Item 1A. Risk Factors
Below are certain risk factors that may affect our business, results of operations or financial condition, or the trading price of our
common stock or other securities. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot predict
such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business.
Risk Factors Relating to the Company and Industry-Related Risks
We could experience significant operating losses in the future.
For
a number of reasons, including those addressed in these risk factors, we might fail to achieve profitability and might experience significant losses. In particular, the condition of the economy and the high volatility of fuel prices have had and
continue to have an impact on our operating results, and increase the risk that we will experience losses.
Downturns in
economic conditions adversely affect our business.
Due to the discretionary nature of business and leisure travel
spending, airline industry revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased
passenger demand for air travel and changes in booking practices, both of which in turn have had, and may have in the future, a strong negative effect on our revenues. In addition, during challenging economic times, actions by our competitors to
increase their revenues can have an adverse impact on our revenues. See “
The airline industry is intensely competitive and dynamic
” below. Certain labor agreements to which we are a party limit our ability to reduce the number of
aircraft in operation, and the utilization of such aircraft, below certain levels. As a result, we may not be able to optimize the number of aircraft in operation in response to a decrease in passenger demand for air travel.
Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs,
increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.
Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel, which represents one of the largest single cost items in our business. Jet fuel
market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $1.87 per gallon to a high of approximately $3.38 per gallon during the period from January 1, 2010 to
June 30, 2013.
Because of the amount of fuel needed to operate our airline, even a relatively small increase in the
price of fuel can have a material adverse aggregate effect on our costs and liquidity. Due to the competitive nature of the airline industry and unpredictability of the market, we can offer no assurance that we may be able to increase our fares,
impose fuel surcharges or otherwise increase revenues sufficiently to offset fuel price increases.
Although we are currently
able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price volatility or cost of aircraft fuel. Natural disasters, political disruptions or wars involving oil-producing countries, changes in fuel-related
governmental policy, the strength of the U.S. dollar against foreign currencies, changes in access to petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental
concerns and other unpredictable events may result in fuel supply shortages, additional fuel price volatility and cost increases in the future.
Historically, we have from time to time entered into hedging arrangements designed to protect against rising fuel costs. Currently, we are not a party to any transactions to hedge our fuel consumption.
Our ability to hedge in the future may be limited, particularly if our financial condition provides insufficient liquidity to meet counterparty collateral requirements. Our future fuel hedging arrangements, if any, may not completely protect us
against price increases and may be limited in both volume of fuel and duration. Also, a rapid decline in the projected price of fuel at a time when we have fuel hedging contracts in place could adversely impact our short-term liquidity, because
hedge counterparties could require that we post collateral in the form of cash or letters of credit. See also the discussion in Part I, Item 3, “
Quantitative and Qualitative Disclosures About Market Risk
.”
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The airline industry is intensely competitive and dynamic.
Our competitors include other major domestic airlines and foreign, regional and new entrant airlines, many of which have more financial
resources or lower cost structures than ours, as well as other forms of transportation, including rail and private automobiles. In many of our markets we compete with at least one low-cost air carrier. Our revenues are sensitive to the actions of
other carriers in many areas including pricing, scheduling, capacity and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues. These factors may become even more significant in periods
when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near-term survival rather than long-term viability. In addition, because a significant portion of
our traffic is short-haul travel, we are more susceptible than other major airlines to competition from surface transportation such as automobiles and trains.
Low-cost carriers have a profound impact on industry revenues. Using the advantage of low unit costs, these carriers offer lower fares in order to shift demand from larger, more-established airlines. Some
low-cost carriers, which have cost structures lower than ours, have better financial performance and significant numbers of aircraft on order for delivery in the next few years. These low-cost carriers are expected to continue to increase their
market share through growth and, potentially, consolidation, and could continue to have an impact on our overall performance.
Additionally, as mergers and other forms of industry consolidation, including antitrust immunity grants, take place, we might or might
not be included as a participant. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with such combinations, our competitive position relative to the post-combination
carriers or other carriers that acquire such assets could be harmed. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks will grow, and that growth will result in greater overlap with our
network, which in turn could result in lower overall market share and revenues for us. Such consolidation is not limited to the U.S., but could include further consolidation among international carriers in Europe and elsewhere.
See also the risk factors provided under the caption “
Risk Factors Relating to the Merger and the Combined Company
.”
Increased costs of financing, a reduction in the availability of financing and fluctuations in interest rates could
adversely affect our liquidity, operating expenses and results.
Concerns about the systemic impact of inflation, the
availability and cost of credit, energy costs and geopolitical issues, combined with continued changes in business activity levels and consumer confidence, increased unemployment and volatile oil prices, have contributed to unprecedented levels of
volatility in the capital markets. As a result of these market conditions, the cost and availability of credit have been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. These changes in the domestic and
global financial markets may increase our costs of financing and adversely affect our ability to obtain financing needed for the acquisition of aircraft that we have contractual commitments to purchase and for other types of financings we may seek
in order to refinance debt maturities, raise capital or fund other types of obligations. Any downgrades to our credit rating may likewise increase the cost and reduce the availability of financing.
In addition, we have substantial non-cancelable commitments for capital expenditures, including the acquisition of new aircraft and
related spare engines. We have financing commitments for all future Airbus aircraft deliveries.
Further, a substantial
portion of our indebtedness bears interest at fluctuating interest rates, primarily based on the London interbank offered rate for deposits of U.S. dollars (“LIBOR”). LIBOR tends to fluctuate based on general economic conditions,
general interest rates, Federal Reserve rates and the supply of and demand for credit in the London interbank market. We have not hedged our interest rate exposure and, accordingly, our interest expense for any particular period may fluctuate based
on LIBOR and other variable interest rates. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash
flow for general corporate requirements may be adversely affected. See also the discussion of interest rate risk in Part I, Item 3, “
Quantitative and Qualitative Disclosures About Market Risk
.”
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Our high level of fixed obligations limits our ability to fund general corporate
requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions.
We have a significant amount of fixed obligations, including debt, aircraft leases and financings, aircraft purchase commitments, leases
and developments of airport and other facilities and other cash obligations. We also have certain guaranteed costs associated with our express operations. Our existing indebtedness is secured by substantially all of our assets.
As a result of the substantial fixed costs associated with these obligations:
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a decrease in revenues results in a disproportionately greater percentage decrease in earnings;
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we may not have sufficient liquidity to fund all of these fixed costs if our revenues decline or costs increase; and
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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.
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These obligations also impact our ability to obtain additional financing, if needed, and our flexibility in
the conduct of our business.
Any failure to comply with the liquidity covenants contained in our financing arrangements
would likely have a material adverse effect on our business, financial condition and results of operations.
The terms
of our 2013 Citicorp credit facility require us to maintain consolidated unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities in an aggregate amount not less than $850 million prior to the Merger
and $2.0 billion following the Merger, in each case, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding amount of the loan) of that amount held in accounts subject to control agreements.
Our ability to comply with these covenants while paying the fixed costs associated with our contractual obligations and our
other expenses will depend on our operating performance and cash flow, which are seasonal, as well as factors including fuel costs and general economic and political conditions.
The factors affecting our liquidity (and our ability to comply with related covenants) will remain subject to significant fluctuations
and uncertainties, many of which are outside our control. Any breach of our liquidity covenants or failure to timely pay our obligations could result in a variety of adverse consequences, including the acceleration of our indebtedness, the
withholding of credit card proceeds by our credit card processors and the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our contractual obligations, repay the accelerated
indebtedness, make required lease payments or otherwise cover our fixed costs.
If our financial condition worsens,
provisions in our credit card processing and other commercial agreements may adversely affect our liquidity.
