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Executives

Dan Cravens – Director IR

Doug Parker – CEO

Derek Kerr – EVP & CFO

Scott Kirby – President

Robert Isom – COO

Analysts

Jamie Baker – JPMorgan

Mike Linenberg – Bank of America

Gary Chase – Barclays Capital

Dan McKenzie – Next Generation Equity Research

Helane Becker - Jesup & Lamont

Kevin Crissey – UBS

William Greene – Morgan Stanley

Bob McAdoo – Avondale Partners

Mary Schlangenstein – Bloomberg News

Ted Reed – TheStreet.com

US Airways Group, Inc. (LCC) Q4 2009 Earnings Call January 28, 2010 12:30 PM ET

Operator

Welcome to the US Airways fourth quarter and fiscal year end 2009 earnings conference call. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Dan Cravens, Investor Relations. Please go ahead, Sir.

Dan Cravens

Good morning everybody, and thanks for joining us today for our fourth quarter and full year 2009 earnings conference call. With us in the room today are 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 C.A. Howlett, Senior Vice President of Public Affairs and Elise Eberwein, our Executive Vice President of People and Communications.

As we usually do, we are going to start the call with Doug. He will provide some general comments on our fourth quarter and 2009 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. 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 does contain forward-looking statements, including statements concerning future revenues and fuel prices. These statements represent our predictions and expectations as to future events, but numerous risks and uncertainties could cause actual results to differ materially from those projected. Information about some of those risks and uncertainties can be found in our earnings press release issued this morning, our Form 10-Q for the quarter ended September 30, 2009 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 Company Information/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 are 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 will turn the call over to Doug. Thanks again for joining us.

Doug Parker

Thanks Dan and thanks everybody for being on. By now you have already seen we reported our loss for the fourth quarter this year. Of course we are never happy to report a loss but we were very encouraged by the improvement we have seen year-over-year and also encouraged by our performance relative to our competitors and I will talk a little bit about that.

The loss itself excluding special items was a loss of $32 million. That is a $190 million improvement over a $222 million fourth quarter 2008 loss excluding special items so very nice improvement. On an operating basis we actually had an operating profit excluding special items of $50 million and that compares to a loss of $136 million in the fourth quarter of 2008.

As it relates to our competitors, I said also these results compared quite favorably. If you look on a pre-tax margin basis. For example, you will see excluding special items US Airways with the $32 million loss is 1% of our revenues, or a 1% negative margin. That was second only to Continental among the five largest hub and spoke airlines. Not only was it second, it was a lot closer to first than it was to third. Continental had very small positive margin, something less than one-half of 1% while our other competitors had negative margins ranging from negative 3.5% to negative 8.5%.

We feel very good about where we have gotten the airline vis a vis our peers. Clearly we all in the industry have a bit of work to do but relative to where everyone else is we feel extremely good about where US Airways is right now.

Now the reason for the significant improvement in earnings is all of the initiatives we have taken over the past few years that are working. First, capacity reductions, you see our ASMs are down 4.5% in 2009. What we have done is gone and eliminated our least profitable flying. Our schedule is now focused on areas where we have real competitive advantage and that is in our hubs and in Shuttle. 99% of our flying now such as Philadelphia, Charlotte, Phoenix, Washington National or the Shuttle.

Next, ala cart revenues. We have over $400 million of revenue collected in 2009. Derek will talk more about that but it is a huge difference in our improvement year-over-year. We got a very nice job on cost control. Our costs per ASM excluding fuel was down for 2009 despite the fact our capacity was also down and that is driven by the fourth measure of our improvement which is our operations performance.

That cost per ASM decline is largely driven by running a much more efficient operation in things like reducing block times from our schedule, increasing the use of automation and a number of other things have resulted in a much more efficient operation. We have done that and kept our quality extremely high. We are number one in on-time performance in 2009 on a year-to-date basis based on DOT reports. That follows a number one ranking in 2008 among the five largest hub and spoke airlines. We have also seen a 36% reduction in baggage mishandling so far in 2009. We have seen a 34% reduction in complaints to the DOT and now consistently among the industry leaders in those metrics as well.

This is thanks to our entire team of 32,000 hard working fellow employees who remain focused on our customers during these difficult times and they are the reason for this improvement and our stronger performance relative to our competitors and for that we are extremely thankful.

Moving past the P&L to the cash balance, we ended the year with $2 billion in total cash, $500 million of which is restricted. This is slightly up from the 2008 unrestricted cash although very slightly but it is nearly $300 million higher in unrestricted cash. That is despite the losses. Furthermore we significantly reduced our cash requirements going forward in 2010 and 2011 by pushing back aircraft deliveries and dead amortization payments and Derek will talk more about that.

