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Executives

Stephen Johnson - Executive Vice President of Corporate & Government Affairs and General Counsel

Derek Kerr - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

William Parker - Executive Chairman, Chief Executive Officer, Chairman of Labor Committee, Chairman of US Airways and Director of AWA

Daniel Cravens - Director of Investor Relations

J. Kirby - President

Robert Isom - Chief Operating Officer and Executive Vice President

Analysts

Will Randow - Citigroup Inc

Megan Neighbor

Kevin Crissey - UBS Investment Bank

Mary Schlangenstein - Bloomberg News

Garrett Chase - Barclays Capital

Daniel McKenzie - Hudson Securities, Inc.

Steve Wilder - Capstone Investments

John Godyn - Morgan Stanley

Ray Neidl - Calyon Securities

Glenn Engel - BofA Merrill Lynch

Jamie Baker - JP Morgan Chase & Co

Ted Reed - TheStreet.com

Michael Derchin - CRT Capital Group LLC

David Koenig - Associated Press

Helane Becker - Dahlman Rose & Company, LLC

Michael Linenberg - Deutsche Bank AG

US Airways Group (LCC) Q1 2011 Earnings Call April 26, 2011 1:00 PM ET

Operator

Good day, everyone, and welcome to the US Airways First Quarter 2011 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.

Daniel Cravens

Thanks, Jennifer, and welcome, everybody, to the US Airways First Quarter 2011 Earnings Conference Call. Joining us in the room today are Doug Parker, our Chairman and CEO; Scott Kirby, our 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 normally do, we're going to start with Doug, and he will provide us an overview of the first 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 questions from analysts 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 on our earnings press release issued this morning, our Form 10-Q for the quarter ended March 31, 2011, and also our 2010 Form 10-K.

In addition, we'll 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 also 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 the website and will be archived for approximately 1 month. The information that we're giving you on the call is as of today's date and we undertake no obligation to update the information subsequently.

Thanks for joining us, and with that, I'll turn it over to Doug.

William Parker

Thank you, Dan for that fine, dramatic reading, getting better every time. Thanks, everybody, for being on. We did, indeed, report or release our first quarter results.

We had a net loss of $110 million, excluding special items. That compares to an $89 million loss in the first quarter of last year on the same basis. That's obviously not moving in the direction we want it to move. It's down somewhat year-over-year. The driver of that, of course, is fuel. The price per gallon that we pay for fuel is up about 33% on a year-over-year basis.

Fuel is now, by far, our largest expense item. If you go through the financials, you'll see that fuel expense in the quarter was about $1 billion in the first quarter of 2011, roughly 1/3 of our $3 billion in total operating expenses. So if average fuel prices had simply remained at the first quarter 2010 levels, which we thought were pretty high, our first quarter 2011 fuel expenses would've been $240 million lower. They didn't stay there, of course, though. And our job is to manage all issues, including rising fuel prices. Our team did an excellent job of doing that. Our revenue performance was strong, with unit revenues up more than 8%, and Scott will discuss that in more detail. Our cost performance was very strong. Unit costs, excluding fuel, down 1%, and Derek will talk more about that.

Our 32,000 employees did an excellent job of taking care of our customers and we thank them, again, for that. We're pleased to be ranked first amongst the network carriers in the recently released Air Quality Rating report, which measures carriers on airline reliability and service for the full year 2010. And thanks to our team, we're off to a great start again in 2011 and we expect to be first again this year.

So as we look forward, this strong revenue performance, our cost control, our capacity discipline and our commitment to being the best in the industry, in terms of operational reliability, have us well positioned to compete in this current high fuel cost environment.

And with that said, I'll turn it over to Derek and Scott to give you more details.

Derek Kerr

Thanks, Doug. As has been our custom, we did file our first quarter 10-Q this morning. As Doug said in that Q, we reported a net loss, excluding special items of $110 million or a loss of $0.68 per diluted share. This compares to a net loss, excluding special items of $89 million or $0.55 per share a year ago.

On a GAAP basis, the company's net loss for the first quarter was $114 million or a loss of $0.71 per diluted share versus a net loss of $45 million or $0.28 per share in the first quarter of last year. This quarter's results were impacted by the significant year-over-year increase in fuel prices, which I'll talk a little bit -- talk about a little later. Also, I mentioned that the first quarter GAAP loss in 2010 was impacted by special items totaling a credit of $44 million. This was due principally to a net realized gain related to the sale of certain investments in auction rate securities.

For the quarter, total capacity was 20.5 billion ASMs, up 3.4% from 2010, partially due to a higher year-over-year completion factor of approximately 1%. Our mainline capacity for the quarter was 17 billion ASMs, up 2.8% from a year ago. And express capacity was 3.5 billion ASMs, up 6.5% from 2010.

During 2011, we do plan to grow the fleet by 1 aircraft, adding 13 aircraft, 12 new A321s and 1 older 757, while returning 12 older 737-300 leased aircraft and continuing our fleet renewal. The 757 went into service in the first quarter, and the 12 A321s are scheduled to be delivered in the third and fourth quarters. The express fleet count is anticipated to remain flat in 2011.

With fuel prices continuing to increase, we have relooked at our capacity plans for the remainder of the year. We are once again reducing total capacity by pulling down guidance in the third and fourth quarters by approximately 1%, and this is in addition to the announced 1-point March capacity reduction. As a result of these changes, total system capacity in the back half of the year will be down versus 2010 third quarter, approximately 0.5 point down and the fourth quarter down 2%.

Full year total capacity is now forecasted to be up approximately 1%.

Mainline ASMs are projected to be 27.2 billion this year, which is up about 1.5% versus 2010. Domestic mainline is expected to be up slightly, while international is projected to be up approximately 4%.

ASM's breakdown by quarters is 19.2 billion in the second quarter, 19.1 billion in the third and 17.3 billion in the fourth. Express capacity for the year is forecasted to be 14.1 billion. ASMs, down 1%. Express will be down 3.3% in the third quarter and 8.3% in the fourth quarter. We will continue to evaluate further capacity reduction in the light of the high fuel price in the economy.

