FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to ____________________
US Airways Group, Inc.
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 872-5306
(Registrant's telephone number, including area code)
(Commission file number: 1-8444)
(I.R.S. Employer Identification No: 54-1194634)
US Airways, Inc.
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 872-7000
(Registrant's telephone number, including area code)
(Commission file number: 1-8442)
(I.R.S. Employer Identification No: 53-0218143)
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
--- ---
As of October 31, 1998 there were outstanding approximately 87,410,000
shares of common stock of US Airways Group, Inc. and 1,000 shares of common
stock of US Airways, Inc.
The registrant US Airways, 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 in the reduced disclosure format
permitted by such Instructions.
US Airways Group, Inc.
and
US Airways, Inc.
Form 10-Q
Quarterly Period Ended September 30, 1998
Table of Contents
Part I. Financial Information Page
----
Item 1A. Financial Statements - US Airways Group, Inc.
Condensed Consolidated Statements of Operations
- Three Months and Nine Months Ended September 30, 1998 and 1997 1
Condensed Consolidated Balance Sheets
- September 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Statement of Changes in Stockholders' Equity
- Nine Months Ended September 30, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 1B. Financial Statements - US Airways, Inc.
Condensed Consolidated Statements of Operations
- Three Months and Nine Months Ended September 30, 1998 and 1997 9
Condensed Consolidated Balance Sheets
- September 30, 1998 and December 31, 1997 10
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended September 30, 1998 and 1997 11
Condensed Consolidated Statement of Changes in Stockholder's Equity
- Nine Months Ended September 30, 1998 12
Notes to Condensed Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
US Airways Group, Inc.
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1998 and 1997 (unaudited)
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Operating Revenues
Passenger transportation $1,988 $1,917 $5,924 $5,826
Cargo and freight 39 46 124 135
Other 181 152 519 468
----- ----- ----- -----
Total Operating Revenues 2,208 2,115 6,567 6,429
Operating Expenses
Personnel costs 786 764 2,309 2,306
Aviation fuel 150 194 474 617
Commissions 132 151 394 461
Aircraft rent 108 125 330 359
Other rent and landing fees 107 116 308 316
Aircraft maintenance 110 127 338 329
Depreciation and amortization 83 155 236 327
Other 462 400 1,342 1,200
----- ----- ----- -----
Total Operating Expenses 1,938 2,032 5,731 5,915
----- ----- ----- -----
Operating Income 270 83 836 514
Other Income (Expense)
Interest income 26 28 87 75
Interest expense (51) (64) (174) (193)
Interest capitalized 5 3 (8) 9
Equity in earnings of affiliates - 4 1 30
Gains on sales of interests in affiliates - 180 - 180
Other, net (12) (2) (14) 14
----- ----- ----- -----
Other Income (Expense), Net (32) 149 (108) 115
----- ----- ----- -----
Income Before Taxes 238 232 728 629
Provision (Credit) for Income Taxes 96 45 294 84
----- ----- ----- -----
Net Income 142 187 434 545
----- ----- ----- -----
Preferred Dividend Requirement - (11) (6) (55)
----- ----- ----- -----
Earnings Applicable to
Common Stockholders $ 142 $ 176 $ 428 $ 490
===== ===== ===== =====
Earnings per Common Share
Basic $ 1.54 $ 2.10 $ 4.53 $ 6.66
Diluted $ 1.51 $ 1.82 $ 4.40 $ 5.21
Shares Used for Computation
Basic 92 84 94 74
Diluted 94 103 99 104
See accompanying Notes to Condensed Consolidated Financial Statements.
1
US Airways Group, Inc.
Condensed Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997
(dollars in millions)
September December
30, 31,
1998 1997
---- ----
ASSETS
Current Assets
Cash $ 26 $ 18
Cash equivalents 698 1,076
Short-term investments 721 870
Receivables, net 438 300
Materials and supplies, net 225 226
Deferred income taxes 487 147
Prepaid expenses and other 123 140
----- -----
Total Current Assets 2,718 2,777
Property and Equipment
Flight equipment 5,165 5,221
Ground property and equipment 911 876
Less accumulated depreciation and amortization (2,592) (2,527)
----- -----
3,484 3,570
Purchase deposits 174 155
----- -----
Total Property and Equipment, Net 3,658 3,725
Other Assets
Goodwill, net 601 616
Other intangibles, net 430 371
Investment in marketable equity securities 261 190
Deferred income taxes - 270
Other assets, net 470 423
----- -----
Total Other Assets 1,762 1,870
----- -----
$ 8,138 $ 8,372
===== =====
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 69 $ 186
Accounts payable 594 323
Traffic balances payable and unused tickets 919 707
Accrued aircraft rent 434 509
Accrued salaries, wages and vacation 316 311
Other accrued expenses 462 492
----- -----
Total Current Liabilities 2,794 2,528
Long-Term Debt, Net of Current Maturities 1,971 2,426
Deferred Credits and Other Liabilities
Deferred gains, net 312 333
Postretirement benefits other than pensions,
noncurrent 1,226 1,173
Noncurrent employee benefit liabilities and other 1,124 829
----- -----
Total Deferred Credits and Other Liabilities 2,662 2,335
Commitments and Contingencies
Redeemable Cumulative Convertible Preferred Stock
Series H, no par value, 358,000 shares issued and
outstanding as of December 31, 1997 - 358
Stockholders' Equity
Common Stock 101 91
Paid-in capital 2,295 1,906
Retained earnings (deficit) (852) (1,280)
Common Stock held in treasury, at cost (883) (3)
Deferred compensation (91) (80)
Accumulated other comprehensive income, net of
income tax effect 141 91
----- -----
Total Stockholders' Equity 711 725
----- -----
$ 8,138 $ 8,372
===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
2
US Airways Group, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 (unaudited)
(in millions)
1998 1997
------ -----
Cash and Cash equivalents at beginning of period $ 1,094 $ 951
------ -----
Cash flows from operating activities
Net income 434 545
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 236 327
Losses (gains) on dispositions of property (9) (16)
Gains on sales of interests in affiliates - (180)
Amortization of deferred gains and credits (21) (21)
Other 81 14
Changes in certain assets and liabilities
Decrease (increase) in receivables (137) (74)
Decrease (increase) in materials and supplies,
prepaid expenses and pension assets (25) 39
Decrease (increase) in deferred income taxes 89 -
Increase (decrease) in traffic balances
payable and unused tickets 212 158
Increase (decrease) in accounts payable and
accrued expenses 283 (179)
Increase (decrease) in postretirement benefits
other than pensions, noncurrent 53 56
------ -----
Net cash provided by (used for) operating
activities 1,196 669
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net (151) (19)
Additions to other property (202) (115)
Proceeds from dispositions of property 97 54
Proceeds from sales of interests in affiliates - 224
Decrease (increase) in short-term investments 153 (223)
Decrease (increase) in restricted cash and investments (50) 18
Other 4 5
------ -----
Net cash provided by (used for) investing
activities (149) (56)
Cash flows from financing activities
Principal payments on long-term debt (543) (73)
Issuances of Common Stock 7 30
Purchases of Common Stock (881) -
Sales of treasury stock 6 1
Redemptions of preferred stock, including redemption
premiums - (126)
Dividends paid on preferred stock (6) (172)
------ -----
Net cash provided by (used for) financing
activities (1,417) (340)
------ -----
Net increase (decrease) in Cash and Cash equivalents (370) 273
------ -----
Cash and Cash equivalents at end of period $ 724 $1,224
====== =====
Noncash investing and financing activities
Conversion of preferred stock into Common Stock $ 358 $ 497
Net unrealized gain on available-for-sale securities,
net of income tax effect $ 47 $ 134
Reduction of aircraft-related purchase deposits $ 61 $ -
Supplemental Information
Cash paid during the period for interest, net of amount
capitalized $ 204 $ 207
Net cash paid during the period for income taxes $ 197 $ 65
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<TABLE>
US Airways Group, Inc.
Condensed Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 1998 (unaudited)
(dollars in millions, except per share amounts)
<CAPTION>
Accumulated other
comprehensive income,
net of income tax effect
-----------------------
Unrealized Adjustment
gain on for
Retained Common Deferred available- minimum
Common Paid-in earnings Stock held compen- for-sale pension Comprehensive
Stock capital (deficit) in treasury sation securities liability Total income
----- ------- ------- ----------- ------ ---------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 $91 $1,906 $(1,280) $ (3) $(80) $104 $(13) $ 725 $ -
Purchase of 13,822,600 shares
of Common Stock - - - (889) - - - (889) -
Conversion of 358,000 shares
of Series H Preferred Stock 9 349 - - - - - 358 -
Grant of 120,840 shares of
nonvested stock and
2,300,000 stock options - 30 - 2 (32) - - - -
Reversion of 50,920 shares of
previously-granted non-vested
stock - (1) - - 1 - - - -
Acquisition of 11,345 shares
of Common Stock from certain
employees - - - (1) - - - (1) -
Exercise of 686,573 stock options 1 6 - 8 - - - 15 -
Dividends paid (preferred stock)
Series H - $18.50 per share - - (6) - - - - (6) -
Amortization of deferred
compensation - - - - 20 - - 20 -
Unrealized gain on available-for
-sale securities, net of income
tax effect - - - - - 47 - 47 47
Adjustment for minimum pension
liability, net of income tax
effect - - - - - - 3 3 3
Tax benefit related to employee
stock option exercises - 5 - - - - - 5 -
Net income - - 434 - - - - 434 434
--- ----- --- --- -- --- -- --- ---
Balance as of September 30, 1998 $101 $2,295 $(852) $(883) $(91) $151 $(10) $711
=== ===== === === == === == ===
Total comprehensive income for the nine months ended September 30, 1998 $484
===
See accompanying Notes to Condensed Consolidated Financial Statements.
4
</TABLE>
US Airways Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include the
accounts of US Airways Group, Inc. (US Airways Group or the Company) and its
wholly-owned subsidiaries US Airways, Inc. (US Airways), Shuttle, Inc.,
Allegheny Airlines, Inc., Piedmont Airlines, Inc., PSA Airlines, Inc., US
Airways Leasing and Sales, Inc., US Airways Fuel Corporation, Airways
Assurance Limited and Material Services Company, Inc.
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 1997 amounts have been reclassified to conform with 1998
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,
1997.
2. Earnings per Common Share
Earnings per Common Share (EPS) is presented on both a basic and diluted
basis in accordance with the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share." Basic EPS is computed by dividing
net income, after deducting preferred stock dividend requirements, by the
weighted average number of shares of common stock outstanding. Diluted EPS
reflects the maximum dilution that would result after giving effect to
dilutive stock options and to the assumed conversion of any dilutive
convertible preferred stock issuance. The following table presents the
computation of basic and diluted EPS (in millions, except per share amounts):
Three Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
---- ----
Earnings applicable to common stockholders:
Earnings applicable to common stockholders
(basic) $ 142 $ 428
Preferred dividend requirement - 6
---- ----
Earnings applicable to common stockholders
(diluted) $ 142 $ 434
==== ====
Common shares:
Weighted average common shares outstanding
(basic) 92 94
Incremental shares related to outstanding
stock options 2 2
Incremental shares related to convertible
preferred stock issuance - 3
---- ----
Weighted average common shares outstanding
(diluted) 94 99
==== ====
Earnings per Common Share:
Basic $1.54 $4.53
Diluted $1.51 $4.40
5
Note: The numbers in the table on the preceding page may not recalculate
due to rounding.
The Company paid dividends totaling $6.6 million on its Series H
Preferred Stock during 1998 prior to the holders converting those shares into
9.2 million shares of the Company's Common Stock on March 12, 1998. The
Company subsequently retired its Series H Preferred Stock.
3. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS
130 establishes standards for the reporting and presentation of comprehensive
income and its components in financial statements. Comprehensive income
encompasses net income and "other comprehensive income," which includes all
other non-owner transactions and events that change stockholders' equity.
As presented in the accompanying Condensed Consolidated Statement of
Changes in Stockholders' Equity, the Company recognized comprehensive income
of $484 million for the nine months ended September 30, 1998, including net
income of $434 million and other comprehensive income of $50 million. For the
nine months ended September 30, 1997, the Company recognized comprehensive
income of $701 million, including net income of $545 million and other
comprehensive income of $156 million. The Company recognized comprehensive
income of $108 million and $343 million for the three months ended September
30, 1998 and 1997, respectively, including net income of $142 million and
$187 million and other comprehensive income (loss) of $(33) million and $156
million, respectively.
<TABLE><CAPTION>
Nine months ended September 30,
------------------------------------------------------
1998 1997
------------------------- --------------------------
Before Tax Net Before Tax Net
tax effect of tax tax effect of tax
effect (expense) effect effect (expense) effect
------ ------- ------ ------ ------- ------
(millions)
Unrealized gain on available-for-sale securities:
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains during the period $73 $(26) $47 $162 $(28) $134
Reclassification adjustment for gains
included in net income during the period - - - - - -
-- -- -- --- -- ---
Net unrealized gains 73 (26) 47 162 (28) 134
Adjustment for minimum pension liability - 3 3 22 - 22
-- -- -- --- -- ---
Other comprehensive income $73 $(23) $50 $184 $(28) $156
== == == === == ===
</TABLE>
<TABLE><CAPTION>
Three months ended September 30,
------------------------------------------------------
1998 1997
------------------------- --------------------------
Before Tax Net Before Tax Net
tax effect of tax tax effect of tax
effect (expense) effect effect (expense) effect
------ ------- ------ ------ ------- ------
(millions)
Unrealized gain (loss) on available-for-sale securities:
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses) during the period $(50) $17 $(33) $162 $(28) $134
Reclassification adjustment for gains (losses)
included in net income during the period - - - - - -
-- -- -- --- -- ---
Net unrealized gains (losses) (50) 17 (33) 162 (28) 134
Adjustment for minimum pension liability - - - 22 - 22
-- -- -- --- -- ---
Other comprehensive income (loss) $(50) $17 $(33) $184 $(28) $156
== == == === == ===
6
</TABLE>
4. Commitments and Contingencies
In the fourth quarter of 1998, the Company began accepting delivery of
up to 400 new Airbus Industrie (Airbus) A320-Family aircraft. As of September
30, 1998, the Company had 128 A320-Family aircraft on firm order, 112
aircraft subject to reconfirmation prior to scheduled delivery and options
for 160 additional aircraft. Of the first 128 aircraft, six are scheduled for
delivery in the fourth quarter 1998, 33 in 1999 and 89 in the years 2000
through 2002; 43 of the aircraft scheduled for delivery in the 2000 to 2002
time period are subject to cancellation with 18 months notice and payment of
a cancellation fee. These new single-aisle aircraft are expected to
ultimately replace, at a minimum, US Airways' Boeing B737-200 and Douglas DC-
9-30 and MD-80 aircraft.