So with our cash balance where it is, our future cash obligations reduced and our earnings prospects significantly improved we believe we have fully addressed the investor concerns from earlier in the year regarding US Airways’ liquidity and we are happy to have done so.

In summary, we believe we are well positioned to take advantage of the improving economic environment. We are already producing profit margins that are better than our peers. We are maintaining our cost discipline. We are producing industry leading operations reliability and we are doing so efficiently. We have adequately addressed our near-term liquidity issues by bolstering our cash on hand and reducing our future cash outflows.

So with that I will turn it over to Derek who will give you a lot more detail on the numbers and then Scott will talk to you about what is going on in the revenue environment and we will get to your questions. Derek?

Derek Kerr

Thanks Doug. As announced in our press release earlier this morning and as Doug just alluded to we recorded a fourth quarter net loss of $79 million or $0.49 loss per diluted share versus a loss of $543 million and $4.76 per share a year ago. When you exclude special items the company’s loss for the fourth quarter was $32 million or a $0.20 loss per diluted share versus a loss of $222 million or $1.94 per share from the fourth quarter of last year.

For the full year 2009 the company recorded a net loss excluding special items of $499 million or $3.75 per share versus a net loss excluding special items of $808 million for the full year 2008. Please refer to the press release for details on these special items. For the remainder of this call I will just exclude that from the impact of the special items to more accurately reflect our performance for the quarter.

Total capacity for the quarter was 20.2 billion ASMs, down 1.8% from 2008. Our mainline capacity for the quarter was 16.7 billion ASMs, down 1.8 from a year ago and Express was also down about 2% to 3.5 billion ASMs. From a fleet standpoint we ended 2009 with 349 mainline aircraft and plan on reducing our fleet count to 339 aircraft by the end of 2010. We are going to return 14 aircraft; five 757’s, five 737’s, older aircraft and four Embraer 190’s which we announced the reduction of ten of those during 2009.

We are only adding four new aircraft. All four of those deliveries are in the first quarter. Two A330’s and two A320’s. As reported in late November we worked with Airbus to defer all but these four deliveries from 2010 and I will comment on the aircraft deferral and our completed liquidity initiatives a little bit later.

Total operating revenues for the quarter were $2.6 billion, down 4.9% from the same period in 2008. Mainline passenger revenues were $1.7 billion, down 8.7%. During the quarter other operating revenues were up 9.9% versus 2008 due to an increase in ala cart revenues that Doug alluded to earlier. For the year we realized approximately $425 million and we expect the amount to increase by about $100 million in 2010.

Cargo revenues showed significant improvement in the fourth quarter coming in flat versus 2008 for the first time this year. The improvement was due to both international and mail revenues. Mainline revenue passenger miles were 13.3 billion resulting in a load factor for the fourth quarter of 79.8%.

Versus the fourth quarter 2008 total passenger RASM was down 4.7% to $0.1144 for the same periods combined yields decreased 4.8% and our combined load factor was flat year-over-year at 78.6%. Total RASM for the fourth quarter was down only 3.1% versus 2008 due largely to the increase in ala cart revenues.

The airline’s operating expenses for the fourth quarter were $2.6 billion, down 16.8% as compared to a year ago. Our mainline operating cost per ASM excluding special items was at $0.1162, down 12% year-over-year driven by a 33.9% reduction in fuel prices.

As Doug mentioned our entire team did a tremendous job of running a great airline through an extremely difficult year. As a result of their significant efforts the company continues to make dramatic improvements in all DOT metrics. Our employees earned $3.4 million in bonuses for October and November operational performance and $12 million for the full-year 2009. Our team also did an outstanding job finding ways to keep our costs in line despite a 4.6% capacity reduction during the year. The positive cost performance was largely driven by running a much more efficient operation and we were able to reduce our full year mainline CASM X fuel by 4.3% versus 2008.

For the fourth quarter excluding special items and fuel our mainline cost per ASM was $0.0856 in the quarter, an increase of only 0.8% on a 1.8 decrease in ASMs. Express operating cost per ASM was $0.134 for the quarter which was 4.8% higher than 2008. Our mainline fuel price including taxes for the quarter was $2.04 per gallon versus $3.08 per gallon in the full year 2008. The 2008 did include $0.78 of realized hedge losses in that 2008 number. As we talked in the last call we suspended our fuel hedge program in August of 2008 and we have not added any new hedges since that time.

We ended the quarter with $2 billion of total cash and investments of which $500 million of that was restricted. The total cash does include $203 million of auction rate securities at fair market value that currently are reflected as non-current assets on our balance sheet. During the quarter we did monetize $32 million of securities, $64 million of par value for approximately the value we had on our books.

As I said earlier in late November we completed a series of transactions with key business partners to improve our near-term and future liquidity. We significantly reduced capital expenditures over the next three years, eliminated the need to access aircraft finance markets in 2010 and extended debt maturities. Together these transactions [audio break] cash balance of approximately $150 million and will generate in aggregate approximately $450 million of projected liquidity improvements by the end of 2010.