We have
agreements with companies that process customer credit card transactions for the sale of air travel and other services. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a
“holdback”) equal to some or all of the advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. We are currently subject to certain holdback requirements. These holdback
requirements can be modified at the discretion of the processing companies upon the occurrence of specific events, including material adverse changes in our financial condition. An increase in the current holdback balances to higher percentages up
to and including 100% of relevant advanced ticket sales could materially reduce our liquidity. Likewise, other of our commercial agreements contain provisions that allow other entities to impose less favorable terms, including the acceleration of
amounts due, in the event of material adverse changes in our financial condition.
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Union disputes, employee strikes and other labor-related disruptions may adversely
affect our operations.
Relations between air carriers and labor unions in the United States are governed by the
Railway Labor Act (“RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of
employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”).
If no agreement is reached during direct negotiations between the parties, either party may request that the NMB appoint a federal mediator. The RLA prescribes no timetable for the direct negotiation and
mediation processes, and it is not unusual for those processes to last for many months or even several years. If no agreement is reached in mediation, the NMB in its discretion may declare that an impasse exists and proffer binding arbitration to
the parties. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30-day “cooling off” period commences. During or after that period, a Presidential Emergency Board (“PEB”) may be
established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another 30-day “cooling off” period. At the end of a “cooling off” period, unless an
agreement is reached or action is taken by Congress, the labor organization may exercise “self-help,” such as a strike, which could materially adversely affect our ability to conduct our business and our financial performance.
We are currently in negotiations with the unions representing our fleet service employees, our passenger service employees, our mechanic,
stock clerk and related employees, our maintenance training instructors, our flight crew training instructors and our flight simulator engineers. On February 8, 2013, the US Airways pilots represented by the US Airline Pilots Association voted
to ratify a memorandum of understanding (“MOU”) that will become effective in the event the Merger is consummated. If the Merger is completed, the MOU provides a six-year agreement for the pilots of the combined post-Merger carrier. In
addition, our express subsidiary, Piedmont, is in negotiations with the unions representing its flight attendants and its mechanics. All negotiations except those involving the Piedmont mechanics are being overseen by the NMB. None of these unions
presently may lawfully engage in concerted refusals to work, such as strikes, slow-downs, sick-outs or other similar activity, against us. Nonetheless, there is a risk that disgruntled employees, either with or without union involvement, could
engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our financial performance. For example, on September 28, 2011, the U.S. District Court in Charlotte granted a
preliminary injunction, which was subsequently converted to a permanent injunction, enjoining the labor union representing our pilots from engaging in an illegal work slowdown.
The inability to maintain labor costs at competitive levels would harm our financial performance.
Currently, our labor costs are very competitive relative to the other hub-and-spoke carriers. However, we cannot provide assurance that
labor costs going forward will remain competitive because some of our agreements are amendable now and others may become amendable, competitors may significantly reduce their labor costs or we may agree to higher-cost provisions in our current or
future labor negotiations. Approximately 83% of the employees within US Airways Group are represented for collective bargaining purposes by labor unions. Some of our unions have brought and may continue to bring grievances to binding arbitration,
including related to wages. Unions may also bring court actions and may seek to compel us to engage in bargaining processes where we believe we have no such obligation. If successful, there is a risk these judicial or arbitral avenues could create
material additional costs that we did not anticipate.
Interruptions or disruptions in service at one of our hub
airports could have a material adverse impact on our operations.
We operate principally through hubs in Charlotte,
Philadelphia, Phoenix and Washington, D.C. Substantially all of our flights either originate in or fly into one of these locations. A significant interruption or disruption in service at one of our hubs resulting from air traffic control delays,
weather conditions, natural disasters, growth constraints, relations with third-party service providers, failure of computer systems, facility disruptions, labor relations, fuel supplies, terrorist activities or otherwise could result in the
cancellation or delay of a significant portion of our flights and, as a result, could have a severe impact on our business, operations and financial performance.
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Regulatory changes affecting the allocation of slots could have a material adverse
impact on our operations.
Operations at four major domestic airports, certain smaller domestic airports and certain
foreign airports served by us are regulated by governmental entities through the use of “slots” or similar regulatory mechanisms which limit the rights of carriers to conduct operations at those airports. Each slot represents the
authorization to land at or take off from the particular airport during a specified time period and may have other operational restrictions as well. In the United States, the Federal Aviation Administration (“FAA”) currently regulates the
allocation of slot or slot exemptions at Ronald Reagan Washington National Airport and three New York City airports: Newark, JFK and LaGuardia. Our operations at these airports generally require the allocation of slots or similar regulatory
authority. Similarly, our operations at international airports in Frankfurt, London Heathrow, Paris and other airports outside the United States are regulated by local slot authorities pursuant to the International Air Transport Association’s
Worldwide Scheduling Guidelines and applicable local law.
We currently have sufficient slots or similar authority to operate
our existing flight schedule and have generally been able to acquire the necessary rights to expand flights and to change our schedules, although some airports are more challenging than others in terms of the cost and availability of additional
authority necessary to expand operations. There is no assurance, however, that we will be able to do so in the future because, among other reasons, such allocations are subject to changes in government policy. The FAA is planning a new rulemaking in
2013 to update the current rules governing the New York City airports. As the new proposal has not been released yet, we cannot state that the new proposed rules, if finalized, would not have a material impact on our operations.
If we incur problems with any of our third-party regional operators or third-party service providers, our operations could be
adversely affected by a resulting decline in revenue or negative public perception about our services.
A significant
portion of our regional operations are conducted by third-party operators on our behalf, primarily under capacity purchase agreements. Due to our reliance on third parties to provide these essential services, we are subject to the risks of
disruptions to their operations, which may result from many of the same risk factors disclosed in this report, such as the impact of adverse economic conditions, and other risk factors, such as a bankruptcy restructuring of any of the regional
operators. We may also experience disruption to our regional operations if we terminate the capacity purchase agreement with one or more of our current operators and transition the services to another provider. As our regional segment provides
revenues to us directly and indirectly (by providing flow traffic to our hubs), any significant disruption to our regional operations would have a material adverse effect on our business, results of operations and financial performance.
In addition, our reliance upon others to provide essential services on behalf of our operations may result in our relative inability to
control the efficiency and timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our operations, including express flight operations, aircraft maintenance, ground
services and facilities, reservations and baggage handling. Similar agreements may be entered into in any new markets we decide to serve. These agreements are generally subject to termination after notice by the third-party service provider. We are
also at risk should one of these service providers cease operations, and there is no guarantee that we could replace these providers on a timely basis with comparably priced providers. Recent volatility in fuel prices, disruptions to
capital markets and the current economic downturn in general have subjected certain of these third-party service providers to strong financial pressures. Any material problems with the efficiency and timeliness of contract services, resulting from
financial hardships or otherwise, could have a material adverse effect on our business, financial condition and results of operations.
We rely on third-party distribution channels and must manage effectively the costs, rights and functionality of these channels.
We rely on third-party distribution channels, including those provided by or through global distribution systems, or GDSs (e.g., Amadeus,
Sabre and Travelport), conventional travel agents and online travel agents, or OTAs (e.g., Expedia, Orbitz and Travelocity), to distribute a significant portion of our airline tickets and we expect in the future to continue to rely on these channels
and hope to expand their ability to distribute and collect revenues for ancillary products (e.g., fees for selective seating). These distribution channels are more expensive and at present have less functionality in respect of ancillary product
offerings than those we operate ourselves, such as our call centers and our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we will need to
manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of third-party distribution channels, while maintaining an industry-competitive cost structure. Any inability to manage our
third-party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our competitive position and our results of
operations.