On July 2, 1998, the Company announced that it had reached an agreement
with Airbus for the purchase of up to 30 widebody A330-300 aircraft. The
agreement includes seven firm aircraft orders, seven aircraft subject to
reconfirmation prior to scheduled delivery and options for 16 additional
aircraft. Of the seven firm-order A330-300 aircraft, six are scheduled for
delivery in the year 2000 and one in early 2001. Orders subject to
reconfirmation are for aircraft that are tentatively scheduled for delivery
beginning in the fourth quarter of 2000. The Company can substitute other
Airbus widebody aircraft for the A330-300s, including the A330-200 or members
of the A340-Series, for orders other than the first seven aircraft. In
October 1998, the Company reached an agreement with Pratt & Whitney for jet
engines to power US Airways' new Airbus widebody aircraft and to provide
long-term maintenance for the engines. The new widebody aircraft are expected
to eventually supplant US Airways' Boeing B767-200ER fleet in transatlantic
markets.
As of September 30, 1998, the minimum determinable payments associated
with the Company's aircraft acquisition agreements for Airbus aircraft
(including progress payments, payments at delivery, buyer-furnished
equipment, spares, capitalized interest, penalty payments, cancellation fees
and/or nonrefundable deposits) are currently estimated at $303 million for
the remainder of 1998, $1.29 billion in 1999, $2.04 billion in 2000 and $79
million in 2001.
5. Treasury Stock
The Company held 13.6 million and approximately 40,000 shares of Common
Stock in treasury as of September 30, 1998 and December 31, 1997,
respectively.
The Company completed two common stock purchase plans during the third
quarter of 1998, one authorized for 2.3 million shares to offset stock
options granted to US Airways' pilots in January 1998 and one authorized for
$500 million. The Company purchased 7.16 million shares of its Common Stock
under the latter plan. As of September 30, 1998, the Company had also
purchased 4.36 million shares of the 5.0 million shares authorized under a
third plan announced on September 2, 1998.
6. Nonrecurring Items
During the third quarter of 1998, US Airways reversed $3.0 million of
previously accrued lease obligations upon the early termination of leases for
two British Aerospace BAe-146-200 (BAe-146) aircraft (recorded as a credit to
Aircraft rent expense).
During the second quarter of 1997, US Airways reversed $1.5 million of
previously accrued lease obligations upon subleasing a BAe-146 aircraft
(recorded as a credit to Aircraft rent expense).
US Airways also recognized nonrecurring expenses totaling $28.3
million during the second quarter of 1997 related to efficiency measures
announced during May 1997: $6.9 million recorded in Personnel costs related
to estimated employee severance payments; $2.9 million recorded in Other
rent and landing fees related primarily to the write-off of lease
obligations at
7
certain facilities to be abandoned (net of any anticipated sublease
revenues); and $18.5 million recorded in Depreciation and amortization
related primarily to the write-down of certain McDonnell Douglas DC-9-30
(DC-9-30) aircraft to estimated fair value. The efficiency measures include
grounding of excess aircraft, ending unprofitable jet service to nine
cities and eliminating other routes that have not been profitable and
closing a flight crew base, two reservations centers and three maintenance
facilities.
The Company recognized additional nonrecurring expenses totaling $72.3
million during the third quarter of 1997 including $59.3 million recorded in
Depreciation and amortization resulting from US Airways' late-September 1997
decision to retire its remaining DC-9-30 aircraft over the next several
years. The remaining nonrecurring expenses recognized during the third
quarter of 1997, $11.4 million recorded in Depreciation and amortization and
$1.7 million recorded in Other rent and landing fees, include the write-down
of certain equipment to be disposed of as a result of the May 1997 efficiency
measures and certain other adjustments to the second quarter 1997 charges.
In addition, USAM recognized a pre-tax gain of $179.6 million during the
third quarter of 1997. The gain resulted from USAM's sale of its investment
in Apollo Travel Services Partnership and a sell-down of its interest in
Galileo International, Inc.
(this space intentionally left blank)
8
US Airways, Inc.
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1998 and 1997 (unaudited)
(in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Operating Revenues
Passenger transportation $1,785 $1,768 $5,331 $5,377
US Airways Express transportation
revenues 188 151 520 452
Cargo and freight 38 45 121 132
Other 166 151 497 453
----- ----- ----- -----
Total Operating Revenues 2,177 2,115 6,469 6,414
Operating Expenses
Personnel costs 732 722 2,153 2,183
Aviation fuel 138 183 437 584
Commissions 121 140 361 429
Aircraft rent 93 110 285 315
Other rent and landing fees 98 112 281 302
Aircraft maintenance 85 109 270 280
Depreciation and amortization 76 151 215 315
US Airways Express capacity purchases 144 122 403 365
Other 427 381 1,245 1,123
----- ----- ----- -----
Total Operating Expenses 1,914 2,030 5,650 5,896
----- ----- ----- -----
Operating Income 263 85 819 518
Other Income (Expense)
Interest income 48 30 130 77
Interest expense (51) (64) (174) (197)
Interest capitalized 1 3 (17) 9
Equity in earnings of affiliates - 4 1 30
Gains on sales of interests in
affiliates - 180 - 180
Other, net (12) (3) (14) 14
----- ----- ----- -----
Other Income (Expense), Net (14) 150 (74) 113
----- ----- ----- -----
Income Before Taxes 249 235 745 631
Provision (Credit) for Income Taxes 100 48 300 99
----- ----- ----- -----
Net Income $ 149 $ 187 $ 445 $ 532
===== ===== ===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
9
US Airways, Inc.
Condensed Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997
(dollars in millions)
September December
30, 31,
1998 1997
---- ----
ASSETS
Current Assets
Cash $ 22 $ 17
Cash equivalents 698 1,075
Short-term investments 721 870
Receivables, net 426 296
Receivables from related parties, net 181 195
Materials and supplies, net 202 200
Deferred income taxes 402 150
Prepaid expenses and other 108 132
----- -----
Total Current Assets 2,760 2,935
Property and Equipment
Flight equipment 4,905 4,968
Ground property and equipment 883 851
Less accumulated depreciation and amortization (2,483) (2,429)
----- -----
3,305 3,390
Purchase deposits 1 70
----- -----
Total Property and Equipment, Net 3,306 3,460
Other Assets
Goodwill, net 461 473
Other intangibles, net 345 283
Investment in marketable equity securities 261 190
Receivable from parent company 1,167 210
Deferred income taxes - 221
Other assets, net 556 493
----- -----
Total Other Assets 2,790 1,870
----- -----
$ 8,856 $ 8,265
===== =====
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current maturities of long-term debt $ 69 $ 186
Accounts payable 550 297
Traffic balances payable and unused tickets 925 702
Accrued aircraft rent 425 496
Accrued salaries, wages and vacation 311 306
Other accrued expenses 428 463
----- -----
Total Current Liabilities 2,708 2,450
Long-Term Debt, Net of Current Maturities 1,970 2,425
Deferred Credits and Other Liabilities
Deferred gains, net 310 330
Postretirement benefits other than pensions,
noncurrent 1,204 1,152
Noncurrent employee benefit liabilities and other 1,062 806
----- -----
Total Deferred Credits and Other Liabilities 2,576 2,288
Commitments and Contingencies
Stockholder's Equity
Common stock - -
Paid-in capital 2,430 2,425
Retained earnings (deficit) (969) (1,414)
Accumulated other comprehensive income,
net of income tax effect 141 91
----- -----
Total Stockholder's Equity 1,602 1,102
----- -----
$ 8,856 $ 8,265
===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
10
US Airways, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 (unaudited)
(in millions)
1998 1997
----- -----
Cash and Cash equivalents at beginning of period $1,092 $ 950
----- -----
Cash flows from operating activities
Net income 445 532
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 215 315
Losses (gains) on dispositions of property (9) (16)
Gains on sales of interests in affiliates - (180)
Amortization of deferred gains and credits (20) (20)
Other 44 8
Changes in certain assets and liabilities
Decrease (increase) in receivables (104) (128)
Decrease (increase) in materials and supplies,
prepaid expenses and pension assets (21) 32
Decrease (increase) in deferred income taxes 91 -
Increase (decrease) in traffic balances payable
and unused tickets 223 158
Increase (decrease) in accounts payable and
accrued expenses 273 (359)
Increase (decrease) in postretirement benefits
other than pensions, noncurrent 52 56
----- -----
Net cash provided by (used for) operating
activities 1,189 398
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net (52) (7)
Additions to other property (200) (109)
Proceeds from dispositions of property 97 52
Proceeds from sales of interests in affiliates - 224
Decrease (increase) in short-term investments 153 (223)
Decrease (increase) in restricted cash and investments (50) 18
Funding of parent company's share purchases (881) -
Funding of parent company's aircraft purchase deposits (88) (12)
Other 3 5
----- -----
Net cash provided by (used for) investing
activities (1,018) (52)
Cash flows from financing activities
Principal payments on long-term debt (543) (72)
----- -----
Net cash provided by (used for) financing
activities (543) (72)
----- -----
Net increase (decrease) in Cash and Cash equivalents (372) 274
----- -----
Cash and Cash equivalents at end of period $ 720 $1,224
===== =====
Noncash investing and financing activities
Net unrealized gain on available-for-sale securities,
net of income tax effect $ 47 $ 134
Reduction of aircraft-related purchase deposits $ 61 $ -
Supplemental Information
Cash paid during the period for interest, net of
amount capitalized $ 204 $ 207
Net cash paid during the period for income taxes $ 194 $ 65
See accompanying Notes to Condensed Consolidated Financial Statements.
11
<TABLE>
US Airways, Inc.
Condensed Consolidated Statement of Changes in Stockholder's Equity
Nine Months Ended September 30, 1998 (unaudited)
(in millions)
<CAPTION>
Accumulated other
comprehensive income,
net of income tax effect
------------------------
Unrealized Adjustment
gain on for
Retained available- minimum Compre-
Common Paid-in earnings for-sale pension hensive
stock capital (deficit) securities liability Total income
----- ------- ------- ---------- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 $ - $2,425 $(1,414) $104 $(13) $1,102 $ -
Unrealized gain on
available-for-sale securities,
net of income tax effect - - - 47 - 47 47
Adjustment for minimum
pension liability, net of
income tax effect - - - - 3 3 3
Tax benefit from employee
stock option exercises - 5 - - - 5 -
Net income - - 445 - - 445 445
-- ----- ------ --- --- ----- ---
Balance as of September 30, 1998 $ - $2,430 $ (969) $151 $(10) $1,602
== ===== ====== === === =====
Total comprehensive income for the nine months ended September 30, 1998 $495
===
See accompanying Notes to Condensed Consolidated Financial Statements.
(this space intentionally left blank)
12
</TABLE>
US Airways, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include the
accounts of US Airways, Inc. (US Airways) and its wholly-owned subsidiary
USAM Corp. (USAM). US Airways is a wholly-owned subsidiary of US Airways
Group, Inc. (US Airways Group).
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 1997 amounts have been reclassified to conform with 1998
classifications.
These interim period Condensed Consolidated Financial Statements should
be read in conjunction with the Consolidated Financial Statements contained
in US Airways' Annual Report on Form 10-K for the year ended December 31,
1997.
2. Comprehensive Income
US Airways adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS
130 establishes standards for the reporting and presentation of comprehensive
income and its components in financial statements. Comprehensive income
encompasses net income and "other comprehensive income," which includes all
other non-owner transactions and events that change stockholder's equity.
US Airways recognized comprehensive income of $495 million for the nine
months ended September 30, 1998, including net income of $445 million and
other comprehensive income of $50 million. For the nine months ended
September 30, 1997, US Airways recognized comprehensive income of $688
million, including net income of $532 million and other comprehensive income
of $156 million. US Airways recognized comprehensive income of $116 million
and $343 million for the three months ended September 30, 1998 and 1997,
respectively, including net income of $149 million and $187 million,
respectively, and other comprehensive income (loss) of $(33) million and $156
million, respectively.
