendered its FAA operating certificate. As a result, all mainline airline operations are now being conducted under US Airways’ FAA operating certificate. In connection with the combination of all mainline airline operations under one FAA operating certificate, US Airways Group contributed 100% of its equity interest in America West Holdings, the parent company of AWA, to US Airways. As a result, America West Holdings and AWA are now wholly owned subsidiaries of US Airways. In addition, AWA transferred substantially all of its assets and liabilities to US Airways. All off-balance sheet commitments of AWA


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were also transferred to US Airways. This transaction constituted a transfer of assets between entities under common control and was accounted for at historical cost.
 
Transfers of assets between entities under common control are accounted for similar to the pooling of interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the contribution of shares. This management’s discussion and analysis of financial condition and results of operations is presented as though the transfer had occurred at the time of US Airways’ emergence from bankruptcy. Therefore, the Successor Company consolidated statements of operations, cash flows and shareholder’s equity for US Airways for the three month period ended December 31, 2005 in this report are comprised of the results of US Airways and America West Holdings. The Predecessor Company statements of operations for US Airways for the nine month period ended September 30, 2005 remain unchanged.
 
In 2007, US Airways realized operating income of $524 million and income before income taxes of $485 million. Included in these results is $245 million of net gains associated with fuel hedging transactions. This includes $187 million of unrealized gains resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments as well as $58 million of net realized gains on settled hedge transactions. US Airways is required to use mark-to-market accounting as our existing fuel hedging instruments do not meet the requirements for hedge accounting established by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” If these instruments had qualified for hedge accounting treatment, any unrealized gains or losses, including the $187 million discussed above, would have been deferred in other comprehensive income, a component of stockholder’s equity, until the jet fuel is purchased and the underlying fuel hedging instrument is settled. Given the market volatility of jet fuel, the fair value of these fuel hedging instruments is expected to change until settled. Operating results in the 2007 period also include $99 million of net special charges due to merger related transition expenses, as well as a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of a change in the FAA mandated retirement age for pilots from 60 to 65 and $4 million in charges related to the plans to reduce flying from Pittsburgh. These charges were offset by $7 million in tax credits due to an IRS rule change allowing US Airways to recover certain fuel usage tax amounts for years 2003-2006 and $9 million of insurance settlement proceeds related to business interruption and property damages incurred as a result of Hurricane Katrina.
 
Nonoperating expense in the 2007 period includes a $17 million gain recognized on the sale of stock in ARINC Incorporated, offset by $10 million in impairment losses on certain available for sale auction rate securities considered to be other than temporary.
 
In 2006, US Airways realized operating income of $557 million and income before income taxes and cumulative effect of change in accounting principle of $446 million. Included in these results is $79 million of net losses associated with fuel hedging transactions. This includes $70 million of unrealized losses resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments as well as $9 million of net realized losses on settled hedge transactions. Operating results in the 2006 period also include $38 million of net special charges, consisting of $131 million of merger related transition expenses offset by a $90 million credit related to the restructuring of the then existing Airbus aircraft order and $3 million of credits related to the settlement of certain bankruptcy-related claims.
 
Nonoperating expense in the 2006 period includes $6 million of expense related to prepayment penalties and $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan previously guaranteed by the ATSB and two loans previously provided to AWA by GECC and $8 million of interest income earned by AWA on certain prior year federal income tax refunds.
 
In 2005, US Airways realized an operating loss of $325 million and income before income taxes of $22 million. Included in these results is $50 million of net losses associated with fuel hedging transactions. This includes $70 million of unrealized losses resulting from the application of mark-to-market accounting for changes in the fair value of fuel hedging instruments offset by $20 million of net realized gains on settled hedge transactions. Operating results in the 2005 period include $36 million of net special charges, including $28 million in merger related transition costs and $7 million in power by the hour program penalties.


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Nonoperating expense in the 2005 period includes $8 million of expenses related to the write-off of the unamortized value of the ATSB warrants upon their repurchase in October 2005 and an aggregate $2 million write off of debt issuance costs associated with the exchange of the 7.25% Senior Exchangeable Notes due 2023.
 
As of December 31, 2007, US Airways has approximately $761 million of gross NOL to reduce future federal taxable income. Of this amount, approximately $649 million is available to reduce federal taxable income in the calendar year 2008. US Airways’ deferred tax asset, which includes the $649 million of NOL discussed above, has been subject to a full valuation allowance.
 
For the year ended December 31, 2007, US Airways utilized NOL to reduce its income tax obligation. Utilization of this NOL results in a corresponding decrease in the valuation allowance. In accordance with SFAS No. 109, as this valuation allowance was established through the recognition of tax expense, the decrease in valuation allowance offsets the tax provision dollar for dollar. US Airways recognized $7 million of non-cash state income tax expense for the year ended December 31, 2007, as it utilized NOL that was generated prior to the merger. In accordance with SFAS No. 109, as this was acquired NOL, the decrease in the valuation allowance associated with this NOL reduced goodwill instead of the provision for income taxes. At December 31, 2007, the remaining federal valuation allowance is $40 million, all of which was established through the recognition of tax expense. In addition, US Airways has $33 million and $3 million, respectively, of unrealized federal and state tax benefit related to amounts recorded in other comprehensive income. At December 31, 2007, the remaining state valuation allowance is $43 million, of which $19 million was established through the recognition of tax expense and $24 million is associated with acquired NOL.
 
For the year ended December 31, 2006, US Airways recognized $85 million of non-cash income tax expense, as it used NOL that was generated prior to the merger. In accordance with SFAS No. 109, as this valuation allowance was established through the recognition of tax expense, the decrease in valuation allowance offsets the tax provision dollar for dollar. US Airways also recorded AMT tax expense of $10 million. In most cases, the recognition of AMT does not result in tax expense. However, as discussed above, since US Airways’ NOL was subject to a full valuation allowance, any liability for AMT is recorded as tax expense. US Airways also recorded $2 million of state income tax provision in 2006 related to certain states where NOL was not available to be used.
 
For the year ended December 31, 2005, US Airways did not record an income tax benefit and recorded a full valuation allowance on any future tax benefits generated during that period as we had yet to achieve several consecutive quarters of profitable results coupled with an expectation of continued profitability.
 
The table below sets forth selected mainline operating data for US Airways. The 2005 full year operating statistics, which consist of a full year of US Airways’ results and AWA’s results for the three months ended December 31, 2005, do not provide a meaningful comparison and have been omitted.
 
                                 
                Percent
       
    Year Ended December 31,     Change
       
    2007     2006     2007-2006        
 
Revenue passenger miles (millions)(a)
    61,262       60,689       0.9          
Available seat miles (millions)(b)
    75,842       76,983       (1.5 )        
Load factor (percent)(c)
    80.8       78.8       2.0 pts          
Yield (cents)(d)
    13.28       13.13       1.2          
Passenger revenue per available seat mile (cents)(e)
    10.73       10.35       3.7          
Aircraft at end of period
    356       359       (0.8 )        
 
 
(a) Revenue passenger mile (“RPM”) — A basic measure of sales volume. A RPM represents one passenger flown one mile.
 
(b) Available seat mile (“ASM”) — A basic measure of production. An ASM represents one seat flown one mile.
 
(c) Load factor — The percentage of available seats that are filled with revenue passengers.
 
(d) Yield — A measure of airline revenue derived by dividing passenger revenue by revenue passenger miles and expressed in cents per mile.


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(e) Passenger revenue per available seat mile (“PRASM”) — Total passenger revenues divided by total available seat miles.
 
2007 Compared With 2006
 
Operating Revenues:
 
                         
                Percent
 
    2007     2006     Change  
    (In millions)        
 
Operating revenues:
                       
Mainline passenger
  $ 8,135     $ 7,966       2.1  
Express passenger
    2,698       2,744       (1.7 )
Cargo
    138       153       (9.4 )
Other
    842       829       1.5  
                         
Total operating revenues
  $ 11,813     $ 11,692       1.0  
                         
 
Total operating revenues for 2007 were $11.81 billion as compared to $11.69 billion in 2006. Mainline passenger revenues were $8.14 billion in 2007, as compared to $7.97 billion in 2006. RPMs increased 0.9% as mainline capacity, as measured by ASMs, decreased 1.5%, resulting in a 2.0 point increase in load factor to 80.8%. Passenger yield increased 1.2% to 13.28 cents in 2007 from 13.13 cents in 2006. PRASM increased 3.7% to 10.73 cents in 2007 from 10.35 cents in 2006. The increases in yield and PRASM are due principally to the strong revenue environment in 2007 resulting from reductions in industry capacity and continued capacity and pricing discipline, industry wide fare increases during the 2007 period and higher passenger demand.
 
Express passenger revenues were $2.7 billion for 2007, a decrease of $46 million from the 2006 period. Express capacity, as measured by ASMs, decreased 5.0% in the 2007 period, due primarily to planned reductions in Express flying during 2007. Express RPMs decreased by 2.6% on lower capacity resulting in a 1.8 point increase in load factor to 73.0%. Passenger yield increased by 1% to 26.12 cents in 2007 from 25.86 cents in 2006.
 
Cargo revenues were $138 million in 2007, a decrease of $15 million from the 2006 period due to decreases in domestic mail and freight volumes. Other revenues were $842 million in 2007, which is consistent with the 2006 period.


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Operating Expenses:
 
                         
                Percent
 
    2007     2006     Change  
    (In millions)        
 
Operating expenses:
                       
Aircraft fuel and related taxes
  $ 2,630     $ 2,518       4.4  
Loss (gain) on fuel hedging instruments, net
                       
Realized
    (58 )     9       nm  
Unrealized
    (187 )     70       nm  
Salaries and related costs
    2,302       2,090       10.2  
Aircraft rent
    727       732       (0.6 )
Aircraft maintenance
    635       582       9.1  
Other rent and landing fees
    536       568       (5.7 )
Selling expenses
    453       446       1.6  
Special items, net
    99       38       nm  
Depreciation and amortization
    198       184       8.1  
Other
    1,227       1,228       (0.1 )
                         
Total mainline operating expenses
    8,562       8,465       1.1  
Express expenses:
                       
Fuel
    765       764       0.1  
Other
    1,962       1,906       2.9  
                         
Total operating expenses
  $ 11,289     $ 11,135       1.4  
                         
 
Total operating expenses were $11.29 billion in 2007, an increase of $154 million or 1.4% compared to the 2006 period. Mainline operating expenses were $8.56 billion in 2007, an increase of $97 million from the 2006 period, while ASMs decreased 1.5%. The 2007 period included net charges from special items of $99 million, primarily due to merger related transition expenses. This compares to net charges from special items of $38 million in 2006, which included $131 million of merger related transition expenses, offset by a $90 million credit related to the restructuring of the then existing Airbus aircraft order and $3 million of credits related to the settlement of certain bankruptcy-related claims. The period over period increase in mainline operating expenses was driven principally by increases in salaries and related costs ($212 million), aircraft fuel ($112 million) and aircraft maintenance ($53 million). These increases were offset in part by gains on fuel hedging instruments ($245 million) in the 2007 period as compared to losses in the 2006 period ($79 million).
 
Significant changes in the components of mainline operating expenses are as follows:
 
  •  Aircraft fuel and related taxes increased 4.4% due primarily to a 5.8% increase in the average price per gallon of fuel to $2.20 in 2007 from $2.08 in 2006.
 
