UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2009

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)
54-1194634 (IRS Employer Identification No.)

111 West Rio Salado Parkway, Tempe, Arizona 85281
(Address of principal executive offices, including zip code)

US Airways, Inc.

(Exact name of registrant as specified in its charter)

(Commission File No. 1-8442)
53-0218143 (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)

Delaware
(State of Incorporation of all Registrants)

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

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

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

US Airways Group, Inc.		Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
US Airways, Inc.		Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

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

US Airways Group, Inc.		Yes		o		No		þ
US Airways, Inc.		Yes		o		No		þ

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 October 16, 2009, there were approximately 161,102,717 shares of US Airways Group, Inc. common stock outstanding.

As of October 16, 2009, 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-Q
Quarterly Period Ended September 30, 2009
Table of Contents

		Page
Part I. Financial Information
Item 1A. Condensed Consolidated Financial Statements of US Airways Group, Inc.
Condensed Consolidated Statements of Operations			5
Condensed Consolidated Balance Sheets			6
Condensed Consolidated Statements of Cash Flows			7
Notes to the Condensed Consolidated Financial Statements			8
Item 1B. Condensed Consolidated Financial Statements of US Airways, Inc.
Condensed Consolidated Statements of Operations			17
Condensed Consolidated Balance Sheets			18
Condensed Consolidated Statements of Cash Flows			19
Notes to the Condensed Consolidated Financial Statements			20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures about Market Risk			60
Item 4. Controls and Procedures			61
Part II. Other Information
Item 1. Legal Proceedings			62
Item 1A. Risk Factors			62
Item 6. Exhibits			71
Signatures			72
Exhibit 2.1
Exhibit 3.1
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 31.4
Exhibit 32.1
Exhibit 32.2

This combined Quarterly Report on Form 10-Q 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-Q to “we,” “us,” “our” and the “Company” refer to US Airways Group and its consolidated subsidiaries.

Note Concerning Forward-Looking Statements

Certain of the statements contained in this report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” and “continue” and similar terms used in connection with statements regarding, among others, our outlook, expected fuel costs, the revenue environment, and our expected financial performance. These statements include, but are not limited to, statements about 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 Part II, Item 1A “Risk Factors,” and the following:

•

the impact of future significant operating losses;

•

economic conditions and their impact on passenger demand and related revenues;

•

a reduction in the availability of financing and changes in prevailing interest rates that result in increased costs of financing;

•

our high level of fixed obligations and our ability to obtain and maintain financing for operations and other purposes and operate pursuant to the terms of our financing facilities (particularly the financial covenants);

•

the impact of fuel price volatility, significant disruptions in the supply of aircraft fuel and further significant increases to fuel prices;

•

our ability to maintain adequate liquidity;

•

labor costs and relations with unionized employees generally and the impact and outcome of labor negotiations, including our ability to complete the integration of the labor groups of US Airways Group and America West Holdings;

•

our reliance on vendors and service providers and our ability to obtain and maintain commercially reasonable terms with those vendors and service providers;

•

our reliance on automated systems and the impact of any failure or disruption of these systems;

•

the impact of the integration of our business units;

•

the impact of changes in our business model;

•

competitive practices in the industry, including significant fare restructuring activities, capacity reductions and in court or out of court restructuring by major airlines;

•

the impact of industry consolidation;

•

our ability to attract and retain qualified personnel;

•

the impact of global instability, including the current instability in the Middle East, the continuing impact of the military presence in Iraq and Afghanistan and the terrorist attacks of September 11, 2001 and the potential impact of future hostilities, terrorist attacks, infectious disease outbreaks or other global events that affect travel behavior;

•

changes in government legislation and regulation;

•

our ability to obtain and maintain adequate facilities and infrastructure to operate and grow our route network;

•

the impact of environmental laws and regulations;

•

costs of ongoing data security compliance requirements and the impact of any data security breach;

•

interruptions or disruptions in service at one or more of our hub airports;

•

the impact of any accident involving our aircraft;

•

delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity;

•

the impact of weather conditions and seasonality of airline travel;

•

the cyclical nature of the airline industry;

•

the impact of possible future increases in insurance costs and disruptions to insurance markets;

•

the impact of foreign currency exchange rate fluctuations;

•

our ability to use NOLs and certain other tax attributes;

•

our ability to maintain contracts that are critical to our operations;

•

our ability to attract and retain customers; and

•

other risks and uncertainties listed from time to time in our reports to and filings with the Securities and Exchange Commission.

