##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One) þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2004
 or
 o
    
    Transition report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number 1-12649 AMERICA WEST HOLDINGS CORPORATION (Exact name of registrant as specified in its charter)
 DELAWARE
    
    86-0847214(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)111 WEST RIO SALADO PARKWAY, TEMPE, ARIZONA
    
    85281(Address of principal executive offices)
    
    (Zip Code)
 (480) 693-0800 
 (Registrants telephone number, including area code)
 N/A
 
 (Former name, former address and former fiscal year, if changed since last report)
 Commission file number 0-12337 AMERICA WEST AIRLINES, INC. (Exact name of registrant as specified in its charter)
 DELAWARE
    
    86-0418245(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)4000 EAST SKY HARBOR BLVD, PHOENIX, ARIZONA
    
    85034(Address of principal executive offices)
    
    (Zip Code)
 (480) 693-0800
 
 (Registrants telephone number, including area code)
 N/A  (Former name, former address and former fiscal year, if changed since last report)
 Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yesþ   Noo Indicate by check mark whether the Registrants are accelerated filers (as
defined in Exchange Act Rule 12b-2). America West Holdings Corporation
    
    Yes
    
    þ
    
    No
    
    oAmerica West Airlines, Inc.
    
    Yes
    
    o
    
    No
    
    þ
 As of July 21, 2004,
America West Holdings Corporation has 859,117 shares of
Class A common stock and
35,252,800 shares of Class B common stock outstanding.
As of July 21, 2004, America West Airlines, Inc. has 1,000 shares of Class B
common stock outstanding, all of which are held by America West Holdings
Corporation.




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  AMERICA WEST HOLDINGS CORPORATIONCondensed Consolidated Balance SheetsCondensed Consolidated Statements of OperationsCondensed Consolidated Statements of Cash FlowsNotes To Condensed Consolidated Financial StatementsITEM 1B. CONDENSED FINANCIAL STATEMENTS  AMERICA WEST AIRLINES, INCCondensed Balance SheetsCondensed Statements of OperationsCondensed Statements of Cash FlowsNotes To Condensed Consolidated Financial StatementsITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKPART II  OTHER INFORMATIONITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATUREEXHIBIT INDEXExhibit 3.1Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 31.3Exhibit 31.4Exhibit 32.1Exhibit 32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION America West Holdings Corporation (Holdings or the Company) is the
holding company that owns all of the stock of America West Airlines, Inc.
(AWA or the Airline). AWA, the eighth largest passenger airline and the
second largest low cost carrier in the United States, accounted for most of
Holdings revenues and expenses in 2003. The Leisure Company (TLC),
previously a wholly owned subsidiary of Holdings, was merged into AWA on
January 1, 2004 and continues to operate as the America West Vacations
division of AWA. Through its America West Vacations division, AWA also
sells individual and group travel packages. This combined Form 10-Q is
filed by both Holdings and AWA and includes the financial statements of each
company in Item 1A and Item 1B, respectively. 
 ITEM 1A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  AMERICA WEST HOLDINGS CORPORATION. 
 AMERICA WEST HOLDINGS CORPORATION Condensed Consolidated Balance Sheets
 (in thousands except share data)
 (unaudited)
 June 30,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    348,049
    
    
    $
    403,082Short-term investments
    
    
    75,053
    
    
    
    72,890Restricted cash
    
    
    42,900
    
    
    
    42,900Accounts receivable, net
    
    
    100,569
    
    
    
    77,235Expendable spare parts and supplies, net
    
    
    51,773
    
    
    
    58,575Prepaid expenses
    
    
    175,375
    
    
    
    129,368Total current assets
    
    
    793,719
    
    
    
    784,050Property and equipment:Flight equipment
    
    
    876,298
    
    
    
    858,395Other property and equipment
    
    
    281,677
    
    
    
    273,284Equipment purchase deposits
    
    
    53,050
    
    
    
    46,0501,211,025
    
    
    
    1,177,729Less accumulated depreciation and amortization
    
    
    587,371
    
    
    
    570,017Net property and equipment
    
    
    623,654
    
    
    
    607,712Other assets:Investments in debt securities
    
    
    55,000
    
    
    
    40,740Restricted cash
    
    
    68,606
    
    
    
    69,876Other assets, net
    
    
    116,840
    
    
    
    124,534Total other assets
    
    
    240,446
    
    
    
    235,150$
    1,657,819
    
    
    $
    1,626,912
 See accompanying notes to condensed consolidated financial statements. 2




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION Condensed Consolidated Balance Sheets
 (in thousands except share data)
 (unaudited)
 June 30,
    
    December 31,2004
    
    2003Liabilities and Stockholders EquityCurrent liabilities:Current maturities of long-term debt
    
    $
    110,974
    
    
    $
    103,899Current obligations under capital leases
    
    
    6,525
    
    
    
    3,442Accounts payable
    
    
    181,530
    
    
    
    210,288Air traffic liability
    
    
    236,845
    
    
    
    174,486Accrued compensation and vacation benefits
    
    
    41,489
    
    
    
    61,045Accrued taxes
    
    
    51,625
    
    
    
    36,846Other accrued liabilities
    
    
    82,838
    
    
    
    59,277Total current liabilities
    
    
    711,826
    
    
    
    649,283Long-term debt, less current maturities
    
    
    647,670
    
    
    
    688,965Capital leases, less current obligations
    
    
    5,141
    
    
    
    8,467Deferred credits and other liabilities
    
    
    146,142
    
    
    
    141,681Stockholders equity:Preferred stock, $.01 par value. Authorized 48,800,000
shares; no shares issued
    
    
    
    
    
    
    Class A common stock, $.01 par value. Authorized
1,200,000 shares; issued and outstanding 859,117 shares at
June 30, 2004 and December 31, 2003
    
    
    8
    
    
    
    8Class B common stock, $.01 par value. Authorized 100,000,000
shares; issued and outstanding 51,488,695 shares at June 30, 2004
and 51,239,200 shares at December 31, 2003
    
    
    515
    
    
    
    512Additional paid-in capital
    
    
    632,117
    
    
    
    631,269Accumulated deficit
    
    
    (192,724
    )
    
    
    (199,594
    )Accumulated other comprehensive income
    
    
    15,030
    
    
    
    12,527454,946
    
    
    
    444,722Less: Cost of Class B common stock in treasury, 16,437,575
shares at June 30, 2004 and 16,283,895 shares at December 31, 2003
    
    
    (307,906
    )
    
    
    (306,206
    )Total stockholders equity
    
    
    147,040
    
    
    
    138,516$
    1,657,819
    
    
    $
    1,626,912
 See accompanying notes to condensed consolidated financial statements. 3




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION Condensed Consolidated Statements of Operations
 (in thousands except per share data)
 (unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Operating revenues:Passenger
    
    $
    569,166
    
    
    $
    538,358
    
    
    $
    1,106,499
    
    
    $
    1,038,932Cargo
    
    
    6,817
    
    
    
    7,844
    
    
    
    13,720
    
    
    
    14,900Other
    
    
    29,091
    
    
    
    29,569
    
    
    
    61,399
    
    
    
    45,172Total operating revenues
    
    
    605,074
    
    
    
    575,771
    
    
    
    1,181,618
    
    
    
    1,099,004Operating expenses:Salaries and related costs
    
    
    161,977
    
    
    
    156,623
    
    
    
    328,252
    
    
    
    319,717Aircraft rents
    
    
    75,346
    
    
    
    72,291
    
    
    
    150,531
    
    
    
    147,445Other rents and landing fees
    
    
    42,011
    
    
    
    37,505
    
    
    
    83,252
    
    
    
    77,265Aircraft fuel
    
    
    128,459
    
    
    
    86,530
    
    
    
    239,528
    
    
    
    179,886Agency commissions
    
    
    6,253
    
    
    
    9,332
    
    
    
    13,003
    
    
    
    18,156Aircraft maintenance materials and repairs
    
    
    52,350
    
    
    
    58,510
    
    
    
    102,404
    
    
    
    122,718Depreciation and amortization
    
    
    12,587
    
    
    
    17,328
    
    
    
    26,378
    
    
    
    34,991Special charges
    
    
    
    
    
    
    14,472
    
    
    
    (600
    )
    
    
    14,370Other
    
    
    105,243
    
    
    
    106,875
    
    
    
    200,194
    
    
    
    214,291Total operating expenses
    
    
    584,226
    
    
    
    559,466
    
    
    
    1,142,942
    
    
    
    1,128,839Operating income (loss)
    
    
    20,848
    
    
    
    16,305
    
    
    
    38,676
    
    
    
    (29,835
    )Nonoperating income (expenses):Interest income
    
    
    1,779
    
    
    
    1,158
    
    
    
    3,297
    
    
    
    2,565Interest expense, net
    
    
    (19,237
    )
    
    
    (19,515
    )
    
    
    (38,989
    )
    
    
    (38,020
    )Federal government assistance
    
    
    
    
    
    
    81,255
    
    
    
    
    
    
    
    81,255Other, net
    
    
    2,304
    
    
    
    481
    
    
    
    3,886
    
    
    
    1,701Total nonoperating income (expenses), net
    
    
    (15,154
    )
    
    
    63,379
    
    
    
    (31,806
    )
    
    
    47,501Income before income taxes
    
    
    5,694
    
    
    
    79,684
    
    
    
    6,870
    
    
    
    17,666Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    5,694
    
    
    $
    79,684
    
    
    $
    6,870
    
    
    $
    17,666Earnings per share:Basic
    
    $
    0.16
    
    
    $
    2.36
    
    
    $
    0.19
    
    
    $
    0.52Diluted
    
    $
    0.11
    
    
    $
    2.02
    
    
    $
    0.13
    
    
    $
    0.48Shares used for computation:Basic
    
    
    36,005
    
    
    
    33,719
    
    
    
    35,928
    
    
    
    33,716Diluted
    
    
    52,020
    
    
    
    39,497
    
    
    
    52,070
    
    
    
    36,605
 See accompanying notes to condensed consolidated financial statements. 4




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AMERICA WEST HOLDINGS CORPORATION Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Six Months EndedJune 30,2004
    
    2003Net cash provided by operating activities
    
    $
    83,557
    
    
    $
    123,567Cash flows from investing activities:Purchases of property and equipment
    
    
    (77,173
    )
    
    
    (82,219
    )Purchases of short-term investments
    
    
    (38,833
    )
    
    
    (40,804
    )Sales of short-term investments
    
    
    41,435
    
    
    
    24,738Purchases of investments in debt securities
    
    
    (35,000
    )
    
    
    Sales of investments in debt securities
    
    
    15,000
    
    
    
    Decrease (increase) in restricted cash
    
    
    1,270
    
    
    
    (32,709
    )Proceeds from disposition of assets
    
    
    1,848
    
    
    
    23,972Net cash used in investing activities
    
    
    (91,453
    )
    
    
    (107,022
    )Cash flows from financing activities:Repayment of debt
    
    
    (47,980
    )
    
    
    (7,622
    )Other
    
    
    843
    
    
    
    233Net cash used in financing activities
    
    
    (47,137
    )
    
    
    (7,389
    )Net increase (decrease) in cash and cash equivalents
    
    
    (55,033
    )
    
    
    9,156Cash and cash equivalents at beginning of period
    
    
    403,082
    
    
    
    335,750Cash and cash equivalents at end of period
    
    $
    348,049
    
    
    $
    344,906Cash, cash equivalents, short-term investments and investments in debt
securities at end of period
    
    $
    478,102
    
    
    $
    385,710Cash paid for:Interest, net of amounts capitalized
    
    $
    10,339
    
    
    $
    8,975Income taxes
    
    $
    1,440
    
    
    $
    119Non-cash investing and financing activities:Payment in kind notes issued
    
    $
    4,672
    
    
    $
    4,426Exercise of warrants
    
    $
    2
    
    
    $
    Acquisition of shares due to loan default
    
    $
    1,700
    
    
    $
    Reclassification of investments in debt securities to
short-term investments
    
    $
    5,730
    
    
    $
    Notes payable issued (cancelled) under the aircraft purchase
agreement
    
    $
    7,000
    
    
    $
    (3,500
    )
 See accompanying notes to condensed consolidated financial statements. 5




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AMERICA WEST HOLDINGS CORPORATION Notes To Condensed Consolidated Financial Statements
 June 30, 2004
 1. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements include the
accounts of Holdings and its wholly owned subsidiary, AWA. TLC, previously a
wholly owned subsidiary of Holdings, was merged into AWA on January 1, 2004 and
continues to operate as the America West Vacations division of AWA.
Accordingly, Holdings operates as one operating segment. These statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and, in accordance with those rules and regulations,
certain information and footnotes required by generally accepted accounting
principles have been omitted. In the opinion of management, the condensed
consolidated financial statements reflect all adjustments, which are of a
normal recurring nature, necessary for a fair presentation. Certain prior year
amounts have been reclassified to conform with current year presentation. The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
thereto included in the Companys Annual Report on Form 10-K (Form 10-K) for
the year ended December 31, 2003. 2. STOCK OPTIONS The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The Company
issues its stock options at a price equal to fair market value on the date of
grant. Accordingly, no compensation cost has been recognized for stock options
in the accompanying condensed consolidated financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation,the Companys net
income and income per share would have been reduced to the pro forma amounts
indicated below: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands except per share data)Net income, as reported
    
    $
    5,694
    
    
    $
    79,684
    
    
    $
    6,870
    
    
    $
    17,666Stock-based compensation expense
    
    
    (1,650
    )
    
    
    (945
    )
    
    
    (2,916
    )
    
    
    (2,211
    )Pro forma net income
    
    $
    4,044
    
    
    $
    78,739
    
    
    $
    3,954
    
    
    $
    15,455Income per share:Basic  as reported
    
    $
    0.16
    
    
    $
    2.36
    
    
    $
    0.19
    
    
    $
    0.52Basic  pro forma
    
    $
    0.11
    
    
    $
    2.34
    
    
    $
    0.11
    
    
    $
    0.46Diluted  as reported
    
    $
    0.11
    
    
    $
    2.02
    
    
    $
    0.13
    
    
    $
    0.48Diluted  pro forma
    
    $
    0.08
    
    
    $
    1.99
    
    
    $
    0.08
    
    
    $
    0.42
 3. FLIGHT EQUIPMENT In April 2004, the Company sold one Boeing 737-200 aircraft recognizing a
gain of approximately $0.8 million. The Company recorded this amount in
Nonoperating Income (Expenses)  Other, Netin the accompanying condensed
consolidated statements of operations. In May 2004, the Company entered into a sale-leaseback transaction for one
spare engine resulting in a $2.8 million gain. This gain was deferred and is
being amortized over the seven-year term of the operating lease as a reduction
in rent expense. In May 2004, the Company agreed on a term sheet to amend its 1999 Airbus
purchase contract. The new agreement would call for the Company to acquire 22
Airbus A320 family aircraft (a mix of A320s and A319s), all powered by V2500
engines from International Aero Engines. Of the 22 aircraft, 17 (ten A320s and
seven A319s) would be purchased directly from the manufacturer and five would
be leased from various lessors. In the context of this incremental
order, the Company also secured extensive flexibility from Airbus
with respect to its existing A318 order, allowing the Company to
better react to market conditions by enabling it to amend its 15 A318
delivery positions to A319s and A320s, if it so desires, or to no
additional aircraft under certain conditions. As of June 30, 2004, the Company has
negotiated lease agreements for four of these aircraft. Negotiations continue
for the remaining aircraft. The Company plans to take delivery of the five
leased aircraft in early 2005, and the remaining 17 aircraft would be 6




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AMERICA WEST HOLDINGS CORPORATION
Notes To Condensed Consolidated Financial Statements
June 30, 2004 purchased in late 2005 and 2006. The additional 22 aircraft would be used
by the Company to meet its growth targets of 8% to 10% in 2005 and 2006. In the first quarter of 2004, the Company revised the estimated useful
life for certain aircraft and related spare parts inventory as a result of
changes in AWAs fleet plan and for capitalized maintenance on certain of its
engines as a result of changes in aircraft utilization. The net impact of this
change in estimate was an increase in net income for the three and six months
ended June 30, 2004 of $5.2 million and $9.2 million, respectively. As a
result, basic and diluted income per share increased by $0.14 and
$0.10, respectively, for the three months ended June 30, 2004, and
increased by $0.26 and $0.18, respectively for the six months ended June 30, 2004. 4. COMPREHENSIVE INCOME Comprehensive income includes changes in the fair value of derivative
financial instruments that qualify as cash flow hedges in accordance with SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.For
the three months ended June 30, 2004 and 2003, the Company recorded total
comprehensive income of $8.6 million and $75.7 million, respectively. For the
six months ended June 30, 2004 and 2003, the Company recorded total
comprehensive income of $9.4 million and $26.3 million, respectively. The
difference between net income and comprehensive income for the three and six
months ended June 30, 2004 and 2003 is detailed in the following table: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net income
    