Total operating revenues for the quarter were $2.96 billion, up 11.7% from the same period in 2011. Mainline pass-through revenues were $1.9 billion, up 11.9%. During the quarter, other operating revenues were up $14 million or 4.9% versus 2010, due to an increase in ancillary revenues. Cargo revenues continued to show significant improvement in the first quarter, coming in at $43 million, an increase of $10 million or 30% versus last year, driven by higher international volume.

Total passenger RASM increased 8.7% in 2011 versus first quarter 2010, with mainline up 8.9%, express up 6.9%. For the same period, combined yields increased 7.6%. And our combined load factor was a record 78%, an increase of 0.8 points versus 2010. Total RASM in the first quarter was up 8.1% versus 2010 and Scott will talk in more detail about our strong revenue performance in the first quarter after I'm done.

On the expense side, the airline's operating expenses for the quarter were $3 billion, up 12.8% compared to a year ago, due primarily to a $272 million increase in consolidated fuel expense. Our first quarter results were significantly impacted by the extremely high price of oil. Higher average prices accounted for $240 million of the $272 million increase in total fuel expense. Mainline was up $180 million, express was up $60 million.

Our average total fuel price, including taxes, was $2.88 per gallon for the first quarter of 2011 versus $2.18 per gallon in the first quarter of 2010, a 32.5% increase.

Facing sharply higher fuel prices, our employees continue to do an excellent job of increasing revenues and maintaining our strategic cost advantage. Our entire team is focused on maintaining and controlling costs throughout the company. Excluding special items and fuel, our mainline cost per ASM was $.0876 in the quarter, a decrease of 1.3% versus 2010. Express operating cost per ASM x fuel and special items was $0.151 for the quarter, up 3.2% versus 2010 due to the PSA CRJ200s coming off their maintenance honeymoon period.

For the reduction in capacity, we have adjusted our unit cost guidance slightly. Our CASM x fuel guidance for the remainder of 2011 has mainlined flat to up 2% versus 2010, breaks down by quarters as the second quarter should be approximately flat. The third and fourth quarters are up 2% to 4%. Express CASM for the full year is forecasted to be up 6% to 8%, due primarily to higher maintenance costs.

For the full year, we are forecasting fuel price in the range of $3.23 to $3.28, based on the April 19 forward curve. Our forecast breaks down as follows: $3.29 to $3.34 in the second quarter, $3.37 to $3.42 in the third quarter and $3.39 to $3.44 in the fourth quarter. Under these forecasted prices, we anticipate that our fuel cost for 2011 will increase by about $1.45 billion versus 2010.

Next, balance sheet. We extended -- we ended the quarter with $2 billion -- $2.46 billion, excuse me, total cash and investments, of which $2.12 billion was unrestricted. Our total unrestricted cash balance increased by $520 million compared to March 31, 2010, and $200 million from the end of the year.

Total unrestricted cash includes $45 million of auction rate securities at fair market value that are currently reflected in noncurrent assets on our balance sheet. During the quarter, the company monetized auction rate securities of $13 million, which approximated our carrying value.

The company generated $345 million of cash flow from operations and used $128 million for debt payments for the first 3 months of 2011. In April, we were able to secure sale-leaseback financing for 4 of our 12 A321 deliveries in the back half of 2011. Those 4 aircraft will be fully financed, reducing our cash commitments in 2011 by approximately $30 million. We are currently finalizing plans to finance the remaining 8 aircraft deliveries in 2011, which all currently have backstop financing.

Our first quarter nonaircraft CapEx was $30 million. In the current environment, we have re-evaluated our nonaircraft CapEx plans. We now forecast total net CapEx to be $262 million in 2011. This includes nonaircraft CapEx of $160 million, a reduction of $20 million for 2011 versus our previous guidance and net aircraft CapEx of $102 million. We continue to focus our nonaircraft CapEx on investing in our product, which is interior refurbishments, customer self service and recovery tools and only those expenditures required to run the operation.

So in summary, I would like to thank our employees for effectively managing through a first quarter that saw extremely high fuel prices. Due to all of the things we have done, we are well positioned to compete in this challenging environment. And with that, I will turn it over to Scott.

J. Kirby

Thanks, Derek. I'll take a minute to talk briefly about our operational results and then turn to the revenue environment. We're extremely proud of our team that continued to run an industry-leading operation. The employees of US Airways continue to produce outstanding results in all of our operational metrics, including on-time performance, mishandled bag ratios and complaint ratios.

Turning to the revenue environment, during the first quarter, our passenger RASM increased just under 9%. A very strong performance, particularly considering that we had no exposure to the Pacific, the fastest-growing region for U.S. carriers. During the quarter, we saw one of our fastest ever accelerations in revenues in response to the rapid increase in fuel prices. There were multiple fare increases and also several efforts to clean up or cancel low-priced junk fares, all of which helped lead to a quarter with yield up over 7.5%.

In our view, the strength in revenue during Q1 was driven by continued business demand strength, combined with a strong acceleration in leisure revenues, driven mostly by higher fares.

For some specifics, in January, our booked revenue, which I'm defining here as tickets purchased inside 14 days, was up 7%, but leisure booked revenue was up 11%. February was arguably the best month for booked revenue in the modern history of US Airways, with booked business revenue up 9% and booked leisure revenue up 28%.

March started strong as well, but as the international headlines deteriorated with the Japan earthquake, continued turmoil in the Middle East and high oil prices, bookings went from the fantastic numbers that we'd seen in February to merely good bookings. For March, booked business revenue was up 6% and booked leisure revenue was up 14%. So March was still very, very good, but bookings slowed somewhat from the torrid pace we'd seen in February. It therefore appears that business demand was good and largely consistent across the entire quarter, with February doing only slightly better than January and March. Leisure demand was also good in January and March, but was particularly strong in February.

