US Airways Group, Inc. Q2 2009 Earnings Call Transcript

US Airways Group, Inc. (LCC)

Q2 2009 Earnings Call

July 23, 2009 1:00 pm ET

Executives

Doug Parker – CEO

Derek Kerr – EVP & CFO

Scott Kirby – President

Dan Cravens – Director IR

Analysts

William Greene – Morgan Stanley

Kevin Crissey – UBS

Jamie Baker – JPMorgan

Justine Fisher – Goldman Sachs

Mike Linenberg – Bank of America

Helane Becker - Jesup & Lamont

Dan McKenzie – Next Generation Equity Research

Gary Chase – Barclays Capital

Bob McAdoo - Avondale Partners

Ted Reed – TheStreet.com

Mary Schlangenstein – Bloomberg News

[Bram Resnick] – KPNX TV

Presentation

Operator

Good day and welcome to the US Airways second quarter 2009 earnings conference call. At this time for opening remarks and introductions, I would like to turn the call over to Dan Cravens, Director of Investor Relations. Please go ahead.

Dan Cravens

Good morning everybody, and thanks for joining us for our second quarter 2009 earnings conference call. Joining us in the room today is Doug Parker, our Chairman and CEO; Scott Kirby, our President; Robert Isom, our Chief Operating Officer; Derek Kerr, our Chief Financial Officer; Steve Johnson, our Executive Vice President of Corporate; and on the phone with us also is C.A Howlett, our Senior Vice President of Public Affairs.

As we usually do, we’re going to start with Doug. He will provide some general comments on our second quarter financial results and provide an industry overview. Derek will then walk us through the details on the quarter, including our cost structure and liquidity. Scott will then follow with some commentary on the revenue environment and our operational performance during the quarter. And then after we hear from those comments, we will open the call for analyst questions and lastly questions from the media.

Before we begin, we must state that today’s call contains forward-looking statements, including statements concerning future revenues and fuel prices. These statements represent our predictions and expectations as to future events, but numerous risk and uncertainties could cause actual results to differ materially from those projected.

Information about some of these risks and uncertainties can be found in our earnings press release issued this morning, our Form 10-Q for the quarter that was also issued today and our 2008 Form-10K.

In addition, we will be discussing certain non-GAAP financial measures this morning, such as net loss and CASM, excluding unusual items. A reconciliation of these numbers to the GAAP financial measures is included in the earnings release and that can also be found on our website at www.usairways.com under the Investor Relations tab.

A webcast of this call is also available on our website and will be archived for one month. The information that we’re giving you on the call is as of today’s date and we undertake no obligation to update the information subsequently.

At this point, I’m going to turn the call over to Doug, and thanks again for joining us.

Doug Parker

Thanks Dan and thanks to all of you for being with us. We reported a profit this morning of $58 million. That compares to a loss of $568 million in the second quarter of 2008. If you exclude special items that flips to a loss of $95 million for this quarter versus a loss of $102 million in the second quarter of 2008.

I think its important to note that our results both last year and this year were significantly impacted by fuel hedging. That is, last year we had a realized hedging gain of $192 million in the second quarter, that’s because as fuel prices rose we were recognizing a gain on the hedges, now this year as they’ve fallen since the time we purchased hedges we have a loss of $135 million in the second quarter of 2009.

And the facts of the matter are we haven’t hedged since last fall and we believe a better fundamental picture of the airline and how the airline is performing today and on the year over year basis is gained by adjusting for hedging. So if you do that just take out the results of the hedging, what you see is, we have a profit in the second quarter of $40 million versus a loss in the second quarter of 2008 of $294 million which is a $334 million improvement.

On this basis our profit margins are among the very highest of our larger network peers and our margin improvement, indicator of momentum is definitely the highest. Now that improvement is driven by a lower fuel price but also by aggressive actions that we’ve taken here at US Airways.

We reduced our capacity, our mainline capacity is down 6% year over year. As we’ve done that we’ve been very aggressive on cost management and our unit cost excluding fuel is down 2% even though capacity is down.

On the revenue front, our a la carte revenues have generated over $100 million in the second quarter and are expected to generate $400 million for the full year. And on top of all that our operations performance continues to be outstanding. Our on time performance is even better so far this year than it was last year. And recall that last year we let the big six in on time performance.

Our baggage mishandlings are down over 40% and as a result of all that the complaints to the DOT are down over 30%. Our team is just doing a remarkable job of taking care of our customers and we are extremely proud of them and thankful for all they’re doing.

On the revenue front, Scott will talk to you in a bit about some room for optimism we’ve seen of late, but as we said in the press release we’re not counting on a quick recovery. Instead we’re prepared for a continued difficult environment. To that end we’ve continued to build up our cash. We had total cash at the end of the quarter of $2.3 billion, that’s up from $2.1 billion at the end of the first quarter.

And importantly now our cash as a percentage of revenues is now second only to Continental among the big five [inaudible] airlines. So in summary for me, it’s a difficult economic environment but US Airways is performing very well in that environment as evidenced by today’s results.

Looking forward we do see signs of encouragement but we’re not planning for nor relying on a quick economic recovery. Instead we are prepared for a continuation of difficult times and we believe the steps we’ve taken to improve profitability, run a reliable airline, and build up our cash balances has us extremely well positioned for both the near and long-term future.