The major piece of the program included a deferral of 54 Airbus aircraft previously scheduled for delivery between 2010 and 2012 that are now scheduled to be delivered in 2013 and beyond. These deferral arrangements reduced the company’s aircraft capital expenditures over the next three years by approximately $2.5 billion. Also we agreed with [inaudible] lower the monthly unrestricted cash condition precedent for the advanced purchase of frequent flyer miles. We further agreed to defer amortization of our $200 million advanced purchase of frequent flyer miles commitment until 2012.

The focus of these liquidity initiatives was to reduce commitments over the next few years. To put this in context we ended 2009 with $2 billion in total cash. As Doug said, slightly ahead of where we started the year but in 2009 we had significantly higher aircraft and debt commitments we will now not have in 2010.

During 2009 we had approximately $200 million in net cash aircraft commitments and approximately $240 million in non-aircraft net debt principle payments. In our 2010 forecast the net aircraft cash commitment is reduced to approximately $40 million and the non-aircraft net debt principle payments reduced to approximately $175 million. This results in a $225 million reduction in cash outflows in 2010 for these two items alone versus 2009.

For guidance, looking forward in 2010 we continue to remain disciplined in our capacity. As I mentioned on our last call we plan overall capacity in 2010 to be up slightly. The domestic mainline is expected to be down approximately 1% with total international forecasted to be up approximately 9%. This increase is due to a 20% increase in Latin American flying with the resumption of Mexico service that was reduced due to H1N1, our new service to Rio De Janero announced last year and assumed new service to Sao Paolo upon approval of our previously announced DCA/La Guardia slot swap transaction with Delta.

Total mainline ASMs are projected to be approximately 71.8 billion for the total year. The ASMs break down by quarter as follows: 16.8 billion in the first quarter, 18.6 billion in the second, 18.9 billion in the third and 17.5 billion in the fourth. As for fuel we are forecasting fuel price to be higher in 2010. Based on the January 26th fuel curve we expect fuel price to be in a range of $2.16 to $2.21. Our forecast breaks down by quarter as follows; $2.11 to $2.16 in the first quarter. $2.12 to $2.17 in the second quarter. $2.19 to $2.23 in the third quarter and $2.23 to $2.28 in the fourth quarter.

In terms of CASM X fuel guidance for 2010 we intend to maintain our cost discipline. For the full year we are forecasting mainline CASM X fuel to be flat versus 2009. First quarter mainline CASM will be up between 1-3% primarily driven by higher forecasted benefit costs and revenue related expenses on commissions and credit card fees and increases in airport ramp and landing fees. The second and third quarters should be flat. The fourth quarter should be down 2.4%. Express CASM is forecasted to be up 1.3% for the entire year.

Looking at CapEx we continue to make important investment in our product and operations with a focus on customer self-serve and recovery tools. We are forecasting total cash CapEx to be $188 million in 2010. This includes non-aircraft CapEx of $150 million and net aircraft CapEx deliveries of $38 million.

In summary, 2009 was a difficult year for us and the industry but we have worked hard to improve our liquidity in the near-term, optimize our network and maintain our cost advantage in order to return the airline to profitability. We believe we are well positioned to succeed in 2010. Our IR guidance will be up on the website after the call so please refer to that.

Now I will turn it over to Scott to talk about the improvements we are seeing in our revenue environment.

Scott Kirby

Thanks Derek. I will take a minute to talk briefly about our operational results and then turn to the revenue environment.

We are extremely proud of our team who continue to do a superb job operationally and we ended 2009 with an 81% on-time performance. We also continue to see significant improvement in all of our other operational metrics such as mishandled bag ratios, complaints, etc. [You can see in the] operational results, but part of our impressive cost control is related to running better operations as Derek described.

Turning to the revenue environment during the fourth quarter total RASM was down 3% amongst the best year-over-year performance of any of the network carriers. The RASM decline was obviously much less severe in the fourth quarter than in prior quarters and is indicative of the improving economy and airline demand environment.

For some regional color, domestic total RASM continued to outperform international with domestic RASM down 2% while international was down almost 8%. This gap, however, has closed compared to prior quarters and we expect going forward that domestic and international RASM year-over-year performance will be similar in the first quarter and international will likely outperform the domestic market in 2Q and beyond.

With that I will talk about the revenue outlook going forward. I will caution you up front that year-over-year forecasts are challenging and distorted at the moment due to the severe and sudden drop off in demand we experienced at this time last year. I will try and give some facts to help you draw your own conclusions about future demand.

To start we have said publicly if the run rate revenues we saw in November and December continue throughout 2010 which means no additional improvement but also no back sliding in the economy then we expect RASM to be up close to 10%. For some context, our November/December RASM was down 1.5% compared to November/December 2007, two years ago.

