America West Airlines Inc (706270) SEC Filing 10-Q Quarterly report for the period ending Saturday, March 31, 2007

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2007

or

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

For the transition period from                      to                     

US Airways Group, Inc.

(Exact name of registrant as specified in its charter)

(Commission File No. 1-8444)

54-1194634 (IRS Employer Identification No.)

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

America West Airlines, Inc.

(Exact name of registrant as specified in its charter)

(Commission File No. 0-12337)

86-0418245 (IRS Employer Identification No.)

4000 East Sky Harbor Blvd., Phoenix, Arizona 85034
(Address of principal executive offices, including zip code)

US Airways, Inc.

(Exact name of registrant as specified in its charter)

(Commission File No. 1-8442)

53-0218143 (IRS Employer Identification No.)

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

(480) 693-0800
(Registrants’ telephone number, including area code)

Delaware
(State of Incorporation of all Registrants)

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

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

US Airways Group, Inc.

Large accelerated filer

þ

Accelerated filer

o

Non-accelerated filer

o

America West Airlines, Inc.

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

þ

US Airways, Inc.

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

þ

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

US Airways Group, Inc.		Yes		o		No		þ
America West Airlines, Inc.		Yes		o		No		þ
US Airways, Inc.		Yes		o		No		þ

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

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

As of April 20, 2007, there were approximately 91,418,385 shares of US Airways Group, Inc. common stock outstanding.

As of April 20, 2007, America West Airlines, Inc. had 1,000 shares of Class B common stock outstanding, all of which were held by America West Holdings Corporation.

As of April 20, 2007, US Airways, Inc. had 1,000 shares of common stock outstanding, all of which were held by US Airways Group, Inc.

 

 

US Airways Group, Inc.
Form 10-Q
Quarterly Period Ended March 31, 2007
Table of Contents

				Page
Part I.		Financial Information
Item 1A.		Condensed Consolidated Financial Statements of US Airways Group, Inc.
		Condensed Consolidated Statements of Operations			5
		Condensed Consolidated Balance Sheets			6
		Condensed Consolidated Statements of Cash Flows			7
		Notes to the Condensed Consolidated Financial Statements			8
Item 1B.		Condensed Consolidated Financial Statements of America West Airlines, Inc.
		Condensed Consolidated Statements of Operations			14
		Condensed Consolidated Balance Sheets			15
		Condensed Consolidated Statements of Cash Flows			16
		Notes to the Condensed Consolidated Financial Statements			17
Item 1C.		Condensed Financial Statements of US Airways, Inc.
		Condensed Statements of Operations			21
		Condensed Balance Sheets			22
		Condensed Statements of Cash Flows			23
		Notes to the Condensed Financial Statements			24
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			44
Item 4.		Controls and Procedures			44
Part II.		Other Information
Item 1.		Legal Proceedings			45
Item 1A.		Risk Factors			46
Item 6.		Exhibits			53
Signatures					54
EX-3.1
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-31.3
EX-31.4
EX-31.5
EX-31.6
EX-32.1
EX-32.2
EX-32.3

     This combined Quarterly Report on Form 10-Q is filed by US Airways Group, Inc. (“US Airways Group”) and its direct and indirect wholly owned subsidiaries US Airways, Inc. (“US Airways”) and America West Airlines, Inc. (“AWA”). AWA is a wholly owned subsidiary of America West Holdings Corporation (“America West Holdings”), which is a wholly owned subsidiary of US Airways Group. References in this Form 10-Q to “we,” “us,” “our” and the “Company” refer to US Airways Group and its consolidated subsidiaries.

Note Concerning Forward-Looking Statements

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

	•		the impact of high fuel costs, significant disruptions in the supply of aircraft fuel and further significant increases to fuel prices;
	•		our high level of fixed obligations and our ability to obtain and maintain financing for operations and other purposes;
	•		our ability to achieve the synergies anticipated as a result of the merger and to achieve those synergies in a timely manner;
	•		our ability to integrate the management, operations and labor groups of US Airways Group and America West Holdings;
	•		labor costs and relations with unionized employees generally and the impact and outcome of labor negotiations;
	•		the impact of global instability, including the current instability in the Middle East, the continuing impact of the military presence in Iraq and Afghanistan and the terrorist attacks of September 11, 2001 and the potential impact of future hostilities, terrorist attacks, infectious disease outbreaks or other global events that affect travel behavior;
	•		reliance on automated systems and the impact of any failure or disruption of these systems;
	•		the impact of future significant operating losses;
	•		changes in prevailing interest rates;
	•		our ability to obtain and maintain commercially reasonable terms with vendors and service providers and our reliance on those vendors and service providers;
	•		security-related and insurance costs;
	•		changes in government legislation and regulation;
	•		our ability to use pre-merger NOLs and certain other tax attributes;
	•		competitive practices in the industry, including significant fare restructuring activities, capacity reductions and in court or out of court restructuring by major airlines;
	•		continued existence of prepetition liabilities;
	•		interruptions or disruptions in service at one or more of our hub airports;
	•		weather conditions;
	•		our ability to maintain adequate liquidity;
	•		our ability to maintain contracts that are critical to our operations;

	•		our ability to operate pursuant to the terms of our financing facilities (particularly the financial covenants);
	•		our ability to attract and retain customers;
	•		the cyclical nature of the airline industry;
	•		our ability to attract and retain qualified personnel;
	•		economic conditions; and
	•		other risks and uncertainties listed from time to time in our reports to the Securities and Exchange Commission.

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

Part I. Financial Information

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

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

US Airways Group, Inc.

Condensed Consolidated Statements of Operations

(in millions, except share and per share amounts)

(unaudited)

		Three Months
		Ended March 31,
		2007				2006
Operating revenues:
Mainline passenger		$	1,906			$	1,811
Express passenger			609				611
Cargo			37				37
Other			180				173
Total operating revenues			2,732				2,632
Operating expenses:
Aircraft fuel and related taxes			550				555
Gain on fuel hedging instruments, net			(54	)			(28	)
Salaries and related costs			527				503
Express expenses			620				615
Aircraft rent			180				185
Aircraft maintenance			165				138
Other rent and landing fees			128				140
Selling expenses			106				107
Special items, net			39				(44	)
Depreciation and amortization			44				45
Other			311				291
Total operating expenses			2,616				2,507
Operating income			116				125
Nonoperating income (expense):
Interest income			40				26
Interest expense, net			(71	)			(75	)
Other, net			(16	)			(12	)
Total nonoperating expense, net			(47	)			(61	)
Income before income taxes and cumulative effect of change in accounting principle			69				64
Income tax provision			3				—
Income before cumulative effect of change in accounting principle			66				64
Cumulative effect of change in accounting principle, net			—				1
Net income		$	66			$	65
Earnings per common share:
Basic:
Before cumulative effect of change in accounting principle		$	0.73			$	0.79
Cumulative effect of change in accounting principle			—				0.01
Earnings per share			0.73				0.80
Diluted:
Before cumulative effect of change in accounting principle		$	0.70			$	0.75
Cumulative effect of change in accounting principle			—				0.01
Earnings per share			0.70				0.76
Shares used for computation (in thousands):
Basic			91,363				81,679
Diluted			96,223				93,362

See accompanying notes to the condensed consolidated financial statements.