That said, I’ll turn it over to Derek to give you more detail on the numbers and then Scott will go through the revenues.

Derek Kerr

Thanks Doug, we did file our second quarter 10-Q this morning and in that Q as Doug mentioned we did report a net profit of $58 million or $0.42 per diluted share. That does compare to a net loss of $568 million or $6.17 per share a year ago. When you do exclude the special items and I’ll talk about those in a minute, the company’s net loss for the second quarter was $95 million or a loss of $0.77 per share.

A net loss excluding special items in the year before of $102 million or $112.00 per share, that’s how it compares to last year’s quarter. During the 2009 second quarter the company recognized a net special credit of $153 million which included $156 million unrealized net gain associated with the company’s fuel hedge contracts.

The unrealized gains in the second quarter of 2009 are the results of the application of mark-to-market accounting in which unrealized losses recognized in prior periods are reversed as hedge transactions are settled in the current period.

In addition we had two small other charges which with the previously announced capacity reductions we did record $1 million in charges for lease return costs and penalties related to those aircraft going away and the company did also record a non-cash asset impairment charge of $2 million.

For the quarter total capacity was 22 billion ASMs, down 5.6% from 2008. As happened last quarter ASMs came in slightly higher than our previous guidance due to a higher than planned completion factor as our employees continued to run a great operation.

Our mainline capacity for the quarter was 18.3 billion ASMs, down 5.6% from a year ago. Express capacity was 3.7 billion ASMs, also down 5.6% from 2008. In the second quarter we did return one A320 and three 737-300 aircraft and took delivery of five A321 and two A330 fully financed aircraft. For the remainder of 2009 we plan to retire 15 more aircraft and add 16 new aircraft and just remember all of these new deliveries are replacements for older aircraft, not for growth.

We remain disciplined on capacity and accordingly have again adjusted guidance downward slightly and adjusted it between the third and fourth quarter. Mainline ASMs are projected to be 70.5 billion this year, which is down approximately 5% from 2008. Domestic mainline is still expected to be down around 9%.

The ASM breakdown by quarter is as follows, 18.6 billion in the third, which is down 4.4%; 16.7 billion in the fourth and we are also now studying the economic effects of eliminating our Embrarer 190 fleet. The fleet of 25 Embrarer 190’s represents about 2.5% of our total ASMs and we are studying that right now.

The economic recession continues to have a major impact on our revenues. Scott will go into more detail during his comments. Total operating revenues for the quarter were $2.7 billion, down 18.4% from the same period in 2008 on a 5.6% decline in total ASMs. Total revenue per available seat mile was 12.09 cents, down 13.6% versus the same period last year.

During the quarter other operating revenues were up $69 million or 34% versus 2008 due to the successful a la carte pricing model we implemented in May, 2008. As you recall during that quarter we did implement a program enabling online payment for checked bags. Customers who pay for checked bags at the airport will incur an additional $5.00 service fee.

That was implemented during the quarter. These programs are still on track to generate approximately $400 million in revenue for the full year 2009. Mainline passenger revenues were $1.7 billion, down 22.1%. Mainline passenger revenue per available seat mile in the second quarter was 9.42 cents, down 17.65 versus the same period last year.

This was driven by an 18.8% decrease in yields offset in part by a record load factor of 84.8%. The airlines operating expenses for the second quarter were $2.5 billion, down 33.2% compared to a year ago due mainly to a 59% decrease in mainline and express fuel expenses. Mainline costs per ASM was 10.44 cents, down 32% period over period on a 5.6% decrease in mainline capacity.

As Doug mentioned earlier our employees have done an outstanding job of operating a great airline enabling us to continue to reduce costs despite our capacity reductions. Even with the 5.6% reduction in mainline ASMs during the quarter we were able to reduce our cost due to aggressive cost management.

Excluding fuel and special items our mainline cost per ASM was 8.14 cents in the quarter, a decrease of 2.1% versus 2008. Express operating costs per ASM ex fuel was 13.05 cents for the quarter, up 5.3% on a decrease of 5.6% in ASMs.

Our leverage mainline fuel price including taxes and realized losses on fuel hedging instruments for the second quarter was $2.07 per gallon versus $2.99 per gallon in the second quarter of 2008. For the second quarter we had 19% of our total fuel consumption hedged in the quarter. We settled hedge transactions which resulted in a realized loss of $135 million. Its worth about $0.49 per gallon on the cost of our fuel during the quarter.

The company was in a unrealized loss position at the end of the first quarter totaling $204 million which was decreased by $156 million in the second quarter. This leaves the company in a liability position of $48 million at June 30 for hedges in place in the third quarter 2009. The realization of that $48 million is included in our forward fuel price guidance.

At the end of the second quarter we had $65 million, there was $45 million in letters of credit and $20 million in cash deposits collateralizing positions held by our hedged counterparties. As of today our collateral has decreased to approximately $34 million, all in cash deposits as our second quarter hedge positions were settled in July. We should have no collateral held by our hedge counterparties at the end of the third quarter.

For the full year we’re forecasting fuel price in the range of $2.03 to $2.08 and this is based on the July 16 forward curve. For the third quarter its $1.99 to $2.04 and the fourth quarter $1.87 to $1.92. We have only 8% of our total third quarter volume hedged which is when our last transaction expires. The impact of our hedge program on fuel costs is currently forecasted to be an incremental $0.36 for the full year.

