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Executives

Dan Cravens – Director, IR

Doug Parker – Chairman & CEO

Scott Kirby – President

Derek Kerr – CFO

Robert Isom – COO

Steve Johnson – EVP, Corporate

Elise Eberwein – EVP, People & Communications

Analysts

Hunter Keay – Stifel Nicolaus

Jamie Baker – JP Morgan

Bill Greene – Morgan Stanley

Helane Becker – Dahlman Rose

Gary Chase – Barclays Capital

Michael Linenberg – Deutsche Bank

Kevin Crissey – UBS

Dan McKenzie – Hudson Securities

Glenn Engel – Bank of America/Merrill Lynch

L Randall – Citigroup

Bob Mcadoo – Avondale Partners

Ray Neidl – Maxim Group

Megan Neighbor – Arizona Republic

Catherine Craig – Centre for Aviation

Ted Reed – TheStreet.com

US Airways Group, Inc. (LCC) Q4 2010 Earnings Conference Call January 26, 2011 12:00 PM ET

Operator

Good day and welcome to this US Airways Fourth Quarter 2010 Earnings Conference Call. This call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to Mr. Dan Cravens, Director of Investor Relations. Please go ahead, sir.

Dan Cravens

Thanks, Mahishi, and welcome everybody to the US Airways fourth quarter 2010 earnings conference call. In the room with us in Phoenix today are Doug Parker, our Chairman and CEO; Scott Kirby, President; Derek Kerr, our Chief Financial Officer. Also in the room with us for the Q&A session are Robert Isom, our Chief Operating Officer; Steve Johnson, our EVP of Corporate; and Elise Eberwein, our EVP of People and Communications.

Like we typically do, we’re going to start with Doug and he will provide an overview of our fourth quarter financial results. Derek will then walk us through the details on the quarter, including our costs and liquidity. Scott will follow with commentary on the revenue environment and our operational performance, and then after we hear from those comments, we’ll 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 10Q for the quarter ended September 30th, 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 GAAP financial measures is included in the earnings release and that can be found on our website at USAirways.com. A webcast of this call is also available on our website and will be archived for approximately one month. The information we’re giving you on the call is as of today’s date and we undertake no obligation to update the information subsequently.

Thanks again for joining us, and at this point will turn the call over to Doug.

Doug Parker

Thanks, Dan. And before I start I want to acknowledge the recent achievement by Dan, who has managed our Investor Relations functions before the letter [ph]. Dan was recently recognized by being named to the All-American Executive Team by Institutional Investor Magazine, that ranking is determined by survey of buy- and sell-side analysts and lets us know the Dan and the team are doing a nice job of communicating with all of you. So, thanks for that feedback and Dan, congratulations.

Dan Cravens

Thanks.

Doug Parker

By now you all have seen the release, we reported a profit of $499 million for the year, if you exclude special charges it’s $447 million that’s an improvement of $946 million versus 2009 and the second highest profit in the company’s history.

For the fourth quarter, the profit is $28 million and our profitable fourth quarter was 2006. So, in looking back on 2010, it was clearly a great year for US Airways and the financial performance as noted is our second best year ever nearly a billion dollar improvement since 2009, when you look at the components of that the revenue performance was strong, passenger revenue is up 13%, other revenue up 17%, cargo revenue up 50% and we did all that while keeping our cost down, if you are going to cost excluding fuel and special charges and profit sharing its actually up less than 1% much lower than our competitors in general.

And then mutual operation a truly amazing job by our team, our best ever on-time performance, our lowest ever mishandled baggage performance. We are consistently amongst the industry leaders in every important reliability and safety metric and for that we are extremely proud. And you do all those things and investors get rewarded, our stock was up 107% for the year, more than any other airline and something that again we are happy to see happen.

This is all of course, thanks to our team of 31,000 hardworking professionals, who used to do fantastic job of taking care of our customers and we want to – as we always do thank them for their great work on behalf of the airline and the customers we serve. We are extremely happy to report that our 2010 expenses include $47 million in profit sharing to be shared by our team and $24 million in operational incentive payouts that were earned throughout the year.

So, it’s clearly nice to return to profitability in 2010 after the difficult years our industry had in 2008 and 2009. The challenge of course is to stand, we know, we are profitable now because of the steps we took to get to the crisis in 2008 and 2009, things like reducing capacity, realigning our fly and to focus on areas where we have a true competitive strength. Introducing new revenue streams, keep our costs in check and a commitment to exceptional operational reliability. We also know that continuing on this path to sustain profitability requires a continued commitment to what got us here. We have that commitment as US Airways and because of it we feel good about 2011 and the years to follow.

With that said, I’ll turn it over to Derek, who will give you a lot more details on the numbers; and then Scott will walk you through the revenue performance. Derek?

Derek Kerr

Thanks, Doug. As we announced in our press release over this morning, we did record a fourth quarter net profit of $28 million or earnings of $0.17 per share as Doug said, it was our first profitable fourth quarter since 2006. This compares to a loss of $79 million or $0.49 per share a year ago, when you exclude special items the company’s profit for the fourth quarter was also $28 million or $0.17 per share versus a loss of $32 million or $0.20 per share in the fourth quarter of last year.

For the full year 2010, the company recorded second highest profit in the company’s history, net profit excluding special items of $447 million versus the net loss excluding special items of $499 million for the full year of 2009 and as Doug said a tremendous $946 million year-over-year improvement.

Please refer to the tables included in our press release for the details on these special items for the remainder of this call to exclude the impact of the special items to more accurately reflect our performance for the quarter.

Total capacity for the quarter was 21 billion ASMs, up 4.2% from 2009. Mainline capacity for the quarter was 17.4 billion, up 4.2%. Express capacity was up 4.1% to 3.6 billion ASMs. We ended 2010 with 339 mainline aircraft in our fleet and plan to keep the fleet count flat for 2011. During ‘11, we plan to return 13 older 737 leased aircraft while adding 13 new aircraft, 12 A-321s and one 757. 757 comes late in the first quarter and the 12 A-321s are scheduled to be delivered in the third and fourth quarters, three of them in the third and nine in the fourth quarter. All of these aircrafts have backstop financing available. The express fleet count is also anticipated to remain flat in 2010.