US Airways Group, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in millions, except share amounts)

		March 31,				December 31,
		2007				2006
ASSETS
Current assets
Cash and cash equivalents		$	871			$	1,116
Short-term investments			1,655				1,249
Restricted cash			2				1
Accounts receivable, net			479				388
Materials and supplies, net			224				223
Prepaid expenses and other			477				377
Total current assets			3,708				3,354
Property and equipment
Flight equipment			2,103				2,051
Ground property and equipment			622				598
Less accumulated depreciation and amortization			(625	)			(583	)
			2,100				2,066
Equipment purchase deposits			53				48
Total property and equipment			2,153				2,114
Other assets
Goodwill			628				629
Other intangibles, net			548				554
Restricted cash			736				666
Other assets, net			222				259
Total other assets			2,134				2,108
Total assets		$	7,995			$	7,576
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of debt and capital leases		$	100			$	95
Accounts payable			411				454
Air traffic liability			1,255				847
Accrued compensation and vacation			155				262
Accrued taxes			218				181
Other accrued expenses			922				873
Total current liabilities			3,061				2,712
Noncurrent liabilities and deferred credits
Long-term debt and capital leases, net of current maturities			2,901				2,907
Deferred gains and credits			201				205
Postretirement benefits other than pensions			188				187
Employee benefit liabilities and other			595				595
Total noncurrent liabilities and deferred credits			3,885				3,894
Stockholders’ equity
Common stock, $0.01 par value; 200,000,000 shares authorized,91,831,735 and 91,417,742 shares issued and outstanding at March 31, 2007; 91,697,896 and 91,283,903 shares issued and outstanding at December 31, 2006			1				1
Additional paid-in capital			1,514				1,501
Accumulated other comprehensive income			3				3
Accumulated deficit			(456	)			(522	)
Treasury stock, common stock, 413,993 shares at March 31, 2007 and December 31, 2006			(13	)			(13	)
Total stockholders’ equity			1,049				970
Total liabilities and stockholders’ equity		$	7,995			$	7,576

See accompanying notes to the condensed consolidated financial statements.

US Airways Group, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in millions)

		Three Months Ended March 31,
		2007				2006
Net cash provided by operating activities		$	322			$	211
Cash flows from investing activities
Capital expenditures			(86	)			(86	)
Purchase of short-term investments			(908	)			(256	)
Sales of short-term investments			503				97
Increase in long-term restricted cash			(70	)			(215	)
Proceeds from disposition of assets			3				1
Increase in equipment deposits			(5	)			—
Net cash used for investing activities			(563	)			(459	)
Cash flows from financing activities
Repayments of debt			(1,629	)			(1,116	)
Proceeds from issuance of debt			1,622				1,225
Proceeds from issuance of common stock, net			3				1
Net cash provided by (used for) financing activities			(4	)			110
Net decrease in cash and cash equivalents			(245	)			(138	)
Cash and cash equivalents at beginning of period			1,116				1,125
Cash and cash equivalents at end of period		$	871			$	987
Non-cash investing and financing activities
Notes payable cancelled under aircraft purchase agreement		$	—			$	4
Supplemental information
Cash paid for interest, net of amounts capitalized		$	79			$	68
Income taxes paid			1				—

See accompanying notes to the condensed consolidated financial statements.

US Airways Group, Inc.

1. Basis of presentation and summary of significant accounting policies

     The accompanying unaudited condensed consolidated financial statements of US Airways Group, Inc. (“US Airways Group” or the “Company”) should be read in conjunction with the financial statements contained in US Airways Group’s Annual Report on Form 10-K for the year ended December 31, 2006. The accompanying unaudited condensed consolidated financial statements include the accounts of US Airways Group and its wholly owned subsidiaries. Principal subsidiaries include US Airways, Inc. (“US Airways”), America West Airlines, Inc. (“AWA”), Piedmont Airlines, Inc. (“Piedmont”) and PSA Airlines, Inc. (“PSA”). All significant intercompany accounts and transactions have been eliminated. US Airways Group and its domestic subsidiaries, US Airways, Piedmont, PSA and Material Services Company (“MSC”) (collectively, the “Debtors”), which at the time accounted for substantially all of the operations of US Airways Group, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (the “Bankruptcy Court”) on September 12, 2004. On May 19, 2005, US Airways Group signed a merger agreement with America West Holdings pursuant to which America West Holdings merged with a wholly owned subsidiary of US Airways Group. The merger agreement was amended by a letter of agreement on July 7, 2005. The merger became effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005.

     Certain prior year amounts have been reclassified to conform with the 2007 presentation, including fuel costs from US Airways Group’s wholly owned subsidiary, MSC. MSC sells fuel to Mesa Airlines (“Mesa”), an independent Express carrier, specifically for use on US Airways Express flights operated by Mesa under a regional airline alliance agreement at a price that approximates MSC’s cost. Mesa in turn bills back US Airways Group under that agreement at the same cost billed by MSC. The costs associated with the regional airline alliance agreement, including fuel, were recorded as Express expenses. In the third quarter of 2006, the Company concluded that the net method of reporting the revenue and expense for the MSC fuel sales better reflects the nature of these transactions. Accordingly, the cost of the MSC fuel sales previously reflected in other operating expenses has been netted against the related revenue reported in other revenues. The expense associated with MSC fuel sales of $17 million for the three month period ended March 31, 2006, respectively, has been netted against the related other revenue. These changes have no impact on either operating income or net income or loss for the first quarter of 2006.

     Management believes that all adjustments, consisting of normally recurring items, necessary for the fair presentation of results have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the frequent traveler programs and the estimates of fair value for assets and liabilities established in purchase accounting.

     There was no activity within other comprehensive income for the three months ended March 31, 2007 and 2006. Comprehensive income encompasses net income and other comprehensive income, which includes all other non-owner transactions and events that change stockholders’ equity.

Recent Accounting Pronouncements

     In June 2006, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues Task Force Issue No. 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. This issue provides that a company may adopt a policy of presenting taxes either gross within revenue or net. If taxes subject to this issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of such taxes that are recognized on a gross basis. The Company adopted EITF 06-3 during the first quarter of 2007. US Airways Group collects various excise taxes on its ticket sales, which are accounted for on a net basis. The adoption of EITF 06-3 did not have a material impact on the Company’s consolidated financial statements.