For the second quarter as I said it was $0.49 with $0.19 projected for the third quarter. Given the continued volatility of fuel prices we have not added any new hedge transactions since our last call.

For the full year our CASM ex fuel guidance has mainline up zero to 2% versus 2008. For the third quarter it will be up 1% to 3%, fourth quarter up 3% to 5%. Express CASM is forecasted to be up 3% to 5% in 2009. As Doug said we ended the quarter with $2.3 billion in total cash and investments of which $1.7 billion was unrestricted, an increase from the $2.1 billion of total cash, $1.4 billion of unrestricted at March 31.

Total cash at June 30 includes $214 million of auction rate securities at fair market value that currently are reflected as non current assets on our balance sheet. Also included in the company’s restricted cash balance was $45 million of cash collateralizing letters of credit with certain counterparties to the company’s fuel hedging transactions that I just talked about.

Not included in our cash position as of June 30 is the $20 million in cash deposits held by fuel hedging counterparties. Despite the challenging capital markets we were successful in raising approximately $234 million in net proceeds during the second quarter through and underwritten offering of common stock and convertible senior notes.

In addition the company has secured approximately $700 million in aircraft financing commitments since the end of the first quarter. That’s for four A330s, and all the remaining A321 and 320 deliveries in 2009. We now have committed financing in place for all but one of the 25 replacement aircraft that have been or will be delivered in 2009. The company is currently evaluating alternatives for the last A330 delivery and expects to obtain financing for this aircraft at customary advance rates on terms and conditions acceptable to the company.

Looking at CapEx we have once again reduced our spending to include only projects that are mandatory or improve operational efficiency. We have reduced 2009 spend to $150 million. This is $30 million lower than the last quarter. We are now forecasting total net CapEx to be $350 million in 2009. This includes net aircraft CapEx of $200 million.

So in summary the revenue environment continues to be difficult to forecast bringing a lot of uncertainty into play in the second half of the year. We believe the steps we have taken reducing capacity, introducing a la carte revenue streams, aggressively controlling costs, and raising new capital should position us to meet the challenges that may lie ahead and withstand a prolonged economic downturn.

I’ll turn it over to Scott to go through the revenues.

Scott Kirby

Thanks Derek, I’ll take a minute to talk briefly about our operational results and product initiatives and then turn to the revenue environment. Operationally we’re extremely proud of our outstanding team of 34,000 employees who continue to do a superb job in the second quarter as Doug said with running an even better operation than we did last year with the 79% on time performance and significant improvement in all of our other operational metrics including mishandled bags, complaints, etc.

We’re also excited today to announce our partnership with Aircell to install Gogo’s Inflight Internet connectivity on all our A321 aircraft, implementation beginning in early 2010. Turning to the revenue environment during the second quarter we had industry leading RASM performance with consolidated passenger RASM down 16.9% while total RASM was down 13.6%.

During the quarter we had the benefit of Easter falling in April, followed by an estimated $35 million negative impact from H1N1 across the entire quarter. We like others continue to see a decline in business demand as we experience weakness in leisure yields as the industry resorted to aggressive discounting to fill seats.

For some regional color, domestic total RASM continued to outperform international with domestic total RASM down 13% while international was down 25%. This is obviously reflective of the larger domestic capacity cuts and the impact of ancillary revenues on the domestic route network. And we expect this trend to continue into the third quarter.

With that I’ll turn to the revenue outlook going forward, I think our view may be slightly more bullish though with significant uncertainty then some others have expressed during this earnings season. Post Memorial Day we’ve seen real strength in bookings. While the pricing environment remains weak we’ve been able to push up yields through some modest fare increases and the ability to yield manage during the peak months.

Additionally we think we see some anecdotal evidence that business is improving or stated more accurately, at least its not as bad as it was. For US Airways our corporate contracted revenue was down between 30% and 35% in every single month between January and May.

In June it was down 28%, and month to date July, its down only 22%. Additionally we’ve seen an up tick in flown RASM in business oriented markets like the shuttle. As a result of modest fare increases and modest business travel recovery we’ve also seem some improvement in our booked yields.

In May our booked yield bottomed down 23% year over year, in June it was down 21%, but July month to date is down only 15%. For clarity, booked yield is for bookings that we’ve taken in each month for all future travel as opposed to the flown yield for each month. And while taking bookings at a 15% year over year decline in yield is far from good, it’s a lot better than where we were in May.

Of course we don’t really have visibility into what will happen with demand when the peak travel season ends in mid August the fact that we’ve seen some improvement in business demand and a slightly improved pricing environment however leads us to guess that the late August and September periods will continue to perform better then May, June.

But to be clear that’s only an opinion and we don’t yet have factual evidence to support that view. We do of course have more clarity for July and we expect passenger RASM to decline by 16% to 17% year over year which represents improvements over June’s down 20%.

For August its too early to tell particularly since the back half of August will be much more dependant on business traffic recovery but at the moment August booked RASM is similar to where July was at the same point in time.

So in summery, US Airways continues to outperform the industry both operationally and on revenue. We’ve seen definite signs of improvement over the summer and are hopeful that this will carry through once the summer peak travel period is over.

With that I’ll turn it back to Doug.

Doug Parker

We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of William Greene – Morgan Stanley

William Greene – Morgan Stanley

I was wondering if I could talk a little bit more about liquidity, if we look forward what other options do you have, can you monetize mileage sales, could you get money back from a credit card processor at a certain liquidity level, can you talk about some of those things.