Total operating revenues for the quarter were 2.9 billion, up 10.7% from the same period in 2009. Mainline passenger revenues were 1.85 billion, up 11.1% driven by higher yields as a result of the improved economy in the industry capacity discipline.

During the quarter other operating revenues were up 9.5% versus 2009 due primarily to the increase in a la carte revenues. For the year, we’ve realized more than 500 million from these new programs.

Cargo revenues which were impacted by the contraction of business spending in 2009 again showed significant improvement in the fourth quarter coming in 28.6% higher than 2009. We saw an improvement in both international cargo and domestic mail revenues versus fourth quarter 2009 total passenger RASM was up 6.1% to 12.14 cents for the same period combined yields increased 3.4% and our combined load factor was 80.6% in all time fourth quarter record. Total RASM for the fourth quarter was up 6.2% versus 2009.

The airlines operating expenses for the fourth quarter were 2.8 billion, up 7.3% as compared to a year ago, mainline operating cost per ASM excluding special items was approximately 12 cents, up 3.5% year-over-year driven by a 17.9% increase in fuel prices.

Our average mainline fuel price including taxes for the fourth quarter of 2010 was $2.40 per gallon versus $2.04 per gallon in the fourth quarter of 2009, which drove a $150 million increase in year-over-year fuel cost. Remarkably even given the rapid run up in fuel during the fourth quarter, US Airways still had the lowest fuel costs of any airline to report thus far.

Despite higher fuel prices the company was able to keep its costs in check through outstanding operational reliability and continued cost diligence. The team did a terrific job managing our expenses which is especially noteworthy in an environment of relatively flat capacity growth. We were able to reduce our full year main line CASM x fuels, special items, and profit sharing by 0.4% versus 2009. For the fourth quarter excluding special items, fuel, and profit sharing our main line cost for ASM was 8.39 cents in the quarter, a decrease of 2% versus 2009.

Express operating costs per ASM x fuel was 1.38 cents for the quarter, which is 3% higher than 2009. As Doug said, our operation ran very well in 2010. US Airways ranked number one among the five largest network carriers in baggage handling, and number two in on-time performances reported by the DOT through November 2010. Our customer satisfaction also outperformed the competition that evidenced by our 2010 compliant ratio which was 10 percentage points better than the average of our peers.

This exceptional operation performance allowed our team members to earn approximately 24 million in operational payouts in 2010. Our team members also earned another 47 million of profit sharing based on our strong 2010 financial performance.

We ended the quarter with 2.3 billion of total cash in investments of which 364 million was restricted. Total cash in investments include 57 million of auction rate securities at fair market value that currently are reflected as non-current assets on our balance sheet.

The year-end total cash and investment balance is up from 2 billion at the end of 2009 of which 480 million was restricted. During the quarter we completed our 340 million WTC financing transaction, approximately 306 million of the proceeds were used to refinance existing debt associated with eight owned airbus, aircraft. We’re extremely pleased we were able to return to the capital markets to finance our aircraft with this WTC.

The company generated 20 million of positive cash flow from operations and used 53 million of cash flow defined as operating cash flow less capital expenditures during the quarter, excluding the debt refinancing as resulted the WTC transaction we had 91 million in debt payments. For the full year 2010 we generated 809 million of operating cash flow and 602 million of free cash flow.

Looking forward to 2011, we continue to remain disciplined on our capacity. As I mentioned on our last call, we plan overall capacity in 2011 to be up approximately 2%. However, it is important to note that domestic main line is expected to be up only 1% while international is forecasted to be up approximately 7% with no additional aircraft in the fleet. The international increase is due to new service from our Charlotte hub and our higher year-over-year completion factor.

Total main line ASMs are projected to be approximately 73.3 billion for the year. ASM’s breakdown by quarter as follows, 17 billion in the first quarter, 19.1 billion in the second quarter, 19.4 billion in the third, and 17.8 billion in the fourth quarter. We are forecasting fuel price to increase significantly in 2011 based on the January 24 fuel curve, we expect fuel price to be on the range of $2.76 to $2.81 for 2011.

By quarters that breaks down to 2.67 to 2.72 in the first quarter, 2.75 to 2.80 in the second, 2.78 to 2.83 in the third, and 2.81 to 2.86 in the fourth. In terms of CASM guidance for 2011 we intend to continue our cross diligence. For the full-year 2011, we’re forecasting main line CASM x fuels, special items and profit sharing to be flat versus 2010. First and second quarter, main line CASM is forecasted to be flat, third quarter is up 1% to 3%, while the fourth quarter will also be flat. Express CASM is forecasted to be up 5% to 7% in 2011 due primarily to our PSA CRJ200 aircraft coming after the maintenance honeymoon. This is worth approximately 4 points to Express CASM in 2011.

Looking at CapEx, we continue to make important investment in our product and operations with a focus on interior upgrades, in-sourcing reservations, customers self-service and recovery tools. We are forecasting total CapEx to be 316 million in 2011, which includes non-aircraft CapEx of 180 million, and that aircraft CapEx of $136 million.

In summary, I would like to thank all of our employees for all their hard work and dedication over the past few years. During 2010, we were able to return the company to profitability. It’s a tremendous effort by all 31,000 team members to manage through this challenging time. We believe we are well positioned to maintain that momentum in 2011.

I’ll turn it over to Scott to talk about the operations and revenue.

Scott Kirby

Thanks Derek. As always I will take a minute to talk briefly about our operational results and then turn to the revenue environment. We’re extremely proud of our team who ran a truly outstanding operation throughout 2010. In 2010, US Airways was number one and on-time performance three timed, number one in baggage six times and number one in lowest complaints to DOT three times. Truly a remarkable performance from all the people of US Airways.

Turning to the revenue environment, during the fourth quarter our passenger in total RASM increased 6%, in the geographic mix of markets we are very happy with the fourth quarter revenue performance. As in prior quarters, the year-over-year improvement was driven largely by improving business demand. Corporate demand continued to rebuild and was up 17% year-over-year in the quarter. Of more interest to most of you is probably our outlook going forward, so I’ll try to provide you with some data and some opinions as we see it on the outlook.

