FORM 10-K.-ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- -------------------
US AIRWAYS GROUP, INC.
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 872-5306
(Registrant's telephone number, including area code)
(Commission file number: 1-8444)
(I.R.S. Employer Identification No: 54-1194634)
US AIRWAYS, INC.
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 872-7000
(Registrant's telephone number, including area code)
(Commission file number: 1-8442)
(I.R.S. Employer Identification No: 53-0218143)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Registrant Title of each class on which registered
- ---------- ------------------- ---------------------
US Airways Common stock, par value $1.00 New York Stock Exchange
Group, Inc. per share (Common Stock)
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrants were required to file such reports), and (2)
have been subject to such filing requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K section 229.405 is not contained herein, and will
not be contained, to the best of the registrants' knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of US Airways Group,
Inc. held by non-affiliates on February 27, 1998 was approximately
$6,342,000,000. On February 27, 1998, there were outstanding approximately
91,646,000 shares of Common Stock and 1,000 shares of common stock of US
Airways, Inc.
The registrant US Airways, Inc. meets the conditions set forth in
General Instructions J(1)(a) and (b) of Form 10-K and is therefore
participating in the filing of this form in the reduced disclosure format
permitted by such Instructions.
Item of Form 10-K Document Incorporated By Reference
- -------------------------------- ----------------------------------
Part III, Items 10, 11,12 and 13 Proxy Statement* (excluding therefrom
the subsections entitled "Report of the
Human Resources Committee of the Board
of Directors" and "Performance Graph")
- --------------
* Refers to the definitive Proxy Statement of US Airways Group, Inc., to
be filed pursuant to Regulation 14A, relating to the Annual Meeting of
Stockholders of US Airways Group, Inc. to be held on May 20, 1998.
(this space intentionally left blank)
US AIRWAYS GROUP, INC.
AND
US AIRWAYS, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page
PART I ----
Item 1.
Business 1
Overview 1
Airline Industry and US Airways' Position 2
in the Marketplace
Industry Regulation and Airport Access 4
Certain Ownership Matters 6
Executive Officers 8
Employees 9
Aviation Fuel 12
Use of Travel Agents and Commissions Expenses 12
Computerized Reservation Systems 13
Frequent Traveler Program 13
Insurance 14
Item 2. Properties 15
Flight Equipment 15
Ground Facilities 16
Terminal Construction Projects 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5A. Market for US Airways Group's Common Equity and Related 19
Stockholder Matters
Stock Exchange Listing 19
Market Prices of Common Stock 20
Foreign Ownership Restrictions 20
Item 5B. Market for US Airways' Common Equity and 20
Related Stockholder Matters
Item 6. Selected Financial Data 21
Consolidated Statements of Operations - US Airways Group 21
Consolidated Balance Sheets - US Airways Group 21
Selected Operating and Financial Statistics - US Airways 22
(table continued on following page)
US AIRWAYS GROUP, INC.
AND
US AIRWAYS, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
(CONTINUED)
Page
----
Item 7. Management's Discussion and Analysis of Financial 23
Condition and Results of Operations
Results of Operations 30
Liquidity and Capital Resources 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 39
Item 8A. Consolidated Financial Statements for US Airways Group, Inc. 40
Item 8B. Consolidated Financial Statements for US Airways, Inc. 75
Item 9. Changes In and Disagreements with Accountants on 104
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of US Airways Group 105
Item 11. Executive Compensation 105
Item 12. Security Ownership of Certain Beneficial Owners 105
and Management
Item 13. Certain Relationships and Related Transactions 105
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports 105
on Form 8-K
Consolidated Financial Statements 105
Consolidated Financial Statement Schedules 106
Exhibits 106
Reports on Form 8-K 109
SIGNATURES
US Airways Group, Inc. 110
US Airways, Inc. 111
PART I
ITEM 1. BUSINESS
OVERVIEW
US Airways Group, Inc. (US Airways Group or the Company) is organized
under the laws of the State of Delaware. The Company's executive offices
are located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone
number (703) 872-5306). US Airways Group changed its name from USAir Group,
Inc. effective February 21, 1997.
US Airways Group's primary business activity is the ownership of all
the common stock of US Airways, Inc. (US Airways), Shuttle, Inc. (Shuttle),
Allegheny Airlines, Inc. (Allegheny), Piedmont Airlines, Inc. (Piedmont),
PSA Airlines, Inc. (PSA), US Airways Fuel Corporation (formerly USAir Fuel
Corporation), US Airways Leasing and Sales, Inc. (formerly USAir Leasing
and Services, Inc.) and Material Services Company, Inc. US Airways'
accounts include its wholly-owned subsidiary USAM Corp. (USAM). As
discussed below, the Company purchased Shuttle on December 30, 1997.
US Airways, which is also organized under the laws of the State of
Delaware, is the Company's principal operating subsidiary. US Airways is a
certificated air carrier engaged primarily in the business of transporting
passengers, property and mail. In 1997, US Airways accounted for
approximately 92% of the Company's operating revenues on a consolidated
basis. US Airways enplaned almost 59 million passengers in 1997 and is the
fifth largest domestic air carrier (as ranked by revenue passenger miles
(RPMs) flown). As of December 31, 1997, US Airways operated 376 jet
aircraft (see Part I, Item 2. "Properties" for additional information) and
provided regularly scheduled service through 102 airports in 33 states in
the continental United States, Canada, Mexico, France, Germany, Italy,
Spain and the Caribbean. US Airways' executive offices are located at 2345
Crystal Drive, Arlington, Virginia 22227 (telephone number (703) 872-7000).
US Airways' internet address is www.usairways.com. US Airways changed its
name from USAir, Inc. effective February 21, 1997.
US Airways' principal connecting hubs are located at the major
airports in Charlotte, Philadelphia and Pittsburgh. US Airways also has
substantial operations at Baltimore/ Washington International Airport
(BWI), Boston's Logan International Airport, New York's LaGuardia Airport
(LaGuardia) and Washington's Ronald Reagan Washington National Airport
(National). Measured by departures, US Airways is the largest or second
largest airline at each of the foregoing airports and is the largest air
carrier in many smaller eastern cities such as Albany, Buffalo, Hartford,
Providence, Richmond, Rochester and Syracuse. US Airways is also the
leading airline from the Northeast U.S. to Florida. US Airways currently
has approximately 84% of its departures and approximately 56% of its
capacity (available seat miles or ASMs) deployed in the Eastern U.S. (that
portion of the U.S. east of the Mississippi River).
As of December 31, 1997, US Airways had code share arrangements with
ten air carriers which operate under the trade name "US Airways Express,"
including Allegheny, Piedmont and PSA (see Part I, Item 2. "Properties" for
additional information related to aircraft operated by the Company's three
wholly-owned regional airlines). Under a code share arrangement one air
carrier places its designator code and sells tickets on the flights of
another air carrier (its code share partner). Through service agreements
US Airways provides reservations and, at certain stations, ground support
services, in return for service fees. The US Airways Express network feeds
traffic into US Airways' route system at several points, primarily at
US Airways' hubs. As of December 31, 1997, US Airways Express served 174
airports in 33 states in the continental U.S., Canada and the Bahamas,
including 70 airports also served by US Airways. During 1997, US Airways
Express air carriers enplaned 10.9 million passengers (including 6.1
million
1
passengers enplaned by Piedmont, PSA and Allegheny), approximately 55% of
whom connected to US Airways flights.
During the fourth quarter of 1996, US Airways began purchasing all of
the capacity (ASMs) generated by Allegheny, Piedmont and PSA in exchange
for all of their transportation revenues. These agreements have no effect
on the Company's results of operations (US Airways' revenues from these
arrangements are reclassified to Passenger transportation revenues and the
related expenses eliminated during consolidation of the Company's financial
results). In January 1998, US Airways began purchasing the capacity (ASMs)
of Mesa Airlines, Inc. (Mesa) in certain markets. Mesa operates regional
jets in these markets as part of US Airways Express.
US Airways also code shares with Shuttle, which operates under the
trade name "US Airways Shuttle." The US Airways Shuttle currently provides
high frequency service between New York (LaGuardia), Boston and Washington
(National). During December 1997, the Company exercised its right to
purchase the Shuttle from its prior owners. US Airways managed Shuttle's
operations prior to the purchase. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained in Part II,
Item 7. of this report (hereafter referred to as "MD&A") for additional
information related to the Company's purchase of Shuttle.
US Airways also has code share agreements with Qantas Airways Limited
and Deutsche BA for flights to/from certain Australian and Pacific
destinations and intra-Germany, respectively.
During 1997, US Airways terminated the remaining aspects of its
relationship with British Airways Plc. (British Airways), including the
code sharing agreement between the two companies and certain other
commercial arrangements. As discussed in "Certain Ownership Matters" below,
British Airways divested its ownership interest in the Company during 1997.
As discussed in Part I, Item 3. "Legal Proceedings," litigation remains
outstanding between the Company and British Airways.
The Company has an agreement with a subsidiary of Airbus Industrie
G.I.E. (Airbus) for the purchase of up to 400 new single-aisle aircraft.
The agreement, which is discussed in MD&A, includes firm orders for 124
Airbus A320-family aircraft. The Company expects that these new aircraft
will replace, at a minimum, US Airways' B737-200, DC-9-30 and MD80
aircraft. Deliveries of the new Airbus aircraft are scheduled to begin in
Fall 1998.
The Company is also discussing the possible acquisition of new wide-
body aircraft with Airbus and The Boeing Company (Boeing) in support of the
Company's long-term strategic objective of establishing US Airways as a
competitive global airline.
AIRLINE INDUSTRY AND US AIRWAYS' POSITION IN THE MARKETPLACE
Historically, demand for air transportation has tended to mirror
general economic conditions. Since early-1995, general domestic economic
conditions have been relatively favorable with the level of demand for air
transportation exhibiting a strong correlation. In addition, over the same
time period, the Company's airline subsidiaries have experienced favorable
pricing and capacity trends in the markets in which they operate.
US Airways has the highest cost structure of all major domestic air
carriers. Most of the markets in which the Company's airline subsidiaries
operate are highly competitive, especially with respect to leisure traffic.
The Company's airline subsidiaries compete to varying degrees with other
air carriers and with other forms of transportation. US Airways competes
with at least one major airline on most of its routes between major cities.
Competitors have frequently offered sharply reduced discount fares in many
of the markets in which the Company's airline subsidiaries operate.
However, in recent years the level of fare discounting among the major
2
domestic air carriers has been somewhat restrained. Airlines, including US
Airways, typically use discount fares and other promotions to stimulate
traffic during normally slack travel periods to generate cash flow and to
increase relative market share in selected markets. Discount and
promotional fares are often subject to various restrictions such as minimum
stay requirements, advance ticketing, limited seating and refund penalties.
US Airways has often elected to match discount or promotional fares
initiated by other air carriers in certain markets in order to compete in
those markets. Competition between air carriers also involves certain route
structure characteristics, such as flight frequencies, availability of non-
stop flights, markets served and the time certain flights are operated. To
a lesser extent, competition can involve other products, such as in-flight
food or amenities, frequent flier programs and airport clubs.
Recent years have seen the entrance and growth of "low cost, low fare"
competitors in many of the markets in which the Company's airline
subsidiaries operate. These competitors, based on low costs of operations
and low fare structures, include Southwest Airlines Co. (Southwest) as well
as a number of smaller start-up air carriers. During October 1996, Delta
Air Lines, Inc. (Delta) launched a low cost product called "Delta Express."
Delta Express currently operates primarily within the Eastern U.S. Low
cost, low fare operations typically offer a simple product in primarily
leisure markets. For example, neither Southwest nor Delta Express offer
first class seating or meal service.
In the past, US Airways has in some cases responded to the entry of a
low cost, low fare competitor into its markets by matching fares and, as a
result of increased passenger traffic volumes related to lower fares,
increasing the frequency of service in related markets, generally with the
result of diluting US Airways' yield (Passenger transportation revenue per
revenue passenger mile) in these markets. In some cases, US Airways has
responded by reducing or eliminating service in affected markets (see
related discussion in MD&A under "Current Competitive Position").
US Airways' Northeast-Florida service has been particularly affected by low
cost, low fare competition. The Company believes that US Airways' new
contract with its pilots and the introduction of new aircraft into US
Airways' operating fleet will help to improve US Airways' competitiveness
in the marketplace. US Airways' new contract with its pilots also allows it
to establish its own competitive response to low cost, low fare
competitors. This product, "MetroJet," which will begin operations on June
1, 1998, is expected to provide US Airways with a cost-effective response
to Southwest, Delta Express and other low cost, low fare competition.
MetroJet will initially operate five B737-200 aircraft from BWI to
Cleveland, Providence, Ft. Lauderdale and Manchester (New Hampshire). The
Company's growth plans for MetroJet include MetroJet operating up to 20
aircraft by the end of 1998.
As mentioned in "Overview" above, a substantial portion of US Airways'
current route structure is located in the Eastern U.S. Although a
competitive strength in some regards, the regional concentration of
significant operations results in US Airways being susceptible to changes in
certain regional conditions that may adversely affect the Company's results
of operations and financial condition. The combination of a high cost
structure and the regional concentration of operations has also contributed
to US Airways being particularly vulnerable to competition from air carriers
or operations with lower cost and fare structures.
In May 1997, US Airways announced certain efficiency measures which
included retiring 22 aircraft from its operating fleet, ending unprofitable
service to nine cities and eliminating other routes that had not been
profitable and closing a flight crew base (February 1998), two reservations
centers (October 1997) and three maintenance facilities (by September
1998). The Company recognized certain nonrecurring charges as a result of
these actions. In September 1997, US Airways decided to retire its
remaining DC-9-30 aircraft earlier than previously planned resulting in an
additional nonrecurring charge. The Company expects that these efficiency
measures will ultimately result in the furlough of approximately 750 US
Airways employees. See MD&A for additional information related to these
efficiency measures and
3
nonrecurring items.
US Airways has substantially increased its transatlantic operations
since 1995. For 1997, as compared to 1996 and 1995, US Airways'
transatlantic capacity (ASMs) increased approximately 35% and 110%,
respectively. During April 1998, US Airways will begin service from
Philadelphia to London's Gatwick Airport and to Amsterdam. US Airways will
also begin service from Charlotte to London's Gatwick Airport in May 1998.
US Airways has filed petitions with the appropriate authorities to begin
service to additional foreign cities, as discussed in "Industry Regulation
and Airport Access" below. Expanding US Airways' transatlantic operations is
an important element of the Company's overall strategic objective.
See MD&A for additional information related to the Company's
competitive position, particularly with respect to changes during 1997 and
actions the Company is currently undertaking to improve its competitive
position.
INDUSTRY REGULATION AND AIRPORT ACCESS
US Airways operates under a certificate of public convenience and
necessity issued by the U.S. Department of Transportation (DOT). Such
certificate may be altered, amended, modified or suspended by the DOT if
the public convenience and necessity so require, or may be revoked for
failure to comply with the terms and conditions of a certificate. Airlines
are also regulated by the U. S. Federal Aviation Administration (FAA), a
division of the DOT, primarily in the areas of flight operations,
maintenance, ground facilities and other technical matters. Pursuant to
these regulations, US Airways has an FAA-approved maintenance program for
each type of aircraft it operates that provides for the ongoing maintenance
of such aircraft, ranging from frequent routine inspections to major
overhauls. From time-to-time, the FAA issues maintenance directives and
other regulations affecting US Airways or one or more of the aircraft types
it operates. In recent years, for example, the FAA has issued or proposed
such mandates relating to, among other things, flight data recorders (see
below), cargo hold fire detection/suppression systems (see below), ground
proximity warning systems (see below), the retirement of older aircraft,
collision avoidance systems, airborne windshear avoidance systems, noise
abatement and increased inspections and maintenance procedures to be
conducted on certain aircraft.
In August 1997, the FAA issued regulations that require flight data
recorders to measure more parameters than most original equipment flight
data recorders. These regulations, which affect US Airways' entire
operating fleet, must be implemented before August 2001. The Company
estimates that these regulations will cost approximately $20 million over
the four-year phase-in period.
In February 1998, the FAA issued regulations that require certain
commercial passenger aircraft to have cargo hold fire detection/suppression
systems. These regulations, which affect US Airways' B737-Series, F100, DC-
9-30 and MD-80 aircraft (the other aircraft types in US Airways' operating
fleet already have such systems), must be implemented before March 2001.
The Company estimates that these regulations will cost approximately $22
million over the three-year phase-in period.
The FAA has proposed regulations that would require the installation of
Enhanced Ground Proximity Warning Systems (EGPWS) on certain commercial
aircraft. The EGPWS is a system designed to complement the current functions
of the Ground Proximity Warning System (GPWS) and provide warnings in
situations where the GPWS does not. A Notice of Proposed Rule Making (NPRM)
is expected to be issued in April 1998 with a final ruling expected to be
issued by the end of 1998. The NPRM is also expected to allow for an
exemption for aircraft being retired by a specific date, currently believed
to be December 2008. The cost to install the EGPWS on the aircraft in
US Airways' operating fleet, excluding aircraft US Airways expects to retire
before
4
December 2008, is currently estimated to be approximately $29 million over
the anticipated three-year phase-in period (the Airbus aircraft that the
Company expects to begin receiving in Fall 1998 will be delivered with
EGPWS). The Company cannot predict whether or when the proposed regulations
will be adopted or if any such regulations, if adopted, would differ
materially from the current proposed regulations.
The federal excise tax on domestic air transportation ("ticket tax")
was reinstated on August 27, 1996, for tickets sold for travel before
January 1, 1997. This tax, 10% of the cost of an airline ticket, had
previously expired on January 1, 1996. The Company believes that its
Passenger transportation revenues were stimulated during the period the tax
was not in effect-the absence of the tax effectively reduced the cost of air
travel-but cannot estimate the dollar impact of the tax expiration. The tax
expired again on January 1, 1997. On February 28, 1997, President Clinton
signed legislation reinstating the tax for tickets sold beginning March 7,
1997 through September 30, 1997. Finally, on August 5, 1997, President
Clinton signed legislation extending the ticket tax from October 1, 1997
through September 30, 2007. The new legislation reduced the domestic ticket
tax from 10% of fare to 9.0% (decreasing to 8.0% on October 1, 1998 and to
7.5% on October 1, 1999), added a new segment tax of $1.00 (which increases
to $3.00 by the year 2002), changed the current $6.00 international
departure tax to $12.00 and added a $12.00 international arrival tax. The
legislation also added a new 7.5% tax effective October 1, 1997 on certain
purchases of frequent traveler program miles from domestic air carriers. The
Company does not believe that the new ticket tax structure has had a
material adverse effect on its results of operations or financial condition.
The Company's airline subsidiaries became obligated to pay the $.043
per gallon federal excise tax on transportation fuels on October 1, 1995.
US Airways recognized expenses of $41.9 million, $43.0 million and $11.9
million as a result of this tax during 1997, 1996 and 1995, respectively.
The DOT allows local airport authorities to implement procedures
designed to abate special noise problems, provided such procedures do not
unreasonably interfere with interstate or foreign commerce or the national
transportation system. Certain airports, including the major airports at
Boston, Washington D.C., Chicago, San Diego, San Francisco and Orange
County (California), have established airport restrictions to limit noise,
including restrictions on aircraft types to be used and limits on the
number of hourly or daily operations or the time of such operations. In
some instances these restrictions have caused curtailments in services or
increases in operating costs and such restrictions could limit the ability
of US Airways to expand its operations at the affected airports.
Authorities at other airports may consider adopting similar noise
regulations.
Several airports have recently sought to increase substantially the
rates charged to air carriers, and the ability of air carriers to contest
such increases has been restricted by federal legislation, DOT regulations
and judicial decisions. In addition, legislation which became effective
June 1, 1992 allows public airports to impose passenger facility charges of
up to $3 per departing or connecting passenger at such airports. With
certain exceptions, air carriers pass these charges on to passengers. The
ability of US Airways to pass-through such fees to its customers is subject
to various factors, including market conditions and competitive factors.
The FAA has designated John F. Kennedy International Airport, Chicago
O'Hare International Airport, LaGuardia and National as "high density
traffic airports" and limited the number of departure and arrival slots
available to air carriers at those airports. Currently, slots at the high
density traffic airports may be voluntarily sold or transferred between air
carriers. The DOT has in the past reallocated slots to other air carriers
and reserves the right to withdraw slots. The DOT awarded slots to several
low cost, low fare air carriers during October 1997. However, these slots
were "created" and not confiscated from incumbent air carriers. Various
amendments to the slot system, proposed from time-to-time by the FAA,
members of Congress and others,
5
could, if adopted, significantly affect operations at the high density
traffic airports or expand slot controls to other airports. Certain
proposals could restrict the number of flights, limit the ownership
transferability of slots, increase the risk of slot withdrawal, or
otherwise decrease the value of slots. There are currently several such
proposals before Congress. US Airways and Shuttle hold a substantial number
of slots at LaGuardia and National. These slots are valuable assets and
important in the Company's overall business strategy. The Company cannot
predict whether any of the current proposals before Congress will be
adopted or whether such legislation, if finalized, would result in US
Airways or Shuttle being forced to give up slots or otherwise affect US
Airways' or Shuttle's current operations at LaGuardia and National.
The availability of international routes to domestic air carriers is
regulated by agreements between the U.S. and foreign governments. US
Airways has petitioned the appropriate authorities for the rights to
operate Philadelphia-Milan, Pittsburgh-Paris, and between Pittsburgh and
Boston and London (Gatwick Airport). US Airways is constrained by the
current agreement between the U.S. and the United Kingdom with respect to
London service. US Airways would prefer to serve London through the more-
prestigious Heathrow Airport, but cannot do so under the current treaty.
Many aspects of US Airways' operations are subject to increasingly
stringent federal, state and local laws protecting the environment. Future
regulatory developments could affect operations and increase operating
costs for the airline industry, including US Airways.
As with most domestic companies, the Company is subject to federal
income taxes. The Company recognized certain tax benefits totaling $466.9
million during 1997 which stem primarily from the Company reflecting for
financial reporting purposes the future income tax benefits associated with
net operating losses and other tax credits generated in prior years. See
MD&A for additional information.
CERTAIN OWNERSHIP MATTERS
During 1997, the Company paid all dividends in arrears and resumed
regularly scheduled dividend payments on its outstanding preferred stock
issuances. The Company had previously deferred dividend payments on its
outstanding preferred stock beginning with payments due September 30, 1994
for reasons resulting principally from several years of poor financial
performance.
In May 1997, British Airways converted 28,059.364 shares of Series F
Preferred Stock into 14,458,851 shares of Common Stock, which it then sold
to third parties. Also in May 1997, the Company repurchased the remaining
shares of Series F Preferred Stock and all of the Series T Preferred Stock
(both series were held exclusively by British Airways). The Company's board
of directors declared regular quarterly dividends on the Series F and
Series T Preferred Stock prior to the conversion and repurchase
transactions. After the conversion and repurchase transactions, the Company
believes that British Airways held no ownership interest in US Airways
Group. As of December 31, 1996, the preferred stock held by British Airways
constituted approximately 23% of the total voting interest in the Company.
In August 1997, the Company exchanged its Series A Preferred Stock for
Series H Senior Cumulative Convertible Preferred Stock (Series H Preferred
Stock). The Series A Preferred Stock was, and the Series H Preferred Stock
is, owned by affiliates of Berkshire Hathaway, Inc. (Berkshire Hathaway).
The provisions of the Series H Preferred Stock are substantially similar to
those of the Series A Preferred Stock. The exchange transaction facilitated
the redemption of the Series B Preferred Stock (as discussed in the
following paragraph).
6
On August 18, 1997, the Company notified the holders of its Series B
Preferred Stock that it would redeem all 4,263,000 outstanding depositary
shares representing Series B Preferred Stock on September 15, 1997 at
$51.75 per share plus accrued dividends of $0.3646 per share. Because
conversion into Common Stock was financially advantageous to the holders,
all but approximately 6,000 depositary shares were converted prior to the
redemption date resulting in the issuance of 10.6 million shares of Common
Stock.
In January 1998, the Company announced plans to purchase up to 2.3
million shares of its Common Stock from time-to-time in open market or
privately negotiated transactions. This program was authorized by the
Company's board of directors in conjunction with US Airways' agreement to
provide up to 2.3 million stock options to its pilots in 1998 (see also
"Employees" below). In February 1998, the Company's board of directors
announced certain actions aimed at increasing shareholder value, including
the purchase from time-to-time in open market or privately negotiated
transactions of up to $500 million of the Company's Common Stock (in
addition to the previously announced plan), the call for redemption of the
Series H Preferred Stock (in February 1998, the Company notified Berkshire
Hathaway of its intention to redeem the Series H Preferred Stock on
March 15, 1998; see below) and the retirement of certain debt obligations
totaling approximately $380 million. During late February 1998, US Airways
retired early certain debt obligations with a combined principal amount of
$76.1 million (the transactions resulted in an immaterial net gain).
US Airways expects to retire its 10% Senior Notes, which have a face amount
of $300 million, during early Summer 1998. Retirement of the 10% Senior
Notes is expected to result in an extraordinary loss on early debt
extinguishment of approximately $15 million.
On March 12, 1998, Berkshire Hathaway exercised its right to convert
the Series H Preferred Stock into 9.2 million shares of the Company's Common
Stock. The Company subsequently retired its Series H Preferred Stock.
With the retirement of all of the Company's preferred stock, the
Company is relieved of annual dividends of approximately $79 million.
Annual interest payments associated with the debt obligations retired early
or to be retired early under the aforementioned program total approximately
$37 million.
See Notes 7(a), 7(b) and 8(c) to the Company's Notes to Consolidated
Financial Statements contained in Part II, Item 8A. of this report for
additional information related to the Company's preferred stock issuances.
In addition, see Note 15 to the Company's Notes to Consolidated Financial
Statements for additional information with respect to the Company's plans
to retire certain debt obligations.
Sections 382 and 383 of the Internal Revenue Code and the regulations
thereunder impose limitations on the utilization of net operating loss and
credit carryforwards if a corporation has had a "change of control" as
defined therein. Generally, a change of control occurs if the corporation
experiences more than a 50% ownership change over a rolling three year
testing period. In general, if a corporation has a change of control, the
amount of loss carryforwards and credits that can be used in any subsequent
year are limited to an amount equal to the product of the value of the
corporation's stock immediately prior to the change multiplied by the
"long-term tax exempt rate," as defined by the U.S. Internal Revenue Code.
The Company does not believe it experienced a change of control before the
preferred stock transactions discussed above, nor does it believe that
those transactions caused a change of control. During the fourth quarter of
1997, the Company recognized a significant amount of future tax benefits
related primarily to loss carryforwards. See Note 3 to the Company's Notes
to Consolidated Financial Statements for additional information.
7
EXECUTIVE OFFICERS
The following individuals, listed alphabetically, are the executive
officers of US Airways Group and US Airways as of March 18, 1998:
Name Age Position
---- --- --------
N. Bruce Ashby 37 Senior Vice President-Planning, US Airways
Christopher Doan 51 Senior Vice President-Maintenance, US Airways
Rakesh Gangwal 44 President and Chief Operating Officer, US
Airways Group and US Airways
Terry L. Hall 44 Senior Vice President-Finance and Chief
Financial Officer, US Airways Group and US
Airways
John R. Long, III 49 Executive Vice President-Human Resources,
US Airways
Lawrence M. Nagin 57 Executive Vice President-Corporate
Affairs and General Counsel, US Airways
Group and US Airways
Stephen M. Wolf 56 Chairman of the Board of Directors and
Chief Executive Officer, US Airways
Group and US Airways
There are no family relationships among any of the officers listed
above. No officer was selected pursuant to any arrangement between himself
and any other person. Officers are elected annually to serve for the
following year or until the election and qualification of their successors.
Mr. Long has been actively engaged in the business and affairs of the
Company and US Airways during the past five years.
The business experience of the officers listed above since at least
January 1, 1993:
From April 1996, Mr. Ashby served as Vice President-Financial Planning
and Analysis of US Airways until his election as Senior Vice President-
Planning in January, 1998. He previously served as Vice President-Marketing
Development at Delta from June 1995 to April 1996, and in several executive
positions at United Air Lines, Inc. (United) from January 1989 to June
1995, including Vice President-Financial Planning and Analysis and Vice
President and Treasurer.
Mr. Doan joined US Airways in March of 1997. Prior to joining US
Airways, Mr. Doan was Vice President of Technical Operations at Northwest
Airlines, Inc. (Northwest). Mr. Doan served as an officer in a variety of
maintenance-related positions at Northwest from 1985 through 1997. Prior to
1985, Mr. Doan served for 18 years in maintenance-related management
positions at Trans World Airlines, Inc.
Mr. Gangwal was elected President and Chief Operating Officer of US
Airways Group and US Airways effective February 19, 1996. Mr. Gangwal came
to US Airways from Compagnie Nationale Air France where he had been
Executive Vice President-Planning and Development since November 1994. Mr.
Gangwal previously served in a variety of management roles at United over
an eleven-year period, culminating in the role of Senior Vice President-
Planning.
Mr. Hall was elected Senior Vice President-Finance and Chief Financial
Officer of US Airways Group and US Airways in February 1998. Prior to
joining US Airways, Mr. Hall was Vice President-Finance and Chief Financial
Officer at Apogee Enterprises, Inc. (Apogee)
8
and, prior to that position, Mr. Hall was Vice President and Chief
Financial Officer for Tyco International Ltd. (Tyco). Apogee and Tyco are
both multi-billion dollar, multinational diversified companies. Before the
latter two positions, from 1990 to 1993, Mr. Hall served as Vice President
and Treasurer at United.
Mr. Long served as Senior Vice President-Administration of US Airways
until his election as Senior Vice President-Customer Operations of US
Airways in June 1989. He was elected Senior Vice President-Customer
Services in March 1991 and Executive Vice President-Customer Services in
May 1992. Mr. Long was elected Executive Vice President-Human Resources in
May 1996.
Mr. Nagin practiced law with Skadden, Arps, Slate, Meagher & Flom LLP
from August 1994 until he joined US Airways Group and US Airways in
February 1996. He previously served in several executive positions at
United and UAL Corp. (UAL) from September 1988 to July 1994, culminating in
the role of Executive Vice President-Corporate Affairs and General Counsel
of United and UAL. From 1980-1988, Mr. Nagin was Senior Vice President and
General Counsel of The Flying Tiger Line Inc. (Flying Tiger).
Mr. Wolf is Chairman of the Board of Directors and Chief Executive
Officer of US Airways Group and US Airways and was elected to those
positions in January 1996. Immediately prior to joining US Airways, Mr.
Wolf was a senior advisor to the investment bank Lazard Freres & Co. From
1987 to July 1994, Mr. Wolf was Chief Executive Officer of UAL and United
and became Chairman of each in 1988. Mr. Wolf is a Director of Philip
Morris Companies, R.R. Donnelley & Sons Co., The Brookings Institution and
the Alzheimer's Disease and Related Disorders Association. He is also a
trustee of Northwestern University and Georgetown University.
EMPLOYEES
As of December 31, 1997, on a full-time equivalent basis, US Airways
employed approximately 4,700 pilots, 7,500 mechanical and related
personnel, 9,200 station personnel, 3,500 reservations personnel, 7,900
flight attendants and 5,700 personnel in administrative and miscellaneous
job categories. As of December 31, 1997, on a full-time equivalent basis,
the Company's remaining subsidiaries employed approximately 1,000 pilots,
600 maintenance and related personnel, 1,300 station personnel, 600 flight
attendants and 500 personnel in administrative and miscellaneous job
categories.
As of December 31, 1997, approximately 37,900, or 84%, of the
employees of the Company's subsidiaries were covered by collective
bargaining agreements with various labor unions, or will be covered by a
collective bargaining agreement for which negotiations are in progress.
(this space intentionally left blank)
9
The status of US Airways' labor agreements as of December 31, 1997:
Date Contract
Union (1) Class or Craft Employees (2) Amendable
- --------- -------------- ------------- --------------
ALPA Pilots 4,700 01/01/03(4)
AFA Flight attendants 7,900 01/01/97(5)
CWA Passenger service employees 9,100(3) -(6)
IAM Mechanics and related employees 7,500 10/01/95(5)
IAM Fleet service employees 6,000(3) -(6)
TWU Flight crew training instructors 50 10/09/96(5)
TWU Flight simulator engineers 57 08/02/97(5)
TWU Dispatch employees 155 09/01/96(5)
(1) ALPA Air Line Pilots Association, International
AFA Association of Flight Attendants
CWA Communications Workers of America
IAM International Association of Machinists and Aerospace Workers
TWU Transport Workers' Union
(2) Approximate number of employees covered by the contract.
(3) Estimated number of employees who will be covered under this new
contract.
(4) US Airways' pilots ratified a new agreement during October 1997 which
became effective January 1, 1998.
(5) Currently in negotiations.
(6) Initial contract in negotiations.
As noted above, US Airways and ALPA entered into a new contract effective
January 1, 1998. The major terms of US Airways' new contract with its
pilots include:
- - No pre-determined guaranteed increases to hourly rates of pay for
"mainline" operations for existing aircraft types and new Airbus aircraft
through the term of the contract. Reviews must be completed by January 1 of
the years 2001, 2002 and 2003 to determine what adjustments (increases or
decreases), if any, must be made to rates of pay and/or work rules so that
US Airways' pilot costs (pay and productivity) are at parity plus 1% as
compared to a weighted average of mainline pilot costs at American
Airlines, Inc. (American), Delta, Northwest and United. At the option of
the pilots, an additional "interim review" may be undertaken for completion
by January 1, 1999.
- - Allowing US Airways to establish a "low cost, low fare" product to
compete with Southwest, Delta's Delta Express product, AirTran and other
such competitors in certain markets and under certain conditions. US
Airways' low cost, low fare product can begin service with up to 54
aircraft with the flexibility, under certain circumstances, to expand its
operations up to 25% of US Airways' total system block hours. Pay rates for
pilots on US Airways' low cost, low fare product will be comparable to
those of Southwest's pilots (with pay protection for mainline pilots
involuntarily displaced to US Airways' low cost, low fare product ending
when such pilots have the ability to return to mainline operations). See
"Airline Industry and US Airways' Position in the Marketplace" for recent
developments involving US Airways' low cost product, which will begin
operations on June 1, 1998.
- - Work rule changes including reductions in sick leave and vacation which
are estimated to result in significant annual savings when fully
implemented.
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- - Allowing US Airways Express to ultimately operate up to the greater of
35 regional jet aircraft or the equivalent of 9% of US Airways' operating
fleet, once all pilots are recalled from furlough (see "Overview" above
related to the introduction of regional jets by US Airways Express).
- - A commitment to grow at an annual rate of the greater of 2.5% (as
measured by 1998 system block hours) or 20% above the average block hour
growth rate of American, Delta, Northwest and United subject to certain
deferral rights and force majeure provisions.
- - Lump sum payments to pilots equal to 1% of annual salary for the
calendar years 1999, 2001 and 2002, payable in the subsequent calendar
year.
- - 11.5 million options to purchase US Airways Group Common Stock, to be
issued ratably to pilots over the five-year life of the contract, with
exercise prices established based on the fair market value of the Company's
Common Stock over a time period preceding each grant date.
- - An early retirement program for up to 325 pilots and the recall from
furlough by December 15, 1997 of 100 pilots furloughed in 1997, as well as
offering recall by December 31, 2001 of 283 additional pilots furloughed
prior to 1997.
- - A requirement for US Airways to operate certain levels of transoceanic
block hours before increasing international code-sharing.
- - Certain change of control protections, including vesting of all 11.5
million stock options at an exercise price equal to the exercise price of
the most recent stock options granted to the pilots, and cash payments to
pilots of up to $250 million under certain circumstances if US Airways is
acquired and is not the surviving entity and the pilots' labor contract is
adversely affected as a result of the acquisition.
- - Certain job security provisions, including a "no furlough" clause for
pilots on the seniority list on the effective date of the agreement.
As discussed in MD&A, the Company recorded a $115 million charge to
Personnel costs during the fourth quarter of 1997 associated with the early
retirement plan. US Airways expects to realize significant net long-term
savings in both wages and benefits expenses as a result of the early
retirement program. US Airways will recognize expenses for the lump sum
payments, which are expected to total approximately $20 million, as an
element of Personnel costs in the period in which they are earned. Any
personnel expenses associated with the stock options granted under the new
contract would be recognized over the vesting period of the grant and be
dependent upon the exercise price of each grant.
On September 29, 1997, US Airways' passenger service employees,
approximately 9,100 employees, voted for representation by CWA. This
election was a re-run election mandated by the National Mediation Board
(NMB). In January 1997, US Airways passenger service employees voted
against unionization, but the NMB subsequently ordered that a new
representation election be held for these employees because of alleged
interference by US Airways with the election process. US Airways has filed
an action challenging this order in federal court.
The Company is unable to predict how long it will take to conclude
collective bargaining talks with respect to labor contracts that are
currently amendable and for labor contracts for which an initial contract
is being negotiated or the ultimate outcome of these discussions. Under the
Railway Labor Act, a labor contract does not "expire," but rather becomes
amendable on a
11
certain date. Thirty days prior to that date, either party to the contract
may give notice to the other of its intention to amend the contract, at
which point the collective bargaining process begins. If, after a period of
negotiations, the parties cannot reach an agreement, a federal mediator
from the NMB is brought in to assist. The process of mediation continues
until the NMB determines, at its sole discretion, that the parties have
reached an impasse. At that point, the parties enter a thirty-day "cooling-
off" period before either party may employ so-called "self-help" (e.g., the
imposition of contract changes or a lockout by the company or a strike by
the union). While in negotiations and mediation, both parties must observe
the status quo.
As discussed under "Airline Industry and US Airways' Position in the
Marketplace," US Airways expects that the efficiency measures announced in
May 1997 will ultimately result in the furlough of approximately 750
employees (attrition has resulted in a lower estimate than previously
disclosed). US Airways eliminated approximately 240 full-time and part-time
positions at BWI during Summer 1997 as the result of certain schedule
adjustments.
During December 1997, US Airways entered into a 25-year agreement with
The SABRE Group (TSG) under which TSG assumed responsibility for managing
most of US Airways' information technology requirements. As a result of this
agreement, approximately 670 US Airways employees took positions with TSG on
January 1, 1998. See MD&A for additional information related to US Airways'
agreement with TSG.
AVIATION FUEL
Prices and availability of all petroleum products are subject to
political, economic and market factors that are generally outside of the
Company's control. Accordingly, the price and availability of aviation
fuel, as well as other petroleum products, can be unpredictable. Because
the operations of the Company's airline subsidiaries are dependent upon
aviation fuel, significant increases in aviation fuel costs could
materially and adversely affect the Company's results of operations and
financial condition. For 1997, 1996 and 1995, aviation fuel expenses were
10.5%, 10.8% and 9.6% of US Airways' total operating expenses (as adjusted
to exclude nonrecurring items and certain expenses for comparability
purposes), respectively.
US Airways continually adjusts its aviation fuel purchasing strategy
in order to take advantage of the best available prices while at the same
time ensuring that it has an adequate supply of aviation fuel to support
its operations. In addition, US Airways participates in arrangements to
hedge the price of a portion of its aviation fuel needs, which may have the
net effect of increasing or decreasing US Airways' aviation fuel expenses
(as discussed in Note 2(a) to the Company's Notes to Consolidated Financial
Statements).
See Part II, Item 6. "Selected Financial Data" for additional
information related to aviation fuel. In addition, see "Industry Regulation
and Airport Access" above for information related to taxes on aviation
fuel.
USE OF TRAVEL AGENTS AND COMMISSIONS EXPENSES
As is typical in the airline industry, a majority of the tickets for
travel on the Company's airline subsidiaries are sold by travel agents.
During 1997, travel agents accounted for approximately 76% of US Airways'
tickets sales (as measured by gross fares). During 1996, the percentage was
approximately 77%.
The Company accounts for fees paid to travel agents in the Commissions
line item on its Consolidated Statements of Operations (which are contained
in Part II, Item 8A. of this report). Such fees are calculated in
accordance with policies established by the Company. Fees paid to travel
agents accounted for approximately 7.7%, 7.5% and 7.9% of US Airways' total
operating
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expenses (as adjusted to exclude nonrecurring items and certain expenses
for comparability purposes) for the years 1997, 1996 and 1995,
respectively.
During September 1997, US Airways established a revised fee structure
for base commissions paid to travel agents: 8% of ticket price on all
domestic and international tickets issued by travel agents in the U.S.,
Puerto Rico, the U.S. Virgin Islands and Canada. US Airways' existing
maximum payment of $25 one-way and $50 round-trip for tickets purchased in
the U.S. and Puerto Rico for travel in and between the U.S., Puerto Rico
the U.S. Virgin Islands and Canada was not changed. Prior to the revised
rate structure, fees were generally paid to travel agents at 10% of ticket
price. US Airways pays travel agents additional "incentive" commissions
under certain circumstances, such as for reaching certain volume sales
levels. Such special incentive fees are typical in the airline industry.
In April 1996, travel agents began selling electronic tickets for
travel on the Company's airline subsidiaries. By February 1998, "E Tickets"
for travel on US Airways and its regional affiliates exceeded 28% of all
ticket sales. The Company believes that electronic ticketing helps to
reduce distribution costs.
COMPUTERIZED RESERVATION SYSTEMS
Computerized Reservation Systems (CRSs) play a significant role in the
marketing and distribution of airline tickets. As mentioned above, travel
agents issue tickets which generate the majority of US Airways' passenger
revenues. Most travel agencies use one or more CRSs to obtain information
about airline schedules and fares and to book their clients' travel.
On July 30, 1997, Galileo International, Inc. (Galileo) completed an
initial public offering (IPO) and used the proceeds, together with the
proceeds of bank financing, to purchase Apollo Travel Services Partnership
(ATS). USAM owned approximately 21% of ATS. Immediately preceding the IPO,
Galileo International Partnership (GIP) was merged with and into a wholly-
owned limited liability company subsidiary of Galileo and USAM received
shares in Galileo in the same proportion as its partnership interest in
GIP. As part of the IPO, USAM sold some of its Galileo shares and its
interest in Galileo was reduced from 11% to approximately 6.7%. The
transaction is discussed further in MD&A.
Galileo owns, operates and markets the Galileo CRS. The Galileo CRS is
the world's second largest CRS system, as measured by revenues generated by
travel agent subscribers.
As of December 31, 1997, USAM owned approximately 6.7% of Galileo and
held an 11% interest in Galileo Japan Partnership, which markets the
Galileo CRS in Japan.
FREQUENT TRAVELER PROGRAM
Under US Airways' "Dividend Miles" frequent traveler program (FTP),
participants generally receive mileage credits equal to the greater of
actual miles flown or 500 miles for each paid flight segment on US Airways
or US Airways Express, or actual miles flown on one of US Airways' FTP
airline partners. Participants generally receive a minimum of 500 mileage
credits for each paid flight on US Airways Shuttle. Participants flying on
first or business class tickets generally receive additional mileage
credits. Participants may also earn mileage credits by utilizing certain
credit cards, staying at participating hotels, renting cars from
participating car rental companies and through other means. Mileage credits
earned by FTP participants, which do not expire under current program
guidelines, can be redeemed for various travel awards, including fare
discounts, first class upgrades and tickets on US Airways or on one of US
Airways' FTP airline partners. Certain awards also include hotel and car
rental awards. Awards may not be brokered, bartered or sold, and have no
cash value.
13
US Airways and its FTP airline partners limit the number of seats
allocated per flight for award recipients by using various inventory
management techniques. Award travel for all but US Airways' most frequent
travelers generally is not permitted on blackout dates, which correspond to
certain holiday periods or peak travel dates to foreign destinations. US
Airways reserves the right to terminate Dividend Miles or portions of the
program at any time. Program rules, partners, special offers, blackout
dates, awards and requisite mileage levels for awards are subject to change
without prior notice.
US Airways uses the incremental cost method to account for liabilities
associated with Dividend Miles. Estimated future travel awards are valued
at the estimated average incremental cost of carrying one additional
passenger. Incremental costs include unit costs for passenger food,
beverages and supplies, fuel, reservations, communications, liability
insurance and denied boarding compensation expenses. No profit or overhead
margin is included in the accrual for incremental costs. The Company
periodically reviews the assumptions made to calculate its FTP liability
for reasonableness and makes adjustments to these assumptions as necessary.
No liability is recorded for airline, hotel or car rental award
certificates that are to be honored by other parties because there is no
cost to US Airways for such awards.
As of December 31, 1997 and 1996, Dividend Miles participants had
accumulated mileage credits for approximately 4,253,000 awards and
3,715,000 awards, respectively. Because US Airways expects that some
potential awards will never be redeemed, calculations of FTP liabilities
are based on approximately 87% of total accumulated mileage credits.
Mileage credits for Dividend Miles participants who have accumulated less
than the minimum number of mileage credits necessary to claim an award,
25,000, are excluded from calculations of FTP liabilities. Incremental
changes in FTP liabilities resulting from participants earning or redeeming
mileage credits or changes in assumptions used for the related calculations
are recorded as part of the regular review process.
During 1997, 1996 and 1995, US Airways' customers redeemed
approximately 0.9 million, 1.0 million and 1.2 million awards for free
travel, respectively, representing approximately 5%, 6% and 9% of US
Airways' RPMs in those years, respectively. US Airways does not believe
that usage of FTP awards results in any significant displacement of revenue
passengers. US Airways' exposure to the displacement of revenue passengers
is not significant, as the number of US Airways flights that depart 100%
full is minimal. For example, in the second quarter of 1997 (the quarter
when the highest number of free frequent traveler trips were flown during
1997) fewer than 7% of US Airways' flights departed 100% full. During this
same quarterly period, approximately 4% of US Airways' flights departed
100% full but also had one or more passengers on board who were traveling
on Dividend Miles award tickets.
As mentioned previously, US Airways terminated its relationship with
British Airways during 1997, including arrangements involving the two
companies' frequent traveler programs.
INSURANCE
The Company and its subsidiaries maintain insurance of the types and
in amounts deemed adequate to protect themselves and their property.
Principal coverage includes liability for bodily injury to or death of
members of the public, including passengers; damage to property of the
Company, its subsidiaries and others; loss of or damage to flight
equipment, whether on the ground or in flight; fire and extended coverage,
and; workers' compensation and employer's liability. Coverage for
environmental liabilities is expressly excluded from these insurance
policies.
14
ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
As of December 31, 1997, US Airways operated the following jet
aircraft:
Passenger Average
Type Capacity Age(years) Owned(2) Leased(3) Total
---- --------- ---------- -------- --------- -----
Boeing 767-200ER 208 8.5 6 6 12
Boeing 757-200 182 7.2 23 11 34
Boeing 737-400 145 8.0 19 35 54
McDonnell Douglas MD-80 141 15.8 15 16 31
Boeing 737-300 127 10.7 11 74 85
Boeing 737-200 110 15.7 52 12 64
Douglas DC-9-30 (1) 101 23.6 49 7 56
Fokker 100 98 7.0 36 4 40
---- --- --- ---
12.7 211 165 376
==== === === ===
(1) US Airways removed five DC-9-30 aircraft from its operating fleet during
first quarter 1998.
(2) Of the owned aircraft, 103 were pledged as collateral for various
secured financing obligations aggregating $2.1 billion as of
December 31, 1997.
(3) The terms of the leases expire between 1998 and 2015. US Airways
purchased a B767-200ER aircraft upon lease expiry in February 1998.
As of December 31, 1997, the Company's four wholly-owned regional
airline subsidiaries operated the following aircraft:
Passenger Average
Type Capacity Age(years) Owned Leased(3) Total
---- --------- ---------- ----- --------- -----
Boeing 727-200 (1) 161 25.7 12 - 12
de Havilland Dash 8 (2) 37 7.1 29 56 85
Dornier 328-110 (2) 32 2.3 - 25 25
---- -- -- ---
8.0 41 81 122
==== == == ===
(1) Jet aircraft operated by Shuttle (see Note 15 to the Company's Notes to
Consolidated Financial Statements for information related to the
Company's purchase of Shuttle on December 30, 1997).
(2) Turboprop aircraft.
(3) The terms of the leases expire between 1998 and 2012.
The Company has an agreement with a subsidiary of Airbus related to the
acquisition of new jet aircraft and accompanying jet engines. In addition,
one of the Company's regional airline subsidiaries is party to an agreement
related to the acquisition by lease of up to 15 turboprop aircraft. See
Notes 6(a) and 6(c) to the Company's Notes to Consolidated Financial
Statements for additional information regarding outstanding commitments and
options for the purchase of flight equipment.
The Company's airline subsidiaries maintain inventories of spare
engines, spare parts, accessories and other maintenance supplies sufficient
to meet their operating requirements.
As of December 31, 1997, the Company's airline subsidiaries,
principally US Airways, owned or leased the following aircraft which were
not considered part of the operating fleets presented in the tables above.
These aircraft were either parked in storage facilities or, as shown in the
far right column, leased or subleased to third parties (see table on
following page).
15
Average Leased/
Type Age(years) Owned Leased Total Subleased
---- ---------- ----- ------ ----- ---------
British Aerospace
BAe-146-200 (1) 12.9 - 13 13 12
Douglas DC-9-30 (2) 28.4 5 - 5 -
Fokker F28-1000 24.5 17 - 17 17
Fokker F28-4000 (3) 13.2 4 11 15 9
Embraer EMB-120 7.8 - 2 2 2
British Aerospace
Jetstream 31 10.7 - 14 14 14
---- -- -- -- --
17.2 26 40 66 54
==== == == == ==
(1) US Airways subleased an additional nonoperating BAe-146-200 aircraft in
March 1998.
(2) US Airways parked five additional DC-9-30 aircraft and sold three of
its nonoperating DC-9-30 aircraft in the first quarter of 1998.
(3) US Airways leased one of its owned and subleased two of its leased
nonoperating F28-4000 aircraft during the first quarter of 1998.