If 2010 just continues that trend and runs down 1.5% compared to 2008 then our year-over-year RASM this year will be up over 12%. This is just an indication of how the impact of the poor revenue environment in 2010 leads to easy comps which leads to large year-over-year RASM gains even without further improvement in the economy. These year-over-year comps get sequentially easier every month all the way into the summer as we overlap last year’s decline. So we expect year-over-year RASM to get sequentially better every month for the first half of the year.

In last year’s first quarter for example, RASM declined 3% in January, 10% in February and 18% in March. So of course we expect the year-over-year comps for February and March to be meaningfully better than January. We also continue to see improving corporate demand and thus far in January our corporate booked revenue is up 22% year-over-year. Similarly the pricing environment is much stronger than last year with far fewer and less aggressively sale and junk fares. As a result our booked yield so far in January is up 7% year-over-year.

Turning to the specific forecasts we expect January RASM to be up about 1%. As I mentioned earlier, with easier comps we expect February RASM to be up several points more than January and March to be several points better than February on a year-over-year basis. At the moment February is booked about 2.5 points behind on yield factor but the booked yield is over [6%] ahead of where it was at this time last year and that number continues to improve.

We can’t be certain of course but we expect to close much, if not all, of the load factor gap with close in bookings and also expect the yield to continue to further improve on a year-over-year basis. In March we are actually booked slightly ahead year-over-year with the [inaudible] currently 7 points better than February was at the same point in time. Consistent with our view that RASM will continue to show larger year-over-year improvement throughout the quarter.

In summary, the employees of US Airways continue to run a truly fantastic operation and while the industry isn’t out of the woods yet we continue to be encouraged by the improving demand environment.

With that operator I think we are ready for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jamie Baker – JPMorgan.

Jamie Baker – JPMorgan

A common question this season, I asked it of Air Tran and it just came up on the Alaska call, US Airways charges for bags. Southwest doesn’t charge for bags. Your domestic RASM, you just gave us the guidance and it is up slightly. Southwest’s RASM is up significantly. I know there is meaningful revenue coming in the door from fees but how do you measure and how certain are you that you are capturing the share that might be going out the door?

Scott Kirby

First, I would say Southwest’s results are very impressive and they are doing a good job. I think there is a lot more to the Southwest results than just bags, capacity being the biggest one. I would also point out that Southwest has not only reduced capacity but their pricing is much more aggressive meaning they are not running as many fare sales as they have and they have cleaned up their pricing environment significantly which I think is leading to improvement at Southwest.

I think one of the biggest and most underappreciated elements at Southwest is their relative capacity particularly when you look on a year-over-year basis. In this year’s fourth quarter for example Southwest capacity was down something close to 8%. Compared to the industry down about 2%. So they had a six point capacity advantage. But if you compare it to where they were last year in last year’s fourth quarter Southwest’s was actually still growing while the industry was down 11%. So last year they had a 12 point disadvantage in terms of capacity relative to the industry and this year they have a 6 point advantage. So there is an 18 point capacity swing which should lead on a year-over-year basis to dramatically larger outperformance on RASM just based on capacity.

Whether that explains all of their outperformance or not or over 100% I can’t be certain but I think [audio break] dynamic to look at the relative performance and make any kind conclusions about something like bag fees. Now that said we do look at our own data and as you said we can’t see a measurable or meaningful share shift away from us to Southwest. But, I think that we may be at a point where we are at an industry level at a state of equilibrium where Southwest is getting some market share shift from all of the other five big carriers and the smaller ones like Air Tran that are also matching.

It isn’t measurable or meaningful to us but when you add it all together it is meaningful to them. So Southwest is 17% of the domestic market, if we each are giving up a small portion of share, say 1%, that would cost us $100 million but Southwest would be earning six times as much. So Southwest would see six times the benefit we see. So we are generating $500 million in bag fees and I am certain the largest share shift is something less than $500 million, though when you multiply it by six it is probably a big enough number for Southwest that Southwest is seeing something close to what they would get if they did an excess bag fee.

Long answer, I know. One, I think you have to look though at capacity as probably the biggest explanatory factor in Southwest outperforming. Second, recognize that Southwest is going to see a larger positive benefit than the rest of us see a negative benefit and that very well may be a stable equilibrium that maximizes revenue across the entire industry.

Jamie Baker – JPMorgan

If you achieve a common pilot contract this year, what sort of CASM increase does that potentially imply and should we even be thinking about this as a potential 2010 event?

Derek Kerr

I hope so. As you know our pilot issue is largely a seniority integration issue and it is still the subject of litigation. So absent that there is not going to be any contract. Assuming we can get that resolved we certainly would like to get to a contract. It is given we haven’t had negotiations that have gotten anywhere near economics that we can give you any indication of where we end up. All I can tell you is what we put on the table several years ago which was I think a $120 million increase which would be about one point to our total cost per ASM, CASM X fuel.