To start, it feels to us like the revenue environment made a step function improvement as we entered the New Year. I’ll carry out all of the following revenue comments by saying that, perhaps we’re seeing some temporary strength that is just a reversion of bookings, given what’s going on at American Airlines’ distribution. As I look to a lot of data however, I don’t think so that’s the case, and if so it’s a small effect. But it’s possible that our revenue is being temporarily implied from that.

For some historical perspective, I’m going to roll the clock all the way back to the fourth quarter of 2008, when mainline was failing and the world was falling apart, stock market was dropping and confidence was very low. Airline revenue, particularly business revenue declined but not dramatically during the fourth quarter of ‘08. But in the hind side, corporations clearly cut travel budgets for 2009. And in January 2009, we saw a dramatic sequential reduction in business revenues across the industry. In the first quarter of 2009, RASM declined by about 1,300 basis points as compared to a normal sequential change versus 4Q 2008.

As we went through 2009, the macro economy pulled back in the break and began recovery. Airline business revenues gradually improved by a ranch of rate in the macroeconomic recovery. I think this was due corporate travel budgets were set back, they were set back in the dark days of the fourth quarter of 2008.

By the fourth quarter of 2009 however, the stock market was up, confidence was much higher and corporations increased their travel budgets. So as regarding to January of 2010, we saw a step function increase in business demand with about a 1,200 basis point sequential improvement in demand from the fourth quarter of 2009 into the first quarter of 2010. That increase was significant and continued to 2010, but didn’t really accelerate much for the rest of 2010.

As regard to the fourth quarter of last year, the economy again looked much better. The market was up, confidence was strong and I think corporate travel budgets were ratcheted it up once again. So as we entered January of 2011, it feels like we’ve seen another step function improvement in that business demand. It’s not as large as the 1,200 basis point improvement from last year, but I think it could be three to 400 basis points better than the fourth quarter runway.

This conclusion is also consistent with a lot of anecdotal evidence that I hear from other executives of other companies, talking about having company conferences at [inaudible] in Florida with lots of attendees. Going back to the behavior that they had in 2007, 2008, after two years of smaller affair, company headquarters with a lot fewer attendees and lots of other similar anecdotes. As a result, I think airline revenues are going to outperform in the normal year-over-year GDP relationships throughout 2011.

Thankfully, the strong demand environment is allowing airlines to pass along with part of increasing fuel prices. With three systemwide fare increases already this year versus none in the last four months of 2010.

Despite the fact that confidence get more difficult in the first quarter than in the fourth quarter, we expect January RASM to be up about 7% year-over-year and expect Q1 RASM to be up 6% to 8% year-over-year. This means that we’ve finally recovered the RASM and yield above 2008 levels and expect that basically all months in 2011 will set a new all-time-high for both RASM and yield.

As we roll in over to a new calendar year, we feel very good about the revenue environment. Business demand is strong, we’re even starting to see more improvements even starting to see more improvements of our leisure markets. The pricing environment is also strong which is important given the run up in fuel prices.

So to conclude the employees of US Airways continue to run a truly fantastic operation and we continue to feel positive about the macroeconomic environment, particularly the macro outlook for airline revenue. With that I think we are ready for questions.

Derek Kerr

Great. Thanks, Doug. Thanks, Scott. And operator, yeah we’re ready for taking questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions) We’ll go to Hunter Keay with Stifel Nicolaus.

Hunter Keay – Stifel Nicolaus

Good morning, guys.

Doug Parker

Hey, Hunter.

Hunter Keay – Stifel Nicolaus

Can you give us an update on – sorry, I missed some of the prepared remarks, can you give us an update as further restricted cash situation and the credit card holdback, if you still have one, sort of what triggers it, and already in that causes you think that the trigger to fuel runs up a bit just because of your hedge situation?

Derek Kerr

Yeah. Hi, it’s Derek. Our restricted cash situation we have $364 million of restricted cash. That numbers down to 120 million year-over-year, primarily due to reduction in the credit card holdback. We currently have about a $100 million in credit card holdback that has driven – our contract has three different tiers, a holdback of 0%, 15%, and 25%. And we are at that second tier right now. I mean it’s all driven by fixed charge ratios and other numbers.

So, I think from our perspective, the max holdback can be 25% at this point in time and we’re in good shape, we’ve had reduced throughout the year, and we believe we’re planning all year, at the tier two level which is 15% holdback. But if things get better that could be reduced to zero at certain ratios.

Hunter Keay – Stifel Nicolaus

Okay. Thanks, Derek. That’s helpful. And I’d like to talk a little about this – some of the gauge differences that we’re going to be seeing here throughout the year, I don’t evenit’s pretty impressive that you’re only going to increase domestic capacity only 1% given the fact that you’re taking on a 57, which I assume is going to be develop domestically, you’re replacing shale for shale, 137 classics with A-321. So, how do you manage the yield risk, do you cut frequencies and if so does that concern that you’re in always business travel, I don’t know, just give me some color and that would be great.

Derek Kerr

It’s fine, that’s important because there is so much happening across all the network. But we do have slightly higher gauge which really account – slightly higher gauge and higher completion factor accounts for all of our domestic capacity growth. So we would be flat to down slightly without those two affects. Departures are about the same, so it’s just a mix of things that are happening across the network which are really good about our business pattern in all of our business market and so no real change for that, but just little things here and there to get you through.

Doug Parker

And Hunter, just remember the A321s that are coming in are, fourth, late in the fourth, nine of those are coming in the fourth quarter. So it doesn’t impact the full-year that much and also the 757 coming in as replacing an aircraft that we got rid of last year.

Hunter Keay – Stifel Nicolaus

All right. That’s helpful. Thanks so much, guys.

Doug Parker

Thanks, Hunter.

Operator

Our next question comes from Jamie Baker with JP Morgan.

Doug Parker

Hey, Jamie.

Jamie Baker – JP Morgan

Hey, guys. Scott, I think you failed to identify the JP Morgan Airline in Aerospace conference this March, kind of RASM strength. With that, it’s plugged out of the way, I knew to look at slide of yours showing how you paid less for fuel and everybody at last year?

Doug Parker

Yeah.

Jamie Baker – JP Morgan

Problem is there is obviously no assurance in 2011 that we offset, can’t happen. I’m wondering if you’ve seen anything in the energy market, maybe anything related to the overall costs of hedging that might make you re-think the strategy. And I think you should, just wondering if – what topic you even revisit from time to time.