See Note 6(b) to the Company's Notes to Consolidated Financial
Statements for additional information related to third party lease
arrangements involving flight equipment.
US Airways is a participant in the Civil Reserve Air Fleet (CRAF), a
voluntary program administered by the Air Mobility Command (AMC). The
General Services Administration of the U.S. government also requires that
airlines participate in CRAF in order to receive U.S. government business.
The U.S. government is US Airways' largest customer. US Airways' commitment
under CRAF is to provide up to eleven B767-200ER aircraft in support of
military operations, most likely aeromedical missions, as specified by the
AMC. US Airways would be reimbursed at prescribed rates if these aircraft
were activated under the CRAF program. To date, the AMC has not requested US
Airways to activate any of its aircraft under CRAF.
GROUND FACILITIES
US Airways leases the majority of its ground facilities, including
executive and administrative offices in Arlington, Virginia adjacent to
National airport; its principal operating, overhaul and maintenance bases at
the Pittsburgh and Charlotte/Douglas International Airports; major training
facilities in Pittsburgh and Charlotte; central reservations offices in
several cities; and line maintenance bases and local ticket, cargo and
administrative offices throughout its system. US Airways owns a building and
vacant land in Fairfax County, Virginia, a training facility in Winston-
Salem (North Carolina) and reservations facilities in San Diego and Orlando.
US Airways recently completed negotiations to sell its property in Fairfax
County in two separate transactions. The sales transactions are expected to
be completed by the end of the second quarter of 1998 and result in proceeds
of $11.6 million and a $2.0 million gain.
As further discussed in MD&A, US Airways announced certain efficiency
measures in May 1997 which include closing certain facilities. US Airways
will close its maintenance facilities in Roanoke (Virginia), Greensboro
(North Carolina) and Winston-Salem by September 1998 (the work performed at
these locations will be transferred to other US Airways maintenance
facilities). In addition, also as part of these efficiency measures, US
Airways consolidated certain reservation facilities by closing its Nashville
and Utica (New York) reservations centers.
16
TERMINAL CONSTRUCTION PROJECTS
The Company's airline subsidiaries utilize public airports for their
flight operations under lease arrangements with the government entities that
own or control these airports. Airport authorities frequently require
airlines to execute long-term leases to assist in obtaining financing for
terminal and facility construction. Any future requirements for new or
improved airport facilities and passenger terminals at airports at which the
Company's airline subsidiaries operate could result in additional
expenditures and long-term commitments for these subsidiaries. Several
significant projects which affect large airports on US Airways' route system
are discussed below.
US Airways is currently negotiating with the City of Philadelphia to
construct a new international terminal and a new US Airways Express terminal
at Philadelphia International Airport, one of US Airways' connecting hubs
and US Airways' principle international gateway. The new international
terminal would include at least twelve gates for widebody aircraft and new
federal inspection facilities. The new terminal would be connected to the
existing terminal by a moving walkway. The new US Airways Express facility
would be a stand-alone terminal capable of accommodating approximately 30
regional aircraft. The combined cost of the two facilities is estimated at
$340 million with both projects expected to be completed in 2001. An
estimate of the impact on the Company's annual operating costs at
Philadelphia International Airport for the two terminal projects is not
currently available.
In 1993, US Airways and the City of Philadelphia reached an agreement
to proceed with certain capital improvements at Philadelphia International
Airport. These improvements include approximately $136 million in various
terminal renovations and improvements, including the construction of a new
US Airways Club, and $220 million to expand the runway used primarily by
regional aircraft. The Company expects the terminal renovations and
improvements to be completed in 1998. The runway expansion project is not
expected to be completed until late 1999. US Airways expects that its annual
cost of operations at Philadelphia International Airport will increase by
approximately $16 million once construction of both projects is complete,
representing an increase of approximately 35%.
A major portion of the Metropolitan Washington Airport Authority's
capital development program at National was completed in the third quarter
of 1997. The $1 billion program included construction of a new terminal. US
Airways' annual operating expenses at National have increased by
approximately $11 million as a result of higher rent payments associated
with the new facility.
In 1996, US Airways and the Massachusetts Port Authority (MassPort)
reached an agreement to renovate and expand US Airways' terminal facilities
at Boston's Logan International Airport (Logan). MassPort has issued
approximately $49 million of special facilities bonds to finance various
improvements which include renovation and expansion of holdrooms, ticket
counter space, public circulation areas, concessions, baggage processing,
baggage claim areas and the construction of a new US Airways Club. The
terminal expansion project provides approximately 95,000 square feet of
additional space. US Airways is responsible for awarding contracts and
managing the construction. Portions of the project have already been
completed and US Airways expects the remainder of the project to be
completed in June 1998. US Airways anticipates that its annual operating
expenses at Logan will increase by approximately $5 million as a result of
this project.
ITEM 3. LEGAL PROCEEDINGS
US Airways is involved in legal proceedings arising out of certain
aircraft accidents, including an accident in September of 1994 near
Pittsburgh in which 127 passengers and five crew members lost their lives.
With respect to the 1994 accident, the National Transportation Safety Board
(NTSB) held hearings in January and November of 1995, and is scheduled to
hold additional hearings in 1998 before issuing its final accident
investigation report. Wrongful death cases are
17
pending in a consolidated multi-district litigation in U.S. District Court
for the Western District of Pennsylvania, and in state courts in Cook
County, Illinois and Harris County, Texas. While US Airways has settled over
80% of the cases arising from the Pittsburgh accident, it expects that it
will be at least two years before all of the settlements and/or related
litigation are concluded. US Airways is fully insured with respect to this
litigation and, therefore, believes that the litigation will not have a
material adverse effect on the Company's financial condition or results of
operations.
Boeing filed suit against US Airways in September 1997 in state court
in King County, Washington seeking unspecified damages for alleged breach of
two aircraft purchase agreements concerning, respectively, eight B757-200
aircraft and 40 B737-Series aircraft. On October 31, 1997, US Airways filed
an answer and counterclaims to Boeing's complaint denying liability and
seeking recovery from Boeing of approximately $35 million in equipment
purchase deposits. The case is currently in the discovery phase of
litigation. In its initial discovery response, Boeing has quantified its
damage claim at approximately $220 million. The Company is unable to predict
at this time the ultimate resolution or potential financial impact of these
proceedings on the Company's financial condition or results of operations.
In October 1995, US Airways terminated for cause an agreement with In-
Flight Phone Corporation (IFPC). IFPC was US Airways' provider of on-board
telephone and interactive data systems. The IFPC system had been installed
in approximately 80 aircraft prior to the date of termination of the
agreement. On December 6, 1995, IFPC filed suit against US Airways in
Illinois state court seeking equitable relief and damages in excess of $186
million. US Airways believes that its termination of its agreement with IFPC
was appropriate and that it is owed significant damages from IFPC. US
Airways has filed a counterclaim against IFPC seeking compensatory damages
in excess of $25 million and punitive damages in excess of $25 million. In
January 1997, IFPC filed for protection from its creditors under Chapter 11
of the Bankruptcy Code. The parties stipulated to lift the automatic stay
provided for in the Bankruptcy Code which could allow IFPC's and US Airways'
claims to be fully litigated. The Company is unable to predict at this time
the ultimate resolution or potential financial impact of these proceedings
on the Company's financial condition or results of operations.
On July 30, 1996, the Company and US Airways initiated a lawsuit in
U.S. District Court for the Southern District of New York against British
Airways, BritAir Acquisition Corp., Inc., American and American's parent
company, AMR Corp. The Company and US Airways claimed that British Airways,
in pursuit of an alliance with American, is responsible for breaches of
fiduciary duty to the Company and US Airways and violated certain provisions
of the January 21, 1993 Investment Agreement between the Company and British
Airways (the Investment Agreement). The lawsuit also claims that the
defendants have committed violations of U.S. antitrust laws. In response to
the defendants' Motion to Dismiss, the Court sustained US Airways' claims
for breach of contract against British Airways. The Court dismissed the
remaining claims against British Airways and all claims against American. On
February 6, 1998, British Airways filed its answer to the complaint along
with counterclaims against the Company and US Airways. British Airways'
counterclaims alleged that US Airways breached various provisions of the
Investment Agreement and that US Airways breached the Code Share Agreement
between British Airways and US Airways by providing certain allegedly
confidential information to a third party. In addition, British Airways
seeks a declaratory judgment regarding certain payment obligations under its
wet lease arrangement with US Airways. British Airways claimed damages of
$16.7 million for the termination of the code share relationship and an
unspecified amount of damages for its remaining claims. The Company is
unable to predict at this time the ultimate resolution or potential
financial impact of these proceedings on the Company's financial condition
or results of operations.
In May 1995, the Company, US Airways and the Retirement Income Plan for
US Airways, Inc. (the Pilots Pension Plan) were sued in federal district
court for the District of Columbia by 481
18
active and retired pilots alleging that defendants had incorrectly
interpreted the Pilots Pension Plan provisions and erroneously calculated
benefits under the Pilots' Pension Plan. The plaintiffs sought damages in
excess of $70 million. In May 1996, the court issued a decision granting US
Airways' Motion to Dismiss the majority of the complaint for lack of
jurisdiction, deciding that the dispute must be resolved through the
arbitration process under the Railway Labor Act because the Pilots Pension
Plan was collectively bargained. The court retained jurisdiction over one
count of the complaint alleging a violation of a disclosure requirement
under the Employee Retirement Income Security Act. The plaintiffs have
attempted to appeal the district court's dismissal before the U.S. Court of
Appeals for the District of Columbia. In January of 1998, the Court of
Appeals dismissed plaintiff's appeal for lack of jurisdiction because the
lower court order was not final.
In February of 1998 a purported class action complaint was filed by a
travel agency in Puerto Rico against seven major U.S. airlines, including US
Airways. The complaint alleges that the defendant airlines are
undercompensating Puerto Rican travel agents in connection with the agents'
sale of travel. The plaintiffs allege that the airlines are contractually
obligated to pay a 10% commission and that the defendant airlines breached
that contract as a result of the introduction of commission caps limiting
commission payable with respect to a single trip to a stated dollar amount
and reducing certain commissions to 8%. The plaintiffs have stated their
damages for the class in the amount of $150 million. Given the early stage
of this litigation, the Company is unable to predict at this time the
ultimate resolution or potential financial impact of these proceedings on
the Company's financial condition or results of operations.
The City and County of San Francisco have sued a number of San
Francisco International Airport tenants for the recovery of approximately
$18 million of costs incurred with respect to the characterization and
cleanup of soil and groundwater contamination at the airport. The City has
recently identified US Airways as a potentially responsible party, although
the City has not amended the complaint to add US Airways as a defendant
party. The Company is unable to predict at this time the ultimate resolution
or potential financial impact of these proceedings on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
PART II
ITEM 5A. MARKET FOR US AIRWAYS GROUP'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
STOCK EXCHANGE LISTING
US Airways Group's Common Stock, $1 par value (the Common Stock), is
traded on the New York Stock Exchange (Symbol U). On February 27, 1998,
there were approximately 91,646,000 shares of the Company's Common Stock
outstanding held by 27,161 stockholders of record at that date. The holders
reside throughout the United States and in other countries.
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19
MARKET PRICES OF COMMON STOCK
The high and low sale prices ($) of the Company's Common Stock as
reported on the New York Stock Exchange Composite Tape were:
Period High Low
------ ---- ---
1997 Fourth Quarter 65 3/4 39 15/16
Third Quarter 43 1/8 32 7/8
Second Quarter 38 1/4 23 1/8
First Quarter 26 3/4 19 1/4
1996 Fourth Quarter 25 7/8 15 1/4
Third Quarter 19 1/2 15 1/8
Second Quarter 20 3/4 15 7/8
First Quarter 19 3/4 11 3/4
Holders of Common Stock are entitled to receive such dividends as may
be lawfully declared by the Company's board of directors. The Company has
not paid dividends on its Common Stock since the second quarter of 1990. As
of the date of this report, the Company's board of directors had not
authorized the resumption of dividends on the Company's Common Stock and
there can be no assurance when or if such dividend payments will resume.
FOREIGN OWNERSHIP RESTRICTIONS
Under current federal law, non-U.S. citizens cannot own or control more
than 25% of the outstanding voting securities of a domestic air carrier. The
Company believes that it was in compliance with this statute during the time
period covered by this report.
ITEM 5B. MARKET FOR US AIRWAYS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
US Airways Group owns all of US Airways' outstanding common stock, par
value $1 (US Airways Common Stock). US Airways' board of directors has not
authorized the payment of dividends on US Airways' Common Stock since 1988.
Currently, the amount of dividends that US Airways can pay on its
common stock is materially limited by covenants contained in its 10% and 9
5/8% Senior Notes. However, these covenants do not restrict US Airways from
loaning or advancing funds to US Airways Group.
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20
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS - US AIRWAYS GROUP (IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Operating Revenues $8,514 $8,142 $7,474 $6,997 $7,083
Operating Expenses 7,930 7,705 7,153 7,489 7,179
------ ------ ------ ------ ------
Operating Income (Loss) $ 584 $ 437 $ 322 $ (491) $ (96)
Income (Loss) Before
Taxes and Accounting
Change $ 672 $ 275 $ 128 $ (685) $ (349)
Provision (Credit)
for Income Taxes (353) 12 9 - -
------ ------ ------ ------ ------
Income (Loss) Before
Accounting Change 1,025 263 119 (685) (349)
Accounting Change (1) - - - - (44)
------ ------ ------ ------ ------
Net Income (Loss) $1,025 $ 263 $ 119 $ (685) $ (393)
Net Earnings Applicable
to Common Stockholders $ 961 $ 175 $ 34 $ (763) $ (467)
Basic Earnings (Loss)
per Common Share (2)
Before Accounting
Change $12.32 $ 2.73 $ 0.55 $(12.73) $(7.68)
Effect of
Accounting Change - - - - (0.80)
----- ----- ----- ------ -----
$12.32 $ 2.73 $ 0.55 $(12.73) $(8.48)
Diluted Earnings (Loss)
per Common Share (2)
Before Accounting
Change $ 9.87 $ 2.35 $ 0.55 $(12.73) $(7.68)
Effect of
Accounting Change - - - - (0.80)
----- ----- ----- ------ -----
$ 9.87 $ 2.35 $ 0.55 $(12.73) $(8.48)
Cash dividends per
Common Share $ - $ - $ - $ - $ -
CONSOLIDATED BALANCE SHEETS - US AIRWAYS GROUP (IN MILLIONS)
As of December 31,
-------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Total Assets $8,372 $7,531 $6,955 $6,808 $6,878
Long-Term
Obligations (3)(4) $4,142 $4,552 $4,572 $4,699 $4,198
Series B Preferred
Stock (4) $ - $ 213 $ 213 $ 213 $ 213
Common Stockholders'
Equity (Deficit) (4) $ 725 $ (798)$(1,049)$(1,110) $ (426)
Total Stockholders'
Equity (Deficit) (4) $ 725 $ (584) $ (836) $( 897) $ (213)
Shares of Common Stock
Outstanding (5) 91.5 64.3 63.4 61.1 59.2
(1) Cumulative effect of change in method of accounting for
postemployment benefits.
(2) During 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 established new guidelines for calculating
earnings per share. The Company's Earnings (Loss) per Common
Share figures for the years 1993 through 1996 have been
restated to conform with the provisions of SFAS 128.
(3) Includes long-term debt, capital leases, postretirement
benefits other than pensions, noncurrent and outstanding
redeemable preferred stock.
(4) 1996, 1995 and 1994 do not include any effects from deferred
dividends on preferred stock. See Notes 7(a), 7(b) and 8(c)
to the Company's Notes to Consolidated Financial Statements
contained in Part II, Item 8A. of this report for additional
information related to the Company's preferred stock
issuances.
(5) 1997 activity included conversions of preferred stock into
Common Stock. See Notes 7(b) and 8(c) to the Company's Notes
to Consolidated Financial Statements for additional
information.
Note: Numbers may not add or calculate due to rounding.
21
SELECTED OPERATING AND FINANCIAL STATISTICS - US AIRWAYS (1)
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Revenue passengers
(thousands)* 58,659 56,640 56,674 59,495 53,678
Total RPMs
(millions)(2) 41,749 39,220 38,079 38,395 35,529
RPMs (millions)* 41,579 38,943 37,618 37,941 35,221
Total ASMs
(millions)(3) 58,500 57,208 58,678 61,540 59,841
ASMs (millions)* 58,294 56,885 58,163 61,027 59,485
Passenger load
factor* (4) 71.3% 68.5% 64.7% 62.2% 59.2%
Break-even load
factor (5) 66.4% 67.9% 64.9% 67.3% 61.7%
Yield* (6) 17.10c 17.46c 16.66c 15.61c 17.27c
Passenger revenue
per ASM* (7) 12.20c 11.95c 10.78c 9.70c 10.22c
Revenue per ASM (8) 13.50c 13.19c 11.80c 10.59c 11.04c
Cost per ASM (9) 12.33c 12.69c 11.40c 11.02c 11.12c
Average passenger
journey (miles)* 709 688 664 638 656
Average stage length
(miles)* 591 578 560 536 536
Revenue aircraft
miles (millions)* 435 426 444 473 462
Cost of aviation
fuel per gallon (10) 67.47c 70.51c 56.83c 55.79c 60.37c
Cost of aviation fuel
per gallon,
excluding fuel
taxes (11) 61.26c 64.09c 53.23c 53.28c 58.40c
Gallons of aviation
fuel consumed
(millions) 1,129 1,107 1,137 1,205 1,161
Operating aircraft
at year-end 376 390 394 424 441
Full-time equivalent
employees at
year-end 38,533 40,160 39,891 42,399 45,277
* Scheduled service only (excludes charter service).
c cents
(1) Operating statistics include free frequent travelers and the
related miles they flew. Operating statistics exclude
flights operated by US Airways under a wet lease arrangement
with British Airways Plc. (the "wet lease arrangement,"
which ended May 31, 1996). Nonrecurring items and certain
revenues and expenses have been excluded from US Airways'
financial results for purposes of financial statistical
calculation and to provide better comparability between
periods. Nonrecurring items include those items reported as
"nonrecurring items" by US Airways in its various filings
from time-to-time with the U.S. Securities and Exchange
Commission (see Note 12 to US Airways' Notes to Consolidated
Financial Statements). Excluded revenues and expenses
include revenues and expenses associated with US Airways'
capacity purchase arrangements with certain affiliated
airlines and the wet lease arrangement (see Notes 9(a) and
9(b) to US Airways' Notes to Consolidated Financial
Statements for additional information).
(2) Revenue Passenger Miles (RPMs) - revenue passengers
multiplied by the number of miles they flew.
(3) Available Seat Miles (ASMs) - Seats available multiplied by
the number of miles flown (a measure of capacity).
(4) Percentage of aircraft seating capacity that is actually
utilized (RPMs/ASMs).
(5) Percentage of aircraft seating capacity utilized that
equates to US Airways breaking-even at the pre-tax income
level.
(6) Passenger transportation revenue divided by RPMs.
(7) Passenger transportation revenue divided by ASMs (a measure
of unit revenue).
(8) Total Operating Revenues divided by ASMs (a measure of unit
revenue).
(9) Total Operating Expenses divided by ASMs (a measure of unit
cost).
(10) Includes the base cost of aviation fuel, fuel taxes and
transportation charges.
(11) Includes the base cost of aviation fuel and transportation
charges.
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22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL INFORMATION
Certain information contained herein should be considered "forward-
looking information" which is subject to a number of risks and
uncertainties. The preparation of forward-looking information requires the
use of estimates of future revenues, expenses, activity levels and economic
and market conditions, many of which are outside the Company's control.
Among the specific factors that could cause actual results to differ
materially from those set forth in the forward-looking information are the
following: economic conditions, labor costs, aviation fuel costs,
competitive pressures on pricing particularly from lower-cost competitors,
weather conditions, government legislation, consumer perceptions of the
Company's products, demand for air transportation in the markets in which
the Company operates and other risks and uncertainties listed from time to
time in the Company's reports to the United States Securities and Exchange
Commission (SEC). Other factors and assumptions not identified above are
also involved in the preparation of forward-looking information, and the
failure of such other factors and assumptions to be realized may also cause
actual results to differ materially from those discussed. The Company
assumes no obligation to update such estimates to reflect actual results,
changes in assumptions or changes in other factors affecting such
estimates.
Except where noted, the following discussion relates primarily to the
results of operations, financial condition and future prospects of US
Airways. US Airways is the Company's principal operating subsidiary,
accounting for approximately 92% of the Company's operating revenues for
1997 (on a consolidated basis). US Airways' financial results include the
financial results of its wholly-owned subsidiary USAM Corp. (USAM).
FINANCIAL OVERVIEW
For 1997, the Company's operating revenues were $8.51 billion,
operating income was $584.3 million, net income was $1.02 billion and
earnings per common share (EPS) was $12.32 for basic and $9.87 for diluted.
The Company's financial results for 1997 include $466.9 million resulting
from the recognition of a deferred tax asset (see "Recognition of Deferred
Tax Asset" below), pre-tax gains totaling $179.6 million which resulted
from USAM's sale of certain investments (see "USAM Investments" below) as
well as certain other nonrecurring items. See "Results of Operations" below
for additional information.
The Company recognized net income of $263.4 million in 1996 and $119.3
million in 1995. The Company's financial results for 1997, as well as the
net income improvement realized by the Company over the last three years,
are primarily attributable to relatively favorable domestic economic and
industry conditions, overall favorable capacity and pricing trends in
markets served by the Company's airline subsidiaries, improved operating
performance, recent marketing efforts and the positive influence of certain
revenue enhancement and cost-reduction initiatives.
NEW STRATEGIC FOUNDATION
The Company now has in place a new strategic foundation on which it
can move forward with achieving its long-term strategic objective of
establishing US Airways as a competitive global airline: a new labor
contract between US Airways and its pilots; an agreement with a subsidiary
of Airbus Industrie G.I.E. (Airbus) to purchase up to 400 new aircraft; an
expanded and substantially improved line of products, including new
international service, a new international business class, a new low cost,
low fare product to be launched this Summer and new regional jet service on
certain routes operated by US Airways Express; and, a contract with The
SABRE Group (TSG) that is expected to provide substantial long-term cost
savings and enhancements
23
with respect to the Company's information services requirements.
A new five-year labor contract between US Airways and its pilots
became effective January 1, 1998. This contract includes various provisions
which the Company believes will help US Airways to address its high cost
structure, including linking the compensation of US Airways' pilots to the
compensation of pilots at several other major domestic air carriers. The
new contract also includes provisions which allow US Airways to launch a
low cost, low fare product. As discussed under "Current Competitive
Position," US Airways has faced significant pressure in certain markets
from competitors with lower cost structures. US Airways has recently
announced that its low cost, low fare product, "MetroJet," will begin
operations on June 1, 1998 (see below). The major provisions of US Airways'
new contract with its pilots are presented in Part I, Item 1. of this
report under "Business/Employees."
In October 1998, the Company is scheduled to take delivery of the
first of 124 new aircraft the Company has on firm order with Airbus. Six
Airbus aircraft are scheduled for delivery in the fourth quarter of 1998,
20 in 1999 and 98 in the years 2000 through 2002. The Company's aircraft
purchase agreement with Airbus also includes 116 aircraft subject to
reconfirmation prior to scheduled delivery and options for 160 additional
aircraft. These new aircraft, all of which are members of Airbus' A320
family of single-aisle aircraft, include the A319, A320 and A321. The
Company anticipates that the new Airbus aircraft will ultimately replace,
at a minimum, US Airways' B737-200, DC-9-30 and MD-80 aircraft. The Company
has also entered into an agreement with CFM International, Inc. (CFMI) for
jet engines to power the new Airbus aircraft. As part of its agreement with
CFMI, GE Engine Services, Inc. will maintain these engines under an up to
20-year agreement.
The Airbus aircraft are more fuel-efficient, less costly to maintain,
have greater range capabilities and are expected to provide certain
customer service benefits over the aircraft they are intended to replace.
However, certain expenses such as interest expense, depreciation and
aircraft rent expense are likely to increase in conjunction with the higher
ownership and/or rental costs associated with the new aircraft. In
addition, the Company is currently unable to determine whether US Airways
will be required to recognize an "impairment charge" related to aircraft
that will be retired because certain information required for the analysis
is currently undetermined (e.g., aircraft retirement dates). See "Results
of Operations" below for additional information about impairment charges.
See also "Liquidity and Capital Resources" below for additional information
related to the Company's aircraft purchase commitments.
In December 1997, US Airways launched an improved international
business class product called "Envoy Class." US Airways added a second
Philadelphia-Paris flight during Summer 1997 and announced new service from
Charlotte and Philadelphia to London's Gatwick Airport and from Philadelphia
to Amsterdam beginning in Spring 1998. US Airways' transatlantic capacity
(as measured by available seat miles or ASMs) for 1997 was 35.4% greater
than for 1996 and has more than doubled from 1995 levels. US Airways
continues to explore additional international opportunities.
US Airways has announced that MetroJet will begin operations on June
1, 1998. MetroJet is expected to provide US Airways with a cost-effective
response to Southwest Airlines Co. (Southwest), Delta Express, the low cost
product offered by Delta Air Lines, Inc. (Delta), and other low cost, low
fare competition. MetroJet will initially operate five B737-200 aircraft
from Baltimore/Washington International Airport to Cleveland, Providence,
Ft. Lauderdale and Manchester (New Hampshire). The Company's growth plans
for MetroJet include MetroJet operating up to 20 aircraft by the end of
1998. See also "Current Competitive Position" below.
On December 30, 1997, the Company purchased Shuttle, Inc. (Shuttle).
Shuttle, which operates under the trade name "US Airways Shuttle,"
currently provides high frequency service
24
from New York to Boston and Washington. Shuttle owns twelve B727-200
aircraft (see also "Liquidity and Capital Resources" below). The Company
has recently announced plans to add US Airways' Boston-Washington service
to its US Airways Shuttle product in Spring 1998.
US Airways has announced a major expansion and improvements of its
facilities at Philadelphia, including a new international terminal and a
new facility for US Airways Express operations. Philadelphia International
Airport is US Airways' primary international gateway.
In December 1997, US Airways entered into an agreement with TSG under
which TSG assumed responsibility, as of January 1, 1998, for substantially
all of US Airways' information technology requirements. The agreement with
TSG is expected to result in substantial information system enhancements
and efficiencies, particularly in the areas of reservations, passenger
check-in, yield management and aircraft and crew scheduling. Under the
terms of the agreement, TSG purchased US Airways' information systems and
related assets. On January 1, 1998, in conjunction with US Airways'
agreement with TSG, 670 US Airways information services employees took
positions with TSG and TSG assumed management and operation of US Airways'
data processing facilities, data and voice networks and substantially all
other information technologies activities.
TSG and US Airways are engaged in the conversion of the information
technologies services previously provided by US Airways on its own behalf
to similar information technology services of TSG, including the transfer
of data processing activities to TSG's data processing facilities. The
conversion efforts are expected to be substantially completed by April
1999. If these conversion efforts result in operational difficulties or are
unsuccessful, the Company's operations, results of operations and financial
condition could be adversely affected. Under the terms of US Airways'
agreement with TSG, TSG has also assumed responsibility for US Airways'
Year 2000 compliance efforts (see "Other Information" below for additional
information).
Decreases in Personnel costs resulting from the transfer of employees
to TSG are expected to be offset by higher outside services expenses,
including expenses related to conversion efforts. See "Liquidity and
Capital Resources" below for additional information related to US Airways'
agreement with TSG.
CURRENT COMPETITIVE POSITION
US Airways' foremost competitive threat continues to be the growth of
low cost, low fare competition in its primary operating region, the Eastern
United States. Currently, approximately 84% of US Airways' departures and
approximately 56% of its capacity (ASMs) are located within this region. US
Airways' estimated origin/destination passenger overlap with low cost, low
fare competition is approximately 47% of its traffic base as of February
1998 as compared to approximately 50% as of April 1997 and approximately
49% as of March 1996. The lower overlap exhibited in February 1998 is due
primarily to schedule changes implemented by US Airways, including those
resulting from the efficiency measures announced in May 1997 (see
discussion below).
Prior to fourth quarter 1996, the primary low cost, low fare
competition confronted by the Company's airline subsidiaries included
Southwest and a number of smaller, start-up air carriers. Southwest has
steadily increased operations within the Eastern U.S. since first offering
service in this region in late 1993. In October 1996, however, Delta, a
major air carrier which was itself experiencing pressure from low cost, low
fare competition, launched a low-cost product called "Delta Express." Delta
Express currently operates 25 aircraft in predominantly Eastern U.S.
markets. Delta recently announced that it will assign additional aircraft
to its Delta Express unit in May 1998.
25
Direct competition with low cost, low fare competition has typically
resulted in the dilution of yield realized by the Company's airline
subsidiaries. US Airways' Northeast-Florida service has been particularly
affected by low cost, low fare competition. US Airways has the highest unit
operating cost (operating cost per ASM or cost per ASM) of all major
domestic air carriers. US Airways' cost per ASM was 12.33 cents for 1997. By
contrast, Southwest reported unit operating costs for 1997 of 7.40 cents.
Although Delta reported an overall unit operating cost of 8.78 cents for its
fiscal year 1997, its Delta Express product is purported to have a unit
operating cost of approximately 7.50 cents. As mentioned above under "New
Strategic Foundation," US Airways will launch its own competitive response
to the low cost, low fare threat, MetroJet, on June 1, 1998. The Company
believes that MetroJet will help US Airways to effectively compete against
low cost, low fare competitors and enhance the Company's current product
mix, particularly with respect to predominantly leisure markets such as
Northeast-Florida.
In May 1997, US Airways announced certain efficiency measures
including retiring 22 aircraft from its operating fleet, including the last
five F28-4000 aircraft and 17 older DC-9-30 aircraft (all of these aircraft
had been retired by the end of February 1998), ending unprofitable service
to nine cities and eliminating other routes that had not been profitable
(completed during early September 1997) and closing a flight crew base
(February 1998), two reservations centers (October 1997) and three
maintenance facilities (by September 1998). The Company recognized certain
nonrecurring charges as a result of these actions. In September 1997,
US Airways decided to retire its remaining DC-9-30 aircraft earlier than
previously planned resulting in an additional nonrecurring charge
(nonrecurring charges are discussed under "Results of Operations" below).
Excluding any additional impairment charges (see "New Strategic Foundation"
above), US Airways anticipates that deliveries of new Airbus aircraft will
mitigate the effects of DC-9-30 retirements on its financial results and
capacity. The Company has been working closely with union leaders and
employee groups to minimize to the greatest degree possible the impact of
changes in operations on affected employees. The Company expects these
efficiency measures will ultimately result in the furlough of approximately
750 US Airways employees.
The Company believes that US Airways' new contract with its pilots and
the introduction of new aircraft into US Airways' operating fleet will help
to improve US Airways' competitive position in the marketplace,
particularly in markets where US Airways faces low cost, low fare
competition.
CERTAIN OWNERSHIP MATTERS
On March 26, 1997, the Company paid dividends totaling $34.8 million
to the holders of its Series A, Series F and Series T Preferred Stock and
the Company's board of directors declared dividends of $46.6 million on the
Company's Series B Preferred Stock (see Notes 7(a), 7(b) and 8(c) to the
Company's Notes to Consolidated Financial Statements contained in Part II,
Item 8A. for additional information related to the Company's preferred
stock issuances). After payment of the Series B Preferred Stock dividends
in May 1997, the Company had paid all dividends in arrears (including
penalty dividends on the deferred dividends) and had resumed regular
quarterly dividend payments on all of its outstanding preferred stock
issuances.
In May 1997, British Airways Plc. (British Airways) converted
28,059.364 shares of Series F Preferred Stock into 14,458,851 shares of
Common Stock, which it then sold to third parties. Also in May 1997, the
Company repurchased the remaining shares of Series F Preferred Stock and
all of the Series T Preferred Stock (both series were held exclusively by
British Airways). The Company's board of directors declared regular
quarterly dividends on the Series F and Series T Preferred Stock prior to
the conversion and repurchase transactions. After the conversion and
repurchase transactions, the Company believes that British Airways held no
ownership interest in US Airways Group (see also "Liquidity and Capital
Resources" below).
26
In August 1997, the Company exchanged its Series A Preferred Stock for
Series H Senior Cumulative Convertible Preferred Stock (Series H Preferred
Stock). The Series A Preferred Stock was, and the Series H Preferred Stock
is, owned by affiliates of Berkshire Hathaway, Inc. (Berkshire Hathaway).
The provisions of the Series H Preferred Stock are substantially similar to
those of the Series A Preferred Stock. The exchange transaction facilitated
the redemption of the Series B Preferred Stock (as discussed below).
On August 18, 1997, the Company notified the holders of its Series B
Preferred Stock that it would redeem all 4,263,000 outstanding depositary
shares representing Series B Preferred Stock on September 15, 1997 at
$51.75 per share plus accrued dividends of $0.3646 per share. Because
conversion into Common Stock was financially advantageous to the holders,
all but approximately 6,000 depositary shares were converted prior to the
redemption date resulting in the issuance of 10.6 million shares of Common
Stock (see also "Liquidity and Capital Resources" below).
In January 1998, the Company announced plans to purchase up to 2.3
million shares of its Common Stock from time-to-time in open market or
privately negotiated transactions. This program was authorized by the
Company's board of directors in conjunction with US Airways' agreement to
provide up to 2.3 million stock options to its pilots in 1998. In February
1998, the Company's board of directors announced certain actions aimed at
increasing shareholder value, including the purchase from time-to-time in
open market or privately negotiated transactions of up to $500 million of
the Company's Common Stock (in addition to the previously announced plan),
the call for redemption of the Series H Preferred Stock (in February 1998,
the Company notified Berkshire Hathaway of its intention to redeem the
Series H Preferred Stock on March 15, 1998; see below) and the retirement of
certain debt obligations totaling approximately $380 million. During late
February 1998, US Airways retired early certain debt obligations with a
combined principal amount of $76.1 million (the transactions resulted in an
immaterial net gain). US Airways expects to retire its 10% Senior Notes,
which have a face amount of $300 million, during early Summer 1998.
Retirement of the 10% Senior Notes is expected to result in an extraordinary
loss on early debt extinguishment of approximately $15 million.
On March 12, 1998, Berkshire Hathaway exercised its right to convert
the Series H Preferred Stock into 9.2 million shares of the Company's Common
Stock. The Company subsequently retired its Series H Preferred Stock.
With the retirement of all of the Company's preferred stock, the
Company has been relieved of annual dividends of approximately $79 million.
Annual interest payments associated with the debt obligations retired early
or to be retired early under the aforementioned program total approximately
$37 million.
USAM INVESTMENTS
On July 30, 1997, Galileo International, Inc. (Galileo) completed an
initial public offering (IPO) and used the proceeds, together with the
proceeds of bank financing, to purchase Apollo Travel Services Partnership
(ATS). USAM owned approximately 21% of ATS. Immediately preceding the IPO,
Galileo International Partnership (GIP) was merged with and into a wholly-
owned limited liability company subsidiary of Galileo and USAM received
shares in Galileo in the same proportion as its partnership interest in
GIP. As part of the IPO, USAM sold some of its Galileo shares, and its
interest in Galileo was reduced from 11% to approximately 6.7%. USAM
received proceeds of $62.2 million and recognized a pre-tax gain of
approximately $50 million from the sell-down of its interest in Galileo and
received proceeds of $162.0 million and recognized a pre-tax gain of
approximately $130 million in connection with the sale of its interest in
ATS.
27
USAM applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," to account for its remaining investment in Galileo. The
resulting adjustment to Stockholders' Equity (Deficit) to reflect the
increase in the fair value of USAM's Galileo investment over its carrying
cost is reflected in the Company's balance sheet line item "Unrealized gain
on available-for-sale securities, net of income tax effects" (see Note 8(f)
to the Company's Notes to Consolidated Financial Statements, which are
contained in Part II, Item 8A. of this report).
See Part I, Item 1. "Business/Computerized Reservation Systems" for
related information.
RECOGNITION OF DEFERRED TAX ASSET
During the fourth quarter of 1997, the Company recognized income tax
benefits of $466.9 million. These tax benefits, which are reflected in the
line item, "Provision (Credit) for Income Taxes" on the Company's
Consolidated Statements of Operations, stem primarily from net operating
losses and other tax credits generated in prior years. The Company
recognized these tax benefits for financial reporting purposes based on its
expectations of future earnings levels and the fact that certain of these
tax benefits don't expire or will be realized in future periods
irrespective of future earnings levels. As of December 31, 1997, the
Company believes that it is more likely than not that these tax benefits
will be fully utilized in future periods.
As a result of recognizing these tax benefits in 1997, the Company's
future effective income tax rate will be higher than the effective income
tax rate for 1997 and earlier years. For 1998, the Company's effective
income tax rate for financial reporting purposes is expected to be
approximately 41% although the actual rate at which the Company expects to
pay income taxes is estimated at 20% to 25% (the actual rate is expected to
remain within this range until the Company has utilized a significant
portion of the accumulated income tax benefits).
See Note 3 to the Company's Notes to Consolidated Financial Statements
for additional information, including the components of the Company's
deferred income tax assets and liabilities.
OTHER INFORMATION
The Company is currently operating computer software applications and
systems that are not Year 2000 compliant to support important business
applications, including reservations, accounting and flight operations
systems. If these software applications and systems are not made Year 2000
compliant, the Company could suffer a material adverse effect on its
operations, results of operations and financial condition. As part of the
Company's long-term information technology relationship with TSG (as
discussed in "New Strategic Foundation" above), many of these software
applications and systems are being replaced by new software applications
and systems that are expected to provide significant operational and other
benefits, in addition to being Year 2000 compliant. TSG has agreed, with
respect to each US Airways software application and system that is neither
Year 2000 compliant nor being replaced, to modify such software application
or system such that it is Year 2000 compliant. The Company currently
expects to spend approximately $25 million to modify these software
applications and systems. The Company believes that it will be able to
achieve Year 2000 compliance by the end of 1999, or earlier where
necessary. Notwithstanding the foregoing, the Company cannot assure that
its Year 2000 compliance program will successfully correct all Year 2000-
related problems. Additionally, the Company exchanges information
electronically with a number of other parties, including computer
reservation systems that provide reservations services for the majority of
the Company's customers. The Company is engaging in contact with these
other parties to determine the effect of their Year 2000 compliance status
on the Company's operations.
28
US Airways' labor contracts with all of its non-pilot unionized
employees are currently amendable. US Airways is unable to determine when
new agreements with these employees will be reached or the final terms and
conditions of any new contracts. See Part I, Item 1. "Business/Employees"
for additional information related to the Company's workforce, including US
Airways' labor contracts.
On September 24, 1997, US Airways announced that it reduced the rates
for base commissions paid to travel agencies from 10% of ticket price to 8%
on all domestic and international tickets issued by travel agents in the
U.S., Puerto Rico, the U.S. Virgin Islands and Canada. US Airways' existing
maximum payment of $25 one-way and $50 round-trip for tickets purchased in
the U.S. and Puerto Rico for travel in and between the U.S., Puerto Rico,
the U.S. Virgin Islands and Canada remains unchanged.
During October 1997, the U.S. Department of Transportation (DOT)
awarded takeoff and landing rights ("slots") at New York's LaGuardia
Airport (LaGuardia) and at Chicago's O'Hare International Airport to
several low cost, low fare air carriers. The DOT awarded the slots as part
of new policies designed to increase competition at certain high-traffic
domestic airports. Previously, slots at such airports (which also includes
New York's John F. Kennedy International Airport and Washington's Ronald
Reagan Washington National Airport (National)) were only available through
purchase or lease from another air carrier. US Airways and Shuttle hold a
considerable number of slots at such airports, primarily at LaGuardia and
National. The recent awards were minimal and are not expected to have a
material adverse impact on the Company's results of operations or financial
condition.
There are several proposals before Congress which would address
service to small and medium-size airports. Most notable is a bill which
would, among other things, confiscate slots from the major air carriers at
the four high-density airports mentioned in the preceding paragraph and
auction them off to other air carriers. The Company has testified in
opposition to such a plan. Adoption of such a plan could force a reduction
in US Airways' or Shuttle's flights from LaGuardia and National and could
have an adverse effect on the Company's results of operations and financial
condition.
On August 5, 1997, President Clinton signed legislation extending
federal excise taxes on air transportation (the "ticket tax") from October
1, 1997 through September 30, 2007. In addition, effective October 1, 1997,
the legislation reduced the domestic ticket tax from the prior level of 10%
of fare to 9.0% (decreasing to 8.0% on October 1, 1998 and to 7.5% on
October 1, 1999), added a new segment tax of $1.00 (which increases to
$3.00 by the year 2002), changed the current $6.00 international departure
tax to $12.00 and added a $12.00 international arrival tax. The legislation
also added a new 7.5% tax effective October 1, 1997 on certain purchases of
frequent traveler program miles from domestic air carriers. The Company
does not believe that the new ticket tax structure has had a material
adverse effect on its results of operations or financial condition.
The Company and its subsidiaries are subject to a wide range of
government regulation. Besides taxes on income, property and aviation fuel,
the Company's airline subsidiaries are subject to numerous safety,
maintenance and environmental related mandates. The Company's airline
subsidiaries also collect various taxes from their customers, such as the
ticket tax (see above), and pass through the collected amounts to the
appropriate governmental agencies. Such taxes, even though not expenses for
the Company, are an additional cost for the Company's customers. Increases
in such taxes can be detrimental to demand for air transportation and
decreases can have a stimulative effect on demand. In addition, especially
in regards to international operations and certain high-traffic domestic
airports (see above), the Company's airline subsidiaries are subject to
certain restrictions on when and where they can operate. Changes in
government regulation can have a material impact on the Company's results
of
29
operations and financial condition. Besides the effect of additional taxes
on the Company's results of operations and financial condition, the
Company's financial performance can be materially affected by the ability
of the Company to pass through such additional expenses to its customers.
Additional information related to government regulation can be found in
Part I, Item 1. of this report under "Business/Industry Regulation and
Airport Access."
As detailed in Note 6(c) to the Company's Notes to Consolidated
Financial Statements, litigation between US Airways and The Boeing Company
(Boeing) continued into 1998. During September 1997, Boeing filed suit
against US Airways seeking unspecified damages for alleged breach of two
aircraft purchase agreements concerning eight B757-200 aircraft and 40
B737-Series aircraft. US Airways subsequently filed an answer and
counterclaim to Boeing's complaint denying liability and seeking recovery
from Boeing of approximately $35 million in equipment purchase deposits and
past overcharges. The Company is unable to predict the timing or eventual
outcome of this litigation.
RESULTS OF OPERATIONS
The following section pertains to activity included in the Company's
Consolidated Statements of Operations (which are contained in Part II, Item
8A. of this report) and changes in select US Airways operating and
financial statistics (see Part II, Item 6. of this report). Except where
noted, operating statistics referred to in this section are for scheduled
service only.
1997 COMPARED WITH 1996
Operating Revenues-US Airways' Passenger transportation revenues increased
$312.6 million (4.6%) as the result of a 6.8% increase in revenue passenger
miles (RPMs) partially offset by a 2.1% decrease in yield. The main factors
contributing to the improved performance are discussed above. The Company
estimates that severe winter weather within the Eastern U.S. and a partial
shutdown of the federal government adversely affected first quarter 1996
revenues by approximately $55 million. Inclement weather (hurricanes)
during the third quarter of 1996 is estimated to have adversely affected
Passenger transportation revenues by approximately $10 million. Cargo and
freight revenues increased due primarily to volume factors. Other revenues
for 1996 included $12.6 million related to a wet lease arrangement between
US Airways and British Airways (see also Other, net below and "1996
Compared With 1995" below for additional information).
Operating Expenses-The Company recognized certain nonrecurring items during
both 1997 and 1996. The table below shows where these nonrecurring items
were recorded in the Company's Consolidated Statements of Operations (in
millions; brackets indicate expense).
1997 1996
---- ----
Operating Expenses
Personnel costs $(121.9) $ -
Aircraft rent 1.5 22.5
Other rent and landing fees (4.6) -
Aircraft maintenance - 7.0
Depreciation and amortization (89.1) -
----- ----
(214.1) 29.5
Other Income (Expense)
Gains on sales of interests in affiliates 179.6 -
----- ----
179.6 -
----- ----
Net amount reflected in Income Before Taxes $ (34.5) $ 29.5
===== ====
30
Except for a $115.0 million charge recognized in Personnel costs and
the $1.5 million credit to Aircraft rent, the nonrecurring items recorded
in 1997 in operating expenses relate to certain efficiency measures
announced during May 1997 (see "Current Competitive Position" above) and
certain impairment charges recorded in the third quarter (see below). The
$115.0 million charge was recognized in the fourth quarter of 1997 in
accordance with SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
(SFAS 88) and relates to an early retirement program offered to US Airways'
pilots. The Company expects 325 pilots to opt for early retirement under
this program. This program is expected to result in significant net long-
term savings in both wages and benefits expenses. The credit to Aircraft
rent was recognized in conjunction with US Airways' subleasing an
additional BAe-146 aircraft. During 1994, US Airways accrued a substantial
portion of the future rent obligations related to its parked BAe-146
aircraft. The remaining Personnel costs charge relates to severance
accruals and the charge to Other rent and landing fees reflects the accrual
of lease obligations at certain facilities abandoned or to be abandoned
(net of any anticipated sublease revenues).
A majority of the nonrecurring items recorded in Depreciation and
amortization stem from analyses performed in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of" (SFAS 121). In general, SFAS 121
requires an "impairment charge" to be recognized when the estimated net
undiscounted future cash flows from an asset's use (including any
anticipated proceeds from disposition) are less than the asset's current
book value and the asset's current book value exceeds its fair value. The
impairment charge reflects writing-down the assets to fair value. The
elements of the charge to Depreciation and amortization include an $18.1
million impairment charge associated with US Airways' retirement of 17 DC-
9-30 aircraft as the result of the May 1997 efficiency measures and a $59.3
million impairment charge resulting from US Airways' late-September 1997
decision to retire its remaining DC-9-30 aircraft over the next several
years. US Airways suspended its DC-9-30 "hush-kit" program in conjunction
with its decision to retire this fleet-type. The remaining components of
the Depreciation and amortization charge relate to the May 1997 efficiency
measures, including amounts related to owned facilities which have been or
will be abandoned and the write-down of certain equipment to be disposed
of.
Gains on sales of interests in affiliates resulted from USAM's sale of
certain investments, as discussed above under "USAM Investments."
The two nonrecurring items recognized in 1996 related to US Airways'
subleasing of eleven BAe-146 aircraft-a credit of $22.5 million recorded in
Aircraft rent (reversal of previously accrued lease obligations) and a
credit of $7.0 million recorded in Aircraft maintenance (reversal of
previously accrued lease return provisions). US Airways also recorded a
similar credit of $4.1 million to Aircraft rent during 1995 related to
these aircraft.
Excluding the SFAS 88 charge recognized in 1997 (see above) and profit
sharing expenses totaling $121.6 million recorded during 1996, Personnel
costs were relatively unchanged. The profit sharing expenses recognized
during 1996 were associated with US Airways' 1992 Salary Reduction Program
(there were no similar expenses during 1997). The Company's defined benefit
pension and postretirement benefit expenses decreased due primarily to
higher interest rates (discount factors) used for 1997 calculations.
Medical and dental expenses were marginally higher year-over-year. Expenses
associated with stock appreciation rights (SARs) were $33.2 million for
1997 and $41.6 million for 1996 (see Note 8(e) to the Company's Notes to
Consolidated Financial Statements for information related to the Company's
stock-based compensation arrangements).
US Airways' new labor contract with its pilots provides for certain
lump sum payments and stock options. US Airways will recognize expenses for
the lump sum payments to its pilots,
31
which are expected to total approximately $20 million, as an element of
Personnel costs in the period in which they are earned. Any personnel
expenses associated with the stock options granted under the new contract
would be recognized over the vesting period of the grant and be dependent
upon the exercise price of each grant.
Commissions expenses increased marginally year-over-year, but
decreased 8.2% during fourth quarter 1997 as compared to fourth quarter
1996 due primarily to a revised commission rate structure established
during September 1997 (see "Other Information" above). Excluding the
effects of nonrecurring items (see above), Aircraft rent increased due
primarily to net rent expense adjustments totaling $15.1 million recorded
during 1997 related to certain F28-4000 aircraft. Other rent and landing
fees were relatively unchanged if the effects of the nonrecurring items
(see above) are excluded. Aircraft maintenance expenses increased due
primarily to an increase of approximately $23 million in unserviceable
(scrap) Pratt & Whitney JT8D engine parts, other adjustments to spare parts
totaling approximately $13 million with a majority of the remaining
increase attributable to certain timing factors associated with the "power-
by-the-hour" jet engine maintenance contracts US Airways entered into
during the fourth quarters of both 1997 and 1996 and increases in the cost
of certain JT8D jet engine parts. US Airways signed a ten-year power-by-
the-hour maintenance agreement with Rolls Royce Canada Limitee during
December 1997 covering jet engines originally manufactured by Rolls Royce
Plc. US Airways entered into a similar ten-year agreement with the General
Electric Company (GE) during fourth quarter 1996 for US Airways' GE-
manufactured jet engines (see also "1996 Compared With 1995" below). As
discussed in "New Strategic Foundation" above, the Company has also entered
into a power-by-the-hour maintenance agreement which will cover the jet
engines that will accompany the new Airbus aircraft. The Company believes
that these maintenance contracts will provide substantial long-term savings
over otherwise expected levels of maintenance costs. 1996 activity included
a nonrecurring expense credit (see above). Depreciation and amortization
decreased 1.5% if nonrecurring items (see above) are excluded. Other, net
includes expenses totaling $35.6 million recorded during the fourth quarter
of 1997 related to US Airways' new information technology management
agreement with TSG (see discussion in "New Strategic Foundation" above).