    $
    5,694
    
    
    $
    79,684
    
    
    $
    6,870
    
    
    $
    17,666Unrealized gains (losses) on derivative instruments
    
    
    5,241
    
    
    
    (3,998
    )
    
    
    7,700
    
    
    
    17,890Reclassification adjustment to net income of
previously reported unrealized losses on
derivative
instruments
    
    
    (2,297
    )
    
    
    
    
    
    
    (5,197
    )
    
    
    (9,210
    )Total other comprehensive income (loss)
    
    
    2,944
    
    
    
    (3,998
    )
    
    
    2,503
    
    
    
    8,680Comprehensive income
    
    $
    8,638
    
    
    $
    75,686
    
    
    $
    9,373
    
    
    $
    26,346
 5. SPECIAL CHARGES In the first quarter of 2004, the Company recorded a $0.6 million
reduction in special charges related to the revision of estimated costs
associated with the sale and leaseback of certain aircraft. The following table presents the payments and other settlements made
during the six months ended June 30, 2004 related to the special charge
accruals: ContractSale-
    
    Fleet
    
    Reductions-
    
    Termination/Leaseback
    
    Restructuring
    
    in-force
    
    Other Costs
    
    Total(in thousands)Balance at December 31, 2003
    
    $
    605
    
    
    $
    1,389
    
    
    $
    357
    
    
    $
    2,649
    
    
    $
    5,000Revision of estimate
    
    
    (600
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )Payments
    
    
    (5
    )
    
    
    (180
    )
    
    
    (275
    )
    
    
    (515
    )
    
    
    (975
    )Balance at March 31, 2004
    
    $
    
    
    
    $
    1,209
    
    
    $
    82
    
    
    $
    2,134
    
    
    $
    3,425Revision of estimate
    
    
    
    
    
    
    
    
    
    
    (65
    )
    
    
    
    
    
    
    (65
    )Payments
    
    
    
    
    
    
    (195
    )
    
    
    (17
    )
    
    
    (506
    )
    
    
    (718
    )Balance at June 30, 2004
    
    $
    
    
    
    $
    1,014
    
    
    $
    
    
    
    $
    1,628
    
    
    $
    2,642
 The Company expects to make payments related to these special charges through the fourth quarter of 2005. 7




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AMERICA WEST HOLDINGS CORPORATION
Notes To Condensed Consolidated Financial Statements
June 30, 2004 6. EARNINGS PER SHARE (EPS) The following table presents the computation of basic and diluted EPS. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands of dollars except share data)BASIC EARNINGS PER SHAREIncome applicable to common stock
    
    $
    5,694
    
    
    $
    79,684
    
    
    $
    6,870
    
    
    $
    17,666Weighted average common shares outstanding
    
    
    36,004,896
    
    
    
    33,719,192
    
    
    
    35,927,712
    
    
    
    33,715,972Basic earnings per share
    
    $
    0.16
    
    
    $
    2.36
    
    
    $
    0.19
    
    
    $
    0.52DILUTED EARNINGS PER SHAREIncome applicable to common stock
    
    $
    5,694
    
    
    $
    79,684
    
    
    $
    6,870
    
    
    $
    17,666Share computation:Weighted average common shares outstanding
    
    
    36,004,896
    
    
    
    33,719,192
    
    
    
    35,927,712
    
    
    
    33,715,972Assumed exercise of stock options and warrants
    
    
    16,015,144
    
    
    
    5,778,262
    
    
    
    16,142,057
    
    
    
    2,889,211Weighted average common shares outstanding for purposes of
computing diluted net income per share
    
    
    52,020,040
    
    
    
    39,497,454
    
    
    
    52,069,769
    
    
    
    36,605,183Diluted income per share
    
    $
    0.11
    
    
    $
    2.02
    
    
    $
    0.13
    
    
    $
    0.48
 For the three and six months ended June 30, 2004, 5,251,892 and 3,981,890
stock options, respectively, are not included in the computation of diluted EPS
because the option exercise prices were greater than the average market price
of common stock for the period. In addition, 8,694,000 incremental shares from
assumed conversion of the 7.5% convertible senior notes are not included in the
computation of diluted EPS for the second quarter and the six month period
because of the antidilutive effect on EPS. The shares issuable upon conversion
of the 7.25% Senior Exchangeable Notes due 2023 were not included in the
computation of diluted earnings per share since the conditions for conversion
have not been met. However, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) recently made a tentative
decision proposing that issuers of convertible securities with contingent
conversion features use the if-convertedmethod to calculate reported EPS
irrespective of the contingent conversion trigger being met. The EITF is
expected to reach a final conclusion at its meeting in September 2004. If
adopted as proposed, the Company does not believe the effect of including
shares issuable upon conversion of 7.25% Senior Exchangeable Notes in the
diluted EPS calculations for prior periods will be significant. For the three months ended June 30, 2003, 17,321,941 warrants issued in
conjunction with the government guaranteed loan and related transactions and
6,379,060 stock options are not included in the computation of diluted EPS
because the option and warrant exercise prices were greater than the average
market price of common stock for the period. For the six months ended June 30, 2003, 7,073,763 stock options and
19,929,470 warrants issued in conjunction with the government guaranteed loan
and related transactions are not included in the computation of diluted EPS
because the option and warrant exercise prices were greater than the average
market price of common stock for the period. 8




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION
Notes To Condensed Consolidated Financial Statements
June 30, 2004 7. SUBSEQUENT EVENT 401K Plan Shares Holdings recently became aware that an insufficient number of shares of
its Class B common stock may have been registered for offer and sale through
its 401(k) plan, apparently because the aggregate investments in Company stock
by participants through their 401(k) plan accounts significantly exceeded
expectations. If an insufficient number of shares have been registered, 401(k)
plan participants may be entitled to remedies under the Securities Act of 1933,
as amended, including rescission or damages. Upon learning of the foregoing,
the Company immediately began the process of filing a new registration
statement on Form S-8 to register an additional 4,500,000 shares of Holdings Class B common stock, with the purpose and
effect of preventing any such potential violations in the future. The 401(k)
plan then will be able to purchase this number of shares in the open market for
offer and sale to participants through the plan, but will not purchase any such
shares directly from Holdings. Accordingly, the registration of these shares
and their purchase by the 401(k) plan will have no dilutive impact on the
outstanding equity of Holdings. Holdings also is continuing to investigate any
curative actions that Holdings and/or the 401(k) plan should or may be required
to undertake under applicable securities laws, the Internal Revenue Code and
the Employee Retirement Income Security Act of 1974 (ERISA). While Holdings
cannot predict the possible effect of federal or state regulatory action,
Holdings does not believe that any failure to register sufficient shares for
offer and sale through the 401(k) plan will have a material adverse effect on
Holdings financial position or results of operations. 9




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##### Table of Contents



ITEM 1B. CONDENSED FINANCIAL STATEMENTS  AMERICA WEST AIRLINES, INC The unaudited condensed balance sheets of AWA, a wholly-owned subsidiary
of Holdings, as of June 30, 2004 and December 31, 2003, the condensed
statements of operations for the three and six months ended June 30, 2004 and
2003 and the condensed statements of cash flows for the six months ended June
30, 2004 and 2003, together with the related notes, are set forth on the
following pages. TLC, previously a wholly owned subsidiary of Holdings, was
merged into AWA on January 1, 2004 and continues to operate as the America West
Vacations division of AWA. See Note 1, Basis of Presentationand Note 7,
Merger of TLC into AWAin Notes to Condensed Financial Statements. AMERICA WEST AIRLINES, INC. 
 Condensed Balance Sheets
 (in thousands except share data)
 (unaudited)
 June 30,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    328,639
    
    
    $
    383,875Short-term investments
    
    
    75,053
    
    
    
    72,890Restricted cash
    
    
    42,900
    
    
    
    42,900Accounts receivable, net
    
    
    100,569
    
    
    
    77,235Expendable spare parts and supplies, net
    
    
    51,773
    
    
    
    58,575Prepaid expenses
    
    
    175,337
    
    
    
    129,294Total current assets
    
    
    774,271
    
    
    
    764,769Property and equipment:Flight equipment
    
    
    876,298
    
    
    
    858,395Other property and equipment
    
    
    279,986
    
    
    
    271,592Equipment purchase deposits
    
    
    53,050
    
    
    
    46,0501,209,334
    
    
    
    1,176,037Less accumulated depreciation and amortization
    
    
    586,822
    
    
    
    569,468Net property and equipment
    
    
    622,512
    
    
    
    606,569Other assets:Investments in debt securities
    
    
    55,000
    
    
    
    40,740Restricted cash
    
    
    68,606
    
    
    
    69,876Advances to parent company, net
    
    
    257,069
    
    
    
    254,792Other assets, net
    
    
    115,137
    
    
    
    122,725Total other assets
    
    
    495,812
    
    
    
    488,133$
    1,892,595
    
    
    $
    1,859,471
 See accompanying notes to condensed financial statements. 10




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##### Table of Contents



AMERICA WEST AIRLINES, INC. Condensed Balance Sheets
 (in thousands except share data)
 (unaudited)
 June 30,
    
    December 31,2004
    
    2003Liabilities and Stockholders EquityCurrent liabilities:Current maturities of long-term debt
    
    $
    110,974
    
    
    $
    103,899Current obligations under capital leases
    
    
    6,525
    
    
    
    3,442Accounts payable
    
    
    181,245
    
    
    
    209,372Payable to affiliate, net
    
    
    
    
    
    
    1,927Air traffic liability
    
    
    236,845
    
    
    
    174,486Accrued compensation and vacation benefits
    
    
    41,489
    
    
    
    61,045Accrued taxes
    
    
    39,929
    
    
    
    24,117Other accrued liabilities
    
    
    82,838
    
    
    
    59,277Total current liabilities
    
    
    699,845
    
    
    
    637,565Long-term debt, less current maturities
    
    
    647,670
    
    
    
    688,965Capital leases, less current maturities
    
    
    5,141
    
    
    
    8,468Deferred credits and other liabilities
    
    
    144,334
    
    
    
    139,873Stockholders equity:Common Stock $.01 par value. Authorized, issued and
outstanding; 1,000 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    555,114
    
    
    
    555,115Accumulated deficit
    
    
    (174,539
    )
    
    
    (183,042
    )Accumulated other comprehensive income
    
    
    15,030
    
    
    
    12,527Total stockholders equity
    
    
    395,605
    
    
    
    384,600$
    1,892,595
    
    
    $
    1,859,471
 See accompanying notes to condensed financial statements. 11




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##### Table of Contents



AMERICA WEST AIRLINES, INC. 
 Condensed Statements of Operations
 (in thousands)
 (unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Operating revenues:Passenger
    
    $
    569,166
    
    
    $
    538,358
    
    
    $
    1,106,499
    
    
    $
    1,038,932Cargo
    
    
    6,817
    
    
    
    7,844
    
    
    
    13,720
    
    
    
    14,900Other
    
    
    28,921
    
    
    
    29,399
    
    
    
    61,059
    
    
    
    44,832Total operating revenues
    
    
    604,904
    
    
    
    575,601
    
    
    
    1,181,278
    
    
    
    1,098,664Operating expenses:Salaries and related costs
    
    
    161,617
    
    
    
    156,051
    
    
    
    327,546
    
    
    
    318,508Aircraft rents
    
    
    75,346
    
    
    
    72,291
    
    
    
    150,531
    
    
    
    147,445Other rents and landing fees
    
    
    42,011
    
    
    
    37,505
    
    
    
    83,252
    
    
    
    77,265Aircraft fuel
    
    
    128,459
    
    
    
    86,530
    
    
    
    239,528
    
    
    
    179,886Agency commissions
    
    
    6,253
    
    
    
    9,332
    
    
    
    13,003
    
    
    
    18,156Aircraft maintenance materials and repairs
    
    
    52,350
    
    
    
    58,510
    
    
    
    102,404
    
    
    
    122,718Depreciation and amortization
    
    
    12,587
    
    
    
    17,328
    
    
    
    26,378
    
    
    
    34,991Special charges, net
    
    
    
    
    
    
    14,472
    
    
    
    (600
    )
    
    
    14,370Other
    
    
    104,497
    
    
    
    106,267
    
    
    
    198,828
    
    
    
    213,130Total operating expenses
    
    
    583,120
    
    
    
    558,286
    
    
    
    1,140,870
    
    
    
    1,126,469Operating income (loss)
    
    
    21,784
    
    
    
    17,315
    
    
    
    40,408
    
    
    
    (27,805
    )Nonoperating income (expenses):Interest income
    
    
    3,418
    
    
    
    2,909
    
    
    
    6,619
    
    
    
    6,031Interest expense, net
    
    
    (20,948
    )
    
    
    (21,288
    )
    
    
    (42,410
    )
    
    
    (41,529
    )Federal government assistance
    
    
    
    
    
    
    81,255
    
    
    
    
    
    
    
    81,255Other, net
    
    
    2,304
    
    
    
    481
    
    
    
    3,886
    
    
    
    1,701Total nonoperating income (expenses), net
    
    
    (15,226
    )
    
    
    63,357
    
    
    
    (31,905
    )
    
    
    47,458Income before income taxes
    
    
    6,558
    
    
    
    80,672
    
    
    
    8,503
    
    
    
    19,653Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    6,558
    
    
    $
    80,672
    
    
    $
    8,503
    
    
    $
    19,653
 See accompanying notes to condensed financial statements. 12




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##### Table of Contents



AMERICA WEST AIRLINES, INC. 
 Condensed Statements of Cash Flows
 (in thousands)
 (unaudited)
 Six Months EndedJune 30,2004
    
    2003Net cash provided by operating activities
    
    $
    84,205
    
    
    $
    123,600Cash flows from investing activities:Purchases of property and equipment
    
    
    (77,173
    )
    
    
    (82,219
    )Purchases of short-term investments
    
    
    (38,833
    )
    
    
    (40,804
    )Sales of short-term investments
    
    
    41,435
    
    
    
    24,738Purchases of investments in debt securities
    
    
    (35,000
    )
    
    
    Sales of investments in debt securities
    
    
    15,000
    
    
    
    Decrease (increase) in restricted cash
    
    
    1,270
    
    
    
    (32,709
    )Proceeds from disposition of assets
    
    
    1,848
    
    
    
    23,972Net cash used in investing activities
    
    
    (91,453
    )
    
    
    (107,022
    )Cash flows from financing activities:Repayment of debt
    
    
    (47,980
    )
    
    
    (7,622
    )Other
    
    
    (8
    )
    
    
    Net cash used in financing activities
    
    
    (47,988
    )
    
    
    (7,622
    )Net increase (decrease) in cash and cash equivalents
    
    
    (55,236
    )
    
    
    8,956Cash and cash equivalents at beginning of period
    
    
    383,875
    
    
    
    334,679Cash and cash equivalents at end of period
    
    $
    328,639
    
    
    $
    343,635Cash, cash equivalents, short-term investments and investments in
debt securities at end of period
    
    $
    458,692
    
    
    $
    384,439Cash paid for:Interest, net of amounts capitalized
    
    $
    10,339
    
    
    $
    8,975Income taxes
    
    $
    325
    
    
    $
    29Non-cash investing and financing activities:Payment in kind notes issued
    
    $
    4,672
    
    
    $
    4,426Reclassification of investments in debt securities to
short-term investments
    
    $
    5,730
    
    
    $
    Notes payable issued (cancelled) under the aircraft purchase
agreement
    
    $
    7,000
    
    
    $
    (3,500
    )
 See accompanying notes to condensed financial statements. 13




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##### Table of Contents



AMERICA WEST AIRLINES,
INC.
Notes To Condensed Financial Statements
June 30, 2004 1. BASIS OF PRESENTATION The unaudited condensed financial statements included herein have been
prepared by AWA, a wholly owned subsidiary of Holdings, pursuant to the rules
and regulations of the Securities and Exchange Commission and, in accordance
with those rules and regulations, certain information and footnotes required by
generally accepted accounting principles have been omitted. TLC, previously a
wholly owned subsidiary of Holdings, was merged into AWA on January 1, 2004 and
continues to operate as the America West Vacations division of AWA.
Accordingly, prior period amounts have been adjusted to give effect to the
merger as if it had occurred on January 1, 2003 and all intercompany
transactions between AWA and TLC have been eliminated. See Note 7, Merger of
TLC into AWA.In the opinion of management, the condensed financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation. Certain prior year amounts have been
reclassified to conform with current year presentation. The accompanying
condensed financial statements should be read in conjunction with the financial
statements and related notes thereto included in AWAs Annual Report on Form
10-K for the year ended December 31, 2003. 2. ADVANCES TO PARENT COMPANY AND AFFILIATE As of June 30, 2004, AWA had net advances to Holdings of $257.1 million,
which were classified in Other Assetson AWAs condensed balance sheet due to
certain restrictions related to the timing of repayment under the government
guaranteed loan, of which $386.1 million remains outstanding, and the term
loan, of which $75.5 million remains outstanding. AWA settled all intercompany
amounts due to TLC upon the completion of the merger of TLC on January 1, 2004. 3. STOCK OPTIONS Certain of AWAs employees are eligible to participate in the stock option
plans of Holdings. Holdings accounts for its stock option plans in accordance
with the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees,and related interpretations. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Holdings issues its stock
options at a price equal to the fair market value on the date of grant.
Accordingly, no compensation cost has been recognized for stock options in
Holdings condensed consolidated financial statements. Had Holdings determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, Accounting for Stock-Based Compensation,and
allocated compensation expense to AWA for its employees participating in the
stock option plans, AWAs net income would have been reduced to the pro forma
amounts indicated below: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net income, as reported
    
