<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
USAir Group, Inc.
(Commission file number: 1-8444)
and
USAir, Inc.
(Commission file number: 1-8442)
(Exact names of registrants as specified in their charters)
Delaware USAir Group, Inc. 54-1194634
(State of incorporation USAir, Inc. 53-0218143
of both registrants) (I.R.S. Employer Identification Numbers)
USAir Group, Inc.
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 418-5306
(Registrant's telephone number, including area code)
USAir, Inc.
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 418-7000
(Registrant's telephone number, including area code)
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 [ ]
At October 31, 1996, there were outstanding approximately 64,180,000
shares of common stock of USAir Group, Inc. and 1,000 shares of common stock
of USAir, Inc.
The registrant USAir, Inc. meets the conditions set forth in General
Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in
the filing of this form with the reduced disclosure format.
<PAGE>
USAir Group, Inc.
and
USAir, Inc.
Quarterly Report on Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1A. Financial Statements - USAir Group, Inc.
Condensed Consolidated Statements of Operations
-- Three Months and Nine Months Ended September 30,
1996 and 1995 1
Condensed Consolidated Balance Sheets
-- September 30, 1996 and December 31, 1995 2
Condensed Consolidated Statements of Cash Flows
-- Nine Months Ended September 30, 1996 and 1995 4
Notes to Condensed Consolidated Financial Statements 6
Item 1B. Financial Statements - USAir, Inc.
Condensed Consolidated Statements of Operations
-- Three Months and Nine Months Ended September 30,
1996 and 1995 11
Condensed Consolidated Balance Sheets
-- September 30, 1996 and December 31, 1995 12
Condensed Consolidated Statements of Cash Flows
-- Nine Months Ended September 30, 1996 and 1995 14
Notes to Condensed Consolidated Financial Statements 16
Item 2. Management's Discussion and Analysis of Financial 18
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 34
Item 3. Defaults Upon Senior Securities 34
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 37
</TABLE>
<PAGE>
Part 1. Financial Information
Item 1A. Financial Statements
<TABLE>
<CAPTION>
USAir Group, Inc.
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1996 and 1995 (unaudited)
- --------------------------------------------------------------------------
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenues
Passenger transportation $ 1,885,792 $ 1,687,824 $ 5,520,502 $ 5,078,439
Cargo and freight 39,701 37,889 117,944 118,306
Other 147,074 147,704 452,030 423,063
------------- ------------- ------------- -------------
Total Operating Revenues 2,072,567 1,873,417 6,090,476 5,619,808
Operating Expenses
Personnel costs 810,282 730,145 2,351,826 2,179,066
Aviation fuel 188,321 154,223 532,394 477,666
Commissions 147,088 135,400 440,225 431,222
Aircraft rent 116,378 108,718 321,641 329,738
Other rent and landing fees 105,839 105,308 311,539 310,506
Aircraft maintenance 75,446 83,287 265,903 264,928
Depreciation and amortization 77,411 87,912 238,072 263,978
Other, net 420,450 375,775 1,240,793 1,148,937
------------- ------------- ------------- -------------
Total Operating Expenses 1,941,215 1,780,768 5,702,393 5,406,041
------------- ------------- ------------- -------------
Operating Income (Loss) 131,352 92,649 388,083 213,767
Other Income (Expense)
Interest income 21,732 13,562 51,409 32,553
Interest expense (66,456) (75,065) (201,409) (228,521)
Interest capitalized 2,280 758 5,702 7,730
Equity in earnings (loss) of affiliates 9,791 9,234 31,102 27,781
Other, net (19,486) 8,332 (20,091) 12,137
------------- ------------- ------------- -------------
Other Income (Expense), Net (52,139) (43,179) (133,287) (148,320)
------------- ------------- ------------- -------------
Income (Loss) Before Taxes 79,213 49,470 254,796 65,447
Provision (Credit) for Income Taxes 11,475 6,414 18,576 6,414
------------- ------------- ------------- -------------
Net Income (Loss) 67,738 43,056 236,220 59,033
Preferred Dividend Requirement (22,338) (21,415) (67,134) (63,044)
------------- ------------- ------------- -------------
Net Income (Loss) Applicable to
Common Stockholders $ 45,400 $ 21,641 $ 169,086 $ (4,011)
============= ============= ============= =============
Income (Loss) per Common Share
Primary $ 0.69 $ 0.35 $ 2.58 $ (0.06)
Fully-diluted $ 0.60 N/A $ 2.15 N/A
Shares Used for Computation (000)
Primary 65,838 62,571 65,457 62,143
Fully-diluted 95,754 N/A 95,373 N/A
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
USAir Group, Inc.
Condensed Consolidated Balance Sheets
September 30, 1996 (unaudited) and December 31, 1995
- ----------------------------------------------------
(dollars in thousands, except per share amounts)
September 30, December 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 655,447 $ 881,854
Short-term investments 631,114 19,831
Receivables, net 410,293 322,122
Materials and supplies, net 250,600 248,144
Prepaid expenses and other 138,035 111,131
--------------- --------------
Total current assets 2,085,489 1,583,082
Property and Equipment
Flight equipment 5,275,700 5,251,742
Ground property and equipment 1,091,620 1,073,720
Less accumulated depreciation and amortization (2,464,773) (2,301,059)
--------------- --------------
3,902,547 4,024,403
Purchase deposits 64,261 17,026
--------------- --------------
Property and equipment, net 3,966,808 4,041,429
Other Assets
Goodwill, net 498,524 510,562
Other intangibles, net 302,389 312,786
Other assets, net 518,618 507,149
--------------- --------------
Total other assets 1,319,531 1,330,497
--------------- --------------
$ 7,371,828 $ 6,955,008
=============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 94,727 $ 80,721
Accounts payable 380,546 325,330
Traffic balances payable and unused tickets 844,353 607,170
Accrued expenses 1,421,787 1,471,475
--------------- --------------
Total current liabilities 2,741,413 2,484,696
Long-term Debt, Net of Current Maturities 2,625,790 2,717,085
Deferred Credits and Other Liabilities
Deferred gains, net 366,555 386,947
Postretirement benefits other than pensions,
non-current 1,076,688 1,015,623
Non-current employee benefit liabilities and other 464,070 427,726
--------------- --------------
Total deferred credits and other liabilities 1,907,313 1,830,296
</TABLE>
(continued on next page)
2
<PAGE>
<TABLE>
<CAPTION>
USAir Group, Inc.
Condensed Consolidated Balance Sheets
September 30, 1996 (unaudited) and December 31, 1995 (Continued)
- ------------------------------------------------------------------
(dollars in thousands, except per share amounts)
September 30, December 31,
1996 1995
--------------- --------------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Commitments and Contingencies
Redeemable Cumulative Convertible Preferred Stock
Series A, 358,000 shares issued, no par value 358,000 358,000
(redemption value of $417,181 at September 30,
1996)
Series F, 30,000 shares issued, no par value 300,000 300,000
(redemption value of $331,429 at September 30,
1996)
Series T, 10,000 shares issued, no par value 100,719 100,719
(redemption value of $110,044 at September 30,
1996)
Stockholders' Equity (Deficit)
Series B cumulative convertible preferred stock,
no par value, 4,263,000 depositary shares 213,153 213,153
issued (liquidation preference of $250,455 at
September 30, 1996)
Common stock, par value $1 per share, authorized
150,000,000 shares, issued and outstanding 64,216 63,449
64,216,000 and 63,449,000 shares, respectively
Paid-in capital 1,385,139 1,362,756
Retained earnings (deficit) (2,144,991) (2,298,211)
Deferred compensation (100,929) (98,847)
Adjustment for minimum pension liability (77,995) (78,088)
--------------- --------------
Total stockholders' equity (deficit) (661,407) (835,788)
--------------- --------------
$ 7,371,828 $ 6,955,008
=============== ==============
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
USAir Group, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 (unaudited)
- ---------------------------------------------------------
(in thousands)
Nine Months Ended September 30,
-------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash and cash equivalents beginning of period $ 881,854 $ 429,538
---------- ----------
Cash flows from operating activities
Net income (loss) 236,220 59,033
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities
Depreciation and amortization 238,072 263,978
Loss (gain) on disposition of property (889) (13,762)
Amortization of deferred gains and credits (20,749) (20,704)
Other 42,560 (2,847)
Changes in certain assets and liabilities
Decrease (increase) in receivables (88,171) (130,595)
Decrease (increase) in materials, supplies,
prepaid expenses and intangible pension assets (42,453) (12,221)
Increase (decrease) in traffic balances
payable and unused tickets 237,183 204,348
Increase (decrease) in accounts payable
and accrued expenses 4,762 72,086
Increase (decrease) in postretirement
benefits other than pensions, non-current 61,065 55,455
---------- ----------
Net cash provided by (used for)
operating activities 667,600 474,771
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net (37,231) (49,675)
Additions to other property (105,711) (55,561)
Proceeds from disposition of property 15,503 154,174
Change in short-term investments (603,983) 21,994
Change in restricted cash and investments (2,347) 330
Other (10,821) (1,421)
---------- ----------
Net cash provided by (used for) investing
activities (744,590) 69,841
</TABLE>
(continued on next page)
4
<PAGE>
<TABLE>
<CAPTION>
USAir Group, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 (unaudited) (Continued)
- ------------------------------------------------------------------------
(in thousands)
Nine Months Ended September 30,
-------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
Cash flows from financing activities
Issuance of debt 103,002 1,162
Reduction of debt (211,942) (118,174)
Issuance of common stock 2,523 8,315
Dividends paid (43,000) -
---------------- ---------------
Net cash provided by (used for) financing
activities (149,417) (108,697)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (226,407) 435,915
---------------- ---------------
Cash and cash equivalents end of period $ 655,447 $ 865,453
================ ===============
Noncash investing and financing activities
Issuance of debt - refinancing of debt secured
by aircraft $ 159,998 $ -
================ ===============
Reduction of debt - refinancing of debt
secured by aircraft $ 154,422 $ -
================ ===============
Issuance of debt - aircraft acquisitions $ 26,075 $ 162,125
================ ===============
Reduction of debt - aircraft purchase deposits $ - $ 70,837
================ ===============
Underwriter's fees - refinancing of debt
secured by aircraft $ 2,488 $ -
================ ===============
Dividends declared, but not paid $ 40,000 $ -
================ ===============
Supplemental Information
Cash paid during the year for interest, net
of amounts capitalized $ 219,270 $ 243,410
================ ===============
Net cash (received) paid during the year
for income taxes $ 7,254 $ 4,609
================ ===============
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
5
<PAGE>
USAir Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include the
accounts of USAir Group, Inc. ("USAir Group" or the "Company") and its
wholly-owned subsidiaries USAir, Inc. ("USAir"), Piedmont Airlines, Inc., PSA
Airlines, Inc. (formerly Jetstream International Airlines, Inc.), Allegheny
Airlines, Inc. (formerly Pennsylvania Commuter Airlines, Inc.), USAir Leasing
and Services, Inc., USAir Fuel Corporation, Material Services Company, Inc.
and The OR Group, Inc. (the "OR Group"). USAir's accounts include its
wholly-owned subsidiary USAM Corp. ("USAM").