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

Part I. Financial Information

This combined Form 10-Q is filed by US Airways Group and US Airways and includes the financial statements of each company in Item 1A and Item 1B, respectively.

Item 1A.		Condensed Consolidated Financial Statements of US Airways Group, Inc.

See accompanying notes to the condensed consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

US Airways Group, Inc.

The Company adopted FSP APB 14-1 on January 1, 2009. The Company concluded that the fair value of the equity component of the 7% notes at the time of issuance in 2005 was $47 million. Upon retrospective application, the adoption resulted in a $29 million increase in accumulated deficit at December 31, 2008, comprised of non-cash interest expense of $17 million for the years 2005-2008 and non-cash losses on debt extinguishment of $12 million related to the partial conversion of certain of the 7% notes to common stock in 2006. As of September 30, 2009 and December 31, 2008, the carrying value of the equity component was $40 million. The principal amount of the outstanding notes, the unamortized discount and the net carrying value at September 30, 2009 was $74 million, $7 million and $67 million, respectively, and at December 31, 2008 was $74 million, $11 million and $63 million, respectively. The remaining period over which the unamortized discount will be recognized is one year. The Company recognized $1 million and $4 million in non-cash interest expense in the three and nine months ended September 30, 2009, respectively, and $1 million and $3 million in the three and nine months ended September 30, 2008, respectively, related to the adoption of FSP APB 14-1. In addition, the Company recognized $2 million and $4 million in cash interest expense in the three and nine months ended September 30, 2009, respectively, and $2 million and $4 million in cash interest expense in the three and nine months ended September 30, 2008, respectively. The following table presents the December 31, 2008 balance sheet line items affected as adjusted and as originally reported (in millions).

In April 2009, the FASB issued FSP Financial Accounting Standards (“FAS”) 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” as adopted by the Codification on July 1, 2009. This FSP changes existing guidance for determining whether an impairment of debt securities is other-than-temporary. The FSP requires other-than-temporary impairments to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings and the amount related to other factors (referred to as noncredit losses) which is recognized in other comprehensive income. This noncredit loss component of the impairment may only be classified in other comprehensive income if both of the following conditions are met (a) the holder of the security concludes that it does not intend to sell the security and (b) the holder concludes that it is more likely than not that the holder will not be required to sell the security before the security recovers its value. If these conditions are not met, the noncredit loss must also be recognized in earnings. When adopting the FSP, an entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009. The Company adopted FSP FAS 115-2 and FAS 124-2 as of April 1, 2009. The Company does not meet the conditions necessary to recognize the noncredit loss component of its auction rate securities in other comprehensive income. Accordingly, the Company did not reclassify any previously recognized other-than-temporary impairment losses from retained earnings to accumulated other comprehensive income and the adoption of FSP FAS 115-2 and FAS 124-2 had no material impact on the Company’s condensed consolidated financial statements. Refer to Note 8 for further discussion of the Company’s investments in marketable securities.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” as adopted by the Codification on July 1, 2009. This FSP provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Company adopted FSP FAS 157-4 during the second quarter of 2009, and its application had no impact on the Company’s condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” as adopted by the Codification on July 1, 2009, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS No. 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted SFAS No. 165 during the second quarter of 2009, and its application had no impact on the Company’s condensed consolidated financial statements. The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was October 21, 2009.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation (“FIN”) No. 46(R),” which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. SFAS No. 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. Management is currently evaluating the requirements of SFAS No. 167 and has not yet determined the impact on the Company’s condensed consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. Management is currently evaluating the requirements of ASU No. 2009-13 and has not yet determined the impact on the Company’s condensed consolidated financial statements.

