##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2006
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 
 US Airways Group, Inc.
    
 America West Airlines, Inc.
    
 US Airways, Inc.
    
 
 
 þ o
  US Airways Group, Inc.
    
    Large accelerated filer
    
    o
    
    Accelerated filer
    
    þ
    
    Non-accelerated filer
    
    oAmerica West
Airlines, Inc.
    
    Large accelerated filer
    
    o
    
    Accelerated filer
    
    o
    
    Non-accelerated filer
    
    þUS Airways, Inc.
    
    Large accelerated filer
    
    o
    
    Accelerated filer
    
    o
    
    Non-accelerated filer
    
    þ
  US Airways Group, Inc.
    
    Yes
    o
    

    
    No
    þAmerica West Airlines, Inc.
    
    Yes
    o
    

    
    No
    þUS Airways, Inc.
    
    Yes
    o
    

    
    No
    þ
  US Airways Group, Inc.
    
    Yes
    þ
    


    
    No
    oUS Airways, Inc.
    
    Yes
    þ
    

    
    No
    o




---



##### 



US Airways Group, Inc.
Form 10-Q
Quarterly Period Ended June 30, 2006
 Table of Contents
 PagePart I.
    
    Financial InformationItem 1A.
    
    Condensed Consolidated Financial Statements of US Airways Group, Inc.Condensed Consolidated Statements of Operations
    
    4Condensed Consolidated Balance Sheets
    
    6Condensed Consolidated Statements of Cash Flows
    
    7Notes to the Condensed Consolidated Financial Statements
    
    8Item 1B.
    
    Condensed Consolidated Financial Statements of America West Airlines, Inc.Condensed Consolidated Statements of Operations
    
    21Condensed Consolidated Balance Sheets
    
    22Condensed Consolidated Statements of Cash Flows
    
    23Notes to the Condensed Consolidated Financial Statements
    
    24Item 1C.
    
    Condensed Financial Statements of US Airways, Inc.Condensed Statements of Operations
    
    33Condensed Balance Sheets
    
    34Condensed Statements of Cash Flows
    
    35Notes to the Condensed Financial Statements
    
    36Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    49Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    79Item 4.
    
    Controls and Procedures
    
    80Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    81Item 1A.
    
    Risk Factors
    
    84Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    93Item 6.
    
    Exhibits
    
    94Signatures
    
    95EX-10.1EX-10.3EX-31.1EX-31.2EX-31.3EX-31.4EX-31.5EX-31.6EX-32.1EX-32.2EX-32.3
  1




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##### Table of Contents



Note Concerning Forward-Looking Statements
  
    
    the impact of significant disruptions in the supply of aircraft fuel and historically
high fuel prices;
    
    our high level of fixed obligations;
    
    our ability to integrate the management, operations and labor groups of US Airways
Group and America West Holdings;
    
    our ability to achieve the synergies anticipated as a result of the merger and to
achieve those synergies in a timely manner;
    
    the impact of continued significant operating losses;
    
    labor costs and relations with unionized employees generally and the impact and outcome
of labor negotiations;
    
    changes in prevailing interest rates;
    
    reliance on automated systems and the impact of any failure of these systems;
    
    our ability to obtain and maintain normal terms with vendors and service providers;
    
    security-related and insurance costs;
    
    the impact of global instability, including the current instability in the Middle East,
the continuing impact of the military presence in Iraq and Afghanistan and the terrorist
attacks of September 11, 2001 and the potential impact of future hostilities, terrorist
attacks, infectious disease outbreaks or other global events;
    
    changes in government legislation and regulation;
 2




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##### Table of Contents




    
    our ability to use pre-merger NOLs and certain other tax attributes;
    
    competitive practices in the industry, including significant fare restructuring
activities, capacity reductions and in court or out of court restructuring by major
airlines;
    
    continued existence of prepetition liabilities;
    
    weather conditions;
    
    our ability to obtain and maintain any necessary financing for operations and other purposes;
    
    our ability to maintain adequate liquidity;
    
    our ability to maintain contracts that are critical to our operations;
    
    our ability to operate pursuant to the terms of our financing facilities (particularly
the financial covenants);
    
    our ability to attract and retain customers;
    
    the cyclical nature of the airline industry;
    
    our ability to attract and retain qualified personnel;
    
    economic conditions; and
    
    other risks and uncertainties listed from time to time in our reports to the Securities
and Exchange Commission.
  
 Part I. Financial Information
  3




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating RevenuesMainline passenger
    
    $
    2,186
    
    
    $
    657
    
    
    $
    3,996
    
    
    $
    1,234Express passenger
    
    
    780
    
    
    
    129
    
    
    
    1,392
    
    
    
    233Cargo
    
    
    37
    
    
    
    8
    
    
    
    74
    
    
    
    17Other
    
    
    188
    
    
    
    51
    
    
    
    378
    
    
    
    96Total Operating Revenues
    
    
    3,191
    
    
    
    845
    
    
    
    5,840
    
    
    
    1,580Operating ExpensesAircraft fuel and related taxes
    
    
    669
    
    
    
    199
    
    
    
    1,223
    
    
    
    359Gain on fuel hedging instruments, net
    
    
    (29
    )
    
    
    (9
    )
    
    
    (56
    )
    
    
    (69
    )Salaries and related costs
    
    
    542
    
    
    
    174
    
    
    
    1,045
    
    
    
    349Express expenses
    
    
    660
    
    
    
    136
    
    
    
    1,276
    
    
    
    247Aircraft rent
    
    
    180
    
    
    
    81
    
    
    
    365
    
    
    
    158Aircraft maintenance
    
    
    153
    
    
    
    66
    
    
    
    291
    
    
    
    120Other rent and landing fees
    
    
    145
    
    
    
    46
    
    
    
    285
    
    
    
    87Selling expenses
    
    
    121
    
    
    
    44
    
    
    
    228
    
    
    
    81Special items, net
    
    
    35
    
    
    
    
    
    
    
    (9
    )
    
    
    1Depreciation and amortization
    
    
    45
    
    
    
    12
    
    
    
    90
    
    
    
    23Other
    
    
    328
    
    
    
    83
    
    
    
    635
    
    
    
    166Total operating expenses
    
    
    2,849
    
    
    
    832
    
    
    
    5,373
    
    
    
    1,522Operating income
    
    
    342
    
    
    
    13
    
    
    
    467
    
    
    
    58Nonoperating income (expense)Interest income
    
    
    41
    
    
    
    2
    
    
    
    66
    
    
    
    4Interest expense, net
    
    
    (72
    )
    
    
    (20
    )
    
    
    (147
    )
    
    
    (39
    )Other, net
    
    
    
    
    
    
    2
    
    
    
    (11
    )
    
    
    2Nonoperating expense, net
    
    
    (31
    )
    
    
    (16
    )
    
    
    (92
    )
    
    
    (33
    )Income (loss) before income taxes and cumulative effect
of change in accounting principle
    
    
    311
    
    
    
    (3
    )
    
    
    375
    
    
    
    25Income tax provision
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    Income (loss) before cumulative effect of change in
accounting principle
    
    
    305
    
    
    
    (3
    )
    
    
    369
    
    
    
    25Cumulative effect of change in accounting principle, net
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (202
    )Net income (loss)
    
    $
    305
    
    
    $
    (3
    )
    
    $
    370
    
    
    $
    (177
    )Unaudited pro forma net income (loss) assuming change in
method of accounting was applied retroactively (Note 1)
    
    $
    305
    
    
    $
    (3
    )
    
    $
    369
    
    
    $
    25
 4




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Earnings (loss) per common share:Basic:Before cumulative effect of change in accounting principle
    
    $
    3.55
    
    
    $
    (0.20
    )
    
    $
    4.40
    
    
    $
    1.70Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    (13.59
    )Net income (loss) per common share
    
    
    3.55
    
    
    
    (0.20
    )
    
    
    4.41
    
    
    
    (11.89
    )Diluted:Before cumulative effect of change in accounting
principle
    
    $
    3.25
    
    
    $
    (0.20
    )
    
    $
    4.02
    
    
    $
    1.31Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    (9.20
    )Net income (loss) per common share
    
    
    3.25
    
    
    
    (0.20
    )
    
    
    4.03
    
    
    
    (7.89
    )Shares used for computation (in thousands):Basic
    
    
    85,886
    
    
    
    14,863
    
    
    
    83,794
    
    
    
    14,856Diluted
    
    
    94,673
    
    
    
    14,863
    
    
    
    94,012
    
    
    
    21,943
  5




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    1,097
    
    
    $
    1,125Short-term investments
    
    
    1,123
    
    
    
    452Restricted cash
    
    
    4
    
    
    
    8Accounts receivable, net
    
    
    467
    
    
    
    353Materials and supplies, net
    
    
    228
    
    
    
    229Prepaid expenses and other
    
    
    498
    
    
    
    392Total current assets
    
    
    3,417
    
    
    
    2,559Property and equipmentFlight equipment
    
    
    1,985
    
    
    
    1,920Ground property and equipment
    
    
    557
    
    
    
    532Less accumulated depreciation and amortization
    
    
    (498
    )
    
    
    (431
    )2,044
    
    
    
    2,021Equipment purchase deposits
    
    
    40
    
    
    
    43Total property and equipment
    
    
    2,084
    
    
    
    2,064Other assetsGoodwill
    
    
    701
    
    
    
    732Other intangibles, net
    
    
    567
    
    
    
    583Restricted cash
    
    
    984
    
    
    
    792Other assets, net
    
    
    235
    
    
    
    234Total other assets
    
    
    2,487
    
    
    
    2,341Total assets
    
    $
    7,988
    
    
    $
    6,964LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent maturities of debt and capital leases
    
    $
    113
    
    
    $
    211Accounts payable
    
    
    469
    
    
    
    457Air traffic liability
    
    
    1,214
    
    
    
    788Accrued compensation and vacation
    
    
    230
    
    
    
    210Accrued taxes
    
    
    191
    
    
    
    146Other accrued expenses
    
    
    861
    
    
    
    847Total current liabilities
    
    
    3,078
    
    
    
    2,659Noncurrent liabilities and deferred creditsLong-term debt and capital leases, net of current maturities
    
    
    2,903
    
    
    
    2,749Deferred gains and credits
    
    
    229
    
    
    
    254Employee benefit liabilities and other
    
    
    851
    
    
    
    882Total noncurrent liabilities and deferred credits
    
    
    3,983
    
    
    
    3,885Commitments and contingenciesStockholders equityPreferred stock, $0.01 par value; 48,800,000 shares authorized, no shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value; 200,000,000 shares authorized, 87,003,337 shares
outstanding at June 30, 2006; 81,668,989 shares outstanding at December 31, 2005
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    1,395
    
    
    
    1,258Accumulated deficit
    
    
    (456
    )
    
    
    (826
    )Treasury stock, common stock, 413,993 shares at June 30, 2006 and December 31, 2005
    
    
    (13
    )
    
    
    (13
    )Total stockholders equity
    
    
    927
    
    
    
    420Total liabilities and stockholders equity
    
    $
    7,988
    
    
    $
    6,964
  6




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##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005Net cash provided by operating activities
    
    $
    675
    
    
    $
    224Cash flows from investing activitiesPurchases of property and equipment
    
    
    (113
    )
    
    
    (97
    )Purchase of short-term investments
    
    
    (980
    )
    
    
    (284
    )Sales of short-term investments
    
    
    309
    
    
    
    234Increase in long-term restricted cash
    
    
    (193
    )
    
    
    (20
    )Proceeds from disposition of assets
    
    
    2
    
    
    
    1Net cash used for investing activities
    
    
    (975
    )
    
    
    (166
    )Cash flows from financing activitiesRepayments of debt
    
    
    (1,128
    )
    
    
    (87
    )Proceeds from issuance of debt
    
    
    1,375
    
    
    
    Proceeds from issuance of common stock, net
    
    
    25
    
    
    
    Other
    
    
    
    
    
    
    (4
    )Net cash provided by (used for) financing activities
    
    
    272
    
    
    
    (91
    )Net decrease in cash and cash equivalents
    
    
    (28
    )
    
    
    (33
    )Cash and cash equivalents at beginning of period
    
    
    1,125
    
    
    
    149Cash and cash equivalents at end of period
    
    $
    1,097
    
    
    $
    116Non-cash investing and financing activitiesReclassification of investments in debt securities to
short-term investments
    
    $
    
    
    
    $
    30Notes payable issued under aircraft purchase agreement
    
    
    
    
    
    
    9Notes payable cancelled under aircraft purchase agreement
    
    
    4
    
    
    
    7Conversion
of 7.5% Convertible Senior Notes, net of discount of $17 million
to common stock
    
    
    95
    
    
    
    Equipment
purchases financed by capital leases
    
    
    3
    
    
    
    Supplemental informationCash paid for interest, net of amounts capitalized
    
    $
    124
    
    
    $
    Income taxes paid
    
    
    3
    
    
    
    
  7




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##### Table of Contents



US Airways Group, Inc.
 