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Further, on April 21, 2011, we filed an antitrust lawsuit against Sabre Holdings
Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit, as amended to date, alleges, among other things, that Sabre has engaged in
anticompetitive practices to preserve its monopoly power by restricting our ability to distribute our products to our customers. The lawsuit also alleges that these actions have prevented us from employing new competing technologies and has allowed
Sabre to continue to charge us supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two of the four
counts in the complaint to proceed. We intend to pursue our claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.
Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to our operations, limits on our operating flexibility, reductions in the demand
for air travel, and competitive disadvantages.
Airlines are subject to extensive domestic and international
regulatory requirements. In the last several years, Congress has passed laws, and the U.S. Department of Transportation (“DOT”), the FAA, the Transportation Security Administration (“TSA”) and the Department of Homeland Security
have issued a number of directives and other regulations that affect the airline industry. These requirements impose substantial costs on us and restrict the ways we may conduct our business.
For example, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that
require significant expenditures or operational restrictions. Our failure to timely comply with these requirements has in the past and may in the future result in fines and other enforcement actions by the FAA or other regulators. In addition, the
FAA recently issued its final regulations governing pilot rest periods and work hours for all airlines certificated under Part 121 of the Federal Aviation Regulations. The rule, which becomes effective on January 14, 2014, impacts the required
amount and timing of rest periods for pilots between work assignments and modifies duty and rest requirements based on the time of day, number of scheduled segments, flight types, time zones, and other factors. These regulations could have a
material adverse effect on us and the industry upon implementation.
Recent DOT consumer rules require new procedures for
customer handling during long onboard delays, further regulate airline interactions with passengers through the reservations process, at the airport, and on board the aircraft, and require new disclosures concerning airline fares and ancillary fees
such as baggage fees. The DOT has been aggressively investigating alleged violations of these new rules. Other DOT rules apply to post-ticket purchase price increases and an expansion of tarmac delay regulations to international airlines.
The Aviation and Transportation Security Act mandates the federalization of certain airport security procedures and imposes
additional security requirements on airports and airlines, most of which are funded by a per-ticket tax on passengers and a tax on airlines.
The results of our operations, demand for air travel, and the manner in which we conduct business each may be affected by changes in law and future actions taken by governmental agencies, including:
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changes in law which affect the services that can be offered by airlines in particular markets and at particular airports, or the types of fees that
can be charged to passengers;
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the granting and timing of certain governmental approvals (including antitrust or foreign government approvals) needed for codesharing alliances and
other arrangements with other airlines;
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restrictions on competitive practices (for example, court orders, or agency regulations or orders, that would curtail an airline’s ability to
respond to a competitor);
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the adoption of new passenger security standards or regulations that impact customer service standards (for example, a “passenger bill of
rights”);
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restrictions on airport operations, such as restrictions on the use of takeoff and landing slots at airports or the auction or reallocation of slot
rights currently held by US Airways Group; and
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the adoption of more restrictive locally-imposed noise restrictions.
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Each additional regulation or other form of regulatory oversight increases costs and adds
greater complexity to airline operations and, in some cases, may reduce the demand for air travel. There can be no assurance that our compliance with new rules, anticipated rules or other forms of regulatory oversight will not have a material
adverse effect on us.
In April 2013, the FAA announced the imposition of furloughs that resulted in reduced staffing,
including among air traffic controllers, in connection with its implementation of budget reductions related to the federal government’s response to the so-called “sequester” of government funding. These furloughs have been suspended
as a result of Congressional legislation. However, we cannot predict whether there will be further furloughs or the impact of any such furloughs on our business. Any significant reduction in air traffic capacity at key airports in the U.S. could
have a material adverse effect on our operations and financial results.
In addition, the air traffic control system is not
successfully managing the growing demand for U.S. air travel. Air traffic controllers rely on outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes. On February 14, 2012, the FAA
Modernization and Reform Act of 2012 was signed. The law provides funding for the FAA to rebuild its air traffic control system, including switching from radar to a GPS-based system. It is uncertain when any improvements to the air traffic control
system will take effect. Failure to update the air traffic control system in a timely manner and the substantial funding requirements that may be imposed on airlines of a modernized air traffic control system may have a material adverse effect on
our business.
The ability of U.S. airlines 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 and appropriate slots or facilities may not be made available. We currently operate on a number of international routes under government arrangements that limit
the number of airlines permitted to operate on the route, the capacity of the airlines providing services on the route, or the number of airlines allowed access to particular airports. If an open skies policy were to be adopted for any of these
routes, such an event could have a material adverse impact on us and could result in the impairment of material amounts of our related tangible and intangible assets. In addition, competition from revenue-sharing joint ventures, joint business
agreements, and other alliance arrangements by and among other airlines could impair the value of our business and assets on the open skies routes. For example, the open skies air services agreement between the U.S. and the European Union
(“EU”), which took effect in March 2008, provides airlines from the U.S. and EU member states open access to each other’s markets, with freedom of pricing and unlimited rights to fly from the U.S. to any airport in the EU, including
London’s Heathrow Airport. As a result of the agreement, we face increased competition in these markets, including Heathrow Airport. In addition, the open skies agreement between the U.S. and Brazil, which was signed in 2010 and takes full
effect in 2015, has resulted in increased competition in the U.S./Brazil market.
The airline industry is heavily taxed.
The airline industry is subject to extensive government fees and taxation that will negatively impact our revenue.
The U.S. airline industry is one of the most heavily taxed of all industries. These fees and taxes have grown significantly in the past decade for domestic flights, and various U.S. fees and taxes also are assessed on international flights. For
example, as permitted by federal legislation, most major U.S. airports impose a passenger facility charge per passenger on us. In addition, the governments of foreign countries in which we operate impose on U.S. airlines, including us, various fees
and taxes, and these assessments have been increasing in number and amount in recent years. Moreover, we are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air
transportation. We will collect the excise tax, along with certain other U.S. and foreign taxes and user fees on air transportation (such as a per-ticket tax on passengers to fund the TSA), and pass along the collected amounts to the appropriate
governmental agencies. Although these taxes are not operating expenses, they represent an additional cost to our customers. There are continuing efforts in Congress and in other countries to raise different portions of the various taxes, fees, and
charges imposed on airlines and their passengers. Increases in such taxes, fees, and charges could negatively impact our business, financial condition, and results of operations.
Under recent DOT regulations, all governmental taxes and fees must be included in the fares we quote or advertise to our customers. Due
to the competitive revenue environment, many increases in these fees and taxes have been absorbed by the airline industry rather than being passed on to the customer. Further increases in fees and taxes may reduce demand for air travel, and thus our
revenues.
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Changes to our business model that are designed to increase revenues may not be
successful and may cause operational difficulties or decreased demand.
We have implemented several new measures
designed to increase revenue and offset costs. These measures include charging separately for services that had previously been included within the price of a ticket and increasing other pre-existing fees. We may introduce additional initiatives in
the future; however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives. We cannot assure you that these new measures or any future initiatives will be successful in increasing our revenues.
Additionally, the implementation of these initiatives creates logistical challenges that could harm the operational performance of our airline. Also, the new and increased fees might reduce the demand for air travel on our airline or across the
industry in general, particularly if weakened economic conditions continue to make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers that determine not to institute similar
charges.
The loss of key personnel upon whom we depend to operate our business or the inability to attract additional
qualified personnel could adversely affect the results of our operations or our financial performance.
We believe
that our future success will depend in large part on our ability to attract and retain highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting and retaining other highly
qualified personnel. Any inability to retain or attract significant numbers of qualified management and other personnel could adversely affect our business.