     In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain

circumstances. Management is currently evaluating the requirements of SFAS No. 159 and has not yet determined the impact, if any, on the Company’s consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. Management is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact, if any, on the Company’s consolidated financial statements.

     In September 2006, the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities.” This amends the existing major maintenance accounting guidance contained within the AICPA Industry Audit Guide “Audits of Airlines” and prohibits the use of the accrue in advance method of accounting for planned major maintenance activities for owned aircraft. The provisions of the announcement are applicable for fiscal years beginning after December 15, 2006. The Company currently uses the direct expense method of accounting for planned major maintenance; therefore, the adoption of FSP No. AUG AIR-1 did not have any material impact on the Company’s consolidated financial statements.

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of an uncertain tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

     The Company adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a material impact on the Company’s financial statements. The Company files tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. As part of US Airways’ bankruptcy filings, the Internal Revenue Service and various state jurisdictions filed proofs of claim. Upon its emergence from bankruptcy, US Airways had established reserves for all IRS claims and state income tax claims as of the date of the bankruptcy filing on September 2004. All creditors, including the IRS and state and local taxing jurisdictions, had to timely file a proof of claim to support any tax deficiencies per the tax authority records. On February 15, 2007, US Airways and the IRS agreed to settle the IRS’s outstanding proofs of claim for $7 million dollars. As of the end of the first quarter, the Company had remaining reserves of less than $1 million related to uncertain tax positions.

     All federal and state tax filings for US Airways Group and its subsidiaries as of December 31, 2005 have been timely filed. There are currently no federal or state audits in process. US Airways last federal income tax audit closed all tax years through December 31, 2002. AWA’s tax years through 2001 were closed by a signed IRS Form 870 on March 1, 2006. AWA’s tax year 2002 was closed by operation of the statute of limitation expiring and there were no extensions filed.

2. Special items, net

     Special items as shown on the condensed consolidated statements of operations include the following charges (credits) for the three months ended March 31, 2007 and 2006 (in millions):

		Three Months
		Ended March 31,
		2007				2006
Airbus restructuring (a)		$	—			$	(90	)
Merger related transition expenses (b)			39				46
Special items, net		$	39			$	(44	)

(b)		In connection with the merger, the Company incurred $39 million of transition and merger integration costs in the first quarter of 2007. These items included $9 million in training and related expenses; $8 million in equity awards; $7 million of aircraft livery costs; $11 million in professional and technical fees, including continuing professional fees associated with US Airways’ bankruptcy proceedings; $1 million in employee moving expenses; $2 million related to the reservation system migration expense and $1 million of other expenses.
		In connection with the merger, the Company incurred $46 million of transition and merger integration costs in the first quarter of 2006. These items included $21 million in personnel costs primarily for severance, retention payments and stock awards; $7 million in merger related aircraft lease return expenses; $6 million of aircraft livery costs; $4 million in professional and technical fees; $3 million in continuing professional fees associated with US Airways’ bankruptcy proceedings; $3 million in employee moving expenses; $1 million of transition-related sales and marketing program expenses and $1 million of other expenses.

3. Earnings per share

     Basic earnings per share (“EPS”) is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding employee stock options, employee stock appreciation rights, employee restricted stock units, warrants and convertible debt. The following table presents the computation of basic and diluted EPS for the three months ended March 31, 2007 and 2006 (in millions, except share and per share amounts):

		Three Months Ended
		March 31,				March 31,
		2007				2006
Basic earnings per share:
Income before cumulative effect of change in accounting principle		$	66			$	64
Cumulative effect of change in accounting principle			—				1
Net income		$	66			$	65
Weighted average common shares outstanding (in thousands)			91,363				81,679
Basic earnings per share:
Before cumulative effect of change in accounting principle		$	0.73			$	0.79
Cumulative effect of change in accounting principle			—				0.01
Net earnings per share		$	0.73			$	0.80
Diluted earnings per share:
Income before cumulative effect of change in accounting principle		$	66			$	64
Cumulative effect of change in accounting principle			—				1
Net income			66				65
Interest expense on 7.5% convertible senior notes			—				3
Interest expense on 7.0% senior convertible notes			1				3
Income for purposes of computing diluted earnings per share		$	67			$	71
Share computation (in thousands):
Weighted average common shares outstanding			91,363				81,679
Dilutive effect of stock awards and warrants			1,810				1,863
Assumed conversion of 7.5% convertible senior notes			—				3,860
Assumed conversion of 7.0% senior convertible notes			3,050				5,960
Weighted average common shares outstanding as adjusted			96,223				93,362
Diluted earnings per share:
Before cumulative effect of change in accounting principle		$	0.70			$	0.75
Cumulative effect of change in accounting principle			—				0.01
Earnings per share		$	0.70			$	0.76

     For the three months ended March 31, 2007, 814,473 stock options and stock appreciation rights are not included in the computation of diluted EPS because the exercise prices were greater than the average market price of common stock for the period. In addition, 29,500 performance-based restricted stock unit awards were excluded as the performance conditions had not been met as of March 31, 2007.

     For the three months ended March 31, 2006, 2,026,092 stock options and stock appreciation rights are not included in the computation of diluted EPS because the exercise prices were greater than the average market price of common stock for the period. In addition, 56,500 performance-based restricted stock unit awards were excluded as the performance conditions had not been met as of March 31, 2006.

4. Stock options

     Agreements with ALPA — US Airways Group and US Airways have a letter of agreement with the Air Line Pilots Association (“ALPA”) that provides that US Airways’ pilots designated by ALPA receive stock options to purchase 1.1 million shares of the Company’s common stock. The first tranche of 500,000 stock options was granted on January 31, 2006 with an exercise price of $33.65 and the second tranche of 300,000 stock options was granted on January 31, 2007 with an exercise price of $56.90, the average market price for the 20 business days preceding the option issuance date. The stock options granted to ALPA pilots do not reduce the shares available for grant under any equity incentive plan. Any of these ALPA stock options that are forfeited or that expire without being exercised will not become available for grant under any of our plans.

     The per share fair value of the ALPA pilot stock options granted on January 31, 2006 and 2007 were $17.11 and $18.02, respectively, calculated using a Black-Scholes option pricing model with the following assumptions:

		2007				2006
Risk free interest rate			4.9	%			4.4	%
Expected dividend yield			—	%			—	%
Expected life		2.0 years				5.0 years
Volatility			53.0	%			69.8	%

     The Company’s net income for the three months ended March 31, 2007 includes $5 million of compensation costs related to the ALPA stock option grant. As of March 31, 2007, there were no unrecognized compensation costs related to stock options granted to ALPA pilots as the stock options were fully vested on the grant date.