Also, US Airways experienced increases in certain sales and traffic-related
expenses (most notably, credit card expenses). Other, net for 1996 included
expenses of $12.6 million associated with US Airways' wet lease arrangement
with British Airways (see Other revenues above and "1996 Compared With
1995" below).
Other Income (Expense)-Equity in earnings of affiliates decreased as USAM
discontinued applying the equity method of accounting for certain of its
investments after July 1997. The amount recorded in Gains on sales of
interests in affiliates is related to USAM's sale of certain investments,
as discussed in "USAM Investments" above. Other, net activity in 1997
included $18.0 million related to US Airways' sale of eleven nonoperating
aircraft. In 1996, Other, net included losses totaling $8.7 million related
to US Airways' sale of eight nonoperating aircraft and $9.5 million expense
related to US Airways' settlement of litigation involving travel agencies.
Provision (Credit) for Income Taxes-During the fourth quarter of 1997, the
Company recognized certain tax benefits totaling $466.9 million. See
"Recognition of Deferred Tax Asset" above.
Earnings per Common Share-During the third quarter of 1997, most of the
Series B Preferred Stock was converted into 10.6 million shares of Common
Stock. During the second quarter of 1997, most of the Series F Preferred
Stock was converted into 14.5 million shares of Common Stock. For full-year
1997, on a weighted average basis, these transactions had the effect of
increasing shares of Common Stock outstanding by 12.6 million shares.
The Company adopted SFAS No. 128, "Earnings per Share" (SFAS 128)
during 1997. The Company's EPS figures for 1996 have been restated to
conform with the provisions of
32
SFAS 128. The implementation of SFAS 128 did not have a material impact on
the Company's EPS disclosures. See Note 1(n) to the Company's Notes to
Consolidated Financial Statements for additional information related to the
Company's EPS calculations.
Select US Airways Operating and Financial Statistics-Yield decreased 2.1%,
but the related effects on US Airways' Passenger transportation revenues
were more than offset by a 6.8% increase in RPMs. The yield decrease is
primarily attributable to increased competitive pressures year-over-year
(see "Current Competitive Position" above) and matters related to the
ticket tax (see "Other Information" above). An increase in US Airways'
average passenger journey also negatively affected yield. US Airways
selectively increased fares in certain markets up to 5% in both March and
September 1997.
US Airways' unit operating cost decreased slightly primarily due to a
2.3% increase in total capacity (nonrecurring items, which are discussed
above, are excluded from calculations of unit operating cost). The capacity
(ASMs) increase is primarily the result of higher aircraft utilization
rates during 1997 partially offset by fewer operating aircraft in US
Airways' fleet during 1997. Aircraft utilization was adversely affected by
inclement weather during both the first and third quarters of 1996 (see
also Passenger transportation revenues above). During fourth quarter 1997,
as compared to fourth quarter 1996, however, capacity decreased 4.2% as the
result of schedule changes implemented during third quarter 1997 (see
"Current Competitive Position" above). As disclosed in a Current Report on
Form 8-K filed with the SEC on January 21, 1998, US Airways' capacity is
expected to decrease approximately 2.4% and its unit operating cost is
expected to increase approximately 2.0% for 1998 as compared to 1997 (the
unit operating cost estimate is based on an average aviation fuel cost of
62.50 cents per gallon for 1998).
Although the average price of aviation fuel per gallon decreased
during 1997, especially during fourth quarter 1997, aviation fuel prices
are subject to market conditions and other factors that are generally
outside of the Company's control. Fluctuations in the price of aviation
fuel can have a dramatic effect on the Company's results of operations.
Supplemental Information-In June 1997, the Financial Accounting Standards
Board (FASB) adopted SFAS No. 130, "Reporting Comprehensive Income," (SFAS
130) and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (SFAS 131). In February 1998, the FASB adopted SFAS
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" (SFAS 132). SFAS 130 establishes standards for the reporting and
presentation of comprehensive income and its components in financial
statements. SFAS 131 establishes standards for defining operating segments
and the reporting of certain information regarding operating segments. SFAS
132 establishes revised disclosure requirements with respect to employer
pension and benefit plans. The Company does not believe that its adoption
of these standards will have an effect on the Company's results of
operations, liquidity or financial condition. All three standards pertain
to disclosure requirements and do not effect amounts reported in the
Company's consolidated financial statements. Once the Company has
determined its reporting obligations under the new standards, the necessary
information will be disclosed as part of the Company's financial reporting
in the appropriate period.
1996 COMPARED WITH 1995
Operating Revenues-US Airways' Passenger transportation revenues increased
$531.7 million, or 8.5%, with the remainder of the $622.3 million increase
attributable to passengers carried by the Company's regional airline
subsidiaries. US Airways' increase is primarily the result of a 4.8%
increase in yield and a 3.6% increase in average passenger journey. The
main factors which contributed to the Company's improved performance during
1996 include relatively favorable domestic economic conditions, overall
favorable capacity and pricing trends in markets served by the Company's
airline subsidiaries and the positive influence of certain revenue
enhancement
33
initiatives. The Company estimates that severe winter weather within the
Eastern U.S. and a partial shutdown of the federal government adversely
affected first quarter 1996 revenues by approximately $55 million.
Inclement weather (hurricanes) during the third quarter of 1996 is
estimated to have adversely affected Passenger transportation revenues by
approximately $10 million. The Company's airline subsidiaries faced intense
competitive pressure from Continental Airlines, Inc.'s low cost product,
"Continental Lite" during early 1995 (see discussion related to low cost,
low fare competition in "Current Competitive Position" above). Other
revenues decreased due primarily to wet lease revenues falling to $12.6
million for 1996 from $63.6 million for 1995 (see also Aircraft rent and
Other, net below).
Operating Expenses-Profit sharing expenses, the impact of adding a SAR
feature to one of the Company's stock option plans, interest rate driven
increases in pension and postretirement benefits expenses, contractual wage
increases that US Airways' pilot and flight attendant employee groups
received in January 1996 and wage increases received by certain non-
contract employees effective January 1, 1996 were the primary factors which
resulted in the Company's Personnel costs increasing 10.7% year-over-year.
US Airways' mechanics and pilots also received contractual wage increases
in March 1995 and July 1995, respectively. The Company recorded profit
sharing expense related to its 1992 Salary Reduction Plan of $121.6 million
in 1996 versus $49.7 million in 1995. The Company's obligations under this
plan ended with a payment to participants in early March 1997. The Company
recognized expenses of $41.6 million related to SARs during the fourth
quarter of 1996 (see additional information in "1997 Compared With 1996"
above). Pension and postretirement benefits expenses increased $107.1
million due primarily to interest rate factors. In addition, expenses
related to stock option grants, Common Stock grants, severance payments and
similar-type compensation (excluding SARs expense) increased $20.6 million
year-over-year. Long-term disability expenses increased $22.7 million due
mainly to an increase in number of employees on long-term disability.
The increase in Commissions expense is attributable to higher
Passenger transportation revenues (see also Other, net below). Excluding
nonrecurring items (see "1997 Compared With 1996" above), Aircraft rent
expense increased 4.0% due primarily to two leased B767-200ER aircraft
reentering US Airways' operating fleet during the first half of 1996.
US Airways recognized expenses related to these aircraft in the Other
operating expenses category while they were operated by British Airways
under a wet lease arrangement (see also Other revenues above and Other, net
below). Excluding a nonrecurring item recognized during 1996, Aircraft
maintenance increased $33.1 million. Efficiencies gained from reengineering
efforts in US Airways maintenance areas and the effects of fewer operating
aircraft in US Airways' fleet year-over-year were more than offset by
timing factors and expenses identifiable as transition expenses related to
a change in service providers for certain jet engine maintenance work.
US Airways signed a ten-year contract with a subsidiary of GE during the
third quarter of 1996 for the upkeep and overhaul of certain jet engines
originally manufactured by a GE affiliate. US Airways experienced
approximately $14 million in costs during the fourth quarter of 1996
directly related to the transition of work from the former contractor to
GE. Depreciation and amortization decreased due primarily to fewer owned
aircraft in US Airways' operating fleet. Other, net increased due primarily
to increases in insurance and communications-related costs. US Airways also
experienced higher credit card expenses linked to higher Passenger
transportation revenues. Expenses related to the wet lease arrangement with
British Airways decreased $51.0 million due to the expiration of this
arrangement during May 1996 (see also Other revenues and Aircraft rent
above).
Other Income (Expense)-Interest income increased due mainly to higher Cash,
Cash equivalents and Short-term investments balances during 1996 and
Interest expense decreased primarily as the result of less long-term debt
outstanding year-over-year. Equity in earnings of affiliates increased as
results improved for all three of the partnerships in which USAM had an
ownership interest. The improved financial results for these partnerships
were driven by increases in airline industry
34
passenger volumes. For 1996, Other, net included expenses of $9.5 million
related to US Airways' settlement of litigation involving travel agencies
and losses of $8.7 million related to US Airways' disposition of eight
nonoperating aircraft. For 1995, Other, net included gains totaling $10.7
million related to the sale of certain B737-300 aircraft.
Provision (Credit) for Income Taxes-The Company was subject to federal
alternative minimum tax for 1996 and 1995 as well as income taxes in certain
states. The Company was not subject to regular federal income tax during
1996 or 1995 as the result of using federal income tax net operating loss
carryforwards.
Earnings per Common Share-The Company' EPS for both 1996 and 1995 have been
restated in conjunction with the Company's implementation of SFAS 128. See
"1997 Compared With 1996" above for additional information.
Select US Airways Operating and Financial Statistics-US Airways' yield
improved 4.8% and capacity (ASMs) fell 2.2%. The number of revenue
passengers carried by US Airways was relatively unchanged year-over-year,
but average passenger journey increased 3.6%. The decrease in capacity was
due mainly to fewer aircraft in US Airways' operating fleet year-over-year.
The increase in average passenger journey primarily reflects US Airways'
expanded transatlantic operations. In general, favorable capacity and
pricing trends have been evident in markets served by the Company's airline
subsidiaries since the demise of Continental Lite in early 1995.
Competition with Continental Lite included US Airways selectively lowering
fares in certain markets to maintain market share.
US Airways' unit operating cost was 12.69 cents for 1996, an 11.3%
increase versus its unit operating cost for 1995. This increase is
primarily the result of higher operating expenses applied over less
capacity.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's Cash, Cash equivalents and
Short-term investments totaled $1.96 billion (excluding $70.4 million
deposited in trust accounts to collateralize letters of credit and workers'
compensation policies and included in Other assets on the Company's
Consolidated Balance Sheets, which are contained in Part II, Item 8A. of
this report).
The Company's ratio of current assets to current liabilities ("current
ratio") was 1.10 and 0.81 as of December 31, 1997 and 1996, respectively.
The Company's debt to equity ratio improved to 3.60 as of December 31, 1997
from (4.62) as of December 31, 1996 (calculations exclude amounts related
to redeemable preferred stock) due primarily to higher net income year-
over-year. In addition, preferred stock conversions (see "Certain Ownership
Matters" above) improved the debt to equity ratio due to the resulting
issuances of Common Stock.
US Airways' capital expenditures for 1998 are currently expected to
include approximately $320 million related to the purchase of aircraft
(including new aircraft, as discussed below, and two leased B767-200ER
aircraft that US Airways currently intends to purchase at lease expiry) and
aircraft-related assets and approximately $130 million to purchase non-
aircraft assets. The Company expects to satisfy its liquidity requirements
for 1998, except as discussed below related to its aircraft purchase
commitments, through a combination of cash on hand (Cash, Cash equivalents
and Short-term investments) and cash generated by operations. The Company
is highly leveraged and requires substantial working capital in order to
meet scheduled debt and lease payments and to finance day-to-day
operations. The Company has entered into agreements to acquire up to 400
new aircraft and jet engines to power these aircraft. These agreements
increase the Company's financing needs and will result in a significant
increase in its financial obligations and debt burden (see related
discussion below). The Company is also discussing with
35
Airbus and Boeing the possible acquisition of new wide-body aircraft.
Changes in certain factors that are generally outside the Company's
control, such as an economic downturn, additional government regulation,
intensified pressures from competitors with lower cost structures and
increases in the cost of aviation fuel, could have a material adverse
effect on the Company's results of operations, liquidity and financial
condition. Until US Airways is able to establish a competitive cost
structure, the Company believes that its results of operations and
financial condition will be particularly susceptible to adverse changes in
general economic and market conditions.
Eastern U.S. operations comprise a substantial portion of US Airways'
current route structure. Although a competitive strength in some regards,
the regional concentration of significant operations results in US Airways
being susceptible to changes in certain regional conditions that may
adversely affect the Company's results of operations and financial
condition. The combination of a high cost structure and the regional
concentration of operations has also contributed to US Airways being
particularly vulnerable to low cost, low fare competition.
US Airways uses risk management strategies to reduce its exposure to
certain market uncertainties. US Airways is party to financial contracts
which it believes help to reduce its exposure to significant increases in
the price of aviation fuel. Under these arrangements, US Airways pays a
fixed rate per notional gallon of fuel and receives in return a floating
rate per notional gallon based on the market rate during the month of
settlement. Decreases in the market cost of the fuel below the rates
specified in the contracts require US Airways to make cash payments. Gains
or losses related to these contracts are deferred until the period in which
they are settled. Realized gains and losses are recognized as an element of
aviation fuel expense. US Airways has also hedged certain foreign-
denominated debt to maturity. US Airways periodically reviews the financial
condition of each counterparty to these financial contracts and believes
that the potential for default by any of the current counterparties is
negligible. Although such financial contracts involve certain inherent
risks, US Airways believes that such arrangements help reduce its exposure
to significant increases in aviation fuel prices and the value of certain
foreign currencies. See Note 2(a) to the Company's Notes to Consolidated
Financial Statements for additional information.
As presented in the Company's Consolidated Statements of Cash Flows
(which are also contained in Part II, Item 8A. of this report), net cash
flows provided by operating activities during 1997, 1996 and 1995 were
$869.7 million, $1.03 billion and $576.6 million, respectively. The Company
is currently unable to predict the full impact of recent events involving
US Airways' labor costs and agreements to purchase new aircraft and jet
engines on its future operating cash flows (see "New Strategic Foundation"
above). The Company expects decreases in certain future operating cash
outflows as US Airways replaces several older, diverse aircraft types with
newer, more efficient aircraft, but may experience increases in certain
other future operating cash outflows as the result of US Airways' growth
plans, including costs associated with integrating new aircraft types into
its operating fleet.
With the reinstatement of the ticket tax during March 1997, the
Company resumed ticket tax remittances to the federal government (see
"Other Information" above). The ticket tax was not in effect during the
periods January 1, 1996-August 27, 1996 and January 1, 1997-March 7, 1997.
The Company also made profit sharing payments to employees totaling $129.1
million during first quarter 1997. These payments ended the Company's
obligation for profit sharing under its 1992 Salary Reduction Plan (the
related expenses were recognized by the Company during 1996 and earlier
periods). USAM received partnership distributions from its CRS investments
of $18.3 million, $48.7 million and $14.0 million during 1997, 1996 and
1995, respectively, as reflected in the Other operating adjustments
category in the Company's Consolidated Statements of Cash Flows (see also
"USAM Investments" above).
36
Approximately 3.9 million and 570,000 SARs were exercised during 1997
and 1996, respectively, resulting in cash outflows of $54.7 million during
1997 and $4.9 million during 1996. As of December 31, 1997, approximately
180,700 SARs remained outstanding.
US Airways' contributions to its defined benefit plans in 1997 totaled
$113.1 million. US Airways estimates that it will need to contribute less
than $20 million to these plans in 1998 in order to meet statutory minimum
pension funding requirements due primarily to favorable returns on assets
held by these plans and certain changes in assumptions underlying the
calculations of the funding minimums. US Airways' estimates of future
pension plan contributions are subject to change, including the possibility
of it contributing to these plans in excess of minimum funding
requirements. US Airways' new labor contract with its pilots includes a
provision for early retirement which could result in the funding of certain
pilot pension plans in excess of funding minimums (see related discussion
in "Results of Operations" above).
Investing activities during 1997 included cash outflows of $280.3
million for the acquisition of assets and cash inflows of $85.0 million
related to asset dispositions. Progress payments for new aircraft totaled
$77.0 million for 1997. US Airways' cash outflows related to asset
acquisitions include $125.7 million for aircraft and aircraft-related
assets. US Airways purchased nine aircraft off lease during 1997, including
four BAe-146 aircraft which were sold to third parties immediately
following their purchase. Asset dispositions included cash inflows related
to US Airways' sale of certain nonoperating aircraft. Investing activities
during 1997 also included proceeds of $162.0 million which resulted from
USAM's sale of its interest in ATS and proceeds of $62.2 million related to
USAM's sell-down of its interest in Galileo (see "USAM Investments" above).
On December 30, 1997, the Company purchased Shuttle, Inc. for $189.8
million (see "New Strategic Foundation" above). Short-term investments
increased $235.1 million from the year-end 1996 balance due primarily to
cash flows generated from operations exceeding immediate operational and
other needs. The net cash used for investing activities during 1997 was
$371.9 million.
In January 1998, US Airways sold substantially all of its information
systems and related assets to TSG (see "New Strategic Foundation" above).
The transaction resulted in proceeds of $46.5 million with no material
gain/loss recorded.
Investing activities during 1996 included cash outflows of $180.7
million for the acquisition of assets ($34.9 million for hush-kits,
progress payments for B757-200 aircraft of $31.4 million (see related
information in "Other Information" above), $15.2 million to purchase four
B737-200 aircraft prior to lease expiry and $99.2 million related to the
purchase of rotables, various ground support equipment and computer
equipment). Short-term investments increased $603.6 million versus year-end
1995 as the Company's operations generated significantly more cash than
needed to fulfill immediate operational needs. Net cash used by investing
activities during 1996 was $753.8 million.
Net cash provided by investing activities for 1995 was $148.9 million,
including cash inflows from the disposition of assets of $222.3 million
(primarily from the sale of thirteen B737-300 aircraft) offset by cash
outflows of $146.7 million related to the acquisition of assets. Asset
acquisitions included: progress payments of $61.7 million for new B757-200
aircraft (see "Other Information" above) and $85.0 million for the purchase
of aircraft rotables, hush-kits, computer equipment and various ground
support equipment.
Net cash used for financing activities during 1997 was $354.7 million.
The Company paid dividends totaling $180.7 million to holders of its
outstanding preferred stock during 1997. In May 1997, the Company
repurchased the Series T Preferred Stock and 1,940.636 shares of Series F
Preferred Stock from British Airways for a combined $126.2 million. British
Airways
37
converted the remaining Series F shares into Common Stock and subsequently
sold those shares to third parties. In August 1997, the Company exercised
its right to redeem all 4,263,000 outstanding depositary shares
representing its Series B Preferred Stock. All but approximately 6,000
depositary shares were converted into Common Stock prior to the redemption
date. The related cash outflows were $0.3 million. Proceeds from stock
options exercises totaled $39.1 million for 1997.
As discussed in "Certain Ownership Matters" above, the Company has
retired its Series H Preferred Stock. With the retirement of the Series H
Preferred Stock, the Company has retired all of its preferred stock
outstanding as of December 31, 1996, relieving the Company of annual
dividends of approximately $79 million. Annual interest payments associated
with the debt obligations retired early or to be retired early, as
discussed in "Certain Ownership Matters" above, total approximately $37
million.
As mentioned under "New Strategic Foundation," the Company has entered
into agreements for the acquisition of up to 400 new aircraft and
accompanying jet engines. The minimum determinable payments associated with
these agreements (including progress payments, payments at delivery, buyer-
furnished equipment, spares, capitalized interest, penalty payments,
cancellation fees and/or nonrefundable deposits) are currently estimated at
$302 million in 1998, $725 million in 1999, $1.07 billion in 2000 and $211
million in 2001. If the Company takes delivery of all of the Airbus
aircraft it currently has on firm order, the aggregate payments for
aircraft and related expenditures in connection with the acquisition of the
aircraft could approximate $4.75 billion. The Company anticipates using
cash on hand to fulfill short-term purchase deposit requirements and
currently plans on financing a substantial portion of the remaining
commitment. The Company has commitments or letters of intent which it
believes will provide financing for at least 25% of the anticipated
purchase price of such aircraft. However, further financing or internally-
generated funds will be needed to satisfy the Company's capital commitments
for the balance of the aircraft purchase price and for other aircraft-
related expenditures. Other capital expenditures, such as for rotables and
other aircraft components, are also expected to increase in conjunction
with the acquisition of the new aircraft and jet engines. There can be no
assurance that sufficient financing will be available for all aircraft and
other capital expenditures not covered by committed financing.
As of December 31, 1997, current maturities of long-term debt had
increased to $185.8 million, from $84.3 million at the end of 1996. The
increase is due mainly to reclassifying the first series of US Airways'
1993-A Pass Through Trusts, $75.0 million, from long-term to short-term
status. US Airways currently expects to settle this obligation, which
becomes payable on September 1, 1998, from cash on hand.
On October 1, 1997, Standard & Poor's (S&P) placed the credit ratings
of US Airways Group and US Airways on "CreditWatch" with positive
implications. During July 1997, S&P raised its ratings outlook on US
Airways Group and US Airways to "Positive" from "Developing." Credit
ratings issued by such credit rating agencies can have an effect on a
company's ability to issue debt or equity securities and the effective rate
at which such financings are undertaken. Except for the Enhanced Notes sold
in 1996, the Company's and US Airways' outstanding debt and equity
securities are presently rated "below investment grade" by S&P and Moody's
Investors Service, Inc.
Net cash used by financing activities during 1996 was $209.0 million.
During the third quarter of 1996, US Airways paid-off certain long-term
debt with a principal amount of $42.8 million for one of the Company's
regional airline subsidiaries (the affiliated company repaid US Airways
during December 1996). The Company paid dividends of $83.0 million on its
outstanding Senior Preferred Stock during 1996. The Company had previously
deferred dividends on all of its outstanding series of preferred stock
beginning in September 1994 (see also "Certain Ownership
38
Matters" above).
US Airways sold $263.0 million principal amount of Enhanced Equipment
Notes (the Enhanced Notes) during the first quarter of 1996 through a
private placement offering under SEC Regulation 144A. US Airways used the
proceeds from the offering as part of the funds necessary to repay in full
the indebtedness incurred in connection with certain B757-200 aircraft
delivered to US Airways in 1995 and 1994. The transaction is reflected on
the Company's Consolidated Statements of Cash Flows as proceeds from the
issuance of debt of $103.0 million and a "non-cash" issuance of debt of
$160.0 million. The non-cash component reflects proceeds that US Airways
directed to reduce debt and pay underwriter's fees at the time of the
offering. US Airways used the cash proceeds it received from the offering
and additional funds to make debt repayments of approximately $105.5
million immediately following the offering. The Enhanced Notes are secured
by nine B757-200 aircraft. US Airways filed a Form S-4 Registration
Statement with the SEC during July 1996 in connection with its offer to
exchange registered Enhanced Notes for the privately-placed Enhanced Notes.
The exchange offer was completed in August 1996. The exchange offer did not
result in cash inflows or outflows with the exception of filing fees and
certain administrative costs.
In addition to the prepayment and refinancing transactions and the
early pay-off by US Airways of an affiliate's third party debt in 1996,
both discussed above, the Company's subsidiaries made scheduled debt
repayments of $85.0 million. US Airways also incurred new debt of $29.2
million associated with progress payments for B757-200 aircraft (see also
"Other Information" above). The $29.2 million is reflected as non-cash
activity in the Company's Consolidated Statements of Cash Flows because US
Airways incurred the related debt in conjunction with the payment of the
progress payments.
During 1995, financing activities included $283.2 million of debt
payments, including the redemption of US Airways' remaining outstanding 12
7/8% Unsecured Senior Notes (the 12 7/8% Notes). In addition, the Company
incurred debt of $169.7 million associated with the delivery of seven new
B757-200 aircraft and scheduled progress payments for the future aircraft
deliveries during 1995. In connection with the deferral of eight B757-200
deliveries, US Airways rescheduled the due date of $70.8 million of
previously satisfied aircraft purchase deposits into the future resulting
in a reduction of both debt and equipment deposits (see related information
in "Other Information" above). The $169.7 million and $70.8 million are
reflected as non-cash activity in the Company's Consolidated Statements of
Cash Flows because US Airways experienced an increase in assets
concurrently with the increase in debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market capitalization as of January 28, 1997 did not
exceed $2.5 billion. Therefore, in accordance with the instructions to this
item, the Company is not obligated to disclose information under this item
as part of this report.
(this space intentionally left blank)
39
ITEM 8A. CONSOLIDATED FINANCIAL STATEMENTS FOR US AIRWAYS GROUP, INC.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
US Airways Group, Inc.:
We have audited the accompanying consolidated balance sheets of US Airways
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows, and changes in
stockholders' equity (deficit) for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of US
Airways Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Washington, D. C.
February 25, 1998, except as to Note 15, which
is as of March 12, 1998
(this space intentionally left blank)
40
<TABLE>
US Airways Group, Inc.
Consolidated Statements of Operations
Year Ended December 31,
- ---------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Revenues
Passenger transportation $7,711,501 $7,370,888 $6,748,564
Cargo and freight 181,484 162,704 157,262
Other 620,839 608,821 568,522
--------- --------- ---------
Total Operating Revenues 8,513,824 8,142,413 7,474,348
Operating Expenses
Personnel costs 3,178,782 3,195,463 2,887,115
Aviation fuel 804,768 824,745 677,621
Commissions 594,914 586,226 563,037
Aircraft rent 474,760 436,873 437,649
Other rent and landing fees 420,427 412,275 404,158
Aircraft maintenance 451,311 372,997 346,854
Depreciation and amortization 400,506 316,043 352,447
Other, net 1,604,087 1,560,298 1,483,780
--------- --------- ---------
Total Operating Expenses 7,929,555 7,704,920 7,152,661
--------- --------- ---------
Operating Income 584,269 437,493 321,687
Other Income (Expense)
Interest income 108,074 74,819 51,624
Interest expense (256,055) (267,122) (302,593)
Interest capitalized 12,648 8,398 8,781
Equity in earnings of affiliates 30,614 36,602 34,546
Gains on sales of interests in affiliates 179,625 - -
Other, net 12,861 (14,708) 14,227
--------- --------- ---------
Other Income (Expense), Net 87,767 (162,011) (193,415)
--------- --------- ---------
Income Before Taxes 672,036 275,482 128,272
Provision (Credit) for Income Taxes (352,663) 12,109 8,985
--------- --------- ---------
Net Income 1,024,699 263,373 119,287
Preferred Dividend Requirement (63,262) (88,775) (84,904)
--------- --------- ---------
Earnings Applicable to Common Stockholders $ 961,437 $ 174,598 $ 34,383
========= ========= =========
Earnings per Common Share
Basic $ 12.32 $ 2.73 $ 0.55
Diluted $ 9.87 $ 2.35 $ 0.55
Shares Used for Computation
Basic 78,054 64,021 62,352
Diluted 103,180 94,834 62,430
See accompanying Notes to Consolidated Financial Statements.
41
</TABLE>
US Airways Group, Inc.
Consolidated Balance Sheets
December 31,
- --------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
ASSETS 1997 1996
--------- ---------
Current Assets
Cash $ 18,200 $ 20,986
Cash equivalents 1,075,908 929,980
Short-term investments 870,205 635,839
Receivables, net 300,162 337,025
Materials and supplies, net 226,023 248,774
Deferred income taxes 146,694 -
Prepaid expenses and other 140,224 137,590
--------- ---------
Total Current Assets 2,777,416 2,310,194
Property and Equipment
Flight equipment 5,220,762 5,202,057
Ground property and equipment 876,916 1,108,648
Less accumulated depreciation and amortization (2,527,237) (2,470,337)
--------- ---------
3,570,441 3,840,368
Purchase deposits 154,640 77,620
--------- ---------
Total Property and Equipment, Net 3,725,081 3,917,988
Other Assets
Goodwill, net 616,068 494,511
Other intangibles, net 371,309 283,309
Investment in marketable equity securities 190,035 -
Deferred income taxes 269,704 -
Other assets, net 422,786 525,409
--------- ---------
Total Other Assets 1,869,902 1,303,229
--------- ---------
$ 8,372,399 $ 7,531,411
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 185,786 $ 84,259
Accounts payable 323,414 438,951
Traffic balances payable and unused tickets 707,009 715,576
Accrued aircraft rent 508,624 510,752
Accrued salaries, wages and vacation 311,394 422,766
Other accrued expenses 492,067 676,415
--------- ---------
Total Current Liabilities 2,528,294 2,848,719
Long-Term Debt, Net of Current Maturities 2,425,820 2,615,780
Deferred Credits and Other Liabilities
Deferred gains, net 332,529 359,748
Postretirement benefits other than 1,172,760 1,093,519
pensions, noncurrent
Noncurrent employee benefit liabilities and other 829,687 439,308
--------- ---------
Total Deferred Credits and Other Liabilities 2,334,976 1,892,575
Commitments and Contingencies
Redeemable Cumulative Convertible Preferred Stock
Series H, no par value, 358,000 shares 358,000 358,000
issued and outstanding
Series F, no par value, 30,000 shares - 300,000
issued and outstanding as of December 31, 1996
Series T, no par value, 10,000 shares - 100,719
issued and outstanding as of December 31, 1996
Stockholders' Equity (Deficit)
Series B cumulative convertible preferred stock, - 213,128
no par value, 4,263,000 depositary shares
issued and outstanding as of December 31, 1996
Common stock, par value $1 per share, 91,482 64,306
authorized 150,000,000 shares, issued and
outstanding 91,482,000 and 64,306,000 shares,
respectively
Paid-in capital 1,906,395 1,386,557
Retained earnings (deficit) (1,279,864) (2,117,838)
Common stock held in treasury, at cost, (3,265) -
39,929 shares as of December 31, 1997
Deferred compensation (79,945) (95,326)
Unrealized gain on available-for-sale securities, 103,795 -
net of income tax effects
Adjustment for minimum pension liability, (13,289) (35,209)
net of income tax effects
--------- --------
Total Stockholders' Equity (Deficit) 725,309 (584,382)
--------- --------
$ 8,372,399 $ 7,531,411
========= =========
See accompanying Notes to Consolidated Financial Statements.
42
<TABLE>
US Airways Group, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash and Cash equivalents at beginning of year $ 950,966 $ 881,854 $ 429,538
--------- --------- ---------
Cash flows from operating activities
Net income 1,024,699 263,373 119,287
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 400,506 316,043 352,447
Losses (gains) on dispositions of property (15,815) 748 (17,043)
Gains on sales of interests in affiliates (179,625) - -
Amortization of deferred gains and credits (27,683) (27,668) (27,817)
Other 34,474 38,048 6,294
Changes in certain assets and liabilities
Decrease (increase) in receivables 39,840 (14,903) 2,417
Decrease (increase) in materials and supplies, prepaid expenses
and pension assets 37,615 (45,455) (74,980)
Decrease (increase) in deferred income tax assets (453,524) - -
Increase (decrease) in traffic balances payable and unused tickets (13,606) 108,406 38,955
Increase (decrease) in accounts payable and accrued expenses (36,097) 315,440 120,422
Increase (decrease) in postretirement benefits other than
pensions, noncurrent 58,927 77,896 56,667
--------- --------- ---------
Net cash provided by (used for) operating activities 869,711 1,031,928 576,649
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net (106,889) (52,854) (61,689)
Additions to other property (173,367) (127,875) (84,980)
Proceeds from dispositions of property 85,027 24,903 222,325
Acquisition of Shuttle, Inc. (189,788) - -
Proceeds from sales of interests in affiliates 224,233 - -
Decrease (increase) in short-term investments (235,068) (603,593) 2,430
Decrease (increase) in restricted cash and investments 18,481 11,086 71,980
Other 5,518 (5,497) (1,134)
--------- --------- ---------
Net cash provided by (used for) investing activities (371,853) (753,830) 148,932
Cash flows from financing activities
Issuances of debt - 103,002 1,162
Principal payments on long-term debt (88,433) (235,500) (283,160)
Issuances of Common Stock 39,110 3,882 8,733
Sales of treasury stock 1,758 2,630 -
Redemptions of preferred stock, including redemption premiums (126,485) - -
Dividends paid on preferred stock (180,666) (83,000) -
--------- --------- ---------
Net cash provided by (used for) financing activities (354,716) (208,986) (273,265)
--------- --------- ---------
Net increase in Cash and Cash equivalents 143,142 69,112 452,316
--------- --------- ---------
Cash and Cash equivalents at end of year $1,094,108 $ 950,966 $ 881,854
========= ========= =========
Noncash investing and financing activities
Conversions of preferred stock into Common Stock $ 496,550 $ - $ -
Unrealized gain on available-for-sale securities, net of income tax effects $ 103,795 $ - $ -
Treasury stock acquired for tax withholding on employee stock grants $ 5,158 $ 2,630 $ -
Issuances of debt - refinancing of debt secured by aircraft $ - $ 159,998 $ -
Reductions of debt - refinancing of debt secured by aircraft $ - $ 154,422 $ -
Issuances of debt - aircraft acquisitions $ - $ 29,155 $ 169,725
Underwriter's fees - refinancing of debt secured by aircraft $ - $ 2,488 $ -
Reductions of debt - aircraft purchase deposits $ - $ - $ 70,837
Acquisition of Shuttle, Inc.
Fair value of assets acquired $ 257,600 $ - $ -
Cash paid (189,788) - -
--------- --------- ---------
Liabilities assumed $ 67,812 $ - $ -
========= ========= =========
Supplemental Information
Cash paid during the year for interest, net of amounts capitalized $ 245,798 $ 260,625 $ 299,871
Net cash paid during the year for income taxes $ 94,773 $ 12,325 $ 6,637
See accompanying Notes to Consolidated Financial Statements.
43
</TABLE>
<TABLE>
US Airways Group, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
Three Years Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<CAPTION> Unrealized gain
on available- Adjustment
for-sale for minimum
Series B Retained Common Deferred securities, pension liability,
Preferred Common Paid-in earnings stock held compen- net of income net of income
Stock stock capital (deficit) in treasury sation tax effects tax effects Total
------- ------ --------- --------- ----- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1994 $213,153 $61,088 $1,344,336 $(2,417,498) $ - $(90,965) $ - $ (7,017) $(896,903)
Sale of 1,384,000 shares
of common stock - 1,384 6,929 - - - - - 8,313
Grant of 935,000 shares
of restricted stock - 934 10,982 - - (11,916) - - -
Exercise of 43,000 options - 43 377 - - - - - 420
Amortization of deferred
compensation - - 132 - - 4,034 - - 4,166
Adjustment for minimum
pension liability, net
of income tax effects - - - - - - - (71,071) (71,071)
Net income - - - 119,287 - - - - 119,287
------- ------ --------- --------- ----- ------ ------- ------ ---------
Balance as of
December 31, 1995 $213,153 $63,449 $1,362,756 $(2,298,211) $ - $(98,847) $ - $(78,088) $(835,788)
Grant of 635,000 shares
of restricted stock
and 2,415,000 options - 635 20,668 - - (21,303) - - -
Acquisition of 118,000
shares of common stock
from certain employees - - - - (2,630) - - - (2,630)
Exercise of 435,000 options - 317 4,241 - 2,630 - - - 7,188
Conversion of 500
depositary shares (25) 1 24 - - - - - -
Reversion of 96,000 shares
of restricted stock
previously granted - (96) (1,132) - - 1,228 - - -
Dividends declared
(preferred stock)
Series H-$133.74 per share - - - (47,879) - - - - (47,879)
Series F-$902.14 per share - - - (27,064) - - - - (27,064)
Series T-$799.91 per share - - - (8,057) - - - - (8,057)
Amortization of
deferred compensation - - - - - 23,596 - - 23,596
Adjustment for minimum
pension liability, net
of income tax effects - - - - - - - 42,879 42,879
Net income - - - 263,373 - - - - 263,373
------- ------ --------- --------- ----- ------ ------- ------ ---------
Balance as of
December 31, 1996 $213,128 $64,306 $1,386,557 $(2,117,838) $ - $(95,326) $ - $(35,209) $(584,382)
(continued on following page)
44
</TABLE>
<TABLE>
US Airways Group, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Continued)
Three Years Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<CAPTION> Unrealized gain
on available- Adjustment
for-sale for minimum
Series B Retained Common Deferred securities, pension liability,
Preferred Common Paid-in earnings stock held compen- net of income net of income
Stock stock capital (deficit) in treasury sation tax effects tax effects Total
------- ------ --------- --------- ----- ------ ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1996 $213,128 $64,306 $1,386,557 $(2,117,838) $ - $(95,326) $ - $(35,209) $ (584,382)
Conversion of
4,257,000
depositary shares (212,833) 10,610 202,219 - - - - - (4)
Redemption of 6,000
depositary shares (295) - - (10) - - - - (305)
Conversion of 28,000
shares of Series F
Preferred Stock - 14,459 261,778 - - - - - 276,237
Grant of 162,000 shares
of restricted stock - 162 3,875 - - (4,037) - - -
Reversion of 89,000 shares
of restricted stock
previously granted - (89) (1,040) - - 1,129 - - -
Acquisition of 125,000
shares of common stock
from certain employees - - - - (5,158) - - - (5,158)
Exercise of 2,119,000 options - 2,034 43,311 - 1,893 - - - 47,238
Dividends declared
(preferred stock)
Series H-$225.24 per share - - - (80,635) - - - - (80,635)
Series F-$1,137.00 per share - - - (34,110) - - - - (34,110)
Series T-$991.22 per share - - - (9,983) - - - - (9,983)
Series B-$13.49 per share - - - (55,938) - - - - (55,938)
Redemption premiums on
repurchases of Redeemable
Cumulative Convertible
Preferred Stock - - - (6,049) - - - - (6,049)
Amortization of
deferred compensation - - - - - 18,289 - - 18,289
Unrealized gain on
available-for-sale
securities, net of
income tax effects - - - - - - 103,795 - 103,795
Tax benefit from employee
stock option exercises - - 9,695 - - - - - 9,695
Adjustment for minimum
pension liability, net
of income tax effects - - - - - - - 21,920 21,920
Net income - - - 1,024,699 - - - - 1,024,699
------- ------ --------- --------- ----- ------ ------- ------ ---------
Balance as of
December 31, 1997 $ - $91,482 $1,906,395 $(1,279,864) $(3,265) $(79,945) $103,795 $(13,289) $ 725,309
======= ====== ========= ========= ===== ====== ======= ====== =========
See accompanying Notes to Consolidated Financial Statements.
45
</TABLE>
US AIRWAYS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying Consolidated Financial Statements include the accounts
of US Airways Group, Inc. (US Airways Group or the Company) and its wholly-
owned subsidiaries US Airways, Inc. (US Airways), Allegheny Airlines, Inc.
(Allegheny), Piedmont Airlines, Inc. (Piedmont), PSA Airlines, Inc. (PSA),
US Airways Leasing and Sales, Inc. (US Airways Leasing and Sales) (formerly
USAir Leasing and Services, Inc.), US Airways Fuel Corporation (Fuel Corp.)
(formerly USAir Fuel Corporation) and Material Services Company, Inc. (MSC).
All significant intercompany accounts and transactions have been eliminated.
US Airways is the Company's principal operating subsidiary and
accounted for approximately 92% of its operating revenues in 1997 on a
consolidated basis. US Airways is a major United States air carrier whose
primary business is transporting passengers, property and mail. US Airways
enplaned 58.8 million passengers during 1997 and is currently the fifth
largest domestic air carrier, as measured by revenue passenger miles (RPMs).
US Airways operates predominantly in the Eastern U.S. with primary hubs at
the major airports in Charlotte, Philadelphia and Pittsburgh. US Airways
also has substantial operations at Baltimore/Washington International
Airport, Boston's Logan International Airport, New York's LaGuardia Airport
(LaGuardia) and Washington's Ronald Reagan Washington National Airport
(National).
US Airways' results include the results of its wholly-owned subsidiary
USAM Corp. (USAM). USAM owns 11% of the Galileo Japan Partnership (GJP),
which markets the Galileo Computer Reservation System (Galileo CRS) in
Japan. USAM accounts for this investment using the equity method because it
is represented on the board of directors and therefore participates in
policy making processes. Until July 1997, as discussed in Note 9, USAM held
interests in the Galileo International Partnership and the Apollo Travel
Services Partnership and accounted for these investments using the equity
method.
Piedmont, PSA and Allegheny are regional air carriers that, along with
seven non-owned regional airline franchisees, form "US Airways Express." US
Airways Express, which also has a majority of its operations in the Eastern
U.S., enplaned 10.9 million passengers in 1997 (of which 6.1 million were
enplaned by Piedmont, PSA and Allegheny), approximately 55% of whom
connected to US Airways flights.
On December 30, 1997, the Company purchased Shuttle, Inc. (Shuttle).
Shuttle, which operates under the trade name "US Airways Shuttle," currently
provides high frequency service from New York to Boston and Washington. See
Note 14 for additional information related to Shuttle.
Fuel Corp. was established in 1987 primarily to serve as a fuel
wholesaler to US Airways, in certain circumstances. MSC performs a function
similar to Fuel Corp., selling aviation fuel to US Airways Express carriers
and also assisting the US Airways Express carriers with major maintenance
and procurement contracts. US Airways Leasing and Sales' main function is
remarketing US Airways' surplus or inactive aircraft.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting
46
period. Actual results could differ from those estimates.
US Airways, Allegheny, Piedmont, PSA and Shuttle operate within one
industry (air transportation); therefore, no segment information is
provided.
Certain 1996 and 1995 amounts have been reclassified to conform with
1997 classifications.
(b) OPERATING ENVIRONMENT
Most of the Company's airline subsidiaries operate in competitive
markets. Competitors include other air carriers along with other methods of
transportation.
US Airways currently has the highest unit operating costs among the
major domestic air carriers. The growth and expansion of competitors with
lower cost and fare structures in its markets has put considerable pressure
on US Airways to reduce its operating costs in order to maintain
competitiveness. In addition, although a competitive strength in some
regards, the concentration of significant operations in the Eastern U.S.
results in US Airways being susceptible to changes in certain regional
conditions that may have an adverse effect on the Company's results of
operations and financial condition.
Personnel costs represent the Company's largest expense category. As of
December 31, 1997, the Company's various subsidiaries employed 42,500 full-
time equivalent employees. Approximately 37,900 (84%) of the Company's
employees are covered by collective bargaining agreements with various
unions or will be covered by collective bargaining agreements for which
initial negotiations are in progress. A new five-year contract between US
Airways and its pilots became effective January 1, 1998. US Airways'
contracts with its mechanical/related personnel and flight attendants are
currently amendable; talks with respect to new contracts are ongoing.
US Airways is also negotiating with representatives of its fleet service and
passenger service employees with respect to initial labor contracts. The
Company cannot predict the ultimate outcome of any of these negotiations or
the timing of any new agreements. US Airways' new contract with its pilots
includes certain provisions that the Company believes will help US Airways
address its high cost structure, including allowing US Airways to establish
a low cost, low fare operation.
The operations of the Company's airline subsidiaries are largely
dependent on the availability of aviation fuel. The availability and price
of aviation fuel is largely determined by actions generally outside of the
Company's control. US Airways has a diversified aviation fuel supplier
network and uses certain risk management techniques (see Note 2(a)) in order
to help ensure aviation fuel availability and partially protect itself from
temporary aviation fuel price fluctuations.
(c) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments purchased within three months of maturity
are classified as Cash equivalents. Short-term investments consist primarily
of certificates of deposit and commercial paper purchased with maturities
greater than three months but less than one year.
The Company classifies securities underlying its Cash equivalents and
Short-term investments as "available-for-sale" in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). Cash equivalents are
stated at cost, which approximates fair value due to the highly liquid
nature and short maturities of the underlying securities. Short-term
investments are stated at fair value with the offsetting unrecognized gain
or loss reflected as a separate component of Stockholders' Equity (Deficit),
net of income tax effects. See also Note 8(f).
47
(d) MATERIALS AND SUPPLIES, NET
Inventories of materials and supplies are valued at the lower of cost
or fair value. Costs are determined using average costing methods and are
charged to operations as consumed. An allowance for obsolescence is provided
for flight equipment expendable and repairable parts.
(e) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost or, if acquired under capital
lease, at the lower of the present value of minimum lease payments or fair
value of the asset at the inception of the lease. Maintenance and repairs
are charged to operating expense as incurred. Costs of major improvements
are capitalized for both owned and leased assets. Interest related to
deposits on aircraft purchase contracts and facility and equipment
construction projects is capitalized as an additional cost of the asset or
as a leasehold improvement if the asset is leased. Depreciation and
amortization for principle asset classifications is calculated on a
straight-line basis to estimated residual values over estimated depreciable
lives. These estimates are periodically reviewed for reasonableness and
revised, if necessary. In addition, the Company monitors the recoverability
of the carrying value of its long-lived assets. Under the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
(SFAS 121), the Company recognizes an "impairment charge" when the net
undiscounted future cash flows from an asset's use (including any proceeds
from disposition) are less than the asset's carrying value and the asset's
carrying value exceeds its fair value. The impairment charge reflects
writing-down the asset to fair value. See Note 13(a) for impairment charges
recognized by US Airways during 1997.
Depreciable Residual
Asset Life Value
----- ----------- -----------
(years) (in millions)
Aircraft
Boeing 767-200ER 20 $14.0
Boeing 757-200 20 8.0
Boeing 737-300/400 20 7.5
Boeing 737-200 17 5.0
Boeing 727-200 2-3 1.5
McDonnell Douglas MD-80 20 7.5
Douglas DC-9-30 17 3.0
Fokker 100 20 5.0
Fokker F28-4000 8 2.0
Fokker F28-1000 6 1.0
Turboprop aircraft 11-17 1.5
Improvements to leased aircraft life of lease -
Ground property, equipment and leasehold 3-10 or -
improvements life of lease
Buildings 25-30 -
Property acquired under capital lease is amortized on a straight-line
basis over the term of the lease and charged to depreciation and
amortization expense. When property and equipment is sold or retired any
gain or loss is recognized as Other, net, a component of Other Income
(Expense).
(f) GOODWILL, NET AND OTHER INTANGIBLES, NET
Goodwill, the cost in excess of fair value of identified net assets
acquired, is amortized on a straight-line basis over 40 years. The $629.5
million goodwill resulting from the acquisitions of Pacific Southwest
Airlines (Pacific Southwest) and Piedmont Aviation, Inc. (Piedmont
48
Aviation), both in 1987, is amortized as depreciation and amortization
expense. As of December 31, 1997 and 1996, accumulated amortization related
to the Pacific Southwest and Piedmont Aviation acquisitions was $159.9
million and $144.1 million, respectively. As of December 31, 1997 and 1996,
USAM's goodwill in connection with its computer reservation system
investments was $4.3 million and $11.4 million, respectively. During July
1997, USAM's goodwill was reduced as a result of its sale of certain
investments (see Note 9). USAM's goodwill is amortized as a component of
Other Income (Expense), consistent with the classification of the related
income on these investments. As of December 31, 1997 and 1996, USAM's
related accumulated amortization was $1.0 million and $2.3 million,
respectively.
On December 30, 1997, the Company purchased Shuttle for $189.8 million
(see Note 14). Goodwill resulting from this acquisition totaled $143.1
million and will also be amortized as depreciation and amortization expense
over 40 years.
The Company periodically evaluates whether goodwill is impaired by
comparing the goodwill balances with estimated future undiscounted cash
flows which, in the Company's judgment, are attributable to the goodwill.
This analysis is performed separately for the goodwill which resulted from
each acquisition.
Other intangible assets consist mainly of purchased operating rights
at various airports, capitalized software costs and the intangible asset
associated with the underfunded amounts of certain pension plans. The cost
of operating rights and capitalized software costs are amortized on a
straight-line basis over the expected periods of benefit as depreciation
and amortization expense. Operating rights, which are valued at purchase
cost or appraised value if acquired with Pacific Southwest, Piedmont
Aviation or Shuttle, are amortized over periods ranging from ten to 25
years and capitalized software costs are amortized over five years. The
intangible pension asset is recognized in accordance with Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions"
(SFAS 87) (see Note 8(g)). As of December 31, 1997 and 1996, accumulated
amortization related to other intangible assets was $149.0 million and
$129.3 million, respectively.
Based on the most recent analyses, the Company believes that goodwill
and other intangible assets were not impaired as of December 31, 1997.
(g) INVESTMENT IN MARKETABLE EQUITY SECURITIES
USAM's investment in Galileo International, Inc. (Galileo), which is
accounted for under the cost method, is classified as "available-for-sale"
under SFAS 115 and recorded at fair value. See also Notes 2(b), 8(f) and 9.
(h) OTHER ASSETS, NET
Other assets, net consists primarily of noncurrent pension assets,
restricted cash and investments, unamortized debt issue costs and a long-
term receivable from British Airways Plc. (British Airways). Restricted cash
and investments are deposits in trust accounts to collateralize letters of
credit and workers' compensation policies. The long-term receivable from
British Airways resulted from the relinquishment by US Airways of three U.S.
to London routes.
(i) FREQUENT TRAVELER PROGRAM
US Airways accrues the estimated incremental cost of travel awards
earned by participants in its "Dividend Miles" frequent traveler program
when requisite mileage award levels are achieved. US Airways also sells
mileage credits to participating partners in Dividend Miles. The resulting
revenues are recorded as other operating revenues during the period in
which the credits
49
are sold.
(j) DEFERRED GAINS, NET
Gains on aircraft sale and leaseback transactions are deferred and
amortized over the term of the leases as a reduction of the related aircraft
rent expense.
(k) PASSENGER TRANSPORTATION REVENUES
Passenger ticket sales are recognized as Passenger transportation
revenues when the transportation service is rendered or the ticket otherwise
expires. At the time of sale, a liability is established (Traffic balances
payable and unused tickets) and subsequently relieved either through
carriage of the passenger, through billing from another air carrier which
provided the service, upon expiration of the ticket or by refund to the
passenger.