The OR Group was incorporated in February 1996 and is a wholly-owned
subsidiary of USAir Group. The OR Group provides resource allocation
consulting services and decision-making support systems to USAir, which is
currently OR Group's only customer.
USAir has announced that it will terminate its Airline Technical
Services, LLC joint venture with a subsidiary of British Airways Plc,
effective January 1997. Airline Technical Services, LLC, a Delaware limited
liability company, was formed during the fourth quarter of 1995 for the
purpose of offering joint aviation maintenance, and technical and engineering
expertise in the Americas. Amounts related to this joint venture included in
the Company's financial results for the first nine months of 1996 are
immaterial and no material charges are expected to result from its
termination.
Management believes that all adjustments necessary for a fair statement
of results have been included in the Condensed Consolidated Financial
Statements for the interim periods presented, which are unaudited. All
significant intercompany accounts and transactions have been eliminated. 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 1995 amounts have been reclassified to conform with 1996
classifications.
These interim period Condensed Consolidated Financial Statements should
be read in conjunction with the Consolidated Financial Statements contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(2) Income (Loss) Per Common Share
The Company includes the effects of assuming conversion of all dilutive
stock options and convertible equity instruments into common stock when
calculating fully-diluted income (loss) per common share. For the three month
period ended September 30, 1996, approximately 1,625,000
6
<PAGE>
incremental shares were included in the calculation as the result of applying
the treasury stock method to the Company's outstanding stock options. For the
same period, the effects of assuming conversion of the Company's Series F
Cumulative Convertible Senior Preferred Stock ("Series F Preferred Stock"),
Series T-1 Cumulative Convertible Exchangeable Senior Preferred Stock ("Series
T-1 Preferred Stock"), Series T-2 Cumulative Convertible Exchangeable Senior
Preferred Stock ("Series T-2 Preferred Stock") (the Series T-1 and Series T-2
Preferred Stock are collectively referred to as the "Series T Preferred
Stock"), and the Series B Cumulative Convertible Preferred Stock ("Series B
Preferred Stock") were dilutive and therefore included in the calculation. The
income and share effects of assuming conversion of these preferred stock
issuances were approximately $12,144,000 and 29,916,000 shares. The effects
of assuming conversion of the Company's 9 % Series A Cumulative Convertible
Redeemable Preferred Stock ("Series A Preferred Stock") were antidilutive and
therefore excluded from the calculation.
For the nine month period ended September 30, 1996, approximately
1,510,000 incremental shares were included in the calculation as the result of
applying the treasury stock method to the Company's outstanding stock options.
For the same period, the effects of assuming conversion of the Series F,
Series T and Series B Preferred Stock were dilutive and therefore included in
the calculation. The total income and share effects of the dilutive preferred
stock issuances were approximately $36,404,000 and 29,916,000 shares. The
effects of assuming conversion of the Series A Preferred Stock were
antidilutive and therefore excluded from the calculation.
(3) Redeemable Preferred Stock
On October 25, 1996, the Company paid dividends of $40.0 million on its
outstanding Series A, Series F and Series T Preferred Stock (collectively the
Company's "Senior Preferred Stock"). The Company also paid dividends of $43.0
million on its Senior Preferred Stock during August 1996. Prior to the
August 1996 payment, the Company had deferred the payment of dividends on all
of its outstanding preferred stock issuances effective with dividend payments
due September 30, 1994.
The Company's capital surplus as of September 30, 1996, as calculated in
accordance with Delaware General Corporation Law based on the Company's
Condensed Consolidated Balance Sheets, was $33.1 million. This surplus amount
includes the effect of the October dividend payment, which was accrued as of
September 30, 1996. The Company's outstanding Series B Preferred Stock is
junior to the Company's Senior Preferred Stock and is not eligible to receive
dividends until the deferred dividends on the Senior Preferred Stock are paid
in full and all Senior Preferred Stock dividend payments are current. There
can be no assurance of when or if the Company's Board of Directors will
declare additional dividends on the Company's outstanding capital stock.
After the October dividend payment, accumulated deferred dividends on all
of the Company's outstanding preferred stock issuances, including penalty
dividends thereon, totaled approximately $97.9 million.
7
<PAGE>
(4) Stockholders' Equity
On May 22, 1996, the Company's stockholders approved the 1996 Stock
Incentive Plan ("1996 Plan") and the Nonemployee Director Stock Incentive Plan
("Director Plan"). With the approval of the 1996 Plan, 3.1 million additional
shares of USAir Group Common Stock ("Common Stock") were authorized for the
granting of stock options and/or restricted stock. In conjunction with the
1996 Plan, 2,745,000 additional shares of Common Stock were reserved for the
granting of stock options and/or restricted stock as of September 30, 1996.
With the approval of the Director Plan, 70,000 shares of Common Stock
were authorized for the granting of stock options to nonemployee directors of
USAir Group. As of September 30, 1996, 15,000 shares of Common Stock were
reserved for the granting of stock options under the Director Plan.
(5) Amendment of the 1992 Stock Option Plan
In September 1996, the Human Resources Committee of the Company's Board
of Directors amended the 1992 Stock Option Plan ("1992 Plan") to permit the
granting of stock appreciation rights ("SARs") in tandem with the options
under this plan. The Committee further amended the 1992 Plan to include the
grant to all option holders of one SAR for each outstanding option held
effective November 1, 1996. For each SAR, the holder is entitled to receive
the difference between the fair market value of a share of USAir Group Common
Stock and $15. The exercise of any SAR cancels its tandem option. Conversely,
the exercise of any option cancels its tandem SAR. The SARs have the same
expiration date as the tandem options.
(6) Nonemployee Director Retirement Plan
The Retirement Plan for Outside Directors of USAir Group, Inc. was
terminated as of December 31, 1995. Pursuant to such termination, (i) no
individual who first becomes a director on or after December 31, 1995 will
participate in the retirement plan and (ii) directors as of December 31, 1995
will be credited with units of phantom stock of the Company ("deferred stock
units" or "DSUs") equal in value to the present value of their accrued
benefits as of December 31, 1995 based on the average price of the stock in
the month of December 1995. Such DSUs will be paid in cash following the
director's termination of service. On May 22, 1996 the Company's stockholders
approved the Nonemployee Director Stock Incentive Plan (see Note 4 for
additional information) providing for an annual grant of 1,500 stock options.
As of January 1, 1996, the Company established the Nonemployee Director
Deferred Stock Unit Plan, pursuant to which each nonemployee director will
receive an annual grant of 500 DSUs. These stock options and DSUs will vest
after the director serves a full one-year term.
USAir Group reversed approximately $93 thousand from its Adjustment for
minimum pension liability (an element of Stockholders' Equity (Deficit)) in
conjunction with the termination of the Retirement Plan for Outside Directors
of USAir Group, Inc.
8
<PAGE>
(7) Select Financial Information - USAM Investments
USAM owns 11% of the Galileo International Partnership ("GIP"),
approximately 11% of the Galileo Japan Partnership ("GJP") and approximately
21% of the Apollo Travel Services Partnership ("ATS"). USAM accounts for these
investments using the equity method. The following is summarized financial
information for GIP and ATS (combined, in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Service revenues $ 370 $ 327 $ 1,114 $ 1,004
Cost and expenses 304 271 898 823
----- ----- ------- -------
Net earnings $ 66 $ 56 $ 216 $ 181
===== ===== ======= =======
</TABLE>
USAM received distributions from GIP and ATS of approximately $2.8
million and $41.9 million (including a special distribution from ATS of $33.7
million during the second quarter of 1996 which represented a distribution of
cash to partners), respectively, during the first nine months of 1996. USAM
received distributions from GIP and ATS of approximately $1.8 million and $9.1
million, respectively, during the first nine months of 1995.
(8) Non-Recurring Items
Results for the first nine months of 1996 include two non-recurring items
recorded by USAir during the second quarter of 1996 related to its
non-operating British Aerospace BAe-146-200 ("BAe-146") aircraft. USAir
reached agreements to sublease eleven BAe-146s during the second quarter. Both
non-recurring items resulted in credits to Operating Expense categories. USAir
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.
(9) Subsequent Event
On November 6, 1996, USAir announced that it has entered into an
agreement-in-principle with AVSA, S.A.R.L., an affiliate of aircraft
manufacturer Airbus Industrie ("Airbus"), regarding the possible acquisition
by USAir of up to 400 Airbus A319, A320 and A321 narrowbody aircraft
(collectively, the "Airbus Aircraft") for delivery to USAir between 1997 and
2009. Completion of the transaction is dependent upon USAir achieving a
competitive cost structure. The proposed transaction, if consummated, would
be comprised of 120 firm Airbus Aircraft and 120 Airbus Aircraft to be
reconfirmed by USAir at a future date. In addition, USAir would have the
option to acquire up to 160 additional Airbus Aircraft with open-ended
delivery dates, USAir would have the flexibility in selecting among the
122-seat A319, the 144-seat A320 and the 168-seat A321, depending upon
projected industry conditions at the time final delivery schedules were set.
9
<PAGE>
The agreement-in-principle with Airbus is subject to several conditions.
Included are Board of Directors approvals, reaching a definitive purchase
agreement and related documentation with Airbus and USAir reaching a
satisfactory arrangement with one or more engine manufacturers.
The Airbus Aircraft are presently intended as, at a minimum, replacement
aircraft for USAir's existing fleet of McDonnell Douglas DC-9-30 and MD-80
aircraft, Boeing 737-200 aircraft, and Fokker F-28-4000 aircraft, all of which
are intended to be disposed of by USAir. The Company has not yet determined
whether consummation of the Airbus transaction and the disposition of the
aircraft intended to be replaced would require the Company to recognize an
"impairment loss" in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
(this space intentionally left blank)
10
<PAGE>
Part 1. Financial Information
Item 1B. Financial Statements
<TABLE>
<CAPTION>
USAir, Inc.
