-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AD/KAMa34DuZErbO0KzizQdUG1DKaZDoQa3CXo6sH+OUwqMYwdA7wJ4j44EIew/n 74WnCN0lYORWiVgfLfOmeA== 0000701345-98-000005.txt : 19980323 0000701345-98-000005.hdr.sgml : 19980323 ACCESSION NUMBER: 0000701345-98-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US AIRWAYS GROUP INC CENTRAL INDEX KEY: 0000701345 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 541194634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08444 FILM NUMBER: 98568624 BUSINESS ADDRESS: STREET 1: 2345 CRYSTAL DR CITY: ARLINGTON STATE: VA ZIP: 22227 BUSINESS PHONE: 7038725306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US AIRWAYS INC CENTRAL INDEX KEY: 0000714560 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 530218143 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08442 FILM NUMBER: 98568625 BUSINESS ADDRESS: STREET 1: 2345 CRYSTAL DRIVE CITY: ARLINGTON STATE: VA ZIP: 22227 BUSINESS PHONE: 7038727000 10-K405 1 FORM 10-K.-ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or [ ] 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. (Exact name of registrant as specified in its charter) State of Incorporation: Delaware 2345 Crystal Drive, Arlington, Virginia 22227 (Address of principal executive offices) (703) 872-5306 (Registrant's telephone number, including area code) (Commission file number: 1-8444) (I.R.S. Employer Identification No: 54-1194634) US AIRWAYS, INC. (Exact name of registrant as specified in its charter) State of Incorporation: Delaware 2345 Crystal Drive, Arlington, Virginia 22227 (Address of principal executive offices) (703) 872-7000 (Registrant's telephone number, including area code) (Commission file number: 1-8442) (I.R.S. Employer Identification No: 53-0218143) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Registrant Title of each class on which registered - ---------- ------------------- --------------------- US Airways Common stock, par value $1.00 New York Stock Exchange Group, Inc. per share (Common Stock) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K section 229.405 is not contained herein, and will not be contained, to the best of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of US Airways Group, Inc. held by non-affiliates on February 27, 1998 was approximately $6,342,000,000. On February 27, 1998, there were outstanding approximately 91,646,000 shares of Common Stock and 1,000 shares of common stock of US Airways, Inc. The registrant US Airways, Inc. meets the conditions set forth in General Instructions J(1)(a) and (b) of Form 10-K and is therefore participating in the filing of this form in the reduced disclosure format permitted by such Instructions. Item of Form 10-K Document Incorporated By Reference - -------------------------------- ---------------------------------- Part III, Items 10, 11,12 and 13 Proxy Statement* (excluding therefrom the subsections entitled "Report of the Human Resources Committee of the Board of Directors" and "Performance Graph") - -------------- * Refers to the definitive Proxy Statement of US Airways Group, Inc., to be filed pursuant to Regulation 14A, relating to the Annual Meeting of Stockholders of US Airways Group, Inc. to be held on May 20, 1998. (this space intentionally left blank) US AIRWAYS GROUP, INC. AND US AIRWAYS, INC. FORM 10-K YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS Page PART I ---- Item 1. Business 1 Overview 1 Airline Industry and US Airways' Position 2 in the Marketplace Industry Regulation and Airport Access 4 Certain Ownership Matters 6 Executive Officers 8 Employees 9 Aviation Fuel 12 Use of Travel Agents and Commissions Expenses 12 Computerized Reservation Systems 13 Frequent Traveler Program 13 Insurance 14 Item 2. Properties 15 Flight Equipment 15 Ground Facilities 16 Terminal Construction Projects 17 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 19 PART II Item 5A. Market for US Airways Group's Common Equity and Related 19 Stockholder Matters Stock Exchange Listing 19 Market Prices of Common Stock 20 Foreign Ownership Restrictions 20 Item 5B. Market for US Airways' Common Equity and 20 Related Stockholder Matters Item 6. Selected Financial Data 21 Consolidated Statements of Operations - US Airways Group 21 Consolidated Balance Sheets - US Airways Group 21 Selected Operating and Financial Statistics - US Airways 22 (table continued on following page) US AIRWAYS GROUP, INC. AND US AIRWAYS, INC. FORM 10-K YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS (CONTINUED) Page ---- Item 7. Management's Discussion and Analysis of Financial 23 Condition and Results of Operations Results of Operations 30 Liquidity and Capital Resources 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 39 Item 8A. Consolidated Financial Statements for US Airways Group, Inc. 40 Item 8B. Consolidated Financial Statements for US Airways, Inc. 75 Item 9. Changes In and Disagreements with Accountants on 104 Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of US Airways Group 105 Item 11. Executive Compensation 105 Item 12. Security Ownership of Certain Beneficial Owners 105 and Management Item 13. Certain Relationships and Related Transactions 105 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports 105 on Form 8-K Consolidated Financial Statements 105 Consolidated Financial Statement Schedules 106 Exhibits 106 Reports on Form 8-K 109 SIGNATURES US Airways Group, Inc. 110 US Airways, Inc. 111 PART I ITEM 1. BUSINESS OVERVIEW US Airways Group, Inc. (US Airways Group or the Company) is organized under the laws of the State of Delaware. The Company's executive offices are located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone number (703) 872-5306). US Airways Group changed its name from USAir Group, Inc. effective February 21, 1997. US Airways Group's primary business activity is the ownership of all the common stock of US Airways, Inc. (US Airways), Shuttle, Inc. (Shuttle), Allegheny Airlines, Inc. (Allegheny), Piedmont Airlines, Inc. (Piedmont), PSA Airlines, Inc. (PSA), US Airways Fuel Corporation (formerly USAir Fuel Corporation), US Airways Leasing and Sales, Inc. (formerly USAir Leasing and Services, Inc.) and Material Services Company, Inc. US Airways' accounts include its wholly-owned subsidiary USAM Corp. (USAM). As discussed below, the Company purchased Shuttle on December 30, 1997. US Airways, which is also organized under the laws of the State of Delaware, is the Company's principal operating subsidiary. US Airways is a certificated air carrier engaged primarily in the business of transporting passengers, property and mail. In 1997, US Airways accounted for approximately 92% of the Company's operating revenues on a consolidated basis. US Airways enplaned almost 59 million passengers in 1997 and is the fifth largest domestic air carrier (as ranked by revenue passenger miles (RPMs) flown). As of December 31, 1997, US Airways operated 376 jet aircraft (see Part I, Item 2. "Properties" for additional information) and provided regularly scheduled service through 102 airports in 33 states in the continental United States, Canada, Mexico, France, Germany, Italy, Spain and the Caribbean. US Airways' executive offices are located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone number (703) 872-7000). US Airways' internet address is www.usairways.com. US Airways changed its name from USAir, Inc. effective February 21, 1997. US Airways' principal connecting hubs are located at the major airports in Charlotte, Philadelphia and Pittsburgh. US Airways also has substantial operations at Baltimore/ Washington International Airport (BWI), Boston's Logan International Airport, New York's LaGuardia Airport (LaGuardia) and Washington's Ronald Reagan Washington National Airport (National). Measured by departures, US Airways is the largest or second largest airline at each of the foregoing airports and is the largest air carrier in many smaller eastern cities such as Albany, Buffalo, Hartford, Providence, Richmond, Rochester and Syracuse. US Airways is also the leading airline from the Northeast U.S. to Florida. US Airways currently has approximately 84% of its departures and approximately 56% of its capacity (available seat miles or ASMs) deployed in the Eastern U.S. (that portion of the U.S. east of the Mississippi River). As of December 31, 1997, US Airways had code share arrangements with ten air carriers which operate under the trade name "US Airways Express," including Allegheny, Piedmont and PSA (see Part I, Item 2. "Properties" for additional information related to aircraft operated by the Company's three wholly-owned regional airlines). Under a code share arrangement one air carrier places its designator code and sells tickets on the flights of another air carrier (its code share partner). Through service agreements US Airways provides reservations and, at certain stations, ground support services, in return for service fees. The US Airways Express network feeds traffic into US Airways' route system at several points, primarily at US Airways' hubs. As of December 31, 1997, US Airways Express served 174 airports in 33 states in the continental U.S., Canada and the Bahamas, including 70 airports also served by US Airways. During 1997, US Airways Express air carriers enplaned 10.9 million passengers (including 6.1 million 1 passengers enplaned by Piedmont, PSA and Allegheny), approximately 55% of whom connected to US Airways flights. During the fourth quarter of 1996, US Airways began purchasing all of the capacity (ASMs) generated by Allegheny, Piedmont and PSA in exchange for all of their transportation revenues. These agreements have no effect on the Company's results of operations (US Airways' revenues from these arrangements are reclassified to Passenger transportation revenues and the related expenses eliminated during consolidation of the Company's financial results). In January 1998, US Airways began purchasing the capacity (ASMs) of Mesa Airlines, Inc. (Mesa) in certain markets. Mesa operates regional jets in these markets as part of US Airways Express. US Airways also code shares with Shuttle, which operates under the trade name "US Airways Shuttle." The US Airways Shuttle currently provides high frequency service between New York (LaGuardia), Boston and Washington (National). During December 1997, the Company exercised its right to purchase the Shuttle from its prior owners. US Airways managed Shuttle's operations prior to the purchase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7. of this report (hereafter referred to as "MD&A") for additional information related to the Company's purchase of Shuttle. US Airways also has code share agreements with Qantas Airways Limited and Deutsche BA for flights to/from certain Australian and Pacific destinations and intra-Germany, respectively. During 1997, US Airways terminated the remaining aspects of its relationship with British Airways Plc. (British Airways), including the code sharing agreement between the two companies and certain other commercial arrangements. As discussed in "Certain Ownership Matters" below, British Airways divested its ownership interest in the Company during 1997. As discussed in Part I, Item 3. "Legal Proceedings," litigation remains outstanding between the Company and British Airways. The Company has an agreement with a subsidiary of Airbus Industrie G.I.E. (Airbus) for the purchase of up to 400 new single-aisle aircraft. The agreement, which is discussed in MD&A, includes firm orders for 124 Airbus A320-family aircraft. The Company expects that these new aircraft will replace, at a minimum, US Airways' B737-200, DC-9-30 and MD80 aircraft. Deliveries of the new Airbus aircraft are scheduled to begin in Fall 1998. The Company is also discussing the possible acquisition of new wide- body aircraft with Airbus and The Boeing Company (Boeing) in support of the Company's long-term strategic objective of establishing US Airways as a competitive global airline. AIRLINE INDUSTRY AND US AIRWAYS' POSITION IN THE MARKETPLACE Historically, demand for air transportation has tended to mirror general economic conditions. Since early-1995, general domestic economic conditions have been relatively favorable with the level of demand for air transportation exhibiting a strong correlation. In addition, over the same time period, the Company's airline subsidiaries have experienced favorable pricing and capacity trends in the markets in which they operate. US Airways has the highest cost structure of all major domestic air carriers. Most of the markets in which the Company's airline subsidiaries operate are highly competitive, especially with respect to leisure traffic. The Company's airline subsidiaries compete to varying degrees with other air carriers and with other forms of transportation. US Airways competes with at least one major airline on most of its routes between major cities. Competitors have frequently offered sharply reduced discount fares in many of the markets in which the Company's airline subsidiaries operate. However, in recent years the level of fare discounting among the major 2 domestic air carriers has been somewhat restrained. Airlines, including US Airways, typically use discount fares and other promotions to stimulate traffic during normally slack travel periods to generate cash flow and to increase relative market share in selected markets. Discount and promotional fares are often subject to various restrictions such as minimum stay requirements, advance ticketing, limited seating and refund penalties. US Airways has often elected to match discount or promotional fares initiated by other air carriers in certain markets in order to compete in those markets. Competition between air carriers also involves certain route structure characteristics, such as flight frequencies, availability of non- stop flights, markets served and the time certain flights are operated. To a lesser extent, competition can involve other products, such as in-flight food or amenities, frequent flier programs and airport clubs. Recent years have seen the entrance and growth of "low cost, low fare" competitors in many of the markets in which the Company's airline subsidiaries operate. These competitors, based on low costs of operations and low fare structures, include Southwest Airlines Co. (Southwest) as well as a number of smaller start-up air carriers. During October 1996, Delta Air Lines, Inc. (Delta) launched a low cost product called "Delta Express." Delta Express currently operates primarily within the Eastern U.S. Low cost, low fare operations typically offer a simple product in primarily leisure markets. For example, neither Southwest nor Delta Express offer first class seating or meal service. In the past, US Airways has in some cases responded to the entry of a low cost, low fare competitor into its markets by matching fares and, as a result of increased passenger traffic volumes related to lower fares, increasing the frequency of service in related markets, generally with the result of diluting US Airways' yield (Passenger transportation revenue per revenue passenger mile) in these markets. In some cases, US Airways has responded by reducing or eliminating service in affected markets (see related discussion in MD&A under "Current Competitive Position"). US Airways' Northeast-Florida service has been particularly affected by low cost, low fare competition. The Company believes that US Airways' new contract with its pilots and the introduction of new aircraft into US Airways' operating fleet will help to improve US Airways' competitiveness in the marketplace. US Airways' new contract with its pilots also allows it to establish its own competitive response to low cost, low fare competitors. This product, "MetroJet," which will begin operations on June 1, 1998, is expected to provide US Airways with a cost-effective response to Southwest, Delta Express and other low cost, low fare competition. MetroJet will initially operate five B737-200 aircraft from BWI to Cleveland, Providence, Ft. Lauderdale and Manchester (New Hampshire). The Company's growth plans for MetroJet include MetroJet operating up to 20 aircraft by the end of 1998. As mentioned in "Overview" above, a substantial portion of US Airways' current route structure is located in the Eastern U.S. Although a competitive strength in some regards, the regional concentration of significant operations results in US Airways being susceptible to changes in certain regional conditions that may adversely affect the Company's results of operations and financial condition. The combination of a high cost structure and the regional concentration of operations has also contributed to US Airways being particularly vulnerable to competition from air carriers or operations with lower cost and fare structures. In May 1997, US Airways announced certain efficiency measures which included retiring 22 aircraft from its operating fleet, ending unprofitable service to nine cities and eliminating other routes that had not been profitable and closing a flight crew base (February 1998), two reservations centers (October 1997) and three maintenance facilities (by September 1998). The Company recognized certain nonrecurring charges as a result of these actions. In September 1997, US Airways decided to retire its remaining DC-9-30 aircraft earlier than previously planned resulting in an additional nonrecurring charge. The Company expects that these efficiency measures will ultimately result in the furlough of approximately 750 US Airways employees. See MD&A for additional information related to these efficiency measures and 3 nonrecurring items. US Airways has substantially increased its transatlantic operations since 1995. For 1997, as compared to 1996 and 1995, US Airways' transatlantic capacity (ASMs) increased approximately 35% and 110%, respectively. During April 1998, US Airways will begin service from Philadelphia to London's Gatwick Airport and to Amsterdam. US Airways will also begin service from Charlotte to London's Gatwick Airport in May 1998. US Airways has filed petitions with the appropriate authorities to begin service to additional foreign cities, as discussed in "Industry Regulation and Airport Access" below. Expanding US Airways' transatlantic operations is an important element of the Company's overall strategic objective. See MD&A for additional information related to the Company's competitive position, particularly with respect to changes during 1997 and actions the Company is currently undertaking to improve its competitive position. INDUSTRY REGULATION AND AIRPORT ACCESS US Airways operates under a certificate of public convenience and necessity issued by the U.S. Department of Transportation (DOT). Such certificate may be altered, amended, modified or suspended by the DOT if the public convenience and necessity so require, or may be revoked for failure to comply with the terms and conditions of a certificate. Airlines are also regulated by the U. S. Federal Aviation Administration (FAA), a division of the DOT, primarily in the areas of flight operations, maintenance, ground facilities and other technical matters. Pursuant to these regulations, US Airways has an FAA-approved maintenance program for each type of aircraft it operates that provides for the ongoing maintenance of such aircraft, ranging from frequent routine inspections to major overhauls. From time-to-time, the FAA issues maintenance directives and other regulations affecting US Airways or one or more of the aircraft types it operates. In recent years, for example, the FAA has issued or proposed such mandates relating to, among other things, flight data recorders (see below), cargo hold fire detection/suppression systems (see below), ground proximity warning systems (see below), the retirement of older aircraft, collision avoidance systems, airborne windshear avoidance systems, noise abatement and increased inspections and maintenance procedures to be conducted on certain aircraft. In August 1997, the FAA issued regulations that require flight data recorders to measure more parameters than most original equipment flight data recorders. These regulations, which affect US Airways' entire operating fleet, must be implemented before August 2001. The Company estimates that these regulations will cost approximately $20 million over the four-year phase-in period. In February 1998, the FAA issued regulations that require certain commercial passenger aircraft to have cargo hold fire detection/suppression systems. These regulations, which affect US Airways' B737-Series, F100, DC- 9-30 and MD-80 aircraft (the other aircraft types in US Airways' operating fleet already have such systems), must be implemented before March 2001. The Company estimates that these regulations will cost approximately $22 million over the three-year phase-in period. The FAA has proposed regulations that would require the installation of Enhanced Ground Proximity Warning Systems (EGPWS) on certain commercial aircraft. The EGPWS is a system designed to complement the current functions of the Ground Proximity Warning System (GPWS) and provide warnings in situations where the GPWS does not. A Notice of Proposed Rule Making (NPRM) is expected to be issued in April 1998 with a final ruling expected to be issued by the end of 1998. The NPRM is also expected to allow for an exemption for aircraft being retired by a specific date, currently believed to be December 2008. The cost to install the EGPWS on the aircraft in US Airways' operating fleet, excluding aircraft US Airways expects to retire before 4 December 2008, is currently estimated to be approximately $29 million over the anticipated three-year phase-in period (the Airbus aircraft that the Company expects to begin receiving in Fall 1998 will be delivered with EGPWS). The Company cannot predict whether or when the proposed regulations will be adopted or if any such regulations, if adopted, would differ materially from the current proposed regulations. The federal excise tax on domestic air transportation ("ticket tax") was reinstated on August 27, 1996, for tickets sold for travel before January 1, 1997. This tax, 10% of the cost of an airline ticket, had previously expired on January 1, 1996. The Company believes that its Passenger transportation revenues were stimulated during the period the tax was not in effect-the absence of the tax effectively reduced the cost of air travel-but cannot estimate the dollar impact of the tax expiration. The tax expired again on January 1, 1997. On February 28, 1997, President Clinton signed legislation reinstating the tax for tickets sold beginning March 7, 1997 through September 30, 1997. Finally, on August 5, 1997, President Clinton signed legislation extending the ticket tax from October 1, 1997 through September 30, 2007. The new legislation reduced the domestic ticket tax from 10% of fare to 9.0% (decreasing to 8.0% on October 1, 1998 and to 7.5% on October 1, 1999), added a new segment tax of $1.00 (which increases to $3.00 by the year 2002), changed the current $6.00 international departure tax to $12.00 and added a $12.00 international arrival tax. The legislation also added a new 7.5% tax effective October 1, 1997 on certain purchases of frequent traveler program miles from domestic air carriers. The Company does not believe that the new ticket tax structure has had a material adverse effect on its results of operations or financial condition. The Company's airline subsidiaries became obligated to pay the $.043 per gallon federal excise tax on transportation fuels on October 1, 1995. US Airways recognized expenses of $41.9 million, $43.0 million and $11.9 million as a result of this tax during 1997, 1996 and 1995, respectively. The DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate or foreign commerce or the national transportation system. Certain airports, including the major airports at Boston, Washington D.C., Chicago, San Diego, San Francisco and Orange County (California), have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. In some instances these restrictions have caused curtailments in services or increases in operating costs and such restrictions could limit the ability of US Airways to expand its operations at the affected airports. Authorities at other airports may consider adopting similar noise regulations. Several airports have recently sought to increase substantially the rates charged to air carriers, and the ability of air carriers to contest such increases has been restricted by federal legislation, DOT regulations and judicial decisions. In addition, legislation which became effective June 1, 1992 allows public airports to impose passenger facility charges of up to $3 per departing or connecting passenger at such airports. With certain exceptions, air carriers pass these charges on to passengers. The ability of US Airways to pass-through such fees to its customers is subject to various factors, including market conditions and competitive factors. The FAA has designated John F. Kennedy International Airport, Chicago O'Hare International Airport, LaGuardia and National as "high density traffic airports" and limited the number of departure and arrival slots available to air carriers at those airports. Currently, slots at the high density traffic airports may be voluntarily sold or transferred between air carriers. The DOT has in the past reallocated slots to other air carriers and reserves the right to withdraw slots. The DOT awarded slots to several low cost, low fare air carriers during October 1997. However, these slots were "created" and not confiscated from incumbent air carriers. Various amendments to the slot system, proposed from time-to-time by the FAA, members of Congress and others, 5 could, if adopted, significantly affect operations at the high density traffic airports or expand slot controls to other airports. Certain proposals could restrict the number of flights, limit the ownership transferability of slots, increase the risk of slot withdrawal, or otherwise decrease the value of slots. There are currently several such proposals before Congress. US Airways and Shuttle hold a substantial number of slots at LaGuardia and National. These slots are valuable assets and important in the Company's overall business strategy. The Company cannot predict whether any of the current proposals before Congress will be adopted or whether such legislation, if finalized, would result in US Airways or Shuttle being forced to give up slots or otherwise affect US Airways' or Shuttle's current operations at LaGuardia and National. The availability of international routes to domestic air carriers is regulated by agreements between the U.S. and foreign governments. US Airways has petitioned the appropriate authorities for the rights to operate Philadelphia-Milan, Pittsburgh-Paris, and between Pittsburgh and Boston and London (Gatwick Airport). US Airways is constrained by the current agreement between the U.S. and the United Kingdom with respect to London service. US Airways would prefer to serve London through the more- prestigious Heathrow Airport, but cannot do so under the current treaty. Many aspects of US Airways' operations are subject to increasingly stringent federal, state and local laws protecting the environment. Future regulatory developments could affect operations and increase operating costs for the airline industry, including US Airways. As with most domestic companies, the Company is subject to federal income taxes. The Company recognized certain tax benefits totaling $466.9 million during 1997 which stem primarily from the Company reflecting for financial reporting purposes the future income tax benefits associated with net operating losses and other tax credits generated in prior years. See MD&A for additional information. CERTAIN OWNERSHIP MATTERS During 1997, the Company paid all dividends in arrears and resumed regularly scheduled dividend payments on its outstanding preferred stock issuances. The Company had previously deferred dividend payments on its outstanding preferred stock beginning with payments due September 30, 1994 for reasons resulting principally from several years of poor financial performance. In May 1997, British Airways converted 28,059.364 shares of Series F Preferred Stock into 14,458,851 shares of Common Stock, which it then sold to third parties. Also in May 1997, the Company repurchased the remaining shares of Series F Preferred Stock and all of the Series T Preferred Stock (both series were held exclusively by British Airways). The Company's board of directors declared regular quarterly dividends on the Series F and Series T Preferred Stock prior to the conversion and repurchase transactions. After the conversion and repurchase transactions, the Company believes that British Airways held no ownership interest in US Airways Group. As of December 31, 1996, the preferred stock held by British Airways constituted approximately 23% of the total voting interest in the Company. In August 1997, the Company exchanged its Series A Preferred Stock for Series H Senior Cumulative Convertible Preferred Stock (Series H Preferred Stock). The Series A Preferred Stock was, and the Series H Preferred Stock is, owned by affiliates of Berkshire Hathaway, Inc. (Berkshire Hathaway). The provisions of the Series H Preferred Stock are substantially similar to those of the Series A Preferred Stock. The exchange transaction facilitated the redemption of the Series B Preferred Stock (as discussed in the following paragraph). 6 On August 18, 1997, the Company notified the holders of its Series B Preferred Stock that it would redeem all 4,263,000 outstanding depositary shares representing Series B Preferred Stock on September 15, 1997 at $51.75 per share plus accrued dividends of $0.3646 per share. Because conversion into Common Stock was financially advantageous to the holders, all but approximately 6,000 depositary shares were converted prior to the redemption date resulting in the issuance of 10.6 million shares of Common Stock. In January 1998, the Company announced plans to purchase up to 2.3 million shares of its Common Stock from time-to-time in open market or privately negotiated transactions. This program was authorized by the Company's board of directors in conjunction with US Airways' agreement to provide up to 2.3 million stock options to its pilots in 1998 (see also "Employees" below). In February 1998, the Company's board of directors announced certain actions aimed at increasing shareholder value, including the purchase from time-to-time in open market or privately negotiated transactions of up to $500 million of the Company's Common Stock (in addition to the previously announced plan), the call for redemption of the Series H Preferred Stock (in February 1998, the Company notified Berkshire Hathaway of its intention to redeem the Series H Preferred Stock on March 15, 1998; see below) and the retirement of certain debt obligations totaling approximately $380 million. During late February 1998, US Airways retired early certain debt obligations with a combined principal amount of $76.1 million (the transactions resulted in an immaterial net gain). US Airways expects to retire its 10% Senior Notes, which have a face amount of $300 million, during early Summer 1998. Retirement of the 10% Senior Notes is expected to result in an extraordinary loss on early debt extinguishment of approximately $15 million. On March 12, 1998, Berkshire Hathaway exercised its right to convert the Series H Preferred Stock into 9.2 million shares of the Company's Common Stock. The Company subsequently retired its Series H Preferred Stock. With the retirement of all of the Company's preferred stock, the Company is relieved of annual dividends of approximately $79 million. Annual interest payments associated with the debt obligations retired early or to be retired early under the aforementioned program total approximately $37 million. See Notes 7(a), 7(b) and 8(c) to the Company's Notes to Consolidated Financial Statements contained in Part II, Item 8A. of this report for additional information related to the Company's preferred stock issuances. In addition, see Note 15 to the Company's Notes to Consolidated Financial Statements for additional information with respect to the Company's plans to retire certain debt obligations. Sections 382 and 383 of the Internal Revenue Code and the regulations thereunder impose limitations on the utilization of net operating loss and credit carryforwards if a corporation has had a "change of control" as defined therein. Generally, a change of control occurs if the corporation experiences more than a 50% ownership change over a rolling three year testing period. In general, if a corporation has a change of control, the amount of loss carryforwards and credits that can be used in any subsequent year are limited to an amount equal to the product of the value of the corporation's stock immediately prior to the change multiplied by the "long-term tax exempt rate," as defined by the U.S. Internal Revenue Code. The Company does not believe it experienced a change of control before the preferred stock transactions discussed above, nor does it believe that those transactions caused a change of control. During the fourth quarter of 1997, the Company recognized a significant amount of future tax benefits related primarily to loss carryforwards. See Note 3 to the Company's Notes to Consolidated Financial Statements for additional information. 7 EXECUTIVE OFFICERS The following individuals, listed alphabetically, are the executive officers of US Airways Group and US Airways as of March 18, 1998: Name Age Position ---- --- -------- N. Bruce Ashby 37 Senior Vice President-Planning, US Airways Christopher Doan 51 Senior Vice President-Maintenance, US Airways Rakesh Gangwal 44 President and Chief Operating Officer, US Airways Group and US Airways Terry L. Hall 44 Senior Vice President-Finance and Chief Financial Officer, US Airways Group and US Airways John R. Long, III 49 Executive Vice President-Human Resources, US Airways Lawrence M. Nagin 57 Executive Vice President-Corporate Affairs and General Counsel, US Airways Group and US Airways Stephen M. Wolf 56 Chairman of the Board of Directors and Chief Executive Officer, US Airways Group and US Airways There are no family relationships among any of the officers listed above. No officer was selected pursuant to any arrangement between himself and any other person. Officers are elected annually to serve for the following year or until the election and qualification of their successors. Mr. Long has been actively engaged in the business and affairs of the Company and US Airways during the past five years. The business experience of the officers listed above since at least January 1, 1993: From April 1996, Mr. Ashby served as Vice President-Financial Planning and Analysis of US Airways until his election as Senior Vice President- Planning in January, 1998. He previously served as Vice President-Marketing Development at Delta from June 1995 to April 1996, and in several executive positions at United Air Lines, Inc. (United) from January 1989 to June 1995, including Vice President-Financial Planning and Analysis and Vice President and Treasurer. Mr. Doan joined US Airways in March of 1997. Prior to joining US Airways, Mr. Doan was Vice President of Technical Operations at Northwest Airlines, Inc. (Northwest). Mr. Doan served as an officer in a variety of maintenance-related positions at Northwest from 1985 through 1997. Prior to 1985, Mr. Doan served for 18 years in maintenance-related management positions at Trans World Airlines, Inc. Mr. Gangwal was elected President and Chief Operating Officer of US Airways Group and US Airways effective February 19, 1996. Mr. Gangwal came to US Airways from Compagnie Nationale Air France where he had been Executive Vice President-Planning and Development since November 1994. Mr. Gangwal previously served in a variety of management roles at United over an eleven-year period, culminating in the role of Senior Vice President- Planning. Mr. Hall was elected Senior Vice President-Finance and Chief Financial Officer of US Airways Group and US Airways in February 1998. Prior to joining US Airways, Mr. Hall was Vice President-Finance and Chief Financial Officer at Apogee Enterprises, Inc. (Apogee) 8 and, prior to that position, Mr. Hall was Vice President and Chief Financial Officer for Tyco International Ltd. (Tyco). Apogee and Tyco are both multi-billion dollar, multinational diversified companies. Before the latter two positions, from 1990 to 1993, Mr. Hall served as Vice President and Treasurer at United. Mr. Long served as Senior Vice President-Administration of US Airways until his election as Senior Vice President-Customer Operations of US Airways in June 1989. He was elected Senior Vice President-Customer Services in March 1991 and Executive Vice President-Customer Services in May 1992. Mr. Long was elected Executive Vice President-Human Resources in May 1996. Mr. Nagin practiced law with Skadden, Arps, Slate, Meagher & Flom LLP from August 1994 until he joined US Airways Group and US Airways in February 1996. He previously served in several executive positions at United and UAL Corp. (UAL) from September 1988 to July 1994, culminating in the role of Executive Vice President-Corporate Affairs and General Counsel of United and UAL. From 1980-1988, Mr. Nagin was Senior Vice President and General Counsel of The Flying Tiger Line Inc. (Flying Tiger). Mr. Wolf is Chairman of the Board of Directors and Chief Executive Officer of US Airways Group and US Airways and was elected to those positions in January 1996. Immediately prior to joining US Airways, Mr. Wolf was a senior advisor to the investment bank Lazard Freres & Co. From 1987 to July 1994, Mr. Wolf was Chief Executive Officer of UAL and United and became Chairman of each in 1988. Mr. Wolf is a Director of Philip Morris Companies, R.R. Donnelley & Sons Co., The Brookings Institution and the Alzheimer's Disease and Related Disorders Association. He is also a trustee of Northwestern University and Georgetown University. EMPLOYEES As of December 31, 1997, on a full-time equivalent basis, US Airways employed approximately 4,700 pilots, 7,500 mechanical and related personnel, 9,200 station personnel, 3,500 reservations personnel, 7,900 flight attendants and 5,700 personnel in administrative and miscellaneous job categories. As of December 31, 1997, on a full-time equivalent basis, the Company's remaining subsidiaries employed approximately 1,000 pilots, 600 maintenance and related personnel, 1,300 station personnel, 600 flight attendants and 500 personnel in administrative and miscellaneous job categories. As of December 31, 1997, approximately 37,900, or 84%, of the employees of the Company's subsidiaries were covered by collective bargaining agreements with various labor unions, or will be covered by a collective bargaining agreement for which negotiations are in progress. (this space intentionally left blank) 9 The status of US Airways' labor agreements as of December 31, 1997: Date Contract Union (1) Class or Craft Employees (2) Amendable - --------- -------------- ------------- -------------- ALPA Pilots 4,700 01/01/03(4) AFA Flight attendants 7,900 01/01/97(5) CWA Passenger service employees 9,100(3) -(6) IAM Mechanics and related employees 7,500 10/01/95(5) IAM Fleet service employees 6,000(3) -(6) TWU Flight crew training instructors 50 10/09/96(5) TWU Flight simulator engineers 57 08/02/97(5) TWU Dispatch employees 155 09/01/96(5) (1) ALPA Air Line Pilots Association, International AFA Association of Flight Attendants CWA Communications Workers of America IAM International Association of Machinists and Aerospace Workers TWU Transport Workers' Union (2) Approximate number of employees covered by the contract. (3) Estimated number of employees who will be covered under this new contract. (4) US Airways' pilots ratified a new agreement during October 1997 which became effective January 1, 1998. (5) Currently in negotiations. (6) Initial contract in negotiations. As noted above, US Airways and ALPA entered into a new contract effective January 1, 1998. The major terms of US Airways' new contract with its pilots include: - - No pre-determined guaranteed increases to hourly rates of pay for "mainline" operations for existing aircraft types and new Airbus aircraft through the term of the contract. Reviews must be completed by January 1 of the years 2001, 2002 and 2003 to determine what adjustments (increases or decreases), if any, must be made to rates of pay and/or work rules so that US Airways' pilot costs (pay and productivity) are at parity plus 1% as compared to a weighted average of mainline pilot costs at American Airlines, Inc. (American), Delta, Northwest and United. At the option of the pilots, an additional "interim review" may be undertaken for completion by January 1, 1999. - - Allowing US Airways to establish a "low cost, low fare" product to compete with Southwest, Delta's Delta Express product, AirTran and other such competitors in certain markets and under certain conditions. US Airways' low cost, low fare product can begin service with up to 54 aircraft with the flexibility, under certain circumstances, to expand its operations up to 25% of US Airways' total system block hours. Pay rates for pilots on US Airways' low cost, low fare product will be comparable to those of Southwest's pilots (with pay protection for mainline pilots involuntarily displaced to US Airways' low cost, low fare product ending when such pilots have the ability to return to mainline operations). See "Airline Industry and US Airways' Position in the Marketplace" for recent developments involving US Airways' low cost product, which will begin operations on June 1, 1998. - - Work rule changes including reductions in sick leave and vacation which are estimated to result in significant annual savings when fully implemented. 10 - - Allowing US Airways Express to ultimately operate up to the greater of 35 regional jet aircraft or the equivalent of 9% of US Airways' operating fleet, once all pilots are recalled from furlough (see "Overview" above related to the introduction of regional jets by US Airways Express). - - A commitment to grow at an annual rate of the greater of 2.5% (as measured by 1998 system block hours) or 20% above the average block hour growth rate of American, Delta, Northwest and United subject to certain deferral rights and force majeure provisions. - - Lump sum payments to pilots equal to 1% of annual salary for the calendar years 1999, 2001 and 2002, payable in the subsequent calendar year. - - 11.5 million options to purchase US Airways Group Common Stock, to be issued ratably to pilots over the five-year life of the contract, with exercise prices established based on the fair market value of the Company's Common Stock over a time period preceding each grant date. - - An early retirement program for up to 325 pilots and the recall from furlough by December 15, 1997 of 100 pilots furloughed in 1997, as well as offering recall by December 31, 2001 of 283 additional pilots furloughed prior to 1997. - - A requirement for US Airways to operate certain levels of transoceanic block hours before increasing international code-sharing. - - Certain change of control protections, including vesting of all 11.5 million stock options at an exercise price equal to the exercise price of the most recent stock options granted to the pilots, and cash payments to pilots of up to $250 million under certain circumstances if US Airways is acquired and is not the surviving entity and the pilots' labor contract is adversely affected as a result of the acquisition. - - Certain job security provisions, including a "no furlough" clause for pilots on the seniority list on the effective date of the agreement. As discussed in MD&A, the Company recorded a $115 million charge to Personnel costs during the fourth quarter of 1997 associated with the early retirement plan. US Airways expects to realize significant net long-term savings in both wages and benefits expenses as a result of the early retirement program. US Airways will recognize expenses for the lump sum payments, which are expected to total approximately $20 million, as an element of Personnel costs in the period in which they are earned. Any personnel expenses associated with the stock options granted under the new contract would be recognized over the vesting period of the grant and be dependent upon the exercise price of each grant. On September 29, 1997, US Airways' passenger service employees, approximately 9,100 employees, voted for representation by CWA. This election was a re-run election mandated by the National Mediation Board (NMB). In January 1997, US Airways passenger service employees voted against unionization, but the NMB subsequently ordered that a new representation election be held for these employees because of alleged interference by US Airways with the election process. US Airways has filed an action challenging this order in federal court. The Company is unable to predict how long it will take to conclude collective bargaining talks with respect to labor contracts that are currently amendable and for labor contracts for which an initial contract is being negotiated or the ultimate outcome of these discussions. Under the Railway Labor Act, a labor contract does not "expire," but rather becomes amendable on a 11 certain date. Thirty days prior to that date, either party to the contract may give notice to the other of its intention to amend the contract, at which point the collective bargaining process begins. If, after a period of negotiations, the parties cannot reach an agreement, a federal mediator from the NMB is brought in to assist. The process of mediation continues until the NMB determines, at its sole discretion, that the parties have reached an impasse. At that point, the parties enter a thirty-day "cooling- off" period before either party may employ so-called "self-help" (e.g., the imposition of contract changes or a lockout by the company or a strike by the union). While in negotiations and mediation, both parties must observe the status quo. As discussed under "Airline Industry and US Airways' Position in the Marketplace," US Airways expects that the efficiency measures announced in May 1997 will ultimately result in the furlough of approximately 750 employees (attrition has resulted in a lower estimate than previously disclosed). US Airways eliminated approximately 240 full-time and part-time positions at BWI during Summer 1997 as the result of certain schedule adjustments. During December 1997, US Airways entered into a 25-year agreement with The SABRE Group (TSG) under which TSG assumed responsibility for managing most of US Airways' information technology requirements. As a result of this agreement, approximately 670 US Airways employees took positions with TSG on January 1, 1998. See MD&A for additional information related to US Airways' agreement with TSG. AVIATION FUEL Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of the Company's control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Because the operations of the Company's airline subsidiaries are dependent upon aviation fuel, significant increases in aviation fuel costs could materially and adversely affect the Company's results of operations and financial condition. For 1997, 1996 and 1995, aviation fuel expenses were 10.5%, 10.8% and 9.6% of US Airways' total operating expenses (as adjusted to exclude nonrecurring items and certain expenses for comparability purposes), respectively. US Airways continually adjusts its aviation fuel purchasing strategy in order to take advantage of the best available prices while at the same time ensuring that it has an adequate supply of aviation fuel to support its operations. In addition, US Airways participates in arrangements to hedge the price of a portion of its aviation fuel needs, which may have the net effect of increasing or decreasing US Airways' aviation fuel expenses (as discussed in Note 2(a) to the Company's Notes to Consolidated Financial Statements). See Part II, Item 6. "Selected Financial Data" for additional information related to aviation fuel. In addition, see "Industry Regulation and Airport Access" above for information related to taxes on aviation fuel. USE OF TRAVEL AGENTS AND COMMISSIONS EXPENSES As is typical in the airline industry, a majority of the tickets for travel on the Company's airline subsidiaries are sold by travel agents. During 1997, travel agents accounted for approximately 76% of US Airways' tickets sales (as measured by gross fares). During 1996, the percentage was approximately 77%. The Company accounts for fees paid to travel agents in the Commissions line item on its Consolidated Statements of Operations (which are contained in Part II, Item 8A. of this report). Such fees are calculated in accordance with policies established by the Company. Fees paid to travel agents accounted for approximately 7.7%, 7.5% and 7.9% of US Airways' total operating 12 expenses (as adjusted to exclude nonrecurring items and certain expenses for comparability purposes) for the years 1997, 1996 and 1995, respectively. During September 1997, US Airways established a revised fee structure for base commissions paid to travel agents: 8% of ticket price on all domestic and international tickets issued by travel agents in the U.S., Puerto Rico, the U.S. Virgin Islands and Canada. US Airways' existing maximum payment of $25 one-way and $50 round-trip for tickets purchased in the U.S. and Puerto Rico for travel in and between the U.S., Puerto Rico the U.S. Virgin Islands and Canada was not changed. Prior to the revised rate structure, fees were generally paid to travel agents at 10% of ticket price. US Airways pays travel agents additional "incentive" commissions under certain circumstances, such as for reaching certain volume sales levels. Such special incentive fees are typical in the airline industry. In April 1996, travel agents began selling electronic tickets for travel on the Company's airline subsidiaries. By February 1998, "E Tickets" for travel on US Airways and its regional affiliates exceeded 28% of all ticket sales. The Company believes that electronic ticketing helps to reduce distribution costs. COMPUTERIZED RESERVATION SYSTEMS Computerized Reservation Systems (CRSs) play a significant role in the marketing and distribution of airline tickets. As mentioned above, travel agents issue tickets which generate the majority of US Airways' passenger revenues. Most travel agencies use one or more CRSs to obtain information about airline schedules and fares and to book their clients' travel. On July 30, 1997, Galileo International, Inc. (Galileo) completed an initial public offering (IPO) and used the proceeds, together with the proceeds of bank financing, to purchase Apollo Travel Services Partnership (ATS). USAM owned approximately 21% of ATS. Immediately preceding the IPO, Galileo International Partnership (GIP) was merged with and into a wholly- owned limited liability company subsidiary of Galileo and USAM received shares in Galileo in the same proportion as its partnership interest in GIP. As part of the IPO, USAM sold some of its Galileo shares and its interest in Galileo was reduced from 11% to approximately 6.7%. The transaction is discussed further in MD&A. Galileo owns, operates and markets the Galileo CRS. The Galileo CRS is the world's second largest CRS system, as measured by revenues generated by travel agent subscribers. As of December 31, 1997, USAM owned approximately 6.7% of Galileo and held an 11% interest in Galileo Japan Partnership, which markets the Galileo CRS in Japan. FREQUENT TRAVELER PROGRAM Under US Airways' "Dividend Miles" frequent traveler program (FTP), participants generally receive mileage credits equal to the greater of actual miles flown or 500 miles for each paid flight segment on US Airways or US Airways Express, or actual miles flown on one of US Airways' FTP airline partners. Participants generally receive a minimum of 500 mileage credits for each paid flight on US Airways Shuttle. Participants flying on first or business class tickets generally receive additional mileage credits. Participants may also earn mileage credits by utilizing certain credit cards, staying at participating hotels, renting cars from participating car rental companies and through other means. Mileage credits earned by FTP participants, which do not expire under current program guidelines, can be redeemed for various travel awards, including fare discounts, first class upgrades and tickets on US Airways or on one of US Airways' FTP airline partners. Certain awards also include hotel and car rental awards. Awards may not be brokered, bartered or sold, and have no cash value. 13 US Airways and its FTP airline partners limit the number of seats allocated per flight for award recipients by using various inventory management techniques. Award travel for all but US Airways' most frequent travelers generally is not permitted on blackout dates, which correspond to certain holiday periods or peak travel dates to foreign destinations. US Airways reserves the right to terminate Dividend Miles or portions of the program at any time. Program rules, partners, special offers, blackout dates, awards and requisite mileage levels for awards are subject to change without prior notice. US Airways uses the incremental cost method to account for liabilities associated with Dividend Miles. Estimated future travel awards are valued at the estimated average incremental cost of carrying one additional passenger. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, reservations, communications, liability insurance and denied boarding compensation expenses. No profit or overhead margin is included in the accrual for incremental costs. The Company periodically reviews the assumptions made to calculate its FTP liability for reasonableness and makes adjustments to these assumptions as necessary. No liability is recorded for airline, hotel or car rental award certificates that are to be honored by other parties because there is no cost to US Airways for such awards. As of December 31, 1997 and 1996, Dividend Miles participants had accumulated mileage credits for approximately 4,253,000 awards and 3,715,000 awards, respectively. Because US Airways expects that some potential awards will never be redeemed, calculations of FTP liabilities are based on approximately 87% of total accumulated mileage credits. Mileage credits for Dividend Miles participants who have accumulated less than the minimum number of mileage credits necessary to claim an award, 25,000, are excluded from calculations of FTP liabilities. Incremental changes in FTP liabilities resulting from participants earning or redeeming mileage credits or changes in assumptions used for the related calculations are recorded as part of the regular review process. During 1997, 1996 and 1995, US Airways' customers redeemed approximately 0.9 million, 1.0 million and 1.2 million awards for free travel, respectively, representing approximately 5%, 6% and 9% of US Airways' RPMs in those years, respectively. US Airways does not believe that usage of FTP awards results in any significant displacement of revenue passengers. US Airways' exposure to the displacement of revenue passengers is not significant, as the number of US Airways flights that depart 100% full is minimal. For example, in the second quarter of 1997 (the quarter when the highest number of free frequent traveler trips were flown during 1997) fewer than 7% of US Airways' flights departed 100% full. During this same quarterly period, approximately 4% of US Airways' flights departed 100% full but also had one or more passengers on board who were traveling on Dividend Miles award tickets. As mentioned previously, US Airways terminated its relationship with British Airways during 1997, including arrangements involving the two companies' frequent traveler programs. INSURANCE The Company and its subsidiaries maintain insurance of the types and in amounts deemed adequate to protect themselves and their property. Principal coverage includes liability for bodily injury to or death of members of the public, including passengers; damage to property of the Company, its subsidiaries and others; loss of or damage to flight equipment, whether on the ground or in flight; fire and extended coverage, and; workers' compensation and employer's liability. Coverage for environmental liabilities is expressly excluded from these insurance policies. 14 ITEM 2. PROPERTIES FLIGHT EQUIPMENT As of December 31, 1997, US Airways operated the following jet aircraft: Passenger Average Type Capacity Age(years) Owned(2) Leased(3) Total ---- --------- ---------- -------- --------- ----- Boeing 767-200ER 208 8.5 6 6 12 Boeing 757-200 182 7.2 23 11 34 Boeing 737-400 145 8.0 19 35 54 McDonnell Douglas MD-80 141 15.8 15 16 31 Boeing 737-300 127 10.7 11 74 85 Boeing 737-200 110 15.7 52 12 64 Douglas DC-9-30 (1) 101 23.6 49 7 56 Fokker 100 98 7.0 36 4 40 ---- --- --- --- 12.7 211 165 376 ==== === === === (1) US Airways removed five DC-9-30 aircraft from its operating fleet during first quarter 1998. (2) Of the owned aircraft, 103 were pledged as collateral for various secured financing obligations aggregating $2.1 billion as of December 31, 1997. (3) The terms of the leases expire between 1998 and 2015. US Airways purchased a B767-200ER aircraft upon lease expiry in February 1998. As of December 31, 1997, the Company's four wholly-owned regional airline subsidiaries operated the following aircraft: Passenger Average Type Capacity Age(years) Owned Leased(3) Total ---- --------- ---------- ----- --------- ----- Boeing 727-200 (1) 161 25.7 12 - 12 de Havilland Dash 8 (2) 37 7.1 29 56 85 Dornier 328-110 (2) 32 2.3 - 25 25 ---- -- -- --- 8.0 41 81 122 ==== == == === (1) Jet aircraft operated by Shuttle (see Note 15 to the Company's Notes to Consolidated Financial Statements for information related to the Company's purchase of Shuttle on December 30, 1997). (2) Turboprop aircraft. (3) The terms of the leases expire between 1998 and 2012. The Company has an agreement with a subsidiary of Airbus related to the acquisition of new jet aircraft and accompanying jet engines. In addition, one of the Company's regional airline subsidiaries is party to an agreement related to the acquisition by lease of up to 15 turboprop aircraft. See Notes 6(a) and 6(c) to the Company's Notes to Consolidated Financial Statements for additional information regarding outstanding commitments and options for the purchase of flight equipment. The Company's airline subsidiaries maintain inventories of spare engines, spare parts, accessories and other maintenance supplies sufficient to meet their operating requirements. As of December 31, 1997, the Company's airline subsidiaries, principally US Airways, owned or leased the following aircraft which were not considered part of the operating fleets presented in the tables above. These aircraft were either parked in storage facilities or, as shown in the far right column, leased or subleased to third parties (see table on following page). 15 Average Leased/ Type Age(years) Owned Leased Total Subleased ---- ---------- ----- ------ ----- --------- British Aerospace BAe-146-200 (1) 12.9 - 13 13 12 Douglas DC-9-30 (2) 28.4 5 - 5 - Fokker F28-1000 24.5 17 - 17 17 Fokker F28-4000 (3) 13.2 4 11 15 9 Embraer EMB-120 7.8 - 2 2 2 British Aerospace Jetstream 31 10.7 - 14 14 14 ---- -- -- -- -- 17.2 26 40 66 54 ==== == == == == (1) US Airways subleased an additional nonoperating BAe-146-200 aircraft in March 1998. (2) US Airways parked five additional DC-9-30 aircraft and sold three of its nonoperating DC-9-30 aircraft in the first quarter of 1998. (3) US Airways leased one of its owned and subleased two of its leased nonoperating F28-4000 aircraft during the first quarter of 1998. See Note 6(b) to the Company's Notes to Consolidated Financial Statements for additional information related to third party lease arrangements involving flight equipment. US Airways is a participant in the Civil Reserve Air Fleet (CRAF), a voluntary program administered by the Air Mobility Command (AMC). The General Services Administration of the U.S. government also requires that airlines participate in CRAF in order to receive U.S. government business. The U.S. government is US Airways' largest customer. US Airways' commitment under CRAF is to provide up to eleven B767-200ER aircraft in support of military operations, most likely aeromedical missions, as specified by the AMC. US Airways would be reimbursed at prescribed rates if these aircraft were activated under the CRAF program. To date, the AMC has not requested US Airways to activate any of its aircraft under CRAF. GROUND FACILITIES US Airways leases the majority of its ground facilities, including executive and administrative offices in Arlington, Virginia adjacent to National airport; its principal operating, overhaul and maintenance bases at the Pittsburgh and Charlotte/Douglas International Airports; major training facilities in Pittsburgh and Charlotte; central reservations offices in several cities; and line maintenance bases and local ticket, cargo and administrative offices throughout its system. US Airways owns a building and vacant land in Fairfax County, Virginia, a training facility in Winston- Salem (North Carolina) and reservations facilities in San Diego and Orlando. US Airways recently completed negotiations to sell its property in Fairfax County in two separate transactions. The sales transactions are expected to be completed by the end of the second quarter of 1998 and result in proceeds of $11.6 million and a $2.0 million gain. As further discussed in MD&A, US Airways announced certain efficiency measures in May 1997 which include closing certain facilities. US Airways will close its maintenance facilities in Roanoke (Virginia), Greensboro (North Carolina) and Winston-Salem by September 1998 (the work performed at these locations will be transferred to other US Airways maintenance facilities). In addition, also as part of these efficiency measures, US Airways consolidated certain reservation facilities by closing its Nashville and Utica (New York) reservations centers. 16 TERMINAL CONSTRUCTION PROJECTS The Company's airline subsidiaries utilize public airports for their flight operations under lease arrangements with the government entities that own or control these airports. Airport authorities frequently require airlines to execute long-term leases to assist in obtaining financing for terminal and facility construction. Any future requirements for new or improved airport facilities and passenger terminals at airports at which the Company's airline subsidiaries operate could result in additional expenditures and long-term commitments for these subsidiaries. Several significant projects which affect large airports on US Airways' route system are discussed below. US Airways is currently negotiating with the City of Philadelphia to construct a new international terminal and a new US Airways Express terminal at Philadelphia International Airport, one of US Airways' connecting hubs and US Airways' principle international gateway. The new international terminal would include at least twelve gates for widebody aircraft and new federal inspection facilities. The new terminal would be connected to the existing terminal by a moving walkway. The new US Airways Express facility would be a stand-alone terminal capable of accommodating approximately 30 regional aircraft. The combined cost of the two facilities is estimated at $340 million with both projects expected to be completed in 2001. An estimate of the impact on the Company's annual operating costs at Philadelphia International Airport for the two terminal projects is not currently available. In 1993, US Airways and the City of Philadelphia reached an agreement to proceed with certain capital improvements at Philadelphia International Airport. These improvements include approximately $136 million in various terminal renovations and improvements, including the construction of a new US Airways Club, and $220 million to expand the runway used primarily by regional aircraft. The Company expects the terminal renovations and improvements to be completed in 1998. The runway expansion project is not expected to be completed until late 1999. US Airways expects that its annual cost of operations at Philadelphia International Airport will increase by approximately $16 million once construction of both projects is complete, representing an increase of approximately 35%. A major portion of the Metropolitan Washington Airport Authority's capital development program at National was completed in the third quarter of 1997. The $1 billion program included construction of a new terminal. US Airways' annual operating expenses at National have increased by approximately $11 million as a result of higher rent payments associated with the new facility. In 1996, US Airways and the Massachusetts Port Authority (MassPort) reached an agreement to renovate and expand US Airways' terminal facilities at Boston's Logan International Airport (Logan). MassPort has issued approximately $49 million of special facilities bonds to finance various improvements which include renovation and expansion of holdrooms, ticket counter space, public circulation areas, concessions, baggage processing, baggage claim areas and the construction of a new US Airways Club. The terminal expansion project provides approximately 95,000 square feet of additional space. US Airways is responsible for awarding contracts and managing the construction. Portions of the project have already been completed and US Airways expects the remainder of the project to be completed in June 1998. US Airways anticipates that its annual operating expenses at Logan will increase by approximately $5 million as a result of this project. ITEM 3. LEGAL PROCEEDINGS US Airways is involved in legal proceedings arising out of certain aircraft accidents, including an accident in September of 1994 near Pittsburgh in which 127 passengers and five crew members lost their lives. With respect to the 1994 accident, the National Transportation Safety Board (NTSB) held hearings in January and November of 1995, and is scheduled to hold additional hearings in 1998 before issuing its final accident investigation report. Wrongful death cases are 17 pending in a consolidated multi-district litigation in U.S. District Court for the Western District of Pennsylvania, and in state courts in Cook County, Illinois and Harris County, Texas. While US Airways has settled over 80% of the cases arising from the Pittsburgh accident, it expects that it will be at least two years before all of the settlements and/or related litigation are concluded. US Airways is fully insured with respect to this litigation and, therefore, believes that the litigation will not have a material adverse effect on the Company's financial condition or results of operations. Boeing filed suit against US Airways in September 1997 in state court in King County, Washington seeking unspecified damages for alleged breach of two aircraft purchase agreements concerning, respectively, eight B757-200 aircraft and 40 B737-Series aircraft. On October 31, 1997, US Airways filed an answer and counterclaims to Boeing's complaint denying liability and seeking recovery from Boeing of approximately $35 million in equipment purchase deposits. The case is currently in the discovery phase of litigation. In its initial discovery response, Boeing has quantified its damage claim at approximately $220 million. The Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. In October 1995, US Airways terminated for cause an agreement with In- Flight Phone Corporation (IFPC). IFPC was US Airways' provider of on-board telephone and interactive data systems. The IFPC system had been installed in approximately 80 aircraft prior to the date of termination of the agreement. On December 6, 1995, IFPC filed suit against US Airways in Illinois state court seeking equitable relief and damages in excess of $186 million. US Airways believes that its termination of its agreement with IFPC was appropriate and that it is owed significant damages from IFPC. US Airways has filed a counterclaim against IFPC seeking compensatory damages in excess of $25 million and punitive damages in excess of $25 million. In January 1997, IFPC filed for protection from its creditors under Chapter 11 of the Bankruptcy Code. The parties stipulated to lift the automatic stay provided for in the Bankruptcy Code which could allow IFPC's and US Airways' claims to be fully litigated. The Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. On July 30, 1996, the Company and US Airways initiated a lawsuit in U.S. District Court for the Southern District of New York against British Airways, BritAir Acquisition Corp., Inc., American and American's parent company, AMR Corp. The Company and US Airways claimed that British Airways, in pursuit of an alliance with American, is responsible for breaches of fiduciary duty to the Company and US Airways and violated certain provisions of the January 21, 1993 Investment Agreement between the Company and British Airways (the Investment Agreement). The lawsuit also claims that the defendants have committed violations of U.S. antitrust laws. In response to the defendants' Motion to Dismiss, the Court sustained US Airways' claims for breach of contract against British Airways. The Court dismissed the remaining claims against British Airways and all claims against American. On February 6, 1998, British Airways filed its answer to the complaint along with counterclaims against the Company and US Airways. British Airways' counterclaims alleged that US Airways breached various provisions of the Investment Agreement and that US Airways breached the Code Share Agreement between British Airways and US Airways by providing certain allegedly confidential information to a third party. In addition, British Airways seeks a declaratory judgment regarding certain payment obligations under its wet lease arrangement with US Airways. British Airways claimed damages of $16.7 million for the termination of the code share relationship and an unspecified amount of damages for its remaining claims. The Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. In May 1995, the Company, US Airways and the Retirement Income Plan for US Airways, Inc. (the Pilots Pension Plan) were sued in federal district court for the District of Columbia by 481 18 active and retired pilots alleging that defendants had incorrectly interpreted the Pilots Pension Plan provisions and erroneously calculated benefits under the Pilots' Pension Plan. The plaintiffs sought damages in excess of $70 million. In May 1996, the court issued a decision granting US Airways' Motion to Dismiss the majority of the complaint for lack of jurisdiction, deciding that the dispute must be resolved through the arbitration process under the Railway Labor Act because the Pilots Pension Plan was collectively bargained. The court retained jurisdiction over one count of the complaint alleging a violation of a disclosure requirement under the Employee Retirement Income Security Act. The plaintiffs have attempted to appeal the district court's dismissal before the U.S. Court of Appeals for the District of Columbia. In January of 1998, the Court of Appeals dismissed plaintiff's appeal for lack of jurisdiction because the lower court order was not final. In February of 1998 a purported class action complaint was filed by a travel agency in Puerto Rico against seven major U.S. airlines, including US Airways. The complaint alleges that the defendant airlines are undercompensating Puerto Rican travel agents in connection with the agents' sale of travel. The plaintiffs allege that the airlines are contractually obligated to pay a 10% commission and that the defendant airlines breached that contract as a result of the introduction of commission caps limiting commission payable with respect to a single trip to a stated dollar amount and reducing certain commissions to 8%. The plaintiffs have stated their damages for the class in the amount of $150 million. Given the early stage of this litigation, the Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. The City and County of San Francisco have sued a number of San Francisco International Airport tenants for the recovery of approximately $18 million of costs incurred with respect to the characterization and cleanup of soil and groundwater contamination at the airport. The City has recently identified US Airways as a potentially responsible party, although the City has not amended the complaint to add US Airways as a defendant party. The Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1997. PART II ITEM 5A. MARKET FOR US AIRWAYS GROUP'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK EXCHANGE LISTING US Airways Group's Common Stock, $1 par value (the Common Stock), is traded on the New York Stock Exchange (Symbol U). On February 27, 1998, there were approximately 91,646,000 shares of the Company's Common Stock outstanding held by 27,161 stockholders of record at that date. The holders reside throughout the United States and in other countries. (this space intentionally left blank) 19 MARKET PRICES OF COMMON STOCK The high and low sale prices ($) of the Company's Common Stock as reported on the New York Stock Exchange Composite Tape were: Period High Low ------ ---- --- 1997 Fourth Quarter 65 3/4 39 15/16 Third Quarter 43 1/8 32 7/8 Second Quarter 38 1/4 23 1/8 First Quarter 26 3/4 19 1/4 1996 Fourth Quarter 25 7/8 15 1/4 Third Quarter 19 1/2 15 1/8 Second Quarter 20 3/4 15 7/8 First Quarter 19 3/4 11 3/4 Holders of Common Stock are entitled to receive such dividends as may be lawfully declared by the Company's board of directors. The Company has not paid dividends on its Common Stock since the second quarter of 1990. As of the date of this report, the Company's board of directors had not authorized the resumption of dividends on the Company's Common Stock and there can be no assurance when or if such dividend payments will resume. FOREIGN OWNERSHIP RESTRICTIONS Under current federal law, non-U.S. citizens cannot own or control more than 25% of the outstanding voting securities of a domestic air carrier. The Company believes that it was in compliance with this statute during the time period covered by this report. ITEM 5B. MARKET FOR US AIRWAYS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS US Airways Group owns all of US Airways' outstanding common stock, par value $1 (US Airways Common Stock). US Airways' board of directors has not authorized the payment of dividends on US Airways' Common Stock since 1988. Currently, the amount of dividends that US Airways can pay on its common stock is materially limited by covenants contained in its 10% and 9 5/8% Senior Notes. However, these covenants do not restrict US Airways from loaning or advancing funds to US Airways Group. (this space intentionally left blank) 20 ITEM 6. SELECTED FINANCIAL DATA CONSOLIDATED STATEMENTS OF OPERATIONS - US AIRWAYS GROUP (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Operating Revenues $8,514 $8,142 $7,474 $6,997 $7,083 Operating Expenses 7,930 7,705 7,153 7,489 7,179 ------ ------ ------ ------ ------ Operating Income (Loss) $ 584 $ 437 $ 322 $ (491) $ (96) Income (Loss) Before Taxes and Accounting Change $ 672 $ 275 $ 128 $ (685) $ (349) Provision (Credit) for Income Taxes (353) 12 9 - - ------ ------ ------ ------ ------ Income (Loss) Before Accounting Change 1,025 263 119 (685) (349) Accounting Change (1) - - - - (44) ------ ------ ------ ------ ------ Net Income (Loss) $1,025 $ 263 $ 119 $ (685) $ (393) Net Earnings Applicable to Common Stockholders $ 961 $ 175 $ 34 $ (763) $ (467) Basic Earnings (Loss) per Common Share (2) Before Accounting Change $12.32 $ 2.73 $ 0.55 $(12.73) $(7.68) Effect of Accounting Change - - - - (0.80) ----- ----- ----- ------ ----- $12.32 $ 2.73 $ 0.55 $(12.73) $(8.48) Diluted Earnings (Loss) per Common Share (2) Before Accounting Change $ 9.87 $ 2.35 $ 0.55 $(12.73) $(7.68) Effect of Accounting Change - - - - (0.80) ----- ----- ----- ------ ----- $ 9.87 $ 2.35 $ 0.55 $(12.73) $(8.48) Cash dividends per Common Share $ - $ - $ - $ - $ - CONSOLIDATED BALANCE SHEETS - US AIRWAYS GROUP (IN MILLIONS) As of December 31, ------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Total Assets $8,372 $7,531 $6,955 $6,808 $6,878 Long-Term Obligations (3)(4) $4,142 $4,552 $4,572 $4,699 $4,198 Series B Preferred Stock (4) $ - $ 213 $ 213 $ 213 $ 213 Common Stockholders' Equity (Deficit) (4) $ 725 $ (798)$(1,049)$(1,110) $ (426) Total Stockholders' Equity (Deficit) (4) $ 725 $ (584) $ (836) $( 897) $ (213) Shares of Common Stock Outstanding (5) 91.5 64.3 63.4 61.1 59.2 (1) Cumulative effect of change in method of accounting for postemployment benefits. (2) During 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 established new guidelines for calculating earnings per share. The Company's Earnings (Loss) per Common Share figures for the years 1993 through 1996 have been restated to conform with the provisions of SFAS 128. (3) Includes long-term debt, capital leases, postretirement benefits other than pensions, noncurrent and outstanding redeemable preferred stock. (4) 1996, 1995 and 1994 do not include any effects from deferred dividends on preferred stock. See Notes 7(a), 7(b) and 8(c) to the Company's Notes to Consolidated Financial Statements contained in Part II, Item 8A. of this report for additional information related to the Company's preferred stock issuances. (5) 1997 activity included conversions of preferred stock into Common Stock. See Notes 7(b) and 8(c) to the Company's Notes to Consolidated Financial Statements for additional information. Note: Numbers may not add or calculate due to rounding. 21 SELECTED OPERATING AND FINANCIAL STATISTICS - US AIRWAYS (1) 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Revenue passengers (thousands)* 58,659 56,640 56,674 59,495 53,678 Total RPMs (millions)(2) 41,749 39,220 38,079 38,395 35,529 RPMs (millions)* 41,579 38,943 37,618 37,941 35,221 Total ASMs (millions)(3) 58,500 57,208 58,678 61,540 59,841 ASMs (millions)* 58,294 56,885 58,163 61,027 59,485 Passenger load factor* (4) 71.3% 68.5% 64.7% 62.2% 59.2% Break-even load factor (5) 66.4% 67.9% 64.9% 67.3% 61.7% Yield* (6) 17.10c 17.46c 16.66c 15.61c 17.27c Passenger revenue per ASM* (7) 12.20c 11.95c 10.78c 9.70c 10.22c Revenue per ASM (8) 13.50c 13.19c 11.80c 10.59c 11.04c Cost per ASM (9) 12.33c 12.69c 11.40c 11.02c 11.12c Average passenger journey (miles)* 709 688 664 638 656 Average stage length (miles)* 591 578 560 536 536 Revenue aircraft miles (millions)* 435 426 444 473 462 Cost of aviation fuel per gallon (10) 67.47c 70.51c 56.83c 55.79c 60.37c Cost of aviation fuel per gallon, excluding fuel taxes (11) 61.26c 64.09c 53.23c 53.28c 58.40c Gallons of aviation fuel consumed (millions) 1,129 1,107 1,137 1,205 1,161 Operating aircraft at year-end 376 390 394 424 441 Full-time equivalent employees at year-end 38,533 40,160 39,891 42,399 45,277 * Scheduled service only (excludes charter service). c cents (1) Operating statistics include free frequent travelers and the related miles they flew. Operating statistics exclude flights operated by US Airways under a wet lease arrangement with British Airways Plc. (the "wet lease arrangement," which ended May 31, 1996). Nonrecurring items and certain revenues and expenses have been excluded from US Airways' financial results for purposes of financial statistical calculation and to provide better comparability between periods. Nonrecurring items include those items reported as "nonrecurring items" by US Airways in its various filings from time-to-time with the U.S. Securities and Exchange Commission (see Note 12 to US Airways' Notes to Consolidated Financial Statements). Excluded revenues and expenses include revenues and expenses associated with US Airways' capacity purchase arrangements with certain affiliated airlines and the wet lease arrangement (see Notes 9(a) and 9(b) to US Airways' Notes to Consolidated Financial Statements for additional information). (2) Revenue Passenger Miles (RPMs) - revenue passengers multiplied by the number of miles they flew. (3) Available Seat Miles (ASMs) - Seats available multiplied by the number of miles flown (a measure of capacity). (4) Percentage of aircraft seating capacity that is actually utilized (RPMs/ASMs). (5) Percentage of aircraft seating capacity utilized that equates to US Airways breaking-even at the pre-tax income level. (6) Passenger transportation revenue divided by RPMs. (7) Passenger transportation revenue divided by ASMs (a measure of unit revenue). (8) Total Operating Revenues divided by ASMs (a measure of unit revenue). (9) Total Operating Expenses divided by ASMs (a measure of unit cost). (10) Includes the base cost of aviation fuel, fuel taxes and transportation charges. (11) Includes the base cost of aviation fuel and transportation charges. (this space intentionally left blank) 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL INFORMATION Certain information contained herein should be considered "forward- looking information" which is subject to a number of risks and uncertainties. The preparation of forward-looking information requires the use of estimates of future revenues, expenses, activity levels and economic and market conditions, many of which are outside the Company's control. Among the specific factors that could cause actual results to differ materially from those set forth in the forward-looking information are the following: economic conditions, labor costs, aviation fuel costs, competitive pressures on pricing particularly from lower-cost competitors, weather conditions, government legislation, consumer perceptions of the Company's products, demand for air transportation in the markets in which the Company operates and other risks and uncertainties listed from time to time in the Company's reports to the United States Securities and Exchange Commission (SEC). Other factors and assumptions not identified above are also involved in the preparation of forward-looking information, and the failure of such other factors and assumptions to be realized may also cause actual results to differ materially from those discussed. The Company assumes no obligation to update such estimates to reflect actual results, changes in assumptions or changes in other factors affecting such estimates. Except where noted, the following discussion relates primarily to the results of operations, financial condition and future prospects of US Airways. US Airways is the Company's principal operating subsidiary, accounting for approximately 92% of the Company's operating revenues for 1997 (on a consolidated basis). US Airways' financial results include the financial results of its wholly-owned subsidiary USAM Corp. (USAM). FINANCIAL OVERVIEW For 1997, the Company's operating revenues were $8.51 billion, operating income was $584.3 million, net income was $1.02 billion and earnings per common share (EPS) was $12.32 for basic and $9.87 for diluted. The Company's financial results for 1997 include $466.9 million resulting from the recognition of a deferred tax asset (see "Recognition of Deferred Tax Asset" below), pre-tax gains totaling $179.6 million which resulted from USAM's sale of certain investments (see "USAM Investments" below) as well as certain other nonrecurring items. See "Results of Operations" below for additional information. The Company recognized net income of $263.4 million in 1996 and $119.3 million in 1995. The Company's financial results for 1997, as well as the net income improvement realized by the Company over the last three years, are primarily attributable to relatively favorable domestic economic and industry conditions, overall favorable capacity and pricing trends in markets served by the Company's airline subsidiaries, improved operating performance, recent marketing efforts and the positive influence of certain revenue enhancement and cost-reduction initiatives. NEW STRATEGIC FOUNDATION The Company now has in place a new strategic foundation on which it can move forward with achieving its long-term strategic objective of establishing US Airways as a competitive global airline: a new labor contract between US Airways and its pilots; an agreement with a subsidiary of Airbus Industrie G.I.E. (Airbus) to purchase up to 400 new aircraft; an expanded and substantially improved line of products, including new international service, a new international business class, a new low cost, low fare product to be launched this Summer and new regional jet service on certain routes operated by US Airways Express; and, a contract with The SABRE Group (TSG) that is expected to provide substantial long-term cost savings and enhancements 23 with respect to the Company's information services requirements. A new five-year labor contract between US Airways and its pilots became effective January 1, 1998. This contract includes various provisions which the Company believes will help US Airways to address its high cost structure, including linking the compensation of US Airways' pilots to the compensation of pilots at several other major domestic air carriers. The new contract also includes provisions which allow US Airways to launch a low cost, low fare product. As discussed under "Current Competitive Position," US Airways has faced significant pressure in certain markets from competitors with lower cost structures. US Airways has recently announced that its low cost, low fare product, "MetroJet," will begin operations on June 1, 1998 (see below). The major provisions of US Airways' new contract with its pilots are presented in Part I, Item 1. of this report under "Business/Employees." In October 1998, the Company is scheduled to take delivery of the first of 124 new aircraft the Company has on firm order with Airbus. Six Airbus aircraft are scheduled for delivery in the fourth quarter of 1998, 20 in 1999 and 98 in the years 2000 through 2002. The Company's aircraft purchase agreement with Airbus also includes 116 aircraft subject to reconfirmation prior to scheduled delivery and options for 160 additional aircraft. These new aircraft, all of which are members of Airbus' A320 family of single-aisle aircraft, include the A319, A320 and A321. The Company anticipates that the new Airbus aircraft will ultimately replace, at a minimum, US Airways' B737-200, DC-9-30 and MD-80 aircraft. The Company has also entered into an agreement with CFM International, Inc. (CFMI) for jet engines to power the new Airbus aircraft. As part of its agreement with CFMI, GE Engine Services, Inc. will maintain these engines under an up to 20-year agreement. The Airbus aircraft are more fuel-efficient, less costly to maintain, have greater range capabilities and are expected to provide certain customer service benefits over the aircraft they are intended to replace. However, certain expenses such as interest expense, depreciation and aircraft rent expense are likely to increase in conjunction with the higher ownership and/or rental costs associated with the new aircraft. In addition, the Company is currently unable to determine whether US Airways will be required to recognize an "impairment charge" related to aircraft that will be retired because certain information required for the analysis is currently undetermined (e.g., aircraft retirement dates). See "Results of Operations" below for additional information about impairment charges. See also "Liquidity and Capital Resources" below for additional information related to the Company's aircraft purchase commitments. In December 1997, US Airways launched an improved international business class product called "Envoy Class." US Airways added a second Philadelphia-Paris flight during Summer 1997 and announced new service from Charlotte and Philadelphia to London's Gatwick Airport and from Philadelphia to Amsterdam beginning in Spring 1998. US Airways' transatlantic capacity (as measured by available seat miles or ASMs) for 1997 was 35.4% greater than for 1996 and has more than doubled from 1995 levels. US Airways continues to explore additional international opportunities. US Airways has announced that MetroJet will begin operations on June 1, 1998. MetroJet is expected to provide US Airways with a cost-effective response to Southwest Airlines Co. (Southwest), Delta Express, the low cost product offered by Delta Air Lines, Inc. (Delta), and other low cost, low fare competition. MetroJet will initially operate five B737-200 aircraft from Baltimore/Washington International Airport to Cleveland, Providence, Ft. Lauderdale and Manchester (New Hampshire). The Company's growth plans for MetroJet include MetroJet operating up to 20 aircraft by the end of 1998. See also "Current Competitive Position" below. On December 30, 1997, the Company purchased Shuttle, Inc. (Shuttle). Shuttle, which operates under the trade name "US Airways Shuttle," currently provides high frequency service 24 from New York to Boston and Washington. Shuttle owns twelve B727-200 aircraft (see also "Liquidity and Capital Resources" below). The Company has recently announced plans to add US Airways' Boston-Washington service to its US Airways Shuttle product in Spring 1998. US Airways has announced a major expansion and improvements of its facilities at Philadelphia, including a new international terminal and a new facility for US Airways Express operations. Philadelphia International Airport is US Airways' primary international gateway. In December 1997, US Airways entered into an agreement with TSG under which TSG assumed responsibility, as of January 1, 1998, for substantially all of US Airways' information technology requirements. The agreement with TSG is expected to result in substantial information system enhancements and efficiencies, particularly in the areas of reservations, passenger check-in, yield management and aircraft and crew scheduling. Under the terms of the agreement, TSG purchased US Airways' information systems and related assets. On January 1, 1998, in conjunction with US Airways' agreement with TSG, 670 US Airways information services employees took positions with TSG and TSG assumed management and operation of US Airways' data processing facilities, data and voice networks and substantially all other information technologies activities. TSG and US Airways are engaged in the conversion of the information technologies services previously provided by US Airways on its own behalf to similar information technology services of TSG, including the transfer of data processing activities to TSG's data processing facilities. The conversion efforts are expected to be substantially completed by April 1999. If these conversion efforts result in operational difficulties or are unsuccessful, the Company's operations, results of operations and financial condition could be adversely affected. Under the terms of US Airways' agreement with TSG, TSG has also assumed responsibility for US Airways' Year 2000 compliance efforts (see "Other Information" below for additional information). Decreases in Personnel costs resulting from the transfer of employees to TSG are expected to be offset by higher outside services expenses, including expenses related to conversion efforts. See "Liquidity and Capital Resources" below for additional information related to US Airways' agreement with TSG. CURRENT COMPETITIVE POSITION US Airways' foremost competitive threat continues to be the growth of low cost, low fare competition in its primary operating region, the Eastern United States. Currently, approximately 84% of US Airways' departures and approximately 56% of its capacity (ASMs) are located within this region. US Airways' estimated origin/destination passenger overlap with low cost, low fare competition is approximately 47% of its traffic base as of February 1998 as compared to approximately 50% as of April 1997 and approximately 49% as of March 1996. The lower overlap exhibited in February 1998 is due primarily to schedule changes implemented by US Airways, including those resulting from the efficiency measures announced in May 1997 (see discussion below). Prior to fourth quarter 1996, the primary low cost, low fare competition confronted by the Company's airline subsidiaries included Southwest and a number of smaller, start-up air carriers. Southwest has steadily increased operations within the Eastern U.S. since first offering service in this region in late 1993. In October 1996, however, Delta, a major air carrier which was itself experiencing pressure from low cost, low fare competition, launched a low-cost product called "Delta Express." Delta Express currently operates 25 aircraft in predominantly Eastern U.S. markets. Delta recently announced that it will assign additional aircraft to its Delta Express unit in May 1998. 25 Direct competition with low cost, low fare competition has typically resulted in the dilution of yield realized by the Company's airline subsidiaries. US Airways' Northeast-Florida service has been particularly affected by low cost, low fare competition. US Airways has the highest unit operating cost (operating cost per ASM or cost per ASM) of all major domestic air carriers. US Airways' cost per ASM was 12.33 cents for 1997. By contrast, Southwest reported unit operating costs for 1997 of 7.40 cents. Although Delta reported an overall unit operating cost of 8.78 cents for its fiscal year 1997, its Delta Express product is purported to have a unit operating cost of approximately 7.50 cents. As mentioned above under "New Strategic Foundation," US Airways will launch its own competitive response to the low cost, low fare threat, MetroJet, on June 1, 1998. The Company believes that MetroJet will help US Airways to effectively compete against low cost, low fare competitors and enhance the Company's current product mix, particularly with respect to predominantly leisure markets such as Northeast-Florida. In May 1997, US Airways announced certain efficiency measures including retiring 22 aircraft from its operating fleet, including the last five F28-4000 aircraft and 17 older DC-9-30 aircraft (all of these aircraft had been retired by the end of February 1998), ending unprofitable service to nine cities and eliminating other routes that had not been profitable (completed during early September 1997) and closing a flight crew base (February 1998), two reservations centers (October 1997) and three maintenance facilities (by September 1998). The Company recognized certain nonrecurring charges as a result of these actions. In September 1997, US Airways decided to retire its remaining DC-9-30 aircraft earlier than previously planned resulting in an additional nonrecurring charge (nonrecurring charges are discussed under "Results of Operations" below). Excluding any additional impairment charges (see "New Strategic Foundation" above), US Airways anticipates that deliveries of new Airbus aircraft will mitigate the effects of DC-9-30 retirements on its financial results and capacity. The Company has been working closely with union leaders and employee groups to minimize to the greatest degree possible the impact of changes in operations on affected employees. The Company expects these efficiency measures will ultimately result in the furlough of approximately 750 US Airways employees. The Company believes that US Airways' new contract with its pilots and the introduction of new aircraft into US Airways' operating fleet will help to improve US Airways' competitive position in the marketplace, particularly in markets where US Airways faces low cost, low fare competition. CERTAIN OWNERSHIP MATTERS On March 26, 1997, the Company paid dividends totaling $34.8 million to the holders of its Series A, Series F and Series T Preferred Stock and the Company's board of directors declared dividends of $46.6 million on the Company's Series B Preferred Stock (see Notes 7(a), 7(b) and 8(c) to the Company's Notes to Consolidated Financial Statements contained in Part II, Item 8A. for additional information related to the Company's preferred stock issuances). After payment of the Series B Preferred Stock dividends in May 1997, the Company had paid all dividends in arrears (including penalty dividends on the deferred dividends) and had resumed regular quarterly dividend payments on all of its outstanding preferred stock issuances. In May 1997, British Airways Plc. (British Airways) converted 28,059.364 shares of Series F Preferred Stock into 14,458,851 shares of Common Stock, which it then sold to third parties. Also in May 1997, the Company repurchased the remaining shares of Series F Preferred Stock and all of the Series T Preferred Stock (both series were held exclusively by British Airways). The Company's board of directors declared regular quarterly dividends on the Series F and Series T Preferred Stock prior to the conversion and repurchase transactions. After the conversion and repurchase transactions, the Company believes that British Airways held no ownership interest in US Airways Group (see also "Liquidity and Capital Resources" below). 26 In August 1997, the Company exchanged its Series A Preferred Stock for Series H Senior Cumulative Convertible Preferred Stock (Series H Preferred Stock). The Series A Preferred Stock was, and the Series H Preferred Stock is, owned by affiliates of Berkshire Hathaway, Inc. (Berkshire Hathaway). The provisions of the Series H Preferred Stock are substantially similar to those of the Series A Preferred Stock. The exchange transaction facilitated the redemption of the Series B Preferred Stock (as discussed below). On August 18, 1997, the Company notified the holders of its Series B Preferred Stock that it would redeem all 4,263,000 outstanding depositary shares representing Series B Preferred Stock on September 15, 1997 at $51.75 per share plus accrued dividends of $0.3646 per share. Because conversion into Common Stock was financially advantageous to the holders, all but approximately 6,000 depositary shares were converted prior to the redemption date resulting in the issuance of 10.6 million shares of Common Stock (see also "Liquidity and Capital Resources" below). In January 1998, the Company announced plans to purchase up to 2.3 million shares of its Common Stock from time-to-time in open market or privately negotiated transactions. This program was authorized by the Company's board of directors in conjunction with US Airways' agreement to provide up to 2.3 million stock options to its pilots in 1998. In February 1998, the Company's board of directors announced certain actions aimed at increasing shareholder value, including the purchase from time-to-time in open market or privately negotiated transactions of up to $500 million of the Company's Common Stock (in addition to the previously announced plan), the call for redemption of the Series H Preferred Stock (in February 1998, the Company notified Berkshire Hathaway of its intention to redeem the Series H Preferred Stock on March 15, 1998; see below) and the retirement of certain debt obligations totaling approximately $380 million. During late February 1998, US Airways retired early certain debt obligations with a combined principal amount of $76.1 million (the transactions resulted in an immaterial net gain). US Airways expects to retire its 10% Senior Notes, which have a face amount of $300 million, during early Summer 1998. Retirement of the 10% Senior Notes is expected to result in an extraordinary loss on early debt extinguishment of approximately $15 million. On March 12, 1998, Berkshire Hathaway exercised its right to convert the Series H Preferred Stock into 9.2 million shares of the Company's Common Stock. The Company subsequently retired its Series H Preferred Stock. With the retirement of all of the Company's preferred stock, the Company has been relieved of annual dividends of approximately $79 million. Annual interest payments associated with the debt obligations retired early or to be retired early under the aforementioned program total approximately $37 million. USAM INVESTMENTS On July 30, 1997, Galileo International, Inc. (Galileo) completed an initial public offering (IPO) and used the proceeds, together with the proceeds of bank financing, to purchase Apollo Travel Services Partnership (ATS). USAM owned approximately 21% of ATS. Immediately preceding the IPO, Galileo International Partnership (GIP) was merged with and into a wholly- owned limited liability company subsidiary of Galileo and USAM received shares in Galileo in the same proportion as its partnership interest in GIP. As part of the IPO, USAM sold some of its Galileo shares, and its interest in Galileo was reduced from 11% to approximately 6.7%. USAM received proceeds of $62.2 million and recognized a pre-tax gain of approximately $50 million from the sell-down of its interest in Galileo and received proceeds of $162.0 million and recognized a pre-tax gain of approximately $130 million in connection with the sale of its interest in ATS. 27 USAM applies the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," to account for its remaining investment in Galileo. The resulting adjustment to Stockholders' Equity (Deficit) to reflect the increase in the fair value of USAM's Galileo investment over its carrying cost is reflected in the Company's balance sheet line item "Unrealized gain on available-for-sale securities, net of income tax effects" (see Note 8(f) to the Company's Notes to Consolidated Financial Statements, which are contained in Part II, Item 8A. of this report). See Part I, Item 1. "Business/Computerized Reservation Systems" for related information. RECOGNITION OF DEFERRED TAX ASSET During the fourth quarter of 1997, the Company recognized income tax benefits of $466.9 million. These tax benefits, which are reflected in the line item, "Provision (Credit) for Income Taxes" on the Company's Consolidated Statements of Operations, stem primarily from net operating losses and other tax credits generated in prior years. The Company recognized these tax benefits for financial reporting purposes based on its expectations of future earnings levels and the fact that certain of these tax benefits don't expire or will be realized in future periods irrespective of future earnings levels. As of December 31, 1997, the Company believes that it is more likely than not that these tax benefits will be fully utilized in future periods. As a result of recognizing these tax benefits in 1997, the Company's future effective income tax rate will be higher than the effective income tax rate for 1997 and earlier years. For 1998, the Company's effective income tax rate for financial reporting purposes is expected to be approximately 41% although the actual rate at which the Company expects to pay income taxes is estimated at 20% to 25% (the actual rate is expected to remain within this range until the Company has utilized a significant portion of the accumulated income tax benefits). See Note 3 to the Company's Notes to Consolidated Financial Statements for additional information, including the components of the Company's deferred income tax assets and liabilities. OTHER INFORMATION The Company is currently operating computer software applications and systems that are not Year 2000 compliant to support important business applications, including reservations, accounting and flight operations systems. If these software applications and systems are not made Year 2000 compliant, the Company could suffer a material adverse effect on its operations, results of operations and financial condition. As part of the Company's long-term information technology relationship with TSG (as discussed in "New Strategic Foundation" above), many of these software applications and systems are being replaced by new software applications and systems that are expected to provide significant operational and other benefits, in addition to being Year 2000 compliant. TSG has agreed, with respect to each US Airways software application and system that is neither Year 2000 compliant nor being replaced, to modify such software application or system such that it is Year 2000 compliant. The Company currently expects to spend approximately $25 million to modify these software applications and systems. The Company believes that it will be able to achieve Year 2000 compliance by the end of 1999, or earlier where necessary. Notwithstanding the foregoing, the Company cannot assure that its Year 2000 compliance program will successfully correct all Year 2000- related problems. Additionally, the Company exchanges information electronically with a number of other parties, including computer reservation systems that provide reservations services for the majority of the Company's customers. The Company is engaging in contact with these other parties to determine the effect of their Year 2000 compliance status on the Company's operations. 28 US Airways' labor contracts with all of its non-pilot unionized employees are currently amendable. US Airways is unable to determine when new agreements with these employees will be reached or the final terms and conditions of any new contracts. See Part I, Item 1. "Business/Employees" for additional information related to the Company's workforce, including US Airways' labor contracts. On September 24, 1997, US Airways announced that it reduced the rates for base commissions paid to travel agencies from 10% of ticket price to 8% on all domestic and international tickets issued by travel agents in the U.S., Puerto Rico, the U.S. Virgin Islands and Canada. US Airways' existing maximum payment of $25 one-way and $50 round-trip for tickets purchased in the U.S. and Puerto Rico for travel in and between the U.S., Puerto Rico, the U.S. Virgin Islands and Canada remains unchanged. During October 1997, the U.S. Department of Transportation (DOT) awarded takeoff and landing rights ("slots") at New York's LaGuardia Airport (LaGuardia) and at Chicago's O'Hare International Airport to several low cost, low fare air carriers. The DOT awarded the slots as part of new policies designed to increase competition at certain high-traffic domestic airports. Previously, slots at such airports (which also includes New York's John F. Kennedy International Airport and Washington's Ronald Reagan Washington National Airport (National)) were only available through purchase or lease from another air carrier. US Airways and Shuttle hold a considerable number of slots at such airports, primarily at LaGuardia and National. The recent awards were minimal and are not expected to have a material adverse impact on the Company's results of operations or financial condition. There are several proposals before Congress which would address service to small and medium-size airports. Most notable is a bill which would, among other things, confiscate slots from the major air carriers at the four high-density airports mentioned in the preceding paragraph and auction them off to other air carriers. The Company has testified in opposition to such a plan. Adoption of such a plan could force a reduction in US Airways' or Shuttle's flights from LaGuardia and National and could have an adverse effect on the Company's results of operations and financial condition. On August 5, 1997, President Clinton signed legislation extending federal excise taxes on air transportation (the "ticket tax") from October 1, 1997 through September 30, 2007. In addition, effective October 1, 1997, the legislation reduced the domestic ticket tax from the prior level of 10% of fare to 9.0% (decreasing to 8.0% on October 1, 1998 and to 7.5% on October 1, 1999), added a new segment tax of $1.00 (which increases to $3.00 by the year 2002), changed the current $6.00 international departure tax to $12.00 and added a $12.00 international arrival tax. The legislation also added a new 7.5% tax effective October 1, 1997 on certain purchases of frequent traveler program miles from domestic air carriers. The Company does not believe that the new ticket tax structure has had a material adverse effect on its results of operations or financial condition. The Company and its subsidiaries are subject to a wide range of government regulation. Besides taxes on income, property and aviation fuel, the Company's airline subsidiaries are subject to numerous safety, maintenance and environmental related mandates. The Company's airline subsidiaries also collect various taxes from their customers, such as the ticket tax (see above), and pass through the collected amounts to the appropriate governmental agencies. Such taxes, even though not expenses for the Company, are an additional cost for the Company's customers. Increases in such taxes can be detrimental to demand for air transportation and decreases can have a stimulative effect on demand. In addition, especially in regards to international operations and certain high-traffic domestic airports (see above), the Company's airline subsidiaries are subject to certain restrictions on when and where they can operate. Changes in government regulation can have a material impact on the Company's results of 29 operations and financial condition. Besides the effect of additional taxes on the Company's results of operations and financial condition, the Company's financial performance can be materially affected by the ability of the Company to pass through such additional expenses to its customers. Additional information related to government regulation can be found in Part I, Item 1. of this report under "Business/Industry Regulation and Airport Access." As detailed in Note 6(c) to the Company's Notes to Consolidated Financial Statements, litigation between US Airways and The Boeing Company (Boeing) continued into 1998. During September 1997, Boeing filed suit against US Airways seeking unspecified damages for alleged breach of two aircraft purchase agreements concerning eight B757-200 aircraft and 40 B737-Series aircraft. US Airways subsequently filed an answer and counterclaim to Boeing's complaint denying liability and seeking recovery from Boeing of approximately $35 million in equipment purchase deposits and past overcharges. The Company is unable to predict the timing or eventual outcome of this litigation. RESULTS OF OPERATIONS The following section pertains to activity included in the Company's Consolidated Statements of Operations (which are contained in Part II, Item 8A. of this report) and changes in select US Airways operating and financial statistics (see Part II, Item 6. of this report). Except where noted, operating statistics referred to in this section are for scheduled service only. 1997 COMPARED WITH 1996 Operating Revenues-US Airways' Passenger transportation revenues increased $312.6 million (4.6%) as the result of a 6.8% increase in revenue passenger miles (RPMs) partially offset by a 2.1% decrease in yield. The main factors contributing to the improved performance are discussed above. The Company estimates that severe winter weather within the Eastern U.S. and a partial shutdown of the federal government adversely affected first quarter 1996 revenues by approximately $55 million. Inclement weather (hurricanes) during the third quarter of 1996 is estimated to have adversely affected Passenger transportation revenues by approximately $10 million. Cargo and freight revenues increased due primarily to volume factors. Other revenues for 1996 included $12.6 million related to a wet lease arrangement between US Airways and British Airways (see also Other, net below and "1996 Compared With 1995" below for additional information). Operating Expenses-The Company recognized certain nonrecurring items during both 1997 and 1996. The table below shows where these nonrecurring items were recorded in the Company's Consolidated Statements of Operations (in millions; brackets indicate expense). 