US Airways Group's CEO Hosts Annual Shareholders' Meeting (Transcript)

| About: American Airlines (AAL)

US Airways Group, Inc. (LCC) Annual Shareholders' Meeting. June 14, 2012 9:00 AM ET


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

William Douglas Parker

Thank you, all, for being here. This is our Annual Shareholders' Meeting. We are webcasting this as well. Welcome, everyone, for being here. I'm Bill Parker, Chairman and CEO of US Airways Group, Inc. I'm pleased to welcome you to our 2012 Annual Meeting of Stockholders. All stockholders here today should have registered at the front door prior to entering the meeting and indicated on the sign-in sheet where they intend to vote in person here at the meeting.

Joining us here today are all the members of the Board of Directors: Matt Hart, Richard Kraemer, Cheryl Krongard, Bruce Lakefield, Denise O'Leary, George Philip and Bill Post. Herb Baum, who is not in attendance, retired as a member of the Board of Directors today, and we want to take this opportunity to thank him for his service to the Board during his tenure. Herb joined the America West Board back in 2003, and over the time he was with us, he was just a great advocate for our employees, for our shareholders, for our customers. And we thank him very much for his service and we'll miss him. So thank you, Herb. We are also joined by several members of the senior management team and representative of the KPMG, who are the company's auditors, and Caroline Ray will serve as the secretary for this meeting.

I also want to take the opportunity to thank our friends here at Latham & Watkins for their generosity. Thanks, gentlemen, for allowing us to hold the 2012 Annual Meeting of Stockholders at their office here in New York.

At the conclusion and adjournment of the formal business meeting, this morning, I will provide a general overview of the company's business and then we'll open the floor to questions and comments.

So with that introduction, I now formally call to order the 2012 Annual Meeting of Stockholders. We will now proceed with the formal business of the meeting as set forth in your Notice of Annual Meeting and Proxy Statement. The appropriate corporate documents are in order, and I have in my possession a copy of the notice of the US Airways Annual Meeting of Stockholders and a Proxy Statement dated April 27, 2012 together with the affidavit amount.

The Board of Directors has appointed Broadridge Investor Communications Services to act as the inspector of election at this meeting. Broadridge is represented by Thomas Tai [ph]. Tom is back there. His function is to decide upon the qualifications of votes and tally the ballots cast as for each matter. The inspector of elections sworn in, and I have results. The list of stockholders as of close, on April 16, 2012, the record date for purposes of determining the stockholders entitled to notice of and to vote at this meeting and the number of shares held by each stockholder is available at the entrance of this room for any stockholder wishing to inspect.

I've been informed by the inspector of elections that the shares of those present in person or presented by proxy [indiscernible] requirements, so our meeting may begin. The time is now 9:03 a.m. Eastern and the polls are now open for voting.

There are 4 proposals to be considered by the stockholders of this meeting as set forth [indiscernible] and those are: the election of directors, the ratification of auditors and advisory vote on the compensation of named [indiscernible] and a stockholder proposal relating to cumulative voting. No other matters will be considered.

Approximately 144 million, or about 89% of our shares, were voted by proxy and the inspector of elections advised me that his preliminary tabulation shows that a sufficient number of the votes previously cast have been voted in favor of the election of the nominees for director, in favor of the ratification of the appointment of KPMG LLP as the independent registered public accounting firm, in favor of the advisory vote on the compensation of named executive officers and against the shareholder proposal related to cumulative voting.

First item of business is the election of the directors nominated by the Board of Directors. No other nominations complying with the nomination procedures in the company's bylaws have been received and the nominations are closed. Pursuant to the company's certificate of incorporation of bylaws, the company's directors are elected on a staggered basis in 3 classes. At this meeting, Matthew J. Hart, Richard C. Kraemer and Cheryl G. Krongard, have been appointed as Class I Directors of the company to serve until the 2015 Annual Meeting and until their successors have been duly elected and qualified. Denise O'Leary and George Philip are Class II Directors whose terms will expire in 2013; and Bruce Lakefield, William Post and myself are Class III Directors, whose terms will expire in 2014. Class II and Class III Directors are not standing for election at this meeting and as I mentioned, Herb Baum is not standing for reelection and his term will end today. Are there any questions regarding these nominations?