Derek Kerr

Well, we think about it, but I mean, it’s remarkable given the run up in energy prices, but just accorded a very short window in the fourth quarter, and that was a rapid spike in the fuel prices. It’s remarkable to me that we still had the lowest economic fuel price in the airline, is the only airline that didn’t hedge even given that rapid run up in fuel prices. And the cost of fuel hedging remains exorbitantly expensive and hedging out the money for us for years, where’s the production if you do, your call options would be about $335 million. And so, while we continue to look at the market and think about it, it’s hard to rationalize hedging when the cost of the insurance is so incredibly expensive and with the cost of the insurance, last year would have cost us, I have to updated the numbers but something like 160 million, if would had it industry average hedging program would have cost us a 160 million despite the fact that fuel were up from 70 to $92 a bill across the year. So hard to understand how you can make it systematic hedging program work.

Jamie Baker – JP Morgan

And second, you haven’t been on the top of GDS use obviously some of your peers are leading the charge on that. IATA referred to GDS witches if I recall last summer, just wondering whether distribution savings or a priority for airways right now or maybe just something for another day.

Derek Kerr

Okay. Well, I’ll give you a comprehensive answer, I hope to that because I knew this question will come up. And that is that we agree in principle with what American Airlines is doing. And that is important to lower our distribution costs, the reality is that the technology landscape has evolved really over the last three decades and the GDS and distribution environment much of it had stayed stuck in legacy systems that were really built 30 years ago. And that it needs to evolve and get to lower costs but not only does it need to get to the lower cost, what we need to be able to do is more quickly innovate and sell new products. Most industries can elevate and get these done pretty quick in the airline industry with the GDS systems, and all legacy systems everywhere in the industry, it takes us a long time to sell those systems.

But while we agree with American in principle, we perhaps take a slightly more pragmatic approach then they do on how we’re going to get there. Meaning that, we are willing to see costs come down incrementally, don’t have to go all the way to what a spare costing would be overnight. And we are willing to see those costs come down incrementally and work with our partners as they try to – rework their businesses be those partners online travel agencies, break in motor travel agencies or GDSs. And we are willing to do that particularly so long as they are making progress towards changing their systems to allow us the flexibility to sell new products.

And in that regard our goal is to be able to sell all of our ancillary products through all of our distribution channels. We don’t want to prevent a GDS and OTA or any travel agent from selling all of our products, quite the opposite the more channels where we can sell, the better that earns for us. And just take Choice Seats as an example, Choice Seats is our product where you can pay more to get a better seating coach. Because the reality is sitting on the isle on the first row of coach, you need better product than sitting the middle seat in the last row of coach, next to the lav with no recline, it’s just a better product. And today and historically we charge the same price for both of those seats. And so ability to sell those seats for more is an ancillary revenue initiative that for your sale rate is going to be 30 to $40 million this year, but could be two to $300 million once we can sell through all distribution channels. So it’s really important for us to be able to sell through those distribution channels.

Today the OTAs, the GDSs are the braking motor travel agency can’t do that and it’s hard for them to change their technology to be able to do that. We just signed up with Expedia, which as an example and part of the importance for us to sign an agreement with Expedia is that they have agreed to start selling Choice Seats. And so, that was important to us, so that you can call this (inaudible) we agree with the American that cost become down to reflect today’s technology landscape, and over time they need to come down dramatically. But in the short term we are willing to make incremental progress in that regard as long as our distribution partners are willing to start changing our model of an – expand their flexibility and ability to sell ancillary products.

Doug Parker

And Scott said that a while, just note when you said more pragmatic, you mean more pragmatic for us, it may not be more pragmatic for American. And I’m sure they’re doing what they believe is most pragmatic for them. But for us, we’re at the position and we think this is the best way to go about as opposed to the position Americans in. But we’re here at (inaudible)

Jamie Baker – JP Morgan

Okay. Excellent. I appreciate the clarity. Thanks a lot.

Doug Parker

Thanks Jamie.

Operator

We’ll take our next question from Bill Greene with Morgan Stanley

Bill Greene – Morgan Stanley

I’m wondering there has been news recently on the slot swap. So if this did move forward, does it change any of the original estimates, I guess I will call them synergies, I don’t know what other use that benefit to you, given that there has been a delay and when it would have been implemented?

Doug Parker

Well, it certainly changes the timing of when those benefits would accrue to us. And the benefits would get lowered somewhat by the fact that there going – if there is a divestiture, the benefits would get lower because of that divestiture.

Bill Greene – Morgan Stanley

But overall the fact that this could still get done I guess the potential negotiating points that you’re going over now it won’t radically change the originally intent of this. It still substantially….

Derek Kerr

Yeah. And it’s built meaningfully positive we said 75 million before we thought that was conservative, it’s still meaningfully positive to get the deal done and we still are hopeful that we will be able to get it done.

Doug Parker

But the query is also uncertain enough that is not included any of our guidance.

Bill Greene – Morgan Stanley

Correct. Got it. Yeah. Okay, good. And then second question is, look you guys gave some very disciplined capacity numbers for 2011 and I realized that there is no specific fuel price point where that could necessarily change. But what are the circumstances look that would force you to revisit that to the downside or do you even have the option to do it to the upside or that’s not even a choice if fuel were 70 tomorrow would you change this?

Derek Kerr

Well, I will answer the second part of the question first. If fuel were 70 tomorrow we would be very happy but wouldn’t change our capacity upwards. We are all worried of course, if anyone is responsible be worried about oil at this level. As stated we’re happy that the industry has restructured enough that it can actually be profitable with all above $90 and that’s a result of all the changes that have turned the industry the past years. We are also happy that the industry is having much greater success passing along higher fuel through fare increases, I have mentioned the three domestic fare increases, the international market is also ratcheting up quite quickly – pricing in the international market is also ratcheting up quite quickly with big increases in the fuel surcharges there.

That being said, just being profitable isn’t enough, so all of equal we have a bias to reduce capacity with oil at this level. Practically speaking, however the current schedule that we are working on is the summer schedule, and even though the oil higher than it is today, it won’t make sense, it will not likely to reduce capacity during the peak summer travel period. However, as we move into the fall’s schedule we would much more likely reduce capacity with all of these levels. But we don’t need to make that decision for a few months yet, so we just hadn’t made it and we’ll get more information on oil and on the revenue environment before we make decisions on the fall schedule.