1997 1996 ---- ---- Operating Expenses Personnel costs $(121.9) $ - Aircraft rent 1.5 22.5 Other rent and landing fees (4.6) - Aircraft maintenance - 7.0 Depreciation and amortization (89.1) - ----- ---- (214.1) 29.5 Other Income (Expense) Gains on sales of interests in affiliates 179.6 - ----- ---- 179.6 - ----- ---- Net amount reflected in Income Before Taxes $ (34.5) $ 29.5 ===== ==== 30 Except for a $115.0 million charge recognized in Personnel costs and the $1.5 million credit to Aircraft rent, the nonrecurring items recorded in 1997 in operating expenses relate to certain efficiency measures announced during May 1997 (see "Current Competitive Position" above) and certain impairment charges recorded in the third quarter (see below). The $115.0 million charge was recognized in the fourth quarter of 1997 in accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" (SFAS 88) and relates to an early retirement program offered to US Airways' pilots. The Company expects 325 pilots to opt for early retirement under this program. This program is expected to result in significant net long- term savings in both wages and benefits expenses. The credit to Aircraft rent was recognized in conjunction with US Airways' subleasing an additional BAe-146 aircraft. During 1994, US Airways accrued a substantial portion of the future rent obligations related to its parked BAe-146 aircraft. The remaining Personnel costs charge relates to severance accruals and the charge to Other rent and landing fees reflects the accrual of lease obligations at certain facilities abandoned or to be abandoned (net of any anticipated sublease revenues). A majority of the nonrecurring items recorded in Depreciation and amortization stem from analyses performed in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" (SFAS 121). In general, SFAS 121 requires an "impairment charge" to be recognized when the estimated net undiscounted future cash flows from an asset's use (including any anticipated proceeds from disposition) are less than the asset's current book value and the asset's current book value exceeds its fair value. The impairment charge reflects writing-down the assets to fair value. The elements of the charge to Depreciation and amortization include an $18.1 million impairment charge associated with US Airways' retirement of 17 DC- 9-30 aircraft as the result of the May 1997 efficiency measures and a $59.3 million impairment charge resulting from US Airways' late-September 1997 decision to retire its remaining DC-9-30 aircraft over the next several years. US Airways suspended its DC-9-30 "hush-kit" program in conjunction with its decision to retire this fleet-type. The remaining components of the Depreciation and amortization charge relate to the May 1997 efficiency measures, including amounts related to owned facilities which have been or will be abandoned and the write-down of certain equipment to be disposed of. Gains on sales of interests in affiliates resulted from USAM's sale of certain investments, as discussed above under "USAM Investments." The two nonrecurring items recognized in 1996 related to US Airways' subleasing of eleven BAe-146 aircraft-a credit of $22.5 million recorded in Aircraft rent (reversal of previously accrued lease obligations) and a credit of $7.0 million recorded in Aircraft maintenance (reversal of previously accrued lease return provisions). US Airways also recorded a similar credit of $4.1 million to Aircraft rent during 1995 related to these aircraft. Excluding the SFAS 88 charge recognized in 1997 (see above) and profit sharing expenses totaling $121.6 million recorded during 1996, Personnel costs were relatively unchanged. The profit sharing expenses recognized during 1996 were associated with US Airways' 1992 Salary Reduction Program (there were no similar expenses during 1997). The Company's defined benefit pension and postretirement benefit expenses decreased due primarily to higher interest rates (discount factors) used for 1997 calculations. Medical and dental expenses were marginally higher year-over-year. Expenses associated with stock appreciation rights (SARs) were $33.2 million for 1997 and $41.6 million for 1996 (see Note 8(e) to the Company's Notes to Consolidated Financial Statements for information related to the Company's stock-based compensation arrangements). US Airways' new labor contract with its pilots provides for certain lump sum payments and stock options. US Airways will recognize expenses for the lump sum payments to its pilots, 31 which are expected to total approximately $20 million, as an element of Personnel costs in the period in which they are earned. Any personnel expenses associated with the stock options granted under the new contract would be recognized over the vesting period of the grant and be dependent upon the exercise price of each grant. Commissions expenses increased marginally year-over-year, but decreased 8.2% during fourth quarter 1997 as compared to fourth quarter 1996 due primarily to a revised commission rate structure established during September 1997 (see "Other Information" above). Excluding the effects of nonrecurring items (see above), Aircraft rent increased due primarily to net rent expense adjustments totaling $15.1 million recorded during 1997 related to certain F28-4000 aircraft. Other rent and landing fees were relatively unchanged if the effects of the nonrecurring items (see above) are excluded. Aircraft maintenance expenses increased due primarily to an increase of approximately $23 million in unserviceable (scrap) Pratt & Whitney JT8D engine parts, other adjustments to spare parts totaling approximately $13 million with a majority of the remaining increase attributable to certain timing factors associated with the "power- by-the-hour" jet engine maintenance contracts US Airways entered into during the fourth quarters of both 1997 and 1996 and increases in the cost of certain JT8D jet engine parts. US Airways signed a ten-year power-by- the-hour maintenance agreement with Rolls Royce Canada Limitee during December 1997 covering jet engines originally manufactured by Rolls Royce Plc. US Airways entered into a similar ten-year agreement with the General Electric Company (GE) during fourth quarter 1996 for US Airways' GE- manufactured jet engines (see also "1996 Compared With 1995" below). As discussed in "New Strategic Foundation" above, the Company has also entered into a power-by-the-hour maintenance agreement which will cover the jet engines that will accompany the new Airbus aircraft. The Company believes that these maintenance contracts will provide substantial long-term savings over otherwise expected levels of maintenance costs. 1996 activity included a nonrecurring expense credit (see above). Depreciation and amortization decreased 1.5% if nonrecurring items (see above) are excluded. Other, net includes expenses totaling $35.6 million recorded during the fourth quarter of 1997 related to US Airways' new information technology management agreement with TSG (see discussion in "New Strategic Foundation" above). Also, US Airways experienced increases in certain sales and traffic-related expenses (most notably, credit card expenses). Other, net for 1996 included expenses of $12.6 million associated with US Airways' wet lease arrangement with British Airways (see Other revenues above and "1996 Compared With 1995" below). Other Income (Expense)-Equity in earnings of affiliates decreased as USAM discontinued applying the equity method of accounting for certain of its investments after July 1997. The amount recorded in Gains on sales of interests in affiliates is related to USAM's sale of certain investments, as discussed in "USAM Investments" above. Other, net activity in 1997 included $18.0 million related to US Airways' sale of eleven nonoperating aircraft. In 1996, Other, net included losses totaling $8.7 million related to US Airways' sale of eight nonoperating aircraft and $9.5 million expense related to US Airways' settlement of litigation involving travel agencies. Provision (Credit) for Income Taxes-During the fourth quarter of 1997, the Company recognized certain tax benefits totaling $466.9 million. See "Recognition of Deferred Tax Asset" above. Earnings per Common Share-During the third quarter of 1997, most of the Series B Preferred Stock was converted into 10.6 million shares of Common Stock. During the second quarter of 1997, most of the Series F Preferred Stock was converted into 14.5 million shares of Common Stock. For full-year 1997, on a weighted average basis, these transactions had the effect of increasing shares of Common Stock outstanding by 12.6 million shares. The Company adopted SFAS No. 128, "Earnings per Share" (SFAS 128) during 1997. The Company's EPS figures for 1996 have been restated to conform with the provisions of 32 SFAS 128. The implementation of SFAS 128 did not have a material impact on the Company's EPS disclosures. See Note 1(n) to the Company's Notes to Consolidated Financial Statements for additional information related to the Company's EPS calculations. Select US Airways Operating and Financial Statistics-Yield decreased 2.1%, but the related effects on US Airways' Passenger transportation revenues were more than offset by a 6.8% increase in RPMs. The yield decrease is primarily attributable to increased competitive pressures year-over-year (see "Current Competitive Position" above) and matters related to the ticket tax (see "Other Information" above). An increase in US Airways' average passenger journey also negatively affected yield. US Airways selectively increased fares in certain markets up to 5% in both March and September 1997. US Airways' unit operating cost decreased slightly primarily due to a 2.3% increase in total capacity (nonrecurring items, which are discussed above, are excluded from calculations of unit operating cost). The capacity (ASMs) increase is primarily the result of higher aircraft utilization rates during 1997 partially offset by fewer operating aircraft in US Airways' fleet during 1997. Aircraft utilization was adversely affected by inclement weather during both the first and third quarters of 1996 (see also Passenger transportation revenues above). During fourth quarter 1997, as compared to fourth quarter 1996, however, capacity decreased 4.2% as the result of schedule changes implemented during third quarter 1997 (see "Current Competitive Position" above). As disclosed in a Current Report on Form 8-K filed with the SEC on January 21, 1998, US Airways' capacity is expected to decrease approximately 2.4% and its unit operating cost is expected to increase approximately 2.0% for 1998 as compared to 1997 (the unit operating cost estimate is based on an average aviation fuel cost of 62.50 cents per gallon for 1998). Although the average price of aviation fuel per gallon decreased during 1997, especially during fourth quarter 1997, aviation fuel prices are subject to market conditions and other factors that are generally outside of the Company's control. Fluctuations in the price of aviation fuel can have a dramatic effect on the Company's results of operations. Supplemental Information-In June 1997, the Financial Accounting Standards Board (FASB) adopted SFAS No. 130, "Reporting Comprehensive Income," (SFAS 130) and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131). In February 1998, the FASB adopted SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits" (SFAS 132). SFAS 130 establishes standards for the reporting and presentation of comprehensive income and its components in financial statements. SFAS 131 establishes standards for defining operating segments and the reporting of certain information regarding operating segments. SFAS 132 establishes revised disclosure requirements with respect to employer pension and benefit plans. The Company does not believe that its adoption of these standards will have an effect on the Company's results of operations, liquidity or financial condition. All three standards pertain to disclosure requirements and do not effect amounts reported in the Company's consolidated financial statements. Once the Company has determined its reporting obligations under the new standards, the necessary information will be disclosed as part of the Company's financial reporting in the appropriate period. 1996 COMPARED WITH 1995 Operating Revenues-US Airways' Passenger transportation revenues increased $531.7 million, or 8.5%, with the remainder of the $622.3 million increase attributable to passengers carried by the Company's regional airline subsidiaries. US Airways' increase is primarily the result of a 4.8% increase in yield and a 3.6% increase in average passenger journey. The main factors which contributed to the Company's improved performance during 1996 include relatively favorable domestic economic conditions, overall favorable capacity and pricing trends in markets served by the Company's airline subsidiaries and the positive influence of certain revenue enhancement 33 initiatives. The Company estimates that severe winter weather within the Eastern U.S. and a partial shutdown of the federal government adversely affected first quarter 1996 revenues by approximately $55 million. Inclement weather (hurricanes) during the third quarter of 1996 is estimated to have adversely affected Passenger transportation revenues by approximately $10 million. The Company's airline subsidiaries faced intense competitive pressure from Continental Airlines, Inc.'s low cost product, "Continental Lite" during early 1995 (see discussion related to low cost, low fare competition in "Current Competitive Position" above). Other revenues decreased due primarily to wet lease revenues falling to $12.6 million for 1996 from $63.6 million for 1995 (see also Aircraft rent and Other, net below). Operating Expenses-Profit sharing expenses, the impact of adding a SAR feature to one of the Company's stock option plans, interest rate driven increases in pension and postretirement benefits expenses, contractual wage increases that US Airways' pilot and flight attendant employee groups received in January 1996 and wage increases received by certain non- contract employees effective January 1, 1996 were the primary factors which resulted in the Company's Personnel costs increasing 10.7% year-over-year. US Airways' mechanics and pilots also received contractual wage increases in March 1995 and July 1995, respectively. The Company recorded profit sharing expense related to its 1992 Salary Reduction Plan of $121.6 million in 1996 versus $49.7 million in 1995. The Company's obligations under this plan ended with a payment to participants in early March 1997. The Company recognized expenses of $41.6 million related to SARs during the fourth quarter of 1996 (see additional information in "1997 Compared With 1996" above). Pension and postretirement benefits expenses increased $107.1 million due primarily to interest rate factors. In addition, expenses related to stock option grants, Common Stock grants, severance payments and similar-type compensation (excluding SARs expense) increased $20.6 million year-over-year. Long-term disability expenses increased $22.7 million due mainly to an increase in number of employees on long-term disability. The increase in Commissions expense is attributable to higher Passenger transportation revenues (see also Other, net below). Excluding nonrecurring items (see "1997 Compared With 1996" above), Aircraft rent expense increased 4.0% due primarily to two leased B767-200ER aircraft reentering US Airways' operating fleet during the first half of 1996. US Airways recognized expenses related to these aircraft in the Other operating expenses category while they were operated by British Airways under a wet lease arrangement (see also Other revenues above and Other, net below). Excluding a nonrecurring item recognized during 1996, Aircraft maintenance increased $33.1 million. Efficiencies gained from reengineering efforts in US Airways maintenance areas and the effects of fewer operating aircraft in US Airways' fleet year-over-year were more than offset by timing factors and expenses identifiable as transition expenses related to a change in service providers for certain jet engine maintenance work. US Airways signed a ten-year contract with a subsidiary of GE during the third quarter of 1996 for the upkeep and overhaul of certain jet engines originally manufactured by a GE affiliate. US Airways experienced approximately $14 million in costs during the fourth quarter of 1996 directly related to the transition of work from the former contractor to GE. Depreciation and amortization decreased due primarily to fewer owned aircraft in US Airways' operating fleet. Other, net increased due primarily to increases in insurance and communications-related costs. US Airways also experienced higher credit card expenses linked to higher Passenger transportation revenues. Expenses related to the wet lease arrangement with British Airways decreased $51.0 million due to the expiration of this arrangement during May 1996 (see also Other revenues and Aircraft rent above). Other Income (Expense)-Interest income increased due mainly to higher Cash, Cash equivalents and Short-term investments balances during 1996 and Interest expense decreased primarily as the result of less long-term debt outstanding year-over-year. Equity in earnings of affiliates increased as results improved for all three of the partnerships in which USAM had an ownership interest. The improved financial results for these partnerships were driven by increases in airline industry 34 passenger volumes. For 1996, Other, net included expenses of $9.5 million related to US Airways' settlement of litigation involving travel agencies and losses of $8.7 million related to US Airways' disposition of eight nonoperating aircraft. For 1995, Other, net included gains totaling $10.7 million related to the sale of certain B737-300 aircraft. Provision (Credit) for Income Taxes-The Company was subject to federal alternative minimum tax for 1996 and 1995 as well as income taxes in certain states. The Company was not subject to regular federal income tax during 1996 or 1995 as the result of using federal income tax net operating loss carryforwards. Earnings per Common Share-The Company' EPS for both 1996 and 1995 have been restated in conjunction with the Company's implementation of SFAS 128. See "1997 Compared With 1996" above for additional information. Select US Airways Operating and Financial Statistics-US Airways' yield improved 4.8% and capacity (ASMs) fell 2.2%. The number of revenue passengers carried by US Airways was relatively unchanged year-over-year, but average passenger journey increased 3.6%. The decrease in capacity was due mainly to fewer aircraft in US Airways' operating fleet year-over-year. The increase in average passenger journey primarily reflects US Airways' expanded transatlantic operations. In general, favorable capacity and pricing trends have been evident in markets served by the Company's airline subsidiaries since the demise of Continental Lite in early 1995. Competition with Continental Lite included US Airways selectively lowering fares in certain markets to maintain market share. US Airways' unit operating cost was 12.69 cents for 1996, an 11.3% increase versus its unit operating cost for 1995. This increase is primarily the result of higher operating expenses applied over less capacity. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997, the Company's Cash, Cash equivalents and Short-term investments totaled $1.96 billion (excluding $70.4 million deposited in trust accounts to collateralize letters of credit and workers' compensation policies and included in Other assets on the Company's Consolidated Balance Sheets, which are contained in Part II, Item 8A. of this report). The Company's ratio of current assets to current liabilities ("current ratio") was 1.10 and 0.81 as of December 31, 1997 and 1996, respectively. The Company's debt to equity ratio improved to 3.60 as of December 31, 1997 from (4.62) as of December 31, 1996 (calculations exclude amounts related to redeemable preferred stock) due primarily to higher net income year- over-year. In addition, preferred stock conversions (see "Certain Ownership Matters" above) improved the debt to equity ratio due to the resulting issuances of Common Stock. US Airways' capital expenditures for 1998 are currently expected to include approximately $320 million related to the purchase of aircraft (including new aircraft, as discussed below, and two leased B767-200ER aircraft that US Airways currently intends to purchase at lease expiry) and aircraft-related assets and approximately $130 million to purchase non- aircraft assets. The Company expects to satisfy its liquidity requirements for 1998, except as discussed below related to its aircraft purchase commitments, through a combination of cash on hand (Cash, Cash equivalents and Short-term investments) and cash generated by operations. The Company is highly leveraged and requires substantial working capital in order to meet scheduled debt and lease payments and to finance day-to-day operations. The Company has entered into agreements to acquire up to 400 new aircraft and jet engines to power these aircraft. These agreements increase the Company's financing needs and will result in a significant increase in its financial obligations and debt burden (see related discussion below). The Company is also discussing with 35 Airbus and Boeing the possible acquisition of new wide-body aircraft. Changes in certain factors that are generally outside the Company's control, such as an economic downturn, additional government regulation, intensified pressures from competitors with lower cost structures and increases in the cost of aviation fuel, could have a material adverse effect on the Company's results of operations, liquidity and financial condition. Until US Airways is able to establish a competitive cost structure, the Company believes that its results of operations and financial condition will be particularly susceptible to adverse changes in general economic and market conditions. Eastern U.S. operations comprise a substantial portion of US Airways' current route structure. Although a competitive strength in some regards, the regional concentration of significant operations results in US Airways being susceptible to changes in certain regional conditions that may adversely affect the Company's results of operations and financial condition. The combination of a high cost structure and the regional concentration of operations has also contributed to US Airways being particularly vulnerable to low cost, low fare competition. US Airways uses risk management strategies to reduce its exposure to certain market uncertainties. US Airways is party to financial contracts which it believes help to reduce its exposure to significant increases in the price of aviation fuel. Under these arrangements, US Airways pays a fixed rate per notional gallon of fuel and receives in return a floating rate per notional gallon based on the market rate during the month of settlement. Decreases in the market cost of the fuel below the rates specified in the contracts require US Airways to make cash payments. Gains or losses related to these contracts are deferred until the period in which they are settled. Realized gains and losses are recognized as an element of aviation fuel expense. US Airways has also hedged certain foreign- denominated debt to maturity. US Airways periodically reviews the financial condition of each counterparty to these financial contracts and believes that the potential for default by any of the current counterparties is negligible. Although such financial contracts involve certain inherent risks, US Airways believes that such arrangements help reduce its exposure to significant increases in aviation fuel prices and the value of certain foreign currencies. See Note 2(a) to the Company's Notes to Consolidated Financial Statements for additional information. As presented in the Company's Consolidated Statements of Cash Flows (which are also contained in Part II, Item 8A. of this report), net cash flows provided by operating activities during 1997, 1996 and 1995 were $869.7 million, $1.03 billion and $576.6 million, respectively. The Company is currently unable to predict the full impact of recent events involving US Airways' labor costs and agreements to purchase new aircraft and jet engines on its future operating cash flows (see "New Strategic Foundation" above). The Company expects decreases in certain future operating cash outflows as US Airways replaces several older, diverse aircraft types with newer, more efficient aircraft, but may experience increases in certain other future operating cash outflows as the result of US Airways' growth plans, including costs associated with integrating new aircraft types into its operating fleet. With the reinstatement of the ticket tax during March 1997, the Company resumed ticket tax remittances to the federal government (see "Other Information" above). The ticket tax was not in effect during the periods January 1, 1996-August 27, 1996 and January 1, 1997-March 7, 1997. The Company also made profit sharing payments to employees totaling $129.1 million during first quarter 1997. These payments ended the Company's obligation for profit sharing under its 1992 Salary Reduction Plan (the related expenses were recognized by the Company during 1996 and earlier periods). USAM received partnership distributions from its CRS investments of $18.3 million, $48.7 million and $14.0 million during 1997, 1996 and 1995, respectively, as reflected in the Other operating adjustments category in the Company's Consolidated Statements of Cash Flows (see also "USAM Investments" above). 36 Approximately 3.9 million and 570,000 SARs were exercised during 1997 and 1996, respectively, resulting in cash outflows of $54.7 million during 1997 and $4.9 million during 1996. As of December 31, 1997, approximately 180,700 SARs remained outstanding. US Airways' contributions to its defined benefit plans in 1997 totaled $113.1 million. US Airways estimates that it will need to contribute less than $20 million to these plans in 1998 in order to meet statutory minimum pension funding requirements due primarily to favorable returns on assets held by these plans and certain changes in assumptions underlying the calculations of the funding minimums. US Airways' estimates of future pension plan contributions are subject to change, including the possibility of it contributing to these plans in excess of minimum funding requirements. US Airways' new labor contract with its pilots includes a provision for early retirement which could result in the funding of certain pilot pension plans in excess of funding minimums (see related discussion in "Results of Operations" above). Investing activities during 1997 included cash outflows of $280.3 million for the acquisition of assets and cash inflows of $85.0 million related to asset dispositions. Progress payments for new aircraft totaled $77.0 million for 1997. US Airways' cash outflows related to asset acquisitions include $125.7 million for aircraft and aircraft-related assets. US Airways purchased nine aircraft off lease during 1997, including four BAe-146 aircraft which were sold to third parties immediately following their purchase. Asset dispositions included cash inflows related to US Airways' sale of certain nonoperating aircraft. Investing activities during 1997 also included proceeds of $162.0 million which resulted from USAM's sale of its interest in ATS and proceeds of $62.2 million related to USAM's sell-down of its interest in Galileo (see "USAM Investments" above). On December 30, 1997, the Company purchased Shuttle, Inc. for $189.8 million (see "New Strategic Foundation" above). Short-term investments increased $235.1 million from the year-end 1996 balance due primarily to cash flows generated from operations exceeding immediate operational and other needs. The net cash used for investing activities during 1997 was $371.9 million. In January 1998, US Airways sold substantially all of its information systems and related assets to TSG (see "New Strategic Foundation" above). The transaction resulted in proceeds of $46.5 million with no material gain/loss recorded. Investing activities during 1996 included cash outflows of $180.7 million for the acquisition of assets ($34.9 million for hush-kits, progress payments for B757-200 aircraft of $31.4 million (see related information in "Other Information" above), $15.2 million to purchase four B737-200 aircraft prior to lease expiry and $99.2 million related to the purchase of rotables, various ground support equipment and computer equipment). Short-term investments increased $603.6 million versus year-end 1995 as the Company's operations generated significantly more cash than needed to fulfill immediate operational needs. Net cash used by investing activities during 1996 was $753.8 million. Net cash provided by investing activities for 1995 was $148.9 million, including cash inflows from the disposition of assets of $222.3 million (primarily from the sale of thirteen B737-300 aircraft) offset by cash outflows of $146.7 million related to the acquisition of assets. Asset acquisitions included: progress payments of $61.7 million for new B757-200 aircraft (see "Other Information" above) and $85.0 million for the purchase of aircraft rotables, hush-kits, computer equipment and various ground support equipment. Net cash used for financing activities during 1997 was $354.7 million. The Company paid dividends totaling $180.7 million to holders of its outstanding preferred stock during 1997. In May 1997, the Company repurchased the Series T Preferred Stock and 1,940.636 shares of Series F Preferred Stock from British Airways for a combined $126.2 million. British Airways 37 converted the remaining Series F shares into Common Stock and subsequently sold those shares to third parties. In August 1997, the Company exercised its right to redeem all 4,263,000 outstanding depositary shares representing its Series B Preferred Stock. All but approximately 6,000 depositary shares were converted into Common Stock prior to the redemption date. The related cash outflows were $0.3 million. Proceeds from stock options exercises totaled $39.1 million for 1997. As discussed in "Certain Ownership Matters" above, the Company has retired its Series H Preferred Stock. With the retirement of the Series H Preferred Stock, the Company has retired all of its preferred stock outstanding as of December 31, 1996, relieving the Company of annual dividends of approximately $79 million. Annual interest payments associated with the debt obligations retired early or to be retired early, as discussed in "Certain Ownership Matters" above, total approximately $37 million. As mentioned under "New Strategic Foundation," the Company has entered into agreements for the acquisition of up to 400 new aircraft and accompanying jet engines. The minimum determinable payments associated with these agreements (including progress payments, payments at delivery, buyer- furnished equipment, spares, capitalized interest, penalty payments, cancellation fees and/or nonrefundable deposits) are currently estimated at $302 million in 1998, $725 million in 1999, $1.07 billion in 2000 and $211 million in 2001. If the Company takes delivery of all of the Airbus aircraft it currently has on firm order, the aggregate payments for aircraft and related expenditures in connection with the acquisition of the aircraft could approximate $4.75 billion. The Company anticipates using cash on hand to fulfill short-term purchase deposit requirements and currently plans on financing a substantial portion of the remaining commitment. The Company has commitments or letters of intent which it believes will provide financing for at least 25% of the anticipated purchase price of such aircraft. However, further financing or internally- generated funds will be needed to satisfy the Company's capital commitments for the balance of the aircraft purchase price and for other aircraft- related expenditures. Other capital expenditures, such as for rotables and other aircraft components, are also expected to increase in conjunction with the acquisition of the new aircraft and jet engines. There can be no assurance that sufficient financing will be available for all aircraft and other capital expenditures not covered by committed financing. As of December 31, 1997, current maturities of long-term debt had increased to $185.8 million, from $84.3 million at the end of 1996. The increase is due mainly to reclassifying the first series of US Airways' 1993-A Pass Through Trusts, $75.0 million, from long-term to short-term status. US Airways currently expects to settle this obligation, which becomes payable on September 1, 1998, from cash on hand. On October 1, 1997, Standard & Poor's (S&P) placed the credit ratings of US Airways Group and US Airways on "CreditWatch" with positive implications. During July 1997, S&P raised its ratings outlook on US Airways Group and US Airways to "Positive" from "Developing." Credit ratings issued by such credit rating agencies can have an effect on a company's ability to issue debt or equity securities and the effective rate at which such financings are undertaken. Except for the Enhanced Notes sold in 1996, the Company's and US Airways' outstanding debt and equity securities are presently rated "below investment grade" by S&P and Moody's Investors Service, Inc. Net cash used by financing activities during 1996 was $209.0 million. During the third quarter of 1996, US Airways paid-off certain long-term debt with a principal amount of $42.8 million for one of the Company's regional airline subsidiaries (the affiliated company repaid US Airways during December 1996). The Company paid dividends of $83.0 million on its outstanding Senior Preferred Stock during 1996. The Company had previously deferred dividends on all of its outstanding series of preferred stock beginning in September 1994 (see also "Certain Ownership 38 Matters" above). US Airways sold $263.0 million principal amount of Enhanced Equipment Notes (the Enhanced Notes) during the first quarter of 1996 through a private placement offering under SEC Regulation 144A. US Airways used the proceeds from the offering as part of the funds necessary to repay in full the indebtedness incurred in connection with certain B757-200 aircraft delivered to US Airways in 1995 and 1994. The transaction is reflected on the Company's Consolidated Statements of Cash Flows as proceeds from the issuance of debt of $103.0 million and a "non-cash" issuance of debt of $160.0 million. The non-cash component reflects proceeds that US Airways directed to reduce debt and pay underwriter's fees at the time of the offering. US Airways used the cash proceeds it received from the offering and additional funds to make debt repayments of approximately $105.5 million immediately following the offering. The Enhanced Notes are secured by nine B757-200 aircraft. US Airways filed a Form S-4 Registration Statement with the SEC during July 1996 in connection with its offer to exchange registered Enhanced Notes for the privately-placed Enhanced Notes. The exchange offer was completed in August 1996. The exchange offer did not result in cash inflows or outflows with the exception of filing fees and certain administrative costs. In addition to the prepayment and refinancing transactions and the early pay-off by US Airways of an affiliate's third party debt in 1996, both discussed above, the Company's subsidiaries made scheduled debt repayments of $85.0 million. US Airways also incurred new debt of $29.2 million associated with progress payments for B757-200 aircraft (see also "Other Information" above). The $29.2 million is reflected as non-cash activity in the Company's Consolidated Statements of Cash Flows because US Airways incurred the related debt in conjunction with the payment of the progress payments. During 1995, financing activities included $283.2 million of debt payments, including the redemption of US Airways' remaining outstanding 12 7/8% Unsecured Senior Notes (the 12 7/8% Notes). In addition, the Company incurred debt of $169.7 million associated with the delivery of seven new B757-200 aircraft and scheduled progress payments for the future aircraft deliveries during 1995. In connection with the deferral of eight B757-200 deliveries, US Airways rescheduled the due date of $70.8 million of previously satisfied aircraft purchase deposits into the future resulting in a reduction of both debt and equipment deposits (see related information in "Other Information" above). The $169.7 million and $70.8 million are reflected as non-cash activity in the Company's Consolidated Statements of Cash Flows because US Airways experienced an increase in assets concurrently with the increase in debt. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market capitalization as of January 28, 1997 did not exceed $2.5 billion. Therefore, in accordance with the instructions to this item, the Company is not obligated to disclose information under this item as part of this report. (this space intentionally left blank) 39 ITEM 8A. CONSOLIDATED FINANCIAL STATEMENTS FOR US AIRWAYS GROUP, INC. INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors US Airways Group, Inc.: We have audited the accompanying consolidated balance sheets of US Airways Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows, and changes in stockholders' equity (deficit) for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of US Airways Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Washington, D. C. February 25, 1998, except as to Note 15, which is as of March 12, 1998 (this space intentionally left blank) 40 US Airways Group, Inc. Consolidated Statements of Operations Year Ended December 31, - --------------------------------------------------------------------------------------- (in thousands, except per share amounts)
1997 1996 1995 ---- ---- ---- Operating Revenues Passenger transportation $7,711,501 $7,370,888 $6,748,564 Cargo and freight 181,484 162,704 157,262 Other 620,839 608,821 568,522 --------- --------- --------- Total Operating Revenues 8,513,824 8,142,413 7,474,348 Operating Expenses Personnel costs 3,178,782 3,195,463 2,887,115 Aviation fuel 804,768 824,745 677,621 Commissions 594,914 586,226 563,037 Aircraft rent 474,760 436,873 437,649 Other rent and landing fees 420,427 412,275 404,158 Aircraft maintenance 451,311 372,997 346,854 Depreciation and amortization 400,506 316,043 352,447 Other, net 1,604,087 1,560,298 1,483,780 --------- --------- --------- Total Operating Expenses 7,929,555 7,704,920 7,152,661 --------- --------- --------- Operating Income 584,269 437,493 321,687 Other Income (Expense) Interest income 108,074 74,819 51,624 Interest expense (256,055) (267,122) (302,593) Interest capitalized 12,648 8,398 8,781 Equity in earnings of affiliates 30,614 36,602 34,546 Gains on sales of interests in affiliates 179,625 - - Other, net 12,861 (14,708) 14,227 --------- --------- --------- Other Income (Expense), Net 87,767 (162,011) (193,415) --------- --------- --------- Income Before Taxes 672,036 275,482 128,272 Provision (Credit) for Income Taxes (352,663) 12,109 8,985 --------- --------- --------- Net Income 1,024,699 263,373 119,287 Preferred Dividend Requirement (63,262) (88,775) (84,904) --------- --------- --------- Earnings Applicable to Common Stockholders $ 961,437 $ 174,598 $ 34,383 ========= ========= ========= Earnings per Common Share Basic $ 12.32 $ 2.73 $ 0.55 Diluted $ 9.87 $ 2.35 $ 0.55 Shares Used for Computation Basic 78,054 64,021 62,352 Diluted 103,180 94,834 62,430 See accompanying Notes to Consolidated Financial Statements. 41
US Airways Group, Inc. Consolidated Balance Sheets December 31, - -------------------------------------------------------------------------- (dollars in thousands, except per share amounts) ASSETS 1997 1996 --------- --------- Current Assets Cash $ 18,200 $ 20,986 Cash equivalents 1,075,908 929,980 Short-term investments 870,205 635,839 Receivables, net 300,162 337,025 Materials and supplies, net 226,023 248,774 Deferred income taxes 146,694 - Prepaid expenses and other 140,224 137,590 --------- --------- Total Current Assets 2,777,416 2,310,194 Property and Equipment Flight equipment 5,220,762 5,202,057 Ground property and equipment 876,916 1,108,648 Less accumulated depreciation and amortization (2,527,237) (2,470,337) --------- --------- 3,570,441 3,840,368 Purchase deposits 154,640 77,620 --------- --------- Total Property and Equipment, Net 3,725,081 3,917,988 Other Assets Goodwill, net 616,068 494,511 Other intangibles, net 371,309 283,309 Investment in marketable equity securities 190,035 - Deferred income taxes 269,704 - Other assets, net 422,786 525,409 --------- --------- Total Other Assets 1,869,902 1,303,229 --------- --------- $ 8,372,399 $ 7,531,411 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Current maturities of long-term debt $ 185,786 $ 84,259 Accounts payable 323,414 438,951 Traffic balances payable and unused tickets 707,009 715,576 Accrued aircraft rent 508,624 510,752 Accrued salaries, wages and vacation 311,394 422,766 Other accrued expenses 492,067 676,415 --------- --------- Total Current Liabilities 2,528,294 2,848,719 Long-Term Debt, Net of Current Maturities 2,425,820 2,615,780 Deferred Credits and Other Liabilities Deferred gains, net 332,529 359,748 Postretirement benefits other than 1,172,760 1,093,519 pensions, noncurrent Noncurrent employee benefit liabilities and other 829,687 439,308 --------- --------- Total Deferred Credits and Other Liabilities 2,334,976 1,892,575 Commitments and Contingencies Redeemable Cumulative Convertible Preferred Stock Series H, no par value, 358,000 shares 358,000 358,000 issued and outstanding Series F, no par value, 30,000 shares - 300,000 issued and outstanding as of December 31, 1996 Series T, no par value, 10,000 shares - 100,719 issued and outstanding as of December 31, 1996 Stockholders' Equity (Deficit) Series B cumulative convertible preferred stock, - 213,128 no par value, 4,263,000 depositary shares issued and outstanding as of December 31, 1996 Common stock, par value $1 per share, 91,482 64,306 authorized 150,000,000 shares, issued and outstanding 91,482,000 and 64,306,000 shares, respectively Paid-in capital 1,906,395 1,386,557 Retained earnings (deficit) (1,279,864) (2,117,838) Common stock held in treasury, at cost, (3,265) - 39,929 shares as of December 31, 1997 Deferred compensation (79,945) (95,326) Unrealized gain on available-for-sale securities, 103,795 - net of income tax effects Adjustment for minimum pension liability, (13,289) (35,209) net of income tax effects --------- -------- Total Stockholders' Equity (Deficit) 725,309 (584,382) --------- -------- $ 8,372,399 $ 7,531,411 ========= ========= See accompanying Notes to Consolidated Financial Statements. 42 US Airways Group, Inc. Consolidated Statements of Cash Flows Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------- (in thousands)
1997 1996 1995 ---- ---- ---- Cash and Cash equivalents at beginning of year $ 950,966 $ 881,854 $ 429,538 --------- --------- --------- Cash flows from operating activities Net income 1,024,699 263,373 119,287 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 400,506 316,043 352,447 Losses (gains) on dispositions of property (15,815) 748 (17,043) Gains on sales of interests in affiliates (179,625) - - Amortization of deferred gains and credits (27,683) (27,668) (27,817) Other 34,474 38,048 6,294 Changes in certain assets and liabilities Decrease (increase) in receivables 39,840 (14,903) 2,417 Decrease (increase) in materials and supplies, prepaid expenses and pension assets 37,615 (45,455) (74,980) Decrease (increase) in deferred income tax assets (453,524) - - Increase (decrease) in traffic balances payable and unused tickets (13,606) 108,406 38,955 Increase (decrease) in accounts payable and accrued expenses (36,097) 315,440 120,422 Increase (decrease) in postretirement benefits other than pensions, noncurrent 58,927 77,896 56,667 --------- --------- --------- Net cash provided by (used for) operating activities 869,711 1,031,928 576,649 Cash flows from investing activities Aircraft acquisitions and purchase deposits, net (106,889) (52,854) (61,689) Additions to other property (173,367) (127,875) (84,980) Proceeds from dispositions of property 85,027 24,903 222,325 Acquisition of Shuttle, Inc. (189,788) - - Proceeds from sales of interests in affiliates 224,233 - - Decrease (increase) in short-term investments (235,068) (603,593) 2,430 Decrease (increase) in restricted cash and investments 18,481 11,086 71,980 Other 5,518 (5,497) (1,134) --------- --------- --------- Net cash provided by (used for) investing activities (371,853) (753,830) 148,932 Cash flows from financing activities Issuances of debt - 103,002 1,162 Principal payments on long-term debt (88,433) (235,500) (283,160) Issuances of Common Stock 39,110 3,882 8,733 Sales of treasury stock 1,758 2,630 - Redemptions of preferred stock, including redemption premiums (126,485) - - Dividends paid on preferred stock (180,666) (83,000) - --------- --------- --------- Net cash provided by (used for) financing activities (354,716) (208,986) (273,265) --------- --------- --------- Net increase in Cash and Cash equivalents 143,142 69,112 452,316 --------- --------- --------- Cash and Cash equivalents at end of year $1,094,108 $ 950,966 $ 881,854 ========= ========= ========= Noncash investing and financing activities Conversions of preferred stock into Common Stock $ 496,550 $ - $ - Unrealized gain on available-for-sale securities, net of income tax effects $ 103,795 $ - $ - Treasury stock acquired for tax withholding on employee stock grants $ 5,158 $ 2,630 $ - Issuances of debt - refinancing of debt secured by aircraft $ - $ 159,998 $ - Reductions of debt - refinancing of debt secured by aircraft $ - $ 154,422 $ - Issuances of debt - aircraft acquisitions $ - $ 29,155 $ 169,725 Underwriter's fees - refinancing of debt secured by aircraft $ - $ 2,488 $ - Reductions of debt - aircraft purchase deposits $ - $ - $ 70,837 Acquisition of Shuttle, Inc. Fair value of assets acquired $ 257,600 $ - $ - Cash paid (189,788) - - --------- --------- --------- Liabilities assumed $ 67,812 $ - $ - ========= ========= ========= Supplemental Information Cash paid during the year for interest, net of amounts capitalized $ 245,798 $ 260,625 $ 299,871 Net cash paid during the year for income taxes $ 94,773 $ 12,325 $ 6,637 See accompanying Notes to Consolidated Financial Statements. 43
US Airways Group, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficit) Three Years Ended December 31, 1997 - --------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts)
Unrealized gain on available- Adjustment for-sale for minimum Series B Retained Common Deferred securities, pension liability, Preferred Common Paid-in earnings stock held compen- net of income net of income Stock stock capital (deficit) in treasury sation tax effects tax effects Total ------- ------ --------- --------- ----- ------ ------ ------ ------- Balance as of December 31, 1994 $213,153 $61,088 $1,344,336 $(2,417,498) $ - $(90,965) $ - $ (7,017) $(896,903) Sale of 1,384,000 shares of common stock - 1,384 6,929 - - - - - 8,313 Grant of 935,000 shares of restricted stock - 934 10,982 - - (11,916) - - - Exercise of 43,000 options - 43 377 - - - - - 420 Amortization of deferred compensation - - 132 - - 4,034 - - 4,166 Adjustment for minimum pension liability, net of income tax effects - - - - - - - (71,071) (71,071) Net income - - - 119,287 - - - - 119,287 ------- ------ --------- --------- ----- ------ ------- ------ --------- Balance as of December 31, 1995 $213,153 $63,449 $1,362,756 $(2,298,211) $ - $(98,847) $ - $(78,088) $(835,788) Grant of 635,000 shares of restricted stock and 2,415,000 options - 635 20,668 - - (21,303) - - - Acquisition of 118,000 shares of common stock from certain employees - - - - (2,630) - - - (2,630) Exercise of 435,000 options - 317 4,241 - 2,630 - - - 7,188 Conversion of 500 depositary shares (25) 1 24 - - - - - - Reversion of 96,000 shares of restricted stock previously granted - (96) (1,132) - - 1,228 - - - Dividends declared (preferred stock) Series H-$133.74 per share - - - (47,879) - - - - (47,879) Series F-$902.14 per share - - - (27,064) - - - - (27,064) Series T-$799.91 per share - - - (8,057) - - - - (8,057) Amortization of deferred compensation - - - - - 23,596 - - 23,596 Adjustment for minimum pension liability, net of income tax effects - - - - - - - 42,879 42,879 Net income - - - 263,373 - - - - 263,373 ------- ------ --------- --------- ----- ------ ------- ------ --------- Balance as of December 31, 1996 $213,128 $64,306 $1,386,557 $(2,117,838) $ - $(95,326) $ - $(35,209) $(584,382) (continued on following page) 44
US Airways Group, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Continued) Three Years Ended December 31, 1997 - --------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts)
Unrealized gain on available- Adjustment for-sale for minimum Series B Retained Common Deferred securities, pension liability, Preferred Common Paid-in earnings stock held compen- net of income net of income Stock stock capital (deficit) in treasury sation tax effects tax effects Total ------- ------ --------- --------- ----- ------ ------- ------ --------- Balance as of December 31, 1996 $213,128 $64,306 $1,386,557 $(2,117,838) $ - $(95,326) $ - $(35,209) $ (584,382) Conversion of 4,257,000 depositary shares (212,833) 10,610 202,219 - - - - - (4) Redemption of 6,000 depositary shares (295) - - (10) - - - - (305) Conversion of 28,000 shares of Series F Preferred Stock - 14,459 261,778 - - - - - 276,237 Grant of 162,000 shares of restricted stock - 162 3,875 - - (4,037) - - - Reversion of 89,000 shares of restricted stock previously granted - (89) (1,040) - - 1,129 - - - Acquisition of 125,000 shares of common stock from certain employees - - - - (5,158) - - - (5,158) Exercise of 2,119,000 options - 2,034 43,311 - 1,893 - - - 47,238 Dividends declared (preferred stock) Series H-$225.24 per share - - - (80,635) - - - - (80,635) Series F-$1,137.00 per share - - - (34,110) - - - - (34,110) Series T-$991.22 per share - - - (9,983) - - - - (9,983) Series B-$13.49 per share - - - (55,938) - - - - (55,938) Redemption premiums on repurchases of Redeemable Cumulative Convertible Preferred Stock - - - (6,049) - - - - (6,049) Amortization of deferred compensation - - - - - 18,289 - - 18,289 Unrealized gain on available-for-sale securities, net of income tax effects - - - - - - 103,795 - 103,795 Tax benefit from employee stock option exercises - - 9,695 - - - - - 9,695 Adjustment for minimum pension liability, net of income tax effects - - - - - - - 21,920 21,920 Net income - - - 1,024,699 - - - - 1,024,699 ------- ------ --------- --------- ----- ------ ------- ------ --------- Balance as of December 31, 1997 $ - $91,482 $1,906,395 $(1,279,864) $(3,265) $(79,945) $103,795 $(13,289) $ 725,309 ======= ====== ========= ========= ===== ====== ======= ====== ========= See accompanying Notes to Consolidated Financial Statements. 45
