Item 1A. Risk Factors
Below are certain risk factors that may affect our business, results of operations or financial condition, or the trading price
of our common stock or other securities. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risks and uncertainties emerge from time to time. Management cannot
predict such new risks and uncertainties, nor can it assess the extent to which any of the risk factors below or any such new risks and uncertainties, or any combination thereof, may impact our business.
Risk Factors Relating to the Company and Industry-Related Risks
We could experience significant operating losses in the future.
For a number of reasons, including those addressed in these risk factors, we might fail to achieve profitability and might
experience significant losses. In particular, the condition of the economy and the high volatility of fuel prices have had and continue to have an impact on our operating results, and increase the risk that we will experience losses.
Downturns in economic conditions adversely affect our business.
Due to the discretionary nature of business and leisure travel spending, airline industry revenues are heavily influenced by
the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased passenger demand for air travel and changes in booking
practices, both of which in turn have had, and may have in the future, a strong negative effect on our revenues. In addition, during challenging economic times, actions by our competitors to increase their revenues can have an adverse impact on our
revenues. See “
The airline industry is intensely competitive and dynamic
” below. Certain labor agreements to which we are a party limit our ability to reduce the number of aircraft in operation, and the utilization of such aircraft,
below certain levels. As a result, we may not be able to optimize the number of aircraft in operation in response to a decrease in passenger demand for air travel.
Our business is dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel
costs, increased fuel prices and significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.
Our operating results are materially impacted by changes in the availability, price volatility and cost of aircraft fuel,
which represents one of the largest single cost items in our business. Jet fuel market prices have fluctuated substantially over the past several years with market spot prices ranging from a low of approximately $1.87 per gallon to a high of
approximately $3.38 per gallon during the period from January 1, 2010 to September 30, 2013.
Because of the
amount of fuel needed to operate our airline, even a relatively small increase in the price of fuel can have a material adverse aggregate effect on our costs and liquidity. Due to the competitive nature of the airline industry and unpredictability
of the market, we can offer no assurance that we may be able to increase our fares, impose fuel surcharges or otherwise increase revenues sufficiently to offset fuel price increases.
Although we are currently able to obtain adequate supplies of aircraft fuel, we cannot predict the future availability, price
volatility or cost of aircraft fuel. Natural disasters, political disruptions or wars involving oil-producing countries, changes in fuel-related governmental policy, the strength of the U.S. dollar against foreign currencies, changes in access to
petroleum product pipelines and terminals, speculation in the energy futures markets, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages, additional fuel price
volatility and cost increases in the future.
Historically, we have from time to time entered into hedging arrangements
designed to protect against rising fuel costs. Currently, we are not a party to any transactions to hedge our fuel consumption. Our ability to hedge in the future may be limited, particularly if our financial condition provides insufficient
liquidity to meet counterparty collateral requirements. Our future fuel hedging arrangements, if any, may not completely protect us against price increases and may be limited in both volume of fuel and duration. Also, a rapid decline in the
projected price of fuel at a time when we have fuel hedging contracts in place could adversely impact our short-term liquidity, because hedge counterparties could require that we post collateral in the form of cash or letters of credit. See also the
discussion in Part I, Item 3, “
Quantitative and Qualitative Disclosures About Market Risk
.”
57
The airline industry is intensely competitive and dynamic.
Our competitors include other major domestic airlines and foreign, regional and new entrant airlines, many of which have more
financial resources or lower cost structures than ours, as well as other forms of transportation, including rail and private automobiles. In many of our markets we compete with at least one low-cost air carrier. Our revenues are sensitive to the
actions of other carriers in many areas including pricing, scheduling, capacity and promotions, which can have a substantial adverse impact not only on our revenues, but on overall industry revenues. These factors may become even more significant in
periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to achieve near-term survival rather than long-term viability. In addition, because a significant
portion of our traffic is short-haul travel, we are more susceptible than other major airlines to competition from surface transportation such as automobiles and trains.
Low-cost carriers have a profound impact on industry revenues. Using the advantage of low unit costs, these carriers offer
lower fares in order to shift demand from larger, more-established airlines. Some low-cost carriers, which have cost structures lower than ours, have better financial performance and significant numbers of aircraft on order for delivery in the next
few years. These low-cost carriers are expected to continue to increase their market share through growth and, potentially, consolidation, and could continue to have an impact on our overall performance.
Additionally, as mergers and other forms of industry consolidation, including antitrust immunity grants, take place, we might
or might not be included as a participant. Depending on which carriers combine and which assets, if any, are sold or otherwise transferred to other carriers in connection with such combinations, our competitive position relative to the
post-combination carriers or other carriers that acquire such assets could be harmed. In addition, as carriers combine through traditional mergers or antitrust immunity grants, their route networks will grow, and that growth will result in greater
overlap with our network, which in turn could result in lower overall market share and revenues for us. Such consolidation is not limited to the U.S., but could include further consolidation among international carriers in Europe and elsewhere.
See also the risk factors provided under the caption “
Risk Factors Relating to the Merger and the Combined
Company
.”
Increased costs of financing, a reduction in the availability of financing and fluctuations in
interest rates could adversely affect our liquidity, operating expenses and results.
Concerns about the systemic
impact of inflation, the availability and cost of credit, energy costs and geopolitical issues, combined with continued changes in business activity levels and consumer confidence, increased unemployment and volatile oil prices, have contributed to
unprecedented levels of volatility in the capital markets. As a result of these market conditions, the cost and availability of credit have been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. These
changes in the domestic and global financial markets may increase our costs of financing and adversely affect our ability to obtain financing needed for the acquisition of aircraft that we have contractual commitments to purchase and for other types
of financings we may seek in order to refinance debt maturities, raise capital or fund other types of obligations. Any downgrades to our credit rating may likewise increase the cost and reduce the availability of financing.
In addition, we have substantial non-cancelable commitments for capital expenditures, including the acquisition of new
aircraft and related spare engines. We have financing commitments for all future Airbus aircraft deliveries.
Further, a
substantial portion of our indebtedness bears interest at fluctuating interest rates, primarily based on the London interbank offered rate for deposits of U.S. dollars (“LIBOR”). LIBOR tends to fluctuate based on general economic
conditions, general interest rates, Federal Reserve rates and the supply of and demand for credit in the London interbank market. We have not hedged our interest rate exposure and, accordingly, our interest expense for any particular period may
fluctuate based on LIBOR and other variable interest rates. To the extent these interest rates increase, our interest expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our
available cash flow for general corporate requirements may be adversely affected. See also the discussion of interest rate risk in Part I, Item 3, “
Quantitative and Qualitative Disclosures About Market Risk
.”
58
Our high level of fixed obligations limits our ability to fund general
corporate requirements and obtain additional financing, limits our flexibility in responding to competitive developments and increases our vulnerability to adverse economic and industry conditions.
We have a significant amount of fixed obligations, including debt, aircraft leases and financings, aircraft purchase
commitments, leases and developments of airport and other facilities and other cash obligations. We also have certain guaranteed costs associated with our express operations. Our existing indebtedness is secured by substantially all of our assets.
As a result of the substantial fixed costs associated with these obligations:
|
|
•
|
|
a decrease in revenues results in a disproportionately greater percentage decrease in earnings;
|
|
|
•
|
|
we may not have sufficient liquidity to fund all of these fixed costs if our revenues decline or costs increase; and
|
|
|
•
|
|
we may have to use our working capital to fund these fixed costs instead of funding general corporate requirements, including capital expenditures.
|
These obligations also impact our ability to obtain additional financing, if needed, and our
flexibility in the conduct of our business.
Any failure to comply with the liquidity covenants contained in our
financing arrangements would likely have a material adverse effect on our business, financial condition and results of operations.
The terms of our 2013 Citicorp credit facility require us to maintain consolidated unrestricted cash and cash equivalents and
amounts available to be drawn under revolving credit facilities in an aggregate amount not less than $850 million prior to the Merger and $2.0 billion following the Merger, in each case, with not less than $750 million (subject to partial reductions
upon certain reductions in the outstanding amount of the loan) of that amount held in accounts subject to control agreements.
Our ability to comply with these covenants while paying the fixed costs associated with our contractual obligations and our
other expenses will depend on our operating performance and cash flow, which are seasonal, as well as factors including fuel costs and general economic and political conditions.
The factors affecting our liquidity (and our ability to comply with related covenants) will remain subject to significant
fluctuations and uncertainties, many of which are outside our control. Any breach of our liquidity covenants or failure to timely pay our obligations could result in a variety of adverse consequences, including the acceleration of our indebtedness,
the withholding of credit card proceeds by our credit card processors and the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our contractual obligations, repay the accelerated
indebtedness, make required lease payments or otherwise cover our fixed costs.