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1996 and 1995 (unaudited)
- --------------------------------------------------------------------------
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
--------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Operating Revenues
Passenger transportation $ 1,739,074 $ 1,561,583 $ 5,093,175 $ 4,724,470
Cargo and freight 38,671 36,923 115,066 115,658
Other 146,312 144,300 449,028 419,627
--------------- --------------- ------------- ---------------
Total Operating Revenues 1,924,057 1,742,806 5,657,269 5,259,755
Operating Expenses
Personnel costs 771,279 691,925 2,237,314 2,077,828
Aviation fuel 178,260 146,811 504,728 456,319
Commissions 137,090 126,110 410,854 404,269
Aircraft rent 103,009 98,295 285,931 300,500
Other rent and landing fees 101,263 101,428 298,417 299,146
Aircraft maintenance 62,099 70,306 222,710 226,497
Depreciation and amortization 73,511 84,007 226,508 252,157
Other, net 400,779 357,626 1,176,383 1,092,326
--------------- --------------- ------------- ---------------
Total Operating Expenses 1,827,290 1,676,508 5,362,845 5,109,042
--------------- --------------- ------------- ---------------
Operating Income (Loss) 96,767 66,298 294,424 150,713
Other Income (Expense)
Interest income 22,041 13,385 51,522 32,158
Interest expense (71,255) (75,931) (213,323) (225,526)
Interest capitalized 2,280 758 5,702 7,730
Equity in earnings (loss) of affiliates 9,791 9,234 31,102 27,781
Other, net (19,931) 6,220 (20,302) 9,930
--------------- --------------- ------------- ---------------
Other Income (Expense), Net (57,074) (46,334) (145,299) (147,927)
--------------- --------------- ------------- ---------------
Income (Loss) Before Taxes 39,693 19,964 149,125 2,786
Provision (Credit) for Income Taxes 11,646 3,365 15,440 3,365
--------------- --------------- ------------- ---------------
Net Income (Loss) $ 28,047 $ 16,599 $ 133,685 $ (579)
=============== =============== ============= ===============
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
USAir, Inc.
Condensed Consolidated Balance Sheets
September 30, 1996 (unaudited) and December 31, 1995
- ----------------------------------------------------
(dollars in thousands, except per share amount)
September 30, December 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 653,893 $ 879,613
Short-term investments 631,114 19,831
Receivables, net 417,097 321,755
Materials and supplies, net 217,535 222,245
Prepaid expenses and other 124,391 97,922
--------------- --------------
Total current assets 2,044,030 1,541,366
Property and Equipment
Flight equipment 5,043,310 5,021,520
Ground property and equipment 1,069,618 1,052,706
Less accumulated depreciation and amortization (2,377,058) (2,222,814)
--------------- --------------
3,735,870 3,851,412
Purchase deposits 64,261 17,026
--------------- --------------
Property and equipment, net 3,800,131 3,868,438
Other Assets
Goodwill, net 498,524 510,562
Other intangibles, net 302,353 312,539
Other assets, net 644,013 590,622
--------------- --------------
Total other assets 1,444,890 1,413,723
--------------- --------------
$ 7,289,051 $ 6,823,527
=============== ==============
LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 94,646 $ 77,496
Accounts payable 337,587 325,079
Payable to parent company 246,788 100,344
Traffic balances payable and unused tickets 883,506 638,019
Accrued expenses 1,381,818 1,435,194
--------------- --------------
Total current liabilities 2,944,345 2,576,132
Long-term Debt, Net of Current Maturities
Long-term debt 2,624,801 2,674,376
Note payable - parent company - 67,556
--------------- --------------
Total long-term debt, net of current maturities 2,624,801 2,741,932
</TABLE>
(continued on next page)
12
<PAGE>
<TABLE>
<CAPTION>
USAir, Inc.
Condensed Consolidated Balance Sheets
September 30, 1996 (unaudited) and December 31, 1995 (Continued)
- ------------------------------------------------------------------
(dollars in thousands, except per share amount)
September 30, December 31,
1996 1995
--------------- --------------
LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIT) (Continued)
<S> <C> <C>
Deferred Credits and Other Liabilities
Deferred gains, net 363,186 382,995
Postretirement benefits other than pensions,
non-current 1,076,438 1,015,373
Non-current employee benefit liabilities and other 457,769 418,268
--------------- --------------
Total deferred credits and other liabilities 1,897,393 1,816,636
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 2,416,131 2,416,131
Retained earnings (deficit) (2,515,625) (2,649,310)
Adjustment for minimum pension liability (77,995) (77,995)
--------------- --------------
Total stockholder's equity (deficit) (177,488) (311,173)
--------------- --------------
$ 7,289,051 $ 6,823,527
=============== ==============
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
USAir, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 (unaudited)
- ---------------------------------------------------------
(in thousands)
Nine Months Ended September 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash and cash equivalents beginning of period $ 879,613 $ 428,925
---------- ----------
Cash flows from operating activities
Net income (loss) 133,685 (579)
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities
Depreciation and amortization 226,508 252,157
Loss (gain) on disposition of property (373) (13,595)
Amortization of deferred gains and credits (19,809) (19,809)
Other 21,708 (2,014)
Changes in certain assets and liabilities
Decrease (increase) in receivables (91,112) (132,123)
Decrease (increase) in materials, supplies,
prepaid expenses and intangible pension assets (32,445) (71)
Increase (decrease) in traffic balances
payable and unused tickets 245,487 217,724
Increase (decrease) in accounts payable
and accrued expenses 75,901 119,017
Increase (decrease) in postretirement
benefits other than pensions, non-current 61,065 55,455
---------- ----------
Net cash provided by (used for)
operating activities 620,615 476,162
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net (37,231) (49,675)
Additions to other property (101,211) (49,556)
Proceeds from disposition of property 14,748 151,909
Change in short-term investments (603,983) 21,994
Change in restricted cash and investments (2,347) 330
Payment of debt for affiliated company (42,830) -
Other (10,490) (1,421)
---------- ----------
Net cash provided by (used for) investing
activities (783,344) 73,581
</TABLE>
(continued on next page)
14
<PAGE>
<TABLE>
<CAPTION>
USAir, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 (unaudited) (Continued)
- ------------------------------------------------------------------------
(in thousands)
Nine Months Ended September 30,
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from financing activities
Issuance of debt 103,002 -
Reduction of debt (165,993) (114,352)
---------------- ----------------
Net cash provided by (used for) financing
activities (62,991) (114,352)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (225,720) 435,391
---------------- ----------------
Cash and cash equivalents end of period $ 653,893 $ 864,316
================ ================
Noncash investing and financing activities
Issuance of debt - refinancing of debt secured
by aircraft $ 159,998 $ -
================ ================
Reduction of debt - refinancing of debt
secured by aircraft $ 154,422 $ -
================ ================
Reduction of parent company debt - aircraft
acquisitions $ 68,641 $ -
================ ================
Issuance of debt - aircraft acquisitions $ 26,075 $ 162,125
================ ================
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 amounts capitalized $ 216,360 $ 235,380
================ ================
Net cash (received) paid during the year
for income taxes $ 6,042 $ 4,751
================ ================
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
15
<PAGE>
USAir, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include the
accounts of USAir, Inc. ("USAir") and its wholly-owned subsidiary USAM Corp.
("USAM"). USAir is a wholly-owned subsidiary of USAir Group, Inc. ("USAir
Group").
USAir has announced that it will terminate its Airline Technical
Services, LLC joint venture with a subsidiary of British Airways Plc,
effective January 1997. Airline Technical Services, LLC, a Delaware limited
liability company, was formed during the fourth quarter of 1995 for the
purpose of offering joint aviation maintenance, and technical and engineering
expertise in the Americas. Amounts related to this joint venture included in
the Company's financial results for the first nine months of 1996 are
immaterial and no material charges are expected to result from its
termination.
Management believes that all adjustments necessary for a fair statement
of results have been included in the Condensed Consolidated Financial
Statements for the interim periods presented, which are unaudited. All
significant intercompany accounts and transactions have been eliminated. 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 1995 amounts have been reclassified to conform with 1996
classifications.
These interim period Condensed Consolidated Financial Statements should
be read in conjunction with the Consolidated Financial Statements contained in
USAir's Annual Report on Form 10-K for the year ended December 31, 1995.
(2) Select Financial Information - USAM Investments
Please refer to Note 7 in USAir Group's "Notes to Condensed Consolidated
Financial Statements" on Page 9 of this report.
(3) Non-Recurring Items
Please refer to Note 8 in USAir Group's "Notes to Condensed Consolidated
Financial Statements" on Page 9 of this report.
16
<PAGE>
(4) Related Party Transactions
During the third quarter of 1996, USAir prepaid certain long-term debt
with a principal balance of approximately $42.8 million for Allegheny
Airlines, Inc. ("Allegheny"), a wholly-owned regional airline subsidiary of
USAir Group. As a result of this transaction, USAir and Allegheny entered into
a long-term note receivable/payable agreement which expires in the year 2003.
The balance of the long-term note receivable was approximately $42.5 million
as of September 30, 1996.
Effective October 1, 1996, USAir is purchasing the capacity generated by
USAir Group's three wholly-owned regional air carriers at a fixed rate per
ASM. These arrangements have no effect on USAir Group's financial statements;
however, USAir's financial statements will reflect increased operating
expenses from the capacity purchases and increased operating revenues from the
sale of the purchased capacity.
(5) Subsequent Event
Please refer to Note 9 in USAir Group's "Notes to Condensed Consolidated
Financial Statements" on Page 9 of this report.
(this space intentionally left blank)
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion relates to the financial condition and results
of operations of USAir Group, Inc. ("USAir Group" or the "Company"). USAir,
Inc. ("USAir") is the Company's principal subsidiary and accounted for
approximately 92% of the Company's operating revenues for the third quarter of
1996. Except where noted, the following discussion is based primarily upon
USAir's financial condition, results of operations and future prospects.
The Company recognized net income of $67.7 million for the third quarter
of 1996 on operating revenues of $2.07 billion. USAir, whose results include
its wholly-owned subsidiary USAM Corp. ("USAM"), recorded net income of $28.0
million for the same period. For the first nine months of 1996, the Company's
net income was $236.2 million and USAir's net income was $133.7 million.
The third quarter of 1996 was characterized by the continuation of the
relatively stable domestic economic climate and favorable capacity and pricing
trends in markets served by the Company's airline subsidiaries that have
existed since mid-1995. However, the Company's airline subsidiaries recently
began experiencing increased competitive pressure. ValuJet Inc. ("ValuJet")
reinstated service on September 30th, Delta Air Lines, Inc. ("Delta") launched
its low cost, low fare product "Delta Express" on October 1st and Southwest
Airlines, Inc. ("Southwest") further expanded its East Coast presence on
October 27th. ValuJet had reduced its service in May 1996 and suspended
operations entirely on June 17, 1996. The Company estimates that approximately
8% of USAir's capacity (as measured by available seat miles or "ASMs")
directly overlapped with ValuJet's route structure prior to ValuJet's service
reduction. ValuJet, which operated 51 aircraft prior to its service reduction,
currently operates 15 aircraft. The Company believes that ValuJet's cessation
of operations had a favorable effect on the Company's Passenger Transportation
revenues during the second and third quarters of 1996, but has not precisely
quantified such effect. The Company is unable to predict whether ValuJet's
capacity in markets also served by USAir will eventually match or exceed the
pre-May 1996 levels.