<TABLE><CAPTION>
Nine months ended September 30,
------------------------------------------------------
1998 1997
------------------------- --------------------------
Before Tax Net Before Tax Net
tax effect of tax tax effect of tax
effect (expense) effect effect (expense) effect
------ ------- ------ ------ ------- ------
(millions)
Unrealized gain on available-for-sale securities:
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains during the period $73 $(26) $47 $162 $(28) $134
Reclassification adjustment for gains
included in net income during the period - - - - - -
-- -- -- --- -- ---
Net unrealized gains 73 (26) 47 162 (28) 134
Adjustment for minimum pension liability - 3 3 22 - 22
-- -- -- --- -- ---
Other comprehensive income $73 $(23) $50 $184 $(28) $156
== == == === == ===
13
</TABLE>
<TABLE><CAPTION>
Three months ended September 30,
------------------------------------------------------
1998 1997
------------------------- --------------------------
Before Tax Net Before Tax Net
tax effect of tax tax effect of tax
effect (expense) effect effect (expense) effect
------ ------- ------ ------ ------- ------
(millions)
Unrealized gain (loss) on available-for-sale securities:
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses) during the period $(50) $17 $(33) $162 $(28) $134
Reclassification adjustment for gains (losses)
included in net income during the period - - - - - -
-- -- -- --- -- ---
Net unrealized gains (losses) (50) 17 (33) 162 (28) 134
Adjustment for minimum pension liability - - - 22 - 22
-- -- -- --- -- ---
Other comprehensive income (loss) $(50) $17 $(33) $184 $(28) $156
== == == === == ===
</TABLE>
3. Commitments and Contingencies
Please refer to Note 4 in US Airways Group's Notes to Condensed
Consolidated Financial Statements on page 7 of this report.
4. Related Party Transactions
US Airways' noncurrent receivable from US Airways Group was $1.17
billion and $210 million as of September 30, 1998 and December 31, 1997,
respectively. The increase is due primarily to US Airways funding US Airways
Group's common stock purchase programs and an increase in US Airways Group's
obligations for purchase deposits for new flight equipment with expected
delivery dates beyond one year from the balance sheet date. See Notes 4 and 5
in US Airways Group's Notes to Condensed Consolidated Financial Statements on
page 7 of this report for additional information.
5. Nonrecurring Items
Please refer to Note 6 in US Airways Group's "Notes to Condensed
Consolidated Financial Statements" on page 7 of this report.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General Information
Part I, Item 2 of this report should be read in conjunction with Part
II, Item 7 of US Airways Group, Inc.'s (US Airways Group or the Company) and
US Airways, Inc.'s (US Airways) Annual Report to the United States Securities
and Exchange Commission (SEC) on Form 10-K for the year ended December 31,
1997. The information contained herein is not a comprehensive management
overview and analysis of the financial condition and results of operations of
the Company and US Airways, but rather updates disclosures made in the
aforementioned filing.
Certain information contained herein should be considered "forward-
looking information," which is subject to a number of risks and
uncertainties. The preparation of forward-looking information requires the
use of estimates of future revenues, expenses, activity levels and economic
and market conditions, many of which are outside the Company's control.
Specific factors that could cause actual results to differ materially from
those set forth in the forward-looking information include: economic
conditions, labor costs, aviation fuel costs, competitive pressures on
product pricing-particularly from lower-cost competitors, weather conditions,
government legislation, consumer perceptions of the Company's products,
demand for air transportation in the
14
markets in which the Company operates and other risks and uncertainties
listed from time to time in the Company's reports to the SEC. Other factors
and assumptions not identified above are also involved in the preparation of
forward-looking information, and the failure of such other factors and
assumptions to be realized may also cause actual results to differ materially
from those discussed. The Company assumes no obligation to update such
estimates to reflect actual results, changes in assumptions or changes in
other factors affecting such estimates.
Except where noted, the following discussion relates primarily to the
financial condition, results of operations and future prospects of US
Airways. US Airways is the Company's principal operating subsidiary,
accounting for approximately 90% of the Company's consolidated operating
revenues for the first nine months of 1998. US Airways' financial results
include the financial results of its wholly-owned subsidiary USAM Corp.
(USAM).
Financial Overview
For the third quarter of 1998, the Company's operating revenues were
$2.21 billion, operating income was $270.2 million, net income was $141.9
million and earnings per common share (EPS) was $1.51 on a diluted basis. For
the comparative period in 1997, the Company's operating revenues were $2.12
billion, operating income was $83.2 million, net income was $187.0 million
and EPS was $1.82 on a diluted basis. The Company's financial results for
1998 include the financial results of Shuttle, Inc. (Shuttle), which the
Company acquired on December 30, 1997, and reflect a significant change in
the Company's income tax position. In addition, certain nonrecurring items
are included in the Company's financial results for both 1998 and 1997. See
"Results of Operations" below for additional information related to the
Company's financial results.
For the first nine months of 1998, the Company's operating revenues were
$6.57 billion, operating income was $835.8 million, net income was $434.5
million and EPS was $4.40 on a diluted basis. For the first nine months of
1997, the Company's operating revenues were $6.43 billion, operating income
was $514.3 million, net income was $545.3 million and EPS was $5.21 on a
diluted basis. As mentioned above, several factors affect the comparability
of the Company's financial results.
The same factors that contributed to the Company's record financial
performance for 1997 continue to favorably affect the Company's financial
results in 1998. These factors include relatively favorable domestic economic
and industry conditions, overall favorable capacity and pricing trends in
markets served by the Company's airline subsidiaries, US Airways' improved
operating performance, recent marketing efforts undertaken by the Company and
the positive influence of certain revenue-enhancement and cost-reduction
initiatives. The Company is closely monitoring the passenger traffic of its
airline subsidiaries in light of the much-publicized speculation that
domestic economic conditions are weakening. See related discussion under
"Liquidity and Capital Resources."
Update on US Airways' Competitive Position
On October 16, 1998, US Airways took delivery of its first new Airbus
Industrie (Airbus) A320-Family aircraft, an A319. As of the date of this
report, US Airways had taken delivery of three additional A319 aircraft. The
Company has 124 additional A320-Family aircraft on firm order, 112 aircraft
subject to reconfirmation prior to scheduled delivery and options for 160
additional aircraft. These new single-aisle aircraft are expected to
ultimately replace, at a minimum, US Airways' Boeing B737-200 and Douglas DC-
9-30 and MD-80 aircraft. The new Airbus aircraft are more fuel-efficient,
less costly to maintain, have greater range capabilities and are expected to
provide certain customer service benefits over the aircraft they are intended
to replace, although certain expenses such as aircraft rent will likely
increase in conjunction with the higher ownership cost of the new aircraft.
These new aircraft are a major component of the Company's long-term strategic
15
goal of establishing US Airways as a competitive global airline. See Note 4
to the Company's Notes to Condensed Consolidated Financial Statement
contained on page 7 of this report and "Liquidity and Capital Resources"
below for additional information.
On July 2, 1998, the Company announced that it had reached an agreement
with Airbus for the purchase of up to 30 widebody A330-300 aircraft. The
agreement includes seven firm aircraft orders, seven aircraft subject to
reconfirmation prior to scheduled delivery and options for 16 additional
aircraft. Of the seven firm-order A330-300 aircraft, six are scheduled for
delivery in 2000 and one in early 2001. Orders subject to reconfirmation are
for aircraft that are tentatively scheduled for delivery beginning in the
fourth quarter of 2000. The Company can substitute other Airbus widebody
aircraft for the A330-300s, including the A330-200 or members of the A340-
Series, for orders other than the first seven aircraft. In October 1998, the
Company reached an agreement with Pratt & Whitney for jet engines to power US
Airways' new Airbus widebody aircraft and to provide long-term maintenance
for the engines. The new widebody aircraft are expected to eventually
supplant US Airways' Boeing B767-200ER fleet in transatlantic markets. See
Note 4 to the Company's Notes to Condensed Consolidated Financial Statement
contained on page 7 of this report and "Liquidity and Capital Resources"
below for additional information.
The Company has also entered into an agreement with a subsidiary of
Bombardier, Inc. to lease 11 deHavilland Dash-8 turboprop aircraft. All 11
aircraft, which will be operated by two of the Company's regional airline
subsidiaries, will enter operational service before the end of 1998 (four
entered operational service during third quarter 1998).
On June 1, 1998, US Airways' launched "MetroJet," its competitive
response to low cost, low fare competition, with five Boeing B737-200
aircraft and service between Baltimore/Washington International Airport and
four eastern cities. MetroJet's operational performance has exceeded
management's expectations. During third quarter 1998, MetroJet's on-time
performance was 90.3%. Expanding monthly since its launch, MetroJet is
expected to operate 22 aircraft with service to 16 cities by the end of 1998
and operate 54 aircraft by the end of 1999.
The level of low cost, low fare competition confronting the Company's
airline subsidiaries is relatively unchanged versus the level reported in the
Company's Form 10-K for the year ended December 31, 1997. Low cost, low fare
competitors have expanded operations in markets in which US Airways operates
during 1998, but, primarily as the result of schedule changes implemented in
early 1998, US Airways exited certain markets in which it competed with such
airlines. The introduction and growth of MetroJet has resulted in an
incremental increase in low cost, low fare competition for US Airways as most
of the markets served by MetroJet are also served by low cost, low fare air
carriers (primarily Southwest Airlines Co., and Delta Express, the low cost,
low fare product offered by Delta Airlines, Inc.).
US Airways has added additional transatlantic service during 1998:
Philadelphia-London (Gatwick Airport) and Philadelphia-Amsterdam in April
1998, Pittsburgh-Paris in October 1998 and a second Philadelphia-London
flight in early November 1998. US Airways also expects to receive the
appropriate authorizations to add a second Philadelphia-Paris flight, which
is expected to begin in Spring 1999. US Airways continues to seek approval
from U.S. and Italian authorities to operate Philadelphia-Milan service and
has filed with the U.S. Department of Transportation (DOT) for authority to
serve London's Heathrow Airport (Heathrow) from Boston, Charlotte,
Philadelphia and Pittsburgh. US Airways anticipates moving its operations at
Gatwick Airport to Heathrow when possible (the availability of operating
rights at Heathrow is currently constrained by the bilateral aviation treaty
between the U.S. and the United Kingdom). Talks between the DOT and the U.K.
government aimed at negotiating a new bilateral aviation treaty with the U.K
were recently suspended and no new talks are currently scheduled. In
addition, according to recent press reports, British Airways and American
Airlines have decided to phase in their proposed alliance over a four to five
year period rather than seek government approval for all aspects of the
alliance at
16
this time. British Airways has also stated that it would favor an incremental
liberalization of the aviation treaty. These changes in British Airways'
position could make it more difficult for other airlines, including US
Airways, to obtain the rights and get access to slots (takeoff and landing
rights) necessary to operate flights to Heathrow. US Airways believes that a
new aviation treaty between the two countries is a prerequisite for US
Airways' obtaining the right to serve Heathrow and has proposed that the U.S.
government renounce the treaty in order to permit negotiation of a new
liberal agreement. US Airways continues to explore opportunities to further
its growth in European markets, especially in light of the Company's recent
order for new widebody aircraft.
On April 22, 1998, US Airways announced that it had postponed its
service to London's Gatwick Airport from Charlotte, citing "unlawful"
behavior by the U.K. in refusing to grant commercially viable landing rights
for the flight, which was scheduled to begin May 7, 1998. While not
commercially viable for once-daily service from Charlotte, US Airways has
been able to use landing rights during the 1998-1999 winter season it
intended for use to Charlotte to add a second Philadelphia-London flight.
Upon US Airways' petition, the DOT dismissed US Airways' complaint against
the U.K. over the landing rights issue, which argued that the bilateral
aviation agreement between the U.S. and the U.K. guarantees U.S. air carriers
a "fair and equal opportunity to compete" with U.K. air carriers. However, US
Airways continues to pursue this matter and intends to establish Charlotte-
London service as soon as it is granted commercially viable landing rights
for the flight.
On April 23, 1998, US Airways and American announced a marketing
relationship that gives customers of both companies important new benefits,
including combined access to both frequent traveler programs: US Airways'
Dividend Miles and American's AAdvantage. Under the program, effective
August 1, 1998, members who belong to Dividend Miles and AAdvantage are able
to claim awards for travel on both airlines. In addition, US Airways Club and
American's Admiral Club members now enjoy reciprocal access to each airlines'
airport clubs. During August 1998, the second phase of the marketing
relationship was launched: enabling Dividend Miles and AAdvantage members who
belong to both programs to combine miles when claiming a travel award on
either airline. The third phase of the relationship, allowing AAdvantage
members to earn AAdvantage miles as well as Dividend Miles on certain
US Airways Shuttle flights, was unveiled in early October 1998.
US Airways also believes that "code-sharing" with American on certain
flights would be beneficial to its customers. However, because certain types
of code-sharing are subject to provisions in the labor contracts of both
airlines, US Airways has no plans to implement domestic code-sharing between
the "mainline" operations of the airlines unless pressured to do so for
competitive reasons. Code-sharing on the regional air carriers of both
airlines, US Airways Express and American Eagle, is expected to be
implemented in early 1999 on certain flight segments.
Legislation has recently been enacted that would provide for increased
scrutiny of certain airline joint ventures by the DOT. In April 1998, the DOT
issued proposed rules designed to regulate perceived anti-competitive
behavior directed at new entrants in the airline industry. Legislation has
recently been enacted requiring among other things, the National Research
Council of the National Academy of Sciences to complete a comprehensive study
pertaining to competitive issues in the airline industry prior to the DOT's
implementation of any such rules. The Company cannot predict whether or when
any such proposed rules will be adopted.
Effects of the Year 2000
The Company is currently operating computer software applications and
systems to support important business applications, including reservations,
accounting and flight operations systems, that will not properly process
dates on or after January 1, 2000 (commonly referred to as the "Year 2000"
problem). In order to address this situation, the Company has implemented a
plan that
17
addresses the Company's information technology and non-information technology
systems. The Company has two teams of full-time staff in place. One team is
coordinating the conversion of the Company's information technology to
systems managed by The Sabre Group (TSG), including the Year 2000 compliance
for those systems, as further described below. A second team, headed by the
Company's Chief Information Officer, is coordinating Year 2000 compliance
efforts for non-information technology systems. This team has engaged the
consulting arm of a "big five" public accounting firm to assist with those
efforts. This team is reviewing the level of the Company's Year 2000
compliance, and recommending such remedial measures as are necessary.