If our financial condition worsens,
provisions in our credit card processing and other commercial agreements may adversely affect our liquidity.
We
have agreements with companies that process customer credit card transactions for the sale of air travel and other services. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a
“holdback”) equal to some or all of the advance ticket sales that have been processed by that company, but for which we have not yet provided the air transportation. We are currently subject to certain holdback requirements. These holdback
requirements can be modified at the discretion of the processing companies upon the occurrence of specific events, including material adverse changes in our financial condition. An increase in the current holdback balances to higher percentages up
to and including 100% of relevant advanced ticket sales could materially reduce our liquidity. Likewise, other of our commercial agreements contain provisions that allow other entities to impose less favorable terms, including the acceleration of
amounts due, in the event of material adverse changes in our financial condition.
59
Union disputes, employee strikes and other labor-related disruptions may
adversely affect our operations.
Relations between air carriers and labor unions in the United States are
governed by the Railway Labor Act (“RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and
conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”).
If no agreement is reached during direct negotiations between the parties, either party may request that the NMB appoint a
federal mediator. The RLA prescribes no timetable for the direct negotiation and mediation processes, and it is not unusual for those processes to last for many months or even several years. If no agreement is reached in mediation, the NMB in its
discretion may declare that an impasse exists and proffer binding arbitration to the parties. Either party may decline to submit to arbitration, and if arbitration is rejected by either party, a 30-day “cooling off” period commences.
During or after that period, a Presidential Emergency Board (“PEB”) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another 30-day “cooling
off” period. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may exercise “self-help,” such as a strike, which could materially adversely affect our
ability to conduct our business and our financial performance.
We are currently in negotiations with the unions
representing our fleet service employees, our passenger service employees, our mechanic, stock clerk and related employees, our maintenance training instructors, our flight crew training instructors and our flight simulator engineers. On
February 8, 2013, the US Airways pilots represented by the US Airline Pilots Association voted to ratify a memorandum of understanding (“MOU”) that will become effective in the event the Merger is consummated. If the Merger is
completed, the MOU provides a six-year agreement for the pilots of the combined post-Merger carrier. In addition, our express subsidiary, Piedmont, is in negotiations with the unions representing its flight attendants and its mechanics. All
negotiations except those involving the Piedmont mechanics are being overseen by the NMB. None of these unions presently may lawfully engage in concerted refusals to work, such as strikes, slow-downs, sick-outs or other similar activity, against us.
Nonetheless, there is a risk that disgruntled employees, either with or without union involvement, could engage in one or more concerted refusals to work that could individually or collectively harm the operation of our airline and impair our
financial performance. For example, on September 28, 2011, the U.S. District Court in Charlotte granted a preliminary injunction, which was subsequently converted to a permanent injunction, enjoining the labor union representing our pilots from
engaging in an illegal work slowdown.
The inability to maintain labor costs at competitive levels would harm our
financial performance.
Currently, our labor costs are very competitive relative to the other hub-and-spoke
carriers. However, we cannot provide assurance that labor costs going forward will remain competitive because some of our agreements are amendable now and others may become amendable, competitors may significantly reduce their labor costs or we may
agree to higher-cost provisions in our current or future labor negotiations. Approximately 83% of the employees within US Airways Group are represented for collective bargaining purposes by labor unions. Some of our unions have brought and may
continue to bring grievances to binding arbitration, including related to wages. Unions may also bring court actions and may seek to compel us to engage in bargaining processes where we believe we have no such obligation. If successful, there is a
risk these judicial or arbitral avenues could create material additional costs that we did not anticipate.
Interruptions or disruptions in service at one of our hub airports could have a material adverse impact on our
operations.
We operate principally through hubs in Charlotte, Philadelphia, Phoenix and Washington, D.C.
Substantially all of our flights either originate in or fly into one of these locations. A significant interruption or disruption in service at one of our hubs resulting from air traffic control delays, weather conditions, natural disasters, growth
constraints, relations with third-party service providers, failure of computer systems, facility disruptions, labor relations, fuel supplies, terrorist activities or otherwise could result in the cancellation or delay of a significant portion of our
flights and, as a result, could have a severe impact on our business, operations and financial performance.
60
Regulatory changes affecting the allocation of slots could have a material
adverse impact on our operations.
Operations at four major domestic airports, certain smaller domestic airports
and certain foreign airports served by us are regulated by governmental entities through the use of “slots” or similar regulatory mechanisms which limit the rights of carriers to conduct operations at those airports. Each slot represents
the authorization to land at or take off from the particular airport during a specified time period and may have other operational restrictions as well. In the United States, the Federal Aviation Administration (“FAA”) currently regulates
the allocation of slot or slot exemptions at Ronald Reagan Washington National Airport and three New York City airports: Newark, JFK and LaGuardia. Our operations at these airports generally require the allocation of slots or similar regulatory
authority. Similarly, our operations at international airports in Frankfurt, London Heathrow, Paris and other airports outside the United States are regulated by local slot authorities pursuant to the International Air Transport Association’s
Worldwide Scheduling Guidelines and applicable local law.
We currently have sufficient slots or similar authority to
operate our existing flight schedule and have generally been able to acquire the necessary rights to expand flights and to change our schedules, although some airports are more challenging than others in terms of the cost and availability of
additional authority necessary to expand operations. There is no assurance, however, that we will be able to do so in the future because, among other reasons, such allocations are subject to changes in government policy. The FAA is planning a new
rulemaking in 2013 to update the current rules governing the New York City airports. As the new proposal has not been released yet, we cannot state that the new proposed rules, if finalized, would not have a material impact on our operations.
If we incur problems with any of our third-party regional operators or third-party service providers, our operations
could be adversely affected by a resulting decline in revenue or negative public perception about our services.
A
significant portion of our regional operations are conducted by third-party operators on our behalf, primarily under capacity purchase agreements. Due to our reliance on third parties to provide these essential services, we are subject to the risks
of disruptions to their operations, which may result from many of the same risk factors disclosed in this report, such as the impact of adverse economic conditions, and other risk factors, such as a bankruptcy restructuring of any of the regional
operators. We may also experience disruption to our regional operations if we terminate the capacity purchase agreement with one or more of our current operators and transition the services to another provider. As our regional segment provides
revenues to us directly and indirectly (by providing flow traffic to our hubs), any significant disruption to our regional operations would have a material adverse effect on our business, results of operations and financial performance.
In addition, our reliance upon others to provide essential services on behalf of our operations may result in our relative
inability to control the efficiency and timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our operations, including express flight operations, aircraft
maintenance, ground services and facilities, reservations and baggage handling. Similar agreements may be entered into in any new markets we decide to serve. These agreements are generally subject to termination after notice by the third-party
service provider. We are also at risk should one of these service providers cease operations, and there is no guarantee that we could replace these providers on a timely basis with comparably priced providers. Recent volatility in
fuel prices, disruptions to capital markets and the current economic downturn in general have subjected certain of these third-party service providers to strong financial pressures. Any material problems with the efficiency and timeliness of
contract services, resulting from financial hardships or otherwise, could have a material adverse effect on our business, financial condition and results of operations.
We rely on third-party distribution channels and must manage effectively the costs, rights and functionality of these
channels.
We rely on third-party distribution channels, including those provided by or through global
distribution systems, or GDSs (e.g., Amadeus, Sabre and Travelport), conventional travel agents and online travel agents, or OTAs (e.g., Expedia, Orbitz and Travelocity), to distribute a significant portion of our airline tickets and we expect in
the future to continue to rely on these channels and hope to expand their ability to distribute and collect revenues for ancillary products (e.g., fees for selective seating). These distribution channels are more expensive and at present have less
functionality in respect of ancillary product offerings than those we operate ourselves, such as our call centers and our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products
generally. To remain competitive, we will need to manage successfully our distribution costs and rights, increase our distribution flexibility and improve the functionality of third-party distribution channels, while maintaining an
industry-competitive cost structure. Any inability to manage our third-party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material
adverse effect on our competitive position and our results of operations.
61
Further, on April 21, 2011, we filed an antitrust lawsuit against Sabre
Holdings Corporation, Sabre Inc. and Sabre Travel International Limited (collectively, “Sabre”) in Federal District Court for the Southern District of New York. The lawsuit, as amended to date, alleges, among other things, that Sabre has
engaged in anticompetitive practices to preserve its monopoly power by restricting our ability to distribute our products to our customers. The lawsuit also alleges that these actions have prevented us from employing new competing technologies and
has allowed Sabre to continue to charge us supracompetitive fees. The lawsuit seeks both injunctive relief and money damages. Sabre filed a motion to dismiss the case, which the court denied in part and granted in part in September 2011 allowing two
of the four counts in the complaint to proceed. We intend to pursue our claims against Sabre vigorously, but there can be no assurance of the outcome of this litigation.