5. Debt

     The following table details US Airways Group’s debt as of March 31, 2007 (in millions). Variable interest rates listed are the rates as of March 31, 2007 unless noted.

		March 31,				December 31,
		2007				2006
Secured
Citicorp North America loan, variable interest rate of 7.85%, installments due through maturity		$	1,600			$	—
General Electric Capital Corporation loan			—				1,250
Equipment notes payable, variable interest rates of 6.89% to 9.65%			1,249				1,258
Slot Financing, interest rate of 8%, installments due through 2015			47				47
Capital lease obligations, interest rate of 8%, installments due through 2021			43				41
Senior secured discount notes, variable interest rate 8.73%, installments due 2005 through 2009			33				33
GE Credit Facility			—				21
Capital Lease Obligations, computer software, installments due through 2008			2				2
			2,974				2,652
Unsecured
7% senior convertible notes, interest only payments until due in 2020			74				74
GE Engine Maintenance Term Note, variable interest of 9.38%, installments due 2008 through 2011			45				45
Industrial development bonds, fixed interest rate of 6.3% due 2023			29				29
Juniper prepaid miles			—				325
Note payable to Pension Benefit Guaranty Corporation, interest rate of 6%, interest only payments until due in 2012			10				10
			158				483
Total long-term debt and capital lease obligations			3,132				3,135
Less: Unamortized discount on debt			(131	)			(133	)
Current maturities			(100	)			(95	)
Long-term debt and capital lease obligations, net of current maturities		$	2,901			$	2,907

     Refinancing Transaction — On March 23, 2007, US Airways Group entered into a new term loan credit facility (the “New Credit Facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which the Company borrowed an aggregate principal amount of $1.6 billion. AWA, US Airways and certain other subsidiaries of US Airways Group are guarantors of the New Credit Facility.

     The proceeds of the New Credit Facility were used to repay in full the following indebtedness:

	•		The amended and restated loan agreement, dated April 7, 2006, entered into by US Airways Group with General Electric Capital Corporation (“GECC”) and a syndicate of lenders. At the time of the repayment, the total outstanding balance of the loan was $1.25 billion.
	•		The Juniper pre-paid miles issued on October 3, 2005 in connection with the amended co-branded credit card agreement dated August 8, 2005 between pre-merger US Airways Group, AWA and Juniper Bank, a subsidiary of Barclays PLC. At the time of the repayment, the total outstanding balance was $325 million.
	•		The credit facility with GECC, amended in July 2005 with an original balance of $28 million. At the time of the repayment, the total outstanding balance of the loan was $19 million.

     The New Credit Facility bears interest at an index rate plus an applicable index margin or, at US Airways Group’s option, LIBOR plus an applicable LIBOR margin for interest periods of one, two, three or six months. The applicable index margin, subject to adjustment, is 1.00%, 1.25% or 1.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or between $1 billion and $1.6 billion, respectively. The applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25% or 2.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or between $1 billion and $1.6 billion, respectively. In addition, interest on the New Credit Facility may be adjusted based on the credit rating for the New Credit Facility as follows: (i) if the credit ratings of the New Credit Facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least one subgrade better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be the lower of 2.25% and the rate otherwise applicable based upon the adjusted New Credit Facility balance and (B) the applicable index margin will be the lower of 1.25% and the rate otherwise applicable based upon the New Credit Facility principal balance, and (ii) if the credit ratings of the New Credit Facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least two subgrades better than the credit ratings in effect on the closing date, then (A) the applicable LIBOR margin would be 2.00% and (B) the applicable index margin will be 1.00%.

     The New Credit Facility matures on March 23, 2014, and is repayable in seven annual installments, with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.

     In addition, the New Credit Facility requires certain mandatory prepayments upon the occurrence of certain events, establishes certain financial covenants, including minimum cash requirements and maintenance of certain minimum ratios, contains customary affirmative covenants and negative covenants and contains customary events of default. The New Credit Facility requires US Airways Group to maintain consolidated unrestricted cash and cash equivalents of not less than $1.25 billion, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements. The Company capitalized $4 million of debt issuance costs consisting principally of New Credit Facility arrangement fees which will be amortized over the life of the loan. The Company recorded a nonoperating expense of $18 million related to the write-off of unamortized debt issuance costs for the $1.25 billion GECC loan. At March 31, 2007, the Company was in compliance with all debt covenants.

6. Bankruptcy claims resolution

     Pursuant to the bankruptcy process, the Debtors’ claims agent received timely-filed proofs of claims totaling approximately $26.4 billion in the aggregate, exclusive of approximately $13.6 billion in claims by governmental entities. The Debtors continue to be responsible for administering and resolving claims related to the bankruptcy process. The administrative claims objection deadline passed on September 15, 2006. As of March 31, 2007, there were approximately $358 million of unresolved claims. The ultimate resolution of certain of the claims asserted against the Debtors in the Chapter 11 cases will be subject to negotiations, elections and Bankruptcy Court procedures. The recovery to individual creditors ultimately distributed to any particular general unsecured creditor under the plan of reorganization will depend on a number of variables, including the agreed value of any general unsecured claims filed by that creditor, the aggregate value of all resolved general unsecured claims and the value of shares of the new common stock of US Airways Group in the marketplace at the time of distribution. The effects of these distributions were reflected in US Airways’ financial statements upon emergence and will not have any further impact on the results of operations.

7. Income Taxes

     As of December 31, 2006, the Company had $980 million of net operating loss carryforwards (“NOL”) to reduce future taxable income. Of this amount, $795 million is available to reduce federal taxable income in the calendar year 2007. The Company’s deferred tax asset, which includes the $795 million of NOL discussed above, has been subject to a fully valuation allowance.

     In the first quarter of 2007, the Company used federal NOL to reduce its income tax obligation. Utilization of this NOL results in a corresponding decrease in the valuation allowance. In accordance with SFAS No. 109, as this valuation was established through the recognition of tax expense, the decrease in the valuation allowance offsets the Company’s tax provision dollar for dollar.

     The Company recorded $3 million of tax provision in the first quarter of 2007, which included $1 million of Alternative Minimum Tax liability (“AMT”) expense and $2 million of state tax expense.

     The Company expects to be subject to AMT for the full year 2007. In most cases the recognition of AMT does not result in tax expense. However, since the Company’s net deferred tax asset is subject to a full valuation allowance, any liability for AMT is recorded as tax expense.

     In the first quarter of 2007, US Airways utilized state NOL that was generated by US Airways prior to the merger. In accordance with SFAS No. 109, as this was acquired NOL, the decrease in the valuation allowance reduced goodwill instead of the provision for income taxes. Accordingly, the Company recognized $1 million of non-cash state income tax expense in quarter. The Company also recorded $1 million of state income tax related to certain states where NOL was not available to be used, in the first quarter of 2007.

