US Airways Group Inc. Q1 2010 Earnings Call Transcript

Apr.27.10 | About: American Airlines (AAL)

US Airways Group Inc. (LCC) Q1 2010 Earnings Call April 27, 2010 12:00 PM ET


Doug Parker - Chairman & Chief Executive Officer

Scott Kirby - President

Robert Isom - Chief Operating Officer

Derek Kerr - Chief Financial Officer

Steve Johnson - Executive Vice President of Corporate

C.A. Howlett - Senior Vice President of Public Affairs

Elise Eberwein - Executive Vice President of People and Communications

Dan Cravens - Director of Investor Relations


Jamie Baker - JP Morgan

Bill Greene - Morgan Stanley

Helane Becker - Jesup & Lamont

[Bill Mascaras - Broadpoint Gleacher]

Dan McKenzie - Hudson Securities

Gary Chase - Barclays Capital

Josh Freed - The Associated Press

Mary Schlangenstein - Bloomberg News

Don Gilbert - Arizona Republic


Good day and welcome to the US Airways, first quarter 2010 earnings conference call. This call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Dan Cravens, Director of Investor Relations; please go ahead sir.

Dan Cravens

Thanks Elizabeth and hello and thank you for joining us today for our first quarter 2010 earnings conference call. With us in the room today is Doug Parker, our Chairman and CEO; Scott Kirby, President; Robert Isom, Chief Operating Officer; Derek Kerr, CFO; Steve Johnson, our EVP of Corporate; C.A. Howlett, our Senior Vice President of Public Affairs; and Elise Eberwein, our EVP 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 first quarter financial results. Derek will then walk us through the details on the quarter, including our cost structure and liquidity. Scott will then follow with 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.

But 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 these risks and uncertainties can be found in our earnings press release issued this morning, our Form 10-Q for the quarter ended March 31, 2010, and our 2009 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 those numbers to the GAAP financial measures is included in the earnings release, and that can also be found on our website at under the company information and investor relations section.

A webcast of this call is also available on our website and will be archived for approximately 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’ll turn the call over to Doug, and thanks again for joining us.

Doug Parker

Thanks Dan, and thanks everybody for being on. We reported our first quarter net loss this morning, excluding special items of $89 million. That’s nearly $200 million better than the $260 million loss we had in the first quarter of ’09.

That improvement would have been even greater if not for the extreme winter storms that hit the east coast this quarter, that resulted in more smaller foreclosings and many canceled projects, but our fellow employees did an amazing job of managing through that and taking care of our customers, and we are extremely grateful for their hard work.

We are extremely pleased with the improvement that we have seen in our performance, and also the levels of performance of our peers. It’s clearly evidenced that all the steps we’ve taken to return US Airways to profitability are working.

The steps include; focusing our flying on areas of competitive strength, increasing earnings through our revenue generation, flying with industry leading operating liability, and keeping our costs in check. You combine those steps with a much improved industry revenue environment, and it results in the kind of improvement we reported today, and provides us with significant momentum going forward.

We anticipate our second quarter results will also show dramatic improvement versus last year, and also anticipate it will be a profitable quarter, which will be our first profit excluding special items since the third quarter of 2007. So we are very pleased with our progress and the momentum we have going forward.

With that, I will turn it over to Derek and Scott to give you more detail.

Derek Kerr

Thanks Doug. We did file our first quarter 10-Q this morning, and as Doug said, in that Q we reported a net loss of $45 million or a loss of $0.28 per diluted share. This compares to a net loss of $103 million or $0.90 per diluted share a year ago. When you exclude net special items, the company’s net loss for the first quarter was $89 million or a loss of $0.55 per diluted share, versus a net loss of $260 million or $2.28 per share in the first quarter last year.

During the first quarter the company did recognize special items totaling a credit of $44 million. These special items included $49 million of net realized gains related to the sale of certain investments and auction rate securities, which I’ll talk about a little bit later. Offset in part by $5 million in aircraft costs as a result of the company’s previously announced capacity reductions.

For the quarter, total capacity main line and express was 19.9 billion ASMs, down 2.8% from 2009. This is lower than our original guidance due to weather related cancellations in February, driving completion factor down to 96.3% for the quarter. Our mainline capacity for the quarter was 16.6 billion ASMs, down 2.4% from a year ago, expressed capacity was down 5.1% from 2009.