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. Basis of presentation and summary of significant accounting policies
      8




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##### Table of Contents



Frequent Traveler Program
   2. Special items
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Airbus restructuring (a)
    
    $
    
    
    
    $
    
    
    
    $
    (90
    )
    
    $
    Merger related transition expenses (b)
    
    
    35
    
    
    
    
    
    
    
    81
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Special items, net
    
    $
    35
    
    
    $
    
    
    
    $
    (9
    )
    
    $
    1
 
 (a)
    
    In connection with the merger and the Airbus Memorandum of Understanding (Airbus
MOU) executed between US Airways Group, US Airways and AWA, certain aircraft firm orders were
restructured. In connection with that restructuring, US Airways Group and America West
Holdings were required to pay restructuring fees totaling $89 million by means of set-off
against existing equipment deposits of US Airways and AWA held by Airbus of $39 million and
$50 million, respectively. Also in connection with the Airbus MOU, US Airways and AWA entered
into two loan agreements with commitments of up to $161 million and $89 million. As described
in further detail in Note 5, on March 31, 2006, the outstanding principal and accrued interest
on the $89 million loan was forgiven upon repayment in full of the $161 million loan in
accordance with the terms of the Airbus Loans. As a result, the Company recognized a gain
associated with the return of these equipment deposits upon forgiveness of the loan totaling
$90 million, consisting of the $89 million in equipment deposits and accrued interest of $1
million. 9




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##### Table of Contents



(b)
    
    In connection with the merger, the Company incurred $35 million of transition and merger
integration costs in the second quarter of 2006. These items included $8 million in personnel
costs primarily for severance, retention payments and stock awards, $11 million of costs
associated with the integration of the AWA FlightFund and US Airways Dividend Miles frequent
traveler programs, $2 million in merger related aircraft lease return expenses, $2 million of
aircraft livery costs, $8 million in professional and technical fees, including continuing
professional fees associated with US Airways bankruptcy proceedings, $2 million in employee
moving expenses, $1 million of transition-related sales and marketing program expenses and $1
million in other expenses.In connection with the merger, the Company incurred $81 million of transition and merger
integration costs in the first six months of 2006. These items included $29 million in
personnel costs primarily for severance, retention payments and stock awards, $11 million of
costs associated with the integration of the AWA FlightFund and US Airways Dividend Miles
frequent traveler programs, $9 million in merger related aircraft lease return expenses, $9
million of aircraft livery costs, $15 million in professional and technical fees, including
continuing professional fees associated with US Airways bankruptcy proceedings, $5 million in
employee moving expenses, $1 million of transition-related sales and marketing program
expenses, $1 million in programming expenses and $1 million in other expenses. 3. Earnings (loss) per share
  Three Months Ended
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic earnings (loss) per share:Income (loss) before cumulative
effect of change in accounting
principle
    
    $
    305
    
    
    $
    (3
    )
    
    $
    369
    
    
    $
    25Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (202
    )Net income (loss)
    
    $
    305
    
    
    $
    (3
    )
    
    $
    370
    
    
    $
    (177
    )Weighted average common shares
outstanding (in thousands)
    
    
    85,886
    
    
    
    14,863
    
    
    
    83,794
    
    
    
    14,856Basic earnings (loss) per share:Before cumulative
effect of change in accounting
principle
    
    $
    3.55
    
    
    $
    (0.20
    )
    
    $
    4.40
    
    
    $
    1.70Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    (13.59
    )Net earnings (loss) per share
    
    $
    3.55
    
    
    $
    (0.20
    )
    
    $
    4.41
    
    
    $
    (11.89
    )Diluted earnings (loss) per share:Cumulative effect
of change in accounting principle
    
    $
    305
    
    
    $
    (3
    )
    
    $
    369
    
    
    $
    25Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (202
    )Net income (loss)
    
    
    305
    
    
    
    (3
    )
    
    
    370
    
    
    
    (177
    )
 10




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest expense on 7.5%
convertible senior notes
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    Interest expense on 7.25%
convertible senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Interest expense on 7.0% senior
convertible notes
    
    
    3
    
    
    
    
    
    
    
    5
    
    
    
    Income (loss) for purposes of
computing diluted net income
(loss) per share
    
    $
    308
    
    
    $
    (3
    )
    
    $
    379
    
    
    $
    (173
    )Share computation (in thousands):Weighted average common shares
outstanding
    
    
    85,886
    
    
    
    14,863
    
    
    
    83,794
    
    
    
    14,856Dilutive effect of stock awards
and warrants
    
    
    2,469
    
    
    
    
    
    
    
    2,158
    
    
    
    3,747Assumed conversion of 7.5%
convertible senior notes
    
    
    358
    
    
    
    
    
    
    
    2,100
    
    
    
    Assumed conversion of 7.25%
convertible senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,340Assumed conversion of 7.0%
senior convertible notes
    
    
    5,960
    
    
    
    
    
    
    
    5,960
    
    
    
    Weighted average common shares
outstanding as adjusted
    
    
    94,673
    
    
    
    14,863
    
    
    
    94,012
    
    
    
    21,943Diluted earnings (loss) per share:Before cumulative
effect of change in accounting
principle
    
    $
    3.25
    
    
    $
    (0.20
    )
    
    $
    4.02
    
    
    $
    1.31Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    (9.20
    )Earnings (loss) per share
    
    $
    3.25
    
    
    $
    (0.20
    )
    
    $
    4.03
    
    
    $
    (7.89
    )
    Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    20057.5% convertible senior notes
    
    
    
    
    
    
    3,860
    
    
    
    
    
    
    
    3,8607.25% convertible senior notes
    
    
    
    
    
    
    3,340
    
    
    
    
    
    
    
    
 4. Stock options (Adoption of SFAS 123R)
  11




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2005Net loss as reported
    
    $
    (3
    )
    
    $
    (177
    )Stock-based compensation
determined under the
fair-value based method
    
    
    (1
    )
    
    
    (2
    )Pro forma net loss
    
    $
    (4
    )
    
    $
    (179
    )Loss per common shareBasic  as reported
    
    $
    (0.20
    )
    
    $
    (11.89
    )Basic  pro forma
    
    
    (0.27
    )
    
    
    (12.05
    )Diluted  as reported
    
    
    (0.20
    )
    
    
    (7.89
    )Diluted  pro forma
    
    
    (0.27
    )
    
    
    (8.00
    )
 Restricted Stock Unit Awards 
 12




---



##### Table of Contents



WeightedNumber of
    
    average grant-2005 Equity Incentive Plan
    
    shares
    
    date fair valueNonvested balances at January 1, 2006
    
    
    687
    
    
    $
    26.17Granted
    
    
    250
    
    
    
    38.45Vested and released
    
    
    (7
    )
    
    
    46.38Forfeited
    
    
    (14
    )
    
    
    27.55Nonvested balance at June 30, 2006
    
    
    916
    
    
    $
    29.35
  Stock Options and Stock Appreciation Rights 
  WeightedaverageStock
    
    Weighted
    
    remaining
    
    Aggregateoptions
    
    average
    
    contractual term
    
    intrinsic valueand SARs
    
    exercise price
    
    (years)
    
    (in millions)1994
Incentive Equity PlanBalance at January 1, 2006
    
    
    1,267
    
    
    $
    38.28Granted
    
    
    
    
    
    
    Exercised
    
    
    (239
    )
    
    
    22.45Forfeited
    
    
    
    
    
    
    Expired
    
    
    (62
    )
    
    
    50.96Balance at June 30, 2006
    
    
    966
    
    
    $
    41.38
    
    
    
    3.13
    
    
    
    11Exercisable at June 30, 2006
    
    
    966
    
    
    $
    41.38
    
    
    
    3.13
    
    
    
    112002
Incentive Equity PlanBalance at January 1, 2006
    
    
    2,048
    
    
    $
    16.98Granted
    
    
    
    
    
    
    Exercised
    
    
    (641
    )
    
    
    15.72Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Balance at June 30, 2006
    
    
    1,407
    
    
    $
    17.55
    
    
    
    7.50
    
    
    
    46Exercisable at June 30, 2006
    
    
    1,200
    
    
    $
    16.96
    
    
    
    7.23
    
    
    
    402005
Equity Incentive PlanBalance at January 1, 2006
    
    
    1,973
    
    
    $
    23.15Granted
    
    
    1,008
    
    
    
    38.75Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (56
    )
    
    
    27.55Expired
    
    
    
    
    
    
    Balance at June 30, 2006
    
    
    2,925
    
    
    $
    28.44
    
    
    
    9.46
    
    
    
    65Exercisable at June 30, 2006
    
    
    45
    
    
    $
    46.69
    
    
    
    9.89
    
    
    
    174
 13




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Weighted average fair value
    
    $
    16.45
    
    
    $
    4.48
    
    
    $
    16.11
    
    
    $
    5.05Risk free interest rate
    
    
    4.9%
    
    
    
    3.4%
    
    
    
    4.9%
    
    
    
    3.4%Expected dividend yield
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Expected life
    
    2.9 years
    
    
    4.0 years
    
    
    2.9 years
    
    
    4.0 yearsVolatility
    
    
    58%
    
    
    
    54%
    
    
    
    57%
    
    
    
    54%
   Agreements with ALPA 
  Risk free interest rate
    
    
    4.4%Expected dividend yield
    
    
    %Contractual term
    
    5.0 yearsVolatility
    
    
    69.8%
  14




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##### Table of Contents



5. Debt
  June 30,
    
    
    December 31,2006
    
    
    2005SecuredGeneral Electric Capital Corporation loan, variable interest rate of 8.59%,
interest only payments until due on June 30, 2011
    
    $
    1,250
    
    
    $
    AWA Citibank Loan (former AWA ATSB Loan)
    
    
    
    
    
    
    250GECC term loan
    
    
    
    
    
    
    111Senior secured discount notes, variable interest rate of 8.87%, installments
due 2005 through 2009
    
    
    34
    
    
    
    34Airbus Loans
    
    
    
    
    
    
    186Equipment
notes payable, variable interest rates of 6.80% to 10.30%
    
    
    1,243
    
    
    
    1,240US Airways Citibank Loan (formerly US Airways ATSB Loan)
    
    
    
    
    
    
    551Slot Financing, interest rate of 8%, installments due through 2015
    
    
    49
    
    
    
    50Capital lease obligations, interest rate of 8%, installments due through 2021
    
    
    44
    
    
    
    46GE Credit
Facility, variable interest rate of 9.21%, installments due 2006
to 2010
    
    
    24
    
    
    
    28Capital Lease Obligations, computer software, installments due through 2008
    
    
    3
    
    
    
    2,647
    
    
    
    2,496Unsecured7% senior convertible notes, interest only payments until due in 2020
    
    
    144
    
    
    
    1447.5% convertible senior notes, interest only payments until due in 2009
    
    
    
    
    
    
    112Equipment notes payable
    
    
    
    
    
    
    4Industrial development bonds, fixed interest rate of 6.3% due 2023
    
    
    29
    
    
    
    29State loan, variable
    
    
    
    
    
    
    1Juniper prepaid miles, variable interest rate of 9.86%, interest only
payments until January 2008.
    
    
    325
    
    
    
    325Note payable to Pension Benefit Guaranty Corporation, interest rate of 6%,
interest only payments until due 2012
    
    
    10
    
    
    
    10508
    
    
    
    625Total long-term debt and capital lease obligations
    
    
    3,155
    
    
    
    3,121Less: Unamortized discount on debt
    
    
    (139
    )
    
    
    (161
    )Current maturities
    
    
    (113
    )
    
    
    (211
    )Long-term debt and capital lease obligations, net of current maturities
    
    $
    2,903
    
    
    $
    2,749
 Refinancing Transaction 
  15




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##### Table of Contents




    The amended and restated US Airways and AWA loans entered into on September 27, 2005
that had previously been guaranteed by the Air Transportation Stabilization Board (the
ATSB). On October 19, 2005, $777 million of the loans, of which $752 million had been
guaranteed by the ATSB, was sold by the lenders by order of the ATSB to 13 fixed income
investors, removing the ATSB guarantee. At the time of repayment of these loans on March
31, 2006, the total outstanding balance of the loans was $801 million, of which $551
million was outstanding under the US Airways loan and $250 million was outstanding under
the AWA loan. Proceeds were also used to pay $15 million of accrued interest and fees on
the US Airways loan, and $8 million of accrued interest and $5 million of prepayment
penalty on the AWA loan.
    The $161 million loan entered into as of September 27, 2005 between US Airways and AWA
and Airbus Financial Services, for which US Airways Group was the guarantor. At the time
of repayment on March 31, 2006, the outstanding balance of the loan was $161 million. US
Airways and AWA also had an $89 million loan from Airbus Financial Services entered into as
of September 27, 2005. In accordance with the terms of the loan agreements, the
outstanding principal amount of the $89 million loan was to be forgiven in writing on the
earlier of December 31, 2010 or the date that the outstanding principal amount of, accrued
interest on, and all other amounts due under the Airbus $161 million loan were paid in
full, provided that the Company complies with the delivery schedule for certain Airbus
aircraft. As a result of the prepayment of the $161 million loan on March 31, 2006, the
$89 million loan agreement was terminated and the $89 million loan, of which $89 million
was outstanding, was forgiven along with $1 million in accrued interest.
    Two loans provided by GECC to AWA pursuant to loan agreements entered into as of
September 3, 2004 referred to as the Spare Parts Facility and the Engines Facility. At the
time of repayment, the principal amounts outstanding under the Spare Parts Facility and the
Engines Facility were $76 million and $34 million, respectively. Proceeds were also used to
pay $1 million of accrued interest and $1 million of prepayment penalties on these two GECC
loans.
  16




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##### Table of Contents



Conversion of 7.5% Convertible Senior Notes due 2009 
 6. Purchase accounting
 (a) Purchase price allocation
   Goodwill reported as of December 31, 2005
    
    $
    732Non-current employee benefits and other
    
    
    (20
    )Long-term debt
    
    
    (10
    )Materials and supplies, net
    
    
    11Other assets
    
    
    (13
    )Property and equipment
    
    
    4Accrued compensation and vacation
    
    
    (4
    )Accrued taxes
    
    
    (2
    )Accounts receivable
    
    
    1Other accrued expenses
    
    
    2Goodwill reported as of June 30, 2006
    
    $
    701
  17




---



##### Table of Contents



(b) Pro forma information
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005Operating revenues
    
