FORM 10-Q-QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
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) 872-7000
(Registrant's telephone number, including area code)
(Commission file number: 1-8444)
(I.R.S. Employer Identification No: 54-1194634)
US AIRWAYS, INC.
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 872-7000
(Registrant's telephone number, including area code)
(Commission file number: 1-8442)
(I.R.S. Employer Identification No: 53-0218143)
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrants were required to file such reports), and (2)
have been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
As of July 31, 2000 there were outstanding approximately 67,061,000
shares of common stock of US Airways Group, Inc. and 1,000 shares of common
stock of US Airways, Inc.
The registrant US Airways, Inc. meets the conditions set forth in
General Instructions H(1)(a) and (b) of Form 10-Q and is therefore
participating in the filing of this form in the reduced disclosure format
permitted by such Instructions.
US AIRWAYS GROUP, INC.
AND
US AIRWAYS, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1A. Financial Statements-US Airways Group, Inc.
Condensed Consolidated Statements of Operations
- Three Months and Six Months Ended June 30, 2000 and 1999 1
Condensed Consolidated Balance Sheets
- June 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows
- Six Months Ended June 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4
Item 1B. Financial Statements-US Airways, Inc.
Condensed Consolidated Statements of Operations
- Three Months and Six Months Ended June 30, 2000 and 1999 8
Condensed Consolidated Balance Sheets
- June 30, 2000 and December 31, 1999 9
Condensed Consolidated Statements of Cash Flows
- Six Months Ended June 30, 2000 and 1999 10
Notes to Condensed Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
US Airways Group, Inc.
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 2000 and 1999 (unaudited)
(in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Operating Revenues
Passenger transportation $2,212 $2,063 $4,096 $3,919
Cargo and freight 39 35 78 75
Other 182 188 357 364
----- ----- ----- -----
Total Operating Revenues 2,433 2,286 4,531 4,358
Operating Expenses
Personnel costs 878 813 1,754 1,615
Aviation fuel 284 162 557 292
Commissions 99 130 190 254
Aircraft rent 125 105 250 219
Other rent and landing fees 109 106 220 214
Aircraft maintenance 126 120 256 238
Other selling expenses 115 95 222 195
Depreciation and amortization 92 77 183 158
Other 437 399 870 805
----- ----- ----- -----
Total Operating Expenses 2,265 2,007 4,502 3,990
----- ----- ----- -----
Operating Income 168 279 29 368
Other Income (Expense)
Interest income 25 14 37 29
Interest expense (65) (47) (122) (97)
Interest capitalized 8 9 17 17
Gain on sale of investment - 274 - 274
Other, net (1) 3 - 17
----- ----- ----- -----
Other Income (Expense), Net (33) 253 (68) 240
----- ----- ----- -----
Income (Loss) Before Taxes and
Cumulative Effect of
Accounting Change 135 532 (39) 608
Provision (Credit) for
Income Taxes 55 215 (4) 245
----- ----- ----- -----
Income (Loss) Before Cumulative
Effect of Accounting Change 80 317 (35) 363
Cumulative Effect of Accounting Change,
Net of Applicable Income Taxes
of $63 Million - - (103) -
----- ----- ----- -----
Net Income (Loss) $ 80 $ 317 $ (138) $ 363
===== ===== ===== =====
Earnings (Loss) per Common Share
Basic
Before Cumulative Effect of
Accounting Change $ 1.19 $ 4.34 $(0.52) $ 4.76
Cumulative Effect of
Accounting Change $ - $ - $(1.55) $ -
----- ----- ----- -----
Net Earnings (Loss) per Common Share $ 1.19 $ 4.34 $(2.07) $ 4.76
===== ===== ===== =====
Diluted
Before Cumulative Effect of
Accounting Change $ 1.17 $ 4.26 $(0.52) $ 4.67
Cumulative Effect of
Accounting Change $ - $ - $(1.55) $ -
----- ----- ----- -----
Net Earnings (Loss) per Common Share $ 1.17 $ 4.26 $(2.07) $ 4.67
===== ===== ===== =====
Shares Used for Computation (000)
Basic 66,831 72,981 66,665 76,205
Diluted 68,282 74,457 66,665 77,671
See accompanying Notes to Condensed Consolidated Financial Statements.
1
US Airways Group, Inc.