So don’t expect of immediate reduction in our capacity guidance but that’s really because of the calendar with summer as the next schedule that we’re working on. Primarily capacity discipline in the face of today’s high fuel prices is something that we’ll apply when we go to our fall schedule.

Bill Greene – Morgan Stanley

That’s very helpful. Thank you so much.

Operator

The next question comes from Helane Becker with Dahlman Rose.

Doug Parker

Hello Helane? (Inaudible)

Helane Becker – Dahlman Rose

Am I here? Can you hear me?

Doug Parker

Yeah.

Derek Kerr

Yeah.

Helane Becker – Dahlman Rose Yeah. I don’t know there’s something wrong with my phone, we probably just stood and lined out. So this is my question, I just want to get some clarity on labor with respect to furloughs and retirements, and how that changes over the next year or so, a. And b, you still don’t have everybody on one seniority at least, so you probably get some penalty from that, or maybe not? And I was kind of wondering if you could kind of discuss that with how things change given the average age of the workforce in the East must be getting older?

Derek Kerr

Yeah. Okay Helane, I’m going to take the second part of that and then Robert Isom can maybe help you as furloughs and retirements, but maybe a little more clarifications what you’re getting out on that first part. The second part which we talk about often, look the – I guess de-synergy for like a better word of not having the two workgroups fully combined is not a small number but not an enormous number either. We haven’t done it a long time but given how big both fleets are, you can run them separately and not have a big cost to the airline I’m not being able to combine the pilots for example.

That number again we said at the past with something around $10 a year, I assume that’s still not the accurate number but I would just we haven’t gone to run and get in long time. So it’s – the number you’d like to see go away as far as numbers go, but if I only care about numbers what it would cost us to combine the two groups is a good, bit more than that, I’m just taking the east pilots to the west pay scales, is something that good bit higher than something over $100 million a year.

Having said that we proposed that four years ago and still would like to do that because we didn’t get the right way to get – we need to get the pilot groups working together as one group, we need to get to a joint contract and that’s a necessary cause to doing so. And we think that’s the right thing to do. So we would like to see that happen, unfortunately the seniority dispute continues and it’s now tied up in court, so it hasn’t happened yet, but it’ll happen one day. And when it does, the effects that you just described financially will happen but also what will happen is we’ll be able to – one group of employees, all working together as we should. So, we reckon how to get that done but unfortunately haven’t been able to do so because of the legal disputes that continue.

On the furloughs and retirements, (inaudible) let me know a little more what you’re trying to give that Helane, we can give you our data but we’re not sure we’re giving the right data.

Helane Becker – Dahlman Rose

Yeah. I would think that as the workforce retires and you’re hiring newer employees, the reason for the original dispute goes away, so that it makes it easier to get on one contract?

Doug Parker

Yeah. I’m not sure, I’m not it’s that simple. It’s gotten emotional enough and I think what really has to happen it has to play out in court and people feel like they’ve done everything they can, to fight for everything they can for it to happen. And we’ve got to let that playing out. So what you’re saying maybe logical, this in the some cases has gotten past just the – all about logic and a lot about emotion which is where you never wanted to get. So we’ve got to let it play out in the court associates. I hear you saying and indeed there will be more retirements on the former US Airways side than you would see on the former America West side just due to age 65. And you’ll see a good bit more on the East side but that – I wouldn’t describe that – I wouldn’t want to characterize that to you as what’s going to help us get through this. It has to get done in court.

Helane Becker – Dahlman Rose

Okay. Is there a timing –

Derek Kerr

I’m sorry.

Helane Becker – Dahlman Rose

I’m sorry. Was there a timeframe for court decisions? I know it’s like what this year or next year?

Doug Parker

Yeah, I’m getting with – anyway, the issue is we had a – the federal court judgment said the – our current union wasn’t using its duty a fair bit, it wasn’t volume biased duly to fair representation. That was appealed to a court who then said, they weren’t going to opine on that but rather that it wasn’t right, that is, since we hadn’t actually come to an agreement yet. There was – you couldn’t say that they haven’t fulfilled their duty to represent because they haven’t got any agreement. That’s what the appeal said. And that leaves the company in this really spot of not knowing what we can actually negotiate because of – we have – this ruling that at one point that said from their federal court and said if we did agree to this, it would not be legal and that’s something that we find troubling.

So we have gone and asked to court for the claritory relief on that, claritory judgment to let us – to let them chose the answers of questions for us, as to indeed what we can and can’t do and what would be the company’s liability if we did certain things. So that is yet to be heard so in federal court here in Phoenix.

Helane Becker – Dahlman Rose

Got you. Okay. Thank you. I appreciate your help.

Doug Parker

Sure, I do what right to do. Okay, thanks Helane.

Helane Becker – Dahlman Rose

Thank you.

Operator

(Operator Instructions) I’ll go to Gary Chase with Barclays Capital.

Gary Chase – Barclays Capital

Good morning, everybody.

Doug Parker

Hey Gary.

Scott Kirby

Hey Gary.

Gary Chase – Barclays Capital

I wanted to – if I could start with Derek and the mainline cost out look a little bit better than I was thinking and I’m obviously cognizant of the nearly flying a longer stage given the international. And I’m curious if there is something else that’s spurring in there and you mentioned some tailwind, some gauge and completion factors. Is there any other initiative in there we should be aware of that’s driving that down?

Derek Kerr

No. I think the big savings on a CASM side is also on the aircraft rent side. As we renewed the older aircraft, last year if you recall, we pushed off a fair amount of aircraft for our liquidity initiative that had us go and renew some of the older aircrafts that we’re going to replace down the road. There’s a significant amount of savings in that in order to reduce that. But that’s the major thing that’s going on from an expense side. And then everything else has been held pretty much in line as we go through all of the expense lines year-over-year.

Gary Chase – Barclays Capital

So is that moving to the financing part of the P&Ls or to stand Derek or?

Derek Kerr

No, no. I’d say we’re not replacing aircraft as quick as we had planned on replacing aircrafts. So we needed to go out and renegotiate those deals on older 737, 300’s and 400’s. And we’re getting significant declines in aircraft rents on those aircrafts, which we’ll save us a significant amount year-over-year.