    $
    6,558
    
    
    $
    80,672
    
    
    $
    8,503
    
    
    $
    19,653Stock-based compensation expense
    
    
    (1,650
    )
    
    
    (945
    )
    
    
    (2,916
    )
    
    
    (2,211
    )Pro forma net income
    
    $
    4,908
    
    
    $
    79,727
    
    
    $
    5,587
    
    
    $
    17,442
 4. FLIGHT EQUIPMENT In April 2004, AWA sold one Boeing 737-200 aircraft recognizing a gain of
approximately $0.8 million. The Company recorded this amount in Nonoperating
Income (Expenses)  Other, Netin the accompanying condensed statements of
operations. In May 2004, AWA entered into a sale-leaseback transaction for one spare
engine resulting in a $2.8 million gain. This gain was deferred and is being
amortized over the seven-year term of the operating lease as a reduction in
rent expense. 14




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##### Table of Contents



AMERICA WEST AIRLINES,
INC.
Notes To Condensed Financial Statements
June 30, 2004 In May 2004, AWA agreed on a term sheet to amend its 1999 Airbus purchase
contract. The new agreement would call for AWA to acquire 22 Airbus A320
family aircraft (a mix of A320s and A319s), all powered by V2500 engines from
International Aero Engines. Of the 22 aircraft, 17 (ten A320s and seven A319s)
would be purchased directly from the manufacturer and five would be leased from
various lessors. In the context of this incremental
order, AWA also secured extensive flexibility from Airbus
with respect to its existing A318 order, allowing AWA to
better react to market conditions by enabling it to amend its 15 A318
delivery positions to A319s and A320s, if it so desires, or to no
additional aircraft under certain conditions. As of June 30, 2004, AWA has negotiated lease agreements for
four of these aircraft. Negotiations continue for the remaining aircraft. AWA
plans to take delivery of the five leased aircraft in early 2005, and the
remaining 17 aircraft would be purchased in late 2005 and 2006. The additional
22 aircraft would be used by the Airline to meet its growth targets of 8% to
10% in 2005 and 2006. In the first quarter of 2004, AWA revised the estimated useful life for
certain aircraft and related spare parts inventory as a result of changes in
its fleet plan and for capitalized maintenance on certain of its engines as a
result of changes in aircraft utilization. The net impact of this change in
estimate was an increase in net income for the three and six months ended June
30, 2004 by $5.2 million and $9.2 million, respectively. 5. COMPREHENSIVE INCOME Comprehensive income includes changes in the fair value of derivative
financial instruments that qualify for hedge accounting. For the three months
ended June 30, 2004 and 2003, AWA recorded total comprehensive income of $9.5
million and $76.7 million, respectively. For the six months ended June 30,
2004 and 2003, AWA recorded total comprehensive income of $11.0 million and
$28.3 million, respectively. The difference between net income and
comprehensive income for the three and six months ended June 30, 2004 and 2003
is detailed in the following table: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net income
    
    $
    6,558
    
    
    $
    80,672
    
    
    $
    8,503
    
    
    $
    19,653Unrealized gains (losses) on derivative instruments
    
    
    5,241
    
    
    
    (3,998
    )
    
    
    7,700
    
    
    
    17,890Reclassification adjustment to net income of
previously reported unrealized losses on
derivative instruments
    
    
    (2,297
    )
    
    
    
    
    
    
    (5,197
    )
    
    
    (9,210
    )Total other comprehensive income (loss)
    
    
    2,944
    
    
    
    (3,998
    )
    
    
    2,503
    
    
    
    8,680Comprehensive income
    
    $
    9,502
    
    
    $
    76,674
    
    
    $
    11,006
    
    
    $
    28,333
 6. SPECIAL CHARGES In the first quarter of 2004, AWA recorded a $0.6 million reduction in
special charges related to the revision of estimated costs associated with the
sale and leaseback of certain aircraft. The following table presents the payments and other settlements made
during the six months ended June 30, 2004 related to the special charge
accruals: ContractSale-
    
    Fleet
    
    Reductions-
    
    Termination/Leaseback
    
    Restructuring
    
    in-force
    
    Other Costs
    
    Total(in thousands)Balance at December 31, 2003
    
    $
    605
    
    
    $
    1,389
    
    
    $
    307
    
    
    $
    2,649
    
    
    $
    4,950Revision of estimate
    
    
    (600
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )Increase due to TLC merger at 01/01/04
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    50Payments
    
    
    (5
    )
    
    
    (180
    )
    
    
    (275
    )
    
    
    (515
    )
    
    
    (975
    )Balance at March 31, 2004
    
    $
    
    
    
    $
    1,209
    
    
    $
    82
    
    
    $
    2,134
    
    
    $
    3,425Revision of estimate
    
    
    
    
    
    
    
    
    
    
    (65
    )
    
    
    
    
    
    
    (65
    )Payments
    
    
    
    
    
    
    (195
    )
    
    
    (17
    )
    
    
    (506
    )
    
    
    (718
    )Balance at June 30, 2004
    
    $
    
    
    
    $
    1,014
    
    
    $
    
    
    
    $
    1,628
    
    
    $
    2,642
 AWA expects to make payments related to these special charges through the
fourth quarter of 2005. 15




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##### Table of Contents



AMERICA WEST AIRLINES, INC.
Notes To Condensed Financial Statements
June 30, 2004 7. MERGER OF TLC INTO AWA On January 1, 2004, TLC was merged into AWA. As a result of the merger,
TLC, which is one of the nations largest tour operators, ceased to exist as a
separate legal entity and instead became a division of AWA. This merger was
intended to save costs and streamline operations for the Company and did not
change any operating procedures. The assets and liabilities of TLC have been
recorded at historical cost. The condensed statement of operations for the three and six months ended
June 30, 2003, after giving effect to the merger, are set forth below. America West Airlines, Inc.
Condensed Statement of Operations
For the Three Months Ended June 30, 2003
(Unaudited) AWA
    
    
    
    
    
    Eliminations/As Reported
    
    TLC
    
    Adjustments
    
    Combined(In thousands)Operating revenues:Passenger
    
    $
    538,358
    
    
    $
    
    
    
    $
    
    
    
    $
    538,358Cargo
    
    
    7,844
    
    
    
    
    
    
    
    
    
    
    
    7,844Other
    
    
    18,854
    
    
    
    10,688
    
    
    
    (143
    )(a)
    
    
    29,399Total operating revenues
    
    
    565,056
    
    
    
    10,688
    
    
    
    (143
    )
    
    
    575,601Operating expenses:Salaries and related costs
    
    
    154,437
    
    
    
    1,614
    
    
    
    
    
    
    
    156,051Aircraft rents
    
    
    72,291
    
    
    
    
    
    
    
    
    
    
    
    72,291Other rents and landing fees
    
    
    37,505
    
    
    
    143
    
    
    
    (143
    )(a)
    
    
    37,505Aircraft fuel
    
    
    86,530
    
    
    
    
    
    
    
    
    
    
    
    86,530Agency commissions
    
    
    6,291
    
    
    
    3,041
    
    
    
    
    
    
    
    9,332Aircraft maintenance materials and repairs
    
    
    58,510
    
    
    
    
    
    
    
    
    
    
    
    58,510Depreciation and amortization
    
    
    17,155
    
    
    
    173
    
    
    
    
    
    
    
    17,328Special charges, net
    
    
    14,081
    
    
    
    391
    
    
    
    
    
    
    
    14,472Other
    
    
    104,225
    
    
    
    2,042
    
    
    
    
    
    
    
    106,267Total operating expenses
    
    
    551,025
    
    
    
    7,404
    
    
    
    (143
    )
    
    
    558,286Operating income
    
    
    14,031
    
    
    
    3,284
    
    
    
    
    
    
    
    17,315Nonoperating income (expenses):Interest income
    
    
    2,829
    
    
    
    80
    
    
    
    
    
    
    
    2,909Interest expense, net
    
    
    (21,288
    )
    
    
    
    
    
    
    
    
    
    
    (21,288
    )Federal government assistance
    
    
    81,255
    
    
    
    
    
    
    
    
    
    
    
    81,255Other, net
    
    
    481
    
    
    
    
    
    
    
    
    
    
    
    481Total nonoperating income, net
    
    
    63,277
    
    
    
    80
    
    
    
    
    
    
    
    63,357Income before income taxes
    
    
    77,308
    
    
    
    3,364
    
    
    
    
    
    
    
    80,672Income taxes
    
    
    
    
    
    
    1,307
    
    
    
    (1,307
    )(b)
    
    
    Net income
    
    $
    77,308
    
    
    $
    2,057
    
    
    $
    1,307
    
    
    $
    80,672
  (a)
    
    TLC paid rent in the amount of $143,000 to AWA for space it occupied in
certain AWA facilities. This rent was reflected in other revenues by AWA
and in operating expenses by TLC. This adjustment eliminates those
amounts.  (b)
    
    TLC reported income tax expense of $1.3 million on a stand alone basis.
On a pro forma basis, AWAs tax benefits were utilized by TLC, which
eliminated income tax expense and resulted in a corresponding decrease in
AWAs tax valuation allowance. 16




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##### Table of Contents



AMERICA WEST AIRLINES, INC.
Notes To Condensed Financial Statements
June 30, 2004 America West Airlines, Inc.
Condensed Statement of Operations
For the Six Months Ended June 30, 2003
(Unaudited) AWA
    
    
    
    
    
    Eliminations/As Reported
    
    TLC
    
    Adjustments
    
    Combined(In thousands)Operating revenues:Passenger
    
    $
    1,038,932
    
    
    $
    
    
    
    $
    
    
    
    $
    1,038,932Cargo
    
    
    14,900
    
    
    
    
    
    
    
    
    
    
    
    14,900Other
    
    
    25,629
    
    
    
    19,489
    
    
    
    (286
    )(a)
    
    
    44,832Total operating revenues
    
    
    1,079,461
    
    
    
    19,489
    
    
    
    (286
    )
    
    
    1,098,664Operating expenses:Salaries and related costs
    
    
    314,933
    
    
    
    3,575
    
    
    
    
    
    
    
    318,508Aircraft rents
    
    
    147,445
    
    
    
    
    
    
    
    
    
    
    
    147,445Other rents and landing fees
    
    
    77,265
    
    
    
    286
    
    
    
    (286
    )(a)
    
    
    77,265Aircraft fuel
    
    
    179,886
    
    
    
    
    
    
    
    
    
    
    
    179,886Agency commissions
    
    
    12,483
    
    
    
    5,673
    
    
    
    
    
    
    
    18,156Aircraft maintenance materials and repairs
    
    
    122,718
    
    
    
    
    
    
    
    
    
    
    
    122,718Depreciation and amortization
    
    
    34,629
    
    
    
    362
    
    
    
    
    
    
    
    34,991Special charges, net
    
    
    13,979
    
    
    
    391
    
    
    
    
    
    
    
    14,370Other
    
    
    208,839
    
    
    
    4,291
    
    
    
    
    
    
    
    213,130Total operating expenses
    
    
    1,112,177
    
    
    
    14,578
    
    
    
    (286
    )
    
    
    1,126,469Operating income (loss)
    
    
    (32,716
    )
    
    
    4,911
    
    
    
    
    
    
    
    (27,805
    )Nonoperating income (expenses):Interest income
    
    
    5,886
    
    
    
    145
    
    
    
    
    
    
    
    6,031Interest expense, net
    
    
    (41,529
    )
    
    
    
    
    
    
    
    
    
    
    (41,529
    )Federal government assistance
    
    
    81,255
    
    
    
    
    
    
    
    
    
    
    
    81,255Other, net
    
    
    1,701
    
    
    
    
    
    
    
    
    
    
    
    1,701Total nonoperating income, net
    
    
    47,313
    
    
    
    145
    
    
    
    
    
    
    
    47,458Income before income taxes
    
    
    14,597
    
    
    
    5,056
    
    
    
    
    
    
    
    19,653Income taxes
    
    
    
    
    
    
    1,965
    
    
    
    (1,965
    )(b)
    
    
    Net income
    
    $
    14,597
    
    
    $
    3,091
    
    
    $
    1,965
    
    
    $
    19,653
  (a)
    
    TLC paid rent in the amount of $286,000 to AWA for space it occupied in
certain AWA facilities. This rent was reflected in other revenues by AWA
and in operating expenses by TLC. This adjustment eliminates those
amounts.  (b)
    
    TLC reported income tax expense of $2.0 million on a stand alone basis.
On a pro forma basis, AWAs tax benefits were utilized by TLC, which
eliminated income tax expense and resulted in a corresponding decrease in
AWAs tax valuation allowance. 17




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##### Table of Contents



AMERICA WEST AIRLINES, INC.
Notes To Condensed Financial Statements
June 30, 2004 8. SUBSEQUENT EVENT 401-K Plan Shares Holdings recently became aware that an insufficient number of shares of
its Class B common stock may have been registered for offer and sale through
its 401(k) plan, apparently because the aggregate investments in Company stock
by participants through their 401(k) plan accounts significantly exceeded
expectations. If an insufficient number of shares have been registered, 401(k)
plan participants may be entitled to remedies under the Securities Act of 1933,
as amended, including rescission or damages. Upon learning of the foregoing,
the Company immediately began the process of filing a new registration
statement on Form S-8 to register an additional 4,500,000 shares of Holdings Class B common stock, with the purpose and
effect of preventing any such potential violations in the future. The 401(k)
plan then will be able to purchase this number of shares in the open market for
offer and sale to participants through the plan, but will not purchase any such
shares directly from Holdings. Accordingly, the registration of these shares
and their purchase by the 401(k) plan will have no dilutive impact on the
outstanding equity of Holdings. Holdings also is continuing to investigate any
curative actions that Holdings and/or the 401(k) plan should or may be required
to undertake under applicable securities laws, the Internal Revenue Code and
the Employee Retirement Income Security Act of 1974 (ERISA). While Holdings
cannot predict the possible effect of federal or state regulatory action,
Holdings does not believe that any failure to register sufficient shares for
offer and sale through the 401(k) plan will have a material adverse effect on
Holdings financial position or results of operations. 18




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 
  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Holdings is the parent company of AWA. AWA is the eighth largest
passenger airline and the second largest low cost carrier in the United States
operating through its hubs located in Phoenix, Arizona and Las Vegas, Nevada.
As of June 30, 2004, AWA served 63 destinations in North America, including
eight destinations in Mexico, two in Canada and one in Costa Rica. TLC,
previously a wholly owned subsidiary of Holdings, was merged into AWA on
January 1, 2004 and continues to operate as the America West Vacations (AWV)
division of AWA. See Note 7, Merger of TLC into AWAin Notes to Condensed
Financial Statements of AWA. AWV arranges and sells vacation packages
primarily to Las Vegas, Nevada that may include airfare, hotel accommodations
and ground transportation. Holdings primary business activity is ownership
of all the capital stock of AWA. Overview In the second quarter of 2004, Holdings realized an operating profit of
$20.8 million and pretax and net income of $5.7 million, or $0.11 per diluted
share. During the second quarter:  
    
    Passenger revenue per available seat mile (RASM) decreased 2.3% to
7.54 cents versus the 2003 second quarter primarily due to an increase
in industry capacity and AWAs 8.9% increase in aircraft utilization
and 6.7% increase in average stage length.  
    