US AIRWAYS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION AND NATURE OF OPERATIONS The accompanying Consolidated Financial Statements include the accounts of US Airways Group, Inc. (US Airways Group or the Company) and its wholly- owned subsidiaries US Airways, Inc. (US Airways), Allegheny Airlines, Inc. (Allegheny), Piedmont Airlines, Inc. (Piedmont), PSA Airlines, Inc. (PSA), US Airways Leasing and Sales, Inc. (US Airways Leasing and Sales) (formerly USAir Leasing and Services, Inc.), US Airways Fuel Corporation (Fuel Corp.) (formerly USAir Fuel Corporation) and Material Services Company, Inc. (MSC). All significant intercompany accounts and transactions have been eliminated. US Airways is the Company's principal operating subsidiary and accounted for approximately 92% of its operating revenues in 1997 on a consolidated basis. US Airways is a major United States air carrier whose primary business is transporting passengers, property and mail. US Airways enplaned 58.8 million passengers during 1997 and is currently the fifth largest domestic air carrier, as measured by revenue passenger miles (RPMs). US Airways operates predominantly in the Eastern U.S. with primary hubs at the major airports in Charlotte, Philadelphia and Pittsburgh. US Airways also has substantial operations at Baltimore/Washington International Airport, Boston's Logan International Airport, New York's LaGuardia Airport (LaGuardia) and Washington's Ronald Reagan Washington National Airport (National). US Airways' results include the results of its wholly-owned subsidiary USAM Corp. (USAM). USAM owns 11% of the Galileo Japan Partnership (GJP), which markets the Galileo Computer Reservation System (Galileo CRS) in Japan. USAM accounts for this investment using the equity method because it is represented on the board of directors and therefore participates in policy making processes. Until July 1997, as discussed in Note 9, USAM held interests in the Galileo International Partnership and the Apollo Travel Services Partnership and accounted for these investments using the equity method. Piedmont, PSA and Allegheny are regional air carriers that, along with seven non-owned regional airline franchisees, form "US Airways Express." US Airways Express, which also has a majority of its operations in the Eastern U.S., enplaned 10.9 million passengers in 1997 (of which 6.1 million were enplaned by Piedmont, PSA and Allegheny), approximately 55% of whom connected to US Airways flights. On December 30, 1997, the Company purchased Shuttle, Inc. (Shuttle). Shuttle, which operates under the trade name "US Airways Shuttle," currently provides high frequency service from New York to Boston and Washington. See Note 14 for additional information related to Shuttle. Fuel Corp. was established in 1987 primarily to serve as a fuel wholesaler to US Airways, in certain circumstances. MSC performs a function similar to Fuel Corp., selling aviation fuel to US Airways Express carriers and also assisting the US Airways Express carriers with major maintenance and procurement contracts. US Airways Leasing and Sales' main function is remarketing US Airways' surplus or inactive aircraft. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting 46 period. Actual results could differ from those estimates. US Airways, Allegheny, Piedmont, PSA and Shuttle operate within one industry (air transportation); therefore, no segment information is provided. Certain 1996 and 1995 amounts have been reclassified to conform with 1997 classifications. (b) OPERATING ENVIRONMENT Most of the Company's airline subsidiaries operate in competitive markets. Competitors include other air carriers along with other methods of transportation. US Airways currently has the highest unit operating costs among the major domestic air carriers. The growth and expansion of competitors with lower cost and fare structures in its markets has put considerable pressure on US Airways to reduce its operating costs in order to maintain competitiveness. In addition, although a competitive strength in some regards, the concentration of significant operations in the Eastern U.S. results in US Airways being susceptible to changes in certain regional conditions that may have an adverse effect on the Company's results of operations and financial condition. Personnel costs represent the Company's largest expense category. As of December 31, 1997, the Company's various subsidiaries employed 42,500 full- time equivalent employees. Approximately 37,900 (84%) of the Company's employees are covered by collective bargaining agreements with various unions or will be covered by collective bargaining agreements for which initial negotiations are in progress. A new five-year contract between US Airways and its pilots became effective January 1, 1998. US Airways' contracts with its mechanical/related personnel and flight attendants are currently amendable; talks with respect to new contracts are ongoing. US Airways is also negotiating with representatives of its fleet service and passenger service employees with respect to initial labor contracts. The Company cannot predict the ultimate outcome of any of these negotiations or the timing of any new agreements. US Airways' new contract with its pilots includes certain provisions that the Company believes will help US Airways address its high cost structure, including allowing US Airways to establish a low cost, low fare operation. The operations of the Company's airline subsidiaries are largely dependent on the availability of aviation fuel. The availability and price of aviation fuel is largely determined by actions generally outside of the Company's control. US Airways has a diversified aviation fuel supplier network and uses certain risk management techniques (see Note 2(a)) in order to help ensure aviation fuel availability and partially protect itself from temporary aviation fuel price fluctuations. (c) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS All highly liquid investments purchased within three months of maturity are classified as Cash equivalents. Short-term investments consist primarily of certificates of deposit and commercial paper purchased with maturities greater than three months but less than one year. The Company classifies securities underlying its Cash equivalents and Short-term investments as "available-for-sale" in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). Cash equivalents are stated at cost, which approximates fair value due to the highly liquid nature and short maturities of the underlying securities. Short-term investments are stated at fair value with the offsetting unrecognized gain or loss reflected as a separate component of Stockholders' Equity (Deficit), net of income tax effects. See also Note 8(f). 47 (d) MATERIALS AND SUPPLIES, NET Inventories of materials and supplies are valued at the lower of cost or fair value. Costs are determined using average costing methods and are charged to operations as consumed. An allowance for obsolescence is provided for flight equipment expendable and repairable parts. (e) PROPERTY AND EQUIPMENT Property and equipment is stated at cost or, if acquired under capital lease, at the lower of the present value of minimum lease payments or fair value of the asset at the inception of the lease. Maintenance and repairs are charged to operating expense as incurred. Costs of major improvements are capitalized for both owned and leased assets. Interest related to deposits on aircraft purchase contracts and facility and equipment construction projects is capitalized as an additional cost of the asset or as a leasehold improvement if the asset is leased. Depreciation and amortization for principle asset classifications is calculated on a straight-line basis to estimated residual values over estimated depreciable lives. These estimates are periodically reviewed for reasonableness and revised, if necessary. In addition, the Company monitors the recoverability of the carrying value of its long-lived assets. Under the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" (SFAS 121), the Company recognizes an "impairment charge" when the net undiscounted future cash flows from an asset's use (including any proceeds from disposition) are less than the asset's carrying value and the asset's carrying value exceeds its fair value. The impairment charge reflects writing-down the asset to fair value. See Note 13(a) for impairment charges recognized by US Airways during 1997. Depreciable Residual Asset Life Value ----- ----------- ----------- (years) (in millions) Aircraft Boeing 767-200ER 20 $14.0 Boeing 757-200 20 8.0 Boeing 737-300/400 20 7.5 Boeing 737-200 17 5.0 Boeing 727-200 2-3 1.5 McDonnell Douglas MD-80 20 7.5 Douglas DC-9-30 17 3.0 Fokker 100 20 5.0 Fokker F28-4000 8 2.0 Fokker F28-1000 6 1.0 Turboprop aircraft 11-17 1.5 Improvements to leased aircraft life of lease - Ground property, equipment and leasehold 3-10 or - improvements life of lease Buildings 25-30 - Property acquired under capital lease is amortized on a straight-line basis over the term of the lease and charged to depreciation and amortization expense. When property and equipment is sold or retired any gain or loss is recognized as Other, net, a component of Other Income (Expense). (f) GOODWILL, NET AND OTHER INTANGIBLES, NET Goodwill, the cost in excess of fair value of identified net assets acquired, is amortized on a straight-line basis over 40 years. The $629.5 million goodwill resulting from the acquisitions of Pacific Southwest Airlines (Pacific Southwest) and Piedmont Aviation, Inc. (Piedmont 48 Aviation), both in 1987, is amortized as depreciation and amortization expense. As of December 31, 1997 and 1996, accumulated amortization related to the Pacific Southwest and Piedmont Aviation acquisitions was $159.9 million and $144.1 million, respectively. As of December 31, 1997 and 1996, USAM's goodwill in connection with its computer reservation system investments was $4.3 million and $11.4 million, respectively. During July 1997, USAM's goodwill was reduced as a result of its sale of certain investments (see Note 9). USAM's goodwill is amortized as a component of Other Income (Expense), consistent with the classification of the related income on these investments. As of December 31, 1997 and 1996, USAM's related accumulated amortization was $1.0 million and $2.3 million, respectively. On December 30, 1997, the Company purchased Shuttle for $189.8 million (see Note 14). Goodwill resulting from this acquisition totaled $143.1 million and will also be amortized as depreciation and amortization expense over 40 years. The Company periodically evaluates whether goodwill is impaired by comparing the goodwill balances with estimated future undiscounted cash flows which, in the Company's judgment, are attributable to the goodwill. This analysis is performed separately for the goodwill which resulted from each acquisition. Other intangible assets consist mainly of purchased operating rights at various airports, capitalized software costs and the intangible asset associated with the underfunded amounts of certain pension plans. The cost of operating rights and capitalized software costs are amortized on a straight-line basis over the expected periods of benefit as depreciation and amortization expense. Operating rights, which are valued at purchase cost or appraised value if acquired with Pacific Southwest, Piedmont Aviation or Shuttle, are amortized over periods ranging from ten to 25 years and capitalized software costs are amortized over five years. The intangible pension asset is recognized in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (SFAS 87) (see Note 8(g)). As of December 31, 1997 and 1996, accumulated amortization related to other intangible assets was $149.0 million and $129.3 million, respectively. Based on the most recent analyses, the Company believes that goodwill and other intangible assets were not impaired as of December 31, 1997. (g) INVESTMENT IN MARKETABLE EQUITY SECURITIES USAM's investment in Galileo International, Inc. (Galileo), which is accounted for under the cost method, is classified as "available-for-sale" under SFAS 115 and recorded at fair value. See also Notes 2(b), 8(f) and 9. (h) OTHER ASSETS, NET Other assets, net consists primarily of noncurrent pension assets, restricted cash and investments, unamortized debt issue costs and a long- term receivable from British Airways Plc. (British Airways). Restricted cash and investments are deposits in trust accounts to collateralize letters of credit and workers' compensation policies. The long-term receivable from British Airways resulted from the relinquishment by US Airways of three U.S. to London routes. (i) FREQUENT TRAVELER PROGRAM US Airways accrues the estimated incremental cost of travel awards earned by participants in its "Dividend Miles" frequent traveler program when requisite mileage award levels are achieved. US Airways also sells mileage credits to participating partners in Dividend Miles. The resulting revenues are recorded as other operating revenues during the period in which the credits 49 are sold. (j) DEFERRED GAINS, NET Gains on aircraft sale and leaseback transactions are deferred and amortized over the term of the leases as a reduction of the related aircraft rent expense. (k) PASSENGER TRANSPORTATION REVENUES Passenger ticket sales are recognized as Passenger transportation revenues when the transportation service is rendered or the ticket otherwise expires. At the time of sale, a liability is established (Traffic balances payable and unused tickets) and subsequently relieved either through carriage of the passenger, through billing from another air carrier which provided the service, upon expiration of the ticket or by refund to the passenger. (l) STOCK-BASED COMPENSATION The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) to account for Common Stock, stock options and other stock-based compensation granted to employees. See also Note 8(e). (m) ADVERTISING EXPENSES Advertising costs are expensed when incurred as Other operating expenses. Advertising expenses for 1997, 1996 and 1995 were $45.5 million, $51.2 million and $66.6 million, respectively. (n) EARNINGS PER COMMON SHARE The Company adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128) during 1997. The Company's Earnings per Common Share (EPS) figures for prior periods have been restated to conform with the provisions of SFAS 128. In accordance with SFAS 128, basic EPS is computed by dividing net income, after deducting preferred stock dividend requirements, by the weighted average number of shares of Common Stock outstanding. Diluted EPS reflects the maximum dilution that would result after giving effect to dilutive stock options and to the assumed conversion of all dilutive convertible preferred stock issuances. Using the "treasury stock" method, stock options added approximately 1,888,000, 898,000 and 78,000 incremental shares to the denominator for purposes of calculating diluted EPS for 1997, 1996 and 1995, respectively. For 1997, the effects of assuming conversion of the Company's outstanding preferred stock issuances were dilutive and therefore included in the determination of diluted EPS, except for shares of Series F preferred stock which were redeemed in May 1997 (see Note 7(b)). The income and weighted average share effects of these assumed conversions were approximately $57.5 million and 23,238,000 shares, respectively. For 1996, the assumed conversion of the Series B, Series F and Series T Preferred Stock had a dilutive effect on diluted EPS (assumed conversion of the Series A Preferred Stock was anti-dilutive). The income and share effects of these assumed conversions were approximately $48.3 million and 29,915,000 shares, respectively. For 1995, the assumed conversion of each outstanding preferred stock issuance was anti-dilutive. See also Note 5(e) regarding Common Stock held in trust for US Airways' employee stock ownership plan (ESOP). 50 2. FINANCIAL INSTRUMENTS (a) TERMS OF CERTAIN FINANCIAL INSTRUMENTS The Company uses risk management strategies to reduce its exposure to certain market uncertainties. US Airways is party to financial contracts which it believes help to reduce its exposure to significant increases in the price of aviation fuel. US Airways has also hedged certain foreign- denominated debt to maturity. US Airways periodically reviews the financial condition of each counterparty to these financial contracts and believes that the potential for default by any of the current counterparties is negligible. US Airways has entered into fuel swap contracts that result in US Airways receiving or making payments based on the difference between a fixed price and a variable price per notional gallon for specified petroleum products. Gains and losses related to these contracts are deferred until the period in which they are settled. Realized gains and losses are recognized as an element of Aviation fuel expense. The total notional gallons under these contracts were approximately 47 million and 84 million as of December 31, 1997 and 1996, respectively (US Airways entered into contracts prior to December 31, 1997 and 1996 which effectively closed certain hedging arrangements covering approximately 17 million and 22 million gallons, respectively). For contracts open as of December 31, 1997, US Airways will pay fixed prices ranging from $0.496 to $0.600 per notional gallon and receive a variable price per gallon based on current market prices. The open contracts, all of which settle during 1998, represent approximately 3% of US Airways' expected 1998 fuel consumption. For contracts open as of December 31, 1996, US Airways paid fixed prices ranging from $0.553 to $0.700 per notional gallon and received a floating rate based on market prices. An aggregate of $32 million of future principal payments of US Airways' long-term debt due 1998 through 2000 is payable in Japanese Yen. This foreign currency exposure has been hedged to maturity by US Airways' participation in foreign currency contracts. Net settlements will be recorded as adjustments to Interest expense. (b) FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with the provisions of SFAS 115, the fair values for US Airways' short-term and marketable equity security investments are determined based upon quoted market prices. Restricted cash and certain long-term investments are carried at cost which approximates fair value. The Company estimated the fair values of its long-term note receivable and long- term debt by discounting expected future cash flows using current rates offered to the Company for note receivables and debt with similar maturities. The Black-Scholes pricing model was used to estimate the fair value of the Company's outstanding preferred stock issuance as of December 31, 1997 (see Note 7(a)) incorporating the following assumptions: redemption date of March 15, 1998 (see Note 15), discount rate of 5.2%, volatility of 53.0% and regular dividends accrued through the redemption date. The estimated fair value of the Company's outstanding preferred stock issuances at December 31, 1996 was obtained from an independent external valuation source. The fair values of fuel swap and foreign currency contracts are obtained from dealer quotes. These values represent the estimated amount US Airways would receive or pay to terminate such agreements as of the valuation date. (this space intentionally left blank) 51 The estimated fair values of the Company's financial instruments, none of which are held for trading purposes (in thousands; brackets denote a liability): December 31, ---------------------------------------------- 1997 1996 ---------------------- ---------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- Short-term investments (1) $ 870,205 $ 870,205 $ 635,839 $ 635,605 Investment in marketable equity securities (1) 190,035 190,035 - - Restricted cash and investments (2) 69,844 69,844 87,783 87,843 Long-term note receivable (2)(3) 30,350 30,557 40,733 30,080 Other long-term investments (2)(3) - - 20,606 22,126 Long-term debt (excludes capital lease obligations) (2,578,138) (2,861,752) (2,650,659) (2,698,431) Redeemable preferred stock (358,000) (588,757) (758,719) (894,400) Fuel swap contracts: In a net receivable (payable) position - (528) - 3,550 Foreign currency contracts: In a net receivable (payable) position - (2,928) - 963 (1) Classified as "available-for-sale" in accordance with SFAS 115. See also Notes 1(c) and 1(g). (2) Carrying amount included in Other Assets on the Company's Consolidated Balance Sheets. (3) Classified as "held-to-maturity" in accordance with SFAS 115. 3. INCOME TAXES The Company accounts for income taxes according to the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The Company files a consolidated federal income tax return with its wholly-owned subsidiaries. During 1997, the Company determined that it was no longer appropriate to apply a valuation allowance to its deferred tax assets. The Company believes, based on prior earnings and future earnings projections, that it is more likely than not that the Company will be able to utilize tax benefits accumulated through December 31, 1997 in future periods. Accordingly, as of December 31, 1997, previous valuation allowances were substantially removed, resulting in a net deferred tax asset and an income tax credit for 1997. The components of the Company's provision (credit) for income taxes (in thousands): 1997 1996 1995 ---- ---- ---- Current provision: Federal $ 100,879 $ 6,423 $ 6,081 State 7,680 3,000 831 ------- ----- ----- Total current provision 108,559 9,423 6,912 ------- ----- ----- Deferred provision: Federal (406,571) - - State (54,651) 2,686 2,073 ------- ----- ----- Total deferred provision (461,222) 2,686 2,073 ------- ----- ----- Provision (credit) for income taxes $(352,663) $ 12,109 $ 8,985 ======= ====== ===== In 1997, the Company was not subject to regular federal income tax as a result of using $1.1 billion in federal net operating loss carryforwards. However, the Company was subject to federal alternative minimum tax (AMT). Approximately $383 million in AMT net operating loss 52 carryforwards and approximately $427 million in state net operating loss carryforwards were utilized to reduce the federal and state liabilities. The significant components of deferred income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 (in thousands): 1997 1996 1995 ---- ---- ---- Deferred tax expense (exclusive of the other components listed below) $ 180,947 $ 114,906 $ 51,511 Decrease in the valuation allowance for deferred tax assets (642,169) (112,220) (49,438) ------- ------- ------ Total $(461,222) $ 2,686 $ 2,073 ======= ======= ====== A reconciliation of taxes computed at the statutory federal tax rate on earnings before income taxes to the provision (credit) for income taxes (in thousands): 1997 1996 1995 ---- ---- ---- Tax provision computed at federal statutory rate $ 235,213 $ 96,419 $ 44,895 Book expenses not deductible for tax purposes 16,694 17,628 16,064 State income tax provision (credit), net of federal tax benefit (30,531) 4,636 1,888 Reduction of federal valuation allowance (569,149) (103,900) (56,875) Other (4,890) (2,674) 3,013 ------- ------- ------ Provision (credit) for income taxes $(352,663) $ 12,109 $ 8,985 ======= ======= ====== Effective tax rate (52)% 4% 7% ======= ======= ====== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 1997 and 1996 (in thousands): 1997 1996 ---- ---- Deferred tax assets: Leasing transactions $ 170,966 $ 154,732 Tax benefits purchased/sold 31,352 43,441 Gain on sale and leaseback transactions 125,169 135,308 Employee benefits 683,416 608,948 Net operating loss carryforwards 193,575 540,495 Alternative minimum tax credit carryforwards 158,441 33,459 Investment tax credit carryforwards 17,841 49,802 Other deferred tax assets 94,640 82,744 --------- --------- Total gross deferred tax assets 1,475,400 1,648,929 Less valuation allowance (1,377) (643,546) --------- --------- Net deferred tax assets 1,474,023 1,005,383 Deferred tax liabilities: Equipment depreciation and amortization 940,784 966,874 Other deferred tax liabilities 62,791 45,415 --------- --------- Total deferred tax liabilities 1,003,575 1,012,289 --------- --------- Net deferred tax liabilities (assets) $ (470,448) $ 6,906 ========= ========= The valuation allowance for deferred tax assets decreased approximately $642 million in 1997 and decreased approximately $112 million in 1996. 53 Included in the deferred tax assets at December 31, 1997, among other items, are $455 million related to obligations of postretirement medical benefits, unused net operating losses of approximately $464 million for federal tax purposes expiring in the years 2008 and 2009, approximately $18 million of investment tax credits expiring in the years 2003 and 2004, and $158 million of alternative minimum tax credits, which do not expire. There were no alternative minimum tax net operating loss carryforwards remaining at December 31, 1997. Investment tax credit benefits were recorded using the "flow through" method as a reduction of the federal income tax provision. No new investment tax credits were generated during 1997, 1996 or 1995. The federal income tax returns of the Company through 1986 have been examined and settled with the Internal Revenue Service. The Company believes that a significant portion of the deferred tax assets will be realized through reversals of existing taxable temporary differences. The Company needs to generate approximately $464 million of taxable income to realize the benefits of most of the other deferred tax assets that have a future expiration date. The deferred tax assets and liabilities disclosed above exclude tax assets and liabilities which arise as a result of including certain transactions in the equity section of the balance sheet, net of tax. These tax attributes include a deferred tax liability of $56 million for unrealized gains on available-for-sale investments pursuant to SFAS 115 and a deferred tax asset of $2 million relating to the equity adjustment for the minimum pension liability for US Airways' defined benefit plans. The following table is a summary of pretax book income and taxable income prior to net operating loss carryforwards for the last three years (in thousands): 1997 1996 1995 ---- ---- ---- Pretax book income $ 672,036 $275,482 $128,272 Taxable income $1,083,559 $284,550 $ 82,516 The reasons for significant differences between taxable income and pretax book income in 1997 primarily relate to employee pension and postretirement benefit costs, certain aircraft impairment charges and lease accruals, and other employee related accruals. 4. LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS Details of long-term debt are as follows (in thousands): December 31, ----------------------- Senior Debt: 1997 1996 ---- ---- 10% Senior Notes due 2003 $ 300,000 $ 300,000 9 5/8% Senior Notes due 2001 175,000 175,000 5.7% to 11.7% Equipment Financing Agreements, Installments due 1998 to 2016 2,045,227 2,117,534 8.6% Airport Facility Revenue Bond due 2022 27,620 27,620 7.4 % Aircraft Purchase Deposit Financing due 1998* 29,155 29,155 Other 1,136 1,350 --------- --------- 2,578,138 2,650,659 Capital Lease Obligations 33,468 49,380 --------- --------- Total 2,611,606 2,700,039 Less Current Maturities (185,786) (84,259) --------- --------- $2,425,820 $2,615,780 ========= ========= * See related information under Note 6(c) (re: litigation between the Company and The Boeing Company (Boeing)). 54 Maturities of long-term debt and debt under capital leases for the next five years (in thousands): 1998 $ 185,786 1999 77,454 2000 122,681 2001 246,494 2002 77,236 Thereafter 1,901,955 Interest rates on $230.3 million principal amount of long-term debt as of December 31, 1997 are subject to adjustment to reflect prime rate and other rate changes. Equipment financings totaling $2.08 billion were collateralized by aircraft and engines with a net book value of approximately $2.17 billion as of December 31, 1997. See Note 15 for subsequent events related to long-term debt. 5. EMPLOYEE PENSION AND BENEFIT PLANS Substantially all of the Company's employees are eligible to participate in various defined benefit and defined contribution pension plans, in addition to medical and life insurance plans sponsored by the Company. Employees who meet certain service and other requirements are also eligible to participate in an employee stock ownership plan. (a) DEFINED BENEFIT PENSION PLANS One qualified defined benefit pension plan covers US Airways' maintenance employees and provides specific benefits based on length of service. Qualified defined benefit pension plans for substantially all other employees provide benefits based on years of service and compensation. The qualified defined benefit pension plans for domestic employees are funded, on a current basis, to meet or exceed the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Liabilities related to pension plans covering foreign employees are calculated in accordance with generally accepted accounting principles and funded in accordance with the laws of the individual country. US Airways recorded a $115.0 million charge to Personnel Costs in the fourth quarter of 1997 for special termination benefits in accordance with Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" (SFAS 88). The charge relates to an early retirement program offered to US Airways pilots. The Company expects 325 pilots to opt for early retirement under this program. (this space intentionally left blank) 55 The funded status of the Company's qualified defined benefit pension plans as of September 30, 1997 and 1996, respectively, except for subsidiaries other than US Airways which are as of December 31, 1997 and 1996, respectively (in millions):
1997 1996 -------------------- ------------------- Plans with Plans with -------------------- ------------------- Assets in ABO in Assets in ABO in Excess of Excess of Excess of Excess of ABO Assets ABO Assets -------- --------- ------- -------- Fair value of plan assets $ 2,697 $ 457 $ 2,186 $ 305 Actuarial present value of: Vested benefit obligation 2,461 445 2,062 369 Nonvested benefit obligation 30 19 24 13 -------- --------- ------- -------- Accumulated benefit obligation (ABO) based on salaries to date 2,491 464 2,086 382 Additional benefits based on estimated future salary levels 780 3 665 - -------- --------- ------- -------- Projected benefit obligation (PBO) 3,271 467 2,751 382 PBO in excess of fair value of plan assets (574) (10) (565) (77) Contributions from October 1 through December 31 - - 45 12 Unrecognized net transition asset (18) (7) (21) (9) Unrecognized prior service (credit) cost (12) 70 (13) 75 Unrecognized net loss 437 19 508 40 -------- --------- ------- -------- Pension (liability) or asset before adjustment (167) 72 (46) 41 -------- --------- ------- -------- Adjustment for minimum pension liability * - (82) - (106) -------- --------- ------- -------- Pension liability as adjusted and recognized in Consolidated Balance Sheets $ (167) $ (10) $ (46) $ (65) ======= ========= ======= ======== * See Note 8(g).
The weighted average assumptions used to determine the actuarial present value of the PBO: 1997 1996 ---- ---- Discount rate 7.5% 8.0% Rate of increase in compensation levels 3.6% 3.6% Expected long-term rate of return on plan assets 9.5% 8.8% Components of plan assets: Cash equivalents and short-term investments 12% 10% Equity investments 40% 28% Fixed income and other investments 48% 62% (this space intentionally left blank) 56 Total pension cost for the qualified defined benefit pension plans (in millions): 1997 1996 1995 ---- ---- ---- Service cost (benefits earned during the period) $ 127 $ 146 $ 94 Interest cost on PBO 254 251 218 Actual return (gain) on plan assets (589) (57) (541) Net amortization and deferral 363 (131) 371 ---- ---- ---- Net periodic pension cost 155 209 142 Special termination benefits * 43 - - ---- ---- ---- Total pension cost $ 198 $ 209 $ 142 ==== ==== ==== * Related to an early retirement program offered to US Airways' pilots (see above). See also disclosure below related to the Company's non-qualified supplemental pension plans. Non-qualified supplemental pension plans are established for certain employee groups. These plans provide incremental pension payments from the Company's funds so total pension payments equal amounts that would have been payable from the Company's qualified pension plans if it were not for federal limitation. The funded status of the Company's non-qualified supplemental pension plans as of September 30, 1997 and 1996, respectively (in millions): 1997 1996 ---- ---- Fair value of plan assets $ - $ - Actuarial present value of: Vested benefit obligation 140 32 Nonvested benefit obligation 4 1 ---- ---- ABO based on salaries to date 144 33 Additional benefits based on estimated future salary levels 31 2 ---- ---- PBO 175 35 ---- ---- PBO in excess of fair value of plan assets (175) (35) Contributions from October 1 through December 31 1 1 Unrecognized net transition asset - - Unrecognized prior service cost 39 2 Unrecognized net loss 22 3 ---- ---- Pension liability before adjustment (113) (29) Adjustment for minimum pension liability * (29) (6) ---- ---- Unfunded supplemental liability as adjusted and recognized in Consolidated Balance Sheets $(142) $ (35) ==== ==== * See Note 8 (g). The discount rate used to determine the actuarial present value of the PBO was 7.5% and 8.0% as of September 30, 1997 and 1996, respectively. A weighted average rate of 3.2% and 6.0% was used to estimate future salary levels in 1997 and 1996, respectively. (this space intentionally left blank) 57 Total pension cost for non-qualified supplemental defined benefit pension plans (in millions): 1997 1996 1995 ---- ---- ---- Service cost (benefits earned during the period) $ 4 $ 2 $ - Interest cost on PBO 6 2 2 Actual return on plan assets - - - Net amortization and deferral 6 6 (1) ---- ---- ---- Net periodic supplemental pension cost 16 10 1 Special termination benefits * 72 - - ---- ---- ---- Total supplemental pension cost $ 88 $ 10 $ 1 ==== ==== ==== * Related to an early retirement program offered to US Airways' pilots (see above). (b) DEFINED CONTRIBUTION PENSION PLANS The Company's contributions to its defined contribution pension plans are based on a formula which considers the age and earnings of each participant and the amount the participant contributes. Expenses related to these plans, excluding expenses related to US Airways' ESOP and any profit sharing contributions, were approximately $58.9 million, $55.6 million and $64.8 million for the years 1997, 1996 and 1995, respectively. Expenses for 1995 include a catch up adjustment of $11.6 million for new employer matching contributions for certain unionized employees. See Notes 5(e) and 5(f) for information related to US Airways' ESOP and profit sharing contributions. (c) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Medical and life insurance benefits are offered to certain employees who retire from the Company and their eligible dependents. The medical benefits provided by the Company are coordinated with Medicare benefits. Retirees generally contribute amounts towards the cost of their medical expenses based on years of service with the Company. The Company also provides uninsured death benefit payments to survivors of retired employees for stated dollar amounts, or in the case of retired pilot employees, death benefit payments determined by age and level of pension benefit. The plans for postretirement medical and death benefits are funded on a pay-as-you-go basis. The funded status of the plans as of September 30, 1997 and 1996, respectively, except for certain subsidiaries other than US Airways which are as of December 31, 1997 and 1996, respectively (in millions): 1997 1996 ---- ---- Fair value of plan assets $ - $ - Accumulated postretirement benefit obligation (APBO): Retirees 308 326 Fully eligible plan participants 209 170 Other plan participants 501 455 ----- ----- Total APBO 1,018 951 APBO in excess of fair value of plan assets (1,018) (951) Contributions from October 1 through December 31, 7 7 Unrecognized prior service credits (130) (142) Unrecognized net gain (62) (34) ----- ----- Accrued postretirement benefit liability $(1,203) $(1,120) ===== ===== 58 The assumptions used to determine the APBO: 1997 1996 ---- ---- Discount rate 7.5% 8.0% Rate of increase in compensation levels 3.0% to 6.0% 3.0% to 6.0% Health care cost trend 4.5% 7.5% Net periodic postretirement benefit expense (in millions): 1997 1996 1995 ---- ---- ---- Service cost (benefits earned during the period) $ 35 $ 44 $ 29 Interest cost on APBO 71 75 65 Actual return on plan assets - - - Net amortization and deferral (16) (11) (15) --- --- --- Net periodic postretirement benefit expense $ 90 $ 108 $ 79 === === === The assumed health care cost trend rate used in measuring the APBO was changed from 6.5% in 1998 decreasing to 4.5% in 2000 to a flat 4.5% in 1998 and thereafter. This change was made in response to observed average historical trends. If the assumed health care cost trend rates were increased by one percentage point, the APBO at September 30, 1997 would be increased by approximately 10% and 1997 periodic postretirement benefit expense would increase approximately 13%. (d) POSTEMPLOYMENT BENEFITS The Company provides certain postemployment benefits to all of its employees. Such benefits include disability-related and workers' compensation benefits and severance payments for certain employees. The Company accrues for the cost of such benefit expenses once a triggering event has occurred. (e) EMPLOYEE STOCK OWNERSHIP PLAN In August 1989, US Airways established an ESOP. US Airways Group sold 2,200,000 shares of its Common Stock to an Employee Stock Ownership Trust (the Trust) to hold on behalf of US Airways' employees, exclusive of officers, in accordance with the terms of the Trust and the ESOP. The trustee placed those shares in a suspense account pending their release and allocation to employees. US Airways provided financing to the Trust in the form of a 9 3/4% loan for $111.4 million for its purchase of shares and US Airways contributed an additional $2.2 million to the Trust. US Airways makes a yearly contribution to the Trust sufficient to cover the Trust's debt service requirement. The contributions are made in amounts equal to the periodic loan payments as they come due, less dividends available for loan payment. Since the Company did not pay dividends on any shares held by the Trust for the years ended December 31, 1997, 1996 and 1995, the Trust did not utilize dividends to service its debt during those periods. The initial maturity of the loan is 30 years. As the loan is repaid over time, the trustee systematically releases shares of the Common Stock from the suspense account and allocates them to participating employees. Each participant's allocation is based on the participant's compensation, the total compensation of all ESOP participants and the total number of shares being released. For each year after 1989, a minimum of 71,933 shares are released from the suspense account and allocated to participant accounts. If US Airways Group's return on sales equals or exceeds four percent in a given year, more shares are released and repayment of the loan is accelerated. See also Note 5(f) regarding the profit sharing component of US Airways' ESOP. Annual contributions made by US Airways, and therefore loan repayments made by the Trust, were $11.4 million in each of 1997, 1996 and 1995. The interest portion of these contributions was $10.1 million in 1997, $10.3 million in 1996 and $10.4 million in 1995. Approximately 790,000 shares of Common Stock have been released or committed to be released as of December 31, 1997. US Airways recognized compensation expense 59 related to the ESOP of $11.1 million in 1997, $3.7 million in 1996 and $3.7 million in 1995 based on shares allocated to employees (the "shares allocated" method). Deferred compensation related to the ESOP amounted to approximately $72.4 million, $83.5 million and $87.2 million as of December 31, 1997, 1996 and 1995, respectively. All shares of Common Stock sold to the Trust are considered issued and outstanding for computing the weighted average common shares outstanding for the earnings per common share calculation. See Note 1(l) with respect to the Company's accounting policies for stock-based compensation. (f) PROFIT SHARING In exchange for temporary wage and salary reductions and other concessions during a twelve month period in 1992 and 1993, including certain ongoing work rule and medical benefits concessions and the freeze of the defined benefit plan for certain non-contract employees, affected US Airways employees participated in a profit sharing program and were granted stock options to purchase US Airways Group Common Stock (see related discussion under Note 8(e)). This profit sharing program was designed to recompense those US Airways employees whose pay was reduced in an amount equal to (i) two times salary forgone plus (ii) one time salary forgone (subject to a minimum of $1,000) for the freeze of the defined benefit pension plan for certain non-contract employees. US Airways recognized charges of $213.5 million, including $121.6 million and $49.7 million in 1996 and 1995, respectively, related to this program. Cash distributions to participants of $213.5 million have also been made, including $74.9 million and $3.3 million in 1996 and 1995, respectively, and a final cash distribution in the first quarter of 1997 of $129.1 million. After the first quarter 1997 payment, US Airways' obligations under this profit sharing program were satisfied and this program ceased. US Airways' ESOP and Defined Contribution Retirement Program (DCRP) each have profit sharing components. Under the ESOP, each eligible US Airways employee receives Common Stock shares based on his or her compensation relative to the total compensation of all participants and the number of Common Stock shares in the allocation pool. When US Airways' return on sales equals or exceeds certain prescribed levels, US Airways increases its contribution, which effectively increases the number of Common Stock shares in the allocation pool (see Note 5(e)). US Airways' ESOP- related expenses for 1997 include $7.4 million related to this profit sharing program. US Airways did not make any provision for profit sharing contributions in connection with the profit sharing component of the ESOP during 1996 or 1995. Under the DCRP, US Airways makes additional contributions to participant accounts when US Airways Group achieves certain prescribed pre-tax margin levels (see also Note 5(b)). US Airways' 1997 and 1996 results of operations reflect expenses of $24.1 million and $4.8 million, respectively, for the profit sharing component of the DCRP. In 1995, US Airways did not achieve the prescribed pre-tax margin levels and, accordingly, made no such provision for this program. 6. COMMITMENTS AND CONTINGENCIES (a) COMMITMENTS TO PURCHASE FLIGHT EQUIPMENT On October 31, 1997, the Company entered into agreements with AVSA, S.A.R.L. (AVSA), an affiliate of aircraft manufacturer Airbus Industrie G.I.E. (Airbus), and CFM International, Inc. (CFMI) for the acquisition of up to 400 Airbus A320 family aircraft and accompanying jet engines. The A320 family aircraft are single-aisle aircraft which include the Airbus A319, A320 and A321. The Company has 124 aircraft on firm order, 116 aircraft subject to reconfirmation prior to scheduled delivery and options for 160 additional aircraft. Of the first 124 aircraft, six are scheduled for delivery in 1998, 20 in 1999 and 98 in the years 2000 through 2002. The Company anticipates that the new Airbus aircraft will ultimately replace, at a minimum, US Airways' 60 B737-200, DC-9-30 and MD-80 aircraft. The minimum determinable payments associated with the Company's agreements with AVSA and CFMI (including progress payments, payments at delivery, buyer-furnished equipment, spares, capitalized interest, penalty payments, cancellation fees and/or nonrefundable deposits) are currently estimated at $302 million in 1998, $725 million in 1999, $1.07 billion in 2000 and $211 million in 2001. US Airways has a commitment to purchase hush-kits for certain of its B737-200 aircraft. The installation of hush-kits will allow these aircraft to meet certain statutory noise level requirements. Expected payments associated with this commitment are approximately $60 million for 1998 and 1999. See also Note 6(c) with respect to litigation between US Airways and Boeing. (b) LEASES The Company's airline subsidiaries lease certain aircraft, engines, computer and ground equipment, in addition to the majority of their ground facilities. Ground facilities include executive offices, overhaul and maintenance bases and ticket and administrative offices. Public airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports. Substantially all leases provide that the lessee shall pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Some leases also include renewal and purchase options. The Company subleases certain leased aircraft and ground facilities under noncancelable operating leases expiring in various years through the year 2021. The following amounts related to capital leases are included in property and equipment (in thousands): December 31, --------------------- 1997 1996 ---- ---- Flight equipment $80,448 $167,308 Ground property and equipment 406 406 ------ ------- 80,854 167,714 Less accumulated amortization (54,495) (125,568) ------ ------- $26,359 $ 42,146 ====== ======= (this space intentionally left blank) 61 As of December 31, 1997, obligations under capital and noncancelable operating leases for future minimum lease payments (in thousands): Capital Operating Leases Leases ------- --------- 1998 $10,294 $ 795,393 1999 10,295 760,727 2000 7,193 729,409 2001 4,703 726,325 2002 4,703 672,714 Thereafter 9,405 6,046,372 ------ --------- Total minimum lease payments 46,593 9,730,940 Less sublease rental receipts - (123,285) --------- Total minimum operating lease payments $9,607,655 ========= Less amount representing interest (13,125) ------ Present value of future minimum capital lease payments 33,468 Less current obligations under capital leases (6,300) ------ Long-term obligations under capital leases $27,168 ====== For 1997, 1996 and 1995, rental expense under operating leases was approximately $804 million, $787 million and $773 million, respectively. Rental expense for 1997, 1996 and 1995 exclude credits of $1.5 million, $22.5 million and $4.1 million, respectively, related to US Airways' subleasing of BAe-146 aircraft (see Notes 13(a), 13(b) and 13(c)). Rental expense for 1997 also excludes $4.6 million related to expenses recognized by US Airways in conjunction with certain efficiency measures (see Note 13(a)). The Company's airline subsidiaries also lease certain owned flight equipment under noncancelable operating leases which expire in the years 1998 through 2000. The future minimum rental revenues associated with these leases are: $8.9 million-1998; $7.2 million-1999; and, $0.7 million-2000. The following amounts relate to aircraft leased under such agreements as reflected in flight equipment (in thousands): December 31, --------------------- 1997 1996 ---- ---- Flight equipment $52,645 $49,358 Less accumulated amortization (31,696) (24,711) ------ ------ $20,949 $24,647 ====== ====== (c) LEGAL PROCEEDINGS US Airways is involved in legal proceedings arising out of certain aircraft accidents, including an accident in September of 1994 near Pittsburgh in which 127 passengers and five crew members lost their lives. With respect to the 1994 accident, the National Transportation Safety Board (NTSB) held hearings in January and November of 1995, and is scheduled to hold additional hearings in 1998 before issuing its final accident investigation report. Wrongful death cases are pending in a consolidated multi-district litigation in U.S. District Court for the Western District of Pennsylvania, and in state courts in Cook County, Illinois and Harris County, Texas. While US Airways has settled over 80% of the cases arising from the Pittsburgh accident, it expects that it will be at least two years before all of the settlements and/or related litigation are concluded. US Airways is fully insured with respect to this litigation and, therefore, believes that the litigation will not have a material adverse effect on the Company's financial condition or results of operations. 62 Boeing filed suit against US Airways in September 1997 in state court in King County, Washington seeking unspecified damages for alleged breach of two aircraft purchase agreements concerning, respectively, eight B757-200 aircraft and 40 B737-Series aircraft. On October 31, 1997, US Airways filed an answer and counterclaims to Boeing's complaint denying liability and seeking recovery from Boeing of approximately $35 million in equipment purchase deposits. The case is currently in the discovery phase of litigation. In its initial discovery response, Boeing has quantified its damage claim at approximately $220 million. The Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. In October 1995, US Airways terminated for cause an agreement with In- Flight Phone Corporation (IFPC). IFPC was US Airways' provider of on-board telephone and interactive data systems. The IFPC system had been installed in approximately 80 aircraft prior to the date of termination of the agreement. On December 6, 1995, IFPC filed suit against US Airways in Illinois state court seeking equitable relief and damages in excess of $186 million. US Airways believes that its termination of its agreement with IFPC was appropriate and that it is owed significant damages from IFPC. US Airways has filed a counterclaim against IFPC seeking compensatory damages in excess of $25 million and punitive damages in excess of $25 million. In January 1997, IFPC filed for protection from its creditors under Chapter 11 of the Bankruptcy Code. The parties stipulated to lift the automatic stay provided for in the Bankruptcy Code which could allow IFPC's and US Airways' claims to be fully litigated. The Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. On July 30, 1996, the Company and US Airways initiated a lawsuit in U.S. District Court for the Southern District of New York against British Airways Plc. (British Airways), BritAir Acquisition Corp., Inc., American Airlines, Inc. (American) and American's parent company, AMR Corp. The Company and US Airways claimed that British Airways, in pursuit of an alliance with American, is responsible for breaches of fiduciary duty to the Company and US Airways and violated certain provisions of the January 21, 1993 Investment Agreement between the Company and British Airways (the Investment Agreement). The lawsuit also claims that the defendants have committed violations of U.S. antitrust laws. In response to the defendants' Motion to Dismiss, the Court sustained US Airways' claims for breach of contract against British Airways. The Court dismissed the remaining claims against British Airways and all claims against American. On February 6, 1998, British Airways filed its answer to the complaint along with counterclaims against the Company and US Airways. British Airways' counterclaims alleged that US Airways breached various provisions of the Investment Agreement and that US Airways breached the Code Share Agreement between British Airways and US Airways by providing certain allegedly confidential information to a third party. In addition, British Airways seeks a declaratory judgment regarding certain payment obligations under its wet lease arrangement with US Airways. British Airways claimed damages of $16.7 million for the termination of the code share relationship and an unspecified amount of damages for its remaining claims. The Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. In May 1995, the Company, US Airways and the Retirement Income Plan for US Airways, Inc. (the Pilots Pension Plan) were sued in federal district court for the District of Columbia by 481 active and retired pilots alleging that defendants had incorrectly interpreted the Pilots Pension Plan provisions and erroneously calculated benefits under the Pilots' Pension Plan. The plaintiffs sought damages in excess of $70 million. In May 1996, the court issued a decision granting US Airways' Motion to Dismiss the majority of the complaint for lack of jurisdiction, deciding that the dispute must be resolved through the arbitration process under the Railway Labor Act because the Pilots Pension Plan was collectively bargained. The court retained jurisdiction over one count of the complaint alleging a violation of a disclosure requirement under the Employee Retirement Income 63 Security Act. The plaintiffs have attempted to appeal the district court's dismissal before the U.S. Court of Appeals for the District of Columbia. In January of 1998, the Court of Appeals dismissed plaintiff's appeal for lack of jurisdiction because the lower court order was not final. In February of 1998 a purported class action complaint was filed by a travel agency in Puerto Rico against seven major U.S. airlines, including US Airways. The complaint alleges that the defendant airlines are undercompensating Puerto Rican travel agents in connection with the agents' sale of travel. The plaintiffs allege that the airlines are contractually obligated to pay a 10% commission and that the defendant airlines breached that contract as a result of the introduction of commission caps limiting commission payable with respect to a single trip to a stated dollar amount and reducing certain commissions to 8%. The plaintiffs have stated their damages for the class in the amount of $150 million. Given the early stage of this litigation, the Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. The City and County of San Francisco have sued a number of San Francisco International Airport tenants for the recovery of approximately $18 million of costs incurred with respect to the characterization and cleanup of soil and groundwater contamination at the airport. The City has recently identified US Airways as a potentially responsible party, although the City has not amended the complaint to add US Airways as a defendant party. The Company is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on the Company's financial condition or results of operations. (d) GUARANTEES US Airways guarantees the payment of principal and interest on special facility revenue bonds issued by certain municipalities to build or improve airport and maintenance facilities. Under related lease arrangements, US Airways is required to make rental payments sufficient to pay maturing principal and interest payments on the bonds. As of December 31, 1997 the principal amount of these bonds outstanding was $77.4 million. (e) CONCENTRATION OF CREDIT RISK The Company invests available cash in money market securities of various banks, commercial paper of financial institutions and other companies with high credit ratings and securities backed by the United States government. As of December 31, 1997, most of the Company's receivables related to tickets sold to passengers through the use of major credit cards (45%) or to tickets sold by other airlines (18%) and used by passengers on the Company's airline subsidiaries. These receivables are short-term, generally being settled within 14 days after sale. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts. The Company does not believe it is subject to any significant concentration of credit risk. 7. REDEEMABLE PREFERRED STOCK (a) SERIES H PREFERRED STOCK As of December 31, 1997, 358,000 shares of the Company's 9 1/4% Series H Senior Cumulative Convertible Preferred Stock (Series H Preferred Stock), without par value, were outstanding. Each share of Series H Preferred Stock is convertible into 25.8099 shares of Common Stock and is entitled to 25.8099 votes on all matters submitted to a vote of the Company's stockholders (both rates are subject to certain anti-dilution adjustments). The Series H Preferred 64 Stock is senior to the Company's Common Stock with respect to dividend payments and the distribution of assets. The holders of the Series H Preferred Stock, currently affiliates of Berkshire Hathaway, Inc. (Berkshire Hathaway), are entitled to receive annual dividends of $92.50 per share, payable in equal quarterly payments on March 31, June 30, September 30 and December 31. Dividends, if not paid quarterly, are accrued at the stated dividend rate of 9 1/4% plus additional dividends (interest) on the balance of the deferred dividends at the higher of the stated dividend rate or the prime rate plus five percentage points. The holders of the Series H Preferred Stock have the exclusive right to elect two directors to the Company's board of directors after a scheduled dividend payment has not been paid for thirty days. The Company is required to redeem all outstanding shares of Series H Preferred Stock on August 7, 1999 at $1,000 per share plus accrued dividends. The Company can redeem shares of Series H Preferred Stock at a premium of $150 per share prior to the mandatory redemption date. The holders of the Series H Preferred Stock can require the Company to redeem the Series H Preferred Stock if, under certain conditions, a non-affiliated entity purchases fifty percent or more of the combined voting power of the Company's then outstanding voting stock. Berkshire Hathaway is not permitted to sell more than 3% of the Series H Preferred Stock to any entity or group of affiliated entities or to any entity that has filed a Schedule 13D with the U.S. Securities and Exchange Commission as a 5% holder of the Company's voting stock. The Series H Preferred Stock was issued in exchange for the Company's 9 1/4% Series A Cumulative Convertible Redeemable Preferred Stock (Series A Preferred Stock) during August 1997. The Series A Preferred Stock, which was originally issued in 1989, was also owned by affiliates of Berkshire Hathaway. The terms of Series H Preferred Stock are substantially similar to the terms of the Series A Preferred Stock, with the following exceptions: the early redemption premium (redeeming the Series H Preferred Stock prior to August 7, 1999) was increased to $150 per share from $100 per share and certain changes were made to provisions related to the ability of Berkshire Hathaway to sell shares of Series H Preferred Stock to entities other than US Airways Group. The Company paid dividends totaling $80.6 million and $47.9 million to the holders of the Series H Preferred Stock (including amounts related to the former Series A Preferred Stock) during 1997 and 1996, respectively. Dividend payments during both years included dividends deferred from prior periods and accrued dividends (interest) on deferred dividends. The Company deferred dividend payments on all its outstanding preferred stock issuances beginning with dividends payable on September 30, 1994. After a March 1997 dividend payment, the Company had paid all dividends in arrears and had resumed regular quarterly dividend payments on this preferred stock issuance. See Note 8(a) for information related to the ability of the Company to pay dividends on its outstanding capital stock. See also Note 15. (b) SERIES F AND SERIES T PREFERRED STOCK During 1993 US Airways Group and British Airways entered into an investment agreement (the Investment Agreement) under which a wholly-owned subsidiary of British Airways purchased certain series of redeemable convertible preferred stock from the Company, and British Airways entered into code sharing and other business arrangements with US Airways. As of December 31, 1996, the preferred stock held by British Airways constituted approximately 23% of the total voting interest in the Company. These holdings included the Company's Series F Cumulative Convertible Senior Preferred Stock, without par value (Series F Preferred Stock), the Series T- 1 Cumulative Convertible Exchangeable Senior Preferred Stock, without par value (Series T-1 Preferred Stock), and the Series T-2 Cumulative Convertible Exchangeable Senior Preferred 65 Stock, without par value (Series T-2 Preferred Stock). The Series T-1 Preferred Stock and the Series T-2 Preferred Stock are collectively referred to herein as the "Series T Preferred Stock." On June 11, 1996, British Airways announced a proposed "operational merger" with American, which is currently being reviewed by regulatory authorities in the United Kingdom, the United States and Europe. Following this announcement, in October 1996, US Airways notified British Airways that it was terminating the code share and other business arrangements between the companies effective March 29, 1997. On January 28, 1997, the Company received notice that the three British Airways' representatives resigned as directors of US Airways Group and on February 12, 1997, the Company received notice that such individuals resigned as directors of US Airways. In the letter of resignation, British Airways waived its current and future rights under the Investment Agreement to US Airways Group board representation. On May 21, 1997, British Airways converted 28,059.364 shares of Series F Preferred Stock into 14,458,851 shares of Common Stock, which it then sold to third parties. On May 22, 1997, US Airways Group repurchased the remaining outstanding shares of Series F Preferred Stock and all of the Series T Preferred Stock for $126.2 million (which included a premium over the stated amount of $5.2 million for the shares of Series F Preferred Stock repurchased and $0.8 million for the Series T Preferred Stock). The Company believes that British Airways held no ownership interest in the Company after May 22, 1997. The Company paid dividends totaling $44.1 million and $35.1 million on its Series F and Series T Preferred Stock during 1997 and 1996, respectively. Dividend payments during both years included dividends deferred from prior periods and accrued dividends (interest) on deferred dividends. The Company deferred dividend payments on all its outstanding preferred stock issuances beginning with dividends payable on September 30, 1994. After a March 1997 dividend payment, the Company had paid all dividends in arrears and had resumed regular quarterly dividend payments on both the Series F and Series T Preferred Stock. As mentioned above, the Series F and Series T Preferred Stock were converted/repurchased during May 1997. See Note 6(c) for information related to outstanding litigation involving the Company and British Airways and Note 10 for information related to certain other transactions between the Company and British Airways. 8. STOCKHOLDERS' EQUITY (a) COMMON STOCK As of December 31, 1997, the Company had 150.0 million authorized shares of Common Stock, par value $1.00 per share, of which 91.5 million shares were issued (including shares of Common Stock held in treasury as discussed in Note 8(d)) and 16.1 million shares were reserved for issuance upon conversion of the Series H Preferred Stock (see Note 7(a)) and for offerings under employee stock purchase, stock option, stock incentive and employee retirement plans. The Company has not paid dividends on its Common Stock since the second quarter of 1990. There can be no assurance when or if the Company will resume dividend payments on its Common Stock. The Company, organized under the laws of the State of Delaware, is subject to Sections 160 and 170 of the Delaware General Corporation Law (Delaware Law) with respect to the payment of dividends on or the repurchase or redemption of its capital stock. As of December 31, 1997, the Company does not believe that Delaware Law placed any material restrictions on the Company's ability to pay dividends on or repurchase or redeem its capital stock. 66 See Notes 7(a), 7(b) and 8(c) for information related to preferred stock converted into Common Stock during 1997. (b) PREFERRED STOCK AND SENIOR PREFERRED STOCK As of December 31, 1997, the Company had 5.0 million authorized shares of Preferred Stock, without nominal or par value, of which 358,000 shares were issued and outstanding as Series H Preferred Stock (see Note 7(a)), and 3.0 million authorized shares of Senior Preferred Stock, without nominal or par value, none of which were issued and outstanding. See also Note 8(a). (c) SERIES B PREFERRED STOCK During August 1997, the Company notified the holders of its publicly- held Series B Cumulative Convertible Preferred Stock (Series B Preferred Stock) that it would redeem all 4,263,000 outstanding depositary shares representing shares of Series B Preferred Stock on September 15, 1997 at $51.75 per depositary share plus accrued dividends of $0.3646 per depositary share. Because conversion into Common Stock was financially advantageous to the holders, all but approximately 6,000 depositary shares were converted prior to the redemption date resulting in the issuance of approximately 10.6 million shares of Common Stock. The Company paid dividends totaling $55.9 million to the holders of the Series B Preferred Stock during 1997 prior to its conversion/redemption. The Company did not make any dividend payments on the Series B Preferred Stock during 1996. Dividend payments during 1997 included dividends deferred from prior periods. The Company deferred dividend payments on all its outstanding preferred stock issuances beginning with dividends payable on September 30, 1994. After an April 1997 dividend payment, the Company had paid all dividends in arrears and had resumed regular quarterly dividend payments on this preferred stock issuance. (d) TREASURY STOCK The Company held approximately 40,000 shares of Common Stock in treasury as of December 31, 1997. During 1997 and 1996, employees surrendered approximately 125,000 and 118,000 shares of Common Stock, respectively, to the Company in lieu of cash payments to satisfy tax withholding requirements related to the vesting of certain Common Stock grants. The Company has typically reissued such shares upon the exercise of stock options held by employees. See also Note 15. (e) STOCK-BASED COMPENSATION As of December 31, 1997, approximately 5.9 million shares of Common Stock were reserved for future grants of Common Stock or the possible exercise of stock options issued under the Company's five stock option and incentive plans. The Company accounts for stock-based compensation using the intrinsic value method as prescribed under APB 25. In accordance with APB 25, the Company recognized compensation expense (an element of Personnel costs) related to Common Stock grants of $5.7 million, $11.9 million and $0.3 million in 1997, 1996 and 1995, respectively, and compensation expense related to stock option grants of $1.4 million in 1997 and $7.9 million in 1996 (none for 1995). In addition, the Company recognized compensation expenses related to stock appreciation rights (SARs), the Company's only variable stock-based compensation instrument, of $33.2 million in 1997 and $41.6 million in 1996 (none for 1995). Deferred compensation related to Common Stock grants was $6.6 million and $9.4 million as of December 31, 1997 and 1996, respectively, and deferred compensation related to stock option grants was $1.0 million and $2.4 million as of December 31, 1997 and 1996. The Company granted 0.2 million, 0.6 million and 0.9 million shares of Common Stock during 1997, 1996 and 1995, respectively. The weighted average fair value per share of Common Stock granted in 1997, 67 1996 and 1995 was $25, $17 and $13, respectively. The 1997 Stock Incentive Plan of US Airways Group, Inc. (1997 Plan), which became effective during March 1997, authorizes the Company to grant Common Stock and stock option awards to non-officer key employees provided that no more than 750,000 shares of Common Stock are issued as a result of the awards. The 1996 Stock Incentive Plan of US Airways Group, Inc. (1996 Plan), which became effective during May 1996 and encompasses the Company's former 1988 Stock Incentive Plan of USAir Group, Inc., authorizes the Company to grant Common Stock and stock option awards to key employees provided that no more than 8.4 million shares of Common Stock are issued as a result of the awards. All stock option awards under the 1997 Plan and 1996 Plan expire after a period of ten years and one month from date of grant. Under both plans, the Company uses its discretion in setting the vesting rate of each award. All awards granted prior to December 31, 1997 have a vesting period of five years or less. Under the 1992 Stock Option Plan of USAir Group, Inc. (1992 Plan), US Airways employees whose pay was reduced, generally during a 12 month period in 1992 and 1993, received stock options to purchase 50 shares of Common Stock at a price of $15 per share for each $1,000 of salary reduction. Participating employees have five years from the grant date to exercise such stock options (see also Note 5(f) for related information). Effective November 1, 1996, the Company added a SAR feature to the 1992 Plan and granted SARs to stock option holders on a one-for-one basis. For each SAR, the holder is entitled to receive a cash distribution equal to the excess of the fair market value of a share of Common Stock above $15. The exercise of any SAR cancels its tandem stock option and, conversely, the exercise of any stock option cancels its tandem SAR. The SARs have the same expiration date as the tandem stock options. As of December 31, 1997, only 0.2 million stock options (with tandem SARs) granted under the 1992 Plan were outstanding, all of which are due to expire during 1998. The 1984 Stock Option and Stock Appreciation Rights Plan of USAir Group, Inc. (1984 Plan) authorized the Company to grant stock option and SAR awards to key employees provided that no more than 600,000 shares of Common Stock were issued as a result of the awards. All awards under the 1984 Plan expire after a period of ten years and one month from date of grant. No SARs awarded under the 1984 Plan were outstanding as of December 31, 1997. The Company may no longer grant awards under neither the 1992 Plan nor the 1984 Plan. All awards previously granted under both of these plans have vested. The USAir Group, Inc. Nonemployee Director Stock Incentive Plan (Director Plan), which became effective during May 1996, authorizes the Company to grant stock option awards to each nonemployee director provided that no more than 70,000 shares of Common Stock are issued as a result of the awards. All stock option awards under the Director Plan expire after ten years from date of grant and are subject to a one year vesting period. (this space intentionally left blank) 68 The following table summarizes stock option transactions pursuant to the Company's various stock option and incentive plans for the years ended December 31, 1997, 1996 and 1995: 1997 1996 1995 ----------------- ----------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- -------- ------- -------- ------- -------- (000) (000) (000) Stock Options - ------------- Outstanding at beginning of year 9,782 $17 8,426 $17 8,844 $18 Granted (1) 951 $27 97 $17 155 $9 Granted (2) - - 2,415 $13 - - Exercised (2,119) $19 (435) $15 (43) $10 Forfeited(3)(4) (3,795) $16 (673) $16 (489) $25 Expired (186) $24 (48) $32 (41) $36 ----- ----- ----- Outstanding at end of year 4,633 $18 9,782 $17 8,426 $17 Exercisable at end of year 2,792 7,802 7,986 (1) Exercise price equal to the fair market value of a share of Common Stock at date of grant; includes 50,000 and 20,000 stock options that were repriced during 1997 and 1996, respectively. (2) Exercise price was lower than the fair market value of a share of Common Stock at measurement date for grant. (3) Activity during 1997 and 1996 includes cancellation of repriced stock options. See (1) above. (4) Activity during 1997 and 1996 includes 3.5 million and 0.6 million stock options, respectively, that were forfeited as a result of their tandem SAR being exercised. The weighted average fair value per stock option for stock options which have an exercise price equal to the fair market value of a share of Common Stock at date of grant was $18, $12 and $6 for 1997, 1996 and 1995, respectively. The weighted average fair value per stock option for stock options which have an exercise price lower than the fair market value of a share of Common Stock at date of grant was $13 for 1996 (no such grants during 1997 and 1995). Stock Options Stock Options Outstanding Exercisable --------------------------------- --------------------- Weighted Number Average Weighted Weighted of Options Remaining Average Average Range of Outstanding Contractual Exercise Number Exercise Exercise Prices at 12/31/97 Life Price Exercisable Price - ---------------- ----------- ----------- -------- ----------- -------- (000) (years) (000) $ 4.25 to $10.00 133 7.0 $ 7 95 $ 7 $10.01 to $15.00 2,655 7.5 $13 1,756 $13 $15.01 to $20.00 291 5.4 $17 240 $17 $20.01 to $25.00 646 3.5 $22 608 $22 $25.01 to $40.00 826 9.2 $28 16 $37 $40.01 to $48.00 82 2.1 $45 77 $45 69 During 1995, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS 123), which requires the use of fair value techniques to determine compensation expense associated with stock-based compensation. Although the Company has opted to continue to apply the provisions of APB 25 to determine compensation expense, as permitted under SFAS 123, the Company is obligated to disclose certain information including pro forma net income and earnings per share as if SFAS 123 had been adopted by the Company to measure compensation expense. Had compensation cost been measured in accordance with SFAS 123, the Company's net income and earnings per common share would have been reduced to the pro forma numbers indicated in the table below. In order to calculate the pro forma net income information presented below, the Company used the Black- Scholes stock option-pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: stock volatility of 52.6%, 50.1% and 48.8%; risk-free interest rates of 6.6%, 6.2% and 6.6%; expected stock option life of eight years, nine years and nine years; and no dividend yield. 1997 1996 1995 ---- ---- ---- Net Income As reported (000s) $1,024,699 $263,373 $119,287 Pro forma (000s) $1,017,705 $248,204 $119,074 Earnings Applicable to As reported (000s) $961,437 $174,598 $ 34,383 Common Stockholders Pro forma (000s) $954,443 $159,429 $ 34,170 Earnings per Common As reported $12.32 $2.73 $0.55 Share - Basic (1) Pro forma $12.23 $2.49 $0.55 Earnings per Common As reported $9.87 $2.35 $0.55 Share - Diluted (1) Pro forma $9.83 $2.21 $0.55 (1) The Company's Earnings per Common Share figures (as reported and pro forma) for the years 1996 and 1995 have been restated to conform with SFAS 128 (see also Note 1(n)). The pro forma net income and earnings per common share information presented above reflects stock options granted during 1997, 1996 and 1995 only. Therefore, the full impact of calculating compensation expense for stock options under SFAS 123 is not reflected in the pro forma net income and earnings per common share amounts above because compensation expense is recognized over the stock option's vesting period and compensation expense for stock options granted prior to January 1, 1995 is not considered. See also Note 1(n). (f) UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES, NET OF INCOME TAX EFFECTS In accordance with SFAS 115, the Company records an adjustment to Stockholders' Equity (Deficit) to reflect differences between the fair value of investments in marketable equity securities and short-term investments (both types of investments are considered "available-for-sale" under SFAS 115) and their respective carrying values at each balance sheet date. (g) ADJUSTMENT FOR MINIMUM PENSION LIABILITY, NET OF INCOME TAX EFFECTS In accordance with SFAS 87, the Company recorded an Adjustment for minimum pension liability as of December 31, 1997 and 1996. SFAS 87 requires the recognition of an additional minimum pension liability for each defined benefit plan for which the accumulated benefit obligation exceeds the fair value of the plan's assets and accrued pension costs. An offsetting intangible asset is recognized for each additional minimum pension liability recorded. Because each intangible asset recognized is limited to the amount of unrecognized prior service cost, any balance is reflected as a reduction of Stockholders' Equity (Deficit), net of income tax effects. 70 See also Note 5(a). 9. USAM'S SALE OF CERTAIN INVESTMENTS As of December 31, 1996 and prior to the events described below, USAM owned 11% of the Galileo International Partnership (GIP) and approximately 21% of the Apollo Travel Services Partnership (ATS). GIP owned and operated the Galileo CRS and ATS marketed the Galileo CRS in the U.S. and Mexico. On July 30, 1997, Galileo completed an initial public offering (IPO) and used the proceeds, together with the proceeds of bank financing, to purchase ATS. Immediately preceding the IPO, GIP was merged with and into a wholly-owned limited liability company subsidiary of Galileo and USAM received shares in Galileo in the same proportion as its partnership interest in GIP. As part of the IPO, USAM sold some of its Galileo shares and its interest in Galileo was reduced from 11% to approximately 6.7%. USAM received proceeds of $62.2 million and recognized a pre-tax gain of approximately $50 million from the sell-down of its interest in Galileo and received proceeds of $162.0 million and recognized a pre-tax gain of approximately $130 million in connection with the ATS sale. As of December 31, 1997, USAM owned approximately 6.7% of Galileo and 11% of GJP. USAM applies the provisions of SFAS 115 to account for its remaining investment in Galileo, which is classified as "available-for- sale." USAM received distributions from GIP, GJP and ATS of $12.7 million, $1.0 million and $4.6 million, respectively, during 1997, and $4.1 million, $0.1 million and $44.5 million (including a special distribution from ATS of $33.7 million during the second quarter of 1996), respectively, during 1996. USAM also received a dividend of $0.4 million from Galileo during 1997. 10. RELATED PARTY TRANSACTIONS US Airways wet leased B767-200ER aircraft, including cockpit and cabin crews, to British Airways in order to serve three routes between the U.S. and London beginning in June 1993 and ending in May 1996. US Airways recognized other operating revenues of $12.6 million and $63.6 million for the years 1996 and 1995, respectively, related to these arrangements. These revenues were offset by an equal amount of other operating expenses. US Airways also has various agreements with British Airways for ground handling at certain airports, contract training and other services. US Airways recognized other operating revenues of $1.5 million for the first five months of 1997 and $5.8 million and $4.9 million for the years 1996 and 1995, respectively, related to services US Airways performed for British Airways. As of December 31, 1996, US Airways' receivables from and payables to British Airways were $8.0 million and $5.5 million, respectively. US Airways also has a long-term note receivable from British Airways related to three U.S. to London routes that US Airways relinquished at the time of implementation of a code sharing arrangement with British Airways. The balance of this note receivable was $40.7 million as of December 31, 1996. Payments began in December 1995 in conjunction with the termination of the first wet lease arrangement and are scheduled to continue through the year 2004. US Airways terminated the code share and other business arrangements between the two companies effective March 29, 1997. See Note 7(b) for additional information related to the Company's relationship with British Airways. 71 During 1997 and 1996, employees surrendered approximately 125,000 and 118,000 shares of Common Stock, respectively, to the Company in lieu of cash payments to satisfy tax withholding requirements related to the vesting of certain common stock grants (see also Note 8(d)). 11. VALUATION AND QUALIFYING ACCOUNTS Allowance For ------------------------------ Uncollectible Inventory Accounts Obsolescence ------------- ------------- (in thousands) Balance as of December 31, 1994 $ 9,471 $172,791 Additions charged to expense 12,046 12,146 Amounts charged to reserve (9,177) (20,851) ------ ------- Balance as of December 31, 1995 12,340 164,086 Additions charged to expense 11,086 10,501 Amounts charged to reserve (11,237) (28,296) ------ ------ Balance as of December 31, 1996 12,189 146,291 Additions charged to expense 14,395 10,474 Amounts charged to reserve (9,000) (9,569) Other (1) 671 546 ------ ------- Balance as of December 31, 1997 $18,255 $147,742 ====== ======= (1) Reserves of Shuttle, Inc. See Note 14. 12. SELECT QUARTERLY FINANCIAL INFORMATION (UNAUDITED) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in millions, except per share amounts) 1997 Operating Revenues $2,101 $2,213 $2,115 $2,085 Operating Income $ 176 $ 256 $ 83 $ 70 Net Income $ 153 $ 206 $ 187 $ 479 Earnings Applicable to Common Stockholders $ 132 $ 182 $ 176 $ 471 Earnings per Common Share Basic $ 2.05 $ 2.53 $ 2.10 $ 5.16 Diluted $ 1.45 $ 1.92 $ 1.82 $ 4.66 1996 Operating Revenues $1,868 $2,149 $2,073 $2,052 Operating Income $ 11 $ 246 $ 131 $ 49 Net Income (Loss) $ (32) $ 201 $ 68 $ 27 Earnings (Loss) Applicable to Common Stockholders $ (55) $ 178 $ 45 $ 6 Earnings (Loss) per Common Share Basic $(0.86) $ 2.78 $ 0.71 $ 0.09 Diluted $(0.86) $ 1.91 $ 0.60 $ 0.08 See also Notes 1(l), 3, 5, 9 and 15. Note: The sum of the four quarters may not equal yearly totals due to rounding of quarterly results. 72 13. NONRECURRING ITEMS (a) 1997 The Company's results for 1997 include certain nonrecurring items recorded by US Airways: (i) $121.9 million in Personnel costs (including a fourth quarter charge of $115.0 million related to an early retirement program for pilots (see also Note 5(a)) and a second quarter charge of $6.9 million related to estimated employee severance payments due to efficiency measures US Airways announced during May 1997); (ii) a $1.5 million credit to Aircraft rent due to the reversal of previously accrued lease obligations upon the subleasing of an additional BAe-146 aircraft, recognized in the second quarter (see Notes 13 (b) and 13 (c) below); (iii) $4.6 million in Other rent and landing fees (including a third quarter charge of $1.7 million to write-down certain equipment to be disposed of and a second quarter charge of $2.9 million to write-off lease obligations at certain facilities to be abandoned (net of any anticipated sublease revenues), both related to the May 1997 efficiency measures); (iv) $89.1 million in Depreciation and amortization (including third quarter charges of $11.4 million related to the May 1997 efficiency measures to write-down certain equipment to be disposed of and a $59.3 million SFAS 121 impairment charge resulting from US Airways' September 1997 decision to retire its remaining DC-9-30 aircraft over the next several years, and second quarter charges of $0.3 million to write-off certain leasehold improvements and an $18.1 million SFAS 121 impairment charge to write-down certain DC-9-30 aircraft, both related to the May 1997 efficiency measures); and (v) $179.6 million in Gains on sales of interests in affiliates which resulted from USAM's sale of certain investments as discussed in Note 9. (b) 1996 The Company's results for 1996 include two nonrecurring items recorded by US Airways during the second quarter of 1996 related to US Airways' subleasing of eleven non-operating BAe-146 aircraft (see Note 13(c) below). US Airways reversed $22.5 million of previously accrued rent obligations related to these aircraft against Aircraft rent expense and reversed $7.0 million against Aircraft maintenance expense related to previously accrued lease return provisions. (c) 1995 In the fourth quarter of 1995, US Airways reversed $4.1 million of the $132.8 million nonrecurring charge related to its grounded BAe-146 fleet that was recorded in the fourth quarter of 1994. The reversal, a credit to Aircraft rent expense, reflects the successful remarketing by US Airways of three of these aircraft. 14. ACQUISITION OF SHUTTLE On December 30, 1997, the Company purchased Shuttle for $189.8 million. Shuttle, which operates under the trade name "US Airways Shuttle," provides high-frequency service between New York, Boston and Washington. For accounting purposes the acquisition was treated as a purchase and, accordingly, Shuttle's results of operations for December 31, 1997 have been included in the Company's Consolidated Statements of Operations for 1997. In addition, Shuttle's assets and liabilities were re-valued at fair value as of the acquisition date. The Company's Consolidated Balance Sheets as of December 31, 1997 include the assets and liabilities of Shuttle. The purchase of Shuttle resulted in goodwill, as discussed in Note 1(f). The impact of this acquisition was not material to the Company's Consolidated Statements of Operations or its Consolidated Balance Sheets; consequently, no pro forma information is presented. 73 Shuttle's assets include twelve B727-200 aircraft and takeoff and landing rights at both LaGuardia and National airports. 15. SUBSEQUENT EVENTS On March 12, 1998, Berkshire Hathaway exercised its right to convert the Series H Preferred Stock into approximately 9.2 million shares of the Company's Common Stock. The Company subsequently retired the Series H Preferred Stock. See also Note 7(a). In January 1998, the Company announced plans to purchase up to 2.3 million shares of its Common Stock from time-to-time in open market or privately negotiated transactions. This program was authorized by the Company's board of directors in conjunction with US Airways' agreement to provide up to 2.3 million stock options to its pilots in 1998. In February 1998, the Company's board of directors announced certain actions aimed at increasing shareholder value, including the purchase from time-to-time in open market or privately negotiated transactions of up to $500 million of the Company's Common Stock (in addition to the previously announced plan) and the retirement of certain debt obligations totaling approximately $380 million, including US Airways 10% Senior Notes. During late February 1998, US Airways retired early certain debt obligations with a combined principal amount of $76.1 million (the transactions resulted in an immaterial net gain). US Airways expects to retire its 10% Senior Notes, which have a face amount of $300 million, during early Summer 1998. (this space intentionally left blank) 74 ITEM 8B. CONSOLIDATED FINANCIAL STATEMENTS FOR US AIRWAYS, INC. INDEPENDENT AUDITORS' REPORT The Stockholder and Board of Directors US Airways, Inc.: We have audited the accompanying consolidated balance sheets of US Airways, Inc. and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows, and changes in stockholder's equity (deficit) for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of US Airways, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Washington, D. C. February 25, 1998 (this space intentionally left blank) 75 US Airways, Inc. Consolidated Statements of Operations Year Ended December 31, - ------------------------------------------------------------------------------ (in thousands) 1997 1996 1995 ---- ---- ---- Operating Revenues Passenger transportation $7,112,029 $6,799,420 $6,267,762 US Airways Express transportation revenues 604,505 145,118 - Cargo and freight 177,404 158,899 153,651 Other 607,547 600,620 563,463 ---------- ---------- ---------- Total Operating Revenues 8,501,485 7,704,057 6,984,876 Operating Expenses Personnel costs 3,012,175 3,040,682 2,751,437 Aviation fuel 761,020 780,597 646,004 Commissions 554,018 547,048 527,058 Aircraft rent 415,728 387,312 398,063 Other rent and landing fees 401,830 394,431 388,866 Aircraft maintenance 387,323 311,901 295,594 Depreciation and amortization 384,943 300,608 337,066 US Airways Express capacity purchases 485,873 93,042 - Other, net 1,512,425 1,479,768 1,406,137 ---------- ---------- ---------- Total Operating Expenses 7,915,335 7,335,389 6,750,225 ---------- ---------- ---------- Operating Income 586,150 368,668 234,651 Other Income (Expense) Interest income 112,270 75,905 51,122 Interest expense (260,029) (283,936) (301,923) Interest capitalized 11,582 8,398 8,781 Equity in earnings of affiliates 30,614 36,602 34,546 Gains on sales of interests in affiliates 179,625 - - Other, net 13,017 (14,594) 10,221 ---------- ---------- ---------- Other Income (Expense), Net 87,079 (177,625) (197,253) ---------- ---------- ---------- Income Before Taxes 673,229 191,043 37,398 Provision (Credit) for Income Taxes (378,930) 7,811 4,408 ---------- ---------- ---------- Net Income $1,052,159 $ 183,232 $ 32,990 ========== ========== ========== See accompanying Notes to Consolidated Financial Statements. 76 US Airways, Inc. Consolidated Balance Sheets December 31, - -------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amount)
ASSETS 1997 1996 ---- ---- Current Assets Cash $ 16,975 $ 20,154 Cash equivalents 1,074,565 929,980 Short-term investments 870,205 635,839 Receivables, net 295,720 325,478 Receivables from related parties, net 195,332 - Materials and supplies, net 200,494 211,184 Deferred income taxes 150,084 - Prepaid expenses and other 131,605 129,380 --------- --------- Total Current Assets 2,934,980 2,252,015 Property and Equipment Flight equipment 4,968,282 4,972,873 Ground property and equipment 850,575 1,087,178 Less accumulated depreciation and amortization (2,428,948) (2,381,844) --------- --------- 3,389,909 3,678,207 Purchase deposits 70,420 77,620 --------- --------- Total Property and Equipment, Net 3,460,329 3,755,827 Other Assets Goodwill, net 472,968 494,511 Other intangibles, net 283,271 283,274 Investment in marketable equity securities 190,035 - Receivable from parent company 209,612 - Deferred income taxes 220,921 - Other assets, net 493,384 606,906 --------- --------- Total Other Assets 1,870,191 1,384,691 --------- --------- $ 8,265,500 $ 7,392,533 ========= ========= LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIT) Current Liabilities Current maturities of long-term debt $ 185,691 $ 84,171 Accounts payable 296,716 420,388 Payable to related parties, net - 193,860 Traffic balances payable and unused tickets 701,970 715,576 Accrued aircraft rent 495,740 495,662 Accrued salaries, wages and vacation 305,889 419,688 Other accrued expenses 464,557 654,085 --------- --------- Total Current Liabilities 2,450,563 2,983,430 Long-term Debt, Net of Current Maturities 2,424,954 2,614,818 Deferred Credits and Other Liabilities Deferred gains, net 330,172 356,583 Postretirement benefits other than pensions, noncurrent 1,152,196 1,093,269 Noncurrent employee benefit liabilities and other 805,848 429,588 --------- --------- Total Deferred Credits and Other Liabilities 2,288,216 1,879,440 Commitments and Contingencies Stockholder's Equity (Deficit) Common stock, par value $1 per share, authorized 1,000 shares, issued and outstanding 1,000 shares 1 1 Paid-in capital 2,425,179 2,416,131 Retained earnings (deficit) (1,413,919) (2,466,078) Unrealized gain on available-for-sale securities, net of income tax effects 103,795 - Adjustment for minimum pension liability, net of income tax effects (13,289) (35,209) --------- --------- Total Stockholder's Equity (Deficit) 1,101,767 (85,155) --------- --------- $ 8,265,500 $ 7,392,533 ========= ========= See accompanying Notes to Consolidated Financial Statements. 77
US Airways, Inc. Consolidated Statements of Cash Flows Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- (in thousands)
1997 1996 1995 ---- ---- ---- Cash and Cash equivalents at beginning of year $ 950,134 $ 879,613 $ 428,925 --------- --------- --------- Cash flows from operating activities Net income 1,052,159 183,232 32,990 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 384,943 300,608 337,066 Losses (gains) on dispositions of property (15,350) 1,808 (16,654) Gains on sales of interests in affiliates (179,625) - - Amortization of deferred gains and credits (26,411) (26,412) (26,411) Other 25,927 21,524 (4,354) Changes in certain assets and liabilities Decrease (increase) in receivables (80,438) (13,335) 5,178 Decrease (increase) in materials and supplies, prepaid expenses and pension assets 28,798 (32,219) (68,415) Decrease (increase) in deferred income tax assets (421,633) - - Increase (decrease) in traffic balances payable and unused tickets (13,606) 77,557 46,865 Increase (decrease) in accounts payable and accrued expenses (219,421) 319,099 213,786 Increase (decrease) in postretirement benefits other than pensions, noncurrent 58,927 77,896 56,667 --------- --------- --------- Net cash provided by (used for) operating activities 594,270 909,758 576,718 Cash flows from investing activities Aircraft acquisitions and purchase deposits, net (27,847) (52,854) (61,689) Transfer of aircraft purchase deposits to parent company 7,200 - - Additions to other property (165,664) (123,575) (80,644) Proceeds from dispositions of property 82,067 21,725 219,762 Proceeds from sales of interests in affiliates 224,233 - - Decrease (increase) in short-term investments (235,068) (603,593) 2,430 Decrease (increase) in restricted cash and investments 18,481 11,086 71,980 Funding of parent company's purchase of Shuttle, Inc. (209,572) - - Funding of parent company's aircraft purchase deposits (85,176) - - Payment of debt for affiliated company - (42,830) - Collection on note receivable from affiliated company - 42,830 - Other 26,826 (5,497) 433 --------- --------- --------- Net cash provided by (used for) investing activities (364,520) (752,708) 152,272 Cash flows from financing activities Issuances of debt - 103,002 - Principal payments on long-term debt (88,344) (189,531) (278,302) --------- --------- --------- Net cash provided by (used for) financing activities (88,344) (86,529) (278,302) --------- --------- --------- Net increase in Cash and Cash equivalents 141,406 70,521 450,688 --------- --------- --------- Cash and Cash equivalents at end of year $1,091,540 $ 950,134 $ 879,613 ========= ========= ========= Noncash investing and financing activities Unrealized gain on available-for-sale securities, net of income tax effects $ 103,795 $ - $ - Issuances of debt - refinancing of debt secured by aircraft $ - $ 159,998 $ - Reductions of debt - refinancing of debt secured by aircraft $ - $ 154,422 $ - Issuance of parent company debt - aircraft acquisitions $ - $ - $ 68,640 Reduction of parent company debt - aircraft acquisitions $ - $ 68,640 $ - Issuances of debt - aircraft acquisitions $ - $ 29,155 $ 169,725 Reduction of debt - aircraft purchase deposits $ - $ - $ 70,837 Underwriter's fees - refinancing of debt secured by aircraft $ - $ 2,488 $ - Supplemental Information Cash paid during the year for interest, net of amount capitalized $ 245,712 $ 257,689 $ 290,560 Net cash paid during the year for income taxes $ 95,412 $ 11,061 $ 6,329 See accompanying Notes to Consolidated Financial Statements. 78
US Airways, Inc. Consolidated Statements of Changes in Stockholder's Equity (Deficit) Three Years Ended December 31, 1997 - ------------------------------------------------------------------------------------------------------------- (in thousands)
Unrealized gain on Adjustment available- for minimum for-sale pension Retained securities, liability, Common Paid-in earnings net of income net of income stock capital (deficit) tax effects tax effects Total ------ ------- --------- ------------- ------------- ----- Balance as of December 31, 1994 $ 1 $2,416,131 $(2,682,300) $ - $ (7,017) $ (273,185) Net income - - 32,990 - - 32,990 Adjustment for minimum pension liability, net of income tax effects - - - - (70,978) (70,978) ----- --------- ---------- ------------ ----------- --------- Balance as of December 31, 1995 1 2,416,131 (2,649,310) - (77,995) (311,173) Net income - - 183,232 - - 183,232 Adjustment for minimum pension liability, net of income tax effects - - - - 42,786 42,786 ----- --------- ---------- ------------ ----------- --------- Balance as of December 31, 1996 1 2,416,131 (2,466,078) - (35,209) (85,155) Net income - - 1,052,159 - - 1,052,159 Unrealized gain on available-for-sale securities, net of income tax effects - - - 103,795 - 103,795 Tax benefit from employee stock option exercises - 9,048 - - - 9,048 Adjustment for minimum pension liability, net of income tax effects - - - - 21,920 21,920 ----- --------- ---------- ------------ ----------- --------- Balance as of December 31, 1997 $ 1 $2,425,179 $(1,413,919) $ 103,795 $ (13,289) $1,101,767 ===== ========= ========== ============ =========== ========= See accompanying Notes to Consolidated Financial Statements. 79
US AIRWAYS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION AND NATURE OF OPERATIONS The accompanying Consolidated Financial Statements include the accounts of US Airways, Inc. (US Airways) and its wholly-owned subsidiary USAM Corp. (USAM). US Airways is a wholly-owned subsidiary of US Airways Group, Inc. (US Airways Group). All significant intercompany accounts and transactions have been eliminated. However, as discussed further in Note 9, US Airways' financial results are significantly influenced by related party transactions. US Airways is a major United States air carrier whose primary business is transporting passengers, property and mail. US Airways operates predominantly in the Eastern U.S. with primary hubs at the major airports in Charlotte, Philadelphia and Pittsburgh. US Airways also has substantial operations at Baltimore/Washington International Airport, Boston's Logan International Airport, New York's LaGuardia Airport and Washington's Ronald Reagan Washington National Airport. US Airways enplaned 58.8 million passengers during 1997 and is currently the fifth largest domestic air carrier, as measured by revenue passenger miles (RPMs). USAM owns 11% of the Galileo Japan Partnership (GJP), which markets the Galileo Computer Reservation System (Galileo CRS) in Japan. USAM accounts for this investment using the equity method because it is represented on the board of directors and therefore participates in policy making processes. Until July 1997, as discussed in Note 8, USAM held interests in the Galileo International Partnership and the Apollo Travel Services Partnership and accounted for these investments using the equity method. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain 1996 and 1995 amounts have been reclassified to conform with 1997 classifications. (b) OPERATING ENVIRONMENT Most of US Airways' operations are in competitive markets. Competitors include other air carriers along with other methods of transportation. US Airways currently has the highest unit operating costs among the major domestic air carriers. The growth and expansion of competitors with lower cost and fare structures in its markets has put considerable pressure on US Airways to reduce its operating costs in order to maintain competitiveness. In addition, although a competitive strength in some regards, the concentration of significant operations in the Eastern U.S. results in US Airways being susceptible to changes in certain regional conditions that may have an adverse effect on its results of operations and financial condition. Personnel costs represent US Airways' largest expense category. As of December 31, 1997, US Airways employed approximately 38,500 full-time equivalent employees. Approximately 35,400 (87%) of US Airways' employees are covered by collective bargaining agreements with various unions or will be covered by collective bargaining agreements for which initial negotiations 80 are in progress. A new five-year contract between US Airways and its pilots became effective January 1, 1998. US Airways' contracts with its mechanical/related personnel and flight attendants are currently amendable; talks with respect to new contracts are ongoing. US Airways is also negotiating with representatives of its fleet service and passenger service employees with respect to initial labor contracts. US Airways cannot predict the ultimate outcome of any of these negotiations or the timing of any new agreements. US Airways believes that the provisions of the new contract with its pilots will help it address its high cost structure, including allowing US Airways to establish a low cost, low fare operation. US Airways operations are largely dependent on the availability of aviation fuel. The availability and price of aviation fuel is largely determined by actions generally outside of US Airways' control. US Airways has a diversified aviation fuel supplier network and uses certain risk management techniques (see Note 2(a)) in order to help ensure aviation fuel availability and partially protect itself from temporary aviation fuel price fluctuations. (c) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS All highly liquid investments purchased within three months of maturity are classified as Cash equivalents. Short-term investments consist primarily of certificates of deposit and commercial paper purchased with maturities greater than three months but less than one year. US Airways classifies securities underlying its Cash equivalents and Short-term investments as "available-for-sale" in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). Cash equivalents are stated at cost, which approximates fair value due to the highly liquid nature and short maturities of the underlying securities. Short-term investments are stated at fair value with the offsetting unrecognized gain or loss reflected as a separate component of Stockholder's Equity (Deficit), net of income tax effects. See also Note 7(b). (d) MATERIALS AND SUPPLIES, NET Inventories of materials and supplies are valued at the lower of cost or fair value. Costs are determined using average costing methods and are charged to operations as consumed. An allowance for obsolescence is provided for flight equipment expendable and repairable parts. (e) PROPERTY AND EQUIPMENT Property and equipment is stated at cost or, if acquired under capital lease, at the lower of the present value of minimum lease payments or fair value of the asset at the inception of the lease. Maintenance and repairs are charged to operating expense as incurred. Costs of major improvements are capitalized for both owned and leased assets. Interest related to deposits on aircraft purchase contracts and facility and equipment construction projects is capitalized as an additional cost of the asset or as a leasehold improvement if the asset is leased. Depreciation and amortization for principle asset classifications is calculated on a straight-line basis to estimated residual values over estimated depreciable lives. These estimates are periodically reviewed for reasonableness and revised, if necessary. In addition, US Airways monitors the recoverability of the carrying value of its long-lived assets. Under the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" (SFAS 121), US Airways recognizes an "impairment charge" when the net undiscounted future cash flows from an asset's use (including any proceeds from disposition) are less than the asset's carrying value and the asset's carrying value exceeds its fair value. The impairment charge reflects writing-down the asset to fair value. See Note 12(a) for impairment charges recognized by US Airways during 1997. 81 Depreciable Asset Life Residual Value ----- ----------- -------------- (years) (in millions) Aircraft Boeing 767-200ER 20 $14.0 Boeing 757-200 20 8.0 Boeing 737-300/400 20 7.5 Boeing 737-200 17 5.0 McDonnell Douglas MD-80 20 7.5 Douglas DC-9-30 17 3.0 Fokker 100 20 5.0 Fokker F28-4000 8 2.0 Fokker F28-1000 6 1.0 Turboprop aircraft 15 1.5 Improvements to leased aircraft life of lease - Ground property, equipment and 5-10 or - leasehold improvements life of lease Buildings 30 - Property acquired under capital lease is amortized on a straight-line basis over the term of the lease and charged to depreciation and amortization expense. When property and equipment is sold or retired any gain or loss is recognized as Other, net, a component of Other Income (Expense). (f) GOODWILL, NET AND OTHER INTANGIBLES, NET Goodwill, the cost in excess of fair value of identified net assets acquired, is amortized on a straight-line basis over 40 years. The $629.5 million goodwill resulting from the acquisitions of Pacific Southwest Airlines (Pacific Southwest) and Piedmont Aviation, Inc. (Piedmont Aviation), both in 1987, is amortized as depreciation and amortization expense. As of December 31, 1997 and 1996, accumulated amortization related to the Pacific Southwest and Piedmont Aviation acquisitions was $159.9 million and $144.1 million, respectively. As of December 31, 1997 and 1996, USAM's goodwill in connection with its computer reservation system investments was $4.3 million and $11.4 million, respectively. During July 1997, USAM's goodwill was reduced as a result of its sale of certain investments (see Note 8). USAM's goodwill is amortized as a component of Other Income (Expense), consistent with the classification of the related income or loss on the investments. As of December 31, 1997 and 1996, USAM's related accumulated amortization was $1.0 million and $2.3 million, respectively. US Airways periodically evaluates whether goodwill is impaired by comparing the goodwill balances with estimated future undiscounted cash flows which, in US Airways' judgment, are attributable to the goodwill. This analysis is performed separately for the goodwill which resulted from each acquisition. Other intangible assets consist mainly of purchased operating rights at various airports, capitalized software costs and the intangible asset associated with the underfunded amounts of certain pension plans. The cost of operating rights and capitalized software costs are amortized on a straight-line basis over the expected periods of benefit as depreciation and amortization expense. Operating rights, which are valued at purchase cost or appraised value if acquired with Pacific Southwest or Piedmont Aviation, are amortized over periods ranging from ten to 25 years and capitalized software costs are amortized over five years. The intangible pension asset is recognized in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (SFAS 87) (see Note 7(c)). As of December 31, 1997 and 1996, accumulated amortization related to other intangible assets was $149.0 million and $128.2 million, respectively. 82 Based on the most recent analyses, US Airways believes that goodwill and other intangible assets were not impaired as of December 31, 1997. (g) INVESTMENT IN MARKETABLE EQUITY SECURITIES USAM's investment in Galileo International, Inc. (Galileo), which is accounted for under the cost method, is classified as "available-for-sale" under SFAS 115 and recorded at fair value. See also Notes 2(b), 7(b) and 8. (h) OTHER ASSETS, NET Other assets, net consists primarily of noncurrent pension assets, the unamortized balance of deferred compensation, restricted cash and investments, unamortized debt issuance costs and a long-term receivable from British Airways Plc. (British Airways). Deferred compensation resulted mainly from US Airways' establishment of an employee stock ownership plan (ESOP) in 1989 (see Note 5(e)). Restricted cash and investments are deposits in trust accounts to collateralize letters of credit and workers' compensation policies. The long-term receivable from British Airways resulted from the relinquishment by US Airways of three U.S. to London routes. Besides the deferred compensation that arose from the establishment of the ESOP, US Airways accounts for deferred compensation and the related amortization by applying the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In accordance with APB 25, US Airways recognizes deferred compensation equal to the grant date fair market value of US Airways Group common stock for stock granted to US Airways employees (Stock Grants) (which is amortized as Personnel costs over the vesting period) but typically records no deferred compensation when options to purchase US Airways Group common stock are granted to US Airways employees (Option Grants) (because, except on limited occasions, the exercise price of the stock options and the fair market value of US Airways Group common stock on the date of grant are equal). US Airways recognized compensation expense related to Stock Grants of $5.7 million, $11.9 million and $0.3 million in 1997, 1996 and 1995, respectively, and compensation expense related to Option Grants of $1.4 million and $7.9 million in 1997 and 1996, respectively (none for 1995). In addition, US Airways recognized compensation expense related to stock appreciation rights (SARs) tied to the fair market value of US Airways Group common stock of $33.2 million and $41.6 million in 1997 and 1996, respectively (none for 1995) as the result of a SAR feature granted to stock option holders under US Airways Group's 1992 Stock Option Plan. Deferred compensation related to Stock Grants was $6.6 million and $9.4 million as of December 31, 1997 and 1996, respectively, and deferred compensation related to Options Grants was $1.0 million and $2.4 million as of December 31, 1997 and December 31, 1996, respectively. (this space intentionally left blank) 83 The following table summarizes stock option transactions related to US Airways employees pursuant to US Airways Group's various stock option and incentive plans for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- -------- ------- -------- ------- -------- (000) (000) (000) Stock Options - ------------- Outstanding at beginning of year 9,767 $17 8,426 $17 8,844 $18 Granted (1) 939 $27 82 $17 155 $9 Granted (2) - - 2,415 $13 - - Exercised (2,119) $19 (435) $15 (43) $10 Forfeited (3) (4) (3,795) $16 (673) $16 (489) $25 Expired (186) $24 (48) $32 (41) $36 ------ ----- ----- Outstanding at end of year 4,606 $18 9,767 $17 8,426 $17 Exercisable at end of year 2,777 7,802 7,986 (1) Exercise price equal to the fair market value of a share of US Airways Group common stock at date of grant; includes 50,000 and 20,000 stock options that were repriced during 1997 and 1996, respectively. (2) Exercise price was lower than the fair market value of a share of US Airways Group common stock at measurement date for grant. (3) Activity for 1997 and 1996 includes the cancellation of repriced stock options. See (1) above. (4) Activity during 1997 and 1996 includes 3.5 million and 0.6 million stock options, respectively, that were forfeited as a result of their tandem SAR being exercised.