Gary Chase – Barclays Capital

Is there any way – I mean, is that a point of it or is it not that big?

Scott Kirby

It’s probably about half a point.

Gary Chase – Barclays Capital

Okay. And then Scott, when you talked about the step function change in January RASM, is that something you’re reading through the bookings or the RASM number that you’re guiding to for January reflects that much of a sequential improvement from where you think you were in sort of the fourth quarter?

Scott Kirby

I don’t think that all reflected in January because much of January is bookings occurred early in that, so it’s of more what’s happening from a booking perspective in January.

Gary Chase – Barclays Capital

Okay. So, we’ll see that presumably much more in March and beyond?

Scott Kirby

Yeah.

Gary Chase – Barclays Capital

And then, the 330 million, just a quick note that you said would be the cost of hedging program, was that assuming a 100% position?

Scott Kirby

Yes. Full year with the production.

Gary Chase – Barclays Capital

Okay. So if you started today and hedge the full year forward at 100% it would be 330?

Scott Kirby

Yeah.

Gary Chase – Barclays Capital

Okay.

Scott Kirby

And that will be hedging at the market meaning, that higher prices in today because the cover is our perspective [ph].

Gary Chase – Barclays Capital

All right. Okay. Thanks everybody.

Scott Kirby

Gary, just to reduce the update on that number, it also has the renewals that you will look forward, so it’s worth about one point, two points. The aircraft ranked reduction year-over-year.

Gary Chase – Barclays Capital

Derek, could you clarify that? Would you say it has renewals from the airport?

Derek Kerr

It has extensions at lower rates, and then the rate we leased the fair amount of aircraft, so there are 11 air few aircraft and then 23 lease extensions and that’s worth some $18 million, it’s worth about one point, two points year-over-year on a CASM basis.

Gary Chase – Barclays Capital

Thank you very much.

Doug Parker

Yeah, thanks.

Operator

Our next question comes from Michael Linenberg with Deutsche Bank.

Michael Linenberg – Deutsche Bank

Hi everyone. Just on capacity, you gave the mainline number. Can you give consolidated for the quarter and then sort of related to that? The 7% international, I guess, this is to Scott, you guys – I think you guys are pulling down some trans-Atlantic services this summer. Is that 7%, is that driven more by Latin America, Caribbean?

Scott Kirby

I’ll start, well Derek will get you the other number, but it’s, we’ll point on couple of market, but we’re also adding Charlotte to Madrid, and Charlotte to Dublin, and Charlotte to Sao Paulo, additionally several of our seasonal markets are going year around now, so even our Atlantic capacity, even if you exclude Latin Mid-Atlantic capacity is up several percentage.

Michael Linenberg – Deutsche Bank

Okay.

Scott Kirby

I think 6%, we got rid of two market, added two markets but then several other markets are going in around.

Michael Linenberg – Deutsche Bank

Okay. And then, actually I know Derek is going to give me that other number but Scott you said Charlotte Sao Paulo, wasn’t that Sao Paulo, wasn’t that tight to the slot deal. Is that something else that, is that some sort of additional frequency that became available?

Scott Kirby

Since the slot deal occurred, we got another frequency to Sao Paulo from United. So I’d be able to start Sao Paulo, we hope in November this year even if the – even if the slot swap deal doesn’t get down though, of course we hope slot swap deal get done.

Michael Linenberg – Deutsche Bank

Okay. And then, just sort of the bigger second question here, you’re one of the few carriers without anti-trust immunity in, a deal, let me say, I think you are, I am trying to think if you have a partner with anti-trust immunity and of course that doesn’t essentially mean that you can’t generate very good profits, I mean, your performance has been very good, Alaska is another carrier without anti-trust immunity that’s actually putting up some of the best margins, now with the United continental merger behind us, is that something that you would consider to pursue for 2011 and it would sort of made me think about it was just this little swap – sort of swap that you did here with the United obviously being part of an anti-trust immunized JV would allow you to do a lot more stuff in, the precedent has now been set that, two separate carriers, it can effectively be in, in immunize, in anti-trust immunized JV, even if there are, separate competitors domestically. Just thoughts on that?

Scott Kirby

We would like to be able to explore that with United depending on the economics, hope that something, that might get up to something that you can get done, we’re currently very happy with our trans-Atlantic service, it does really well and some of the most profitable client we have, but if there is not to, you make it better by being part of the JV, we would like to do that. United understandably has a lot to do plight right now trying to integrate with Continental, it’s something that we had some conversations about with them. And maybe it’s a potential down the road but it’s not that you can terminate.

Michael Linenberg – Deutsche Bank

Okay.

Derek Kerr

Len, I would like to follow up on your question. The total ASMs in the first quarter are $20.5 billion.

Michael Linenberg – Deutsche Bank

Okay.

Derek Kerr

Second quarter $22.8 billion.

Michael Linenberg – Deutsche Bank

Okay.

Derek Kerr

Third quarter $23 billion and fourth quarter 21.2 for a total of 87.5.

Michael Linenberg – Deutsche Bank

Thanks, that’s helpful. Thanks, great quarter guys.

Doug Parker

Thanks Mike.

Operator

Our next question comes from Kevin Crissey with UBS.

Kevin Crissey – UBS

Hi guys. Can you talk and maybe this is for you Scott, I’m not sure. Google-ITA, the airlines have been relatively quiet on the thoughts on that. What is your position on that?

Scott Kirby

Very big partner with ITA. And I think actually we are the first or maybe I count it as first – we are the second airline department. And so, we’ve got great technology and like dealing with them. Our thoughts really are, as long as we keep our relationship with them as it is today, we would have objection to it as long as you can be assured if that’s going to go – continue going forward. More of the objections are coming I think from the Almond travel agents and from the airlines.

Kevin Crissey – UBS

Yeah, thank you. And just I guess when you’re selling the choice seats and you’re doing that through the GDS. How is that working functionally, is it a fair class? You see, there is difficulties on a GDS doing that technology wise, yet you’re doing it. How is that being accomplished?