The Company has a long-term information technology relationship with TSG
pursuant to which it is converting many of its information technology systems
to those operated by TSG. TSG has reported that a majority of its primary
"host" systems (including systems for reservations, flight operations, and
cargo) are already Year 2000 compliant. Generally, US Airways' conversion to
TSG systems is being implemented after the applicable TSG system is already
Year 2000 compliant. The remaining systems will be made compliant by TSG by
August 1, 1999. The Company is working to establish Year 2000 testing
procedures between its systems and TSG's systems. The balance of TSG's
systems to which the Company will be converting are scheduled to be Year 2000
compliant no later than August 1, 1999. TSG is also remediating all non-Year
2000 compliant systems that are covered by the Company's relationship with
TSG, but that are not being converted to a TSG system. These remediation
efforts are scheduled for completion by August 1, 1999.
TSG has also informed the Company that it is in the process of
communicating with TSG's own third party vendors concerning the Year 2000
compliance of their products and services.
The Company operates computer software and systems that are not Year
2000 compliant, and that are not covered by the TSG relationship. This
includes both information technology and non-information technology systems
(such as fax machines, miscellaneous airport devices, and aircraft avionics).
The Company has completed an inventory of items with possible Year 2000
problems. The Company has prioritized these items and has begun to implement
a program to assess, remediate and test the non-discretionary systems based
on this prioritization. The Company plans to complete the assessment of all
vital items by December 31, 1998. The Company plans to complete the
remediation of all non-discretionary systems by June 30, 1999. The Company is
also working with the Federal Aviation Administration (FAA) to ensure full
compliance with any FAA Year 2000 requirements.
The Company has also commenced airport and facility reviews. This
entails reviewing the Year 2000 compliance of the systems in those locations
over which the Company has little or no control, such as certain flight
information displays, elevators, security and other miscellaneous airport
devices. The Company plans to complete these reviews by December 31, 1998.
The Company is also participating in Year 2000 review efforts being
coordinated on an industry-wide basis by the Airline Transport Association
and the International Air Transport Association.
The Company has identified and prioritized its supplier base, and is
commencing formal contact with these vendors to determine their Year 2000
status, and any possible impact on the Company. Approximately one-third of
the vendors have been contacted with fourteen percent vendor responses
returned. The Company will track these responses and evaluate its long-term
relationship with these vendors based on the responses it receives.
Although TSG has notified the Company that it believes that its Year
2000 compliance program is on schedule, there can be no assurance that the
compliance program will be completed on a timely basis. Similarly, there can
be no assurance that the Company's own computer software and
18
systems, those of its suppliers, the airports at which the Company operates,
or the air traffic control system managed by the FAA will be made Year 2000
compliant in a timely manner. Any such failures could have a material adverse
effect on the business, financial position and results of operations of the
Company.
The Company is establishing contingency plans in the event that any non-
discretionary system is not Year 2000 compliant by the date required. These
plans will entail reverting to an older and/or manual system until the
applicable system can be remediated. In the event that the Company is
required to implement a contingency plan, it believes that the result may be
significant delays in operations and flight cancellations. In the event that
such delays and flight cancellations occur, it is possible, depending on the
extent of the delays and cancellations, that there could be a material
adverse impact on the Company's results of operations and financial position.
As of September 30, 1998, aggregate expenses incurred by the Company to
become Year 2000 compliant, apart from expenses related to the TSG
relationship, have amounted to approximately $2.1 million. The Company
expects to spend an additional $8 million, apart from the TSG relationship,
in order to become fully Year 2000 compliant. These amounts are also
exclusive of any replacement equipment that may become necessary and have not
yet been identified. With respect to the cost of TSG's Year 2000 compliance
program, the Company cannot completely quantify the costs for Year 2000
compliance on its information technology systems because such costs have been
incorporated into the costs of the broader conversion plan to TSG systems.
However, the Company anticipates incurring $24 million in expenses for TSG
services which are related solely to Year 2000 compliance efforts on the
systems, unrelated to the broader conversion plan. The Company expects to pay
TSG $18 million for these services in 1998 and another $6 million in 1999.
Overall, the Company believes that the cost of becoming Year 2000 compliant
is not expected to have a material adverse effect on the business, financial
position or results of operations of the Company.
Other Information
During the third quarter of 1998, US Airways issued recall notices to
all of its furloughed pilots. The recalls are part of US Airways' continuing
planning process due to normal attrition, retirements and training
requirements for the new single-aisle Airbus aircraft that have begun
entering US Airways' operating fleet. US Airways had approximately 280 pilots
on furlough prior to the recalls.
On June 23, 1998 the International Association of Machinists and
Aerospace Workers ("IAMAW") filed with the National Mediation Board ("NMB")
for mediation in its negotiations with US Airways for an initial contract
covering approximately 6,100 fleet service employees. Following the NMB's
appointment of a mediator, a tentative agreement was reached by the IAMAW and
US Airways on August 17, 1998. The IAMAW failed to ratify the tentative
agreement and the mediator reconvened the parties to resume negotiations on
October 6, 1998.
On September 29, 1998, the IAMAW also filed with the NMB for mediation in
its contract negotiations with US Airways covering approximately 7,000
mechanic and related employees. The labor agreement covering the mechanic and
related employees was amendable on October 1, 1995. Negotiations between the
parties will resume in November 1998 under the auspices of the NMB-appointed
mediator.
US Airways is also in negotiations over amendable labor agreements with
the Association of Flight Attendants covering flight attendants and with the
Transport Workers Union covering flight crew training instructors, flight
simulator engineers and dispatch employees, and is in negotiations over an
initial contract with the Communication Workers of America covering passenger
service employees.
19
In October 1998, US Airways launched an on-line internet reservation
system called Personal TravelWorks. The new system offers customers the
ability to make their own travel arrangements for flights on US Airways,
MetroJet, US Airways Shuttle and US Airways Express. Visitors to
www.usairways.com, and the new MetroJet internet site, www.flymetrojet.com,
can make travel reservations, purchase tickets, and obtain flight schedules,
ticket prices and other travel information on-line.
In September 1997, The Boeing Company (Boeing) filed suit against US
Airways in state court in King County, Washington seeking unspecified
damages, estimated at approximately $220 million, for alleged breach of two
aircraft purchase agreements concerning, respectively, eight B757-200
aircraft and 40 B737-Series aircraft. On October 31, 1997, US Airways filed
an answer and counterclaims to Boeing's complaint denying liability and
seeking recovery from Boeing of approximately $35 million in equipment
purchase deposits. On April 23, 1998 the parties reached a settlement
terminating all obligations with respect to both purchase agreements.
Pursuant to the settlement, the litigation has been dismissed with prejudice
as to both Boeing's claims and US Airways' counterclaims.
RESULTS OF OPERATIONS
The following section pertains to activity included in the Company's
Condensed Consolidated Statements of Operations (which are contained in Part
I, Item 1A. of this report) and in selected US Airways operating and
financial statistics. Except where noted, operating statistics referred to in
this section are for scheduled service only.
THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH THE
THREE MONTHS ENDED SEPTEMBER 30, 1997
As mentioned above, the Company purchased Shuttle on December 30, 1997.
Because the Company's acquisition of Shuttle was accounted for using the
"purchase method," only Shuttle's financial results post-acquisition are
included in the Company's results of operations. Shuttle operates under the
trade name "US Airways Shuttle."
Operating Revenues-Passenger transportation revenues increased $70.7 million
or 3.7%, of which $41.0 million is attributable to US Airways Shuttle
operations. See "Selected US Airways Operating and Financial Statistics"
below for additional information related to US Airways' passenger
transportation revenues. Cargo and freight revenues in third quarter 1997
were favorably affected by an employee strike at United Parcel Service. Less
capacity (fewer aircraft) in 1998 also affects the comparison to 1997
activity. Other operating revenues increased 19.3% due primarily to revenues
generated from sales of capacity (ASMs) on a non-owned US Airways Express air
carrier (the agreement was effective in January 1998), an increase in
cancellation fees revenues and an increase in frequent traveler miles sold to
partners in US Airways' Dividend Miles program. The increase in revenues from
sales of capacity on the US Airways Express air carrier is partially offset
by increases in expenses recognized in the Other operating expenses category
related to purchases of the capacity (see below).
Operating Expenses-In second quarter 1997, US Airways recognized operating
expenses totaling $26.8 million categorized as nonrecurring items. The
nonrecurring items related to certain efficiency measures, including US
Airways' elimination of service on certain unprofitable routes and the
consolidation of certain maintenance and reservations activities into fewer
facilities. The table on the following page shows where these nonrecurring
items were recorded in the Company's Condensed Consolidated Statements of
Operations. The charge to Personnel costs relates to severance for displaced
employees and the charge to Other rent and landing fees relates to facilities
abandoned, both repercussions from the efficiency measures. A majority of the
charge to
20
Depreciation and amortization stems from an analysis performed in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121). In general, SFAS 121 requires an
impairment charge to be recognized when the net undiscounted future cash
flows from an asset's use (including any anticipated proceeds from
disposition) are less than the asset's current book value and the asset's
current book value exceeds its fair value. The impairment charge reflects
writing-down the asset to fair value. $18.1 million of the second quarter
charge is an impairment charge associated with retiring 17 DC-9-30 aircraft
as the result of the efficiency measures. A $1.5 million credit to Aircraft
rent was recorded upon US Airways' subleasing of one of its nonoperating
BAe-146 aircraft. The credit reflects a reversal of previously accrued lease
obligations.
The Company recognized additional nonrecurring items in the third
quarter of 1997 (see the table on the following page). Of the $70.6 million
charge to Depreciation and amortization, $59.3 million is an impairment
charge (see discussion above) resulting from US Airways' late-September 1997
decision to retire its remaining DC-9-30 aircraft over the next several
years. US Airways has suspended its DC-9-30 "hush-kit" program in conjunction
with its decision to retire this fleet-type. The remaining components of the
Depreciation and amortization charge relate to facilities abandoned as a
result of the efficiency measures.
Gains on sales of interests in affiliates resulted from USAM's sale of
its investment in Apollo Travel Services Partnership and a sell-down of its
interest in Galileo International, Inc., both in July 1997.
The table below shows where these nonrecurring items were recorded in
the Company's Condensed Consolidated Statements of Operations (dollars in
millions).
1997
-----------------------------
Second Third Year-to
Quarter Quarter Date
------- ------- -------
Operating Expenses
Personnel costs $ (6.9) $ - $ (6.9)
Aircraft rent 1.5 - 1.5
Other rent and landing fees (2.9) (1.7) (4.6)
Depreciation and amortization (18.5) (70.6) (89.1)
---- ----- -----
(26.8) (72.3) (99.1)
---- ----- -----
Other Income (Expense)
Gains on sales of interests
in affiliates - 179.6 179.6
---- ----- -----
- 179.6 179.6
---- ----- -----
Net amount reflected in Income
Before Taxes $(26.8) $107.3 $ 80.5
==== ===== =====
US Airways recorded a nonrecurring item for $3.0 million during third
quarter 1998 related to the early termination of the leases for two of its
nonoperating BAe-146 aircraft. The nonrecurring item, a reversal of
previously accrued lease obligations, was recorded as a credit to Aircraft
rent.
Compared to third quarter 1997, the Company's Personnel costs for third
quarter 1998 increased 2.9%. The increase is primarily attributable to
including Shuttle's results in 1998 and increased training expenses
associated with two major projects: US Airways' integration of new aircraft
into its operating fleet (training for pilots, flight attendants and
mechanics) and the implementation of several new information systems managed
by TSG (training for customer service employees and reservations agents).
These two projects have also adversely affected overtime expenses. In
addition, US Airways accrued $11.0 million during the third quarter of 1998
related to a provision in a tentative initial labor agreement with its fleet
service workers that called for a one-time
21
payment upon ratification of the contract. The fleet service employees
subsequently rejected the contract and negotiations continue. Fewer full-time
equivalent employees at US Airways helped to mitigate the factors driving the
increase in Personnel costs. As previously disclosed, approximately 670
US Airways employees transferred to TSG in late December 1997 as a result of
US Airways' information services management agreement with TSG (see also
Other operating expenses and Depreciation and amortization below). Aviation
fuel decreased significantly due primarily to lower average fuel prices.
Commissions also decreased significantly reflecting the revised commission
rate structure the Company established in September 1997. Aircraft rent
expenses in 1997 were adversely affected by a $9.6 million adjustment
recorded during the third quarter of 1997 related to US Airways' F28-4000
aircraft. Excluding nonrecurring items, Other rent and landing fees decreased
7.0% primarily due to capacity decreases year-over-year (fewer landings) as
well as fewer leased facilities year-over-year (see related discussion
above). Aircraft maintenance decreased 13.4% due to two unusual charges
recognized in third quarter 1997: $14.5 million related to unserviceable
(scrapped) JT8D engine parts and $10.0 million in adjustments related to
other spare parts. The favorable effects of these adjustments were partially
offset by including Shuttle's results in 1998 and increases in expenses
during 1998 associated with the timing of when US Airways recognizes certain
maintenance expenses. US Airways entered into a ten-year maintenance
agreement with Rolls Royce Canada Limitee in December 1997 for its jet
engines originally manufactured by Rolls Royce Plc. Because the new contract
is based on a per-flight-hour cost (as opposed to the cost of time and
materials when the jet engines are actually serviced), the timing of certain
expenses related to the maintenance of these jet engines also changed.