With that background, I'll give you some specifics on the revenue outlook going forward. For mid-March forward, bookings have continued to be good, but not yet back to the pace we saw in February. As other airlines have also said on their recent conference calls, April results will be relatively weaker than Q1. But at this point, May and beyond look to be returning to the strength that we saw in February and early March. It's too early to say with a high degree of certainty, but the data does seem to indicate that we had a very strong revenue environment, deteriorated to a merely good revenue environment in mid-March. And as a result, the last half of March and all of April, while still good revenue months, turned out to be less strong than February was or that May and June are expected to be.

Specifically, then, similar to other airlines, we expect April RASM to be up less year-over-year than March was at about 6%. But we currently expect May and June to return to double digit year-over-year RASM increases. We continue to see a strong pricing environment, improving corporate demand, consistent with underlying demand -- with strong underlying demand trends, as evidenced by another system-wide successful fare increase last week.

So in summary, the employees of US Airways continue to run a truly fantastic operation and we continue to be encouraged with the strong revenue environment.

William Parker

Thank you, Derek. Thank you, Scott. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Bill Greene with Morgan Stanley.

John Godyn - Morgan Stanley

This is John filling in for Bill. First of all, Scott, on your commentary on May and June double-digit PRASM, Delta earlier today talked about how that sort of level of PRASM grows. And that momentum was going to last through the summer into July and August. I know it's early, but are you seeing similar trends?

J. Kirby

Oh, I certainly think that will be the case, but it's hard to say that from a purely -- from a data standpoint. For July, we probably have 10% to 15% of our revenue on the books. So July is starting off, actually even better than May and June. And August is similar, but a long way to go before they're final. But if I had to bet today, I would bet on similar performance.

John Godyn - Morgan Stanley

Okay, thanks. And Doug, you've long been a favor of industry consolidation, and I was hoping you could just give us an update on your thoughts. To us, on the one hand, it seems like high oil prices are slowing recovery a wide range in how different airline stocks have performed since the bottom, would be conducive to consolidation going forward. But offsetting this is a fact that they are just fewer possible combinations and given all the activity that's gone on already and those that haven't consolidated seem less interested in doing so. Is the industry still in a place where consolidation is actually feasible or has more consolidation become more of a theoretical?

William Parker

John, I had looked at -- you've couched it pretty well, I think. The issue is, I think consolidation still makes sense, but there's not much more left. So what remains is, I think, more going to be a result of stars aligning than just something, anything-can-happen-type stuff, if that makes sense. The reality is there's just -- there's not much more to do. I think there is more to come, but it could happen soon, it could happen a long time from now. Where we are is happily running a stand-alone independent airline that is capable of doing that for the long term. So if it happens and if those stars align, we want to be positioned to participate. But if they don't, we're already positioned to succeed. And as to the high fuel environment, while in the past, maybe, crisis has led to consolidation. There are forced some to have to consolidate. We're nowhere near that point right now. I mean, I'm not trying to minimize the impact of these fuels prices and, indeed, think there's a lot more, we as an industry, need to do. Two, to make sure we're profitable, even in times like this. And more consolidation would help in that regard, but we're not by any means in a kind of crisis state the industry was in, in prior years, as you can see from everyone's results. So I don't think the current environment does anything to either compel or detract from the many consolidation opportunities. I think it's just more of an issue of when airlines are ready and I think it makes sense -- it will makes sense, and I just don't know if we're there yet. I don't think we are.

John Godyn - Morgan Stanley

Just as a quick follow-up. Is it better if we saw a more distressed environment or is it better if we saw the cycle?

William Parker

No, we are not in favor of creating crises. So no, this is great right now. Everybody, I think that's -- and indeed, I don't believe that the only way to get the industry fixed is to have it go into another crisis. I believe the right way to do it is for management to manage independently, each of their own airlines, in a way that tries to cover their cost of capital irrespective of where the fuel prices are. And we're not quite there, yet. But -- and more consolidation would help. But we're getting off -- we're getting a lot -- we're a lot closer than we were. And I'm hopeful that we'll get there over time. We still have a lot of things that I think, as an industry, we could be doing to manage the current environment better. But we're doing everything we can at US Airways and are happily doing so.

John Godyn - Morgan Stanley

Perfect. Thanks a lot, guys.

William Parker

Thank you.

Operator

Our next question will come from Jamie Baker with JPMorgan.

Jamie Baker - JP Morgan Chase & Co

Derek, first question. Given the progress, the success, I guess, on some recent sale leaseback transactions, have you noticed a real change, in terms of lessor comfort with Airways? I mean, are they offering you a lot better deals now that liquidity is much higher? Any color there?

Derek Kerr

I think in showing what we did with these for our sale leasebacks, I think the market is out there. Yes, I think 2 years ago, we couldn't have got these done. So I think there is a much more positive feeling about US Airways from the business that we're in and from a liquidity position. So I think the environment is good and we may pursue that for some of the other 8 aircraft that we have out there. But it's much more positive than it has been in the past.

Jamie Baker - JP Morgan Chase & Co

Okay, excellent. And to follow-up, Scott, thanks for the revenue commentary. It exceeded our forecast for the second quarter. But I remember when you were speaking at our event in March, you identified the CNN effect, in terms of the second half of March. But you felt at that time, that April was going to make a stronger rebound than apparently it turned out to. Was there another lag down? Did it just not live up to your expectations? How did the kind of RASM ramped through April look that it just emerged in the 6% range?

J. Kirby

Yes, I think you've seen consistently from where March -- mid-March, March 12, whenever the earthquake happened, forward for the next 4 to 5 weeks that bookings took a drop, but then recovered. And they recovered, and they recovered to strong year-over-year gains, but not at the really torrid pace that we had seen in February. I mean, February literally was probably the best booking month in the history of the industry, with our booked leisure revenue up almost 30% in 1 month. And so we recovered and we recovered to really good levels, but not as strong as things were in February. And that led to a weaker April than I was expecting. And I think kind of across the industry than you were -- than people were expecting when you consider that April had the Easter benefit. It arguably should have been stronger than March. It remains to be seen if this is true or not. I do think that, that's mostly concentrated in March and April. And as I look at our data and listen to commentary from other airlines, it looks like May and June are going to be returning to double-digit kind of RASM increases. So I think that it was concentrated in the short term. I do think some of that was a CNN headline effect, but we'll wait and see as we get through the summer to confirm if that hypothesis is correct.