  •  Loss (gain) on fuel hedging instruments, net fluctuated from a loss of $79 million in 2006 to a gain of $245 million in 2007 as a result of a period over period increase in the volume of barrels hedged during a period in which the fair market value of the costless collar transactions increased.
 
  •  Salaries and related costs increased 10.2% due a $99 million charge for an increase to long-term disability obligations for US Airways’ pilots as a result of a change in the FAA mandated retirement age for pilots from 60 to 65 as well as a period over period increase in headcount, principally in fleet and passenger service employees as part of our initiative to improve operational performance, and increases in employee benefits as a result of higher medical claims due to general inflationary cost increases.
 
  •  Aircraft maintenance expense increased 9.1% due principally to an increase in the number of overhauls performed on engines not subject to power by the hour maintenance agreements as well as an increase in the volume of seat overhauls and thrust reverser repairs in the 2007 period compared to the 2006 period.


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  •  Depreciation and amortization increased 8.1% due to an increase in capital expenditures in 2007, specifically the acquisition of Embraer 190 aircraft and equipment to support flight operations.
 
Total Express expenses increased 2.1% in the 2007 period to $2.73 billion from $2.67 billion in the 2006 period, as other Express operating expenses increased $56 million. Fuel costs remained consistent period over period as the average fuel price per gallon increased 4.2% from $2.14 in the 2006 period to $2.23 in the 2007 period, which was offset by a 4% decrease in gallons consumed as block hours were down 6.2% in the 2007 period due to planned reductions in Express flying. The increase in other Express operating expenses is a result of higher rates paid under certain capacity purchase agreements due to contractually scheduled rate changes.
 
Nonoperating Income (Expense):
 
                         
                Percent
 
    2007     2006     Change  
    (In millions)        
 
Nonoperating income (expense):
                       
Interest income
  $ 172     $ 153       12.6  
Interest expense, net
    (229 )     (268 )     (14.4 )
Other, net
    18       4       nm  
                         
Total nonoperating expense, net
  $ (39 )   $ (111 )     (64.7 )
                         
 
US Airways had net nonoperating expense of $39 million in 2007 as compared to $111 million in 2006. Interest income increased $19 million to $172 million in 2007 due to higher average cash balances and higher average rates of returns on investments. Interest expense decreased to $229 million from $268 million due to the full year effect in 2007 of the refinancing in March 2006 by US Airways Group of the loan formerly guaranteed by the ATSB. The refinanced debt is no longer held by US Airways. Also contributing to lower interest expense was the conversion of the 7.5% Convertible Senior Notes in April 2006 into equity of US Airways Group and the repayment by US Airways Group of the Barclays Bank of Delaware prepaid miles loan in March 2007.
 
The 2007 period includes other nonoperating income of $18 million primarily related to a $17 million gain on the sale of stock in ARINC Incorporated as well as $7 million in foreign currency gains related to sales transactions denominated in foreign currencies, offset by a $10 million impairment on auction rate securities considered to be other than temporary. The 2006 period includes other nonoperating expense of $6 million related to prepayment penalties and an aggregate of $5 million in accelerated amortization of debt issuance costs in connection with the refinancing of the loan formerly guaranteed by the ATSB and two loans previously provided to AWA by GECC, offset by $11 million of derivative gains attributable to stock options in Sabre and warrants in a number of companies.
 
2006 Compared With 2005
 
As discussed above, the Successor Company consolidated statement of operations for US Airways for the three month period ended December 31, 2005 in this report is comprised of the results of US Airways and America West


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Holdings. The Predecessor Company statement of operations for US Airways for the nine month period ended September 30, 2005 remains unchanged. The table below shows the consolidated results (in millions):
 
                         
          Predecessor
 
    Successor Company     Company  
          Three Months
    Nine Months
 
    Year Ended
    Ended
    Ended
 
    December 31,
    December 31,
    September 30,
 
    2006     2005     2005  
 
Operating revenues
  $ 11,692     $ 2,589     $ 5,452  
Operating expenses
    11,135       2,772       5,594  
                         
Operating income (loss)
    557       (183 )     (142 )
Nonoperating income (expense), net
    (111 )     (73 )     420  
Income tax provision (benefit)
    98             (2 )
                         
Income (loss) before cumulative effect of a change in accounting principle
  $ 348     $ (256 )   $ 280  
                         
 
Total revenue in 2006 was $11.69 billion compared to $8.04 billion in 2005. The majority of the increase in revenue resulted from the inclusion of the results of America West Holdings beginning in the fourth quarter of 2005. In addition, an increase of $849 million, or 11.8%, was driven by an increase in passenger yield of 12.2% due to improvements in the revenue environment from increased demand and reductions in industry capacity.
 
Total operating expenses in 2006 were $11.14 billion compared to $8.37 billion, primarily reflecting the impact of the inclusion of America West Holdings’ results. The remaining increase in operating expense of $44 million or 0.6% was driven by the following factors:
 
  •  Aircraft fuel and related tax expense increased $121 million or 8.1% due primarily to a 16.8% increase in the average price per gallon of fuel to $2.07 in 2006 from $1.77 in 2005.
 
  •  Selling expenses decreased $42 million or 12.9% primarily due to reduction in travel agent commissions and booking fees as a result of lower rates renegotiated subsequent to the merger.
 
  •  Depreciation and amortization decreased $51 million or 27% as a result of fewer owned aircraft in the operating fleet as a result of sale lease back transactions completed in 2005.
 
Total nonoperating expense (income) decreased from income of $347 million in 2005 to expense of $111 million in 2006, primarily reflecting income from reorganization items in 2005 of $636 million and the results of the inclusion of America West Holdings. Interest income increased $116 million to $153 million in 2006 due to higher average cash balances as a result of the merger and higher average rates of return on investments. Interest expense decreased $44 million to $268 million as a result of reductions in the outstanding debt subsequent to the sale-leaseback transactions completed in 2005 and the fact that interest expense in the first nine months of 2005 included penalty interest incurred as a result of the bankruptcy proceedings.


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Description of Reorganization Items
 
Reorganization items, net represent amounts incurred as a direct result of US Airways’ Chapter 11 filings and are presented separately in the statements of operations. Such items consist of the following (in millions):
 
         
    Predecessor Company  
    Nine Months Ended
 
    September 30, 2005  
 
Curtailment of postretirement benefits(a)
  $ 1,420  
Termination of pension plans(b)
    801  
Discharge of liabilities(c)
    75  
Aircraft order cancellation penalties & reversals(d)
    30  
Interest income on accumulated cash
    7  
Damage and deficiency claims(e)
    2  
Revaluation of assets and liabilities(f)
    (1,498 )
Severance including benefits(g)
    (96 )
Professional fees
    (57 )
Airbus equipment deposits and credits, net(h)
    (35 )
Restructured aircraft financings(i)
    (5 )
Write-off of deferred compensation
    (4 )
Other
    (4 )
         
    $ 636  
         
 
 
(a) In January 2005, the Bankruptcy Court approved settlement agreements between US Airways and representatives of its retirees, including the IAM, TWU and a court-appointed Section 1114 Committee, to begin the significant curtailment of postretirement medical benefits. US Airways recognized a gain of $183 million in connection with this curtailment in the first quarter of 2005. Upon the emergence from bankruptcy and effectiveness of the plan of reorganization, an additional gain of $1.24 billion was recognized when the liability associated with the postretirement medical benefits was reduced to fair market value. See also Note 6(a) to US Airways’ consolidated financial statements included in Item 8B of this report.
 
(b) Also in January 2005, US Airways terminated three defined benefit plans related to the flight attendants, mechanics and certain other employees (see Note 6(a) to US Airways’ consolidated financial statements included in Item 8B of this report). PBGC was appointed trustee of the plans upon termination. US Airways recognized a curtailment gain of $24 million and a $91 million minimum pension liability adjustment in connection with the terminations in the first quarter of 2005. Upon the effective date of the plan of reorganization and in connection with the settlement with the PBGC, the remaining liabilities associated with these plans were written off, net of settlement amounts.
 
(c) Reflects the discharge of trade accounts payable and other liabilities upon emergence from bankruptcy. Most of these obligations were only entitled to receive such distributions of cash and common stock as provided for under the plan of reorganization in each of the bankruptcies. A portion of the liabilities subject to compromise in the bankruptcies were restructured and continued, as restructured, to be liabilities of the Successor Company.
 
(d) As a result of US Airways’ bankruptcy filing in September 2004, US Airways was not able to secure the financing necessary to take on-time delivery of three scheduled regional jet aircraft and therefore accrued penalties of $3 million until delivery of these aircraft was made to a US Airways Express affiliate in August 2005. Offsetting these penalties is the reversal of $33 million in penalties recorded by US Airways in the nine months ended December 31, 2003 due to its intention not to take delivery of certain aircraft scheduled for future delivery. In connection with the Airbus Memorandum of Understanding (“MOU”), the accrual for these penalties was reversed.
 
(e) Damage and deficiency claims are largely a result of US Airways’ election to either restructure, abandon or reject aircraft debt and leases during the bankruptcy proceedings. As a result of the confirmation of the plan of reorganization and the effectiveness of the merger, these claims were withdrawn and the accruals reversed.


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(f) As of September 30, 2005, US Airways recorded $1.5 billion of adjustments to reflect assets and liabilities at fair value, including an initial net write-down of goodwill of $1.82 billion. Goodwill of $584 million was recorded to reflect the excess of the estimated fair value of liabilities and equity over identifiable assets. Subsequent to September 30, 2005, US Airways recorded an additional $148 million of goodwill to reflect adjustments to the estimated fair values of certain assets and liabilities.
 
(g) In connection with filing for bankruptcy on September 12, 2004, US Airways achieved cost-savings agreements with its principal collective bargaining groups. In connection with the new labor agreements, approximately 5,000 employees across several of US Airways’ labor groups were involuntarily terminated or participated in voluntary furlough and termination programs.
 
(h) In connection with the Airbus MOU, US Airways was required to pay a restructuring fee of $39 million, which was paid by means of offset against existing equipment deposits held by Airbus. US Airways also received credits from Airbus totaling $4 million in 2005, primarily related to equipment deposits. See also Note 3 to US Airways’ consolidated financial statements included in Item 8B of this report.
 
(i) The GE Merger MOU provided for the continued use of certain leased Airbus, Boeing and regional jet aircraft, the modification of monthly lease rates and the return of certain other leased Airbus and Boeing aircraft. The GE Merger MOU also provided for the sale-leaseback of assets securing various GE obligations. In connection with these transactions, US Airways recorded a net loss of $5 million.
 
Liquidity and Capital Resources
 
As of December 31, 2007, our cash, cash equivalents, investments in marketable securities and restricted cash were $3 billion, of which $2.53 billion was unrestricted. As of December 31, 2007, US Airways’ cash, cash equivalents, investments in marketable securities and restricted cash were $2.99 billion, of which $2.52 billion was unrestricted. US Airways’ and our investments in marketable securities include $353 million of investments in auction rate securities that are classified as noncurrent assets on our balance sheet.
 