Overall, US Airways is realizing cost savings from its power-by-the-hour
maintenance arrangements. Depreciation and amortization decreased 1.6% if the
nonrecurring charges recognized in 1997 are excluded. Decreases related to
US Airways' sale of information systems and related assets to TSG in early
January 1998 (which occurred as part of its information services management
agreement with TSG) were partially offset by expenses related to Shuttle,
including amortization of goodwill, and higher depreciation expenses recorded
in conjunction with US Airways' revising downward the residual values for
certain DC-9-30 aircraft. Other operating expenses increased 15.6% due
primarily to expenses associated with US Airways' information services
management contract with TSG (see related discussion under "Effects of the
Year 2000" above), amounts recorded in this expense category related to
settlement of litigation with Boeing (as discussed above under "Other
Information") and expenses associated with purchases of capacity from a non-
owned US Airways Express air carrier (see Other operating revenues above). As
a result of US Airways' information services agreement with TSG, certain
expenses categorized as Personnel costs and Depreciation and amortization in
1997 have been replaced by expenses categorized as Other operating expenses
(e.g., outside services).
Other Income (Expense)-Interest income decreased as the average balance of
cash equivalents and short-term investments decreased period over period.
Interest expense decreased substantially as the result of less outstanding
long-term debt. US Airways' outstanding long-term debt (including current
maturities) has been reduced by $587.9 million since September 30, 1997.
Interest capitalized increased due primarily to increased equipment purchase
deposits for new Airbus aircraft. The decrease in Equity in earnings of
affiliates results from USAM discontinuing the equity method of accounting
for certain investments in July 1997. During July 1998, US Airways incurred
prepayment penalties of $15.0 million recorded in Other, net associated with
the early extinguishment of its $300.0 million principal amount 10% Senior
Notes.
Provision (Credit) for Income Taxes-The Company's effective income tax rate
for financial reporting purposes increased substantially as the result of the
Company recognizing certain income tax benefits during the fourth quarter of
1997.
Preferred Dividend Requirement-With the retirement of the Company's Series H
Preferred Stock (formerly the Series A Preferred Stock) during March 1998,
the Company no longer has preferred stock outstanding. In addition to
dividends on the Series H Preferred Stock, the preferred dividend
22
requirement of $11 million for third quarter 1997 reflects dividend
requirements for the Company's Series B Preferred Stock, which was retired in
September 1997.
Earnings per Common Share-The number of shares used to calculate EPS has been
affected by: the conversion of the Series B Preferred Stock during August and
September 1997; the conversion of the Series H Preferred Stock in March 1998,
and; purchases of Common Stock during the first nine months of 1998. As of
September 30, 1998, the Company held 13.6 million shares of Common Stock in
treasury. See also Note 2 to the Company's Condensed Consolidated Financial
Statements contained in Part I, Item 1A. of this report for additional
information. The Company's EPS figures for third quarter 1997 have been
restated to conform with SFAS No. 128, "Earnings Per Share," which the
Company adopted during fourth quarter 1997.
In 1998, the Financial Accounting Standards Board adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
(SFAS 132) and SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133). SFAS 132 revises standards for the reporting
and presentation of information about pension and other postretirement
benefit plans. Implementation of SFAS 132 will not impact the Company's
results of operations or financial position because this standard only
addresses disclosure matters. SFAS 133 establishes accounting and reporting
standards for derivative financial instruments and for hedging activities.
Although only a preliminary assessment has been completed, the Company does
not believe that implementing SFAS 133 will materially impact its results of
operations or financial condition. This conclusion is based on US Airways'
current limited participation in contracts involving derivative financial
instruments and hedging transactions. The Company is required to implement
SFAS 132 as part of its year-end reporting for 1998 and SFAS 133 as part of
its financial reporting for the first quarter of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
As mentioned above, the Company purchased Shuttle on December 30, 1997.
Because the Company's acquisition of Shuttle was accounted for using the
"purchase method," only Shuttle's financial results post-acquisition are
included in the Company's results of operations.
Operating Revenues-Passenger transportation revenues increased $97.7 million
or 1.7%, which includes $125.6 million attributable to US Airways Shuttle,
$18.3 million attributable to the Company's three wholly-owned regional
airlines partially offset by a $46.3 million decrease attributable to
US Airways. See "Selected US Airways Operating and Financial Statistics"
below for additional information related to US Airways' passenger
transportation revenues. Cargo and freight revenues decreased due principally
to less capacity (fewer aircraft) in 1998. In addition, activity during third
quarter 1997 was favorably affected by an employee strike at United Parcel
Service. Other operating revenues increased 11.0% due primarily to revenues
generated from sales of capacity (ASMs) on a non-owned US Airways Express air
carrier (the agreement was effective in January 1998), an increase in
cancellation fees revenues and an increase in frequent traveler miles sold to
partners in US Airways' Dividend Miles program. The increase in revenues from
sales of capacity on the US Airways Express air carrier is partially offset
by increases in expenses recognized in the Other operating expenses category
related to purchases of the capacity (see below).
Operating Expenses-Excluding nonrecurring items (discussed above), Personnel
costs increased marginally as decreases in full-time equivalent employees
were more than offset by the effects of including Shuttle's personnel costs
in the Company's 1998 financial results and factors related primarily to
training (see Personnel costs in the comparison of quarterly results above).
Aviation fuel decreased significantly due primarily to lower average fuel
prices. Commissions also decreased
23
significantly reflecting the revised commission rate structure the Company
established in September 1997. Aircraft rent expenses in 1997 were adversely
affected by adjustments totaling $16.8 million recorded during 1997 related
to US Airways' F28-4000 aircraft. Excluding nonrecurring items, Other rent
and landing fees decreased marginally due to capacity decreases year-over-
year (fewer landings) and fewer leased facilities year-over-year (see related
discussion above) partially offset by the timing of when rent credits from
certain airport facilities were received. Aircraft maintenance increased $9.7
million or 2.9%. A majority of the increase relates to including Shuttle's
results in 1998. Additionally, as discussed under Aircraft maintenance in the
comparison of quarterly results, comparisons are affected by the timing of
when certain maintenance expenses were incurred. Depreciation and
amortization was relatively unchanged if nonrecurring items are excluded. The
same factors discussed in the comparison of quarterly results (see above) are
applicable to the year-to-date analysis. Other increased $143.7 million or
12.0% due primarily to expenses associated with US Airways' information
services management contract with TSG, amounts recorded during the second
quarter of 1998 related to US Airways' settlement of litigation with Boeing
(as discussed above under "Other Information") and expenses associated with
purchases of capacity from a non-owned US Airways Express air carrier. As a
result of US Airways' information services agreement with TSG, certain
expenses categorized as Personnel costs and Depreciation and amortization in
1997 have been replaced by expenses categorized as Other operating expenses
(e.g., outside services).
Other Income (Expense)-Interest income increased as the average balance of
cash equivalents and short-term investments was higher during the first nine
months of 1998. Interest expense decreased as the result of less outstanding
long-term debt. The decrease in Interest capitalized reflects US Airways'
write-off of capitalized interest on equipment purchase deposits with Boeing
in conjunction with the settlement of litigation between US Airways and
Boeing (as discussed above under "Other Information") partially offset by
capitalized interest on equipment purchase deposits for Airbus aircraft. The
decrease in Equity in earnings of affiliates results from USAM discontinuing
the equity method of accounting for certain investments in July 1997. During
the first nine months of 1997, US Airways recognized gains in the Other, net
category totaling $18.0 million related to US Airways' sale of 11 B737-200
and one Fokker F28-4000 aircraft. During July 1998, US Airways incurred
prepayment penalties of $15.0 million associated with the early
extinguishment of its $300.0 million principal amount 10% Senior Notes.
Provision (Credit) for Income Taxes-The Company's effective income tax rate
for financial reporting purposes increased substantially as the result of the
Company recognizing certain income tax benefits during the fourth quarter of
1997.
Preferred Dividend Requirement-With the retirement of the Company's Series H
Preferred Stock in March 1998, the Company no longer has preferred stock
outstanding. In addition to dividends on the Series H Preferred Stock, the
preferred dividend requirement of $55 million for the first nine months of
1997 reflects dividend requirements for the Company's Series F and Series T
Preferred Stock, both of which were retired in May 1997 and its Series B
Preferred Stock, which was retired in September 1997.
Earnings per Common Share-As discussed above in the comparison of quarterly
results, the number of shares of Common Stock used to calculate EPS has been
affected by several transactions, most notably conversions of preferred stock
into Common Stock and purchases of Common Stock. The Company's EPS amounts
for the first nine months of 1997 have been restated to conform with SFAS No.
128, "Earnings Per Share," which the Company adopted during fourth quarter
1997.
24
<TABLE>
SELECTED US AIRWAYS OPERATING AND FINANCIAL STATISTICS (NOTE 1)
(UNAUDITED)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ Increase ------------------- Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue passengers (thousands)* 15,177 15,080 0.6 % 43,788 44,480 (1.6)%
Total RPMs (millions) (Note 2) 10,961 10,979 (0.2)% 31,358 31,930 (1.8)%
RPMs (millions)* 10,937 10,940 - % 31,263 31,793 (1.7)%
Total ASMs (millions) (Note 3) 14,458 14,957 (3.3)% 42,371 44,418 (4.6)%
ASMs (millions)* 14,430 14,908 (3.2)% 42,260 44,254 (4.5)%
Passenger load factor* (Note 4) 75.8% 73.4% 2.4 pts. 74.0% 71.8% 2.2 pts.
Break-even load factor (Note 5) 68.2% 70.0% (1.8)pts. 66.3% 66.7% (0.4)pts.
Yield* (Note 6) 16.32c 16.16c 1.0 % 17.05c 16.91c 0.8 %
Passenger revenue per ASM* (Note 7) 12.37c 11.86c 4.3 % 12.61c 12.15c 3.8 %
Revenue per ASM (Note 8) 13.75c 13.13c 4.7 % 14.04c 13.42c 4.6 %
Cost per ASM (Note 9) 12.26c 12.27c (0.1)% 12.39c 12.23c 1.3 %
Average passenger journey (miles)* 721 726 (0.7)% 714 715 (0.1)%
Average stage length (miles)* 597 599 (0.3)% 595 592 0.5 %
Revenue aircraft miles (millions)* 107 111 (3.6)% 315 330 (4.5)%
Cost of aviation fuel per gallon
(Note 10) 48.83c 63.96c (23.7)% 52.87c 68.15c (22.4)%
Cost of aviation fuel per gallon,
excluding fuel taxes (Note 11) 42.87c 58.23c (26.4)% 46.87c 61.95c (24.3)%
Gallons of aviation fuel consumed
(millions) 282 287 (1.7)% 827 857 (3.5)%
Number of aircraft in operating
fleet at period-end 368 377 (2.4)% 368 377 (2.4)%
Full-time equivalent employees
at period-end 38,188 39,857 (4.2)% 38,188 39,857 (4.2)%
* Scheduled service only (excludes charter service).
c cents
Note 1. Operating statistics include US Airways' "mainline" operations as well as the operations of
its low-fare product, MetroJet. Operating statistics include free frequent travelers and the
related miles they flew. Certain nonrecurring items and revenues and expenses associated
with US Airways' capacity purchase arrangements with certain affiliated airlines have been
excluded from US Airways' financial results for purposes of financial statistical
calculations and better comparability between periods.
Note 2. Revenue passenger miles (RPMs)-Revenue passengers multiplied by the number of miles they
flew.
Note 3. Available seat miles (ASMs)-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 utilized that equates to US Airways breaking-even at
the pre-tax income level.
Note 6. Passenger transportation revenue divided by RPMs.
Note 7. Passenger transportation revenue divided by ASMs (a measure of unit revenue).
Note 8. Total Operating Revenues divided by ASMs (a measure of unit revenue).
Note 9. Total Operating Expenses divided by ASMs (a measure of unit cost).
Note 10. Includes the base cost of aviation fuel, fuel taxes and transportation charges.
Note 11. Includes the base cost of aviation fuel and transportation charges (excludes fuel taxes).
</TABLE>
The number of passengers carried by US Airways during third quarter
1998 increased marginally compared to third quarter 1997 as the affects of
schedule changes US Airways implemented during early September 1997 begin
to influence year-over-year comparisons. These schedule changes included US
Airways terminating service to nine cities and retiring certain aircraft.
The number of passengers carried by US Airways during the first nine months
of 1998 decreased 1.6% versus the first nine months of 1997. Capacity
(available seat miles) decreased 3.2% for the third quarter of 1998 as
compared to third quarter 1997 after falling 5.4% and 4.9%
25
for the first and second quarters of 1998, respectively, again reflecting
the efficiency measures US Airways implemented in Fall 1997. US Airways'
capacity is expected to increase 3.5% for the fourth quarter of 1998
compared to the fourth quarter of 1997 primarily as the result of new
aircraft entering operational service during fourth quarter 1998. US
Airways' capacity is expected to increase approximately 8% for 1999
compared to 1998, composed of an increase of 470% for MetroJet, an increase
of 22% for transatlantic service and a decrease of 5% for US Airways'
higher-cost mainline operations. US Airways continues to closely monitor
economic conditions and will adjust its growth plans accordingly.
Yield and passenger load factor were higher in both the third quarter
and the first nine months of 1998 versus the comparable periods in 1997,
mitigating the effects of decreased capacity on US Airways' passenger
transportation revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's Cash, Cash equivalents and
Short-term investments totaled $1.45 billion and the ratio of the Company's
current assets to its current liabilities ("current ratio") was 0.97. As of
December 31, 1997, the Company's Cash, Cash equivalents and Short-term
investments totaled $1.96 billion and the Company's current ratio was 1.10.