Our business is subject to extensive government regulation, which may result in increases in our costs, disruptions to
our operations, limits on our operating flexibility, reductions in the demand for air travel, and competitive disadvantages.
Airlines are subject to extensive domestic and international regulatory requirements. In the last several years, Congress has
passed laws, and the U.S. Department of Transportation (“DOT”), the FAA, the Transportation Security Administration (“TSA”) and the Department of Homeland Security have issued a number of directives and other regulations that
affect the airline industry. These requirements impose substantial costs on us and restrict the ways we may conduct our business.
For example, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of
aircraft that require significant expenditures or operational restrictions. Our failure to timely comply with these requirements has in the past and may in the future result in fines and other enforcement actions by the FAA or other regulators. In
addition, the FAA recently issued its final regulations governing pilot rest periods and work hours for all airlines certificated under Part 121 of the Federal Aviation Regulations. The rule, which becomes effective on January 4, 2014, impacts
the required amount and timing of rest periods for pilots between work assignments and modifies duty and rest requirements based on the time of day, number of scheduled segments, flight types, time zones, and other factors. These regulations, or
other regulations, could have a material adverse effect on us and the industry upon implementation.
Recent DOT consumer
rules require new procedures for customer handling during long onboard delays, further regulate airline interactions with passengers through the reservations process, at the airport, and on board the aircraft, and require new disclosures concerning
airline fares and ancillary fees such as baggage fees. The DOT has been aggressively investigating alleged violations of these new rules. Other DOT rules apply to post-ticket purchase price increases and an expansion of tarmac delay regulations to
international airlines.
The Aviation and Transportation Security Act mandates the federalization of certain airport
security procedures and imposes additional security requirements on airports and airlines, most of which are funded by a per-ticket tax on passengers and a tax on airlines.
The results of our operations, demand for air travel, and the manner in which we conduct business each may be affected by
changes in law and future actions taken by governmental agencies, including:
|
|
•
|
|
changes in law which affect the services that can be offered by airlines in particular markets and at particular airports, or the types of fees
that can be charged to passengers;
|
|
|
•
|
|
the granting and timing of certain governmental approvals (including antitrust or foreign government approvals) needed for codesharing alliances
and other arrangements with other airlines;
|
|
|
•
|
|
restrictions on competitive practices (for example, court orders, or agency regulations or orders, that would curtail an airline’s ability to
respond to a competitor);
|
|
|
•
|
|
the adoption of new passenger security standards or regulations that impact customer service standards (for example, a “passenger bill of
rights”);
|
|
|
•
|
|
restrictions on airport operations, such as restrictions on the use of takeoff and landing slots at airports or the auction or reallocation of slot
rights currently held by US Airways Group; and
|
|
|
•
|
|
the adoption of more restrictive locally-imposed noise restrictions.
|
62
Each additional regulation or other form of regulatory oversight increases costs
and adds greater complexity to airline operations and, in some cases, may reduce the demand for air travel. There can be no assurance that our compliance with new rules, anticipated rules or other forms of regulatory oversight will not have a
material adverse effect on us.
In April 2013, the FAA announced the imposition of furloughs that resulted in reduced
staffing, including among air traffic controllers, in connection with its implementation of budget reductions related to the federal government’s response to the so-called “sequester” of government funding. These furloughs have been
suspended as a result of Congressional legislation. However, we cannot predict whether there will be further furloughs or the impact of any such furloughs on our business. Any significant reduction in air traffic capacity at key airports in the U.S.
could have a material adverse effect on our operations and financial results.
In addition, the air traffic control system
is not successfully managing the growing demand for U.S. air travel. Air traffic controllers rely on outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes. On February 14, 2012, the
FAA Modernization and Reform Act of 2012 was signed. The law provides funding for the FAA to rebuild its air traffic control system, including switching from radar to a GPS-based system. It is uncertain when any improvements to the air traffic
control system will take effect. Failure to update the air traffic control system in a timely manner and the substantial funding requirements that may be imposed on airlines of a modernized air traffic control system may have a material adverse
effect on our business. We also experienced delays in routine non-operational interactions with the FAA as a result of the government shut down.
The ability of U.S. airlines to operate international routes is subject to change because the applicable arrangements between
the U.S. and foreign governments may be amended from time to time and appropriate slots or facilities may not be made available. We currently operate on a number of international routes under government arrangements that limit the number of airlines
permitted to operate on the route, the capacity of the airlines providing services on the route, or the number of airlines allowed access to particular airports. If an open skies policy were to be adopted for any of these routes, such an event could
have a material adverse impact on us and could result in the impairment of material amounts of our related tangible and intangible assets. In addition, competition from revenue-sharing joint ventures, joint business agreements, and other alliance
arrangements by and among other airlines could impair the value of our business and assets on the open skies routes. For example, the open skies air services agreement between the U.S. and the European Union (“EU”), which took effect in
March 2008, provides airlines from the U.S. and EU member states open access to each other’s markets, with freedom of pricing and unlimited rights to fly from the U.S. to any airport in the EU, including London’s Heathrow Airport. As a
result of the agreement, we face increased competition in these markets, including Heathrow Airport. In addition, the open skies agreement between the U.S. and Brazil, which was signed in 2010 and takes full effect in 2015, has resulted in increased
competition in the U.S./Brazil market.
The airline industry is heavily taxed.
The airline industry is subject to extensive government fees and taxation that will negatively impact our revenue. The U.S.
airline industry is one of the most heavily taxed of all industries. These fees and taxes have grown significantly in the past decade for domestic flights, and various U.S. fees and taxes also are assessed on international flights. For example, as
permitted by federal legislation, most major U.S. airports impose a passenger facility charge per passenger on us. In addition, the governments of foreign countries in which we operate impose on U.S. airlines, including us, various fees and taxes,
and these assessments have been increasing in number and amount in recent years. Moreover, we are obligated to collect a federal excise tax, commonly referred to as the “ticket tax,” on domestic and international air transportation. We
will collect the excise tax, along with certain other U.S. and foreign taxes and user fees on air transportation (such as a per-ticket tax on passengers to fund the TSA), and pass along the collected amounts to the appropriate governmental agencies.
Although these taxes are not operating expenses, they represent an additional cost to our customers. There are continuing efforts in Congress and in other countries to raise different portions of the various taxes, fees, and charges imposed on
airlines and their passengers. Increases in such taxes, fees, and charges could negatively impact our business, financial condition, and results of operations.
Under recent DOT regulations, all governmental taxes and fees must be included in the fares we quote or advertise to our
customers. Due to the competitive revenue environment, many increases in these fees and taxes have been absorbed by the airline industry rather than being passed on to the customer. Further increases in fees and taxes may reduce demand for air
travel, and thus our revenues.
63
Changes to our business model that are designed to increase revenues may
not be successful and may cause operational difficulties or decreased demand.
We have implemented several new
measures designed to increase revenue and offset costs. These measures include charging separately for services that had previously been included within the price of a ticket and increasing other pre-existing fees. We may introduce additional
initiatives in the future; however, as time goes on, we expect that it will be more difficult to identify and implement additional initiatives. We cannot assure you that these new measures or any future initiatives will be successful in increasing
our revenues. Additionally, the implementation of these initiatives creates logistical challenges that could harm the operational performance of our airline. Also, the new and increased fees might reduce the demand for air travel on our airline or
across the industry in general, particularly if weakened economic conditions continue to make our customers more sensitive to increased travel costs or provide a significant competitive advantage to other carriers that determine not to institute
similar charges.
The loss of key personnel upon whom we depend to operate our business or the inability to attract
additional qualified personnel could adversely affect the results of our operations or our financial performance.
We believe that our future success will depend in large part on our ability to attract and retain highly qualified management,
technical and other personnel. We may not be successful in retaining key personnel or in attracting and retaining other highly qualified personnel. Any inability to retain or attract significant numbers of qualified management and other personnel
could adversely affect our business.
We may be adversely affected by conflicts overseas or terrorist attacks; the
travel industry continues to face ongoing security concerns.