So that is a number we put on the table long ago. That would take the US Airways pilots up to the America West pilots plus about 3% from where the America West guys were with an 18% increase for the US Airways pilots. So that certainly seemed reasonable to us at the time but it has gone nowhere of course because there are no real negotiations going on because our pilots continue to sort out their seniority integration issues.

Operator

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

Mike Linenberg – Bank of America

First, going back to your point about how you currently don’t have any hedges in place and I want to know if philosophically is that the view going forward or is the fact when you decided not to hedge back in August if you think about where your cash position was at the time and where the oil was at the time and the fact the curve I think was still pretty steep, there was a lot of contango. Those have all now changed. The flatter curve, volatility has come down a bit and you are in a better cash position. Would you reconsider that or is the game plan going forward to basically price to fuel?

Derek Kerr

The game plan going forward is to continue to look at it. I think your observations are why we stopped at the point when we stopped. We have been looking at it and we meet regularly on it. At this point in time we haven’t put any in place. We are going to continue to look at it. I think the contango is down. We have looked it. An example is to put something in place today is still expensive. For us if we were to put in place today and lock in 100% of our fuel today at the prices we are at today it costs us over $200 million to do that. Analyst expectations that are out there today and they may change over time but are about a profit for us of $100 million. So if we did that and locked it in place we would wipe away every bit of positive earnings that is expected for us out there.

Even with that we are continuing to look at it. We are looking at what other airlines are doing and we are tracking that. There is no philosophy we are never going to do it again it is just at this time we are being cautious and watching it.

Doug Parker

I will add on to what Derek said because we all have our own views on this, but I think we are all consistent but my own personal observations are I don’t think it makes sense. I think we all learned hopefully there is a natural hedge in place, or at least there has been the last couple of years now, that if in fact oil goes down dramatically it is probably because the economy got worse which means our revenues are down and you increase the risk to the firm, not decrease it through hedging. By oil prices falling, you are locked into a higher price. Now you pay in advance because you now have to post collateral against the derivative. That is a scenario we will make certain we avoid. Like I say, that is not reducing the volatility of the company. It is increasing it and in some cases increasing it dramatically.

Trying to do things like trying to lock in where we are now, I don’t think there is any probability you would see us do that certainly in the near-term. What might make sense and what we are seeing some others do is go buy insurance against disaster or go buy way out on money calls for example. We looked at that and we will continue to look at that as Derek said. The problem is it is still expensive. So we look at it and say the insurance we are buying is far more expensive than it should be or certainly for what we are insuring against so we choose not to. We will of course look at what the competitors do. Unfortunately that does have some bearing on what we decide to do because you don’t want to get yourself in a position where in a disaster you are not covered and others are. All I am getting at is don’t view us as being costly. It is not.

We have to do what’s best for our shareholders. A lot of that is managing risk. A lot of that is also not spending money on things that don’t help the risk.

Mike Linenberg – Bank of America

With the Tokyo Haneda route proceedings kicking off in the next week or so, is that something you would be interested in or is that just better suited for your star alliance partners?

Scott Kirby

We have great star partners in Asia to start with. At the moment our Tokyo plans are more focused on serving Narita which we will have already acquired a slot as soon as we hopefully get regulatory approval for our transaction with Delta for the DC/La Guardia slot swap which also of course includes a slot for us in Tokyo and the ability to serve Sao Paolo.

Operator

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

Gary Chase – Barclays Capital

I wonder if you could elaborate a bit on the cost guidance for the year which sounds quite good to me? What is moving around? How should we think you are going to be able to manage the cost there in a flat capacity environment?

Derek Kerr

What is moving around. The cost pressure on the side as others have talked about are just revenue related selling expenses. Benefits are up a little bit year-over-year but where we have been able to get cost reductions are on the salary side. We have continued to get more efficient from a headcount and salary standpoint. Our aircraft rents are reducing year-over-year because we are getting out of aircraft and reducing rents because as part of pushing off all of the aircraft deliveries we had to renegotiate aircraft rents on planes that we were going to let go. So there is a reduction there.

Our maintenance year-over-year is about a point better so we have had a reduction on the maintenance side. Then we believe in the back half of the year to have some significant savings in airport rents and things and due to the announced transaction of the La Guardia DCA to get out of a lot of the facilities in the La Guardia situation and not need a lot of facilities at DCA when we move into DCA. So all of those provide us a benefit to drive our costs flat year-over-year.

Doug Parker

A lot of this is productivity enhancements. Robert Isom, our COO is here. He is driving through a lot. Robert if you could just talk about a few of the things we are doing to give people comfort we will deal with this.