    Operating cost per available seat mile (CASM) decreased 3.6% to
7.72 cents, despite an increase in the average fuel price per gallon of
41.4% from 81.7 cents in the second quarter of 2003 to 115.6 cents per
gallon in the second quarter of 2004. The primary drivers of AWAs
CASM improvement during the second quarter of 2004 were continued cost
control and the increases in aircraft utilization and average stage length. As of June 30, 2004, Holdings unrestricted and restricted cash, cash
equivalents, short-term investments and investments in debt securities totaled
$589.6 million, the highest June 30 cash balance in the Companys history. Airline Operations Update The increase in aircraft utilization has helped to lower the Companys
unit cost and has been a significant contributor to AWAs profitable first six
months of 2004. Higher utilization does, though, put pressure on operations
and AWAs operating performance and completion factor were worse than the
second quarter of 2003. The Company has recently taken action to improve
operating performance including a modest reduction in planned growth and an
increase in maintenance stations. The operating performance for the first half
of July was much improved  on-time performance (79.0%), completion factor
(98.7%)  and the Company expects third quarter 2004 operating results will be
improved versus the second quarter. AWA reported the following operating statistics to the U.S. Department of
Transportation (DOT) for the second quarters of 2004 and 2003: Percent Change2004
    
    2003
    
    2004 - 2003Apr
    
    May
    
    Jun
    
    Apr
    
    May
    
    Jun
    
    Apr
    
    May
    
    JunOn-time performance
(a)
    
    
    76.9
    
    
    
    80.3
    
    
    
    73.0
    
    
    
    88.2
    
    
    
    85.9
    
    
    
    85.2
    
    
    
    (11.4
    )
    
    
    (5.6
    )
    
    
    (12.3
    )Completion factor
(b)
    
    
    98.2
    
    
    
    98.7
    
    
    
    98.4
    
    
    
    99.7
    
    
    
    99.6
    
    
    
    99.8
    
    
    
    (1.5
    )
    
    
    (0.9
    )
    
    
    (1.3
    )Mishandled baggage
(c)
    
    
    3.07
    
    
    
    2.94
    
    
    
    4.24
    
    
    
    2.53
    
    
    
    2.68
    
    
    
    3.12
    
    
    
    21.4
    
    
    
    9.8
    
    
    
    35.9Customer complaints
(d)
    
    
    1.21
    
    
    
    0.86
    
    
    
    1.51
    
    
    
    0.84
    
    
    
    1.04
    
    
    
    0.61
    
    
    
    43.8
    
    
    
    (17.4
    )
    
    
    
  (a)
    
    Percentage of reported flight operations arriving on time.  (b)
    
    Percentage of scheduled flight operations completed. 19




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004  (c)
    
    Rate of mishandled baggage reports per 1,000 passengers.  (d)
    
    Rate of customer complaints filed with the DOT per 100,000
passengers. Summary of Holdings Financial Results Holdings recorded consolidated net income of $5.7 million in the second
quarter of 2004, or $0.11 per diluted share. This compares to consolidated net
income of $79.7 million, or $2.02 per diluted share, in the second quarter of
2003. The second quarter 2003 results include a nonoperating gain of $81.3
million related to the federal government assistance received under the
Emergency Wartime Supplemental Appropriations Actand special charges of
$14.5 million resulting from the elimination of AWAs hub operations in
Columbus, Ohio ($9.6 million), the reduction-in-force of certain management,
professional and administrative employees ($2.3 million) and the impairment of
certain owned Boeing 737-200 aircraft grounded in 2003 ($2.6 million). Holdings recorded consolidated net income of $6.9 million in the first six
months of 2004, or $0.13 per diluted share. This compares to consolidated net
income of $17.7 million, or $0.48 per diluted share, in the first six months of
2003. The 2003 results include the $81.3 million of federal government
assistance discussed above, an operating gain of $4.4 million related to the
purchase and subsequent exchange of an A320 airframe in the first quarter of
2003 and an operating gain of $1.1 million due to a revision of the estimated
costs related to the early termination of certain aircraft leases. These gains
were offset in part by special charges of $15.5 million resulting from the
elimination of AWAs hub operations in Columbus, Ohio ($10.6 million), the
reduction-in-force of certain management, professional and administrative
employees ($2.3 million) and the impairment of certain owned Boeing 737-200
aircraft grounded in 2003 ($2.6 million). The Company did not record income tax expense in the second quarter or for
the first six months of 2004 as it currently expects to continue to record a
full valuation allowance on any future tax benefits until we have achieved
several quarters of consecutive profitable results coupled with an expectation
of continued profitability. RESULTS OF OPERATIONS The following discussion provides an analysis of AWAs results of
operations for the three and six months ended June 30, 2004 and material
changes compared to the three and six months ended June 30, 2003. The table below sets forth selected operating data for AWA. Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    PercentChange
    
    
    
    Change2004
    
    2003
    
    2004-2003
    
    2004
    
    2003
    
    2004-2003Aircraft (end of period)
    
    
    140
    
    
    
    140
    
    
    
    
    
    
    
    140
    
    
    
    140
    
    
    
    Average daily aircraft utilization (hours) (a)
    
    
    11.0
    
    
    
    10.1
    
    
    
    8.9
    
    
    
    10.9
    
    
    
    10.1
    
    
    
    7.9Available seat miles (in millions) (b)
    
    
    7,552
    
    
    
    6,974
    
    
    
    8.3
    
    
    
    14,904
    
    
    
    13,826
    
    
    
    7.8Block hours (c)
    
    
    139,202
    
    
    
    129,576
    
    
    
    7.4
    
    
    
    275,880
    
    
    
    259,680
    
    
    
    6.2Average stage length (miles) (d)
    
    
    1,058
    
    
    
    992
    
    
    
    6.7
    
    
    
    1,047
    
    
    
    989
    
    
    
    5.9Average passenger journey (miles) (e)
    
    
    1,692
    
    
    
    1,586
    
    
    
    6.7
    
    
    
    1,644
    
    
    
    1,510
    
    
    
    8.9Revenue passenger miles (in millions) (f)
    
    
    5,915
    
    
    
    5,502
    
    
    
    7.5
    
    
    
    11,222
    
    
    
    10,374
    
    
    
    8.2Load factor (percent) (g)
    
    
    78.3
    
    
    
    78.9
    
    
    

    (0.6)
    pts
    
    
    75.3
    
    
    
    75.0
    
    

    
    0.3
    ptsPassenger enplanements (in thousands) (h)
    
    
    5,343
    
    
    
    5,185
    
    
    
    3.0
    
    
    
    10,241
    
    
    
    9,840
    
    
    
    4.1Yield per revenue passenger mile (cents) (i)
    
    
    9.62
    
    
    
    9.79
    
    
    
    (1.7
    )
    
    
    9.86
    
    
    
    10.01
    
    
    
    (1.5
    )Revenue per available seat mile:Passenger (cents) (j)
    
    
    7.54
    
    
    
    7.72
    
    
    
    (2.3
    )
    
    
    7.42
    
    
    
    7.51
    
    
    
    (1.2
    )Total (cents) (k)
    
    
    8.01
    
    
    
    8.25
    
    
    
    (2.9
    )
    
    
    7.93
    
    
    
    7.95
    
    
    
    (0.3
    )Fuel consumption (gallons in millions)
    
    
    113.9
    
    
    
    105.9
    
    
    
    7.6
    
    
    
    222.4
    
    
    
    209.7
    
    
    
    6.1Average fuel price (cents per gallon)
    
    
    115.6
    
    
    
    81.7
    
    
    
    41.4
    
    
    
    109.1
    
    
    
    85.8
    
    
    
    27.2Average number of full-time equivalent employees
    
    
    11,936
    
    
    
    11,492
    
    
    
    3.9
    
    
    
    11,881
    
    
    
    11,898
    
    
    
    (0.1
    )
 20




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004  (a)
    
    Average daily aircraft utilization  The average number of
block hours per day for all aircraft in service.(b)
    
    Available seat mile (ASM)  A basic measure of production.
It is one seat flown one mile.(c)
    
    Block hours  The hours measured from the moment an aircraft
first moves under its own power, including taxi time,
for the purposes of flight until the aircraft is docked at the next
point of landing and its power is shut down.(d)
    
    Average stage length  The average of the distances flown on
each segment of every route.(e)
    
    Average passenger journey  The average one-way trip measured
in miles for one passenger origination.(f)
    
    Revenue passenger mile (RPM)  A basic measure of sales
volume. It is one passenger flown one mile.(g)
    
    Load factor  The percentage of available seats that are filled
with revenue passengers.(h)
    
    Passenger enplanements  The number of passengers on board an
aircraft including local, connecting and through passengers.(i)
    
    Yield  A measure of airline revenue derived by dividing
passenger revenue by revenue passenger miles and expressed in cents
per mile.(j)
    
    Passenger revenue per available seat mile (RASM)  Total
passenger revenues divided by total available seat miles.(k)
    
    Total revenue per available seat mile  Total operating
revenues divided by total available seat miles. The table below sets forth the major components of operating cost per
available seat mile (CASM) for AWA. Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    PercentChange
    
    
    
    Change2004
    
    2003
    
    2004-2003
    
    2004
    
    2003
    
    2004-2003(in cents)Salaries and related costs
    
    
    2.14
    
    
    
    2.24
    
    
    
    (4.4
    )
    
    
    2.20
    
    
    
    2.30
    
    
    
    (4.6
    )Aircraft rents
    
    
    1.00
    
    
    
    1.04
    
    
    
    (3.8
    )
    
    
    1.00
    
    
    
    1.07
    
    
    
    (5.3
    )Other rents and landing fees
    
    
    0.56
    
    
    
    0.54
    
    
    
    3.4
    
    
    
    0.56
    
    
    
    0.56
    
    
    
    (0.1
    )Aircraft fuel
    
    
    1.70
    
    
    
    1.24
    
    
    
    37.1
    
    
    
    1.61
    
    
    
    1.30
    
    
    
    23.5Agency commissions
    
    
    0.08
    
    
    
    0.13
    
    
    
    (38.1
    )
    
    
    0.09
    
    
    
    0.13
    
    
    
    (33.6
    )Aircraft maintenance materials and repairs
    
    
    0.69
    
    
    
    0.84
    
    
    
    (17.4
    )
    
    
    0.69
    
    
    
    0.89
    
    
    
    (22.6
    )Depreciation and amortization
    
    
    0.17
    
    
    
    0.25
    
    
    
    (32.9
    )
    
    
    0.17
    
    
    
    0.26
    
    
    
    (30.1
    )Special charges, net
    
    
    
    
    
    
    0.21
    
    
    
    (100.0
    )
    
    
    
    
    
    
    0.10
    
    
    
    (100.0
    )Other
    
    
    1.38
    
    
    
    1.52
    
    
    
    (9.2
    )
    
    
    1.33
    
    
    
    1.54
    
    
    
    (13.5
    )7.72
    
    
    
    8.01
    
    
    
    (3.6
    )
    
    
    7.65
    
    
    
    8.15
    
    
    
    (6.1
    )
 Three Months Ended June 30, 2004 and 2003 For the second quarter of 2004, AWA realized operating income of $21.8
million compared to operating income of $17.3 million in last years second
quarter. Income before income taxes for the second quarter of 2004 was $6.6
million compared to income before income taxes of $80.7 million for the
comparable 2003 period. Total operating revenues for the second quarter of 2004 were $604.9
million. Passenger revenues were $569.2 million, an increase of $30.8 million
or 5.7% from the comparable 2003 quarter. RPMs increased 7.5% on an 8.3%
increase in ASMs resulting in a 0.6 point decline in load factor. Yield fell
1.7% and RASM decreased 2.3% to 7.54 cents in 2004 from 7.72 cents in 2003.
The decline in RASM was driven by increased industry capacity as well as AWAs
6.7% increase in average stage length and a 8.9% increase in average daily
aircraft utilization. Cargo revenues decreased 13.1% to $6.8 million while
other revenues were relatively flat quarter-over-quarter. Operating expenses in the second quarter of 2004 increased $24.8 million
or 4.4% as compared to the second quarter of 2003 while ASMs increased 8.3%
primarily due to increases in average stage length (6.7%) and
aircraft utilization (8.9%). As a result, CASM
decreased 3.6% to 7.72 cents in the second quarter of 2004 from 8.01 cents for
the second quarter of 2003. Significant changes in the components of CASM are
explained as follows: 21




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004  
    
    Salaries and related costs per ASM decreased 4.4% due to increased
productivity. While ASMs increased 8.3%, average full-time equivalent
employees (FTEs) increased only 3.9%.  
    
    Aircraft rent expense per ASM decreased 3.8% due to the increase in
aircraft utilization.  
    
    Other rents and landing fees expense per ASM increased 3.4% mainly
driven by a 17.3% increase in landing fees and a 15.3% increase in
airport rents.  
    
    Aircraft fuel expense per ASM increased 37.1% primarily due to a
41.4% increase in the average price per gallon of fuel to 115.6 cents in
the second quarter of 2004 from 81.7 cents in the comparable 2003
quarter. Fuel expense in the second quarter of 2004 was reduced by $4.5 million as a
result of fuel hedging transactions in the quarter of which $2.2 million
was due to hedge ineffectiveness.  
    
    Agency commissions expense per ASM decreased 38.1% due to reductions
in various travel agency incentive programs and lower override
commissions.  
    
    Aircraft maintenance materials and repairs expense per ASM
decreased 17.4% primarily due to the decrease in capitalized
maintenance amortization expense ($7.6 million). A change in the
estimated useful life on certain engines, effective January 1,
2004, as a result of changes in aircraft utilization
($1.9 million) contributed to that decrease. The Company also
retired fully depreciated assets related to the return of certain
leased aircraft and engines which reduced capitalized maintenance
amortization expense by $1.0 million during the period.  
    
    Depreciation and amortization expense per ASM decreased 32.9%
primarily due to lower computer hardware and software amortization ($1.8
million), lower amortization expense related to aircraft leasehold
improvements ($0.6 million) and reduced capital expenditures as a result
of the Companys cash conservation program. A change in the estimated
useful life as a result of changes in AWAs fleet plan contributed to
the decrease for rotable and repairable spare parts ($0.9 million), and
for improvements on AWAs owned aircraft ($1.2 million).  
    
    Other operating expenses per ASM decreased 9.2% due primarily
to the 8.3% increase in ASMs. A $3.5 million gain resulting from
the settlement of a claim in bankruptcy for amounts earned under an
executory contract and a $1.0 million volume incentive earned
due to certain Affinity Card sales levels meeting certain contract
thresholds also contributed to the decrease. AWA had net nonoperating expenses of $15.2 million in the second quarter
of 2004 compared to $63.4 million of net nonoperating income in the second
quarter of 2003. The 2003 period benefited from $81.3 million of federal
government assistance received under the Emergency Wartime Supplemental
Appropriation Act.A gain on the disposition of property and equipment of $1.4
million was recorded in the second quarter of 2004, due principally to the sale
of one Boeing 737-200 aircraft. Interest income increased $0.5 million or
17.5% due to higher cash balances while interest expense decreased 1.6% due to
lower outstanding debt. 22




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Six Months Ended June 30, 2004 and 2003 For the six months ended June 30, 2004, AWA realized operating income of
$40.4 million compared to an operating loss of $27.8 million in the first six
months of 2003. Income before income taxes for the six month period in 2004
was $8.5 million compared to income of $19.7 million in 2003. Total operating revenues for the six months ended June 30, 2004 were $1.2
billion. Passenger revenues were $1.1 billion, an increase of $67.6 million or
6.5% from the 2003 six-month period. An 8.2% increase in RPMs exceeded a 7.8%
increase in ASMs, resulting in a 0.3 point increase in load factor, while yield
decreased 1.5%. As a result, RASM decreased 1.2% to 7.42 cents in 2004 from
7.51 cents in 2003 due to the overall increase in industry capacity and
competition. Cargo revenues decreased 7.9% to $13.7 million, while other
revenues increased 36.2% to $61.1 million due primarily to increased flying for
AWA by its codeshare partner Mesa Airlines (Mesa) and a $2.5 million credit
related to the reduction of certain obligations based upon a settlement with
Mesa. These increases were offset in part by lower net revenues from the sale
of America West Vacations packages due primarily to a decrease in volume. Operating expenses in the first six months of 2004 increased $14.4 million
or 1.3% as compared to the 2003 six-month period, while ASMs increased 7.8% due
to increases in average stage length (5.9%) and aircraft utilization (7.9%).
CASM decreased 6.1% to 7.65 cents in 2004 from 8.15 cents for the six-month
period in 2003 despite a 27.2% increase in average fuel price per gallon.
Operating expenses in the first six months of 2004 included a $0.6 million
reduction in special charges related to the revision of estimated costs
associated with the sale and leaseback of certain aircraft. The 2003 period
included special charges of $14.4 million. Significant changes in the
components of CASM are explained as follows:  
    
    Salaries and related costs per ASM decreased 4.6% due to increased
productivity. While ASMs increased 7.8%, average full-time equivalent
employees (FTEs) decreased 0.1%.  
    