Acts of terrorism or fear of such attacks, including
elevated national threat warnings, wars or other military conflicts, may depress air travel, particularly on international routes, and cause declines in revenues and increases in costs. The attacks of September 11, 2001 and continuing terrorist
threats and attempted attacks materially impacted and continue to impact air travel. Increased security procedures introduced at airports since the attacks and other such measures as may be introduced in the future generate higher operating costs
for airlines. The Aviation and Transportation Security Act mandated improved flight deck security, deployment of federal air marshals on board flights, improved airport perimeter access security, airline crew security training, enhanced security
screening of passengers, baggage, cargo, mail, employees and vendors, enhanced training and qualifications of security screening personnel, additional provision of passenger data to U.S. Customs and enhanced background checks. A concurrent
increase in airport security charges and procedures, such as restrictions on carry-on baggage, has also had and may continue to have a disproportionate impact on short-haul travel, which constitutes a significant portion of our flying and revenue.
Our ability to operate and grow our route network in the future is dependent on the availability of adequate
facilities and infrastructure throughout our system and, at some airports, adequate slots.
In order to operate
our existing and proposed flight schedule and, where appropriate, add service along new or existing routes, we must be able to maintain and/or obtain adequate gates, ticketing facilities, operations areas, slots (where applicable), and office space.
Also, as airports around the world become more congested, we will not always be sure that our plans for new service can be implemented in a commercially viable manner, given operating constraints at airports throughout our network. Further, our
operating costs at airports at which we operate, including our hubs, may increase significantly because of capital improvements at such airports that we may be required to fund, directly or indirectly. In some circumstances, such costs could be
imposed by the relevant airport authority without our approval.
Access to slots at several major U.S. and foreign
airports to be served by us is subject to government regulation. There is no assurance that we will be able to retain or acquire the necessary rights to operate our desired schedule and change our schedule in the future because, among other reasons,
such allocations are subject to changes in government policy. For example, the FAA is planning a new rulemaking in 2013 to modify the current rules limiting flight operations at New York City’s JFK and LaGuardia airports. Any limitation on our
ability to acquire or maintain adequate gates, ticketing facilities, operations areas, slots (where applicable), or office space could severely constrain our operations and have a material adverse effect on us.
64
We are subject to many forms of environmental regulation and may incur
substantial costs as a result.
We are subject to increasingly stringent federal, state, local and foreign laws,
regulations and ordinances relating to the protection of the environment, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste
materials. Compliance with all environmental laws and regulations can require significant expenditures, and violations can lead to significant fines and penalties.
The U.S. Environmental Protection Agency (“EPA”) has proposed changes to underground storage tank regulations that
could affect certain airport fuel hydrant systems. Airport systems that fall within threshold requirements would need to be modified to meet regulations. Additionally, the EPA has proposed the Draft National Pollutant Discharge Elimination System
General Permit for Stormwater Discharges from Industrial Activities. This rule would require new limitations on certain discharges along with mandatory best management practices. Concurrently, California has proposed the State Final Draft Industrial
General Permit for stormwater discharges. This rule employs the use of benchmark values to trigger response actions when exceeding those limits and eliminates group monitoring. These rules have not been finalized, and cost estimates have not been
defined, but US Airways along with other airlines would share a portion of these costs at applicable airports. In addition to the proposed EPA and state regulations, several U.S. airport authorities are actively engaged in efforts to limit
discharges of de-icing fluid to local groundwater, often by requiring airlines to participate in the building or reconfiguring of airport de-icing facilities. Such efforts are likely to impose additional costs and restrictions on airlines using
those airports. We do not believe, however, that such environmental developments will have a material impact on our capital expenditures or otherwise adversely affect our operations, operating costs or competitive position.
We are also subject to other environmental laws and regulations, including those that require us to remediate soil or
groundwater to meet certain objectives. Under federal law, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring
response actions. Liability under these laws is often strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to us. We
have liability for such costs at various sites, although the future costs associated with the remediation efforts are currently not expected to have a material adverse effect on our business.
We have various leases and agreements with respect to real property, tanks and pipelines with airports and other operators.
Under these leases and agreements, we have agreed to indemnify the lessor or operator against environmental liabilities associated with the real property or operations described under the agreement, even if we are not the party responsible for the
initial event that caused the environmental damage. We also participate in leases with other airlines in fuel consortiums and fuel committees at airports, where such indemnities are generally joint and several among the participating airlines.
There is increasing global regulatory focus on climate change and greenhouse gas emissions. For example, the EU has
established the Emissions Trading Scheme (“ETS”), the mechanism by which emissions of CO2 are currently regulated in the EU. Since the beginning of 2012, the ETS required airlines to have emission allowances equal to the amount of carbon
dioxide emissions from flights to and from EU member states but, except for flights within and between EU states, this mandate was stayed for one year by the EU in November 2012 pending developments at the International Civil Aviation Organization
(“ICAO”). In addition, President Obama signed legislation in November 2012 which encourages the DOT to seek an international solution through the ICAO, and if necessary, will allow the Secretary of Transportation to prohibit U.S. airlines
from participating in the ETS. In October 2013, the ICAO General Assembly reaffirmed goals for reduced aviation emissions, including CO2-neutral collective industry growth from 2020, and a commitment to try to implement an appropriate global
emissions trading scheme before 2020. The EU proposed in October 2013 to apply ETS to operations within its airspace (an expansion of the current ETS application, which, due to the stay, only affects flights within and between EU states).
Ultimately, the scope and application of ETS or other emissions trading schemes to US Airways, now or in the near future, remains uncertain. US Airways does not anticipate any significant emissions allowance expenditures in 2013. Beyond 2013,
compliance with the ETS or similar emissions-related requirements could significantly increase our operating costs. Further, the potential impact of ETS or other emissions-related requirements on our costs will ultimately depend on a number of
factors, including baseline emissions, the price of emission credits and the number of future flights subject to ETS or other emissions-related requirements. These costs have not been completely defined and could fluctuate. Similarly, within the
U.S., there is an increasing trend toward regulating greenhouse gas emissions directly under the Clean Air Act, and while the EPA’s recent regulatory activity in this area has focused on industries other than aviation, it is possible that
future EPA regulations or new legislation could impact airlines. Several states are also considering initiatives to regulate emissions of greenhouse gases, primarily through the planned development of greenhouse gas emissions inventories and/or
regional greenhouse gas cap and trade programs. These regulatory efforts, both internationally and in the U.S. at the federal and state levels, are still developing and we cannot yet determine what the final regulatory programs will be in the U.S.,
the EU or in other areas in which we do business. However, such climate change-related regulatory activity in the future may adversely affect our business and financial results by requiring us to reduce our emissions, purchase allowances or
otherwise pay for our emissions. Such activity may also impact us indirectly by increasing our operating costs, including fuel costs.
65
Governmental authorities in several U.S. and foreign cities are also
considering or have already implemented aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We have been able to accommodate local noise restrictions imposed to date,
but our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.
We rely heavily on technology and automated systems to operate our business, and any failure of these technologies or
systems could harm our business, financial condition or results of operations.
We are highly dependent on
technology and automated systems to operate and achieve low operating costs. These technologies and systems include our computerized airline reservation system, flight operations system, financial planning, management and accounting systems,
telecommunications systems, website, maintenance systems and check-in kiosks. In order for our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and
deliver flight information. Substantially all of our tickets are issued to passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained under a long-term contract by a third-party service provider, to be able
to issue, track and accept these electronic tickets. If our automated systems are not functioning or if our third-party service providers were to fail to adequately provide technical support, system maintenance or timely software upgrades for any
one of our key existing systems, we could experience service disruptions or delays, which could harm our business and result in the loss of important data, increase our expenses and decrease our revenues. In the event that one or more of our primary
technology or systems vendors goes into bankruptcy, ceases operations or fails to perform as promised, replacement services may not be readily available on a timely basis, at competitive rates or at all, and any transition time to a new system may
be significant. Our automated systems cannot be completely protected against other events that are beyond our control, including natural disasters, computer viruses or telecommunications failures. Substantial or sustained system failures could cause
service delays or failures and result in our customers purchasing tickets from other airlines. We cannot assure you that our security measures, change control procedures or disaster recovery plans are adequate to prevent disruptions or delays.
Disruption in or changes to these systems could result in a disruption to our business and the loss of important data. Any of the foregoing could result in a material adverse effect on our business, results of operations or financial condition.
Ongoing data security compliance requirements could increase our costs, and any significant data breach could harm our
business, financial condition or results of operations.
Our business requires the appropriate and secure
utilization of customer and other sensitive information. We cannot be certain that advances in criminal capabilities (including cyber attacks or cyber intrusions over the Internet, malware, computer viruses and the like), discovery of new
vulnerabilities or attempts to exploit existing vulnerabilities in our systems, other data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting the
networks that access and store sensitive information. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the
number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad (particularly in the EU),
including requirements for varying levels of customer notification in the event of a data breach.