We may be adversely affected by conflicts overseas or terrorist attacks; the travel industry continues to face ongoing security concerns.
Acts of terrorism or fear of such attacks, including elevated national threat warnings, wars or other military conflicts, may depress air
travel, particularly on international routes, and cause declines in revenues and increases in costs. The attacks of September 11, 2001 and continuing terrorist threats and attempted attacks materially impacted and continue to impact air travel.
Increased security procedures introduced at airports since the attacks and other such measures as may be introduced in the future generate higher operating costs for airlines. The Aviation and Transportation Security Act mandated improved flight
deck security, deployment of federal air marshals on board flights, improved airport perimeter access security, airline crew security training, enhanced security screening of passengers, baggage, cargo, mail, employees and vendors, enhanced training
and qualifications of security screening personnel, additional provision of passenger data to U.S. Customs and enhanced background checks. A concurrent increase in airport security charges and procedures, such as restrictions on carry-on
baggage, has also had and may continue to have a disproportionate impact on short-haul travel, which constitutes a significant portion of our flying and revenue.
Our ability to operate and grow our route network in the future is dependent on the availability of adequate facilities and infrastructure throughout our system and, at some airports, adequate
slots.
In order to operate our existing and proposed flight schedule and, where appropriate, add service along new or
existing routes, we must be able to maintain and/or obtain adequate gates, ticketing facilities, operations areas, slots (where applicable), and office space. Also, as airports around the world become more congested, we will not 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. Further, our operating costs at airports at which we operate, including our hubs, may increase
significantly because of capital improvements at such airports that we may be required to fund, directly or indirectly. In some circumstances, such costs could be imposed by the relevant airport authority without our approval.
Access to slots at several major U.S. and foreign airports to be served by us is subject to government regulation. There is no assurance
that we will be able to retain or acquire the necessary rights to operate our desired schedule and change our schedule in the future because, among other reasons, such allocations are subject to changes in government policy. For example, the FAA is
planning a new rulemaking in 2013 to modify the current rules limiting flight operations at New York City’s JFK and LaGuardia airports. Any limitation on our ability to acquire or maintain adequate gates, ticketing facilities, operations areas,
slots (where applicable), or office space could severely constrain our operations and have a material adverse effect on us.
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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, and violations can lead to significant fines and penalties.
The U.S. Environmental Protection Agency (“EPA”) has proposed effluent limitation guidelines for airport de-icing fluid. This proposed technology-based rule would require the mitigation of spent
de-icing fluid (glycol) discharges through collection and treatment. Airports meeting threshold requirements would have to construct or reconfigure de-icing facilities to capture and treat the fluid. Additionally, the EPA has proposed changes to
underground storage tank regulations that could affect certain airport fuel hydrant systems. Airport systems that fall within threshold requirements would need to be modified to meet regulations. Neither rule has been finalized, and cost estimates
have not been defined, but US Airways along with other airlines would share a portion of these costs at applicable airports. In addition to the proposed EPA regulations, several U.S. airport authorities are actively engaged in efforts to limit
discharges of de-icing fluid to local groundwater, often by requiring airlines to participate in the building or reconfiguring of airport de-icing facilities. Such efforts are likely to impose additional costs and restrictions on airlines using
those airports. We do not believe, however, that such environmental developments will have a material impact on our capital expenditures or otherwise adversely affect our operations, operating costs or competitive position.
We are also subject to other environmental laws and regulations, including those that require us to remediate soil or groundwater to meet
certain objectives. Under federal law, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions.
Liability under these laws is often strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to us. We have liability for
such costs at various sites, although the future costs associated with the remediation efforts are currently not expected to have a material adverse effect on our business.
We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators. Under these leases and agreements, we have agreed to indemnify the lessor or
operator against environmental liabilities associated with the real property or operations described under the agreement, even if we are not the party responsible for the initial event that caused the environmental damage. We also participate in
leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines.
There is increasing global regulatory focus on climate change and greenhouse gas emissions. For example, the EU has established the Emissions Trading Scheme (“ETS”), the mechanism by which
emissions of CO2 are currently regulated in the EU. Since the beginning of 2012, the ETS has required airlines to have emission allowances equal to the amount of carbon dioxide emissions from flights to and from EU member states. In November 2012,
the EU announced a one-year derogation on compliance obligations under the ETS for flights between the EU and countries outside the EU pending the adoption of an alternative scheme at the International Civil Aviation Organization (“ICAO”)
Assembly in the Fall of 2013. The final regulatory text for the derogation was ratified by EU Parliament in April 2013 and adopted by the EU Council in April 2013. In addition, President Obama signed legislation in November 2012 which encourages the
DOT to seek an international solution through the ICAO, and if necessary, will allow the Secretary of Transportation to prohibit U.S. airlines from participating in the ETS. Should the ICAO fail to reach an agreement at the ICAO Assembly, the EU
will revert to the original version of the ETS and all flights in and out of the EU would be automatically covered again for the entire 2013 period, in which case US Airways may be responsible for reporting all 2013 emissions data at that time and
for remitting 2013 allowances in April 2014. US Airways does not anticipate any significant emissions credit expenditures in 2013. Beyond 2013, compliance with the ETS could significantly increase our operating costs. However, whether US Airways
will ever be required to purchase and redeem emissions credits under the EU scheme is still unknown. Further, the potential impact of ETS on costs will ultimately depend on a number of factors, including baseline emissions, the price of emission
credits and the number of future flights subject to ETS. These costs have not been completely defined and will fluctuate. In the U.S., there is an increasing trend toward regulating greenhouse gas emissions directly under the Clean Air Act, and
while the EPA’s recent regulatory activity in this area has focused on industries other than aviation, it is possible that future EPA regulations or new legislation could impact airlines. Several states are also considering initiatives to
regulate emissions of greenhouse gases, primarily through the planned development of greenhouse gas emissions inventories and/or regional greenhouse gas cap and trade programs. These regulatory efforts, both internationally and in the U.S. at the
federal and state levels, are still developing and we cannot yet determine what the final regulatory programs will be in the U.S., the EU or in other areas in which we do business. However, such climate change-related regulatory activity in the
future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or otherwise pay for our emissions. Such activity may also impact us indirectly by increasing our operating costs, including
fuel costs.
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Governmental authorities in several U.S. and foreign cities are also considering or
have already implemented aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We have been able to accommodate local noise restrictions imposed to date, but our
operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.
We rely
heavily on technology and automated systems to operate our business, and any failure of these technologies or systems could harm our business, financial condition or results of operations.
We are highly dependent on technology and automated systems to operate and achieve low operating costs. These technologies and systems
include our computerized airline reservation system, flight operations system, financial planning, management and accounting systems, telecommunications systems, website, maintenance systems and check-in kiosks. In order for our operations to work
efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. Substantially all of our tickets are issued to passengers as electronic tickets. We
depend on our reservation system, which is hosted and maintained under a long-term contract by a third-party service provider, to be able to issue, track and accept these electronic tickets. If our automated systems are not functioning or if our
third-party service providers were to fail to adequately provide technical support, system maintenance or timely software upgrades for any one of our key existing systems, we could experience service disruptions or delays, which could harm our
business and result in the loss of important data, increase our expenses and decrease our revenues. In the event that one or more of our primary technology or systems vendors goes into bankruptcy, ceases operations or fails to perform as promised,
replacement services may not be readily available on a timely basis, at competitive rates or at all, and any transition time to a new system may be significant. Our automated systems cannot be completely protected against other events that are
beyond our control, including natural disasters, computer viruses or telecommunications failures. Substantial or sustained system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines. We
cannot assure you that our security measures, change control procedures or disaster recovery plans are adequate to prevent disruptions or delays. Disruption in or changes to these systems could result in a disruption to our business and the loss of
important data. Any of the foregoing could result in a material adverse effect on our business, results of operations or financial condition.