(l) STOCK-BASED COMPENSATION
The Company applies the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) to
account for Common Stock, stock options and other stock-based compensation
granted to employees. See also Note 8(e).
(m) ADVERTISING EXPENSES
Advertising costs are expensed when incurred as Other operating
expenses. Advertising expenses for 1997, 1996 and 1995 were $45.5 million,
$51.2 million and $66.6 million, respectively.
(n) EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS 128) during 1997. The Company's Earnings per
Common Share (EPS) figures for prior periods have been restated to conform
with the provisions of SFAS 128. In accordance with SFAS 128, basic EPS is
computed by dividing net income, after deducting preferred stock dividend
requirements, by the weighted average number of shares of Common Stock
outstanding.
Diluted EPS reflects the maximum dilution that would result after
giving effect to dilutive stock options and to the assumed conversion of all
dilutive convertible preferred stock issuances. Using the "treasury stock"
method, stock options added approximately 1,888,000, 898,000 and 78,000
incremental shares to the denominator for purposes of calculating diluted
EPS for 1997, 1996 and 1995, respectively. For 1997, the effects of assuming
conversion of the Company's outstanding preferred stock issuances were
dilutive and therefore included in the determination of diluted EPS, except
for shares of Series F preferred stock which were redeemed in May 1997 (see
Note 7(b)). The income and weighted average share effects of these assumed
conversions were approximately $57.5 million and 23,238,000 shares,
respectively. For 1996, the assumed conversion of the Series B, Series F and
Series T Preferred Stock had a dilutive effect on diluted EPS (assumed
conversion of the Series A Preferred Stock was anti-dilutive). The income
and share effects of these assumed conversions were approximately $48.3
million and 29,915,000 shares, respectively. For 1995, the assumed
conversion of each outstanding preferred stock issuance was anti-dilutive.
See also Note 5(e) regarding Common Stock held in trust for US Airways'
employee stock ownership plan (ESOP).
50
2. FINANCIAL INSTRUMENTS
(a) TERMS OF CERTAIN FINANCIAL INSTRUMENTS
The Company uses risk management strategies to reduce its exposure to
certain market uncertainties. US Airways is party to financial contracts
which it believes help to reduce its exposure to significant increases in
the price of aviation fuel. US Airways has also hedged certain foreign-
denominated debt to maturity. US Airways periodically reviews the financial
condition of each counterparty to these financial contracts and believes
that the potential for default by any of the current counterparties is
negligible.
US Airways has entered into fuel swap contracts that result in US
Airways receiving or making payments based on the difference between a fixed
price and a variable price per notional gallon for specified petroleum
products. Gains and losses related to these contracts are deferred until the
period in which they are settled. Realized gains and losses are recognized
as an element of Aviation fuel expense. The total notional gallons under
these contracts were approximately 47 million and 84 million as of
December 31, 1997 and 1996, respectively (US Airways entered into contracts
prior to December 31, 1997 and 1996 which effectively closed certain
hedging arrangements covering approximately 17 million and 22 million
gallons, respectively). For contracts open as of December 31, 1997, US
Airways will pay fixed prices ranging from $0.496 to $0.600 per notional
gallon and receive a variable price per gallon based on current market
prices. The open contracts, all of which settle during 1998, represent
approximately 3% of US Airways' expected 1998 fuel consumption. For
contracts open as of December 31, 1996, US Airways paid fixed prices ranging
from $0.553 to $0.700 per notional gallon and received a floating rate based
on market prices.
An aggregate of $32 million of future principal payments of US Airways'
long-term debt due 1998 through 2000 is payable in Japanese Yen. This
foreign currency exposure has been hedged to maturity by US Airways'
participation in foreign currency contracts. Net settlements will be
recorded as adjustments to Interest expense.
(b) FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the provisions of SFAS 115, the fair values for US
Airways' short-term and marketable equity security investments are
determined based upon quoted market prices. Restricted cash and certain
long-term investments are carried at cost which approximates fair value. The
Company estimated the fair values of its long-term note receivable and long-
term debt by discounting expected future cash flows using current rates
offered to the Company for note receivables and debt with similar
maturities. The Black-Scholes pricing model was used to estimate the fair
value of the Company's outstanding preferred stock issuance as of December
31, 1997 (see Note 7(a)) incorporating the following assumptions: redemption
date of March 15, 1998 (see Note 15), discount rate of 5.2%, volatility of
53.0% and regular dividends accrued through the redemption date. The
estimated fair value of the Company's outstanding preferred stock issuances
at December 31, 1996 was obtained from an independent external valuation
source. The fair values of fuel swap and foreign currency contracts are
obtained from dealer quotes. These values represent the estimated amount US
Airways would receive or pay to terminate such agreements as of the
valuation date.
(this space intentionally left blank)
51
The estimated fair values of the Company's financial instruments, none
of which are held for trading purposes (in thousands; brackets denote a
liability):
December 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Short-term investments (1) $ 870,205 $ 870,205 $ 635,839 $ 635,605
Investment in marketable
equity securities (1) 190,035 190,035 - -
Restricted cash and
investments (2) 69,844 69,844 87,783 87,843
Long-term note
receivable (2)(3) 30,350 30,557 40,733 30,080
Other long-term
investments (2)(3) - - 20,606 22,126
Long-term debt (excludes
capital lease
obligations) (2,578,138) (2,861,752) (2,650,659) (2,698,431)
Redeemable preferred stock (358,000) (588,757) (758,719) (894,400)
Fuel swap contracts:
In a net receivable (payable)
position - (528) - 3,550
Foreign currency contracts:
In a net receivable (payable)
position - (2,928) - 963
(1) Classified as "available-for-sale" in accordance with SFAS 115. See also
Notes 1(c) and 1(g).
(2) Carrying amount included in Other Assets on the Company's Consolidated
Balance Sheets.
(3) Classified as "held-to-maturity" in accordance with SFAS 115.
3. INCOME TAXES
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). The Company files a consolidated federal income tax
return with its wholly-owned subsidiaries.
During 1997, the Company determined that it was no longer appropriate
to apply a valuation allowance to its deferred tax assets. The Company
believes, based on prior earnings and future earnings projections, that it
is more likely than not that the Company will be able to utilize tax
benefits accumulated through December 31, 1997 in future periods.
Accordingly, as of December 31, 1997, previous valuation allowances were
substantially removed, resulting in a net deferred tax asset and an income
tax credit for 1997.
The components of the Company's provision (credit) for income taxes (in
thousands):
1997 1996 1995
---- ---- ----
Current provision:
Federal $ 100,879 $ 6,423 $ 6,081
State 7,680 3,000 831
------- ----- -----
Total current provision 108,559 9,423 6,912
------- ----- -----
Deferred provision:
Federal (406,571) - -
State (54,651) 2,686 2,073
------- ----- -----
Total deferred provision (461,222) 2,686 2,073
------- ----- -----
Provision (credit) for income taxes $(352,663) $ 12,109 $ 8,985
======= ====== =====
In 1997, the Company was not subject to regular federal income tax as a
result of using $1.1 billion in federal net operating loss carryforwards.
However, the Company was subject to federal alternative minimum tax (AMT).
Approximately $383 million in AMT net operating loss
52
carryforwards and approximately $427 million in state net operating loss
carryforwards were utilized to reduce the federal and state liabilities.
The significant components of deferred income tax expense (benefit) for
the years ended December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
---- ---- ----
Deferred tax expense (exclusive of
the other components listed below) $ 180,947 $ 114,906 $ 51,511
Decrease in the valuation allowance
for deferred tax assets (642,169) (112,220) (49,438)
------- ------- ------
Total $(461,222) $ 2,686 $ 2,073
======= ======= ======
A reconciliation of taxes computed at the statutory federal tax rate on
earnings before income taxes to the provision (credit) for income taxes (in
thousands):
1997 1996 1995
---- ---- ----
Tax provision computed at federal
statutory rate $ 235,213 $ 96,419 $ 44,895
Book expenses not deductible for
tax purposes 16,694 17,628 16,064
State income tax provision (credit),
net of federal tax benefit (30,531) 4,636 1,888
Reduction of federal valuation allowance (569,149) (103,900) (56,875)
Other (4,890) (2,674) 3,013
------- ------- ------
Provision (credit) for income taxes $(352,663) $ 12,109 $ 8,985
======= ======= ======
Effective tax rate (52)% 4% 7%
======= ======= ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1997
and 1996 (in thousands):
1997 1996
---- ----
Deferred tax assets:
Leasing transactions $ 170,966 $ 154,732
Tax benefits purchased/sold 31,352 43,441
Gain on sale and leaseback transactions 125,169 135,308
Employee benefits 683,416 608,948
Net operating loss carryforwards 193,575 540,495
Alternative minimum tax credit carryforwards 158,441 33,459
Investment tax credit carryforwards 17,841 49,802
Other deferred tax assets 94,640 82,744
--------- ---------
Total gross deferred tax assets 1,475,400 1,648,929
Less valuation allowance (1,377) (643,546)
--------- ---------
Net deferred tax assets 1,474,023 1,005,383
Deferred tax liabilities:
Equipment depreciation and amortization 940,784 966,874
Other deferred tax liabilities 62,791 45,415
--------- ---------
Total deferred tax liabilities 1,003,575 1,012,289
--------- ---------
Net deferred tax liabilities (assets) $ (470,448) $ 6,906
========= =========
The valuation allowance for deferred tax assets decreased approximately
$642 million in 1997 and decreased approximately $112 million in 1996.
53
Included in the deferred tax assets at December 31, 1997, among other
items, are $455 million related to obligations of postretirement medical
benefits, unused net operating losses of approximately $464 million for
federal tax purposes expiring in the years 2008 and 2009, approximately $18
million of investment tax credits expiring in the years 2003 and 2004, and
$158 million of alternative minimum tax credits, which do not expire. There
were no alternative minimum tax net operating loss carryforwards remaining
at December 31, 1997. Investment tax credit benefits were recorded using the
"flow through" method as a reduction of the federal income tax provision. No
new investment tax credits were generated during 1997, 1996 or 1995. The
federal income tax returns of the Company through 1986 have been examined
and settled with the Internal Revenue Service.
The Company believes that a significant portion of the deferred tax
assets will be realized through reversals of existing taxable temporary
differences. The Company needs to generate approximately $464 million of
taxable income to realize the benefits of most of the other deferred tax
assets that have a future expiration date.
The deferred tax assets and liabilities disclosed above exclude tax
assets and liabilities which arise as a result of including certain
transactions in the equity section of the balance sheet, net of tax. These
tax attributes include a deferred tax liability of $56 million for
unrealized gains on available-for-sale investments pursuant to SFAS 115 and
a deferred tax asset of $2 million relating to the equity adjustment for the
minimum pension liability for US Airways' defined benefit plans.
The following table is a summary of pretax book income and taxable
income prior to net operating loss carryforwards for the last three years
(in thousands):
1997 1996 1995
---- ---- ----
Pretax book income $ 672,036 $275,482 $128,272
Taxable income $1,083,559 $284,550 $ 82,516
The reasons for significant differences between taxable income and
pretax book income in 1997 primarily relate to employee pension and
postretirement benefit costs, certain aircraft impairment charges and lease
accruals, and other employee related accruals.
4. LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS
Details of long-term debt are as follows (in thousands):
December 31,
-----------------------
Senior Debt: 1997 1996
---- ----
10% Senior Notes due 2003 $ 300,000 $ 300,000
9 5/8% Senior Notes due 2001 175,000 175,000
5.7% to 11.7% Equipment Financing Agreements,
Installments due 1998 to 2016 2,045,227 2,117,534
8.6% Airport Facility Revenue Bond due 2022 27,620 27,620
7.4 % Aircraft Purchase Deposit Financing due 1998* 29,155 29,155
Other 1,136 1,350
--------- ---------
2,578,138 2,650,659
Capital Lease Obligations 33,468 49,380
--------- ---------
Total 2,611,606 2,700,039
Less Current Maturities (185,786) (84,259)
--------- ---------
$2,425,820 $2,615,780
========= =========
* See related information under Note 6(c) (re: litigation between the
Company and The Boeing Company (Boeing)).
54
Maturities of long-term debt and debt under capital leases for the next
five years (in thousands):
1998 $ 185,786
1999 77,454
2000 122,681
2001 246,494
2002 77,236
Thereafter 1,901,955
Interest rates on $230.3 million principal amount of long-term debt as
of December 31, 1997 are subject to adjustment to reflect prime rate and
other rate changes.
Equipment financings totaling $2.08 billion were collateralized by
aircraft and engines with a net book value of approximately $2.17 billion as
of December 31, 1997.
See Note 15 for subsequent events related to long-term debt.
5. EMPLOYEE PENSION AND BENEFIT PLANS
Substantially all of the Company's employees are eligible to
participate in various defined benefit and defined contribution pension
plans, in addition to medical and life insurance plans sponsored by the
Company. Employees who meet certain service and other requirements are also
eligible to participate in an employee stock ownership plan.
(a) DEFINED BENEFIT PENSION PLANS
One qualified defined benefit pension plan covers US Airways'
maintenance employees and provides specific benefits based on length of
service. Qualified defined benefit pension plans for substantially all other
employees provide benefits based on years of service and compensation. The
qualified defined benefit pension plans for domestic employees are funded,
on a current basis, to meet or exceed the minimum funding requirements of
the Employee Retirement Income Security Act of 1974. Liabilities related to
pension plans covering foreign employees are calculated in accordance with
generally accepted accounting principles and funded in accordance with the
laws of the individual country.
US Airways recorded a $115.0 million charge to Personnel Costs in the
fourth quarter of 1997 for special termination benefits in accordance with
Statement of Financial Accounting Standards No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" (SFAS 88). The charge relates to an early retirement
program offered to US Airways pilots. The Company expects 325 pilots to opt
for early retirement under this program.
(this space intentionally left blank)
55
The funded status of the Company's qualified defined benefit pension
plans as of September 30, 1997 and 1996, respectively, except for
subsidiaries other than US Airways which are as of December 31, 1997 and
1996, respectively (in millions):
<TABLE>
<CAPTION> 1997 1996
-------------------- -------------------
Plans with Plans with
-------------------- -------------------
Assets in ABO in Assets in ABO in
Excess of Excess of Excess of Excess of
ABO Assets ABO Assets
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Fair value of plan assets $ 2,697 $ 457 $ 2,186 $ 305
Actuarial present value of:
Vested benefit obligation 2,461 445 2,062 369
Nonvested benefit obligation 30 19 24 13
-------- --------- ------- --------
Accumulated benefit obligation (ABO)
based on salaries to date 2,491 464 2,086 382
Additional benefits based on
estimated future salary levels 780 3 665 -
-------- --------- ------- --------
Projected benefit obligation (PBO) 3,271 467 2,751 382
PBO in excess of fair value of plan assets (574) (10) (565) (77)
Contributions from October 1
through December 31 - - 45 12
Unrecognized net transition asset (18) (7) (21) (9)
Unrecognized prior service (credit) cost (12) 70 (13) 75
Unrecognized net loss 437 19 508 40
-------- --------- ------- --------
Pension (liability) or asset
before adjustment (167) 72 (46) 41
-------- --------- ------- --------
Adjustment for minimum
pension liability * - (82) - (106)
-------- --------- ------- --------
Pension liability as adjusted
and recognized in Consolidated
Balance Sheets $ (167) $ (10) $ (46) $ (65)
======= ========= ======= ========
* See Note 8(g).
</TABLE>
The weighted average assumptions used to determine the actuarial
present value of the PBO:
1997 1996
---- ----
Discount rate 7.5% 8.0%
Rate of increase in compensation levels 3.6% 3.6%
Expected long-term rate of return on plan assets 9.5% 8.8%
Components of plan assets:
Cash equivalents and short-term investments 12% 10%
Equity investments 40% 28%
Fixed income and other investments 48% 62%
(this space intentionally left blank)
56
Total pension cost for the qualified defined benefit pension plans (in
millions):
1997 1996 1995
---- ---- ----
Service cost (benefits earned during the period) $ 127 $ 146 $ 94
Interest cost on PBO 254 251 218
Actual return (gain) on plan assets (589) (57) (541)
Net amortization and deferral 363 (131) 371
---- ---- ----
Net periodic pension cost 155 209 142
Special termination benefits * 43 - -
---- ---- ----
Total pension cost $ 198 $ 209 $ 142
==== ==== ====
* Related to an early retirement program offered to US Airways' pilots (see
above). See also disclosure below related to the Company's non-qualified
supplemental pension plans.
Non-qualified supplemental pension plans are established for certain
employee groups. These plans provide incremental pension payments from the
Company's funds so total pension payments equal amounts that would have been
payable from the Company's qualified pension plans if it were not for
federal limitation.
The funded status of the Company's non-qualified supplemental pension
plans as of September 30, 1997 and 1996, respectively (in millions):
1997 1996
---- ----
Fair value of plan assets $ - $ -
Actuarial present value of:
Vested benefit obligation 140 32
Nonvested benefit obligation 4 1
---- ----
ABO based on salaries to date 144 33
Additional benefits based on estimated future salary levels 31 2
---- ----
PBO 175 35
---- ----
PBO in excess of fair value of plan assets (175) (35)
Contributions from October 1 through December 31 1 1
Unrecognized net transition asset - -
Unrecognized prior service cost 39 2
Unrecognized net loss 22 3
---- ----
Pension liability before adjustment (113) (29)
Adjustment for minimum pension liability * (29) (6)
---- ----
Unfunded supplemental liability as adjusted and
recognized in Consolidated Balance Sheets $(142) $ (35)
==== ====
* See Note 8 (g).
The discount rate used to determine the actuarial present value of the
PBO was 7.5% and 8.0% as of September 30, 1997 and 1996, respectively. A
weighted average rate of 3.2% and 6.0% was used to estimate future salary
levels in 1997 and 1996, respectively.
(this space intentionally left blank)
57
Total pension cost for non-qualified supplemental defined benefit
pension plans (in millions):
1997 1996 1995
---- ---- ----
Service cost (benefits earned during the period) $ 4 $ 2 $ -
Interest cost on PBO 6 2 2
Actual return on plan assets - - -
Net amortization and deferral 6 6 (1)
---- ---- ----
Net periodic supplemental pension cost 16 10 1
Special termination benefits * 72 - -
---- ---- ----
Total supplemental pension cost $ 88 $ 10 $ 1
==== ==== ====
* Related to an early retirement program offered to US Airways' pilots
(see above).
(b) DEFINED CONTRIBUTION PENSION PLANS
The Company's contributions to its defined contribution pension plans
are based on a formula which considers the age and earnings of each
participant and the amount the participant contributes. Expenses related to
these plans, excluding expenses related to US Airways' ESOP and any profit
sharing contributions, were approximately $58.9 million, $55.6 million and
$64.8 million for the years 1997, 1996 and 1995, respectively. Expenses for
1995 include a catch up adjustment of $11.6 million for new employer
matching contributions for certain unionized employees. See Notes 5(e) and
5(f) for information related to US Airways' ESOP and profit sharing
contributions.
(c) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Medical and life insurance benefits are offered to certain employees
who retire from the Company and their eligible dependents. The medical
benefits provided by the Company are coordinated with Medicare benefits.
Retirees generally contribute amounts towards the cost of their medical
expenses based on years of service with the Company. The Company also
provides uninsured death benefit payments to survivors of retired employees
for stated dollar amounts, or in the case of retired pilot employees, death
benefit payments determined by age and level of pension benefit. The plans
for postretirement medical and death benefits are funded on a pay-as-you-go
basis.
The funded status of the plans as of September 30, 1997 and 1996,
respectively, except for certain subsidiaries other than US Airways which
are as of December 31, 1997 and 1996, respectively (in millions):
1997 1996
---- ----
Fair value of plan assets $ - $ -
Accumulated postretirement benefit obligation (APBO):
Retirees 308 326
Fully eligible plan participants 209 170
Other plan participants 501 455
----- -----
Total APBO 1,018 951
APBO in excess of fair value of plan assets (1,018) (951)
Contributions from October 1 through December 31, 7 7
Unrecognized prior service credits (130) (142)
Unrecognized net gain (62) (34)
----- -----
Accrued postretirement benefit liability $(1,203) $(1,120)
===== =====
58
The assumptions used to determine the APBO:
1997 1996
---- ----
Discount rate 7.5% 8.0%
Rate of increase in compensation levels 3.0% to 6.0% 3.0% to 6.0%
Health care cost trend 4.5% 7.5%
Net periodic postretirement benefit expense (in millions):
1997 1996 1995
---- ---- ----
Service cost (benefits earned during the period) $ 35 $ 44 $ 29
Interest cost on APBO 71 75 65
Actual return on plan assets - - -
Net amortization and deferral (16) (11) (15)
--- --- ---
Net periodic postretirement benefit expense $ 90 $ 108 $ 79
=== === ===
The assumed health care cost trend rate used in measuring the APBO was
changed from 6.5% in 1998 decreasing to 4.5% in 2000 to a flat 4.5% in 1998
and thereafter. This change was made in response to observed average
historical trends. If the assumed health care cost trend rates were
increased by one percentage point, the APBO at September 30, 1997 would be
increased by approximately 10% and 1997 periodic postretirement benefit
expense would increase approximately 13%.
(d) POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment benefits to all of its
employees. Such benefits include disability-related and workers'
compensation benefits and severance payments for certain employees. The
Company accrues for the cost of such benefit expenses once a triggering
event has occurred.
(e) EMPLOYEE STOCK OWNERSHIP PLAN
In August 1989, US Airways established an ESOP. US Airways Group sold
2,200,000 shares of its Common Stock to an Employee Stock Ownership Trust
(the Trust) to hold on behalf of US Airways' employees, exclusive of
officers, in accordance with the terms of the Trust and the ESOP. The
trustee placed those shares in a suspense account pending their release and
allocation to employees. US Airways provided financing to the Trust in the
form of a 9 3/4% loan for $111.4 million for its purchase of shares and US
Airways contributed an additional $2.2 million to the Trust. US Airways
makes a yearly contribution to the Trust sufficient to cover the Trust's
debt service requirement. The contributions are made in amounts equal to the
periodic loan payments as they come due, less dividends available for loan
payment. Since the Company did not pay dividends on any shares held by the
Trust for the years ended December 31, 1997, 1996 and 1995, the Trust did
not utilize dividends to service its debt during those periods. The initial
maturity of the loan is 30 years. As the loan is repaid over time, the
trustee systematically releases shares of the Common Stock from the suspense
account and allocates them to participating employees. Each participant's
allocation is based on the participant's compensation, the total
compensation of all ESOP participants and the total number of shares being
released. For each year after 1989, a minimum of 71,933 shares are released
from the suspense account and allocated to participant accounts. If US
Airways Group's return on sales equals or exceeds four percent in a given
year, more shares are released and repayment of the loan is accelerated. See
also Note 5(f) regarding the profit sharing component of US Airways' ESOP.
Annual contributions made by US Airways, and therefore loan repayments made
by the Trust, were $11.4 million in each of 1997, 1996 and 1995. The
interest portion of these contributions was $10.1 million in 1997, $10.3
million in 1996 and $10.4 million in 1995. Approximately 790,000 shares of
Common Stock have been released or committed to be released as of
December 31, 1997. US Airways recognized compensation expense
59
related to the ESOP of $11.1 million in 1997, $3.7 million in 1996 and $3.7
million in 1995 based on shares allocated to employees (the "shares
allocated" method). Deferred compensation related to the ESOP amounted to
approximately $72.4 million, $83.5 million and $87.2 million as of
December 31, 1997, 1996 and 1995, respectively. All shares of Common Stock
sold to the Trust are considered issued and outstanding for computing the
weighted average common shares outstanding for the earnings per common share
calculation.
See Note 1(l) with respect to the Company's accounting policies for
stock-based compensation.
(f) PROFIT SHARING
In exchange for temporary wage and salary reductions and other
concessions during a twelve month period in 1992 and 1993, including certain
ongoing work rule and medical benefits concessions and the freeze of the
defined benefit plan for certain non-contract employees, affected US Airways
employees participated in a profit sharing program and were granted stock
options to purchase US Airways Group Common Stock (see related discussion
under Note 8(e)). This profit sharing program was designed to recompense
those US Airways employees whose pay was reduced in an amount equal to (i)
two times salary forgone plus (ii) one time salary forgone (subject to a
minimum of $1,000) for the freeze of the defined benefit pension plan for
certain non-contract employees. US Airways recognized charges of $213.5
million, including $121.6 million and $49.7 million in 1996 and 1995,
respectively, related to this program. Cash distributions to participants of
$213.5 million have also been made, including $74.9 million and $3.3 million
in 1996 and 1995, respectively, and a final cash distribution in the first
quarter of 1997 of $129.1 million. After the first quarter 1997 payment, US
Airways' obligations under this profit sharing program were satisfied and
this program ceased.
US Airways' ESOP and Defined Contribution Retirement Program (DCRP)
each have profit sharing components. Under the ESOP, each eligible US
Airways employee receives Common Stock shares based on his or her
compensation relative to the total compensation of all participants and the
number of Common Stock shares in the allocation pool. When US Airways'
return on sales equals or exceeds certain prescribed levels, US Airways
increases its contribution, which effectively increases the number of Common
Stock shares in the allocation pool (see Note 5(e)). US Airways' ESOP-
related expenses for 1997 include $7.4 million related to this profit
sharing program. US Airways did not make any provision for profit sharing
contributions in connection with the profit sharing component of the ESOP
during 1996 or 1995. Under the DCRP, US Airways makes additional
contributions to participant accounts when US Airways Group achieves certain
prescribed pre-tax margin levels (see also Note 5(b)). US Airways' 1997 and
1996 results of operations reflect expenses of $24.1 million and $4.8
million, respectively, for the profit sharing component of the DCRP. In
1995, US Airways did not achieve the prescribed pre-tax margin levels and,
accordingly, made no such provision for this program.
6. COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS TO PURCHASE FLIGHT EQUIPMENT
On October 31, 1997, the Company entered into agreements with AVSA,
S.A.R.L. (AVSA), an affiliate of aircraft manufacturer Airbus Industrie
G.I.E. (Airbus), and CFM International, Inc. (CFMI) for the acquisition of
up to 400 Airbus A320 family aircraft and accompanying jet engines. The A320
family aircraft are single-aisle aircraft which include the Airbus A319,
A320 and A321.
The Company has 124 aircraft on firm order, 116 aircraft subject to
reconfirmation prior to scheduled delivery and options for 160 additional
aircraft. Of the first 124 aircraft, six are scheduled for delivery in 1998,
20 in 1999 and 98 in the years 2000 through 2002. The Company anticipates
that the new Airbus aircraft will ultimately replace, at a minimum,
US Airways'
60
B737-200, DC-9-30 and MD-80 aircraft.
The minimum determinable payments associated with the Company's
agreements with AVSA and CFMI (including progress payments, payments at
delivery, buyer-furnished equipment, spares, capitalized interest, penalty
payments, cancellation fees and/or nonrefundable deposits) are currently
estimated at $302 million in 1998, $725 million in 1999, $1.07 billion in
2000 and $211 million in 2001.
US Airways has a commitment to purchase hush-kits for certain of its
B737-200 aircraft. The installation of hush-kits will allow these aircraft
to meet certain statutory noise level requirements. Expected payments
associated with this commitment are approximately $60 million for 1998 and
1999.
See also Note 6(c) with respect to litigation between US Airways and
Boeing.
(b) LEASES
The Company's airline subsidiaries lease certain aircraft, engines,
computer and ground equipment, in addition to the majority of their ground
facilities. Ground facilities include executive offices, overhaul and
maintenance bases and ticket and administrative offices. Public airports are
utilized for flight operations under lease arrangements with the
municipalities or agencies owning or controlling such airports.
Substantially all leases provide that the lessee shall pay taxes,
maintenance, insurance and certain other operating expenses applicable to
the leased property. Some leases also include renewal and purchase options.
The Company subleases certain leased aircraft and ground facilities under
noncancelable operating leases expiring in various years through the year
2021.
The following amounts related to capital leases are included in
property and equipment (in thousands):
December 31,
---------------------
1997 1996
---- ----
Flight equipment $80,448 $167,308
Ground property and equipment 406 406
------ -------
80,854 167,714
Less accumulated amortization (54,495) (125,568)
------ -------
$26,359 $ 42,146
====== =======
(this space intentionally left blank)
61
As of December 31, 1997, obligations under capital and noncancelable
operating leases for future minimum lease payments (in thousands):
Capital Operating
Leases Leases
------- ---------
1998 $10,294 $ 795,393
1999 10,295 760,727
2000 7,193 729,409
2001 4,703 726,325
2002 4,703 672,714
Thereafter 9,405 6,046,372
------ ---------
Total minimum lease payments 46,593 9,730,940
Less sublease rental receipts - (123,285)
---------
Total minimum operating lease payments $9,607,655
=========
Less amount representing interest (13,125)
------
Present value of future minimum capital
lease payments 33,468
Less current obligations under capital leases (6,300)
------
Long-term obligations under capital leases $27,168
======
For 1997, 1996 and 1995, rental expense under operating leases was
approximately $804 million, $787 million and $773 million, respectively.
Rental expense for 1997, 1996 and 1995 exclude credits of $1.5 million,
$22.5 million and $4.1 million, respectively, related to US Airways'
subleasing of BAe-146 aircraft (see Notes 13(a), 13(b) and 13(c)). Rental
expense for 1997 also excludes $4.6 million related to expenses recognized
by US Airways in conjunction with certain efficiency measures (see Note
13(a)).
The Company's airline subsidiaries also lease certain owned flight
equipment under noncancelable operating leases which expire in the years
1998 through 2000. The future minimum rental revenues associated with these
leases are: $8.9 million-1998; $7.2 million-1999; and, $0.7 million-2000.
The following amounts relate to aircraft leased under such agreements
as reflected in flight equipment (in thousands):
December 31,
---------------------
1997 1996
---- ----
Flight equipment $52,645 $49,358
Less accumulated amortization (31,696) (24,711)
------ ------
$20,949 $24,647
====== ======
(c) LEGAL PROCEEDINGS
US Airways is involved in legal proceedings arising out of certain
aircraft accidents, including an accident in September of 1994 near
Pittsburgh in which 127 passengers and five crew members lost their lives.
With respect to the 1994 accident, the National Transportation Safety Board
(NTSB) held hearings in January and November of 1995, and is scheduled to
hold additional hearings in 1998 before issuing its final accident
investigation report. Wrongful death cases are pending in a consolidated
multi-district litigation in U.S. District Court for the Western District of
Pennsylvania, and in state courts in Cook County, Illinois and Harris
County, Texas. While US Airways has settled over 80% of the cases arising
from the Pittsburgh accident, it expects that it will be at least two years
before all of the settlements and/or related litigation are concluded.
US Airways is fully insured with respect to this litigation and, therefore,
believes that the litigation will not have a material adverse effect on the
Company's financial condition or results of operations.
62
Boeing filed suit against US Airways in September 1997 in state court
in King County, Washington seeking unspecified damages for alleged breach of
two aircraft purchase agreements concerning, respectively, eight B757-200
aircraft and 40 B737-Series aircraft. On October 31, 1997, US Airways filed
an answer and counterclaims to Boeing's complaint denying liability and
seeking recovery from Boeing of approximately $35 million in equipment
purchase deposits. The case is currently in the discovery phase of
litigation. In its initial discovery response, Boeing has quantified its
damage claim at approximately $220 million. The Company is unable to predict
at this time the ultimate resolution or potential financial impact of these
proceedings on the Company's financial condition or results of operations.
In October 1995, US Airways terminated for cause an agreement with In-
Flight Phone Corporation (IFPC). IFPC was US Airways' provider of on-board
telephone and interactive data systems. The IFPC system had been installed
in approximately 80 aircraft prior to the date of termination of the
agreement. On December 6, 1995, IFPC filed suit against US Airways in
Illinois state court seeking equitable relief and damages in excess of $186
million. US Airways believes that its termination of its agreement with IFPC
was appropriate and that it is owed significant damages from IFPC. US
Airways has filed a counterclaim against IFPC seeking compensatory damages
in excess of $25 million and punitive damages in excess of $25 million. In
January 1997, IFPC filed for protection from its creditors under Chapter 11
of the Bankruptcy Code. The parties stipulated to lift the automatic stay
provided for in the Bankruptcy Code which could allow IFPC's and US Airways'
claims to be fully litigated. The Company is unable to predict at this time
the ultimate resolution or potential financial impact of these proceedings
on the Company's financial condition or results of operations.
On July 30, 1996, the Company and US Airways initiated a lawsuit in
U.S. District Court for the Southern District of New York against British
Airways Plc. (British Airways), BritAir Acquisition Corp., Inc., American
Airlines, Inc. (American) and American's parent company, AMR Corp. The
Company and US Airways claimed that British Airways, in pursuit of an
alliance with American, is responsible for breaches of fiduciary duty to the
Company and US Airways and violated certain provisions of the January 21,
1993 Investment Agreement between the Company and British Airways (the
Investment Agreement). The lawsuit also claims that the defendants have
committed violations of U.S. antitrust laws. In response to the defendants'
Motion to Dismiss, the Court sustained US Airways' claims for breach of
contract against British Airways. The Court dismissed the remaining claims
against British Airways and all claims against American. On February 6,
1998, British Airways filed its answer to the complaint along with
counterclaims against the Company and US Airways. British Airways'
counterclaims alleged that US Airways breached various provisions of the
Investment Agreement and that US Airways breached the Code Share Agreement
between British Airways and US Airways by providing certain allegedly
confidential information to a third party. In addition, British Airways
seeks a declaratory judgment regarding certain payment obligations under its
wet lease arrangement with US Airways. British Airways claimed damages of
$16.7 million for the termination of the code share relationship and an
unspecified amount of damages for its remaining claims. The Company is
unable to predict at this time the ultimate resolution or potential
financial impact of these proceedings on the Company's financial condition
or results of operations.
In May 1995, the Company, US Airways and the Retirement Income Plan for
US Airways, Inc. (the Pilots Pension Plan) were sued in federal district
court for the District of Columbia by 481 active and retired pilots alleging
that defendants had incorrectly interpreted the Pilots Pension Plan
provisions and erroneously calculated benefits under the Pilots' Pension
Plan. The plaintiffs sought damages in excess of $70 million. In May 1996,
the court issued a decision granting US Airways' Motion to Dismiss the
majority of the complaint for lack of jurisdiction, deciding that the
dispute must be resolved through the arbitration process under the Railway
Labor Act because the Pilots Pension Plan was collectively bargained. The
court retained jurisdiction over one count of the complaint alleging a
violation of a disclosure requirement under the Employee Retirement Income
63
Security Act. The plaintiffs have attempted to appeal the district court's
dismissal before the U.S. Court of Appeals for the District of Columbia. In
January of 1998, the Court of Appeals dismissed plaintiff's appeal for lack
of jurisdiction because the lower court order was not final.
In February of 1998 a purported class action complaint was filed by a
travel agency in Puerto Rico against seven major U.S. airlines, including US
Airways. The complaint alleges that the defendant airlines are
undercompensating Puerto Rican travel agents in connection with the agents'
sale of travel. The plaintiffs allege that the airlines are contractually
obligated to pay a 10% commission and that the defendant airlines breached
that contract as a result of the introduction of commission caps limiting
commission payable with respect to a single trip to a stated dollar amount
and reducing certain commissions to 8%. The plaintiffs have stated their
damages for the class in the amount of $150 million. Given the early stage
of this litigation, the Company is unable to predict at this time the
ultimate resolution or potential financial impact of these proceedings on
the Company's financial condition or results of operations.
The City and County of San Francisco have sued a number of San
Francisco International Airport tenants for the recovery of approximately
$18 million of costs incurred with respect to the characterization and
cleanup of soil and groundwater contamination at the airport. The City has
recently identified US Airways as a potentially responsible party, although
the City has not amended the complaint to add US Airways as a defendant
party. The Company is unable to predict at this time the ultimate resolution
or potential financial impact of these proceedings on the Company's
financial condition or results of operations.
(d) GUARANTEES
US Airways guarantees the payment of principal and interest on special
facility revenue bonds issued by certain municipalities to build or improve
airport and maintenance facilities. Under related lease arrangements, US
Airways is required to make rental payments sufficient to pay maturing
principal and interest payments on the bonds. As of December 31, 1997 the
principal amount of these bonds outstanding was $77.4 million.
(e) CONCENTRATION OF CREDIT RISK
The Company invests available cash in money market securities of
various banks, commercial paper of financial institutions and other
companies with high credit ratings and securities backed by the United
States government.
As of December 31, 1997, most of the Company's receivables related to
tickets sold to passengers through the use of major credit cards (45%) or
to tickets sold by other airlines (18%) and used by passengers on the
Company's airline subsidiaries. These receivables are short-term, generally
being settled within 14 days after sale. Bad debt losses, which have been
minimal in the past, have been considered in establishing allowances for
doubtful accounts. The Company does not believe it is subject to any
significant concentration of credit risk.
7. REDEEMABLE PREFERRED STOCK
(a) SERIES H PREFERRED STOCK
As of December 31, 1997, 358,000 shares of the Company's 9 1/4% Series
H Senior Cumulative Convertible Preferred Stock (Series H Preferred Stock),
without par value, were outstanding. Each share of Series H Preferred Stock
is convertible into 25.8099 shares of Common Stock and is entitled to
25.8099 votes on all matters submitted to a vote of the Company's
stockholders (both rates are subject to certain anti-dilution adjustments).
The Series H Preferred
64
Stock is senior to the Company's Common Stock with respect to dividend
payments and the distribution of assets. The holders of the Series H
Preferred Stock, currently affiliates of Berkshire Hathaway, Inc. (Berkshire
Hathaway), are entitled to receive annual dividends of $92.50 per share,
payable in equal quarterly payments on March 31, June 30, September 30 and
December 31. Dividends, if not paid quarterly, are accrued at the stated
dividend rate of 9 1/4% plus additional dividends (interest) on the balance
of the deferred dividends at the higher of the stated dividend rate or the
prime rate plus five percentage points. The holders of the Series H
Preferred Stock have the exclusive right to elect two directors to the
Company's board of directors after a scheduled dividend payment has not been
paid for thirty days.
The Company is required to redeem all outstanding shares of Series H
Preferred Stock on August 7, 1999 at $1,000 per share plus accrued
dividends. The Company can redeem shares of Series H Preferred Stock at a
premium of $150 per share prior to the mandatory redemption date. The
holders of the Series H Preferred Stock can require the Company to redeem
the Series H Preferred Stock if, under certain conditions, a non-affiliated
entity purchases fifty percent or more of the combined voting power of the
Company's then outstanding voting stock. Berkshire Hathaway is not permitted
to sell more than 3% of the Series H Preferred Stock to any entity or group
of affiliated entities or to any entity that has filed a Schedule 13D with
the U.S. Securities and Exchange Commission as a 5% holder of the Company's
voting stock.
The Series H Preferred Stock was issued in exchange for the Company's 9
1/4% Series A Cumulative Convertible Redeemable Preferred Stock (Series A
Preferred Stock) during August 1997. The Series A Preferred Stock, which was
originally issued in 1989, was also owned by affiliates of Berkshire
Hathaway. The terms of Series H Preferred Stock are substantially similar to
the terms of the Series A Preferred Stock, with the following exceptions:
the early redemption premium (redeeming the Series H Preferred Stock prior
to August 7, 1999) was increased to $150 per share from $100 per share and
certain changes were made to provisions related to the ability of Berkshire
Hathaway to sell shares of Series H Preferred Stock to entities other than
US Airways Group.
The Company paid dividends totaling $80.6 million and $47.9 million to
the holders of the Series H Preferred Stock (including amounts related to
the former Series A Preferred Stock) during 1997 and 1996, respectively.
Dividend payments during both years included dividends deferred from prior
periods and accrued dividends (interest) on deferred dividends. The Company
deferred dividend payments on all its outstanding preferred stock issuances
beginning with dividends payable on September 30, 1994. After a March 1997
dividend payment, the Company had paid all dividends in arrears and had
resumed regular quarterly dividend payments on this preferred stock
issuance.
See Note 8(a) for information related to the ability of the Company to
pay dividends on its outstanding capital stock. See also Note 15.
(b) SERIES F AND SERIES T PREFERRED STOCK
During 1993 US Airways Group and British Airways entered into an
investment agreement (the Investment Agreement) under which a wholly-owned
subsidiary of British Airways purchased certain series of redeemable
convertible preferred stock from the Company, and British Airways entered
into code sharing and other business arrangements with US Airways.
As of December 31, 1996, the preferred stock held by British Airways
constituted approximately 23% of the total voting interest in the Company.
These holdings included the Company's Series F Cumulative Convertible Senior
Preferred Stock, without par value (Series F Preferred Stock), the Series T-
1 Cumulative Convertible Exchangeable Senior Preferred Stock, without par
value (Series T-1 Preferred Stock), and the Series T-2 Cumulative
Convertible Exchangeable Senior Preferred
65
Stock, without par value (Series T-2 Preferred Stock). The Series T-1
Preferred Stock and the Series T-2 Preferred Stock are collectively referred
to herein as the "Series T Preferred Stock."
On June 11, 1996, British Airways announced a proposed "operational
merger" with American, which is currently being reviewed by regulatory
authorities in the United Kingdom, the United States and Europe. Following
this announcement, in October 1996, US Airways notified British Airways that
it was terminating the code share and other business arrangements between
the companies effective March 29, 1997. On January 28, 1997, the Company
received notice that the three British Airways' representatives resigned as
directors of US Airways Group and on February 12, 1997, the Company received
notice that such individuals resigned as directors of US Airways. In the
letter of resignation, British Airways waived its current and future rights
under the Investment Agreement to US Airways Group board representation.
On May 21, 1997, British Airways converted 28,059.364 shares of Series
F Preferred Stock into 14,458,851 shares of Common Stock, which it then sold
to third parties. On May 22, 1997, US Airways Group repurchased the
remaining outstanding shares of Series F Preferred Stock and all of the
Series T Preferred Stock for $126.2 million (which included a premium over
the stated amount of $5.2 million for the shares of Series F Preferred Stock
repurchased and $0.8 million for the Series T Preferred Stock). The Company
believes that British Airways held no ownership interest in the Company
after May 22, 1997.
The Company paid dividends totaling $44.1 million and $35.1 million on
its Series F and Series T Preferred Stock during 1997 and 1996,
respectively. Dividend payments during both years included dividends
deferred from prior periods and accrued dividends (interest) on deferred
dividends. The Company deferred dividend payments on all its outstanding
preferred stock issuances beginning with dividends payable on September 30,
1994. After a March 1997 dividend payment, the Company had paid all
dividends in arrears and had resumed regular quarterly dividend payments on
both the Series F and Series T Preferred Stock. As mentioned above, the
Series F and Series T Preferred Stock were converted/repurchased during May
1997.
See Note 6(c) for information related to outstanding litigation
involving the Company and British Airways and Note 10 for information
related to certain other transactions between the Company and British
Airways.
8. STOCKHOLDERS' EQUITY
(a) COMMON STOCK
As of December 31, 1997, the Company had 150.0 million authorized
shares of Common Stock, par value $1.00 per share, of which 91.5 million
shares were issued (including shares of Common Stock held in treasury as
discussed in Note 8(d)) and 16.1 million shares were reserved for issuance
upon conversion of the Series H Preferred Stock (see Note 7(a)) and for
offerings under employee stock purchase, stock option, stock incentive and
employee retirement plans.
The Company has not paid dividends on its Common Stock since the second
quarter of 1990. There can be no assurance when or if the Company will
resume dividend payments on its Common Stock.
The Company, organized under the laws of the State of Delaware, is
subject to Sections 160 and 170 of the Delaware General Corporation Law
(Delaware Law) with respect to the payment of dividends on or the repurchase
or redemption of its capital stock. As of December 31, 1997, the Company
does not believe that Delaware Law placed any material restrictions on the
Company's ability to pay dividends on or repurchase or redeem its capital
stock.
66
See Notes 7(a), 7(b) and 8(c) for information related to preferred
stock converted into Common Stock during 1997.
(b) PREFERRED STOCK AND SENIOR PREFERRED STOCK
As of December 31, 1997, the Company had 5.0 million authorized shares
of Preferred Stock, without nominal or par value, of which 358,000 shares
were issued and outstanding as Series H Preferred Stock (see Note 7(a)), and
3.0 million authorized shares of Senior Preferred Stock, without nominal or
par value, none of which were issued and outstanding. See also Note 8(a).
(c) SERIES B PREFERRED STOCK
During August 1997, the Company notified the holders of its publicly-
held Series B Cumulative Convertible Preferred Stock (Series B Preferred
Stock) that it would redeem all 4,263,000 outstanding depositary shares
representing shares of Series B Preferred Stock on September 15, 1997 at
$51.75 per depositary share plus accrued dividends of $0.3646 per depositary
share. Because conversion into Common Stock was financially advantageous to
the holders, all but approximately 6,000 depositary shares were converted
prior to the redemption date resulting in the issuance of approximately 10.6
million shares of Common Stock.
The Company paid dividends totaling $55.9 million to the holders of the
Series B Preferred Stock during 1997 prior to its conversion/redemption. The
Company did not make any dividend payments on the Series B Preferred Stock
during 1996. Dividend payments during 1997 included dividends deferred from
prior periods. The Company deferred dividend payments on all its outstanding
preferred stock issuances beginning with dividends payable on September 30,
1994. After an April 1997 dividend payment, the Company had paid all
dividends in arrears and had resumed regular quarterly dividend payments on
this preferred stock issuance.
(d) TREASURY STOCK
The Company held approximately 40,000 shares of Common Stock in
treasury as of December 31, 1997. During 1997 and 1996, employees
surrendered approximately 125,000 and 118,000 shares of Common Stock,
respectively, to the Company in lieu of cash payments to satisfy tax
withholding requirements related to the vesting of certain Common Stock
grants. The Company has typically reissued such shares upon the exercise of
stock options held by employees. See also Note 15.
(e) STOCK-BASED COMPENSATION
As of December 31, 1997, approximately 5.9 million shares of Common
Stock were reserved for future grants of Common Stock or the possible
exercise of stock options issued under the Company's five stock option and
incentive plans. The Company accounts for stock-based compensation using
the intrinsic value method as prescribed under APB 25. In accordance with
APB 25, the Company recognized compensation expense (an element of
Personnel costs) related to Common Stock grants of $5.7 million, $11.9
million and $0.3 million in 1997, 1996 and 1995, respectively, and
compensation expense related to stock option grants of $1.4 million in 1997
and $7.9 million in 1996 (none for 1995). In addition, the Company
recognized compensation expenses related to stock appreciation rights
(SARs), the Company's only variable stock-based compensation instrument, of
$33.2 million in 1997 and $41.6 million in 1996 (none for 1995). Deferred
compensation related to Common Stock grants was $6.6 million and $9.4
million as of December 31, 1997 and 1996, respectively, and deferred
compensation related to stock option grants was $1.0 million and $2.4
million as of December 31, 1997 and 1996. The Company granted 0.2 million,
0.6 million and 0.9 million shares of Common Stock during 1997, 1996 and
1995, respectively. The weighted average fair value per share of Common
Stock granted in 1997,
67
1996 and 1995 was $25, $17 and $13, respectively.
The 1997 Stock Incentive Plan of US Airways Group, Inc. (1997 Plan),
which became effective during March 1997, authorizes the Company to grant
Common Stock and stock option awards to non-officer key employees provided
that no more than 750,000 shares of Common Stock are issued as a result of
the awards. The 1996 Stock Incentive Plan of US Airways Group, Inc. (1996
Plan), which became effective during May 1996 and encompasses the Company's
former 1988 Stock Incentive Plan of USAir Group, Inc., authorizes the
Company to grant Common Stock and stock option awards to key employees
provided that no more than 8.4 million shares of Common Stock are issued as
a result of the awards. All stock option awards under the 1997 Plan and
1996 Plan expire after a period of ten years and one month from date of
grant. Under both plans, the Company uses its discretion in setting the
vesting rate of each award. All awards granted prior to December 31, 1997
have a vesting period of five years or less.
Under the 1992 Stock Option Plan of USAir Group, Inc. (1992 Plan), US
Airways employees whose pay was reduced, generally during a 12 month period
in 1992 and 1993, received stock options to purchase 50 shares of Common
Stock at a price of $15 per share for each $1,000 of salary reduction.
Participating employees have five years from the grant date to exercise
such stock options (see also Note 5(f) for related information). Effective
November 1, 1996, the Company added a SAR feature to the 1992 Plan and
granted SARs to stock option holders on a one-for-one basis. For each SAR,
the holder is entitled to receive a cash distribution equal to the excess
of the fair market value of a share of Common Stock above $15. The exercise
of any SAR cancels its tandem stock option and, conversely, the exercise of
any stock option cancels its tandem SAR. The SARs have the same expiration
date as the tandem stock options. As of December 31, 1997, only 0.2 million
stock options (with tandem SARs) granted under the 1992 Plan were
outstanding, all of which are due to expire during 1998. The 1984 Stock
Option and Stock Appreciation Rights Plan of USAir Group, Inc. (1984 Plan)
authorized the Company to grant stock option and SAR awards to key
employees provided that no more than 600,000 shares of Common Stock were
issued as a result of the awards. All awards under the 1984 Plan expire
after a period of ten years and one month from date of grant. No SARs
awarded under the 1984 Plan were outstanding as of December 31, 1997. The
Company may no longer grant awards under neither the 1992 Plan nor the 1984
Plan. All awards previously granted under both of these plans have vested.
The USAir Group, Inc. Nonemployee Director Stock Incentive Plan
(Director Plan), which became effective during May 1996, authorizes the
Company to grant stock option awards to each nonemployee director provided
that no more than 70,000 shares of Common Stock are issued as a result of
the awards. All stock option awards under the Director Plan expire after
ten years from date of grant and are subject to a one year vesting period.