The weighted average fair value per stock option for stock options which have an exercise price equal to the fair market value of a share of US Airways Group common stock at date of grant was $18, $11, and $6 for 1997, 1996 and 1995, respectively. The weighted average value per stock option for stock options which have an exercise price lower than the fair market value of a share of US Airways Group common stock at date of grant was $13 for 1996 (no such grants during 1997 and 1995). During 1995, the Financial Accounting Standards Board adopted Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This statement requires the use of fair value techniques to determine compensation expense associated with stock-based compensation. As mentioned above, US Airways applies the provisions of APB 25 to determine compensation expense, as permitted under SFAS 123. However, US Airways is obligated to disclose certain information including pro forma net income as if SFAS 123 had been adopted to measure compensation expense. Had compensation cost been measured in accordance with SFAS 123, US Airways estimates that its net income for 1997 would have been reduced from $1,052.2 million to $1,045.4 million, its net income for 1996 would have been reduced from $183.2 million to $168.1 million and its net income for 1995 would have been reduced from $33.0 million to $32.8 million. In order to calculate this pro forma net income information, US Airways used the Black-Scholes stock option-pricing model with the following weighted- average assumptions for 1997, 1996 and 1995, respectively: stock volatility of US Airways 84 Group common stock of 52.6%, 50.1% and 48.8%; risk-free interest rates of 6.6%, 6.2% and 6.6%; expected stock option life of 8 years, 9 years and 9 years; and no dividend yield (0%). The pro forma net income information reflects Option Grants granted during 1997, 1996 and 1995 only. Therefore, the full impact of calculating compensation expense for stock options under SFAS 123 is not reflected in the pro forma net income amounts above because compensation expense is recognized over the stock option's vesting period and compensation expense for stock options granted prior to January 1, 1995 is not considered. (i) FREQUENT TRAVELER PROGRAM US Airways accrues the estimated incremental cost of travel awards earned by participants in its "Dividend Miles" frequent traveler program when requisite mileage award levels are achieved. US Airways also sells mileage credits to participating partners in Dividend Miles. The resulting revenues are recorded as other operating revenues during the period in which the credits are sold. (j) DEFERRED GAINS, NET Gains on aircraft sale and leaseback transactions are deferred and amortized over the term of the leases as a reduction of the related aircraft rent expense. (k) PASSENGER TRANSPORTATION REVENUES Passenger ticket sales are recognized as Passenger transportation revenues when the transportation service is rendered or the ticket otherwise expires. At the time of sale, a liability is established (Traffic balances payable and unused tickets) and subsequently relieved through carriage of the passenger, through billing from another air carrier which provided the service, upon expiration of the ticket or by refund to the passenger. Effective October 1, 1996, US Airways began purchasing all of the capacity (available seat miles) generated by US Airways Group's three wholly-owned regional air carriers and, concurrently, recognizing revenues, "US Airways Express transportation revenues," when transportation service is rendered by these affiliated air carriers or the related tickets otherwise expire. Liabilities related to tickets sold for travel on these air carriers are also included in US Airways' Traffic balances payable and unused tickets and are subsequently eliminated in the same manner as described above. See Note 9(b) for more information related to these capacity purchase arrangements. (l) ADVERTISING EXPENSES Advertising costs are expensed when incurred as Other operating expenses. Advertising expenses for 1997, 1996 and 1995 were $45.5 million, $51.2 million and $66.6 million, respectively. 2. FINANCIAL INSTRUMENTS (a) TERMS OF CERTAIN FINANCIAL INSTRUMENTS US Airways uses risk management strategies to reduce its exposure to certain market uncertainties. US Airways is party to financial contracts which it believes help to reduce its exposure to significant increases in the price of aviation fuel. US Airways has also hedged certain foreign- denominated debt to maturity. US Airways periodically reviews the financial condition of each counterparty to these financial contracts and believes that the potential for default by any of 85 the current counterparties is negligible. US Airways has entered into fuel swap contracts that result in US Airways receiving or making payments based on the difference between a fixed price and a variable price per notional gallon for specified petroleum products. Gains or losses related to these contracts are deferred until the period in which they are settled. Realized gains and losses are recognized as an element of Aviation fuel expense. The total notional gallons under these contracts were approximately 47 million and 84 million as of December 31, 1997 and 1996, respectively (US Airways entered into contracts prior to December 31, 1997 and 1996 which effectively closed certain hedging arrangements covering approximately 17 million and 22 million gallons, respectively). For contracts open as of December 31, 1997, US Airways will pay fixed prices ranging from $0.496 to $0.600 per notional gallon and receive a variable price per gallon based on current market prices. The open contracts, all of which settle during 1998, represent approximately 3% of US Airways' expected 1998 fuel consumption. For contracts open as of December 31, 1996, US Airways paid fixed prices ranging from $0.553 to $0.700 per notional gallon and received a floating rate based on market prices. An aggregate of $32 million of future principal payments of US Airways' long-term debt due 1998 through 2000 is payable in Japanese Yen. This foreign currency exposure has been hedged to maturity by US Airways' participation in foreign currency contracts. Net settlements will be recorded as adjustments to Interest expense. (b) FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with the provisions of SFAS 115, the fair values for US Airways' short-term and marketable equity security investments are determined based upon quoted market prices. Restricted cash and certain long-term investments are carried at cost which approximates fair value. US Airways estimated the fair values of its long-term note receivable and long-term debt by discounting expected future cash flows using current rates offered to US Airways for note receivables and debt with similar maturities. The fair values of fuel swap and foreign currency contracts are obtained from dealer quotes. These values represent the estimated amount US Airways would receive or pay to terminate such agreements as of the valuation date. The estimated fair values of US Airways' financial instruments, none of which are held for trading purposes (in thousands; brackets denote a liability):
December 31, --------------------------------------------------- 1997 1996 ----------------------- ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Short-term investments (1) $ 870,205 $ 870,205 $ 635,839 $ 635,605 Investment in marketable equity securities (1) 190,035 190,035 - - Restricted cash and investments (2) 69,844 69,844 87,783 87,843 Long-term note receivable (2)(3) 30,350 30,557 40,733 30,080 Other long-term investments (2)(3) - - 20,606 22,126 Long-term debt (excludes capital lease obligations) (2,577,177) (2,860,767) (2,649,609) (2,697,422) Fuel swap contracts: In a net receivable (payable) position - (528) - 3,550 Foreign currency contracts: In a net receivable (payable) position - (2,928) - 963 (1) Classified as "available-for-sale" in accordance with SFAS 115. See also Notes 1(c) and 1(g). (2) Carrying amount included in Other Assets on US Airways' Consolidated Balance Sheets. (3) Classified as "held-to-maturity" in accordance with SFAS 115.
86 3. INCOME TAXES US Airways accounts for income taxes according to the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). US Airways files a consolidated federal income tax return with its parent company, US Airways Group. US Airways Group and its wholly- owned subsidiaries have executed a tax sharing agreement (Tax Sharing Agreement) which allocates tax and tax items, such as net operating losses and tax credits between members of the group based on their proportion of taxable income and other items. This tax sharing and allocation impacts the deferred tax assets and liabilities reported by each corporation on a separate company basis. Accordingly, US Airways' tax expense is based on its taxable income, taking into consideration its allocated tax loss carryforwards and tax credit carryforwards. During 1997, US Airways determined that it was no longer appropriate to apply a valuation allowance to its deferred tax assets. US Airways believes, based on prior earnings and projections of future earnings, that it is more likely than not that it will be able to utilize tax benefits accumulated through December 31, 1997 in future periods. Accordingly, at December 31, 1997, previous valuation allowances were removed, resulting in a net deferred income tax asset and an income tax credit for 1997. The components of the provision (credit) for income taxes (in thousands): 1997 1996 1995 ---- ---- ---- Current provision: Federal $ 117,718 $4,432 $4,107 State 7,121 3,026 301 -------- ----- ----- Total current provision 124,839 7,458 4,408 -------- ----- ----- Deferred provision: Federal (447,078) - - State (56,691) 353 - -------- ----- ----- Total deferred provision (503,769) 353 - -------- ----- ------ Provision (credit) for income taxes $(378,930) $7,811 $4,408 ======== ===== ===== In 1997, US Airways was not subject to regular federal income tax as a result of using $1.1 billion in federal net operating loss carryforwards. However, US Airways was subject to federal alternative minimum tax (AMT). Approximately $257 million in AMT net operating loss carryforwards and approximately $417 million in state net operating loss carryforwards were utilized to reduce the federal and state tax liabilities. The significant components of deferred income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands): 1997 1996 1995 ---- ---- ---- Deferred tax expense (exclusive of the other components listed below) $ 191,307 $ 90,583 $ 17,779 Decrease in the valuation allowance for deferred tax assets (695,076) (90,230) (17,779) -------- ------ ------ Total $(503,769) $ 353 $ - ======== ======= ====== (this space intentionally left blank) 87 A reconciliation of taxes computed at the statutory federal tax rate on earnings before income taxes to the provision (credit) for income taxes (in thousands): 1997 1996 1995 ---- ---- ---- Tax provision computed at federal statutory rate $ 235,630 $ 66,865 $ 13,089 Book expenses not deductible for tax purposes 15,482 16,535 15,088 State income tax provision (credit), net of federal tax benefit (32,220) 2,320 196 Reduction of federal valuation allowance (594,992) (75,133) (24,687) Other (2,830) (2,776) 722 -------- ------ ------- Provision (credit) for income taxes $(378,930) $ 7,811 $ 4,408 ======== ======= ======= Effective tax rate (56)% 4% 12% ======== ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 1997 and 1996 (in thousands): 1997 1996 ---- ---- Deferred tax assets: Leasing transactions $ 169,645 $ 153,952 Tax benefits purchased/sold 40,526 54,173 Gain on sale and leaseback transactions 124,271 134,090 Employee benefits 668,291 606,213 Net operating loss carryforwards 125,177 473,918 Alternative minimum tax credit carryforwards 157,124 32,681 Investment tax credit carryforwards 11,293 48,720 Other deferred tax assets 86,660 156,811 --------- --------- Total gross deferred tax assets 1,382,987 1,660,558 Less valuation allowance - (695,076) --------- --------- Net deferred tax assets 1,382,987 965,482 Deferred tax liabilities: Equipment depreciation and amortization 901,845 927,442 Other deferred tax liabilities 56,086 38,393 --------- --------- Total deferred tax liabilities 957,931 965,835 --------- --------- Net deferred tax liabilities (assets) $ (425,056) $ 353 ========= ========= For 1996, the line item Other deferred tax assets in the above table includes tax assets of approximately $79 million which originated from subsidiaries of US Airways Group in accordance with the Tax Sharing Agreement. The tax receivables from related parties included in the schedule above as of December 31, 1996, were settled through intercompany accounts during 1997, and, therefore, $78 million of amounts included in "Receivables from related parties, net" in the accompanying Consolidated Balance Sheets relate to these tax attributes. The valuation allowance for deferred tax assets decreased approximately $695 million in 1997 and decreased approximately $90 million in 1996. Included in the deferred tax assets at December 31, 1997, among other items, are $447 million related to obligations of postretirement medical benefits, unused net operating losses of $274 million for federal tax purposes expiring in the year 2009, $11 million of investment tax credits expiring in the years 2003 and 2004, and $157 million of alternative minimum tax credits which do not expire. There were no alternative minimum tax net operating loss carryforwards remaining at December 31, 1997. Investment tax credit benefits were recorded using the "flow through" method as a reduction of the federal income tax provision. No new investment tax credits were 88 generated during 1997, 1996 or 1995. The federal income tax returns of US Airways through 1986 have been examined and settled with the Internal Revenue Service. US Airways believes that a significant portion of the deferred tax assets will be realized through reversals of existing taxable temporary differences. US Airways needs to generate approximately $274 million of taxable income to realize the benefits of most of the other deferred tax assets that have a future expiration date. The deferred tax assets and liabilities disclosed above exclude tax assets and liabilities which arise as a result of including certain transactions in the equity section of the balance sheet, net of tax. These tax attributes include a deferred tax liability of $56 million for unrealized gains on available-for-sale investments pursuant to SFAS 115 and a deferred tax asset of $2 million relating to the equity adjustment for the minimum pension liability for US Airways' defined benefit plans. The following table is a summary of pretax book income prior to net operating loss carryforwards for the last three years (in thousands): 1997 1996 1995 --------- ------- ------ Pretax book income $ 673,229 $191,043 $37,398 Taxable income (loss) $1,065,822 $185,989 $(4,775) The reasons for significant differences between taxable income and pretax book income in 1997 primarily relate to employee pension and postretirement benefit costs, certain aircraft impairment charges and lease accruals, and other employee related accruals. 4. LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS Details of long-term debt are as follows (in thousands): December 31, -------------------------- 1997 1996 ---- ---- Senior Debt: 10% Senior Notes due 2003 $ 300,000 $ 300,000 9 5/8% Senior Notes due 2001 175,000 175,000 5.7% to 11.7% Equipment Financing Agreements, Installments due 1998 to 2016 2,045,227 2,117,534 8.6% Airport Facility Revenue Bond due 2022 27,620 27,620 7.4% Aircraft Purchase Deposit Financing due 1998* 29,155 29,155 Other 175 300 --------- --------- 2,577,177 2,649,609 Capital Lease Obligations 33,468 49,380 --------- --------- Total 2,610,645 2,698,989 Less Current Maturities (185,691) (84,171) --------- --------- $2,424,954 $2,614,818 ========= ========= * See related information under Note 6(c) (re: litigation between US Airways and The Boeing Company (Boeing)). Maturities of long-term debt and debt under capital leases for the next five years (in thousands): 1998 $ 185,691 1999 77,351 2000 122,569 2001 246,372 2002 77,105 Thereafter 1,901,557 89 Interest rates on $230.3 million principal amount of long-term debt as of December 31, 1997 are subject to adjustment to reflect prime rate and other rate changes. Equipment financings totaling $2.08 billion were collateralized by aircraft and engines with a net book value of approximately $2.17 billion as of December 31, 1997. See Note 13 for subsequent events related to long-term debt. 5. EMPLOYEE PENSION AND BENEFIT PLANS Substantially all of US Airways' employees are eligible to participate in various defined benefit and defined contribution pension plans, in addition to medical and life insurance plans sponsored by US Airways. Employees who meet certain service and other requirements are also eligible to participate in an employee stock ownership plan. (a) DEFINED BENEFIT PENSION PLANS One qualified defined benefit pension plan covers US Airways' maintenance employees and provides specified benefits based on length of service. Qualified defined benefit pension plans for substantially all other employees provide benefits based on years of service and compensation. The qualified defined benefit pension plans for domestic employees are funded, on a current basis, to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Liabilities related to pension plans covering foreign employees are calculated in accordance with generally accepted accounting principles and funded in accordance with the laws of the individual country. US Airways recorded a $115.0 million charge to Personnel costs in 1997 for special termination benefits in accordance with Statement of Financial Accounting Standards No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" (SFAS 88). The charge relates to an early retirement program offered to US Airways' pilots. US Airways expects 325 pilots to opt for early retirement under this program. (this space intentionally left blank) 90 The funded status of US Airways' qualified defined benefit pension plans as of September 30, 1997 and 1996, respectively (in millions):
1997 1996 ---------------------------- --------------------- Plans with Plans with ---------------------------- --------------------- Assets in ABO in Assets in ABO in Excess of Excess of Excess of Excess of ABO Assets ABO Assets --------- --------- -------- --------- Fair value of plan assets $ 2,667 $ 435 $ 2,168 $ 305 Actuarial present value of: Vested benefit obligation 2,439 425 2,050 369 Nonvested benefit obligation 29 16 23 13 ----- --- ----- --- Accumulated benefit obligation (ABO) based on salaries to date 2,468 441 2,073 382 Additional benefits based on estimated future salary levels 767 - 653 - ----- --- ----- --- Projected benefit obligation (PBO) 3,235 441 2,726 382 PBO in excess of fair value of plan assets (568) (6) (558) (77) Contributions from October 1 through December 31 - - 45 12 Unrecognized net transition asset (18) (7) (22) (9) Unrecognized prior service (credit) cost (13) 70 (13) 75 Unrecognized net loss 437 18 506 40 ----- --- ----- --- Pension (liability) or asset before adjustment (162) 75 (42) 41 ----- --- ----- --- Adjustment for minimum pension liability - (81) - (106) ----- --- ----- --- Pension liability as adjusted and recognized in Consolidated Balance Sheets $ (162) $ (6) $ (42) $ (65) ===== === ===== === * See Note 7(c).
The weighted average assumptions used to determine the actuarial present value of the PBO: 1997 1996 ---- ---- Discount rate 7.5% 8.0% Rate of increase in compensation levels 3.5% 3.5% Expected long-term rate of return on plan assets 9.5% 8.8% Components of plan assets: Cash equivalents and short-term investments 12% 11% Equity investments 39% 27% Fixed income and other investments 49% 62% (this space intentionally left blank) 91 Total pension cost for the qualified defined benefit pension plans (in millions): 1997 1996 1995 ---- ---- ---- Service cost (benefits earned during the period) $ 124 $ 143 $ 92 Interest cost on PBO 252 250 216 Actual return (gain) on plan assets (587) (55) (539) Net amortization and deferral 363 (132) 371 --- --- --- Net periodic pension cost 152 206 140 Special termination benefits* 43 - - --- --- --- Total pension cost $ 195 $ 206 $ 140 === === === * Related to an early retirement program offered to US Airways' pilots (see above). See also disclosure below related to US Airways' non-qualified supplemental pension plans. Non-qualified supplemental pension plans are available to certain employee groups. These plans provide incremental pension payments from US Airways' funds so total pension payments equal amounts that would have been payable from US Airways' qualified pension plans if it were not for federal limitations. The funded status of US Airways' non-qualified supplemental pension plans as of September 30, 1997 and 1996, respectively (in millions): 1997 1996 ---- ---- Fair value of plan assets $ - $ - Actuarial present value of: Vested benefit obligation 139 31 Nonvested benefit obligation 3 1 ---- ---- ABO based on salaries to date 142 32 Additional benefits based on estimated future salary levels 31 1 ---- ---- PBO 173 33 ---- ---- PBO in excess of fair value of plan assets (173) (33) Contributions from October 1 through December 31 2 1 Unrecognized net transition asset - - Unrecognized prior service cost 39 2 Unrecognized net loss 21 3 ---- ---- Pension liability before adjustment (111) (27) Adjustment for minimum pension liability * (30) (7) ---- ---- Unfunded supplemental liability as adjusted and recognized in Consolidated Balance Sheets $ (141) $ (34) ==== ==== * See Note 7(c). The discount rate used to determine the actuarial present value of the PBO was 7.5% and 8.0% as of September 30, 1997 and 1996, respectively. A weighted average rate of 3.2% and 6.0% was used to estimate future salary levels in 1997 and 1996, respectively. (this space intentionally left blank) 92 Total pension cost for non-qualified supplemental defined benefit pension plans (in millions): 1997 1996 1995 ---- ---- ---- Service cost (benefits earned during the period) $ 4 $ 2 $ - Interest cost on PBO 5 2 2 Actual return on plan assets - - - Net amortization and deferral 7 6 (1) ---- ---- ---- Net periodic supplemental pension cost 16 10 1 Special termination benefits* 72 - - ---- ---- ---- Total supplemental pension cost $ 88 $ 10 $ 1 ==== ==== ==== * Related to an early retirement program offered to US Airways' pilots (see above). (b) DEFINED CONTRIBUTION PENSION PLANS US Airways' contributions to its defined contribution pension plans are based on a formula which considers the age and earnings of each participant and the amount the participant contributes. Expenses related to these plans, excluding expenses related to US Airways' ESOP and any profit sharing contributions, were approximately $57.0 million, $54.2 million and $64.2 million for the years 1997, 1996 and 1995, respectively. Expenses for 1995 include a catch up adjustment of $11.6 million for new employer matching contributions for certain unionized employees. See Notes 5(e) and 5(f) for information related to US Airways' ESOP and profit sharing contributions. (c) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Medical and life insurance benefits are offered to certain employees who retire from US Airways and their eligible dependents. The medical benefits provided by US Airways are coordinated with Medicare benefits. Retirees generally contribute amounts towards the cost of their medical expenses based on years of service with US Airways. US Airways also provides uninsured death benefit payments to survivors of retired employees for stated dollar amounts, or in the case of retired pilot employees, death benefit payments determined by age and level of pension benefit. The plans for postretirement medical and death benefits are funded on a pay-as-you-go basis. The funded status of the plans as of September 30, 1997 and 1996, respectively (in millions): 1997 1996 ----- ----- Fair value of plan assets $ - $ - Accumulated postretirement benefit obligation (APBO): Retirees 305 326 Fully eligible plan participants 197 170 Other plan participants 494 454 ----- ----- Total APBO 996 950 APBO in excess of fair value of plan assets (996) (950) Contributions from October 1 through December 31 7 7 Unrecognized prior service credits (130) (143) Unrecognized net gain (62) (34) ----- ----- Accrued postretirement benefit liability $(1,181) $(1,120) ===== ===== 93 The assumptions used to determine the APBO: 1997 1996 ---- ---- Discount rate 7.5% 8.0% Rate of increase in compensation levels 3.0% to 6.0% 3.0% to 6.0% Health care cost trend 4.5% 7.5% Net periodic postretirement benefit expense (in millions): 1997 1996 1995 ---- ---- ---- Service cost (benefits earned during the period) $ 34 $ 44 $ 29 Interest cost on APBO 71 74 65 Actual return on plan assets - - - Net amortization and deferral (15) (11) (15) -- --- -- Net periodic postretirement benefit expense $ 90 $ 107 $ 79 == === == The assumed health care cost trend rate used in measuring the APBO was changed from 6.5% in 1998 decreasing to 4.5% in 2000 to a flat 4.5% in 1998 and thereafter. This change was made in response to observed average historical trends. If the assumed health care cost trend rates were increased by one percentage point, the APBO at September 30, 1997 would be increased by approximately 10% and 1997 periodic postretirement benefit expense would increase approximately 13%. (d) POSTEMPLOYMENT BENEFITS US Airways provides certain postemployment benefits to all of its employees. Such benefits include disability-related and workers' compensation benefits and severance payments for certain employees. US Airways accrues for the cost of such benefit expenses once a triggering event has occurred. (e) EMPLOYEE STOCK OWNERSHIP PLAN In August 1989, US Airways established an ESOP. US Airways Group sold 2,200,000 shares of its common stock to an Employee Stock Ownership Trust (the Trust) to hold on behalf of US Airways' employees, exclusive of officers, in accordance with the terms of the Trust and the ESOP. The trustee placed those shares in a suspense account pending their release and allocation to employees. US Airways provided financing to the Trust in the form of a 9 3/4% loan for $111.4 million for its purchase of shares and US Airways contributed an additional $2.2 million to the Trust. US Airways makes a yearly contribution to the Trust sufficient to cover the Trust's debt service requirement. The contributions are made in amounts equal to the periodic loan payments as they come due, less dividends available for loan payment. Since US Airways Group did not pay dividends on any shares held by the Trust for the years ended December 31, 1997, 1996 and 1995, the Trust did not utilize dividends to service its debt during those periods. The initial maturity of the loan is 30 years. As the loan is repaid over time, the trustee systematically releases shares of the common stock from the suspense account and allocates them to participating employees. Each participant's allocation is based on the participant's compensation, the total compensation of all ESOP participants and the total number of shares being released. For each year after 1989, a minimum of 71,933 shares are released from the suspense account and allocated to participant accounts. If US Airways Group's return on sales equals or exceeds four percent in a given year, more shares are released and repayment of the loan is accelerated. See also Note 5(f) regarding the profit sharing component of US Airways' ESOP. Annual contributions made by US Airways, and therefore loan repayments made by the Trust, were $11.4 million in each of 1997, 1996 and 1995. The interest portion of these contributions was $10.1 million in 1997, $10.3 million in 1996 and $10.4 million in 1995. Approximately 790,000 shares of US Airways Group common stock have been released or committed to be released as of December 31, 1997. US Airways recognized 94 compensation expense related to the ESOP of $11.1 million in 1997, $3.7 million in 1996 and $3.7 million in 1995 based on shares allocated to employees (the "shares allocated" method). Deferred compensation related to the ESOP amounted to approximately $72.4 million, $83.5 million and $87.2 million as of December 31, 1997, 1996 and 1995, respectively. See Note 1(h) with respect to US Airways' accounting policies for stock- based compensation. (f) PROFIT SHARING PLANS In exchange for temporary wage and salary reductions and other concessions during a twelve month period in 1992 and 1993, including certain ongoing work rule and medical benefits concessions and the freeze of the defined benefit plan for certain non-contract employees, affected US Airways employees participated in a profit sharing program and were granted stock options to purchase US Airways Group common stock (see related discussion under Note 1(e)). This profit sharing program was designed to recompense those US Airways employees whose pay was reduced in an amount equal to (i) two times salary forgone plus (ii) one time salary forgone (subject to a minimum of $1,000) for the freeze of the defined benefit pension plan for certain non-contract employees. US Airways recognized charges of $213.5 million, including $121.6 million and $49.7 million in 1996 and 1995, respectively, related to this program. Cash distributions to participants of $213.5 million have also been made, including $74.9 million and $3.3 million in 1996 and 1995, respectively, and a final cash distribution in the first quarter of 1997 of $129.1 million. After the first quarter 1997 payment, US Airways' obligations under this profit sharing program were satisfied and this program ceased. US Airways' ESOP and Defined Contribution Retirement Program (DCRP) each have profit sharing components. Under the ESOP, each eligible US Airways employee receives shares of US Airways Group common stock based on his or her compensation relative to the total compensation of all participants and the number of shares of US Airways Group common stock in the allocation pool. When US Airways' return on sales equals or exceeds certain prescribed levels, US Airways increases its contribution, which effectively increases the number of shares of US Airways Group common stock in the allocation pool (see Note 5(e)). US Airways' ESOP-related expenses for 1997 include $7.4 million related to this profit sharing program. US Airways did not make any provision for profit sharing contributions in connection with the profit sharing component of the ESOP during 1996 or 1995. Under the DCRP, US Airways makes additional contributions to participant accounts when US Airways Group achieves certain prescribed pre-tax margin levels (see Note 5(b)). US Airways' 1997 and 1996 results of operations reflect expenses of $24.1 million and $4.8 million, respectively, for the profit sharing component of the DCRP. In 1995, US Airways did not achieve the prescribed pre-tax margin levels and, accordingly, made no such provision for this program. 6. COMMITMENTS AND CONTINGENCIES (a) COMMITMENTS TO PURCHASE FLIGHT EQUIPMENT On October 31, 1997, US Airways Group entered into agreements with AVSA, S.A.R.L. (AVSA), an affiliate of aircraft manufacturer Airbus Industrie G.I.E. (Airbus), and CFM International, Inc. (CFMI) for the acquisition of up to 400 Airbus A320 family aircraft and accompanying jet engines. The A320 family aircraft are single-aisle aircraft which include the Airbus A319, A320 and A321. US Airways Group has 124 aircraft on firm order, 116 aircraft subject to reconfirmation prior to scheduled delivery and options for 160 additional aircraft. Of the first 124 aircraft, six are scheduled for delivery in 1998, 20 in 1999 and 98 in the years 2000 through 2002. Although the agreements with AVSA and CFMI represent a commitment of US Airways' parent company, 95 US Airways anticipates that the new Airbus aircraft will replace, at a minimum, its B737-200, DC-9-30 and MD-80 aircraft. The minimum determinable payments associated with US Airways Group's agreements with AVSA and CFMI (including progress payments, payments at delivery, buyer-furnished equipment, spares, capitalized interest, penalty payments, cancellation fees and/or nonrefundable deposits) are currently estimated at $302 million in 1998, $725 million in 1999, $1.07 billion in 2000 and $211 million in 2001. US Airways has a commitment to purchase hush-kits for certain of its B737-200 aircraft. The installation of hush-kits will allow these aircraft to meet certain statutory noise level requirements. Expected payments associated with this commitment are approximately $60 million for 1998 and 1999. As also Note 6(c) with respect to litigation between US Airways and Boeing. In addition, see Note 9(a) for information related to transactions between US Airways and its parent company. (b) LEASES US Airways leases certain aircraft, engines, computer and ground equipment, in addition to the majority of its ground facilities. Ground facilities include executive offices, overhaul and maintenance bases and ticket and administrative offices. Public airports are utilized for flight operations under lease arrangements with the municipalities or agencies owning or controlling such airports. Substantially all leases provide that the lessee shall pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Some leases also include renewal and purchase options. US Airways subleases certain leased aircraft and ground facilities under noncancelable operating leases expiring in various years through the year 2021. The following amounts related to capital leases are included in property and equipment (in thousands): December 31, 1997 1996 ---- ---- Flight equipment $80,448 $167,308 Ground property and equipment 406 406 ------ ------ 80,854 167,714 Less accumulated amortization (54,495) (125,568) ------ ------- $26,359 $ 42,146 ====== ======= (this space intentionally left blank) 96 As of December 31, 1997, obligations under capital and noncancelable operating leases for future minimum lease payments were as follows (in thousands): Capital Operating Leases Leases ------ ------ 1998 $10,294 $ 722,055 1999 10,295 697,305 2000 7,193 682,595 2001 4,703 680,976 2002 4,703 634,872 Thereafter 9,405 5,989,960 ----- --------- Total minimum lease payments 46,593 9,407,763 Less sublease rental receipts - (130,468) --------- Total minimum operating lease payments $9,277,295 ========= Less amount representing interest (13,125) ------ Present value of future minimum capital lease payments 33,468 Less current obligations under capital leases (6,300) ----- Long-term obligations under capital leases $27,168 ====== For 1997, 1996 and 1995, rental expense under operating leases was approximately $741 million, $731 million and $738 million, respectively. Rental expense for 1997, 1996 and 1995 exclude credits of $1.5 million, $22.5 million and $4.1 million, respectively, related to US Airways' subleasing of BAe-146 aircraft (see Notes 12(a), 12(b) and 12(c)). Rental expense for 1997 also excludes $4.6 million related to expenses recognized by US Airways in conjunction with certain efficiency measures (see Note 12(a)). US Airways also leases certain owned flight equipment to both third and related parties (see Notes 9(b) and 9(c)) under noncancelable operating leases which expire in the years 1998 through 2002. The future minimum rental revenues associated with these leases are: $13.2 million-1998; $11.4 million-1999, $5.0 million-2000; $4.2 million-2001; and $1.8 million-2002. The following amounts relate to aircraft leased under such agreements as reflected in flight equipment (in thousands): December 31, --------------------- 1997 1996 ---- ---- Flight equipment $86,155 $82,868 Less accumulated amortization (45,769) (36,947) ------ ------ $40,386 $45,921 ====== ====== (c) LEGAL PROCEEDINGS US Airways is involved in legal proceedings arising out of certain aircraft accidents, including an accident in September of 1994 near Pittsburgh in which 127 passengers and five crew members lost their lives. With respect to the 1994 accident, the National Transportation Safety Board (NTSB) held hearings in January and November of 1995, and is scheduled to hold additional hearings in 1998 before issuing its final accident investigation report. Wrongful death cases are pending in a consolidated multi-district litigation in U.S. District Court for the Western District of Pennsylvania, and in state courts in Cook County, Illinois and Harris County, Texas. While US Airways has settled over 80% of the cases arising from the Pittsburgh accident, it expects that it will be at least two years before all of the settlements and/or related litigation are concluded. US Airways is fully insured with respect to this litigation and, therefore, believes that the litigation will not have a material adverse effect on its financial condition or results of operations. 97 Boeing filed suit against US Airways in September 1997 in state court in King County, Washington seeking unspecified damages for alleged breach of two aircraft purchase agreements concerning, respectively, eight B757-200 aircraft and 40 B737-Series aircraft. On October 31, 1997, US Airways filed an answer and counterclaims to Boeing's complaint denying liability and seeking recovery from Boeing of approximately $35 million in equipment purchase deposits. The case is currently in the discovery phase of litigation. In its initial discovery response, Boeing has quantified its damage claim at approximately $220 million. US Airways is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on its financial condition or results of operations. In October 1995, US Airways terminated for cause an agreement with In- Flight Phone Corporation (IFPC). IFPC was US Airways' provider of on-board telephone and interactive data systems. The IFPC system had been installed in approximately 80 aircraft prior to the date of termination of the agreement. On December 6, 1995, IFPC filed suit against US Airways in Illinois state court seeking equitable relief and damages in excess of $186 million. US Airways believes that its termination of its agreement with IFPC was appropriate and that it is owed significant damages from IFPC. US Airways has filed a counterclaim against IFPC seeking compensatory damages in excess of $25 million and punitive damages in excess of $25 million. In January 1997, IFPC filed for protection from its creditors under Chapter 11 of the Bankruptcy Code. The parties stipulated to lift the automatic stay provided for in the Bankruptcy Code which could allow IFPC's and US Airways' claims to be fully litigated. US Airways is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on its financial condition or results of operations. On July 30, 1996, US Airways Group and US Airways initiated a lawsuit in U.S. District Court for the Southern District of New York against British Airways Plc. (British Airways), BritAir Acquisition Corp., Inc., American Airlines, Inc. (American) and American's parent company, AMR Corp. The Company and US Airways claimed that British Airways, in pursuit of an alliance with American, is responsible for breaches of fiduciary duty to US Airways Group and US Airways and violated certain provisions of the January 21, 1993 Investment Agreement between the US Airways Group and British Airways (the Investment Agreement). The lawsuit also claims that the defendants have committed violations of U.S. antitrust laws. In response to the defendants' Motion to Dismiss, the Court sustained US Airways' claims for breach of contract against British Airways. The Court dismissed the remaining claims against British Airways and all claims against American. On February 6, 1998, British Airways filed its answer to the complaint along with counterclaims against US Airways Group and US Airways. British Airways' counterclaims alleged that US Airways breached various provisions of the Investment Agreement and that US Airways breached the Code Share Agreement between British Airways and US Airways by providing certain allegedly confidential information to a third party. In addition, British Airways seeks a declaratory judgment regarding certain payment obligations under its wet lease arrangement with US Airways. British Airways claimed damages of $16.7 million for the termination of the code share relationship and an unspecified amount of damages for its remaining claims. US Airway is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on its financial condition or results of operations. In May 1995, US Airways Group, US Airways and the Retirement Income Plan for US Airways, Inc. (the Pilots Pension Plan) were sued in federal district court for the District of Columbia by 481 active and retired pilots alleging that defendants had incorrectly interpreted the Pilots Pension Plan provisions and erroneously calculated benefits under the Pilots' Pension Plan. The plaintiffs sought damages in excess of $70 million. In May 1996, the court issued a decision granting US Airways' Motion to Dismiss the majority of the complaint for lack of jurisdiction, deciding that the dispute must be resolved through the arbitration process under the Railway Labor Act because the Pilots Pension Plan was collectively bargained. The court retained jurisdiction over one count of the complaint alleging a violation of a disclosure requirement under the Employee 98 Retirement Income Security Act. The plaintiffs have attempted to appeal the district court's dismissal before the U.S. Court of Appeals for the District of Columbia. In January of 1998, the Court of Appeals dismissed plaintiff's appeal for lack of jurisdiction because the lower court order was not final. In February of 1998 a purported class action complaint was filed by a travel agency in Puerto Rico against seven major U.S. airlines, including US Airways. The complaint alleges that the defendant airlines are undercompensating Puerto Rican travel agents in connection with the agents' sale of travel. The plaintiffs allege that the airlines are contractually obligated to pay a 10% commission and that the defendant airlines breached that contract as a result of the introduction of commission caps limiting commission payable with respect to a single trip to a stated dollar amount and reducing certain commissions to 8%. The plaintiffs have stated their damages for the class in the amount of $150 million. Given the early stage of this litigation, US Airways is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on its financial condition or results of operations. The City and County of San Francisco have sued a number of San Francisco International Airport tenants for the recovery of approximately $18 million of costs incurred with respect to the characterization and cleanup of soil and groundwater contamination at the airport. The City has recently identified US Airways as a potentially responsible party, although the City has not amended the complaint to add US Airways as a defendant party. US Airways is unable to predict at this time the ultimate resolution or potential financial impact of these proceedings on its financial condition or results of operations. (d) GUARANTEES As of December 31, 1997, US Airways guaranteed payments of debt and lease obligations of Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA), both wholly-owned subsidiaries of US Airways Group, totaling $63.9 million. US Airways also guarantees the payment of principal and interest on special facility revenue bonds issued by certain municipalities to build or improve airport and maintenance facilities. Under related lease arrangements, US Airways is required to make rental payments sufficient to pay maturing principal and interest payments on the bonds. As of December 31, 1997 the principal amount of these bonds outstanding was $77.4 million. (e) CONCENTRATION OF CREDIT RISK US Airways invests available cash in money market securities of various banks, commercial paper of financial institutions and other companies with high credit ratings and securities backed by the United States government. As of December 31, 1997, most of US Airways' receivables related to tickets sold to passengers through the use of major credit cards (45%) or to tickets sold by other airlines (18%) and used by passengers on US Airways or its regional airline affiliates. These receivables are short- term, generally being settled within 14 days after sale. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts. US Airways does not believe it is subject to any significant concentration of credit risk. 99 7. STOCKHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS (a) COMMON STOCK AND DIVIDEND RESTRICTIONS US Airways Group owns all of US Airways' outstanding common stock, par value $1 (US Airways Common Stock). US Airways' board of directors has not authorized the payment of dividends on US Airways' Common Stock since 1988. Currently, the amount of dividends that US Airways can pay on its common stock is materially limited by covenants contained in its 10% and 9 5/8% Senior Unsecured Notes. However, these covenants do not restrict US Airways from loaning or advancing funds to US Airways Group. US Airways, organized under the laws of the State of Delaware, may also be subject to certain legal restrictions on its ability to pay dividends on or repurchase or redeem its own shares of capital stock. (b) UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURTITIES, NET OF INCOME TAX EFFECTS In accordance with SFAS 115, US Airways records an adjustment to Stockholder's Equity (Deficit) to reflect differences between the fair value of investments in marketable equity securities and short-term investments (both types of investments are considered "available-for-sale" under SFAS 115) and their respective carrying values at each balance sheet date. (c) ADJUSTMENT FOR MINIMUM PENSION LIABILITY, NET OF INCOME TAX EFFECTS In accordance with SFAS 87, US Airways recorded an Adjustment for minimum pension liability as of December 31, 1997 and 1996. SFAS 87 requires the recognition of an additional minimum pension liability for each defined benefit plan for which the accumulated benefit obligation exceeds the fair value of the plan's assets and accrued pension costs. An offsetting intangible asset is recognized for each additional minimum pension liability recorded. Because each intangible asset recognized is limited to the amount of unrecognized prior service cost, any balance is reflected as a reduction of Stockholder's Equity (Deficit), net of income tax effects. See also Note 5(a). 8. USAM's SALE OF CERTAIN INVESTMENTS As of December 31, 1996 and prior to the events described below, USAM owned 11% of the Galileo International Partnership (GIP) and approximately 21% of the Apollo Travel Services Partnership (ATS). GIP owned and operated the Galileo CRS and ATS marketed the Galileo CRS in the U.S. and Mexico. On July 30, 1997, Galileo completed an initial public offering (IPO) and used the proceeds, together with the proceeds of bank financing, to purchase ATS. Immediately preceding the IPO, GIP was merged with and into a wholly-owned limited liability company subsidiary of Galileo and USAM received shares in Galileo in the same proportion as its partnership interest in GIP. As part of the IPO, USAM sold some of its Galileo shares and its interest in Galileo was reduced from 11% to approximately 6.7%. USAM received proceeds of $62.2 million and recognized a pre-tax gain of approximately $50 million from the sell-down of its interest in Galileo and received proceeds of $162.0 million and recognized a pre-tax gain of approximately $130 million in connection with the ATS sale. As of December 31, 1997, USAM owned approximately 6.7% of Galileo and 11% of GJP. USAM applies the provisions of SFAS 115 to account for its remaining investment in Galileo, 100 which is classified as "available-for-sale." USAM received distributions from GIP, GJP and ATS of $12.7 million, $1.0 million and $4.6 million, respectively, during 1997, and $4.1 million, $0.1 million and $44.5 million (including a special distribution from ATS of $33.7 million during the second quarter of 1996), respectively, during 1996. USAM also received a dividend of $0.4 million from Galileo during 1997. 9. RELATED PARTY TRANSACTIONS (a) PARENT COMPANY US Airways provides loans to US Airways Group which arise in the normal course of business and bear interest at market rates, which are reset quarterly. US Airways' net receivable from and net payable to US Airways Group for intercompany loan balances were $123.3 million and $159.0 million as of December 31, 1997 and 1996, respectively. US Airways is currently financing US Airways Group's purchase deposits for Airbus aircraft at a blended interest rate, which is reset quarterly, based upon US Airways' outstanding debt and capital lease obligations. The related receivable from US Airways Group was $86.2 million as of December 31, 1997. On December 30, 1997, US Airways Group purchased Shuttle, Inc. (Shuttle). US Airways provided the financing for this transaction at an interest rate of 7.5%, the balance of which is reflected in US Airways' balance sheet line item "Receivable from parent company." US Airways recorded net interest income of $0.5 million in 1997 and net interest expense of $19.7 million and $7.8 million in 1996 and 1995, respectively, related to the above transactions. (b) REGIONAL AIRLINE SUBSIDIARIES OF US AIRWAYS GROUP Effective October 1, 1996, US Airways began purchasing all of the capacity (available seat miles or ASMs) generated by US Airways Group's three wholly-owned regional airline subsidiaries, Allegheny Airlines, Inc. (Allegheny), Piedmont and PSA, at a rate per ASM that is determined by US Airways on a monthly basis and, concurrently, recognizing revenues that result from passengers being carried by these affiliated companies. The rate per ASM that US Airways pays is based on estimates of the costs incurred to produce the capacity. US Airways recognized US Airways Express transportation revenues of $604.5 million and $145.1 million and US Airways Express capacity purchases (expenses) of $485.9 million and $93.0 million in 1997 and the fourth quarter of 1996, respectively, related to this program. US Airways provides various services including passenger handling, contract training and catering. US Airways recognized other operating revenues of $54.6 million, $63.5 million and $46.5 million related to these services for the years 1997, 1996 and 1995, respectively. These regional airlines also perform passenger and ground handling for US Airways at certain airports for which US Airways recognized other operating expenses of $21.6 million, $18.7 million and $21.0 million for the years 1997, 1996 and 1995, respectively. US Airways also leases or subleases certain turboprop aircraft to these regional airline subsidiaries. US Airways recognized other operating revenues related to these arrangements of $8.3 million, $14.4 million and $18.7 million for the years 1997, 1996 and 1995, respectively. US Airways entered into a sale-leaseback arrangement with Allegheny during 1994 involving certain turboprop aircraft (in return, US Airways subleased these same aircraft back to 101 Allegheny). This arrangement was terminated in September 1996. US Airways recognized other operating expenses related to the lease of these aircraft from Allegheny of $6.0 million and $9.8 million for 1996 and 1995, respectively. US Airways' receivables from and payables to these regional airlines were $18.5 million and $36.7 million, respectively, as of December 31, 1997 and $17.3 million and $34.1 million, respectively, as of December 31, 1996. As a result of the capacity purchase program discussed above, liabilities related to tickets sold for travel on the regional airline subsidiaries are included in the US Airways' Traffic balances payable and unused tickets balance sheet line item. As of December 31, 1997, US Airways receivables from and payables to Shuttle were $8.2 million and $7.1 million, respectively. (c) OTHER US AIRWAYS GROUP SUBSIDIARIES US Airways leases certain aircraft to US Airways Group's wholly-owned subsidiary US Airways Leasing and Sales, Inc. (US Airways Leasing and Sales) (formerly USAir Leasing and Services, Inc.). US Airways Leasing and Sales subleases these aircraft to third parties. US Airways recognized other operating revenues related to these arrangements of $2.2 million, $4.3 million and $4.6 million for the years 1997, 1996 and 1995, respectively. US Airways receivable from US Airways Leasing and Sales was $21.2 million as of December 31, 1997 (primarily resulting from the transfer of income tax benefits as discussed in Note 5). US Airways purchases a portion of its aviation fuel from US Airways Group's wholly-owned subsidiary US Airways Fuel Corporation (Fuel Corp.) (formerly USAir Fuel Corporation), which acts as a fuel wholesaler to US Airways in certain circumstances. US Airways' aviation fuel purchases were $183.1 million, $205.9 million and $104.9 million for the years 1997, 1996 and 1995, respectively. US Airways' accounts payable to Fuel Corp. was $16.8 million and $17.4 million as of December 31, 1997 and 1996, respectively. (d) BRITISH AIRWAYS During 1993, US Airways Group and British Airways entered into an Investment Agreement under which a wholly-owned subsidiary of British Airways purchased certain series of redeemable convertible preferred stock from US Airways Group and British Airways entered into code sharing and wet lease arrangements with US Airways. US Airways wet leased B767-200ER aircraft, including cockpit and cabin crews, to British Airways in order to serve three routes between the U.S. and London beginning in June 1993 and ending in May 1996. US Airways recognized other operating revenues of $12.6 million and $63.6 million for the years 1996 and 1995, respectively, related to these arrangements. These revenues were offset by an equal amount of other operating expenses. US Airways also has various agreements with British Airways for ground handling at certain airports, contract training and other services. US Airways recognized other operating revenues of $1.5 million for the first five months of 1997 and $5.8 million and $4.9 million for the years 1996 and 1995, respectively, related to services US Airways performed for British Airways. As of December 31, 1996, US Airways' receivables from and payables to British Airways were $8.0 million and $5.5 million, respectively. US Airways also has a long-term note receivable from British Airways related to three U.S. to London routes that US Airways relinquished at the time of implementation of a code sharing arrangement with British Airways. The balance of this note receivable was $40.7 million as of December 31, 1996. Payments began 102 in December 1995 in conjunction with the termination of the first wet lease arrangement and are scheduled to continue through the year 2004. US Airways terminated the code share and other business arrangements between the two companies effective March 29, 1997. In addition, US Airways believes that British Airways held no ownership interest in US Airways Group after May 22, 1997. 10. VALUATION AND QUALIFYING ACCOUNTS Allowance For Uncollectible Inventory Accounts Obsolescence ------------- ------------ (in thousands) Balance as of December 31, 1994 $ 9,222 $169,827 Additions charged to expense 2,000 9,667 Amounts charged to reserve (9,118) (17,829) ----- ------ Balance as of December 31, 1995 12,104 161,665 Additions charged to expense 11,000 9,440 Amounts charged to reserve (11,151) (28,295) ------ ------ Balance as of December 31, 1996 1,953 142,810 Additions charged to expense 13,900 9,329 Amounts charged to reserve (8,406) (9,458) ------ ------- Balance as of December 31, 1997 $17,447 $142,681 ====== ======= 11. SELECT QUARTERLY FINANCIAL INFORMATION (UNAUDITED) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in millions) 1997 Operating Revenues $2,090 $2,208 $2,115 $2,087 Operating Income $ 174 $ 259 $ 85 $ 68 Net Income $ 144 $ 202 $ 187 $ 520 1996 Operating Revenues $1,740 $1,994 $1,924 $2,047 Operating Income (Loss) $ (9) $ 207 $ 97 $ 74 Net Income (Loss) $ (55) $ 161 $ 28 $ 50 See also Notes 3, 8 and 12. NOTE: The sum of the four quarters may not equal yearly totals due to rounding of quarterly results. 12. NONRECURRING ITEMS (a) 1997 US Airways' results for 1997 include certain nonrecurring items: (i) $121.9 million recorded in Personnel costs (including a fourth quarter charge of $115.0 million related to an early retirement program for pilots (see also Note 5(a)) and a second quarter charge of $6.9 million related to estimated employee severance payments due to efficiency measures US Airways 103 announced during May 1997); (ii) a $1.5 million credit recorded in Aircraft rent due to the reversal of previously accrued lease obligations upon the subleasing of an additional BAe-146 aircraft, recognized in the second quarter (see Note 12 (b) and 12 (c) below); (iii) $4.6 million recorded in Other rent and landing fees (including a third quarter charge of $1.7 million to write-down certain equipment to be disposed of and a second quarter charge of $2.9 million to write-off lease obligations at certain facilities to be abandoned (net of any anticipated sublease revenues), both related to the May 1997 efficiency measures); (iv) $89.1 million recorded in Depreciation and amortization (including a third quarter charges of $11.4 million related to the May 1997 efficiency measures to write-down certain equipment to be disposed of and a $59.3 million SFAS 121 impairment charge resulting from US Airways' September 1997 decision to retire its remaining DC-9-30 aircraft over the next several years, and second quarter charges of $0.3 million to write-off certain leasehold improvements and an $18.1 million SFAS 121 impairment charge to write-down certain DC-9-30 aircraft, both related to the May 1997 efficiency measures); and (v) $179.6 million recorded in Gains on sales of interests in affiliates which resulted from USAM's sale of certain investments as discussed in Note 8. (b) 1996 US Airways' results for 1996 include two nonrecurring items recorded during the second quarter of 1996 related to its subleasing of 11 non- operating BAe-146 aircraft (see Note 12 (c) below). US Airways reversed $22.5 million of previously accrued rent obligations related to these aircraft against Aircraft rent expense and reversed $7.0 million against Aircraft maintenance expense related to previously accrued lease return provisions. (c) 1995 In the fourth quarter of 1995, US Airways reversed $4.1 million of the $132.8 million nonrecurring charge related to its grounded BAe-146 fleet that was recorded in the fourth quarter of 1994. The reversal, a credit to Aircraft rent expense, reflects the successful remarketing by US Airways of three of these aircraft. 