We ended the quarter with 347 mainline aircraft to our fleet, and plan to reduce our fleet to 339 aircraft by the end of 2010. We continue to remove older 737 and 757 aircrafts. In the first quarter we returned four 757 aircraft and for remainder of 2010 we planned to retire six more aircrafts, one 757, and five 737, and reduce our Embraer 190 fleet by two aircrafts, down to the 15 as we have previously announced.

Also in the quarter we took delivery of two A320 and two A330 aircrafts, and we have no more new aircraft deliveries in 2010. Mainline ASMs are projected to be $71.5 billion this year, which is up about 1% versus 2009. Domestic mainline is still expected to be down 1% to 2%, while international was up approximately 8% to 9%.

As we said on our last call, the international increase is due a 20% increase in Latin American flying, with a resumption of Mexico service that was reduced due to H1N1 in 2009, our new service to Rio De Janero and assume new services to Sao Paolo upon approval of our previously announced DCA/La Guardia slot swap transaction with Delta.

ASMs breakdown by quarter is as follows: $18.5 billion in the second, $19.1 billion in the third, and $17.4 billion in the fourth. Total operating revenues for the quarter were $2.6 billion, up 7.9% from the same period in 2009. This is despite a negative $30 million impact to revenue during February, as a result of the severe winter storms on the east coast.

Mainline passenger revenues were $1.7 billion, up 5.4% during the quarter. Other operating revenues were up $50 million or 18% versus 2009 due to an increase in ancillary revenues. Cargo revenues continue to show significant improvement in the first quarter coming in at $33 million, an increase of 37% versus last year, driven by higher international cargo revenues.

Total passenger RASM increased 9.5% in 2010 versus first quarter 2009, with mainline up 8% and express up 14.9%. The same period combined yields increased 8.9%, and our combined load factor was 77.2%, an increase of half a point versus 2009. Total RASM in the first quarter was up 11.1%, due largely to the increase in ala cart revenues and cargo revenues.

On the expense side, the airline’s operating expenses in the first quarter were $2.7 billion, up 7.3%. Mainline cost per ASM was $12.13, up 9.8% period over period and a 2.4% decrease in mainline capacity, due to an approximately 40% increase in fuel expense.

As Doug said, our employees successfully got our operations back on track quickly after the February storms, and continued to do an excellent job of controlling costs associated with our capacity reductions. Even with the 2.4% reduction in mainline ASMs during the quarter, we were able to keep our costs in line.

Excluding special items in fuel, our mainline cost per ASM was $8.88 in the quarter, an increase of 2.9% versus 2009. The increase was due to higher benefit costs, higher revenue related expenses, increase in international expenses due to growth, and lower capacity as our completion factor is down resulting from the winter storms in February. Express operating costs per ASM was $14.62 for the quarter, up 4.9% versus 2009.

Our average mainline fuel price including taxes for the first quarter was $2.17 per gallon, versus a $1.47 in the first quarter of 2009; it’s a 47% increase year-over-year. We continue to monitor opportunities to hedge our exposure to fuel costs, however given the continued volatility of fuel prices we haven’t entered into any new hedge positions.

For the full year we are forecasting fuel price in the range of $2.38 to $2.42, based on the April 5th forward curve, which is pretty close where it is today. Our forecast break down by quarter is as follows; $2.35 to $2.40 in the second quarter, $2.46 to $2.51 in the third quarter, and $2.52 to $2.57 in the fourth quarter.

We’ve maintained our unit cost guidance on CASM, ex-fuel guidance for the remainder of 2010 as mainline CASM ex-fuel flat versus 2009 breaks down by quarters. The second and third quarter should be flat plus or minus 1%, fourth quarter down 1% to 3%, express CASM is forecast to be up 2% to 4% in 2010.

On the balance sheet, we ended the quarter with $2 billion of total cash and investments, of which $1.6 billion was unrestricted. Our total unrestricted cash balance increased by $100 million from the end of the year. Total unrestricted cash does include $70 million auction rate securities, that’s from a fair market value that’s currently reflected as non-current assets on our balance sheet.