    Aircraft rent expense per ASM decreased 5.3% due to the increase in
aircraft utilization.  
    
    Other rents and landing fees expense per ASM decreased 0.1% mainly
driven by a 7.8% increase in ASMs, despite increases in airport rents
($3.7 million) and landing fees ($2.7 million) expenses.  
    
    Aircraft fuel expense per ASM increased 23.5% due to a 27.2% increase
in the average price per gallon of fuel to 109.1 cents in the first six
months of 2004 from 85.8 cents in 2003. Fuel expense was reduced as a
result of fuel hedging transactions by $7.7 million in 2004 of which
$2.5 million was due to hedge ineffectiveness as compared to $10.1
million for the same period in 2003.  
    
    Agency commissions expense per ASM decreased 33.6% primarily due to
the reductions in various travel agency incentive programs and lower
override commissions.  
    
    Aircraft maintenance materials and repairs expense per ASM
decreased 22.6% primarily due to decreases in aircraft C-Check
($5.0 million) and capitalized maintenance amortization expense
($17.7 million). The decrease in capitalized maintenance
amortization expense is driven by changes in the estimated useful
life on certain engines, effective January 1, 2004, as a result
of changes in aircraft utilization ($4.3 million), and on
certain aircraft engine overhaul costs, effective April 1, 2003,
driven by a new maintenance agreement that guarantees minimum cycles
on engine overhauls ($2.3 million). The Company also retired
fully depreciated assets related to the return of certain leased
aircraft and engines which reduced capitalized maintenance
amortization expense by $3.8 million.  
    
    Depreciation and amortization expense per ASM decreased 30.1% due
primarily to lower computer hardware and software amortization ($2.7
million), lower amortization expense related to aircraft leasehold
improvements ($2.1) million, and reduced capital expenditures as a
result of the Companys cash conservation program. A change in the
estimated useful life as a result of changes in AWAs fleet plan
contributed to the decrease for rotable and repairable spare parts ($1.8
million), and for improvements on AWAs owned aircraft ($1.2 million). 23




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004  
    
    Other operating expenses per ASM decreased 13.5% due primarily to
decreases in catering costs ($3.8 million), bad debt expense
($3.1 million), property taxes ($3.0 million), airport
guard services ($1.3 million), ground handling services
($0.9 million), offset by increases in credit card discount fees
($2.5 million) and aircraft fuel taxes ($1.6 million). A
$3.5 million gain resulting from the settlement of a claim in
bankruptcy for amounts earned under an executory contract, a
$2.0 million gain resulting from the settlement of a lawsuit
related to certain computer hardware and software that had previously
been written off and a $1.0 million volume incentive earned due
to certain Affinity Card sales levels meeting certain contract thresholds, also contributed
to the decrease. AWA had net nonoperating expenses of $31.9 million in the first six months
of 2004 compared to $47.5 million of net nonoperating income in the first six
months of 2003. The 2003 period benefited from $81.3 million of federal
government assistance received under the Emergency Wartime Supplemental
Appropriations Act.A gain on the disposition of property and equipment of
$2.1 million was recorded year-to-date in 2004, due principally to the sale of
one Boeing 737-200 aircraft. Interest income increased $0.6 million or 9.7% due
to higher cash balances and interest expense increased $0.9 million or 2.1% due
to higher outstanding debt. LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash At June 30, 2004, Holdings and AWAs total cash, cash equivalents,
short-term investments, investments in debt securities and restricted cash was
$589.6 million and $570.2 million, respectively. Net cash provided by
operating activities for Holdings and AWA was $83.6 million and $84.2 million,
respectively, in the first six months of 2004 compared to $123.6 million for
both Holdings and AWA in the first six months of 2003. The year-over-year
decrease in net cash provided by operating activities of $40.0 million and
$39.4 million for Holdings and AWA, respectively, was primarily due to
receiving $81.3 million of refunded security fees from the federal government
in the second quarter of 2003. In the first six months of 2004, net cash used in investing activities was
$91.5 million for Holdings and AWA. This compares to net cash used in
investing activities of $107.0 million for Holdings and AWA in the first six
months of 2003. Principal investing activities during the first six months of
2004 included purchases of property and equipment totaling $77.2 million and
net purchases of short-term investments and investments in debt securities
totaling $17.4 million. The first six months of 2003 included purchases of
property and equipment totaling $82.2 million, including $12.0 million related
to the purchase of an A320 airframe that was used to replace an airframe that
was damaged in an accident in August 2002, and net purchases of short-term
investments totaling $16.1 million. The 2003 period also included proceeds
from the disposition of assets totaling $24.0 million, including $12.6 million
of insurance proceeds and $3.6 million of scrap proceeds both associated with
the replaced A320 airframe discussed above, and $6.9 million related to the
sale and leaseback of 29 jet bridges at Phoenix Sky Harbor International
Airport. In the first six months of 2004, net cash used in financing activities by
both Holdings and AWA was $48.0 million, consisting primarily of debt
repayments, including the first principal payment of $42.9 million for the
government guaranteed loan. This compares to $7.6 million of debt repayments
during the comparable 2003 period. Capital expenditures for the first six months of 2004 were approximately
$77.2 million for both Holdings and AWA as compared to capital expenditures of
approximately $82.2 million for both Holdings and AWA for the first six months
of 2003. Included in these amounts are capital expenditures for capitalized
maintenance of approximately $58.4 million and $57.1 million for both Holdings
and AWA for the first six months of 2004 and 2003, respectively. 24




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Off-Balance Sheet Arrangements The Pass Through Trusts Since AWAs restructuring in 1994, AWA has set up 19 pass through trusts,
which have issued over $1.4 billion of pass through trust certificates (also
known as Enhanced Equipment Trust Certificates or EETC) covering the
financing of 54 aircraft, all of which have been delivered. These trusts are
off-balance sheet entities, the primary purpose of which is to finance the
acquisition of aircraft. Rather than finance each aircraft separately when
such aircraft is purchased or delivered, these trusts allow the Company to
raise the financing for several aircraft at one time and place such funds in
escrow pending the purchase or delivery of the relevant aircraft. The trusts
also are structured to provide for certain credit enhancements, such as
liquidity facilities to cover certain interest payments, that reduce the risks
to the purchasers of the trust certificates and, as a result, reduce the cost
of aircraft financing to AWA. Each trust covered a set amount of aircraft scheduled to be delivered
within a specific period of time. At the time of each covered aircraft
financing, the relevant trust used the funds in escrow to purchase equipment
notes relating to the financed aircraft. The equipment notes were issued, at
AWAs election, either by AWA in connection with a mortgage financing of the
aircraft or by a separate owner trust in connection with a leveraged lease
financing of the aircraft. In the case of a leveraged lease financing, the
owner trust then leased the aircraft to AWA. In both cases, the equipment
notes are secured by a security interest in the aircraft. The pass through
trust certificates are not direct obligations of, nor guaranteed by, Holdings
or AWA. However, in the case of mortgage financings, the equipment notes
issued to the trusts are direct obligations of AWA and in the case of leveraged
lease financings, the leases are direct obligations of AWA. In addition,
neither Holdings nor AWA guarantee or participate in any way in the residual
value of the leased aircraft. All aircraft financed by these trusts are
currently structured as leveraged lease financings, which are not reflected as
debt on the balance sheets of either AWA or Holdings in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation
of Variable Interest Entities(Fin 46). In the second quarter and the first
six months of 2004, AWA made $25.3 million and $101.4 million, respectively, in
lease payments in respect of the leveraged lease financings under the pass
through trusts. Other Operating Leases In addition to the aircraft financed by the pass through trust
certificates, AWA has noncancelable operating leases covering 82 aircraft, as
well as leases for certain terminal space, ground facilities and computer and
other equipment. In the second quarter and first six months of 2004, AWA made
$44.8 million and $97.3 million, respectively, in lease payments related to
these operating leases. AWA is currently evaluating the economic viability to
continue to operate its leased Boeing 737-200 fleet, particularly given the age of
the aircraft and the associated maintenance cost. Special Facility Revenue Bonds In June 1999, Series 1999 special facility revenue bonds (new bonds)
were issued by the Industrial Development Authority (IDA) of the City of
Phoenix to fund the retirement of the Series 1994A bonds (old bonds) and the
construction of a new concourse with 14 gates at Terminal 4 in Phoenix Sky
Harbor International Airport in support of AWAs strategic growth plan. The
new bonds are due June 2019 with interest accruing at 6.25% per annum payable
semiannually on June 1 and December 1, commencing on December 1, 1999. The new
bonds are subject to optional redemption prior to the maturity date on or after
June 1, 2009 in whole or in part, on any interest payment date at the following
redemption prices: 101% on June 1 or December 1, 2009; 100.5% on June 1 or
December 1, 2010; and 100% on June 1, 2011 and thereafter. In connection with these bonds, AWA entered into an Amended and Restated
Airport Use Agreement, pursuant to which AWA agreed to make sufficient payments
to the IDA to cover the principal and interest of the bonds and to indemnify
the IDA for any claims arising out of the issuance and sale of the bonds and
the use and occupancy of the concourses financed by these bonds and the old
bonds. At June 30, 2004, the outstanding principal amount of the bonds was
$21.8 million. The Company estimates its remaining payments to cover the
principal and interest of these bonds will be approximately $42.2 million. In
accordance with Emerging Issues Task Force (EITF) Issue No. 97-10, The
Effect of Lessee Involvement in Asset Construction,the Company accounts for
this as an operating lease. 25




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Commitments As of June 30, 2004, AWA had $758.6 million of long-term debt (including
current maturities). This amount consisted primarily of the government
guaranteed loan, of which $386.1 million remains outstanding, a secured term
loan with a group of financial institutions, of which $75.5 million remains
outstanding (including interest through June 30, 2004 as a deemed loan added to
the principal thereof), $39.5 million principal amount of
103⁄4% senior
unsecured notes, $108.2 million principal amount of 7.5% convertible senior
notes (including interest through June 30, 2004 as a deemed loan added to the
principal thereof) and $86.8 million issue price of 7.25% senior exchangeable
notes. Government Guaranteed Loan In January 2002, AWA closed a $429 million loan supported by a $380
million guarantee provided by the Air Transportation Stabilization Board (the
ATSB). Certain third-party counter-guarantors have fully and unconditionally
guaranteed the payment of an aggregate of $45 million of the outstanding
principal amount under the government guaranteed loan plus accrued and unpaid
interest thereon. In addition, Holdings has fully and unconditionally
guaranteed the payment of all principal, premium, interest and other
obligations outstanding under the government guaranteed loan and has pledged
the stock of AWA to secure its obligations under such guarantee. Principal
amounts under this loan become due in ten installments of $42.9 million on each
March 31 and September 30, commencing on March 31, 2004 and ending on September
30, 2008. AWA made the first principal payment of $42.9 million on March 31,
2004. In connection with the issuance of the 7.25% Senior Exchangeable Notes
in the third quarter of 2003, AWA placed $42.9 million of the net proceeds in a
cash collateral account to secure the second principal payment due on September
30, 2004. This amount has been recorded as restricted cash in the accompanying
condensed consolidated balance sheet. See 7.25% Senior Exchangeable Notes Due
2023below. Principal amounts outstanding under the government guaranteed
loan bear interest at a rate per annum equal to LIBOR plus 40 basis points. Subject to certain exceptions, we are required to prepay the government
guaranteed loan with:  
    
    the net proceeds of all issuances of debt or equity by either
Holdings or AWA after January 2002;  
    
    proceeds from asset sales in excess of $20 million in any fiscal
year to the extent such proceeds are not applied to redeem AWAs
103⁄4% senior notes due 2005; and  
    
    insurance proceeds in excess of $2 million to the extent such
proceeds are not used to restore or replace the assets from which such
proceeds are derived. In addition, we are required to prepay the government guaranteed loan upon
a change in control and we may be required to prepay portions of the loan if
our employee compensation costs exceed a certain threshold. We may, at our
option, prepay the government guaranteed loan without premium or penalty,
subject to reimbursement of the lenders breakage costs in the case of
prepayment of LIBOR loans. The government guaranteed loan requires that AWA maintain a minimum cash
balance of $100 million. In addition, the government loan contains customary
affirmative covenants and the following negative covenants: restrictions on
liens, investments, restricted payments, changes in our fundamental business,
asset sales and acquisitions, the creation of new subsidiaries, sale-leaseback
transactions, transactions with affiliates, continued existence, mergers or
consolidations, issuances and dispositions of capital stock of subsidiaries,
and amendments to other indebtedness. The government guaranteed loan contains
customary events of default, including payment defaults, cross-defaults, breach
of covenants, bankruptcy and insolvency defaults and judgment defaults. 26




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##### Table of Contents



AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Term Loan In connection with the closing of the government guaranteed loan and the
related transactions, AWA converted its existing revolving credit facility into
a term loan with the Mizuho Corporate Bank, Ltd., as successor by merger to the
Industrial Bank of Japan, Limited, and certain other lenders. As of June 30,
2004, $75.5 million remains outstanding under the term loan (including interest
paid through June 30, 2004 as a deemed loan added to the initial principal
thereof.) Principal amounts under the term loan become due in two installments
of $30 million on December 31, 2005 and December 31, 2006 with the remaining
amounts becoming due and payable in full on December 31, 2007. Principal
amounts outstanding under the term loan bear interest at a rate per annum equal
to, at our option, either the Base Rate or the Eurodollar Rate (which is based
on LIBOR), in each case plus an applicable margin. The applicable margin
adjusts based on the length of time the term loan has been outstanding. The
term Base Rate has a meaning customary and appropriate for financings of this
type. In addition, principal amounts outstanding under the term loan bear
interest in kind at a rate of 2% through December 31, 2004. The prepayment requirements and covenants of the term loan are
substantially similar to those of the government guaranteed loan. We may, at
our option, prepay the term loan without premium or penalty, subject to
reimbursement of the lenders breakage costs in the case of prepayment of loans
bearing the Eurodollar Rate. The term loan is secured by a first priority
perfected security interest in certain of our spare engines, rotable aircraft
parts inventory and a maintenance facility. We may be required to prepay
portions of the loan if the fair market value of the collateral, as determined
by independent appraisers, decreases. The term loan contains customary events
of default, including payment defaults, cross-defaults, breach of covenants,
bankruptcy and insolvency defaults and judgment defaults. 103⁄4% Senior Notes due 2005 In August 1995, AWA issued $75.0 million principal amount of 103⁄4%
senior notes due 2005 of which $39.5 million remained outstanding at June 30,
2004. Interest on the 103⁄4% senior notes is payable semiannually in arrears
on March 1 and September 1 of each year. We may redeem the 103⁄4% senior notes, in whole or in part, at a
redemption price of 100%. If AWA undergoes a change of control, it may be
required to repurchase the 103⁄4% senior notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. If AWA sells certain assets, it may be required to use the net
cash proceeds to repurchase the 103⁄4% senior notes at 100% of the principal
amount, plus accrued and unpaid interest, to the date of purchase. The indenture governing the 103⁄4% senior notes contains certain
covenants that, among other things, limit our ability to pay dividends or make
distributions to our stockholders, repurchase or redeem capital stock, make
investments or other restricted payments, enter into transactions with our
stockholders and affiliates, sell assets (including the stock of our
subsidiaries) and merge or consolidate with other companies. The indenture
governing the 103⁄4% senior notes also contains customary events of default,
including payment defaults, cross-defaults, breach of covenants, bankruptcy and
insolvency defaults and judgment defaults. 7.5% Convertible Senior Notes due 2009 In connection with the closing of the government guaranteed loan and the
related transactions, Holdings issued $104.5 million of 7.5% convertible senior
notes due 2009, of which approximately $108.2 remained outstanding at June 30,
2004 (including interest paid through June 30, 2004 as a deemed loan added to
the principal thereof). Beginning January 18, 2005, these notes are
convertible into shares of Class B common stock, at the option of the holders,
at an initial conversion price of $12.00 per share or a conversion ratio of
approximately 83.333 shares per $1,000 principal amount of such notes, subject
to standard anti-dilution adjustments. Interest on the 7.5% convertible senior
notes is payable semiannually in arrears on June 1 and December 1 of each year.
At Holdings option, the first 27