Second item of business is the ratification of the appointment of KPMG LLP to serve as the independent registered public accounting firm for US Airways Group, Inc. for fiscal year ending December 31, 2012. Are there any questions regarding this proposal?

Third item, the approval, on a non-binding advisory basis, of the compensation of named executive officers. The Dodd-Frank Act enables our stockholders to vote to approve, on a non-binding advisory basis, the compensation of our named executive officers as disclosed in the Proxy Statement pursuant to the compensation disclosure rules of the SEC. The Board of Directors has recommended the stockholders vote for the approval of the compensation of our named executive officers, pursuant to the compensation disclosure rules of the SEC as described in the compensation discussion and analysis of the compensation tables narrows the discussion any related material [indiscernible] Proxy Statement for the 2012 Annual Meeting of Stockholders. Are there any questions regarding this proposal?

Final business is the shareholder proposal [indiscernible] to request the company to provide for cumulative voting in the election of Directors. Neither Mrs. Davis nor a qualified representative is present at the meeting today to present Mrs. Davis's stockholder proposal. Her non-attendance will be noted in the meeting -- in the minutes of this meeting, in that neither Mrs. Davis nor her qualified representative is in attendance, this stockholder proposal has not been properly brought forth, meaning, it will not be voted upon.

The voting is by proxy and written ballot, not necessary to vote in person, if you previously voted by proxy. Do any persons present now wish to vote in person? None.

If you are voting by ballot -- well, since no one is, I'll skip that part. I'll remind you the stockholders of record on April 16 are eligible to vote at this meeting. The time is now 9:07 a.m. and the polls are closed for voting. As previously announced, the inspector of elections advised me that the number of shares voted in person or by proxy already tabulated shows sufficient number of votes previously cast have been voted for proposals 1, 2 and 3. The company exercises its right to exclude proposal 4 from a formal vote due to the failure of Mrs. Davis or a qualified representative to attend the meeting. Had it been voted upon, the stockholders would've voted against proposal 4. The inspector of election has prepared a certificate of the inspector of election for the company once all the votes are tallied, which report will be notarized and included in the minutes of the meeting. These results will be detailed in the current report on Form 8-K, which we will file with the Securities and Exchange Commission. That concludes the formal portion of the meeting, and the stockholders meeting is now adjourned.

Now, so before I begin my overview of the company's business, as with most presentations, the following discussions contains some forward-looking statements and the company's actual results may differ materially from those discussed here. Additional information concerning factors that can cause such a difference can be found on the company's annual report on Form 10-K of the fiscal year ended December 31, 2011 and the quarterly report on Form 10-Q for the quarter period ended March 31, 2012.

So anyway, what I want to do now is take you through a brief presentation about what's going on here at the company and then get to any questions you may have.

So first, in the -- as it is in the 2011 Shareholder Meeting, it makes sense to take some time and talk about 2011, take a quick look back to what we did in 2011. The reality is after a really difficult 2008, 2009, US Airways made over $400 million in 2010. It was the second best year on our company's history and many suggested that, that proved that we've actually transformed the company. Our response to that was, "No, that's not a sufficient proof." 2010 was a good year for airlines. This is a business where, in good years, airlines can make money. The real test is in a tough year, can you make money?

And so the real test for us, as we said, would be in a difficult year. 2011 was that year. We had record high fuel prices in the industry. It was difficult for all airlines. We had 1 major airline that filed bankruptcy, proving how difficult it was but US Airways passed that test. One way we like to describe this is to compare it to 2008. It was very similar. On the 2 things that really make the industry so cyclical, fuel prices, which are very volatile and global economic demand, which the -- global economic environment, which drives demand in our business makes our revenues extremely volatile as well. Both of those things were very similar in 2011 as they were in 28 -- 2008, I'm sorry.