Robert Isom

For example, mishandled baggage expense is 40% better year-over-year and facilitated by a sizeable investment in scanning technology and there is more to come on that. $20 million reduction in reservations related expense due to better utilization of agents through Intelligent call management systems and there are many more enhancements on the way there. As Derek mentioned, in terms of maintenance we have implemented several comprehensive risk reducing cost and maintenance agreements with some of our largest engine and component suppliers that have basically kept costs flat or have reduced them. Those are locked in. Those are just a few things.

The overall running of the airline better and on-time operation our passenger inconvenience expense is way down year-over-year. The tighter schedule has led to a lot less expense in terms of pilots, flight attendants and our ground workers to much utilization. Those are a handful.

Doug Parker

All of this stuff is in. None of that requires more investment or vetting on the comments what you are seeing now is just the run rate for the year.

Gary Chase – Barclays Capital

On the salaries, that was something I wanted to ask specifically in the quarter. The fourth quarter wage number was quite a bit lower than I would have guessed and it looks like it was pretty abruptly off from the third. Is that the stuff you are referring to? What drove it to happen all at once like that?

Derek Kerr

Third quarter over fourth quarter was a lot of salary reductions. A lot of the stuff Robert said. Capacity was different quarter-over-quarter. We have put into effect and announced some furloughs in the airports. So that has happened and we have done that through October/November and December in the fourth quarter. So our salaries were down year-over-year by a fair amount and quarter-over-quarter by a fair amount from those things we did.

Doug Parker

All of that of course is productivity. Salaries are either flat or up in the airlines. So it is all tied to the stuff we are talking about.

Gary Chase – Barclays Capital

Is there any snap back in that maintenance contract you were talking about? In other words, you said the maintenance costs went down and you were able to negotiate some contractual changes. Is there any…

Scott Kirby

There was no snap back in that. That wasn’t part of the liquidity program. That was just renegotiated.

Operator

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

Dan McKenzie – Next Generation Equity Research

First off a housekeeping question. Given the Mesa filing, I am wondering how that relationship changes or not for US Airways. Are there cost improvements that potentially could be passed on that is not factored in the guidance or potentially further capacity cuts or capacity could be rationalized?

Derek Kerr

Just because Mesa filed that doesn’t give us automatically any new rights to cancel, lower the cost or reduce capacity. But it does create opportunity and we are working with Mesa to see what those opportunities are and see if we can find something that is mutually beneficial to the state and to us. At the moment our contract goes out through December of 2012. It is for 38 CRJ 900’s, ten CRJ 200’s, which are the 50 seaters so we can reduce those by two per year and six Dash 8 aircraft. Worst case, nothing changes for us. But it certainly creates potentially opportunity for us with regard to either capacity and/or costs.

Dan McKenzie – Next Generation Equity Research

Given the 10-12% RASM commentary, one wrinkle in 2010 of course for US Airways is the slot swap with Delta. How should investors think about the revenue magnitude of that? I know you have quantified the total profit improvement I believe at $75 million previously but I believe that was costs and revenues combined. I am wondering from your perspective is the potential change material to your material revenue outlook or is the benefit more on the cost side?

Scott Kirby

It comes on both sides. Really I think the better way to think about it is the $75 million profit outlook. That is largely because it also causes change to the gauge of aircraft. For example, our average gauge of aircraft will go up. We are flying a lot of turbo props in La Guardia which are high CASM and high RASM just because they are small airplanes. Those will get replaced by larger airplanes and it will be lower CASM and lower RASM. So I think it is hard to think about it in terms of RASM and CASM the way you traditionally do just because there is so much changing with the gauge of the airplanes. As Derek talked about our costs will be going down meaningfully because the facilities in La Guardia are amongst the most expensive just given where that real estate is and we don’t need as many new facilities in DCA to accommodate the additional slots. So we will have big cost savings there but in terms of cost per ASM it gets overwhelmed by the gauge changes.

Doug Parker

I would add that given that we haven’t had approval yet it will be awhile. So when we actually have this up and running it will transition in so it is looking to me that $75 million isn’t going to be much in 2010 if at all because we have to transition into it. So it is not really in our guidance in terms of that being up and approved. It is $75 million when it is at a full run rate but you shouldn’t build that out and we haven’t put it into our guidance.

Dan McKenzie – Next Generation Equity Research

Given your views on industry consolidation and media reports on US Airways attempts historically on larger mergers, I wonder if instead it makes sense to look downstream at a smaller carrier to get at perhaps a larger, more rational network?

Doug Parker

I can’t speculate about individual carriers. When we talk about consolidation we are very careful to talk about the value created by consolidation doesn’t necessarily have to involve US Airways. It is an industry that is too fragmented. This isn’t a US Airways specific issue and us picking up some smaller airline wouldn’t fix that issue. What needs to happen for this industry to get well is for us to have less fragmentation. For there not to be five different hub and spoke airlines with who knows how many hubs across the United States and that results in all of us fighting for the same connecting passengers over numerous hubs that results in less adequate returns to our investors and to everyone. Our employees and all.