During the first quarter the company monetized auction rate securities with a book value of approximately $131 million, for an amount of approximately the value of what we had on the books. Subsequently in April, the company monetized an additional $11 million. After the April transaction the company currently holds approximately $59 million in auction rate securities at book value. We continue to look at other opportunities to reduce our exposure to these financial instruments.

During the quarter we generated $199 million of cash flow from operations. Net cash used in financing activities was $58 million for the first three months of 2010. This includes the payment to distinguish debt on our hanger and training center facilities in Phoenix.

Looking at CapEx, we continue to make investments in our operations and our product, with a focus on customer service, self-service and recovery tools. Our first quarter non-aircraft CapEx was $13 million. We forecast the total net CapEx to be $230 million in 2010. This includes non-aircraft CapEx of $150, and net aircraft CapEx which includes A321, A330 deliveries and pre-delivery deposits of $80 million.

So in summary, our rate improvement continues to outpace the industry, and on absolute basis our pre-tax margins now are among the best of the major network carriers. We have worked hard to improve our liquidity, optimize our network, and maintain our cost advantage. With a revenue environment continuing to look strong, we look forward to returning to profitability in the second quarter.

With that, I will turn it over to Scott.

Scott Kibry

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 run its core operations as both Doug and Derek mentioned under some very difficult circumstances in the first quarter. Not only did we have the worst winter weather in our history. We followed that by starting the second quarter with the volcano shutting down European operations.

Despite the challenges, the employees of US Airways continue to produce outstanding results in all of our operational metrics, including quality performance, mishandled bag ratios and complaints.

Turning to the revenue environment; during the first quarter our total RASM increased to 11%, amongst the best year-over-year performance of any of the network carriers, and it’s nice to be back in a positive year-over-year RASM environment. Of course the year-over-year RASM growth is largely due to the dramatic drop off that the industry experienced last year. Compared to 2008 our first quarter RASM we’re still down 3%, but we are getting close to our peak rather than production levels.

For some regional color; international RASM, particularly transatlantic began to outperform domestic. Transatlantic RASM was up 19%, domestic was up 10%, and Latin Caribbean was up 5%. We expect that international, particularly transatlantic international outperformed to accelerate in the second and third quarter.

The quarter’s improvement was driven largely by improving business demand. During the quarter our book-to-corporate revenue was up 35%, though remarkably it’s still down 6% compared to 2008. The pricing environment was also much improved during the first quarter, and our booked yields were up 16% year-over-year. Though similar to the corporate revenue story, book yields were still down slightly compared to 2008. With that, I’ll talk about the revenue outlook going forward.

While the RASM outlook going forward is very impressive on a year-over-year basis, its largely a function of the easier comps created by the dramatic drop off in revenue that we experienced in 2009.

We will continue to see a strong year-over-year pricing environment, and improving corporate demand, with booked corporate up 45% year-over-year thus far in April, and overall booked yield up 20% thus far in April. Both are still slightly below 2008 levels, however though we are getting close to the 2008 levels of both yield and business demands.

For some specific forecast, our year-over-year comps get sequentially easier every month during the second quarter. By a wide margin April is the most difficult comp in the quarter for US Airways, with a relatively strong April 2009 compared to other months last year for the industry, out performance at US Airways in April 2009 versus the industry and the Easter Holiday shift this year. Consequently we expect to see April past year RASM up about 13% year-over-year, expect May to be up high teens, and June to be up over 20%.

So in summary, the employees of US Airways continue to run a truly fantastic operation, and we continue to be encouraged with the improving revenue environment. We see dramatic improvement on a year-over-year basis, and are getting close to returning to 2008 revenue production levels.

With that, I’ll turn it back to Doug for a few more remarks.

Doug Parker

Thanks Derek, thanks Scott. Before we get to questions I do want to comment on an issue that I know a lot of you want to discuss, and that’s consolidation. We put out a press release last week announcing we discontinued talks with United about a potential merger, and we are not going to be able to say anything different about that transaction on this call than we said last week.

To reiterate what we said last week, we believe consolidation is good for our industry. It reduces fragmentation and creates efficiencies that allow the industry to better withstand economic downturns. That’s good for all airlines, whether we all participate in the consolidation or not.

As it relates to US Airways, all things equal, we would prefer to participate in consolidation rather than not. We have been very open about that point and aggressive in our actions. That does not however mean we need to participate.