The Company considers the presence of Delta Express and Southwest a
serious competitive threat in markets served by its airline subsidiaries.
Delta Express marks the culmination of Delta's efforts to establish a product
capable of competing with low cost, low fare air carriers such as ValuJet and
Southwest. Delta Express, which became possible as a result of a new labor
agreement Delta recently entered into with its unionized pilots group,
currently operates between Florida and 10 Northeast and Midwest cities.
Southwest, which first entered the intra-East Coast market during 1993,
recently initiated service between Providence and Baltimore, Orlando, Tampa,
Nashville and Chicago. Southwest's service at Providence, which is
approximately 60 miles from Boston, has resulted in some passenger traffic
being drawn from Boston's Logan International Airport. USAir and its regional
airline affiliates have substantial operations at Boston's Logan International
Airport. Southwest has reported that its unit operating cost is approximately
7.50 cents per ASM and USAir estimates that Delta Express' unit operating cost
will be near this level. USAir's unit operating cost was 12.44 cents per ASM
for the third quarter of 1996.
18
<PAGE>
The Company estimates that USAir's direct route overlap with Delta
Express and Southwest is currently 2.4% and 2.3%, respectively (as measured by
ASMs). However, the Company anticipates that USAir's route overlap with both
competitors, as well as the intensity of the competitive pressure on USAir,
will increase as Delta Express follows its planned doubling of operations by
January 1997 and Southwest allocates additional resources to its new Northeast
operations. Direct competition with low cost, low fare air carriers or
operations has typically resulted in the dilution of yield realized by the
Company's airline subsidiaries, depending on the number of markets affected.
USAir's cost structure continues to be the highest of all major air
carriers in the U.S. Despite the Company's favorable financial results for the
first nine months of 1996, the competitive threat posed by low cost, low fare
competition presents a serious challenge to the Company to lower USAir's cost
structure to remain competitive and ensure long-term financial viability.
Negotiations With Organized Labor Groups
USAir's contract with the International Association of Machinists and
Aerospace Workers ("IAM") became amendable in October of 1995 and its contract
with the Air Line Pilots Association ("ALPA") became amendable on April 30,
1996. USAir's contract with its flight attendant employee group, represented
by the Association of Flight Attendants ("AFA"), will be amendable on January
1, 1997. Collective bargaining talks between USAir and the IAM and ALPA
continued during the third quarter. USAir has also had preliminary talks with
the AFA. USAir cannot predict the outcome of these negotiations at this time
or if it will be able to secure meaningful wage and benefit concessions and
productivity improvements from its unionized employee groups. The Company
remains committed to reducing USAir's personnel costs and improving employee
productivity.
Proposed British Airways-American Airlines Alliance
On June 11, 1996, American Airlines, Inc. ("American") and British
Airways Plc ("British Airways") announced a proposed alliance to jointly
market, price and manage their North Atlantic airline services, effective
April 1, 1997, subject to U.S. and international approvals. The joint services
would carry the designator codes of both airlines and each would code-share
beyond the other's gateways. The two airlines have also indicated that they
intend to act cooperatively in other areas, such as marketing, sales,
facilities use and cargo. British Airways and American have stated that they
will seek antitrust immunity in connection with approval of their alliance.
Certain competition authorities in the U.S. and Europe have made inquiries
into the proposed alliance and several airlines serving the North Atlantic
have raised very strong objections to the proposed alliance.
On July 30, 1996, the Company and USAir 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 USAir have claimed that British Airways, in pursuit of
an alliance with American, has breached its fiduciary duty to the Company and
USAir and has violated certain provisions of the January 21, 1993 Investment
Agreement between the Company and British Airways. In addition, the lawsuit
claims that American has aided
19
<PAGE>
and abetted British Airways' breach of its fiduciary duties and has tortiously
interfered with British Airways' performance of its obligations under the
Investment Agreement. The lawsuit also claims that the defendants are in
violation of U.S. antitrust laws that prohibit conduct that harms competition.
On September 20, 1996, and September 27, 1996, respectively, British
Airways and American filed Motions to Dismiss the lawsuit brought by USAir. In
a hearing on October 25, 1996, U.S. District Court Judge Cederbaum heard oral
arguments on the Motions to Dismiss. The Court dismissed a portion of the
lawsuit against American relating to non-antitrust claims. The other claims
against American and British Airways remain pending and the Court took under
submission the Motions to Dismiss these claims.
The Company is unable to predict at this time the ultimate outcome of
this lawsuit.
Payment of Dividends on Senior Preferred Stock
On October 25, 1996, the Company paid dividends of $40.0 million on its
outstanding Senior Preferred Stock. The Company also paid dividends of $43.0
million on its outstanding Senior Preferred Stock during August 1996. Prior to
the August 1996 dividend payment, the Company had deferred the payment of
dividends on all of its outstanding preferred stock issuances effective with
dividend payments due September 30, 1994.
The Company's capital surplus as of September 30, 1996, as calculated in
accordance with Delaware General Corporation Law based on the Company's
Condensed Consolidated Balance Sheets (which are contained in Part I, Item 1A
of this report), was $33.1 million. This surplus amount is after the effect of
the October dividend payment, which was accrued for payment as of September
30, 1996. The Company's outstanding Series B Preferred Stock is junior to the
Company's Senior Preferred Stock and is not eligible to receive dividends
until the deferred dividends on the Senior Preferred Stock are paid in full
and all Senior Preferred Stock dividend payments are current. There can be no
assurance of when or if the Company's Board of Directors will declare
additional dividends on the Company's outstanding capital stock.
After the October dividend payment, accumulated deferred dividends on all
of the Company's outstanding preferred stock issuances, including penalty
dividends thereon, totaled approximately $97.9 million. See Note 3 to the
Company's Condensed Consolidated Financial Statements contained in Part I,
Item 1A of this report for a description of each of the Company's outstanding
preferred stock issuances and Part II, Item 3 of this report, "Defaults Upon
Senior Securities," for additional information with respect to accumulated
deferred dividends.
Government Regulation
The Federal Aviation Administration ("FAA") has proposed new regulations
that would require flight data recorders that measure more flight parameters
than most original equipment flight data recorders. The proposed regulations,
subject to DOT approval, would require the upgraded flight data recorders to
be installed within four years. The proposal, as drafted, would affect USAir's
20
<PAGE>
entire operating fleet. The Company estimates that the proposed regulations,
if adopted, would cost USAir approximately $20 million over the four year
period. The Company cannot predict whether or when the proposed regulations
will be adopted or if the proposed regulations will result in expenditures
consistent with the Company's current estimate.
Following the July 1996 accident involving a Trans World Airlines, Inc.
aircraft and the speculation that the cause of the accident may have been
sabotage, President Clinton ordered new security measures related to
passenger, baggage and cargo screening, particularly with respect to
international operations. The increased security measures have resulted in an
increase in the Company's operating expenses, although the dollar effect of
the new security measures is not material. The President also formed a
special committee which is reviewing aviation safety and airport security, as
well as the air traffic control system. The committee's final recommendations
are not expected before February 1997. Further increases in
government-mandated security measures may have an adverse effect on the
Company's results of operations and financial condition depending on the
ability of USAir and its regional affiliates to pass-through any new Federal
taxes, surcharges or additional operating expenses to customers. Any
effective increase in the cost of air transportation may dampen passenger and
cargo traffic levels which could have a material adverse effect on the
Company's results of operations and financial condition.
The 10% 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.
The Company cannot estimate the dollar impact of the tax expiration on its
Passenger Transportation revenues during the period the tax was not collected
due to the complexity and number of factors that contribute to the Company's
performance in this area. Legislation to extend the tax past the January 1,
1997 expiration date has not been enacted by Congress. The Company is unable
to predict whether this tax will be extended past the January 1, 1997
expiration date or reimposed at a later date. As mentioned above, any
effective increase in the cost of air transportation may have an adverse
effect on air transportation demand which could have a material adverse effect
on the Company's results of operations and 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.
Airlines had a three year exemption from this tax, which became law during
1992. Attempts to either rescind this tax or reinstate the airline exemption
continue, although these efforts have not been successful to date. USAir
cannot predict the ultimate outcome of future attempts to either rescind the
tax or reinstate the airline exemption. USAir estimates that this tax will
result in additional operating expenses of approximately $42 million for 1996
based on its current projected 1996 domestic aviation fuel consumption. USAir
recognized expense of approximately $11 million and $31 million as a result of
this tax during the third quarter and first nine months of 1996, respectively.
21
<PAGE>
Other Information
On November 12, 1996, USAir Group, Inc. announced that it will change its
name to US Airways Group, Inc. and the name of its wholly-owned subsidiary,
USAir, Inc., will change to US Airways, Inc. The name changes are scheduled
to become effective in early 1997. Following the name changes, USAir's
operations will be conducted under the name US Airways.
On November 6, 1996, USAir announced that it has entered into an
agreement-in-principle with AVSA, S.A.R.L., an affiliate of aircraft
manufacturer Airbus Industrie ("Airbus"), regarding the acquisition by USAir
of up to 400 Airbus A319, A320 and A321 narrowbody aircraft (collectively, the
"Airbus Aircraft") for delivery to USAir between 1997 and 2009. The proposed
transaction would be comprised of 120 firm Airbus Aircraft and 120 Airbus
Aircraft to be reconfirmed by USAir at a future date. In addition, USAir
would have the option to acquire up to 160 additional Airbus Aircraft with
open-ended delivery dates. USAir would have the flexibility in selecting
among the 122-seat A319, the 144-seat A320 and the 168-seat A321, depending
upon projected industry conditions at the time final delivery schedules were
set.
The agreement-in-principle with Airbus remains subject to required
approvals of Airbus and the Company, a definitive purchase agreement and
related documentation with Airbus, USAir reaching a satisfactory arrangement
with one or more engine manufacturers, and USAir achieving a competitive cost
structure.
The Airbus Aircraft are presently intended as, at a minimum, replacement
aircraft for USAir's existing fleet of McDonnell Douglas DC-9-30 and MD-80
aircraft, Boeing 737-200 aircraft, and Fokker F-28-4000 aircraft, all of which
are intended to be disposed of by USAir. The Company has not yet determined
whether consummation of the Airbus transaction and the disposition of the
aircraft intended to be replaced would require the Company to recognize an
"impairment loss" in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
USAir also announced that it would begin examining alternatives for
widebody aircraft to support USAir's goal of increased international
operations.