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68
The following table summarizes stock option transactions pursuant to
the Company's various stock option and incentive plans for the years ended
December 31, 1997, 1996 and 1995:
1997 1996 1995
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(000) (000) (000)
Stock Options
- -------------
Outstanding at
beginning of year 9,782 $17 8,426 $17 8,844 $18
Granted (1) 951 $27 97 $17 155 $9
Granted (2) - - 2,415 $13 - -
Exercised (2,119) $19 (435) $15 (43) $10
Forfeited(3)(4) (3,795) $16 (673) $16 (489) $25
Expired (186) $24 (48) $32 (41) $36
----- ----- -----
Outstanding at
end of year 4,633 $18 9,782 $17 8,426 $17
Exercisable at
end of year 2,792 7,802 7,986
(1) Exercise price equal to the fair market value of a share of Common
Stock at date of grant; includes 50,000 and 20,000 stock options that
were repriced during 1997 and 1996, respectively.
(2) Exercise price was lower than the fair market value of a share of
Common Stock at measurement date for grant.
(3) Activity during 1997 and 1996 includes cancellation of repriced stock
options. See (1) above.
(4) Activity during 1997 and 1996 includes 3.5 million and 0.6 million
stock options, respectively, that were forfeited as a result of their
tandem SAR being exercised.
The weighted average fair value per stock option for stock options
which have an exercise price equal to the fair market value of a share of
Common Stock at date of grant was $18, $12 and $6 for 1997, 1996 and 1995,
respectively. The weighted average fair value per stock option for stock
options which have an exercise price lower than the fair market value of a
share of Common Stock at date of grant was $13 for 1996 (no such grants
during 1997 and 1995).
Stock Options Stock Options
Outstanding Exercisable
--------------------------------- ---------------------
Weighted
Number Average Weighted Weighted
of Options Remaining Average Average
Range of Outstanding Contractual Exercise Number Exercise
Exercise Prices at 12/31/97 Life Price Exercisable Price
- ---------------- ----------- ----------- -------- ----------- --------
(000) (years) (000)
$ 4.25 to $10.00 133 7.0 $ 7 95 $ 7
$10.01 to $15.00 2,655 7.5 $13 1,756 $13
$15.01 to $20.00 291 5.4 $17 240 $17
$20.01 to $25.00 646 3.5 $22 608 $22
$25.01 to $40.00 826 9.2 $28 16 $37
$40.01 to $48.00 82 2.1 $45 77 $45
69
During 1995, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), which requires the use of fair value
techniques to determine compensation expense associated with stock-based
compensation. Although the Company has opted to continue to apply the
provisions of APB 25 to determine compensation expense, as permitted under
SFAS 123, the Company is obligated to disclose certain information
including pro forma net income and earnings per share as if SFAS 123 had
been adopted by the Company to measure compensation expense. Had
compensation cost been measured in accordance with SFAS 123, the Company's
net income and earnings per common share would have been reduced to the pro
forma numbers indicated in the table below. In order to calculate the pro
forma net income information presented below, the Company used the Black-
Scholes stock option-pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: stock volatility of
52.6%, 50.1% and 48.8%; risk-free interest rates of 6.6%, 6.2% and 6.6%;
expected stock option life of eight years, nine years and nine years; and
no dividend yield.
1997 1996 1995
---- ---- ----
Net Income As reported (000s) $1,024,699 $263,373 $119,287
Pro forma (000s) $1,017,705 $248,204 $119,074
Earnings Applicable to As reported (000s) $961,437 $174,598 $ 34,383
Common Stockholders Pro forma (000s) $954,443 $159,429 $ 34,170
Earnings per Common As reported $12.32 $2.73 $0.55
Share - Basic (1) Pro forma $12.23 $2.49 $0.55
Earnings per Common As reported $9.87 $2.35 $0.55
Share - Diluted (1) Pro forma $9.83 $2.21 $0.55
(1) The Company's Earnings per Common Share figures (as reported and pro
forma) for the years 1996 and 1995 have been restated to conform with
SFAS 128 (see also Note 1(n)).
The pro forma net income and earnings per common share information
presented above reflects stock options granted during 1997, 1996 and 1995
only. Therefore, the full impact of calculating compensation expense for
stock options under SFAS 123 is not reflected in the pro forma net income
and earnings per common share amounts above because compensation expense is
recognized over the stock option's vesting period and compensation expense
for stock options granted prior to January 1, 1995 is not considered. See
also Note 1(n).
(f) UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES, NET OF INCOME
TAX EFFECTS
In accordance with SFAS 115, the Company records an adjustment to
Stockholders' Equity (Deficit) to reflect differences between the fair
value of investments in marketable equity securities and short-term
investments (both types of investments are considered "available-for-sale"
under SFAS 115) and their respective carrying values at each balance sheet
date.
(g) ADJUSTMENT FOR MINIMUM PENSION LIABILITY, NET OF INCOME TAX
EFFECTS
In accordance with SFAS 87, the Company recorded an Adjustment for
minimum pension liability as of December 31, 1997 and 1996. SFAS 87
requires the recognition of an additional minimum pension liability for
each defined benefit plan for which the accumulated benefit obligation
exceeds the fair value of the plan's assets and accrued pension costs. An
offsetting intangible asset is recognized for each additional minimum
pension liability recorded. Because each intangible asset recognized is
limited to the amount of unrecognized prior service cost, any balance is
reflected as a reduction of Stockholders' Equity (Deficit), net of income
tax effects.
70
See also Note 5(a).
9. USAM'S SALE OF CERTAIN INVESTMENTS
As of December 31, 1996 and prior to the events described below, USAM
owned 11% of the Galileo International Partnership (GIP) and approximately
21% of the Apollo Travel Services Partnership (ATS). GIP owned and
operated the Galileo CRS and ATS marketed the Galileo CRS in the U.S. and
Mexico.
On July 30, 1997, Galileo completed an initial public offering (IPO)
and used the proceeds, together with the proceeds of bank financing, to
purchase ATS. Immediately preceding the IPO, GIP was merged with and into a
wholly-owned limited liability company subsidiary of Galileo and USAM
received shares in Galileo in the same proportion as its partnership
interest in GIP. As part of the IPO, USAM sold some of its Galileo shares
and its interest in Galileo was reduced from 11% to approximately 6.7%.
USAM received proceeds of $62.2 million and recognized a pre-tax gain of
approximately $50 million from the sell-down of its interest in Galileo and
received proceeds of $162.0 million and recognized a pre-tax gain of
approximately $130 million in connection with the ATS sale.
As of December 31, 1997, USAM owned approximately 6.7% of Galileo and
11% of GJP. USAM applies the provisions of SFAS 115 to account for its
remaining investment in Galileo, which is classified as "available-for-
sale."
USAM received distributions from GIP, GJP and ATS of $12.7 million,
$1.0 million and $4.6 million, respectively, during 1997, and $4.1 million,
$0.1 million and $44.5 million (including a special distribution from ATS
of $33.7 million during the second quarter of 1996), respectively, during
1996. USAM also received a dividend of $0.4 million from Galileo during
1997.
10. RELATED PARTY TRANSACTIONS
US Airways wet leased B767-200ER aircraft, including cockpit and cabin
crews, to British Airways in order to serve three routes between the U.S.
and London beginning in June 1993 and ending in May 1996. US Airways
recognized other operating revenues of $12.6 million and $63.6 million for
the years 1996 and 1995, respectively, related to these arrangements. These
revenues were offset by an equal amount of other operating expenses. US
Airways also has various agreements with British Airways for ground
handling at certain airports, contract training and other services. US
Airways recognized other operating revenues of $1.5 million for the first
five months of 1997 and $5.8 million and $4.9 million for the years 1996
and 1995, respectively, related to services US Airways performed for
British Airways.
As of December 31, 1996, US Airways' receivables from and payables to
British Airways were $8.0 million and $5.5 million, respectively. US
Airways also has a long-term note receivable from British Airways related
to three U.S. to London routes that US Airways relinquished at the time of
implementation of a code sharing arrangement with British Airways. The
balance of this note receivable was $40.7 million as of December 31, 1996.
Payments began in December 1995 in conjunction with the termination of the
first wet lease arrangement and are scheduled to continue through the year
2004.
US Airways terminated the code share and other business arrangements
between the two companies effective March 29, 1997. See Note 7(b) for
additional information related to the Company's relationship with British
Airways.
71
During 1997 and 1996, employees surrendered approximately 125,000 and
118,000 shares of Common Stock, respectively, to the Company in lieu of
cash payments to satisfy tax withholding requirements related to the
vesting of certain common stock grants (see also Note 8(d)).
11. VALUATION AND QUALIFYING ACCOUNTS
Allowance For
------------------------------
Uncollectible Inventory
Accounts Obsolescence
------------- -------------
(in thousands)
Balance as of December 31, 1994 $ 9,471 $172,791
Additions charged to expense 12,046 12,146
Amounts charged to reserve (9,177) (20,851)
------ -------
Balance as of December 31, 1995 12,340 164,086
Additions charged to expense 11,086 10,501
Amounts charged to reserve (11,237) (28,296)
------ ------
Balance as of December 31, 1996 12,189 146,291
Additions charged to expense 14,395 10,474
Amounts charged to reserve (9,000) (9,569)
Other (1) 671 546
------ -------
Balance as of December 31, 1997 $18,255 $147,742
====== =======
(1) Reserves of Shuttle, Inc. See Note 14.
12. SELECT QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions, except per share amounts)
1997
Operating Revenues $2,101 $2,213 $2,115 $2,085
Operating Income $ 176 $ 256 $ 83 $ 70
Net Income $ 153 $ 206 $ 187 $ 479
Earnings Applicable to
Common Stockholders $ 132 $ 182 $ 176 $ 471
Earnings per Common Share
Basic $ 2.05 $ 2.53 $ 2.10 $ 5.16
Diluted $ 1.45 $ 1.92 $ 1.82 $ 4.66
1996
Operating Revenues $1,868 $2,149 $2,073 $2,052
Operating Income $ 11 $ 246 $ 131 $ 49
Net Income (Loss) $ (32) $ 201 $ 68 $ 27
Earnings (Loss) Applicable to
Common Stockholders $ (55) $ 178 $ 45 $ 6
Earnings (Loss) per Common Share
Basic $(0.86) $ 2.78 $ 0.71 $ 0.09
Diluted $(0.86) $ 1.91 $ 0.60 $ 0.08
See also Notes 1(l), 3, 5, 9 and 15.
Note: The sum of the four quarters may not equal yearly totals due to
rounding of quarterly results.
72
13. NONRECURRING ITEMS
(a) 1997
The Company's results for 1997 include certain nonrecurring items
recorded by US Airways: (i) $121.9 million in Personnel costs (including a
fourth quarter charge of $115.0 million related to an early retirement
program for pilots (see also Note 5(a)) and a second quarter charge of $6.9
million related to estimated employee severance payments due to efficiency
measures US Airways announced during May 1997); (ii) a $1.5 million credit
to Aircraft rent due to the reversal of previously accrued lease
obligations upon the subleasing of an additional BAe-146 aircraft,
recognized in the second quarter (see Notes 13 (b) and 13 (c) below); (iii)
$4.6 million in Other rent and landing fees (including a third quarter
charge of $1.7 million to write-down certain equipment to be disposed of
and a second quarter charge of $2.9 million to write-off lease obligations
at certain facilities to be abandoned (net of any anticipated sublease
revenues), both related to the May 1997 efficiency measures); (iv) $89.1
million in Depreciation and amortization (including third quarter charges
of $11.4 million related to the May 1997 efficiency measures to write-down
certain equipment to be disposed of and a $59.3 million SFAS 121 impairment
charge resulting from US Airways' September 1997 decision to retire its
remaining DC-9-30 aircraft over the next several years, and second quarter
charges of $0.3 million to write-off certain leasehold improvements and an
$18.1 million SFAS 121 impairment charge to write-down certain DC-9-30
aircraft, both related to the May 1997 efficiency measures); and (v) $179.6
million in Gains on sales of interests in affiliates which resulted from
USAM's sale of certain investments as discussed in Note 9.
(b) 1996
The Company's results for 1996 include two nonrecurring items recorded
by US Airways during the second quarter of 1996 related to US Airways'
subleasing of eleven non-operating BAe-146 aircraft (see Note 13(c) below).
US Airways reversed $22.5 million of previously accrued rent obligations
related to these aircraft against Aircraft rent expense and reversed $7.0
million against Aircraft maintenance expense related to previously accrued
lease return provisions.
(c) 1995
In the fourth quarter of 1995, US Airways reversed $4.1 million of the
$132.8 million nonrecurring charge related to its grounded BAe-146 fleet
that was recorded in the fourth quarter of 1994. The reversal, a credit to
Aircraft rent expense, reflects the successful remarketing by US Airways of
three of these aircraft.
14. ACQUISITION OF SHUTTLE
On December 30, 1997, the Company purchased Shuttle for $189.8 million.
Shuttle, which operates under the trade name "US Airways Shuttle," provides
high-frequency service between New York, Boston and Washington. For
accounting purposes the acquisition was treated as a purchase and,
accordingly, Shuttle's results of operations for December 31, 1997 have
been included in the Company's Consolidated Statements of Operations for
1997. In addition, Shuttle's assets and liabilities were re-valued at fair
value as of the acquisition date. The Company's Consolidated Balance Sheets
as of December 31, 1997 include the assets and liabilities of Shuttle. The
purchase of Shuttle resulted in goodwill, as discussed in Note 1(f).
The impact of this acquisition was not material to the Company's
Consolidated Statements of Operations or its Consolidated Balance Sheets;
consequently, no pro forma information is presented.
73
Shuttle's assets include twelve B727-200 aircraft and takeoff and
landing rights at both LaGuardia and National airports.
15. SUBSEQUENT EVENTS
On March 12, 1998, Berkshire Hathaway exercised its right to convert
the Series H Preferred Stock into approximately 9.2 million shares of the
Company's Common Stock. The Company subsequently retired the Series H
Preferred Stock. See also Note 7(a).
In January 1998, the Company announced plans to purchase up to 2.3
million shares of its Common Stock from time-to-time in open market or
privately negotiated transactions. This program was authorized by the
Company's board of directors in conjunction with US Airways' agreement to
provide up to 2.3 million stock options to its pilots in 1998. In February
1998, the Company's board of directors announced certain actions aimed at
increasing shareholder value, including the purchase from time-to-time in
open market or privately negotiated transactions of up to $500 million of
the Company's Common Stock (in addition to the previously announced plan)
and the retirement of certain debt obligations totaling approximately $380
million, including US Airways 10% Senior Notes. During late February 1998,
US Airways retired early certain debt obligations with a combined principal
amount of $76.1 million (the transactions resulted in an immaterial net
gain). US Airways expects to retire its 10% Senior Notes, which have a face
amount of $300 million, during early Summer 1998.
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74
ITEM 8B. CONSOLIDATED FINANCIAL STATEMENTS FOR US AIRWAYS, INC.
INDEPENDENT AUDITORS' REPORT
The Stockholder and Board of Directors
US Airways, Inc.:
We have audited the accompanying consolidated balance sheets of US Airways,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, cash flows, and changes in
stockholder's equity (deficit) for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of US
Airways, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Washington, D. C.
February 25, 1998
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75
US Airways, Inc.
Consolidated Statements of Operations
Year Ended December 31,
- ------------------------------------------------------------------------------
(in thousands)
1997 1996 1995
---- ---- ----
Operating Revenues
Passenger transportation $7,112,029 $6,799,420 $6,267,762
US Airways Express transportation revenues 604,505 145,118 -
Cargo and freight 177,404 158,899 153,651
Other 607,547 600,620 563,463
---------- ---------- ----------
Total Operating Revenues 8,501,485 7,704,057 6,984,876
Operating Expenses
Personnel costs 3,012,175 3,040,682 2,751,437
Aviation fuel 761,020 780,597 646,004
Commissions 554,018 547,048 527,058
Aircraft rent 415,728 387,312 398,063
Other rent and landing fees 401,830 394,431 388,866
Aircraft maintenance 387,323 311,901 295,594
Depreciation and amortization 384,943 300,608 337,066
US Airways Express capacity purchases 485,873 93,042 -
Other, net 1,512,425 1,479,768 1,406,137
---------- ---------- ----------
Total Operating Expenses 7,915,335 7,335,389 6,750,225
---------- ---------- ----------
Operating Income 586,150 368,668 234,651
Other Income (Expense)
Interest income 112,270 75,905 51,122
Interest expense (260,029) (283,936) (301,923)
Interest capitalized 11,582 8,398 8,781
Equity in earnings of affiliates 30,614 36,602 34,546
Gains on sales of interests in affiliates 179,625 - -
Other, net 13,017 (14,594) 10,221
---------- ---------- ----------
Other Income (Expense), Net 87,079 (177,625) (197,253)
---------- ---------- ----------
Income Before Taxes 673,229 191,043 37,398
Provision (Credit) for Income Taxes (378,930) 7,811 4,408
---------- ---------- ----------
Net Income $1,052,159 $ 183,232 $ 32,990
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
76
<TABLE>
US Airways, Inc.
Consolidated Balance Sheets
December 31,
- --------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amount)
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash $ 16,975 $ 20,154
Cash equivalents 1,074,565 929,980
Short-term investments 870,205 635,839
Receivables, net 295,720 325,478
Receivables from related parties, net 195,332 -
Materials and supplies, net 200,494 211,184
Deferred income taxes 150,084 -
Prepaid expenses and other 131,605 129,380
--------- ---------
Total Current Assets 2,934,980 2,252,015
Property and Equipment
Flight equipment 4,968,282 4,972,873
Ground property and equipment 850,575 1,087,178
Less accumulated depreciation and amortization (2,428,948) (2,381,844)
--------- ---------
3,389,909 3,678,207
Purchase deposits 70,420 77,620
--------- ---------
Total Property and Equipment, Net 3,460,329 3,755,827
Other Assets
Goodwill, net 472,968 494,511
Other intangibles, net 283,271 283,274
Investment in marketable equity securities 190,035 -
Receivable from parent company 209,612 -
Deferred income taxes 220,921 -
Other assets, net 493,384 606,906
--------- ---------
Total Other Assets 1,870,191 1,384,691
--------- ---------
$ 8,265,500 $ 7,392,533
========= =========
LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 185,691 $ 84,171
Accounts payable 296,716 420,388
Payable to related parties, net - 193,860
Traffic balances payable and unused tickets 701,970 715,576
Accrued aircraft rent 495,740 495,662
Accrued salaries, wages and vacation 305,889 419,688
Other accrued expenses 464,557 654,085
--------- ---------
Total Current Liabilities 2,450,563 2,983,430
Long-term Debt, Net of Current Maturities 2,424,954 2,614,818
Deferred Credits and Other Liabilities
Deferred gains, net 330,172 356,583
Postretirement benefits other than pensions, noncurrent 1,152,196 1,093,269
Noncurrent employee benefit liabilities and other 805,848 429,588
--------- ---------
Total Deferred Credits and Other Liabilities 2,288,216 1,879,440
Commitments and Contingencies
Stockholder's Equity (Deficit)
Common stock, par value $1 per share, authorized 1,000 shares,
issued and outstanding 1,000 shares 1 1
Paid-in capital 2,425,179 2,416,131
Retained earnings (deficit) (1,413,919) (2,466,078)
Unrealized gain on available-for-sale securities, net of income tax effects 103,795 -
Adjustment for minimum pension liability, net of income tax effects (13,289) (35,209)
--------- ---------
Total Stockholder's Equity (Deficit) 1,101,767 (85,155)
--------- ---------
$ 8,265,500 $ 7,392,533
========= =========
See accompanying Notes to Consolidated Financial Statements.
77
</TABLE>
<TABLE>
US Airways, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash and Cash equivalents at beginning of year $ 950,134 $ 879,613 $ 428,925
--------- --------- ---------
Cash flows from operating activities
Net income 1,052,159 183,232 32,990
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 384,943 300,608 337,066
Losses (gains) on dispositions of property (15,350) 1,808 (16,654)
Gains on sales of interests in affiliates (179,625) - -
Amortization of deferred gains and credits (26,411) (26,412) (26,411)
Other 25,927 21,524 (4,354)
Changes in certain assets and liabilities
Decrease (increase) in receivables (80,438) (13,335) 5,178
Decrease (increase) in materials and supplies, prepaid expenses
and pension assets 28,798 (32,219) (68,415)
Decrease (increase) in deferred income tax assets (421,633) - -
Increase (decrease) in traffic balances payable and unused tickets (13,606) 77,557 46,865
Increase (decrease) in accounts payable and accrued expenses (219,421) 319,099 213,786
Increase (decrease) in postretirement benefits other than
pensions, noncurrent 58,927 77,896 56,667
--------- --------- ---------
Net cash provided by (used for) operating activities 594,270 909,758 576,718
Cash flows from investing activities
Aircraft acquisitions and purchase deposits, net (27,847) (52,854) (61,689)
Transfer of aircraft purchase deposits to parent company 7,200 - -
Additions to other property (165,664) (123,575) (80,644)
Proceeds from dispositions of property 82,067 21,725 219,762
Proceeds from sales of interests in affiliates 224,233 - -
Decrease (increase) in short-term investments (235,068) (603,593) 2,430
Decrease (increase) in restricted cash and investments 18,481 11,086 71,980
Funding of parent company's purchase of Shuttle, Inc. (209,572) - -
Funding of parent company's aircraft purchase deposits (85,176) - -
Payment of debt for affiliated company - (42,830) -
Collection on note receivable from affiliated company - 42,830 -
Other 26,826 (5,497) 433
--------- --------- ---------
Net cash provided by (used for) investing activities (364,520) (752,708) 152,272
Cash flows from financing activities
Issuances of debt - 103,002 -
Principal payments on long-term debt (88,344) (189,531) (278,302)
--------- --------- ---------
Net cash provided by (used for) financing activities (88,344) (86,529) (278,302)
--------- --------- ---------
Net increase in Cash and Cash equivalents 141,406 70,521 450,688
--------- --------- ---------
Cash and Cash equivalents at end of year $1,091,540 $ 950,134 $ 879,613
========= ========= =========
Noncash investing and financing activities
Unrealized gain on available-for-sale securities, net of income tax effects $ 103,795 $ - $ -
Issuances of debt - refinancing of debt secured by aircraft $ - $ 159,998 $ -
Reductions of debt - refinancing of debt secured by aircraft $ - $ 154,422 $ -
Issuance of parent company debt - aircraft acquisitions $ - $ - $ 68,640
Reduction of parent company debt - aircraft acquisitions $ - $ 68,640 $ -
Issuances of debt - aircraft acquisitions $ - $ 29,155 $ 169,725
Reduction of debt - aircraft purchase deposits $ - $ - $ 70,837
Underwriter's fees - refinancing of debt secured by aircraft $ - $ 2,488 $ -
Supplemental Information
Cash paid during the year for interest, net of amount capitalized $ 245,712 $ 257,689 $ 290,560
Net cash paid during the year for income taxes $ 95,412 $ 11,061 $ 6,329
See accompanying Notes to Consolidated Financial Statements.
78
</TABLE>
<TABLE>
US Airways, Inc.
Consolidated Statements of Changes in Stockholder's Equity (Deficit)
Three Years Ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<CAPTION>
Unrealized
gain on Adjustment
available- for minimum
for-sale pension
Retained securities, liability,
Common Paid-in earnings net of income net of income
stock capital (deficit) tax effects tax effects Total
------ ------- --------- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 $ 1 $2,416,131 $(2,682,300) $ - $ (7,017) $ (273,185)
Net income - - 32,990 - - 32,990
Adjustment for minimum
pension liability, net of
income tax effects - - - - (70,978) (70,978)
----- --------- ---------- ------------ ----------- ---------
Balance as of December 31, 1995 1 2,416,131 (2,649,310) - (77,995) (311,173)
Net income - - 183,232 - - 183,232
Adjustment for minimum
pension liability, net of
income tax effects - - - - 42,786 42,786
----- --------- ---------- ------------ ----------- ---------
Balance as of December 31, 1996 1 2,416,131 (2,466,078) - (35,209) (85,155)
Net income - - 1,052,159 - - 1,052,159
Unrealized gain on
available-for-sale
securities, net of income
tax effects - - - 103,795 - 103,795
Tax benefit from employee
stock option exercises - 9,048 - - - 9,048
Adjustment for minimum
pension liability, net of
income tax effects - - - - 21,920 21,920
----- --------- ---------- ------------ ----------- ---------
Balance as of December 31, 1997 $ 1 $2,425,179 $(1,413,919) $ 103,795 $ (13,289) $1,101,767
===== ========= ========== ============ =========== =========
See accompanying Notes to Consolidated Financial Statements.
79
</TABLE>
US AIRWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying Consolidated Financial Statements include the accounts
of US Airways, Inc. (US Airways) and its wholly-owned subsidiary USAM Corp.
(USAM). US Airways is a wholly-owned subsidiary of US Airways Group, Inc.
(US Airways Group). All significant intercompany accounts and transactions
have been eliminated. However, as discussed further in Note 9, US Airways'
financial results are significantly influenced by related party
transactions.
US Airways is a major United States air carrier whose primary business
is transporting passengers, property and mail. US Airways operates
predominantly in the Eastern U.S. with primary hubs at the major airports in
Charlotte, Philadelphia and Pittsburgh. US Airways also has substantial
operations at Baltimore/Washington International Airport, Boston's Logan
International Airport, New York's LaGuardia Airport and Washington's Ronald
Reagan Washington National Airport. US Airways enplaned 58.8 million
passengers during 1997 and is currently the fifth largest domestic air
carrier, as measured by revenue passenger miles (RPMs).
USAM owns 11% of the Galileo Japan Partnership (GJP), which markets the
Galileo Computer Reservation System (Galileo CRS) in Japan. USAM accounts
for this investment using the equity method because it is represented on the
board of directors and therefore participates in policy making processes.
Until July 1997, as discussed in Note 8, USAM held interests in the Galileo
International Partnership and the Apollo Travel Services Partnership and
accounted for these investments using the equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain 1996 and 1995 amounts have been reclassified to conform with
1997 classifications.
(b) OPERATING ENVIRONMENT
Most of US Airways' operations are in competitive markets. Competitors
include other air carriers along with other methods of transportation.
US Airways currently has the highest unit operating costs among the
major domestic air carriers. The growth and expansion of competitors with
lower cost and fare structures in its markets has put considerable pressure
on US Airways to reduce its operating costs in order to maintain
competitiveness. In addition, although a competitive strength in some
regards, the concentration of significant operations in the Eastern U.S.
results in US Airways being susceptible to changes in certain regional
conditions that may have an adverse effect on its results of operations and
financial condition.
Personnel costs represent US Airways' largest expense category. As of
December 31, 1997, US Airways employed approximately 38,500 full-time
equivalent employees. Approximately 35,400 (87%) of US Airways' employees
are covered by collective bargaining agreements with various unions or will
be covered by collective bargaining agreements for which initial
negotiations
80
are in progress. A new five-year contract between US Airways and its pilots
became effective January 1, 1998. US Airways' contracts with its
mechanical/related personnel and flight attendants are currently amendable;
talks with respect to new contracts are ongoing. US Airways is also
negotiating with representatives of its fleet service and passenger service
employees with respect to initial labor contracts. US Airways cannot predict
the ultimate outcome of any of these negotiations or the timing of any new
agreements. US Airways believes that the provisions of the new contract with
its pilots will help it address its high cost structure, including allowing
US Airways to establish a low cost, low fare operation.
US Airways operations are largely dependent on the availability of
aviation fuel. The availability and price of aviation fuel is largely
determined by actions generally outside of US Airways' control. US Airways
has a diversified aviation fuel supplier network and uses certain risk
management techniques (see Note 2(a)) in order to help ensure aviation fuel
availability and partially protect itself from temporary aviation fuel price
fluctuations.
(c) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments purchased within three months of maturity
are classified as Cash equivalents. Short-term investments consist primarily
of certificates of deposit and commercial paper purchased with maturities
greater than three months but less than one year.
US Airways classifies securities underlying its Cash equivalents and
Short-term investments as "available-for-sale" in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). Cash equivalents are
stated at cost, which approximates fair value due to the highly liquid
nature and short maturities of the underlying securities. Short-term
investments are stated at fair value with the offsetting unrecognized gain
or loss reflected as a separate component of Stockholder's Equity (Deficit),
net of income tax effects. See also Note 7(b).
(d) MATERIALS AND SUPPLIES, NET
Inventories of materials and supplies are valued at the lower of cost
or fair value. Costs are determined using average costing methods and are
charged to operations as consumed. An allowance for obsolescence is provided
for flight equipment expendable and repairable parts.
(e) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost or, if acquired under capital
lease, at the lower of the present value of minimum lease payments or fair
value of the asset at the inception of the lease. Maintenance and repairs
are charged to operating expense as incurred. Costs of major improvements
are capitalized for both owned and leased assets. Interest related to
deposits on aircraft purchase contracts and facility and equipment
construction projects is capitalized as an additional cost of the asset or
as a leasehold improvement if the asset is leased. Depreciation and
amortization for principle asset classifications is calculated on a
straight-line basis to estimated residual values over estimated depreciable
lives. These estimates are periodically reviewed for reasonableness and
revised, if necessary. In addition, US Airways monitors the recoverability
of the carrying value of its long-lived assets. Under the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
(SFAS 121), US Airways recognizes an "impairment charge" when the net
undiscounted future cash flows from an asset's use (including any proceeds
from disposition) are less than the asset's carrying value and the asset's
carrying value exceeds its fair value. The impairment charge reflects
writing-down the asset to fair value. See Note 12(a) for impairment charges
recognized by US Airways during 1997.
81
Depreciable
Asset Life Residual Value
----- ----------- --------------
(years) (in millions)
Aircraft
Boeing 767-200ER 20 $14.0
Boeing 757-200 20 8.0
Boeing 737-300/400 20 7.5
Boeing 737-200 17 5.0
McDonnell Douglas MD-80 20 7.5
Douglas DC-9-30 17 3.0
Fokker 100 20 5.0
Fokker F28-4000 8 2.0
Fokker F28-1000 6 1.0
Turboprop aircraft 15 1.5
Improvements to leased aircraft life of lease -
Ground property, equipment and 5-10 or -
leasehold improvements life of lease
Buildings 30 -
Property acquired under capital lease is amortized on a straight-line
basis over the term of the lease and charged to depreciation and
amortization expense. When property and equipment is sold or retired any
gain or loss is recognized as Other, net, a component of Other Income
(Expense).
(f) GOODWILL, NET AND OTHER INTANGIBLES, NET
Goodwill, the cost in excess of fair value of identified net assets
acquired, is amortized on a straight-line basis over 40 years. The $629.5
million goodwill resulting from the acquisitions of Pacific Southwest
Airlines (Pacific Southwest) and Piedmont Aviation, Inc. (Piedmont
Aviation), both in 1987, is amortized as depreciation and amortization
expense. As of December 31, 1997 and 1996, accumulated amortization related
to the Pacific Southwest and Piedmont Aviation acquisitions was $159.9
million and $144.1 million, respectively. As of December 31, 1997 and 1996,
USAM's goodwill in connection with its computer reservation system
investments was $4.3 million and $11.4 million, respectively. During July
1997, USAM's goodwill was reduced as a result of its sale of certain
investments (see Note 8). USAM's goodwill is amortized as a component of
Other Income (Expense), consistent with the classification of the related
income or loss on the investments. As of December 31, 1997 and 1996, USAM's
related accumulated amortization was $1.0 million and $2.3 million,
respectively. US Airways periodically evaluates whether goodwill is impaired
by comparing the goodwill balances with estimated future undiscounted cash
flows which, in US Airways' judgment, are attributable to the goodwill. This
analysis is performed separately for the goodwill which resulted from each
acquisition.
Other intangible assets consist mainly of purchased operating rights at
various airports, capitalized software costs and the intangible asset
associated with the underfunded amounts of certain pension plans. The cost
of operating rights and capitalized software costs are amortized on a
straight-line basis over the expected periods of benefit as depreciation and
amortization expense. Operating rights, which are valued at purchase cost or
appraised value if acquired with Pacific Southwest or Piedmont Aviation, are
amortized over periods ranging from ten to 25 years and capitalized software
costs are amortized over five years. The intangible pension asset is
recognized in accordance with Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions" (SFAS 87) (see Note 7(c)). As
of December 31, 1997 and 1996, accumulated amortization related to other
intangible assets was $149.0 million and $128.2 million, respectively.
82
Based on the most recent analyses, US Airways believes that goodwill
and other intangible assets were not impaired as of December 31, 1997.
(g) INVESTMENT IN MARKETABLE EQUITY SECURITIES
USAM's investment in Galileo International, Inc. (Galileo), which is
accounted for under the cost method, is classified as "available-for-sale"
under SFAS 115 and recorded at fair value. See also Notes 2(b), 7(b) and 8.
(h) OTHER ASSETS, NET
Other assets, net consists primarily of noncurrent pension assets, the
unamortized balance of deferred compensation, restricted cash and
investments, unamortized debt issuance costs and a long-term receivable from
British Airways Plc. (British Airways). Deferred compensation resulted
mainly from US Airways' establishment of an employee stock ownership plan
(ESOP) in 1989 (see Note 5(e)). Restricted cash and investments are deposits
in trust accounts to collateralize letters of credit and workers'
compensation policies. The long-term receivable from British Airways
resulted from the relinquishment by US Airways of three U.S. to London
routes.
Besides the deferred compensation that arose from the establishment of
the ESOP, US Airways accounts for deferred compensation and the related
amortization by applying the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). In
accordance with APB 25, US Airways recognizes deferred compensation equal
to the grant date fair market value of US Airways Group common stock for
stock granted to US Airways employees (Stock Grants) (which is amortized as
Personnel costs over the vesting period) but typically records no deferred
compensation when options to purchase US Airways Group common stock are
granted to US Airways employees (Option Grants) (because, except on limited
occasions, the exercise price of the stock options and the fair market
value of US Airways Group common stock on the date of grant are equal).
US Airways recognized compensation expense related to Stock Grants of
$5.7 million, $11.9 million and $0.3 million in 1997, 1996 and 1995,
respectively, and compensation expense related to Option Grants of $1.4
million and $7.9 million in 1997 and 1996, respectively (none for 1995). In
addition, US Airways recognized compensation expense related to stock
appreciation rights (SARs) tied to the fair market value of US Airways
Group common stock of $33.2 million and $41.6 million in 1997 and 1996,
respectively (none for 1995) as the result of a SAR feature granted to
stock option holders under US Airways Group's 1992 Stock Option Plan.
Deferred compensation related to Stock Grants was $6.6 million and $9.4
million as of December 31, 1997 and 1996, respectively, and deferred
compensation related to Options Grants was $1.0 million and $2.4 million as
of December 31, 1997 and December 31, 1996, respectively.
(this space intentionally left blank)
83
<TABLE>
The following table summarizes stock option transactions related to US Airways employees
pursuant to US Airways Group's various stock option and incentive plans for the years ended December
31, 1997, 1996 and 1995:
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(000) (000) (000)
<S> <C> <C> <C> <C> <C> <C>
Stock Options
- -------------
Outstanding at
beginning of year 9,767 $17 8,426 $17 8,844 $18
Granted (1) 939 $27 82 $17 155 $9
Granted (2) - - 2,415 $13 - -
Exercised (2,119) $19 (435) $15 (43) $10
Forfeited (3) (4) (3,795) $16 (673) $16 (489) $25
Expired (186) $24 (48) $32 (41) $36
------ ----- -----
Outstanding at
end of year 4,606 $18 9,767 $17 8,426 $17
Exercisable at
end of year 2,777 7,802 7,986
(1) Exercise price equal to the fair market value of a share of US Airways Group common stock at
date of grant; includes 50,000 and 20,000 stock options that were repriced during 1997 and
1996, respectively.
(2) Exercise price was lower than the fair market value of a share of US Airways Group common stock
at measurement date for grant.
(3) Activity for 1997 and 1996 includes the cancellation of repriced stock options. See (1) above.
(4) Activity during 1997 and 1996 includes 3.5 million and 0.6 million stock options, respectively,
that were forfeited as a result of their tandem SAR being exercised.
</TABLE>
The weighted average fair value per stock option for stock options
which have an exercise price equal to the fair market value of a share of
US Airways Group common stock at date of grant was $18, $11, and $6 for
1997, 1996 and 1995, respectively. The weighted average value per stock
option for stock options which have an exercise price lower than the fair
market value of a share of US Airways Group common stock at date of grant
was $13 for 1996 (no such grants during 1997 and 1995).
During 1995, the Financial Accounting Standards Board adopted
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
This statement requires the use of fair value techniques to determine
compensation expense associated with stock-based compensation. As mentioned
above, US Airways applies the provisions of APB 25 to determine
compensation expense, as permitted under SFAS 123. However, US Airways is
obligated to disclose certain information including pro forma net income as
if SFAS 123 had been adopted to measure compensation expense. Had
compensation cost been measured in accordance with SFAS 123, US Airways
estimates that its net income for 1997 would have been reduced from
$1,052.2 million to $1,045.4 million, its net income for 1996 would have
been reduced from $183.2 million to $168.1 million and its net income for
1995 would have been reduced from $33.0 million to $32.8 million. In order
to calculate this pro forma net income information, US Airways used the
Black-Scholes stock option-pricing model with the following weighted-
average assumptions for 1997, 1996 and 1995, respectively: stock volatility
of US Airways
84
Group common stock of 52.6%, 50.1% and 48.8%; risk-free interest rates of
6.6%, 6.2% and 6.6%; expected stock option life of 8 years, 9 years and 9
years; and no dividend yield (0%).
The pro forma net income information reflects Option Grants granted
during 1997, 1996 and 1995 only. Therefore, the full impact of calculating
compensation expense for stock options under SFAS 123 is not reflected in
the pro forma net income amounts above because compensation expense is
recognized over the stock option's vesting period and compensation expense
for stock options granted prior to January 1, 1995 is not considered.
(i) FREQUENT TRAVELER PROGRAM
US Airways accrues the estimated incremental cost of travel awards
earned by participants in its "Dividend Miles" frequent traveler program
when requisite mileage award levels are achieved. US Airways also sells
mileage credits to participating partners in Dividend Miles. The resulting
revenues are recorded as other operating revenues during the period in
which the credits are sold.
(j) DEFERRED GAINS, NET
Gains on aircraft sale and leaseback transactions are deferred and
amortized over the term of the leases as a reduction of the related aircraft
rent expense.
(k) PASSENGER TRANSPORTATION REVENUES
Passenger ticket sales are recognized as Passenger transportation
revenues when the transportation service is rendered or the ticket otherwise
expires. At the time of sale, a liability is established (Traffic balances
payable and unused tickets) and subsequently relieved through carriage of
the passenger, through billing from another air carrier which provided the
service, upon expiration of the ticket or by refund to the passenger.
Effective October 1, 1996, US Airways began purchasing all of the
capacity (available seat miles) generated by US Airways Group's three
wholly-owned regional air carriers and, concurrently, recognizing revenues,
"US Airways Express transportation revenues," when transportation service is
rendered by these affiliated air carriers or the related tickets otherwise
expire. Liabilities related to tickets sold for travel on these air carriers
are also included in US Airways' Traffic balances payable and unused tickets
and are subsequently eliminated in the same manner as described above. See
Note 9(b) for more information related to these capacity purchase
arrangements.
(l) ADVERTISING EXPENSES
Advertising costs are expensed when incurred as Other operating
expenses. Advertising expenses for 1997, 1996 and 1995 were $45.5 million,
$51.2 million and $66.6 million, respectively.
2. FINANCIAL INSTRUMENTS
(a) TERMS OF CERTAIN FINANCIAL INSTRUMENTS
US Airways uses risk management strategies to reduce its exposure to
certain market uncertainties. US Airways is party to financial contracts
which it believes help to reduce its exposure to significant increases in
the price of aviation fuel. US Airways has also hedged certain foreign-
denominated debt to maturity. US Airways periodically reviews the financial
condition of each counterparty to these financial contracts and believes
that the potential for default by any of
85
the current counterparties is negligible.
US Airways has entered into fuel swap contracts that result in US
Airways receiving or making payments based on the difference between a fixed
price and a variable price per notional gallon for specified petroleum
products. Gains or losses related to these contracts are deferred until the
period in which they are settled. Realized gains and losses are recognized
as an element of Aviation fuel expense. The total notional gallons under
these contracts were approximately 47 million and 84 million as of
December 31, 1997 and 1996, respectively (US Airways entered into contracts
prior to December 31, 1997 and 1996 which effectively closed certain
hedging arrangements covering approximately 17 million and 22 million
gallons, respectively). For contracts open as of December 31, 1997, US
Airways will pay fixed prices ranging from $0.496 to $0.600 per notional
gallon and receive a variable price per gallon based on current market
prices. The open contracts, all of which settle during 1998, represent
approximately 3% of US Airways' expected 1998 fuel consumption. For
contracts open as of December 31, 1996, US Airways paid fixed prices ranging
from $0.553 to $0.700 per notional gallon and received a floating rate based
on market prices.
An aggregate of $32 million of future principal payments of US Airways'
long-term debt due 1998 through 2000 is payable in Japanese Yen. This
foreign currency exposure has been hedged to maturity by US Airways'
participation in foreign currency contracts. Net settlements will be
recorded as adjustments to Interest expense.
(b) FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the provisions of SFAS 115, the fair values for US
Airways' short-term and marketable equity security investments are
determined based upon quoted market prices. Restricted cash and certain
long-term investments are carried at cost which approximates fair value.
US Airways estimated the fair values of its long-term note receivable and
long-term debt by discounting expected future cash flows using current rates
offered to US Airways for note receivables and debt with similar maturities.
The fair values of fuel swap and foreign currency contracts are obtained
from dealer quotes. These values represent the estimated amount US Airways
would receive or pay to terminate such agreements as of the valuation date.
<TABLE>
The estimated fair values of US Airways' financial instruments, none of which are held for
trading purposes (in thousands; brackets denote a liability):
<CAPTION>
December 31,
---------------------------------------------------
1997 1996
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Short-term investments (1) $ 870,205 $ 870,205 $ 635,839 $ 635,605
Investment in marketable
equity securities (1) 190,035 190,035 - -
Restricted cash and investments (2) 69,844 69,844 87,783 87,843
Long-term note receivable (2)(3) 30,350 30,557 40,733 30,080
Other long-term investments (2)(3) - - 20,606 22,126
Long-term debt (excludes
capital lease obligations) (2,577,177) (2,860,767) (2,649,609) (2,697,422)
Fuel swap contracts:
In a net receivable (payable) position - (528) - 3,550
Foreign currency contracts:
In a net receivable (payable) position - (2,928) - 963
(1) Classified as "available-for-sale" in accordance with SFAS 115. See also Notes 1(c) and 1(g).
(2) Carrying amount included in Other Assets on US Airways' Consolidated Balance Sheets.
(3) Classified as "held-to-maturity" in accordance with SFAS 115.
</TABLE>
86
3. INCOME TAXES
US Airways accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). US Airways files a consolidated federal income tax return
with its parent company, US Airways Group. US Airways Group and its wholly-
owned subsidiaries have executed a tax sharing agreement (Tax Sharing
Agreement) which allocates tax and tax items, such as net operating losses
and tax credits between members of the group based on their proportion of
taxable income and other items. This tax sharing and allocation impacts the
deferred tax assets and liabilities reported by each corporation on a
separate company basis. Accordingly, US Airways' tax expense is based on its
taxable income, taking into consideration its allocated tax loss
carryforwards and tax credit carryforwards.
During 1997, US Airways determined that it was no longer appropriate to
apply a valuation allowance to its deferred tax assets. US Airways believes,
based on prior earnings and projections of future earnings, that it is more
likely than not that it will be able to utilize tax benefits accumulated
through December 31, 1997 in future periods. Accordingly, at December 31,
1997, previous valuation allowances were removed, resulting in a net
deferred income tax asset and an income tax credit for 1997.
The components of the provision (credit) for income taxes (in
thousands):
1997 1996 1995
---- ---- ----
Current provision:
Federal $ 117,718 $4,432 $4,107
State 7,121 3,026 301
-------- ----- -----
Total current provision 124,839 7,458 4,408
-------- ----- -----
Deferred provision:
Federal (447,078) - -
State (56,691) 353 -
-------- ----- -----
Total deferred provision (503,769) 353 -
-------- ----- ------
Provision (credit)
for income taxes $(378,930) $7,811 $4,408
======== ===== =====
In 1997, US Airways was not subject to regular federal income tax as a
result of using $1.1 billion in federal net operating loss carryforwards.
However, US Airways was subject to federal alternative minimum tax (AMT).
Approximately $257 million in AMT net operating loss carryforwards and
approximately $417 million in state net operating loss carryforwards were
utilized to reduce the federal and state tax liabilities.
The significant components of deferred income tax expense (benefit) for
the years ended December 31, 1997, 1996 and 1995 are as follows (in
thousands):
1997 1996 1995
---- ---- ----
Deferred tax expense
(exclusive of the other
components listed below) $ 191,307 $ 90,583 $ 17,779
Decrease in the valuation
allowance for deferred
tax assets (695,076) (90,230) (17,779)
-------- ------ ------
Total $(503,769) $ 353 $ -
======== ======= ======
(this space intentionally left blank)
87
A reconciliation of taxes computed at the statutory federal tax rate on
earnings before income taxes to the provision (credit) for income taxes (in
thousands):
1997 1996 1995
---- ---- ----
Tax provision computed at
federal statutory rate $ 235,630 $ 66,865 $ 13,089
Book expenses not deductible
for tax purposes 15,482 16,535 15,088
State income tax provision
(credit), net of federal
tax benefit (32,220) 2,320 196
Reduction of federal
valuation allowance (594,992) (75,133) (24,687)
Other (2,830) (2,776) 722
-------- ------ -------
Provision (credit)
for income taxes $(378,930) $ 7,811 $ 4,408
======== ======= =======
Effective tax rate (56)% 4% 12%
======== ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1997
and 1996 (in thousands):
1997 1996
---- ----
Deferred tax assets:
Leasing transactions $ 169,645 $ 153,952
Tax benefits purchased/sold 40,526 54,173
Gain on sale and leaseback transactions 124,271 134,090
Employee benefits 668,291 606,213
Net operating loss carryforwards 125,177 473,918
Alternative minimum tax
credit carryforwards 157,124 32,681
Investment tax credit carryforwards 11,293 48,720
Other deferred tax assets 86,660 156,811
--------- ---------
Total gross deferred tax assets 1,382,987 1,660,558
Less valuation allowance - (695,076)
--------- ---------
Net deferred tax assets 1,382,987 965,482
Deferred tax liabilities:
Equipment depreciation and
amortization 901,845 927,442
Other deferred tax liabilities 56,086 38,393
--------- ---------
Total deferred tax liabilities 957,931 965,835
--------- ---------
Net deferred tax liabilities
(assets) $ (425,056) $ 353
========= =========
For 1996, the line item Other deferred tax assets in the above table
includes tax assets of approximately $79 million which originated from
subsidiaries of US Airways Group in accordance with the Tax Sharing
Agreement. The tax receivables from related parties included in the schedule
above as of December 31, 1996, were settled through intercompany accounts
during 1997, and, therefore, $78 million of amounts included in "Receivables
from related parties, net" in the accompanying Consolidated Balance Sheets
relate to these tax attributes.
The valuation allowance for deferred tax assets decreased approximately
$695 million in 1997 and decreased approximately $90 million in 1996.
Included in the deferred tax assets at December 31, 1997, among other
items, are $447 million related to obligations of postretirement medical
benefits, unused net operating losses of $274 million for federal tax
purposes expiring in the year 2009, $11 million of investment tax credits
expiring in the years 2003 and 2004, and $157 million of alternative minimum
tax credits which do not expire. There were no alternative minimum tax net
operating loss carryforwards remaining at December 31, 1997. Investment tax
credit benefits were recorded using the "flow through" method as a
reduction of the federal income tax provision. No new investment tax
credits were
88
generated during 1997, 1996 or 1995. The federal income tax returns of US
Airways through 1986 have been examined and settled with the Internal
Revenue Service.
US Airways believes that a significant portion of the deferred tax
assets will be realized through reversals of existing taxable temporary
differences. US Airways needs to generate approximately $274 million of
taxable income to realize the benefits of most of the other deferred tax
assets that have a future expiration date.
The deferred tax assets and liabilities disclosed above exclude tax
assets and liabilities which arise as a result of including certain
transactions in the equity section of the balance sheet, net of tax. These
tax attributes include a deferred tax liability of $56 million for
unrealized gains on available-for-sale investments pursuant to SFAS 115 and
a deferred tax asset of $2 million relating to the equity adjustment for the
minimum pension liability for US Airways' defined benefit plans.
The following table is a summary of pretax book income prior to net
operating loss carryforwards for the last three years (in thousands):
1997 1996 1995
--------- ------- ------
Pretax book income $ 673,229 $191,043 $37,398
Taxable income (loss) $1,065,822 $185,989 $(4,775)
The reasons for significant differences between taxable income and
pretax book income in 1997 primarily relate to employee pension and
postretirement benefit costs, certain aircraft impairment charges and lease
accruals, and other employee related accruals.
4. LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS
Details of long-term debt are as follows (in thousands):
December 31,
--------------------------
1997 1996
---- ----
Senior Debt:
10% Senior Notes due 2003 $ 300,000 $ 300,000
9 5/8% Senior Notes due 2001 175,000 175,000
5.7% to 11.7% Equipment
Financing Agreements,
Installments due 1998 to 2016 2,045,227 2,117,534
8.6% Airport Facility Revenue
Bond due 2022 27,620 27,620
7.4% Aircraft Purchase Deposit
Financing due 1998* 29,155 29,155
Other 175 300
--------- ---------
2,577,177 2,649,609
Capital Lease Obligations 33,468 49,380
--------- ---------
Total 2,610,645 2,698,989
Less Current Maturities (185,691) (84,171)
--------- ---------
$2,424,954 $2,614,818
========= =========
* See related information under Note 6(c) (re: litigation between
US Airways and The Boeing Company (Boeing)).