To the contrary as evidenced by today’s results, we have a very strong standalone airline that’s performing as well and better than our peer hub-and-spoke airlines of every measure; operating reliability, cost control, financial momentum, absolute financial performance, etc. Consolidation among our competitors will always serve to strengthen our standalone airline, so we are supportive of any such potential consolidation.

One final point I would like to make is, what a great job our team has done in prompting consolidation in our industry for the benefit of our shareholders. We started talking about the need for industry consolidation over five years ago, when American West was the seventh largest and by far the smallest hub-and-spoke carrier in an overly fragmented field. We merged American West and US Airways in 2005 to reduce that field of six.

In 2007 we made an aggressive offer for Delta, which they rejected but which ultimately lead to the merger of Delta and Northwest, reducing the field to five, and now it appears our talks with the United may have helped motivate Continental to finally agree to merge with United. Now if that happens, we’ll be down to four large hub-and-spoke carriers. Even with those mergers our industry is still an overly fragmented group; however, it’s a lot better than it was five years ago, and as a result our industry will be more stable.

So I couldn’t be more proud of our team and the actions they have taken on behalf of our shareholders. I think we have done our jobs very well and have made a difference, both in transforming our standalone airline, and its helping to influence the industry in a way that has positive outcomes for our shareholders, our customers and employees. We still have a lot of work to do though, and you can count on the US Airways team to continue to aggressively manage our airline.

I want to take this opportunity to acknowledge and thank the great team we have here, which I am certain is the best in our business. We are all looking forward to continue to shape things up together as we move forward.

With that, we are happy to take questions Elizabeth.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Jamie Baker - JP Morgan.

Jamie Baker - JP Morgan

I wasn’t going to bring up the topic, but since Doug already did -- well it’s a follow-on to the point that you were making, and obviously you have been more involved in than other managements over the years, but I am curious whether you believe, and this is in the event of a United Continental transaction, that any further consolidation would still be required, or whether simply shutting the Northwest brand and potentially the Continental brand, we think we finally reached the suite spot for the industry for lack of a better term.

Doug Parker

Yes Jamie, again we barely consistently said that we think the industry is too fragmented. I just said again that even with these mergers I think we are still overly fragmented, so I don’t believe we’ve got to the suite spot yet.

Jamie Baker - JP Morgan

Okay, and as a follow-up to that, just as it relates to I guess mergers and alliances, is there any level of stepped up coordination you could pursue with United as part of the Star relationship or has that relationship basically been taken as far as it can possibly go.

Doug Parker

Well, there certainly is potential for greater cooperation with both United and Continental. United and Continental for example have a deeper relationship than we currently have with either one of those, so we can move along the number of paths to get there, even going so far as to being in the ATI.

I don’t expect anything like that to happen eminently and certainly with what’s going on with their merger or potential merger, that will make it more complex, but there are opportunities to do more. I just don’t know when we’ll be able to realize those opportunities.


Your next question comes from Bill Greene - Morgan Stanley.

Bill Greene - Morgan Stanley

Just one quick follow-up on the alliance commentary. Continental left the Sky Team when Delta Northwest merged, because they felt I guess they were somewhat marginalized in that alliance. Is it not a similar situation with you here? I would think and you sort of acknowledged this, that you would have some complications while trying to get deeper into this, but maybe there is a better alliance for you, how do you think about that?

Doug Parker

Well, first I’d say we think Star Alliance is the best alliance in the world, so we are happy to be in Star Alliance and don’t anticipate anything changing in the near term. To the extent we could have a deeper partnership and alliance that might not be the number one, maybe that turns out to be better for US Airways, maybe it doesn’t, but at the moment we think Star Alliance is the best. We are happy with where we are, and look forward to hopefully be able to expand our Star Alliance relationships.

Scott Kirby

I’m sorry, I was just going to add. If indeed United and Continental get merged, it makes Star Alliance stronger.

Bill Greene - Morgan Stanley

How much revenue do you generate from these alliances?

Doug Parker

I don’t think we have ever disclosed that, and it’s hard to say, because it’s hard to know when customers are buying a ticket because you are in the Star Alliance, which they otherwise wouldn’t have brought. So it’s not a number we’d ever disclosed, but it’s in the hundreds and millions of dollars.