Jamie Baker - JP Morgan Chase & Co

Okay, excellent. I appreciate the color. Thanks, everybody.

William Parker

Thank you, Jamie.

Operator

[Operator Instructions] We'll now move on to a question from Hunter Keay with Wolfe Trahan.

Hunter Keay

Wondering how you're finding the competitive landscape in transatlantic right now, with ATI benefits and JVs ramping for some of your peers out there with you guys kind of flying solo. Is it harder than you expected? Is it easier expected? Is that where some of the capacity trends are coming from? Maybe a little bit of color on that?

J. Kirby

Okay. I don't think the JVs have really affected us in any way that I can tell. Although as the JVs try to get themselves organized during the early days, they're sometimes -- airlines within the JVs are doing things opposite of each other, so it's just kind of hard to figure out what's going on but that's with the transition. I don't think it's really affected us much from a competitive perspective. And transatlantic was weaker in the first quarter as everyone had forecast than domestic. For us, transatlantic RASM was up about 1%, domestic was up about 10%. I think by the time we get in the second quarter, those are going -- the transatlantic and domestic are going to be very similar. The first quarter transatlantic story was mostly about loss of capacity growth across the industry, and that moderates somewhat in the second quarter and beyond and demand is, at least, looks strong for the summer. So I think they'll be performing on a similar level on a going-forward basis.

Hunter Keay

Okay, thanks. I hate to even ask this question, but you mentioned another record load factor. I think you guys have reported record loads for something like, 11 in the last 12 quarters or something. But do you think it's still possible that you're still leaving some yield on the table? Maybe sort of triangulate that with where advanced bookings are right now? Are you in a position where you feel comfortable -- you have the liquidity it takes in more sort of inventory risk? Or do you feel like you were kind of getting as much out as we can on the yield side at this point?

J. Kirby

Well, I think that we, at US Airways, are optimizing. And we aren't at all making decisions to say, "Let's take more advanced bookings because that's less risky or because of liquidity or anything like that." We have a forecast for demand and we run it through our optimizers and the optimizers set inventory buckets based on math as opposed to opinions. And so where our inventory is, is really it's just a mathematical calculation. That said, I think at an industry level, higher fares would lead to lower load factors and higher revenue. I mean, I've been on record many occasions, absolutely convinced that demand for air travel is inelastic and a 100 different times I'm looking at it, it always turns out that demand is inelastic. So higher fares lead to lower revenues, but we exist in a competitive environment and we have to keep our fares competitive. So at an industry level, higher fares lead to higher revenues. But at the US Airways level, I think we're doing exactly what we should be doing to optimize revenues going forward.

Operator

Our next question will come from Helane Becker with Dahlman Rose.

Helane Becker - Dahlman Rose & Company, LLC

Can -- so can you say on that back half decrease, 8.3%, I think for express, where that's coming from? Like which hubs or which entities or how should we think about where that capacity is coming from and how that will change your overall domestic share?

J. Kirby

Domestic capacity in the back half is roughly flat and we've pulled some international in total. The express is kind of coming from all over. Some of that is international for express but it's obviously Mexico and Canada kind of stuff. But really, Express is coming down kind of across the board and across the system

William Parker

But mainline is flat, Helane.

Helane Becker - Dahlman Rose & Company, LLC

So it's coming out of all the 3 hubs is Express, is that it?

William Parker

Yes.

Helane Becker - Dahlman Rose & Company, LLC

Yes, okay. As then my other question is you said something in the press release, and I was wondering if you could say, well two things. One, you talked about Piedmont handling all of the ground handling operations now. Can you say what that cost savings is making that change? And then two, you talked about a lawsuit you filed against Sabre. Can you say what kind of damages you're looking for? Thank you. I think that was like 2.5 questions.

William Parker

It's okay. Helane, on the Piedmont at ground handling, really what is happening is Piedmont is taking over ground handling for Mesa at the Phoenix Airport and some other stations on the West Coast. So Mesa is basically getting out of the ground handling business for us on the West Coast. There is no real savings in that. It's pretty much breakeven as we are replacing, taking most of their people and hiring them on the Piedmont side. And so there's -- it's really breakeven on that.

J. Kirby

And then on Sabre, we haven't given any specific number. We have said that we think the damages are in the hundreds of millions of dollars before traveling, but we haven't disclosed a specific number.

Helane Becker - Dahlman Rose & Company, LLC

Okay. But not $1 billion? Hundreds of millions?

J. Kirby

Hundreds of millions before traveling.

Helane Becker - Dahlman Rose & Company, LLC

Okay. Got you. Okay, thank you.

William Parker

Good luck with that.

Operator

Our next question will come from Will Randow with Citigroup.

Will Randow - Citigroup Inc

A couple of questions for you. I was happy to hear that you're buying [ph] back CapEx. How should we think about the cadence of your order book, particularly in 2013 and our ability to change it, in light of -- financing deliveries really doesn’t allow you to delever the balance sheet over the next three years?

Derek Kerr

I think we have shown in the past that we have been able to change our order book. Two years ago, we did push out these deliveries so if we needed to work with Airbus to do that, they have done that in the past. But at this point in time, we have no plans to do that.

William Parker

And I would just add that they're replacement aircraft, not growth. And in the past, we pushed them off out of crisis, in a need to get predelivery deposits back. Now assuming they're fully financed, which they will be, they'll be cash positive when they come in the door because they replace older 737s that are less fuel-efficient and require more maintenance. And, so, pushing those off would actually be a negative. Assuming they can be fully financed, which again, they will be. It would be a negative cash flow rather than a positive.