In addition, many of
our commercial partners, including credit card companies, have imposed data security standards that we must meet. In particular, we are required by the Payment Card Industry Security Standards Council, founded by the credit card companies, to comply
with their highest level of data security standards. While we continue our efforts to meet these standards, new and revised standards may be imposed that may be difficult for us to meet and could increase our costs.
Failure to comply with the Payment Card Industry Standards discussed above or other privacy and data use and security
requirements of our partners or related laws, rules and regulations to which we are subject may expose us to claims for contract breach, fines, sanctions or other penalties, which could materially and adversely affect our results of operations and
overall business. In addition, failure to address appropriately these issues could also give rise to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement
actions, fines and penalties and cause us to incur further related costs and expenses.
66
We are at risk of losses and adverse publicity stemming from any accident
involving any of our aircraft or the aircraft of our regional operators.
If one of our aircraft, an aircraft that
is operated under our brand by one of our regional operators or an aircraft that is operated by an airline that is one of our codeshare partners were to be involved in an accident, we could be exposed to significant tort liability. The insurance we
carry to cover damages arising from any future accidents may be inadequate. In the event that our insurance is not adequate, we may be forced to bear substantial losses from an accident. In addition, any accident involving an aircraft that we
operate, an aircraft that is operated under our brand by one of our regional operators or an aircraft that is operated by an airline that is one of our codeshare partners could create a public perception that our aircraft or those of our regional
operators or codeshare partners are not safe or reliable, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft or those of our regional operators or codeshare partners and adversely impact our financial
condition and operations.
Delays in scheduled aircraft deliveries or other loss of anticipated fleet capacity may
adversely impact our operations and financial results.
The success of our business depends on, among other
things, the ability to operate an optimum number and type of aircraft. In many cases, the aircraft we intend to operate are not yet in our fleet, but we have contractual commitments to purchase or lease them. If for any reason we were unable to
accept or secure deliveries of new aircraft on contractually scheduled delivery dates, this could have a negative impact on our business, operations and financial performance. Our failure to integrate newly purchased aircraft into our fleet as
planned might require us to seek extensions of the terms for some leased aircraft. Such unanticipated extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased
maintenance costs. If new aircraft orders are not filled on a timely basis, we could face higher monthly rental rates.
We are dependent on a limited number of suppliers for aircraft, aircraft engines and parts.
We are dependent on a limited number of suppliers for aircraft, aircraft engines and many aircraft and engine parts. As a
result, we are vulnerable to any problems associated with the supply of those aircraft, parts and engines, including design defects, mechanical problems, contractual performance by the suppliers, or adverse perception by the public that would result
in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft.
Our business will
be affected by many changing economic and other conditions beyond our control, and our results of operations could be volatile and fluctuate due to seasonality.
Our business, financial condition, and results of operations will be affected by many changing economic and other conditions
beyond our control, including, among others:
|
|
•
|
|
actual or potential changes in international, national, regional, and local economic, business and financial conditions, including recession,
inflation, higher interest rates, wars, terrorist attacks, or political instability;
|
|
|
•
|
|
changes in consumer preferences, perceptions, spending patterns, or demographic trends;
|
|
|
•
|
|
changes in the competitive environment due to industry consolidation, changes in airline alliance affiliations, and other factors;
|
|
|
•
|
|
actual or potential disruptions to the air traffic control systems, including as a result of “sequestration” or any other interruption in
government funding;
|
|
|
•
|
|
increases in costs of safety, security, and environmental measures;
|
|
|
•
|
|
outbreaks of diseases that affect travel behavior; and
|
|
|
•
|
|
weather and natural disasters.
|
67
Thus, our results of operations could be volatile and subject to rapid and
unexpected change. In addition, due to generally weaker demand for air travel during the winter, our revenues in the first and fourth quarters of the year could be weaker than revenues in the second and third quarters of the year.
Increases in insurance costs or reductions in insurance coverage may adversely impact our operations and financial
results.
The terrorist attacks of September 11, 2001 led to a significant increase in insurance premiums and
a decrease in the insurance coverage available to commercial air carriers. Accordingly, our insurance costs increased significantly and our ability to continue to obtain insurance even at current prices remains uncertain. In addition, we have
obtained third-party war risk (terrorism) insurance through a special program administered by the FAA, resulting in lower premiums than if we had obtained this insurance in the commercial insurance market. The program has been extended, with the
same conditions and premiums, until December 31, 2013. If the federal insurance program terminates, we would likely face a material increase in the cost of war risk insurance. The failure of one or more of our insurers could result in a lack of
coverage for a period of time. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the claims paying ability of some insurers. Future downgrades in the ratings of enough insurers could adversely
impact both the availability of appropriate insurance coverage and its cost. Because of competitive pressures in our industry, our ability to pass additional insurance costs to passengers is limited. As a result, further increases in insurance costs
or reductions in available insurance coverage could have an adverse impact on our financial results.
We may be
adversely affected by global events that affect travel behavior.
Our revenue and results of operations may be
adversely affected by global events beyond our control. An outbreak of a contagious disease such as Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, or any other influenza-type illness, if it were to persist for an extended
period, could again materially affect the airline industry and us by reducing revenues and impacting travel behavior.
We are exposed to foreign currency exchange rate fluctuations.
As a result of our international operations, we have significant operating revenues and expenses, as well as assets and
liabilities, denominated in foreign currencies. Fluctuations in foreign currencies can significantly affect our operating performance and the value of our assets and liabilities located outside of the United States.
The use of our net operating losses and certain other tax attributes could be limited in the future.
When a corporation undergoes an ownership change, as defined in Section 382 (“Section 382”) of the
Internal Revenue Code of 1986, as amended (the “Code”), a limitation is imposed on the corporation’s future ability to utilize any net operating losses (“NOLs”) generated before the ownership change and certain subsequently
recognized “built-in” losses and deductions, if any, existing as of the date of the ownership change. We believe US Airways Group underwent an “ownership change” as defined in Section 382 in February 2007. Since February
2007, there have been additional changes in the ownership of US Airways Group that, if combined with sufficiently large future changes in ownership, could result in another “ownership change” as defined in Section 382. Until US
Airways Group has used all of its existing NOLs, future shifts in ownership of US Airways Group’s common stock could result in new Section 382 limitations on the use of our NOLs as of the date of an additional “ownership change.”
US Airways Group expects to undergo an ownership change in connection with the Merger with AMR.
See also “
Risk
Factors Relating to the Merger and the Combined Company – The use of AMR’s and our respective pre-Merger NOL carryforwards and certain other tax attributes may be limited following the consummation of the Merger
.”
68
Risk Factors Relating to the Merger and the Combined Company
On February 13, 2013, US Airways Group and AMR entered into the Merger Agreement, as described in Note 2 to the
respective condensed consolidated financial statements of US Airways Group and US Airways included in Part I, Items 1A and 1B of this report.
The DOJ Action has delayed, and could ultimately prevent, the consummation of the Merger.
On August 13, 2013, the United States government along with certain states and the District of Columbia filed the DOJ
Action seeking to permanently enjoin our pending Merger with AMR. The filing of the DOJ Action has delayed and, if we and AMR are unsuccessful in defending against or settling the DOJ Action, could ultimately prevent, the consummation of the Merger.
There can be no assurance that we will be successful in defending against or settling the DOJ Action or that the Merger will be consummated by any particular time, if at all.
In addition, even if we enter into a settlement with respect to the DOJ Action, there can be no assurance that we will not be
required to agree to terms, conditions, requirements, limitations, costs or restrictions that could further delay completion of the Merger, impose additional material costs on or limit the revenues of the combined company, or limit some of the
synergies and other benefits we presently anticipate to realize following the Merger. We cannot provide any assurance that any such terms, conditions, requirements, limitations, costs or restrictions will not result in a material delay in, or the
abandonment of, the Merger, or that the Bankruptcy Court will approve of such terms, conditions, requirements, limitations, costs or restrictions. Any such settlement may require that AMR give additional notice to its creditors or re-solicit them
for acceptance of AMR’s plan of reorganization, which would further delay the consummation of the Merger and could result in changes to the structure of the Merger. In addition, there are no assurances that AMR’s creditors would not
challenge AMR’s plan of reorganization, as amended, or that they would vote in favor of an amended plan of reorganization.
Delays in completing the Merger have delayed, and could continue to delay, the benefits expected to be achieved by the
Merger.