The par value of these auction rate securities totals $411 million as of December 31, 2007. Contractual maturities for these auction rate securities are greater than nine years with an interest reset date approximately every 28 days. Historically, the carrying value of auction rate securities approximated fair value due to the frequent resetting of the interest rates. With the liquidity issues experienced in the global credit and capital markets, our auction rate securities have experienced multiple failed auctions. While we continue to earn interest on these investments at the maximum contractual rate, the estimated market value of these auction rate securities no longer approximates par value.
 
Given the complexity of auction rate securities, we engaged an investment advisor to assist us in determining the fair values of our investments. With the assistance of our advisor, we estimated the fair value of these auction rate securities based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security. These estimated fair values could change significantly based on future market conditions.
 
We concluded that the fair market value of these auction rate securities at December 31, 2007 was $353 million, a decline of $58 million from par value. Of this amount $48 million was deemed temporary as we believe the decline in market value is due to general market conditions. Based upon our evaluation of available information, we believe these investments are of high credit quality, as substantially all of the investments carry an AAA credit rating, and approximately 30% of the par value of these auction rate securities is insured. Accordingly, we have recorded an unrealized loss on these securities of $48 million in other comprehensive income. We concluded that $10 million of the decline was other than temporary and recorded an impairment charge in other income, net. Our conclusion for the other than temporary impairment is based on the significant decline in fair value indicated for a certain investment, a portion of which is collateralized either directly or indirectly by sub-prime mortgages.
 
As of January 31, 2008, the commercial banks managing our investments provided us with estimated fair market values, which indicated an additional decline in the aggregate fair market value of our auction rate securities of approximately $70 million (from amounts provided as of December 31, 2007). We currently believe that these


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additional declines in value are also temporary and are attributed to current credit market events and continued lack of market liquidity in early 2008. Such temporary declines, if sustained, would be recognized in other comprehensive income in the first quarter of 2008. It is possible that additional declines in fair value may occur. To the extent the fair market values of our auction rate securities were to subsequently increase, such increase would reduce the unrealized loss recorded in other comprehensive income.
 
We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of our investments. If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in other comprehensive income or impairment charges in 2008.
 
We intend and have the ability to hold these auction rate securities until the market recovers. We do not anticipate having to sell these securities in order to operate our business. We believe that, based on our current unrestricted cash, cash equivalents and short-term marketable securities balances of $2.17 billion at December 31, 2007, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flow or our ability to fund our operations.
 
Sources and Uses of Cash
 
US Airways Group
 
Net cash provided by operating activities was $442 million and $618 million in 2007 and 2006, respectively, a decrease of $176 million. The decrease is a result of higher cash outflows in 2007 related to salaries and benefits, aircraft maintenance expense and fuel costs. The increase in cash outflows was partially offset by an increase in cash receipts due to the better revenue environment in 2007 compared to 2006.
 
Net cash provided by investing activities in 2007 was $269 million compared to net cash used in investing activities of $903 million in 2006. Principal investing activities in 2007 included purchases of property and equipment that totaled $523 million, including the purchase of nine Embraer 190 aircraft, an $80 million increase in equipment purchase deposits, a decrease in restricted cash of $200 million, and $56 million in proceeds from the sale of investments in ARINC and Sabre. We also had net proceeds from sales of investments in marketable securities of $612 million, which was principally the result of sales of auction rate securities that were still liquid at par value in the third quarter of 2007. The 2006 period included purchases of property and equipment totaling $232 million, including the purchase of three Boeing 757-200 and two Embraer 190 aircraft, net purchases of investments in marketable securities of $798 million and a decrease in restricted cash of $128 million. Changes in the restricted cash balances for the 2007 and 2006 periods are due to changes in reserves required under agreements for processing credit card transactions.
 
Net cash provided by financing activities was $121 million and $276 million in 2007 and 2006, respectively. Principal financing activities in 2007 included proceeds from the issuance of new debt including $1.6 billion of debt under the Citicorp credit facility and $198 million of equipment notes issued to finance the acquisition of nine Embraer 190 aircraft. Debt repayments were $1.68 billion and, using the proceeds from the Citicorp credit facility discussed above, included the repayment in full of the outstanding balance on the GE loan of $1.25 billion, the prepayment of miles by Barclays Bank Delaware of $325 million and a GECC credit facility of $19 million. Principal financing activities in 2006 included proceeds from the issuance of new debt totaling $1.42 billion, which included borrowings of $1.25 billion under the GE loan, a $64 million draw on one of the Airbus loans and $92 million of equipment notes issued to finance the acquisition of three Boeing 757-200 and two Embraer 190 aircraft. Debt repayments totaled $1.19 billion and, using the proceeds from the GE loan, included the repayment in full of the balances outstanding on our ATSB loans of $801 million, Airbus loans of $161 million, and two GECC term loans of $110 million. We also made a $17 million payment in 2006 related to the partial conversion of the 7% Senior Convertible Notes.
 
US Airways
 
Net cash provided by operating activities was $430 million and $649 million in 2007 and 2006, respectively, a decrease of $219 million. The decrease is a result of higher cash outflows in 2007 related to salaries and benefits,


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aircraft maintenance expense and fuel costs. The increase in cash outflows was partially offset by an increase in cash receipts due to the better revenue environment in 2007 compared to 2006.
 
Net cash provided by investing activities in 2007 was $306 million compared to net cash used in investing activities of $893 million in 2006. Principal investing activities in 2007 included purchases of property and equipment that totaled $486 million, including the purchase of nine Embraer 190 aircraft, an $80 million increase in equipment purchase deposits, a decrease in restricted cash of $200 million, and $56 million in proceeds from the sale of investments in ARINC and Sabre. US Airways also had net proceeds from sales of investments in marketable securities of $612 million, principally the result of sales of auction rate securities that were still liquid at par value in the third quarter of 2007. The 2006 period included purchases of property and equipment totaling $222 million, including the purchase of three Boeing 757-200 and two Embraer 190 aircraft, net purchases of investments in marketable securities of $798 million and a decrease in restricted cash of $128 million. Changes in the restricted cash balances for the 2007 and 2006 periods are due to changes in reserves required under agreements for processing credit card transactions.
 
Net cash provided by financing activities was $93 million and $239 million in 2007 and 2006, respectively. Principal financing activities in 2007 included the issuance of $198 million of new debt to finance the acquisition of nine Embraer 190 aircraft and total debt repayments of $105 million. The 2006 period included a net increase in payables to related parties of $247 million, the issuance of $92 million of new debt to finance the acquisition of three Boeing 757-200 aircraft and two Embraer 190 aircraft and total debt repayments of $100 million.
 
Commitments
 
As of December 31, 2007, we had $3.27 billion of long-term debt and capital leases (including current maturities and net of discount on debt), which consisted primarily of the items discussed below.
 
Refinancing Transactions
 
On March 23, 2007, we entered into a new term loan credit facility with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders, pursuant to which US Airways Group borrowed an aggregate principal amount of $1.6 billion. US Airways, AWA and certain other subsidiaries of US Airways Group are guarantors of the Citicorp credit facility.
 
The proceeds of the Citicorp credit facility were used to repay in full the following indebtedness:
 
  •  The amended and restated loan agreement, dated April 7, 2006, entered into by US Airways Group with GECC and a syndicate of lenders. At the time of the repayment, the total outstanding balance of the loan was $1.25 billion.
 
  •  The Barclays prepaid miles issued on October 3, 2005 in connection with the amended co-branded credit card agreement dated August 8, 2005 between pre-merger US Airways Group, AWA and Juniper Bank, a subsidiary of Barclays PLC that has since been renamed Barclays Bank Delaware (“Barclays”). At the time of the repayment, the total outstanding balance was $325 million.
 
  •  The credit facility with GECC, amended in July 2005 with an original balance of $28 million. At the time of the repayment, the total outstanding balance of the loan was $19 million.
 
The Citicorp credit facility bears interest at an index rate plus an applicable index margin or, at our option, LIBOR plus an applicable LIBOR margin for interest periods of one, two, three or six months. The applicable index margin, subject to adjustment, is 1.00%, 1.25% or 1.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or between $1 billion and $1.6 billion, respectively. The applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25% or 2.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or between $1 billion and $1.6 billion, respectively. In addition, interest on the Citicorp credit facility may be adjusted based on the credit rating for the Citicorp credit facility as follows: (i) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least one subgrade better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be the lower of 2.25% and the rate otherwise applicable based upon the


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adjusted Citicorp credit facility balance and (B) the applicable index margin will be the lower of 1.25% and the rate otherwise applicable based upon the Citicorp credit facility principal balance, and (ii) if the credit ratings of the Citicorp credit facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least two subgrades better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be 2.00% and (B) the applicable index margin will be 1.00%. As of December 31, 2007, the interest rate on the Citicorp credit facility was 7.28% based on a 2.50% LIBOR margin.
 
The Citicorp credit facility matures on March 23, 2014, and is repayable in seven annual installments with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.
 
In addition, the Citicorp credit facility requires certain mandatory prepayments upon the occurrence of certain events, establishes certain financial covenants, including minimum cash requirements and maintenance of certain minimum ratios, contains customary affirmative covenants and negative covenants and contains customary events of default. The Citicorp credit facility requires us to maintain consolidated unrestricted cash and cash equivalents of not less than $1.25 billion, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements, which would become restricted for use by us if certain adverse events occur per the terms of the agreement. At December 31, 2007, we were in compliance with all debt covenants.
 
7% Senior Convertible Notes
 
US Airways Group received net proceeds of $139 million related to the 7% Senior Convertible Notes due 2020 that were issued on September 30, 2005. The 7% notes are US Airways Group’s senior unsecured obligations and rank equally in right of payment to its other senior unsecured and unsubordinated indebtedness, and are effectively subordinated to its secured indebtedness to the extent of the value of assets securing such indebtedness. The 7% notes are fully and unconditionally guaranteed, jointly and severally and on a senior unsecured basis, by US Airways and AWA. The US Airways and AWA guarantees are the guarantors’ unsecured obligations, rank equally in right of payment to the other senior unsecured and unsubordinated indebtedness of the guarantors and are effectively subordinated to the guarantors’ secured indebtedness to the extent of the value of assets securing such indebtedness.
 
The 7% notes bear interest at the rate of 7% per year payable in cash semiannually in arrears on March 30 and September 30 of each year, beginning March 30, 2006. The 7% notes mature on September 30, 2020. Holders may convert, at any time on or prior to maturity or redemption, any outstanding notes (or portions thereof) into shares of US Airways Group’s common stock, initially at a conversion rate of 41.4508 shares of US Airways Group’s common stock per $1,000 principal amount of 7% notes (equivalent to an initial conversion price of approximately $24.12 per share of US Airways Group’s common stock). If a holder elects to convert its 7% notes in connection with certain specified fundamental changes that occur prior to October 5, 2015, the holder will be entitled to receive additional shares of US Airways Group’s common stock as a make whole premium upon conversion. In lieu of delivery of shares of US Airways Group’s common stock upon conversion of all or any portion of the 7% notes, US Airways Group may elect to pay holders surrendering 7% notes for conversion cash or a combination of shares and cash.
 
Holders of the 7% notes may require US Airways Group to purchase for cash or shares or a combination thereof, at US Airways Group’s election, all or a portion of their notes on September 30, 2010 and September 30, 2015 at a purchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, if any, to the purchase date. In addition, if US Airways Group experiences a fundamental change (as defined in the indenture governing the notes), holders may require US Airways Group to purchase for cash, shares or a combination thereof, at its election, all or a portion of their notes, subject to specified exceptions, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any, to the purchase date. Prior to October 5, 2010, the notes will not be redeemable at US Airways Group’s option. US Airways Group may redeem all or a portion of the notes at any time on or after October 5, 2010, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any, to the redemption date if the closing price of US


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Airways Group’s common stock has exceeded 115% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the trading day before the date on which US Airways Group mails the redemption notice.
 