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 six interest payments may be paid in the form
of a deemed loan added to the principal amount of these notes. The 7.5%
convertible senior notes will mature on January 18, 2009 unless earlier
converted or redeemed. The payment of principal, premium and interest on the
7.5% convertible senior notes is fully and unconditionally guaranteed by AWA. Holdings may redeem some or all of the 7.5% convertible senior notes at
any time before January 18, 2005, at a redemption price equal to $1,000 per
note to be redeemed if (A) the closing price of the Class B common stock has
exceeded 120% of the conversion price then in effect for at least 20 trading
days within a period of 30 consecutive trading days ending on the trading day
before the date of the mailing of the redemption notice, and (B) a shelf
registration statement covering resales of the notes and the Class B common
stock issuable upon conversion thereof is effective and available for use and
is expected to remain effective and available for use for the 30 days following
the redemption date, unless registration is no longer required. Holdings may
redeem the 7.5% convertible senior notes, in whole or in part, on or after
January 18, 2005 at the following redemption prices (expressed as percentages
of the principal amount thereof), if redeemed during the twelve-month period
commencing on January 18 of the years set forth below, plus, in each case,
accrued and unpaid interest, if any, to the date of redemption: Year
    
    Redemption Price2005
    
    
    103.75
    %2006
    
    
    102.50
    %2007
    
    
    101.25
    %2008 and thereafter
    
    
    100.00
    %
 7.25% Senior Exchangeable Notes due 2023 In July and August of 2003, AWA completed a private placement of
approximately $86.8 million issue price of 7.25% Senior Exchangeable Notes due
2023. The notes bear cash interest until July 30, 2008. Thereafter, the notes
will cease bearing cash interest and begin accruing original issue discount
daily at a rate of 7.25% per year until maturity. Each note was issued at a
price of $343.61 and is exchangeable for Class B common stock of Holdings at an
exchange ratio of 32.038 shares per $1,000 principal amount at maturity of the
notes (subject to adjustment in certain circumstances). This represents an
equivalent conversion price of approximately $10.73 per share. The aggregate
amount due at maturity, including accrued original issue discount from July 31,
2008, will be $252,695,000. The notes are unconditionally guaranteed on a
senior unsecured basis by Holdings. Holders may exchange their notes for the shares of Class B common stock of
Holdings at any time, if, as of the last day of the preceding fiscal quarter,
the closing sale price of the Class B common stock for at least 20 trading days
in a period of 30 consecutive trading days ending on the last trading day of
such preceding fiscal quarter is more than 110% of the accreted exchange price
per share of Class B common stock on the last day of such preceding fiscal
quarter. If the foregoing condition is satisfied, then the notes will be
exchangeable at any time at the option of the holder through maturity. The
accreted exchange price per share as of any day will equal the issue price of a
note plus accrued original issue discount to that day divided by 32.038,
subject to any adjustments to the exchange rate through that day. On or before July 30, 2018, a holder also may exchange its notes for
shares of the Class B common stock at any time after a 10 consecutive
trading-day period in which the average of the trading prices for the notes for
that 10 trading-day period was less than 103% of the average exchange value for
the notes during that period. Exchange value is equal to the product of the
closing sale price for the shares of Class B common stock on a given day
multiplied by the then current exchange rate, which is the number of shares of
Class B common stock for which each note is then exchangeable. In addition, the holders may exchange the notes if the notes have been
called for redemption or if certain specified corporate transactions have
occurred. 28




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Holders of the notes may require AWA to repurchase the notes at a price
equal to the original issue price plus accrued cash interest and original issue
discount, if any, on July 30, 2008, 2013 and 2018. The purchase price of such
notes may be paid in cash or Class B common stock of Holdings, subject to
certain restrictions. In addition, each holder may require AWA to purchase all
or a portion of such holders notes upon the occurrence of certain change of
control events concerning AWA or Holdings. AWA may redeem the notes, in whole
or in part, on or after July 30, 2008 at a price equal to the original issue
price plus accrued cash interest and original issue discount, if any. In connection with the offering AWA placed $42.9 million of the net
proceeds in a cash collateral account to secure the scheduled principal and
interest payments on certain of its indebtedness through September 30, 2004.
This amount has been recorded as restricted cash in the accompanying condensed
consolidated balance sheet. Other Indebtedness and Obligations In addition to the above described indebtedness, we had $43.6 million of
secured equipment notes and $43.0 million of other unsecured indebtedness,
including $29.3 million of industrial revenue bonds. The following table sets forth our cash obligations as of June 30, 2004. 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Beyond 2008
    
    Total(In thousands)Long-term debt:Equipment notes  non-EETC (1)
    
    $
    4,152
    
    
    $
    8,305
    
    
    $
    8,305
    
    
    $
    7,772
    
    
    $
    15,083
    
    
    $
    
    
    
    $
    43,617Term loan (2)
    
    
    3,869
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    11,665
    
    
    
    
    
    
    
    
    
    
    
    75,5347.5% convertible senior notes due
2009(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,240
    
    
    
    108,2407.25% senior exchangeable notes
due 2023 (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252,695
    
    
    
    252,695Government guaranteed loan (5)
    
    
    42,900
    
    
    
    85,800
    
    
    
    85,800
    
    
    
    85,800
    
    
    
    85,800
    
    
    
    
    
    
    
    386,100State loan (6)
    
    
    750
    
    
    
    250
    
    
    
    250
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    1,500103⁄4% senior unsecured notes
due 2005
    
    
    
    
    
    
    39,548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,548Industrial development bonds (7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,300
    
    
    
    29,300AVSA promissory notes (8)
    
    
    5,250
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,25056,921
    
    
    
    170,903
    
    
    
    124,355
    
    
    
    105,487
    
    
    
    100,883
    
    
    
    390,235
    
    
    
    948,784Cash aircraft rental payments (9)
    
    
    147,697
    
    
    
    320,037
    
    
    
    294,740
    
    
    
    276,679
    
    
    
    228,825
    
    
    
    1,839,262
    
    
    
    3,107,240Lease payments on equipment and
facility operating leases (10)
    
    
    10,925
    
    
    
    19,480
    
    
    
    17,546
    
    
    
    15,512
    
    
    
    15,735
    
    
    
    63,249
    
    
    
    142,447Capital lease obligations
    
    
    4,315
    
    
    
    4,744
    
    
    
    4,988
    
    
    
    1,773
    
    
    
    
    
    
    
    
    
    
    
    15,820Special
facility revenue bonds (11)
    
    
    681
    
    
    
    1,363
    
    
    
    1,363
    
    
    
    1,362
    
    
    
    1,362
    
    
    
    36,106
    
    
    
    42,237Aircraft purchase commitments (12)
    
    
    79,739
    
    
    
    91,738
    
    
    
    223,362
    
    
    
    263,941
    
    
    
    
    
    
    
    
    
    
    
    658,780Engine maintenance commitments (13)
    
    
    12,000
    
    
    
    24,000
    
    
    
    8,000
    
    
    
    4,000
    
    
    
    6,000
    
    
    
    2,000
    
    
    
    56,000Total
    
    $
    312,278
    
    
    $
    632,265
    
    
    $
    674,354
    
    
    $
    668,754
    
    
    $
    352,805
    
    
    $
    2,330,852
    
    
    $
    4,971,308
  (1)
    
    Includes approximately $43.6 million of equipment notes with variable
interest rates of 2.19% to 2.40%, averaging 2.22%, installments due 2004
through 2008.  (2)
    
    Includes a $71.7 million secured term loan maturing at year-end 2007 with
a variable interest rate of 3.37% and $3.8 million of interest paid in
kind through June 30, 2004 at a fixed rate of 2%. Excludes $0.8 million
of interest payable in kind through December 2004.  (3)
    
    Includes $90.7 million principal amount of 7.5% convertible senior notes,
due 2009, and $17.5 million of interest paid in kind through June 30,
2004. For financial reporting purposes, we recorded the convertible
senior notes at their fair market value on the date of issuance. As of
June 30, 2004, the balance of the convertible senior notes in the
accompanying condensed consolidated balance sheet is approximately $66.6
million.  (4)
    
    Includes $252.7 million principal amount of 7.25% senior exchangeable
notes due July 2023 with cash interest payable through July 2008 at a rate
of 2.49% on the principal amount at maturity. Thereafter, the notes will
cease bearing cash interest and begin accruing original issue discount at
a rate of 7.25% until maturity. The aggregate amount due at maturity,
including accrued original issue discount from July 31, 2008, will be
$252.7 million. 29




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004  (5)
    
    Government guaranteed loan includes $386.1 million with a variable
interest rate of 1.5% at June 30, 2004 and ratable principal payments due
2004 through 2008. Guarantee fees of approximately 8.0% of the
outstanding guaranteed principal balance in 2004 through 2008 are payable
to the U.S. Treasury Department and other loan participants.  (6)
    
    Includes Arizona State loan of $1.5 million due December 2007 with a
variable interest rate of 4.93% at June 30, 2004.  (7)
    
    Includes $29.3 million of 6.3% industrial development bonds due April
2023.  (8)
    
    Includes AVSA promissory notes of $12.2 million due 2004 with a variable
interest rate of 2.43% at June 30, 2004.  (9)
    
    Includes non-cancelable operating leases for 136 aircraft with remaining
terms ranging from five months to approximately 20 years. Management
estimates the debt equivalent value of these operating leases approximates
$1.8 billion using an interest rate of 10%. AWA is currently evaluating
the economic viability to continue to operate its leased Boeing 737-200
fleet, particularly given the age of the aircraft and the associated
maintenance cost.  (10)
    
    Includes leases for terminal space, ground facilities, the flight
training center and computer and other equipment under non-cancelable
operating leases.  (11)
    
    Includes Series 1999 Terminal 4 Improvements Bonds, due 2019.  (12)
    
    Includes commitments to purchase a total of 19 Airbus aircraft and three
spare engines for delivery in 2004 through 2007. AWA agreed on a term
sheet to amend its 1999 Airbus purchase contract. The new agreement would
decrease our commitments by $0.5 million and $250.4 million in 2004 and
2007, respectively, offset by increases of $179.4 million in 2005 and
$235.5 million in 2006.  (13)
    
    Includes minimum commitments under AWAs rate per engine hour agreement
with General Electric Engine Services for overhaul maintenance services on
V2500-A1 and CFM56-3B engines through April 2008. Minimum monthly
commitment amounts: for the period through and including July 2004 through
and including April 2006  $2.0 million, for the period May 2006 through
and including April 2008  $500,000. We expect to fund these cash obligations from funds provided by operations
and future financings, if necessary. The cash available to us from these
sources, however, may not be sufficient to cover these cash obligations because
economic factors outside our control may reduce the amount of cash generated by
operations or increase our costs. For instance, a further economic downturn or
other events, including future hostilities and terrorist attacks or infectious
disease outbreaks could reduce the
demand for air travel, which would reduce the amount of cash generated by
operations. An increase in our costs, either due to an increase in borrowing
costs caused by a reduction in our credit rating or a general increase in
interest rates or due to an increase in the cost of fuel, maintenance, aircraft
and aircraft engines and parts, could decrease the amount of cash available to
cover the cash obligations. In addition, we may be required to prepay portions
of the government guaranteed loan if our employee compensation costs exceed a
certain threshold and we may be required to prepay portions of the term loan to
the extent the value of the collateral securing the term loan decreases. In
any of these cases, our liquidity may be adversely affected and we may not have
sufficient cash to prepay the government loan and meet our other obligations.
Moreover, certain of our long-term debt agreements contain a $100 million
minimum cash balance requirement. As a result, we cannot use all of our
available cash to fund operations, capital expenditures and cash obligations
without violating this requirement. Although there can be no assurances, we believe that cash flow from
operating activities coupled with existing cash balances, will be adequate to
fund our operating and capital needs as well as enable us to maintain
compliance with our various debt agreements through at least December 31, 2004. 30




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Financial Covenants and Credit Rating In addition to the minimum cash balance requirements, our long-term debt
agreements contain various negative covenants that restrict our actions,
including our ability to pay dividends, together with any other restricted
payments. Moreover, under the terms of the government guaranteed loan, we are
prohibited from paying cash dividends prior to repayment of the loan in full.
Finally, our long-term debt agreements contain cross-default provisions, which
may be triggered by defaults by us under other agreements relating to
indebtedness. See Risk Factors Relating to America West and Industry Related
Risks  Our high level of indebtedness and fixed costs 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.As of June 30,
2004, Holdings and AWA were in compliance with the covenants in their long-term
debt agreements. In March 2004, Moodys raised its credit ratings on AWA to B3 from Caa1
for its senior implied rating and to Caa2 from Caa3 for its senior unsecured
debt rating. Standard & Poors currently rates AWAs and Holdings corporate
credit ratings at B- and AWAs senior unsecured rating at CCC and Fitch
Ratings rates AWAs long-term and senior unsecured debt rating at CCC. Our
relatively low credit ratings may impair our ability to incur additional
indebtedness. The rating agencies base their ratings on our financial
performance and operations, our cash flow and liquidity, the level of our debt
and industry conditions in general. Any downgrade of our credit ratings may
indicate a decline in our business and in our ability to satisfy our
obligations under our indebtedness. See Risk Factors Relating to America
West and Industry Related Risks  Because of our relatively low credit ratings,
our borrowing costs may be high and our ability to incur additional debt may be
impaired. Other Information Labor Relations On January 13, 2003, negotiations commenced with the Transport Workers
Union (TWU) on a second contract covering the Companys dispatchers. On
September 17, 2003, TWU filed a petition for mediation with the National
Mediation Board (NMB). Mediated discussions began on October 15, 2003 and a
tentative agreement for a new four-year contract was announced on February 20,
2004. On March 26, 2004, TWU informed the Company that a majority of
dispatchers voted against ratification of the tentative agreement. Mediated
negotiations with TWU will resume in August 2004. Negotiations with the International Brotherhood of Teamsters  Airline
Division (IBT) on a second contract covering the Companys mechanics and
related employees commenced on October 9, 2003 and are ongoing. Negotiations with the Association of Flight Attendants  Communications
Workers of America (AFA) on a second contract covering the Companys flight
attendants commenced on February 4, 2004 and are ongoing. On July 7, 2004, the NMB authorized an election among the Companys
passenger service employees in response to an application filed by the IBT.
Telephone electronic voting will take place from July 27 through August 17,
2004. Related Party Transactions As part of our reorganization in 1994, Continental Airlines and AWA
entered into an alliance agreement which included code sharing arrangements,
reciprocal frequent flyer programs and ground handling operations. Continental
terminated the code sharing and frequent flyer agreements between the two
airlines, effective April 26, 2002. In the second quarter of 2004, AWA paid
Continental approximately $4.3 million and also received approximately $1.4
million from Continental pursuant to these agreements. In the second quarter
of 2003, the amount paid to and received from Continental pursuant to these
agreements was $4.5 million and $1.2 million, respectively. 31




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Application of Critical Accounting Policies The preparation of our consolidated financial statements in accordance
with generally accepted accounting principles requires that we make certain
estimates and assumptions that affect the reported amount of assets and
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities at the date of our financial statements. We believe our estimates
and assumptions are reasonable; however, actual results could differ from those
estimates. We have identified the following critical accounting policies that
require the use of significant judgments and estimates relating to matters that
are inherently uncertain and may result in materially different results under
different assumptions and conditions.  
    
    Passenger Revenue  Passenger revenue is recognized when
transportation is provided. Ticket sales for transportation that has
not yet been provided are recorded as air traffic liability. Passenger
traffic commissions and related fees are expensed when the related
revenue is recognized. Passenger traffic commissions and related fees
not yet recognized are included as a prepaid expense. Due to complex
pricing structures, refund and exchange policies, and interline
agreements with other airlines, certain amounts are recognized in
revenue using estimates regarding both the timing of the revenue
recognition and the amount of revenue to be recognized. These estimates
are generally based on the statistical analysis of our historical data.
Any adjustments resulting from periodic evaluations of the estimated air
traffic liability are included in results of operations during the
period in which the evaluations are completed.  
    
    Accounting For Long-Lived Assets  Owned property and equipment are
recorded at cost and depreciated to residual values over the estimated
useful lives using the straight-line method. Leasehold improvements
relating to flight equipment and other property on operating leases are
amortized over the life of the lease, or the life of the asset,
whichever is shorter. Interest on advance payments for aircraft
acquisitions and on expenditures for aircraft improvements is
capitalized and added to the cost of the asset. The estimated useful
lives of our owned aircraft, jet engines, flight equipment and rotable
parts range from five to 25 years. The estimated useful lives of our
technical support facility and flight training center in Phoenix,
Arizona are 22 years and 30 years, respectively. The estimated useful
lives of our ground property and equipment range from three to 12
years. We test for impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might
be impaired as defined by SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets.An impairment loss is recognized if
the carrying amount of the asset is not recoverable from its
undiscounted cash flows and is measured as the difference between the
carrying amount and fair value of the asset.  
    