Condensed Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999
(in millions)
June 30, December 31,
2000 1999
-------- -----------
ASSETS
Current Assets
Cash $ 36 $ 31
Cash equivalents 619 215
Short-term investments 384 624
Receivables, net 407 387
Materials and supplies, net 230 226
Deferred income taxes 367 348
Prepaid expenses and other 220 265
------ ------
Total Current Assets 2,263 2,096
Property and Equipment
Flight equipment 6,511 5,672
Ground property and equipment 1,083 1,011
Less accumulated depreciation
and amortization (3,051) (2,919)
------ ------
4,543 3,764
Purchase deposits for flight equipment 312 285
------ ------
Total Property and Equipment 4,855 4,049
Other Assets
Goodwill, net 560 569
Other intangibles, net 336 358
Other assets, net 683 613
------ ------
Total Other Assets 1,579 1,540
------ ------
$ 8,697 $ 7,685
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 311 $ 116
Accounts payable 540 474
Traffic balances payable and unused tickets 1,084 635
Accrued aircraft rent 153 236
Accrued salaries, wages and vacation 309 341
Other accrued expenses 503 699
------ ------
Total Current Liabilities 2,900 2,501
Noncurrent Liabilities
Long-term debt, net of current maturities 2,400 2,113
Accrued aircraft rent 321 279
Deferred gains, net 496 500
Postretirement benefits other
than pensions 1,356 1,323
Employee benefit liabilities and other 1,469 1,086
------ ------
Total Noncurrent Liabilities 6,042 5,301
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock 101 101
Paid-in capital 2,241 2,268
Retained earnings (deficit) (689) (551)
Common stock held in treasury, at cost (1,805) (1,852)
Deferred compensation (93) (83)
------ ------
Total Stockholders' Equity (Deficit) (245) (117)
------ ------
$ 8,697 $ 7,685
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
2
US Airways Group, Inc.
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 (unaudited)
(in millions)
2000 1999
---- ----
Cash flows from operating activities
Net income (loss) $ (138) $ 363
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities
Depreciation and amortization 183 158
Gains on dispositions of property (3) (5)
Gain on sale of investment - (274)
Amortization of deferred gains and credits (20) (15)
Cumulative effect of accounting change,
net of applicable income taxes 103 -
Other 27 31
Changes in certain assets and liabilities
Decrease (increase) in receivables (102) (50)
Decrease (increase) in materials and
supplies, prepaid expenses and pension assets 43 47
Decrease (increase) in deferred income taxes (58) (25)
Increase (decrease) in traffic balances
payable and unused tickets 283 121
Increase (decrease) in accounts payable
and accrued expenses 166 241
Increase (decrease) in postretirement
benefits other than pensions, noncurrent 33 60
----- -----
Net cash provided by (used for)
operating activities 517 652
Cash flows from investing activities
Capital expenditures (893) (611)
Proceeds from dispositions of property 8 38
Proceeds from exercise of Sabre options 81 -
Proceeds from sale of investment - 307
Decrease (increase) in short-term investments 229 40
Other 3 3
----- -----
Net cash provided by (used for)
investing activities (572) (223)
Cash flows from financing activities
Proceeds from the sale-leaseback of aircraft - 300
Proceeds from issuance of long-term debt 1,014 12
Principal payments on long-term debt (532) (81)
Purchases of Common Stock (20) (670)
Sales of treasury stock 2 4
----- -----
Net cash provided by (used for)
financing activities 464 (435)
----- -----
Net increase (decrease) in Cash and Cash equivalents 409 (6)
----- -----
Cash and Cash equivalents at beginning of period 246 612
----- -----
Cash and Cash equivalents at end of period $ 655 $ 606
===== =====
Supplemental Information
Cash paid during the period for interest,
net of amount capitalized $ 97 $ 90
Net cash paid (received) during the period
for income taxes $ (50) $ 55
See accompanying Notes to Condensed Consolidated Financial Statements.
3
US AIRWAYS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include the
accounts of US Airways Group, Inc. (US Airways Group or the Company) and its
wholly-owned subsidiaries. These interim period statements should be read in
conjunction with the Consolidated Financial Statements contained in the
Company's and US Airways, Inc.'s (US Airways, the Company's principal
operating subsidiary) Annual Report to the United States Securities and
Exchange Commission (SEC) on Form 10-K for the year ended December 31, 1999.
Management believes that all adjustments necessary for a fair statement
of results have been included in the Condensed Consolidated Financial
Statements for the interim periods presented, which are unaudited. All
significant intercompany accounts and transactions have been eliminated. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain 1999 amounts have been reclassified to conform with 2000
classifications.