Maturities of long-term debt and debt under capital leases for the next
five years (in thousands):
1998 $ 185,691
1999 77,351
2000 122,569
2001 246,372
2002 77,105
Thereafter 1,901,557
89
Interest rates on $230.3 million principal amount of long-term debt as
of December 31, 1997 are subject to adjustment to reflect prime rate and
other rate changes.
Equipment financings totaling $2.08 billion were collateralized by
aircraft and engines with a net book value of approximately $2.17 billion as
of December 31, 1997.
See Note 13 for subsequent events related to long-term debt.
5. EMPLOYEE PENSION AND BENEFIT PLANS
Substantially all of US Airways' employees are eligible to participate
in various defined benefit and defined contribution pension plans, in
addition to medical and life insurance plans sponsored by US Airways.
Employees who meet certain service and other requirements are also eligible
to participate in an employee stock ownership plan.
(a) DEFINED BENEFIT PENSION PLANS
One qualified defined benefit pension plan covers US Airways'
maintenance employees and provides specified benefits based on length of
service. Qualified defined benefit pension plans for substantially all other
employees provide benefits based on years of service and compensation. The
qualified defined benefit pension plans for domestic employees are funded,
on a current basis, to meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Liabilities related to pension plans
covering foreign employees are calculated in accordance with generally
accepted accounting principles and funded in accordance with the laws of the
individual country.
US Airways recorded a $115.0 million charge to Personnel costs in 1997
for special termination benefits in accordance with Statement of Financial
Accounting Standards No. 88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
(SFAS 88). The charge relates to an early retirement program offered to US
Airways' pilots. US Airways expects 325 pilots to opt for early retirement
under this program.
(this space intentionally left blank)
90
<TABLE>
The funded status of US Airways' qualified defined benefit pension plans as of September 30, 1997 and 1996, respectively (in
millions):
<CAPTION> 1997 1996
---------------------------- ---------------------
Plans with Plans with
---------------------------- ---------------------
Assets in ABO in Assets in ABO in
Excess of Excess of Excess of Excess of
ABO Assets ABO Assets
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Fair value of plan assets $ 2,667 $ 435 $ 2,168 $ 305
Actuarial present value of:
Vested benefit obligation 2,439 425 2,050 369
Nonvested benefit obligation 29 16 23 13
----- --- ----- ---
Accumulated benefit obligation (ABO)
based on salaries to date 2,468 441 2,073 382
Additional benefits based on
estimated future salary levels 767 - 653 -
----- --- ----- ---
Projected benefit obligation (PBO) 3,235 441 2,726 382
PBO in excess of fair value of plan assets (568) (6) (558) (77)
Contributions from October 1
through December 31 - - 45 12
Unrecognized net transition asset (18) (7) (22) (9)
Unrecognized prior service (credit) cost (13) 70 (13) 75
Unrecognized net loss 437 18 506 40
----- --- ----- ---
Pension (liability) or asset
before adjustment (162) 75 (42) 41
----- --- ----- ---
Adjustment for minimum
pension liability - (81) - (106)
----- --- ----- ---
Pension liability as adjusted and
recognized in Consolidated
Balance Sheets $ (162) $ (6) $ (42) $ (65)
===== === ===== ===
* See Note 7(c).
</TABLE>
The weighted average assumptions used to determine the actuarial present
value of the PBO:
1997 1996
---- ----
Discount rate 7.5% 8.0%
Rate of increase in compensation levels 3.5% 3.5%
Expected long-term rate of return on plan assets 9.5% 8.8%
Components of plan assets:
Cash equivalents and short-term investments 12% 11%
Equity investments 39% 27%
Fixed income and other investments 49% 62%
(this space intentionally left blank)
91
Total pension cost for the qualified defined benefit pension plans (in
millions):
1997 1996 1995
---- ---- ----
Service cost (benefits earned during the period) $ 124 $ 143 $ 92
Interest cost on PBO 252 250 216
Actual return (gain) on plan assets (587) (55) (539)
Net amortization and deferral 363 (132) 371
--- --- ---
Net periodic pension cost 152 206 140
Special termination benefits* 43 - -
--- --- ---
Total pension cost $ 195 $ 206 $ 140
=== === ===
* Related to an early retirement program offered to US Airways' pilots (see
above). See also disclosure below related to US Airways' non-qualified
supplemental pension plans.
Non-qualified supplemental pension plans are available to certain
employee groups. These plans provide incremental pension payments from US
Airways' funds so total pension payments equal amounts that would have been
payable from US Airways' qualified pension plans if it were not for federal
limitations.
The funded status of US Airways' non-qualified supplemental pension plans
as of September 30, 1997 and 1996, respectively (in millions):
1997 1996
---- ----
Fair value of plan assets $ - $ -
Actuarial present value of:
Vested benefit obligation 139 31
Nonvested benefit obligation 3 1
---- ----
ABO based on salaries to date 142 32
Additional benefits based on estimated future salary levels 31 1
---- ----
PBO 173 33
---- ----
PBO in excess of fair value of plan assets (173) (33)
Contributions from October 1 through December 31 2 1
Unrecognized net transition asset - -
Unrecognized prior service cost 39 2
Unrecognized net loss 21 3
---- ----
Pension liability before adjustment (111) (27)
Adjustment for minimum pension liability * (30) (7)
---- ----
Unfunded supplemental liability as adjusted and
recognized in Consolidated Balance Sheets $ (141) $ (34)
==== ====
* See Note 7(c).
The discount rate used to determine the actuarial present value of the PBO
was 7.5% and 8.0% as of September 30, 1997 and 1996, respectively. A weighted
average rate of 3.2% and 6.0% was used to estimate future salary levels in 1997
and 1996, respectively.
(this space intentionally left blank)
92
Total pension cost for non-qualified supplemental defined benefit pension
plans (in millions):
1997 1996 1995
---- ---- ----
Service cost (benefits earned during the period) $ 4 $ 2 $ -
Interest cost on PBO 5 2 2
Actual return on plan assets - - -
Net amortization and deferral 7 6 (1)
---- ---- ----
Net periodic supplemental pension cost 16 10 1
Special termination benefits* 72 - -
---- ---- ----
Total supplemental pension cost $ 88 $ 10 $ 1
==== ==== ====
* Related to an early retirement program offered to US Airways' pilots (see
above).
(b) DEFINED CONTRIBUTION PENSION PLANS
US Airways' contributions to its defined contribution pension plans are
based on a formula which considers the age and earnings of each participant and
the amount the participant contributes. Expenses related to these plans,
excluding expenses related to US Airways' ESOP and any profit sharing
contributions, were approximately $57.0 million, $54.2 million and $64.2
million for the years 1997, 1996 and 1995, respectively. Expenses for 1995
include a catch up adjustment of $11.6 million for new employer matching
contributions for certain unionized employees. See Notes 5(e) and 5(f) for
information related to US Airways' ESOP and profit sharing contributions.
(c) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Medical and life insurance benefits are offered to certain employees who
retire from US Airways and their eligible dependents. The medical benefits
provided by US Airways are coordinated with Medicare benefits. Retirees
generally contribute amounts towards the cost of their medical expenses based
on years of service with US Airways. US Airways also provides uninsured death
benefit payments to survivors of retired employees for stated dollar amounts,
or in the case of retired pilot employees, death benefit payments determined by
age and level of pension benefit. The plans for postretirement medical and
death benefits are funded on a pay-as-you-go basis.
The funded status of the plans as of September 30, 1997 and 1996,
respectively (in millions):
1997 1996
----- -----
Fair value of plan assets $ - $ -
Accumulated postretirement benefit obligation (APBO):
Retirees 305 326
Fully eligible plan participants 197 170
Other plan participants 494 454
----- -----
Total APBO 996 950
APBO in excess of fair value of plan assets (996) (950)
Contributions from October 1 through December 31 7 7
Unrecognized prior service credits (130) (143)
Unrecognized net gain (62) (34)
----- -----
Accrued postretirement benefit liability $(1,181) $(1,120)
===== =====
93
The assumptions used to determine the APBO:
1997 1996
---- ----
Discount rate 7.5% 8.0%
Rate of increase in compensation levels 3.0% to 6.0% 3.0% to 6.0%
Health care cost trend 4.5% 7.5%
Net periodic postretirement benefit expense (in millions):
1997 1996 1995
---- ---- ----
Service cost (benefits earned during the period) $ 34 $ 44 $ 29
Interest cost on APBO 71 74 65
Actual return on plan assets - - -
Net amortization and deferral (15) (11) (15)
-- --- --
Net periodic postretirement benefit expense $ 90 $ 107 $ 79
== === ==
The assumed health care cost trend rate used in measuring the APBO was
changed from 6.5% in 1998 decreasing to 4.5% in 2000 to a flat 4.5% in 1998 and
thereafter. This change was made in response to observed average historical
trends. If the assumed health care cost trend rates were increased by one
percentage point, the APBO at September 30, 1997 would be increased by
approximately 10% and 1997 periodic postretirement benefit expense would
increase approximately 13%.
(d) POSTEMPLOYMENT BENEFITS
US Airways provides certain postemployment benefits to all of its
employees. Such benefits include disability-related and workers' compensation
benefits and severance payments for certain employees. US Airways accrues for
the cost of such benefit expenses once a triggering event has occurred.
(e) EMPLOYEE STOCK OWNERSHIP PLAN
In August 1989, US Airways established an ESOP. US Airways Group sold
2,200,000 shares of its common stock to an Employee Stock Ownership Trust (the
Trust) to hold on behalf of US Airways' employees, exclusive of officers, in
accordance with the terms of the Trust and the ESOP. The trustee placed those
shares in a suspense account pending their release and allocation to employees.
US Airways provided financing to the Trust in the form of a 9 3/4% loan for
$111.4 million for its purchase of shares and US Airways contributed an
additional $2.2 million to the Trust. US Airways makes a yearly contribution to
the Trust sufficient to cover the Trust's debt service requirement. The
contributions are made in amounts equal to the periodic loan payments as they
come due, less dividends available for loan payment. Since US Airways Group did
not pay dividends on any shares held by the Trust for the years ended
December 31, 1997, 1996 and 1995, the Trust did not utilize dividends to
service its debt during those periods. The initial maturity of the loan is 30
years. As the loan is repaid over time, the trustee systematically releases
shares of the common stock from the suspense account and allocates them to
participating employees. Each participant's allocation is based on the
participant's compensation, the total compensation of all ESOP participants and
the total number of shares being released. For each year after 1989, a minimum
of 71,933 shares are released from the suspense account and allocated to
participant accounts. If US Airways Group's return on sales equals or exceeds
four percent in a given year, more shares are released and repayment of the
loan is accelerated. See also Note 5(f) regarding the profit sharing component
of US Airways' ESOP. Annual contributions made by US Airways, and therefore
loan repayments made by the Trust, were $11.4 million in each of 1997, 1996 and
1995. The interest portion of these contributions was $10.1 million in 1997,
$10.3 million in 1996 and $10.4 million in 1995. Approximately 790,000 shares
of US Airways Group common stock have been released or committed to be released
as of December 31, 1997. US Airways recognized
94
compensation expense related to the ESOP of $11.1 million in 1997, $3.7 million
in 1996 and $3.7 million in 1995 based on shares allocated to employees (the
"shares allocated" method). Deferred compensation related to the ESOP amounted
to approximately $72.4 million, $83.5 million and $87.2 million as of
December 31, 1997, 1996 and 1995, respectively.
See Note 1(h) with respect to US Airways' accounting policies for stock-
based compensation.
(f) PROFIT SHARING PLANS
In exchange for temporary wage and salary reductions and other concessions
during a twelve month period in 1992 and 1993, including certain ongoing work
rule and medical benefits concessions and the freeze of the defined benefit
plan for certain non-contract employees, affected US Airways employees
participated in a profit sharing program and were granted stock options to
purchase US Airways Group common stock (see related discussion under Note
1(e)). This profit sharing program was designed to recompense those US Airways
employees whose pay was reduced in an amount equal to (i) two times salary
forgone plus (ii) one time salary forgone (subject to a minimum of $1,000) for
the freeze of the defined benefit pension plan for certain non-contract
employees. US Airways recognized charges of $213.5 million, including $121.6
million and $49.7 million in 1996 and 1995, respectively, related to this
program. Cash distributions to participants of $213.5 million have also been
made, including $74.9 million and $3.3 million in 1996 and 1995, respectively,
and a final cash distribution in the first quarter of 1997 of $129.1 million.
After the first quarter 1997 payment, US Airways' obligations under this profit
sharing program were satisfied and this program ceased.
US Airways' ESOP and Defined Contribution Retirement Program (DCRP) each
have profit sharing components. Under the ESOP, each eligible US Airways
employee receives shares of US Airways Group common stock based on his or her
compensation relative to the total compensation of all participants and the
number of shares of US Airways Group common stock in the allocation pool. When
US Airways' return on sales equals or exceeds certain prescribed levels, US
Airways increases its contribution, which effectively increases the number of
shares of US Airways Group common stock in the allocation pool (see Note 5(e)).
US Airways' ESOP-related expenses for 1997 include $7.4 million related to this
profit sharing program. US Airways did not make any provision for profit
sharing contributions in connection with the profit sharing component of the
ESOP during 1996 or 1995. Under the DCRP, US Airways makes additional
contributions to participant accounts when US Airways Group achieves certain
prescribed pre-tax margin levels (see Note 5(b)). US Airways' 1997 and 1996
results of operations reflect expenses of $24.1 million and $4.8 million,
respectively, for the profit sharing component of the DCRP. In 1995, US Airways
did not achieve the prescribed pre-tax margin levels and, accordingly, made no
such provision for this program.
6. COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS TO PURCHASE FLIGHT EQUIPMENT
On October 31, 1997, US Airways Group entered into agreements with
AVSA, S.A.R.L. (AVSA), an affiliate of aircraft manufacturer Airbus
Industrie G.I.E. (Airbus), and CFM International, Inc. (CFMI) for the
acquisition of up to 400 Airbus A320 family aircraft and accompanying jet
engines. The A320 family aircraft are single-aisle aircraft which include
the Airbus A319, A320 and A321.
US Airways Group has 124 aircraft on firm order, 116 aircraft subject
to reconfirmation prior to scheduled delivery and options for 160 additional
aircraft. Of the first 124 aircraft, six are scheduled for delivery in 1998,
20 in 1999 and 98 in the years 2000 through 2002. Although the agreements
with AVSA and CFMI represent a commitment of US Airways' parent company,
95
US Airways anticipates that the new Airbus aircraft will replace, at a
minimum, its B737-200, DC-9-30 and MD-80 aircraft.
The minimum determinable payments associated with US Airways Group's
agreements with AVSA and CFMI (including progress payments, payments at
delivery, buyer-furnished equipment, spares, capitalized interest, penalty
payments, cancellation fees and/or nonrefundable deposits) are currently
estimated at $302 million in 1998, $725 million in 1999, $1.07 billion in
2000 and $211 million in 2001.
US Airways has a commitment to purchase hush-kits for certain of its
B737-200 aircraft. The installation of hush-kits will allow these aircraft
to meet certain statutory noise level requirements. Expected payments
associated with this commitment are approximately $60 million for 1998 and
1999.
As also Note 6(c) with respect to litigation between US Airways and
Boeing. In addition, see Note 9(a) for information related to transactions
between US Airways and its parent company.
(b) LEASES
US Airways leases certain aircraft, engines, computer and ground
equipment, in addition to the majority of its ground facilities. Ground
facilities include executive offices, overhaul and maintenance bases and
ticket and administrative offices. Public airports are utilized for flight
operations under lease arrangements with the municipalities or agencies
owning or controlling such airports. Substantially all leases provide that
the lessee shall pay taxes, maintenance, insurance and certain other
operating expenses applicable to the leased property. Some leases also
include renewal and purchase options. US Airways subleases certain leased
aircraft and ground facilities under noncancelable operating leases expiring
in various years through the year 2021.
The following amounts related to capital leases are included in
property and equipment (in thousands):
December 31,
1997 1996
---- ----
Flight equipment $80,448 $167,308
Ground property and equipment 406 406
------ ------
80,854 167,714
Less accumulated amortization (54,495) (125,568)
------ -------
$26,359 $ 42,146
====== =======
(this space intentionally left blank)
96
As of December 31, 1997, obligations under capital and noncancelable
operating leases for future minimum lease payments were as follows (in
thousands):
Capital Operating
Leases Leases
------ ------
1998 $10,294 $ 722,055
1999 10,295 697,305
2000 7,193 682,595
2001 4,703 680,976
2002 4,703 634,872
Thereafter 9,405 5,989,960
----- ---------
Total minimum lease payments 46,593 9,407,763
Less sublease rental receipts - (130,468)
---------
Total minimum operating lease payments $9,277,295
=========
Less amount representing interest (13,125)
------
Present value of future minimum capital lease
payments 33,468
Less current obligations under capital leases (6,300)
-----
Long-term obligations under capital leases $27,168
======
For 1997, 1996 and 1995, rental expense under operating leases was
approximately $741 million, $731 million and $738 million, respectively.
Rental expense for 1997, 1996 and 1995 exclude credits of $1.5 million,
$22.5 million and $4.1 million, respectively, related to US Airways'
subleasing of BAe-146 aircraft (see Notes 12(a), 12(b) and 12(c)). Rental
expense for 1997 also excludes $4.6 million related to expenses recognized
by US Airways in conjunction with certain efficiency measures (see Note
12(a)).
US Airways also leases certain owned flight equipment to both third and
related parties (see Notes 9(b) and 9(c)) under noncancelable operating
leases which expire in the years 1998 through 2002. The future minimum
rental revenues associated with these leases are: $13.2 million-1998; $11.4
million-1999, $5.0 million-2000; $4.2 million-2001; and $1.8 million-2002.
The following amounts relate to aircraft leased under such agreements
as reflected in flight equipment (in thousands):
December 31,
---------------------
1997 1996
---- ----
Flight equipment $86,155 $82,868
Less accumulated amortization (45,769) (36,947)
------ ------
$40,386 $45,921
====== ======
(c) LEGAL PROCEEDINGS
US Airways is involved in legal proceedings arising out of certain
aircraft accidents, including an accident in September of 1994 near
Pittsburgh in which 127 passengers and five crew members lost their lives.
With respect to the 1994 accident, the National Transportation Safety Board
(NTSB) held hearings in January and November of 1995, and is scheduled to
hold additional hearings in 1998 before issuing its final accident
investigation report. Wrongful death cases are pending in a consolidated
multi-district litigation in U.S. District Court for the Western District of
Pennsylvania, and in state courts in Cook County, Illinois and Harris
County, Texas. While US Airways has settled over 80% of the cases arising
from the Pittsburgh accident, it expects that it will be at least two years
before all of the settlements and/or related litigation are concluded.
US Airways is fully insured with respect to this litigation and, therefore,
believes that the litigation will not have a material adverse effect on its
financial condition or results of operations.
97
Boeing filed suit against US Airways in September 1997 in state court
in King County, Washington seeking unspecified damages for alleged breach of
two aircraft purchase agreements concerning, respectively, eight B757-200
aircraft and 40 B737-Series aircraft. On October 31, 1997, US Airways filed
an answer and counterclaims to Boeing's complaint denying liability and
seeking recovery from Boeing of approximately $35 million in equipment
purchase deposits. The case is currently in the discovery phase of
litigation. In its initial discovery response, Boeing has quantified its
damage claim at approximately $220 million. US Airways is unable to predict
at this time the ultimate resolution or potential financial impact of these
proceedings on its financial condition or results of operations.
In October 1995, US Airways terminated for cause an agreement with In-
Flight Phone Corporation (IFPC). IFPC was US Airways' provider of on-board
telephone and interactive data systems. The IFPC system had been installed
in approximately 80 aircraft prior to the date of termination of the
agreement. On December 6, 1995, IFPC filed suit against US Airways in
Illinois state court seeking equitable relief and damages in excess of $186
million. US Airways believes that its termination of its agreement with IFPC
was appropriate and that it is owed significant damages from IFPC. US
Airways has filed a counterclaim against IFPC seeking compensatory damages
in excess of $25 million and punitive damages in excess of $25 million. In
January 1997, IFPC filed for protection from its creditors under Chapter 11
of the Bankruptcy Code. The parties stipulated to lift the automatic stay
provided for in the Bankruptcy Code which could allow IFPC's and US Airways'
claims to be fully litigated. US Airways is unable to predict at this time
the ultimate resolution or potential financial impact of these proceedings
on its financial condition or results of operations.
On July 30, 1996, US Airways Group and US Airways initiated a lawsuit
in U.S. District Court for the Southern District of New York against British
Airways Plc. (British Airways), BritAir Acquisition Corp., Inc., American
Airlines, Inc. (American) and American's parent company, AMR Corp. The
Company and US Airways claimed that British Airways, in pursuit of an
alliance with American, is responsible for breaches of fiduciary duty to US
Airways Group and US Airways and violated certain provisions of the January
21, 1993 Investment Agreement between the US Airways Group and British
Airways (the Investment Agreement). The lawsuit also claims that the
defendants have committed violations of U.S. antitrust laws. In response to
the defendants' Motion to Dismiss, the Court sustained US Airways' claims
for breach of contract against British Airways. The Court dismissed the
remaining claims against British Airways and all claims against American. On
February 6, 1998, British Airways filed its answer to the complaint along
with counterclaims against US Airways Group and US Airways. British Airways'
counterclaims alleged that US Airways breached various provisions of the
Investment Agreement and that US Airways breached the Code Share Agreement
between British Airways and US Airways by providing certain allegedly
confidential information to a third party. In addition, British Airways
seeks a declaratory judgment regarding certain payment obligations under its
wet lease arrangement with US Airways. British Airways claimed damages of
$16.7 million for the termination of the code share relationship and an
unspecified amount of damages for its remaining claims. US Airway is unable
to predict at this time the ultimate resolution or potential financial
impact of these proceedings on its financial condition or results of
operations.
In May 1995, US Airways Group, US Airways and the Retirement Income
Plan for US Airways, Inc. (the Pilots Pension Plan) were sued in federal
district court for the District of Columbia by 481 active and retired pilots
alleging that defendants had incorrectly interpreted the Pilots Pension Plan
provisions and erroneously calculated benefits under the Pilots' Pension
Plan. The plaintiffs sought damages in excess of $70 million. In May 1996,
the court issued a decision granting US Airways' Motion to Dismiss the
majority of the complaint for lack of jurisdiction, deciding that the
dispute must be resolved through the arbitration process under the Railway
Labor Act because the Pilots Pension Plan was collectively bargained. The
court retained jurisdiction over one count of the complaint alleging a
violation of a disclosure requirement under the Employee
98
Retirement Income Security Act. The plaintiffs have attempted to appeal the
district court's dismissal before the U.S. Court of Appeals for the District
of Columbia. In January of 1998, the Court of Appeals dismissed plaintiff's
appeal for lack of jurisdiction because the lower court order was not final.
In February of 1998 a purported class action complaint was filed by a
travel agency in Puerto Rico against seven major U.S. airlines, including US
Airways. The complaint alleges that the defendant airlines are
undercompensating Puerto Rican travel agents in connection with the agents'
sale of travel. The plaintiffs allege that the airlines are contractually
obligated to pay a 10% commission and that the defendant airlines breached
that contract as a result of the introduction of commission caps limiting
commission payable with respect to a single trip to a stated dollar amount
and reducing certain commissions to 8%. The plaintiffs have stated their
damages for the class in the amount of $150 million. Given the early stage
of this litigation, US Airways is unable to predict at this time the
ultimate resolution or potential financial impact of these proceedings on
its financial condition or results of operations.
The City and County of San Francisco have sued a number of San
Francisco International Airport tenants for the recovery of approximately
$18 million of costs incurred with respect to the characterization and
cleanup of soil and groundwater contamination at the airport. The City has
recently identified US Airways as a potentially responsible party, although
the City has not amended the complaint to add US Airways as a defendant
party. US Airways is unable to predict at this time the ultimate resolution
or potential financial impact of these proceedings on its financial
condition or results of operations.
(d) GUARANTEES
As of December 31, 1997, US Airways guaranteed payments of debt and
lease obligations of Piedmont Airlines, Inc. (Piedmont) and PSA Airlines,
Inc. (PSA), both wholly-owned subsidiaries of US Airways Group, totaling
$63.9 million.
US Airways also guarantees the payment of principal and interest on
special facility revenue bonds issued by certain municipalities to build or
improve airport and maintenance facilities. Under related lease
arrangements, US Airways is required to make rental payments sufficient to
pay maturing principal and interest payments on the bonds. As of
December 31, 1997 the principal amount of these bonds outstanding was $77.4
million.
(e) CONCENTRATION OF CREDIT RISK
US Airways invests available cash in money market securities of
various banks, commercial paper of financial institutions and other
companies with high credit ratings and securities backed by the United
States government.
As of December 31, 1997, most of US Airways' receivables related to
tickets sold to passengers through the use of major credit cards (45%) or
to tickets sold by other airlines (18%) and used by passengers on US
Airways or its regional airline affiliates. These receivables are short-
term, generally being settled within 14 days after sale. Bad debt losses,
which have been minimal in the past, have been considered in establishing
allowances for doubtful accounts. US Airways does not believe it is subject
to any significant concentration of credit risk.
99
7. STOCKHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
(a) COMMON STOCK AND DIVIDEND RESTRICTIONS
US Airways Group owns all of US Airways' outstanding common stock, par
value $1 (US Airways Common Stock). US Airways' board of directors has not
authorized the payment of dividends on US Airways' Common Stock since 1988.
Currently, the amount of dividends that US Airways can pay on its
common stock is materially limited by covenants contained in its 10% and 9
5/8% Senior Unsecured Notes. However, these covenants do not restrict US
Airways from loaning or advancing funds to US Airways Group.
US Airways, organized under the laws of the State of Delaware, may
also be subject to certain legal restrictions on its ability to pay
dividends on or repurchase or redeem its own shares of capital stock.
(b) UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURTITIES,
NET OF INCOME TAX EFFECTS
In accordance with SFAS 115, US Airways records an adjustment to
Stockholder's Equity (Deficit) to reflect differences between the fair
value of investments in marketable equity securities and short-term
investments (both types of investments are considered "available-for-sale"
under SFAS 115) and their respective carrying values at each balance sheet
date.
(c) ADJUSTMENT FOR MINIMUM PENSION LIABILITY, NET OF INCOME TAX
EFFECTS
In accordance with SFAS 87, US Airways recorded an Adjustment for
minimum pension liability as of December 31, 1997 and 1996. SFAS 87
requires the recognition of an additional minimum pension liability for
each defined benefit plan for which the accumulated benefit obligation
exceeds the fair value of the plan's assets and accrued pension costs. An
offsetting intangible asset is recognized for each additional minimum
pension liability recorded. Because each intangible asset recognized is
limited to the amount of unrecognized prior service cost, any balance is
reflected as a reduction of Stockholder's Equity (Deficit), net of income
tax effects. See also Note 5(a).
8. USAM's SALE OF CERTAIN INVESTMENTS
As of December 31, 1996 and prior to the events described below, USAM
owned 11% of the Galileo International Partnership (GIP) and approximately
21% of the Apollo Travel Services Partnership (ATS). GIP owned and operated
the Galileo CRS and ATS marketed the Galileo CRS in the U.S. and Mexico.
On July 30, 1997, Galileo completed an initial public offering (IPO)
and used the proceeds, together with the proceeds of bank financing, to
purchase ATS. Immediately preceding the IPO, GIP was merged with and into a
wholly-owned limited liability company subsidiary of Galileo and USAM
received shares in Galileo in the same proportion as its partnership
interest in GIP. As part of the IPO, USAM sold some of its Galileo shares
and its interest in Galileo was reduced from 11% to approximately 6.7%.
USAM received proceeds of $62.2 million and recognized a pre-tax gain of
approximately $50 million from the sell-down of its interest in Galileo and
received proceeds of $162.0 million and recognized a pre-tax gain of
approximately $130 million in connection with the ATS sale.
As of December 31, 1997, USAM owned approximately 6.7% of Galileo and
11% of GJP. USAM applies the provisions of SFAS 115 to account for its
remaining investment in Galileo,
100
which is classified as "available-for-sale."
USAM received distributions from GIP, GJP and ATS of $12.7 million,
$1.0 million and $4.6 million, respectively, during 1997, and $4.1 million,
$0.1 million and $44.5 million (including a special distribution from ATS
of $33.7 million during the second quarter of 1996), respectively, during
1996. USAM also received a dividend of $0.4 million from Galileo during
1997.
9. RELATED PARTY TRANSACTIONS
(a) PARENT COMPANY
US Airways provides loans to US Airways Group which arise in the normal
course of business and bear interest at market rates, which are reset
quarterly. US Airways' net receivable from and net payable to US Airways
Group for intercompany loan balances were $123.3 million and $159.0 million
as of December 31, 1997 and 1996, respectively.
US Airways is currently financing US Airways Group's purchase deposits
for Airbus aircraft at a blended interest rate, which is reset quarterly,
based upon US Airways' outstanding debt and capital lease obligations. The
related receivable from US Airways Group was $86.2 million as of December
31, 1997.
On December 30, 1997, US Airways Group purchased Shuttle, Inc.
(Shuttle). US Airways provided the financing for this transaction at an
interest rate of 7.5%, the balance of which is reflected in US Airways'
balance sheet line item "Receivable from parent company."
US Airways recorded net interest income of $0.5 million in 1997 and
net interest expense of $19.7 million and $7.8 million in 1996 and 1995,
respectively, related to the above transactions.
(b) REGIONAL AIRLINE SUBSIDIARIES OF US AIRWAYS GROUP
Effective October 1, 1996, US Airways began purchasing all of the
capacity (available seat miles or ASMs) generated by US Airways Group's
three wholly-owned regional airline subsidiaries, Allegheny Airlines, Inc.
(Allegheny), Piedmont and PSA, at a rate per ASM that is determined by US
Airways on a monthly basis and, concurrently, recognizing revenues that
result from passengers being carried by these affiliated companies. The
rate per ASM that US Airways pays is based on estimates of the costs
incurred to produce the capacity. US Airways recognized US Airways Express
transportation revenues of $604.5 million and $145.1 million and US Airways
Express capacity purchases (expenses) of $485.9 million and $93.0 million
in 1997 and the fourth quarter of 1996, respectively, related to this
program.
US Airways provides various services including passenger handling,
contract training and catering. US Airways recognized other operating
revenues of $54.6 million, $63.5 million and $46.5 million related to these
services for the years 1997, 1996 and 1995, respectively. These regional
airlines also perform passenger and ground handling for US Airways at
certain airports for which US Airways recognized other operating expenses
of $21.6 million, $18.7 million and $21.0 million for the years 1997, 1996
and 1995, respectively.
US Airways also leases or subleases certain turboprop aircraft to
these regional airline subsidiaries. US Airways recognized other operating
revenues related to these arrangements of $8.3 million, $14.4 million and
$18.7 million for the years 1997, 1996 and 1995, respectively. US Airways
entered into a sale-leaseback arrangement with Allegheny during 1994
involving certain turboprop aircraft (in return, US Airways subleased these
same aircraft back to
101
Allegheny). This arrangement was terminated in September 1996. US Airways
recognized other operating expenses related to the lease of these aircraft
from Allegheny of $6.0 million and $9.8 million for 1996 and 1995,
respectively.
US Airways' receivables from and payables to these regional airlines
were $18.5 million and $36.7 million, respectively, as of December 31, 1997
and $17.3 million and $34.1 million, respectively, as of December 31,
1996. As a result of the capacity purchase program discussed above,
liabilities related to tickets sold for travel on the regional airline
subsidiaries are included in the US Airways' Traffic balances payable and
unused tickets balance sheet line item.
As of December 31, 1997, US Airways receivables from and payables to
Shuttle were $8.2 million and $7.1 million, respectively.
(c) OTHER US AIRWAYS GROUP SUBSIDIARIES
US Airways leases certain aircraft to US Airways Group's wholly-owned
subsidiary US Airways Leasing and Sales, Inc. (US Airways Leasing and
Sales) (formerly USAir Leasing and Services, Inc.). US Airways Leasing and
Sales subleases these aircraft to third parties. US Airways recognized
other operating revenues related to these arrangements of $2.2 million,
$4.3 million and $4.6 million for the years 1997, 1996 and 1995,
respectively. US Airways receivable from US Airways Leasing and Sales was
$21.2 million as of December 31, 1997 (primarily resulting from the
transfer of income tax benefits as discussed in Note 5).
US Airways purchases a portion of its aviation fuel from US Airways
Group's wholly-owned subsidiary US Airways Fuel Corporation (Fuel Corp.)
(formerly USAir Fuel Corporation), which acts as a fuel wholesaler to US
Airways in certain circumstances. US Airways' aviation fuel purchases were
$183.1 million, $205.9 million and $104.9 million for the years 1997, 1996
and 1995, respectively. US Airways' accounts payable to Fuel Corp. was
$16.8 million and $17.4 million as of December 31, 1997 and 1996,
respectively.
(d) BRITISH AIRWAYS
During 1993, US Airways Group and British Airways entered into an
Investment Agreement under which a wholly-owned subsidiary of British
Airways purchased certain series of redeemable convertible preferred stock
from US Airways Group and British Airways entered into code sharing and wet
lease arrangements with US Airways.
US Airways wet leased B767-200ER aircraft, including cockpit and cabin
crews, to British Airways in order to serve three routes between the U.S.
and London beginning in June 1993 and ending in May 1996. US Airways
recognized other operating revenues of $12.6 million and $63.6 million for
the years 1996 and 1995, respectively, related to these arrangements. These
revenues were offset by an equal amount of other operating expenses. US
Airways also has various agreements with British Airways for ground
handling at certain airports, contract training and other services. US
Airways recognized other operating revenues of $1.5 million for the first
five months of 1997 and $5.8 million and $4.9 million for the years 1996
and 1995, respectively, related to services US Airways performed for
British Airways.
As of December 31, 1996, US Airways' receivables from and payables to
British Airways were $8.0 million and $5.5 million, respectively. US
Airways also has a long-term note receivable from British Airways related
to three U.S. to London routes that US Airways relinquished at the time of
implementation of a code sharing arrangement with British Airways. The
balance of this note receivable was $40.7 million as of December 31, 1996.
Payments began
102
in December 1995 in conjunction with the termination of the first wet lease
arrangement and are scheduled to continue through the year 2004.
US Airways terminated the code share and other business arrangements
between the two companies effective March 29, 1997. In addition, US Airways
believes that British Airways held no ownership interest in US Airways
Group after May 22, 1997.
10. VALUATION AND QUALIFYING ACCOUNTS
Allowance For
Uncollectible Inventory
Accounts Obsolescence
------------- ------------
(in thousands)
Balance as of December 31, 1994 $ 9,222 $169,827
Additions charged to expense 2,000 9,667
Amounts charged to reserve (9,118) (17,829)
----- ------
Balance as of December 31, 1995 12,104 161,665
Additions charged to expense 11,000 9,440
Amounts charged to reserve (11,151) (28,295)
------ ------
Balance as of December 31, 1996 1,953 142,810
Additions charged to expense 13,900 9,329
Amounts charged to reserve (8,406) (9,458)
------ -------
Balance as of December 31, 1997 $17,447 $142,681
====== =======
11. SELECT QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions)
1997
Operating Revenues $2,090 $2,208 $2,115 $2,087
Operating Income $ 174 $ 259 $ 85 $ 68
Net Income $ 144 $ 202 $ 187 $ 520
1996
Operating Revenues $1,740 $1,994 $1,924 $2,047
Operating Income (Loss) $ (9) $ 207 $ 97 $ 74
Net Income (Loss) $ (55) $ 161 $ 28 $ 50
See also Notes 3, 8 and 12.
NOTE: The sum of the four quarters may not equal yearly totals due to
rounding of quarterly results.
12. NONRECURRING ITEMS
(a) 1997
US Airways' results for 1997 include certain nonrecurring items: (i)
$121.9 million recorded in Personnel costs (including a fourth quarter
charge of $115.0 million related to an early retirement program for pilots
(see also Note 5(a)) and a second quarter charge of $6.9 million related to
estimated employee severance payments due to efficiency measures US Airways
103
announced during May 1997); (ii) a $1.5 million credit recorded in Aircraft
rent due to the reversal of previously accrued lease obligations upon the
subleasing of an additional BAe-146 aircraft, recognized in the second
quarter (see Note 12 (b) and 12 (c) below); (iii) $4.6 million recorded in
Other rent and landing fees (including a third quarter charge of $1.7
million to write-down certain equipment to be disposed of and a second
quarter charge of $2.9 million to write-off lease obligations at certain
facilities to be abandoned (net of any anticipated sublease revenues), both
related to the May 1997 efficiency measures); (iv) $89.1 million recorded
in Depreciation and amortization (including a third quarter charges of
$11.4 million related to the May 1997 efficiency measures to write-down
certain equipment to be disposed of and a $59.3 million SFAS 121 impairment
charge resulting from US Airways' September 1997 decision to retire its
remaining DC-9-30 aircraft over the next several years, and second quarter
charges of $0.3 million to write-off certain leasehold improvements and an
$18.1 million SFAS 121 impairment charge to write-down certain DC-9-30
aircraft, both related to the May 1997 efficiency measures); and (v) $179.6
million recorded in Gains on sales of interests in affiliates which
resulted from USAM's sale of certain investments as discussed in Note 8.
(b) 1996
US Airways' results for 1996 include two nonrecurring items recorded
during the second quarter of 1996 related to its subleasing of 11 non-
operating BAe-146 aircraft (see Note 12 (c) below). US Airways reversed
$22.5 million of previously accrued rent obligations related to these
aircraft against Aircraft rent expense and reversed $7.0 million against
Aircraft maintenance expense related to previously accrued lease return
provisions.
(c) 1995
In the fourth quarter of 1995, US Airways reversed $4.1 million of the
$132.8 million nonrecurring charge related to its grounded BAe-146 fleet
that was recorded in the fourth quarter of 1994. The reversal, a credit to
Aircraft rent expense, reflects the successful remarketing by US Airways of
three of these aircraft.
13. SUBSEQUENT EVENTS
In January 1998, US Airways Group announced plans to purchase up to 2.3
million shares of its common stock from time-to-time in open market or
privately negotiated transactions. This program was authorized by US Airways
Group's board of directors in conjunction with US Airways' agreement to
provide up to 2.3 million stock options to its pilots in 1998. In February
1998, US Airways Group's board of directors announced certain actions aimed
at increasing shareholder value, including the purchase from time-to-time in
open market or privately negotiated transactions of up to $500 million of US
Airways Group's common stock (in addition to the previously announced plan)
and the retirement of certain debt obligations of US Airways totaling
approximately $380 million, including US Airways 10% Senior Notes. During
late February 1998, US Airways retired early certain debt obligations with a
combined principal amount of $76.1 million (the transactions resulted in an
immaterial net gain). US Airways expects to retire its 10% Senior Notes,
which have a face amount of $300 million, during early Summer 1998. With
respect to US Airways Group's stock buy-back program, US Airways has
typically funded such activities of its parent company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
104
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF US AIRWAYS GROUP.
Information regarding this item appears in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A relating to the
Company's Annual Meeting of Stockholders on May 20, 1998 and is incorporated
herein by reference. Information concerning executive officers of the
Company is set forth in Part I, Item 1. of this report under the caption
"Executive Officers" in reliance on General Instruction G to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding this item appears in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A relating to the
Company's Annual Meeting of Stockholders on May 20, 1998 and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information regarding this item appears in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A relating to the
Company's Annual Meeting of Stockholders on May 20, 1998 and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding this item appears in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A relating to the
Company's Annual Meeting of Stockholders on May 20, 1998 and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report:
CONSOLIDATED FINANCIAL STATEMENTS
(i) The following consolidated financial statements of US Airways
Group, Inc. are included in Part II, Item 8A. of this report:
- Consolidated Statements of Operations for each of the
three years ended December 31, 1997
- Consolidated Balance Sheets as of December 31, 1997 and
1996
- Consolidated Statements of Cash Flows for each of the
three years ended December 31, 1997
- Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for each of the three years ended December 31,
1997
- Notes to Consolidated Financial Statements
(this space intentionally left blank)
105
(ii) The following consolidated financial statements of US
Airways, Inc. are included in Part II, Item 8B., of this
report:
- Consolidated Statements of Operations for each of the
three years ended December 31, 1997
- Consolidated Balance Sheets as of December 31, 1997 and
1996
- Consolidated Statements of Cash Flows for each of the
three years ended December 31, 1997
- Consolidated Statements of Changes in Stockholder's
Equity (Deficit) for each of the three years ended
December 31, 1997
- Notes to Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are
not applicable or not required, or because the required information is
either incorporated herein by reference or included in the financial
statements or notes thereto included in this report.
EXHIBITS
Designation Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of US Airways
Group, Inc. (US Airways Group) (incorporated by
reference to Exhibit 3.1 to US Airways Group's
Registration Statement on Form 8-B dated January 27,
1983), including the Certificate of Amendment dated
May 13, 1987 (incorporated by reference to Exhibit
3.1 to US Airways Group's and US Airways, Inc.'s (US
Airways) Quarterly Report on Form 10-Q for the
quarter ended March 31, 1987), the Certificate of
Increase dated June 30, 1987 (incorporated by
reference to Exhibit 3 to US Airways Group's and US
Airways' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1987), the Certificate of
Increase dated October 16, 1987 (incorporated by
reference to Exhibit 3.1 to US Airways Group's and
US Airways' Quarterly Report on Form 10-Q for the
quarter ended September 30, 1987), the Certificate
of Increase dated August 7, 1989 (incorporated by
reference to Exhibit 3.1 to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1989), the Certificate of Increase
dated April 9, 1992 (incorporated by reference to
Exhibit 3.1 to US Airways Group's and US Airways'
Annual Report on Form 10-K for the year ended
December 31, 1992), the Certificate of Increase
dated January 21, 1993 (incorporated by reference to
US Airways Group's and US Airways' Annual Report on
Form 10-K for the year ended December 31, 1992), and
the Certificate of Amendment dated May 26, 1993
(incorporated by reference to Appendix II to
US Airways Group's Proxy Statement dated April 26,
1993); and the Certificate of Ownership and Merger
merging Nameco, Inc. into USAir Group, Inc. dated
February 17, 1997 (incorporated by reference to
Exhibit 3.1 to US Airways Group's Annual Report on
Form 10-K for 1996).
3.2 By-Laws of US Airways Group.
3.3 Restated Certificate of Incorporation of US Airways
(incorporated by reference to Exhibit 3.1 to US
Airways' Registration Statement on Form 8-B dated
January 27, 1983); and the Certificate of Amendment
to Restated Certificate of Incorporation of USAir,
Inc. dated February 17, 1997 (incorporated by
reference to Exhibit 3.3 to US Airways' Annual Report
on Form 10-K for 1996).
106
3.4 By-Laws of US Airways.
10.1 Purchase agreement dated October 31, 1997 between US
Airways Group and AVSA, S.A.R.L., an affiliate of
aircraft manufacturer Airbus Industry G.I.E.
(incorporated by reference to Exhibit 10.1 to
US Airways Group's Quarterly Report on Form 10-Q for
the three months ended September 30, 1997).
10.2 Purchase Agreement No. 1725 dated December 23, 1991
between US Airways and The Boeing Company
(incorporated by reference to Exhibit 10.3 to US
Airways Group's and US Airways' Annual Report on Form
10-K for the year ended December 31, 1991).
10.3 Supplemental Agreement No. 18, dated December 23,
1991, to Purchase Agreement No. 1102 between US
Airways and The Boeing Company (incorporated by
reference to Exhibit 10.2(c) to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1991).
10.4 Supplemental Agreement No. 17, dated November 28,
1990, to Purchase Agreement No. 1102 between US
Airways and The Boeing Company (incorporated by
reference to Exhibit 10.2(b) to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1990).
10.5 Supplemental Agreement No. 16, dated July 19, 1990,
to Purchase Agreement No. 1102 between US Airways and
The Boeing Company (incorporated by reference to
Exhibit 10.2(a) to US Airways Group's Annual Report
on Form 10-K for the year ended December 31, 1990).
10.6 Incentive Compensation Plan of US Airways Group, Inc.
as amended and restated January 1, 1997.
10.7 US Airways, Inc. Supplementary Retirement Benefit
Plan (incorporated by reference to Exhibit 10.5 to US
Airways Group's Annual Report on Form 10-K for the
year ended December 31, 1989).
10.8 US Airways, Inc. Supplemental Executive Defined
Contribution Plan (incorporated by reference to
Exhibit 10.6 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.9 1997 Stock Incentive Plan of US Airways Group, Inc.
as amended and restated as of November 18, 1997.
10.10 1996 Stock Incentive Plan of US Airways Group, Inc.
as amended and restated as of November 18, 1997.
10.11 US Airways Group Nonemployee Director Stock Incentive
Plan (incorporated by reference to Exhibit B to US
Airways Group's Proxy Statement dated April 15,
1996).
10.12 US Airways Group Nonemployee Director Deferred stock
Unit Plan.
10.13 1992 Stock Option Plan of USAir Group (incorporated
by reference to Exhibit A to US Airways Group's Proxy
Statement dated March 31, 1992).
107
10.14 1984 Stock Option and Stock Appreciation Rights
Plan of USAir Group Inc. (incorporated by reference
to Exhibit A to US Airways Group's Proxy Statement
dated March 30, 1984).
10.15 Amendment to Employment Agreement between US Airways
and its former Senior Vice President-Finance and
Chief Financial Officer (incorporated by reference to
Exhibit 10.2 to US Airways Group's Quarterly Report
on Form 10-Q for the three months ended September 30,
1997).
10.16 Employment Agreement between US Airways and its Chief
Executive Officer. (incorporated by reference to
Exhibit 10.11 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.17 Employment Agreement between US Airways and its
President and Chief Operating Officer (incorporated
by reference to Exhibit 10.12 to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1995).
10.18 Employment Agreement between US Airways and its
Executive Vice President-Corporate Affairs and
General Counsel (incorporated by reference to Exhibit
10.13 to US Airways Group's Annual Report on Form
10-K for the year ended December 31, 1995).
10.19 Agreement between US Airways and its Chief Executive
Officer with respect to certain employment
arrangements (incorporated by reference to Exhibit
10.14 to US Airways Group's Annual Report on Form
10-K for the year ended December 31, 1995).
10.20 Agreement between US Airways and its President and
Chief Operating Officer with respect to certain
employment arrangements (incorporated by reference to
Exhibit 10.15 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.21 Agreement between US Airways and its Executive Vice
President-Corporate Affairs and General Counsel with
respect to certain employment arrangements
(incorporated by reference to Exhibit 10.16 to US
Airways Group's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.22 Employment Agreement between US Airways and its
Executive Vice President-Human Resources
(incorporated by reference to Exhibit 10.22 to US
Airways Group's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.23 Agreement between US Airways and its Chief Executive
Officer providing supplemental retirement benefits
(incorporated by reference to Exhibit 10.23 to
US Airways Group's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.24 Agreement between US Airways and its President and
Chief Operating Officer providing supplemental
retirement benefits (incorporated by reference to
Exhibit 10.24 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.25 Agreement between US Airways and its Executive Vice
President-Corporate Affairs and General Counsel
providing supplemental retirement benefits
(incorporated by reference to Exhibit 10.25 to US
Airways Group's Annual Report
108
on Form 10-K for the year ended December 31, 1995).
10.26 Employment Agreement between US Airways and its
Executive Vice President-Human Resources providing
retirement benefits (incorporated by reference to
Exhibit 10.30 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1995).
11 Computation of basic and diluted earnings per share
of US Airways Group for each of the three years ended
December 31, 1997.
21.1 Subsidiaries of US Airways Group.
21.2 Subsidiaries of US Airways.
23.1 Consent of the Auditors of US Airways Group to the
incorporation of their report concerning certain
financial statements contained in this report in
certain registration statements.
23.2 Consent of the Auditors of US Airways to the
incorporation of their report concerning certain
financial statements contained in this report in
certain registration statements.
24.1 Powers of Attorney signed by the directors of US
Airways Group, authorizing their signatures on this
report.
24.2 Powers of Attorney signed by the directors of US
Airways, authorizing their signatures on this report.
27.1 Financial Data Schedule-US Airways Group.
27.2 Financial Data Schedule-US Airways.
REPORTS ON FORM 8-K
Date of Report Subject of Report
- -------------- -----------------
March 12, 1998 US Airways Group and the holders of the
Company's Series H Senior Cumulative
Convertible Preferred Stock (Series H Preferred
Stock), affiliates of Berkshire Hathaway, Inc.,
completed a transaction whereby the Series H
Preferred Stock was converted into 9,239,938
shares of the Company's common stock, $1.00 par
value, and the Series H Preferred Stock was
retired.
February 3, 1998 US Airways Group announced that its board of
directors had authorized the repurchase of up
to $500 million of the Company's outstanding
common stock, the redemption of the last of the
Company's outstanding preferred stock issuances
and the retirement of certain debt obligations
as part of a wide-ranging plan to enhance
shareholder value. Information related to the
upcoming launch of a new low cost product
called "MetroJet" was also released. MetroJet
will commence operations on June 1, 1998.
(table continued on following page)
109
(table continued from previous page)
January 21, 1998 Consolidated statements of operations for both
the Company and US Airways for fourth quarter
1997 and full-year 1997, and select operating
and financial statistics for US Airways.
November 19, 1997 Announcement that the company would purchase
Shuttle, Inc. (operating as "US Airways
Shuttle"), based upon a valuation of $285
million.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
US AIRWAYS GROUP, INC. (REGISTRANT)
By: /s/ Stephen M. Wolf Date: March 18, 1998
-------------------
Stephen M. Wolf, Chairman of
the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of US
Airways Group, Inc. and in the capacities and on the dates indicated.