2. Special Items, Net

Special items, net as shown on the condensed consolidated statements of operations included the following charges for the three and nine months ended September 30, 2009 and 2008 (in millions):

3. Loss Per Common Share

Basic earnings (loss) per common share (“EPS”) is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of potentially dilutive shares of common stock outstanding during the period using the treasury stock method. Potentially dilutive shares include outstanding employee stock options, employee stock appreciation rights, employee restricted stock units and convertible debt. The following table presents the computation of basic and diluted EPS (in millions, except share and per share amounts):

For the three and nine months ended September 30, 2009, 12,128,427 and 11,288,952 shares, respectively, underlying stock options, stock appreciation rights and restricted stock units were not included in the computation of diluted EPS because inclusion of such shares would be antidilutive or because the exercise prices were greater than the average market price of common stock for the period. In addition, for the three and nine months ended September 30, 2009, 3,048,914 incremental shares from the assumed conversion of the 7% notes were excluded from the computation of diluted EPS due to their antidilutive effect. For the three and nine months ended September 30, 2009, 37,746,174 and 19,357,012 incremental shares, respectively, from the assumed conversion of the 7.25% convertible senior notes were excluded from the computation of diluted EPS due to their antidilutive effect.

For the three and nine months ended September 30, 2008, 9,256,697 and 7,602,552 shares, respectively, underlying stock options, stock appreciation rights and restricted stock units were not included in the computation of diluted EPS because inclusion of such shares would be antidilutive or because the exercise prices were greater than the average market price of common stock for the period. For the three and nine months ended September 30, 2008, 3,048,914 incremental shares from assumed conversion of the 7% notes were excluded from the computation of diluted EPS due to their antidilutive effect.

4. Debt

The following table details the Company’s debt (in millions). Variable interest rates listed are the rates as of September 30, 2009.

The Company was in compliance with the covenants in its debt agreements at September 30, 2009.

7.25% Convertible Senior Notes

In May 2009, US Airways Group issued $172 million aggregate principal amount of 7.25% Convertible Senior Notes due 2014 (the “7.25% notes”) for proceeds, net of expenses, of approximately $168 million. The 7.25% notes bear interest at a rate of 7.25% per annum, which shall be payable semi-annually in arrears on each May 15 and November 15, beginning November 15, 2009. The 7.25% notes mature on May 15, 2014.

Holders may convert their 7.25% notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date for the 7.25% notes. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of US Airways Group’s common stock or a combination thereof at the Company’s election. The initial conversion rate for the 7.25% notes is 218.8184 shares of US Airways Group’s common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $4.57 per share). Such conversion rate is subject to adjustment in certain events.

If the Company undergoes a fundamental change, holders may require the Company to purchase all or a portion of their 7.25% notes for cash at a price equal to 100% of the principal amount of the 7.25% notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. A fundamental change includes a person or group (other than the Company or its subsidiaries) becoming the beneficial owner of more than 50% of the voting power of the Company’s capital stock, certain merger or combination transactions, a substantial turnover of the Company’s directors, stockholder approval of the liquidation or dissolution of the Company and the Company’s common stock ceasing to be listed on at least one national securities exchange.

The 7.25% notes rank equal in right of payment to all of the Company’s other existing and future unsecured senior debt and senior in right of payment to the Company’s debt that is expressly subordinated to the 7.25% notes, if any. The 7.25% notes impose no limit on the amount of debt the Company or its subsidiaries may incur. The 7.25% notes are structurally subordinated to all debt and other liabilities and commitments (including trade payables) of the Company’s subsidiaries. The 7.25% notes are also effectively junior to the Company’s secured debt, if any, to the extent of the value of the assets securing such debt.