8. Express expenses

     Expenses associated with US Airways’ MidAtlantic division, US Airways Group’s wholly owned regional airlines and affiliate regional airlines operating as US Airways Express, and expenses associated with AWA’s regional alliance agreement with Mesa are classified as Express expenses on the condensed consolidated statements of operations. Effective May 27, 2006, the transfer of certain MidAtlantic assets to Republic Airways was complete, and Republic Airways assumed the operation of the aircraft as a US Airways affiliate Express carrier. Express expenses consist of the following for the three months ended March 31, 2007 and 2006 (in millions):

		Three Months Ended
		March 31,
		2007				2006
Aircraft fuel and related taxes		$	153			$	172
Salaries and related costs			37				44
Capacity purchases			218				208
Aircraft rent			2				9
Aircraft maintenance			22				20
Other rent and landing fees			28				32
Selling expenses			35				35
Depreciation and amortization			6				6
Other expenses			119				89
Express expenses		$	620			$	615

Item 1B. Condensed Consolidated Financial Statements of America West Airlines, Inc.

America West Airlines, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in millions)

		Three Months
		Ended March 31,
		2007				2006
Operating revenues:
Mainline passenger		$	661			$	652
Express passenger			148				153
Cargo			6				9
Other			51				47
Total operating revenues			866				861
Operating expenses:
Aircraft fuel and related taxes			202				205
Gain on fuel hedging instruments, net			(54	)			(28	)
Salaries and related costs			174				174
Express expenses			145				145
Aircraft rent			83				86
Aircraft maintenance			66				52
Other rent and landing fees			46				45
Selling expenses			37				39
Special items, net			13				(30	)
Depreciation and amortization			12				11
Other			97				80
Total operating expenses			821				779
Operating income			45				82
Nonoperating income (expense):
Interest income			19				13
Interest expense, net			(9	)			(28	)
Other, net			—				(10	)
Total nonoperating income (expense), net			10				(25	)
Income before income taxes and cumulative effect of change in accounting principle			55				57
Income tax provision			—				—
Income before cumulative effect of change in accounting principle			55				57
Cumulative effect of change in accounting principle, net			—				1
Net income		$	55			$	58

See accompanying notes to the condensed consolidated financial statements.

America West Airlines, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in millions, except share amounts)

		March 31,				December 31,
		2007				2006
ASSETS
Current assets
Cash and cash equivalents		$	159			$	620
Short-term investments			924				506
Accounts receivable, net			112				181
Materials and supplies, net			72				76
Prepaid expenses and other			237				234
Total current assets			1,504				1,617
Property and equipment
Flight equipment			339				343
Ground property and equipment			389				372
Less accumulated depreciation and amortization			(434	)			(426	)
			294				289
Equipment purchase deposits			20				16
Total property and equipment			314				305
Other assets
Restricted cash			218				211
Other assets, net			71				70
Total other assets			289				281
Total assets		$	2,107			$	2,203
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities
Current maturities of debt and capital leases		$	2			$	2
Accounts payable			135				224
Payables to related parties, net			1,271				720
Air traffic liability			244				359
Accrued compensation and vacation			56				144
Accrued taxes			36				80
Other accrued expenses			162				195
Total current liabilities			1,906				1,724
Noncurrent liabilities and deferred credits
Long-term debt and capital leases, net of current maturities			59				384
Deferred credits			30				32
Employee benefit liabilities and other			204				210
Total noncurrent liabilities and deferred credits			293				626
Stockholder’s deficit
Common stock, $0.01 par value; 1,000 shares authorized and outstanding			—				—
Additional paid-in capital			555				555
Accumulated deficit			(647	)			(702	)
Total stockholder’s deficit			(92	)			(147	)
Total liabilities and stockholder’s deficit		$	2,107			$	2,203

See accompanying notes to the condensed consolidated financial statements.

America West Airlines, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in millions)

		Three Months Ended March 31,
		2007				2006
Net cash used for operating activities		$	(14	)		$	(3	)
Cash flows from investing activities
Purchases of property and equipment			(19	)			(14	)
Purchase of short-term investments			(548	)			(166	)
Sales of short-term investments			130				97
Increase in long-term restricted cash			(7	)			(2	)
Proceeds from disposition of assets			3				—
Other			(6	)			1
Net cash used for investing activities			(447	)			(84	)
Cash flows from financing activities
Repayments of debt			—				(1	)
Net decrease in payables to related parties			—				(72	)
Net cash used for financing activities			—				(73	)
Net decrease in cash and cash equivalents			(461	)			(160	)
Cash and cash equivalents at beginning of period			620				632
Cash and cash equivalents at end of period		$	159			$	472
Non-cash investing and financing activities
Repayment of Juniper prepaid miles by parent		$	325			$	—
Repayment of ATSB, Airbus, and GECC loans by parent			—				520
Notes payable cancelled under aircraft purchase agreement			—				4
Loan proceeds received by parent			—				64
Supplemental information
Cash paid for interest, net of amounts capitalized		$	9			$	10
Income taxes paid			—				—

See accompanying notes to the condensed consolidated financial statements.

America West Airlines, Inc.

1. Basis of presentation

     The accompanying unaudited condensed consolidated financial statements of America West Airlines, Inc. (“AWA”) should be read in conjunction with the financial statements contained in AWA’s Annual Report on Form 10-K for the year ended December 31, 2006. The accompanying unaudited condensed consolidated financial statements include the accounts of AWA and its wholly owned subsidiary, FTCHP, LLC. AWA is a wholly owned subsidiary of America West Holdings Corporation (“America West Holdings”). On September 27, 2005, America West Holdings merged with Barbell Acquisition Corp., a wholly owned subsidiary of US Airways Group, Inc. (“US Airways Group”), and as a result itself became a wholly owned subsidiary of US Airways Group.

     Management believes that all adjustments, consisting of normally recurring items, necessary for the fair presentation of results have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to passenger revenue recognition, impairment of long-lived assets and the frequent traveler program. Certain prior year amounts have been reclassified to conform with the 2007 presentation.

     There was no activity within other comprehensive income for the three months ended March 31, 2007 and 2006. Comprehensive income encompasses net income and other comprehensive income, which includes all other non-owner transactions and events that change stockholder’s equity.

Recent Accounting Pronouncements

     In June 2006, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues Task Force Issue No. 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. This issue provides that a company may adopt a policy of presenting taxes either gross within revenue or net. If taxes subject to this issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of such taxes that are recognized on a gross basis. AWA adopted EITF 06-3 during the first quarter of 2007. AWA collects various excise taxes on its ticket sales, which are accounted for on a net basis. The adoption of EITF 06-3 did not have a material impact on AWA’s consolidated financial statements.