By: /s/ Stephen M. Wolf Date: March 18, 1998
-------------------
Stephen M. Wolf, Chairman of
the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Terry L. Hall Date: March 18, 1998
-----------------
Terry L. Hall, Chief Financial Officer
(Principal Financial Officer)
By: /s/ James A. Hultquist Date: March 18, 1998
----------------------
James A. Hultquist, Controller
(Principal Accounting Officer)
By: * Date: March 18, 1998
-----------------
Mathias J. DeVito, Director
By: * Date: March 18, 1998
-----------------
Rakesh Gangwal, Director
By: * Date: March 18, 1998
-----------------
George J. W. Goodman, Director
By: * Date: March 18, 1998
-----------------
John W. Harris, Director
(table is continued on following page)
110
(table is continued from previous page)
By: * Date: March 18, 1998
-----------------
Edward A. Horrigan, Jr., Director
By: * Date: March 18, 1998
-----------------
Robert L. Johnson, Director
By: * Date: March 18, 1998
-----------------
Robert LeBuhn, Director
By: * Date: March 18, 1998
-----------------
John G. Medlin, Jr., Director
By: * Date: March 18, 1998
-----------------
Hanne M. Merriman, Director
By: * Date: March 18, 1998
-----------------
Raymond W. Smith, Director
By: *
-----------------
Terry L. Hall, Attorney-In-Fact
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
US AIRWAYS, INC. (REGISTRANT)
By: /s/ Stephen M. Wolf Date: March 18, 1998
-------------------
Stephen M. Wolf, Chairman of
the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of US
Airways, Inc. and in the capacities and on the dates indicated.
By: /s/ Stephen M. Wolf Date: March 18, 1998
-------------------
Stephen M. Wolf, Chairman of
the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Terry L. Hall Date: March 18, 1998
-----------------
Terry L. Hall, Chief Financial Officer
(Principal Financial Officer)
By: /s/ James A. Hultquist Date: March 18, 1998
----------------------
James A. Hultquist, Controller
(Principal Accounting Officer)
(table is continued on following page)
111
(table is continued from previous page)
By: * Date: March 18, 1998
-----------------
Mathias J. DeVito, Director
By: * Date: March 18, 1998
-----------------
Rakesh Gangwal, Director
By: * Date: March 18, 1998
-----------------
George J. W. Goodman, Director
By: * Date: March 18, 1998
-----------------
John W. Harris, Director
By: * Date: March 18, 1998
-----------------
Edward A. Horrigan, Jr., Director
By: * Date: March 18, 1998
-----------------
Robert L. Johnson, Director
By: * Date: March 18, 1998
-----------------
Robert LeBuhn, Director
By: * Date: March 18, 1998
-----------------
John G. Medlin, Jr., Director
By: * Date: March 18, 1998
-----------------
Hanne M. Merriman, Director
By: * Date: March 18, 1998
-----------------
Raymond W. Smith, Director
By: *
-----------------
Terry L. Hall, Attorney-In-Fact
(this space intentionally left blank)
112
Exhibit 3.2
BY-LAWS
US AIRWAYS GROUP, INC.
January 1, 1998
* * * * * * * * * * *
ARTICLE I
OFFICES
The registered office of the Corporation shall be in the City of
Wilmington, County of New Castle, Delaware. The Corporation may
have offices within and without the State of Delaware.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. ANNUAL MEETINGS. The annual meeting of stockholders
for the election of Directors shall be held on the fourth
Wednesday in May, or if that be a legal holiday, on the next
succeeding day not a legal holiday, at nine- thirty o'clock in the
morning, or in any year at such other date and time as may be
designated by the Board of Directors, at which meeting the
stockholders shall elect by ballot, by plurality vote, a Board of
Directors and may transact such other business as may come before
the meeting.
Section 2. SPECIAL MEETINGS. Special meetings of the
stockholders, except those regulated by statue, may be called at
any time by the Chairman or President, and shall, be called by the
President or Secretary on the request, in writing, or by vote, of
a majority of Directors, and by no other person or persons. No
business may be transacted at a special meeting of the
stockholders except as set forth in the notice of such meeting.
Section 3. LOCATION OF MEETINGS. All meetings of the
stockholders for any purpose may be held, within or without the
State of Delaware, at such time and place as shall be stated in
the notice of the meeting or a duly executed waiver of notice, and
by no other person or persons. No business may be transacted at a
special meeting of the stockholder except as set forth in the
notice of such meeting.
Section 4. LIST OF STOCKHOLDERS. The Secretary shall cause to
be prepared a complete list of stockholders entitled to vote at
any meeting, arranged in alphabetical order and showing the
address of each stockholder and number of shares registered in the
name of each stockholder. The list shall be open to the
examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours for at least ten days
prior to the meeting either at a place within the city where the
meeting is to be held (which place shall be specified in the
notice of meeting) or at the place where the meeting is to be
held. The list shall also be open for inspection by stockholders
during the time and at the place of the meeting.
Section 5. VOTING. Each stockholder entitled to vote shall, at
every meeting of the stockholders, be entitled to one vote in
person or by proxy, signed by him, for each share of voting stock
held by him but no proxy shall be voted on or after three years
from its date, unless it provides for a longer period. Such right
to vote shall be subject to the right of the Board of Directors to
fix a record date for voting stockholders as hereinafter provided.
Section 6. NOTICE OF STOCKHOLDER BUSINESS. At an annual
meeting of the stockholders held pursuant to Section 1 of this
Article II, only such business shall be conducted as shall have
been brought before the meeting (a) by or at the direction of the
Board of Directors or (b) by any stockholder of the Corporation,
provided such stockholder complies with this Section 6. For
business to be properly brought before an annual meeting by a
stockholder, the stockholder shall give prior
2
written notice thereof to the Secretary. Such notice shall be
received at the principal executive offices of the Corporation by
the Secretary not less than thirty nor more than sixty days prior
to such annual meeting; provided, however, that in the event that
less than forty days' prior written notice or prior public
disclosure of the date of the meeting is given or made to
stockholders, such notice by the stockholder shall be received by
the Secretary not later than the close of business on the tenth
day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary pursuant to this Section 6
shall set forth as to each matter the stockholder proposes to
bring before the annual meeting: (a) a brief description of the
business desired to be brought before the annual meeting and the
reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (c) the class and
number of shares of the Corporation which are beneficially owned
by the stockholder, and (d) any material interest of the
stockholder in such business. Notwithstanding any provision in
these By-Laws to the contrary, no business shall be conducted at
an annual meeting except in accordance with this Section 6. The
Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not
properly brought before the meeting in accordance with this
Section 6, and if he should so determine, he shall so declare to
the meeting and any such business shall not be transacted.
Section 7. NOTICE TO STOCKHOLDERS. Notice of all meetings
shall be mailed by the Secretary to each stockholder of record
entitled to vote, at his or her last known post office address,
not less than ten nor more than sixty days prior to any annual or
special meeting.
Section 8. QUORUM. The holders of a majority of the stock
outstanding and entitled to vote shall constitute a quorum but the
holders of a smaller amount may adjourn from time to time without
3
further notice until a quorum is secured.
Section 9. STOCKHOLDER ACTION BY WRITTEN CONSENT. In order
that the Corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the
Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record
date is adopted by the Board of Directors, and which date shall
not be more than 10 days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. Any
stockholder of record seeking to have the stockholders authorize
or take corporate action by written consent shall, by written
notice to the Secretary, request the Board of Directors to fix a
record date. The Board of Directors shall promptly, but in all
events within 10 days after the date on which such a request is
received, adopt a resolution fixing the record date. If no record
date has been fixed by the Board of Directors within 10 days of
the date on which such a request is received, the record date for
determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of
Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken
or proposed to be taken is delivered to the Corporation by
delivery to its registered office in the State of Delaware, its
principal place of business, or any officer or agent of the
Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified
or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the
Board of Directors is required by applicable law, the record date
for determining stockholders entitled to consent to corporate
action in writing without a meeting shall be at the close of
business on the date on which the Board of Directors adopts the
resolution taking such prior action.
4
ARTICLE III
DIRECTORS
Section 1. NUMBER. The property and business of the
Corporation shall be managed and controlled by its Board of
Directors, consisting of eleven members. Directors need not be
stockholders.
Section 2. NOTICE OF STOCKHOLDER NOMINEES. Only persons
nominated in accordance with this Section 2 shall be eligible for
election as Directors. Nomination of persons for election to the
Board of Directors of the Corporation may be made at a meeting of
stockholders (a) by or at the direction of the Board of Directors
or (b) by any stockholder of the Corporation entitled to vote for
the election of Directors at the meeting who complies with this
Section 2. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be received at the
principal executive offices of the Corporation by the Secretary
not less than thirty nor more than sixty days prior to the
meeting; provided, however, that in the event less than forty
days' prior written notice or prior public disclosure of the date
of the meeting is given or made to stockholders, such notice by
the stockholder shall be received by the Secretary not later than
the close of business on the tenth day following the day on which
such notice of the date of meeting was mailed or such public
disclosure was made. Such stockholder's notice shall set forth:
(a) as to each person whom the stockholder proposes to nominate
for election or re-election as a Director, all information
relating to such person as is required to be disclosed in
solicitation of proxies for election of Directors, or is otherwise
required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including such
person's written consent to being named in the proxy statement as
a nominee and to serving as a Director if elected), and (b) as to
the stockholder giving the notice (i) the name and address, as
they
5
appear on the Corporation's books, of such stockholder and (ii)
the class and number of shares of the Corporation which are
beneficially owned by such stockholder. At the request of the
Board of Directors any person nominated by the Board of Directors
for election as a Director shall furnish to the Secretary that
information required by this Section 2 to be set forth in a
stockholder's notice of nomination which pertains to the nominee.
No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with these By-Laws.
The Chairman of the stockholders' meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination
was not made in accordance with these By-Laws, and if he should so
determine, he shall so declare to such meeting and the defective
nomination shall be disregarded.
Section 3. ELECTION, TERM, VACANCIES. The Directors shall hold
office until the next annual election and until their successors
are elected and qualified. They shall be elected by the
stockholders, except that if there be a vacancy in the Board by
reason of death, resignation or otherwise, such vacancy shall be
filled for the unexpired term by the remaining Directors, though
less than a quorum, by a majority vote.
Section 4. POWERS OF DIRECTORS. The business of the
Corporation shall be managed by or under the direction of its
Board of Directors which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by
statute or by the certificate of incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.
Section 5. DIRECTORS EMERITI. For the purpose of conserving,
for the benefit of the Corporation, the knowledge, experience and
good will generated by a long period of service in formulating and
implementing the basic policies of the Corporation or predecessor
or affiliated corporations, the Board of Directors shall have the
power in its discretion to appoint one or more
6
Directors Emeriti. Any person who has served for a period of not
less than ten years on the Board of Directors of the Corporation
or of any predecessor or affiliate of the Corporation, may be
appointed a Director Emeritus by the Board of Directors for an
annual term and shall be eligible for reappointment annually at
the discretion of the Board. The duties of a Director Emeritus
shall consist of being available to the Chairman and President of
the Corporation for consultation and advice on any matters
pertaining to the Corporation which the Chairman or President may
refer to him from time to time. Directors Emeriti shall be
notified of and be invited to attend the annual meeting of the
Board of Directors and such other meetings as determined by the
Chairman or President of the Corporation and be entitled to be
heard at such meetings on matters pending before the Board of
Directors. They shall not be members of the Board nor be entitled
to vote as such nor be counted as constituting part of a quorum.
Section 6. COMPENSATION. Directors, members of committees and
Directors Emeriti shall receive such compensation as the Board
shall from time to time prescribe.
ARTICLE IV
MEETINGS OF DIRECTORS
Section 1. ANNUAL MEETING. After each annual election of
Directors, the newly elected Directors may meet for the purpose of
organization, the election of Officers, and the transaction of
other business, at such place and time as shall be fixed by the
stockholders at the annual meeting, and, if a majority of the
Directors be present at such place and time, no prior notice of
such meeting shall be required to be given to the Directors. The
place and time of such meeting may also be fixed by written
consent of the Directors.
7
Section 2. REGULAR MEETINGS. Bi-monthly meetings of the Board
of Directors shall be held in January, March, May, July, September
and November in each year, on the date and at a time and place
designated from time to time by the Board of Directors. The
Secretary shall forward to each Director, at least five days
before any such meeting, a notice of the time and place of the
meeting.
Section 3. SPECIAL MEETINGS. Special meetings of the Directors
may be called by the Chairman or President on two days' notice in
writing, or on one day's notice by telegraph to each Director, and
shall be called by the President in like manner on the written
request of two or more Directors.
Section 4. LOCATION. Meetings of the Directors may be held
within or without the State of Delaware at such place as is
indicated in the notice of waiver of notice thereof.
Section 5. QUORUM. A majority of the Directors shall
constitute a quorum, but a smaller number may adjourn from time to
time, without further notice, until a quorum is secured.
ARTICLE V
COMMITTEES
Section 1. CREATION. The Board of Directors may, by resolution
or resolutions passed by a majority of the Board, designate one or
more committees each to consist of three or more Directors of the
Corporation. Each such Committee shall have and may exercise such
powers and duties as shall be delegated to it by the Board of
Directors except that no such Committee shall have power to (a)
elect Directors; (b) alter, amend or repeal these By-Laws or any
resolution or resolutions of the Board of Directors relating to
such Committee; (c) declare any dividend or make any other
distribution to the stockholders of the Corporation; (d) appoint
any member of such Committee; or (e) take any other
8
action which may lawfully be taken only by the Board.
Section 2. COMMITTEE PROCEDURE. Each such Committee
established by the Board shall meet at stated times or on notice
to all members by any member of such Committee. Each such
Committee shall establish its own rules of procedure. Each such
Committee shall keep regular minutes of its proceedings and report
the same to the Board of Directors.
ARTICLE VI
INDEMNIFICATION
The Corporation shall indemnify its Directors, Officers and
employees, and shall have the power to indemnify its other agents,
to the full extent permitted by the General Corporation Law of the
State of Delaware, as amended from time to time (but, in the case
of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights
than such law permitted the Corporation to provide on June 29,
1989). Expenses (including attorneys' fees) incurred by an
Officer, Director or employee in defending any civil, criminal,
administrative, or investigative action, suit or proceeding shall
to the fullest extent permitted by law be paid by the Corporation
in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such
Director, Officer or employee to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified
by the Corporation as authorized hereunder. The right to
indemnification and the payment of expenses incurred in defending
a proceeding in advance of its final disposition conferred in this
Article shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, provision of the
Restated Certificate of Incorporation, by-laws, agreement, vote of
stockholders or disinterested directors or otherwise.
9
ARTICLE VII
OFFICERS
Section 1. GENERAL. The Officers of the Corporation shall be a
Chairman of the Board, a Chief Executive Officer, a President, one
or more Vice Presidents, a Secretary, a Treasurer, a Controller
and such other Officers as may from time to time be chosen by the
Board of Directors. The Chief Executive Officer shall be
empowered to appoint and remove from office, at his discretion,
Assistant Vice Presidents and Assistant Secretaries. Any number
of offices may be held by the same person, unless the certificate
of incorporation or these By-Laws otherwise provide.
Section 2. TERM. The Officers of the Corporation shall hold
office until their successors are chosen and qualified. Any
Officer chosen or appointed by the Board of Directors may be
removed either with or without cause at any time by the
affirmative vote of a majority of the whole Board of Directors.
If the office of any Officer other than an assistant officer
becomes vacant for any reason, the vacancy shall be filled by the
affirmative vote of a majority of the whole Board of Directors.
Section 3. CHAIRMAN OF THE BOARD. A Chairman of the Board
shall be chosen from among the Directors. The Chairman of the
Board shall preside at all meetings of the stockholders and
Directors and shall perform such other duties as may be prescribed
by the Board of Directors.
Section 4. CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer shall have responsibility for the general and active
management of the business of the Corporation and shall see that
all orders and resolutions of the Board of Directors are carried
into effect.
Section 5. PRESIDENT. The President shall be the Chief
Operating Officer of the Corporation. The President shall have
such responsibilities and authority as determined by the Chief
Executive Officer of the Corporation.
10
Section 6. VICE PRESIDENT. The Vice President or Vice
Presidents, in the order designated by the Board of Directors,
shall be vested with all the powers and required to perform all
the duties of the President in his absence or disability and shall
perform such other duties as may be prescribed by the Board of
Directors.
Section 7. SECRETARY. The Secretary shall perform all the
duties commonly incident to his office, and keep accurate minutes
of all meetings of the stockholders, the Board of Directors and
the Committees of the Board of Directors, recording all the
proceedings of such meetings in a book kept for that purpose. He
shall give proper notice of meetings of stockholders and Directors
and perform such other duties as the Board of Directors shall
designate.
Section 8. TREASURER. The Treasurer shall have custody of the
funds and securities of the Corporation and shall keep full and
accurate accounts of disbursements and shall deposit all monies
and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board
of Directors. He shall disburse the funds of the Corporation as
may be ordered by the Board or President, taking proper vouchers
for such disbursements, and shall render to the President and
Directors, whenever they may require it, an account of all his
transactions as Treasurer and of the financial condition of the
Corporation. Until such time as a Controller is elected, the
Treasurer shall also maintain adequate records of all assets,
liabilities and transactions of the Corporation and shall see that
adequate audits thereof are currently and regularly made. He
shall cause to be prepared, compiled and filed such reports,
statements, statistics and other data as may be required by law or
prescribed by the President. The Treasurer shall perform such
other duties as the Board of Directors may from time to time
prescribe.
11
ARTICLE VIII
STOCK
Section 1. CERTIFICATES. Certificates of stock of the
Corporation shall be signed by, or in the name of, the Corporation
by the President or a Vice President and the Secretary or an
Assistant Secretary, certifying the number of shares of the holder
thereof. The Board of Directors may appoint one or more transfer
agents and registrars of transfers, which may be the same agency
or agencies, and may require all certificates to bear the
signatures of one of such transfer agents and one of such
registrars of transfers, or as the Board of Directors may
otherwise direct. Where any such certificate is signed by a
transfer agent or transfer clerk and by a registrar, the
signatures of any such President, Vice President, Secretary or
Assistant Secretary may be facsimiles engraved or printed. The
certificates shall bear the seal of the Corporation or a
predecessor corporation or shall bear a facsimile of such seal
engraved or printed.
In case any Officer or Officers who have signed, or whose
facsimile signature or signatures have been used on, any
certificate or certificates of stock, has ceased to be an Officer
or Officers of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates
have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be
issued and delivered as though the person or persons who signed
such certificate or certificates or whose facsimile signature or
signatures have been used thereon, had not ceased to be such
Officer or Officers of the Corporation.
Section 2. LOST CERTIFICATES. If a certificate of stock is
lost or destroyed, another may be issued in its stead upon proof
of loss or destruction and the giving of a satisfactory bond of
indemnity, in an amount sufficient to indemnify the Corporation
against any claim. A certificate may be issued
12
without requiring bond when, in the judgment of the Directors, it
is proper to do so.
Section 3. TRANSFERS. All transfers of stock of the
Corporation shall be made upon its books by the holder of the
shares in person or by his lawfully constituted representative,
upon surrender of certificates of stock for cancellation.
Section 4. FIXING RECORD DATE. The Board of Directors may fix
in advance a record date in order to determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action
in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other
lawful action. The record date shall not be more than sixty nor
less than ten days before the date of any meeting of stockholders
nor more than sixty days prior to any other action.
Section 5. STOCKHOLDERS OF RECORD. The Corporation shall be
entitled to treat the holder of record of any share or shares of
stock as the holder in fact thereof, and accordingly shall not be
bound to recognize any equitable or other claim to or interest in
such share on the part of any other person whether or not it shall
have express or other notice thereof, except as expressly provided
by the laws of the State of Delaware.
ARTICLE IX
GENERAL PROVISIONS
Section 1. FISCAL YEAR. The fiscal year of the Corporation
shall begin the first day of January and end on the 31st day of
December of each year.
Section 2. DIVIDENDS. Dividends upon the capital stock may be
declared by the Board of Directors at any regular or special
meeting and may be paid in cash or in property or in shares of the
13
capital stock. Before paying any dividend or making any
distribution of profits, the Directors may set apart out of any of
the funds of the Corporation available for dividends a reserve or
reserves for any proper purpose and may alter or abolish any such
reserve or reserves.
Section 3. CHECKS. All checks, drafts or orders for the
payment of money shall be signed by the Treasurer or by such other
Officer, Officers, employee or employees as the Board of Directors
may from time to time designate.
Section 4. CORPORATE SEAL. The Corporate Seal shall have
inscribed thereon the name of the Corporation, the year of its
incorporation, and the words "Incorporated Delaware."
ARTICLE X
AMENDMENT TO BY-LAWS
Subject to the provisions of any resolution of Directors
creating any series of preferred stock, the Board of Directors
shall have the power from time to time to make, alter or repeal
By-Laws, but any By-Laws made by the Board of Directors may be
altered, amended or repealed by the stockholders at any annual
meeting of stockholders, or at any special meeting provided that
the notice of such proposed alteration, amendment or repeal is
included in the notice of such special meeting.
ARTICLE XI
RESTATED CERTIFICATE OF INCORPORATION TO GOVERN
Notwithstanding anything to the contrary herein, in the event
any provision contained herein is inconsistent with or conflicts
with a provision of the Corporation's Restated Certificate of
Incorporation, as the same may be from time to time amended or
supplemented (the "Restated Certificate of Incorporation"), such
provision herein shall be superseded by the inconsistent provision
in the Restated Certificate of Incorporation, to the extent
necessary to give effect to such provision in the
14
Restated Certificate of Incorporation.
15
Exhibit 3.4
BY-LAWS
US AIRWAYS, INC.
January 1, 1998
* * * * * * * * * * *
ARTICLE I
OFFICES
The registered office of the Corporation shall be in the City of
Wilmington, County of New Castle, Delaware. The Corporation may
have offices within and without the State of Delaware.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. ANNUAL MEETINGS. The annual meeting of stockholders
for the election of Directors shall be held on the fourth
Wednesday in May, or if that be a legal holiday, on the next
succeeding day not a legal holiday, at nine- thirty o'clock in the
morning, or in any year at such other date and time as may be
designated by the Board of Directors, at which meeting the
stockholders shall elect by ballot, by plurality vote, a Board of
Directors and may transact such other business as may come before
the meeting.
Section 2. SPECIAL MEETINGS. Special meetings of the
stockholders may be called at any time by the Chairman or
President, and shall be called by the President or Secretary on
the request, in writing, or by vote, of a majority of Directors,
or at the request, in writing, of stockholders of record owning a
majority in amount of the capital stock outstanding and entitled
to vote.
Section 3. LOCATION OF MEETINGS. All meetings of the
stockholders for any purpose may be held, within or without the
State of Delaware, at such time and place as shall be stated in
the notice of
the meeting or a duly executed waiver of notice.
Section 4. LIST OF STOCKHOLDERS. The Secretary shall cause to
be prepared a complete list of stockholders entitled to vote at
any meeting, arranged in alphabetical order and showing the
address of each stockholder and number of shares registered in the
name of each stockholder. The list shall be open to the
examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours for at least ten days
prior to the meeting either at a place within the city where the
meeting is to be held (which place shall be specified in the
notice of meeting) or at the place where the meeting is to be
held. The list shall also be open for inspection by stockholders
during the time and at the place of the meeting.
Section 5. VOTING. Each stockholder entitled to vote shall, at
every meeting of the stockholders, be entitled to one vote in
person or by proxy, signed by him, for each share of voting stock
held by him but no proxy shall be voted on or after three years
from its date, unless it provides for a longer period. Such right
to vote shall be subject to the right of the Board of Directors to
fix a record date for voting stockholders as hereinafter provided.
Section 6. NOTICE TO STOCKHOLDERS. Notice of all meetings
shall be mailed by the Secretary to each stockholder of record
entitled to vote, at his or her last known post office address,
not less than ten nor more than sixty days prior to any annual or
special meeting.
Section 7. QUORUM. The holders of a majority of the stock
outstanding and entitled to vote shall constitute a quorum but the
holders of a smaller amount may adjourn from time to time without
further notice until a quorum is secured.
ARTICLE III
DIRECTORS
Section 1. NUMBER. The property and business of the
Corporation shall be managed and
2
controlled by its Board of Directors, consisting of eleven
members. Directors need not be stockholders.
Section 2. ELECTION, TERM, VACANCIES. The Directors shall hold
office until the next annual election and until their successors
are elected and qualified. They shall be elected by the
stockholders, except that if there be a vacancy in the Board by
reason of death, resignation or otherwise, such vacancy shall be
filled for the unexpired term by the remaining Directors, though
less than a quorum, by a majority vote.
Section 3. Powers of Directors. The business of the
Corporation shall be managed by or under the direction of its
Board of Directors which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by
statute or by the certificate of incorporation or by these by-
laws directed or required to be exercised or done by the
stockholders.
Section 4. DIRECTORS EMERITI. For the purpose of conserving,
for the benefit of the Corporation, the knowledge, experience and
good will generated by a long period of service in formulating and
implementing the basic policies of the Corporation or corporations
merged into the corporation, the Board of Directors shall have the
power in its discretion to appoint one or more Directors Emeriti.
Any person who has served for a period of not less than ten years
on the Board of Directors of the Corporation or of any predecessor
or affiliate of the Corporation, may be appointed a Director
Emeritus by the Board of Directors for an annual term and shall be
eligible for reappointment annually at the discretion of the
Board. The duties of a Director Emeritus shall consist of being
available to the Chairman and President of the Corporation for
consultation and advice on any matters pertaining to the
Corporation which the Chairman or President may refer to him from
time to time. Directors Emeriti shall be notified of and be
invited to attend the annual meeting of the Board of Directors and
such other meetings as determined by the Chairman or President of
the Corporation and
3
be entitled to be heard at such meetings on matters pending before
the Board of Directors. They shall not be members of the Board
nor be entitled to vote as such nor be counted as constituting
part of a quorum.
Section 5. COMPENSATION. Directors, members of committees and
Directors Emeriti shall receive such compensation as the Board
shall from time to time prescribe.
ARTICLE IV
MEETINGS OF DIRECTORS
Section 1. ANNUAL MEETING. After each annual election of
Directors, the newly elected Directors may meet for the purpose of
organization, the election of Officers, and the transaction of
other business, at such place and time as shall be fixed by the
stockholders at the annual meeting, and, if a majority of the
Directors be present at such place and time, no prior notice of
such meeting shall be required to be given to the Directors. The
place and time of such meeting may also be fixed by written
consent of the Directors.
Section 2. REGULAR MEETINGS. Bi-monthly meetings of the Board
of Directors shall be held in January, March, May, July, September
and November in each year, on the date and at a time and place
designated from time to time by the Board of Directors. The
Secretary shall forward to each Director, at least five days
before any such meeting, a notice of the time and place of the
meeting.
Section 3. SPECIAL MEETINGS. Special meetings of the Directors
may be called by the Chairman or President on two days' notice in
writing, or on one day's notice by telegraph to each Director, and
shall be called by the President in like manner on the written
request of two or more Directors.
Section 4. LOCATION. Meetings of the Directors may be held
within or without the State of Delaware at such place as is
indicated in the notice of waiver of notice thereof.
4
Section 5. QUORUM. A majority of the Directors shall
constitute a quorum, but a smaller number may adjourn from time to
time, without further notice, until a quorum is secured.
ARTICLE V
COMMITTEES
Section 1. CREATION. The Board of Directors may, by resolution
or resolutions passed by a majority of the Board, designate one or
more committees each to consist of three or more Directors of the
Corporation. Each such Committee shall have and may exercise such
powers and duties as shall be delegated to it by the Board of
Directors except that no such Committee shall have power to (a)
elect Directors; (b) alter, amend or repeal these By-Laws or any
resolution or resolutions of the Board of Directors relating to
such Committee; (c) declare any dividend or make any other
distribution to the stockholders of the Corporation; (d) appoint
any member of such Committee; or (e) take any other action which
may lawfully be taken only by the Board.
Section 2. COMMITTEE PROCEDURE. Each such Committee
established by the Board shall meet at stated times or on notice
to all members by any member of such Committee. Each such
Committee shall establish its own rules of procedure. Each such
Committee shall keep regular minutes of its proceedings and report
the same to the Board of Directors.
ARTICLE VI
INDEMNIFICATION
The Corporation shall indemnify its Directors, Officers and
employees, and shall have the power to indemnify its other agents,
to the full extent permitted by the General Corporation Law of the
State of Delaware, as amended from time to time, (but, in the case
of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights
than such law permitted the Corporation to provide on June 29,
1989). Expenses (including attorneys' fees)
5
incurred by an Officer, Director or employee in defending any
civil, criminal, administrative, or investigative action, suit or
proceeding shall to the fullest extent permitted by law be paid by
the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on
behalf of such Director, Officer or employee to repay such amount
if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized hereunder. The right
to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition
conferred in this Article shall not be exclusive of any other
right which any person may have or hereafter acquire under any
statute, provision of the Restated Certificate of Incorporation,
by-law, agreement, vote of stockholders or disinterested directors
or otherwise.
ARTICLE VII
OFFICERS
Section 1. General. The Officers of the Corporation shall be a
Chairman of the Board, a Chief Executive Officer, a President, one
or more Vice Presidents, a Secretary, a Treasurer, a Controller
and such other Officers as may from time to time be chosen by the
Board of Directors. The Chief Executive Officer shall be
empowered to appoint and remove from office, at his discretion,
Assistant Vice Presidents and Assistant Secretaries. Any number
of offices may be held by the same person, unless the certificate
of incorporation or these By-laws otherwise provide.
Section 2. TERM. The Officers of the Corporation shall hold
office until their successors are chosen and qualified. Any
Officer chosen or appointed by the Board of Directors may be
removed either with or without cause at any time by the
affirmative vote of a majority of the whole Board of Directors.
If the office of any Officer other than an assistant officer
becomes vacant for any reason, the vacancy shall be filled by the
affirmative vote of a majority of the whole Board of Directors.
6
Section 3. CHAIRMAN OF THE BOARD. A Chairman of the Board
shall be chosen from among the Directors. The Chairman of the
Board shall preside at all meetings of the stockholders and
Directors and shall perform such other duties as may be prescribed
by the Board of Directors.
Section 4. CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer shall have responsibility for the general and active
management of the business of the Corporation and shall see that
all orders and resolutions of the Board of Directors are carried
into effect.
Section 5. PRESIDENT. The President shall be the Chief
Operating Officer of the Corporation. The President shall have
such responsibilities and authority as determined by the Chief
Executive Officer of the Corporation.
Section 6. VICE PRESIDENT. The Vice President or Vice
Presidents, in the order designated by the Board of Directors,
shall be vested with all the powers and required to perform all
the duties of the President in his absence or disability and shall
perform such other duties as may be prescribed by the Board of
Directors.
Section 7. SECRETARY. The Secretary shall perform all the
duties commonly incident to his office, and keep accurate minutes
of all meetings of the stockholders, the Board of Directors and
the Committees of the Board of Directors, recording all the
proceedings of such meetings in a book kept for that purpose. He
shall give proper notice of meetings of stockholders and Directors
and perform such other duties as the Board of Directors shall
designate.
Section 8. TREASURER. The Treasurer shall have custody of the
funds and securities of the Corporation and shall keep full and
accurate accounts of disbursements and shall deposit all monies
and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board
of Directors. He shall disburse the funds of the Corporation as
may be ordered by the Board or President, taking proper vouchers
for such disbursements, and shall render to
7
the President and Directors, whenever they may require it, an
account of all his transactions as Treasurer and of the financial
condition of the Corporation. The Treasurer shall perform such
other duties as the Board of Directors may from time to time
prescribe.
Section 9. CONTROLLER. The Controller shall maintain adequate
records of all assets, liabilities and transactions of the
Corporation and shall see that adequate audits thereof are
currently and regularly made. He shall cause to be prepared,
compiled and filed such reports, statements, statistics and other
data as may be required by law or prescribed by the President and
shall perform such other duties as may be prescribed by the Board
of Directors.
ARTICLE VIII
STOCK
Section 1. CERTIFICATES. Certificates of stock of the
Corporation shall be signed by, or in the name of, the Corporation
by the President or a Vice President, and the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary,
certifying the number of shares of the holder thereof. The Board
of Directors may appoint a transfer agent, and a registrar of
transfers, which may be the same agency, and may require all
certificates to bear the signatures of such transfer agent and
such registrar of transfers, or as the Board of Directors may
otherwise direct. Where any such certificate is signed by a
transfer agent or transfer clerk and by a registrar, the
signatures of any such President, Vice President, Treasurer,
Assistant Treasurer, Secretary or Assistant Secretary may be
facsimiles engraved or printed. The certificates shall bear the
seal of the Corporation or shall bear a facsimile of such seal
engraved or printed.
In case any Officer or Officers who have signed, or whose
facsimile signature or signatures have been used on, any
certificate or certificates of stock, has ceased to be an Officer
or Officers of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates
8
have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be
issued and delivered as though the person or persons who signed
such certificate or certificates or whose facsimile signature or
signatures have been used thereon, had not ceased to be such
Officer or Officers of the Corporation.
Section 2. LOST CERTIFICATES. If a certificate of stock is
lost or destroyed, another may be issued in its stead upon proof
of loss or destruction and the giving of a satisfactory bond of
indemnity, in an amount sufficient to indemnify the Corporation
against any claim. A certificate may be issued without requiring
bond when, in the judgment of the Directors, it is proper to do
so.
Section 3. TRANSFERS. All transfers of stock of the
Corporation shall be made upon its books by the holder of the
shares in person or by his lawfully constituted representative,
upon surrender of certificates of stock for cancellation.
Section 4. FIXING RECORD DATE. The Board of Directors may fix
in advance a record date in order to determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action
in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other
lawful action. The record date shall not be more than sixty nor
less than ten days before the date of any meeting of stockholders
nor more than sixty days prior to any other action.
Section 5. STOCKHOLDERS OF RECORD. The Corporation shall be
entitled to treat the holder of record of any share or shares of
stock as the holder in fact thereof, and accordingly shall not be
bound to recognize any equitable or other claim to or interest in
such share on the part of any other person whether or not it shall
have express or other notice thereof, except as expressly provided
by the laws of Delaware.
9
ARTICLE IX
GENERAL PROVISIONS
Section 1. FISCAL YEAR. The fiscal year of the Corporation
shall begin the first day of January and end on the 31st day of
December of each year.
Section 2. DIVIDENDS. Dividends upon the capital stock may be
declared by the Board of Directors at any regular or special
meeting and may be paid in cash or in property or in shares of the
capital stock. Before paying any dividend or making any
distribution of profits, the Directors may set apart out of any of
the funds of the Corporation available for dividends a reserve or
reserves for any proper purpose and may alter or abolish any such
reserve or reserves.
Section 3. CHECKS. All checks, drafts or orders for the
payment of money shall be signed by the Treasurer or by such other
Officer, Officers, employee or employees as the Board of Directors
may from time to time designate.
Section 4. CORPORATE SEAL. The Corporate Seal shall have
inscribed thereon the name of the Corporation, the year of its
incorporation, and the words "Incorporated Delaware."
ARTICLE X
AMENDMENT OF BY-LAWS
Subject to the provisions of any resolution of Directors
creating any series of preferred stock, the Board of Directors
shall have the power from time to time to make, alter or repeal
by-laws, but any by-laws made by the Board of Directors may be
altered, amended or repealed by the stockholders at any annual
meeting of stockholders, or at any special meeting provided that
the notice of such proposed alteration, amendment or repeal is
included in the notice of such special meeting.
10
Exhibit 10.6
Incentive Compensation Plan
of
US Airways Group, Inc.
as amended and restated January 1, 1997
The Incentive Compensation Plan of US Airways Group, Inc.
was originally adopted by the Corporation effective January 1,
1988. By action of the Corporation's Board of Directors, the
Plan has been amended and restated in its entirety to be
effective for Plan Years beginning after December 31, 1996.
1. Purpose -- The purpose of the Plan is to reward executives
and other key management employees of US Airways and other
subsidiaries of the Corporation and to motivate them to
increase shareholder value and to achieve profitable
results.
2. Definitions -- When used in this Plan, unless the context
otherwise suggests:
(a) "Committee" shall mean the Human Resources Committee of
the Corporation's Board of Directors.
(b) "Corporation" shall mean US Airways Group, Inc.
(c) "Plan" shall mean the Incentive Compensation Plan of US
Airways Group, Inc.
(d) "Plan Year" shall mean January 1 to December 31 to
coincide with the Corporation's fiscal year.
(e) "US Airways" shall mean US Airways, Inc.
3. Administration -- The Plan shall be administered by the
Committee. Any Committee member who is eligible to
participate in the Plan shall abstain from voting on any
matter before the Committee relating to the Plan. The
Committee may authorize and establish such rules,
regulations, and procedures as it may determine advisable to
make the Plan effective or to provide for its administration
and may take such other action with regard to the Plan as it
shall deem desirable to effectuate its purposes. A
determination of the Committee as to any questions which
arise with respect to the interpretation of the provisions
of the Plan shall be final.
4. Participants -- Executives and other key management
employees of US Airways and other subsidiaries of the
Corporation as approved by the Committee,
5. Eligibility -- Participants must be actively employed on
the date of payment under the Plan in order to be eligible
to receive an award. However, should a Participant retire,
die or become disabled at any time during the Plan Year, a
pro rata award may be paid based on the Participant's number
of full months of active service during the Plan Year.
Participants in an eligible position for less than a full
Plan Year, due to the commencement of employment, promotion
or demotion, shall receive a pro rata award based on the
number of full months in the eligible position.
Participants whose target percentage changes during a Plan
Year will receive an award based on a pro rata calculation
between the percentages.
6. Awards -- The Plan provides for the payment of incentive
and bonus awards.
(a) Incentive Awards:
(i) The Committee will establish target awards for each
officer Participant in the Plan stated as a percentage
of the Participant's base salary. The senior officer
whose responsibilities include Human Resources, with
the concurrence of the Chief Executive Officer, will
establish target awards for each non-officer
Participant in the Plan stated as a percentage of the
Participant's base salary.
(ii) The Committee shall establish objectives for the Plan
Year by March 31 of the Plan Year against which
incentive awards will be measured.
(iii)Target awards may be paid if the Corporation and the
Participant meet established objectives. If objectives
are achieved at the maximum level, awards may be paid
up to 200% of target. Notwithstanding any other
provision of the Plan, the Committee retains the right
at its sole discretion to increase or decrease a
Participant's award (including down to zero (0) or in
excess of 200% of the individual's target), based on
the individual Participant's performance.
(b) Bonus Awards: For any Plan Year in which no incentive
awards are paid, the Committee retains the right to
authorize bonus awards under the Plan to such
Participants and in such amounts as it shall determine
in its sole discretion.
(c) Incentive and bonus awards shall be paid in a lump sum
cash distribution to Participants as soon as practical
following the close of the Plan Year and after such
awards have been approved by the Committee.
7. Tax Withholding -- Cash awards made pursuant to the Plan
are subject to applicable federal, state and local, if any,
payroll tax withholdings.
8. Amendment of Plan -- The Committee may from time to time
amend the Plan and its terms and conditions and may at any
time discontinue the granting of awards under the Plan.
9. Effective Date and Term of Plan -- The Plan shall be
effective as of January 1, 1988 and shall remain in effect
until the Committee, in its sole discretion, decides to
terminate the Plan.
Page 2
Exhibit 10.9
1997 STOCK INCENTIVE PLAN
OF
US AIRWAYS GROUP, INC.
(as amended and restated as of November 18, 1997)
1. PURPOSE. The purpose of this Stock Incentive Plan is to
advance the interests of the Corporation by encouraging the
acquisition of a larger personal proprietary interest in the
Corporation by key employees of the Corporation and of its
Subsidiaries upon whose judgment and dedication the Corporation
is largely dependent for the successful conduct of its business.
It is anticipated that the acquisition of such proprietary
interest in the Corporation will stimulate the efforts of such
key employees on behalf of the Corporation and strengthen their
desire to remain with the Corporation or its Subsidiaries and
that the opportunity to acquire such a proprietary interest will
enable the Corporation and its Subsidiaries to attract and retain
desirable personnel.
2. DEFINITIONS. When used in this Plan, unless the context
otherwise requires:
(a) "Affiliate" shall mean a person or entity that directly,
or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control
with, the Corporation.
(b) "Board" shall mean the Board of Directors of the
Corporation.
(c) "Cause" shall mean an act or acts of personal dishonesty
taken by optionee and intended to result in substantial
personal enrichment at the expense of the Corporation or
any of its Subsidiaries or the conviction of optionee of
a felony.
(d) "Change of Control" shall mean:
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) of beneficial
ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or
more of either (A) the then outstanding shares of
common stock of the Corporation (the "Outstanding
Group Common Stock") or (B) the combined voting
power of the then outstanding voting securities
of the Corporation entitled to vote generally in
the election of directors (the "Outstanding Group
Voting Securities"); provided, however, that the
following acquisi-
tions shall not constitute a Change of Control:
(w) any acquisition directly from the
Corporation, (x) any acquisition by the
Corporation or any of its Subsidiaries, (y) any
acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the
Corporation or any of its Subsidiaries, or (z)
any acquisition by any corporation with respect
to which, following such acquisition, more than
85% of, respectively, the then outstanding shares
of common stock of such corporation and the
combined voting power of the then outstanding
voting securities of such corporation entitled to
vote generally in the election of directors is
then beneficially owned, directly or indirectly,
by all or substantially all of the individuals
and entities who were the beneficial owners,
respectively, of the Outstanding Group Common
Stock and Outstanding Group Voting Securities
immediately prior to such acquisition, in
substantially the same proportions as their
ownership, immediately prior to such acquisition,
of the Outstanding Group Common Stock and
Outstanding Group Voting Securities, as the case
may be; or
(ii) Individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board")
cease for any reason to constitute at least a
majority of the Board; provided, however, that
any individual becoming a director subsequent to
the date hereof whose election, or nomination for
election by the Corporation's shareholders, was
approved by a vote of at least a majority of the
directors then comprising the Incumbent Board
shall be considered as though such individual
were a member of the Incumbent Board, but
excluding, for this purpose, any such individual
whose initial assumption of office occurs as a
result of either an actual or threatened election
contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation
of proxies or consents; or
(iii) Approval by the shareholders of the Corporation
of a reorganization, merger or consolidation, in
each case, with respect to which all or
substantially all of the individuals and entities
who were the beneficial owners, respectively, of
the Outstanding Group Common Stock and
Outstanding Group Voting Securities immediately
prior to such reorganization,
2
merger or consolidation do not following such
reorganization, merger or consolidation,
beneficially own, directly or indirectly, more
than 85% of, respectively, the then outstanding
shares of common stock and the combined voting
power of the then outstanding voting securities
entitled to vote generally in the election of
directors, as the case may be, of the corporation
resulting from such reorganization, merger or
consolidation in substantially the same
proportions as their ownership, immediately prior
to such reorganization, merger or consolidation
of the Outstanding Group Common Stock and
Outstanding Group Voting Securities, as the case
may be; or
(iv) Approval by the shareholders of the Corporation
of (x) a complete liquidation or dissolution of
the Corporation or (y) the sale or other
disposition of all or substantially all of the
assets of the Corporation, other than to a
corporation, with respect to which following such
sale or other disposition, more than 85% of,
respectively, the then outstanding shares of
common stock of such corporation and the combined
voting power of the then outstanding voting
securities of such corporation entitled to vote
generally in the election of directors is then
beneficially owned, directly or indirectly, by
all or substantially all of the individuals and
entities who were the beneficial owners,
respectively, of the Outstanding Group Common
Stock and Outstanding Group Voting Securities
immediately prior to such sale or other
disposition in substantially the same proportion
as their ownership, immediately prior to such
sale or other disposition, of the Outstanding
Group Common Stock and Outstanding Group Voting
Securities, as the case may be; or
(v) The acquisition by an individual, entity or group
of beneficial ownership of 20% or more of the
then outstanding securities of the Corporation,
including both voting and non-voting securities,
provided, however, that such acquisition shall
only constitute a change of control in the event
that such individual, entity or group also
obtains the power to elect by class vote,
cumulative voting or otherwise to appoint 20% or
more of the total number of directors to the
Board.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
3
amended.
(f) "Committee" shall mean the Human Resources Committee of
the Board or such other committee as may be designated by
the Board.
(g) "Corporation" shall mean US Airways Group, Inc.
(h) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations
promulgated thereunder.
(i) "Fair Market Value" shall mean the average of the high
and low sales prices of the Shares as reported on the New
York Stock Exchange Composite Tape on the date as of
which such value is being determined or, if there shall
be no sale on that date, then on the last previous day on
which a sale was reported, provided, however, that during
the 60-day period from and after a Change of Control,
"Fair Market Value" shall mean, other than in the case of
Shares subject to incentive stock options, as defined in
the Code, the higher of (X) the highest reported sales
price, regular way, of Shares on the New York Stock
Exchange Composite Tape during the 60-day period prior to
the Change of Control and (Y) if the Change of Control is
the result of a transaction or series of transactions
described in paragraphs (i), (iii) or (iv) of the
definition of "Change of Control" herein, the highest
price for Shares paid in such transaction or series of
transactions which in the case of such paragraph (i)
shall be the highest price for Shares as reflected in a
Schedule 13D filed under the Exchange Act by the person
having made the acquisition.
(j) "Options" shall mean the stock options issued pursuant to
Section 5 hereof.
(k) "Plan" shall mean the 1997 Stock Incentive Plan of US
Airways Group, Inc., as such Plan may be amended from
time to time.
(l) "Restricted Period" means the period selected by the
Committee pursuant to Section 6 hereof.
(m) "Restricted Stock" means Shares which have been awarded
to a grantee subject to the restrictions referred to in
Section 6 hereof so long as such restrictions are in
effect.
(n) "Share" shall mean a share of common stock of the
Corporation.
(o) "Subsidiary" shall mean any corporation more than 50%
4
of whose stock having general voting power is owned by
the Corporation or by a Subsidiary of the Corporation.
3. ADMINISTRATION. The Plan shall be administered by the
Committee which, unless otherwise determined by the Board, shall
consist of not less than two directors of the Corporation, each
of whom shall qualify as a "disinterested director" (within the
meaning of Rule 16b-3 promulgated under Section 16(b) of the
Exchange Act) and as an "outside director" (within the meaning of
Section 162(m)(4)(c) of the Code). No more than 750,000 Shares,
which may be either treasury Shares or authorized but unissued
Shares, of the Corporation's common stock in the aggregate,
except to the extent of adjustments authorized by Section 11
hereof, may be issued pursuant to Options and Restricted Stock
awards granted under this Plan. Any Shares subject to Options or
Restricted Stock awards may thereafter be subject to new grants
under this Plan if there is a lapse, expiration or termination of
any such Options or Restricted Stock awards prior to issuance of
the Shares or if Shares are issued hereunder and thereafter
reacquired by the Corporation pursuant to rights reserved by the
Corporation in connection with the issuance thereof. No
individual may be granted Options or Restricted Stock awards with
respect to more than an aggregate of 750,000 Shares in any one
calendar year.
The Committee may authorize and establish such rules,
regulations and revisions thereof not inconsistent with the
provisions of the Plan, as it may determine advisable to make the
Plan, Options, and Restricted Stock effective or provide for
their administration, and may take such other action with regard
to the Plan, Options, and Restricted Stock as it shall deem
desirable to effectuate their purpose. The Committee may require
that any Options granted be exercisable in installments. A
determination of the Committee as to any questions which may
arise with respect to the interpretation of the provisions of the
Plan, Options and Restricted Stock shall be final.
4. PARTICIPANTS. Options and Restricted Stock may be
granted under the Plan to any key employee of the Corporation or
any Subsidiary or to any individual in contemplation of becoming
a key employee of the Corporation or any Subsidiary; provided,
however, that neither Options nor Restricted Stock may be granted
to any individual who, at the time of grant, is an officer of the
Corporation or any of its Subsidiaries. Subject to the preceding
sentence, the individuals to whom Options and Restricted Stock
are to be offered under the Plan and the number of Shares to be
optioned and Restricted Stock to be issued to each such
individual shall be determined by the Committee in its sole
discretion, subject, however, to the terms and conditions of the
Plan.
5. OPTIONS. The number of Shares to be optioned to any
eligible person shall be determined by the Committee in its sole
5
discretion. The Committee shall be entitled to issue Options at
different times to the same person. Options shall be subject to
such terms and conditions and evidenced by agreements in such
form as shall be determined from time to time by the Chief
Executive Officer, provided that the terms and conditions of each
such agreement are not inconsistent with this Plan.
The purchase price per Share for the Shares to be purchased
pursuant to the exercise of any Option shall be fixed by the
Committee, but shall not be less than 100% of the Fair Market
Value of the Shares on the date such Option is granted; provided,
however, for purposes of any grant of Options by the Committee
the meaning of Fair Market Value shall be as defined in Section
2(i) hereof without regard to the proviso in such definition. No
Option granted under the Plan shall be exercisable after ten
years and one month from the date it was granted or such earlier
date as shall be established by the Committee in granting the
Option.
Except as otherwise provided herein, an Option shall be
exercisable by the holder at such rate and times as may be fixed
by the Committee; provided, however, upon a Change of Control,
all Options shall become immediately exercisable. The Committee
may provide that the Option shall not be exercisable, in whole or
in part, except upon the fulfillment of specific defined
conditions. No Option may at any time be exercised in part with
respect to fewer than 100 Shares unless fewer than 100 Shares
remain in the Option grant being exercised.