As the 7.25% notes can be settled in cash upon conversion, for accounting purposes, the 7.25% notes were bifurcated into a debt component that is initially recorded at fair value and an equity component. The Company concluded that the fair value of the equity component of its 7.25% notes is $98 million. The unamortized debt discount at September 30, 2009 is $95 million and the carrying value of the notes is $77 million. The remaining period over which the unamortized debt discount will be recognized as non-cash interest expense is 4.7 years as follows: $3 million in 2009, $12 million in 2010, $16 million in 2011, $22 million in 2012, $29 million in 2013 and $13 million in 2014. The Company recognized $2 million and $3 million in non-cash interest expense in the three and nine months ended September 30, 2009, respectively, related to the amortization of the debt discount.

Other 2009 Financing Transactions

On January 16, 2009, US Airways exercised its right to obtain new loan commitments and incur additional loans under a spare parts loan agreement. In connection with the exercise of that right, Airbus Financial Services funded $50 million in satisfaction of a previous commitment. This loan will mature on October 20, 2014, bears interest at a rate of LIBOR plus a margin and is secured by the collateral securing loans under the spare parts loan agreement.

On March 31, 2009, US Airways again exercised its right to obtain new loan commitments and incur additional loans under the spare parts loan agreement and borrowed $50 million. This loan will mature on October 20, 2014, bears interest at a rate of LIBOR plus a margin and is secured by the collateral securing loans under the spare parts loan agreement. US Airways used a portion of the proceeds to purchase an A321 aircraft previously leased to US Airways by an affiliate of the debt holder. As a result, this aircraft became unencumbered.

In June 2009, US Airways entered into loan agreements totaling $132 million to finance the acquisition of certain A330-200 aircraft. The loans bear interest at a rate of LIBOR plus an applicable margin, contain default provisions and other covenants that are typical in the industry for similar financings and are amortized over seven years with balloon payments at maturity.

In the third quarter of 2009, US Airways utilized backstop financing through the manufacturer totaling $104 million to finance the acquisition of certain A320 family aircraft. The financing bears interest at a rate of LIBOR plus an applicable margin, contains default provisions and other covenants that are typical in the industry for similar financings and is amortized over twelve years.

US Airways Group had previously entered into a co-branded credit card agreement with Barclays Bank Delaware. The agreement provides for, among other things, the pre-purchase of frequent flyer miles in the aggregate amount of $200 million. Barclays has agreed that it will pre-purchase additional miles on a monthly basis in an amount equal to the difference between $200 million and the amount of unused miles then outstanding, which purchases average approximately $17 million per month. Among the conditions to this monthly purchase of miles is a requirement that US Airways Group maintain an unrestricted cash balance of at least $1.5 billion. In September 2009, Barclays agreed to temporarily reduce this requirement to $1.35 billion for the months of August through October 2009.

Fair Value of Debt

The fair value of the Company’s long-term debt was approximately $3.54 billion and $3.31 billion at September 30, 2009 and December 31, 2008, respectively. The fair values were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

5. Income Taxes

As of December 31, 2008, the Company had approximately $1.4 billion of gross net operating loss carryforwards (“NOL”) to reduce future federal taxable income, substantially all of which is available to reduce federal taxable income in the calendar year 2009. The NOL expires during the years 2022 through 2028. The Company’s deferred tax asset, which included $1.3 billion of the NOL discussed above, has been subject to a full valuation allowance. The Company also had approximately $77 million of tax-effected state NOL at December 31, 2008.

In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The Company has recorded a valuation allowance against its net deferred tax asset. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible.

The Company reported a loss in the nine months ended September 30, 2009 and did not record a tax provision in any 2009 period.

The Company recorded income tax expense of $3 million in the three and nine month periods ended September 30, 2008 related to a reconciliation of the 2007 tax provision to the tax return as filed in the third quarter of 2008.