     In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. Management is currently evaluating the requirements of SFAS No. 159 and has not yet determined the impact, if any, on AWA’s consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. AWA will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. Management is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on AWA’s consolidated financial statements.

     In September 2006, the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities.” This amends the existing major maintenance accounting guidance contained within the AICPA Industry Audit Guide “Audits of Airlines” and prohibits the use of the accrue in advance method of accounting for planned major maintenance activities for owned aircraft. The provisions of the announcement are applicable for fiscal years beginning after December 15, 2006. AWA currently uses the direct expense method of accounting for planned major maintenance; therefore, the adoption of FSP No. AUG AIR-1 did not have any material impact on AWA’s consolidated financial statements.

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial

statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of an uncertain tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. AWA adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a material impact on AWA’s consolidated financial statements. AWA’s tax years through 2001 are closed by a signed IRS Form 870 on March 1, 2006. AWA’s tax year 2002 was closed by operation of the statute of limitation expiring and there were no extensions filed.

     2. Special items, net

     Special items as shown on the condensed statements of operations include the following charges (credits) for the three months ended March 31, 2007 and 2006 (in millions):

		Three Months
		Ended March 31,
		2007				2006
Airbus restructuring (a)		$	—			$	(51	)
Merger related transition expenses (b)			13				21
Special items, net		$	13			$	(30	)

3. Debt

     The following table details AWA’s debt as of March 31, 2007 (in millions). Variable interest rates listed are the rates as of March 31, 2007 unless noted.

		March 31,				December 31,
		2007				2006
Secured
Senior secured discount notes, variable interest rate of 8.73%, installments due 2005 through 2009		$	33			$	33
Capital Lease Obligation, computer software, installments due through 2008			2				2
			35				35
Unsecured
Industrial development bonds, fixed interest rate of 6.3% due 2023			29				29
Juniper prepaid miles			—				325
			29				354
Total long-term debt and capital lease obligations			64				389
Less: Unamortized discount on debt			(3	)			(3	)
Current maturities			(2	)			(2	)
Long-term debt and capital lease obligations, net of current maturities		$	59			$	384

     Refinancing Transaction — On March 23, 2007, US Airways Group entered into a new term loan credit facility (the “New Credit Facility”) with Citicorp North America, Inc., as administrative agent, and a syndicate of lenders pursuant to which US Airways Group borrowed an aggregate principal amount of $1.6 billion. AWA, US Airways and certain other subsidiaries of US Airways Group are guarantors of the New Credit Facility.

     The proceeds of the New Credit Facility were used to repay in full the following indebtedness:

	•		The amended and restated loan agreement, dated April 7, 2006, entered into by US Airways Group with General Electric Capital Corporation (“GECC”) and a syndicate of lenders. At the time of the repayment, the total outstanding balance of the loan was $1.25 billion.
	•		The Juniper pre-paid miles issued on October 3, 2005 in connection with the amended co-branded credit card agreement dated August 8, 2005 between pre-merger US Airways Group, AWA and Juniper Bank, a subsidiary of Barclays PLC. At the time of the repayment, the total outstanding balance was $325 million.
	•		The credit facility with GECC, amended in July 2005 with an original balance of $28 million. At the time of the repayment, the total outstanding balance of the loan was $19 million.

     The New Credit Facility bears interest at an index rate plus an applicable index margin or, at US Airways Group’s option, LIBOR plus an applicable LIBOR margin for interest periods of one, two, three or six months. The applicable index margin, subject to adjustment, is 1.00%, 1.25% or 1.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or between $1 billion and $1.6 billion, respectively. The applicable LIBOR margin, subject to adjustment, is 2.00%, 2.25% or 2.50% if the adjusted loan balance is less than $600 million, between $600 million and $1 billion, or between $1 billion and $1.6 billion, respectively. In addition, interest on the New Credit Facility may be adjusted based on the credit rating for the New Credit Facility as follows: (i) if the credit ratings of the New Credit Facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least one subgrade better than the credit ratings in effect on March 23, 2007, then (A) the applicable LIBOR margin will be the lower of 2.25% and the rate otherwise applicable based upon the adjusted New Credit Facility balance and (B) the applicable index margin will be the lower of 1.25% and the rate otherwise applicable based upon the New Credit Facility principal balance, and (ii) if the credit ratings of the New Credit Facility by Moody’s and S&P in effect as of the last day of the most recently ended fiscal quarter are both at least two subgrades better than the credit ratings in effect on the closing date, then (A) the applicable LIBOR margin would be 2.00% and (B) the applicable index margin will be 1.00%.

     The New Credit Facility matures on March 23, 2014, and is repayable in seven annual installments, with each of the first six installments to be paid on each anniversary of the closing date in an amount equal to 1% of the initial aggregate principal amount of the loan and the final installment to be paid on the maturity date in the amount of the full remaining balance of the loan.

     In addition, the New Credit Facility requires certain mandatory prepayments upon the occurrence of certain events, establishes certain financial covenants, including minimum cash requirements and maintenance of certain minimum ratios, contains customary affirmative covenants and negative covenants and contains customary events of default. The New Credit Facility requires US Airways Group to maintain consolidated unrestricted cash and cash equivalents of not less than $1.25 billion, with not less than $750 million (subject to partial reductions upon certain reductions in the outstanding principal amount of the loan) of that amount held in accounts subject to control agreements. At March 31, 2007, AWA was in compliance with all applicable debt covenants.

4. Related party transactions

     (a) Payables to Related Parties, Net

     The following represents the net payable balances with affiliates as of March 31, 2007 and December 31, 2006:

		March 31, 2007				December 31, 2006
US Airways Group		$	1,492			$	1,153
America West Holdings			(275	)			(276	)
US Airways			73				(140	)
Other US Airways Group wholly owned subsidiaries			(19	)			(17	)
		$	1,271			$	720

     US Airways Group has the ability to move funds freely between operating subsidiaries to support operations. These transfers are recognized as intercompany transactions. The net payable to US Airways Group consists of proceeds received by AWA on behalf of US Airways Group in connection with the initial equity investments in US Airways Group following its emergence from bankruptcy, the public stock offering in September 2005, the exercise of options by equity investors, the issuance of 7% senior convertible notes in September 2005, initial funding of Airbus loans and amounts payable to US Airways Group related to the conversion of the 7.25% notes in the fourth quarter of 2005, net of cash retained by US Airways Group. The net payable to US Airways Group increased by $339 million during the three months ended March 31, 2007. The majority of this increase relates to the repayment by US Airways Group of AWA’s Juniper prepaid miles debt and accrued interest (see Note 3).