Doug Parker

I guess what I’d say is rather than going into things that may or may not happen and not speculate as to what we might do, you know we are and what we had last year which is those types of things you suggested which may be things we would do if we had to do something in this environment.

I would point out again I know this comes up a lot, but we have trouble getting to the same conclusion that some are that we actually have, there is a need to raise capital but you’re not suggesting we wouldn’t do so because we’re prudent people. But given where these numbers are I would just encourage you to take a look at where we ended the quarter and where we’re producing now and would make the point that I think you’d actually be hard pressed to come up with a situation whereby we actually end up with the need to raise capital by year end.

William Greene – Morgan Stanley

Well you just raised capital a couple of months ago so I guess I would have thought you would typically have seen an increase in cash between March 31 and June 30 anyway, just for seasonal reasons, so I guess as we look forward I would say well there would probably be some decline from a working capital standpoint and that alone depending on the demand levels could create some pressures. That’s how I was thinking about it. Is that incorrect.

Doug Parker

Here’s what I think, again as it relates, first off on the premise we’ve certainly seem some suggestion that we’re in more difficult straits than others. That premise I certainly don’t accept as we noted, we have more total cash which is what matters [inaudible] by the way, if you’re really worried about how much cash someone has before they need to go get protection.

What matters is total cash not unrestricted cash because in that sense you will quickly have restricted cash. So our total cash is higher than any other large network here except Continental. And our profit margins are higher than all the rest so its hard to accept the view that we get in trouble before others, but that’s our view and what you guys need to go try and figure out.

The second point the one I was trying to make, irrespective of who may be in the worst shape which I would argue is not particularly productive work, because I think we all acknowledge its difficult times, so irrespective of whose in the worst shape what I have a little trouble understanding, I was trying to get at is how anybody concludes that we have a near-term liquidity problem on a stand alone basis.

The reason for that is if you look at what we view as a real trigger in this regard its probably the $850 million unrestricted cash covenant. That’s the only covenant the company has and that obviously gets to a cash level where you start, might be a concern. So that’s the trigger that I encourage you to look at and we ended the second quarter with $1.7 billion of unrestricted cash.

So yes, I’d certainly agree with you that there would be I think under rational assumptions for the back half of the year, you would end up modeling cash drains for us and probably every other airline. I think you’d be really hard pressed to get one to build a scenario that gets you down to those levels of unrestricted cash. You certainly would have to assume a much worse environment that’s in place today.

And we haven’t seen anyone’s detailed models that gets us even close to that. So that’s a second point. If you can help me with that I would appreciate it. I don’t have the same view that there’s a near-term liquidity issue. Now having said that like I said at my outset this is an issue that we’re not going to sit by and watch and believe that okay, we’re going to be just fine which is really I think probably the most important point.

Because what I’d say is third, if someone does conclude that one, we’re the most vulnerable in spite of the fact at hand, and two and further assumes that things are going to get even worse than they are now but you could come up to that conclusion but the problem with those doomsday scenarios is they assume we just sit here and let it happen.

And I can assure you that is a bad assumption. And on that point all I’d say is just simply look at our track record over the last eight years. Unlike many in our business we’ve never defaulted on an obligation and we’ve been in a lot worse circumstances then this one and that’s because we take our commitment to shareholders extremely seriously. We always will. So a lot of times in the past people have suggested we wouldn’t be able to preserve our shareholders’ value and they’ve been wrong each and every time.

And I just suggest to you the track record is relevant on that point and would encourage you to consider that as you make your investment recommendation. I’m not going to be able to tell you exactly what we’re going to do and when it is and why and if we even need to. But what I would tell you is look at the track record and we will not sit idly by and let scenarios that some seem to want to suggest play out.

William Greene – Morgan Stanley

One last question on the financing that you put in place, is the cost of this financing materially different than what you’ve been able to achieve in the past, is it materially higher, for the new aircraft.

Derek Kerr

No its not, it’s at good rates and its even better, we looked at the market and you’ve seen other airlines go out and do double [inaudible] transactions. This is higher loan to value and a higher cash so I think these transactions are very favorable transactions that we’ve done. A couple of them are sale leasebacks which bring in full cash. That number is built in as guidance when I said net aircraft CapEx at $200 million.

So that’s the amount of cash that will go out throughout the year for those but the terms are very good on them.

William Greene – Morgan Stanley

And just the interest rates on them or the implied rates on them are in line with history or—

Derek Kerr

They’re in line with history, they’re in line with the transactions that have been done in the market right now.

Operator

Your next question comes from the line of Kevin Crissey – UBS

Kevin Crissey – UBS

When we’re thinking about the cash and so forth and when we think about the air traffic liability for the year, when we’re modeling that and I know there can be a pretty comprehensive analysis in order to come up with a number or at least that’s what I’m told, should we be thinking of that given no change in the current outlook for revenue, should we be thinking of that as a net producer of cash like usual or a net decrease of cash, just from the ATL itself.

Derek Kerr

Its normal, the trend is still the same its just on lower revenues so as percentage of revenues its normally a positive producer of cash.