Ongoing data security compliance requirements could increase our costs, and any significant data breach could harm our business, financial condition or results of operations.
Our business requires the appropriate and secure utilization of customer and other sensitive information. We cannot be certain that
advances in criminal capabilities (including cyber attacks or cyber intrusions over the Internet, malware, computer viruses and the like), discovery of new vulnerabilities or attempts to exploit existing vulnerabilities in our systems, other data
thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting the networks that access and store sensitive information. The risk of a security breach or
disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the
world have increased. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad (particularly in the EU), including requirements for varying levels of customer notification in the event of a data
breach.
In addition, many of our commercial partners, including credit card companies, have imposed data security standards
that we must meet. In particular, we are required by the Payment Card Industry Security Standards Council, founded by the credit card companies, to comply with their highest level of data security standards. While we continue our efforts to meet
these standards, new and revised standards may be imposed that may be difficult for us to meet and could increase our costs.
Failure to comply with the Payment Card Industry Standards discussed above or other privacy and data use and security requirements of our
partners or related laws, rules and regulations to which we are subject may expose us to claims for contract breach, fines, sanctions or other penalties, which could materially and adversely affect our results of operations and overall business. In
addition, failure to address appropriately these issues could also give rise to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and
penalties and cause us to incur further related costs and expenses.
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We are at risk of losses and adverse publicity stemming from any accident involving
any of our aircraft or the aircraft of our regional operators.
If one of our aircraft, an aircraft that is operated
under our brand by one of our regional operators or an aircraft that is operated by an airline that is one of our codeshare partners were to be involved in an accident, we could be exposed to significant tort liability. The insurance we carry to
cover damages arising from any future accidents may be inadequate. In the event that our insurance is not adequate, we may be forced to bear substantial losses from an accident. In addition, any accident involving an aircraft that we operate, an
aircraft that is operated under our brand by one of our regional operators or an aircraft that is operated by an airline that is one of our codeshare partners could create a public perception that our aircraft or those of our regional operators or
codeshare partners are not safe or reliable, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft or those of our regional operators or codeshare partners and adversely impact our financial condition and
operations.
Delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity may adversely impact
our operations and financial results.
The success of our business depends on, among other things, the ability to
operate an optimum number and type of aircraft. In many cases, the aircraft we intend to operate are not yet in our fleet, but we have contractual commitments to purchase or lease them. If for any reason we were unable to accept or secure deliveries
of new aircraft on contractually scheduled delivery dates, this could have a negative impact on our business, operations and financial performance. Our failure to integrate newly purchased aircraft into our fleet as planned might require us to seek
extensions of the terms for some leased aircraft. Such unanticipated extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs. If new
aircraft orders are not filled on a timely basis, we could face higher monthly rental rates.
We are dependent on a
limited number of suppliers for aircraft, aircraft engines and parts.
We are dependent on a limited number of
suppliers for aircraft, aircraft engines and many aircraft and engine parts. As a result, we are vulnerable to any problems associated with the supply of those aircraft, parts and engines, including design defects, mechanical problems, contractual
performance by the suppliers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft.
Our business will be affected by many changing economic and other conditions beyond our control, and our results of operations
could be volatile and fluctuate due to seasonality.
Our business, financial condition, and results of operations will
be affected by many changing economic and other conditions beyond our control, including, among others:
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actual or potential changes in international, national, regional, and local economic, business and financial conditions, including recession,
inflation, higher interest rates, wars, terrorist attacks, or political instability;
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changes in consumer preferences, perceptions, spending patterns, or demographic trends;
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changes in the competitive environment due to industry consolidation, changes in airline alliance affiliations, and other factors;
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actual or potential disruptions to the air traffic control systems, including as a result of “sequestration” or any other interruption in
government funding;
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increases in costs of safety, security, and environmental measures;
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outbreaks of diseases that affect travel behavior; and
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weather and natural disasters.
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Thus, our results of operations could be volatile and subject to rapid and unexpected
change. In addition, due to generally weaker demand for air travel during the winter, our revenues in the first and fourth quarters of the year could be weaker than revenues in the second and third quarters of the year.
Increases in insurance costs or reductions in insurance coverage may adversely impact our operations and financial results.
The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and a decrease
in the insurance coverage available to commercial air carriers. Accordingly, our insurance costs increased significantly and our ability to continue to obtain insurance even at current prices remains uncertain. In addition, we have obtained
third-party war risk (terrorism) insurance through a special program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial insurance market. The program has been extended, with the same
conditions and premiums, until September 30, 2013. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk insurance. The failure of one or more of our insurers could result in a lack of
coverage for a period of time. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the claims paying ability of some insurers. Future downgrades in the ratings of enough insurers could adversely
impact both the availability of appropriate insurance coverage and its cost. Because of competitive pressures in our industry, our ability to pass additional insurance costs to passengers is limited. As a result, further increases in insurance costs
or reductions in available insurance coverage could have an adverse impact on our financial results.
We may be
adversely affected by global events that affect travel behavior.
Our revenue and results of operations may be
adversely affected by global events beyond our control. An outbreak of a contagious disease such as Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, or any other influenza-type illness, if it were to persist for an extended
period, could again materially affect the airline industry and us by reducing revenues and impacting travel behavior.
We are exposed to foreign currency exchange rate fluctuations.
As a result of our international operations, we have significant operating revenues and expenses, as well as assets and liabilities,
denominated in foreign currencies. Fluctuations in foreign currencies can significantly affect our operating performance and the value of our assets and liabilities located outside of the United States.
The use of our net operating losses and certain other tax attributes could be limited in the future.
When a corporation undergoes an ownership change, as defined in Section 382 (“Section 382”) of the Internal Revenue
Code of 1986, as amended (the “Code”), a limitation is imposed on the corporation’s future ability to utilize any net operating losses (“NOLs”) generated before the ownership change and certain subsequently recognized
“built-in” losses and deductions, if any, existing as of the date of the ownership change. We believe US Airways Group underwent an “ownership change” as defined in Section 382 in February 2007. Since February 2007, there
have been additional changes in the ownership of US Airways Group that, if combined with sufficiently large future changes in ownership, could result in another “ownership change” as defined in Section 382. Until US Airways Group
has used all of its existing NOLs, future shifts in ownership of US Airways Group’s common stock could result in new Section 382 limitations on the use of our NOLs as of the date of an additional “ownership change.” US Airways
Group expects to undergo an ownership change in connection with the Merger with AMR.
See also “
Risk Factors Relating
to the Merger and the Combined Company — The use of AMR’s and our respective pre-Merger NOL carryforwards and certain other tax attributes may be limited following the consummation of the Merger
.”
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Risk Factors Relating to the Merger and the Combined Company
On February 13, 2013, US Airways Group and AMR entered into the Merger Agreement, as described under “
Recent
Developments
” on page 4 of this report.
The Merger is subject to a number of conditions to our and AMR’s
obligations, which, if not fulfilled, may result in termination of the Merger Agreement.