    $
    2,789
    
    
    $
    5,150Operating expenses
    
    
    2,722
    
    
    
    5,231Operating income (loss)
    
    
    67
    
    
    
    (81
    )Net loss
    
    $
    (18
    )
    
    $
    (459
    )Basic and diluted loss per share
    
    $
    (0.27
    )
    
    $
    (6.85
    )Basic and diluted shares (in thousands)
    
    
    67,073
    
    
    
    67,067
 7. Income Taxes
    18




---



##### Table of Contents



8. Employee benefit plans
   Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006Service cost
    
    $
    1
    
    
    $
    1Interest cost
    
    
    1
    
    
    
    2Expected return on plan assets
    
    
    
    
    
    
    (1
    )Total periodic cost
    
    $
    2
    
    
    $
    2
  Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006Service cost
    
    $
    1
    
    
    $
    2Interest cost
    
    
    3
    
    
    
    6Expected return on plan assets
    
    
    
    
    
    
    Total periodic cost
    
    $
    4
    
    
    $
    8
 9. Express expenses
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Aircraft fuel and related taxes
    
    $
    203
    
    
    $
    44
    
    
    $
    375
    
    
    $
    76Salaries and related costs
    
    
    53
    
    
    
    
    
    
    
    123
    
    
    
    Capacity purchases
    
    
    238
    
    
    
    79
    
    
    
    460
    
    
    
    148Aircraft rent
    
    
    15
    
    
    
    
    
    
    
    35
    
    
    
    Aircraft maintenance
    
    
    18
    
    
    
    
    
    
    
    37
    
    
    
    Other rent and landing fees
    
    
    40
    
    
    
    3
    
    
    
    78
    
    
    
    5Selling expenses
    
    
    41
    
    
    
    8
    
    
    
    75
    
    
    
    15Depreciation and amortization
    
    
    6
    
    
    
    
    
    
    
    12
    
    
    
    Other expenses
    
    
    46
    
    
    
    2
    
    
    
    81
    
    
    
    3Express expenses
    
    $
    660
    
    
    $
    136
    
    
    $
    1,276
    
    
    $
    247
 19




---



##### Table of Contents



10. Subsequent Events
   20




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating RevenuesMainline passenger
    
    $
    747
    
    
    $
    657
    
    
    $
    1,399
    
    
    $
    1,234Express passenger
    
    
    184
    
    
    
    129
    
    
    
    337
    
    
    
    233Cargo
    
    
    7
    
    
    
    8
    
    
    
    16
    
    
    
    17Other
    
    
    43
    
    
    
    51
    
    
    
    90
    
    
    
    95Total Operating Revenues
    
    
    981
    
    
    
    845
    
    
    
    1,842
    
    
    
    1,579Operating ExpensesAircraft fuel and related taxes
    
    
    242
    
    
    
    199
    
    
    
    447
    
    
    
    359Gain on fuel hedging instruments, net
    
    
    (29
    )
    
    
    (9
    )
    
    
    (56
    )
    
    
    (69
    )Salaries and related costs
    
    
    191
    
    
    
    173
    
    
    
    366
    
    
    
    348Express expenses
    
    
    159
    
    
    
    136
    
    
    
    305
    
    
    
    247Aircraft rent
    
    
    85
    
    
    
    81
    
    
    
    171
    
    
    
    158Aircraft maintenance
    
    
    73
    
    
    
    66
    
    
    
    125
    
    
    
    120Other rent and landing fees
    
    
    45
    
    
    
    46
    
    
    
    90
    
    
    
    87Selling expenses
    
    
    42
    
    
    
    44
    
    
    
    81
    
    
    
    81Special items, net
    
    
    23
    
    
    
    
    
    
    
    (7
    )
    
    
    1Depreciation and amortization
    
    
    10
    
    
    
    12
    
    
    
    21
    
    
    
    23Other
    
    
    79
    
    
    
    82
    
    
    
    155
    
    
    
    164Total operating expenses
    
    
    920
    
    
    
    830
    
    
    
    1,698
    
    
    
    1,519Operating income
    
    
    61
    
    
    
    15
    
    
    
    144
    
    
    
    60Nonoperating income (expense)Interest income
    
    
    20
    
    
    
    4
    
    
    
    33
    
    
    
    7Interest expense, net
    
    
    (10
    )
    
    
    (21
    )
    
    
    (37
    )
    
    
    (42
    )Other, net
    
    
    1
    
    
    
    
    
    
    
    (10
    )
    
    
    2Nonoperating income (expense), net
    
    
    11
    
    
    
    (17
    )
    
    
    (14
    )
    
    
    (33
    )Income (loss) before income taxes and cumulative effect
of change in accounting principle
    
    
    72
    
    
    
    (2
    )
    
    
    130
    
    
    
    27Income tax provision
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    Income (loss) before cumulative effect of change in
accounting principle
    
    
    68
    
    
    
    (2
    )
    
    
    126
    
    
    
    27Cumulative effect of change in accounting principle, net
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (202
    )Net income (loss)
    
    $
    68
    
    
    $
    (2
    )
    
    $
    127
    
    
    $
    (175
    )Unaudited pro forma net income assuming change in method
of accounting was applied retroactively (Note 1)
    
    $
    68
    
    
    $
    (2
    )
    
    $
    126
    
    
    $
    27
  21




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    413
    
    
    $
    632Short-term investments
    
    
    457
    
    
    
    319Accounts receivable, net
    
    
    174
    
    
    
    119Materials and supplies, net
    
    
    82
    
    
    
    87Prepaid expenses and other
    
    
    266
    
    
    
    169Total current assets
    
    
    1,392
    
    
    
    1,326Property and equipmentFlight equipment
    
    
    340
    
    
    
    348Ground property and equipment
    
    
    336
    
    
    
    309Less accumulated depreciation and amortization
    
    
    (404
    )
    
    
    (399
    )272
    
    
    
    258Equipment purchase deposits
    
    
    8
    
    
    
    11Total property and equipment
    
    
    280
    
    
    
    269Other assetsRestricted cash
    
    
    291
    
    
    
    229Advances to parent company
    
    
    261
    
    
    
    261Other assets, net
    
    
    93
    
    
    
    107Total other assets
    
    
    645
    
    
    
    597Total assets
    
    $
    2,317
    
    
    $
    2,192LIABILITIES AND STOCKHOLDERS EQUITY(DEFICIT)Current liabilitiesCurrent maturities of debt and capital leases
    
    $
    3
    
    
    $
    94Accounts payable
    
    
    143
    
    
    
    146Payables to related parties, net
    
    
    831
    
    
    
    443Air traffic liability
    
    
    356
    
    
    
    218Accrued compensation and vacation
    
    
    92
    
    
    
    59Accrued taxes
    
    
    53
    
    
    
    25Other accrued expenses
    
    
    191
    
    
    
    129Total current liabilities
    
    
    1,669
    
    
    
    1,114Noncurrent liabilities and deferred creditsLong-term debt and capital leases, net of current maturities
    
    
    385
    
    
    
    936Deferred credits
    
    
    36
    
    
    
    252Other liabilities
    
    
    211
    
    
    
    Total noncurrent liabilities and deferred credits
    
    
    632
    
    
    
    1,188Commitments and contingenciesStockholders equity (deficit)Common stock, $0.01 par value; 1,000 shares authorized and
outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    555
    
    
    
    555Accumulated deficit
    
    
    (539
    )
    
    
    (665
    )Total stockholders equity (deficit)
    
    
    16
    
    
    
    (110
    )Total liabilities and stockholders equity (deficit)
    
    $
    2,317
    
    
    $
    2,192
  22




---



##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005Net cash provided by operating activities
    
    $
    216
    
    
    $
    224Cash flows from investing activitiesPurchases of property and equipment
    
    
    (34
    )
    
    
    (97
    )Purchase of short-term investments
    
    
    (379
    )
    
    
    (284
    )Sales of short-term investments
    
    
    242
    
    
    
    234Increase in long-term restricted cash
    
    
    (62
    )
    
    
    (20
    )Other
    
    
    1
    
    
    
    1Net cash used for investing activities
    
    
    (232
    )
    
    
    (166
    )Cash flows from financing activitiesRepayments of debt
    
    
    (2
    )
    
    
    (87
    )Net decrease in payable to related parties
    
    
    (201
    )
    
    
    Other
    
    
    
    
    
    
    (4
    )Net cash used for financing activities
    
    
    (203
    )
    
    
    (91
    )Net decrease in cash and cash equivalents
    
    
    (219
    )
    
    
    (33
    )Cash and cash equivalents at beginning of period
    
    
    632
    
    
    
    128Cash and cash equivalents at end of period
    
    $
    413
    
    
    $
    95Non-cash investing and financing activitiesRepayment of ATSB, Airbus, and GECC loans by parent
    
    $
    520
    
    
    $
    Reclassification of investments in debt
securities to short-term investments
    
    
    
    
    
    
    30Notes payable issued under aircraft purchase agreement
    
    
    
    
    
    
    9Notes payable cancelled under aircraft purchase agreement
    
    
    4
    
    
    
    7Loan proceeds received by parent
    
    
    64
    
    
    
    Conversion of 7.5% Convertible Senior Notes, net of discount of $17 million to common stock of US Airways Group
    
    
    95
    
    
    
    Equipment purchases financed by capital leases
    
    
    3
    
    
    
    Supplemental informationCash paid for interest, net of amounts capitalized
    
    $
    22
    
    
    $
    Income taxes paid
    
    
    3
    
    
    
    
  23




---



##### Table of Contents



America West Airlines, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 1. Basis of presentation
     Frequent Traveler Program
  24




---



##### Table of Contents



Shared Operating Expenses
  Six Months Ended June 30, 2006AWA
    
    
    US Airways
    
    
    TotalCorporate Expenses
    
    $
    79
    
    
    $
    122
    
    
    $
    201Airport Expenses
    
    
    170
    
    
    
    303
    
    
    
    473Total Allocated
Expenses
    
    $
    249
    
    
    $
    425
    
    
    $
    674
 2. Special items
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Airbus restructuring (a)
    
    $
    
    
    
    $
    
    
    
    $
    (51
    )
    
    $
    Merger related transition expenses (b)
    
    
    23
    
    
    
    
    
    
    
    44
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Special items, net
    
    $
    23
    
    
    $
    
    
    
    $
    (7
    )
    
    $
    1
 25




---



##### Table of Contents



(a)
    
    In connection with the merger and the Airbus Memorandum of Understanding
(Airbus MOU) executed between US Airways Group, US Airways and AWA,
certain aircraft firm orders were restructured. In connection with that
restructuring, US Airways Group and America West Holdings were required to
pay restructuring fees totaling $89 million by means of set-off against
existing equipment deposits of US Airways and AWA held by Airbus of $39
million and $50 million, respectively. Also in connection with the Airbus
MOU, US Airways and AWA entered into two loan agreements with commitments
of up to $161 million and $89 million. As described in further detail in
Note 4, on March 31, 2006, the outstanding principal and accrued interest
on the $89 million loan was forgiven upon repayment in full of the $161
million loan in accordance with the terms of the Airbus loans. As a
result, AWA recognized a gain associated with the return of these equipment
deposits upon forgiveness of the loan totaling $51 million, consisting of
the $50 million in equipment deposits and accrued interest of $1 million.(b)
    
    In connection with the merger, AWA incurred $23 million of transition and
merger integration costs in the second quarter of 2006. These items
included $3 million in personnel costs primarily for severance, retention
payments and stock awards, $12 million of costs associated with the
integration of the AWA FlightFund and US Airways Dividend Miles frequent
traveler programs, $2 million in merger related aircraft lease return
expenses, $1 million of aircraft livery costs, $4 million in professional
and technical fees, $1 million of transition-related sales and marketing
program expenses.In the six months ended June 30, 2006, AWA incurred $44 million of
transition and merger integration costs. These items included $7 million
in personnel costs primarily for severance, retention payments and stock
awards, $12 million of costs associated with the integration of the AWA
FlightFund and US Airways Dividend Miles frequent traveler programs, $9
million in merger related aircraft lease return expenses, $6 million of
aircraft livery costs, $7 million in professional and technical fees, $2
million of transition-related sales and marketing program expenses and $1
million of other expenses. 3. Stock options (Adoption of SFAS 123R)
    26




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune
    
    
    June30, 2005
    
    
    30, 2005Net loss as reported
    
    $
    (2
    )
    
    $
    (175
    )Stock-based compensation
determined under the
fair-value based method
    
    
    (1
    )
    
    
    (2
    )Pro forma net loss
    
    $
    (3
    )
    
    $
    (177
    )
 Restricted Stock Unit Awards 
  WeightedNumber of
    
    average grant-2005 Equity Incentive Plan
    
    shares
    
    date fair valueNonvested balances at January 1, 2006
    
    
    687
    
    
    $
    26.17Granted
    
    
    250
    
    
    
    38.45Vested and released
    
    
    (7
    )
    
    
    46.38Forfeited
    
    
    (14
    )
    
    
    27.55Nonvested balance at June 30, 2006
    
    
    916
    
    
    $
    29.35
  Stock Options and Stock Appreciation Rights 
 27




---



##### Table of Contents



WeightedaverageStock
    
    
    
    
    
    
    remaining
    
    
    Aggregateoptions
    
    
    Weighted average
    
    
    contractual term
    
    
    intrinsic valueand SARs
    
    
    exercise price
    
    
    (years)
    
    
    (in millions)1994
Incentive Equity PlanBalance at January 1, 2006
    
    
    1,267
    
    
    $
    38.28Granted
    
    
    
    
    
    
    Exercised
    
    
    (239
    )
    