6. Express Expenses

Expenses associated with the Company’s wholly owned regional airlines and affiliate regional airlines operating as US Airways Express are classified as Express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):

7. Derivative Instruments

To manage the risk of changes in aviation fuel prices, the Company periodically enters into derivative contracts comprised of heating oil-based derivative instruments to hedge a portion of its projected jet fuel requirements. Since the third quarter of 2008, the Company has not entered into any new transactions as part of its fuel hedging program and as of September 30, 2009, there were no remaining outstanding fuel hedging contracts.

The Company’s fuel hedging instruments did not qualify for hedge accounting. Accordingly, the derivative hedging instruments were recorded as an asset or liability on the balance sheet at fair value and any changes in fair value were recorded in the period of change as gains or losses on fuel hedging instruments, net in operating expenses in the accompanying condensed consolidated statements of operations. The following table details the Company’s loss (gain) on fuel hedging instruments, net (in millions):

The unrealized gains in the 2009 periods were related to the reversal of prior period unrealized losses due to contracts settling in the three and nine months ended September 30, 2009.

8. Investments in Marketable Securities (Noncurrent)

As of September 30, 2009, the Company held auction rate securities totaling $411 million at par value, which are classified as available for sale securities and noncurrent assets on the Company’s condensed consolidated balance sheets. Contractual maturities for these auction rate securities range from seven to 43 years, with 62% of the Company’s portfolio maturing within the next 10 years (2016 — 2017), 10% maturing within the next 20 years (2025), 16% maturing within the next 30 years (2033 — 2036) and 12% maturing thereafter (2039 — 2052). With the liquidity issues experienced in the global credit and capital markets, all of the Company’s auction rate securities have experienced failed auctions since August 2007. The estimated fair value of these auction rate securities no longer approximates par value. At September 30, 2009, the fair value of the Company’s auction rate securities was $228 million, a net increase of $14 million from June 30, 2009 and $41 million from December 31, 2008. Refer to Note 9 for discussion on how the Company determines the fair value of its investments in auction rate securities.

In the three and nine months ended September 30, 2009, the Company recorded unrealized gains of $17 million and $51 million, respectively, in other comprehensive income related to the increase in fair value of certain of the Company’s investments in auction rate securities. These unrealized gains were offset by other-than-temporary impairment charges of $3 million and $10 million, respectively, in the three and nine months ended September 30, 2009. These other-than-temporary impairment charges are recorded in other nonoperating expense, net and relate to the decline in fair value of certain of the Company’s investments in auction rate securities.

In the three and nine months ended September 30, 2008, the Company recorded $127 million and $140 million, respectively, of other-than-temporary impairment charges in other nonoperating expense, net. These charges in the three and nine months ended September 30, 2008, included $103 million and $48 million, respectively, of previously recorded unrealized losses in other comprehensive income.

The Company continues to monitor the market for auction rate securities and consider its impact (if any) on the fair value of its investments. If the current market conditions deteriorate, the Company may be required to record additional impairment charges in other nonoperating expense, net in future periods.

9. Fair Value Measurements

Assets measured at fair value on a recurring basis are as follows (in millions):

Assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows (in millions):

10. Other Comprehensive Income (Loss)

The Company’s other comprehensive loss consists of the following (in millions):

The components of accumulated other comprehensive income were as follows (in millions):

11. Flight 1549

On January 15, 2009, US Airways flight 1549 was involved in an accident in New York that resulted in the aircraft ditching in the Hudson River. The Airbus A320 aircraft was en route to Charlotte from LaGuardia with 150 passengers and a crew of five onboard. All aboard survived and there were no serious injuries. US Airways has insurance coverage for both the aircraft (which is a total loss) as well as costs resulting from the accident, and there are no applicable deductibles.

The aircraft involved in the flight 1549 accident was leased by US Airways. In the first quarter of 2009, US Airways exercised its aircraft substitution right under the lease agreement and transferred title of an owned Airbus A320 to the lessor in substitution for the Airbus A320 aircraft that was involved in the accident. This transferred aircraft will continue to be leased to US Airways under the same terms and conditions of the lease agreement. In connection with this transaction, US Airways extinguished $22 million of debt associated with the previously owned aircraft that was transferred to the lessor.