The problem isn’t that US Airways needs to do a merger. To the contrary, as we just showed in these results we are doing as well as anybody. The problem is the industry is doing poorly and the industry does poorly because there is too much fragmentation. Reducing that will create some real value. If it is to us that’s great. If it is to somebody else that is great. We were quite happy to see the Delta/Northwest merger because that is good for reducing fragmentation. That is what we said about consolidation.

Operator

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

Helane Becker - Jesup & Lamont

When I look at your costs what percent of your cost cutting has occurred over the last year ago that I can consider permanent reductions versus coming back with traffic coming back?

Doug Parker

With what to be back?

Helane Becker - Jesup & Lamont

There are traffic related costs that will go up with the traffic coming back, right?

Doug Parker

Right.

Helane Becker - Jesup & Lamont

So what percent of the total expenses of the $10 billion or whatever in expenses should I think about as permanent cost reductions?

Doug Parker

To be clear the guidance Derek gave assumes in 2010 traffic coming back.

Helane Becker - Jesup & Lamont

But that ties into my other question which is your revenues are down about $2 billion on a year-over-year basis. You acquired US Airways presumably for their east coast operation and the revenue they provide, etc. What kind of an economic environment do you have to have now that you have completely changed the route structure in order to get back that $2 billion?

Scott Kirby

I don’t think our explicit goal is to get back that $2 billion. Our explicit goal is to run a profitable airline. The world has changed in the last 4-5 years. Something that might have worked for us that worked in 2005 don’t work today. Places like Las Vegas when oil was $50 a barrel spring to mind as an example of something that worked. Pittsburgh is a different competitive environment, a different economic environment and worked or at least worked marginally in 2005 and it doesn’t today. We don’t have a market share goal or a goal to get back an explicit amount of revenue. We do have a goal to be profitable and as Doug said to amongst the best or the best among the network carriers in terms of margin.

You can see from our results for 2009 we are well on our way to that. If what we think is going to happen with the revenue outlook in 2010 actually comes to pass we should be there.

Operator

The next question comes from the line of Kevin Crissey – UBS.

Kevin Crissey – UBS

Can you talk about what percentage of your ticket sales come with a hotel booking or maybe it is ticket sales through your website that come with a hotel booking. I am not sure how you want to look at that because it seems to be a pretty high margin business that would justify investments and I rarely hear from the larger carriers talk about the investment in that business.

Derek Kerr

You have stumped me on an exact answer for that one. I don’t know it. It is a business that we have invested in historically and amongst the network carriers we probably have the largest percentage and have made the most investments. That was largely an artifact of our Las Vegas presence and America West Vacations which I think for awhile was the second largest seller of hotel rooms in Las Vegas. We still sell a lot of hotel rooms in Las Vegas directly and we work with partners who sell hotels in other destinations.

But places like Las Vegas are far and away where you have the most opportunity. If you have a route network that has a high percentage of your flights to and from Las Vegas, an airline like Allegiant, you are going to have a high ability and propensity to sell hotel rooms. It is a lot [different] selling to other places. We do offer them on our website but in places like New York or business destinations customers tend not to get their hotels through the airline website. I don’t know the exact percentage. It is still pretty high in Las Vegas is a low single digit percentage of our capacity so overall it is fairly low.

Operator

The next question comes from the line of William Greene – Morgan Stanley.

William Greene – Morgan Stanley

If we come back to Jamie’s question on some of the Southwest issues, do you have a sense for what your RASM would look like in markets where you don’t compete with Southwest and how that compares to the markets where you do?

Derek Kerr

In the fourth quarter at least our markets where Southwest is flown are slightly better than our non-Southwest markets.

William Greene – Morgan Stanley

Interesting. On the liquidity points and on the hedging stuff I understand your point about insurance is expensive. Of course if fuel went to $100 tomorrow having that catastrophic insurance would be pretty good. So I guess I sort of struggle with looking at your liquidity where it is and saying it is tough to take a shock with that liquidity. So maybe is the answer we need to raise more liquidity to be able to afford some of this insurance which kind of reduces the overall risk of the enterprise?

Doug Parker

It is not an issue of affording. We have enough cash to do it. I hear you. That is exactly what we are wrestling with. But I will also tell you given the volatility the last couple of years in fuel, going and buying calls at $100 a barrel is more expensive than the insurance it feels like you are getting. This is a debatable point and I understand where you are coming from and we can all certainly come to that conclusion. But I can also tell you it is quite easy to come to the conclusion that all you are doing is throwing away money and that you are never going to be getting the value from. It is not a small amount. I don’t know the exact number at this point but to hedge all of our exposure to $100 a barrel a few weeks ago was around $50 million. Certainly if it goes to $120 we are going to wish we spent the $50 million. You are right. But $50 million is $50 million. That is what we get paid to do. We will come to that conclusion. We always disclose where we are. Right now we have chosen not to make that investment because it doesn’t seem like a prudent use of our shareholder money. Point well taken.