     As of December 31, 2006, the net payable to US Airways consists of amounts due to and from US Airways relating to items such as debt extinguishment, merger related payments and receipts, and various other transactions that occur in the normal course of

business. In the first quarter of 2007, changes in the net (receivable) payable to US Airways represent ordinary course operating transactions due to increased allocations of shared expenses as discussed in Note 4(b) and the migration of the AWA and US Airways reservations systems into one system where all ticket sales are issued and collected by US Airways.

     (b) Shared Operating Expenses

     The operating expenses of AWA reflect expenses for certain services shared with US Airways. During the first quarter of 2007, in anticipation of merging to a single operating certificate in 2007, operations of AWA and US Airways continued to be integrated, including the migration to a single reservation system in early March. During the first quarter of 2007, shared services included reservations, technology and data processing services and corporate functions such as tax, legal, compliance, finance, operations and sales and marketing, including the costs of the combined Dividend Miles frequent traveler program. These shared costs have been allocated based on AWA’s and US Airways’ respective operational statistics, including revenue passenger miles (“RPMs”) and passenger sales revenues. The operating expenses of AWA also reflect shared expenses incurred at more than 30 overlap airports where the operations of AWA and US Airways have been consolidated. These shared costs have been allocated based on AWA’s and US Airways’ respective departures at those airports. Management believes that the methodologies underlying the allocation of these shared costs are reasonable. In the first quarter of 2006, there were no material shared costs. The following details the total shared expenses and airport shared expenses allocated to AWA and US Airways that are included in operating expenses for the three months ended March 31, 2007 (in millions):

		Three Months Ended March 31, 2007
		AWA				US Airways				Total
Salaries and related costs		$	67			$	110			$	177
Other rent and landing fees			27				45				72
Selling expenses			32				60				92
Express expenses			23				57				80
Other expenses			49				82				131
Total Allocated Expenses		$	198			$	354			$	552

5. Income Taxes

     US Airways Group files a consolidated federal income tax return, which includes AWA. As of December 31, 2006, US Airways Group had $980 million of net operating loss carryforwards (“NOL”) to reduce future federal taxable income. Of this amount, $400 million relates to AWA and is subject to a valuation allowance. AWA also had approximately $30 million of valuation allowance associated with state NOL as of December 31, 2006.

     In the first quarter of 2007, AWA recorded no federal or state tax provision as it utilized NOL to reduce its income tax obligation. Utilization of this NOL results in a corresponding decrease in the valuation allowance. In accordance with SFAS No. 109, as this valuation was established through the recognition of tax expense, the decrease in the valuation allowance offsets AWA’s tax provision dollar for dollar.

6. Express expenses

     Expenses associated with AWA’s regional alliance agreement with Mesa Airlines are classified as Express expenses on the condensed consolidated statements of operations and consist of the following for three months ended March 31, 2007 and 2006 (in millions):

		Three Months Ended March 31,
		2007				2006
Aircraft fuel and related taxes		$	38			$	46
Salaries and related costs			1				—
Capacity purchases			94				85
Other rent and landing fees			1				3
Selling expenses			9				10
Other expenses			2				1
Express expenses		$	145			$	145

     Item 1C. Condensed Financial Statements of US Airways, Inc.

US Airways, Inc.

Condensed Statements of Operations

(in millions)

(unaudited)

		Three Months
		Ended March 31,
		2007				2006
Operating revenues:
Mainline passenger		$	1,244			$	1,159
Express passenger			461				458
Cargo			31				29
Other			159				156
Total operating revenues			1,895				1,802
Operating expenses:
Aircraft fuel and related taxes			348				349
Salaries and related costs			353				329
Express expenses			492				499
Aircraft rent			97				99
Aircraft maintenance			99				87
Other rent and landing fees			82				95
Selling expenses			69				67
Special items, net			26				(15	)
Depreciation and amortization			34				36
Other			211				213
Total operating expenses			1,811				1,759
Operating income			84				43
Nonoperating income (expense):
Interest income			22				14
Interest expense, net			(56	)			(55	)
Other, net			2				(2	)
Total nonoperating expense, net			(32	)			(43	)
Income before income taxes			52				—
Income tax provision			20				—
Net income		$	32			$	—

See accompanying notes to the condensed financial statements.

US Airways, Inc.

Condensed Balance Sheets

(unaudited)

(in millions, except share amounts)

		March 31,				December 31,
		2007				2006
ASSETS
Current assets
Cash and cash equivalents		$	683			$	467
Short-term investments			730				744
Restricted cash			2				1
Accounts receivable, net			363				201
Materials and supplies, net			116				112
Prepaid expenses and other			223				117
Total current assets			2,117				1,642
Property and equipment
Flight equipment			1,672				1,623
Ground property and equipment			212				205
Less accumulated depreciation and amortization			(171	)			(141	)
			1,713				1,687
Equipment purchase deposits			33				32
Total property and equipment			1,746				1,719
Other assets
Goodwill			628				629
Other intangibles, net			507				513
Restricted cash			518				456
Other assets, net			143				164
Total other assets			1,796				1,762
Total assets		$	5,659			$	5,123
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Current maturities of debt and capital leases		$	81			$	93
Accounts payable			253				212
Payables to related parties, net			1,098				1,298
Air traffic liability			1,011				487
Accrued compensation and vacation			91				105
Accrued taxes			182				100
Other accrued expenses			734				656
Total current liabilities			3,450				2,951
Noncurrent liabilities and deferred credits
Long-term debt and capital leases, net of current maturities			1,185				1,200
Deferred gains and credits			171				173
Postretirement benefits other than pensions			184				183
Employee benefit liabilities and other			425				404
Total noncurrent liabilities and deferred credits			1,965				1,960
Stockholder’s equity
Common stock, $1 par, 1,000 shares issued and outstanding			—				—
Additional paid-in capital			1				1
Retained earnings			243				211
Total stockholder’s equity			244				212
Total liabilities and stockholder’s equity		$	5,659			$	5,123

See accompanying notes to the condensed financial statements.

US Airways, Inc.

Condensed Statements of Cash Flows

Three Months Ended March 31, 2007 and 2006

(unaudited)

(in millions)

		Three Months
		Ended March 31,
		2007				2006
Net cash provided by operating activities		$	358			$	222
Cash flows from investing activities
Capital expenditures and equipment deposits			(61	)			(68	)
Purchases of short-term investments			(361	)			(89	)
Sales of short-term investments			374				—
Increase in long-term restricted cash			(62	)			(213	)
Net cash used for investing activities			(110	)			(370	)
Cash flows from financing activities
Proceeds from issuance of debt			22				48
Repayments of debt and capital lease obligations			(54	)			(44	)
Net increase in payables to related parties			—				172
Net cash provided by (used for) financing activities			(32	)			176
Net increase in cash and cash equivalents			216				28
Cash and cash equivalents at beginning of period			467				462
Cash and cash equivalents at end of period		$	683			$	490
Non-cash investing and financing activities
Repayment of ATSB and Airbus loans by parent		$	—			$	712
Loan proceeds received by parent			—				64
Supplemental information
Cash paid for income taxes		$	1			$	—
Cash paid for interest, net of amounts capitalized			42				58

See accompanying notes to the condensed financial statements.