12. Stockholders’ Equity

In May 2009, the Company completed an underwritten public offering of 15.2 million shares of common stock, as well as the full exercise of 2.28 million shares of common stock included in an overallotment option, at an offering price of $3.97 per share. Net proceeds from the offering, after underwriting discounts and commissions, were $66 million.

In September 2009, the Company completed an underwritten public offering of 26.3 million shares of common stock, as well as the exercise of 2.7 million shares of common stock included in an overallotment option, at a price of $4.75 per share. Net proceeds from the offering, after offering costs, were $137 million.

13. Slot Exchange

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

14. Subsequent Event

US Airways entered into a term sheet to sell 10 of its Embraer 190 aircraft to Republic Airline Inc. (“Republic”). Through October 21, 2009, five of the 10 aircraft sales have been completed and the remaining five are expected to close in the fourth quarter of 2009. US Airways will lease back eight of the 10 aircraft from Republic for periods ranging from one to seven months. Debt outstanding on the 10 Embraer aircraft was $217 million at September 30, 2009. In connection with this transaction, Republic has agreed to assume the full amount of this debt and release US Airways from its obligations associated with the principal due under the debt. Additionally, at September 30, 2009, US Airways had $35 million outstanding under a loan from Republic (the “Republic loan”). The Republic loan was scheduled to be repaid starting in January 2010 and fully repaid in October 2011. In accordance with the term sheet, the full amount outstanding under the Republic loan will be applied to the purchase price of the 10 aircraft. US Airways expects to incur an aggregate loss of approximately $47 million from the sale of the 10 aircraft and write-off of debt discount associated with the Republic loan in the fourth quarter of 2009.

See accompanying notes to the condensed consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

US Airways, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of US Airways, Inc. (“US Airways”) should be read in conjunction with the financial statements contained in US Airways’ Annual Report on Form 10-K for the year ended December 31, 2008. US Airways is a wholly owned subsidiary of US Airways Group, Inc. (“US Airways Group”). The accompanying unaudited condensed consolidated financial statements include the accounts of US Airways and its wholly owned subsidiary, America West Holdings, LLC (“America West Holdings”). America West Airlines, LLC (“AWA”) and its wholly owned subsidiary, FTCHP, LLC, are wholly owned subsidiaries of America West Holdings. All significant intercompany accounts and transactions between US Airways and its wholly owned subsidiaries have been eliminated.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. Certain prior year amounts have been reclassified to conform with the 2009 presentation. 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 long-lived and intangible assets, valuation of investments in marketable securities, the frequent traveler program and the deferred tax valuation allowance.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162.” SFAS No. 168 establishes the FASB Accounting Standards Codification™ (the “Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. Effective July 1, 2009, the Codification superseded all existing non-SEC accounting and reporting standards.