    
    22.45Forfeited
    
    
    
    
    
    
    Expired
    
    
    (62
    )
    
    
    50.96Balance at June 30, 2006
    
    
    966
    
    
    $
    41.38
    
    
    
    3.13
    
    
    
    11Exercisable at June 30, 2006
    
    
    966
    
    
    $
    41.38
    
    
    
    3.13
    
    
    
    112002
Incentive Equity PlanBalance at January 1, 2006
    
    
    2,048
    
    
    $
    16.98Granted
    
    
    
    
    
    
    Exercised
    
    
    (641
    )
    
    
    15.72Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Balance at June 30, 2006
    
    
    1,407
    
    
    $
    17.55
    
    
    
    7.50
    
    
    
    46Exercisable at June 30, 2006
    
    
    1,200
    
    
    $
    16.96
    
    
    
    7.23
    
    
    
    402005
Equity Incentive PlanBalance at January 1, 2006
    
    
    1,973
    
    
    $
    23.15Granted
    
    
    1,008
    
    
    
    38.75Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (56
    )
    
    
    27.55Expired
    
    
    
    
    
    
    Balance at June 30, 2006
    
    
    2,925
    
    
    $
    28.44
    
    
    
    9.46
    
    
    
    65Exercisable at June 30, 2006
    
    
    45
    
    
    $
    46.69
    
    
    
    9.89
    
    
    
    174
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Weighted average fair value
    
    $
    16.45
    
    
    $
    4.48
    
    
    $
    16.11
    
    
    $
    5.05Risk free interest rate
    
    
    4.9%
    
    
    
    3.4%
    
    
    
    4.9%
    
    
    
    3.4%Expected dividend yield
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Expected life
    
    2.9 years
    
    
    4.0 years
    
    
    2.9 years
    
    
    4.0 yearsVolatility
    
    
    58%
    
    
    
    54%
    
    
    
    57%
    
    
    
    54%
  28




---



##### Table of Contents



4. Debt
  June 30,
    
    
    December 31,2006
    
    
    2005SecuredAWA Citibank Loan (former ATSB loan)
    
    $
    
    
    
    $
    250GECC term loan
    
    
    
    
    
    
    111Senior secured discount notes, variable interest rate of 8.87%,
installments due 2005 through 2009
    
    
    34
    
    
    
    34Airbus Loans
    
    
    
    
    
    
    186Capital Lease Obligation, computer software, installments due through 2008
    
    
    3
    
    
    
    37
    
    
    
    581Unsecured7.5% convertible senior notes, interest only payments until due in 2009
    
    
    
    
    
    
    112Equipment notes payable
    
    
    
    
    
    
    4Industrial development bonds, fixed interest rate of 6.3% due 2023
    
    
    29
    
    
    
    29State loan
    
    
    
    
    
    
    1Juniper prepaid miles, variable interest rate of 9.86%, interest only payments
until January 2008
    
    
    325
    
    
    
    325354
    
    
    
    471Total long-term debt and capital lease obligations
    
    
    391
    
    
    
    1,052Less: Unamortized discount on debt
    
    
    (3
    )
    
    
    (22
    )Current maturities
    
    
    (3
    )
    
    
    (94
    )Long-term debt and capital lease obligations, net of current maturities
    
    $
    385
    
    
    $
    936
 Refinancing Transaction 
  29




---



##### Table of Contents




    The amended and restated US Airways and AWA loans entered into on September 27, 2005
that had previously been guaranteed by the Air Transportation Stabilization Board (the
ATSB). On October 19, 2005, $777 million of the loans, of which $752 million had been
guaranteed by the ATSB, was sold by the lenders by order of the ATSB to 13 fixed income
investors, removing the ATSB guarantee. At the time of repayment of these loans on March
31, 2006, the total outstanding balance of the loans was $801 million, of which $551
million was outstanding under the US Airways loan and $250 million was outstanding under
the AWA loan. Proceeds were also used to pay $15 million of accrued interest and fees on
the US Airways loan, and $8 million of accrued interest and $5 million of prepayment
penalty on the AWA loan.

    The $161 million loan entered into as of September 27, 2005 between US Airways and AWA
and Airbus Financial Services, for which US Airways Group was the guarantor. At the time
of repayment on March 31, 2006, the outstanding balance of the loan was $161 million. US
Airways and AWA also had an $89 million loan from Airbus Financial Services entered into as
of September 27, 2005. In accordance with the terms of the loan agreements, the
outstanding principal amount of the $89 million loan was to be forgiven in writing on the
earlier of December 31, 2010 or the date that the outstanding principal amount of, accrued
interest on, and all other amounts due under the Airbus $161 million loan were paid in
full, provided that US Airways Group complies with the delivery schedule for certain Airbus
aircraft. As a result of the prepayment of the $161 million loan on March 31, 2006, the
$89 million loan agreement was terminated and the $89 million loan, of which $89 million
was outstanding, was forgiven along with $1 million in accrued interest.
    Two loans provided by GECC to AWA pursuant to loan agreements entered into as of
September 3, 2004 referred to as the Spare Parts Facility and the Engines Facility. At the
time of repayment, the principal amounts outstanding under the Spare Parts Facility and the
Engines Facility were $76 million and $34 million, respectively. Proceeds were also used to
pay $1 million of accrued interest and $1 million of prepayment penalties on these two GECC
loans.
  Conversion of 7.5% Convertible Senior Notes due 2009 
 30




---



##### Table of Contents



5. Related party transactions
  June 30, 2006
    
    
    December 31, 2005US Airways Group
    
    $
    (1,083
    )
    
    $
    (465
    )America West Holdings
    
    
    (1
    )
    
    
    (1
    )US Airways
    
    
    247
    
    
    
    22Other US Airways Groups wholly
owned subsidiaries
    
    
    6
    
    
    
    1$
    (831
    )
    
    $
    (443
    )
   6. Income Taxes
   31




---



##### Table of Contents



7. Express expenses
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Aircraft fuel and related taxes
    
    $
    57
    
    
    $
    44
    
    
    $
    103
    
    
    $
    76Capacity purchases
    
    
    88
    
    
    
    79
    
    
    
    173
    
    
    
    148Other rent and landing fees
    
    
    3
    
    
    
    3
    
    
    
    6
    
    
    
    5Selling expenses
    
    
    10
    
    
    
    8
    
    
    
    20
    
    
    
    15Other expenses
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    3Express expenses
    
    $
    159
    
    
    $
    136
    
    
    $
    305
    
    
    $
    247
 10. Subsequent Events
  32




---



##### Table of Contents



Successor
    
    
    
    Predecessor
    
    
    Successor
    
    
    
    PredecessorCompany
    
    
    
    Company
    
    
    Company
    
    
    
    CompanyThree Months
    
    
    
    Three Months
    
    
    Six Months
    
    
    
    Six MonthsEnded
    
    
    
    Ended
    
    
    Ended
    
    
    
    EndedJune 30, 2006
    
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    
    June 30, 2005Operating RevenuesMainline passenger
    
    $
    1,439
    
    
    
    $
    1,332
    
    
    $
    2,597
    
    
    
    $
    2,465Express passenger
    
    
    596
    
    
    
    
    436
    
    
    
    1,054
    
    
    
    
    750Cargo
    
    
    29
    
    
    
    
    25
    
    
    
    58
    
    
    
    
    46Other
    
    
    162
    
    
    
    
    158
    
    
    
    319
    
    
    
    
    311Total Operating Revenues
    
    
    2,226
    
    
    
    
    1,951
    
    
    
    4,028
    
    
    
    
    3,572Operating ExpensesAircraft fuel and related taxes
    
    
    426
    
    
    
    
    381
    
    
    
    776
    
    
    
    
    703Salaries and related costs
    
    
    351
    
    
    
    
    332
    
    
    
    680
    
    
    
    
    741Express expenses
    
    
    534
    
    
    
    
    476
    
    
    
    1,033
    
    
    
    
    896Aircraft rent
    
    
    95
    
    
    
    
    97
    
    
    
    194
    
    
    
    
    195Aircraft maintenance
    
    
    80
    
    
    
    
    89
    
    
    
    166
    
    
    
    
    161Other rent and landing fees
    
    
    100
    
    
    
    
    114
    
    
    
    195
    
    
    
    
    214Selling expenses
    
    
    79
    
    
    
    
    87
    
    
    
    146
    
    
    
    
    181Special items, net
    
    
    12
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    Depreciation and amortization
    
    
    37
    
    
    
    
    56
    
    
    
    73
    
    
    
    
    105Other
    
    
    232
    
    
    
    
    260
    
    
    
    446
    
    
    
    
    499Total operating expenses
    
    
    1,946
    
    
    
    
    1,892
    
    
    
    3,706
    
    
    
    
    3,695Operating income (loss)
    
    
    280
    
    
    
    
    59
    
    
    
    322
    
    
    
    
    (123
    )Nonoperating income (expense)Interest income
    
    
    21
    
    
    
    
    7
    
    
    
    34
    
    
    
    
    9Interest expense, net
    
    
    (53
    )
    
    
    
    (80
    )
    
    
    (107
    )
    
    
    
    (156
    )Reorganization items, net
    
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    (28
    )Other, net
    
    
    (1
    )
    
    
    
    (6
    )
    
    
    (1
    )
    
    
    
    (7
    )Nonoperating income (expense), net
    
    
    (33
    )
    
    
    
    (105
    )
    
    
    (74
    )
    
    
    
    (182
    )Income (loss) before income taxes
    
    
    247
    
    
    
    
    (46
    )
    
    
    248
    
    
    
    
    (305
    )Income tax provision (benefit)
    
    
    1
    
    
    
    
    (2
    )
    
    
    1
    
    
    
    
    (2
    )Net income (loss)
    
    $
    246
    
    
    
    $
    (44
    )
    
    $
    247
    
    
    
    $
    (303
    )
  33




---



##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    649
    
    
    $
    462Short-term investments
    
    
    666
    
    
    
    132Restricted cash
    
    
    5
    
    
    
    8Accounts receivable, net
    
    
    284
    
    
    
    227Materials and supplies, net
    
    
    119
    
    
    
    109Prepaid expenses and other
    
    
    208
    
    
    
    213Total current assets
    
    
    1,931
    
    
    
    1,151Property and equipmentFlight equipment
    
    
    1,559
    
    
    
    1,492Ground property and equipment
    
    
    201
    
    
    
    205Less accumulated depreciation and amortization
    
    
    (83
    )
    
    
    (28
    )1,677
    
    
    
    1,669Equipment purchase deposits
    
    
    32
    
    
    
    32Total property and equipment
    
    
    1,709
    
    
    
    1,701Other assetsGoodwill
    
    
    701
    
    
    
    732Other intangibles, net
    
    
    525
    
    
    
    541Restricted cash
    
    
    693
    
    
    
    563Other assets, net
    
    
    114
    
    
    
    120Total other assets
    
    
    2,033
    
    
    
    1,956Total assets
    
    $
    5,673
    
    
    $
    4,808LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilitiesCurrent maturities of debt and capital leases
    
    $
    110
    
    
    $
    117Accounts payable
    
    
    288
    
    
    
    273Payables to related parties, net
    
    
    1,476
    
    
    
    336Air traffic liability
    
    
    864
    
    
    
    570Accrued compensation and vacation
    
    
    130
    
    
    
    145Accrued taxes
    
    
    125
    
    
    
    108Other accrued expenses
    
    
    642
    
    
    
    684Total current liabilities
    
    
    3,635
    
    
    
    2,233Noncurrent liabilities and deferred creditsLong-term debt and capital leases, net of current maturities
    
    
    1,124
    
    
    
    1,855Deferred gains and credits
    
    
    194
    
    
    
    215Postretirement benefits other than pensions
    
    
    189
    
    
    
    189Employee benefit liabilities and other
    
    
    417
    
    
    
    449Total noncurrent liabilities and deferred credits
    
    
    1,924
    
    
    
    2,708Commitments and contingenciesStockholders equity (deficit)Common stock, $1 par, 1,000 shares issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    1
    
    
    
    1Accumulated deficit
    
    
    113
    
    
    
    (134
    )Total stockholders equity (deficit)
    
    
    114
    
    
    
    (133
    )Total liabilities and stockholders equity (deficit)
    
    $
    5,673
    
    
    $
    4,808
  34




---



##### Table of Contents



Successor
    
    
    
    PredecessorCompany
    
    
    
    Company2006
    
    
    
    2005Net cash provided by (used for) operating activities
before reorganization items
    
    $
    494
    
    
    
    $
    (23
    )Reorganization items, net
    
    
    
    
    
    
    
    (42
    )Net cash provided by (used for) operating activities
    
    
    494
    
    
    
    
    (65
    )Cash flows from investing activitiesPurchases of property and equipment
    
    
    (72
    )
    
    
    
    (40
    )Proceeds from disposition of assets
    
    
    1
    
    
    
    
    4Proceeds from the sale of short-term investments
    
    
    65
    
    
    
    
    Purchase of short-term investments
    
    
    (600
    )
    
    
    
    Increase in long-term restricted cash
    
    
    (130
    )
    
    
    
    (167
    )Net cash used for investing activities
    
    
    (736
    )
    
    
    
    (203
    )Cash flows from financing activitiesNet increase in payable to related parties
    
    
    438
    
    
    
    
    Proceeds from issuance of debt
    
    
    48
    
    
    
    
    68Proceeds from issuance of debtor-in-possession financings
    
    
    
    
    
    
    
    100Repayments of debt and capital lease obligations
    
    
    (57
    )
    
    
    
    (82
    )Net cash provided by financing activities
    
    
    429
    
    
    
    
    86Net increase (decrease) in cash and cash equivalents
    
    
    187
    
    
    
    
    (182
    )Cash and cash equivalents at beginning of period
    
    
    462
    
    
    
    
    734Cash and cash equivalents at end of period
    
    $
    649
    
    
    
    $
    552Non-cash investing and financing activitiesRepayment of ATSB and Airbus loans by parent
    
    $
    712
    
    
    
    $
    Property and equipment financed with debt and capital leases
    
    
    
    
    
    
    
    53Loan proceeds received by parent
    
    
    64
    
    
    
    
    Reduction in debt related to sale leaseback transaction
    
    
    
    
    
    
    
    624Reduction in flight equipment related to sale leaseback transaction
    
    
    
    
    
    
    
    517Supplemental informationCash paid for interest, net of amounts capitalized
    
    $
    75
    
    
    
    $
    138
  35




---



##### Table of Contents



US Airways, Inc.
 