Will Randow - Citigroup Inc

And then just a question in terms of capacity, and if you could add any color on competitive capacity, that'd be great. But can you discuss how existing agreements with airports and other entities may or may not limit your ability to, one, cut more CapEx to respond to any potential demand destruction and, also, if you could highlight competitive capacity trends versus your peers, given that they're pulling a bit more, at least what I'm seeing in secondary cities in light of the high fuel environment?

J. Kirby

You were kind of breaking out there, so I'm not sure if I got it all. But we have remained disciplined about our own capacity. If you just look on a year-over-year basis, I think we're going to be at the bottom -- absolute bottom of the industry in terms of capacity growth. We have a lot of capacity growth in all the major carriers. So, I'll refrain from expressing opinion about other's capacity growth. But we think we've done what's best for US Airways, for shareholders and for our company.

William Parker

I mean, I'll be less restrained. Let me -- just to put some color a little bit on what Scott said. Since our merger in 2005, US Airways were down something around 13% in total ASMs. And that's a lot, that's a little bit more than the others, first off. So when you look at where you are today, and say, "What are you doing?" I -- We agree. That would feel as I -- There's too much capacity there so everyone should be looking at their own capacity. But I would just point out that we are now at a point having shrunk as much as we have. We're now at a point that we're the absolute minimums of are very close to the absolute minimums of our labor -- that our labor contracts allow us to go. We, in that time, have made difficult decisions, very difficult decisions like closing a Pittsburgh hub, closing a Las Vegas hub, stopping flying Boston to the Caribbean, which required us to close some crew bases. Things that are really hard to do and difficult to do, but the absolutely right thing to do, which has got us now in a position where we're flying 99% of our flights, where we have a real competitive advantage, places to Philly, Charlotte, Phoenix or DC and the Shuttle. And if we're able to built the transaction done, that number even goes up more as we get out of LaGuardia assets. So that is where we have gone and we believe it's the right thing and it's the right thing for the industry to do. Others haven't made those difficult decisions yet. And don't -- and our fine places where they don't have competitive advantage in trying to steal share from others still, still have underperforming hubs. And I just think it's interesting in times like this if we're not going to see that stuff go away now, we're never going to see it go away. $120 a barrel of oil then get it done, shame on us. So anyway, that's where US Airways is. We've gotten to the point where all of our capacity is fine in and out of our hubs, and we've gotten to the point where we can't reduce anymore because we're at the minimum for our labor contracts.

Will Randow - Citigroup Inc

Thanks, guys.

Operator

Our next question comes from Ray Neidl with Maxim Group.

Ray Neidl - Calyon Securities

Yes, Scott, I know you're very analytical and you gave a good outline for your look at the revenues going forward, here. But when I saw you a few months ago, you were very, very optimistic about the industry, even with higher fuel prices, not as high as they are now. And you said that you never feel -- I think you said something to the degree that you never felt as good in your 20 years experience with the airlines. Right now, with what's happened since then, would you rate yourself still that optimistic or slightly less optimistic or even more optimistic?

J. Kirby

So at the end of February, February, we were coming off the best booking month, I think, in the history of US Airways, certainly, but probably in the history of the industry. And so that was the peak, as I said on this call. The bookings pace did slow down about the time of the earthquake in Japan, and it's recovered. But it hasn't yet recovered to the torrid pace that it was on in February. It's recovered to a really strong environment. I feel very good about the revenue prospects for the industry and quite optimistic about the revenue prospects for the industry. And I hope that we're going to return to February levels to strong double-digit RASM growth. But we aren't quite yet back to where we were in February.

Ray Neidl - Calyon Securities

So you're still sleeping as well with the current environment?

J. Kirby

I sleep very well.

William Parker

This is not Scott's problem.

Ray Neidl - Calyon Securities

The second thing is if you can just give me a quick update on -- I know you're doing a lot of fleet renewal on the Airbus, the A350, the re-engined A320 series, and if you're participating in next gen?

Derek Kerr

Okay, Ray, on the A350, I think our delivery is out in 2017, '18 timeframe, so those are still in place and out of that timeframe. We haven't had a lot of conversations on the re-engine. All of our deliveries are, as Doug said, are replacement deliveries. A lot of A321s and A320s that are coming in between now and 2015, 2016 to replace all of our 737-300s and 737-400s and older A320 A1 engine aircraft. So the plan is to continue on that delivery stream, bring in all of those aircraft. We do have options past that, which would be in the timeframe of when the NEO engine or NEO aircraft is there. And at that point in time, we may have discussions down the path. But at this point in time, the plan is to continue along the path, take the deliveries that we have on order as replacements and not go into the discussions on the NEO for those deliveries.

Ray Neidl - Calyon Securities

Okay, great. Thank you.

William Parker

Thanks, Ray.

Operator

We'll take a question from Michael Linenberg with Deutsche Bank.

Michael Linenberg - Deutsche Bank AG

Just two quick ones here. One, with respect to the slot swap, what's the date that either side can walk away without penalty?

J. Kirby

September 11.

Michael Linenberg - Deutsche Bank AG

Okay. And then my second question. This would also be to you, Scott, as well. With the merger of Continental and United, now that they're together, what -- have you guys seen any change in the connecting traffic that you have to and from Star? I mean, is it sort of flattish? Has it moved up since it's a much bigger enterprise? Or maybe it hasn't changed all that much just because Continental has been part of Star for longer than I guess 5 or 6 months? Any color on that would be great.

J. Kirby

To my knowledge, we haven't really -- we haven't seen any adverse impacts from Continental and United merging. To be more specific about the question, we've seen an increase in connecting traffic with Star partners, but that has been because we've expanded our co-share relationships with a couple of the European carriers and we've flown more flights to places like Buffalo for longer periods instead of just flying to it seasonally. So there's reason that's specific to US Airways, but we have seen an increase in connecting codeshare traffic with our Star partners in the last year.

Michael Linenberg - Deutsche Bank AG

Okay, very good. Thank you.

Operator

We'll take a question from Steve Wilder with Capstone Investments.