Scott Kirby

Well, we’re not doing it to the GDS and that’s the problem. We’re doing it through our own reservation systems which is suboptimal for us because, a big portion of our – to get yourself to other distribution and so we can’t sell them to those customers. And it’s bad to those customers as well because we have a number of seats on our airplane that are blocked off and are only available to customers who are buying through UHO’s direct channel. But not because we want to box it and force people to go direct to UHO because that’s how you had to do it to make sure your seats work. We would much prefer to have the GDS and all of our partners have the ability to sell those choice seats.

Kevin Crissey – UBS

Isn’t that what you’re new Experia deal does though?

Doug Parker

That’s what it will do, yes.

Kevin Crissey – UBS

And so they’re building it through the GDS, I mean so was it going to be go through – they’re going to build a whole new framework around that or are they’re going to – they’ll be some sort of patch work to allow that to happen?

Scott Kirby

They can’t go through the GDS if we both agree or you can direct if that works more effectively.

Kevin Crissey – UBS

Okay. All right, thank you very much.

Operator

We’ll take our next question from Dan McKenzie with Hudson Securities.

Dan McKenzie – Hudson Securities

Yeah, good morning everybody. Yeah, just a couple of quick questions here. The January CASM was a little stronger than I expected in light of the continued competitive capacity from Delta. I guess, I’m more really bugged for the competitive capacity. What would you estimate the January CASM estimate would have likely been?

Scott Kirby

I think that’s affecting us by 1% to 1.5%. So it would have been 1% to 1.5% higher than that.

Dan McKenzie – Hudson Securities

Okay, very interesting consistent with last quarter. And then, following up in 2010 US Airways exited a handful of European airports and shifted the flying including the Latin American. As you look at how the changes are maturing, how do you feel about the international footprint at this point? Should we expect more shifts looking ahead or have the routes ramped in line with expectations?

Derek Kerr

Routes have done really well to Europe. Our pull down last year was after 2009 where Europe really fell off a cliff. And so we perceptually pulled down in 2010 some of the European flying. But Europe has done very well and over the longer time, I think it’ll continue to grow there. We’re excited to be – to give that service to Sao Paulo. And so we’ll continue to grow in Latin America as well.

Dan McKenzie – Hudson Securities

Okay, thanks. I appreciate it.

Doug Parker

Great, thanks.

Operator

[Operator Instructions] We’ll go next with Glenn Engel with Bank of America and Merrill Lynch.

Doug Parker

Glenn?

Glenn Engel – Bank of America/Merrill Lynch

Hello, I’m sorry.

Doug Parker

Hi Glenn, how are you doing?

Glenn Engel – Bank of America/Merrill Lynch

Hi. On the RASM side, can you go through the fourth quarter of the RASM by reaching domestic Atlantic Latin?

Derek Kerr

The Latin was up about 5% domestic was up slightly more something like in the little, above or average. And Latin was up 18%.

Glenn Engel – Bank of America/Merrill Lynch

I’m sorry. So the Atlantic was up 5%?

Derek Kerr

Correct.

Glenn Engel – Bank of America/Merrill Lynch

And on your website penetration, what is that now and is it still increasing?

Derek Kerr

It is at about 33% and it’s been on a steady long-term increase so – but that increase – that’s like kind of steady increases, I think it’s about 33% in the last couple of months.

Glenn Engel – Bank of America/Merrill Lynch

Thank you very much.

Doug Parker

Thank Glenn.

Operator

Our next question comes from L Randall with Citigroup.

L Randall – Citigroup

Hi, guys.

Doug Parker

Hello.

L Randall – Citigroup

I have a question on your CapEx guidance of; I believe its $360 million net. What does the gross number look like, is it close to the $600 to $700 million. And then what’s the rate level call it normalized gross CapEx? It looks like it’s growing as we get into call it 2013?

Derek Kerr

Yeah, the gross CapEx from an aircraft side is $534 million on that assume the net – aircraft CapEx of a 136 and that’s a debt assuming we used to backstop financing for the aircraft deliveries. And with 12 deliveries coming next year should be in a similar spot in 2012. The $180 million in non-aircraft CapEx is a little higher than we’ve been in the past, we’ve been at about a $150 million but we have some interior upgrades and other things that have moved into 2011 versus 2010. So, I would say that that $180 million in non-aircraft CapEx would be in the 150 to 175 range going forward. But I will expect next year in 2012 to be very similar to what we have this year, maybe a little slightly lower.

L Randall – Citigroup

Thanks for that. And then if I could just follow up on Dan’s questions, terms of competitive capacity pressure that you’re seeing in the first quarter as well as last quarter, what is that kind of paid, is that going to be closed for the third quarter or is that you’re going to see that easier or what you’re thoughts?

Derek Kerr

Well, all that competitive capacity that we’ve talked about is in place right now, I mean somebody may have more capacity that to know about. But there is nothing new that’s coming online though much of the capacity started in the third and fourth quarter. So on a from year-over-year perspective it will continue to impact results all the way up until November. But it’s already – all the new routes already baked into our current run rate.

L Randall – Citigroup

Thanks for that, nice quarter guys.

Derek Kerr

Thank you.

Operator

We’ll go next to Bob Mcadoo with Avondale Partners.

Bob Mcadoo – Avondale Partners

Hi guys, just a quickie. With the Expedia changes it would allow you to sell the better seats, what’s the – you’ve talked about it something that will come, is that take six months for them to do or 12 months or how long does it take before something like that actually could get in place?

Scott Kirby

I don’t think we know for sure yet.

Bob Mcadoo – Avondale Partners

That’s all I had. Thanks.

Operator

Our next question comes from Ray Neidl with Maxim Group.

Ray Neidl – Maxim Group

Hey Doug, I know you like to talk about general history or trends and happenings, but –

Doug Parker

I don’t know that I like to talk about it Ray, (inaudible) me about it, so I answered.

Ray Neidl – Maxim Group

You are very good at it on CNBC.

Doug Parker

Oh thank you, Ray.

Ray Neidl – Maxim Group

I watch you all time. But one thing I haven’t heard you really comment was what’s going now with the narrow body situation, the new aircraft coming on, the more fuel efficient engines, and being that you’re not doing fuel hedges, this is probably an extremely important subject to you, what’s your view on the replacement and what are you looking for?