In July 2006, approximately $21 million of the $144 million outstanding principal amount of the 7% notes were converted into 883,523 shares of common stock. In connection with the conversion, we paid a premium of $5 million to the holders of the converted notes, which was recorded in other non-operating expenses. In November 2006, approximately $49 million of the remaining $123 million outstanding principal amount of the notes were converted into 2,026,113 shares of common stock. In connection with the conversion, we paid a premium of $12 million to the holders of the converted notes, which was recorded in other non-operating expenses.
 
Affinity Credit Card Partner Agreement
 
In connection with the merger, AWA, pre-merger US Airways Group and Barclays Bank of Delaware entered into an amended credit card agreement on August 8, 2005. Pursuant to the amended credit card agreement, Barclays agreed to offer and market an airline mileage award credit card program to the general public to participate in US Airways Group’s Dividend Miles program through the use of a co-branded credit card. Under the amended credit card agreement, Barclays pays us fees for each mile awarded to each credit card account administered by Barclays, subject to certain exceptions. The credit card services provided by Barclays commenced in early January 2006.
 
Pre-merger US Airways’ credit card program was administered by Bank of America, N.A. (USA). Pending termination of the Bank of America agreement, there is a dual branding period during which both Barclays and Bank of America are running separate credit card programs for us. As a result of a May 11, 2007 settlement of litigation filed by Bank of America against US Airways Group, US Airways and AWA, the agreement with Bank of America has been extended to March 31, 2009, among other changes, and the dual branding period has been extended through the same date. The term of the amended credit card agreement with Barclays also was extended to March 31, 2015, among other changes, as a result of the litigation settlement.
 
Under the amended credit card agreement, Barclays also agreed to pay a one-time bonus payment of $130 million following the effectiveness of the merger and an annual bonus of $5 million to us, subject to certain exceptions, for each year after Barclays becomes the exclusive issuer of the co-branded credit card. If Barclays is not granted exclusivity to offer a co-branded credit card after the dual branding period with Bank of America, we must repay this bonus payment plus repay a $20 million bonus payment AWA previously received under the original credit card agreement with Barclays. Barclays may, at its option, terminate the amended credit card agreement in the event that we breach our obligations under the amended credit card agreement, or upon the occurrence of certain other events, which also would require us to repay some or all of the bonus payments as discussed above. As of December 31, 2007, we have not recorded income from the bonus payments and have a deferred liability of $150 million recorded in other long-term liabilities.
 
Aircraft and Engine Purchase Commitments
 
On June 13, 2006, we and Embraer executed an Amended and Restated Purchase Agreement and an Amended and Restated Letter Agreement. In accordance with the terms of these agreements, we placed an initial firm order for 25 Embraer 190 aircraft and an additional order for 32 Embraer 190 aircraft. The progress and deposit payments totaling approximately $18 million previously paid by us to Embraer in accordance with the terms of the Purchase Agreement dated as of May 9, 2003, are being applied to these orders in accordance with the terms of the amended and restated agreements. In addition, we had the option to purchase up to 50 additional Embraer 190 aircraft and to convert certain of the Embraer 190 aircraft to Embraer 170, Embraer 175 or Embraer 195 aircraft, subject to availability and upon agreed notice. Embraer has agreed to provide financing for certain of the aircraft. On July 21, 2006, we assigned 30 of the purchase options to Republic Airlines Inc. On January 12, 2007, we assigned eight additional purchase options to Republic Airlines. We purchased and took delivery of two Embraer 190 aircraft in the fourth quarter of 2006 and nine Embraer 190 aircraft throughout 2007. We expect to take delivery of 14 Embraer 190 aircraft in 2008. In June and August 2007, we amended the Amended and Restated Purchase Agreement to revise the delivery schedule for the additional 32 Embraer 190 aircraft. On June 6, 2007, we entered into another amendment to the Amended and Restated Purchase Agreement whereby Embraer granted us an additional


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140 purchase options. We further amended the Amended and Restated Letter Agreement in August 2007 to revise previous provisions concerning price escalation limits and assignment of purchase rights to regional operators.
 
In June 2007, US Airways announced that it had agreed to terms with Airbus for the acquisition of 92 aircraft, including 60 single-aisle A320 family aircraft and 32 wide-body aircraft, including 22 A350 XWB aircraft and ten A330 aircraft. On October 2, 2007, US Airways and Airbus executed the following definitive agreements for these aircraft:
 
  •  An Amended and Restated Airbus A320 Family Aircraft Purchase Agreement, which supersedes the AWA A319/A320 Purchase Agreement. The terms of the amended and restated purchase agreement encompass the purchase of 60 new narrow-body aircraft, including ten A319 aircraft, 40 A320 aircraft, and ten A321 aircraft, with conversion rights, in addition to the 37 aircraft from the previous A319/A320 Purchase Agreement. Deliveries of the aircraft under this agreement will run through 2012. US Airways expects to use the 60 A320 family aircraft to replace 60 older aircraft in the airline’s fleet. The amended and restated purchase agreement also provides US Airways with certain conversion rights, as well as purchase rights for the acquisition of additional A320 family aircraft, subject to certain terms and conditions. In addition, the amended and restated purchase agreement revises the delivery schedule for 15 A318 aircraft and provides US Airways with certain other rights with respect thereto. On January 31, 2008, US Airways canceled its order for 12 of the 15 A318 aircraft.
 
  •  An Amended and Restated Airbus A350 XWB Purchase Agreement, which supersedes the A350 Purchase Agreement dated September 27, 2005 between US Airways Group, US Airways, AWA and AVSA, S.A.R.L. (now Airbus S.A.S.). The new purchase agreement increases the number of firm order aircraft from 20 A350 aircraft to 18 A350-800 XWB aircraft and four A350-900 XWB aircraft, with the option to convert these aircraft to other A350 models, subject to certain terms and conditions. Deliveries for the 22 A350 XWB aircraft will begin in 2014 and extend through 2017. US Airways expects to use these aircraft for modest international expansion or replacement of existing older technology aircraft, as market conditions warrant. The Amended and Restated Airbus A350 XWB Purchase Agreement also gives US Airways purchase rights for the acquisition of additional A350 XWB aircraft, subject to certain terms and conditions.
 
  •  An Airbus A330 Purchase Agreement, which provides for the purchase by US Airways of ten firm order A330-200 aircraft with deliveries in 2009 and 2010. The Airbus A330 Purchase Agreement also provides US Airways with purchase rights for the acquisition of additional A330-200 aircraft, subject to certain terms and conditions.
 
On October 2, 2007, US Airways and Airbus also entered into Amendment No. 11 to the A330/A340 Purchase Agreement dated as of November 24, 1998, rescheduling the delivery positions for the cancellable A330 aircraft under that agreement to dates in 2014 and 2015 and replacing the predelivery payment schedule.
 
On November 15, 2007, US Airways and Airbus entered into Amendment No. 1 to the A330 Purchase Agreement adding an additional five firm A330-200 aircraft to the Airbus A330 Purchase Agreement. These additional aircraft will allow US Airways to continue its international growth plans of adding approximately three to four new markets per year between 2009 and 2011.
 
On January 11, 2008, US Airways and Airbus entered into Amendment No. 1 to the Amended and Restated Airbus A320 Family Aircraft Purchase Agreement. Under this amended and restated purchase agreement, US Airways has the right to convert certain aircraft models to other aircraft models within the mix of 97 A320 family aircraft. Amendment No. 1 provides for the conversion of 13 A319 aircraft to A320 aircraft, one A319 to an A321 and 11 A320 aircraft to A321 aircraft for deliveries during 2009 and 2010.
 
US Airways has an agreement with International Aero Engines (“IAE”) which provides for the purchase by US Airways of eight new V2500-A5 spare engines scheduled for delivery through 2014 for use on the Airbus A320 family fleet.
 
We have also agreed to terms with Rolls-Royce to acquire Trent XWB engines to power the 22 Airbus A350 XWB aircraft along with a TotalCare long-term engine services agreement. The engine order and the services agreement are contingent upon execution of definitive documentation.


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Under all of the aircraft and engine purchase agreements discussed above, US Airways’ total future commitments to Embraer, Airbus and IAE are expected to be approximately $7.5 billion through 2017, which includes predelivery deposits and payments. US Airways expects to fund these payments through future financings.
 
On October 18, 2006, US Airways entered into a facility agreement in the total aggregate amount of $242 million to finance the acquisition of aircraft. As of December 31, 2007, the amount outstanding under that facility was $237 million. On November 2, 2007, US Airways entered into another facility agreement in the total aggregate amount of $323 million to finance additional deliveries of aircraft. As of December 31, 2007, US Airways has not borrowed against this facility. The financing facilities bear interest at a rate of LIBOR plus a margin and contain default and other covenants that are typical in the industry for similar financings.
 
Covenants and Credit Rating
 
In addition to the minimum cash balance requirements, our long-term debt agreements contain various negative covenants that restrict or limit our actions, including our ability to pay dividends or make other restricted payments. Certain long-term debt agreements also contain cross-default provisions, which may be triggered by defaults by us under other agreements relating to indebtedness. See “Risk Factors — Our high level of fixed obligations limits our ability to fund general corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions” in Item 1A. “Risk Factors.” As of December 31, 2007, we and our subsidiaries were in compliance with the covenants in our long-term debt agreements.
 
Our credit ratings, like those of most airlines, are relatively low, with S&P’s assessment of the issuer credit rating for us and US Airways at B- and our senior unsecured debt rating at CCC. Fitch’s ratings for our long-term debt and senior unsecured debt are B- and CCC, respectively. Moody’s has rated our long-term corporate family rating at B3. A decrease in our credit ratings could cause our borrowing costs to increase, which would increase our interest expense and could affect our net income, and our credit ratings could adversely affect our ability to obtain additional financing. If our financial performance or industry conditions do not improve, we may face future downgrades, which could further negatively impact our borrowing costs and the prices of our equity or debt securities. In addition, any downgrade of our credit ratings may indicate a decline in our business and in our ability to satisfy our obligations under our indebtedness.
 
Off-Balance Sheet Arrangements
 
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company.
 
We have no off-balance sheet arrangements of the types described in the first three categories above that we believe may have a material current or future effect on financial condition, liquidity or results of operations. Certain guarantees that we do not expect to have a material current or future effect on financial condition, liquidity or results of operations are disclosed in Note 10(f) to the consolidated financial statements of US Airways Group included in Item 8A of this report and Note 8(f) to the consolidated financial statements of US Airways included in Item 8B of this report.
 
Pass Through Trusts — US Airways has set up pass through trusts, which have issued pass through trust certificates or EETCs covering the financing of 19 owned aircraft and 62 leased aircraft. These trusts are off-balance sheet entities, the primary purpose of which is to finance the acquisition of aircraft. Rather than finance each aircraft separately when such aircraft is purchased or delivered, these trusts allowed US Airways to raise the financing for several aircraft at one time and place such funds in escrow pending the purchase or delivery of the relevant aircraft. The trusts were also structured to provide for certain credit enhancements, such as liquidity facilities to cover


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certain interest payments, that reduce the risks to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to US Airways.
 