USAir has advised The Boeing Company ("Boeing") and Rolls Royce Plc that
it does not plan to accept delivery of the eight Boeing 757-200 aircraft USAir
presently has on firm order. USAir is in continuing discussions with Boeing
and other relevant parties regarding modifications to the applicable purchase
agreements. Consistent with those discussions and a recent written statement
from Boeing extending the scheduled delivery dates of the Boeing 757s from
1998 to 1999, USAir did not make a progress payment to Boeing of approximately
$3 million which was, prior to such extension, scheduled to be due on November
1, 1996. On November 7, 1996, Boeing alleged that USAir was in default of the
757 purchase agreement for failing to make a progress payment on November 1,
1996. Boeing demanded that the alleged default be cured and certain other
conditions be satisfied by November 14, 1996 or Boeing would purportedly
terminate the 757 purchase agreement and might seek to exercise other remedies
against USAir. USAir, Boeing and other relevant parties are in continuing
discussions regarding the status of the 737 and 757 purchase
22
<PAGE>
agreements, and USAir cannot predict whether Boeing will seek to exercise
remedies against USAir and if so, whether the effect on USAir's financial
condition or results of operations would be material.
In October 1996, certain Series B Preferred Stock shareholders informed
the Company of their intent to pursue the right to elect two additional
directors to the Company's Board of Directors. Under the terms of the Series B
Preferred Stock, the holders of that security have the right to elect two
directors to the Board of Directors of the Company if six quarterly dividend
payments are not paid. That right became effective on February 15, 1996 (see
information related to the Company's recent payment of dividends on Senior
Preferred Stock under "Payment of Dividends on Senior Preferred Stock" above).
On October 24, 1996, USAir notified British Airways that it was
terminating the code sharing and frequent traveler agreements between the two
companies effective March 29, 1997 as a result of British Airways' decision to
enter into an alliance with American (see also "Proposed British
Airways-American Airlines Alliance" above ). In addition, certain other
commercial arrangements between USAir and British Airways are in the process
of being terminated. The Company does not anticipate any material adverse
impact on its results of operations or financial condition as a result of the
termination of these arrangements.
On October 23, 1996, the Company and USAir filed a Current Report on Form
8-K with the Securities and Exchange Commission ("SEC") related to the news
release of financial results for both companies for the three months and nine
months ended September 30, 1996. The Company disclosed in this Current Report
that USAir's capacity (ASMs) is expected to increase by approximately 8% for
the fourth quarter of 1996 versus the comparable periods in 1995 and that
USAir's unit operating cost for the fourth quarter of 1996 is expected to be
approximately 2%-3% higher, excluding aviation fuel expenses, compared to the
fourth quarter of 1995. USAir's bookings for the fourth quarter of 1996 have
been at levels consistent with those experienced during the third quarter of
1996, considering seasonality. The Company also expects USAir's yield and
load factor for the fourth quarter of 1996 to remain relatively flat to
slightly up versus the fourth quarter of 1995. See "Results of Operations"
below for information related to estimated future increases in certain
components of the Company's operating expenses.
The Company has embarked on a program to upgrade and standardize the
interiors of USAir's operating aircraft over the next three years as part of
its efforts to make USAir "the airline of choice." The first phase of the
program, which is in progress and expected to be completed during the fourth
quarter of 1996, involves minor changes and improvements to the interiors of
each of USAir's operating aircraft. This phase of the program will result in
minimal incremental expenditures, but will provide a substantial short-term
improvement in the appearance of each aircraft. The second phase of the
program, which is scheduled to begin in February 1997 and expected to be
completed in 1998, includes, depending on the type of aircraft, the
replacement of carpets, seat cushions, sidewalls and overhead storage bins,
repainting other aircraft interior components, reconfiguring and/or upgrading
seats, expanding first class seating and adding or replacing lavatories. The
Company currently estimates that the second phase of this program will
23
<PAGE>
result in one-time incremental expenditures of approximately $85 million,
approximately $30 million of which is expected to be capitalized.
Effective November 1, 1996, the Company's 1992 Stock Option Plan ("1992
Plan") was amended to include a stock appreciation right ("SAR") feature and
SARs were granted to option holders under this plan on a one-for-one basis.
For each SAR, the holder is entitled to receive the excess of the fair market
value of a share of the Company's Common Stock and $15. The exercise of any
SAR cancels its tandem option. Conversely, the exercise of any option cancels
its tandem SAR. The SARs have the same expiration date as the tandem options.
To the extent the fair market value of a share of its Common Stock exceeds
$15, the Company will record compensation expense based on SARs outstanding.
As of November 1, 1996, approximately 4.9 million options and SARs were
outstanding under the 1992 Plan.
In April 1996, USAir introduced electronic ticketing, or "ticketless
travel," as an option for customers traveling within the U.S. on USAir or
USAir Express. Electronic ticketing enables a customer to book a flight
through USAir's reservations system and receive a confirmation number instead
of a paper ticket. The Company believes that electronic ticketing enhances
customer convenience and will help reduce USAir's distribution costs.
Distribution costs currently account for approximately $1 billion of the
Company's annual operating expenses. Customer response to electronic ticketing
has been favorable and customer use of electronic ticketing has steadily
increased since its introduction. USAir recently announced that travel
agencies using the SABRE and Apollo computer reservation systems can now offer
their customers USAir's electronic ticketing option. USAir continues to work
towards expanding electronic ticketing to other computer reservation systems,
international service and USAir Shuttle flights.
Seeking to increase its international operations, on August 21, 1996,
USAir filed with the U.S. Department of Transportation to serve London's
Heathrow Airport from Boston, Charlotte, Philadelphia and Pittsburgh. USAir
currently serves Frankfurt, Munich, Madrid, Paris and Rome.
Pursuant to the Investment Agreement between the Company and British
Airways, British Airways has the right to maintain its proportionate ownership
of the Company's securities under certain circumstances by purchasing
additional shares of a series of Series T Cumulative Convertible Exchangeable
Senior Preferred Stock ("Series T Preferred Stock"). During April 1996
British Airways advised the Company that it would not exercise their right
(triggered by issuances of Common Stock pursuant to certain USAir stock
incentive and employee benefit plans during the nine month period ended March
31, 1996) to buy additional shares of Series T Preferred Stock.
Results of Operations
The following section provides an overview of changes in certain
components of the Company's results of operations (the Company's Condensed
Consolidated Statements of Operations are contained in Part I, Item 1A of this
report). See Exhibit 99 to this report for select USAir operating and
financial statistics. Exhibit 99 also includes the definition of each of the
terms used below. All terms used in this section refer to USAir's scheduled
service operations except for unit operating cost, which includes charter
service.
24
<PAGE>
Three Month Period Ended September 30, 1996
Compared With the
Three Month Period Ended September 30, 1995
USAir Group recorded net income of $67.7 million for the third quarter of
1996, an improvement of $24.7 million (or 57.3%) versus its results for the
third quarter of 1995. After provision for preferred stock dividends (see
discussion above under "Payment of Dividends on Senior Preferred Stock"), the
Company earned $45.4 million during the third quarter of 1996, or $0.69 per
common share.
USAir's passengers, RPMs, capacity (ASMs), load factor and yield all
increased quarter-over-quarter. With the exception of the capacity increase,
these statistics increased as a result of the relatively stable domestic
economic climate and favorable capacity and pricing trends in markets served
by the Company's airline subsidiaries which prevailed during the third quarter
of 1996 (see discussion above). In addition, as discussed under "Government
Regulation" above, the Company believes that the absence of the ticket tax for
most of the third quarter of 1996 may have had a stimulative effect on traffic
during that period. The quarter-over-quarter capacity increase was marginal.
USAir continues to be the highest-cost major air carrier in the U.S.
USAir's unit operating cost was 12.44 cents for the third quarter of 1996, a
9.1% increase versus its unit operating costs for the third quarter of 1995.
This increase is primarily the result of higher operating expenses applied
over relatively unchanged capacity levels period-over-period (see discussion
below related to changes in certain components of the Company's operating
expenses).
Operating Revenues
Passenger Transportation - USAir's Passenger Transportation revenues increased
$177.5 million, or 11.4%, with the remainder of the $198.0 million increase
attributable to the Company's regional airline subsidiaries. USAir's increase
is the result of a 4.7% increase in yield and a 6.3% increase in RPMs. In
addition, the average passenger journey increased 4.1% due primarily to
additional long-haul flying quarter-over-quarter. The main factors that
contributed to the Company's improved performance during the third quarter of
1996, including the general economic climate, market conditions, the absence
of the ticket tax for most of the quarter and the temporary decrease in low
cost, low fare competition, are discussed above. The Company believes that
Hurricanes Fran and Edouard, which occurred during September 1996, adversely
affected the Company's Passenger Transportation revenues by approximately $10
million.
As discussed above, the Company's airline subsidiaries are experiencing
increased competitive pressure with ValuJet's recent reinstatement of service,
the October 1996 launch of Delta Express and Southwest's late-October 1996
expansion into the Northeast U.S. Direct competition with low cost, low fare
air carriers or operations has typically resulted in the dilution of yield
realized by the Company's airline subsidiaries, depending on the number of
markets affected.
25
<PAGE>
Other Operating Revenues - Fees received by USAir for passenger handling and
reservation services from USAir Express air carriers (other than the fees
USAir receives from the Company's three wholly-owned regional air carriers,
which are eliminated during the consolidation of the Company's results of
operations) increased due to higher passenger volumes and a higher fee
structure. In addition, USAir experienced increased revenues from frequent
traveler program participation fees, reservation cancellation fees and
aircraft lease arrangements. The wet lease arrangement with British Airways
expired during the second quarter of 1996. For the third quarter of 1995, wet
lease revenues of approximately $16.2 million were included in the Company's
Other Operating Revenues. Increases or decreases in components of Other
Operating Revenues are largely offset by related changes in Other Operating
Expenses or other operating expense categories.
Operating Expenses
Personnel Costs - Interest rate-driven increases in pension and
post-retirement benefits expenses, profit sharing expenses, contractual wage
increases that USAir's pilot and flight attendant employee groups received in
January 1996 and wage increases received by certain non-contract employees
effective January 1, 1996, combined to more than offset personnel complement
decreases. USAir's flight attendants and pilots also received contractual wage
increases in January 1995 and July 1995, respectively, and USAir's mechanics
received contractual wage increases in March 1995. USAir had 40,047 full-time
equivalent employees on September 30, 1996 versus 40,455 full-time equivalent
employees on September 30, 1995. Pension, long-term disability and
post-retirement benefits expenses increased approximately $24.9 million
quarter-over-quarter.