Steve Wilder - Capstone Investments

I was just wondering if you could give us -- you have a number of leases coming due next year, and I was wondering what your philosophy is on replacing them with purchases or renewed leases?

Derek Kerr

All of the leases on the 737-300 aircraft will be returned. All of those, as we talked about, we have deliveries coming in to replace those aircraft. On the wide-body fleets, we're still looking at negotiating on the 767s and the A330. We're looking at our wide-body fleet plans to determine where we go there. But on all of the older 737-300 and 400 aircraft, they'll be returned.

Michael Linenberg - Deutsche Bank AG

Okay, all right. Thank you.

William Parker

Thank you.

Operator

Our next question comes from Kevin Crissey with UBS.

Kevin Crissey - UBS Investment Bank

So probably for Scott, I guess. Expedia Direct Connect, do I read it from the Sabre suit that they're saying that you can't do that?

J. Kirby

I'm not sure -- are you talking about the Expedia Direct Connect to the American? Are you saying can we direct connect with Expedia?

Kevin Crissey - UBS Investment Bank

Right, because we've been reading the Sabre lawsuit. It implied that they weren't allowing you to do Direct Connects, yet you had just signed kind of a direct connect with Expedia so I wasn't sure if that's what -- was it implied from that or not?

Derek Kerr

We have not signed a Direct Connect with Expedia. You may be mixing us up with what American has done. We have not signed a Direct Connect with Expedia and the airlines...

Kevin Crissey - UBS Investment Bank

So they were just going to handle the Choice Seats, but you weren't sure how you were going to do it, right?

Derek Kerr

Correct. That's correct.

Kevin Crissey - UBS Investment Bank

But if it can't be done through the GDS, at current, was it sort of implied?

Derek Kerr

No, because we are working with Sabre to implement that functionality and would like to Sabre to be able to offer that to all of their customers, to travel agents, if they can get the implementation done.

J. Kirby

It may be Direct, it may not be. But it doesn't -- it shouldn't imply to you that it has to be Direct Connect.

Kevin Crissey - UBS Investment Bank

Okay. And is it possible, I guess two other real fast, if I could. With -- now you've had Easter came in a little softer than I think the industry or, at least, April did. And I think it was implied somewhat by, at least, other carriers, that it was Easter. Christmas was softer for some other carriers. Is it possible that people are getting more holiday-sensitive? In the past, airlines may have been able to get a better price during holiday periods and maybe there's a little bit of softening in that overall price sensitivity there?

William Parker

I don't know. I mean, I think the answer to that's no, but it's hard to know for sure. We did see -- I think you're correct, softness over Easter. Now I really think that, that is partly a headline effect. And If you look up to the kind of 30 to 45 days leading up to that, you had turmoil in the Middle East, you had the earthquake in Japan and you had people reading about gas prices going to $4, maybe $5 a gallon. And that in the short term impacts consumer behavior, especially when you have those kind of rapid changes, people adjust to it. And as we and others have said, you look out to May and this summer and demand looks good, but in the short term, the shock effect of headlines, I think, has an impact on something like Easter -- had an impact.

Kevin Crissey - UBS Investment Bank

The last one I have then is net CapEx. I guess I'd implore you guys to do gross and net. If -- I don't think you released that and I could be wrong about that. But I'll ask you to do what Continental has done and United has done and move to both, if possible. What are your thoughts on that, maybe, Derek?

Derek Kerr

I would say yes, we can do that. It's just the issue is what is the purchase price of the aircraft, and that is a number that is confidential. And when you have 12 aircraft that are all the same fleet type and if you say, "Here's how much my CapEx is going to be, you can easily get to that number." So we'll think about that and see if it's something that we can do to provide you better information.

Operator

At this time, media may queue up for questions. And now, we'll move to a follow-up question from Helane Becker with Dahlman Rose.

Helane Becker - Dahlman Rose & Company, LLC

Oh sorry, thanks for...

William Parker

Hey, you already did like 3 questions, Helane.

Helane Becker - Dahlman Rose & Company, LLC

I know, I know. I'm sorry, this is just an easy one.

William Parker

Okay.

Helane Becker - Dahlman Rose & Company, LLC

So you guys had done sold equity. I don't know, what 1.5 year or so ago at like $3 a share. Would you consider selling equity at these prices to bolster the balance sheet and maybe lower your cost of capital further going forward?

William Parker

Yes, Helane, in the past, we did that because we needed -- it was the right thing to do for our shareholders because we needed the cash. So we take decisions like that with a lot of thought and didn't do that lightly because the offset, of course, is we're diluting our shareholders. But we felt that was in the best interest of all of our shareholders because we needed the cash. And I think those turned out to be very good decisions for our shareholders. We would make future considerations on the same basis. And given where our cash balance is right now, you can come to your own conclusions, but we would not -- we wouldn't be looking to dilute our shareholders unless we absolutely thought it was the right thing to do from a cash balance perspective.

Helane Becker - Dahlman Rose & Company, LLC

Okay, great. Thank you.

Operator

Next, we'll hear from Gary Chase with Barclays Capital.

Garrett Chase - Barclays Capital

I wanted to see if I could just ask a couple of quick ones here. First, Scott, I wondered if you could give us maybe a little flavor on how your Atlantic and Latin markets are performing versus just sort of the broad average?

J. Kirby

Yes, in the first quarter, transatlantic was up about 1% on RASM, although that was the 18% capacity growth and domestic was up 10%. Latin was up a little bit more than domestic. Our Latin is going to be different than other airlines because it's much more concentrated in Mexico than South America. We've got the one flight out of Rio, that's our only South American service. So that's not exactly an apples-to-apples comparison. That's how we did, though, in the first quarter. In the second quarter, we think domestic and transatlantic are going to be similar. If I had to guess, I'd actually think transatlantic would be a little bit better than domestic, but close to each other. And Latin is -- it looks like it will outperform by a reasonable margin.