So, for example, the fuel price in 2011 was slightly high. How do I make this work -- it was $3.09 per gallon in 2008, $3.11 per gallon in 2011, almost exactly the same. The global economy is a little hard to put metrics on, but I think most people would agree that 2008's pre-recession economy was not much different in the 2011's post-recession moderately recovered economy. But US Airways results were dramatically different. In 2008, we lost $808 million. In 2011, we had a net profit of $111 million. That is night and day in the business. That's on a $10 billion airline, that's nearly $1 billion of improvement, about 9 points of -- about 9% of our revenues in improvement profit in a business where record earnings for airlines generally around 5% of revenues, to have an improvement like this in just 3 years of 9 points is clearly indication of a real transformation and a real -- and a truly different business. What drove that? A number of things.

First off, at the industry level, consolidation has been extremely important. There have been 2 mergers -- during this period, there were 2 mergers of 4 major hub-and-spoke carriers, Delta and Northwest combined to form the new Delta, United Continental merged with [indiscernible] to form the new United, that's -- those are 2 big airlines combining with 2 big airlines in each case. It's something the industry has never experienced before. It's made a huge difference in the industry's ability to be rational, to be able to be profitable in environments like 2011, which made those carriers much stronger, but it has also made our industry more rational.

Other things you'll hear about, things like the a la carte pricing models, which have made a big difference. I think they are largely related to consolidations more rational industry but those things have allowed us, as an industry, to price the products in a way that allows us to cover the cost of travel, allows customers that want to avail themselves of certain products to use them and has made a big difference in our ability to cover our costs. Specific to US Airways, a number of things.

First off, focusing on markets with competitive advantage, commitment to operational excellence, some nice cost control, I'll talk briefly about a couple of those. First off, the focus on markets with competitive advantage. What you see here is the concentration of flying in our 4 key markets: DC, Phoenix, Philadelphia and Charlotte. Back in 2006, it was 83%, it's grown now to 99% of our flying. These are 4 markets where we are the #1 carrier.

Our president Scott Kirby is fond of saying -- fond of quoting Talladega Nights. Ricky Bobby says, "If you're not first, you're last." We're trying to get Scott to get a more refined reference but, nonetheless, he's right. And this business, it's a network business. And in network businesses, scale matters and being able to fly into places where you actually have the advantage makes a huge difference and we now have 99% of our flights where we are the #1 carrier and that's made an enormous difference in our ability to be profitable in an environment like this.

The other thing we're extremely proud of is our team has done -- has created an airline that is the standard for operational reliability excellence. This is not just 2011 data, this is 4 years of data, 2008 to 2011. On the 2 records our customers tell us are most important to them, get me there on-time and make sure my bags are there when we land.

So on-time performance, we have been, over the last 4 years at US Airways, the #1 of the network carriers at 81%. And in terms of mishandled baggage ratio, the lowest in the baggage ratio for network airlines. This is really a combination of great work by our operating team led by Robert Isom but most importantly, the great work of our 35,000 employees who are out there every day making this happen and are doing a great job of taking care of our customers, and we're extremely thankful for that.

That team had a lot of good recognition, which is deserved, and I want to take a minute and talk about it. We do have an outstanding team, of which we are very proud. We -- in 2010, we were #1 in the Airline Quality Rating amongst network airlines. We were #2 in 2011, second only to Delta. We're coming back after them in 2012. We think we're going to get back to #1. What I can tell you is it's either going to be us or Delta. There's no one else that is close, so we are working hard in 2012 to get back to the #1 rating but -- and we hope to be there. Our team was awarded the 2012 Maintenance Repair & Overhaul Organization of the Year. What that means is we're the best maintenance organization in the world. Aviation Week presents this award every year to the best in the world. The US Airways' team won it in 2012. We couldn't be more proud of that team and the work they've done. Our team has been honored by FAA for its work under SMS. Robert went to the Whitehouse for our insourcing of 100% of reservations, which we worked with our unions to bring all of our reservations back into the United States over the course of the year. We -- our team was awarded the 2011 Treasury Team of the Year by Airfinance Journal. We were awarded 2012 Best Investor Relations Department by Institutional Investor. That department is here, one guy, Dan Cravens, who is the winner of the best department.