US Airways, Inc.

1. Basis of presentation

     The accompanying unaudited condensed financial statements of US Airways, Inc. (“US Airways”) should be read in conjunction with the financial statements contained in US Airways’ Annual Report on Form 10-K for the year ended December 31, 2006. US Airways is a wholly owned subsidiary of US Airways Group, Inc. (“US Airways Group”). US Airways Group and its domestic subsidiaries, US Airways, Piedmont Airlines, Inc., PSA Airlines, Inc. and Material Services Company, Inc. (collectively, the “Debtors”), which at the time accounted for substantially all of the operations of US Airways Group, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (the “Bankruptcy Court”) on September 12, 2004. On May 19, 2005, US Airways Group signed a merger agreement with America West Holdings Corporation (“America West Holdings”) pursuant to which America West Holdings merged with a wholly owned subsidiary of US Airways Group. The merger agreement was amended by a letter agreement on July 7, 2005. The merger became effective upon US Airways Group’s emergence from bankruptcy on September 27, 2005.

     Management believes that all adjustments, consisting of normally recurring items, necessary for the fair presentation of results have been included in the unaudited condensed financial statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to passenger revenue recognition, impairment of long-lived assets and the frequent traveler program. Certain prior year amounts have been reclassified to conform with the 2007 presentation.

     There was no activity within other comprehensive income for the three months ended March 31, 2007 and 2006. Comprehensive income encompasses net income and other comprehensive income, which includes all other non-owner transactions and events that change stockholder’s equity.

Recent Accounting Pronouncements

     In June 2006, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues Task Force Issue No. 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. This issue provides that a company may adopt a policy of presenting taxes either gross within revenue or net. If taxes subject to this issue are significant, a company is required to disclose its accounting policy for presenting taxes and the amount of such taxes that are recognized on a gross basis. US Airways adopted EITF 06-3 during the first quarter of 2007. US Airways collects various excise taxes on its ticket sales, which are accounted for on a net basis. The adoption of EITF 06-3 did not have a material impact on US Airways’ financial statements.

     In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. Management is currently evaluating the requirements of SFAS No. 159 and has not yet determined the impact, if any, on the US Airways’ financial statements.

     In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. US Airways will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. Management is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on US Airways’ financial statements.

     In September 2006, the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities.” This amends the existing major maintenance accounting guidance contained within the AICPA Industry Audit Guide “Audits of Airlines” and prohibits the use of the accrue in advance method of accounting for planned major maintenance activities for owned aircraft. The provisions of the announcement are applicable for fiscal years beginning after December 15, 2006. US Airways currently uses the direct expense method of accounting for planned major maintenance; therefore, the adoption of FSP No. AUG AIR-1 did not have any material impact on US Airways’ financial statements.

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of an uncertain tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

     US Airways adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a material impact on US Airways’ financial statements. US Airways files tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. As part of the US Airways bankruptcy filings, the Internal Revenue Service and various state jurisdictions filed proofs of claim. Upon its emergence from bankruptcy, US Airways had established reserves for all IRS claims and state income tax claims as of the date of the bankruptcy filing on September 2004. All creditors, including the IRS and state and local taxing jurisdictions, had to timely file a proof of claim to support any tax deficiencies per the tax authority records. On February 15, 2007, US Airways and the IRS agreed to settle the IRS’s outstanding proof of claims for $7 million dollars. As of the end of the first quarter, US Airways had remaining reserves of less than $1 million related to uncertain tax positions.

     There are currently no federal or state audits in process. US Airways’ last federal income tax audit closed all tax years through December 31, 2002.

2. Special items, net

     Special items as shown on the condensed statements of operations include the following charges (credits) for the three months ended March 31, 2007 and 2006 (in millions):

		Three Months Ended				Three Months Ended
		March 31, 2007				March 31, 2006
Airbus restructuring (a)		$	—			$	(40	)
Merger related transition expenses (b)			26				25
Special items, net		$	26			$	(15	)

3. Stock options

     Agreements with ALPA — US Airways Group and US Airways have a letter of agreement with the Air Line Pilots Association (“ALPA”) that provides that US Airways’ pilots designated by ALPA receive stock options to purchase 1.1 million shares of US Airways Group’s common stock. The first tranche of 500,000 stock options was granted on January 31, 2006 with an exercise price of $33.65 and the second tranche of 300,000 stock options was granted on January 31, 2007 with an exercise price of $56.90, the average market price for the 20 business days preceding the option issuance date. The stock options granted to ALPA pilots do not reduce the shares available for grant under any equity incentive plan. Any of these ALPA stock options that are forfeited or that expire without being exercised will not become available for grant under any of our plans.

     The per share fair value of the ALPA pilot stock options granted on January 31, 2006 and 2007 were $17.11 and $18.02, respectively, calculated using a Black-Scholes option pricing model with the following assumptions:

		2007				2006
Risk free interest rate			4.9	%			4.4	%
Expected dividend yield			—	%			—	%
Expected life		2.0 years				5.0 years
Volatility			53.0	%			69.8	%

     US Airways’ net income for the three months ended March 31, 2007 includes $5 million of compensation costs related to the ALPA stock option grant. As of March 31, 2007, there were no unrecognized compensation costs related to stock options granted to ALPA pilots as the stock options were fully vested on the grant date.

4. Debt

     The following table details US Airways’ debt as of March 31, 2007 (in millions). Variable interest rates listed are the rates as of March 31, 2007 unless noted.

		March 31,				December 31,
		2007				2006
Secured
Equipment notes payable, variable interest rates of 6.89% to 9.65%		$	1,249			$	1,258
Slot financing, interest rate of 8%, installments due through 2015			47				47
Capital lease obligations, interest rate of 8%, installments due through 2021			43				41
GE Credit Facility			—				21
			1,339				1,367
Unsecured
GE Engine Maintenance Term Note, variable interest of 9.38%, installments due 2008 through 2011			45				45
Note payable to Pension Benefit Guaranty Corporation, interest rate of 6%, interest only payments until due in 2012			10				10
			55				55
Total long-term debt and capital lease obligations			1,394				1,422
Less: Unamortized discount on debt			(128	)			(129	)
Current maturities			(81	)			(93	)
Long-term debt and capital lease obligations, net of current maturities		$	1,185			$	1,200