Bill Greene - Morgan Stanley

Okay, while we are on the international, in the last up cycle international was kind of key component to your growth strategy. You were sort of lighter if you will, had less capacity there. Obviously you pushed out jet orders or the deliveries of them.

So how do you think about this strategy going forward, because I would think given that the international component, probably this summery will perform very well given how bad it was last summer. It seems just likely US Airway would under perform in this revenue metric, given your lighter exposure, but how you think about what you are going to do with your strategy there?

Doug Parker

Well first, strategically over the long term we still are smaller than others internationally, and expect to grow that, and we have an aircraft order that will facilitate that growth though. As you say during the crisis in 2008, 2009 we pushed that off.

We are still very comfortable having those aircraft orders pushed off and differing that growth. That growth will still ultimately happen, but we differed it, and while the transatlantic expects we would rebound more strongly than domestic, that’s because it fell more dramatically, and it has to rebound more strongly just to get back to domestic levels of profitability.

So despite the fact that the aircraft orders were pushed off, we still have international growth coming. As I think Derek talked about in his comments, we just started at the end of last year and we are looking forward to starting Sao Paulo, assuming the Department of Transportation and Justice approved our slot swap deal with Delta.

So we do still have international growth, and we will get back to growing more quickly internationally, assuming that the international environment does recover more quickly in 2011, 2012 and beyond.


(Operator Instructions) Your next question comes from Helane Becker - Jesup & Lamont.

Helane Becker - Jesup & Lamont

Just in terms of international, Doug can you just kind of talk about what opportunities are available to you, as you are looking out over the next year and half or two years as a standalone company, where you can kind of throw without a lot of push back from the Star Alliance or your competitors?

Doug Parker

I think we have significant international opportunities. We have focused our international growth in the last two years across the Atlantic, and we still have more growth opportunities across the Atlantic, particularly as we started taking delivery of A320-200, which more range. We started 12 of these, but there is other markets in far Europe that have potential for us when we get back, when the economy really has fully recovered and we can get back to growing.

You see it’s growing in South America with service to Rio, anticipating service to Brazil. Our Delta slot swap transaction also gives us our first entrance into Asia with service to Tokyo. So there are extensive growth opportunities for us on the standalone basis, and feel good about the international potential for the airline.

We are not going to start growing aggressively though, until we have a more solid economic underpinning to justify that growth, but also I would add that despite we have an aircraft order, have the flexibility to just use those aircrafts as replacement and to not grow at all internationally if the economy doesn’t justify that growth.

Helane Becker - Jesup & Lamont

Then I noticed today, just on a follow-up to route structure, Southwest announced service from Phoenix to Boston and Minneapolis. I was just kind of wondering how that would affect you know if at all?

Doug Parker

Well, anytime we have new service on the route that has an impact, we compete extensively with Southwest, than any of the other network carrier and compete effectively and efficiently and have been doing so for a long time, as our history at America West were; Phoenix and Las Vegas for Southwest for years number one, and number two, hubs in terms of size.

So we compete with them across our network, the two, just Phoenix, Boston and Phoenix, Minneapolis are a relatively small percentage of overall capacity because we are much more a middle sized carrier now than we were when we were just American West and its jus normal run of business in the in the airline industry.


Your next question comes from [Bill Mascaras - Broadpoint Gleacher]

Bill Mascaras - Broadpoint Gleacher

Derek in the past you mentioned that liquidity metrics that you targeted are roughly right around 20% of LTM revenue. I am just wondering as fuel creeps up, do you want to keep more liquidity or is that still the target at this point that you are comfortable with?

Derek Kerr

I don’t remember targeting a number, but I think we are continuing to look at liquidity and continuing to focus on that and look for ways to improve our liquidity. I think earnings is the key to increasing liquidity, and as we talked about our second quarter we believe we will be positive in earnings as Doug said that’s the first time since in 2007.

So that’s our first step; is to be profitable and be profitable moving forward. So I think liquidity is something that we are always focusing on and again continue to want to increase in earnings are the best way to get there.

Bill Mascaras - Broadpoint Gleacher

I guess related to that, in previous calls you’ve mentioned that the credit card processing agreements is at $1.5 billion of unrestricted cash and that you had in the past several waivers. I am just wondering has that either been changed, or eased somewhat or maybe if you could just give us an update status as to where you are in that credit card processing agreement.