The Company's debt to equity ratio was 2.87 and 3.60 as of September 30, 1998
and December 31, 1997, respectively (calculations exclude amounts related to
outstanding preferred stock). The decrease in the current ratio is
attributable to cash outflows associated with the Company's common stock
purchase programs in 1998 (see below). The improvement in the Company's debt
to equity ratio reflects a $358 million increase in Stockholders' Equity
which resulted from the conversion of the Series H Preferred Stock into
Common Stock during the first quarter of 1998, significant reductions in
outstanding long-term debt (see below) and the Company's net income for the
first nine months of 1998 partially offset by the effects of the Company's
common stock purchase programs (see below).
For the first nine months of 1998, the Company's operating activities
provided net cash of $1.20 billion (as presented in the Company's Condensed
Consolidated Statements of Cash Flows, which are contained in Part I, Item 1A
of this report). For the first nine months of 1997, the Company's operating
activities provided net cash of $0.67 billion. Operating cash flows during
the first nine months of 1997 were adversely affected by profit sharing
payments totaling $129.1 million and the effects of remitting ticket taxes
collected from passengers of approximately $180 million to the federal
government. The profit sharing payments the Company made to employees during
first quarter 1997 ended the Company's obligation for profit sharing under
its 1992 Salary Reduction Plan (the liability had been accrued prior to first
quarter 1997). The ticket tax remittances resulted from ticket taxes
collected during 1996. The ticket tax was not in effect during the majority
of the first quarter of 1997. The Company resumed regular ticket tax
remittances after the ticket tax was reinstated in March 1997. In addition,
exercises of stock appreciation rights (SARs) resulted in cash outflows of
$47 million during the first nine months of 1997, but only $8 million during
the first nine months of 1998. The Company's 1992 Stock Option Plan ceased as
of August 1, 1998 (approximately 180,700 SARs were outstanding as of
December 31, 1997).
Investing activities during the first nine months of 1998 included cash
outflows of $353 million for the acquisition of assets and cash inflows of
$97 million related to asset dispositions. US Airways' cash outflows related
to asset acquisitions included $151 million for aircraft and aircraft-related
assets, including the purchase of six aircraft at termination of their
operating leases. In addition, the Company made purchase deposit payments for
Airbus aircraft of $90 million during the first nine months of 1998. The
remaining cash outflows for the acquisition of assets included the purchase
of computer equipment and software (including certain costs associated with
US Airways' information services management agreement with TSG), other ground
equipment and miscellaneous assets. As discussed below, US Airways purchased
four new aircraft during October
26
and early November 1998. Asset dispositions included proceeds of $47 million
from US Airways' sale of substantially all of its information systems and
related assets to TSG and proceeds of $33 million from US Airways' sale of 13
nonoperating aircraft. Restricted cash and investments increased $50 million
due primarily to US Airways' return to using cash to collateralize letters of
credit for workers' compensation policies (US Airways previously
collateralized such policies with certain owned flight equipment). The net
cash used for investing activities during the first nine months of 1998 was
$149 million.
Net cash used for financing activities during the first nine months of
1998 was $1.42 billion. Besides scheduled principal repayments, US Airways
retired early certain long-term debt with a face amount of $404.5 million
during the first nine months of 1998. On July 1, 1998, US Airways retired its
10% Senior Notes, which had a principal amount of $300 million. The
transaction resulted in a cash outflow of $315.0 million, including
prepayment penalties of $15 million. US Airways also retired other notes with
an outstanding principal amount of $24.4 million on July 1, 1998. US Airways
paid $75 million to retire the first series of its 1993 Pass-Through
Certificates during August 1998. The retirement was according to the terms of
the obligation (with no redemption penalties). Also during the first nine
months of 1998, the Company purchased 13.8 million shares of Common Stock in
open market transactions. The related cash outflows totaled $881 million. The
Company completed two common stock purchase plans during the third quarter of
1998, one authorized for 2.3 million shares to offset stock options granted
to US Airways' pilots in January 1998 and one authorized for $500 million. As
of September 30, 1998, the Company had also purchased 4.36 million shares of
the 5.0 million shares authorized under a third plan announced on September
2, 1998. On March 12, 1998, the holders of the Company's Series H Preferred
Stock exercised their right to convert those shares into shares of the
Company's Common Stock. As a result of the conversion transactions, the
Company issued 9.2 million shares of Common Stock and retired its Series H
Preferred Stock. The Company paid dividends totaling $6.6 million to holders
of its Series H Preferred Stock in 1998 prior to that series conversion into
Common Stock. Annual dividend requirements for the Series H Preferred Stock
were $33.1 million. The Company had previously retired its Series F and T
Preferred Stock in May 1997 and its Series B Preferred Stock in September
1997.
The Company continues to be highly leveraged, as evidenced by the
Company's high debt burden. The Company and its subsidiaries require
substantial working capital in order to meet scheduled debt and lease
payments and to finance day-to-day operations. The Company's agreements to
acquire up to 430 new Airbus aircraft, accompanying jet engines and ancillary
assets will increase the Company's financing needs and result in a
significant increase in its financial obligations and debt burden. Adverse
changes in certain factors that are generally outside the Company's control,
such as an economic downturn, additional government regulation, intensified
competition from lower-cost competitors or increases in the cost of aviation
fuel, could have a material adverse effect on the Company's results of
operations, financial condition and future prospects. The Company's results
of operations and financial condition are particularly susceptible to adverse
changes in general economic and market conditions due to US Airways' high
cost structure relative to its major competitors.
As of September 30, 1998, the minimum determinable payments associated
with the Company's aircraft acquisition agreements for Airbus aircraft
(including progress payments, payments at delivery, buyer-furnished
equipment, spares, capitalized interest, penalty payments, cancellation fees
and/or nonrefundable deposits) are currently estimated at $303 million for
the remainder of 1998, $1.29 billion in 1999, $2.04 billion in 2000 and $79
million in 2001. The Company expects to satisfy its short-term liquidity
requirements through a combination of third-party financing and cash on hand
and cash generated from operations. The Company expects to finance a
substantial portion of the cost of new aircraft with a combination of
enhanced equipment trust certificates, or similar debt and/or leveraged
leases. US Airways used cash on hand to purchase four new Airbus aircraft
during October and early-November 1998, but anticipates leasing these
aircraft before the
27
end of 1998 (i.e., sale-leaseback transactions). The Company has commitments
or letters of intent that it believes will provide financing for at least 25%
of the anticipated purchase price of all of its firm-order Airbus aircraft.
However, further financing or internally-generated funds will be needed to
satisfy the Company's capital commitments for the balance of the aircraft
purchase price and for other aircraft-related expenditures. Other capital
expenditures, such as for training simulators, rotables and other aircraft
components, are also expected to increase in conjunction with the acquisition
of the new aircraft and jet engines. There can be no assurance that
sufficient financing will be available for all aircraft and other capital
expenditures not covered by committed financing.
On April 15, 1998, Standard & Poor's (S&P) raised its credit ratings of
US Airways Group and US Airways and removed all ratings from CreditWatch,
where they were placed on October 1, 1997. S&P cited "sharply improved
operating performance" among other factors for its decision to raise the
credit ratings. On April 23, 1998, Moody's Investors Service (Moody's) also
raised its credit ratings of the Company and US Airways. Credit ratings
issued by agencies such as S&P and Moody's affect a company's ability to
issue debt or equity securities and the effective rate at which such
financings are undertaken.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No new material legal proceedings have commenced during the time period
covered by this interim report. In addition, there have been no significant
developments in the pending legal proceedings as previously reported on the
Annual Report of US Airways Group, Inc. and US Airways, Inc. on Form 10-K for
the year ended December 31, 1997, except as disclosed in the Quarterly Report
on Form 10-Q of both companies for the quarterly periods ended June 30, 1998
and March 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
DESIGNATION DESCRIPTION
10 1998 Pilot Stock Option Plan of US Airways Group, Inc.
11 Computation of basic and diluted earnings per common share for the
three month and nine month periods ended September 30, 1998 and 1997 for
US Airways Group, Inc.
27.1 Financial Data Schedule-US Airways Group, Inc.
27.2 Financial Data Schedule-US Airways, Inc.
B. REPORTS ON FORM 8-K
DATE OF REPORT Subject of Report
September 2, 1998 News release announcing US Airways Group, Inc.'s board
of directors authorization for the repurchase of up to
five million shares of the Company's outstanding common
stock.
October 21, 1998 Consolidated statements of operations for both
US Airways Group, Inc. and US Airways, Inc. for the three
months and nine months ended September 30, 1998, and
select operating and financial statistics for
US Airways, Inc. for the same periods.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
US Airways Group, Inc. (Registrant)
Date: November 12, 1998 By: /s/ Rakesh Gangwal
-----------------------------
Rakesh Gangwal
President and Chief Operating Officer
(Chief Financial Officer)
US Airways, Inc. (Registrant)
Date: November 12, 1998 By: /s/ Rakesh Gangwal
----------------------------
Rakesh Gangwal
President and Chief Executive Officer
(Chief Financial Officer)
(this space intentionally left blank)
29
EXHIBIT 10
1998 PILOT STOCK OPTION PLAN
OF US AIRWAYS GROUP, INC.
- -------------------------------------------------------------------------
1. PURPOSE. The purpose of this Plan is to grant certain of the
employees of US Airways, Inc. the opportunity to acquire shares of the
common stock of US Airways Group, Inc. through the exercise of the stock
options awarded in accordance with the terms of this Plan and the 1998 US
Airways pilot collective bargaining agreement.
2. DEFINITIONS. When used in this Plan, unless the context
otherwise requires:
(a) "Account Statement" shall mean the statement that contains the
information described in Section 4(k) of this Plan with respect to each
Option Series allocated to a Participant.
(b) "Acquisition" shall mean the consummation of any transaction or
series of transactions as a result of which the Common Stock of the
Corporation ceases to be listed on the NYSE.
(c) "Allocation Statement" shall mean the statement setting forth
the allocation of Options to Participants on each Grant Date pursuant to
Section 4(d) of the Plan.
(d) "ALPA" or the "Association" shall mean the Air Line Pilots
Association, International.
(e) "Board" shall mean the Board of Directors of the Corporation.
(f) "Committee" shall mean a committee appointed by the Corporation
to administer and implement the Plan.
(g) "Common Stock" shall mean the common stock, par value $1.00, of
the Corporation.
(h) "Corporation" shall mean US Airways Group, Inc.
(i) "Expiration Date" shall mean, for any Option Series, ten (10)
years following the Grant Date for the Options in that Option Series.
(j) "Fair Market Value" shall mean the closing sale price of the
Shares as reported on the NYSE Composite Tape on the date as of which such
value is being determined or, if there shall be no sale on that date, then
on the last previous day on which a sale was reported.
(k) "Final Expiration Date" shall mean the date ten (10) years
following the final Grant Date under the Plan.
(l) "Grant Date" shall mean any one of the dates determined in
accordance with Section 4(b) of this Plan.
(m) "Issue Date" shall mean the date upon which Options in an
Option Series are issued to Participants.
(n) "NYSE" shall mean the New York Stock Exchange.
(o) "Option" shall mean an option to acquire shares of Common Stock
issued pursuant to Section 4 of this Plan.
(p) "Option Series" shall have the meaning assigned in Section 4(c)
of this Plan.
(q) "Participant" shall mean, for the Options granted on the
referenced Grant Date, the pilots listed on the Allocation Statement for
that Grant Date.
(r) "Pilot Agreement" shall mean the 1998 collective bargaining
agreement between ALPA and US Airways.
(s) "Plan" shall mean this 1998 Pilot Stock Option Plan of US
Airways Group, Inc.
(t) "Share" shall mean a share of Common Stock.
(u) "US2" shall mean the low cost, low fare operation as described
in Letter of Agreement No. 48 to the Pilot Agreement.
(v) "US Airways" shall mean US Airways, Inc.
3. ADMINISTRATION; SHARES AVAILABLE
(a) ADMINISTRATION. The Plan shall be administered by the
Committee. The Committee may authorize and establish reasonable rules and
regulations to implement or
-2-
administer the Plan or the Options; provided, however, that the Committee
shall take no action that is inconsistent with the provisions of the Plan
or the Pilot Agreement. The Committee shall provide reasonable notice to
and shall consult with the Association before issuing any rules or policies
of general applicability to the Plan or Participants.
(b) POWERS RESERVED TO ALPA. Notwithstanding Section 3(a) or any
other provision of this Plan, ALPA shall maintain the power and authority
to determine or redetermine (i) the Participants who will receive Options
on each Grant Date, (ii) the allocation of Options on each Grant Date, and
(iii) the vesting schedule of the Options granted on each Grant Date
(subject to the minimum vesting requirements set forth in Section 4(h) of
the Plan); provided, however, that such determinations or redeterminations
by ALPA must be approved by the Corporation, which approval shall not be
unreasonably withheld. ALPA shall notify the Corporation of such
determinations for the First Grant Date no later than the day before the
adoption of the Plan and fifteen (15) days following each Grant Date
beginning with the Second Grant Date. Determinations or redeterminations
provided by ALPA shall be deemed approved by the Corporation if the
Committee does not provide ALPA with a written statement of the reasons for
withholding its approval within fifteen (15) days of notification by ALPA
under this Section 3(b).
(c) DISPUTE RESOLUTION. Disputes under this Plan shall be resolved
as follows:
(i) Except as set forth in subsection (ii) of this Section,
disputes concerning the interpretation or application of the Plan, shall
be subject to the grievance and System Board of Adjustment procedures of
the Pilot Agreement.
(ii) Notwithstanding the foregoing sentence, disputes involving
or related to Section 8 of the Plan (anti-dilution) shall be resolved
through final and binding arbitration before a neutral investment banking
professional who is not and has not been employed by or a consultant to the
Corporation, US Airways or ALPA. The neutral professional shall be a
representative of an investment banking firm of national standing selected
by mutual agreement of ALPA and the Corporation or, failing such agreement,
by alternate striking from a list of three such firms submitted by each
party with a coin flip determining which party exercises the first strike.