In April 2009, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standards (“FAS”) 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” as adopted by the Codification on July 1, 2009. This FSP changes existing guidance for determining whether an impairment of debt securities is other-than-temporary. The FSP requires other-than-temporary impairments to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings and the amount related to other factors (referred to as noncredit losses) which is recognized in other comprehensive income. This noncredit loss component of the impairment may only be classified in other comprehensive income if both of the following conditions are met (a) the holder of the security concludes that it does not intend to sell the security and (b) the holder concludes that it is more likely than not that the holder will not be required to sell the security before the security recovers its value. If these conditions are not met, the noncredit loss must also be recognized in earnings. When adopting the FSP, an entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009. US Airways adopted FSP FAS 115-2 and FAS 124-2 as of April 1, 2009. US Airways does not meet the conditions necessary to recognize the noncredit loss component of its auction rate securities in other comprehensive income. Accordingly, US Airways did not reclassify any previously recognized other-than-temporary impairment losses from retained earnings to accumulated other comprehensive income and the adoption of FSP FAS 115-2 and FAS 124-2 had no material impact on US Airways’ condensed consolidated financial statements. Refer to Note 8 for further discussion of US Airways’ investments in marketable securities.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” as adopted by the Codification on July 1, 2009. This FSP provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. US Airways adopted FSP FAS 157-4 during the second quarter of 2009, and its application had no impact on US Airways’ condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” as adopted by the Codification on July 1, 2009, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS No. 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. US Airways adopted SFAS No. 165 during the second quarter of 2009, and its application had no impact on US Airways’ condensed consolidated financial statements. US Airways evaluated subsequent events through the date the accompanying financial statements were issued, which was October 21, 2009.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation (“FIN”) No. 46(R),” which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. SFAS No. 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. Management is currently evaluating the requirements of SFAS No. 167 and has not yet determined the impact on US Airways’ condensed consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. Management is currently evaluating the requirements of ASU No. 2009-13 and has not yet determined the impact on US Airways’ condensed consolidated financial statements.

2. Special Items, Net

Special items, net as shown on the condensed consolidated statements of operations included the following charges for the three and nine months ended September 30, 2009 and 2008 (in millions):

3. Debt

The following table details US Airways’ debt (in millions). Variable interest rates listed are the rates as of September 30, 2009.

US Airways was in compliance with the covenants in its debt agreements at September 30, 2009.

2009 Financing Transactions

On January 16, 2009, US Airways exercised its right to obtain new loan commitments and incur additional loans under a spare parts loan agreement. In connection with the exercise of that right, Airbus Financial Services funded $50 million in satisfaction of a previous commitment. This loan will mature on October 20, 2014, bears interest at a rate of LIBOR plus a margin and is secured by the collateral securing loans under the spare parts loan agreement.

On March 31, 2009, US Airways again exercised its right to obtain new loan commitments and incur additional loans under the spare parts loan agreement and borrowed $50 million. This loan will mature on October 20, 2014, bears interest at a rate of LIBOR plus a margin and is secured by the collateral securing loans under the spare parts loan agreement. US Airways used a portion of the proceeds to purchase an A321 aircraft previously leased to US Airways by an affiliate of the debt holder. As a result, this aircraft became unencumbered.

In June 2009, US Airways entered into loan agreements totaling $132 million to finance the acquisition of certain A330-200 aircraft. The loans bear interest at a rate of LIBOR plus an applicable margin, contain default provisions and other covenants that are typical in the industry for similar financings and are amortized over seven years with balloon payments at maturity.

In the third quarter of 2009, US Airways utilized backstop financing through the manufacturer totaling $104 million to finance the acquisition of certain A320 family aircraft. The financing bears interest at a rate of LIBOR plus an applicable margin, contains default provisions and other covenants that are typical in the industry for similar financings and is amortized over twelve years.

Fair Value of Debt

The fair value of US Airways’ long-term debt was approximately $2.61 billion and $2.28 billion at September 30, 2009 and December 31, 2008, respectively. The fair values were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using a discounted cash flow analysis, based on US Airways’ current incremental borrowing rates for similar types of borrowing arrangements.

4. Related Party Transactions

The following represents the net payable balances to related parties (in millions):

US Airways Group has the ability to move funds freely between operating subsidiaries to support operations. These transfers are recognized as intercompany transactions. In September 2009, US Airways Group contributed $600 million in net intercompany receivables due from US Airways to the capital of US Airways.

The net payable to US Airways Group’s wholly owned subsidiaries consists of amounts due under regional capacity agreements with the other airline subsidiaries and fuel purchase arrangements with a non-airline subsidiary.

5. Income Taxes

US Airways and its wholly owned subsidiaries are part of the US Airways Group consolidated income tax return.