Anyway, these awards: one, we're very proud of; two, they may -- in what we're talking about just Investor Relations Department and Treasury Team may seem like small but the reality is, there aren't a lot of these awards given. To my knowledge, it's actually the only one given, the MRO award, Treasury Department award, Investor Relations award and our team's come in first in every one of them. So if there are awards for best in-flight department, we'd win that too. But anyway, we're extremely proud of the team. They've done a fantastic job, and they've made a huge difference in our ability to be profitable in an environment like this.

I want to take a minute to talk about 2012. 2012, we're off to a very strong start. We have, so far, record revenue performance. We've announced our first quarter results first in our second quarter yet. In the first quarter, we announced record revenues, record load factors, record yields, record revenue per ASM. Revenue performance has been stellar. That's been helped a lot by some record operating reliability. Our highest ever on-time performance, our highest ever completion factor and our lowest ever mishandled baggage ratio. You do all those things, you get some good financial results.

Indeed, our first quarter 2012 net income was $88 million better than in 2011, so we're off to a much better start than when we started in 2011. Those margins aren't just better than what we had and now are amongst the best margins in the industry. So we feel very good about and we currently anticipate a very strong second quarter and full year 2012 results.

When you do all those things, your stock does well. We are so far this year, anyway. I'm pleased that our shareholders are participating in the success. We're up -- our stocks are up 136% as of yesterday. On a year-to-date basis, that's well in excess of the other airlines. This isn't just an industry trend. This is US Airways doing even better than the rest of the industry, of which we're proud and we hope to continue to have our shareholders benefit from our success.

Now, I know some of you might say the stock price increase is not just because of the performance of US Airways. I'm not sure if that's true of not. I certainly think our own performance justifies that kind of improvement in stock price, but need to acknowledge that some of the increase may be due to speculation around the potential merger between US Airways and American Airlines. There's no doubt that there's tremendous financial support for this transaction, and our shareholders are interested in hearing about it. So I'll take a minute and talk about it.

I do want to point out that in addition to the support of the financial markets, we also are pleased to have the support of the employees of American. We have here today with us in the room, Captain David Bates, who's the President of the APA, Laura Glading, President of APFA; thanks, Laura. John Conley, who's from TWU. These individuals represent over 55,000 employees of American Airlines, and we -- who are here, these guys are representing their constituents extremely well. They're obviously in a difficult time fighting some pay cuts, fighting layoffs but they are doing what they're supposed to do with their constituents. They've gone and hired world-class advisors and strategic advisors. They've offered a plan that's an alternative to the standalone, and that plan is a merger with US Airways and we certainly appreciate their support and their presence here today.

I can describe -- it would take me a long time to talk about this transaction in total [ph] I just want to spend a couple of slides and just try to describe you the situation in summary as we see it. First off, the problem that American has today. This slide simply shows, if you look at market share by region -- by 3 regions of the country, East, Middle of the country and West, where this is the market share amongst U.S. carriers, you see back in 2006 American was #3, #1, #3, a lot of dark blue in this map. And now in 2011, they're #4 in the West, #4 in the center of the country, #5 on the very important East Coast. This is an issue that has happened because they sat out consolidation. Consolidation that I talked about earlier that American has not participated in. It has resulted in them losing relative share and again, back here there were a lot more airlines being compared to when they were #1 and #3 and now, in a smaller industry, further down the chain. This creates, of course, a problem that bankruptcy can't fix, bankruptcy can do a lot of things for a company.