Doug Parker

I wouldn’t let people convince you its that complicated. There’s nothing tremendously changed in the buying behavior of people is what would change that number. So if you generally just look at a percentage, there’s certainly seasonality in the number but that seasonality is consistent. So whatever you’ve seen seasonally at our airline and other airlines, I’d just suggest you use the same percentage of whatever next three months revenue and that would probably be the best you can do.

Kevin Crissey – UBS

And when revenue is falling as significantly as its been wouldn’t ordinarily you would see a decline in the overall ATL.

Doug Parker

Again if you’re forecast, I would just take the ATL as a percentage of the coming month’s revenue at the end. At any rate, by no means should you think because revenues are down year over year that the ATL doesn’t build from one quarter to the next because it does. Clearly once you get past the start of the year even—

Kevin Crissey – UBS

I’m not talking about the seasonality of it, not at all.

Doug Parker

I’m just trying to help you with modeling for it and you need to model for the seasonality and then its just a matter of your revenue projection.

Kevin Crissey – UBS

And on the 190 analysis and no I’m not going to get into the details of it but what are the puts and takes on that analysis.

Scott Kirby

Well its capacity that we have the flexibility to reduce. It’s a small sub fleet for us at 25 aircraft so there’s some operational efficiency to be gained by reducing it and it’s a aircraft that is in demand around the world. We have good pricing on the airplane so its something that we can, a transaction that we can effectively implement from a financial perspective so we’re just starting the process of looking at that as a way to further reduce capacity in this environment.

Operator

Your next question comes from the line of Jamie Baker – JPMorgan

Jamie Baker – JPMorgan

Just kind of following up on the direction from Bill’s question, as you might know we sort of have this preoccupation with things coming to a head for the industry this winter and one of the ideas we’ve thrown out there relates to consolidation. You’ve got a track record for pulling off a deal between a bankrupt airline and a solvent one. You made another move on a bankrupt one a couple of years later and assuming and I’m sure you do, that you are not a bankruptcy casualty. Is it a stretch to assume that there’s a high likelihood that a year from now your network looks much different than today. It seems DOJ would be pretty lenient given what’s happened in other sectors.

Doug Parker

Yes I think you’re asking just about consolidations right.

Jamie Baker – JPMorgan

Yes I just like to use a lot of words.

Doug Parker

Let me just answer consolidation, our view on consolidation is well documented and that is we believe that would be helpful to our industry. So because its too fragmented. I think that’s a large part of the problems that have plagued this industry for quite some time. We continue to hold that view. Our challenges, we’re the fifth largest [inaudible] airline not first, second, or third and so its, having that view sometimes just means you have that view. And you can’t get as much done.

So we continue to have that view and one day I believe planets will align. I don’t know if now is the time. To give you a little color on that, crisis tends to, have historically been a time when this happens so we have that going for us, certainly tough economic times. On the flipside these tough economic times are coming with real constraints on capital and that probably makes it harder so I don’t know. You put all that together and see what, the long and short of it is we’d like to see something happen. We think it makes sense, not necessarily and again this is for the industry not necessarily for US Airways.

Jamie Baker – JPMorgan

I was just pointing out that you’re consolidation efforts in the past have involved bankrupt carriers which suggests to me that the probability of consummating a deal over the next year may actually be greater than what it would have been at this point last year and I was just wondering if that logic was shared by you and also if you believe Washington might be more receptive to consolidation than the hostile response for lack of a better term than you met with in 2007.

Doug Parker

We’re starting to get into speculation, that isn’t something that I can get into other than what I said. I think difficult times sometimes make it lead to this because often times companies need to see they don’t have a lot of other alternatives. So if we get to that situation that would probably make it more likely than not but we also need the capital markets to open up some more.

Jamie Baker – JPMorgan

And just a quick follow-up is a longer summer this year at least measured by when Labor Day falls an issue that we need to consider when forecasting RASM or do enough schools now start in August that it doesn’t really effect forecasting.

Scott Kirby

I don’t think it has a big effect. The summer ends August 18 approximately. There’s enough schools that go back early that we view the summer ending at that point and I think most airlines do that too and we all change our summer schedules. So I don’t think it has a material effect.

Jamie Baker – JPMorgan

Does it push back the return the business travel though.

Scott Kirby

I don’t think so.

Operator

Your next question comes from the line of Justine Fisher – Goldman Sachs

Justine Fisher – Goldman Sachs

The first question I have is on the new I guess some of them are international routes but I know you started up a shuttle in Hawaii route is on, I know you can’t to year over year comparisons on the new routes such as Philly’s Tel Aviv etc., but is there any other data point like load factors that you can give us to tell us how those routes are performing as far as demand goes.

Scott Kirby

The transatlantic international had almost exactly the same RASM as the rest of the transatlantic so we feel very good for start up routes that in total they had a similar transatlantic RASM to the rest of the mature system.

Justine Fisher – Goldman Sachs

Are there any other signs that you, that I guess maybe you’re taking some share from Newark because I know Philly and Newark are pretty close and Continental has some flights already out of there so is it too early to tell whether you’re actually gaining share.

Scott Kirby

I don’t know, we don’t really look at Newark versus Philly share. I think we’re doing very well in Philadelphia and we carry a lot of connecting traffic as does Continental I’m sure. The whole transatlantic of course has been weak this summer as I said in my opening comments, total RASM down 25%. So the whole transatlantic has been weak but those markets in that weak environment have performed as well as the rest of the system.