The need to satisfy conditions and obtain consents, clearances, and approvals for the Merger, as well as
the pendency of the DOJ Action, have delayed, and could continue to delay, the consummation of the Merger for a significant period of time or prevent it from occurring. Even if ultimately consummated, the delay in the consummation of the Merger
could cause the combined company to be delayed or limited in realizing some of the synergies and other benefits that the parties anticipated had the Merger been successfully completed within its originally expected time frame.
The Merger is subject to a number of conditions to our and AMR’s obligations, including the receipt of certain
consents and approvals, which, if not fulfilled or received, may result in the termination of the Merger Agreement.
The Merger Agreement contains a number of conditions to consummation of the Merger, including that certain representations and
warranties be materially accurate, that certain covenants be fulfilled, that certain consents and regulatory approvals have been obtained, that there are no legal prohibitions against consummation of the Merger (which will require, among other
things, a favorable resolution of the DOJ Action), that an order from the Bankruptcy Court confirming AMR’s plan of reorganization is in effect, and that secured indebtedness of the Debtors and certain other claims against the Debtors not
exceed specified levels. Many of the conditions to consummation of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied.
If any of the conditions to the consummation of the Merger are not satisfied or waived prior to the earlier of (A) the
later of (i) January 18, 2014 and (ii) the 15th day after the United States District Court for the District of Columbia enters an order in the trial related to the DOJ Action in favor of AMR and US Airways Group, provided that such
order is entered on or prior to January 17, 2014, and (B) five days after the United States District Court for the District of Columbia enters a final, but appealable, order permanently restraining, enjoining or otherwise prohibiting
consummation of the Merger following the trial in the DOJ Action, either AMR or US Airways Group may unilaterally terminate the Merger Agreement and abandon the Merger.
69
Lawsuits, in addition to the DOJ Action, have been filed challenging the
Merger, and an adverse ruling may prevent the Merger from being completed.
US Airways Group, as well as the
members of US Airways Group’s board of directors, were named as defendants in a lawsuit brought by a purported class of US Airways Group’s stockholders challenging the Merger and seeking a declaration that the Merger Agreement is
unenforceable, an injunction against the Merger (or rescission in the event it has been consummated), imposition of a constructive trust, an award of fees and costs, including attorneys’ and experts’ fees, and other relief.
US Airways Group and US Airways were also named as defendants in a lawsuit brought by US Airways’ and/or American
Airlines’ consumers. The complaint alleges that the effect of the Merger may be to substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Antitrust Act. The relief sought in the complaint
includes an injunction against the Merger, or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American Airlines as defendants, and on October 2, 2013 dismissed the initial
California action.
Even if we successfully resolve the DOJ Action, the courts in these private lawsuits could enjoin the
Merger, or could further materially delay its consummation. If such private lawsuits are not successfully resolved, it is possible that the Merger Agreement may be terminated and the Merger abandoned. Even if successfully resolved, such private
lawsuits could result in terms, conditions, requirements, limitations, costs or restrictions that would delay completion of the Merger, impose additional material costs on or materially limit the revenues of us or the combined company, or materially
limit some of the synergies and other benefits we anticipate following the Merger.
Additional lawsuits may be filed
against us, AMR, and/or our or AMR’s directors in connection with the Merger. One of the conditions to the closing of the Merger is that no order, writ, injunction, decree, or any other legal rules, regulations, directives, or policies will be
in effect that prevent completion of the Merger. Consequently, if a settlement or other resolution is not reached in the current and potential lawsuits referenced above, and such other potential lawsuits, if any, and the plaintiffs secure injunctive
or other relief prohibiting, delaying, or otherwise adversely affecting the defendants’ ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming effective within the expected time frame or at
all.
Failure to complete the Merger could negatively impact our stock price and our future business and financial
results.
If the Merger is not completed, our ongoing business may be adversely affected, and we will be subject
to certain risks, including the following:
|
|
•
|
|
we may be required to pay termination fees of $55 million or $195 million under certain circumstances provided in the Merger Agreement;
|
|
|
•
|
|
unless and until it is terminated, we will be prohibited by the Merger Agreement from seeking certain strategic alternatives, such as transactions
with third parties other than AMR, and could therefore miss attractive alternatives to the Merger;
|
|
|
•
|
|
prior to any termination of the Merger Agreement, our operations will be restricted by the terms of the Merger Agreement, which may cause us to
forego otherwise attractive business opportunities;
|
|
|
•
|
|
we will be required to pay certain costs relating to the Merger, whether or not it is consummated, such as legal, accounting, financial adviser and
printing fees, which costs could be substantial; and
|
|
|
•
|
|
our management will have focused its attention on negotiating and preparing for the Merger instead of on pursuing other opportunities that could
have been beneficial to us.
|
If the Merger is not completed, we cannot assure you that these risks will
not materialize and will not materially and adversely affect our business, financial results, and stock price.
70
The Merger Agreement contains customary restrictions on our ability to seek
other strategic alternatives.
The Merger Agreement contains “no shop” provisions that restrict our
ability to initiate, solicit, or knowingly encourage or facilitate competing third-party proposals for any business combination transaction involving a merger of us with another entity or the acquisition of a significant portion of our stock or
assets. In addition, AMR generally has an opportunity to offer to modify the terms of the Merger in response to any competing acquisition proposal. If we were to terminate the Merger Agreement to accept a superior proposal, we would be required to
pay a termination fee of $55 million to AMR.
These provisions, although customary for these types of transactions, would,
prior to the termination of the Merger Agreement, prevent a potential third-party acquirer that might have an interest in acquiring all or a significant portion of our company from proposing any such acquisition, even if the potential third-party
acquirer were prepared to pay consideration with a higher cash or market value than the market value proposed to be received or realized in the Merger.
The combined company may be unable to integrate our and AMR’s businesses successfully and realize the anticipated
benefits of the Merger.
The Merger involves the combination of two companies that currently operate as
independent public companies, each of which operates its own international network airline. Historically, the integration of separate airlines has often proven to be more time consuming and to require more resources than initially estimated. The
combined company will be required to devote significant management attention and resources to integrating our and AMR’s business practices, cultures, and operations. Potential difficulties the combined company may encounter as part of the
integration process include the following:
|
|
•
|
|
the inability to successfully combine our business with that of AMR in a manner that permits the combined company to achieve the synergies and
other benefits anticipated to result from the Merger;
|
|
|
•
|
|
the challenge of integrating complex systems, operating procedures, regulatory compliance programs, technology, aircraft fleets, networks, and
other assets of the two companies in a manner that minimizes any adverse impact on customers, suppliers, employees, and other constituencies;
|
|
|
•
|
|
diversion of the attention of the combined company’s management and other key employees;
|
|
|
•
|
|
the challenge of integrating the workforces of the two companies while maintaining focus on providing consistent, high quality customer service and
running an efficient operation;
|
|
|
•
|
|
disruption of, or the loss of momentum in, the combined company’s ongoing business; and
|
|
|
•
|
|
potential unknown liabilities, liabilities that are significantly larger than we currently anticipate and unforeseen increased expenses or delays
associated with the Merger, including transition costs to integrate the two businesses that may exceed the approximately $1.2 billion of cash transition costs that we currently anticipate.
|
We and AMR have submitted to the FAA a transition plan for merging the day-to-day operations of American and US Airways under
a single operating certificate. The issuance of a single operating certificate will occur when the FAA agrees that the combined company has achieved a level of integration that can be safely managed under one certificate. While the parties currently
believe that such approval can be obtained within two years from the closing of the Merger, the actual time required and cost incurred to receive this approval cannot be predicted. Any delay in the grant of such approval or increase in costs beyond
those presently expected could have a material adverse effect on the completion date of the combined company’s integration plan and receipt of the benefits expected from that plan.
Accordingly, even if the Merger is consummated, the contemplated benefits may not be realized fully, or at all, or may take
longer to realize than expected.
71
The combined company may face challenges in integrating our and AMR’s
computer, communications and other technology systems.
Among the principal risks of integrating our business and
operations with those of AMR are the risks relating to integrating various computer, communications and other technology systems, including designing and implementing an integrated customer reservations system, that will be necessary to operate US
Airways and American as a single airline and to achieve cost synergies by eliminating redundancies in the two companies’ businesses. The integration of these systems in a number of prior airline mergers has taken longer, been more disruptive
and cost more than originally forecast. The implementation process to integrate these various systems will involve a number of risks that could adversely impact the combined company’s business operations, financial condition and results of
operations. New systems will replace multiple legacy systems and the related implementation will be a complex and time-consuming project involving substantial expenditures for implementation consultants, system hardware, software and implementation
activities, as well as the transformation of business and financial processes.