William Greene – Morgan Stanley

On M&A, I just want to think about one of the things you have said in the past which is the Chapter 11 process often affords carriers some opportunities to pursue M&A in a way that might be more successful than when you are not. As we are coming out of this recovery I think maybe it is safe to say you won’t see any major Chapter 11’s at least near-term. If that is true does that mean the environment for M&A is less compelling?

Doug Parker

Well, again Chapter 11 did some things that made it easier certainly for us at US Airways because you can properly size the airline. As airlines are coming out sometimes it is easier for management to use that to get it done. So yes it makes it easier. It is not a requirement, however. So I wouldn’t take the full leap that where we are headed now is to an environment where it is less likely to happen. I have long held what I said earlier which is this is the right thing to happen in our industry. We are not the only ones saying that by the way. Everyone seems to agree upon that.

Management should work to get done with the right things as opposed to arguing that it is too hard or the conditions aren’t quite right. So where the environment is does indeed make a difference. In our view it shouldn’t. What management should do is not just be comfortable because now we are doing better than we were but we should all work to do as well as we possibly can. That is what we are supposed to do. I think there are more that think that way. I hope that is the case and I hope it won’t require a crisis to get consolidation to happen. It requires resolve.

Operator

The next question comes from the line of Bob McAdoo – Avondale Partners.

Bob McAdoo – Avondale Partners

Let me just circle back on the La Guardia, Washington National thing again. Remind me how many additional flights or departures a day would there be at DCA?

Derek Kerr

42.

Bob McAdoo – Avondale Partners

I know there is no way of knowing what the government is going to do but if you had to guess is this something that would be approved in the next 60-90 days or is this something you think they are going to mess around with for half a year? What is your thought on that?

Derek Kerr

My thought is that it started in August. I thought it would have been approved long ago. We don’t know. We are hopeful to hear soon.

Bob McAdoo – Avondale Partners

Once they give it the transition is what a 4-5 month kind of deal?

Derek Kerr

Once we get approval we could probably close within a week and depending on the time of year on when we want to move, we plan to do it in two phases. The first and largest phase could take place in as short a timeframe as 60 days. We are hopeful, as is Delta, that we can have effective that first transition by the beginning of the summer.

Operator

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

Mary Schlangenstein – Bloomberg News

Can you go back over the capacity numbers for the year? I had you back in October saying domestic was going to be down 2-3% and you didn’t give an international number. I am not sure if that domestic was consolidated or mainline but if you could go over those. On the international could you give a geographic breakdown of where you are going to put that capacity?

Derek Kerr

I think the total capacity overall including domestic mainline and international is up just slightly. Basically flat. Domestic mainline is down approximately 1%. So it will be down just domestically 1%. International is up 9% and it is all right in Latin America. We assume Latin America is South America and Latin America flying. So we are adding back service to Mexico destinations and others we pulled out of because of H1N1. We are adding the new service to Rio which has started and we are assuming new service to Sao Paolo which is part of our DCA/La Guardia transaction. That wouldn’t start until later in the year but it is built into our numbers in the back half of the year. That is almost the total increase on the international side of about 9%.

Operator

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

Ted Reed – TheStreet.com

The other calls they are talking about increased improvement in international. International outperforming domestic. So as we recover in the economy, how are you going to have better performance when you have less international?

Derek Kerr

I am not sure I understand the question. We are going to have 9% more international and what we said in the call was we expect in the first quarter international RASM to be up similar to domestic and the second quarter and beyond we expect it to be up more. If you want to look at total revenue, given international capacity is up 9% that means international revenues will be growing faster than domestic revenues.

Ted Reed – TheStreet.com

So relative to your competitors, is that also a benefit even though you have less overall international?

Derek Kerr

I think like our competitors we are seeing the same thing. We expect international revenues to grow faster than domestic revenues.

Ted Reed – TheStreet.com

With all the new additions what percentage of your capacity will now be international?

Derek Kerr

We will get back to you with that.

Operator

That does conclude our question and answer session for today. I would like to turn the conference back over to Doug Parker.

Doug Parker

Thanks. We are concluded. Thanks all for listening in. As always, any investor questions contact Dan Cravens and the media questions contact Jim Olson at Corporate Communications. Thank you very much.

Operator

That does conclude today’s conference. We appreciate your participation.

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Source: US Airways Group, Inc. Q4 2009 Earnings Call Transcript
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