The Merger Agreement
contains a number of customary conditions to consummation of the Merger, including that certain representations and warranties be accurate, that certain covenants be fulfilled, that certain consents and regulatory approvals have been obtained, that
there are no legal prohibitions against consummation of the Merger, that our stockholders have adopted the Merger Agreement, that an order from the Bankruptcy Court confirming AMR’s plan of reorganization is in effect, that the plan of
reorganization conforms to the requirements of the Merger Agreement, that secured indebtedness of the Debtors and certain other claims against the Debtors not exceed specified levels, and certain other conditions. Many of the conditions to
consummation of the Merger are not within either AMR’s or our control and neither of us can predict when or if these conditions will be satisfied. If any of these conditions are not satisfied or waived prior to October 14, 2013, which date
may be extended to December 13, 2013 under certain circumstances, it is possible that the Merger will not be consummated in the expected time frame or that the Merger Agreement may be terminated.
The Merger is subject to the receipt of consents and clearances from certain domestic and foreign regulatory authorities that may
impose conditions that could have a material and adverse effect on the combined company, or that could delay or, if not obtained, prevent the completion of the Merger.
Before the Merger can be completed, applicable waiting periods must expire or terminate under antitrust laws and various approvals, consents or clearances must be obtained from certain domestic and
foreign regulatory entities, including those regulating the provision of commercial aviation services. In deciding whether to grant antitrust or regulatory clearances, the relevant antitrust authorities will consider the effect of the Merger on
competition within their relevant jurisdictions. The terms and conditions of approvals that are granted may impose requirements, limitations, costs or restrictions on the conduct of the combined company’s business following the Merger. There
can be no assurance that regulators will not impose terms, conditions, requirements, limitations, costs or restrictions that would delay completion of the Merger, impose additional material costs on or limit the revenues of the combined company, or
limit some of the synergies and other benefits we anticipate following the Merger. In addition, we cannot provide any assurance that any such terms, conditions, requirements, limitations, costs, or restrictions will not result in a material delay
in, or the abandonment of, the Merger.
The Merger is subject to the confirmation of AMR’s plan of reorganization
by the Bankruptcy Court. Failure to obtain this approval or any other approvals required by the Merger Agreement would prevent the consummation of the Merger.
Before the Merger can be completed, the Bankruptcy Court must enter an order confirming AMR’s plan of reorganization. There can be no assurance that this or any other approvals required by the Merger
Agreement will be obtained. Failure to obtain required approvals within the expected time frame, or having to make significant changes to the structure, terms, or conditions of the Merger to obtain such approvals, may result in a material delay in,
or the abandonment of, the Merger.
Lawsuits have been filed against us challenging the Merger and an adverse ruling may
prevent the Merger from being completed.
US Airways Group, as well as the members of US Airways Group’s board of
directors, were named as defendants in a lawsuit brought by a purported class of US Airways Group’s stockholders challenging the Merger and seeking a declaration that the Merger Agreement is unenforceable, an injunction against the Merger (or
rescission in the event it has been consummated), imposition of a constructive trust, an award of fees and costs, including attorneys’ and experts’ fees, and other relief. US Airways Group and US Airways were also named as defendants in a
lawsuit brought by US Airways’ and/or American Airlines’ consumers challenging the Merger and seeking a declaration that the Merger violates Section 7 of the Clayton Antitrust Act, an injunction against the Merger, an award of fees
and costs, including attorney’s fees, and other relief.
Additional lawsuits may be filed against us, AMR, and/or our or
AMR’s directors in connection with the Merger. One of the conditions to the closing of the Merger is that no order, writ, injunction, decree, or any other legal rules, regulations, directives, or policies will be in effect that prevent
completion of the Merger. Consequently, if a settlement or other resolution is not reached in the current and potential lawsuits referenced here and the plaintiffs secure injunctive or other relief prohibiting, delaying, or otherwise adversely
affecting the defendants’ ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming effective within the expected time frame or at all.
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Any delay in completing the Merger could delay the benefits expected to be achieved
thereunder.
The need to satisfy conditions and obtain consents, clearances, and approvals for the Merger, as well as
any lawsuits related to the Merger, and other events, could delay the consummation of the Merger for a significant period of time or prevent it from occurring. Any delay in consummation of the Merger could cause the combined company to be delayed in
realizing some of the synergies and other benefits that the parties anticipate if the Merger is successfully completed within its expected time frame.
Failure to complete the Merger could negatively impact our stock price and our future business and financial results.
If the Merger is not completed, our ongoing business may be adversely affected, and we will be subject to several risks, including the
following:
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we may be required to pay termination fees of $55 million or $195 million under certain circumstances provided in the Merger Agreement;
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unless and until it is terminated, we will be prohibited by the Merger Agreement from seeking certain strategic alternatives, such as transactions with
third parties other than AMR, and could therefore miss attractive alternatives to the Merger;
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prior to any termination of the Merger Agreement, our operations will be restricted by the terms of the Merger Agreement, which may cause us to forego
otherwise attractive business opportunities;
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we will be required to pay certain costs relating to the Merger, whether or not it is consummated, such as legal, accounting, financial adviser and
printing fees, which costs could be substantial; and
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our management will have focused its attention on negotiating and preparing for the Merger instead of on pursuing other opportunities that could have
been beneficial to us.
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If the Merger is not completed, we cannot assure you that these risks will not
materialize and will not materially and adversely affect our business, financial results, and stock price.
The Merger
Agreement contains customary restrictions on our ability to seek other strategic alternatives.
The Merger Agreement
contains “no shop” provisions that restrict our ability to initiate, solicit, or knowingly encourage or facilitate competing third-party proposals for any business combination transaction involving a merger of us with another entity or the
acquisition of a significant portion of our stock or assets, although we may consider competing, unsolicited proposals and enter into discussions or negotiations regarding such proposals if our board of directors determines that any such acquisition
proposal constitutes, or is reasonably likely to lead to, a superior proposal and that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of the board of directors to us and our stockholders under
applicable law. In addition, AMR generally has an opportunity to offer to modify the terms of the Merger in response to any competing acquisition proposal. If we were to terminate the Merger Agreement to accept a superior proposal, we would be
required to pay a termination fee of $55 million to AMR.
These provisions, although customary for these types of
transactions, could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of our company from proposing any such acquisition, even if the potential third-party acquirer were prepared to pay
consideration with a higher cash or market value than the market value proposed to be received or realized in the Merger or might result in a potential third-party acquirer proposing to pay a lower consideration to our stockholders than it might
otherwise have proposed to pay because of the added expense of the $55 million termination fee that would become payable in connection with the termination of the Merger Agreement by us.
If the Merger Agreement is terminated and we decide to seek another business combination, we may not be able to negotiate a transaction
with another party on terms comparable to, or better than, the terms of the Merger.
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The combined company may be unable to integrate our and AMR’s businesses
successfully and realize the anticipated benefits of the Merger.
The Merger involves the combination of two companies
that currently operate as independent public companies, each of which operates its own international network airline. Historically, the integration of separate airlines has often proven to be more time consuming and to require more resources than
initially estimated. The combined company will be required to devote significant management attention and resources to integrating our and AMR’s business practices, cultures, and operations. Potential difficulties the combined company may
encounter as part of the integration process include the following:
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the inability to successfully combine our business with that of AMR in a manner that permits the combined company to achieve the synergies and other
benefits anticipated to result from the Merger;
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the challenge of integrating complex systems, operating procedures, regulatory compliance programs, technology, aircraft fleets, networks, and other
assets of the two companies in a manner that minimizes any adverse impact on customers, suppliers, employees, and other constituencies;
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diversion of the attention of the combined company’s management and other key employees;
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the challenge of integrating the workforces of the two companies while maintaining focus on providing consistent, high quality customer service and
running an efficient operation;
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disruption of, or the loss of momentum in, the combined company’s ongoing business; and
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potential unknown liabilities, liabilities that are significantly larger than we currently anticipate and unforeseen increased expenses or delays
associated with the Merger, including transition costs to integrate the two businesses that may exceed the approximately $1.2 billion of cash transition costs that we currently anticipate.