The proceeding before the neutral professional shall be completed
expeditiously and the neutral professional's decision shall be rendered no
later than thirty (30) days following the conclusion of the proceeding.
The costs of such neutral investment banking professional shall be shared
equally by the Corporation and ALPA.
-3-
(d) SHARES AVAILABLE. Except to the extent of adjustments
authorized by Section 8 of this Plan, a total of 11.5 million Shares may be
issued pursuant to Options granted under this Plan. Such shares may be
either treasury Shares or authorized but unissued Shares.
4. OPTIONS. Options shall be evidenced by a letter issued to each
Participant containing the Exercise Price and the Expiration Date of the
Options in such form as shall be determined by the Committee, provided that
the terms and conditions of each such letter are not inconsistent with this
Plan.
(a) NUMBERS OF OPTIONS PER GRANT DATE. The Options for 11.5
million Shares reserved for the Plan shall be issued as follows:
(i) As of the First Grant Date, the Corporation shall
grant Options to Participants with respect to an aggregate of 2.3 million
Shares.
(ii) As of the Second, Third, Fourth, Fifth and Sixth Grant
Dates, the Corporation shall grant Options to Participants with respect to
an aggregate of 1.84 million Shares per Grant Date plus the number of
Options forfeited under Section 7 of the Plan since the preceding Grant
Date (subject to adjustment as provided in this Plan).
(iii) Options for fractional shares shall not be granted and
ALPA shall provide the Corporation with an allocation providing each
Participant with Options for full shares, which in the aggregate equal and
do not exceed 2.3 million or 1.84 million shares, as appropriate, plus the
number of Options forfeited under Section 7 of the Plan since the preceding
Grant Date.
(iv) Unless otherwise directed by ALPA in accordance with
the terms of this Plan, all Options shall be granted to Participants as of
each Grant Date even if they are issued at a later date.
(b) GRANT DATES. Options shall be granted as of each of six (6)
Grant Dates, determined as follows.
(i) The First Grant Date shall be January 30, 1998.
(ii) The Second Grant Date shall be the earlier to occur
of (A) the first date on which US Airways' US2 operation is in excess of
fifteen percent (15%) of the consolidated schedule system-wide block hours
of US Airways, inclusive of US2, or (B) January 30, 1999;
-4-
(iii) The Third Grant Date shall be the earlier to occur of
(A) the first date on which US Airways' US2 operation is in excess of
twenty percent (20%) of the consolidated schedule system-wide block hours
of US Airways, inclusive of US2, or (B) January 30, 2000;
(iv) The Fourth Grant Date shall be the earlier to occur
of (A) the first date on which US Airways' US2 operation is in excess of
twenty-one percent (21%) of the consolidated schedule system-wide block
hours of US Airways, inclusive of US2, or (B) January 30, 2001; and
(v) The Fifth Grant Date shall be the earlier to occur of
(A) the first date on which US Airways' US2 operation is in excess of
twenty-two and one-half percent (22.5%) of the consolidated schedule
system-wide block hours of US Airways, inclusive of US2, or (B) January 30,
2002.
(vi) The Sixth Grant Date shall be February 1, 2003.
Notwithstanding the foregoing, within ten (10) business days following
the Second Grant Date, ALPA shall have the right in its sole discretion to
determine that the Third, Fourth and Fifth Grant Dates shall be the first,
second and third anniversaries, respectively, of the Second Grant Date.
Such determination shall be delivered to the Corporation by written notice
and shall be irrevocable.
(c) OPTION SERIES. For administrative purposes, the Options
granted under this Plan on each Grant Date shall be classified and
designated as a separate Option Series according to the following schedule:
Grant Date Option Series
---------- -------------
First Grant Date Series 1
Second Grant Date Series 2
Third Grant Date Series 3
Fourth Grant Date Series 4
Fifth Grant Date Series 5
Sixth Grant Date Series 6
(d) ALLOCATION. The Options in each Option Series shall be
allocated as follows:
(i) As soon as practical, but no later than the day
before the adoption of the Plan with respect to the First Grant Date and no
later than fifteen (15) days
-5-
following each of the Second through Sixth Grant Dates, ALPA shall provide
the Corporation in writing with a description of the principles (the
"Allocation Principles") governing the allocation of Options among
Participants for the applicable Grant Date in reasonable detail for
approval by the Corporation in accordance with Section 3(b) of the Plan.
(ii) The Allocation Principles shall provide for the
allocation of Options to purchase full Shares which, in the aggregate,
equal 2.3 million Options for the First Grant Date and 1.84 million for
each subsequent Grant Date, plus the number of Options forfeited since the
preceding Grant Date.
(iii) For each Grant Date under the Plan, the Corporation
shall perform, to the extent reasonably possible, the data extractions and
mathematical calculations necessary to generate from the Allocation
Principles a list of pilots participating in the allocation and the number
of shares allocated to each participating pilot (the "Allocation
Statement"). The Allocation Principles shall not impose an unreasonable
administrative burden on the Corporation in this process.
(iv) For the First Grant Date, the Corporation shall
prepare a preliminary Allocation Statement (the "Preliminary Allocation
Statement") based on the Allocation Principles determined by ALPA. The
Corporation shall submit the Preliminary Allocation Statement to ALPA for
review. ALPA shall then have forty-five (45) days (the "Objection Period")
in which to provide the Corporation with any written objections to the
Corporation's Preliminary Allocation Statement. Any objection must be
submitted, in writing, by the forty-fifth (45th) calendar day after the
date of mailing of the Preliminary Allocation Statement to the Vice
President-Labor Relations at US Airways, Inc., 2345 Crystal Drive,
Arlington, Virginia 22227. After the Objection Period, ALPA shall be
barred from thereafter bringing any challenge, including but not limited to
filing any grievance, administrative claim or lawsuit before any system
board of adjustment, agency or court, relating to the allocation of Options
for the First Grant Date.
(v) For each of the Second through Sixth Grant Dates,
following the initial creation of a Preliminary Allocation Statement, the
Corporation shall provide each Participant with a statement describing the
individual historical data underlying the pilot's Option allocation. ALPA
and each pilot shall then have forty-five (45) days (the "Objection
Period") in which to provide the Corporation with a written objection to
the Corporation's data statement and to provide all documentation relevant
to the alleged data error. Any objection must be submitted, in writing, by
the forty-fifth (45th) calendar day after the date of
-6-
mailing of the Preliminary Allocation Statement to the Vice President-Labor
Relations at US Airways, Inc., 2345 Crystal Drive, Arlington, Virginia
22227. ALPA or any pilot who does not assert such written claims of error
within the Objection Period shall be barred from thereafter bringing any
challenge, including but not limited to filing any grievance,
administrative claim or lawsuit before any system board of adjustment,
agency or court, relating to the allocation of Options for the applicable
Grant Date.
(vi) In the event that no objections are filed during the
Objection Period following any Grant Date, the Corporation shall promptly
generate a final Allocation Statement (the "Final Allocation Statement")
identical to the Preliminary Allocation Statement and issue the applicable
Option Series to the Participants in accordance with the Final Allocation
Statement.
(vii) The Corporation and ALPA shall review each of the
objections filed during any Objection Period. Any objection that remains
unresolved following this review shall be submitted to final and binding
resolution by a special arbitrator on the basis of the written materials
provided by the objecting pilot and/or ALPA to the Corporation during the
Objection Period and the relevant US Airways data provided by the
Corporation. The special arbitrator shall provide the Corporation, ALPA
and the objecting pilots with his or her final rulings no later than forty-
five (45) days following the close of the Objection Period. Following its
receipt of such rulings, the Corporation shall promptly generate a Final
Allocation Statement consistent with the special arbitrator's rulings and
issue the applicable Option Series to the Participants in accordance with
the Final Allocation Statement.
(viii) Once the Options are issued in accordance with a Final
Allocation Statement, either for the First Grant Date or any subsequent
Grant Date, both ALPA and all pilots shall be barred from thereafter
bringing a challenge, including but not limited to filing any grievance,
administrative claim or lawsuit before any system board of adjustment,
agency or court, relating to the allocation of the applicable Option
Series.
(ix) The special arbitrator described in this Section 4(d)
shall be jointly selected by the parties or, failing agreement, shall be
supplied by the National Mediation Board. The parties shall make every
reasonable effort to designate a single individual as the special
arbitrator for all of the Option allocations under the Plan. The costs of
the special arbitrator shall be shared equally by US Airways and ALPA.
-7-
(e) ISSUE DATE. With respect to each Grant Date, the Options to
be granted shall be issued by the Corporation promptly following the
creation of the Final Allocation Statement for that Grant Date. All
Options shall be granted as of their Grant Date irrespective of the date
they are issued to the Participants.
(f) TERM. Each Option shall have a term of ten (10) years from
its Grant Date.
(g) EXERCISE PRICE. Except as provided in Section 4(i) of this
Plan, the exercise price of each Option (the "Exercise Price") shall be
determined as follows:
(i) For Options granted as of the First Grant Date, the
Exercise Price per Share of each such Option shall be the average of the
Fair Market Value of the Common Stock on the NYSE as of (A) September 30,
1997 and (B) the First Grant Date.
(ii) For Options granted as of each of the Second, Third,
Fourth, Fifth and Sixth Grant Dates, the Exercise Price per Share of each
such Option shall be the average of the Fair Market Value of the Common
Stock on the NYSE on each trading day during the fifteen (15) trading days
immediately preceding such Grant Date.
(h) VESTING; EXERCISABILITY. Each of the Options granted as of
the First Grant Date shall be subject to a minimum two-year vesting period,
each of the Options granted as of the Second Grant Date through the Fifth
Grant Date shall be subject to a minimum one (1) year vesting period, and
each of the Options granted as of the Sixth Grant Date shall not be subject
to any vesting period. The Association may impose additional vesting
requirements pursuant to Section 3(b) of the Plan. Once granted to
Participants, each Option shall be exercisable upon the completion of the
applicable vesting period until the expiration of its ten (10) year term.
(i) EFFECTS OF ACQUISITION
(i) ACQUISITION OPTION GRANTS. Prior to, but in no event
later than a date which is ten (10) business days prior to the publicly-
scheduled occurrence of an Acquisition, ALPA shall deliver in writing to
the Corporation an Allocation Statement pursuant to which Options covering
any remaining Shares that are reserved for issuance under the Plan shall be
granted by the Corporation as of the date immediately prior to the
occurrence of such Acquisition. The Options granted pursuant to this
Section 4(i)(i) shall be granted with a term of ten (10) years computed as
of the effective grant date of such Option, which shall be the
-8-
date immediately prior to the Acquisition, subject to and contingent upon
the occurrence of such Acquisition; if such Acquisition does not occur
then such Options shall be of no force and effect and the Shares so placed
under option shall be available for future grants under the Plan. The
Options granted pursuant to this Section 4(i)(i) shall be immediately
vested and exercisable and shall have an Exercise Price per Share equal to
the Exercise Price per Share of the Options granted on the most recent
Grant Date that occurred no less than six (6) months prior to a public
announcement by a qualified purchaser to pursue a transaction with the
Corporation that results in an Acquisition.
(ii) ACCELERATED VESTING. Upon the occurrence of an
Acquisition, all outstanding Options shall become immediately vested and
exercisable.
(j) METHOD OF EXERCISE. Options shall be exercised in 100-share
increments (or the total number of Options in any Option Series held by a
Participant) by notice to the Secretary of the Corporation (or the
Secretary's designated agent) in such form as is from time to time
prescribed by the Committee and by the payment in full of the aggregate
Exercise Price of the Option (or portion thereof) being exercised. A
Participant may pay such purchase price by any of the following methods:
(i) tendering a cash payment; (ii) authorizing the Corporation to withhold
from the Shares otherwise issuable to such Participant one or more of such
shares having an aggregate Fair Market Value, determined as of the date of
exercise of the Option, equal to the amount of the exercise price of the
portion of the Option being exercised; (iii) delivering to the Corporation
previously acquired Shares (none of which Shares may be subject to any
claim, lien, security interest, community property right or other right of
spouses or present or former family members, pledge, option, voting
agreement or other restriction or encumbrance of any natures whatsoever)
having an aggregate Fair Market Value, determined as of the date of
exercise of the Option, equal to the amount of the exercise price of the
portion of the Option being exercised; or (iv) a "broker cashless exercise"
procedure under terms and procedures developed by the Committee; provided,
that the Participant shall be responsible for payment of any and all
brokerage commissions, fees and expenses, if any, incurred in connection
with such exercise.
(k) RECORDKEEPING AND REPORTING. The Corporation shall maintain
at all times through the Final Expiration Date an Account Statement for
each Participant that contains the following information: (i) the number of
unexercised Options in each Option Series vested to the Participant, (ii)
the number of unexercised Options in each Option Series that have not yet
vested to the Participant and the vesting date for such Options, (iii) the
number of previously exercised Options in each Option Series, (iv) the
Exercise Price for each Option Series and (v) the Expiration Date of each
Option Series. The
-9-
Corporation shall provide Participants with a written cumulative Account
Statement (i) within sixty (60) days of each Issue Date (other than the
first Issue Date) and (ii) within sixty (60) days of each anniversary of
the Sixth Grant Date through the Final Expiration Date.