As with any large project, there will be
many factors that may materially affect the schedule, cost and execution of the integration of our and AMR’s computer, communications and other technology systems. These factors include, among others: problems during the design, implementation
and testing phases; systems delays and/or malfunctions; the risk that suppliers and contractors will not perform as required under their contracts; the diversion of management attention from daily operations to the project; reworks due to
unanticipated changes in business processes; challenges in simultaneously activating new systems throughout our global network; difficulty in training employees in the operations of new systems; the risk of security breach or disruption; and other
unexpected events beyond our control. We cannot assure you that our, AMR’s or the combined company’s security measures, change control procedures or disaster recovery plans will be adequate to prevent disruptions or delays. Disruptions in
or changes to these systems could result in a disruption to the combined company’s business and the loss of important data. Any of the foregoing could result in a material adverse effect on the combined company’s business, results of
operations or financial condition.
The use of AMR’s and our respective pre-Merger NOL carryforwards and
certain other tax attributes may be limited following the consummation of the Merger.
Under the Code, a
corporation is generally allowed a deduction in any taxable year for NOL carryforwards. As of December 31, 2012, AMR had available NOL carryforwards of approximately $6.6 billion for regular U.S. federal income tax purposes, which will expire,
if unused, beginning in 2022, and for state income tax purposes of $3.6 billion, which will expire, if unused, between 2013 and 2027. The amount of AMR’s NOL carryforwards for state income tax purposes that will expire, if unused, in 2013 is
$105 million. AMR’s NOL carryforwards could be subject to limitation as a result of the Chapter 11 bankruptcy cases and certain related transactions. As of December 31, 2012, we had available NOL carryforwards of approximately $1.5 billion
for regular U.S. federal income tax purposes, which will expire, if unused, beginning in 2025, and for state income tax purposes, of approximately $722 million, which will expire, if unused, in 2013 through 2031. The amount of our NOL carryforwards
for state income tax purposes that will expire, if unused, in 2013 is $13 million. Our NOL carryforwards may also be subject to limitation as a result of the Merger. In addition, both our and AMR’s NOL carryforwards are subject to adjustment on
audit by the IRS.
A corporation’s ability to deduct its federal NOL carryforwards and to utilize certain other
available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 of the Code if it undergoes an “ownership change” as defined in Section 382 of the Code (generally where
cumulative stock ownership changes among certain shareholders exceed 50 percentage points during a rolling three-year period). We and AMR each expect to undergo an “ownership change” in connection with AMR’s emergence from its Chapter
11 bankruptcy cases and the Merger, respectively. The general limitation rules for a debtor in a bankruptcy case such as AMR are liberalized where the ownership change occurs upon emergence from bankruptcy. In addition, under certain circumstances,
special rules may apply to allow AMR to utilize substantially all of its pre-emergence NOL carryforwards without regard to the general limitations of Section 382 of the Code, and similar rules also may apply to state NOL carryforwards. However,
there can be no assurance that these special rules under Section 382 of the Code (or any similar rules under applicable state law) will apply to AMR’s ownership change. Accordingly, the utilization of each of AMR’s and our respective
NOL carryforwards and certain other tax attributes could be significantly constrained following AMR’s emergence from its Chapter 11 bankruptcy cases and the Merger. Moreover, an ownership change subsequent to consummation of the Merger could
further limit or effectively eliminate the combined company’s ability to utilize such NOL carryforwards and other tax attributes.
The combined company’s ability to use NOL carryforwards will also depend on the amount of taxable income generated in
future periods. The NOL carryforwards may expire before the combined company can generate sufficient taxable income to use the NOL carryforwards.
72
The combined company will require significant liquidity to fund its
emergence from Chapter 11 and to achieve successful integration and achieve targeted synergies post-closing.
At emergence from Chapter 11, AMR will pay approximately $1.4 billion in cash to settle certain obligations in connection with
its plan of reorganization. In addition, the transition costs to integrate the two businesses may exceed the approximately $1.2 billion of cash transition costs that we and AMR currently anticipate. An inability to obtain necessary funding on
acceptable terms would have a material adverse impact on the combined company and on its ability to sustain its operations.
Each of our and AMR’s indebtedness and other obligations are, and the combined company’s indebtedness and
other obligations following the consummation of the Merger will continue to be, substantial and could adversely affect the combined company’s business and liquidity.
We and AMR each have, and the combined company will continue to have, significant amounts of indebtedness and other
obligations, including pension obligations, obligations to make future payments on aircraft equipment and property leases, and obligations under aircraft purchase agreements. Moreover, currently all but a very limited quantity of our and AMR’s
assets are pledged to secure their respective indebtedness. The combined company’s substantial indebtedness and other obligations could have important consequences. For example, they may:
|
|
•
|
|
limit the combined company’s ability to obtain additional funding for working capital, to withstand operating risks that are customary in the
industry, capital expenditures, acquisitions, investments, integration costs, and general corporate purposes, and adversely affect the terms on which such funding can be obtained;
|
|
|
•
|
|
require the combined company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness and other
obligations, thereby reducing the funds available for other purposes;
|
|
|
•
|
|
make the combined company more vulnerable to economic downturns and catastrophic external events;
|
|
|
•
|
|
contain restrictive covenants that could:
|
|
|
•
|
|
limit the combined company’s ability to merge, consolidate, sell assets, incur additional indebtedness, issue preferred stock, make
investments and pay dividends; and
|
|
|
•
|
|
significantly constrain the combined company’s ability to respond, or respond quickly, to unexpected disruptions in its own operations, the
U.S. or global economy, or the businesses in which it operates, or to take advantage of opportunities that would improve its business, operations, or competitive position versus other airlines; and
|
|
|
•
|
|
limit the combined company’s ability to withstand competitive pressures and reduce its flexibility in responding to changing business and
economic conditions.
|
In addition, increases in the cost of financing could adversely affect the
combined company’s liquidity, business, financial condition, and results of operations.
AMR has not yet
secured financing for all of its scheduled aircraft deliveries, which will be utilized in the fleet of the combined company after the Merger.
AMR has not yet secured financing commitments for some of the aircraft that it has on order, and AMR cannot be assured of the
availability or the cost of that financing. If AMR is unable to arrange financing for such aircraft at customary advance rates and on terms and conditions acceptable to it, AMR, prior to the Merger, and the combined company thereafter, may need to
use cash from operations to purchase such aircraft or may seek to negotiate deferrals for such aircraft with the aircraft manufacturers.
73
The combined company will have significant pension and other
post-employment benefit funding obligations, which may adversely affect its liquidity, financial condition, and results of operations.
The combined company will have significant pension funding obligations, the amount of which will be dependent on the
performance of investments held in trust by the pension plans, interest rates for determining liabilities, and actuarial experience. Currently, the combined company’s minimum funding obligation for its pension plans is subject to temporary,
favorable rules that are scheduled to expire at the end of 2017. Upon the expiration of those rules, the combined company’s funding obligations are likely to increase materially. In addition, the combined company may have significant
obligations for other post-employment benefits depending on the outcome of the adversary proceeding related to the retiree medical and life insurance obligations filed in the Chapter 11 cases. The foregoing post-employment benefit obligations could
materially adversely affect the combined company’s liquidity, financial condition, and results of operations.
The combined company will need to obtain sufficient financing or other capital to operate successfully.
We and AMR currently plan to increase the combined company’s revenue in part by investing heavily in renewing and
optimizing the combined company’s fleet and integrating the companies. Significant capital resources will be required to achieve these goals and, as a result, we and AMR estimate that the combined company’s planned aggregate capital
expenditures on a consolidated basis for calendar years 2013-2017 would be approximately $20 billion. Accordingly, the combined company will need substantial financing or other capital resources, some of which may be obtained prior to AMR’s
emergence from the Chapter 11 cases and thus may be subject to Bankruptcy Court approval. Depending on numerous factors, many of which are out of our and AMR’s control, and will be out of the combined company’s control, such as the state
of the domestic and global economy, the credit market’s view of the combined company’s prospects and the airline industry in general, and the general availability of debt and equity capital at the time the combined company seeks capital,
the financing and other capital that the combined company will need may not be available to it, or may only be available on onerous terms and conditions. There can be no assurance that the combined company will be successful in obtaining financing
or other needed sources of capital to operate successfully.
74
Risks Relating to Our Common Stock
The price of our common stock has recently been and may in the future be volatile.