Options shall be exercised by written notice to the
Secretary of the Corporation (or the Secretary's designated
agent) in such form as is from time to time prescribed by the
Committee and by the payment in full of the aggregate exercise
price of the Options being exercised. Payment of the purchase
price upon exercise of any Option shall be made (A) in cash or
(B) in whole or in part, (i) in Shares valued at Fair Market
Value on the date of exercise or (ii) by electing to have the
Corporation withhold a number of shares of common stock otherwise
receivable upon exercise, the value of such withheld shares
determined by the Fair Market Value on the date of exercise;
provided, however, that during the 60-day period from and after a
Change of Control all optionees with respect to any or all of
their respective Options shall, unless the Committee shall
determine otherwise at the time of grant, have the right, in lieu
of the payment of the full option price of the Shares being
purchased under the Options and by giving written notice to the
Corporation in form satisfactory to the Committee, to elect
(within such 60-day period) to surrender all or part of the
Options to the Corporation and to receive in cash an amount equal
to the amount by which the Fair Market Value of Shares on the
date of exercise exceeds the option price per Share under the
Options multiplied by the number of Shares granted under the
Options as to which the right granted by this proviso shall have
been exercised. Such written notice shall specify the optionee's
6
election to purchase Shares granted under the Options or to
receive the cash payment referred to in the proviso to the
immediately preceding sentence.
6. RESTRICTED STOCK. Subject to the terms of the Plan, the
Committee shall determine and designate the recipients of
Restricted Stock awards, the dates on which such awards are to be
granted, the number of Shares subject to such awards, and the
restrictions applicable to such awards. Restricted Stock awards
shall be subject to such terms and conditions and evidenced by
agreements in such form as shall be determined from time to time
by the Chief Executive Officer, provided that the terms and
conditions of each such agreement are not inconsistent with this
Plan.
7. NONTRANSFERABILITY OF OPTIONS AND RESTRICTED STOCK.
Except as otherwise provided by the Committee, Options and
Restricted Stock shall not be transferable by the holder thereof
otherwise than by will or the laws of descent and distribution to
the extent provided herein, and Options may be exercised during
the holder's lifetime only by the holder thereof.
8. TAX WITHHOLDING. If as a result of: (a) the exercise
of any Options or the disposition of any Shares acquired pursuant
to such exercise, or (b) the lapse of any restrictions on the
disposition of Restricted Stock, the Corporation or Subsidiary
shall be required to withhold any amounts by reason of any
Federal, state or local tax rules or regulations, the Corporation
or Subsidiary shall be entitled to deduct and withhold such
amounts from any cash payments to be made to the holder. In any
event, the holder shall make available to the Corporation or
Subsidiary, promptly when required, sufficient funds to meet the
requirement for such withholding; and the Committee shall be
entitled to take and authorize such steps as it may deem
advisable in order to have such funds available to the
Corporation or Subsidiary when required. Notwithstanding the
foregoing, the holder shall have the right to satisfy such
withholding, in whole or in part, in Shares (including by having
the Corporation withhold Shares otherwise issuable in respect of
such Options or Restricted Stock) valued at Fair Market Value on
the date of exercise or lapse of restrictions, as applicable.
9. TAX LIABILITY. Subject to the Committee's discretion,
agreements between the Corporation and grantees in connection
with awards of Options or Restricted Stock may provide for the
payment by the Corporation of a supplemental cash payment to
grantees promptly after the exercise of an Option, or promptly
after the date on which the shares of Restricted Stock awarded
are included in the gross income of the grantee under the Code.
Such supplemental cash payments, to the extent determined by the
Committee, shall provide for the payment of such amounts as may
be necessary to result in the grantee not having any incremental
tax liability as a result of such exercise or inclusion in
grantee's gross income. The determination of the amount of any
7
supplemental cash payments by the Committee shall be conclusive.
10. TERMINATION OF EMPLOYMENT. Notwithstanding any
provision of the Plan to the contrary, (i) upon the termination
of employment of an Optionee with the Corporation and all
Subsidiaries other than for Cause, the optionee (or the
optionee's estate in the event of the optionee's death) shall
have the privilege of exercising any unexercised Options which
the optionee could have exercised at the time of such termination
of employment at any time until the end of six months following
such termination of employment and (ii) upon the termination of
employment of an optionee with the Corporation and all
Subsidiaries for Cause, all unexercised Options of such optionee
shall terminate ten days after such termination of employment.
The Committee may permit individual exceptions to the
requirements of this section by extending the period in which
Options may be exercised, provided, however, that no Options may
be extended past the earlier to occur of (i) their expiration
date or (ii) three years following termination of employment.
11. ADJUSTMENT OF OPTIONED SHARES. If prior to the
complete exercise of any Option there shall be declared and paid
a stock dividend upon the Shares of the Corporation or if the
Shares shall be split-up, converted, reclassified, or changed
into, or exchanged for, a different number or kind of securities
of the Corporation, the Option, to the extent that it has not
been exercised, shall entitle the holder upon the future exercise
of such Option to such number and kind of securities or other
property subject to the terms of the Option to which he would be
entitled had he actually owned the Shares subject to the
unexercised portion of the Option at the time of the occurrence
of such stock dividend, split-up, conversion, reclassification,
change or exchange; and the aggregate purchase price upon the
future exercise of the Option shall be the same as if originally
optioned Shares were being purchased thereunder. If any such
event should occur, the number of Shares with respect to which
Options remain to be issued, or with respect to which Options may
be reissued, shall be similarly adjusted.
In the event the outstanding Shares shall be changed into or
exchanged for any other class or series of capital stock or cash,
securities or other property pursuant to a recapitalization,
reclassification, merger, consolidation, combination or similar
transaction, then each Option shall thereafter become exercisable
for the number and/or kind of capital stock, and/or the amount of
cash, securities or other property so distributed, into which the
Shares subject to the Option would have been changed or exchanged
had the Option been exercised in full prior to such transaction,
provided that, if the kind or amount of capital stock or cash,
securities or other property received in such transaction is not
the same for each outstanding Share, then the kind or amount of
capital stock or cash, securities or other property for which the
Option shall thereafter become exercisable shall be the kind and
8
amount so receivable per Share by a plurality of the Shares, and
provided further that, if necessary, the provisions of the Option
shall be appropriately adjusted so as to be applicable, as nearly
as may reasonably be, to any shares of capital stock, cash,
securities or other property thereafter issuable or deliverable
upon exercise of the Option.
12. ISSUANCE OF SHARES AND COMPLIANCE WITH SECURITIES ACT.
The Corporation may postpone the issuance and delivery of Shares
upon any exercise of an Option, or upon any lapsing of
restriction on any shares of Restricted Stock until (a) the
admission of such Shares to listing on any stock exchange on
which Shares are then listed and (b) the completion of such
registration or other qualification of such Shares under any
state or Federal law, rule or regulation as the Corporation shall
determine to be necessary or advisable. Any person exercising an
Option and any grantee of Restricted Stock shall make such
representations and furnish such information as may, in the
opinion of counsel for the Corporation, be appropriate to permit
the Corporation, in light of the then existence or nonexistence
with respect to such Shares of an effective registration
statement under the Securities Act of 1933, as from time to time
amended, to issue the Shares in compliance with the provisions of
that or any comparable act.
13. AMENDMENT OF THE PLAN. The Committee may at any time
discontinue the Plan or the grant of any additional Options or
Restricted Stock under the Plan. Except as hereinafter provided,
the Committee may from time to time amend the Plan and the terms
and conditions of any Options or Restricted Stock not theretofore
issued, and the Committee, with the consent of the affected
holder of an Option or Restricted Stock, may at any time withdraw
or from time to time amend the Plan and the terms and conditions
of such Option or Restricted Stock as have been theretofore
granted.
14. EFFECTIVENESS AND TERM OF THE PLAN. The Plan shall
become effective and in full force and effect upon its approval
by the Board and, unless sooner terminated by the Committee
pursuant to Section 13 hereof, the Plan shall terminate on the
date ten years after such approval. No Option or Restricted
Stock may be granted or awarded after termination of the Plan.
Termination of the Plan shall not affect the validity of any
Option or Restricted Stock outstanding on the date of such
termination.
9
(..continued)
Exhibit 10.10
1996 STOCK INCENTIVE PLAN
OF
US AIRWAYS GROUP, INC.
(as amended and restated as of November 18, 1997)
1. PURPOSE. The purpose of this Stock Incentive Plan is to
advance the interests of the Corporation by encouraging the
acquisition of a larger personal proprietary interest in the
Corporation by key employees of the Corporation and of its
Subsidiaries upon whose judgment and dedication the Corporation
is largely dependent for the successful conduct of its business.
It is anticipated that the acquisition of such proprietary
interest in the Corporation will stimulate the efforts of such
key employees on behalf of the Corporation and strengthen their
desire to remain with the Corporation or its Subsidiaries and
that the opportunity to acquire such a proprietary interest will
enable the Corporation and its Subsidiaries to attract and retain
desirable personnel.
2. DEFINITIONS. When used in this Plan, unless the context
otherwise requires:
(a) "Affiliate" shall mean a person or entity that
directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is
under common control with, the Corporation.
(b) "Board" shall mean the Board of Directors of the
Corporation.
(c) "Cause" shall mean an act or acts of personal
dishonesty taken by optionee and intended to result in
substantial personal enrichment at the expense of the
Corporation or any of its Subsidiaries or the
conviction of optionee of a felony.
(d) "Change of Control" shall mean:
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) of beneficial
ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or
more of either (A) the then outstanding shares of
common stock of the Corporation (the
"Outstanding Group Common Stock") or (B) the
combined voting power of the then outstanding
voting securities of the Corporation entitled to
vote generally in the election of directors (the
"Outstanding Group Voting Securities"); provided,
however, that the following acquisitions shall
not constitute a Change of
Control: (w) any acquisition directly from the
Corporation, (x) any acquisition by the
Corporation or any of its Subsidiaries, (y) any
acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the
Corporation or any of its Subsidiaries, or (z)
any acquisition by any corporation with respect
to which, following such acquisition, more than
85% of, respectively, the then outstanding shares
of common stock of such corporation and the
combined voting power of the then outstanding
voting securities of such corporation entitled to
vote generally in the election of directors is
then beneficially owned, directly or indirectly,
by all or substantially all of the individuals
and entities who were the beneficial owners,
respectively, of the Outstanding Group Common
Stock and Outstanding Group Voting Securities
immediately prior to such acquisition, in
substantially the same proportions as their
ownership, immediately prior to such acquisition,
of the Outstanding Group Common Stock and
Outstanding Group Voting Securities, as the case
may be; or
(ii) Individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board")
cease for any reason to constitute at least a
majority of the Board; provided, however, that
any individual becoming a director subsequent to
the date hereof whose election, or nomination
for election by the Corporation's shareholders,
was approved by a vote of at least a majority of
the directors then comprising the Incumbent
Board shall be considered as though such
individual were a member of the Incumbent Board,
but excluding, for this purpose, any such
individual whose initial assumption of office
occurs as a result of either an actual or
threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or
threatened solicitation of proxies or consents;
or
(iii) Approval by the shareholders of the Corporation
of a reorganization, merger or consolidation, in
each case, with respect to which all or
substantially all of the individuals and entities
who were the beneficial owners, respectively, of
the Outstanding Group Common Stock and
Outstanding Group Voting Securities immediately
prior to such reorganization, merger or
consolidation do not following such
2
reorganization, merger or consolidation,
beneficially own, directly or indirectly, more
than 85% of, respectively, the then outstanding
shares of common stock and the combined voting
power of the then outstanding voting securities
entitled to vote generally in the election of
directors, as the case may be, of the corporation
resulting from such reorganization, merger
or consolidation in substantially the same
proportions as their ownership, immediately
prior to such reorganization, merger or
consolidation of the Outstanding Group Common
Stock and Outstanding Group Voting Securities, as
the case may be; or
(iv) Approval by the shareholders of the Corporation
of (x) a complete liquidation or dissolution of
the Corporation or (y) the sale or other
disposition of all or substantially all of the
assets of the Corporation, other than to a
corporation, with respect to which following such
sale or other disposition, more than 85% of,
respectively, the then outstanding shares of
common stock of such corporation and the combined
voting power of the then outstanding voting
securities of such corporation entitled to vote
generally in the election of directors is then
beneficially owned, directly or indirectly, by
all or substantially all of the individuals and
entities who were the beneficial owners,
respectively, of the Outstanding Group Common
Stock and Outstanding Group Voting Securities
immediately prior to such sale or other
disposition in substantially the same proportion
as their ownership, immediately prior to such
sale or other disposition, of the Outstanding
Group Common Stock and Outstanding Group Voting
Securities, as the case may be; or
(v) The acquisition by an individual, entity or group
of beneficial ownership of 20% or more of the
then outstanding securities of the Corporation,
including both voting and non-voting securities,
provided, however, that such acquisition shall
only constitute a change of control in the event
that such individual, entity or group also
obtains the power to elect by class vote,
cumulative voting or otherwise to appoint 20% or
more of the total number of directors to the
Board.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
3
amended.
(f) "Committee" shall mean the Human Resources Committee of
the Board or such other committee as may be designated
by the Board.
(g) "Corporation" shall mean US Airways Group, Inc.
(h) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, and the rules and regulations
promulgated thereunder.
(i) "Fair Market Value" shall mean the average of the high
and low sales prices of the Shares as reported on the
New York Stock Exchange Composite Tape on the date as
of which such value is being determined or, if there
shall be no sale on that date, then on the last
previous day on which a sale was reported, provided,
however, that during the 60-day period from and after a
Change of Control, "Fair Market Value" shall mean the
higher of (X) the highest reported sales price, regular
way, of Shares on the New York Stock Exchange Composite
Tape during the 60-day period prior to the Change of
Control and (Y) if the Change of Control is the result
of a transaction or series of transactions described in
paragraphs (i), (iii) or (iv) of the definition of
"Change of Control" herein, the highest price for
Shares paid in such transaction or series of
transactions which in the case of such paragraph (i)
shall be the highest price for Shares as reflected in a
Schedule 13D filed under the Exchange Act by the person
having made the acquisition.
(j) "Options" shall mean the stock options issued pursuant
to Section 5 hereof.
(k) "Plan" shall mean the 1996 Stock Incentive Plan of US
Airways Group, Inc., as such Plan may be amended from
time to time.
(l) "Restricted Period" means the period selected by the
Committee pursuant to Section 6 hereof.
(m) "Restricted Stock" means Shares which have been awarded
to a grantee subject to the restrictions referred to in
Section 6 hereof so long as such restrictions are in
effect.
(n) "Share" shall mean a share of common stock of the
Corporation.
4
(o) "Subsidiary" shall mean any corporation more than 50%
of whose stock having general voting power is owned by
the Corporation or by a Subsidiary of the Corporation.
3. ADMINISTRATION. The Plan shall be administered by the
Committee which, unless otherwise determined by the Board, shall
consist of not less than two directors of the Corporation, each
of whom shall qualify as a "disinterested director" (within the
meaning of Rule 16b-3 promulgated under Section 16(b) of the
Exchange Act) and as an "outside director" (within the meaning of
Section 162(m)(4)(c) of the Code). No more than 3,100,000
Shares, which may be either treasury Shares or authorized but
unissued Shares, of the Corporation's common stock in the
aggregate, except to the extent of adjustments authorized by
Section 11 hereof, may be issued pursuant to Options and
Restricted Stock awards granted under this Plan. Any Shares
subject to Options or Restricted Stock awards may thereafter be
subject to new grants under this Plan if there is a lapse,
expiration or termination of any such Options or Restricted Stock
awards prior to issuance of the Shares or if Shares are issued
hereunder and thereafter reacquired by the Corporation pursuant
to rights reserved by the Corporation in connection with the
issuance thereof.
The Committee may authorize and establish such rules,
regulations and revisions thereof not inconsistent with the
provisions of the Plan, as it may determine advisable to make the
Plan, Options, and Restricted Stock effective or provide for
their administration, and may take such other action with regard
to the Plan, Options, and Restricted Stock as it shall deem
desirable to effectuate their purpose. The Committee may require
that any Options granted be exercisable in installments. A
determination of the Committee as to any questions which may
arise with respect to the interpretation of the provisions of the
Plan, Options and Restricted Stock shall be final.
This Plan shall constitute an amendment and restatement of
the Corporation's 1988 Stock Incentive Plan with respect to the
Shares reserved thereunder for which awards had not yet been
granted thereunder as of the date of adoption of this Plan by the
Board (or which again become available upon the lapse, expiration
or termination of any award previously made thereunder). Options
and other awards with respect to such Shares may be granted
hereunder by the Committee in accordance with the terms of this
Plan.
4. PARTICIPANTS. Options and Restricted Stock may be
granted under the Plan to any key employee of the Corporation or
any Subsidiary or to any individual in contemplation of becoming
5
a key employee of the Corporation or any Subsidiary. The
individuals to whom Options and Restricted Stock are to be
offered under the Plan and the number of Shares to be optioned
and Restricted Stock to be issued to each such individual shall
be determined by the Committee in its sole discretion, subject,
however, to the terms and conditions of the Plan.
5. OPTIONS. The number of Shares to be optioned to any
eligible person shall be determined by the Committee in its sole
discretion. The Committee shall be entitled to issue Options at
different times to the same person. Options shall be subject to
such terms and conditions and evidenced by agreements in such
form as shall be determined from time to time by the Chief
Executive Officer, provided that the terms and conditions of each
such agreement are not inconsistent with this Plan.
The purchase price per Share for the Shares to be purchased
pursuant to the exercise of any Option shall be fixed by the
Committee, but shall not be less than 100% of the Fair Market
Value of the Shares on the date such Option is granted; provided,
however, for purposes of any grant of Options by the Committee
the meaning of Fair Market Value shall be as defined in Section
2(i) hereof without regard to the proviso in such definition. No
Option granted under the Plan shall be exercisable after ten
years and one month from the date it was granted or such earlier
date as shall be established by the Committee in granting the
Option.
Except as otherwise provided herein, an Option shall be
exercisable by the holder at such rate and times as may be fixed
by the Committee, but not sooner than approval of the Plan by the
stockholders of the Corporation; provided, however, upon a Change
of Control, all Options shall become immediately exercisable.
The Committee may provide that the Option shall not be
exercisable, in whole or in part, except upon the fulfillment of
specific defined conditions. No Option may at any time be
exercised in part with respect to fewer than 100 Shares unless
fewer than 100 Shares remain in the Option grant being exercised.
Options shall be exercised by written notice to the
Secretary of the Corporation (or the Secretary's designated
agent) in such form as is from time to time prescribed by the
Committee and by the payment in full of the aggregate exercise
price of the Options being exercised. Payment of the purchase
price upon exercise of any Option shall be made (A) in cash or
(B) in whole or in part, (i) in Shares valued at Fair Market
Value on the date of exercise or (ii) with respect to the
exercise of Options which are not incentive stock options, as
defined in Section 422 of the Code, by electing to have the
6
Corporation withhold a number of shares of common stock otherwise
receivable upon exercise, the value of such withheld shares
determined by the Fair Market Value on the date of exercise;
provided, however, that during the 60-day period from and after a
Change of Control all optionees with respect to any or all of
their respective Options shall, unless the Committee shall
determine otherwise at the time of grant, have the right, in lieu
of the payment of the full option price of the Shares being
purchased under the Options and by giving written notice to the
Corporation in form satisfactory to the Committee, to elect
(within such 60-day period) to surrender all or part of the
Options to the Corporation and to receive in cash an amount equal
to the amount by which the Fair Market Value of Shares on the
date of exercise exceeds the option price per Share under the
Options multiplied by the number of Shares granted under the
Options as to which the right granted by this proviso shall have
been exercised. Such written notice shall specify the optionee's
election to purchase Shares granted under the Options or to
receive the cash payment referred to in the proviso to the
immediately preceding sentence.
6. RESTRICTED STOCK. Subject to the terms of the Plan, the
Committee shall determine and designate the recipients of
Restricted Stock awards, the dates on which such awards are to be
granted, the number of Shares subject to such awards, and the
restrictions applicable to such awards. Restricted Stock awards
shall be subject to such terms and conditions and evidenced by
agreements in such form as shall be determined from time to time
by the Chief Executive Officer, provided that the terms and
conditions of each such agreement are not inconsistent with this
Plan.
7. NONTRANSFERABILITY OF OPTIONS AND RESTRICTED STOCK.
Options and Restricted Stock shall not be transferable by the
holder thereof otherwise than by will or the laws of descent and
distribution to the extent provided herein, and Options may be
exercised during the holder's lifetime only by the holder
thereof.
8. TAX WITHHOLDING. If as a result of: (a) the exercise
of any Options or the disposition of any Shares acquired pursuant
to such exercise, or (b) the lapse of any restrictions on the
disposition of Restricted Stock, the Corporation or Subsidiary
shall be required to withhold any amounts by reason of any
Federal, state or local tax rules or regulations, the Corporation
or Subsidiary shall be entitled to deduct and withhold such
amounts from any cash payments to be made to the holder. In any
event, the holder shall make available to the Corporation or
Subsidiary, promptly when required, sufficient funds to meet the
7
requirement for such withholding; and the Committee shall be
entitled to take and authorize such steps as it may deem
advisable in order to have such funds available to the
Corporation or Subsidiary when required. Notwithstanding the
foregoing, the holder shall have the right to satisfy such
withholding, in whole or in part, in Shares (including by having
the Corporation withhold Shares otherwise issuable in respect of
such Options or Restricted Stock) valued at Fair Market Value on
the date of exercise or lapse of restrictions, as applicable.
9. TAX LIABILITY. Subject to the Committee's discretion,
agreements between the Corporation and grantees in connection
with awards of Options or Restricted Stock may provide for the
payment by the Corporation of a supplemental cash payment to
grantees promptly after the exercise of an Option, or promptly
after the date on which the shares of Restricted Stock awarded
are included in the gross income of the grantee under the Code.
Such supplemental cash payments, to the extent determined by the
Committee, shall provide for the payment of such amounts as may
be necessary to result in the grantee not having any incremental
tax liability as a result of such exercise or inclusion in
grantee's gross income. The determination of the amount of any
supplemental cash payments by the Committee shall be conclusive.
10. TERMINATION OF EMPLOYMENT. Notwithstanding any
provision of the Plan to the contrary, (i) upon the termination
of employment of an Optionee with the Corporation and all
Subsidiaries other than for Cause, the optionee (or the
optionee's estate in the event of the optionee's death) shall
have the privilege of exercising any unexercised Options which
the optionee could have exercised at the time of such termination
of employment at any time until the end of six months following
such termination of employment and (ii) upon the termination of
employment of an optionee with the Corporation and all
Subsidiaries for Cause, all unexercised Options of such optionee
shall terminate ten days after such termination of employment.
The Committee may permit individual exceptions to the
requirements of this section by extending the period in which
Options may be exercised, provided, however, that no Options may
be extended past the earlier to occur of (i) their expiration
date or (ii) three years following termination of employment.
11. ADJUSTMENT OF OPTIONED SHARES. If prior to the
complete exercise of any Option there shall be declared and paid
a stock dividend upon the Shares of the Corporation or if the
Shares shall be split-up, converted, reclassified, or changed
into, or exchanged for, a different number or kind of securities
of the Corporation, the Option, to the extent that it has not
8
been exercised, shall entitle the holder upon the future exercise
of such Option to such number and kind of securities or other
property subject to the terms of the Option to which he would be
entitled had he actually owned the Shares subject to the
unexercised portion of the Option at the time of the occurrence
of such stock dividend, split-up, conversion, reclassification,
change or exchange; and the aggregate purchase price upon the
future exercise of the Option shall be the same as if originally
optioned Shares were being purchased thereunder. If any such
event should occur, the number of Shares with respect to which
Options remain to be issued, or with respect to which Options may
be reissued, shall be similarly adjusted.
In the event the outstanding Shares shall be changed into or
exchanged for any other class or series of capital stock or cash,
securities or other property pursuant to a recapitalization,
reclassification, merger, consolidation, combination or similar
transaction, then each Option shall thereafter become exercisable
for the number and/or kind of capital stock, and/or the amount of
cash, securities or other property so distributed, into which the
Shares subject to the Option would have been changed or exchanged
had the Option been exercised in full prior to such transaction,
provided that, if the kind or amount of capital stock or cash,
securities or other property received in such transaction is not
the same for each outstanding Share, then the kind or amount of
capital stock or cash, securities or other property for which the
Option shall thereafter become exercisable shall be the kind and
amount so receivable per Share by a plurality of the Shares, and
provided further that, if necessary, the provisions of the Option
shall be appropriately adjusted so as to be applicable, as nearly
as may reasonably be, to any shares of capital stock, cash,
securities or other property thereafter issuable or deliverable
upon exercise of the Option.
12. ISSUANCE OF SHARES AND COMPLIANCE WITH SECURITIES ACT.
The Corporation may postpone the issuance and delivery of Shares
upon any exercise of an Option, or upon any lapsing of
restriction on any shares of Restricted Stock until (a) the
admission of such Shares to listing on any stock exchange on
which Shares are then listed and (b) the completion of such
registration or other qualification of such Shares under any
state or Federal law, rule or regulation as the Corporation shall
determine to be necessary or advisable. Any person exercising an
Option and any grantee of Restricted Stock shall make such
representations and furnish such information as may, in the
opinion of counsel for the Corporation, be appropriate to permit
the Corporation, in light of the then existence or nonexistence
with respect to such Shares of an effective registration
statement under the Securities Act of 1933, as from time to time
9
amended, to issue the Shares in compliance with the provisions of
that or any comparable act.
13. AMENDMENT OF THE PLAN. The Committee may at any time
discontinue the Plan or the grant of any additional Options or
Restricted Stock under the Plan. Except as hereinafter provided,
the Committee may from time to time amend the Plan and the terms
and conditions of any Options or Restricted Stock not theretofore
issued, and the Committee, with the consent of the affected
holder of an Option or Restricted Stock, may at any time withdraw
or from time to time amend the Plan and the terms and conditions
of such Option or Restricted Stock as have been theretofore
granted.
14. EFFECTIVENESS AND TERM OF THE PLAN. The Plan shall
become effective and in full force and effect upon its approval
by the holders of a majority of the Shares present or represented
and entitled to vote at the 1996 annual meeting of the
stockholders of the Corporation and, unless sooner terminated by
the Committee pursuant to Section 13 hereof, the Plan shall
terminate on the date ten years after such approval. No Option
or Restricted Stock may be granted or awarded after termination
of the Plan. Termination of the Plan shall not affect the
validity of any Option or Restricted Stock outstanding on the
date of such termination.
10
(..continued)
Exhibit 10.12
USAIR GROUP, INC.
NONEMPLOYEE DIRECTOR DEFERRED STOCK UNIT PLAN
1. PURPOSE
1.1 The USAir Group, Inc. Nonemployee Director Deferred
Stock Unit Plan is intended to increase the alignment of the
interests of eligible members of the Board with the interests of
stockholders of the Corporation by increasing their incentive to
contribute to the success of the Corporation's business through
the grant of Deferred Stock Units.
1.2 The Plan is intended to comply with Rule 16b-3 under
the Exchange Act, as such rule may be amended from time to time,
and shall be construed to so comply.
2. DEFINITIONS
When used in this Plan, unless the context otherwise
requires:
(a) "Board" shall mean the Board of Directors of the
Corporation.
(b) "Change of Control" shall mean:
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (A) the then
outstanding shares of common stock of the Corporation
(the "Outstanding Group Common Stock") or (B) the
combined voting power of the then outstanding voting
securities of the Corporation entitled to vote
generally in the election of directors (the
"Outstanding Group Voting Securities"); provided,
however, that the following acquisitions shall not
constitute a Change of Control: (w) any acquisition
directly from the Corporation, (x) any acquisition by
the Corporation or any of its Subsidiaries, (y) any
acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or
any of its Subsidiaries, or (z) any acquisition by any
corporation with respect to which, following such
acquisition, more than 85% of, respectively, the then
outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote
generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who
were the beneficial owners, respectively, of the
Outstanding Group Common Stock and Outstanding Group
Voting Securities immediately prior to such
acquisition, in substantially the same proportions as
their ownership, immediately prior to such acquisition,
of the Outstanding Group Common Stock and Outstanding
Group Voting Securities, as the case may be; or
(ii) Individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for
any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming
a director subsequent to the date hereof whose
election, or nomination for election by the
Corporation's shareholders, was approved by a vote of
at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of
either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents; or
(iii) Approval by the shareholders of the
Corporation of a reorganization, merger or
consolidation, in each case, with respect to which all
or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the
Outstanding Group Common Stock and Outstanding Group
Voting Securities immediately prior to such
reorganization, merger or consolidation do not
following such reorganization, merger or consolidation,
beneficially own, directly or indirectly, more than 85%
of, respectively, the then outstanding shares of common
stock and the combined voting power of the then
outstanding voting securities entitled to vote
generally in the election of directors, as the case may
be, of the corporation resulting from such
reorganization, merger or consolidation in
substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or
consolidation of the Outstanding Group Common Stock and
Outstanding Group Voting Securities, as the case may
be; or
(iv) Approval by the shareholders of the
corporation of (x) a complete liquidation or
dissolution of the Corporation or (y) the sale or other
disposition of all or substantially all of the assets
of the Corporation, other than to a corporation, with
respect to which following such sale or other
2
disposition, more than 85% of, respectively, the then
outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote
generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who
were the beneficial owners, respectively, of the
Outstanding Group Common Stock and Outstanding Group
Voting Securities immediately prior to such sale or
other disposition in substantially the same proportion
as their ownership, immediately prior to such sale or
other disposition, of the Outstanding Group Common
Stock and Outstanding Group Voting Securities, as the
case may be; or
(v) The acquisition by an individual, entity or
group of beneficial ownership of 20% or more of the
then outstanding securities of the Corporation,
including both voting and non-voting securities,
provided, however, that such acquisition shall only
constitute a change of control in the event that such
individual, entity or group also obtains the power to
elect by class vote, cumulative voting or otherwise to
appoint 20% or more of the total number of directors to
the Board.
(c) "Committee" shall mean the Human Resources Committee of
the Board or such other committee as may be designated
by the Board.
(d) "Corporation" shall mean USAir Group, Inc.
(e) "Date of Grant" shall mean the date on which Deferred
Stock Units are granted pursuant to Section 5.1.
(f) "Deferred Stock Units" shall mean the units issued
pursuant to Section 5 hereof.
(g) "Eligible Director" shall mean each member of the Board
who (i) is not at the time of reference an employee of
the Corporation or any Subsidiary, (ii) is not serving
on the Board pursuant to rights exercised by a
preferred stockholder of the Corporation, and (iii)
in the case of an individual first becoming a member
of the Board after January 1, 1996, was not previously
an employee of the Corporation or any Subsidiary.
(h) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, and the rules and regulations
promulgated thereunder.
(i) "Fair Market Value" shall mean the average of the high
and low sales prices of the Stock as reported on the
3
New York Stock Exchange Composite Tape on the date as
of which such value is being determined or, if there
shall be no sale on that date, then on the last
previous day on which a sale was reported.
(j) "Plan" shall mean the USAir Group, Inc. Nonemployee
Director Deferred Stock Unit Plan, as such Plan may be
amended from time to time.
(k) "Stock" shall mean the common stock of the Corporation.
(l) "Subsidiary" shall mean any corporation more than 50%
of whose stock having general voting power is owned by
the Corporation or by a Subsidiary of the Corporation.
3. ADMINISTRATION
3.1 The Plan shall be administered by the Committee.
3.2 The Committee may make such rules and establish such
procedures for the administration of the Plan as it deems
appropriate to carry out the purpose of the Plan, provided that
the Committee shall have no discretion with respect to the
grantee, amount, price or timing of any Deferred Stock Unit. The
interpretation and application of the Plan or of any rule or
procedure, and any other matter relating to or necessary to the
administration of the Plan, shall be determined by the Committee,
and any such determination shall be final and binding on all
persons. Deferred Stock Units shall be evidenced by agreements
in such form as shall be determined from time to time by the
Committee, provided that the terms and conditions of each such
agreement are not inconsistent with this Plan.
4. CAPITAL ADJUSTMENTS
4.1 In the event of a reorganization, recapitalization,
stock split, stock dividend, combination of shares, merger,
consolidation or a similar corporate transaction, the class of
shares available under the Plan, and the number or class of
shares of Stock represented by Deferred Stock Units granted
hereunder shall be proportionately adjusted to reflect any such
transaction.
5. GRANT OF DEFERRED STOCK UNITS
5.1 ANNUAL GRANT. The Corporation shall establish a
bookkeeping account for each Eligible Director. On the first
business day following the 1996 annual meeting of stockholders of
the Corporation, the bookkeeping account of each Eligible
Director shall automatically be credited with 500 Deferred Stock
Units. Thereafter, on the first business day following the
annual meeting of stockholders of the Corporation held in each
year subsequent to 1996 and prior to the termination of the Plan,
the bookkeeping account of each Eligible Director shall
4
automatically be credited with 500 Deferred Stock Units.
5.2 TERMS AND CONDITIONS OF DEFERRED STOCK UNITS.
(a) VESTING. The Deferred Stock Units shall become
nonforfeitable on the earliest to occur of (i) the
first anniversary of the Date of Grant, (ii) the
Eligible Director's death, disability or termination of
service as a director upon completion of the last term
of office to which such director was elected, or (iii)
the occurrence of a Change of Control. If an Eligible
Director otherwise terminates service as a Director,
any Deferred Stock Units that are forfeitable shall be
forfeited as of the date of such termination of
service.
(b) DIVIDEND EQUIVALENTS. As of each dividend payment
date declared with respect to the Stock, the
Corporation shall credit to each bookkeeping account a
number of additional Deferred Stock Units equal to (i)
the product of (x) the dividend per share of Stock
payable on such dividend payment date and (y) the
number of Deferred Stock Units credited to such account
as of the applicable dividend record date divided by
(ii) the Fair Market Value of a share of Stock on such
dividend payment date.
(c) PAYMENT WITH RESPECT TO DEFERRED STOCK UNITS. Upon the
termination of service of an Eligible Director the
Eligible Director shall receive a lump sum cash payment
equal to the product of (i) the Fair Market Value of a
share of Stock on the date of such termination of
service and (ii) the number of nonforfeitable Deferred
Stock Units then credited to such Eligible Director's
account. Notwithstanding the foregoing, an Eligible
Director may elect to receive the distribution with
respect to his or her account in five annual
installments commencing as soon as practicable
following the Eligible Director's termination of
service, in which event, the amount of each installment
shall be determined based upon the Fair Market Value of
a share of Stock as of the date preceding the date such
installment payment is made. Any such election may be
made or changed at any time without limitation
provided, however, that any election (and any
modification or revocation of any election) shall not
be given effect unless made at least one year prior to
the Eligible Director's termination of service.
(d) RIGHTS WITH RESPECT TO DEFERRED STOCK UNITS. The
holder of Deferred Stock Units shall have none of the
rights of a stockholder of the Corporation. The
Corporation's obligation hereunder with respect to
Deferred stock Units shall be an unsecured promise to
pay the amount described in Section 5(c) above at the
times described therein.
6. EFFECTIVE DATE; TERM OF PLAN
6.1 The Plan shall be effective as of May 22, 1996.
5
6.2 The Plan shall remain in effect until all Deferred
Stock Units have been paid under the terms of the Plan, provided
that no Deferred Stock Units may be granted after the tenth
anniversary of the effective date of the Plan.
7. AMENDMENT; TERMINATION
7.1 The Board may at any time and from time to time alter,
amend, suspend, or terminate the Plan in whole or in part;
PROVIDED, HOWEVER, that the provisions of Section 5 shall not be
amended more than every six months, other than to comport with
changes in the Internal Revenue Code of 1986, as amended, the
Employee Retirement Income Security Act, as amended, or the rules
thereunder. The termination or any modification or amendment of
the Plan shall not, without the consent of a director, affect his
or her rights under a grant of Deferred Stock Units.
8. MISCELLANEOUS
8.1 Deferred Stock Units granted hereunder shall not be
assignable or transferable by the director except by will or by
the laws of descent and distribution.
8.2 Nothing in the Plan shall be construed as conferring
any right upon any director to continue as a member of the Board.
8.3 The Plan and all rights hereunder shall be construed in
accordance with and governed by the laws of the State of
Delaware.
8.4 TAX WITHHOLDING. The Corporation shall have the right
to require, prior to any payment hereunder, payment by the holder
of such award of any federal, state, local or other taxes which
may be required to be withheld or paid in connection with such
award.
6
(..continued)
US Airways Group, Inc.
Exhibit 11
Computation of Basic and Diluted Earnings Per Common Share
(in thousands, except per share amounts)
Year Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Adjustments to Net Income
- -------------------------
Net income $1,024,699 $263,373 $119,287
Preferred dividend requirement (63,262) a) (88,775) (84,904)
--------- ------- -------
Earnings applicable to common stock
and common stock equivalents
used for basic computation 961,437 174,598 34,383
Diluted adjustments
Assume conversion of all preferred
stock:
Preferred dividend requirement 63,262 a) 88,775 b) 84,904 c)
--------- ------- -------
Adjusted net earnings applicable to
common stock assuming full dilution $1,024,699 $263,373 $119,287
========= ======= =======
Adjustments to common stock shares outstanding
- ----------------------------------------------
Weighted average number of shares of
common stock outstanding used for
basic computation 78,054 64,021 62,352
Diluted adjustments
Incremental shares from outstanding
stock options (treasury stock method) 1,888 898 78
Assume conversion of all preferred stock 23,627 d) 39,155 b) 39,156 c)
--------- ------- -------
Total weighted average number of
common shares outstanding after
full conversion 103,569 104,074 101,586
========= ======= =======
Earnings per Common Share
- -------------------------
Basic $ 12.32 $ 2.73 $ 0.55
========= ======= =======
Diluted $ 9.89 $ 2.53 $ 1.17
========= ======= =======
a) Includes repurchase premiums of $5.2 million and $0.8 million on
1,940.636 shares of Series F Preferred Stock and the Series T Preferred
Stock, respectively (May 22, 1997 repurchase date). See also d) below.
b) The effects of assuming conversion of the Series H Preferred Stock are
antidilutive, but included for purposes of this calculation in accordance
with Regulation S-K, Item 601(b)(11).
c) The effects of assuming conversion of each series of preferred stock are
antidilutive, but included for purposes of this calculation in accordance
with Regulation S-K, Item 601(b)(11).
d) For the time they were outstanding during the period, the effects of
assuming conversion of the shares of Series F Preferred Stock prior to its
repurchase are antidilutive, but included for purposes of this calculation
in accordance with Regulation S-K, Item 601(b)(11). See also a) above.
EXHIBIT 21.1
Subsidiaries of US Airways Group, Inc.
- --------------------------------------
US Airways, Inc.
Incorporated under the laws of the State of Delaware.
Allegheny Airlines, Inc. (operates under the trade name
"US Airways Express")
Incorporated under the laws of the State of Delaware.
Piedmont Airlines, Inc. (operates under the trade name
"US Airways Express")
Incorporated under the laws of the State of Maryland.
PSA Airlines, Inc. (operates under the trade name
"US Airways Express")
Incorporated under the laws of the State of Pennsylvania.
Shuttle, Inc. (operates under the trade name
"US Airways Shuttle")
Incorporated under the laws of the State of Delaware.
US Airways Fuel Corporation
Incorporated under the laws of the State of Delaware.
US Airways Leasing and Sales, Inc.
Incorporated under the laws of the State of Delaware.
Material Services Company, Inc.
Incorporated under the laws of the State of Delaware.
EXHIBIT 21.2
Subsidiary of US Airways, Inc.
- ------------------------------
USAM Corp.
Incorporated under the laws of the State of Delaware.
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
US Airways Group, Inc.:
We consent to the incorporation by reference in the registration
statement nos. 2-98828, 33-26762, 33-39896, 33-44835, 33-60618
and 33-60620 on Form S-8 and the registration statement nos.
33-41821 and 33-50231 on Form S-3 of US Airways Group, Inc. of
our report dated February 25, 1998, except as to Note 15 which is
as of March 12, 1998, relating to the consolidated balance sheets
of US Airways Group, Inc. and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated
statements of operations, cash flows and changes in stockholders'
equity (deficit) for each of the years in the three-year period
ended December 31, 1997 which appear in the December 31, 1997
Annual Report on Form 10-K of the Company and US Airways, Inc.
KPMG Peat Marwick LLP
Washington, D.C.
March 18, 1998
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
US Airways, Inc.:
We consent to the incorporation by reference in the registration
statement nos. 33-35509 and 33-50231-01 on Form S-3 of
US Airways, Inc. of our report dated February 25, 1998 relating
to the consolidated balance sheets of US Airways, Inc. and
subsidiary ("US Airways") as of December 31, 1997 and 1996, and
the related consolidated statements of operations, cash flows and
changes in stockholder's equity (deficit) for each of the years
in the three-year period ended December 31, 1997 which appear in
the December 31, 1997 Annual Report on Form 10-K of US Airways
Group, Inc. and US Airways.
KPMG Peat Marwick LLP
Washington, DC
March 18, 1998
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Mathias J. DeVito
-----------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Rakesh Gangwal,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Rakesh Gangwal
-------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ George J. W. Goodman
-------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ John W. Harris
-------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan,
Jr., Director of US Airways Group, Inc., (the "Company"), do
hereby appoint Lawrence M. Nagin and Terry L. Hall, and each of
them (with full power to each of them to act alone), attorney and
agent for me and in my name and on my behalf to sign any Annual
Report on Form 10-K of the Company for the year ended December 31,
1997 and any amendments or supplements thereto which shall be
filed with the Securities and Exchange Commission under the
Securities and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Edward A. Horrigan, Jr.
----------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert L. Johnson,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Robert L. Johnson
----------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Robert LeBuhn
------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr.,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ John G. Medlin, Jr.
------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Hanne M. Merriman
----------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith,
Director of US Airways Group, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Raymond W. Smith
---------------------
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Mathias J. DeVito,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Mathias J. DeVito
----------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Rakesh Gangwal,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Rakesh Gangwal
-------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, George J. W. Goodman,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ George J. W. Goodman
-------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, John W. Harris,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ John W. Harris
-------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Edward A. Horrigan,
Jr., Director of US Airways, Inc., (the "Company"), do hereby
appoint Lawrence M. Nagin and Terry L. Hall, and each of them
(with full power to each of them to act alone), attorney and agent
for me and in my name and on my behalf to sign any Annual Report
on Form 10-K of the Company for the year ended December 31, 1997
and any amendments or supplements thereto which shall be filed
with the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Edward A. Horrigan, Jr.
----------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert L. Johnson,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Robert L. Johnson
-----------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Robert LeBuhn,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Robert LeBuhn
-----------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, John G. Medlin, Jr.,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ John G. Medlin, Jr.
-----------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Hanne M. Merriman,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Hanne M. Merriman
----------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT I, Raymond W. Smith,
Director of US Airways, Inc., (the "Company"), do hereby appoint
Lawrence M. Nagin and Terry L. Hall, and each of them (with full
power to each of them to act alone), attorney and agent for me and
in my name and on my behalf to sign any Annual Report on Form 10-K
of the Company for the year ended December 31, 1997 and any
amendments or supplements thereto which shall be filed with the
Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended.
I hereby give and grant to said attorneys and agents, and
each of them, full power and authority generally to do and perform
all acts and things necessary to be done in the premises as fully
and effectually in all respects as I could do if personally
present; and I hereby ratify and confirm all that said attorneys
and agents, and each of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this
18th day of March, 1998.
/s/ Raymond W. Smith
--------------------
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000701345
<NAME> US AIRWAYS GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,094,108
<SECURITIES> 870,205
<RECEIVABLES> 300,162<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 226,023
<CURRENT-ASSETS> 2,777,416
<PP&E> 6,252,318
<DEPRECIATION> 2,527,237
<TOTAL-ASSETS> 8,372,399
<CURRENT-LIABILITIES> 2,528,294
<BONDS> 2,425,820
358,000
0
<COMMON> 91,482
<OTHER-SE> 633,827
<TOTAL-LIABILITY-AND-EQUITY> 8,372,399
<SALES> 0
<TOTAL-REVENUES> 8,513,824
<CGS> 0
<TOTAL-COSTS> 7,929,555
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,055
<INCOME-PRETAX> 672,036
<INCOME-TAX> (352,663)
<INCOME-CONTINUING> 961,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 961,437
<EPS-PRIMARY> 12.32
<EPS-DILUTED> 9.87
<FN>
<F1>Receivables are presented net of allowances.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000714560
<NAME> US AIRWAYS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,091,540
<SECURITIES> 870,205
<RECEIVABLES> 491,052<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 200,494
<CURRENT-ASSETS> 2,934,980
<PP&E> 5,889,277
<DEPRECIATION> 2,428,948
<TOTAL-ASSETS> 8,265,500
<CURRENT-LIABILITIES> 2,450,563
<BONDS> 2,424,954
0
0
<COMMON> 1
<OTHER-SE> 1,101,766
<TOTAL-LIABILITY-AND-EQUITY> 8,265,500
<SALES> 0
<TOTAL-REVENUES> 8,501,485
<CGS> 0
<TOTAL-COSTS> 7,915,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260,029
<INCOME-PRETAX> 673,229
<INCOME-TAX> (378,930)
<INCOME-CONTINUING> 1,052,159
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,052,159
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000701345
<NAME> US AIRWAYS GROUP, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 868,848 1,135,750 1,224,411
<SECURITIES> 595,408 482,118 857,068
<RECEIVABLES> 450,825<F1> 408,077<F1> 410,984<F1>
<ALLOWANCES> 0<F1> 0<F1> 0<F1>
<INVENTORY> 235,759 238,065 223,458
<CURRENT-ASSETS> 2,307,552 2,404,581 2,837,192
<PP&E> 6,376,859 6,413,105 6,420,380
<DEPRECIATION> 2,517,494 2,599,954 2,719,346
<TOTAL-ASSETS> 7,470,923 7,514,295 7,923,916
<CURRENT-LIABILITIES> 2,691,663 2,587,716 2,714,307
<BONDS> 2,577,997 2,546,146 2,441,084
758,719 358,000 358,000
213,128 213,128 0
<COMMON> 64,567 80,111 91,119
<OTHER-SE> (846,161) (372,473) 171,074
<TOTAL-LIABILITY-AND-EQUITY> 7,470,923 7,514,295 7,923,916
<SALES> 0 0 0
<TOTAL-REVENUES> 2,101,078 4,313,688 6,428,860
<CGS> 0 0 0
<TOTAL-COSTS> 1,925,450 3,822,516 5,914,525
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 64,508 128,685 192,642
<INCOME-PRETAX> 165,374 397,338 629,092
<INCOME-TAX> 12,716 39,094 83,818
<INCOME-CONTINUING> 152,658 358,244 545,274
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 152,658 358,244 545,274
<EPS-PRIMARY> 2.05<F2> 4.60<F2> 6.66<F2>
<EPS-DILUTED> 1.45 3.39<F2> 5.21<F2>
<FN>
<F1>Receivables are presented net of allowances.
<F2>This amount was restated to conform with current classifications.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000701345
<NAME> US AIRWAYS GROUP, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 775,389 655,447 950,966
<SECURITIES> 464,071 631,114 635,839
<RECEIVABLES> 423,161<F1> 410,293<F1> 337,025<F1>
<ALLOWANCES> 0<F1> 0<F1> 0<F1>
<INVENTORY> 237,181 250,600 248,774
<CURRENT-ASSETS> 2,040,808 2,085,489 2,310,194
<PP&E> 6,372,192 6,431,580 6,388,325
<DEPRECIATION> 2,399,951 2,464,772 2,470,337
<TOTAL-ASSETS> 7,343,909 7,371,828 7,531,411
<CURRENT-LIABILITIES> 2,777,881 2,741,413 2,848,719
<BONDS> 2,679,765 2,625,790 2,615,780
758,719 758,719 758,719
213,153 213,153 213,128
<COMMON> 64,216 64,216 64,306
<OTHER-SE> (928,867) (938,776) (861,816)
<TOTAL-LIABILITY-AND-EQUITY> 7,343,909 7,371,828 7,531,411
<SALES> 0 0 0
<TOTAL-REVENUES> 4,017,909 6,090,476 8,142,413
<CGS> 0 0 0
<TOTAL-COSTS> 3,761,178 5,702,393 7,704,920
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 134,953 201,409 267,122
<INCOME-PRETAX> 175,583 254,796 275,482
<INCOME-TAX> 7,101 18,576 12,109
<INCOME-CONTINUING> 168,482 236,220 263,373
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 168,482 236,220 263,373
<EPS-PRIMARY> 1.94<F2> 2.64<F2> 2.73<F2>
<EPS-DILUTED> 1.55 2.15 2.35<F2>
<FN>
<F1>Receivables are presented net of allowances.
<F2>This amount was restated to conform with current classifications.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000714560
<NAME> US AIRWAYS, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997
<CASH> 1,223,761 1,134,728
<SECURITIES> 857,068 482,118
<RECEIVABLES> 465,224<F1><F3> 456,345<F1><F3>
<ALLOWANCES> 0<F1> 0<F1>
<INVENTORY> 192,191 207,200
<CURRENT-ASSETS> 2,841,685 2,406,615
<PP&E> 6,157,154<F3> 6,151,559<F3>
<DEPRECIATION> 2,624,118 2,505,043
<TOTAL-ASSETS> 7,849,972 7,435,793
<CURRENT-LIABILITIES> 2,674,296 2,544,154
<BONDS> 2,440,193 2,545,231
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 603,744 260,259
<TOTAL-LIABILITY-AND-EQUITY> 7,849,972 7,435,793
<SALES> 0 0
<TOTAL-REVENUES> 6,414,130 4,298,820
<CGS> 0 0
<TOTAL-COSTS> 5,896,000 3,865,742
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 196,637 132,166
<INCOME-PRETAX> 631,055 396,111
<INCOME-TAX> 98,734 50,696
<INCOME-CONTINUING> 532,321 345,415
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 532,321 345,415
<EPS-PRIMARY> 0<F2> 0<F2>
<EPS-DILUTED> 0<F2> 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.
<F3>This amount was restated to conform with current classifications.
</FN>
</TABLE>