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Accordingly, even if the Merger is consummated, the contemplated benefits may not be realized fully, or at all, or may take longer to
realize than expected.
The use of AMR’s and our respective pre-Merger NOL carryforwards and certain other tax
attributes may be limited following the consummation of the Merger.
Under the Code, a corporation is generally
allowed a deduction in any taxable year for NOL carryforwards. As of December 31, 2012, AMR had available NOL carryforwards of approximately $6.6 billion for regular U.S. federal income tax purposes, which will expire, if unused, beginning in
2022, and for state income tax purposes of $3.6 billion, which will expire, if unused, between 2013 and 2027. The amount of AMR’s NOL carryforwards for state income tax purposes that will expire, if unused, in 2013 is $105 million. AMR’s
NOL carryforwards could be subject to limitation as a result of the Chapter 11 bankruptcy cases and certain related transactions. As of December 31, 2012, we had available NOL carryforwards of approximately $1.5 billion for regular U.S. federal
income tax purposes, which will expire, if unused, beginning in 2025, and for state income tax purposes, of approximately $722 million, which will expire, if unused, in 2013 through 2031. The amount of our NOL carryforwards for state income tax
purposes that will expire, if unused, in 2013 is $13 million. Our NOL carryforwards may also be subject to limitation as a result of the Merger. In addition, both our and AMR’s NOL carryforwards are subject to adjustment on audit by the IRS.
A corporation’s ability to deduct its federal NOL carryforwards and to utilize certain other available tax attributes
can be substantially constrained under the general annual limitation rules of Section 382 of the Code if it undergoes an “ownership change” as defined in Section 382 of the Code (generally where cumulative stock ownership changes
among certain shareholders exceed 50 percentage points during a rolling three-year period). We and AMR each expect to undergo an “ownership change” in connection with AMR’s emergence from its Chapter 11 bankruptcy cases and the
Merger, respectively. The general limitation rules for a debtor in a bankruptcy case such as AMR are liberalized where the ownership change occurs upon emergence from bankruptcy. In addition, under certain circumstances, special rules may apply to
allow AMR to utilize substantially all of its pre-emergence NOL carryforwards without regard to the general limitations of Section 382 of the Code, and similar rules also may apply to state NOL carryforwards. However, there can be no assurance
that these special rules under Section 382 of the Code (or any similar rules under applicable state law) will apply to AMR’s ownership change. Accordingly, the utilization of each of AMR’s and our respective NOL carryforwards and
certain other tax attributes could be significantly constrained following AMR’s emergence from its Chapter 11 bankruptcy cases and the Merger. Moreover, an ownership change subsequent to consummation of the Merger could further limit or
effectively eliminate the combined company’s ability to utilize such NOL carryforwards and other tax attributes.
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The combined company’s ability to use NOL carryforwards will also depend on the amount
of taxable income generated in future periods. The NOL carryforwards may expire before the combined company can generate sufficient taxable income to use the NOL carryforwards.
The combined company will require significant liquidity to fund its emergence from Chapter 11 and to achieve successful
integration and achieve targeted synergies post-closing.
At emergence from Chapter 11, AMR will pay approximately
$1.4 billion in cash to settle certain obligations in connection with its plan of reorganization. In addition, the transition costs to integrate the two businesses may exceed the approximately $1.2 billion of cash transition costs that we and AMR
currently anticipate. An inability to obtain necessary funding on acceptable terms would have a material adverse impact on the combined company and on its ability to sustain its operations.
Each of our and AMR’s indebtedness and other obligations are, and the combined company’s indebtedness and other
obligations following the consummation of the Merger will continue to be, substantial and could adversely affect the combined company’s business and liquidity.
We and AMR each have, and the combined company will continue to have, significant amounts of indebtedness and other obligations, including pension obligations, obligations to make future payments on
aircraft equipment and property leases, and obligations under aircraft purchase agreements. Moreover, currently all but a very limited quantity of our and AMR’s assets are pledged to secure their respective indebtedness. The combined
company’s substantial indebtedness and other obligations could have important consequences. For example, they may:
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limit the combined company’s ability to obtain additional funding for working capital, to withstand operating risks that are customary in the
industry, capital expenditures, acquisitions, investments, integration costs, and general corporate purposes, and adversely affect the terms on which such funding can be obtained;
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require the combined company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness and other obligations,
thereby reducing the funds available for other purposes;
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make the combined company more vulnerable to economic downturns and catastrophic external events;
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contain restrictive covenants that could:
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limit the combined company’s ability to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make investments
and pay dividends; and
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significantly constrain the combined company’s ability to respond, or respond quickly, to unexpected disruptions in its own operations, the U.S.
or global economy, or the businesses in which it operates, or to take advantage of opportunities that would improve its business, operations, or competitive position versus other airlines; and
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limit the combined company’s ability to withstand competitive pressures and reduce its flexibility in responding to changing business and economic
conditions.
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In addition, increases in the cost of financing could adversely affect the combined
company’s liquidity, business, financial condition, and results of operations.
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AMR has not yet secured financing for all of its scheduled aircraft deliveries, which
will be utilized in the fleet of the combined company after the Merger.
AMR has not yet secured financing commitments
for some of the aircraft that it has on order, commencing with certain deliveries scheduled for 2013, and AMR cannot be assured of the availability or the cost of that financing. If AMR is unable to arrange financing for such aircraft at customary
advance rates and on terms and conditions acceptable to it, AMR, prior to the Merger, and the combined company thereafter, may need to use cash from operations to purchase such aircraft or may seek to negotiate deferrals for such aircraft with the
aircraft manufacturers.
The combined company will have significant pension and other post-employment benefit funding
obligations, which may adversely affect its liquidity, financial condition, and results of operations.
The combined
company will have significant pension funding obligations, the amount of which will be dependent on the performance of investments held in trust by the pension plans, interest rates for determining liabilities, and actuarial experience. Currently,
the combined company’s minimum funding obligation for its pension plans is subject to temporary, favorable rules that are scheduled to expire at the end of 2017. Upon the expiration of those rules, the combined company’s funding
obligations are likely to increase materially. In addition, the combined company may have significant obligations for other post-employment benefits depending on the outcome of the adversary proceeding related to the retiree medical and life
insurance obligations filed in the Chapter 11 cases. The foregoing post-employment benefit obligations could materially adversely affect the combined company’s liquidity, financial condition, and results of operations.
The combined company will need to obtain sufficient financing or other capital to operate successfully.
We and AMR currently plan to increase the combined company’s revenue in part by investing heavily in renewing and optimizing the
combined company’s fleet and integrating the companies. Significant capital resources will be required to achieve these goals and, as a result, we and AMR estimate that the combined company’s planned aggregate capital expenditures on a
consolidated basis for calendar years 2013-2017 would be approximately $20 billion. Accordingly, the combined company will need substantial financing or other capital resources, some of which may be obtained prior to AMR’s emergence from the
Chapter 11 cases and thus may be subject to Bankruptcy Court approval. Depending on numerous factors, many of which are out of our and AMR’s control, and will be out of the combined company’s control, such as the state of the domestic and
global economy, the credit market’s view of the combined company’s prospects and the airline industry in general, and the general availability of debt and equity capital at the time the combined company seeks capital, the financing and
other capital that the combined company will need may not be available to it, or may only be available on onerous terms and conditions. There can be no assurance that the combined company will be successful in obtaining financing or other needed
sources of capital to operate successfully.
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Risks Relating to Our Common Stock
The price of our common stock has recently been and may in the future be volatile.