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our
control, including:
|
|
•
|
|
our operating results failing to meet the expectations of securities analysts or investors;
|
|
|
•
|
|
changes in financial estimates or recommendations by securities analysts;
|
|
|
•
|
|
material announcements by us or our competitors;
|
|
|
•
|
|
movements in fuel prices;
|
|
|
•
|
|
new regulatory pronouncements and changes in regulatory guidelines;
|
|
|
•
|
|
general and industry-specific economic conditions;
|
|
|
•
|
|
public sales of a substantial number of shares of our common stock; and
|
|
|
•
|
|
general market conditions.
|
The market price of the combined company’s common stock may be volatile.
The combined company’s common stock will be a new issue of securities, which issue is expected to be approved for listing
on the NYSE or NASDAQ to be effective upon issuance of the combined company’s common stock. However, an active public market for the combined company’s common stock may not develop or be sustained after the consummation of the Merger, and
no assurance can be given that there will be any liquidity in any such market. If a market for the combined company’s common stock develops, the price at which a holder of the combined company’s common stock could sell its shares may be
higher or lower than the implied valuation for the combined company’s common stock provided in the Registration Statement on Form S-4 filed with the SEC by AMR on April 15, 2013, as amended. The market price of the combined company’s
common stock may fluctuate significantly in response to a number of factors, some of which are beyond our and AMR’s control, including:
|
|
•
|
|
variations in operating results;
|
|
|
•
|
|
changes in financial estimates by securities analysts;
|
|
|
•
|
|
changes in market values of airline companies;
|
|
|
•
|
|
announcements by the combined company’s competitors of significant acquisitions, strategic partnerships, changes in routes, or capital
commitments;
|
|
|
•
|
|
the success or failure in managing the combined company, including the integration of our and AMR’s separate operations;
|
|
|
•
|
|
increases or decreases in reported holdings by insiders or other significant stockholders;
|
|
|
•
|
|
additions or departures of key personnel;
|
|
|
•
|
|
future sales of the combined company’s common stock or issuance of the combined company’s common stock upon the exercise or conversion of
convertible securities, options, warrants, RSUs, SARs, or similar rights, including common stock issuable upon conversion of shares of the combined company’s convertible preferred stock that will be issued pursuant to AMR’s plan of
reorganization; and
|
|
|
•
|
|
fluctuations in trading volume.
|
75
Certain provisions of US Airways Group’s amended and restated
certificate of incorporation and amended and restated bylaws make it difficult for stockholders to change the composition of US Airways Group’s board of directors and may discourage takeover attempts that some of US Airways Group’s
stockholders might consider beneficial.
Certain provisions of the amended and restated certificate of
incorporation and amended and restated bylaws of US Airways Group may have the effect of delaying or preventing changes in control if US Airways Group’s board of directors determines that such changes in control are not in the best interests of
US Airways Group and its stockholders. These provisions include, among other things, the following:
|
|
•
|
|
a classified board of directors with three-year staggered terms;
|
|
|
•
|
|
advance notice procedures for stockholder proposals to be considered at stockholders’ meetings;
|
|
|
•
|
|
the ability of US Airways Group’s board of directors to fill vacancies on the board;
|
|
|
•
|
|
a prohibition against stockholders taking action by written consent;
|
|
|
•
|
|
a prohibition against stockholders calling special meetings of stockholders;
|
|
|
•
|
|
a requirement that holders of at least 80% of the voting power of the shares entitled to vote in the election of directors approve any amendment of
our amended and restated bylaws submitted to stockholders for approval; and
|
|
|
•
|
|
super-majority voting requirements to modify or amend specified provisions of US Airways Group’s amended and restated certificate of
incorporation.
|
These provisions are not intended to prevent a takeover, but are intended to protect and
maximize the value of the interests of US Airways Group’s stockholders. While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable our
board of directors to prevent a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. In addition, US
Airways Group is subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits business combinations with interested stockholders. Interested stockholders do not include stockholders whose acquisition of US
Airways Group’s securities is approved by the board of directors prior to the investment under Section 203.
The market price of the combined company’s common stock after the Merger may be affected by factors different from
those currently affecting US Airways Group’s shares.
Upon the consummation of the Merger, holders of US
Airways Group’s common stock will become holders of the combined company’s common stock. Our businesses prior to the Merger differ from those of the combined company, and accordingly the results of operations of the combined company may be
affected by factors different from those currently affecting our results of operations, including the uncertainty of the market’s ability to value the combined company as it emerges from the Chapter 11 cases.
The percentage ownership interests of US Airways Group stockholders will be reduced as a result of the Merger and,
accordingly, US Airways Group stockholders will have less influence on the management and policies of the combined company than they now have on the management and policies of US Airways Group.
The aggregate number of shares of the combined company’s common stock issuable to holders of US Airways Group’s
equity instruments (including stockholders, holders of convertible notes, optionees, and holders of stock-settled SARs and RSUs) in the Merger will represent 28% of the diluted equity ownership of the combined company. The remaining 72% equity
ownership of the combined company will be distributable, pursuant to AMR’s reorganization plan, to stakeholders, labor unions, and certain employees of AMR and the other Debtors. Therefore, each of the US Airways Group stockholders will have a
percentage ownership of the combined company that is smaller than the stockholder’s prior percentage ownership of US Airways Group. As a result, the US Airways Group stockholders will have less influence on the management and policies of the
combined company than they now have on the management and policies of US Airways Group.
76
Our charter documents include provisions limiting voting and ownership of
our equity interests, which includes our common stock and our convertible notes, by foreign owners.
Our charter
documents provide that, consistent with the requirements of Subtitle VII of Title 49 of the United States Code, as amended, or as the same may be from time to time amended (the “Aviation Act”), any person or entity who is not a
“citizen of the United States” (as defined under the Aviation Act and administrative interpretations issued by the DOT, its predecessors and successors, from time to time), including any agent, trustee or representative of such person or
entity (a “non-citizen”), shall not own (beneficially or of record) and/or control more than (a) 24.9% of the aggregate votes of all of our outstanding equity securities (as defined, which definition includes our capital stock,
securities convertible into or exchangeable for shares of our capital stock, including our outstanding convertible notes, and any options, warrants or other rights to acquire capital stock) (the “voting cap amount”) or (b) 49.9% of
our outstanding equity securities (the “absolute cap amount”). If non-citizens nonetheless at any time own and/or control more than the voting cap amount, the voting rights of the equity securities in excess of the voting cap amount shall
be automatically suspended in accordance with the provisions of our bylaws. Voting rights of equity securities, if any, owned (beneficially or of record) by non-citizens shall be suspended in reverse chronological order based upon the date of
registration in the foreign stock record. Further, if at any time a transfer of equity securities to a non-citizen would result in non-citizens owning more than the absolute cap amount, such transfer shall be void and of no effect, in accordance
with provisions of our bylaws. Certificates for our equity securities must bear a legend set forth in our amended and restated certificate of incorporation stating that such equity securities are subject to the foregoing restrictions. Under our
bylaws, it is the duty of each stockholder who is a non-citizen to register his, her or its equity securities on our foreign stock record. In addition, our bylaws provide that in the event that non-citizens shall own (beneficially or of record) or
have voting control over any equity securities, the voting rights of such persons shall be subject to automatic suspension to the extent required to ensure that we are in compliance with applicable provisions of law and regulations relating to
ownership or control of a United States air carrier. In the event that we determine that the equity securities registered on the foreign stock record or the stock records of the Company exceed the absolute cap amount, sufficient shares shall be
removed from the foreign stock record and the stock records of the Company so that the number of shares entered therein does not exceed the absolute cap amount. Shares of equity securities shall be removed from the foreign stock record and the stock
records of the Company in reverse chronological order based on the date of registration in the foreign stock record and the stock records of the Company.
In connection with AMR’s emergence from the Chapter 11 cases, the combined company will establish certain
limitations on acquisitions, dispositions and voting of its common stock, which may serve to limit the post-emergence liquidity of its common stock.
To reduce the risk of a potential adverse effect of an “ownership change” as defined in Section 382 of the Code
on the combined company’s ability to use its NOL carryforwards and certain other tax attributes and to avoid violation of federal statutory limitations on equity ownership of U.S. commercial airlines by foreign nationals, the combined
company’s Certificate of Incorporation and Bylaws will contain certain restrictions on the acquisition, disposition and voting of the combined company’s common stock. These restrictions may adversely affect the ability of certain holders
of the combined company’s common stock to dispose of, acquire or vote shares of the combined company’s common stock. No assurance can be given that an ownership change will not occur even with tax-related and other restrictions in place or
that these provisions will assure compliance with the applicable restrictions on foreign ownership.
77