13. SUBSEQUENT EVENTS In January 1998, US Airways Group announced plans to purchase up to 2.3 million shares of its common stock from time-to-time in open market or privately negotiated transactions. This program was authorized by US Airways Group's board of directors in conjunction with US Airways' agreement to provide up to 2.3 million stock options to its pilots in 1998. In February 1998, US Airways Group's board of directors announced certain actions aimed at increasing shareholder value, including the purchase from time-to-time in open market or privately negotiated transactions of up to $500 million of US Airways Group's common stock (in addition to the previously announced plan) and the retirement of certain debt obligations of US Airways totaling approximately $380 million, including US Airways 10% Senior Notes. During late February 1998, US Airways retired early certain debt obligations with a combined principal amount of $76.1 million (the transactions resulted in an immaterial net gain). US Airways expects to retire its 10% Senior Notes, which have a face amount of $300 million, during early Summer 1998. With respect to US Airways Group's stock buy-back program, US Airways has typically funded such activities of its parent company. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 104 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF US AIRWAYS GROUP. Information regarding this item appears in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A relating to the Company's Annual Meeting of Stockholders on May 20, 1998 and is incorporated herein by reference. Information concerning executive officers of the Company is set forth in Part I, Item 1. of this report under the caption "Executive Officers" in reliance on General Instruction G to Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Information regarding this item appears in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A relating to the Company's Annual Meeting of Stockholders on May 20, 1998 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding this item appears in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A relating to the Company's Annual Meeting of Stockholders on May 20, 1998 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding this item appears in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A relating to the Company's Annual Meeting of Stockholders on May 20, 1998 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report: CONSOLIDATED FINANCIAL STATEMENTS (i) The following consolidated financial statements of US Airways Group, Inc. are included in Part II, Item 8A. of this report: - Consolidated Statements of Operations for each of the three years ended December 31, 1997 - Consolidated Balance Sheets as of December 31, 1997 and 1996 - Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997 - Consolidated Statements of Changes in Stockholders' Equity (Deficit) for each of the three years ended December 31, 1997 - Notes to Consolidated Financial Statements (this space intentionally left blank) 105 (ii) The following consolidated financial statements of US Airways, Inc. are included in Part II, Item 8B., of this report: - Consolidated Statements of Operations for each of the three years ended December 31, 1997 - Consolidated Balance Sheets as of December 31, 1997 and 1996 - Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997 - Consolidated Statements of Changes in Stockholder's Equity (Deficit) for each of the three years ended December 31, 1997 - Notes to Consolidated Financial Statements CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All financial statement schedules have been omitted because they are not applicable or not required, or because the required information is either incorporated herein by reference or included in the financial statements or notes thereto included in this report. EXHIBITS Designation Description - ----------- ----------- 3.1 Restated Certificate of Incorporation of US Airways Group, Inc. (US Airways Group) (incorporated by reference to Exhibit 3.1 to US Airways Group's Registration Statement on Form 8-B dated January 27, 1983), including the Certificate of Amendment dated May 13, 1987 (incorporated by reference to Exhibit 3.1 to US Airways Group's and US Airways, Inc.'s (US Airways) Quarterly Report on Form 10-Q for the quarter ended March 31, 1987), the Certificate of Increase dated June 30, 1987 (incorporated by reference to Exhibit 3 to US Airways Group's and US Airways' Quarterly Report on Form 10-Q for the quarter ended June 30, 1987), the Certificate of Increase dated October 16, 1987 (incorporated by reference to Exhibit 3.1 to US Airways Group's and US Airways' Quarterly Report on Form 10-Q for the quarter ended September 30, 1987), the Certificate of Increase dated August 7, 1989 (incorporated by reference to Exhibit 3.1 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1989), the Certificate of Increase dated April 9, 1992 (incorporated by reference to Exhibit 3.1 to US Airways Group's and US Airways' Annual Report on Form 10-K for the year ended December 31, 1992), the Certificate of Increase dated January 21, 1993 (incorporated by reference to US Airways Group's and US Airways' Annual Report on Form 10-K for the year ended December 31, 1992), and the Certificate of Amendment dated May 26, 1993 (incorporated by reference to Appendix II to US Airways Group's Proxy Statement dated April 26, 1993); and the Certificate of Ownership and Merger merging Nameco, Inc. into USAir Group, Inc. dated February 17, 1997 (incorporated by reference to Exhibit 3.1 to US Airways Group's Annual Report on Form 10-K for 1996). 3.2 By-Laws of US Airways Group. 3.3 Restated Certificate of Incorporation of US Airways (incorporated by reference to Exhibit 3.1 to US Airways' Registration Statement on Form 8-B dated January 27, 1983); and the Certificate of Amendment to Restated Certificate of Incorporation of USAir, Inc. dated February 17, 1997 (incorporated by reference to Exhibit 3.3 to US Airways' Annual Report on Form 10-K for 1996). 106 3.4 By-Laws of US Airways. 10.1 Purchase agreement dated October 31, 1997 between US Airways Group and AVSA, S.A.R.L., an affiliate of aircraft manufacturer Airbus Industry G.I.E. (incorporated by reference to Exhibit 10.1 to US Airways Group's Quarterly Report on Form 10-Q for the three months ended September 30, 1997). 10.2 Purchase Agreement No. 1725 dated December 23, 1991 between US Airways and The Boeing Company (incorporated by reference to Exhibit 10.3 to US Airways Group's and US Airways' Annual Report on Form 10-K for the year ended December 31, 1991). 10.3 Supplemental Agreement No. 18, dated December 23, 1991, to Purchase Agreement No. 1102 between US Airways and The Boeing Company (incorporated by reference to Exhibit 10.2(c) to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1991). 10.4 Supplemental Agreement No. 17, dated November 28, 1990, to Purchase Agreement No. 1102 between US Airways and The Boeing Company (incorporated by reference to Exhibit 10.2(b) to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1990). 10.5 Supplemental Agreement No. 16, dated July 19, 1990, to Purchase Agreement No. 1102 between US Airways and The Boeing Company (incorporated by reference to Exhibit 10.2(a) to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1990). 10.6 Incentive Compensation Plan of US Airways Group, Inc. as amended and restated January 1, 1997. 10.7 US Airways, Inc. Supplementary Retirement Benefit Plan (incorporated by reference to Exhibit 10.5 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1989). 10.8 US Airways, Inc. Supplemental Executive Defined Contribution Plan (incorporated by reference to Exhibit 10.6 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1994). 10.9 1997 Stock Incentive Plan of US Airways Group, Inc. as amended and restated as of November 18, 1997. 10.10 1996 Stock Incentive Plan of US Airways Group, Inc. as amended and restated as of November 18, 1997. 10.11 US Airways Group Nonemployee Director Stock Incentive Plan (incorporated by reference to Exhibit B to US Airways Group's Proxy Statement dated April 15, 1996). 10.12 US Airways Group Nonemployee Director Deferred stock Unit Plan. 10.13 1992 Stock Option Plan of USAir Group (incorporated by reference to Exhibit A to US Airways Group's Proxy Statement dated March 31, 1992). 107 10.14 1984 Stock Option and Stock Appreciation Rights Plan of USAir Group Inc. (incorporated by reference to Exhibit A to US Airways Group's Proxy Statement dated March 30, 1984). 10.15 Amendment to Employment Agreement between US Airways and its former Senior Vice President-Finance and Chief Financial Officer (incorporated by reference to Exhibit 10.2 to US Airways Group's Quarterly Report on Form 10-Q for the three months ended September 30, 1997). 10.16 Employment Agreement between US Airways and its Chief Executive Officer. (incorporated by reference to Exhibit 10.11 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.17 Employment Agreement between US Airways and its President and Chief Operating Officer (incorporated by reference to Exhibit 10.12 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.18 Employment Agreement between US Airways and its Executive Vice President-Corporate Affairs and General Counsel (incorporated by reference to Exhibit 10.13 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.19 Agreement between US Airways and its Chief Executive Officer with respect to certain employment arrangements (incorporated by reference to Exhibit 10.14 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.20 Agreement between US Airways and its President and Chief Operating Officer with respect to certain employment arrangements (incorporated by reference to Exhibit 10.15 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.21 Agreement between US Airways and its Executive Vice President-Corporate Affairs and General Counsel with respect to certain employment arrangements (incorporated by reference to Exhibit 10.16 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.22 Employment Agreement between US Airways and its Executive Vice President-Human Resources (incorporated by reference to Exhibit 10.22 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.23 Agreement between US Airways and its Chief Executive Officer providing supplemental retirement benefits (incorporated by reference to Exhibit 10.23 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.24 Agreement between US Airways and its President and Chief Operating Officer providing supplemental retirement benefits (incorporated by reference to Exhibit 10.24 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 10.25 Agreement between US Airways and its Executive Vice President-Corporate Affairs and General Counsel providing supplemental retirement benefits (incorporated by reference to Exhibit 10.25 to US Airways Group's Annual Report 108 on Form 10-K for the year ended December 31, 1995). 10.26 Employment Agreement between US Airways and its Executive Vice President-Human Resources providing retirement benefits (incorporated by reference to Exhibit 10.30 to US Airways Group's Annual Report on Form 10-K for the year ended December 31, 1995). 11 Computation of basic and diluted earnings per share of US Airways Group for each of the three years ended December 31, 1997. 21.1 Subsidiaries of US Airways Group. 21.2 Subsidiaries of US Airways. 23.1 Consent of the Auditors of US Airways Group to the incorporation of their report concerning certain financial statements contained in this report in certain registration statements. 23.2 Consent of the Auditors of US Airways to the incorporation of their report concerning certain financial statements contained in this report in certain registration statements. 24.1 Powers of Attorney signed by the directors of US Airways Group, authorizing their signatures on this report. 24.2 Powers of Attorney signed by the directors of US Airways, authorizing their signatures on this report. 27.1 Financial Data Schedule-US Airways Group. 27.2 Financial Data Schedule-US Airways. REPORTS ON FORM 8-K Date of Report Subject of Report - -------------- ----------------- March 12, 1998 US Airways Group and the holders of the Company's Series H Senior Cumulative Convertible Preferred Stock (Series H Preferred Stock), affiliates of Berkshire Hathaway, Inc., completed a transaction whereby the Series H Preferred Stock was converted into 9,239,938 shares of the Company's common stock, $1.00 par value, and the Series H Preferred Stock was retired. February 3, 1998 US Airways Group announced that its board of directors had authorized the repurchase of up to $500 million of the Company's outstanding common stock, the redemption of the last of the Company's outstanding preferred stock issuances and the retirement of certain debt obligations as part of a wide-ranging plan to enhance shareholder value. Information related to the upcoming launch of a new low cost product called "MetroJet" was also released. MetroJet will commence operations on June 1, 1998. (table continued on following page) 109 (table continued from previous page) January 21, 1998 Consolidated statements of operations for both the Company and US Airways for fourth quarter 1997 and full-year 1997, and select operating and financial statistics for US Airways. November 19, 1997 Announcement that the company would purchase Shuttle, Inc. (operating as "US Airways Shuttle"), based upon a valuation of $285 million. SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. US AIRWAYS GROUP, INC. (REGISTRANT) By: /s/ Stephen M. Wolf Date: March 18, 1998 ------------------- Stephen M. Wolf, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of US Airways Group, Inc. and in the capacities and on the dates indicated. By: /s/ Stephen M. Wolf Date: March 18, 1998 ------------------- Stephen M. Wolf, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By: /s/ Terry L. Hall Date: March 18, 1998 ----------------- Terry L. Hall, Chief Financial Officer (Principal Financial Officer) By: /s/ James A. Hultquist Date: March 18, 1998 ---------------------- James A. Hultquist, Controller (Principal Accounting Officer) By: * Date: March 18, 1998 ----------------- Mathias J. DeVito, Director By: * Date: March 18, 1998 ----------------- Rakesh Gangwal, Director By: * Date: March 18, 1998 ----------------- George J. W. Goodman, Director By: * Date: March 18, 1998 ----------------- John W. Harris, Director (table is continued on following page) 110 (table is continued from previous page) By: * Date: March 18, 1998 ----------------- Edward A. Horrigan, Jr., Director By: * Date: March 18, 1998 ----------------- Robert L. Johnson, Director By: * Date: March 18, 1998 ----------------- Robert LeBuhn, Director By: * Date: March 18, 1998 ----------------- John G. Medlin, Jr., Director By: * Date: March 18, 1998 ----------------- Hanne M. Merriman, Director By: * Date: March 18, 1998 ----------------- Raymond W. Smith, Director By: * ----------------- Terry L. Hall, Attorney-In-Fact SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. US AIRWAYS, INC. (REGISTRANT) By: /s/ Stephen M. Wolf Date: March 18, 1998 ------------------- Stephen M. Wolf, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of US Airways, Inc. and in the capacities and on the dates indicated. By: /s/ Stephen M. Wolf Date: March 18, 1998 ------------------- Stephen M. Wolf, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By: /s/ Terry L. Hall Date: March 18, 1998 ----------------- Terry L. Hall, Chief Financial Officer (Principal Financial Officer) By: /s/ James A. Hultquist Date: March 18, 1998 ---------------------- James A. Hultquist, Controller (Principal Accounting Officer) (table is continued on following page) 111 (table is continued from previous page) By: * Date: March 18, 1998 ----------------- Mathias J. DeVito, Director By: * Date: March 18, 1998 ----------------- Rakesh Gangwal, Director By: * Date: March 18, 1998 ----------------- George J. W. Goodman, Director By: * Date: March 18, 1998 ----------------- John W. Harris, Director By: * Date: March 18, 1998 ----------------- Edward A. Horrigan, Jr., Director By: * Date: March 18, 1998 ----------------- Robert L. Johnson, Director By: * Date: March 18, 1998 ----------------- Robert LeBuhn, Director By: * Date: March 18, 1998 ----------------- John G. Medlin, Jr., Director By: * Date: March 18, 1998 ----------------- Hanne M. Merriman, Director By: * Date: March 18, 1998 ----------------- Raymond W. Smith, Director By: * ----------------- Terry L. Hall, Attorney-In-Fact (this space intentionally left blank) 112 EX-3 2 Exhibit 3.2 BY-LAWS US AIRWAYS GROUP, INC. January 1, 1998 * * * * * * * * * * * ARTICLE I OFFICES The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, Delaware. The Corporation may have offices within and without the State of Delaware. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. ANNUAL MEETINGS. The annual meeting of stockholders for the election of Directors shall be held on the fourth Wednesday in May, or if that be a legal holiday, on the next succeeding day not a legal holiday, at nine- thirty o'clock in the morning, or in any year at such other date and time as may be designated by the Board of Directors, at which meeting the stockholders shall elect by ballot, by plurality vote, a Board of Directors and may transact such other business as may come before the meeting. Section 2. SPECIAL MEETINGS. Special meetings of the stockholders, except those regulated by statue, may be called at any time by the Chairman or President, and shall, be called by the President or Secretary on the request, in writing, or by vote, of a majority of Directors, and by no other person or persons. No business may be transacted at a special meeting of the stockholders except as set forth in the notice of such meeting. Section 3. LOCATION OF MEETINGS. All meetings of the stockholders for any purpose may be held, within or without the State of Delaware, at such time and place as shall be stated in the notice of the meeting or a duly executed waiver of notice, and by no other person or persons. No business may be transacted at a special meeting of the stockholder except as set forth in the notice of such meeting. Section 4. LIST OF STOCKHOLDERS. The Secretary shall cause to be prepared a complete list of stockholders entitled to vote at any meeting, arranged in alphabetical order and showing the address of each stockholder and number of shares registered in the name of each stockholder. The list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for at least ten days prior to the meeting either at a place within the city where the meeting is to be held (which place shall be specified in the notice of meeting) or at the place where the meeting is to be held. The list shall also be open for inspection by stockholders during the time and at the place of the meeting. Section 5. VOTING. Each stockholder entitled to vote shall, at every meeting of the stockholders, be entitled to one vote in person or by proxy, signed by him, for each share of voting stock held by him but no proxy shall be voted on or after three years from its date, unless it provides for a longer period. Such right to vote shall be subject to the right of the Board of Directors to fix a record date for voting stockholders as hereinafter provided. Section 6. NOTICE OF STOCKHOLDER BUSINESS. At an annual meeting of the stockholders held pursuant to Section 1 of this Article II, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation, provided such stockholder complies with this Section 6. For business to be properly brought before an annual meeting by a stockholder, the stockholder shall give prior 2 written notice thereof to the Secretary. Such notice shall be received at the principal executive offices of the Corporation by the Secretary not less than thirty nor more than sixty days prior to such annual meeting; provided, however, that in the event that less than forty days' prior written notice or prior public disclosure of the date of the meeting is given or made to stockholders, such notice by the stockholder shall be received by the Secretary not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary pursuant to this Section 6 shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding any provision in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with this Section 6. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with this Section 6, and if he should so determine, he shall so declare to the meeting and any such business shall not be transacted. Section 7. NOTICE TO STOCKHOLDERS. Notice of all meetings shall be mailed by the Secretary to each stockholder of record entitled to vote, at his or her last known post office address, not less than ten nor more than sixty days prior to any annual or special meeting. Section 8. QUORUM. The holders of a majority of the stock outstanding and entitled to vote shall constitute a quorum but the holders of a smaller amount may adjourn from time to time without 3 further notice until a quorum is secured. Section 9. STOCKHOLDER ACTION BY WRITTEN CONSENT. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. 4 ARTICLE III DIRECTORS Section 1. NUMBER. The property and business of the Corporation shall be managed and controlled by its Board of Directors, consisting of eleven members. Directors need not be stockholders. Section 2. NOTICE OF STOCKHOLDER NOMINEES. Only persons nominated in accordance with this Section 2 shall be eligible for election as Directors. Nomination of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with this Section 2. Such nominations, other than those made by or at the direction of the Board of Directors, shall be received at the principal executive offices of the Corporation by the Secretary not less than thirty nor more than sixty days prior to the meeting; provided, however, that in the event less than forty days' prior written notice or prior public disclosure of the date of the meeting is given or made to stockholders, such notice by the stockholder shall be received by the Secretary not later than the close of business on the tenth day following the day on which such notice of the date of meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth: (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director, all information relating to such person as is required to be disclosed in solicitation of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected), and (b) as to the stockholder giving the notice (i) the name and address, as they 5 appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary that information required by this Section 2 to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with these By-Laws. The Chairman of the stockholders' meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with these By-Laws, and if he should so determine, he shall so declare to such meeting and the defective nomination shall be disregarded. Section 3. ELECTION, TERM, VACANCIES. The Directors shall hold office until the next annual election and until their successors are elected and qualified. They shall be elected by the stockholders, except that if there be a vacancy in the Board by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the remaining Directors, though less than a quorum, by a majority vote. Section 4. POWERS OF DIRECTORS. The business of the Corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Section 5. DIRECTORS EMERITI. For the purpose of conserving, for the benefit of the Corporation, the knowledge, experience and good will generated by a long period of service in formulating and implementing the basic policies of the Corporation or predecessor or affiliated corporations, the Board of Directors shall have the power in its discretion to appoint one or more 6 Directors Emeriti. Any person who has served for a period of not less than ten years on the Board of Directors of the Corporation or of any predecessor or affiliate of the Corporation, may be appointed a Director Emeritus by the Board of Directors for an annual term and shall be eligible for reappointment annually at the discretion of the Board. The duties of a Director Emeritus shall consist of being available to the Chairman and President of the Corporation for consultation and advice on any matters pertaining to the Corporation which the Chairman or President may refer to him from time to time. Directors Emeriti shall be notified of and be invited to attend the annual meeting of the Board of Directors and such other meetings as determined by the Chairman or President of the Corporation and be entitled to be heard at such meetings on matters pending before the Board of Directors. They shall not be members of the Board nor be entitled to vote as such nor be counted as constituting part of a quorum. Section 6. COMPENSATION. Directors, members of committees and Directors Emeriti shall receive such compensation as the Board shall from time to time prescribe. ARTICLE IV MEETINGS OF DIRECTORS Section 1. ANNUAL MEETING. After each annual election of Directors, the newly elected Directors may meet for the purpose of organization, the election of Officers, and the transaction of other business, at such place and time as shall be fixed by the stockholders at the annual meeting, and, if a majority of the Directors be present at such place and time, no prior notice of such meeting shall be required to be given to the Directors. The place and time of such meeting may also be fixed by written consent of the Directors. 7 Section 2. REGULAR MEETINGS. Bi-monthly meetings of the Board of Directors shall be held in January, March, May, July, September and November in each year, on the date and at a time and place designated from time to time by the Board of Directors. The Secretary shall forward to each Director, at least five days before any such meeting, a notice of the time and place of the meeting. Section 3. SPECIAL MEETINGS. Special meetings of the Directors may be called by the Chairman or President on two days' notice in writing, or on one day's notice by telegraph to each Director, and shall be called by the President in like manner on the written request of two or more Directors. Section 4. LOCATION. Meetings of the Directors may be held within or without the State of Delaware at such place as is indicated in the notice of waiver of notice thereof. Section 5. QUORUM. A majority of the Directors shall constitute a quorum, but a smaller number may adjourn from time to time, without further notice, until a quorum is secured. ARTICLE V COMMITTEES Section 1. CREATION. The Board of Directors may, by resolution or resolutions passed by a majority of the Board, designate one or more committees each to consist of three or more Directors of the Corporation. Each such Committee shall have and may exercise such powers and duties as shall be delegated to it by the Board of Directors except that no such Committee shall have power to (a) elect Directors; (b) alter, amend or repeal these By-Laws or any resolution or resolutions of the Board of Directors relating to such Committee; (c) declare any dividend or make any other distribution to the stockholders of the Corporation; (d) appoint any member of such Committee; or (e) take any other 8 action which may lawfully be taken only by the Board. Section 2. COMMITTEE PROCEDURE. Each such Committee established by the Board shall meet at stated times or on notice to all members by any member of such Committee. Each such Committee shall establish its own rules of procedure. Each such Committee shall keep regular minutes of its proceedings and report the same to the Board of Directors. ARTICLE VI INDEMNIFICATION The Corporation shall indemnify its Directors, Officers and employees, and shall have the power to indemnify its other agents, to the full extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide on June 29, 1989). Expenses (including attorneys' fees) incurred by an Officer, Director or employee in defending any civil, criminal, administrative, or investigative action, suit or proceeding shall to the fullest extent permitted by law be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Director, Officer or employee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereunder. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, by-laws, agreement, vote of stockholders or disinterested directors or otherwise. 9 ARTICLE VII OFFICERS Section 1. GENERAL. The Officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, a Controller and such other Officers as may from time to time be chosen by the Board of Directors. The Chief Executive Officer shall be empowered to appoint and remove from office, at his discretion, Assistant Vice Presidents and Assistant Secretaries. Any number of offices may be held by the same person, unless the certificate of incorporation or these By-Laws otherwise provide. Section 2. TERM. The Officers of the Corporation shall hold office until their successors are chosen and qualified. Any Officer chosen or appointed by the Board of Directors may be removed either with or without cause at any time by the affirmative vote of a majority of the whole Board of Directors. If the office of any Officer other than an assistant officer becomes vacant for any reason, the vacancy shall be filled by the affirmative vote of a majority of the whole Board of Directors. Section 3. CHAIRMAN OF THE BOARD. A Chairman of the Board shall be chosen from among the Directors. The Chairman of the Board shall preside at all meetings of the stockholders and Directors and shall perform such other duties as may be prescribed by the Board of Directors. Section 4. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall have responsibility for the general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 5. PRESIDENT. The President shall be the Chief Operating Officer of the Corporation. The President shall have such responsibilities and authority as determined by the Chief Executive Officer of the Corporation. 10 Section 6. VICE PRESIDENT. The Vice President or Vice Presidents, in the order designated by the Board of Directors, shall be vested with all the powers and required to perform all the duties of the President in his absence or disability and shall perform such other duties as may be prescribed by the Board of Directors. Section 7. SECRETARY. The Secretary shall perform all the duties commonly incident to his office, and keep accurate minutes of all meetings of the stockholders, the Board of Directors and the Committees of the Board of Directors, recording all the proceedings of such meetings in a book kept for that purpose. He shall give proper notice of meetings of stockholders and Directors and perform such other duties as the Board of Directors shall designate. Section 8. TREASURER. The Treasurer shall have custody of the funds and securities of the Corporation and shall keep full and accurate accounts of disbursements and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board or President, taking proper vouchers for such disbursements, and shall render to the President and Directors, whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. Until such time as a Controller is elected, the Treasurer shall also maintain adequate records of all assets, liabilities and transactions of the Corporation and shall see that adequate audits thereof are currently and regularly made. He shall cause to be prepared, compiled and filed such reports, statements, statistics and other data as may be required by law or prescribed by the President. The Treasurer shall perform such other duties as the Board of Directors may from time to time prescribe. 11 ARTICLE VIII STOCK Section 1. CERTIFICATES. Certificates of stock of the Corporation shall be signed by, or in the name of, the Corporation by the President or a Vice President and the Secretary or an Assistant Secretary, certifying the number of shares of the holder thereof. The Board of Directors may appoint one or more transfer agents and registrars of transfers, which may be the same agency or agencies, and may require all certificates to bear the signatures of one of such transfer agents and one of such registrars of transfers, or as the Board of Directors may otherwise direct. Where any such certificate is signed by a transfer agent or transfer clerk and by a registrar, the signatures of any such President, Vice President, Secretary or Assistant Secretary may be facsimiles engraved or printed. The certificates shall bear the seal of the Corporation or a predecessor corporation or shall bear a facsimile of such seal engraved or printed. In case any Officer or Officers who have signed, or whose facsimile signature or signatures have been used on, any certificate or certificates of stock, has ceased to be an Officer or Officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon, had not ceased to be such Officer or Officers of the Corporation. Section 2. LOST CERTIFICATES. If a certificate of stock is lost or destroyed, another may be issued in its stead upon proof of loss or destruction and the giving of a satisfactory bond of indemnity, in an amount sufficient to indemnify the Corporation against any claim. A certificate may be issued 12 without requiring bond when, in the judgment of the Directors, it is proper to do so. Section 3. TRANSFERS. All transfers of stock of the Corporation shall be made upon its books by the holder of the shares in person or by his lawfully constituted representative, upon surrender of certificates of stock for cancellation. Section 4. FIXING RECORD DATE. The Board of Directors may fix in advance a record date in order to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. The record date shall not be more than sixty nor less than ten days before the date of any meeting of stockholders nor more than sixty days prior to any other action. Section 5. STOCKHOLDERS OF RECORD. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Delaware. ARTICLE IX GENERAL PROVISIONS Section 1. FISCAL YEAR. The fiscal year of the Corporation shall begin the first day of January and end on the 31st day of December of each year. Section 2. DIVIDENDS. Dividends upon the capital stock may be declared by the Board of Directors at any regular or special meeting and may be paid in cash or in property or in shares of the 13 capital stock. Before paying any dividend or making any distribution of profits, the Directors may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may alter or abolish any such reserve or reserves. Section 3. CHECKS. All checks, drafts or orders for the payment of money shall be signed by the Treasurer or by such other Officer, Officers, employee or employees as the Board of Directors may from time to time designate. Section 4. CORPORATE SEAL. The Corporate Seal shall have inscribed thereon the name of the Corporation, the year of its incorporation, and the words "Incorporated Delaware." ARTICLE X AMENDMENT TO BY-LAWS Subject to the provisions of any resolution of Directors creating any series of preferred stock, the Board of Directors shall have the power from time to time to make, alter or repeal By-Laws, but any By-Laws made by the Board of Directors may be altered, amended or repealed by the stockholders at any annual meeting of stockholders, or at any special meeting provided that the notice of such proposed alteration, amendment or repeal is included in the notice of such special meeting. ARTICLE XI RESTATED CERTIFICATE OF INCORPORATION TO GOVERN Notwithstanding anything to the contrary herein, in the event any provision contained herein is inconsistent with or conflicts with a provision of the Corporation's Restated Certificate of Incorporation, as the same may be from time to time amended or supplemented (the "Restated Certificate of Incorporation"), such provision herein shall be superseded by the inconsistent provision in the Restated Certificate of Incorporation, to the extent necessary to give effect to such provision in the 14 Restated Certificate of Incorporation. 15 EX-3 3 Exhibit 3.4 BY-LAWS US AIRWAYS, INC. January 1, 1998 * * * * * * * * * * * ARTICLE I OFFICES The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, Delaware. The Corporation may have offices within and without the State of Delaware. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. ANNUAL MEETINGS. The annual meeting of stockholders for the election of Directors shall be held on the fourth Wednesday in May, or if that be a legal holiday, on the next succeeding day not a legal holiday, at nine- thirty o'clock in the morning, or in any year at such other date and time as may be designated by the Board of Directors, at which meeting the stockholders shall elect by ballot, by plurality vote, a Board of Directors and may transact such other business as may come before the meeting. Section 2. SPECIAL MEETINGS. Special meetings of the stockholders may be called at any time by the Chairman or President, and shall be called by the President or Secretary on the request, in writing, or by vote, of a majority of Directors, or at the request, in writing, of stockholders of record owning a majority in amount of the capital stock outstanding and entitled to vote. Section 3. LOCATION OF MEETINGS. All meetings of the stockholders for any purpose may be held, within or without the State of Delaware, at such time and place as shall be stated in the notice of the meeting or a duly executed waiver of notice. Section 4. LIST OF STOCKHOLDERS. The Secretary shall cause to be prepared a complete list of stockholders entitled to vote at any meeting, arranged in alphabetical order and showing the address of each stockholder and number of shares registered in the name of each stockholder. The list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for at least ten days prior to the meeting either at a place within the city where the meeting is to be held (which place shall be specified in the notice of meeting) or at the place where the meeting is to be held. The list shall also be open for inspection by stockholders during the time and at the place of the meeting. Section 5. VOTING. Each stockholder entitled to vote shall, at every meeting of the stockholders, be entitled to one vote in person or by proxy, signed by him, for each share of voting stock held by him but no proxy shall be voted on or after three years from its date, unless it provides for a longer period. Such right to vote shall be subject to the right of the Board of Directors to fix a record date for voting stockholders as hereinafter provided. Section 6. NOTICE TO STOCKHOLDERS. Notice of all meetings shall be mailed by the Secretary to each stockholder of record entitled to vote, at his or her last known post office address, not less than ten nor more than sixty days prior to any annual or special meeting. Section 7. QUORUM. The holders of a majority of the stock outstanding and entitled to vote shall constitute a quorum but the holders of a smaller amount may adjourn from time to time without further notice until a quorum is secured. ARTICLE III DIRECTORS Section 1. NUMBER. The property and business of the Corporation shall be managed and 2 controlled by its Board of Directors, consisting of eleven members. Directors need not be stockholders. Section 2. ELECTION, TERM, VACANCIES. The Directors shall hold office until the next annual election and until their successors are elected and qualified. They shall be elected by the stockholders, except that if there be a vacancy in the Board by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the remaining Directors, though less than a quorum, by a majority vote. Section 3. Powers of Directors. The business of the Corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these by- laws directed or required to be exercised or done by the stockholders. Section 4. DIRECTORS EMERITI. For the purpose of conserving, for the benefit of the Corporation, the knowledge, experience and good will generated by a long period of service in formulating and implementing the basic policies of the Corporation or corporations merged into the corporation, the Board of Directors shall have the power in its discretion to appoint one or more Directors Emeriti. Any person who has served for a period of not less than ten years on the Board of Directors of the Corporation or of any predecessor or affiliate of the Corporation, may be appointed a Director Emeritus by the Board of Directors for an annual term and shall be eligible for reappointment annually at the discretion of the Board. The duties of a Director Emeritus shall consist of being available to the Chairman and President of the Corporation for consultation and advice on any matters pertaining to the Corporation which the Chairman or President may refer to him from time to time. Directors Emeriti shall be notified of and be invited to attend the annual meeting of the Board of Directors and such other meetings as determined by the Chairman or President of the Corporation and 3 be entitled to be heard at such meetings on matters pending before the Board of Directors. They shall not be members of the Board nor be entitled to vote as such nor be counted as constituting part of a quorum. Section 5. COMPENSATION. Directors, members of committees and Directors Emeriti shall receive such compensation as the Board shall from time to time prescribe. ARTICLE IV MEETINGS OF DIRECTORS Section 1. ANNUAL MEETING. After each annual election of Directors, the newly elected Directors may meet for the purpose of organization, the election of Officers, and the transaction of other business, at such place and time as shall be fixed by the stockholders at the annual meeting, and, if a majority of the Directors be present at such place and time, no prior notice of such meeting shall be required to be given to the Directors. The place and time of such meeting may also be fixed by written consent of the Directors. Section 2. REGULAR MEETINGS. Bi-monthly meetings of the Board of Directors shall be held in January, March, May, July, September and November in each year, on the date and at a time and place designated from time to time by the Board of Directors. The Secretary shall forward to each Director, at least five days before any such meeting, a notice of the time and place of the meeting. Section 3. SPECIAL MEETINGS. Special meetings of the Directors may be called by the Chairman or President on two days' notice in writing, or on one day's notice by telegraph to each Director, and shall be called by the President in like manner on the written request of two or more Directors. Section 4. LOCATION. Meetings of the Directors may be held within or without the State of Delaware at such place as is indicated in the notice of waiver of notice thereof. 4 Section 5. QUORUM. A majority of the Directors shall constitute a quorum, but a smaller number may adjourn from time to time, without further notice, until a quorum is secured. ARTICLE V COMMITTEES Section 1. CREATION. The Board of Directors may, by resolution or resolutions passed by a majority of the Board, designate one or more committees each to consist of three or more Directors of the Corporation. Each such Committee shall have and may exercise such powers and duties as shall be delegated to it by the Board of Directors except that no such Committee shall have power to (a) elect Directors; (b) alter, amend or repeal these By-Laws or any resolution or resolutions of the Board of Directors relating to such Committee; (c) declare any dividend or make any other distribution to the stockholders of the Corporation; (d) appoint any member of such Committee; or (e) take any other action which may lawfully be taken only by the Board. Section 2. COMMITTEE PROCEDURE. Each such Committee established by the Board shall meet at stated times or on notice to all members by any member of such Committee. Each such Committee shall establish its own rules of procedure. Each such Committee shall keep regular minutes of its proceedings and report the same to the Board of Directors. ARTICLE VI INDEMNIFICATION The Corporation shall indemnify its Directors, Officers and employees, and shall have the power to indemnify its other agents, to the full extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time, (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide on June 29, 1989). Expenses (including attorneys' fees) 5 incurred by an Officer, Director or employee in defending any civil, criminal, administrative, or investigative action, suit or proceeding shall to the fullest extent permitted by law be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Director, Officer or employee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized hereunder. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. ARTICLE VII OFFICERS Section 1. General. The Officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, a Controller and such other Officers as may from time to time be chosen by the Board of Directors. The Chief Executive Officer shall be empowered to appoint and remove from office, at his discretion, Assistant Vice Presidents and Assistant Secretaries. Any number of offices may be held by the same person, unless the certificate of incorporation or these By-laws otherwise provide. Section 2. TERM. The Officers of the Corporation shall hold office until their successors are chosen and qualified. Any Officer chosen or appointed by the Board of Directors may be removed either with or without cause at any time by the affirmative vote of a majority of the whole Board of Directors. If the office of any Officer other than an assistant officer becomes vacant for any reason, the vacancy shall be filled by the affirmative vote of a majority of the whole Board of Directors. 6 Section 3. CHAIRMAN OF THE BOARD. A Chairman of the Board shall be chosen from among the Directors. The Chairman of the Board shall preside at all meetings of the stockholders and Directors and shall perform such other duties as may be prescribed by the Board of Directors. Section 4. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall have responsibility for the general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 5. PRESIDENT. The President shall be the Chief Operating Officer of the Corporation. The President shall have such responsibilities and authority as determined by the Chief Executive Officer of the Corporation. Section 6. VICE PRESIDENT. The Vice President or Vice Presidents, in the order designated by the Board of Directors, shall be vested with all the powers and required to perform all the duties of the President in his absence or disability and shall perform such other duties as may be prescribed by the Board of Directors. Section 7. SECRETARY. The Secretary shall perform all the duties commonly incident to his office, and keep accurate minutes of all meetings of the stockholders, the Board of Directors and the Committees of the Board of Directors, recording all the proceedings of such meetings in a book kept for that purpose. He shall give proper notice of meetings of stockholders and Directors and perform such other duties as the Board of Directors shall designate. Section 8. TREASURER. The Treasurer shall have custody of the funds and securities of the Corporation and shall keep full and accurate accounts of disbursements and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board or President, taking proper vouchers for such disbursements, and shall render to 7 the President and Directors, whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall perform such other duties as the Board of Directors may from time to time prescribe. Section 9. CONTROLLER. The Controller shall maintain adequate records of all assets, liabilities and transactions of the Corporation and shall see that adequate audits thereof are currently and regularly made. He shall cause to be prepared, compiled and filed such reports, statements, statistics and other data as may be required by law or prescribed by the President and shall perform such other duties as may be prescribed by the Board of Directors. ARTICLE VIII STOCK Section 1. CERTIFICATES. Certificates of stock of the Corporation shall be signed by, or in the name of, the Corporation by the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number of shares of the holder thereof. The Board of Directors may appoint a transfer agent, and a registrar of transfers, which may be the same agency, and may require all certificates to bear the signatures of such transfer agent and such registrar of transfers, or as the Board of Directors may otherwise direct. Where any such certificate is signed by a transfer agent or transfer clerk and by a registrar, the signatures of any such President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimiles engraved or printed. The certificates shall bear the seal of the Corporation or shall bear a facsimile of such seal engraved or printed. In case any Officer or Officers who have signed, or whose facsimile signature or signatures have been used on, any certificate or certificates of stock, has ceased to be an Officer or Officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates 8 have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon, had not ceased to be such Officer or Officers of the Corporation. Section 2. LOST CERTIFICATES. If a certificate of stock is lost or destroyed, another may be issued in its stead upon proof of loss or destruction and the giving of a satisfactory bond of indemnity, in an amount sufficient to indemnify the Corporation against any claim. A certificate may be issued without requiring bond when, in the judgment of the Directors, it is proper to do so. Section 3. TRANSFERS. All transfers of stock of the Corporation shall be made upon its books by the holder of the shares in person or by his lawfully constituted representative, upon surrender of certificates of stock for cancellation. Section 4. FIXING RECORD DATE. The Board of Directors may fix in advance a record date in order to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. The record date shall not be more than sixty nor less than ten days before the date of any meeting of stockholders nor more than sixty days prior to any other action. Section 5. STOCKHOLDERS OF RECORD. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, except as expressly provided by the laws of Delaware. 9 ARTICLE IX GENERAL PROVISIONS Section 1. FISCAL YEAR. The fiscal year of the Corporation shall begin the first day of January and end on the 31st day of December of each year. Section 2. DIVIDENDS. Dividends upon the capital stock may be declared by the Board of Directors at any regular or special meeting and may be paid in cash or in property or in shares of the capital stock. Before paying any dividend or making any distribution of profits, the Directors may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may alter or abolish any such reserve or reserves. Section 3. CHECKS. All checks, drafts or orders for the payment of money shall be signed by the Treasurer or by such other Officer, Officers, employee or employees as the Board of Directors may from time to time designate. Section 4. CORPORATE SEAL. The Corporate Seal shall have inscribed thereon the name of the Corporation, the year of its incorporation, and the words "Incorporated Delaware." ARTICLE X AMENDMENT OF BY-LAWS Subject to the provisions of any resolution of Directors creating any series of preferred stock, the Board of Directors shall have the power from time to time to make, alter or repeal by-laws, but any by-laws made by the Board of Directors may be altered, amended or repealed by the stockholders at any annual meeting of stockholders, or at any special meeting provided that the notice of such proposed alteration, amendment or repeal is included in the notice of such special meeting. 10 EX-10 4 Exhibit 10.6 Incentive Compensation Plan of US Airways Group, Inc. as amended and restated January 1, 1997 The Incentive Compensation Plan of US Airways Group, Inc. was originally adopted by the Corporation effective January 1, 1988. By action of the Corporation's Board of Directors, the Plan has been amended and restated in its entirety to be effective for Plan Years beginning after December 31, 1996. 1. Purpose -- The purpose of the Plan is to reward executives and other key management employees of US Airways and other subsidiaries of the Corporation and to motivate them to increase shareholder value and to achieve profitable results. 2. Definitions -- When used in this Plan, unless the context otherwise suggests: (a) "Committee" shall mean the Human Resources Committee of the Corporation's Board of Directors. (b) "Corporation" shall mean US Airways Group, Inc. (c) "Plan" shall mean the Incentive Compensation Plan of US Airways Group, Inc. (d) "Plan Year" shall mean January 1 to December 31 to coincide with the Corporation's fiscal year. (e) "US Airways" shall mean US Airways, Inc. 3. Administration -- The Plan shall be administered by the Committee. Any Committee member who is eligible to participate in the Plan shall abstain from voting on any matter before the Committee relating to the Plan. The Committee may authorize and establish such rules, regulations, and procedures as it may determine advisable to make the Plan effective or to provide for its administration and may take such other action with regard to the Plan as it shall deem desirable to effectuate its purposes. A determination of the Committee as to any questions which arise with respect to the interpretation of the provisions of the Plan shall be final. 4. Participants -- Executives and other key management employees of US Airways and other subsidiaries of the Corporation as approved by the Committee, 5. Eligibility -- Participants must be actively employed on the date of payment under the Plan in order to be eligible to receive an award. However, should a Participant retire, die or become disabled at any time during the Plan Year, a pro rata award may be paid based on the Participant's number of full months of active service during the Plan Year. Participants in an eligible position for less than a full Plan Year, due to the commencement of employment, promotion or demotion, shall receive a pro rata award based on the number of full months in the eligible position. Participants whose target percentage changes during a Plan Year will receive an award based on a pro rata calculation between the percentages. 6. Awards -- The Plan provides for the payment of incentive and bonus awards. (a) Incentive Awards: (i) The Committee will establish target awards for each officer Participant in the Plan stated as a percentage of the Participant's base salary. The senior officer whose responsibilities include Human Resources, with the concurrence of the Chief Executive Officer, will establish target awards for each non-officer Participant in the Plan stated as a percentage of the Participant's base salary. (ii) The Committee shall establish objectives for the Plan Year by March 31 of the Plan Year against which incentive awards will be measured. (iii)Target awards may be paid if the Corporation and the Participant meet established objectives. If objectives are achieved at the maximum level, awards may be paid up to 200% of target. Notwithstanding any other provision of the Plan, the Committee retains the right at its sole discretion to increase or decrease a Participant's award (including down to zero (0) or in excess of 200% of the individual's target), based on the individual Participant's performance. (b) Bonus Awards: For any Plan Year in which no incentive awards are paid, the Committee retains the right to authorize bonus awards under the Plan to such Participants and in such amounts as it shall determine in its sole discretion. (c) Incentive and bonus awards shall be paid in a lump sum cash distribution to Participants as soon as practical following the close of the Plan Year and after such awards have been approved by the Committee. 7. Tax Withholding -- Cash awards made pursuant to the Plan are subject to applicable federal, state and local, if any, payroll tax withholdings. 8. Amendment of Plan -- The Committee may from time to time amend the Plan and its terms and conditions and may at any time discontinue the granting of awards under the Plan. 9. Effective Date and Term of Plan -- The Plan shall be effective as of January 1, 1988 and shall remain in effect until the Committee, in its sole discretion, decides to terminate the Plan. Page 2 EX-10 5 Exhibit 10.9 1997 STOCK INCENTIVE PLAN OF US AIRWAYS GROUP, INC. (as amended and restated as of November 18, 1997) 1. PURPOSE. The purpose of this Stock Incentive Plan is to advance the interests of the Corporation by encouraging the acquisition of a larger personal proprietary interest in the Corporation by key employees of the Corporation and of its Subsidiaries upon whose judgment and dedication the Corporation is largely dependent for the successful conduct of its business. It is anticipated that the acquisition of such proprietary interest in the Corporation will stimulate the efforts of such key employees on behalf of the Corporation and strengthen their desire to remain with the Corporation or its Subsidiaries and that the opportunity to acquire such a proprietary interest will enable the Corporation and its Subsidiaries to attract and retain desirable personnel. 2. DEFINITIONS. When used in this Plan, unless the context otherwise requires: (a) "Affiliate" shall mean a person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Corporation. (b) "Board" shall mean the Board of Directors of the Corporation. (c) "Cause" shall mean an act or acts of personal dishonesty taken by optionee and intended to result in substantial personal enrichment at the expense of the Corporation or any of its Subsidiaries or the conviction of optionee of a felony. (d) "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Corporation (the "Outstanding Group Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Group Voting Securities"); provided, however, that the following acquisi- tions shall not constitute a Change of Control: (w) any acquisition directly from the Corporation, (x) any acquisition by the Corporation or any of its Subsidiaries, (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Subsidiaries, or (z) any acquisition by any corporation with respect to which, following such acquisition, more than 85% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such acquisition, in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; or (iii) Approval by the shareholders of the Corporation of a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such reorganization, 2 merger or consolidation do not following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 85% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (iv) Approval by the shareholders of the Corporation of (x) a complete liquidation or dissolution of the Corporation or (y) the sale or other disposition of all or substantially all of the assets of the Corporation, other than to a corporation, with respect to which following such sale or other disposition, more than 85% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (v) The acquisition by an individual, entity or group of beneficial ownership of 20% or more of the then outstanding securities of the Corporation, including both voting and non-voting securities, provided, however, that such acquisition shall only constitute a change of control in the event that such individual, entity or group also obtains the power to elect by class vote, cumulative voting or otherwise to appoint 20% or more of the total number of directors to the Board. (e) "Code" shall mean the Internal Revenue Code of 1986, as 3 amended. (f) "Committee" shall mean the Human Resources Committee of the Board or such other committee as may be designated by the Board. (g) "Corporation" shall mean US Airways Group, Inc. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (i) "Fair Market Value" shall mean the average of the high and low sales prices of the Shares as reported on the New York Stock Exchange Composite Tape on the date as of which such value is being determined or, if there shall be no sale on that date, then on the last previous day on which a sale was reported, provided, however, that during the 60-day period from and after a Change of Control, "Fair Market Value" shall mean, other than in the case of Shares subject to incentive stock options, as defined in the Code, the higher of (X) the highest reported sales price, regular way, of Shares on the New York Stock Exchange Composite Tape during the 60-day period prior to the Change of Control and (Y) if the Change of Control is the result of a transaction or series of transactions described in paragraphs (i), (iii) or (iv) of the definition of "Change of Control" herein, the highest price for Shares paid in such transaction or series of transactions which in the case of such paragraph (i) shall be the highest price for Shares as reflected in a Schedule 13D filed under the Exchange Act by the person having made the acquisition. (j) "Options" shall mean the stock options issued pursuant to Section 5 hereof. (k) "Plan" shall mean the 1997 Stock Incentive Plan of US Airways Group, Inc., as such Plan may be amended from time to time. (l) "Restricted Period" means the period selected by the Committee pursuant to Section 6 hereof. (m) "Restricted Stock" means Shares which have been awarded to a grantee subject to the restrictions referred to in Section 6 hereof so long as such restrictions are in effect. (n) "Share" shall mean a share of common stock of the Corporation. (o) "Subsidiary" shall mean any corporation more than 50% 4 of whose stock having general voting power is owned by the Corporation or by a Subsidiary of the Corporation. 3. ADMINISTRATION. The Plan shall be administered by the Committee which, unless otherwise determined by the Board, shall consist of not less than two directors of the Corporation, each of whom shall qualify as a "disinterested director" (within the meaning of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act) and as an "outside director" (within the meaning of Section 162(m)(4)(c) of the Code). No more than 750,000 Shares, which may be either treasury Shares or authorized but unissued Shares, of the Corporation's common stock in the aggregate, except to the extent of adjustments authorized by Section 11 hereof, may be issued pursuant to Options and Restricted Stock awards granted under this Plan. Any Shares subject to Options or Restricted Stock awards may thereafter be subject to new grants under this Plan if there is a lapse, expiration or termination of any such Options or Restricted Stock awards prior to issuance of the Shares or if Shares are issued hereunder and thereafter reacquired by the Corporation pursuant to rights reserved by the Corporation in connection with the issuance thereof. No individual may be granted Options or Restricted Stock awards with respect to more than an aggregate of 750,000 Shares in any one calendar year. The Committee may authorize and establish such rules, regulations and revisions thereof not inconsistent with the provisions of the Plan, as it may determine advisable to make the Plan, Options, and Restricted Stock effective or provide for their administration, and may take such other action with regard to the Plan, Options, and Restricted Stock as it shall deem desirable to effectuate their purpose. The Committee may require that any Options granted be exercisable in installments. A determination of the Committee as to any questions which may arise with respect to the interpretation of the provisions of the Plan, Options and Restricted Stock shall be final. 4. PARTICIPANTS. Options and Restricted Stock may be granted under the Plan to any key employee of the Corporation or any Subsidiary or to any individual in contemplation of becoming a key employee of the Corporation or any Subsidiary; provided, however, that neither Options nor Restricted Stock may be granted to any individual who, at the time of grant, is an officer of the Corporation or any of its Subsidiaries. Subject to the preceding sentence, the individuals to whom Options and Restricted Stock are to be offered under the Plan and the number of Shares to be optioned and Restricted Stock to be issued to each such individual shall be determined by the Committee in its sole discretion, subject, however, to the terms and conditions of the Plan. 5. OPTIONS. The number of Shares to be optioned to any eligible person shall be determined by the Committee in its sole 5 discretion. The Committee shall be entitled to issue Options at different times to the same person. Options shall be subject to such terms and conditions and evidenced by agreements in such form as shall be determined from time to time by the Chief Executive Officer, provided that the terms and conditions of each such agreement are not inconsistent with this Plan. The purchase price per Share for the Shares to be purchased pursuant to the exercise of any Option shall be fixed by the Committee, but shall not be less than 100% of the Fair Market Value of the Shares on the date such Option is granted; provided, however, for purposes of any grant of Options by the Committee the meaning of Fair Market Value shall be as defined in Section 2(i) hereof without regard to the proviso in such definition. No Option granted under the Plan shall be exercisable after ten years and one month from the date it was granted or such earlier date as shall be established by the Committee in granting the Option. Except as otherwise provided herein, an Option shall be exercisable by the holder at such rate and times as may be fixed by the Committee; provided, however, upon a Change of Control, all Options shall become immediately exercisable. The Committee may provide that the Option shall not be exercisable, in whole or in part, except upon the fulfillment of specific defined conditions. No Option may at any time be exercised in part with respect to fewer than 100 Shares unless fewer than 100 Shares remain in the Option grant being exercised. Options shall be exercised by written notice to the Secretary of the Corporation (or the Secretary's designated agent) in such form as is from time to time prescribed by the Committee and by the payment in full of the aggregate exercise price of the Options being exercised. Payment of the purchase price upon exercise of any Option shall be made (A) in cash or (B) in whole or in part, (i) in Shares valued at Fair Market Value on the date of exercise or (ii) by electing to have the Corporation withhold a number of shares of common stock otherwise receivable upon exercise, the value of such withheld shares determined by the Fair Market Value on the date of exercise; provided, however, that during the 60-day period from and after a Change of Control all optionees with respect to any or all of their respective Options shall, unless the Committee shall determine otherwise at the time of grant, have the right, in lieu of the payment of the full option price of the Shares being purchased under the Options and by giving written notice to the Corporation in form satisfactory to the Committee, to elect (within such 60-day period) to surrender all or part of the Options to the Corporation and to receive in cash an amount equal to the amount by which the Fair Market Value of Shares on the date of exercise exceeds the option price per Share under the Options multiplied by the number of Shares granted under the Options as to which the right granted by this proviso shall have been exercised. Such written notice shall specify the optionee's 6 election to purchase Shares granted under the Options or to receive the cash payment referred to in the proviso to the immediately preceding sentence. 6. RESTRICTED STOCK. Subject to the terms of the Plan, the Committee shall determine and designate the recipients of Restricted Stock awards, the dates on which such awards are to be granted, the number of Shares subject to such awards, and the restrictions applicable to such awards. Restricted Stock awards shall be subject to such terms and conditions and evidenced by agreements in such form as shall be determined from time to time by the Chief Executive Officer, provided that the terms and conditions of each such agreement are not inconsistent with this Plan. 7. NONTRANSFERABILITY OF OPTIONS AND RESTRICTED STOCK. Except as otherwise provided by the Committee, Options and Restricted Stock shall not be transferable by the holder thereof otherwise than by will or the laws of descent and distribution to the extent provided herein, and Options may be exercised during the holder's lifetime only by the holder thereof. 8. TAX WITHHOLDING. If as a result of: (a) the exercise of any Options or the disposition of any Shares acquired pursuant to such exercise, or (b) the lapse of any restrictions on the disposition of Restricted Stock, the Corporation or Subsidiary shall be required to withhold any amounts by reason of any Federal, state or local tax rules or regulations, the Corporation or Subsidiary shall be entitled to deduct and withhold such amounts from any cash payments to be made to the holder. In any event, the holder shall make available to the Corporation or Subsidiary, promptly when required, sufficient funds to meet the requirement for such withholding; and the Committee shall be entitled to take and authorize such steps as it may deem advisable in order to have such funds available to the Corporation or Subsidiary when required. Notwithstanding the foregoing, the holder shall have the right to satisfy such withholding, in whole or in part, in Shares (including by having the Corporation withhold Shares otherwise issuable in respect of such Options or Restricted Stock) valued at Fair Market Value on the date of exercise or lapse of restrictions, as applicable. 9. TAX LIABILITY. Subject to the Committee's discretion, agreements between the Corporation and grantees in connection with awards of Options or Restricted Stock may provide for the payment by the Corporation of a supplemental cash payment to grantees promptly after the exercise of an Option, or promptly after the date on which the shares of Restricted Stock awarded are included in the gross income of the grantee under the Code. Such supplemental cash payments, to the extent determined by the Committee, shall provide for the payment of such amounts as may be necessary to result in the grantee not having any incremental tax liability as a result of such exercise or inclusion in grantee's gross income. The determination of the amount of any 7 supplemental cash payments by the Committee shall be conclusive. 10. TERMINATION OF EMPLOYMENT. Notwithstanding any provision of the Plan to the contrary, (i) upon the termination of employment of an Optionee with the Corporation and all Subsidiaries other than for Cause, the optionee (or the optionee's estate in the event of the optionee's death) shall have the privilege of exercising any unexercised Options which the optionee could have exercised at the time of such termination of employment at any time until the end of six months following such termination of employment and (ii) upon the termination of employment of an optionee with the Corporation and all Subsidiaries for Cause, all unexercised Options of such optionee shall terminate ten days after such termination of employment. The Committee may permit individual exceptions to the requirements of this section by extending the period in which Options may be exercised, provided, however, that no Options may be extended past the earlier to occur of (i) their expiration date or (ii) three years following termination of employment. 11. ADJUSTMENT OF OPTIONED SHARES. If prior to the complete exercise of any Option there shall be declared and paid a stock dividend upon the Shares of the Corporation or if the Shares shall be split-up, converted, reclassified, or changed into, or exchanged for, a different number or kind of securities of the Corporation, the Option, to the extent that it has not been exercised, shall entitle the holder upon the future exercise of such Option to such number and kind of securities or other property subject to the terms of the Option to which he would be entitled had he actually owned the Shares subject to the unexercised portion of the Option at the time of the occurrence of such stock dividend, split-up, conversion, reclassification, change or exchange; and the aggregate purchase price upon the future exercise of the Option shall be the same as if originally optioned Shares were being purchased thereunder. If any such event should occur, the number of Shares with respect to which Options remain to be issued, or with respect to which Options may be reissued, shall be similarly adjusted. In the event the outstanding Shares shall be changed into or exchanged for any other class or series of capital stock or cash, securities or other property pursuant to a recapitalization, reclassification, merger, consolidation, combination or similar transaction, then each Option shall thereafter become exercisable for the number and/or kind of capital stock, and/or the amount of cash, securities or other property so distributed, into which the Shares subject to the Option would have been changed or exchanged had the Option been exercised in full prior to such transaction, provided that, if the kind or amount of capital stock or cash, securities or other property received in such transaction is not the same for each outstanding Share, then the kind or amount of capital stock or cash, securities or other property for which the Option shall thereafter become exercisable shall be the kind and 8 amount so receivable per Share by a plurality of the Shares, and provided further that, if necessary, the provisions of the Option shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of capital stock, cash, securities or other property thereafter issuable or deliverable upon exercise of the Option. 12. ISSUANCE OF SHARES AND COMPLIANCE WITH SECURITIES ACT. The Corporation may postpone the issuance and delivery of Shares upon any exercise of an Option, or upon any lapsing of restriction on any shares of Restricted Stock until (a) the admission of such Shares to listing on any stock exchange on which Shares are then listed and (b) the completion of such registration or other qualification of such Shares under any state or Federal law, rule or regulation as the Corporation shall determine to be necessary or advisable. Any person exercising an Option and any grantee of Restricted Stock shall make such representations and furnish such information as may, in the opinion of counsel for the Corporation, be appropriate to permit the Corporation, in light of the then existence or nonexistence with respect to such Shares of an effective registration statement under the Securities Act of 1933, as from time to time amended, to issue the Shares in compliance with the provisions of that or any comparable act. 13. AMENDMENT OF THE PLAN. The Committee may at any time discontinue the Plan or the grant of any additional Options or Restricted Stock under the Plan. Except as hereinafter provided, the Committee may from time to time amend the Plan and the terms and conditions of any Options or Restricted Stock not theretofore issued, and the Committee, with the consent of the affected holder of an Option or Restricted Stock, may at any time withdraw or from time to time amend the Plan and the terms and conditions of such Option or Restricted Stock as have been theretofore granted. 14. EFFECTIVENESS AND TERM OF THE PLAN. The Plan shall become effective and in full force and effect upon its approval by the Board and, unless sooner terminated by the Committee pursuant to Section 13 hereof, the Plan shall terminate on the date ten years after such approval. No Option or Restricted Stock may be granted or awarded after termination of the Plan. Termination of the Plan shall not affect the validity of any Option or Restricted Stock outstanding on the date of such termination. 9 (..continued) EX-10 6 Exhibit 10.10 1996 STOCK INCENTIVE PLAN OF US AIRWAYS GROUP, INC. (as amended and restated as of November 18, 1997) 1. PURPOSE. The purpose of this Stock Incentive Plan is to advance the interests of the Corporation by encouraging the acquisition of a larger personal proprietary interest in the Corporation by key employees of the Corporation and of its Subsidiaries upon whose judgment and dedication the Corporation is largely dependent for the successful conduct of its business. It is anticipated that the acquisition of such proprietary interest in the Corporation will stimulate the efforts of such key employees on behalf of the Corporation and strengthen their desire to remain with the Corporation or its Subsidiaries and that the opportunity to acquire such a proprietary interest will enable the Corporation and its Subsidiaries to attract and retain desirable personnel. 2. DEFINITIONS. When used in this Plan, unless the context otherwise requires: (a) "Affiliate" shall mean a person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Corporation. (b) "Board" shall mean the Board of Directors of the Corporation. (c) "Cause" shall mean an act or acts of personal dishonesty taken by optionee and intended to result in substantial personal enrichment at the expense of the Corporation or any of its Subsidiaries or the conviction of optionee of a felony. (d) "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Corporation (the "Outstanding Group Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Group Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (w) any acquisition directly from the Corporation, (x) any acquisition by the Corporation or any of its Subsidiaries, (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Subsidiaries, or (z) any acquisition by any corporation with respect to which, following such acquisition, more than 85% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such acquisition, in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; or (iii) Approval by the shareholders of the Corporation of a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such reorganization, merger or consolidation do not following such 2 reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 85% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (iv) Approval by the shareholders of the Corporation of (x) a complete liquidation or dissolution of the Corporation or (y) the sale or other disposition of all or substantially all of the assets of the Corporation, other than to a corporation, with respect to which following such sale or other disposition, more than 85% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (v) The acquisition by an individual, entity or group of beneficial ownership of 20% or more of the then outstanding securities of the Corporation, including both voting and non-voting securities, provided, however, that such acquisition shall only constitute a change of control in the event that such individual, entity or group also obtains the power to elect by class vote, cumulative voting or otherwise to appoint 20% or more of the total number of directors to the Board. (e) "Code" shall mean the Internal Revenue Code of 1986, as 3 amended. (f) "Committee" shall mean the Human Resources Committee of the Board or such other committee as may be designated by the Board. (g) "Corporation" shall mean US Airways Group, Inc. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (i) "Fair Market Value" shall mean the average of the high and low sales prices of the Shares as reported on the New York Stock Exchange Composite Tape on the date as of which such value is being determined or, if there shall be no sale on that date, then on the last previous day on which a sale was reported, provided, however, that during the 60-day period from and after a Change of Control, "Fair Market Value" shall mean the higher of (X) the highest reported sales price, regular way, of Shares on the New York Stock Exchange Composite Tape during the 60-day period prior to the Change of Control and (Y) if the Change of Control is the result of a transaction or series of transactions described in paragraphs (i), (iii) or (iv) of the definition of "Change of Control" herein, the highest price for Shares paid in such transaction or series of transactions which in the case of such paragraph (i) shall be the highest price for Shares as reflected in a Schedule 13D filed under the Exchange Act by the person having made the acquisition. (j) "Options" shall mean the stock options issued pursuant to Section 5 hereof. (k) "Plan" shall mean the 1996 Stock Incentive Plan of US Airways Group, Inc., as such Plan may be amended from time to time. (l) "Restricted Period" means the period selected by the Committee pursuant to Section 6 hereof. (m) "Restricted Stock" means Shares which have been awarded to a grantee subject to the restrictions referred to in Section 6 hereof so long as such restrictions are in effect. (n) "Share" shall mean a share of common stock of the Corporation. 4 (o) "Subsidiary" shall mean any corporation more than 50% of whose stock having general voting power is owned by the Corporation or by a Subsidiary of the Corporation. 3. ADMINISTRATION. The Plan shall be administered by the Committee which, unless otherwise determined by the Board, shall consist of not less than two directors of the Corporation, each of whom shall qualify as a "disinterested director" (within the meaning of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act) and as an "outside director" (within the meaning of Section 162(m)(4)(c) of the Code). No more than 3,100,000 Shares, which may be either treasury Shares or authorized but unissued Shares, of the Corporation's common stock in the aggregate, except to the extent of adjustments authorized by Section 11 hereof, may be issued pursuant to Options and Restricted Stock awards granted under this Plan. Any Shares subject to Options or Restricted Stock awards may thereafter be subject to new grants under this Plan if there is a lapse, expiration or termination of any such Options or Restricted Stock awards prior to issuance of the Shares or if Shares are issued hereunder and thereafter reacquired by the Corporation pursuant to rights reserved by the Corporation in connection with the issuance thereof. The Committee may authorize and establish such rules, regulations and revisions thereof not inconsistent with the provisions of the Plan, as it may determine advisable to make the Plan, Options, and Restricted Stock effective or provide for their administration, and may take such other action with regard to the Plan, Options, and Restricted Stock as it shall deem desirable to effectuate their purpose. The Committee may require that any Options granted be exercisable in installments. A determination of the Committee as to any questions which may arise with respect to the interpretation of the provisions of the Plan, Options and Restricted Stock shall be final. This Plan shall constitute an amendment and restatement of the Corporation's 1988 Stock Incentive Plan with respect to the Shares reserved thereunder for which awards had not yet been granted thereunder as of the date of adoption of this Plan by the Board (or which again become available upon the lapse, expiration or termination of any award previously made thereunder). Options and other awards with respect to such Shares may be granted hereunder by the Committee in accordance with the terms of this Plan. 4. PARTICIPANTS. Options and Restricted Stock may be granted under the Plan to any key employee of the Corporation or any Subsidiary or to any individual in contemplation of becoming 5 a key employee of the Corporation or any Subsidiary. The individuals to whom Options and Restricted Stock are to be offered under the Plan and the number of Shares to be optioned and Restricted Stock to be issued to each such individual shall be determined by the Committee in its sole discretion, subject, however, to the terms and conditions of the Plan. 5. OPTIONS. The number of Shares to be optioned to any eligible person shall be determined by the Committee in its sole discretion. The Committee shall be entitled to issue Options at different times to the same person. Options shall be subject to such terms and conditions and evidenced by agreements in such form as shall be determined from time to time by the Chief Executive Officer, provided that the terms and conditions of each such agreement are not inconsistent with this Plan. The purchase price per Share for the Shares to be purchased pursuant to the exercise of any Option shall be fixed by the Committee, but shall not be less than 100% of the Fair Market Value of the Shares on the date such Option is granted; provided, however, for purposes of any grant of Options by the Committee the meaning of Fair Market Value shall be as defined in Section 2(i) hereof without regard to the proviso in such definition. No Option granted under the Plan shall be exercisable after ten years and one month from the date it was granted or such earlier date as shall be established by the Committee in granting the Option. Except as otherwise provided herein, an Option shall be exercisable by the holder at such rate and times as may be fixed by the Committee, but not sooner than approval of the Plan by the stockholders of the Corporation; provided, however, upon a Change of Control, all Options shall become immediately exercisable. The Committee may provide that the Option shall not be exercisable, in whole or in part, except upon the fulfillment of specific defined conditions. No Option may at any time be exercised in part with respect to fewer than 100 Shares unless fewer than 100 Shares remain in the Option grant being exercised. Options shall be exercised by written notice to the Secretary of the Corporation (or the Secretary's designated agent) in such form as is from time to time prescribed by the Committee and by the payment in full of the aggregate exercise price of the Options being exercised. Payment of the purchase price upon exercise of any Option shall be made (A) in cash or (B) in whole or in part, (i) in Shares valued at Fair Market Value on the date of exercise or (ii) with respect to the exercise of Options which are not incentive stock options, as defined in Section 422 of the Code, by electing to have the 6 Corporation withhold a number of shares of common stock otherwise receivable upon exercise, the value of such withheld shares determined by the Fair Market Value on the date of exercise; provided, however, that during the 60-day period from and after a Change of Control all optionees with respect to any or all of their respective Options shall, unless the Committee shall determine otherwise at the time of grant, have the right, in lieu of the payment of the full option price of the Shares being purchased under the Options and by giving written notice to the Corporation in form satisfactory to the Committee, to elect (within such 60-day period) to surrender all or part of the Options to the Corporation and to receive in cash an amount equal to the amount by which the Fair Market Value of Shares on the date of exercise exceeds the option price per Share under the Options multiplied by the number of Shares granted under the Options as to which the right granted by this proviso shall have been exercised. Such written notice shall specify the optionee's election to purchase Shares granted under the Options or to receive the cash payment referred to in the proviso to the immediately preceding sentence. 6. RESTRICTED STOCK. Subject to the terms of the Plan, the Committee shall determine and designate the recipients of Restricted Stock awards, the dates on which such awards are to be granted, the number of Shares subject to such awards, and the restrictions applicable to such awards. Restricted Stock awards shall be subject to such terms and conditions and evidenced by agreements in such form as shall be determined from time to time by the Chief Executive Officer, provided that the terms and conditions of each such agreement are not inconsistent with this Plan. 7. NONTRANSFERABILITY OF OPTIONS AND RESTRICTED STOCK. Options and Restricted Stock shall not be transferable by the holder thereof otherwise than by will or the laws of descent and distribution to the extent provided herein, and Options may be exercised during the holder's lifetime only by the holder thereof. 8. TAX WITHHOLDING. If as a result of: (a) the exercise of any Options or the disposition of any Shares acquired pursuant to such exercise, or (b) the lapse of any restrictions on the disposition of Restricted Stock, the Corporation or Subsidiary shall be required to withhold any amounts by reason of any Federal, state or local tax rules or regulations, the Corporation or Subsidiary shall be entitled to deduct and withhold such amounts from any cash payments to be made to the holder. In any event, the holder shall make available to the Corporation or Subsidiary, promptly when required, sufficient funds to meet the 7 requirement for such withholding; and the Committee shall be entitled to take and authorize such steps as it may deem advisable in order to have such funds available to the Corporation or Subsidiary when required. Notwithstanding the foregoing, the holder shall have the right to satisfy such withholding, in whole or in part, in Shares (including by having the Corporation withhold Shares otherwise issuable in respect of such Options or Restricted Stock) valued at Fair Market Value on the date of exercise or lapse of restrictions, as applicable. 9. TAX LIABILITY. Subject to the Committee's discretion, agreements between the Corporation and grantees in connection with awards of Options or Restricted Stock may provide for the payment by the Corporation of a supplemental cash payment to grantees promptly after the exercise of an Option, or promptly after the date on which the shares of Restricted Stock awarded are included in the gross income of the grantee under the Code. Such supplemental cash payments, to the extent determined by the Committee, shall provide for the payment of such amounts as may be necessary to result in the grantee not having any incremental tax liability as a result of such exercise or inclusion in grantee's gross income. The determination of the amount of any supplemental cash payments by the Committee shall be conclusive. 10. TERMINATION OF EMPLOYMENT. Notwithstanding any provision of the Plan to the contrary, (i) upon the termination of employment of an Optionee with the Corporation and all Subsidiaries other than for Cause, the optionee (or the optionee's estate in the event of the optionee's death) shall have the privilege of exercising any unexercised Options which the optionee could have exercised at the time of such termination of employment at any time until the end of six months following such termination of employment and (ii) upon the termination of employment of an optionee with the Corporation and all Subsidiaries for Cause, all unexercised Options of such optionee shall terminate ten days after such termination of employment. The Committee may permit individual exceptions to the requirements of this section by extending the period in which Options may be exercised, provided, however, that no Options may be extended past the earlier to occur of (i) their expiration date or (ii) three years following termination of employment. 11. ADJUSTMENT OF OPTIONED SHARES. If prior to the complete exercise of any Option there shall be declared and paid a stock dividend upon the Shares of the Corporation or if the Shares shall be split-up, converted, reclassified, or changed into, or exchanged for, a different number or kind of securities of the Corporation, the Option, to the extent that it has not 8 been exercised, shall entitle the holder upon the future exercise of such Option to such number and kind of securities or other property subject to the terms of the Option to which he would be entitled had he actually owned the Shares subject to the unexercised portion of the Option at the time of the occurrence of such stock dividend, split-up, conversion, reclassification, change or exchange; and the aggregate purchase price upon the future exercise of the Option shall be the same as if originally optioned Shares were being purchased thereunder. If any such event should occur, the number of Shares with respect to which Options remain to be issued, or with respect to which Options may be reissued, shall be similarly adjusted. In the event the outstanding Shares shall be changed into or exchanged for any other class or series of capital stock or cash, securities or other property pursuant to a recapitalization, reclassification, merger, consolidation, combination or similar transaction, then each Option shall thereafter become exercisable for the number and/or kind of capital stock, and/or the amount of cash, securities or other property so distributed, into which the Shares subject to the Option would have been changed or exchanged had the Option been exercised in full prior to such transaction, provided that, if the kind or amount of capital stock or cash, securities or other property received in such transaction is not the same for each outstanding Share, then the kind or amount of capital stock or cash, securities or other property for which the Option shall thereafter become exercisable shall be the kind and amount so receivable per Share by a plurality of the Shares, and provided further that, if necessary, the provisions of the Option shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of capital stock, cash, securities or other property thereafter issuable or deliverable upon exercise of the Option. 12. ISSUANCE OF SHARES AND COMPLIANCE WITH SECURITIES ACT. The Corporation may postpone the issuance and delivery of Shares upon any exercise of an Option, or upon any lapsing of restriction on any shares of Restricted Stock until (a) the admission of such Shares to listing on any stock exchange on which Shares are then listed and (b) the completion of such registration or other qualification of such Shares under any state or Federal law, rule or regulation as the Corporation shall determine to be necessary or advisable. Any person exercising an Option and any grantee of Restricted Stock shall make such representations and furnish such information as may, in the opinion of counsel for the Corporation, be appropriate to permit the Corporation, in light of the then existence or nonexistence with respect to such Shares of an effective registration statement under the Securities Act of 1933, as from time to time 9 amended, to issue the Shares in compliance with the provisions of that or any comparable act. 13. AMENDMENT OF THE PLAN. The Committee may at any time discontinue the Plan or the grant of any additional Options or Restricted Stock under the Plan. Except as hereinafter provided, the Committee may from time to time amend the Plan and the terms and conditions of any Options or Restricted Stock not theretofore issued, and the Committee, with the consent of the affected holder of an Option or Restricted Stock, may at any time withdraw or from time to time amend the Plan and the terms and conditions of such Option or Restricted Stock as have been theretofore granted. 14. EFFECTIVENESS AND TERM OF THE PLAN. The Plan shall become effective and in full force and effect upon its approval by the holders of a majority of the Shares present or represented and entitled to vote at the 1996 annual meeting of the stockholders of the Corporation and, unless sooner terminated by the Committee pursuant to Section 13 hereof, the Plan shall terminate on the date ten years after such approval. No Option or Restricted Stock may be granted or awarded after termination of the Plan. Termination of the Plan shall not affect the validity of any Option or Restricted Stock outstanding on the date of such termination. 10 (..continued) EX-10 7 Exhibit 10.12 USAIR GROUP, INC. NONEMPLOYEE DIRECTOR DEFERRED STOCK UNIT PLAN 1. PURPOSE 1.1 The USAir Group, Inc. Nonemployee Director Deferred Stock Unit Plan is intended to increase the alignment of the interests of eligible members of the Board with the interests of stockholders of the Corporation by increasing their incentive to contribute to the success of the Corporation's business through the grant of Deferred Stock Units. 1.2 The Plan is intended to comply with Rule 16b-3 under the Exchange Act, as such rule may be amended from time to time, and shall be construed to so comply. 2. DEFINITIONS When used in this Plan, unless the context otherwise requires: (a) "Board" shall mean the Board of Directors of the Corporation. (b) "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Corporation (the "Outstanding Group Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Group Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (w) any acquisition directly from the Corporation, (x) any acquisition by the Corporation or any of its Subsidiaries, (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Subsidiaries, or (z) any acquisition by any corporation with respect to which, following such acquisition, more than 85% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such acquisition, in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; or (iii) Approval by the shareholders of the Corporation of a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such reorganization, merger or consolidation do not following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 85% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (iv) Approval by the shareholders of the corporation of (x) a complete liquidation or dissolution of the Corporation or (y) the sale or other disposition of all or substantially all of the assets of the Corporation, other than to a corporation, with respect to which following such sale or other 2 disposition, more than 85% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Group Common Stock and Outstanding Group Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Group Common Stock and Outstanding Group Voting Securities, as the case may be; or (v) The acquisition by an individual, entity or group of beneficial ownership of 20% or more of the then outstanding securities of the Corporation, including both voting and non-voting securities, provided, however, that such acquisition shall only constitute a change of control in the event that such individual, entity or group also obtains the power to elect by class vote, cumulative voting or otherwise to appoint 20% or more of the total number of directors to the Board. (c) "Committee" shall mean the Human Resources Committee of the Board or such other committee as may be designated by the Board. (d) "Corporation" shall mean USAir Group, Inc. (e) "Date of Grant" shall mean the date on which Deferred Stock Units are granted pursuant to Section 5.1. (f) "Deferred Stock Units" shall mean the units issued pursuant to Section 5 hereof. (g) "Eligible Director" shall mean each member of the Board who (i) is not at the time of reference an employee of the Corporation or any Subsidiary, (ii) is not serving on the Board pursuant to rights exercised by a preferred stockholder of the Corporation, and (iii) in the case of an individual first becoming a member of the Board after January 1, 1996, was not previously an employee of the Corporation or any Subsidiary. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (i) "Fair Market Value" shall mean the average of the high and low sales prices of the Stock as reported on the 3 New York Stock Exchange Composite Tape on the date as of which such value is being determined or, if there shall be no sale on that date, then on the last previous day on which a sale was reported. (j) "Plan" shall mean the USAir Group, Inc. Nonemployee Director Deferred Stock Unit Plan, as such Plan may be amended from time to time. (k) "Stock" shall mean the common stock of the Corporation. (l) "Subsidiary" shall mean any corporation more than 50% of whose stock having general voting power is owned by the Corporation or by a Subsidiary of the Corporation. 3. ADMINISTRATION 3.1 The Plan shall be administered by the Committee. 3.2 The Committee may make such rules and establish such procedures for the administration of the Plan as it deems appropriate to carry out the purpose of the Plan, provided that the Committee shall have no discretion with respect to the grantee, amount, price or timing of any Deferred Stock Unit. The interpretation and application of the Plan or of any rule or procedure, and any other matter relating to or necessary to the administration of the Plan, shall be determined by the Committee, and any such determination shall be final and binding on all persons. Deferred Stock Units shall be evidenced by agreements in such form as shall be determined from time to time by the Committee, provided that the terms and conditions of each such agreement are not inconsistent with this Plan. 4. CAPITAL ADJUSTMENTS 4.1 In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation or a similar corporate transaction, the class of shares available under the Plan, and the number or class of shares of Stock represented by Deferred Stock Units granted hereunder shall be proportionately adjusted to reflect any such transaction. 5. GRANT OF DEFERRED STOCK UNITS 5.1 ANNUAL GRANT. The Corporation shall establish a bookkeeping account for each Eligible Director. On the first business day following the 1996 annual meeting of stockholders of the Corporation, the bookkeeping account of each Eligible Director shall automatically be credited with 500 Deferred Stock Units. Thereafter, on the first business day following the annual meeting of stockholders of the Corporation held in each year subsequent to 1996 and prior to the termination of the Plan, the bookkeeping account of each Eligible Director shall 4 automatically be credited with 500 Deferred Stock Units. 5.2 TERMS AND CONDITIONS OF DEFERRED STOCK UNITS. (a) VESTING. The Deferred Stock Units shall become nonforfeitable on the earliest to occur of (i) the first anniversary of the Date of Grant, (ii) the Eligible Director's death, disability or termination of service as a director upon completion of the last term of office to which such director was elected, or (iii) the occurrence of a Change of Control. If an Eligible Director otherwise terminates service as a Director, any Deferred Stock Units that are forfeitable shall be forfeited as of the date of such termination of service. (b) DIVIDEND EQUIVALENTS. As of each dividend payment date declared with respect to the Stock, the Corporation shall credit to each bookkeeping account a number of additional Deferred Stock Units equal to (i) the product of (x) the dividend per share of Stock payable on such dividend payment date and (y) the number of Deferred Stock Units credited to such account as of the applicable dividend record date divided by (ii) the Fair Market Value of a share of Stock on such dividend payment date. (c) PAYMENT WITH RESPECT TO DEFERRED STOCK UNITS. Upon the termination of service of an Eligible Director the Eligible Director shall receive a lump sum cash payment equal to the product of (i) the Fair Market Value of a share of Stock on the date of such termination of service and (ii) the number of nonforfeitable Deferred Stock Units then credited to such Eligible Director's account. Notwithstanding the foregoing, an Eligible Director may elect to receive the distribution with respect to his or her account in five annual installments commencing as soon as practicable following the Eligible Director's termination of service, in which event, the amount of each installment shall be determined based upon the Fair Market Value of a share of Stock as of the date preceding the date such installment payment is made. Any such election may be made or changed at any time without limitation provided, however, that any election (and any modification or revocation of any election) shall not be given effect unless made at least one year prior to the Eligible Director's termination of service. (d) RIGHTS WITH RESPECT TO DEFERRED STOCK UNITS. The holder of Deferred Stock Units shall have none of the rights of a stockholder of the Corporation. The Corporation's obligation hereunder with respect to Deferred stock Units shall be an unsecured promise to pay the amount described in Section 5(c) above at the times described therein. 6. EFFECTIVE DATE; TERM OF PLAN 6.1 The Plan shall be effective as of May 22, 1996. 5 6.2 The Plan shall remain in effect until all Deferred Stock Units have been paid under the terms of the Plan, provided that no Deferred Stock Units may be granted after the tenth anniversary of the effective date of the Plan. 7. AMENDMENT; TERMINATION 7.1 The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part; PROVIDED, HOWEVER, that the provisions of Section 5 shall not be amended more than every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act, as amended, or the rules thereunder. The termination or any modification or amendment of the Plan shall not, without the consent of a director, affect his or her rights under a grant of Deferred Stock Units. 8. MISCELLANEOUS 8.1 Deferred Stock Units granted hereunder shall not be assignable or transferable by the director except by will or by the laws of descent and distribution. 8.2 Nothing in the Plan shall be construed as conferring any right upon any director to continue as a member of the Board. 8.3 The Plan and all rights hereunder shall be construed in accordance with and governed by the laws of the State of Delaware. 8.4 TAX WITHHOLDING. The Corporation shall have the right to require, prior to any payment hereunder, payment by the holder of such award of any federal, state, local or other taxes which may be required to be withheld or paid in connection with such award. 6 (..continued) EX-11 8 US Airways Group, Inc. Exhibit 11 Computation of Basic and Diluted Earnings Per Common Share (in thousands, except per share amounts) Year Ended December 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- Adjustments to Net Income - ------------------------- Net income $1,024,699 $263,373 $119,287 Preferred dividend requirement (63,262) a) (88,775) (84,904) --------- ------- ------- Earnings applicable to common stock and common stock equivalents used for basic computation 961,437 174,598 34,383 Diluted adjustments Assume conversion of all preferred stock: Preferred dividend requirement 63,262 a) 88,775 b) 84,904 c) --------- ------- ------- Adjusted net earnings applicable to common stock assuming full dilution $1,024,699 $263,373 $119,287 ========= ======= ======= Adjustments to common stock shares outstanding - ---------------------------------------------- Weighted average number of shares of common stock outstanding used for basic computation 78,054 64,021 62,352 Diluted adjustments Incremental shares from outstanding stock options (treasury stock method) 1,888 898 78 Assume conversion of all preferred stock 23,627 d) 39,155 b) 39,156 c) --------- ------- ------- Total weighted average number of common shares outstanding after full conversion 103,569 104,074 101,586 ========= ======= ======= Earnings per Common Share - ------------------------- Basic $ 12.32 $ 2.73 $ 0.55 ========= ======= ======= Diluted $ 9.89 $ 2.53 $ 1.17 ========= ======= ======= a) Includes repurchase premiums of $5.2 million and $0.8 million on 1,940.636 shares of Series F Preferred Stock and the Series T Preferred Stock, respectively (May 22, 1997 repurchase date). See also d) below. b) The effects of assuming conversion of the Series H Preferred Stock are antidilutive, but included for purposes of this calculation in accordance with Regulation S-K, Item 601(b)(11). c) The effects of assuming conversion of each series of preferred stock are antidilutive, but included for purposes of this calculation in accordance with Regulation S-K, Item 601(b)(11). d) For the time they were outstanding during the period, the effects of assuming conversion of the shares of Series F Preferred Stock prior to its repurchase are antidilutive, but included for purposes of this calculation in accordance with Regulation S-K, Item 601(b)(11). See also a) above. EX-21 9 EXHIBIT 21.1 Subsidiaries of US Airways Group, Inc. - -------------------------------------- US Airways, Inc. Incorporated under the laws of the State of Delaware. Allegheny Airlines, Inc. (operates under the trade name "US Airways Express") Incorporated under the laws of the State of Delaware. Piedmont Airlines, Inc. (operates under the trade name "US Airways Express") Incorporated under the laws of the State of Maryland. PSA Airlines, Inc. (operates under the trade name "US Airways Express") Incorporated under the laws of the State of Pennsylvania. Shuttle, Inc. (operates under the trade name "US Airways Shuttle") Incorporated under the laws of the State of Delaware. US Airways Fuel Corporation Incorporated under the laws of the State of Delaware. US Airways Leasing and Sales, Inc. Incorporated under the laws of the State of Delaware. Material Services Company, Inc. Incorporated under the laws of the State of Delaware. EX-21 10 EXHIBIT 21.2 Subsidiary of US Airways, Inc. - ------------------------------ USAM Corp. Incorporated under the laws of the State of Delaware. EX-23 11 EXHIBIT 23.1 Consent of Independent Auditors The Board of Directors US Airways Group, Inc.: We consent to the incorporation by reference in the registration statement nos. 2-98828, 33-26762, 33-39896, 33-44835, 33-60618 and 33-60620 on Form S-8 and the registration statement nos. 33-41821 and 33-50231 on Form S-3 of US Airways Group, Inc. of our report dated February 25, 1998, except as to Note 15 which is as of March 12, 1998, relating to the consolidated balance sheets of US Airways Group, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and changes in stockholders' equity (deficit) for each of the years in the three-year period ended December 31, 1997 which appear in the December 31, 1997 Annual Report on Form 10-K of the Company and US Airways, Inc. KPMG Peat Marwick LLP Washington, D.C. March 18, 1998 EX-23 12 EXHIBIT 23.2 Consent of Independent Auditors The Board of Directors US Airways, Inc.: We consent to the incorporation by reference in the registration statement nos. 33-35509 and 33-50231-01 on Form S-3 of US Airways, Inc. of our report dated February 25, 1998 relating to the consolidated balance sheets of US Airways, Inc. and subsidiary ("US Airways") as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and changes in stockholder's equity (deficit) for each of the years in the three-year period ended December 31, 1997 which appear in the December 31, 1997 Annual Report on Form 10-K of US Airways Group, Inc. and US Airways. KPMG Peat Marwick LLP Washington, DC March 18, 1998 EX-24 13 Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito, Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Mathias J. DeVito ----------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Rakesh Gangwal, Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Rakesh Gangwal ------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman, Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ George J. W. Goodman ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris, Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ John W. Harris ------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan, Jr., Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Edward A. Horrigan, Jr. ---------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert L. Johnson, Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Robert L. Johnson ---------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn, Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Robert LeBuhn ------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr., Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ John G. Medlin, Jr. ------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman, Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Hanne M. Merriman ---------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith, Director of US Airways Group, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Raymond W. Smith --------------------- EX-24 14 Exhibit 24.2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito, Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Mathias J. DeVito ---------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Rakesh Gangwal, Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Rakesh Gangwal ------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman, Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ George J. W. Goodman ------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris, Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ John W. Harris ------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan, Jr., Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Edward A. Horrigan, Jr. ---------------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert L. Johnson, Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Robert L. Johnson ----------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn, Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Robert LeBuhn ----------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr., Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ John G. Medlin, Jr. ----------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman, Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Hanne M. Merriman ---------------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith, Director of US Airways, Inc., (the "Company"), do hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of them (with full power to each of them to act alone), attorney and agent for me and in my name and on my behalf to sign any Annual Report on Form 10-K of the Company for the year ended December 31, 1997 and any amendments or supplements thereto which shall be filed with the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended. I hereby give and grant to said attorneys and agents, and each of them, full power and authority generally to do and perform all acts and things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present; and I hereby ratify and confirm all that said attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of March, 1998. /s/ Raymond W. Smith -------------------- EX-27 15
5 0000701345 US AIRWAYS GROUP, INC. 1,000 YEAR DEC-31-1997 DEC-31-1997 1,094,108 870,205 300,162 0 226,023 2,777,416 6,252,318 2,527,237 8,372,399 2,528,294 2,425,820 358,000 0 91,482 633,827 8,372,399 0 8,513,824 0 7,929,555 0 0 256,055 672,036 (352,663) 961,437 0 0 0 961,437 12.32 9.87 Receivables are presented net of allowances.
EX-27 16
5 0000714560 US AIRWAYS, INC. 1,000 YEAR DEC-31-1997 DEC-31-1997 1,091,540 870,205 491,052 0 200,494 2,934,980 5,889,277 2,428,948 8,265,500 2,450,563 2,424,954 0 0 1 1,101,766 8,265,500 0 8,501,485 0 7,915,335 0 0 260,029 673,229 (378,930) 1,052,159 0 0 0 1,052,159 0 0 Receivables are presented net of allowances. EPS calculations are not relevant because US Airways, Inc. is a wholly-owned subsidiary of US Airways Group, Inc.
EX-27 17
5 0000701345 US AIRWAYS GROUP, INC. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 868,848 1,135,750 1,224,411 595,408 482,118 857,068 450,825 408,077 410,984 0 0 0 235,759 238,065 223,458 2,307,552 2,404,581 2,837,192 6,376,859 6,413,105 6,420,380 2,517,494 2,599,954 2,719,346 7,470,923 7,514,295 7,923,916 2,691,663 2,587,716 2,714,307 2,577,997 2,546,146 2,441,084 758,719 358,000 358,000 213,128 213,128 0 64,567 80,111 91,119 (846,161) (372,473) 171,074 7,470,923 7,514,295 7,923,916 0 0 0 2,101,078 4,313,688 6,428,860 0 0 0 1,925,450 3,822,516 5,914,525 0 0 0 0 0 0 64,508 128,685 192,642 165,374 397,338 629,092 12,716 39,094 83,818 152,658 358,244 545,274 0 0 0 0 0 0 0 0 0 152,658 358,244 545,274 2.05 4.60 6.66 1.45 3.39 5.21 Receivables are presented net of allowances. This amount was restated to conform with current classifications.
EX-27 18
5 0000701345 US AIRWAYS GROUP, INC. 1,000 6-MOS 9-MOS YEAR DEC-31-1996 DEC-31-1996 DEC-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 775,389 655,447 950,966 464,071 631,114 635,839 423,161 410,293 337,025 0 0 0 237,181 250,600 248,774 2,040,808 2,085,489 2,310,194 6,372,192 6,431,580 6,388,325 2,399,951 2,464,772 2,470,337 7,343,909 7,371,828 7,531,411 2,777,881 2,741,413 2,848,719 2,679,765 2,625,790 2,615,780 758,719 758,719 758,719 213,153 213,153 213,128 64,216 64,216 64,306 (928,867) (938,776) (861,816) 7,343,909 7,371,828 7,531,411 0 0 0 4,017,909 6,090,476 8,142,413 0 0 0 3,761,178 5,702,393 7,704,920 0 0 0 0 0 0 134,953 201,409 267,122 175,583 254,796 275,482 7,101 18,576 12,109 168,482 236,220 263,373 0 0 0 0 0 0 0 0 0 168,482 236,220 263,373 1.94 2.64 2.73 1.55 2.15 2.35 Receivables are presented net of allowances. This amount was restated to conform with current classifications.
EX-27 19
5 0000714560 US AIRWAYS, INC. 1,000 9-MOS 6-MOS DEC-31-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 1,223,761 1,134,728 857,068 482,118 465,224 456,345 0 0 192,191 207,200 2,841,685 2,406,615 6,157,154 6,151,559 2,624,118 2,505,043 7,849,972 7,435,793 2,674,296 2,544,154 2,440,193 2,545,231 0 0 0 0 1 1 603,744 260,259 7,849,972 7,435,793 0 0 6,414,130 4,298,820 0 0 5,896,000 3,865,742 0 0 0 0 196,637 132,166 631,055 396,111 98,734 50,696 532,321 345,415 0 0 0 0 0 0 532,321 345,415 0 0 0 0 Receivables are presented net of allowances. EPS calculations are not relevant because US Airways, Inc. is a wholly-owned subsidiary of US Airways Group, Inc. This amount was restated to conform with current classifications.
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