Merger and Related Matters

Description of Transaction

As previously discussed in Note 2, on the Effective Date, the Debtors consummated their reorganization and the Merger pursuant to the Plan. The Merger has been accounted for as a business acquisition using the acquisition method of accounting in accordance with ASC 805, "Business Combinations," with AAG considered the acquirer of US Airways Group. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. The acquisition values have also been reflected in US Airways Group's separate-entity financial statements as of December 9, 2013. The excess of the purchase price over the net fair value of assets and liabilities acquired was recorded as goodwill. Goodwill will not be amortized, but will be tested for impairment at least annually.

Slot Divestiture

As a stipulation for the Merger to be approved by the Department of Justice (DOJ), the Company was required to divest certain slots and LaGuardia Airport and Washington Regan National Airport. As of December 31, 2013, the Company recognized a gain of $67 million related to the sale the LaGuardia Airport slots, which has been included in Special items, net in the consolidated statement of operations. The relevant Washington Regan National Airport slots were classified as assets held for sale and included in Prepaid expenses and other on the Consolidated Balance Sheets.

Tax Matters

The Company experienced an "ownership change" in connection with its emergence from bankruptcy which under Section 382 could substantially constrain the use of a company’s NOL carryforwards and other tax attributes. However, the general limitation rules of Section 382 are liberalized where the ownership change occurs upon emergence from bankruptcy. While the Company anticipates taking advantage of these special rules that would permit the utilization of substantially all of the company’s NOL carryforwards, there can be no assurance that those special rules will apply. If the special rules do not apply, our ability to utilize our NOL carryforwards may be subject to limitation. See Note 11 for additional information related to tax matters.

Fair Value of Consideration Transferred

The fair value of the consideration transferred, or the purchase price, was derived as described below based on the outstanding shares of US Airways Group common stock at December 9, 2013, the exchange ratio of one share of AAG Common Stock for each share of US Airways Group common stock, and a price per share of AAG Common Stock of $22.55, which represented the closing price of US Airways Group common stock on December 6, 2013, the last day such shares traded on the New York Stock Exchange. US Airways Group equity awards outstanding at the close of the Merger converted into equity awards with respect to AAG Common Stock. Vested equity awards held by employees of US Airways Group are considered part of the purchase price.

(in millions except per share data)



Outstanding shares of US Airways Group Common Stock at December 9, 2013 exchanged	197.4
Exchange ratio	1.0
Assumed shares of AAG Common Stock	197.4
Price per share	$	22.55
Fair value of AAG Common Stock issued	$	4,451
Fair value of AAG equity awards issued in exchange for outstanding US Airways Group equity awards	$	141
Total purchase price	$	4,592

Allocation of Consideration Transferred

The Merger has been accounted for using the acquisition method of accounting in accordance with ASC 805, "Business Combinations," with AAG treated as the acquirer of US Airways Group for accounting purposes. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the acquisition date. The excess of the purchase price over the net fair value of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is not amortized, but is tested for impairment at least annually.



	(In millions)
Cash	$	206
Short-term investments	3,517
Other current assets	1,459
Operating property and equipment	5,543
Goodwill	4,086
Identifiable intangibles	1,501
Other noncurrent assets	122
Long-term debt and capital leases, including current portion	(6,026		)
Air traffic liability	(1,417		)
Frequent flyer liability	(1,256		)
Other liabilities assumed	(3,143		)
Total purchase price	$	4,592

The fair values of the assets acquired and liabilities assumed were determined using the market, income and cost approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market, other than certain long-term debt assumed in the Merger. The market approach, which indicates value for a subject asset based on available market pricing for comparable assets, was utilized to estimate the fair value of US Airways’ aircraft and operating leases. The market approach included prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The Company considered the current market for the aircraft, the maintenance condition of the aircraft and the expected proceeds from the sale of the assets, among other factors. The Company also utilized the market approach to value certain intangible assets such as airport take-off and landing slots when sufficient market information was available. The income approach was primarily used to value intangible assets, including customer relationships, marketing agreements, certain international route authorities, and the US Airways logo and tradenames. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation. The fair value of US Airways’ Dividend Miles frequent flyer program liability was determined based on the equivalent ticket value of outstanding miles which were expected to be redeemed at December 9, 2013. The equivalent ticket value contemplates purchased tickets that have similar restrictions as frequent traveler awards. In accordance with ASC 805, the Company may periodically adjust the value of goodwill to reflect changes that occur as a result of adjustments during the measurement period following the date of acquisition.

Pro-forma Impact of the Merger

The AAG unaudited pro-forma results presented below include the effects of the US Airways acquisition as if it had been consummated as of January 1, 2012. The pro-forma results include the depreciation and amortization associated with the acquired tangible and intangible assets, lease fair value adjustments, elimination of any deferred gains or losses from other comprehensive income and the impact of income changes on profit sharing expense, among others. However, pro-forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro-forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2012.



	Year Ended December 31,
	2013			2012
	(In millions)
Revenue	$	40,419		$	38,620
Net loss	$	(1,233	)	$	(1,239	)

Reclassifications

Certain prior period amounts have been reclassified between various financial statement line items to conform to the new AAG financial statement presentation. These reclassifications do not impact the historic net income and are comprised principally of the following items:


•	Reclassifications between various operating income line items to conform the presentation of Cargo and Other revenues.


•	Reclassifications between various operating expense line items to conform the presentation of regional airline expenses.


•	Reclassifications between other nonoperating income (expense), net and operating expenses to conform the presentation of foreign currency gains and losses.

The following table summarizes the historical and revised financial statement amounts for AAG (in millions).



	Year Ended December 31,
	2012						2011
	As Reclassified			Historical			As Reclassified			Historical
Operating revenues:
Mainline passenger	$	18,743		$	18,743		$	17,947		$	17,947
Regional passenger	2,914			2,914			2,724			2,724
Cargo	675			669			709			703
Other	2,523			2,529			2,599			2,605
Total operating revenues	24,855			24,855			23,979			23,979
Operating expenses:
Aircraft fuel and related taxes	7,705			8,717			7,358			8,304
Salaries, wages and benefits	6,217			6,897			6,361			7,053
Regional expenses	3,028			—			3,009			—
Maintenance, materials and repairs	1,158			1,400			1,039			1,284
Other rent and landing fees	1,083			1,304			1,194			1,432
Aircraft rent	553			550			645			662
Selling expenses	1,058			1,050			1,102			1,062
Depreciation and amortization	845			1,015			915			1,086
Special items, net	386			387			756			725
Other	2,674			3,428			2,637			3,425
Total operating expenses	24,707			24,748			25,016			25,033
Operating income (loss)	148			107			(1,037		)	(1,054		)
Nonoperating income (expense):
Interest income	26			26			26			26
Interest expense, net of capitalized interest	(632		)	(612		)	(811		)	(786		)
Other, net	221			242			(39		)	(47		)
Total nonoperating expense, net	$	(385	)	$	(344	)	$	(824	)	$	(807	)

Additionally, the Company reclassified approximately $292 million from current to noncurrent liabilities as of December 31, 2012.