Doug Parker

Yeah, you’re right. I mean, if we were the largest operator Airbus aircraft in the world. I believe, in terms of actual number of shells. So, this is something that we are talking to Airbus about – looking to see if indeed the operating cost savings offset the capital of it yet. But we’re not sure about that yet. But we’ll work with them and if indeed this is an airplane that make sense for us we’ll, I’m certain we’ll be able to have their Airbus. We certainly applaud the effort, additional intervention, trying to do things, both to lower operating cost, but also to improve the machine on the airplanes. We have some other grounds to do a 757 problem which is that airplane comply machines that no other airplane comply. And they’re going to be – need to be retired at some point. So thus we may be able to help some of that as well. So, we are definitely interested in talking, I have no idea if we’re interested in purchasing at this point.

Ray Neidl – Maxim Group

Okay, great. And Derek, I never see you on CNBC, but I got a general finance question for you. The bond markets, the interest rates are unbelievable, which is – which imagine is why you went to the market with the almost giveaway rates that you’re doing. I’m just wondering what incentives do you have to take down debt to redeem debt at these interest rates and do you have a goal for your debt capitalization ratio that you’re shooting for?

Derek Kerr

Well, we’re looking at everything we have Ray. Lot of that, the transactions that we did were part of the liquidity initiatives and we’ll pay a lot of that debt and start paying that debt down this year out of operations. We have, like you said we have gone to the market with the WTCs, we have more aircraft coming this year that we need to finance that we may use the markets for, so we don’t have a target right now, we are continuing to increase cash and we are going to increase cash and keep that level where it needs to be. Our major debt that we have is the $1.2 billion loan that’s at LIBOR plus 250 so it’s at a very good rate and things that are coming due we will pay off with existing – its existing from operations, but we may use the market again as you saw with the successful WTC transaction to finance aircraft for the next couple of years.

Ray Neidl – Maxim Group

Okay, great and congratulations on the quarter.

Doug Parker

Thank you Rand.

Operator

This is the end of the analyst question-and-answer session. We will now go to the media for questions. Our next question comes from Megan Neighbor with Arizona Republic.

Megan Neighbor – Arizona Republic

Hi guys, how are you doing.

Doug Parker

Great, how are you.

Megan Neighbor – Arizona Republic

Very good. As of now is US Airways considering any new fees increases in 2011, for instance a fee for carryon bags?

Derek Kerr

We can’t comment on forward-looking pricing information. We will get into trouble with Department of Justice. But, the one thing we have talked about is choice seat and I talked pretty extensively about better program that already exist, but our desire to stall that to the more distribution channel.

Megan Neighbor – Arizona Republic

Okay. Also can you comment on the current negotiations with your with flight attendants where they are now right now and how they are going?

Doug Parker

Sure, Megan. Where we are, we are in continued negotiations and we have made some nice progress of labor, we are not done and hopefully we can get something done by the end of the year, but we are certainly not there yet. So, we continue to talk, we have table talking with the help of a facilitator who is helping us to get to this process and hopefully we will get something done soon.

Megan Neighbor – Arizona Republic

Thank you.

Operator

We will take our next question from Catherine Craig with Centre for Aviation.

Catherine Craig – Centre for Aviation

Yes, hi Domin. I was curious as to what your GDS or distribution costs are and I will take it either with the GDS OTA perspective or including commissions.

Derek Kerr

Yeah, the total expense is about $300 million a year.

Catherine Craig – Centre for Aviation

Thank you. When are your contracts up?

Derek Kerr

They are staggered. We just signed a new with Expedia. We are in negotiations with Sabre and the others come up at just various times when they are on the way.

Catherine Craig – Centre for Aviation

Okay, thanks.

Doug Parker

Thank you.

Operator

We will take our next question from Ted Reed with TheStreet.com.

Ted Reed – TheStreet.com

Thank you. You guys haven’t said the cost of the weather events in the fourth quarter, can you say what those were?

Derek Kerr

Well, you think, a few million utmost, a $5 million or less because most of its customers rebook and you recapture much of the revenue, not all of them, which you recaptured much of the revenue on other days and you say with the lot of the expenses are flying like fuel. So, we are being precautious putting minimal. You really get extraordinarily low compared to your competitors in the same region.

Doug Parker

We are not sure how to eat the numbers as big as this. What I know is that our team did a phenomenal job of managing through these storms. Well, it’s really difficult to tell you in short, what is difficult is anywhere. We fly as much up and down and these closes and that’s what because of the results of what our team did, that’s what it cost on us. We are extremely proactive, cancelled twice where we knew we could not, if we did not think reapplying, kept people with their plans and as soon as the storms abated we are up there flying with our regular schedule and get people moving in. And our team just did an amazing job, we are really proud that we worked at it.

Ted Reed – TheStreet.com

Can you say anything about your view of why the Charlotte airport ran out of the icing events and how they can be presented in the future?

Doug Parker

We had a great working relationship with the Charlotte airport, Janeiro is one of it if not the best airport managers in the country and this was one of these storms that no one anticipated ever since, again you live there, I mean, it wasn’t just the amount, it wasn’t just the number of the icing events we have but how much flew would you had to use on the zero points because the icing was so fixed. So, we are not going to blame this on the airport and what I know is going forward we have worked with the airport to make that doesn’t happen again.

Ted Reed – TheStreet.com

All right, thank you. And last thing, Scott you were talking with United about antitrust immunity, whatever you said can you please say it again?

Scott Kirby

I think, we would love being star and that we have great partnership with the all the star carriers and United and there maybe opportunity to expand that and ask antitrust immunity over time. I don’t think maybe it’s going to happen eminently, one we are really happy with our Atlantic, it was duty for us and to United has lot of new play time to integrate with United so –

Ted Reed – TheStreet.com

But you have talked briefly with them?

Scott Kirby

Yeah, we have talked to them about it but nobody has made the commitment one way or another.

Ted Reed – TheStreet.com

All right, thank you.

Doug Parker

Thanks, Ted.

Operator

That concludes the question-and-answer session today. At this time Mr. Parker I will turn the conference back over to for any additional or closing remarks.

Doug Parker

Perfect thanks, we are done. We appreciate your interest in our results and if you have further questions either contact Dan for Investor Relations issues or Jim also in our Communication group for the press. Thank you very much. Have a nice day.

Operator

That concludes today’s conference. Thank you for your participation.

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