The Company recorded profit sharing expense of $41.1 million during the
third quarter of 1996 versus $15.2 million during the third quarter of 1995.
Based on its current projection of results for the fourth quarter of 1996, the
Company expects to record additional profit sharing expenses of approximately
$41 million during the fourth quarter of 1996.
Aviation Fuel - USAir's aviation fuel consumption was relatively unchanged
quarter-over-quarter, but rate factors contributed to a 21.4% increase in
aviation fuel expense. USAir paid an average of 63.21 cents per gallon for
aviation fuel during the third quarter of 1996. Aviation fuel prices have
continued to increase during the fourth quarter of 1996. USAir is currently
paying approximately 70 cents to 72 cents on average for a gallon of aviation
fuel. 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. Based on current consumption, each one cent per gallon increase in
USAir's cost of aviation fuel translates into an increase of approximately $11
million in USAir's annual aviation fuel expense. See Other Operating Expenses
below related to Federal taxes on aviation fuel.
Commissions- Increased due to increases in Passenger Transportation revenues.
Aircraft Rent - Increased due primarily to two leased Boeing 767-200ER
aircraft reentering USAir's operating fleet during the first half of 1996.
USAir recognized expenses related to these aircraft in the Other Operating
Expenses category while they were operated by British Airways.
26
<PAGE>
Aircraft Maintenance - Decreased approximately $7.8 million. Efficiencies
gained from reengineering efforts in USAir maintenance areas, the effects of
fewer operating aircraft in USAir's fleet and timing factors contributed to
the expense reduction. USAir recently signed a 10 year contract with a
subsidiary of the General Electric Company ("GE") for the upkeep and overhaul
of USAir's CF6 and CFM-56 jet engines. These engines, originally manufactured
by GE, power all of USAir's 767-200ER, 737-300 and 737-400 aircraft. The
Company expects a long-term decrease in maintenance costs associated with
these engines because of the new contract, but may experience higher
maintenance costs during the fourth quarter of 1996 due to the transition from
the former servicer to GE.
Depreciation and Amortization - Decreased due mainly to fewer owned aircraft
in USAir's operating fleet.
Other Operating Expenses - Increased due primarily to additional Federal taxes
on aviation fuel and increased communications-related costs. The Federal
Excise Tax on Transportation Fuels totaled approximately $11 million for the
third quarter of 1996 (see also "Government Regulation" above). The wet lease
arrangement with British Airways expired during the second quarter of 1996,
however, wet lease expenses of approximately $16.2 million were included in
the Company's Other Operating Expenses for the third quarter of 1995 (see also
Other Operating Revenues and Aircraft Rent above).
Other Income (Expense)
Interest Income - Increased due mainly to higher Cash and Cash Equivalents and
Short-Term Investments balances period-over-period.
Interest Expense - Decreased primarily as the result of less long-term debt
outstanding period-over-period. The Company made early debt repayments of
approximately $44.8 million during the third quarter of 1996.
Equity in Earnings (Loss) of Affiliates - Amounts pertain to USAM's equity
interest in the earnings of Galileo International Partnership, Apollo Travel
Services Partnership ("ATS") and Galileo Japan Partnership. Results for all
three partnerships improved primarily driven by increases in airline industry
passenger volumes period-over-period.
Other, Net - Results for the third quarter of 1996 include expense of $9.8
million related to USAir's settlement of litigation involving travel agencies
(see Part II, Item 1. "Legal Proceedings" for additional information) and
reserves of $10.5 million related to USAir's planned disposition of five
non-operating aircraft. Results for the third quarter of 1995 included a gain
of $5.5 million related to the sale of certain Boeing 737-300 aircraft.
27
<PAGE>
Nine Month Period Ended September 30, 1996
Compared With the
Nine Month Period Ended September 30, 1995
On a year-to-date basis, USAir Group recorded net income of $236.2
million, an improvement of $177.2 million or triple its net income for the
first nine months of 1995. After provision for preferred stock dividends (see
discussion above under "Payment of Dividends on Senior Preferred Stock"), the
Company earned $169.1 million during the first nine months of 1996, or $2.58
per common share.
USAir's passengers and capacity (ASMs) decreased period-over-period,
however, RPMs, load factor and yield all increased for the same comparative
period. Passenger and capacity decreases mainly reflect mid-1995 schedule
reductions with the harsh winter weather during the first quarter of 1996
contributing to the decrease. The increase in RPMs, load factor and yield are
primarily due to the continuation of a relatively stable domestic economic
climate and favorable capacity and pricing trends in markets served by the
Company's airline subsidiaries. In general, the favorable capacity and pricing
trends have been evident since the demise of the Continental Lite product
(offered by Continental Airlines, Inc.) early in the second quarter of 1995.
Competition with Continental Lite included USAir lowering fares in certain
markets to maintain market share. In addition, as discussed under "Government
Regulation" above, the Company believes that the absence of the ticket tax
during the first eight months of 1996 may have had a stimulative effect on
traffic during that period.
USAir's unit operating cost was 12.66 cents for the first nine months of
1996, a 12.4% increase versus the first nine months of 1995. This increase is
primarily the result of higher operating expenses applied over slightly less
capacity (ASMs) period-over-period (see discussion below related to changes in
certain components of the Company's operating expenses).
USAir recorded two non-recurring items during the first nine months of
1996 related to its non-operating British Aerospace BAe-146-200 ("BAe-146")
aircraft. USAir reached agreements to sublease eleven BAe-146s during the
second quarter of 1996 (in addition to the three sublease agreements reached
during the fourth quarter of 1995). Both non-recurring items resulted in
credits to Operating Expense categories. USAir 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. USAir has recently
reached an agreement to dispose of its only owned BAe-146.
Operating Revenues
Passenger Transportation - USAir's Passenger Transportation revenues increased
$368.7 million, or 7.8%, with the remainder of the $442.1 million increase
attributable to the Company's regional airline subsidiaries. USAir's increase
is primarily the result of a 6.7% increase in yield, a 1.0% increase in RPMs
and a 2.8% increase in average passenger journey. The main factors that
contributed to the Company's improved year-over-year performance, including
the general economic climate, market conditions, the impact of the absence of
the ticket tax during the first
28
<PAGE>
eight months of 1996 and the temporary decrease in low cost, low fare
competition experienced by the Company's airline subsidiaries during the
second and third quarters of 1996, are discussed above.
The Company estimates that severe winter weather within the Eastern U.S.
and the partial Federal Government shutdown adversely affected first quarter
1996 revenues by approximately $55 million. In addition, the Company
estimates that Hurricanes Fran and Eduoard, which occurred during September
1996, adversely affected the Company's Passenger Transportation revenues by
approximately $10 million. The Company's airline subsidiaries faced intense
competitive pressure from Continental Lite during early 1995. As mentioned
above, competition with Continental Lite included USAir lowering fares in
certain markets to maintain market share.
See also the quarter-over-quarter analysis of Passenger Transportation
revenues above for information related to the recent increase in competitive
pressure on the Company's airline subsidiaries.
Other Operating Revenues - Fees received by USAir for passenger handling and
reservation services from USAir Express carriers (other than the fees USAir
receives from the Company's three wholly-owned regional air carriers, which
are eliminated during the consolidation of the Company's results of
operations) increased due to higher passenger volumes and a higher
per-passenger fee structure. In addition, USAir had increased revenues from
frequent traveler program participation fees, reservation cancellation fees
and aircraft lease arrangements. Revenues received from the wet lease
arrangement with British Airways decreased approximately $35.0 million due to
the expiration of the arrangement during May 1996. Increases or decreases in
components of Other Operating Revenues are largely offset by related changes
in Other Operating Expenses or other operating expense categories.
Operating Expenses
Personnel Costs - Increased due mainly to the same factors discussed above in
the quarter-over-quarter analysis of Personnel Costs. Pension, long-term
disability and post-retirement benefit expenses increased by approximately
$63.4 million period-over-period. In addition, expenses related to stock
option grants, stock grants, severance payments and similar-type compensation
increased approximately $22.1 million year-over-year.
The Company recorded profit sharing expense of $82.4 million during the
first nine months of 1996 versus $15.2 million during the first nine months of
1995. See related discussion above in quarter-over-quarter analysis of
Personnel Costs.
Aviation Fuel - USAir experienced an increase in the average cost of aviation
fuel per gallon of approximately 8.75 cents period-over-period. The Company's
Aviation Fuel expense increased $54.7 million. See discussion of
quarter-over-quarter changes in Aviation Fuel expense above. See also Other
Operating Expenses below related to Federal taxes on aviation fuel.
29
<PAGE>
Commissions - Increases linked to higher Passenger Transportation revenues
were partially offset by the effects of the revised rate structure for
commissions paid to travel agencies, which went into effect during February
1995.
Aircraft Rent - Excluding the effects of the non-recurring item discussed
above, Aircraft Rent expense increased approximately 4.4%. The increase is
due primarily to two leased Boeing 767-200ER aircraft reentering USAir's
operating fleet during the first half of 1996. USAir recognized expenses
related to these aircraft in the Other Operating Expenses category while they
were operated by British Airways.
Aircraft Maintenance - Excluding the effects of the non-recurring item
discussed above, Aircraft Maintenance expense increased approximately $8.0
million. Efficiencies gained from reengineering efforts in USAir maintenance
areas, the effects of fewer operating aircraft in USAir's fleet and timing
factors were more than offset by an increase in the average cost USAir
incurred to overhaul certain jet engines. See quarter-over-quarter analysis
above related to USAir's new contract with GE for repair and overhaul work of
certain jet engines.
Depreciation and Amortization - Decreased mainly due to fewer owned aircraft
in USAir's operating fleet.
Other Operating Expenses - Increased primarily due to additional Federal taxes
on aviation fuel and increases in insurance and communications-related costs.
USAir also experienced higher credit card expenses linked to higher Passenger
Transportation revenues. The Federal Excise Tax on Transportation Fuels
totaled approximately $31 million for the first nine months of 1996 (see also
"Government Regulation" above). Expenses related to the wet lease arrangement
with British Airways decreased approximately $35.0 million due to the
expiration of this arrangement during May 1996 (see also Other Operating
Revenues above).
Other Income (Expense)
Interest Income - Increased due mainly to higher Cash and Cash Equivalents and
Short-Term Investments balances period-over-period.
Interest Expense - Decreased primarily as the result of less long-term debt
outstanding period-over-period. USAir made early debt repayments totaling
approximately $202.1 million during 1995. See also the quarter-over-quarter
analysis of Interest Expense above.
Equity in Earnings (Loss) of Affiliates - Results for USAM's equity
investments improved due primarily to increases in airline industry passenger
volumes year-over-year.
Other, Net - Net expenses increased due primarily to the same factors
discussed above in the quarter-over-quarter analysis of Other, Net above.