 Notes to Condensed Financial Statements
 (Unaudited)
 1. Basis of presentation
    36




---



##### Table of Contents



Frequent Traveler Program
   Shared Operating Expenses
  37




---



##### Table of Contents



Six Months Ended June 30, 2006AWA
    
    
    US Airways
    
    
    TotalCorporate Expenses
    
    $
    79
    
    
    $
    122
    
    
    $
    201Airport Expenses
    
    
    170
    
    
    
    303
    
    
    
    473Total Allocated
Expenses
    
    $
    249
    
    
    $
    425
    
    
    $
    674
 2. Special items
  Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006Airbus restructuring (a)
    
    $
    
    
    
    $
    (40
    )Merger related transition expenses (b)
    
    
    12
    
    
    
    37Special items, net
    
    $
    12
    
    
    $
    (3
    )
 
 (a)
    
    In connection with the merger and the Airbus Memorandum of
Understanding (Airbus MOU) executed between US Airways Group, US
Airways and AWA, certain aircraft firm orders were restructured.
In connection with that restructuring, US Airways Group and
America West Holdings were required to pay restructuring fees
totaling $89 million by means of set-off against existing
equipment deposits of US Airways and AWA held by Airbus of $39
million and $50 million, respectively. Also in connection with
the Airbus MOU, US Airways and AWA entered into two loan
agreements with commitments of up to $161 million and $89 million.
As described in further detail in Note 4, on March 31, 2006, the
outstanding principal and accrued interest on the $89 million loan
was forgiven upon repayment in full of the $161 million loan in
accordance with terms of the Airbus Loans. As a result, US
Airways recognized a gain associated with the return of these
equipment deposits upon forgiveness of the loan totaling $40
million, consisting of the $39 million in equipment deposits and
accrued interest of $1 million.(b)
    
    In connection with the merger, US Airways incurred $12 million of
transition and merger integration costs in the second quarter of
2006. These items included $5 million in personnel costs for
severance, retention payments and stock awards; $4 million in
continuing professional fees associated with US Airways
bankruptcy proceedings; $2 million in employee moving expenses; $2
million of aircraft livery costs and $1 million credit associated
with reduced costs in connection with the integration of the AWA
FlightFunds and US Airways Dividend Miles frequent traveler
programs.In connection with the merger, US Airways incurred $37 million of
transition and merger integration costs in the first six months of
2006. These items included $22 million in personnel costs for
severance, retention payments and stock awards, $7 million in
continuing professional fees associated with US Airways
bankruptcy proceedings; $5 million in employee moving expenses; $3
million of aircraft livery costs and $1 million of programming
service expense and $1 million credit association with reduced
costs in connection with the integration of the AWA FlightFund and
US Airways Dividend Miles frequent traveler programs. 38




---



##### Table of Contents



3. Stock options (Adoption of SFAS 123R)
     Restricted Stock Unit Awards 
 39




---



##### Table of Contents



WeightedNumber of
    
    
    average grant-2005 Equity Incentive Plan
    
    shares
    
    
    date fair valueNonvested balances at January 1, 2006
    
    
    687
    
    
    $
    26.17Granted
    
    
    250
    
    
    
    38.45Vested and released
    
    
    (7
    )
    
    
    46.38Forfeited
    
    
    (14
    )
    
    
    27.55Nonvested balance at June 30, 2006
    
    
    916
    
    
    $
    29.35
  Stock Options and Stock Appreciation Rights 
  WeightedaverageStock
    
    
    Weighted
    
    
    remaining
    
    
    Aggregateoptions
    
    
    average
    
    
    contractual term
    
    
    intrinsic valueand SARs
    
    
    exercise price
    
    
    (years)
    
    
    (in millions)1994 Incentive Equity PlanBalance at January 1, 2006
    
    
    1,267
    
    
    $
    38.28Granted
    
    
    
    
    
    
    Exercised
    
    
    (239
    )
    
    
    22.45Forfeited
    
    
    
    
    
    
    Expired
    
    
    (62
    )
    
    
    50.96Balance at June 30, 2006
    
    
    966
    
    
    $
    41.38
    
    
    
    3.13
    
    
    
    11Exercisable at June 30, 2006
    
    
    966
    
    
    $
    41.38
    
    
    
    3.13
    
    
    
    112002 Incentive Equity PlanBalance at January 1, 2006
    
    
    2,048
    
    
    $
    16.98Granted
    
    
    
    
    
    
    Exercised
    
    
    (641
    )
    
    
    15.72Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Balance at June 30, 2006
    
    
    1,407
    
    
    $
    17.55
    
    
    
    7.50
    
    
    
    46Exercisable at June 30, 2006
    
    
    1,200
    
    
    $
    16.96
    
    
    
    7.23
    
    
    
    40
 40




---



##### Table of Contents



WeightedaverageStock
    
    
    Weighted
    
    
    remaining
    
    
    Aggregateoptions
    
    
    average
    
    
    contractual term
    
    
    intrinsic valueand SARs
    
    
    exercise price
    
    
    (years)
    
    
    (in millions)2005 Equity Incentive PlanBalance at January 1, 2006
    
    
    1,973
    
    
    $
    23.15Granted
    
    
    1,008
    
    
    
    38.75Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (56
    )
    
    
    27.55Expired
    
    
    
    
    
    
    Balance at June 30, 2006
    
    
    2,925
    
    
    $
    28.44
    
    
    
    9.46
    
    
    
    65Exercisable at June 30, 2006
    
    
    45
    
    
    $
    46.69
    
    
    
    9.89
    
    
    
    174
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average fair value
    
    $
    16.45
    
    
    $
    4.48
    
    
    $
    16.11
    
    
    $
    5.05Risk free interest rate
    
    
    4.9%
    
    
    
    3.4%
    
    
    
    4.9%
    
    
    
    3.4%Expected dividend yield
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Expected life
    
    2.9 years
    
    
    4.0 years
    
    
    2.9 years
    
    
    4.0 yearsVolatility
    
    
    58%
    
    
    
    54%
    
    
    
    57%
    
    
    
    54%
   Agreements with ALPA 
 41




---



##### Table of Contents



Risk free interest rate
    
    
    4.4
    %Expected dividend yield
    
    
    
    %Contractual term
    
    5.0 yearsVolatility
    
    
    69.8
    %
  4. Debt
  June 30,
    
    
    December 31,2006
    
    
    2005SecuredEquipment notes payable, variable interest rates of 6.80% to 10.30%
    
    $
    1,243
    
    
    $
    1,240US Airways Citibank Loan (former ATSB loan)
    
    
    
    
    
    
    551Slot financing, interest rate of 8%, installments due through 2015
    
    
    49
    
    
    
    50Capital lease obligations, interest rate of 8%, installments due through 2021
    
    
    44
    
    
    
    46GE Credit Facility, variable interest rate of 9.21%, installments due 2006 to 2010
    
    
    24
    
    
    
    28Airbus Loans
    
    
    
    
    
    
    1861,360
    
    
    
    2,101UnsecuredNote payable to Pension Benefit Guaranty Corporation, interest rate of 6%,
interest only payments until due 2012
    
    
    10
    
    
    
    1010
    
    
    
    10Total long-term debt and capital lease obligations
    
    
    1,370
    
    
    
    2,111Less: Unamortized discount on debt
    
    
    (136
    )
    
    
    (139
    )Current maturities
    
    
    (110
    )
    
    
    (117
    )Long-term debt and capital lease obligations, net of current maturities
    
    $
    1,124
    
    
    $
    1,855
 Refinancing Transaction 
  42




---



##### Table of Contents




    
    The amended and restated US Airways and AWA loans entered into on September 27, 2005
that had previously been guaranteed by the Air Transportation Stabilization Board (the
ATSB). On October 19, 2005, $777 million of the loans, of which $752 million had been
guaranteed by the ATSB, was sold by the lenders by order of the ATSB to 13 fixed income
investors, removing the ATSB guarantee. At the time of repayment of these loans on March
31, 2006, the total outstanding balance of the loans was $801 million, of which $551
million was outstanding under the US Airways loan and $250 million was outstanding under
the AWA loan. Proceeds were also used to pay $15 million of accrued interest and fees on
the US Airways loan, and $8 million of accrued interest and $5 million of prepayment
penalty on the AWA loan.
    
    The $161 million loan entered into as of September 27, 2005 between US Airways and AWA
and Airbus Financial Services, for which US Airways Group was the guarantor. At the time
of repayment on March 31, 2006, the outstanding balance of the loan was $161 million. US
Airways and AWA also had an $89 million loan from Airbus Financial Services entered into
as of September 27, 2005. In accordance with the terms of the loan agreements, the
outstanding principal amount of the $89 million loan was to be forgiven in writing on the
earlier of December 31, 2010 or the date that the outstanding principal amount of, accrued
interest on, and all other amounts due under the Airbus $161 million loan were paid in
full, provided that US Airways Group complies with the delivery schedule for certain
Airbus aircraft. As a result of the prepayment of the $161 million loan on March 31,
2006, the $89 million loan agreement was terminated and the $89 million loan, of which $89
million was outstanding, was forgiven along with $1 million in accrued interest.
    
    Two loans provided by GECC to AWA pursuant to loan agreements entered into as of
September 3, 2004 referred to as the Spare Parts Facility and the Engines Facility. At
the time of repayment, the principal amounts outstanding under the Spare Parts
 43




---



##### Table of Contents



Facility and the Engines Facility were $76 million and $34 million, respectively. Proceeds
were also used to pay $1 million of accrued interest and $1 million of prepayment penalties
on these two GECC loans.
  5. Emergence from bankruptcy and merger
 (a) Claims resolution
  (b) Fresh-start reporting and purchase accounting updates
   44




---



##### Table of Contents



Goodwill reported as of December 31, 2005
    
    $
    732Non-current employee benefits and other
    
    
    (20
    )Long-term debt
    
    
    (10
    )Payables to related parties
    
    
    8Other assets
    
    
    (13
    )Property and equipment
    
    
    4Accrued compensation and vacation
    
    
    (4
    )Other accrued expenses
    
    
    2Materials and supplies, net
    
    
    3Accounts receivable
    
    
    1Accrued taxes
    
    
    (2
    )Goodwill reported as of June 30, 2006
    
    $
    701
  (c) Reorganization items
  Three Months
    
    
    Six Months EndedEnded June 30, 2005
    
    
    June 30, 2005Gain related to curtailment of postretirement benefits (a)
    
    $
    
    
    
    $
    183Gain related to curtailment of pension plans (a)
    
    
    
    
    
    
    24Interest on accumulated cash
    
    
    3
    
    
    
    5Severance including benefits (b)
    
    
    (4
    )
    
    
    (99
    )Minimum pension liability adjustment (a)
    
    
    
    
    
    
    (91
    )Professional fees
    
    
    (19
    )
    
    
    (34
    )Damage and deficiency claims (c)
    
    
    (6
    )
    
    
    (14
    )Aircraft order penalties (d)
    
    
    
    
    
    
    (2
    )Reorganization items, net
    
    $
    (26
    )
    
    $
    (28
    )
 
 (a)
    
    In January 2005, the Bankruptcy Court approved settlement agreements between US Airways and its unions and the court-appointed
Section 1114 Committee, representing retirees other than those represented by the International Association of Machinists and
Aerospace Workers and Transport Workers Union, to begin the significant curtailment of postretirement medical benefits. US Airways
recognized a gain of $183 million in connection with this curtailment. Also in January 2005, US Airways terminated its three
mainline defined benefit plans. US Airways recognized a curtailment gain of $24 million and a $91 million minimum pension
liability adjustment in connection with the terminations. See also Note 8.
 45




---



##### Table of Contents



(b)
    
    In connection with the labor agreements reached during the bankruptcy, approximately 5,000 employees across several of US Airways
labor groups were involuntarily terminated or participated in voluntary furlough and termination programs.(c)
    
    Damage and deficiency claims arise as a result of the election to restructure, abandon or reject aircraft debt and leases during
the bankruptcy proceedings.(d)
    
    As a result of the bankruptcy filing in September 2004, US Airways did not expect to be able to secure the financing necessary to
take on-time delivery of three scheduled regional jet aircraft and therefore accrued penalties of $2 million in the first quarter
of 2005.
 6. Related party transactions
  June 30, 2006
    
    
    December 31, 2005US Airways Group
    
    $
    (1,139
    )
    
    $
    (269
    )AWA
    
    
    (285
    )
    
    
    (20
    )Other US Airways Group wholly owned subsidiaries
    
    
    (52
    )
    
    
    (47
    )$
    (1,476
    )
    
    $
    (336
    )
    7. Income Taxes
   46




---



##### Table of Contents



8. Employee benefit plans
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    7Interest cost
    
    
    3
    
    
    
    3
    
    
    
    6
    
    
    
    18Expected return on plan assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of:Prior service benefit
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (44
    )Actuarial gain
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (7
    )Net periodic cost
    