Derek Kerr

Let me clarify, the $1.5 billion was the number that was targeted to our Barclays loan. We had a $200 million loan from Barclays that had a $1.5 billion number that we had to hit for them to fund the monthly payment to buy dividend miles each month.

So that number has been reduced to $1.35 for nine months throughout the year and $1.25 in January, February and December, so that’s been a permanent reduction and we did that in back in the fourth quarter, so that is complete. For a credit card holdback and with our credit card processors there is no minimum cash number.

We are actually at, as we talked about the before we are at the high-end 25% which is our max holdback possible on Master Card, Visa that’s at 25% and we had the ability by having earnings and certain ratios to drop it down to 15% would be one level, and then down to zero percent is another level and as our earnings continue to get better the possibility would be to reduce that holdback versus increase that holdback as its at its max level of 25% right now.


(Operator Instruction) Your next question comes from Dan McKenzie - Hudson Securities.

Dan McKenzie - Hudson Securities

My question is if the spot swap with Delta doesn’t get approved, I was wonder if you would be open to dialoging with some other airline on an asset swap in exchange for the LaGuardia swap.

Derek Kerr

We think that the proposal we have it front of the DOT or DOJ is good for US Airways, good for Delta and good for consumers and expected it will get approved.


Your next question comes from Bob McAdoo - Avondale Partners.

Bob McAdoo - Avondale Partners

Can we go back to the alliances for just a minute, and excluding the ATI side of the project, could you just describe for us what is the difference between the relationship that you have with United under Star versus what Continental has with United under Star and what do you mean by their relationship being a deeper relationship, again excluding the concept of the ATI [or is there] no difference other than that.

Doug Parker

Well, ATI is by far the biggest difference and when I say there is a different that principle is what I mean.


(Operator Instructions) Your next question comes from Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

Scott I apologize, there is just a lot going on today. I wondered if you could just very quickly repeat those RASM numbers, you said domestic and these were main lines?

Scott Kirby

Yes, no these were consolidated. For the first quarter it was 10% domestic, 19% transatlantic and 5% in Latin and Caribbean.

Gary Chase - Barclays Capital

Okay thanks, apologize for that. Do you think there has been any dishonorable impact on your bookings from the volcano?

Doug Parker

No, I mean there was a short term impact, but if you are asking a question going forward is there an impact, I would say the answer is no, but transatlantic is booking very well, the pricing environment across the Atlantic is strong and it probably won’t stay this well but booked RASM for the summers was up 35% right now.

Gary Chase - Barclays Capital

Because it would seem like from your guidance and maybe we are just reading this a little bit wrong, but it would seem like the progression you have from April to May to June would imply some acceleration in June. I mean is there a way to characterize that, is that just the concept of the peak periods outperforming the off-peaks or is there something specific to June that you think may be driving it if there is no May problem...

Doug Parker

Some of that is the peak period, and a lot of that I think is we have a higher percentage – I think its some acceleration, acceleration is driven by the fact that a higher percentage of ticket have been booked in a strong pricing environment.

May, has less leaser traffic and so fewer tickets booked, on a year-over-year the booking curve wasn’t as far our, so June is the first month when people came into the new year and were really starting to book, we were in the strong pricing environment.

So, I think you’ll see acceleration in June just because it’s had a higher percentage of its bookings under a strong pricing environment than last year and more so than the other month. My guess is the same thing will occur in July, but some of that is the peak and some of that is I think is real acceleration.


(Operator Instructions) Your next question comes from Bill Green – Morgan Stanley

Bill Green – Morgan Stanley

Just a quick question, if I go through your thought on hedging, has they evolved at all. I mean we see fuel sort of little bit higher than it had been when we did the last call, so I was just curious if there has been any evolution. Do you want to start to put this into the financials?

Derek Kerr

I guess continues to be involved, but it hasn’t results in any changes in our strategy Bill, so anyway to reiterate we said in the past is where we remain.

We believe there is a large economic hedge against oil prices which is our revenue stream and we all learned back in 2008, that the biggest risk you can do to your firm is lock into higher prices in anyway, be it through costless covers or any other vehicle that locks you into prices that end up being higher than the market at a times that revenues fall, and you see your revenues going to end, and worse is you got pre pay for it because of the counter party risk.