30
<PAGE>
Liquidity and Capital Resources
Net cash provided by operations was $667.6 million for the first nine
months of 1996. As of September 30, 1996, Cash and Cash Equivalents totaled
$655.4 million and Short-Term Investments totaled $631.1 million. USAir also
had $102.3 million deposited in trust accounts to collateralize letters of
credit and worker's compensation policies at quarter-end. These deposits are
included in the Other Asset category on the Company's Condensed Consolidated
Balance Sheets (which is contained in Part I, Item 1A of this report). USAM
received a special cash distribution of approximately $33.7 million from ATS
during the second quarter of 1996, reflected in the Other operating
adjustments category on the Company's Condensed Consolidated Statements of
Cash Flows (which is contained in Part I, Item 1A of this report). The
special distribution was part of an ATS distribution of cash to its partners.
USAM has received distributions totaling approximately $44.8 million from its
computer reservation system investments, including the special ATS
distribution, during the first nine months of 1996.
The Company made contributions of approximately $76 million to certain
defined benefit pension plans during the third quarter of 1996 in order to
meet statutory minimum pension funding requirements. Also during the third
quarter of 1996, the Company revised its estimate of short-term pension plan
funding requirements resulting in a decrease in the Company's current
liabilities. The combined effect of the third quarter 1996 pension plan
funding payments and the revision of short-term pension plan funding estimates
was a decrease in the Company's current liabilities of approximately $137
million and a corresponding increase in the Company's long-term liabilities.
The effects of the revision, which have significantly reduced the Company's
estimate of anticipated cash outflows for the next twelve months, are
reflected in the Company's Condensed Consolidated Balance Sheets as of
September 30, 1996.
If the Company's results for the fourth quarter of 1996 meet current
expectations, the Company will pay its remaining obligation under the 1992
Salary Reduction Plan, approximately $130 million, during the first quarter of
1997. This payment would end the Company's obligations for profit sharing
under this plan (the anticipated first quarter 1997 payment will be based on
expenses the Company recognizes for 1996 and in earlier periods).
Effective November 1, 1996, the Company is obligated to pay the excess of
the fair market value of a share of the Company's Common Stock and $15 upon
the exercise of SARs issued under the Company's 1992 Stock Option Plan (see
discussion above under "Other Information"). SAR exercises could have a
material adverse effect on the Company's anticipated future cash outflows
depending on the number and timing of SAR exercises and the fair market value
of a share of the Company's Common Stock when SARs are exercised.
The Company has also initiated a program to upgrade and standardize the
interiors of USAir's operating aircraft. This program, described under "Other
Information" above, will result in currently estimated incremental
expenditures of approximately $85 million, primarily during 1997 and 1998.
31
<PAGE>
As discussed in "Other Information" above, USAir has entered into an
agreement-in-principle with an affiliate of Airbus for the acquisition of up
to 400 Airbus Aircraft. Although the agreement-in-principle is subject to
several contingencies, the acquisition of aircraft by USAir could have a
material effect on the Company's anticipated long-term capital expenditures.
The Company expects to satisfy all of its short-term liquidity
requirements, including the cost of USAir's aircraft interior upgrade and
standardization program, through a combination of cash on hand and cash flows
from operations. Although the Company's current assets have increased by
approximately $502.4 million since the end of 1995, the Company remains highly
leveraged. The Company and USAir require substantial working capital in order
to meet scheduled debt and lease payments and to finance day-to-day
operations. In addition, the Company currently does not have access to
short-term credit or receivable sale facilities. Changes in certain factors
that are generally outside the Company's control, such as an economic
downturn, additional government regulation, intensified competition from low
cost, low fare air carriers or operations (see related discussion above) and
further increases in the price of aviation fuel, could have a materially
adverse effect on the Company's liquidity, financial condition and results of
operations. USAir's high cost structure relative to its major competitors
results in the Company being particularly susceptible to adverse changes in
general economic and market conditions.
Investing activities during the first nine months of 1996 included cash
outflows of $142.9 million for the acquisition of assets ($21.2 million
related to progress payments for Boeing 757-200 aircraft (see "Other
Information" above for recent developments concerning Boeing), $15.2 million
related to USAir's purchase of four Boeing 737-200 aircraft prior to lease
expiry during the third quarter of 1996 and $105.7 million related to the
purchase of hush kits, rotables, computer equipment and various ground support
equipment). The Company's Short-Term Investments increased $604.0 million
during the period primarily due to the Company's operations generating
significantly more cash than needed to fulfill immediate operational needs.
The Other investing uses of cash category includes $12.2 million related to
the purchase of debt issued by Shuttle, Inc. during the first quarter of 1996.
The net cash used by investing activities during the first nine months of 1996
was $744.6 million.
Net cash used by financing activities during the first nine months of
1996 was $149.4 million. During the third quarter of 1996, USAir paid off
certain long-term debt with a principal amount of approximately $42.8 million
for one of the Company's regional airline subsidiaries (USAir and the regional
air carrier entered into a long-term note receivable agreement which is
reflected in USAir's Other Assets on its Condensed Consolidated Balance
Sheets; amounts related to the intercompany note agreement are eliminated for
purposes of consolidation and are therefore not reflected in the Company's
Condensed Consolidated Balance Sheets).
USAir sold $263.0 million principal amount of Enhanced Equipment Notes
("Enhanced Notes") during the first quarter of 1996 through a private
placement offering under SEC Regulation 144A. USAir used the proceeds from the
offering as part of the funds necessary to repay in full the indebtedness
incurred in connection with certain Boeing 757-200 aircraft delivered to USAir
in 1994 and 1995. The transaction is reflected on the Company's Condensed
Consolidated Statements of Cash Flows as proceeds from the issuance of debt of
$103.0 million and a "non-cash" issuance
32
<PAGE>
of debt of $160.0 million. The non-cash component reflects proceeds that
USAir directed to reduce debt and pay underwriter's fees at the time of the
offering. USAir 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
Boeing 757-200 aircraft. USAir 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 USAir of an affiliate's third party debt, both discussed above, the
Company's subsidiaries made scheduled debt repayments of approximately $61.5
million during the first nine months of 1996. USAir also incurred new debt of
$26.1 million associated with progress payments for Boeing 757-200 aircraft
(see "Other Information" above for recent developments concerning Boeing).
The $26.1 million is reflected as non-cash activity in the Company's Condensed
Consolidated Statements of Cash Flows because USAir incurred the related debt
in conjunction with the payment of the progress payments.
On October 25, 1996, the Company paid dividends of $40.0 million on its
outstanding Senior Preferred Stock. The Company also paid dividends of $43.0
million on its outstanding Senior Preferred Stock during August 1996. See
"Payment of Dividends on Senior Preferred Stock" above for additional
information.
As of September 30, 1996, USAir Group's ratio of current assets to
current liabilities was approximately 0.77 to 1 and the debt component of
USAir Group's capitalization structure was greater than 100% (and also greater
than 100% if the three series of mandatorily redeemable preferred stock are
considered to be debt) due to a deficit in stockholders' equity.
Certain information contained in this report should be considered
"forward-looking information". Forward-looking information requires the
Company to make estimates of future revenues, expenses, activity levels and
economic and markets conditions, among other factors. Some of these factors,
such as aviation fuel costs and general economic conditions, are outside of
the Company's control. The Company's estimates are subject to change. Actual
results experienced by the Company may differ from the Company's estimates.
The Company assumes no obligation to update such estimates to reflect actual
results, changes in assumptions or changes in other factors affecting such
estimates.
(this space intentionally left blank)
33
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
In February 1995, thirty-nine class action antitrust cases were filed
against seven air carriers, including USAir, on behalf of travel agents and
the American Society of Travel Agents in connection with the imposition of a
cap on commissions paid to travel agents for ticket sales. On September 3,
1996, USAir entered into a settlement agreement with the plaintiffs under
which USAir agreed to pay $9.8 million without any change in its commission
policy and without any admission of liability or wrongdoing. All other
defendant air carriers also settled. An order granting preliminary approval of
the settlements was issued on September 9, 1996 and notices of the settlements
have been distributed to plaintiff class members. A fairness hearing to
determine whether the settlements should be finally approved is scheduled for
November 15, 1996.
On September 19, 1996, USAir paid approximately $119,056 into various
escrow accounts pursuant to the terms of a Consent Decree it entered into,
along with several other companies, in an environmental action brought by the
United States for cleanup of a superfund site in Moira, New York. USAir has
now substantially complied with its obligations under the Consent Decree.
USAir has reached an agreement in principle with Massport to pay
approximately $300,000 in cash, and to undertake certain remedial
activities in connection with its operations of the hydrant fuel system and
associated airport fueling operations in the vicinity of Terminal B at
Boston's Logan International Airport. Massport has claims pending with all
tenants at the airport. To date, several other carriers have settled their
claims.
Item 3. Defaults Upon Senior Securities
On October 25, 1996, the Company paid dividends of $40.0 million on its
outstanding Senior Preferred Stock. The Company also paid dividends of $43.0
million on its outstanding Senior Preferred Stock during August 1996. Prior
to the August 1996 dividend payment, the Company had deferred the payment of
dividends on all of its outstanding preferred stock issuances effective with
dividend payments due September 30, 1994.
The Company's capital surplus as of September 30, 1996, as calculated in
accordance with Delaware General Corporation Law based on the Company's
Condensed Consolidated Balance Sheets (which are contained in Part I, Item 1A
of this report), was $33.1 million. This surplus amount is after the effect
of the October dividend payment, which was accrued for payment as of
September 30, 1996. The Company's outstanding Series B Preferred Stock is
junior to the Company's Senior Preferred Stock and is not eligible to receive
dividends until the deferred dividends on the Senior Preferred Stock are paid
in full and all Senior Preferred Stock dividend payments are current. There
can be no assurance of when or if the Company's Board of Directors will
declare additional dividends on the Company's outstanding capital stock.
34
<PAGE>
The redemption value of the Series A Preferred Stock at September 30,
1996 was $417.2 million (face amount of $358.0 million plus deferred
dividends and interest thereon of $59.2 million). The redemption values of
the Series F and Series T Preferred Stock at September 30, 1996 were $331.4
million (face amount of $300.0 million plus deferred dividends and interest
thereon of $31.4 million) and $110.0 million (face amount of $100.7 million
plus deferred dividends and interest thereon of $9.3 million), respectively.
The liquidation preference of the Series B Preferred Stock was $250.5 million
(face amount of $213.2 million plus deferred dividends of $37.3 million) at
September 30, 1996. The aformention redemption values/liquidation preference
are as of September 30, 1996, and therefore do not reflect the October 1996
dividend payment.