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control,
including:
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our operating results failing to meet the expectations of securities analysts or investors;
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changes in financial estimates or recommendations by securities analysts;
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material announcements by us or our competitors;
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movements in fuel prices;
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new regulatory pronouncements and changes in regulatory guidelines;
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general and industry-specific economic conditions;
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public sales of a substantial number of shares of our common stock; and
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general market conditions.
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The market price of the combined company’s common stock may be volatile.
The combined company’s common stock will be a new issue of securities, which issue is expected to be approved for listing on the NYSE or NASDAQ to be effective upon issuance of the combined
company’s common stock. However, an active public market for the combined company’s common stock may not develop or be sustained after the consummation of the Merger, and no assurance can be given that there will be any liquidity in any
such market. If a market for the combined company’s common stock develops, the price at which a holder of the combined company’s common stock could sell its shares may be higher or lower than the implied valuation for the combined
company’s common stock provided in the Registration Statement on Form S-4 filed with the SEC by AMR on April 15, 2013, as amended. The market price of the combined company’s common stock may fluctuate significantly in response to a
number of factors, some of which are beyond our and AMR’s control, including:
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variations in operating results;
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changes in financial estimates by securities analysts;
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changes in market values of airline companies;
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announcements by the combined company’s competitors of significant acquisitions, strategic partnerships, changes in routes, or capital
commitments;
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the success or failure in managing the combined company, including the integration of our and AMR’s separate operations;
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increases or decreases in reported holdings by insiders or other significant stockholders;
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additions or departures of key personnel;
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future sales of the combined company’s common stock or issuance of the combined company’s common stock upon the exercise or conversion of
convertible securities, options, warrants, RSUs, SARs, or similar rights, including common stock issuable upon conversion of shares of the combined company’s convertible preferred stock that will be issued pursuant to AMR’s plan of
reorganization; and
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fluctuations in trading volume.
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Certain provisions of US Airways Group’s amended and restated certificate of
incorporation and amended and restated bylaws make it difficult for stockholders to change the composition of US Airways Group’s board of directors and may discourage takeover attempts that some of US Airways Group’s 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 US Airways Group’s 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:
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a classified board of directors with three-year staggered terms;
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advance notice procedures for stockholder proposals to be considered at stockholders’ meetings;
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the ability of US Airways Group’s board of directors to fill vacancies on the board;
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a prohibition against stockholders taking action by written consent;
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a prohibition against stockholders calling special meetings of stockholders;
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a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve any amendment of our
amended and restated bylaws submitted to stockholders for approval; and
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super-majority voting requirements to modify or amend specified provisions of US Airways Group’s amended and restated certificate of
incorporation.
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These provisions are not intended to prevent a takeover, but are intended to protect and
maximize the value of the interests of US Airways Group’s stockholders. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable our
board of directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, US
Airways Group is subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders. Interested stockholders do not include stockholders whose acquisition of US
Airways Group’s securities is approved by the board of directors prior to the investment under Section 203.
The market price of the combined company’s common stock after the Merger may be affected by factors different from those
currently affecting US Airways Group’s shares.
Upon the consummation of the Merger, holders of US Airways
Group’s common stock will become holders of the combined company’s common stock. Our businesses prior to the Merger differ from those of the combined company, and accordingly the results of operations of the combined company may be
affected by factors different from those currently affecting our results of operations, including the uncertainty of the market’s ability to value the combined company as it emerges from the Chapter 11 cases.
The percentage ownership interests of US Airways Group stockholders will be reduced as a result of the Merger and, accordingly, US
Airways Group stockholders will have less influence on the management and policies of the combined company than they now have on the management and policies of US Airways Group.
The aggregate number of shares of the combined company’s common stock issuable to holders of US Airways Group’s equity
instruments (including stockholders, holders of convertible notes, optionees, and holders of stock-settled SARs and RSUs) in the Merger will represent 28% of the diluted equity ownership of the combined company. The remaining 72% equity ownership of
the combined company will be distributable, pursuant to AMR’s reorganization plan, to stakeholders, labor unions, and certain employees of AMR and the other Debtors. Therefore, each of the US Airways Group stockholders will have a percentage
ownership of the combined company that is smaller than the stockholder’s prior percentage ownership of US Airways Group. As a result, the US Airways Group stockholders will have less influence on the management and policies of the combined
company than they now have on the management and policies of US Airways Group.
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Our charter documents include provisions limiting voting and ownership of our equity
interests, which includes our common stock and our convertible notes, by foreign owners.
Our charter documents
provide that, consistent with the requirements of Subtitle VII of Title 49 of the United States Code, as amended, or as the same may be from time to time amended (the “Aviation Act”), any person or entity who is not a “citizen of
the United States” (as defined under the Aviation Act and administrative interpretations issued by the DOT, its predecessors and successors, from time to time), including any agent, trustee or representative of such person or entity (a
“non-citizen”), shall not own (beneficially or of record) and/or control more than (a) 24.9% of the aggregate votes of all of our outstanding equity securities (as defined, which definition includes our capital stock, securities
convertible into or exchangeable for shares of our capital stock, including our outstanding convertible notes, and any options, warrants or other rights to acquire capital stock) (the “voting cap amount”) or (b) 49.9% of our
outstanding equity securities (the “absolute cap amount”). If non-citizens nonetheless at any time own and/or control more than the voting cap amount, the voting rights of the equity securities in excess of the voting cap amount shall be
automatically suspended in accordance with the provisions of our bylaws. Voting rights of equity securities, if any, owned (beneficially or of record) by non-citizens shall be suspended in reverse chronological order based upon the date of
registration in the foreign stock record. Further, if at any time a transfer of equity securities to a non-citizen would result in non-citizens owning more than the absolute cap amount, such transfer shall be void and of no effect, in accordance
with provisions of our bylaws. Certificates for our equity securities must bear a legend set forth in our amended and restated certificate of incorporation stating that such equity securities are subject to the foregoing restrictions. Under our
bylaws, it is the duty of each stockholder who is a non-citizen to register his, her or its equity securities on our foreign stock record. In addition, our bylaws provide that in the event that non-citizens shall own (beneficially or of record) or
have voting control over any equity securities, the voting rights of such persons shall be subject to automatic suspension to the extent required to ensure that we are in compliance with applicable provisions of law and regulations relating to
ownership or control of a United States air carrier. In the event that we determine that the equity securities registered on the foreign stock record or the stock records of the Company exceed the absolute cap amount, sufficient shares shall be
removed from the foreign stock record and the stock records of the Company so that the number of shares entered therein does not exceed the absolute cap amount. Shares of equity securities shall be removed from the foreign stock record and the stock
records of the Company in reverse chronological order based on the date of registration in the foreign stock record and the stock records of the Company.
In connection with AMR’s emergence from the Chapter 11 cases, the combined company will establish certain limitations on acquisitions, dispositions and voting of its common stock, which may
serve to limit the post-emergence liquidity of its common stock.
To reduce the risk of a potential adverse effect of
an “ownership change” as defined in Section 382 of the Code on the combined company’s ability to use its NOL carryforwards and certain other tax attributes and to avoid violation of federal statutory limitations on equity
ownership of U.S. commercial airlines by foreign nationals, the combined company’s Certificate of Incorporation and Bylaws will contain certain restrictions on the acquisition, disposition and voting of the combined company’s common stock.
These restrictions may adversely affect the ability of certain holders of the combined company’s common stock to dispose of, acquire or vote shares of the combined company’s common stock. No assurance can be given that an ownership change
will not occur even with tax-related and other restrictions in place or that these provisions will assure compliance with the applicable restrictions on foreign ownership.
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