Each trust covered a set amount of aircraft scheduled to be delivered within a specific period of time. At the time of each covered aircraft financing, the relevant trust used the funds in escrow to purchase equipment notes relating to the financed aircraft. The equipment notes were issued, at US Airways’ election, either by US Airways in connection with a mortgage financing of the aircraft or by a separate owner trust in connection with a leveraged lease financing of the aircraft. In the case of a leveraged lease financing, the owner trust then leased the aircraft to US Airways. In both cases, the equipment notes are secured by a security interest in the aircraft. The pass through trust certificates are not direct obligations of, nor are they guaranteed by, US Airways Group or US Airways. However, in the case of mortgage financings, the equipment notes issued to the trusts are direct obligations of US Airways. As of December 31, 2007, $576 million associated with these mortgage financings is reflected as debt on the balance sheet of US Airways.
 
AWA also had 18 pass through trusts that have issued over $1.4 billion of EETCs covering the financing of 54 aircraft and three engines that were leased to AWA. As part of the transfer of substantially all of AWA’s assets and liabilities to US Airways in connection with the combination of all mainline airline operations under one FAA operating certificate on September 26, 2007, all off-balance sheet commitments of AWA were also transferred to US Airways. As of September 26, 2007, approximately $714 million of principal amount of pass through certificates was outstanding. All of AWA’s obligations with respect to those pass through trusts and the leases of the related aircraft and engines were transferred to US Airways. As a result of the transfer of AWA’s obligations, the leases are now direct obligations of US Airways. As of December 31, 2007, the total amount of US Airways’ obligations with respect to pass through trusts and leases of the related aircraft and engines, including those transferred from AWA, was $1.85 billion.
 
Neither US Airways Group nor US Airways guarantee or participate in any way in the residual value of the leased aircraft. All leased aircraft financed by these trusts are structured as leveraged leased financings, which are not reflected as debt on the balance sheet of either US Airways Group or US Airways. US Airways does not provide residual value guarantees under these lease arrangements. Each lease contains a purchase option that allows US Airways to purchase the aircraft at a fixed price, which at the inception of the lease approximated the aircraft’s expected fair market value at the option date, near the end of the lease term.
 
These leasing entities meet the criteria for variable interest entities. However, they do not meet the consolidation criteria under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 “Consolidation of Variable Interest Entities,” as revised (“FIN 46(R)”) because US Airways is not the primary beneficiary under these arrangements.
 
Special Facility Revenue Bonds — US Airways guarantees the payment of principal and interest on certain special facility revenue bonds issued by municipalities to build or improve certain airport and maintenance facilities which are leased to US Airways. Under such leases, US Airways is required to make rental payments through 2023, sufficient to pay maturing principal and interest payments on the related bonds. As of December 31, 2007, the principal amount outstanding on these bonds was $93 million. Remaining lease payments guaranteeing the principal and interest on these bonds will be $154 million.
 
US Airways also reviewed long-term operating leases at a number of airports, including leases where US Airways is also the guarantor of the underlying debt. These leases are typically with municipalities or other governmental entities. The arrangements are not required to be consolidated based on the provisions of FIN 46(R).
 
Jet Service Agreements — Certain entities with which US Airways has capacity purchase agreements are considered variable interest entities under FIN 46(R). In connection with its restructuring and emergence from bankruptcy, US Airways contracted with Air Wisconsin, a related party, and Republic Airways to purchase a significant portion of these companies’ regional jet capacity for a period of ten years. US Airways has determined that it is not the primary beneficiary of these variable interest entities, based on cash flow analyses. Additionally, US Airways has analyzed the arrangements with other carriers with which US Airways has long-term capacity purchase agreements and has concluded that it is not required to consolidate any of the entities.


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Contractual Obligations
 
The following table provides details of our future cash contractual obligations as of December 31, 2007 (in millions):
 
                                                         
    Payments Due by Period  
    2008     2009     2010     2011     2012     Thereafter     Total  
 
US Airways Group(1)
                                                       
Debt(2)
  $ 16     $ 16     $ 16     $ 16     $ 16     $ 1,594     $ 1,674  
Aircraft related and other commitments
    453       36                               489  
US Airways(3)
                                                       
Debt and capital lease obligations
    101       129       105       118       123       1,019       1,595  
Aircraft purchase and operating lease commitments(4)
    1,472       2,264       2,240       2,105       1,571       6,142       15,794  
Regional capacity purchase agreements(5)
    1,062       1,106       1,125       1,158       1,017       4,679       10,147  
Other US Airways Group subsidiaries(6)
    11       7       2       1       1       1       23  
                                                         
Total
  $ 3,115     $ 3,558     $ 3,488     $ 3,398     $ 2,728     $ 13,435     $ 29,722  
                                                         
 
 
(1) These commitments represent those specifically entered into by US Airways Group or joint commitments entered into by US Airways Group and US Airways under which each entity is jointly and severally liable.
 
(2) Includes $74 million aggregate principal amount of 7% Senior Convertible Notes due 2020 issued by US Airways Group and the $1.6 billion Citicorp credit facility due March 23, 2014.
 
(3) Commitments listed separately under US Airways and its wholly owned subsidiaries represent commitments under agreements entered into separately by those companies.
 
(4) Aircraft purchase commitments exclude the Rolls Royce engine order announced in June 2007 as the order is contingent upon execution of a definitive purchase agreement.
 
(5) Represents minimum payments under capacity purchase agreements with third-party Express carriers.
 
(6) Represents operating lease commitments entered into by US Airways Group’s other airline subsidiaries Piedmont and PSA.
 
We expect to fund these cash obligations from funds provided by operations and future financings, if necessary. The cash available to us from these sources, however, may not be sufficient to cover these cash obligations because economic factors outside our control may reduce the amount of cash generated by operations or increase our costs. For instance, an economic downturn or general global instability caused by military actions, terrorism, disease outbreaks and natural disasters could reduce the demand for air travel, which would reduce the amount of cash generated by operations. An increase in our costs, either due to an increase in borrowing costs caused by a reduction in our credit rating or a general increase in interest rates or due to an increase in the cost of fuel, maintenance, aircraft and aircraft engines and parts, could decrease the amount of cash available to cover the cash obligations. Moreover, the Citicorp credit facility and our amended credit card agreement with Barclays contain minimum cash balance requirements. As a result, we cannot use all of our available cash to fund operations, capital expenditures and cash obligations without violating these requirements.
 
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States requires that we make certain estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of our financial statements. We believe our estimates and assumptions are reasonable; however, actual results


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could differ from those estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially result in materially different results under different assumptions and conditions. We have identified the following critical accounting policies that impact the preparation of our consolidated financial statements. See also the summary of significant accounting policies included in the notes to the financial statements under Items 8A and 8B of this Form 10-K for additional discussion of the application of these estimates and other accounting policies.
 
Passenger Revenue
 
Passenger revenue is recognized when transportation is provided. Ticket sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on the balance sheet. The air traffic liability represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The balance in the air traffic liability fluctuates throughout the year based on seasonal travel patterns and fare sale activity. Our air traffic liability was $832 million and $847 million as of December 31, 2007 and 2006, respectively.
 
The majority of our tickets sold are nonrefundable. Tickets that are sold but not flown on the travel date may be reused for another flight, up to a year from the date of sale, or refunded, if the ticket is refundable, after taking into account any cancellation penalties or change fees. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of our historical data. We routinely evaluate estimated future refunds and exchanges included in the air traffic liability based on subsequent activity to validate the accuracy of our estimates. Holding other factors constant, a 10% change in our estimate of the amount refunded, exchanged or forfeited for 2007 would result in a $38 million change in our passenger revenue, which represents less than 1% of our passenger revenue.
 
Passenger traffic commissions and related fees are expensed when the related revenue is recognized. Passenger traffic commissions and related fees not yet recognized are included as a prepaid expense.
 
Impairment of Goodwill
 
SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. We believe that this accounting estimate is a critical accounting estimate because: (1) goodwill is a significant asset and (2) the impact that recognizing an impairment would have on the asset reported on the consolidated balance sheets, as well as the consolidated statement of operations, could be material.
 
We assess the fair value of the reporting unit considering both the income approach and market approach. Under the market approach, the fair value of the reporting unit is based on quoted market prices and the number of shares outstanding for US Airways Group common stock. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of factors including estimates of future market growth trends, forecasted revenues and expenses, expected periods the assets will be utilized, appropriate discount rates and other variables. We base our estimates on assumptions that we believe to be reasonable, but which are unpredictable and inherently uncertain. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment. Actual future results may differ from those estimates.
 
At December 31, 2007, goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by America West Holdings on September 27, 2005. We tested goodwill for impairment during the fourth quarter of 2007. At that time, we concluded that the fair value of the reporting unit was in excess of the carrying value. We will perform our next annual impairment test on October 1, 2008.


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Impairment of Long-lived Assets and Intangible Assets
 
We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, our international route authorities and trademark intangible assets are classified as indefinite lived assets and are reviewed for impairment annually. Factors which could trigger an impairment review include the following: significant changes in the manner of use of the assets; significant underperformance relative to historical or projected future operating results; or significant negative industry or economic trends. An impairment has occurred when the future undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Cash flow estimates are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Estimates of fair value represent management’s best estimate based on appraisals, industry trends and reference to market rates and transactions. Changes in industry capacity and demand for air transportation can significantly impact the fair value of aircraft and related assets. International route authorities and trademarks were tested for impairment during the fourth quarter of 2007, at which time we concluded that no impairment exists. We will perform our next annual impairment test on October 1, 2008.
 
Frequent Traveler Programs
 
The Dividend Miles frequent traveler program awards miles to passengers who fly on US Airways, US Airways Shuttle, US Airways Express, Star Alliance carriers and certain other airlines that participate in the program. We use the incremental cost method to account for the portion of our frequent flyer liability incurred when Dividend Miles members earn mileage credits. We have an obligation to provide this future travel and have therefore recognized an expense and recorded a liability for mileage awards. Outstanding miles may be redeemed for travel on any airline that participates in the program, in which case we pay a designated amount to the transporting carrier.
 
Members may not reach the threshold necessary for a free ticket and outstanding miles may not be redeemed for free travel. Therefore, in calculating the liability we estimate how many miles will never be used for an award and exclude those miles from the estimate of the liability. Estimates are also made for the number of miles that will be used per award and the number of awards that will be redeemed on partner airlines. These estimates are based on past customer behavior. Estimated future travel awards for travel on US Airways are valued at the combined estimated average incremental cost of carrying one additional passenger. Incremental costs include unit costs for passenger food, beverages and supplies, credit card fees, fuel, insurance and denied boarding compensation. No profit or overhead margin is included in the accrual for incremental costs. For travel awards on partner airlines, the liability is based upon the gross payment to be paid to the other airline for redemption on the other airline. A change to these cost estimates, actual redemption activity or award redemption level could have a material impact on the liability in the year of change as well as future years. Incremental changes in the liability resulting from participants earning or redeeming mileage credits or changes in assumptions used for the related calculations are recorded in the statement of operations as part of the regular review process. At December 31, 2007, we have assumed 10% of our future travel awards accrued will be redeemed on partner airlines. A 1% increase or decrease in the percentage of awards redeemed on partner airlines would have an $8 million impact on the liability as of December 31, 2007.
 