So that is a risk we want to avoid much more than protecting ourselves against modestly higher fuel prices, which begs the question then I know, what about much higher fuel prices insurance against that.

We have looked at them, but these out of the money options are so expensive that we continue to look at them and therefore I guess I get sparse there thinking of us, but it appears to be much higher insurance premium the insurance is worth. I would note, at least so far this has been working for us; while others, if you going to look at fuel prices that we are paying now versus what others are, because they’ve gone and put in places some hedging vehicles; we have lower fuel prices right now.

So not to say we were right in their roll out. This is always something you never know until it comes around. I think it is worth knowing that right now, up until now it’s working for us, and what we are really most concerned about is protecting ourselves against what we think is the biggest risk, which is what we saw in 2009.


(Operator Instructions) Your first media question comes from Josh Freed - The Associated Press.

Josh Freed – The Associated Press

Is that second quarter profit that you are looking at, is that on a GAAP or an operating basis or…?

Doug Parker

Well, again GAAP, excluding charges. It doesn’t mean its not GAAP, but we never know what kind of special charges may head a quarter, so it certainly excluding special charges. It certainly will be GAAP as well, but we don’t know what kind of charge we may or may not have in the second quarter.

Josh Freed – Associated Press

Okay, and on the improving business travel that you are seeing, is that showing up as sort of closer in bookings that are still going into economy class or are those showing up as more sales of premium class seats. I mean, can you say more about what you are seeing in that area?

Doug Parker

First, we are a largely domestic airline and very few people purchase first class tickets domestically. So on the domestic front, its mostly more bookings close end and in business oriented markets like the shuttle.

Internationally, we also have a lower penetration of front cabin bookings than others did historically. New York to London is by far the biggest market for premium cabin travel; a market that we don’t participate in to any significant degree. So we haven’t seen a big recovery and transatlantic envoy ticket purchases, but it’s a relatively small percentage of our business. It’s probably a better question to ask someone who historically carries more envoy class or first class travel across the Atlantic.

Josh Freed – Associated Press

And one last thing, when Doug was talking about consolidation earlier, he said that there was the idea that you folks ideally in the perfect world would like to participate. If we see United and Continental go forward, do you see any potential remaining partners out there for US Airways at all, or does this really sort of close the door for you folks for the foreseeable future?

Doug Parker

Yes Josh. It’s hard when you speculate on any other principle transactions, but I did before to a prior question, that we believe there is still more privatation than the industry names, which I think is fair to say that we think there is more consolidation that could occur.

Josh Freed – Associated Press

Well, I understand, but I mean, do you see anybody out there for you guys or not?

Doug Parker

We don’t believe the door will be closed on future consolidations involving US Airways.


(Operator Instructions) Your next question comes from Mary Schlangenstein - Bloomberg News.

Mary Schlangenstein – Bloomberg News

I have two quick questions. One is, has the duality given you any indication on when they may get back to you on that revised slot proposal? Then the second question is, if United and Continents are able to do a deal, would you be interested in picking up any particular assets that they much shed as a result of that?

Doug Parker

On the first question, no the duality hasn’t told us; and on the second, I think its far too early to speculate on (a) if the deal gets done, (b) if they were to choose or begin quite to divest anything and (c) what we would be interested in.


Your next question comes from Don Gilbertson - Arizona Republic.

Don Gilbert – Arizona Republic

You answered one of my questions that Mary asked. Two other quick ones, any updates on the FAA discussions regarding the proposed find?

Robert Isom

No discussions, no update Don.

Don Gilbert – Arizona Republic

Then secondly, I don’t know Doug or Scott of any of you, I don’t know who’ll be the best person, but are you concerned at all about potential fall out given your Phoenix base from the immigration law backlash?

Doug Parker

We are looking at each other to answer this Don. No, no, thanks. We would certainly hope not.


And gentlemen, with no questions remaining, I’d like to turn the call back over to you for any additional or closing comments.

Doug Parker

That’s all we have. Thank you all very much for your time, and if you have any further questions, please contact Elise for communications or Dan Cravens, Investor Relations. Thank you again very much.


Ladies and gentlemen, that does conclude today’s conference all, and we thank you for your participation.

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