    Frequent Flyer Accounting  We maintain a frequent travel award
program known as FlightFund that provides a variety of awards to
program members based on accumulated mileage. The estimated cost of
providing the free travel is recognized as a liability and charged to
operations as program members accumulate mileage. Travel awards are
valued at the incremental cost of carrying one passenger, based on
expected redemptions. Incremental costs are based on expectations of
expenses to be incurred on a per passenger basis and include fuel,
liability insurance, food, beverages, supplies and ticketing costs. We
also sell mileage credits to companies participating in our FlightFund
program, such as hotels, car rental agencies and credit card companies.
Transportation-related revenue from the sale of mileage credits is
deferred and recognized when transportation is provided. A change to
the estimated cost per mile, minimum award level, percentage of revenue
to be deferred or deferred recognition period could have a significant
impact on our revenues or mileage liability accrual in the year of the
change as well as future years.  
    
    Long-Term Maintenance Reserve  We record an accrual for the
estimated cost of scheduled airframe and engine overhauls required to be
performed on leased aircraft upon their return to the lessors. These
estimates are based on historical costs and our assumptions regarding
the renewal of aircraft leases. A significant change to AWAs fleet
plan could have a material impact on our reserve requirements. 32




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004  
    
    Deferred Tax Asset Valuation Allowance  The Company initially
recorded a full valuation allowance relating to its net deferred tax
assets at December 31, 2001 and to tax benefits generated in 2002. In
recording that valuation allowance, we considered whether it was more
likely than not that all or a portion of the deferred tax assets will
not be realized, in accordance with SFAS No. 109, Accounting for Income
Taxes.The Company was in a cumulative loss position for the three
years ended December 31, 2002, which weighed heavily in the overall
determination that a valuation allowance was needed. As of June 30,
2004, the Company had recorded a valuation allowance of $61.5 million
against its net deferred tax assets. The Company expects to continue to
record a full valuation allowance on any future tax benefits until we
have achieved several quarters of consecutive profitable results coupled
with an expectation of continued profitability. Forward-Looking Information This quarterly report on Form 10-Q contains various forward-looking
statements within the meaning of Section 21E of the Exchange Act. These
statements are based on managements beliefs as well as assumptions made by and
information currently available to management. When used in this document, the
words anticipate, estimate, expect, project and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated, expected or projected. Among the key factors that may have a direct
bearing on AWAs or Holdings results are:  
    
    economic conditions;  
    
    the impact of global instability, including the continuing impact of
the continued military presence in Iraq and Afghanistan and the
terrorist attacks of September 11, 2001, and the potential impact of any
future hostilities, terrorist attacks, infectious disease outbreaks,
and government responses
thereto, or other global events;  
    
    limitations on the Companys or AWAs ability to obtain additional
financing due to high levels of debt and the financial and other
covenants in its debt instruments;  
    
    changes in federal and state laws and regulations;  
    
    changes in prevailing interest rates and the availability and terms of financing to fund our business;  
    
    the ability to attract and retain qualified personnel;  
    
    the cyclical nature of the airline industry;  
    
    competitive practices in the airline industry;  
    
    the impact of changes in fuel prices; and  
    
    relations with unionized employees generally and the impact and outcome of labor negotiations. For additional discussion of such risks see Business  Risk Factors
Relating to America West and Industry Related Risksdiscussed below. Any
forward-looking statements speak only as of the date of this report. 33




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Risk Factors Relating to America West and Industry Related Risks We caution the reader that these risk factors may not be exhaustive. We
operate in a continually changing business environment and new risk factors
emerge from time to time. Management cannot predict such new risk factors, nor
can it assess the impact, if any, of such new risk factors on our business or
the extent to which any factor or combination of factors may cause actual
results to differ materially from those projected in any forward-looking
statement. In light of these risks, uncertainties and assumptions, the
forward-looking events described in this quarterly report on Form 10-Q might
not occur. In the recent past, we sustained significant operating losses and we may
sustain significant losses in the future. For the years ended December 31, 2002 and 2001, we incurred operating
losses of $160.1 million and $417.9 million, respectively. Although we
reported net income of $57.4 million for the year ended December 31, 2003,
there can be no assurance that we will be able to maintain or grow this level
of net income. Since the terrorist attacks of September 11, 2001, we have
experienced an increase in costs related to enhanced security measures,
aviation insurance and airport rents and landing fees. We expect the threat of
further terrorist attacks and continued instability
in the Middle East to continue to negatively impact our revenues and costs
in the near-term. In addition, we have recently experienced a substantial
increase in the cost of fuel. We may not be able to effectively counteract
increasing costs through our cost reduction initiatives, customer service
initiatives and revised pricing structures. Moreover, our liquidity and
borrowing options are limited and we may not be able to survive a prolonged
economic downturn, further decreases in demand for air travel or further
increases in fuel costs. The inability to sustain profitability may hinder our
ability to satisfy our obligations as they become due, obtain future equity or
debt financing or to do so on economical terms or to sustain or expand our
business. The terrorist attacks of September 11, 2001 and government responses have
had, and continue to have, a material adverse effect on our financial
condition, operations and prospects. The terrorist attacks of September 11, 2001 have had, and continue to
have, a wide-ranging impact on our financial condition, operations and
prospects. The immediate impact of the terrorist attacks included a severe
strain on our liquidity as the government temporarily suspended all flights,
passenger demand dropped precipitously after the attacks and as our credit
ratings were downgraded by both Moodys and Standard & Poors. Since then,
although passenger demand has recovered, we continue to experience reduced
demand compared to prior years, especially in discretionary business travel,
and our costs relating to enhanced security measures, aviation insurance,
airport rents and landing fees have increased, in some cases significantly.
The continued impact of the terrorist attacks on our operations, and the
sufficiency of our financial resources to absorb this impact, will depend on
certain factors, including, among others, the following:  
    
    our ability to maintain our low cost structure and adequate cash balances;  
    
    general economic conditions and the extent to which the current soft economic conditions improve;  
    
    competition in the airline industry;  
    
    our ability to manage fuel and labor costs; and  
    
    the other risks discussed in this report. Moreover, continued global instability (including fuel price
fluctuations), soft economic conditions, future terrorist attacks and
infectious disease outbreaks could
further reduce demand for air travel, increase our fuel, insurance and other
costs and generally impact our liquidity or financial condition. Our ability
to obtain additional financing to absorb the impact of these type of events is
limited by the constraints imposed by our existing indebtedness, reductions in
the value of our aircraft (as a result of the terrorist attacks) and our
relatively low credit ratings. 34




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Increased insurance costs due to the terrorist attacks of September 11,
2001 may adversely impact our operations and financial results. The terrorist attacks of September 11, 2001 resulted in staggering losses
to the insurance industry. These losses led to a significant increase in our
insurance premiums and could lead to future increases in our insurance
premiums. These increases have and could continue to negatively impact our
financial results. In addition, the resulting general instability in the
insurance industry could adversely affect some of our existing insurance
carriers or our ability to obtain future insurance coverage. To the extent
that our existing insurance carriers are unable or unwilling to provide us with
insurance coverage, our insurance costs could further increase. Moreover, since September 11, 2001, AWA and other airlines have been
unable to obtain third party war risk (terrorism) insurance at reasonable rates
from the commercial insurance market and have been obtaining this insurance
through a special program administered by the Federal Aviation Administration,
or FAA. This program has been extended by Vision 100 to a new termination date
of March 30, 2008. If the Federal insurance program terminates, we would
likely face a material increase in the cost of terrorism insurance, but because
of competitive pressures in our industry, our ability to pass this additional
cost to passengers would be limited. Our high level of indebtedness and fixed costs 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 indebtedness. In addition, we have
incurred significant capitalized and operating lease obligations in connection
with the financing of aircraft and the lease of airport and other facilities.
As of June 30, 2004, we had approximately $758.6 million of indebtedness
outstanding, of which $119.1 million was secured by certain aircraft,
substantially all of our spare engines and rotable aircraft parts inventory,
and a maintenance facility. In addition, we had $15.8 million of capital lease
obligations and $3.2 billion of operating lease obligations through the lease
expiration dates incurred primarily in connection with off-balance sheet
aircraft financings. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources -
Off-Balance Sheet Arrangements.We also have guaranteed costs associated with
our regional alliance with Mesa Airlines. Due to our high fixed costs,
including aircraft lease obligations and debt service, a decrease in revenues
results in a disproportionately greater percentage decrease in earnings. In
addition, as a result of our significant indebtedness and fixed costs:  
    
    our ability to satisfy our debt and lease obligations may be
impaired;  
    
    we have only a limited ability to obtain additional financing, if
needed. Our existing indebtedness is secured by a substantial portion
of our assets, leaving us with limited assets to use to obtain
additional financing. In addition, the terms of both the government
guaranteed loan and the term loan restrict our and AWAs ability to
incur additional indebtedness or issue equity unless we use the
proceeds of those transactions to prepay or redeem certain of our
existing indebtedness;  
    
    our ability to fund general corporate requirements, including
capital expenditures, may be impaired. We have substantial obligations
to pay principal and interest on our indebtedness and other recurring
fixed costs. Further, we may be required to prepay portions of the
government guaranteed loan if our employee compensation costs exceed a
certain threshold. Accordingly, we may have to use our working capital
to fund such payments and costs instead of funding general corporate
requirements. In addition, because the terms of certain of AWAs
indebtedness require it to maintain a minimum cash balance of $100
million, we cannot use all of our available cash to fund operations,
capital expenditures and cash obligations without violating this
minimum cash balance requirement; and  
    
    our ability to respond to competitive developments and adverse
economic conditions may be limited. Without the ability to obtain
additional financing and with substantial fixed costs, we may not be
able to fund the capital expenditures, including the purchase of new
aircraft, required to keep us competitive or to withstand prolonged
adverse economic conditions. 35




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Moreover, our flexibility is limited because many of the agreements
governing our indebtedness, including the indenture governing the 103⁄4%
senior notes due 2005 and the agreements governing the government guaranteed
loan and the term loan, contain negative covenants that restrict our ability to
take certain actions. As a result of these restrictive covenants and the
minimum cash balance requirement discussed above, we may be limited in how we
conduct our business and may be unable to raise additional capital through debt
or equity financings to operate during general economic or business downturns,
to compete effectively or to take advantage of new business opportunities. This
may affect our ability to generate revenues and make profits. Without
sufficient revenues, we may not be able to pay interest and principal on
outstanding indebtedness. A breach of these covenants or a failure to make any
required payments under our indebtedness or certain of our aircraft leases
could result in the acceleration of a substantial portion of our indebtedness.
In the event of a breach of these covenants, a failure to make required
payments or an acceleration of our indebtedness, it is likely that credit card
companies would begin to withhold proceeds due to us from the sale of our
tickets and our lessors may attempt to exercise remedies under their respective
leases. In such a situation, it is unlikely we would be able to fulfill our
obligations under or otherwise repay the accelerated indebtedness or make
required lease payments. Fluctuations in fuel costs could adversely affect our operating expenses
and results. The price and supply of jet fuel are unpredictable and fluctuate based on
events outside our control, including geopolitical developments, regional
production patterns and environmental concerns. Since fuel is the principal
raw material consumed by our business, accounting for 21% of our total
operating expenses in the first six months of 2004 and 16% of our total
operating expenses for the same period of 2003, price escalations or
reductions in the supply of jet fuel will increase our operating expenses and
cause our operating results and net income to decline. For example, based on
our current level of fuel consumption, we estimate that a one-cent per gallon
increase in jet fuel prices will cause our annual operating expense to increase
by $4.4 million. We have implemented a fuel-hedging program to manage the risk and effect
of fluctuating jet fuel prices on our business. Our hedging program is
intended to offset increases in jet fuel costs by using derivative instruments
keyed to the future price of heating oil, which is highly correlated to the
price of jet fuel delivered on the East Coast of the United States. Our
hedging program does not fully protect us against increasing jet fuel costs
because our hedging program does not cover all of our projected fuel volumes
for 2004. Hedging transactions are in place with respect to approximately 48%
and 8% of remaining projected 2004 and 2005 fuel requirements, respectively.
Furthermore, our ability to effectively hedge fuel prices is limited because we
purchase a substantially larger portion of our jet fuel requirements on the
West Coast of the United States compared to our large competitors and West
Coast fuel prices are less correlated to heating oil prices and other viable
petroleum derivatives than East Coast fuel prices and, therefore, more
difficult to hedge. The effectiveness of our fuel-hedging program may also be
negatively impacted by continued instability in the Middle East and terrorist
activity. Because of our relatively low credit ratings, our borrowing costs may be
high and our ability to incur additional debt may be impaired. Our credit ratings are relatively low, with Moodys assessment of AWAs
senior implied rating and senior unsecured debt rating at B3 and Caa2,
respectively, Standard & Poors assessment of AWAs and Holdings corporate
credit ratings at B- and AWAs senior unsecured rating at CCC, and Fitch
Ratings assessment of AWAs long-term and senior unsecured debt rating at CCC.
Low credit ratings could cause our future borrowing costs to increase, which
would increase our interest expense and could affect our net income. In
addition, our credit ratings could adversely affect our ability to obtain
additional financing. The rating agencies base their ratings on our financial
performance and operations, our cash flow and liquidity, the level of our
indebtedness and industry conditions in general. If our financial performance
or industry conditions do not improve, we may face future downgrades, which
could further negatively impact our borrowing costs and the prices of our
equity or debt securities. In addition, any downgrade of our credit ratings
may indicate a decline in our business and in our ability to satisfy our
obligations under our indebtedness. 36




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 Negotiations with labor unions could divert management attention and
disrupt operations and new collective bargaining agreements or amendments to
existing collective bargaining agreements could increase our labor costs and
operating expenses. Some of our employees are represented by unions and other groups of our
employees may seek union representation in the future. On January 13, 2003,
negotiations commenced with the TWU on a second contract covering the Companys
dispatchers. On September 17, 2003, the TWU filed a petition for mediation
with the NMB. Mediated discussions began on October 15, 2003 and a tentative
agreement for a new four-year contract was announced on February 20, 2004. On
March 26, 2004, the TWU informed the Company that a majority of dispatchers
voted against ratification of the tentative agreement. Mediated negotiations
with the TWU will resume in August 2004. Negotiations with the IBT for a second
collective bargaining agreement covering the Airlines mechanics and related
employees commenced on October 9, 2003 and are ongoing. Additionally,
negotiations with the AFA on a second contract covering the Companys flight
attendants commenced on February 4, 2004 and are ongoing. On July 7, 2004, the
NMB authorized an election among the Companys passenger service employees in
response to an application filed by the IBT. Telephone electronic voting will
take place from July 27 through August 17, 2004. We
cannot predict the outcome of the passenger service employees election or the
negotiations with the TWU, IBT or AFA or any future negotiations relating to
union representation or collective bargaining agreements. Agreements reached
in collective bargaining may increase operating expenses and lower operating
results and net income. This is particularly significant because our current
employee costs contribute substantially to the low cost structure that we
believe is one of our competitive strengths and because we are required to
repay a portion of the government guaranteed loan if our labor costs exceed a
certain threshold. In addition, negotiations with unions could divert
management attention and disrupt operations, which may result in increased
operating expenses and lower net income. If we are unable to negotiate
acceptable collective bargaining agreements, we might have to address the
threat of, or wait through cooling off periods, which could be followed by
union-initiated work actions, including strikes. Depending on the nature of
the threat or the type and duration of any work action, these actions could
disrupt our operations and, as a result, have a significant adverse affect on
our operating results. Fluctuations in interest rates could adversely affect our liquidity,
operating expenses and results. Our indebtedness under both the government guaranteed loan and the term
loan bears interest at fluctuating interest rates based on the London interbank
offered rate for deposits of U.S. dollars, or LIBOR. LIBOR tends to fluctuate
based on general economic conditions, general interest rates, including the
prime rate, 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. To
the extent LIBOR increases, 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. Our operating costs could increase as a result of past, current or new
regulations that impose additional requirements and restrictions on airline
operations. The airline industry is heavily regulated. Both federal and state
governments from time to time propose new laws and regulations that impose
additional requirements and restrictions on airline operations. Implementing
these measures, such as aviation ticket taxes and passenger safety measures,
has increased operating costs for us and the airline industry as a whole. In
addition, new security measures imposed by the Aviation and Transportation
Security Act, or ATSA, or otherwise by Congress, the Department of Homeland
Security or the FAA as a result of concern over continuing terrorist threats
are expected to continue to increase costs for us and the airline industry as a
whole. Depending on the implementation of these laws and other measures, our
operating costs could increase significantly. Certain governmental agencies,
such as the DOT and the FAA, have the authority to impose mandatory orders,
such as Airworthiness Directives in connection with our aircraft and civil
penalties for violations of applicable laws and regulations, each of which can
result in material costs and adverse publicity. We cannot predict which laws
and regulations will be adopted or what other action regulators might take.
Accordingly, we cannot guarantee that future legislative and regulatory acts
will not have a material impact on our operating results. 37