Justine Fisher – Goldman Sachs

And then following on your business comment on the shuttle routes, what are the other key business markets for you, obviously the shuttle is one, its good to hear that at least that traffic is picking up but what are the other key business cities that you fly to that you look at as good gauges of business traffic.

Scott Kirby

Well that’s the one that’s most pure in terms of business revenue but we have a number of other routes in our system, places like Charlotte to La Guardia, or Charlotte to Boston, DCA to Charlotte, other markets that have a higher percentage of business then the rest of the system on average but the shuttle by far is the most pure representation I think of business demand.

Justine Fisher – Goldman Sachs

You weren’t flying the ERJs on the shuttle, you were flying larger planes then that.

Scott Kirby

Correct.

Justine Fisher – Goldman Sachs

And if you took out the ERJs you would just substitute them with your other CRJs etc. that you’ve got already in the fleet.

Scott Kirby

If we took out the Embraer 190.

Justine Fisher – Goldman Sachs

Yes.

Scott Kirby

Yes, we would just, we would wind up reducing capacity by 2.5%. What that likely means is we would fly fewer frequencies and kind of re gauge, you’d have a re gauging across the entire network but net, 25 fewer airplanes which result in fewer frequencies.

Operator

Your next question comes from the line of Mike Linenberg – Bank of America

Mike Linenberg – Bank of America

Just the 190’s, the 2.5% capacity is that consolidated or mainline.

Scott Kirby

That’s consolidated.

Mike Linenberg – Bank of America

Do you have just what that is on a domestic basis.

Scott Kirby

We’ll we’re about 20% domestic so, or 20% international so that would be a little over—

Mike Linenberg – Bank of America

I can calc that, okay and then when you look at your, the credit facility out there and you look at where that’s trading, the bank debt. At last check I think its in the high 40’s, is there ever a point where maybe sometime soon where it does make sense to go into the market and retire some of that or is it just when you think about the optionality and the fact that that doesn’t, you don’t have to pay anything down for another whatever, three, four years or so and the fact that cash is, you want to have as much cash as now, but that’s just something that doesn’t cross your mind. Just thoughts on that.

Doug Parker

Yes we look at it like you do and think gosh it looks like a drag on investment but given where the industry right now and indeed that cash is king, it’s a tough hurdle for us to overcome. And indeed just look at it and think I imagine we’re going to look back one day and think we wish we could have done that or had done it.

Derek Kerr

There are constraints. We’re prohibited under the loan to buy it back. So that’s part of the answer.

Mike Linenberg – Bank of America

I probably should have asked that first, so there are constraints. I guess the only thing that you could do is I guess you could pay down $100 million at par to reduce the cash covenant requirement, is that right.

Derek Kerr

Correct, we could, by the end of September we could pay down $100 million and reduce the covenant to $750.

Mike Linenberg – Bank of America

And when you say September, September of this year.

Derek Kerr

September of this year, yes.

Mike Linenberg – Bank of America

Is that something that would make sense at this point or no.

Derek Kerr

No.

Mike Linenberg – Bank of America

Okay, very good, cash is king.

Operator

Your next question comes from the line of Helane Becker - Jesup & Lamont

Helane Becker - Jesup & Lamont

Just on the, as you are looking at the ERJs are there penalties that you would have to pay to get out of the contracts there or how does that work.

Scott Kirby

No, we don’t have any contracts that we would have to get out of. They are owned aircraft we would sell or sublease the aircraft.

Operator

Your next question comes from the line of Dan McKenzie – Next Generation Equity Research

Dan McKenzie – Next Generation Equity Research

I apologize I had to jump off the call for a couple of minutes, I really appreciate the working capital perspective in the back half of the year and I wonder if you can help us understand what the key drivers are for your other accrued expenses, pretty big number on the balance sheet as well as accounts payable and how they’re moving around in the back half of the year.

Doug Parker

You’ve stumped the CFO.

Derek Kerr

I think net, net working capital in the back half of the year, it’s the same seasonality as we would have so we’re not seeing anything really different than what we’ve had in the last three years since the merger so I think if you go back and look through the Q’s and have the history from there there’s no real big changes in what we would see in any of those categories going forward.

Dan McKenzie – Next Generation Equity Research

And then I’m just wondering if you can help us understand the business model flexibility for US Airways, it was just a little bit further here and just taking the shuttle for example I’m wondering does the pilot scope clause that ties the minimum mainline aircraft to 322 aircraft still apply say if you wanted to pursue an asset divestiture.

Scott Kirby

We could pursue any asset divestiture that we wanted but we’d still have to keep a certain number of aircraft. We still have 322 aircraft but they don’t have to be flown in the shuttle or any particular markets.

Dan McKenzie – Next Generation Equity Research

I think this next question really taps your historical revenue management wizardry here but some of your legacy peers have implemented non-hub international flying and [offsite] sort of AMRs London Heathrow to Los Angeles for example, but its obviously, I appreciate it makes more sense to [deliver] international flying from your hubs, but it would seem Las Vegas could be an ideal non-hub destination for incoming wide bodies or maybe not. I’m wondering if you can just help us understand the international strategy looking ahead and just given the general industry weakness in that area, and I think you said international was still profitable in the last earnings call.