Companies can file bankruptcy and not pay back the people that they've borrowed money from in full, not honor the waiver contracts that they've signed but they can't fix this. This is a structural weakness that nothing -- that bankruptcy cannot fix. So what does fix it? What could fix it? Again, this is American Airlines today on the same map. Now look, we, at US Airways, are in a similar situation. We have a [indiscernible] network that's much stronger in the East Coast, #3, but weaker throughout the country. We, however, managed this and I'm just showing its results by understanding that this is what our network looks like. We keep our costs in line with revenue generating capabilities. We go -- we fly to places where, even though we have this kind of overall market share, we fly in and out of markets where we're #1, as I showed you. That makes all the difference, and we are able to compete with this network.

That's not what American is planning to do. They're not getting their costs in line with their revenue generation capabilities and they've announced an intention to grow in the markets where they're the weakest, not the strongest. However, if you put these 2 networks together, they're highly complementary and they create this, an airline that has -- that can compete with anyone, that can be -- if you compete, could be the best airline in the world, compete with Delta and United, #1 in the East Coast, #1 on the middle of the country, #3 on the West Coast behind only Southwest and Delta -- sorry, Southwest and United. This airline that we've put together can be the best air team, can be the best airline in the world in any metric. And that's what gets us excited about this. We think this could be good for the employees of both companies.

An airline with this kind of revenue generating capability can do more for its employees than either of these 2 airlines can do independently. An airline with this kind of revenue generating capability with this kind of network can provide better service for customers throughout the country, throughout the world. An airline with this kind of network is better for the creditors with AMR and it's better for the shareholders of US Airways. So that what gets us excited about this in a couple of slides.

We've had a lot of questions on the process, what's going to happen next? What are you guys doing next? So I want to spend a minute on that. The reality is, bankruptcy is a complicated process. We're happy that we've never gone through it, but we are learning a lot about it through this process. And what we know is this process is supervised by the Bankruptcy Court. It's got its own rhythm, its own pace. We, at US Airways, fully respect and understand the process. We are making great progress so far, necessarily affected by many other tasks that AMR has to get through in their process. We further understand that AMR has a fiduciary duty as a debtor to consider all the alternatives that might maximize returns to its unsecured creditors, and we respect the process that they've designed to meet that duty.

So we -- to that end, we were very encouraged that AMR and the Unsecured Creditors Committee have come to an agreement to establish an M&A process to consider strategic alternatives. We've been told that protocol will begin post the 1113 ruling. And that process, by the way, it's not just a US Airways process nor should it be. This is a process, we're being told, that is open to consider all strategic alternatives that American may have or the creditors of American may want to bring forward. That's all we want. All we're asking for is a level playing field, a chance to show our plan up against any others. We're highly confident that given that opportunity, the benefits of the network I just showed you of an AA/US combination would be far superior to any other alternative available to American today. So we're looking forward to this process. We are -- once we get the M&A process moving, we're looking forward to participating in it, along with AMR management, its Board and the Unsecured Creditors Committee so that's where we are.

So in summary, 2011, we think, is proof of the transformation we put in place and that we've had in -- we've been putting in place for a while that has actually worked. We're extremely proud of what we did in 2011. We're even happier about how it's going in 2012 as it's off to a much stronger start. As to consolidation, those results prove we don't have to consolidate. US Airways is doing extremely well standalone, and our people are doing a fantastic job of running this airline, taking care of our customers, keeping our costs down and we can do that forever and are happy to do so. Having said that, we do see a potentially large value creation opportunity in American in combining our network with American, an opportunity that would be -- that can be extremely beneficial for the employees of American, for the employees of US Airways, for the customers -- for both of our customers, for the creditors of American and for the shareholders of US Airways. Because of that, we are pursuing opportunity, and we're looking forward to working with AMR and the Creditors Committee on that process.

So that's it. Questions in the room? I'm hearing none. I want to thank all of you for being here. I, again, want to thank the union leaders of American for being here. We really appreciate you guys showing up and showing your support. We look forward to working with you together to get this done as we move forward. I want to thank our Board for being here and your continued support of the team and your diligence in taking care of our shareholders. We are adjourned for the 2012 Annual Stockholders Meeting. Thank you very much.

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