As of December 31, 2007, Dividend Miles members had accumulated mileage credits for approximately 3.1 million awards. The liability for the future travel awards accrued on our balance sheet within other accrued liabilities was $161 million as of December 31, 2007. The number of awards redeemed for free travel during the year ended December 31, 2007 was approximately 0.9 million, representing approximately 4% of US Airways’ RPMs during that period. The use of certain inventory management techniques minimizes the displacement of revenue passengers by passengers traveling on award tickets.
 
On January 31, 2007, we changed our program regarding active membership status to require members to have either earned or redeemed miles within a consecutive 18 month period to maintain active membership status. Prior to the change in the program, members were granted a 36 month period to maintain active status.
 
US Airways also sells mileage credits to participating airline partners and non-airline business partners. Revenue earned from selling mileage credits to other companies is recognized in two components. A portion of the


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revenue from these sales is deferred, representing the estimated fair value of the transportation component of the sold mileage credits. The deferred revenue for the transportation component is amortized on a straight-line basis over the period in which the credits are expected to be redeemed for travel as passenger revenue, which is currently estimated to be 28 months. The marketing component, which is earned at the time the miles are sold, is recognized in other revenues at the time of the sale. As of December 31, 2007, we had $241 million in deferred revenue from the sale of mileage credits included in other accrued liabilities on our balance sheet. A change to either the period over which the credits are used or the estimated fair value of credits sold could have a significant impact on revenue in the year of change as well as future years.
 
Fresh-start Reporting and Purchase Accounting
 
In connection with its emergence from bankruptcy on September 27, 2005, US Airways adopted fresh-start reporting in accordance with SOP 90-7. Accordingly, US Airways valued its assets, liabilities and equity at fair value. In addition, as a result of the merger, which is accounted for as a reverse acquisition under SFAS No. 141, “Business Combinations” (“SFAS 141”), with America West Holdings as the accounting acquirer, US Airways Group applied the provisions of SFAS 141 and allocated the purchase price to the assets and liabilities of US Airways Group and to its wholly owned subsidiaries including US Airways. The purchase price or value of the merger consideration was determined based upon America West Holdings’ traded market price per share due to the fact that US Airways Group was operating under bankruptcy protection. The $4.82 per share value was based on the five-day average share price of America West Holdings, with May 19, 2005, the merger announcement date, as the midpoint. US Airways’ equity value of $1 million was determined based on an allocation of the purchase price to each of US Airways Group subsidiaries’ fair values of assets and liabilities. The remaining equity of $116 million was assigned to US Airways Group’s and its other subsidiaries. US Airways engaged an outside appraisal firm to assist in determining the fair value of the long-lived tangible and identifiable intangible assets and certain noncurrent liabilities. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of US Airways. Accordingly, we cannot assure you that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
 
See Note 2(b) to the US Airways financial statements in Item 8B of this Form 10-K for further detail related to the fresh-start fair-value and purchase accounting adjustments.
 
Deferred Tax Asset Valuation Allowance
 
At December 31, 2007, US Airways Group has a full valuation allowance against its net deferred tax assets. In assessing the realizability of the deferred tax assets, we considered whether it was more likely than not that all or a portion of the deferred tax assets will not be realized, in accordance with SFAS No. 109, “Accounting for Income Taxes.” We utilized NOL in lieu of cash income tax in 2007, a portion of which was reserved by a valuation allowance. The use of the NOL permitted the reversal of the valuation allowance which reduced income tax expense.
 
Recent Accounting and Reporting Developments
 
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a material impact on our consolidated financial statements.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not


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require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In December of 2007, the FASB agreed to a one year deferral of SFAS No. 157’s fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. Management is currently evaluating the requirements of SFAS No. 157 but does not expect it to have a material impact on our 2008 consolidated financial statements.
 
Effective December 31, 2006, we adopted the recognition provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This statement requires employers to recognize in their balance sheets the overfunded or underfunded status of defined benefit postretirement plans, measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for other postretirement plans). The impact on our consolidated financial statements of adopting the recognition provisions of SFAS No. 158 was not material. We recognized a nominal amount of prior changes in the funded status of our postretirement benefit plans through accumulated other comprehensive income. The adoption of the recognition provisions of SFAS No. 158 had no effect on our statement of operations for the year ended December 31, 2006 or for any prior period presented.
 
SFAS No. 158 also requires plan assets and obligations to be measured as of the employer’s balance sheet date. We currently use a measurement date of September 30 for our other postretirement benefits. The measurement provisions of this statement are required to be adopted no later than fiscal years beginning after December 15, 2008. We will adopt the measurement provisions of this statement in 2008. The impact on our consolidated financial statements of adoption of the measurement provisions will not be material.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS No. 159 on January 1, 2008, but have not yet elected the fair value option for any items permitted under SFAS No. 159.


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Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
Market Risk Sensitive Instruments
 
Our primary market risk exposures include commodity price risk (i.e., the price paid to obtain aviation fuel) and interest rate risk. The potential impact of adverse increases in these risks and general strategies that we employ to manage these risks are discussed below. The following sensitivity analyses do not consider the effects that an adverse change may have on the overall economy nor do they consider additional actions we may take to mitigate our exposure to these changes. Actual results of changes in prices or rates may differ materially from the following hypothetical results.
 
Commodity Price Risk
 
Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of our control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices may be affected by many factors, including:
 
  •  the impact of global political instability on crude production;
 
  •  unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries as evidenced in the third quarter of 2005 when Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations and pipeline capacity along certain portions of the U.S. Gulf Coast. As a result of these disruptions, the price of jet fuel increased significantly and the availability of jet fuel supplies was diminished;
 
  •  unpredicted increases to oil demand due to weather or the pace of economic growth;
 
  •  inventory levels of crude, refined products and natural gas; and
 
  •  other factors, such as the relative fluctuation between the U.S. dollar and other major currencies and influence of speculative positions on the futures exchanges.
 
Because our operations are dependent upon aviation fuel, significant increases in aviation fuel costs materially and adversely affect our liquidity, results of operations and financial condition. Our 2008 forecasted mainline and Express fuel consumption is approximately 1.57 billion gallons and a one cent per gallon increase in fuel price results in a $16 million annual increase in expense, excluding the impact of hedge transactions.
 
As of December 31, 2007, we have entered into costless collars to protect ourself from fuel price risks, which establish an upper and lower limit on heating oil futures prices. These transactions are in place with respect to approximately 22% of our mainline and Express 2008 fuel requirements at a weighted average collar range of $2.05 to $2.25 per gallon of heating oil.
 
The use of such hedging transactions in our fuel hedging program could result in us not fully benefiting from certain declines in heating oil futures prices. Further, these instruments do not provide protection from the increases unless heating oil prices exceed the call option price of the costless collar. Although heating oil prices are generally highly correlated with those of jet fuel, the prices of jet fuel may change more or less then heating oil, resulting in a change in fuel expense that is not perfectly offset by the hedge transactions. As of December 31, 2007, we estimate that a 10% increase in heating oil futures prices would increase the fair value of the hedge transactions by approximately $85 million. We estimate that a 10% decrease in heating oil futures prices would decrease the fair value of the hedging transactions by approximately $75 million.
 
As of February 15, 2008, approximately 28% of our 2008 projected fuel requirements for mainline and Express operations are hedged.
 
Interest Rate Risk
 
Our exposure to interest rate risk relates primarily to our cash equivalents, investments portfolios and variable rate debt obligations. At December 31, 2007, our variable-rate long-term debt obligations of approximately $2.13 billion represented approximately 65% of our total long-term debt. If interest rates increased 10% in 2007, the


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impact on our results of operations would be approximately $16 million of additional interest expense. This increase in interest rates would be largely offset by additional interest income on our $3 billion in cash, cash equivalents, investments in marketable securities and restricted cash. Additional information regarding our debt obligations as of December 31, 2007 is as follows (dollars in millions):
 
                                                         
    Expected Maturity Date  
    2008     2009     2010     2011     2012     Thereafter     Total  
 
Fixed-rate debt
  $ 56     $ 57     $ 61     $ 72     $ 89     $ 802     $ 1,137  
Weighted avg. interest rate
    7.6 %     7.6 %     7.6 %     7.6 %     7.6 %     7.6 %        
Variable-rate debt
  $ 61     $ 88     $ 60     $ 62     $ 50     $ 1,811     $ 2,132  
Weighted avg. interest rate
    7.3 %     7.3 %     7.3 %     7.3 %     7.3 %     7.3 %        
 
US Airways Group and US Airways have total future aircraft and spare engine purchase commitments of approximately $7.53 billion. We expect to finance such commitments either by entering into leases or debt agreements. Changes in interest rates will impact the cost of such financings.
 
At December 31, 2007, included within our investment portfolio are $353 million of investments in auction rate securities. With the liquidity issues experienced in the global credit and capital markets, our auction rate securities have experienced multiple failed auctions. While we continue to earn interest on these investments at the maximum contractual rate, the estimated market values of these auction rate securities no longer approximates par value. As of December 2007, we recorded an unrealized loss of $48 million in other comprehensive income for auction rate securities with declines in value deemed to be temporary and a $10 million impairment charge related to an auction rate security for which we deemed the decline in value to be other than temporary.
 
As of January 31, 2008, the commercial banks managing our investments provided us with estimated fair market values, which indicated an additional decline in the aggregate fair market value of our auction rate securities of approximately $70 million (from amounts provided at December 31, 2007). We believe that these additional declines in value are also temporary and are attributed to current credit market events and continued lack of market liquidity in early 2008. Such temporary declines, if sustained, would be recognized in the first quarter of 2008. It is possible that additional declines in fair value may occur. To the extent the fair market values of our auction rate securities were to subsequently increase, such increase would reduce the unrealized loss recorded in other comprehensive income.
 
We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of our investments. If the current market conditions continue, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses or impairment charges in 2008.
 
We intend and have the ability to hold these auction rate securities until the market recovers. We do not anticipate having to sell these securities in order to operate our business. We believe that, based on our current unrestricted cash, cash equivalents and short-term marketable securities balances of $2.17 billion at December 31, 2007, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flow, or our ability to fund our operations. See Notes 6(c) and 4(c), “Fair Values of Financial Instruments” in Items 8A and 8B, respectively, of this report for additional information.


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Item 8A.   Consolidated Financial Statements and Supplementary Data of US Airways Group, Inc.
 
On September 27, 2005, US Airways Group consummated the transactions contemplated by its plan of reorganization, including the merger transaction with America West Holdings. As a result of the merger, America West Holdings became a wholly owned subsidiary of US Airways Group. As described in greater detail in Note 1(b), while the merger was structured such that US Airways Group was the legal acquirer, the merger was accounted for as a reverse acquisition such that America West Holdings was treated as the accounting acquirer. Financial information for periods prior to the merger include the accounts and activities of America West Holdings, which owned all of the stock of AWA.
 
Management’s Annual Report on Internal Control over Financial Reporting
 
Management of US Airways Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. US Airways Group’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. US Airways Group’s internal control over financial reporting includes those policies and procedures that:
 
  •  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of US Airways Group;
 
  •  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of US Airways Group are being made only in accordance with authorizations of management and directors of US Airways Group; and
 
  •  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of US Airways Group’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management assessed the effectiveness of US Airways Group’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on our assessment and those criteria, management concludes that US Airways Group maintained effective internal control over financial reporting as of December 31, 2007.
 