Garrett Chase - Barclays Capital

Okay. If I just kind of take that and think about what we've heard from some others, is it fair to think that the booked revenue story that you were telling, the way that things sort of were really strong in February and sort of eased off a bit? Did that happen more domestically than it did elsewhere? And is there any color you can give on that?

J. Kirby

No, it was across-the-board, I think. And I think it was across-the-board and we'll see where it goes from here.

Garrett Chase - Barclays Capital

Okay, and then just for Derek, maybe. If you take a look and you took down the capacity outlook a bit. The cost outlook, at least, near as I can tell, there's a lot going on this morning, but near as I can tell, you haven't really changed that. Where are you finding some ability to offset some of the CASM pressure there? And I think, more importantly, are there material opportunities to move the needle there looking forward? Or do you think we're kind of capped out on that after all the efforts over all the years?

Derek Kerr

Well, there's not any huge silver bullets, big huge $10 million ideas, otherwise we would've found them. But we are going to go through in the back half. We did cut the capacity. We still got work to do to go through on a forecast basis line-by-line from a headcount ability and other areas to see where we can pull things out in the back half. It's something that we've just started looking at. So I think there's a few opportunities, but there's no huge opportunities that are out there from a cost perspective.

J. Kirby

And I'd just add, Gary, that this near term to be one, maybe medium term, meaningful opportunities in distribution expenses.

Garrett Chase - Barclays Capital

Okay, thanks very much.

Operator

And our next question will come from Glenn Engel with Bank of America Merrill Lynch.

Glenn Engel - BofA Merrill Lynch

Two questions. One, can you talk about the distribution size, how was your Internet penetration going? Is that starting to flatten out?

J. Kirby

No, that's continued to improve and on usairways.com, and so we feel good about the trajectory and what's happened there and look forward to an evolving distribution landscape, a bit more competitive, good for us, good for consumers.

Glenn Engel - BofA Merrill Lynch

And on the slot swap, you had a lawsuit going and something must have happened that made you change your mind and postpone that lawsuit. What changed your mind? And why haven't things really moved since then?

William Parker

Steve Johnson will take that one.

Stephen Johnson

Sure. Well, the slot swap Doug mentioned earlier, and I'm sure I didn't hear, but I'm sure Delta talked about it on their call this morning. For us, it continues to be a strategically attractive opportunity. I think that remains to be the case for Delta and we continue to work on that. It's complicated because there's two government agencies that have asserted jurisdiction over this. And there are other interested parties, MLock [ph] and the Port Authority of New York. And in order to get something done, it's got to work for us, it's got to work for Delta and it's got to work for those guys. And that makes a resolution to the transaction complicated and something that takes time. But we continue to work on it and we continue to be optimistic that we can find a way to get it done.

Glenn Engel - BofA Merrill Lynch

Is there any one group who's being tougher than another among the government side?

Stephen Johnson

No, it wouldn't be fair to comment.

Glenn Engel - BofA Merrill Lynch

Thanks.

William Parker

Thanks, Glenn.

Operator

Next, we'll take a question from Dan McKenzie with Rodman & Renshaw Hudson Securities.

Daniel McKenzie - Hudson Securities, Inc.

It's pretty loud and clear you're still working on the slot swap, but if we could assume for a moment the deal is dead, would you be interested in pursuing a plan B for the shuttle flying or for the LaGuardia Reagan National flying or would you want that to remain a permanent part of the US Airways network?

William Parker

Yes. I won't even accept the premise. We really want to get the first transaction done, and I think -- I happen to believe we will, so we'll keep working on that.

Daniel McKenzie - Hudson Securities, Inc.

Okay, fair enough, I appreciate that. And then I guess for the follow-up question here. I did jump on a little bit late, so if you've answered this, feel free to punt it. But how much of the May and June PRASM improvement is a function of Southwest pricing actions? Or is that not the right way to think about US Airways' pricing power?

J. Kirby

Fares are up across the industry. That's obviously been easier because Southwest is participating in fare increases unlike what happened in 2008 when Southwest had a fuel hedge that was $80 below market prices and didn't raise theirs. And the need to pass on fare increases to consumers is now true across the industry. So I'm not sure how much of it is because of Southwest versus others, there's been rapid fare increases to Latin America, rapid increases in fares across the Atlantic. It's all being driven by escalating fuel prices and the need for industry to recruit fuel prices. So the pricing environment is strong. Really, all carriers are feeling the pressure from fuel prices and all are participating. And as long as the demand environment remains strong and that can absorb the fair increases, I think, expect that will -- and hope at least that, that will continue.

Daniel McKenzie - Hudson Securities, Inc.

Real good. Thanks, appreciate it.

William Parker

Thank you, Dan.

Operator

Next, we'll hear from Michael Derchin with CRT Capital Group.

Michael Derchin - CRT Capital Group LLC

I may have missed this, but have you given out a monthly ancillary revenue number, kind of monthly run rate on ancillary revenues and where that's trending?

J. Kirby

We've said it's about a little over 500 million a year or so.

Michael Derchin - CRT Capital Group LLC

And is it sort of stabilized at that level?

J. Kirby

Yes.

Michael Derchin - CRT Capital Group LLC

Thanks very much.

William Parker

Thanks, Michael.

Operator

That will now end the analyst question-and-answer session. We'll now move to media, and we'll hear from Mary Schlangenstein with Bloomberg News.

Mary Schlangenstein - Bloomberg News

I just wanted to ask 1 question to clarify on the slot swap. I hate to bring that up again, but on the 9/11 date that Scott mentioned, that's not like a drop dead, you have to get it done by then or there's no deal date? That's just a date that somebody could walk away and not incur a penalty, is that right?

Stephen Johnson

That's right -- and this is Steve, Mary. Under that current agreement on September 11, either party can walk away. But in a world where regulatory approvals are required, September 11 is not very far away. And if we're successful in restructuring the deal, I think you'll see that date get pushed out, at least, under certain circumstances.