(l) DEEMED EXERCISE PRIOR TO EXPIRATION. If (i) a Participant
maintains exercisable but unexercised Options in any Option Series on the
day prior to the Expiration Date for such Option Series and (ii) the Fair
Market Value of the Shares exceeds the Exercise Price for such Options on
such date by an amount sufficient to cover the brokers' commission, fees
and expenses in connection with the exercise of such options, then the
Participant shall be deemed to have exercised all such Options on the
applicable Expiration Date pursuant to the method of exercise specified in
Section 4(j)(iv) of the Plan and the method of tax withholding specified in
Section 6(a)(iv) of the Plan. In the event of any deemed exercise under
this Section 4(l), the Corporation shall provide the Participant with a
notice, in a form determined by the Committee, describing the terms of the
exercise and providing the Participant with the net proceeds of the
exercise.
5. NONTRANSFERABILITY OF OPTIONS. Options may be exercised during
the holder's lifetime only by the holder thereof and shall not be
transferable by the holder thereof other than by will or the laws of
descent and distribution.
6. TAX WITHHOLDING; EFFECT OF INCOME REALIZED BY PARTICIPANT.
(a) TAX WITHHOLDING At the time of the exercise of an Option, the
Corporation shall have the right to require the Participant to remit to the
Corporation an amount sufficient to satisfy any foreign, Federal, state or
local income, employment or other taxes required by law to be withheld with
respect to such exercise. A Participant may satisfy any such withholding
tax obligation by any of the following methods: (i) tendering a cash
payment; (ii) authorizing the Corporation to withhold from the shares
otherwise payable to such Participant one or more of such Shares having an
aggregate Fair Market Value, determined as of the date the withholding tax
obligation arises equal to the amount of the total withholding tax
obligation; (iii) delivering to the Corporation previously acquired Shares
(none of which Shares may be subject to any claim, lien, security interest,
community property right or other right of spouses or present or former
family members, pledge, option, voting agreement or other restriction or
encumbrance of any natures whatsoever) having an aggregate Fair Market
Value, determined as of the date the withholding tax obligation arises,
equal to the amount of the total withholding tax obligation; or (iv) a
"broker cashless exercise" procedure; provided, that the Participant shall
be responsible for payment of any and all brokerage commissions, fees and
expenses, if any, incurred in connection with such exercise. Unless
otherwise provided for, the Corporation shall have the right to deduct any
such taxes from any
-10-
payment otherwise due to the Participant.
(b) EFFECT OF INCOME REALIZED BY PARTICIPANT. To the extent the
grant or exercise of an Option results in the realization of income by any
Participant, the amount of such realized income shall not be taken into
account for purposes of calculating any benefit otherwise payable to the
Participants under the terms of any employee benefit plan, program or
arrangement of the Corporation (or any subsidiary thereof) in which the
Participant may participate from time to time.
7. TERMINATION OF EMPLOYMENT/ FORFEITURES
(a) DEATH, DISABILITY OR RETIREMENT. If a Participant's employment
with the Corporation (or any subsidiary) terminates by reason of death,
disability or retirement, then (i) any Option held by the Participant that
was exercisable at the time of such termination of employment shall
continue to be exercisable until the Expiration Date of the Option; and
(ii) any Option held by such Participant that was not yet exercisable shall
continue to be held by such Participant (or their beneficiary in the case
of death) and shall become exercisable at the applicable vesting date and
thereafter shall remain exercisable through the Expiration Date of the
Option. For purposes of this Section 7, (i) "retirement" shall mean any
permanent separation of employment from the Corporation (or any subsidiary)
after the pilot has attained eligibility for commencement of any form of
retirement benefits (including normal, early or disability) under the terms
of the Retirement Income Plan for Pilots of US Airways, Inc.; and (ii)
"permanent separation" or "permanent termination" shall mean the later to
occur of the expiration of any grievance right under the collective
bargaining agreement, or the date of a final decision by a system board of
adjustment, following a separation of employment.
(b) OTHER SEPARATION OF EMPLOYMENT. If a Participant's employment
with the Corporation (or any subsidiary) permanently terminates for any
reason other than death, disability or retirement, then (i) any Option held
by the Participant (or the Participant's beneficiary if the Participant has
died) that was exercisable on the effective date of such permanent
termination of employment shall remain exercisable until the Expiration
Date of the Option; and (ii) any Option held by such Participant that was
not yet exercisable on the effective date of the permanent termination of
employment shall be forfeited and shall revert to the Plan for reissuance
on the next occurring Grant Date.
8. ADJUSTMENT OF SHARES AND/OR OPTIONS.
(a) If during the term of the Plan and any Option granted
hereunder, there shall be declared and paid a stock dividend upon the
Shares of the Corporation or if the Shares shall be split-up, converted,
reclassified, changed into, or exchanged for, a
-11-
different number or kind of securities of the Corporation, the Option, to
the extent that it has not been exercised, shall entitle the holder upon
the future exercise of such Option to such number and kind of securities or
other property subject to the terms of the Option to which he would be
entitled had he actually owned the Shares subject to the unexercised
portion of the Option at the time of the occurrence of such stock dividend,
split-up, conversion, reclassification or exchange; and the aggregate
purchase price upon the future exercise of the Option shall be the same as
if originally optioned Shares were being purchased. If any such event
should occur, the number of Shares with respect to which Options remain to
be issued shall be similarly adjusted.
(b) In the event the outstanding Shares receive an "extraordinary
distribution" of, or are changed into, or are exchanged for, any other
class or series of capital stock or cash, securities or other property
pursuant to a recapitalization, reclassification, merger, consolidation,
combination or similar transaction, then each Option shall thereafter
become exercisable for the number and/or kind of capital stock, and/or the
amount of cash, securities or other property so distributed, into which the
Shares subject to the Option would have been changed or exchanged had the
Option been exercised in full prior to such transaction, provided that, if
the kind or amount of capital stock or cash, securities or other property
received in such transaction is not the same for each outstanding Share,
then the kind or amount of capital stock or cash, securities or other
property for which the Option shall thereafter become exercisable shall be
the kind and amount so receivable per Share by a plurality of the Shares,
and provided further that, if necessary, the provisions of the Option shall
be appropriately adjusted so as to be applicable, as nearly as may
reasonably be, to any shares of capital stock, cash, securities or other
property thereafter issuable or deliverable upon exercise of the Option.
For purposes of this Section 8(b), the term "extraordinary distribution"
shall mean any single dividend or other distribution to holders of Shares
of cash payable after the effective date of this Plan, where the aggregate
amount of such single cash dividend or distribution together with the
amount of all cash dividends and distributions made to holders of Shares
since the most recent previous extraordinary distribution exceeds twenty-
five percent (25%) of the aggregate Fair Market Value of all Shares
outstanding on the record date for determining the shareholders entitled to
such extraordinary dividend.
(c) In the event that the Corporation (or any subsidiary) shall
issue to any of its employees equity-based awards or instruments
(including, but not limited to, stock options, stock appreciation rights,
restricted stock or equity-based performance units) relating to the Common
Stock or make a profit sharing contribution, in any case, pursuant to an
employee benefit or incentive plan, program or arrangement of the
Corporation (or any subsidiary) not in existence on September 30, 1997, the
number of Shares reserved for issuance under the Plan shall be
appropriately adjusted to provide that Shares issued under this Plan shall
not be diluted. Notwithstanding the foregoing, no such adjustment
-12-
shall be made in the event that the Corporation (or any subsidiary) shall
(i) make cash or other compensation payments to management personnel, or
(ii) issue equity-based awards or instruments (including, but not limited
to, stock options, stock appreciation rights, restricted stock or equity-
based performance units) relating to the Common Stock, up to the number of
Shares reserved as of September 30, 1997 for issuance, including any shares
which revert or are forfeited, pursuant to an employee benefit or incentive
plan, program or arrangement of the Corporation (or any subsidiary) that
was in existence on September 30, 1997.
9. ISSUANCE OF SHARES AND COMPLIANCE WITH THE SECURITIES ACT. The
Corporation may postpone the issuance and delivery of Shares upon any
exercise of an Option until (a) the admission of such Shares to listing on
the NYSE and (b) the completion of such registration or other qualification
of such Shares under any state or Federal law, rule or regulation as the
Corporation shall determine to be necessary or advisable. The Company
shall makes such filings as it deems necessary to satisfy each of the
foregoing conditions prior to January 1, 2000 (i.e., prior to the first
date that an Option may be exercised under this Plan). Any person
exercising an Option shall make such representations and furnish such
information as may, in the opinion of counsel for the Corporation, be
appropriate to permit the Corporation, in light of the then existence or
nonexistence with respect to such Shares of an effective registration
statement under the Securities Act of 1933, as from time to time amended,
to issue the Shares in compliance with the provisions of that or any
comparable act.
10. AMENDMENT OF THE PLAN OR AN OPTION. The amendment or
modification of this Plan or any Option shall be governed by the following
rules:
(a) The Committee shall have the power and authority described in
this Section to make amendments or modifications to the Plan that do not
reduce the dollar value of the Options and that do not contravene the
terms contained in the following Sections of this Plan: 3, 4(a), 4(b), 4(d)
4(f), 4(g), 4(h) 4(i), the initial sentence of 4(j), 5, 6, 7, 8, 10, 11,
and the definitions contained in Section 2 to the extent referenced in
those Sections. Any such amendments shall be subject to the prior written
approval of the Association, which shall not be unreasonably withheld (it
being understood that such amendments or modifications shall be deemed
approved by the Association if the Association does not provide the
Committee a written statement of the reasons for withholding its approval
within fifteen (15) days of the Association=s receipt of written notice of
the proposed amendments or modifications).
(b) Any amendment or modification that would adversely affect the
rights of the holder of an outstanding Option shall require the prior
written consent of such Participant (or beneficiary thereof, if applicable)
in order to be effective.
-13-
(c) The Association shall maintain the powers specified in Section
3(b) of the Plan.
(d) Except as explicitly stated in Sections 10(a), 10(b) or 10(c)
above, the Plan and any Option granted hereunder may only be amended or
modified in a written agreement between the Association and US Airways and
the Corporation.
11. EFFECTIVENESS AND TERM OF THE PLAN. The Plan shall become
effective and in full force and effect upon its adoption by the Board, and
the Plan shall terminate on the Final Expiration Date.
12. GENERAL. Whenever state law is applicable to the Plan, the
laws of the State of Delaware shall apply without giving effect to Delaware
conflict of law principles.
-14-
<TABLE>
US Airways Group, Inc.
Exhibit 11
Computation of Basic and Diluted Earnings Per Common Share
(unaudited)
(in millions, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Adjustments to Net Income
- -------------------------
<S> <C> <C> <C> <C>
Net income $ 142 $ 187 $ 434 $ 545
Preferred dividend requirement - (11) (6) (55) a)
---- ---- ---- ----
Earnings applicable to common
stock used for basic computation 142 176 428 490
Diluted adjustments
Assume conversion of all preferred stock:
Preferred dividend requirement - 11 6 55 a)
---- ---- ---- ----
Adjusted net earnings applicable to
common stock used for diluted computation $ 142 $ 187 $ 434 $ 545
==== ==== ==== ====
Adjustments to common stock shares outstanding
- ----------------------------------------------
Weighted average number of shares of common stock
outstanding for basic computation 92 84 94 74
Diluted adjustments
Incremental shares from outstanding stock
options (treasury stock method) 2 3 2 2
Assume conversion of all preferred stock - 16 3 28 b)
---- ---- ---- ----
Total weighted average number of common
shares for diluted computation 94 103 99 104
==== ==== ==== ====
Earnings Per Common Share
- -------------------------
Basic $1.54 $2.10 $4.53 $6.66
==== ==== ==== ====
Diluted $1.51 $1.82 $4.40 $5.24
==== ==== ==== ====
Note: Numbers may not calculate due to rounding.
a) Includes redemption premiums of $5.2 million and $0.8 million on 1,940.636 shares of Series F
Preferred Stock and the Series T Preferred Stock, respectively (May 22, 1997 redemption date).
See also b) below.
b) For the time they were outstanding during the period, the effects of assuming conversion of the
shares of Series F Preferred Stock prior to their redemption are antidilutive, but included for
purposes of this calculation in accordance with Regulation S-K, Item 601(b)(11). See also a)
above.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000701345
<NAME> US AIRWAYS GROUP, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 724
<SECURITIES> 721
<RECEIVABLES> 438<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 225
<CURRENT-ASSETS> 2,718
<PP&E> 6,250
<DEPRECIATION> 2,592
<TOTAL-ASSETS> 8,138
<CURRENT-LIABILITIES> 2,794
<BONDS> 1,971
0
0
<COMMON> 101
<OTHER-SE> 610
<TOTAL-LIABILITY-AND-EQUITY> 8,138
<SALES> 0
<TOTAL-REVENUES> 6,567
<CGS> 0
<TOTAL-COSTS> 5,731
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> 728
<INCOME-TAX> 294
<INCOME-CONTINUING> 434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434
<EPS-PRIMARY> 4.53
<EPS-DILUTED> 4.40
<FN>
<F1>Receivables are presented net of allowances.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000714560
<NAME> US AIRWAYS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 720
<SECURITIES> 721
<RECEIVABLES> 607<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 202
<CURRENT-ASSETS> 2,760
<PP&E> 5,789
<DEPRECIATION> 2,483
<TOTAL-ASSETS> 8,856
<CURRENT-LIABILITIES> 2,708
<BONDS> 1,970
0
0
<COMMON> 0
<OTHER-SE> 1,602
<TOTAL-LIABILITY-AND-EQUITY> 8,856
<SALES> 0
<TOTAL-REVENUES> 6,469
<CGS> 0
<TOTAL-COSTS> 5,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> 745
<INCOME-TAX> 300
<INCOME-CONTINUING> 445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 445
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Receivables are presented net of allowances.
<F2>EPS calculations are not relevant because US Airways, Inc. is a wholly-owned
subsidiary of US Airways Group, Inc.
</FN>
</TABLE>