    
    4
    
    
    
    (31
    )
    
    
    8
    
    
    
    (26
    )Curtailment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183
    )Total (income) cost
    
    $
    4
    
    
    $
    (31
    )
    
    $
    8
    
    
    $
    (209
    )
  Six Months EndedJune 30, 2005Service cost
    
    $
    1Interest cost
    
    
    6Expected return on plan assets
    
    
    (5
    )Net periodic cost
    
    
    2Curtailment gain
    
    
    (24
    )Total (income) cost
    
    $
    (22
    )
   47




---



##### Table of Contents



9. Express expenses
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Aircraft fuel and related taxes
    
    $
    147
    
    
    $
    128
    
    
    $
    273
    
    
    $
    193Salaries and related costs
    
    
    16
    
    
    
    22
    
    
    
    32
    
    
    
    44Capacity purchases
    
    
    262
    
    
    
    217
    
    
    
    507
    
    
    
    446Aircraft rent
    
    
    2
    
    
    
    7
    
    
    
    9
    
    
    
    14Aircraft maintenance
    
    
    1
    
    
    
    4
    
    
    
    3
    
    
    
    7Other rent and landing fees
    
    
    32
    
    
    
    29
    
    
    
    62
    
    
    
    59Selling expenses
    
    
    31
    
    
    
    25
    
    
    
    55
    
    
    
    44Depreciation and amortization
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    4Other expenses
    
    
    43
    
    
    
    42
    
    
    
    92
    
    
    
    85Express expenses
    
    $
    534
    
    
    $
    476
    
    
    $
    1,033
    
    
    $
    896
 48




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     49




---



##### Table of Contents



Recent Developments
 Refinancing Transaction 
   50




---



##### Table of Contents




    
    The amended and restated US Airways and AWA loans entered into on September 27,
2005 that had previously been guaranteed by the Air Transportation Stabilization Board
(the ATSB). On October 19, 2005, $777 million of the loans, of which $752 million
had been guaranteed by the ATSB, was sold by the lenders by order of the ATSB to 13
fixed income investors, removing the ATSB guarantee. At the time of repayment of
these loans on March 31, 2006, the total outstanding balance of the loans was $801
million, of which $551 million was outstanding under the US Airways loan and $250
million was outstanding under the AWA loan.
    
    The $161 million loan entered into as of September 27, 2005 between US Airways and
AWA and Airbus Financial Services, for which US Airways Group was the guarantor. At
the time of repayment on March 31, 2006, the outstanding balance of the loan was $161
million. US Airways and AWA also had an $89 million loan from Airbus Financial
Services entered into as of September 27, 2005. In accordance with the terms of the
loan agreements, the outstanding principal amount of the $89 million loan was to be
forgiven in writing on the earlier of December 31, 2010 or the date that the
outstanding principal amount of, accrued interest on, and all other amounts due under
the Airbus $161 million loan were paid in full, provided that the Company complies
with the delivery schedule for certain Airbus aircraft. As a result of the prepayment
of the $161 million loan on March 31, 2006, the $89 million loan agreement was
terminated and the $89 million loan, of which $89 million was outstanding, was
forgiven.
    
    Two loans provided by GECC to AWA pursuant to loan agreements entered into as of
September 3, 2004 referred to as the Spare Parts Facility and the Engines Facility.
At the time of repayment, the principal amounts outstanding under the Spare Parts
Facility and the Engines Facility were $76 million and $34 million, respectively.
Proceeds were also used to pay $1 million of accrued interest and $1 million of
prepayment penalties on these two GECC loans.
  Conversion of 7.5% Convertible Senior Notes due 2009 
 51




---



##### Table of Contents



US Airways Groups Emergence from Bankruptcy
  52




---



##### Table of Contents



US Airways Groups Results of Operations
   US Airways Group
Consolidated Statement of Operations
(in millions)
 Three months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues:Mainline passenger
    
    $
    2,186
    
    
    $
    657
    
    
    $
    3,996
    
    
    $
    1,234Express passenger
    
    
    780
    
    
    
    129
    
    
    
    1,392
    
    
    
    233Cargo
    
    
    37
    
    
    
    8
    
    
    
    74
    
    
    
    17Other
    
    
    188
    
    
    
    51
    
    
    
    378
    
    
    
    96Total operating revenues
    
    
    3,191
    
    
    
    845
    
    
    
    5,840
    
    
    
    1,580Operating expenses:Aircraft fuel and related taxes
    
    
    669
    
    
    
    199
    
    
    
    1,223
    
    
    
    359Gain on fuel hedging instruments, net
    
    
    (29
    )
    
    
    (9
    )
    
    
    (56
    )
    
    
    (69
    )Salaries and related costs
    
    
    542
    
    
    
    174
    
    
    
    1,045
    
    
    
    349Express expenses
    
    
    660
    
    
    
    136
    
    
    
    1,276
    
    
    
    247Aircraft rent
    
    
    180
    
    
    
    81
    
    
    
    365
    
    
    
    158Aircraft maintenance
    
    
    153
    
    
    
    66
    
    
    
    291
    
    
    
    120Other rent and landing fees
    
    
    145
    
    
    
    46
    
    
    
    285
    
    
    
    87Selling expenses
    
    
    121
    
    
    
    44
    
    
    
    228
    
    
    
    81Special items, net
    
    
    35
    
    
    
    
    
    
    
    (9
    )
    
    
    1Depreciation and amortization
    
    
    45
    
    
    
    12
    
    
    
    90
    
    
    
    23Other
    
    
    328
    
    
    
    83
    
    
    
    635
    
    
    
    166Total operating expenses
    
    
    2,849
    
    
    
    832
    
    
    
    5,373
    
    
    
    1,522Operating income
    
    
    342
    
    
    
    13
    
    
    
    467
    
    
    
    58Nonoperating income (expense)Interest income
    
    
    41
    
    
    
    2
    
    
    
    66
    
    
    
    4Interest expense, net
    
    
    (72
    )
    
    
    (20
    )
    
    
    (147
    )
    
    
    (39
    )Other, net
    
    
    
    
    
    
    2
    
    
    
    (11
    )
    
    
    2Nonoperating expense, net
    
    
    (31
    )
    
    
    (16
    )
    
    
    (92
    )
    
    
    (33
    )Income (loss) before taxes and cumulative effect
of change in accounting principle
    
    
    311
    
    
    
    (3
    )
    
    
    375
    
    
    
    25Income tax provision
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    Income (loss) before cumulative effect of change
in accounting principle
    
    
    305
    
    
    
    (3
    )
    
    
    369
    
    
    
    25Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (202
    )Net income (loss)
    
    $
    305
    
    
    $
    (3
    )
    
    $
    370
    
    
    $
    (177
    )
 53




---



##### Table of Contents



54




---



##### Table of Contents



Three Months Ended June 30, 2006
Compared with the
Three Months Ended June 30, 2005
    Six Months Ended June 30, 2006
Compared with the
Six Months Ended June 30, 2005
  55




---



##### Table of Contents



AWAs Results of Operations
   56




---



##### Table of Contents



Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent Change
    
    June 30,
    
    Percent Change2006
    
    2005
    
    2006-2005
    
    2006
    
    2005
    
    2006-2005Revenue passenger miles (millions) (a)
    
    
    6,238
    
    
    
    6,386
    
    
    
    (2.3
    )
    
    
    11,898
    
    
    
    12,057
    
    
    
    (1.3
    )Available seat miles (millions) (b)
    
    
    7,580
    
    
    
    7,755
    
    
    
    (2.3
    )
    
    
    14,779
    
    
    
    15,057
    
    
    
    (1.8
    )Load factor (c)
    
    
    82.3
    %
    
    
    82.3
    %
    
    0
    pts

    
    
    80.5
    %
    
    
    80.1
    %
    
    0.4
    ptsYield (d)
    
    
    11.97
    
    
    
    10.29
    
    
    
    16.4
    
    
    
    11.76
    
    
    
    10.23
    
    
    
    14.9Passenger revenue per available seat mile (e)
    
    
    9.85
    
    
    
    8.47
    
    
    
    16.3
    
    
    
    9.47
    
    
    
    8.20
    
    
    
    15.5Cost per available seat mile (f)
    
    
    10.05
    
    
    
    8.95
    
    
    
    12.3
    
    
    
    9.43
    
    
    
    8.45
    
    
    
    11.6Passenger enplanements (thousands) (g)
    
    
    5,545
    
    
    
    5,752
    
    
    
    (3.6
    )
    
    
    10,637
    
    
    
    10,924
    
    
    
    (2.6
    )Aircraft at end of period
    
    
    135
    
    
    
    143
    
    
    
    (5.6
    )
    
    
    135
    
    
    
    143
    
    
    
    (5.6
    )Block hours (h)
    
    
    139,183
    
    
    
    143,365
    
    
    
    (2.9
    )
    
    
    273,153
    
    
    
    279,862
    
    
    
    (2.4
    )Average stage length (miles) (i)
    
    
    1,040
    
    
    
    1,037
    
    
    
    0.3
    
    
    
    1,034
    
    
    
    1,030
    
    
    
    0.4Average passenger journey (miles) (j)
    
    
    1,609
    
    
    
    1,681
    
    
    
    (4.3
    )
    
    
    1,594
    
    
    
    1,653
    
    
    
    (3.6
    )Gallons of aircraft fuel consumed (millions)
    
    
    111.1
    
    
    
    114.5
    
    
    
    (3.0
    )
    
    
    216.3
    
    
    
    221.7
    
    
    
    (2.4
    )Average aircraft fuel price including tax (per gallon)
    
    $
    2.18
    
    
    $
    1.74
    
    
    
    25.3
    
    
    $
    2.07
    
    
    $
    1.62
    
    
    
    27.6Full time equivalent employees at end of period
    
    
    12,766
    
    
    
    12,200
    
    
    
    4.6
    
    
    
    12,766
    
    
    
    12,177
    
    
    
    4.8
 
 (a)
    
    Revenue passenger mile (RPM)  A basic measure of sales volume. A RPM represents one
passenger flown one mile.(b)
    
    Available seat mile (ASM)  A basic measure of production. An ASM represents one seat flown
one mile.(c)
    
    Load factor  The percentage of available seats that are filled with revenue passengers.(d)
    
    Yield  A measure of airline revenue derived by dividing passenger revenue by revenue
passenger miles and expressed in cents per mile.(e)
    
    Passenger revenue per available seat mile (PRASM)  Total passenger revenues divided by
total available seat miles.(f)
    
    Cost per available seat mile (CASM)  Total mainline operating expenses divided by total
available seat miles.(g)
    
    Passenger enplanements The number of passengers on board an aircraft including local,
connecting and through passengers.(h)
    
    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.(i)
    
    Average stage length  The average of the distances flown on each segment of every route.(j)
    
    Average passenger journey  The average one-way trip measured in miles for one passenger
origination.
 57




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##### Table of Contents



Three Months Ended June 30, 2006
Compared with the
Three Months Ended June 30, 2005
    2006
    
    
    2005Operating expenses:Aircraft fuel and related taxes
    
    $
    242
    
    
    $
    199Gains on fuel hedging instruments, net
    
    
    (29
    )
    
    
    (9
    )Salaries and related costs
    
    
    191
    
    
    
    173Aircraft rent
    
    
    85
    
    
    
    81Aircraft maintenance
    
    
    73
    
    
    
    66Other rent and landing fees
    
    
    45
    
    
    
    46Selling expenses
    
    
    42
    
    
    
    44Special items, net
    
    
    23
    
    
    
    Depreciation and amortization
    
    
    10
    
    
    
    12Other
    
    
    79
    
    
    
    82Total mainline operating expenses
    
    
    761
    
    
    
    694Express expenses
    
    
    159
    
    
    
    136Total operating expenses
    
    $
    920
    
    
    $
    830
  58




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##### Table of Contents



Percent2006
    
    2005
    
    changeAircraft fuel and related taxes
    
    
    3.19
    
    
    
    2.57
    
    
    
    24.4Gains on fuel hedging instruments, net
    
    
    (0.38
    )
    
    
    (0.12
    )
    
    
    229.7Salaries and related costs
    
    
    2.52
    
    
    
    2.23
    
    
    
    13.0Aircraft rent
    
    
    1.12
    
    
    
    1.04
    
    
    
    7.4Aircraft maintenance
    
    
    0.96
    
    
    
    0.85
    
    
    
    13.2Other rent and landing fees
    
    
    0.59
    
    
    
    0.59
    
    
    
    Selling expenses
    
    
    0.55
    
    
    
    0.57
    
    
    
    (2.3
    )Special items, net
    
    
    0.30
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    0.13
    
    
    
    0.15
    
    
    
    (14.7
    )Other
    
    
    1.07
    
    
    
    1.07
    
    
    
    10.05
    
    
    
    8.95
    
    
    
    12.3
  
    
    Aircraft fuel and related tax expense per ASM increased 24.4% primarily due
to a 25.3% increase in the average price per gallon of fuel to $2.18 in the second
quarter of 2006 from $1.74 in the comparable 2005 quarter.
    
    Salaries and related costs increased 13.0% primarily due to costs associated
with employee incentive plans including $14 million recorded in the second quarter of
2006 for the US Airways profit sharing plan.
    
    Aircraft rent expense per ASM increased 7.4% due principally to aircraft mix,
as previously leased Boeing 737-300 and Airbus A320 aircraft were returned to aircraft
lessors and replaced with leased Airbus A320 and A319 aircraft at higher monthly lease
rates.
    
    Aircraft maintenance expense per ASM increased 13.2% due
primarily to timing as a
higher number of heavy maintenance checks occurred in the second quarter of 2006
as compared to 2005.
    