US Airways Group’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. That report has been included herein.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
US Airways Group, Inc.:
 
We have audited US Airways Group, Inc.’s (“US Airways Group” or the “Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based upon assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, US Airways Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of US Airways Group and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated February 20, 2008 expressed an unqualified opinion on those consolidated financial statements.
 
/s/  KPMG LLP
 
Phoenix, Arizona
February 20, 2008


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
US Airways Group, Inc.:
 
We have audited the accompanying consolidated balance sheets of US Airways Group, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of US Airways Group, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB No. 109 effective January 1, 2007, and Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R), effective December 31, 2006, and as discussed in Note 17 to the consolidated financial statements, the Company adopted the provisions of SFAS No. 123(R), Share Based Payment, effective January 1, 2006. Also, as discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for major scheduled airframe, engine and certain component overhaul costs from the deferral method to the direct expense method in 2005.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), US Airways Group, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 20, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/  KPMG LLP
 
Phoenix, Arizona
February 20, 2008


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US Airways Group, Inc.
 
Consolidated Statements of Operations
For the Years Ended December 31, 2007, 2006 and 2005
 
                         
    2007     2006     2005  
    (In millions, except share and per share amounts)  
 
Operating revenues:
                       
Mainline passenger
  $ 8,135     $ 7,966     $ 3,695  
Express passenger
    2,698       2,744       976  
Cargo
    138       153       58  
Other
    729       694       340  
                         
Total operating revenues
    11,700       11,557       5,069  
                         
Operating expenses:
                       
Aircraft fuel and related taxes
    2,630       2,518       1,214  
Loss (gain) on fuel hedging instruments, net
    (245 )     79       (75 )
Salaries and related costs
    2,302       2,090       1,046  
Express expenses
    2,594       2,559       1,073  
Aircraft rent
    727       732       429  
Aircraft maintenance
    635       582       349  
Other rent and landing fees
    536       568       281  
Selling expenses
    453       446       232  
Special items, net
    99       27       121  
Depreciation and amortization
    189       175       88  
Other
    1,247       1,223       528  
                         
Total operating expenses
    11,167       10,999       5,286  
                         
Operating income (loss)
    533       558       (217 )
                         
Nonoperating income (expense):
                       
Interest income
    172       153       30  
Interest expense, net
    (273 )     (295 )     (147 )
Other, net
    2       (12 )     (1 )
                         
Total nonoperating expense, net
    (99 )     (154 )     (118 )
                         
Income (loss) before income taxes and cumulative effect of change in accounting principle
    434       404       (335 )
Income tax provision
    7       101        
                         
Income (loss) before cumulative effect of change in accounting principle
    427       303       (335 )
Cumulative effect of change in accounting principle, net (Note 3)
          1       (202 )
                         
Net income (loss)
  $ 427     $ 304     $ (537 )
                         
Earnings (loss) per common share:
                       
Basic:
                       
Before cumulative effect of change in accounting principle
  $ 4.66     $ 3.50     $ (10.65 )
Cumulative effect of change in accounting principle
          0.01       (6.41 )
                         
Earnings (loss) per share
  $ 4.66     $ 3.51     $ (17.06 )
                         
Diluted:
                       
Before cumulative effect of change in accounting principle
  $ 4.52     $ 3.32     $ (10.65 )
Cumulative effect of change in accounting principle
          0.01       (6.41 )
                         
Earnings (loss) per share
  $ 4.52     $ 3.33     $ (17.06 )
                         
Shares used for computation (in thousands):
                       
Basic
    91,536       86,447       31,488  
Diluted
    95,603       93,821       31,488  
 
See accompanying notes to consolidated financial statements.


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US Airways Group, Inc.
 
Consolidated Balance Sheets
December 31, 2007 and 2006
 
                 
    2007     2006  
    (In millions, except share and per share amounts)  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 1,948     $ 1,116  
Investments in marketable securities
    226       1,249  
Restricted cash
    2       1  
Accounts receivable, net
    374       388  
Materials and supplies, net
    249       223  
Prepaid expenses and other
    548       377  
                 
Total current assets
    3,347       3,354  
Property and equipment
               
Flight equipment
    2,414       2,051  
Ground property and equipment
    703       598  
Less accumulated depreciation and amortization
    (757 )     (583 )
                 
      2,360       2,066  
Equipment purchase deposits
    128       48  
                 
Total property and equipment
    2,488       2,114  
Other assets
               
Goodwill
    622       629  
Other intangibles, net
    553       554  
Restricted cash
    466       666  
Investments in marketable securities
    353        
Other assets, net
    211       259  
                 
Total other assets
    2,205       2,108  
                 
Total assets
  $ 8,040     $ 7,576  
                 
 
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities
               
Current maturities of debt and capital leases
  $ 117     $ 95  
Accounts payable
    366       454  
Air traffic liability
    832       847  
Accrued compensation and vacation
    225       262  
Accrued taxes
    152       181  
Other accrued expenses
    859       873  
                 
Total current liabilities
    2,551       2,712  
Noncurrent liabilities and deferred credits
               
Long-term debt and capital leases, net of current maturities
    3,031       2,907  
Deferred gains and credits, net
    168       205  
Postretirement benefits other than pensions
    138       187  
Employee benefit liabilities and other
    713       595  
                 
Total noncurrent liabilities and deferred credits
    4,050       3,894  
Commitments and contingencies (Note 10)
           
Stockholders’ equity
               
Common stock, $0.01 par value; 200,000,000 shares authorized, 92,278,557 and 91,864,564 shares issued and outstanding at December 31, 2007; 91,697,896 and 91,283,903 shares issued and outstanding at December 31, 2006
    1       1  
Additional paid-in capital
    1,536       1,501  
Accumulated other comprehensive income
    10       3  
Accumulated deficit
    (95 )     (522 )
Treasury stock, common stock, 413,993 shares at December 31, 2007 and December 31, 2006
    (13 )     (13 )
                 
Total stockholders’ equity
    1,439       970  
                 
Total liabilities and stockholders’ equity
  $ 8,040     $ 7,576  
                 
 
See accompanying notes to consolidated financial statements.


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US Airways Group, Inc.
 
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2007, 2006 and 2005
 
                         
    2007     2006     2005  
    (In millions)  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 427     $ 304     $ (537 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Cumulative effect of change in accounting principle
          (1 )     202  
Depreciation and amortization
    212       198       88  
Gains on curtailment of pension benefit
    (5 )            
Loss on dispositions of property
    1              
Gain on forgiveness of debt
          (90 )      
Gain on sale of investments
    (17 )            
Impairment on auction rate securities
    10              
Non cash special charges, net
                86  
Utilization of acquired net operating loss carryforwards
    7       85        
Change in fair value of fuel hedging instruments, net
    (187 )     70       (4 )
Amortization of deferred credits
    (43 )     (43 )     (23 )
Amortization of deferred rent
    3       5       5  
Amortization of warrants
                12  
Amortization of debt issuance costs and guarantee fees
    2       4       30  
Amortization of debt discount
    12       12       11  
Amortization of investment discount and premium, net
                9  
Stock-based compensation
    32       34       5  
Debt extinguishment costs
    18       7       2  
Premium paid in conversion of 7% senior convertible notes
          17        
Other
          (1 )     (18 )
Changes in operating assets and liabilities:
                       
Decrease (increase) in restricted cash
    (1 )     6       120  
Decrease (increase) in accounts receivable, net
    14       (35 )     55  
Increase in expendable spare parts and supplies, net
    (18 )     (25 )     (8 )
Decrease (increase) in prepaid expenses
    (52 )     22       (63 )
Decrease (increase) in other assets, net
    (14 )     (16 )     11  
Decrease in accounts payable
    (11 )     (2 )     (45 )
Increase (decrease) in air traffic liability
    (22 )     59       (54 )
Increase (decrease) in accrued compensation and vacation benefits
    (37 )     56       (1 )
Increase (decrease) in accrued taxes
    (29 )     38       (5 )
Increase (decrease) in other liabilities
    140       (86 )     168  
                         
Net cash provided by operating activities
    442       618       46  
                         
Cash flows from investing activities:
                       
Purchases of property and equipment
    (523 )     (232 )     (44 )
Purchases of marketable securities
    (2,591 )     (2,583 )     (711 )
Sales of marketable securities
    3,203       1,785       416  
Proceeds from sale of other investments
    56              
Cash acquired as part of acquisition
                279  
Costs incurred as part of acquisition
                (21 )
Decrease (increase) in long-term restricted cash
    200       128       (112 )
Proceeds from dispositions of property and equipment and sale-leaseback transactions
    4       7       592  
Increase in equipment purchase deposits
    (80 )     (8 )      
                         
Net cash provided by (used in) investing activities
    269       (903 )     399  
                         
Cash flows from financing activities:
                       
Repayments of debt and capital lease obligations
    (1,680 )     (1,187 )     (741 )
Proceeds from issuance of debt
    1,798       1,419       655  
Proceeds from issuance of common stock, net
    3       44       732  
Acquisition of warrants
                (116 )
Other
                1  
                         
Net cash provided by financing activities
    121       276       531  
                         
Net increase (decrease) in cash and cash equivalents
    832       (9 )     976  
Cash and cash equivalents at beginning of year
    1,116       1,125       149  
                         
Cash and cash equivalents at end of year
  $ 1,948     $ 1,116     $ 1,125  
                         
 
See accompanying notes to consolidated financial statements.


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US Airways Group, Inc.
 
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2007, 2006 and 2005
 
                                                                 
                      Retained
    Accumulated
                   
          Class B
    Additional
    Earnings/
    Other
          Class B
       
    Common
    Common
    Paid-In
    (Accumulated
    Comprehensive
    Treasury
    Treasury
       
    Stock     Stock     Capital     Deficit)     Income (Loss)     Stock     Stock     Total  
    (In millions, except share amounts)  
 
Balance at December 31, 2004
  $     $ 1     $ 632     $ (289 )   $     $     $ (308 )   $ 36  
Net loss
                      (537 )                       (537 )
Issuance of 36,465,445 shares of common stock
    1             564                               565  
Issuance of 7,533,334 shares of common stock pursuant to the exercise of stock options by investors, net of issuance costs
                113                               113  
Issuance of 9,775,000 shares of common stock pursuant to a public stock offering, net of issuance costs
                180                               180  
Issuance of 8,212,119 shares of common stock to unsecured creditors
                96                               96  
Withholding of 418,977 shares from the issuance of stock to unsecured creditors to cover tax obligations
                                  (13 )           (13 )
Issuance of 792,475 shares of common stock pursuant to employee stock plans
                12                               12  
Cancellation of 6,781,470 shares of Class B Treasury Stock due to the merger
                                        308       308  
Conversion of 21,430,147 shares of Class B common stock to US Airways Group common stock
          (1 )     (315 )                             (316 )
Issuance of 4,195,275 shares of common stock pursuant to the conversion of the 7.25% notes
                87                               87  
Repurchase of 7,735,770 warrants held by the ATSB
                (116 )                             (116 )
Stock compensation for stock appreciation rights and restricted stock units that will be ultimately settled in shares of common stock
                5                               5  
                                                                 
Balance at December 31, 2005
    1             1,258       (826 )           (13 )           420  
Net income
                      304                         304  
Issuance of 3,860,358 shares of common stock pursuant to the conversion of the 7.5% notes
                95                               95  
Issuance of 2,909,636 shares of common stock pursuant to the conversion of the 7.0% notes
                70                               70  
Issuance of 386,925 shares of common stock pursuant to the exercise of warrants
                3                               3  
Issuance of 2,463,534 shares of common stock pursuant to employee stock plans
                41                               41  
Stock-based compensation expense
                34                               34  
Adjustment to initially apply FASB Statement No. 158, net of tax
                            3                   3  
                                                                 
Balance at December 31, 2006
    1             1,501       (522 )     3       (13 )           970  
Net income
                      427                         427  
Issuance of 580,661 shares of common stock pursuant to employee stock plans
                3                               3  
Stock-based compensation expense
                32                               32  
Actuarial gain associated with pension and other postretirement benefits
                            55                   55  
Unrealized loss on available for sale securities, net
                            (48 )                 (48 )
                                                                 
Balance at December 31, 2007
  $ 1     $     $ 1,536     $ (95 )   $ 10     $ (13 )   $     $ 1,439  
                                                                 
 
See accompanying notes to consolidated financial statements.