Scott Kirby

We’re not going to be flying any non-hub international point. For American they at least have some connectivity at LA and a very big presence in LA as an example and I think most of the other non-hub international flying historically hasn’t worked, tried over the years and it typically doesn’t last very long so we don’t have any plans to try anything outside of our hubs.

Though we do have significant growth opportunities in our hubs that we’re excited about it over the longer-term. In the near-term the international environment doesn’t look that compelling but over the longer-term we expect that as the US and the world economies return from this recession that the international demand will return and we’re excited about the longer-term prospects though in the near-term its slow.

Doug Parker

We’ll get back to you on your detailed question about working capital going forward.

Operator

Your next question comes from the line of Gary Chase – Barclays Capital

Gary Chase – Barclays Capital

I wanted to see if I could just ask a couple of follow-ups, I appreciate the detail that you gave, I just want to make sure that I understand though what you were talking about, you went through a lot of those business statistics quickly. That is your corporate deals, right, that’s your managed accounts and what they’re booking.

Scott Kirby

That’s correct.

Gary Chase – Barclays Capital

Is that a, can you just give us a sense of how much of what you think your high yield travel that represents. Is it 20%, 50.

Scott Kirby

Its low, its probably 20% but it’s a proxy of, a good proxy for business demand overall and consistent with the other indicators.

Gary Chase – Barclays Capital

And business travel overall is going to be in the 40, 45-ish range.

Scott Kirby

Yes, normally its about 50 but given what the more severe decline in business its probably dropped into the 40, 45 range now.

Gary Chase – Barclays Capital

And I guess, as I was thinking about some of those numbers that you were throwing out, and just sort of bringing it into the RASM guidance that you put out there for July, it feels like the business side of it would be the only thing that’s getting materially better, is that not right and then I guess the real question to that is what is it going to take to get the leisure side turned around or is that not looking likely in the near-term.

Scott Kirby

Well I think business has been better in July, business demand and I think in July the pricing environment for leisure has improved. To your specific question I think that’s what needs to happen in the leisure environment is the pricing environment should improve. It has but that will have a small impact on July. It will have a bigger impact on August and September because most of our leisure bookings were taken before July starting.

So there have been a couple of fare increases, the fare sales, the recent ones, while still more than I would like have been less deep discounts and more restricted to peak days and things like that. So the leisure pricing environment I think has improved which is going to help in future months.

Also remember we’re coming into I think as you have pointed out into more difficult comps as we go through the summer. And so to not only flat line with where we were but to actually be seeing some improvement represents more fundamental improvement in the environment in July versus where it was in May for example.

Gary Chase – Barclays Capital

I would agree with that although what we were so used to looking at and in RASM one of the things that I wanted to ask you is about the comps defined as you did in terms of revenue and I guess what I’m really after is do the business travel comps get easier and does that explain some of what you’re seeing and the overall comps don’t but do the business travel comps get easier and we’d somehow have leisure holding up the revenue equation last year at this time or is it pretty apples to apples.

Scott Kirby

I think its apples to apples. I don’t the business comps really get easier until next year and into January when they get much easier.

Gary Chase – Barclays Capital

And then any distinction between domestic and international for all these things that you’re describing, obviously the baselines are quite a bit apart, but are you seeing, when you refer to business travel getting better is that predominately domestic, is it all over the network, what’s the color on that.

Scott Kirby

I think it would similar across the entire network. For us looking forward further on international is a bit distorted because we have so many changes to our network. We’re going from being up 18% in capacity across the Atlantic during the summer to being down I think 4% in capacity by the time we get to October, November. So our data is distorted because of large capacity changes. But I think those fundamental trends are the same in both domestic and international.

Operator

Your next question comes from the line of Bob McAdoo - Avondale Partners

Bob McAdoo - Avondale Partners

The E190’s are those flown in one of your wholly owned subs or are those mainline pilots or who operates those.

Scott Kirby

Mainline pilots.

Bob McAdoo - Avondale Partners

And are all of your fall schedule changes in the computer, you talk about the cuts internationally are they all in the computers now.

Scott Kirby

There will probably be tweaking but by and large, yes.

Operator

Your next question is a follow-up from the line of Jamie Baker – JPMorgan

Jamie Baker – JPMorgan

Just a quick follow-up, we can try to work up what the proceeds might be from an ERJ sales though if you’d comment on that it would helpful but in particular what’s the debt balance on that sub fleet, I’m just trying to figure out if this has liquidity ramifications in addition to capacity ramifications.

Derek Kerr

I wouldn’t assume it has a lot of liquidity ramifications in your models.

Jamie Baker – JPMorgan

Can you be a little bit more precise on the debt balance and just leave us guessing on aircraft values.

Doug Parker

Well that’s what we don’t know. But for your modeling purposes we wouldn’t add anything. We’re not doing this to raise, if indeed we do anything we wouldn’t be doing it to raise liquidity we’d be doing it because there’s too much capacity in the system. Its for long-term profitability enhancement not for near-term liquidity raising.

Operator

Your next question comes from the line of Ted Reed – TheStreet.com

Ted Reed – TheStreet.com

First of all if you’re going to take out 190’s, you haven’t factored in those employment reductions yet so there would be reductions in employment if that occurred wouldn’t there.

Doug Parker

Yes, if that occurred.

Ted Reed – TheStreet.com

So you would be announcing those next week.