    Depreciation and amortization expense per ASM decreased 14.7% due to the mix
of leased to owned aircraft as a result of sale-leaseback transactions in the third
quarter of 2005.
  59




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Six Months Ended June 30, 2006
Compared with the
Six Months Ended June 30, 2005
    2006
    
    
    2005Operating expenses:Aircraft fuel and related taxes
    
    $
    447
    
    
    $
    359Gains on fuel hedging instruments, net
    
    
    (56
    )
    
    
    (69
    )Salaries and related costs
    
    
    366
    
    
    
    348Aircraft rent
    
    
    171
    
    
    
    158Aircraft maintenance
    
    
    125
    
    
    
    120Other rent and landing fees
    
    
    90
    
    
    
    87Selling expenses
    
    
    81
    
    
    
    81Special items, net
    
    
    (7
    )
    
    
    1Depreciation and amortization
    
    
    21
    
    
    
    23Other
    
    
    155
    
    
    
    164Total mainline operating expenses
    
    
    1,393
    
    
    
    1,272Express expenses
    
    
    305
    
    
    
    247Total operating expenses
    
    $
    1,698
    
    
    $
    1,519
  60




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##### Table of Contents



Percent2006
    
    2005
    
    changeAircraft fuel and related taxes
    
    
    3.02
    
    
    
    2.38
    
    
    
    26.9Gains on fuel hedging instruments, net
    
    
    (0.38
    )
    
    
    (0.46
    )
    
    
    (17.3
    )Salaries and related costs
    
    
    2.48
    
    
    
    2.31
    
    
    
    7.2Aircraft rent
    
    
    1.16
    
    
    
    1.05
    
    
    
    10.3Aircraft maintenance
    
    
    0.85
    
    
    
    0.80
    
    
    
    6.1Other rent and landing fees
    
    
    0.61
    
    
    
    0.58
    
    
    
    5.4Selling expenses
    
    
    0.55
    
    
    
    0.54
    
    
    
    1.9Special items, net
    
    
    (0.05
    )
    
    
    0.01
    
    
    Depreciation and amortization
    
    
    0.14
    
    
    
    0.15
    
    
    
    (7.0
    )Other
    
    
    1.05
    
    
    
    1.09
    
    
    
    (3.7
    )9.43
    
    
    
    8.45
    
    
    
    11.6
  
    
    Aircraft fuel and related taxes per ASM increased 26.9% primarily due to a
27.6% increase in the average price per gallon of fuel to $2.07 in the first six
months of 2006 from $1.62 in the comparable 2005 period.
    
    Salaries and related costs increased 7.2% primarily due to higher costs
associated with employee incentive plans including $14 million recorded in the second
quarter of 2006 for the US Airways profit sharing plan.
    
    Aircraft rent expense per ASM increased 10.3% due principally to aircraft
mix, as previously leased Boeing 737-300 and Airbus A320 aircraft were returned to
aircraft lessors and replaced with leased Airbus A320 and A319 aircraft at higher
monthly lease rates.
    
    Aircraft maintenance expense per ASM increased 6.1% due
primarily to timing as a higher
number of heavy maintenance checks occurred in the first six months of 2006 as
compared to 2005.
    
    Other rent and landing fees per ASM increased 5.4% primarily
due to increases in airport rent.
  61




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US Airways Results of Operations
     Three Months Ended
    
    Percent
    
    Six Months Ended
    
    PercentJune 30,
    
    Change
    
    June 30,
    
    Change2006
    
    2005
    
    2006-2005
    
    2006
    
    2005
    
    2006-2005Revenue passenger miles (millions) (a)
    
    
    9,910
    
    
    
    10,727
    
    
    
    (7.6
    )
    
    
    18,206
    
    
    
    20,373
    
    
    
    (10.6
    )Available seat miles (millions) (b)
    
    
    12,055
    
    
    
    13,817
    
    
    
    (12.8
    )
    
    
    23,085
    
    
    
    27,003
    
    
    
    (14.5
    )Load factor (c)
    
    
    82.2
    %
    
    
    77.6
    %
    
    4.6
    pts
    
    
    78.9
    %
    
    
    75.4
    %
    
    3.4
    ptsYield (d)
    
    
    14.52
    
    
    
    12.42
    
    
    
    16.9
    
    
    
    14.26
    
    
    
    12.10
    
    
    
    17.9Passenger revenue per available seat mile (e)
    
    
    11.94
    
    
    
    9.64
    
    
    
    23.8
    
    
    
    11.25
    
    
    
    9.13
    
    
    
    23.2Cost per available seat mile (f)
    
    
    11.72
    
    
    
    10.25
    
    
    
    14.3
    
    
    
    11.58
    
    
    
    10.37
    
    
    
    11.7Passenger enplanements (thousands) (g)
    
    
    9,626
    
    
    
    11,102
    
    
    
    (13.3
    )
    
    
    18,126
    
    
    
    21,355
    
    
    
    (15.1
    )Aircraft at end of period
    
    
    224
    
    
    
    268
    
    
    
    (16.4
    )
    
    
    224
    
    
    
    268
    
    
    
    (16.4
    )Block hours (h)
    
    
    205,547
    
    
    
    249,186
    
    
    
    (17.5
    )
    
    
    398,468
    
    
    
    496,239
    
    
    
    (19.7
    )Average stage length (miles) (i)
    
    
    883
    
    
    
    797
    
    
    
    10.8
    
    
    
    855
    
    
    
    796
    
    
    
    7.4Average passenger journey (miles) (j)
    
    
    1,030
    
    
    
    966
    
    
    
    6.6
    
    
    
    1,005
    
    
    
    954
    
    
    
    5.3Gallons of aircraft fuel consumed (millions)
    
    
    197.4
    
    
    
    226.4
    
    
    
    (12.8
    )
    
    
    379.7
    
    
    
    444.6
    
    
    
    (14.6
    )Average aircraft fuel price including tax (per gallon)
    
    $
    2.16
    
    
    $
    1.68
    
    
    
    28.2
    
    
    $
    2.04
    
    
    $
    1.58
    
    
    
    29.3Full time equivalent employees at end of period
    
    
    19,222
    
    
    
    21,396
    
    
    
    (10.2
    )
    
    
    19,222
    
    
    
    21,396
    
    
    
    (10.2
    )
 
 (a)
    
    Revenue passenger mile (RPM)  A basic measure of sales volume. A RPM represents one
passenger flown one mile. 62




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##### Table of Contents



(b)
    
    Available seat mile (ASM)  A basic measure of production. An ASM represents one seat flown
one mile.(c)
    
    Load factor  The percentage of available seats that are filled with revenue passengers.(d)
    
    Yield  A measure of airline revenue derived by dividing passenger revenue by revenue
passenger miles and expressed in cents per mile.(e)
    
    Passenger revenue per available seat mile (PRASM)  Total passenger revenues divided by
total available seat miles.(f)
    
    Cost per available seat mile (CASM)  Total mainline operating expenses divided by total
available seat miles.(g)
    
    Passenger enplanements The number of passengers on board an aircraft including local,
connecting and through passengers.(h)
    
    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.(i)
    
    Average stage length  The average of the distances flown on each segment of every route.(j)
    
    Average passenger journey  The average one-way trip measured in miles for one passenger
origination. Three Months Ended June 30, 2006
Compared with the
Three Months Ended June 30, 2005
    2006
    
    
    2005Operating expenses:Aircraft fuel and related taxes
    
    $
    426
    
    
    $
    381Salaries and related costs
    
    
    351
    
    
    
    332Aircraft rent
    
    
    95
    
    
    
    97Aircraft maintenance
    
    
    80
    
    
    
    89Other rent and landing fees
    
    
    100
    
    
    
    114Selling expenses
    
    
    79
    
    
    
    87Special items, net
    
    
    12
    
    
    
    Depreciation and amortization
    
    
    37
    
    
    
    56Other
    
    
    232
    
    
    
    260Total mainline operating expenses
    
    
    1,412
    
    
    
    1,416Express expenses
    
    
    534
    
    
    
    476Total operating expenses
    
    $
    1,946
    
    
    $
    1,892
 63




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##### Table of Contents



2006
    
    2005
    
    Percent changeAircraft fuel and related taxes
    
    
    3.53
    
    
    
    2.76
    
    
    
    28.2Salaries and related costs
    
    
    2.91
    
    
    
    2.40
    
    
    
    21.2Aircraft rent
    
    
    0.79
    
    
    
    0.70
    
    
    
    12.3Aircraft maintenance
    
    
    0.66
    
    
    
    0.64
    
    
    
    3.0Other rent and landing fees
    
    
    0.83
    
    
    
    0.83
    
    
    
    Selling expenses
    
    
    0.66
    
    
    
    0.63
    
    
    
    4.1Special items, net
    
    
    0.10
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    0.31
    
    
    
    0.41
    
    
    
    (24.3
    )Other
    
    
    1.93
    
    
    
    1.88
    
    
    
    2.811.72
    
    
    
    10.25
    
    
    
    14.4
  
    
    Aircraft fuel and related tax expense per ASM increased 28.2% primarily due
to a 28.2% increase in the average price per gallon of fuel from $1.68 in the second
quarter of 2005 to $2.16 in the second quarter of 2006.
    
    Salaries and related costs per ASM increased 21.2% primarily due to higher
costs associated with employee incentive plans including $22 million recorded in the
second quarter of 2006 for the US Airways profit sharing plan offset by reduced
salaries and benefits for lower headcount in the second quarter of 2006 as compared to
the same period in 2005.
    
    Aircraft rent expense per ASM increased 12.3% reflecting a shift in the mix
from owned to leased as a result of the sale-leaseback transactions in the second,
third and fourth quarters of 2005.
    
    Depreciation and amortization decreased 24.3% per ASM as a result of fewer
owned aircraft in the operating fleet (see aircraft rent expense per
ASM above) and lower book values on the continuing fleet as a result of the application of
fresh-start reporting.
 64




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65




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Six Months Ended June 30, 2006
Compared with the
Six Months Ended June 30, 2005
    2006
    
    
    2005Operating expenses:Aircraft fuel and related taxes
    
    $
    776
    
    
    $
    703Salaries and related costs
    
    
    680
    
    
    
    741Aircraft rent
    
    
    194
    
    
    
    195Aircraft maintenance
    
    
    166
    
    
    
    161Other rent and landing fees
    
    
    195
    
    
    
    214Selling expenses
    
    
    146
    
    
    
    181Special items, net
    
    
    (3
    )
    
    
    Depreciation and amortization
    
    
    73
    
    
    
    105Other
    
    
    446
    
    
    
    499Total mainline operating expenses
    
    
    2,673
    
    
    
    2,799Express expenses
    
    
    1,033
    
    
    
    896Total operating expenses
    
    $
    3,706
    
    
    $
    3,695
  66




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##### Table of Contents



2006
    
    2005
    
    Percent changeAircraft fuel and related taxes
    
    
    3.36
    
    
    
    2.60
    
    
    
    29.1Salaries and related costs
    
    
    2.95
    
    
    
    2.74
    
    
    
    7.3Aircraft rent
    
    
    0.84
    
    
    
    0.72
    
    
    
    16.4Aircraft maintenance
    
    
    0.72
    
    
    
    0.60
    
    
    
    20.6Other rent and landing fees
    
    
    0.84
    
    
    
    0.79
    
    
    
    6.6Selling expenses
    
    
    0.63
    
    
    
    0.67
    
    
    
    (5.6
    )Special items, net
    
    
    (0.01
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    0.32
    
    
    
    0.39
    
    
    
    (18.7
    )Other
    
    
    1.93
    
    
    
    1.86
    
    
    
    4.511.58
    
    
    
    10.37
    
    
    
    12
  
    
    Aircraft fuel and related tax expense per ASM increased 29.1% primarily due
to a 29.3% increase in the average price per gallon of fuel from $1.58 in the first
six months of 2005 to $2.04 in the first six months of 2006.
    
    Salaries and related costs per ASM increased 7.3% primarily due to higher
costs associated with employee incentive plans including $22 million recorded in the
second quarter of 2006 for the US Airways profit sharing plan offset by reduced
salaries and benefits for lower headcount in the first six months of 2006 as compared
to the same period in 2005.
    
    Aircraft rent expense per ASM increased 16.4% reflecting a shift in the mix
of owned to leased aircraft as a result of the sale-leaseback transactions in the
second, third and fourth quarters of 2005.
    
    Aircraft maintenance per ASM increased 20.6% reflecting the shift to outside
vendors in the second quarter of 2005 to perform scheduled maintenance, partially
offsetting the decrease in salaries and related costs described above.
    
    Other rent and landing fees per ASM increased 6.6% reflecting fixed costs
associated with space rent while ASMs decreased 14.5% as compared to the prior year.
    
    Selling expenses per ASM decreased 5.6% primarily due to decreases in credit
card and computer reservation system expenses and the termination of certain marketing
contracts and reductions in advertising programs as a result of the bankruptcy and
merger.
    