Mary Schlangenstein - Bloomberg News

Okay. And the other question was, Derek, when you mentioned something about 767s and A330s, that you were still considering something to do with those, I wasn't clear, was that, whether to return those as they come off lease or was there something else there?

Derek Kerr

No, it would be -- we're still looking at the wide-body fleet plan to see what we will do in the future. The question was, am I going to renew all those aircraft? And I just said that we are looking at the wide-body fleet plan to determine where we go with that down the road and how long do we keep those aircraft until the A350s show up.

Mary Schlangenstein - Bloomberg News

Okay. And do you have like a date to make that decision, any kind of a timeframe?

Derek Kerr

We will make that decision by the end of the year.

Mary Schlangenstein - Bloomberg News

Okay, great. Thank you.

Operator

We'll now hear from David Koenig with the Associated Press.

David Koenig - Associated Press

Just a follow-up to something that came up in the analyst portion. You said that bookings cooled off in April because of kind of a headline effect, you termed it. Is it possible that truly discretionary travel, like leisure travel at Easter and Thanksgiving and Labor Day and things that are not Christmas or right in the middle of summer, are being affected by the higher fares?

J. Kirby

I think there is a price elasticity effect. I think that air travel, however, remains a fantastic bargain in real terms. Air fares are down over 50% from when the industry was deregulated in 1980. In real terms, airfares are still below where they were in 2007. And so air travel remains a great bargain. If you compare it to the price of other travel component, it remains a great bargain.

David Koenig - Associated Press

Yes, I'm not arguing with that at all. I mean, statistically, that's true, but that's not the way consumers look at things. They've got other bills to pay. I think you know -- in looking at those higher fares and maybe backing off and traveling twice a year instead of 3x?

J. Kirby

Well, I mean I think you've raised a fair question. I guess I'd phrase the question a little bit differently. Consumers do have to -- at least, all consumers in the world with the possible exception of the Federal Reserve Board has to buy food and fuel. And that affects how much discretionary income they have left for everything else. To date, the consumer has stayed pretty strong. I do think when the consumer is reading about all the stuff that was happening in the world at the end of March, and they're on the fence about whether to buy a ticket to go for Easter or not, if -- the margin pushes some consumers to not do that. As fuel prices stabilize, as the world stabilizes, as headlines stabilize, I think those bookings return and we can already see it for summer. Summer's not so much a holiday or event-driven, but bookings are strong across the summer, at least booking demand right now. So I think if there is an effect, it's a short-term effect because the consumers adjust to the new reality.

David Koenig - Associated Press

Okay, thanks.

Operator

We'll now go to a question from Megan Neighbor with Arizona Republic.

Megan Neighbor

I wanted to see if you guys could speak to the competitive landscape going forward in 2Q and 3Q, and how US Airways is addressing your competitors, adding routes that are in direct competition with yours?

William Parker

Well, we have competition all the time. I think the airline industry is one of the most competitive industries in the country. That has been true for as long as I've been at America West or US Airways. And it's no different today. We have a fantastic airline. We're focused on our strengths, our core markets: Phoenix, Philadelphia, DCA and Charlotte. And by focusing on those core markets, we have a real competitive advantage when someone else tries to come in and compete with us in those markets. So we'll continue to do what we've always done and that's focus on the core market. It really does give us a competitive advantage.

Megan Neighbor

Okay, appreciate that.

Operator

Our next question comes from Ted Reed with The Street.

Ted Reed - TheStreet.com

This is just something I was thinking about. Could you tell me, in the Phoenix hub, does it have a lower percentage of business travel than the other 2 hubs? And what does it primarily do, connect West Coast people, connect them to East to the West or O&D or all 3?

J. Kirby

Phoenix is a lower percentage business revenue than the other hub. It's a great leisure destination. It's a great place to visit. It's a great place to live. It does have a lot of business traffic than others. It is similar to our other hubs, in terms of O&D traffic, however, percentage of O&D traffic. And, obviously, most of the connections are going from the West Coast either to the Midwest or the East Coast just by geography.

Ted Reed - TheStreet.com

Thank you. Another thing I'd like to ask. The other thing is in this industry with higher load factors all the time everywhere, it seems to be that more people miss connections in hubs, and then they can't get a seat and that because the next planes out are full. So is there any way to address that? Or is that just going to be something that consumers have to live with and eventually become more angry about?

J. Kirby

Well, I think that's a pretty unusual circumstance and the best way to address that is to run a good operation. There's no avoiding the fact that in this industry that you have weather and ATC delays that those kind of misconnects are going to happen sometimes. I think US Airways' done a fantastic job of dealing with that and minimizing the impact to the customers and minimizing the number of misconnects that ever happened by running a great operation.

Ted Reed - TheStreet.com

Is it an increasing problem for you just because airplanes are full?

Robert Isom

Ted, the answer is no. We track misconnects all the time, so the percentage of the misconnections, they really haven't varied much. It's actually decreased as we've improved the operations so much. But the fact of the matter is, as Scott said, is that things like weather and ATC issues do occur. And one of the things we pride ourselves on, as we have a number of initiatives, they're in progress to make sure that we're the best at recovering when things don't go right. And so a lot of the things that Derek had talked about, in terms of potential investments, are being put into customer self-service tools to get people back on and making sure that we do utilize those seats that are available and make sure that customers are accommodated very quickly.

William Parker

That was Robert Isom, Ted.

Ted Reed - TheStreet.com

That's what I thought.

William Parker

He's on. He's just never asked operational questions....

Robert Isom

That's a good thing, Ted.

William Parker

He rarely speaks.

William Parker

He only answers operational questions when things aren't running well. And since they've run fantastically for 4 years, he never gets to talk. Thanks, Ted.

Operator

That does conclude our question-and-answer session. At this time, I would like to turn the conference back over to Mr. Doug Parker for any additional or closing remarks.

William Parker

Thanks. I have no additional remarks, other than thank you for calling in and listening. And if you have any further questions, please let us know. Thanks. Goodbye.

Operator

Thank you, sir. That does conclude today's teleconference. We do thank you, all, for your participation.

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