Doug Parker

No, seriously, I know you’re kidding but we’re not announcing on the 190’s other than the fact that we have let people know that that’s an aircraft that we could reduce and we’re looking at doing so. But the last thing I want to do is get employees anxious about further job reductions and that’s not what we’re announcing by any means. All we’re announcing is that these are, and given that the environment is still where it is, this is the kind of things that we need to look at. And we will look at it over time as we’re doing right now.

Ted Reed – TheStreet.com

These aircraft are very popular with passengers, aren’t they, the 190’s, so that’s a diminishment.

Scott Kirby

So are Airbus A320’s and 321’s and I think we fly efficient, well rounded fleet.

Doug Parker

Diminishments can be less airplanes flying around, less surplus.

Ted Reed – TheStreet.com

If there were replaced by Canadairs or something that would be bad for people in Charlotte I think.

Scott Kirby

They’re not going to be replaced, that’s the point, we do this to reduce capacity not have them go away and be replaced by something else.

Ted Reed – TheStreet.com

You are a lot more upbeat then all the other hub network carriers, and I’m wondering if that’s partially because of the lack of a lower share of international flying so that the trends you’re seeing are better largely because of that.

Scott Kirby

I think we’re outperforming largely because of that but I don’t the change in the trend is because of that. Its really too early to say because we’re in the peak summer travel season and once we get through the peak summer travel season this may change. I think we’re a little more bullish on forecasting that our opinion is that demand is going to stay at a higher level than its been after we get through the peak summer travel season than some others.

But I think we’re seeing similar results to what others are seeing we’re just a little more forward perhaps naively on thinking that that’s going to continue whereas others have been more cautious on thinking that the demand improvement will continue.

Operator

Your next question comes from the line of Mary Schlangenstein – Bloomberg News

Mary Schlangenstein – Bloomberg News

Not to harp on the E190’s but I just wondered if you could comment in terms of the unit operating costs for them versus the A320’s and is that a factor at all.

Scott Kirby

That’s not really the factor, they’re higher operating costs but that’s because they have a lower number of seats on the airplane.

Mary Schlangenstein – Bloomberg News

And have you gotten any feedback in terms of interest from potential buyers or have you not gotten that far yet.

Scott Kirby

We just started.

Doug Parker

We have not gotten that far yet.

Operator

Your next question comes from the line of [Bram Resnick] – KPNX TV

[Bram Resnick] – KPNX TV

I wonder if you can put this in finer detail on the corporate business bookings in Vegas or Phoenix, either anecdotally or with numbers give us a sense of what’s you’ve seen for the summer and/or fall.

Scott Kirby

I don’t have anything specific on just business demand in Phoenix or Las Vegas though I can say that Phoenix and Las Vegas have held up relatively well compared to the rest of the network, that’s been because they’re more leisure oriented and leisure has been better so through the summer they’ve held up better but I don’t have any specifics on business demand in those two markets.

[Bram Resnick] – KPNX TV

Given your moves in Vegas lately, is the Vegas hub just about gone now.

Scott Kirby

Well its, we still have a significant presence in Las Vegas and we’re still a very large airline, I think we’re probably still the second largest airline in Las Vegas. Really what we did was get rid of the [night] system is the largest piece which was connecting a lot of passengers through Las Vegas but carrying fewer passengers to Las Vegas.

So Las Vegas is still an important city for us and we have a significant presence there.

[Bram Resnick] – KPNX TV

And regarding employment looking ahead, how comfortable are you with your headcount right now do you see any layoffs down the road as the environment continues to worsen.

Scott Kirby

We just announced furloughs, we think we’re at the right level now. We tried to hold off on that as long as possible. We’ve been running over staffed for quite a period of time and eventually decided we had to do that. We were disappointed that we had to do that, we did as much of that as we could through voluntary programs. And at the moment don’t anticipate anything new coming in the near-term.

[Bram Resnick] – KPNX TV

Near-term, would that be through the end of the year.

Scott Kirby

We don’t have any plans for more furloughs so, yes that could change of course but we don’t have any plans for more furloughs.

Doug Parker

I think you know this, those furloughs that ended up happening last week were largely a result of capacity pull downs months ago so that we tried to hold on, thought we’d be able to through normal attrition have people choose just to leave but in today’s economy we’re not seeing attrition rates reach anything that we did, so we had to do that so at any rate, those were the result of a decision long ago. We don’t have any current decision pending that would further reduce capacity with the one possible exception on this E190 issue which is, I feel like I’m making a bigger issue that it should, but on the other hand, anyway that is a fleet type that we may be able to reduce if we need to reduce flying further.

So we’re going to look at that but I don’t want, once again I’m going to reiterate because its so sensitive to our employees, that by no means are we announcing that we’re doing that. We’re simply announcing that it’s the kind of thing that we need to look at in this environment. If we do that and when we do that, at that time there may indeed be the need for further employee reductions but that is nothing close to a decision that we’ve made thus far.

[Bram Resnick] – KPNX TV

Just to clarify you’re saying it’s the kind of thing we might need to look at, I thought I heard Scott saying earlier it is something you are looking at now.

Doug Parker

Okay fair enough, it’s the kind of thing we need to look at in this environment, it may not be a decision we choose to make in this environment.

[Bram Resnick] – KPNX TV

But you are looking at it.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Doug Parker

I think we’ve covered everything, if anyone has any further questions, please feel free to call any of us here at the airline, and we’ll do our best to answer your questions. Thanks.

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