As of December 31, 2008, US Airways had approximately $1.3 billion of gross net operating loss carryforwards (“NOL”) to reduce future federal taxable income, substantially all of which is available to reduce federal taxable income in the calendar year 2009. The NOL expires during the years 2022 through 2028. US Airways’ deferred tax asset, which included $1.2 billion of the NOL discussed above, has been subject to a full valuation allowance. US Airways also had approximately $72 million of tax-effected state NOL at December 31, 2008.

In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. US Airways has recorded a valuation allowance against its net deferred tax asset. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible.

US Airways reported a loss in the nine months ended September 30, 2009 and did not record a tax provision in any 2009 period.

US Airways recorded income tax expense of $3 million in the three and nine month periods ended September 30, 2008 related to a reconciliation of the 2007 tax provision to the tax return as filed in the third quarter of 2008.

6. Express Expenses

Expenses associated with affiliate regional airlines operating as US Airways Express are classified as Express expenses on the condensed consolidated statements of operations. Express expenses consist of the following (in millions):

7. Derivative Instruments

To manage the risk of changes in aviation fuel prices, US Airways periodically enters into derivative contracts comprised of heating oil-based derivative instruments to hedge a portion of its projected jet fuel requirements. Since the third quarter of 2008, US Airways has not entered into any new transactions as part of its fuel hedging program and as of September 30, 2009, there were no remaining outstanding fuel hedging contracts.

US Airways’ fuel hedging instruments did not qualify for hedge accounting. Accordingly, the derivative hedging instruments were recorded as an asset or liability on the balance sheet at fair value and any changes in fair value were recorded in the period of change as gains or losses on fuel hedging instruments, net in operating expenses in the accompanying condensed consolidated statements of operations. The following table details US Airways’ loss (gain) on fuel hedging instruments, net (in millions):

The unrealized gains in the 2009 periods were related to the reversal of prior period unrealized losses due to contracts settling in the three and nine months ended September 30, 2009.

8. Investments in Marketable Securities (Noncurrent)

As of September 30, 2009, US Airways held auction rate securities totaling $411 million at par value, which are classified as available for sale securities and noncurrent assets on US Airways’ condensed consolidated balance sheets. Contractual maturities for these auction rate securities range from seven to 43 years, with 62% of US Airways’ portfolio maturing within the next 10 years (2016 — 2017), 10% maturing within the next 20 years (2025), 16% maturing within the next 30 years (2033 — 2036) and 12% maturing thereafter (2039 — 2052). With the liquidity issues experienced in the global credit and capital markets, all of US Airways’ auction rate securities have experienced failed auctions since August 2007. The estimated fair value of these auction rate securities no longer approximates par value. At September 30, 2009, the fair value of US Airways’ auction rate securities was $228 million, a net increase of $14 million from June 30, 2009 and $41 million from December 31, 2008. Refer to Note 9 for discussion on how US Airways determines the fair value of its investments in auction rate securities.

In the three and nine months ended September 30, 2009, US Airways recorded unrealized gains of $17 million and $51 million, respectively, in other comprehensive income related to the increase in fair value of certain of US Airways’ investments in auction rate securities. These unrealized gains were offset by other-than-temporary impairment charges of $3 million and $10 million, respectively, in the three and nine months ended September 30, 2009. These other-than-temporary impairment charges are recorded in other nonoperating expense, net and relate to the decline in fair value of certain of US Airways’ investments in auction rate securities.

In the three and nine months ended September 30, 2008, US Airways recorded $127 million and $140 million, respectively, of other-than-temporary impairment charges in other nonoperating expense, net. These charges in the three and nine months ended September 30, 2008, included $103 million and $48 million, respectively, of previously recorded unrealized losses in other comprehensive income.

US Airways continues to monitor the market for auction rate securities and consider its impact (if any) on the fair value of its investments. If the current market conditions deteriorate, US Airways may be required to record additional impairment charges in other nonoperating expense, net in future periods.

9. Fair Value Measurements

Assets measured at fair value on a recurring basis are as follows (in millions):