The outstanding issues of preferred stock are the: Series A Preferred
Stock owned by affiliates of Berkshire Hathaway, Inc.; Series F Preferred
Stock and Series T Preferred Stock both owned by an affiliate of British
Airways Plc; and the Series B Preferred Stock which is publicly held.
Item 5. Other Information
On April 25, 1996, the International Association of Machinists and
Aerospace Workers ("IAM") and the Communications Workers of America ("CWA")
filed applications with the National Mediation Board ("NMB") requesting that
an election be held among USAir's passenger service employees, a class or
craft of approximately 10,000 workers, seeking to unionize this group of
employees. On November 12, 1996, the NMB issued a decision holding that the
CWA, but not the IAM, had submitted a sufficient number of authorization
cards to warrant an election. USAir is proceeding with the election process
and cannot predict the outcome of the election.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Designation Description
11 Computation of Primary and Fully-Diluted Earnings Per Share for
the three months and nine months ended September 30, 1996 and
1995 for USAir Group, Inc.
27.1 Financial Data Schedule - USAir Group, Inc.
27.2 Financial Data Schedule - USAir, Inc.
99 Select Airline Operating and Financial Statistics for the three
months and nine months ended September 30, 1996 and 1995 for
USAir, Inc.
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<PAGE>
B. Reports on Form 8-K
Date of Report Subject of Report
October 21, 1996 News Release dated October 21, 1996 of USAir Group, Inc.
and USAir, Inc., with consolidated statements of
operations for both companies for the three months and
nine months ended September 30, 1996 and 1995 and select
operating and financial statistics for USAir, Inc. for
the same periods.
October 24, 1996 News Release dated October 24, 1996 of USAir Group, Inc.
and USAir, Inc., announcing USAir's notice to British
Airways Plc that USAir was terminating its Code Share
Agreement with British Airways Plc effective as of March
29, 1997.
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36
<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
USAir Group, Inc.
(Registrant)
Date: November 13, 1996 By: /s/ James A. Hultquist
----------------------
James A. Hultquist
Controller
(Principal Accounting Officer)
USAir, Inc.
(Registrant)
Date: November 13, 1996 By: /s/ James A. Hultquist
----------------------
James A. Hultquist
Controller
(Principal Accounting Officer)
37
USAir Group, Inc.
Exhibit 11
Computation of Primary and Fully Diluted Earnings Per Share ("EPS")
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Adjustments to Net Income (Loss)
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $ 67,738 $ 43,056 $236,220 $ 59,033
Preferred dividend requirement (22,338) (21,415) (67,134) (63,044)
--------- --------- --------- ---------
Net income (loss) applicable to common
stock and common stock equivalents
used for primary computation 45,400 21,641 169,086 (4,011)
Fully diluted adjustments:
Assume conversion of preferred stock:
Preferred dividend requirement 22,338 a) 21,415 b) 67,134 a) 63,044 b)
--------- --------- --------- ---------
Adjusted net income (loss) applicable to
common stock assuming full dilution $ 67,738 $ 43,056 $236,220 $ 59,033
========= ========= ========= =========
Adjustments to Common Shares Outstanding
- --------------------------------------------------
Average number of shares of common stock 64,213 62,472 63,947 62,143
Primary adjustments
Incremental shares from the 1984, 1992,
and 1996 Plans' outstanding stock
options using the treasury stock method 1,625 99 1,510 - c)
--------- --------- --------- ---------
Total average number of common and
common equivalent shares used for
primary computation 65,838 62,571 65,457 62,143
========= ========= ========= =========
</TABLE>
(continued on next page)
<PAGE>
USAir Group, Inc.
Exhibit 11
Computation of Primary and Fully Diluted Earnings Per Share ("EPS")
(unaudited)
(in thousands, except per share amounts)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average number of shares of common stock 64,213 62,472 63,947 62,143
Fully diluted adjustments
Incremental shares from the 1984, 1992,
and 1996 Plans' outstanding stock
options using the treasury stock
method 1,625 136 1,510 136 d)
Assume conversion of preferred stock 39,156 a) 39,156 b) 39,156 a) 39,156 b)
-------- -------- -------- ---------
Total average number of common
shares to be outstanding after full
conversion 104,994 101,764 104,613 101,435
======== ======== ======== =========
Income (Loss) Per Common Share
- ---------------------------------------------
Primary income (loss) per common share $ 0.69 $ 0.35 $ 2.58 $ (0.06)
======== ======== ======== =========
Fully diluted income (loss) per common share $ 0.65 $ 0.42 $ 2.26 $ 0.58
======== ======== ======== =========
<FN>
a) Inclusion of the effects of assuming conversion of USAir Group, Inc. ("USAir Group") Series A
Preferred Stock is antidilutive but included in accordance with Regulation S-K Item 601(b)(11).
b) Inclusion of the effects of assuming conversion of USAir Group's Series A, B, F, and T
Preferred Stock is antidilutive but included in accordance with Regulation S-K item 601(b)(11).
c) The incremental shares that are a result of assuming exercise of stock options using the
treasury stock method are antidilutive and excluded from the calculation of primary earnings per share.
d) The incremental shares that are a result of assuming exercise of stock options using the
treasury stock method are antidilutive but included in accordance with Regulation S-K item 601(b)(11).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000701345
<NAME> USAIR GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 655,447
<SECURITIES> 631,114
<RECEIVABLES> 410,293<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 250,600
<CURRENT-ASSETS> 2,085,489
<PP&E> 6,431,580
<DEPRECIATION> 2,464,772
<TOTAL-ASSETS> 7,371,828
<CURRENT-LIABILITIES> 2,741,413
<BONDS> 2,625,790
758,719
213,153
<COMMON> 64,216
<OTHER-SE> (938,776)
<TOTAL-LIABILITY-AND-EQUITY> 7,371,828
<SALES> 0
<TOTAL-REVENUES> 6,090,476
<CGS> 0
<TOTAL-COSTS> 5,702,393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,409
<INCOME-PRETAX> 254,796
<INCOME-TAX> 18,576
<INCOME-CONTINUING> 236,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,220
<EPS-PRIMARY> 2.58
<EPS-DILUTED> 2.15
<FN>
<F1>Receivables are presented net of allowances.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000714560
<NAME> USAIR, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 653,893
<SECURITIES> 631,114
<RECEIVABLES> 417,097<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 217,535
<CURRENT-ASSETS> 2,044,030
<PP&E> 6,177,189
<DEPRECIATION> 2,377,058
<TOTAL-ASSETS> 7,289,051
<CURRENT-LIABILITIES> 2,944,345
<BONDS> 2,624,801
0
0
<COMMON> 1
<OTHER-SE> (177,489)
<TOTAL-LIABILITY-AND-EQUITY> 7,289,051
<SALES> 0
<TOTAL-REVENUES> 5,657,269
<CGS> 0
<TOTAL-COSTS> 5,362,845
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 213,323
<INCOME-PRETAX> 149,125
<INCOME-TAX> 15,440
<INCOME-CONTINUING> 133,685
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,685
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Receivables are presented net of allowances.
<F2>EPS calculations are not relevant because USAir, Inc. is a wholly-owned
subsidiary of USAir Group, Inc.
</FN>
</TABLE>
USAir, Inc.
Exhibit 99
Select Airline Operating and Financial Statistics (Note 1.)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue passengers (thousands) * 14,329 14,020 2.2% 42,228 42,986 (1.8)%
Total revenue passenger miles ("RPMs")
(millions) (Note 2.) 10,267 9,711 5.7% 29,186 29,024 0.6%
Revenue passenger miles (millions)
(Note 2.) * 10,201 9,592 6.3% 28,955 28,658 1.0%
Total available seat miles ("ASMs")
(millions) (Note 3.) 14,685 14,560 0.9% 42,491 44,955 (5.5)%
Available seat miles (millions) (Note 3.) * 14,610 14,428 1.3% 42,225 44,549 (5.2)%
Passenger load factor (Note 4.) * 69.8% 66.5% 3.3 pts. 68.6% 64.3% 4.3 pts.
Break even load factor (Note 5.) 68.8% 66.2% 2.6 pts. 67.6% 64.8% 2.8 pts.
Passenger revenue per ASM (Note 6.) * 11.90c 10.82c 10.0% 12.06c 10.60c 13.8%
Total revenue per ASM (Note 7.) 13.10c 11.86c 10.5% 13.28c 11.59c 14.6%
Cost per ASM (Note 8.) 12.44c 11.40c 9.1% 12.66c 11.26c 12.4%
Yield (Note 9.) * 17.05c 16.28c 4.7% 17.59c 16.49c 6.7%
Cost of aviation fuel per gallon (Note 10.) 63.21c 52.84c 19.6% 61.28c 52.53c 16.7%
Gallons of aviation fuel consumed (millions) 282 278 1.4% 824 869 (5.2)%
<FN>
* = Denotes scheduled service only (excludes charter service).
c = Cents
</TABLE>
(continued on next page)
<PAGE>
USAir, Inc.
Exhibit 99
Select Airline Operating and Financial Statistics
(unaudited)
(Continued)
Note 1. Operating statistics exclude flights operated by USAir, Inc.
("USAir") under a wet lease arrangement with British Airways Plc ("wet
lease"). The wet lease arrangement expired May 31, 1996. Operating
statistics include free frequent travelers and the related miles flown.
Financial statistics exclude the revenue and expense (which amounts net to
zero) generated under the wet lease arrangement and non-recurring items. Wet
lease amounts of $12.6 million, $16.2 million and $47.6 million have been
excluded from year-to-date results for 1996, third quarter results for 1995
and year-to-date results for 1995, respectively, from both Other Operating
Revenues and Other Operating Expenses for purposes of financial statistic
calculation. No non-recurring items are included in USAir's results for the
third quarter of 1996, the third quarter of 1995 or for the first nine months
of 1995. USAir's year-to-date 1996 results include non-recurring expense
credits of $29.5 million related to its non-operating BAe-146 aircraft.
Note 2. Revenue passengers multiplied by the number of miles they flew.
Note 3. Seats available multiplied by the number of miles flown (a measure
of capacity).
Note 4. Percentage of aircraft seating capacity that is actually utilized
(RPMs/ASMs).
Note 5. Percentage of aircraft seating capacity that must be utilized,
based on fares in effect during the period, for USAir to break
even at the pretax income level.
Note 6. Passenger Transportation revenue divided by ASMs (a measure of
unit revenue).
Note 7. Total Operating Revenues divided by ASMs (a measure of unit
revenue).
Note 8. Total Operating Expenses divided by ASMs (a measure of unit cost).
Note 9. Passenger Transportation revenue divided by RPMs (a measure of
unit revenue).
Note 10. Includes the base cost of aviation fuel and transportation
charges.