    Depreciation and amortization decreased 18.7% per ASM as a result of fewer
owned aircraft in the operating fleet (see aircraft rent expense per ASM above) and
lower book values on the continuing fleet as a result of the application of
fresh-start reporting.
 67




---



##### Table of Contents



Liquidity and Capital Resources
 Sources and Uses of Cash
 US Airways Group
    68




---



##### Table of Contents



AWA
    US Airways
    69




---



##### Table of Contents



Commitments
  Refinancing Transactions
    
    
    requires certain mandatory prepayments upon certain asset sales, including
sale-leasebacks, subject to US Airways Groups right to reinvest net sales proceeds in
qualified assets;
    
    provides for mandatory prepayments upon a change in control or collateral value
deficiencies;
    
    establishes certain financial covenants, subject to adjustment, including minimum
cash requirements (as described in more detail below), minimum ratios of earnings
before interest, taxes, depreciation, amortization and aircraft rent to fixed charges
(except during a covenant suspension period), and minimum ratios of collateral value
to outstanding principal;
    
    contains customary affirmative covenants and negative covenants (some of which are
eased during a covenant suspension period), including restrictions on liens,
investments, restricted payments, asset sales, acquisitions, changes in fiscal year,
sale and leasebacks, transactions with affiliates, conduct of business, mergers or
consolidations, and amendments to other indebtedness and certain other documents; and
 70




---



##### Table of Contents




    
    contains customary events of default, including payment defaults, cross-defaults,
breach of covenants, bankruptcy and insolvency defaults, judgment defaults and
business discontinuations (i.e., voluntary suspension of substantially all flights for
two days).
   
    
    The amended and restated US Airways and AWA loans entered into on September 27,
2005 that had previously been guaranteed by the ATSB. On October 19, 2005, $777
million of the loans, of which $752 million had been guaranteed by the ATSB, was sold
by the lenders by order of the ATSB to 13 fixed income investors, removing the ATSB
guarantee. At the time of repayment of these loans on March 31, 2006, the total
outstanding balance of the loans was $801 million, of which $551 million was
outstanding under the US Airways loan and $250 million was outstanding under the AWA
loan.
    
    The $161 million loan entered into as of September 27, 2005 between US Airways and
AWA and Airbus Financial Services, for which US Airways Group was the guarantor. At
the time of repayment on March 31, 2006, the outstanding balance of the loan was $161
million. US Airways and AWA also had an $89 million loan from Airbus Financial
Services entered into as of September 27, 2005. In accordance with the terms of the
loan agreements, the outstanding principal amount of the $89 million loan was to be
forgiven in writing on the earlier of December 31, 2010 or the date that the
outstanding principal amount of, accrued interest on, and all other amounts due under
the Airbus $161 million loan were paid in full, provided that the Company complies
with the delivery schedule for certain Airbus aircraft. As a result of the prepayment
of the $161 million loan on March 31, 2006, the $89 million loan agreement was
terminated and the $89 million loan, of which $89 million was outstanding, was
forgiven.
    
    Two loans provided by GECC to AWA pursuant to loan agreements entered into as of
September 3, 2004 referred to as the Spare Parts Facility and the Engines Facility.
At the time of repayment, the principal amounts outstanding under the Spare Parts
Facility and the Engines Facility were $76 million and $34 million, respectively.
  Conversion of 7.5% Convertible Senior Notes due 2009
  71




---



##### Table of Contents



7% Senior Convertible Notes
    72




---



##### Table of Contents



General Electric
  Airbus Term Loans
  ATSB Loans
  73




---



##### Table of Contents




    
    90% of the US Airways loan (Tranche A), bore interest at a rate equal to the
conduit providers weighted average cost related to the issuance of certain commercial
paper notes and other short term borrowings plus 0.30%, provided that portions of
Tranche A that were held by the ATSB or by an assignee and no longer subject to such
commercial paper conduit program bore interest at LIBOR plus 40 basis points, and
portions of Tranche A that were under certain circumstances assigned free of the ATSB
guarantee bore interest at LIBOR plus 6.0%; and
    
    10% of the US Airways loan (Tranche B) bore interest at the greater of the Tranche
A interest rate plus 6.0% and LIBOR plus 6.0%.
     Restructuring of Affinity Credit Card Partner Agreement
  74




---



##### Table of Contents



75




---



##### Table of Contents



Restructuring of Credit Card Processing Agreement
     Asset Based Financings
  Embraer Purchase Commitments
  76




---



##### Table of Contents



Bombardier Purchase Commitments
  Covenants and Credit Rating
   Off-Balance Sheet Arrangements
  77




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##### Table of Contents



Other Indebtedness and Obligations
  Payments Due by Period2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalUS Airways Group (1)Debt (2)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,394
    
    
    $
    1,394Aircraft related
and other
commitments
    
    
    18
    
    
    
    36
    
    
    
    36
    
    
    
    34
    
    
    
    48
    
    
    
    1,668
    
    
    
    1,840US Airways (3)Debt and capital
lease obligations
    
    
    68
    
    
    
    83
    
    
    
    79
    
    
    
    71
    
    
    
    75
    
    
    
    994
    
    
    
    1,370Aircraft purchase
and operating
lease commitments
    
    
    425
    
    
    
    923
    
    
    
    1,089
    
    
    
    882
    
    
    
    1,186
    
    
    
    3,923
    
    
    
    8,428Regional capacity
purchase
agreements
    
    
    298
    
    
    
    604
    
    
    
    616
    
    
    
    628
    
    
    
    641
    
    
    
    2,917
    
    
    
    5,704AWA (3)Debt and capital
lease obligations
    
    
    2
    
    
    
    30
    
    
    
    111
    
    
    
    138
    
    
    
    81
    
    
    
    29
    
    
    
    391Aircraft purchase
and operating
lease commitments
(4)
    
    
    187
    
    
    
    399
    
    
    
    372
    
    
    
    676
    
    
    
    256
    
    
    
    1,826
    
    
    
    3,716Regional capacity
purchase
agreements
    
    
    287
    
    
    
    580
    
    
    
    592
    
    
    
    603
    
    
    
    616
    
    
    
    945
    
    
    
    3,623Other US Airways
Group subsidiaries
(5)
    
    
    5
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Total
    
    $
    1,290
    
    
    $
    2,657
    
    
    $
    2,896
    
    
    $
    3,032
    
    
    $
    2,903
    
    
    $
    13,696
    
    
    $
    26,474
 
 (1)
    
    These commitments represent those specifically entered into by US Airways Group or joint
commitments entered into by US Airways Group, AWA and US Airways under which each entity is
jointly and severally liable.
 (2)
    
    Includes $144 million aggregate principal amount of 7% Senior Convertible Notes due 2020
issued by US Airways Group and the $1.25 billion GE Loan due March 31, 2011. In July 2006,
$21 million of the 7% notes were converted into a total of 883,523 shares of common stock.
 (3)
    
    Commitments listed separately under US Airways or AWA represent commitments under agreements
entered into separately by those companies.
 (4)
    
    In July 2006, AWA paid AerCap $20 million to prepay the $33.4 million in supplemental rent.
As a result of this prepayment, annual rental expense will be reduced by approximately $1.9
million through 2013.
 (5)
    
    Represents operating lease commitments entered into by US Airways Groups other airline
subsidiaries Piedmont and PSA.
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Critical Accounting Policies and Estimates
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk Sensitive Instruments
  Commodity price risk
   Interest rate risk
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Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
  Limitation on the effectiveness of controls.
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Part II. Other Information
 
 Item 1. Legal Proceedings
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Item 1A. Risk Factors
 Risk Factors Relating to the Company and Industry Related Risks
  Our business is dependent on the price and availability of aircraft fuel. Continued periods of
historically high fuel costs, significant disruptions in the supply of aircraft fuel or significant
further increases in fuel costs could have a significant negative impact on our operating results.
  Our high level of fixed obligations limits our ability to fund general corporate requirements and
obtain additional financing, limits our flexibility in responding to competitive developments and
increases our vulnerability to adverse economic and industry conditions.
  
    
    A decrease in revenues results in a disproportionately greater percentage
decrease in earnings.
    
    We may not have sufficient liquidity to fund all of these fixed costs if our
revenues decline or costs increase.
    
    We may have to use our working capital to fund these fixed costs instead of
funding general corporate requirements, including capital expenditures.
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
    
    We may not have sufficient liquidity to respond to competitive developments
and adverse economic conditions.
   We may not perform as well financially as we expect following the merger.
  The integration of US Airways Group and America West Holdings following the merger presents
significant challenges.
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US Airways Group could experience significant operating losses in the future.
     Union disputes, employee strikes and other labor-related disruptions may adversely affect our
operations.
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Fluctuations in interest rates could adversely affect our liquidity, operating expenses and
results.
  We rely heavily on automated systems to operate our business and any failure of these systems, or
the failure to integrate them successfully following the merger, could harm our business.
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If we incur problems with any of our third party service providers, our operations could be
adversely affected by a resulting decline in revenue or negative public perception about our
services.
  The travel industry, materially adversely affected by the September 11, 2001 terrorist attacks,
continues to face on-going security concerns and cost burdens associated with security.
  Increases in insurance costs or reductions in insurance coverage may adversely impact our
operations and financial results.
  Changes in government regulation could increase our operating costs and limit our ability to
conduct our business.
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The use of America West Holdings and US Airways Groups respective pre-merger NOLs and certain
other tax attributes is limited following the merger.
  The airline industry is intensely competitive.
  Certain liabilities were not fully extinguished as a result of confirmation of the plan of
reorganization.
  Interruptions or disruptions in service at one of our hub airports could have a material adverse
impact on our operations.
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We are at risk of losses and adverse publicity stemming from any accident involving any of our
aircraft.
  Our business is subject to weather factors and seasonal variations in airline travel, which cause
our results to fluctuate.
  Employee benefit plans represent significant continuing costs to the sponsoring employers.
  Risks Related to Our Common Stock
 Our common stock has limited trading history and its market price may be volatile.
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
    
    our operating results failing to meet the expectations of securities analysts or investors;
    
    changes in financial estimates or recommendations by securities analysts;
    
    material announcements by us or our competitors;
    
    movements in fuel prices;
    
    new regulatory pronouncements and changes in regulatory guidelines;
    
    general and industry-specific economic conditions;
    
    public sales of a substantial number of shares of our common stock; and
    
    general market conditions.
 Conversion of our convertible notes will dilute the ownership interest of existing stockholders and
could adversely affect the market price of our common stock.
  A small number of stockholders beneficially own a substantial amount of our common stock.
  Certain provisions of the amended and restated certificate of incorporation and amended and
restated bylaws of US Airways Group will make it difficult for stockholders to change the
composition of our board of directors and may discourage takeover attempts that some of our
stockholders might consider beneficial.
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
    
    a classified board of directors with three-year staggered terms;
    
    advance notice procedures for stockholder proposals to be considered at stockholders
meetings;
    
    the ability of US Airways Groups board of directors to fill vacancies on the board;
    
    a prohibition against stockholders taking action by written consent;
    
    a prohibition against stockholders calling special meetings of stockholders;
    
    a requirement for the approval of holders of at least 80% of the voting power of the
shares entitled to vote in the election of directors for the stockholders to amend the
second amended and restated bylaws; and
    
    super-majority voting requirements to modify or amend specified provisions of US
Airways Groups amended and restated certificate of incorporation.
  Our charter documents include provisions limiting voting and ownership by foreign owners.
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Item 4. Submission of Matters to a Vote of Security Holders
  Number of SharesFor
    WithheldHerbert M. Baum
    
    
    59,091,484
    
    
    
    430,488Richard C. Kraemer
    
    
    59,113,596
    
    
    
    408,376Cheryl G. Krongard
    
    
    59,105,962
    
    
    
    416,010
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Item 6. Exhibits
 Exhibit No.
    
    Description10.1
    
    America West Holdings 2002 Incentive Equity Plan as amended through May 23, 2002.10.2
    
    Purchase Agreement dated May 31, 2006 by and among US Airways Group, Inc.,
Eastshore Aviation, LLC and Goldman, Sachs & Co. (incorporated by reference to
Exhibit 1.1 to US Airways Groups Current Report on Form 8-K dated May 31, 2006,
filed on June 2, 2006).10.3*
    
    Amended and Restated Embraer Aircraft Purchase Agreement dated as of June 13,
2006 between US Airways Group, Inc. and Embraer Empresa Brasileira de
Aeronautica S.A.31.1
    
    Certification of US Airways Groups Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of US Airways Groups 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.31.5
    
    Certification of US Airways Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.31.6
    
    Certification of US Airways Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of US Airways Groups 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 2002.32.3
    
    Certification of US Airways Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Portions of this exhibit have been omitted under a request for confidential treatment and
filed separately with the United States Securities and Exchange Commission 94




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Signatures
  US Airways Group, Inc. (Registrant)Date: July 27, 2006
    By:
    /s/ Derek J. KerrDerek J. KerrSenior Vice President and Chief Financial OfficerAmerica West Airlines, Inc. (Registrant)Date: July 27, 2006
    By:
    /s/ Derek J. KerrDerek J. KerrSenior Vice President and Chief Financial OfficerUS Airways, Inc. (Registrant)Date: July 27, 2006
    By:
    /s/ Derek J. KerrDerek J. KerrSenior Vice President and Chief Financial Officer 95




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Exhibit Index
 Exhibit No.
    
    Description10.1
    
    America West Holdings 2002 Incentive Equity Plan as amended through May 23, 2002.10.2
    
    Purchase Agreement dated May 31, 2006 by and among US Airways Group, Inc.,
Eastshore Aviation, LLC and Goldman, Sachs & Co. (incorporated by reference to
Exhibit 1.1 to US Airways Groups Current Report on Form 8-K dated May 31, 2006,
filed on June 2, 2006).10.3*
    
    Amended and Restated Embraer Aircraft Purchase Agreement dated as of June 13,
2006 between US Airways Group, Inc. and Embraer Empresa Barsileira de
Aeronautica S.A.31.1
    
    Certification of US Airways Groups Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of US Airways Groups 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.31.5
    
    Certification of US Airways Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.31.6
    
    Certification of US Airways Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of US Airways Groups 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 2002.32.3
    
    Certification of US Airways Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Portions of this exhibit have been omitted under a request for confidential treatment and
filed separately with the United States Securities and Exchange Commission 96