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US Airways Group, Inc.
 
Notes to Consolidated Financial Statements
 
1.   Basis of presentation and summary of significant accounting policies
 
(a)   Nature of Operations and Operating Environment
 
US Airways Group, Inc.’s (“US Airways Group” or the “Company”) primary business activity is the operation of a major network air carrier through its ownership of the common stock of US Airways, Inc. (“US Airways”), Piedmont Airlines, Inc. (“Piedmont”), PSA Airlines, Inc. (“PSA”), Material Services Company, Inc. (“MSC”) and Airways Assurance Limited, LLC (“AAL”).
 
On September 12, 2004, US Airways Group and its domestic subsidiaries, US Airways, Piedmont, PSA and MSC (collectively referred to as the “Debtors”), which at the time accounted for substantially all of the operations of US Airways Group, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States bankruptcy court for the Eastern District of Virginia, Alexandria Division (the “Bankruptcy Court”). On May 19, 2005, US Airways Group signed a merger agreement with America West Holdings Corporation (“America West Holdings”) pursuant to which America West Holdings, the parent company of America West Airlines, Inc. (“AWA”), merged with a wholly owned subsidiary of US Airways Group. The merger was amended by a letter of agreement on July 7, 2005. The merger became effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005.
 
On September 26, 2007, as part of the integration efforts following the merger of US Airways Group and America West Holdings in September 2005, AWA surrendered its Federal Aviation Administration (“FAA”) operating certificate. As a result, all future mainline airline operations are being conducted under US Airways’ FAA operating certificate. In connection with the combination of all mainline airline operations under one FAA operating certificate, US Airways Group contributed 100% of its equity interest in America West Holdings to US Airways. As a result, America West Holdings and its wholly owned subsidiary, AWA, are now wholly owned subsidiaries of US Airways. In addition, AWA transferred substantially all of its assets and liabilities to US Airways. All off-balance sheet commitments of AWA were also transferred to US Airways. This transaction constituted a transfer of assets between entities under common control and was accounted for at historical cost. Effective January 1, 2008, both America West Holdings and AWA converted from Delaware corporations to Delaware limited liability companies.
 
Transfers of assets between entities under common control are accounted for in a manner similar to the pooling of interests method of accounting. Under this method, the carrying amount of net assets recognized in the balance sheets of each combining entity are carried forward to the balance sheet of the combined entity, and no other assets or liabilities are recognized as a result of the contribution of shares. This contribution has no effect on the US Airways Group consolidated financial statements.
 
Most of the airline operations are in competitive markets. Competitors include other air carriers along with other modes of transportation. US Airways Group operates the fifth largest airline in the United States as measured by domestic revenue passenger miles (“RPMs”) and available seat miles (“ASMs”). US Airways is a certificated air carrier engaged primarily in the business of transporting passengers, property and mail. US Airways enplaned approximately 58 million passengers in 2007. As of December 31, 2007, US Airways operated 356 mainline jet aircraft, which were supported by 49 regional jets and 55 turboprops operated by the Company’s wholly owned regional airlines. During 2007, US Airways, along with US Airways Express, provided regularly scheduled service or seasonal service at 256 airports in the continental United States, Hawaii, Alaska, Canada, the Caribbean, Latin America and Europe.
 
As of December 31, 2007, US Airways Group employed approximately 39,600 active full-time equivalent employees. Approximately 85% of US Airways Group’s employees are covered by collective bargaining agreements with various labor unions. The Company’s pilots, flight attendants, and ground and maintenance employees are currently working under the terms of their respective US Airways or AWA collective bargaining agreements, including, in some cases, transition agreements reached in connection with the merger. In 2007, the Company


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US Airways Group, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
 
reached final single labor agreements covering the flight crew training instructors and the flight simulator engineers, each represented by the Transport Workers Union.
 
(b)   Basis of Presentation
 
The merger was accounted for as a reverse acquisition using the purchase method of accounting. Although the merger was structured such that America West Holdings became a wholly owned subsidiary of US Airways Group, America West Holdings was treated as the acquiring company for accounting purposes under Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations,” due to the following factors: (1) America West Holdings’ stockholders received the larger share of the Company’s common stock in the merger in comparison to the unsecured creditors of US Airways; (2) America West Holdings received a larger number of designees to the board of directors; and (3) America West Holdings’ Chairman and Chief Executive Officer prior to the merger became the Chairman and Chief Executive Officer of the combined company. As a result of the reverse acquisition, the 2005 consolidated statement of operations presented herein includes the results of America West Holdings for the period from January 1, 2005 through September 26, 2005 and consolidated results of US Airways Group for the period from September 27, 2005 through December 31, 2005.
 
The accompanying consolidated financial statements include the accounts of US Airways Group and its wholly owned subsidiaries. US Airways Group has the ability to move funds freely between its operating subsidiaries to support operations. These transfers are recognized as intercompany transactions. All significant intercompany accounts and transactions have been eliminated.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets and the frequent traveler program.
 
(c)   Cash Equivalents
 
Cash equivalents consist primarily of cash in money market securities of various banks, highly liquid debt instruments, commercial paper and asset-backed securities of various financial institutions and securities backed by the U.S. government. All highly liquid investments purchased within three months of maturity are classified as cash equivalents. Cash equivalents are stated at cost, which approximates fair value due to the highly liquid nature and short maturities of the underlying securities.
 
(d)   Investments in Marketable Securities
 
All other highly liquid investments with original maturities greater than three months but less than one year are classified as current investments in marketable securities. Investments in marketable securities classified as noncurrent assets on the Company’s balance sheet represent investments expected to be converted to cash after 12 months. Debt securities, other than auction rate securities, are classified as held to maturity in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). Held to maturity investments are carried at amortized cost. Investments in auction rate securities are classified as available for sale. See Note 6(c) for more information on the Company’s investments in marketable securities.
 
(e)   Restricted Cash
 
Restricted cash includes deposits in trust accounts primarily to fund certain taxes and fees and collateralize letters of credit and workers’ compensation claims, deposits securing certain letters of credit and surety bonds and


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US Airways Group, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
 
deposits held by institutions that process credit card sales transactions. Restricted cash is stated at cost, which approximates fair value.
 
(f)   Materials and Supplies, Net
 
Inventories of materials and supplies are valued at the lower of cost or fair value. Costs are determined using average costing methods. An allowance for obsolescence is provided for flight equipment expendable and repairable parts. These items are generally charged to expense when issued for use.
 
(g)   Property and Equipment
 
Property and equipment are recorded at cost. Interest expenses related to the acquisition of certain property and equipment are capitalized as an additional cost of the asset or as a leasehold improvement if the asset is leased. Interest capitalized for the years ended December 31, 2007, 2006 and 2005 was $4 million, $2 million and $4 million, respectively. Property and equipment is depreciated and amortized to residual values over the estimated useful lives or the lease term, whichever is less, using the straight-line method. Costs of major improvements that enhance the usefulness of the asset are capitalized and depreciated over the estimated useful life of the asset or the modifications, whichever is less.
 
The estimated useful lives range from three to 12 years for owned property and equipment and from 18 to 30 years for training equipment and buildings. The estimated useful lives of owned aircraft, jet engines, flight equipment and rotable parts range from five to 30 years. Leasehold improvements relating to flight equipment and other property on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter, on a straight-line basis.
 
The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired as defined by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. The Company recorded no impairment charges in the years ended December 31, 2007, 2006 and 2005.
 
(h)   Income Taxes
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A valuation allowance is established, if necessary, for the amount of any tax benefits that, based on available evidence, are not expected to be realized.
 
(i)   Goodwill and Other Intangibles, Net
 
At December 31, 2007, goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by America West Holdings on September 27, 2005. Since that time, there have been no events or changes that would indicate an impairment to goodwill. The Company performs its annual impairment test on October 1, unless events or changes indicate a potential impairment in the carrying value. The provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) require that a two-step impairment test be performed on goodwill. In the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets of the reporting unit


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US Airways Group, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
 
exceeds the fair value of the reporting unit, then a second step must be performed in order to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value, then an impairment loss is recorded equal to the difference. The Company tested its goodwill for impairment during the fourth quarter of 2007, at which time it concluded that fair value of the reporting units was in excess of the carrying value. The Company assessed the fair value of the reporting units considering both the income approach and market approach. Under the market approach, the fair value of the reporting units is based on quoted market prices for US Airways Group common stock and the number of shares outstanding of US Airways Group common stock. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows.
 
Other intangible assets consist primarily of trademarks, international route authorities and airport take-off and landing slots and airport gates. As of each of December 31, 2007 and 2006, the Company had $55 million of international route authorities on its balance sheets. The carrying value of the trademarks was $30 million as of December 31, 2007 and 2006. International route authorities and trademarks are classified as indefinite lived assets under SFAS 142. Indefinite lived assets are not amortized but instead are reviewed for impairment annually and more frequently if events or circumstances indicate that the asset may be impaired. International route authorities and trademarks were tested for impairment during the fourth quarter of 2007, at which time the Company concluded that no impairment exists. The Company will perform its next annual impairment test on October 1, 2008.
 
SFAS 142 requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairments in accordance with SFAS 144. The following table provides information relating to the Company’s intangible assets subject to amortization as of December 31, 2007 and 2006 (in millions):
 
                 
    2007     2006  
 
Airport take-off and landing slots
  $ 478     $ 454  
Airport gate leasehold rights
    52       52  
Accumulated amortization
    (62 )     (37 )
                 
Total
  $ 468     $ 469  
                 
 
The intangible assets subject to amortization generally are amortized over 25 years for airport take-off and landing slots and over the term of the lease for airport gate leasehold rights on a straight-line basis and are included in depreciation and amortization on the statements of operations. For the years ended December 31, 2007, 2006 and 2005, the Company recorded amortization expense of $25 million, $28 million and $8 million, respectively, related to its intangible assets. The Company expects to record annual amortization expense of $26 million in 2008, $26 million in year 2009, $25 million in year 2010, $23 million in year 2011, and $21 million in year 2012 related to these intangible assets.


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