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 The airline industry and the markets we serve are highly competitive and
we may be unable to compete effectively against carriers with substantially
greater resources or lower cost structures. The airline industry and most of the markets we serve are highly
competitive. We compete with other airlines on the basis of pricing,
scheduling (frequency and flight times), on-time performance, type of
equipment, cabin configuration, amenities provided to passengers, frequent
flyer programs, the automation of travel agent reservation systems, on-board
products and other services. Certain airlines have in the past engaged in
retaliatory activities, including steep pricing discounts in certain markets
and termination of alliance agreements, in response to changes in our pricing
structure. In addition, the elimination of federal regulations that are
intended to diminish the use of preferential scheduling displays and other CRS
practices may place us at a competitive disadvantage to airlines controlling
the CRS systems. Our principal competitor is Southwest Airlines, which has a
lower operating cost structure than we do. We also compete against other
existing carriers, many of which offer more extensive routes, frequencies and
customer loyalty, marketing and advertising programs than we do and with new
carriers which typically have low operating cost structures. We may be unable
to compete effectively against carriers with substantially greater resources or
lower cost structures. The entry of additional new carriers in our markets,
the consolidation of existing carriers or increased competition from existing
carriers, could adversely affect our operating results. The terrorist attacks of September 11, 2001, the continued military
presence in Iraq and Afghanistan, and the current soft economic conditions have
led to the airline industrys significant losses since 2001. Largely as a
result of these losses, both U.S. Airways and United Airlines filed for
bankruptcy protection. Because bankruptcy protection may allow for greater
flexibility in reducing costs by voiding contracts and renegotiating existing
business obligations, current and future airline bankruptcies could have a
substantial impact on industry competition. Continued weakness in the airline
industry may also result in additional industry consolidation, greater reliance
on industry alliances and increased price competition among the existing
airlines, each of which could dramatically alter competitive environments in
the markets we serve. Our business is sensitive to general economic conditions, unforeseen
events and seasonal fluctuations. As a result, our prior performance is not
necessarily indicative of our future results. The air travel business historically fluctuates on a seasonal basis and in
response to general economic conditions. Due to the greater demand for air and
leisure travel during the summer months, revenues in the airline industry in
the second and third quarters of the year tend to be greater than revenues in
the first and fourth quarters of the year. In addition, the airline industry
is highly susceptible to unforeseen events that result in declines in revenues
or increased costs, such as political instability, regional hostilities,
terrorist attacks, recession, fuel price escalation, inflation, infectious
disease outbreaks, adverse weather conditions, consumer preferences, labor
instability or regulatory
oversight. Also, our results of operations for interim periods are not
necessarily indicative of those for an entire year and our prior results are
not necessarily indicative of our future results. We depend on the expertise of our management team. If key individuals
leave unexpectedly, our business and operations could suffer. Many of our executive officers are key to the management of our business
and operations. Our future success depends on our ability to retain these
officers and other capable managers. Although we believe we could replace key
personnel given adequate prior notice, the unexpected departure of key
executive officers could cause substantial disruption to our business and
operations. In addition, we may not be able to retain and recruit talented
personnel without incurring substantial costs. Moreover, we must repay a
portion of the government guaranteed loan if our labor costs exceed a certain
threshold. As a result, our ability to spend additional amounts to retain and
recruit talented personnel is limited. 38




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 The stockholders who effectively control the voting power of Holdings
could take actions that would favor their own personal interests to the
detriment of our interests. Currently, two stockholders collectively control more than 50% of the
total voting power of Holdings. These stockholders, TPG Partners, L.P. and TPG
Parallel I, L.P (collectively, the TPG Stockholders) are controlled by the
same company, TPG Advisors, Inc. Since TPG Advisors, Inc. is an investment
firm, its strategic objectives may be different than both the short-term or
long-term objectives of our board of directors and management. We cannot
guarantee that the TPG Stockholders will not try to influence Holdings
business in a way that would favor their own personal interests to the
detriment of our interests and those of our other stockholders. We are at risk of losses and adverse publicity stemming from any accident
involving any of our aircraft. If one of our aircraft were to crash or be involved in an accident, we
could be exposed to significant tort liability. There can be no assurance that
the insurance we carry to cover damages arising from any future accidents will
be adequate. In the event that our insurance is not adequate, we may be forced
to bear substantial losses from an accident. Claims resulting from an accident
in excess of our insurance coverage would harm our business and results of
operations. Accidents could also result in unforeseen mechanical and
maintenance costs. In addition, any accident involving an aircraft that we
operate could create a public perception that our aircraft are not safe or
reliable, which could harm our reputation, result in air travelers being
reluctant to fly on our aircraft and harm our business. Our operations are often affected by factors beyond our control, including
traffic congestion at airports, weather conditions and increased security
measures, any of which could harm our financial condition and results of
operations. Like other airlines, our operations are subject to delays caused by
factors beyond our control, including air traffic congestion at airports,
adverse weather conditions and increased security measures, such as those
required to be implemented under the ATSA. During periods of fog, snow, rain,
storms or other adverse weather conditions, flights may be cancelled or
significantly delayed. Cancellations and delays frustrate passengers, reduce
aircraft utilization and increase costs, all of which in turn affect
profitability. As a result, cancellations or delays could harm our financial
condition and results of operations. We rely heavily on automated systems to operate our business and any
failure of these systems could harm our business. We depend on automated systems to operate our business, including our
computerized airline reservation system, our telecommunication systems and our
website. For the first six months of 2003, approximately 96% of our tickets
were issued electronically. Our website and reservation system must be able to
accommodate a high volume of traffic and deliver important flight information.
Substantial or repeated website, reservations system or telecommunication
systems failures could reduce the attractiveness of our services and could
cause our customers to purchase tickets from another airline. Any disruption
in these systems could result in the loss of important data, increase our
expenses and generally harm our business. Shares of our Class B common stock issuable upon exercise or conversion of
outstanding securities could adversely affect our stock price and dilute the
ownership interests of existing stockholders. Sales and potential sales of substantial amounts of our Class B common
stock or securities exercisable for or into our Class B common stock in the
public market, or the perception that these sales could occur, could adversely
affect the market price of our Class B common stock. A substantial number of
additional shares of our Class B common stock are issuable upon the conversion
or exercise of outstanding securities. As of July 21, 2004, the outstanding
shares of our Class B common stock were subject to dilution by:  
    
    19,692,000 shares of Class B common stock that are issuable upon
the exercise, at a price of $3.00 per share, of certain warrants issued
in connection with the government guaranteed loan, including 18,754,000
shares of Class B common stock issuable upon exercise of a warrant
issued to the ATSB; and 39




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AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004  
    
    10,107,742 shares of our Class B common stock that are issuable
upon the exercise of outstanding options. In addition, 859,117 shares of Class B common stock are issuable upon
conversion of the outstanding shares of Holdings Class A common stock held by
the TPG Stockholders (but subject to certain contractual restrictions on
transfer), up to 8,095,891 shares of Holdings Class B common stock will be
issuable upon the exchange of AWAs 7.25% senior exchangeable notes due 2023
(which exchange may not occur until the trading price of Holdings Class B
common stock reaches certain thresholds, or other triggering events occur) and
up to approximately 9,400,000 shares of Holdings Class B common stock will be
issuable after January 18, 2005 upon conversion of Holdings 7.5% convertible
senior notes due 2009. Holdings has registered either the issuance or resale
of all of these shares, meaning that upon exercise, exchange or conversion, as
applicable, such shares could be sold in the public market at any time. The conversion or exercise of some or all of these notes, warrants and
options will dilute the ownership interests of existing stockholders and any
sales in the public market of our Class B common stock issuable upon such
conversion or exercise could adversely affect prevailing market prices of our
Class B common stock. In addition, the existence of the notes, warrants and
options may encourage short selling by market participants because conversion
or exercise of the notes or warrants could depress the price of our Class B
common stock. Provisions in our charter documents might deter acquisition bids for us. Holdings Certificate of Incorporation and Restated Bylaws contain
provisions that, among other things:  
    
    authorize Holdings board of directors to issue preferred stock
ranking senior to our Class B common stock without any action on the
part of the stockholders;  
    
    establish advance notice procedures for stockholder proposals,
including nominations of directors, to be considered at stockholders
meetings;  
    
    authorize Holdings board of directors to fill vacancies on the
board resulting from an increase in the authorized number of directors
or any other cause; and  
    
    restrict the ability of stockholders to call special meetings of
stockholders. These provisions might make it more difficult for a third party to acquire
us, even if doing so would benefit the stockholders. Our stock price may continue to be volatile and could decline
substantially. The stock market has, from time to time, experienced extreme price and
volume fluctuations. Many factors may cause the market price for the Class B
common stock to decline including, among others, the following:  
    
    our operating results failing to meet the expectations of securities analysts or investors in any quarter;  
    
    downward revisions in securities analysts estimates;  
    
    material announcements by us or our competitors;  
    
    public sales of a substantial number of shares of our Class B common stock;
    
    governmental regulatory action; and  
    
    adverse changes in general market conditions or economic trends. 40




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\

AMERICA WEST HOLDINGS CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market Risk Sensitive Instruments (a) Commodity Price Risk As of June 30, 2004, the Company had entered into basis swaps, the price
spread between Los Angeles spot jet fuel prices and NYMEX heating oil futures,
and costless collar transactions, which establish an upper and lower limit on
heating oil futures prices. These transactions are in place with respect to
approximately 48% of remaining projected 2004 fuel requirements, including 50%
related to the third quarter of 2004 and 46% related to the fourth quarter of
2004. Transactions are in place with respect to approximately 8% of the
projected requirements for 2005, including 31% related to the first quarter of
2005. See Risk Factors Relating to America West and Industry Related Risks -
Fluctuations in fuel costs could adversely affect our operating expenses and
results. The use of such hedging transactions in the Companys fuel hedging program
could result in the Company not fully benefiting from certain declines in
heating oil futures prices or certain declines in the differential between jet
fuel and heating oil futures prices. At June 30, 2004, the Company estimates
that a 10% increase in heating oil futures prices would increase the fair value
of the costless collar transactions by approximately $2.2 million and $0.3
million for our 2004 and 2005 requirements, respectively. The Company
estimates that a 10% decrease in heating oil futures prices would decrease the
fair value of the costless collar transactions by approximately $2.4 million
for our 2004 requirements and have relatively no impact for our 2005
requirements. As of July 21, 2004, approximately 48% and 8% of AWAs 2004 and 2005,
respectively, projected fuel requirements are hedged. (b) Interest Rate Risk The Companys exposure to interest rate risk relates primarily to its
variable rate long-term debt obligations. At June 30, 2004, the Companys
variable-rate long-term debt obligations of approximately $515.1 million
represented approximately 68% of its total long-term debt. If interest rates
increased 10% in 2004, the impact on the Companys results of operations would
not be material. ITEM 4. CONTROLS AND PROCEDURES. An evaluation was performed under the supervision and with the
participation of Holdings and AWAs management, including the Chief Executive
Officer (the CEO) and Chief Financial Officer (the CFO), of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in the rules promulgated under the Securities and
Exchange Act of 1934, as amended) as of June 30, 2004. Based on that
evaluation, our management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective as of June 30, 2004. There
were no significant changes in our internal control over financial reporting
during the period covered by this report reasonably likely to materially affect
our internal control over financial reporting. We believe that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and the CEO and CFO have
concluded that these controls and procedures are effective at the reasonable
assurance level. 41




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AMERICA WEST HOLDINGS
CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 
 PART II  OTHER INFORMATION 
  ITEM 2.
    CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table sets forth all purchases made by us or any affiliated
purchaser as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of
1934, as amended (the Exchange Act), of our Class B common stock during each
month within the second quarter of 2004. No purchases were made pursuant to a
publicly announced repurchase plan or program. (d) Maximum Number(c) Total Number of
    
    (or ApproximateShares Purchased as
    
    Dollar Value) ofPart of Publicly
    
    Shares that May Yet(a) Total Number of
    
    (b) Average Price
    
    Announced Plans or
    
    be Purchased UnderPeriod
    
    Shares Purchased (1)
    
    Paid per Share
    
    Programs
    
    the Plans or ProgramsApril 1, 2004 - April 30,
2004
    
    
    23,300
    
    
    
    10.11
    
    
    
    
    
    
    
    May 1, 2004 - May 31, 2004
    
    
    96,200
    
    
    
    10.31
    
    
    
    
    
    
    
    June 1, 2004 - June 30, 2004
    
    
    26,900
    
    
    
    9.50
    
    
    
    
    
    
    
    
  (1)
    
    Amounts consist of shares of our Class B common stock purchased on the
open market by the America West Holdings Corporation Future Care 401(k)
Plan.] 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The results of voting at our annual meeting of stockholders held on May
20, 2004 (the Annual Meeting) are set forth below: 1. The stockholders approved the election of the following directors to
hold office until the Companys annual meeting in 2007 and until their
successors are elected and qualified, or until their earlier death or
resignations. Number of SharesFor
    
    WithheldWalter T. Klenz
    
    
    74,077,877
    
    
    
    2,392,678Richard C. Kraemer
    
    
    73,901,822
    
    
    
    2,568,733Denise M. OLeary
    
    
    73,596,987
    
    
    
    2,873,568
 The following directors term of office as a director continued after the
Annual Meeting: Herbert M. Baum, John L. Goolsby, Robert J. Miller, W.
Douglas Parker, Richard P. Schifter, John F. Tierney and J. Steven Whisler. 2. The stockholders approved an amendment to the America West Holdings
Corporation Certificate of Incorporation to increase the number of authorized
shares of Class B common stock from 100,000,000 to 200,000,000 shares. Number of SharesFor
    
    
    65,295,907Against
    
    
    11,076,250Abstain
    
    
    98,396
 3. The stockholders did not approve a stockholder proposal which is more
fully described in the proxy statement relating to the Annual Meeting. Number of SharesFor
    
    
    2,793,941Against
    
    
    17,797,978Abstain
    
    
    540,929Broker Non-Votes
    
    
    12,142,386
 42




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AMERICA WEST HOLDINGS
CORPORATION AND
AMERICA WEST AIRLINES, INC.
June 30, 2004 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.  a. Exhibits EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Certificate of Amendment to Certificate of Incorporation of America
West Holdings Corporation, as amended May 24, 2004.10.1
    
    Amendment No. 2 to Amended and
Restated Term Loan Agreement, dated as of June 28, 2004, among
AWA, the lenders from time to time party thereto, Mizuho Corporate
Bank, Ltd., Mizuho Global, Ltd., Citicorp USA, Inc. and Deutsch Bank
Trust Company Americas.31.1
    
    Certification of Holdings Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Holdings Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.31.3
    
    Certification of AWAs Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.31.4
    
    Certification of AWAs Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Holdings Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
    
    Certification of AWAs Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  b. Reports on Form 8-KHoldings and AWA filed a report on Form 8-K, dated June 4, 2004,
furnishing under Item 12 a press release dated June 3, 2004 announcing
certain traffic statistics for May 2004.Holdings and AWA filed a report on Form 8-K, dated May 5, 2004,
furnishing under Item 12 a press release dated May 4, 2004 announcing
certain traffic statistics for April 2004.Holdings and AWA filed a report on Form 8-K, dated April 20, 2004,
furnishing under Item 12 a press release dated April 20, 2004 announcing
the Companys results for three months ended March 31, 2004.Holdings and AWA filed a report on Form 8-K, dated April 6, 2004,
furnishing under Item 12 a press release dated April 5, 2005 announcing
certain traffic statistics for March 2004. 43




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AMERICA WEST HOLDINGS
CORPORATION
June 30, 2004 
 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. AMERICA WEST HOLDINGS CORPORATIONBy
    /s/ Derek J. KerrDerek J. KerrSenior Vice President and Chief Financial Officer DATED: July 21, 2004 44




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AMERICA WEST AIRLINES, INC.
June 30, 2004 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. AMERICA WEST AIRLINES, INC.By
    /s/ Derek J. KerrDerek J. KerrSenior Vice President and Chief Financial Officer DATED: July 21, 2004 45




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EXHIBIT INDEX EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Certificate of Amendment to Certificate of Incorporation of America
West Holdings Corporation, as amended May 24, 2004.10.1
    
    Amendment No. 2 to Amended and
Restated Term Loan Agreement, dated as of June 28, 2004, among
AWA, the lenders from time to time party thereto, Mizuho Corporate
Bank, Ltd., Mizuho Global, Ltd., Citicorp USA, Inc. and Deutsch Bank
Trust Company Americas.31.1
    
    Certification of Holdings Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Holdings Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.31.3
    
    Certification of AWAs Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.31.4
    
    Certification of AWAs Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Holdings Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
    
    Certification of AWAs Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.