(B) FREQUENT TRAVELER PROGRAM
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. Although SAB 101 does not change existing accounting
rules on revenue recognition, changes in accounting to apply the guidance in
SAB 101 may be accounted for as a change in accounting principle. On January
1, 2000, the Company changed its method of accounting for the sale of mileage
credits in its Dividend Miles program from recognizing revenue when credits
are sold, to deferring a portion of revenue attributable to future
transportation and recognizing it as passenger revenue when the service is
provided. The remaining portion of sales proceeds will continue to be
recognized immediately as a component of Other operating revenues. The
Company believes the new method results in a better matching of revenue with
the period in which travel services are provided. In connection with the
change, the Company recognized a $103 million, net of applicable income
taxes, cumulative effect charge on January 1, 2000.
(this space intentionally left blank)
4
The pro forma 1999 amounts below are provided to show what US Airways
Group would have reported if the new accounting policy had been in effect in
periods prior to 2000.
Three Months Six Months
Ended June 30, Ended June 30,
------------- -------------
Pro Pro
Forma Forma
2000 1999 2000 1999
---- ---- ---- ----
Operating Revenues
Passenger transportation $2,212 $2,098 $4,096 $3,987
Cargo and freight 39 35 78 75
Other 182 145 357 279
----- ----- ----- -----
Total Operating Revenues $2,433 $2,278 $4,531 $4,341
===== ===== ===== =====
Income (Loss) Before Cumulative
Effect of Accounting Change $ 80 $ 313 $ (35) $ 353
===== ===== ===== =====
Earnings (Loss) Per Common Share
Before Accounting Change
Basic $ 1.19 $ 4.28 $(0.52) $ 4.63
Diluted $ 1.17 $ 4.20 $(0.52) $ 4.54
2. EARNINGS (LOSS) PER COMMON SHARE
Earnings per Common Share (EPS) is presented on both a basic and diluted
basis in accordance with the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share." Basic EPS is computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS reflects the maximum dilution that
would result after giving effect to dilutive stock options. The following
table presents the computation of basic and diluted EPS (in millions, except
per share amounts):
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Earnings (loss) applicable to
common stockholders before cumulative
effect of accounting change $ 80 $ 317 $ (35) $ 363
===== ===== ===== ====
Common shares:
Weighted average common shares
outstanding (basic) 67 73 67 76
Incremental shares related to
outstanding stock options (1) 1 1 - 2
----- ----- ----- ----
Weighted average common shares
outstanding (diluted) 68 74 67 78
===== ===== ===== ====
EPS before accounting change - Basic $ 1.19 $ 4.34 $(0.52) $4.76
EPS before accounting change - Diluted $ 1.17 $ 4.26 $(0.52) $4.67
(1) Option effect is antidilutive and therefore excluded for the six months
ended June 30, 2000.
Note: EPS amounts may not recalculate due to rounding.
3. COMPREHENSIVE INCOME
Comprehensive income (loss) was $80 million and $118 million for the
three months ended June 30, 2000 and 1999, respectively, and $(138) million
and $185 million for the six months ended June 30, 2000 and 1999,
respectively. Comprehensive income encompasses net income and
5
"other comprehensive income," which includes all other non-owner
transactions and events that change stockholders' equity. Other comprehensive
income is composed primarily of changes in the fair value of the Company's
equity investments.
4. OPERATING SEGMENTS AND RELATED DISCLOSURES
The Company has two reportable operating segments: US Airways and
US Airways Express. The US Airways segment includes the operations of US
Airways (excluding US Airways' wholly-owned subsidiaries) and Shuttle, Inc.
The US Airways Express segment includes the operations of the Company's three
wholly-owned regional airlines and activity resulting from marketing
agreements with two non-owned US Airways Express air carriers. All Other (as
presented in the table below) reflects the activity of subsidiaries other than
those included in the Company's two reportable operating segments.
Financial information for each reportable operating segment is set forth
below (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
Operating Revenues:
US Airways external $2,172 $2,076 $4,067 $3,966
US Airways intersegment 20 15 37 30
US Airways Express external 234 210 429 391
US Airways Express intersegment 11 8 20 15
All Other 27 - 35 1
Intersegment Elimination (31) (23) (57) (45)
----- ----- ----- -----
$2,433 $2,286 $4,531 $4,358
===== ===== ===== =====
Income (Loss) Before Taxes and Cumulative
Effect of Accounting Change:
US Airways $ 79 $ 243 $ (108) $ 316
US Airways Express 43 50 49 76
All Other (1) 13 239 20 216
----- ----- ----- -----
$ 135 $ 532 $ (39) $ 608
===== ===== ===== =====
(1) 1999 amounts include a $274 million gain on the sale of Galileo
International, Inc. stock.
5. LONG-TERM DEBT
On December 10, 1999, the Company entered into $500 million senior
secured credit facilities (Facilities) with a syndicate of financial
institutions. The Facilities are structured as a $250 million, 364-day
revolving loan facility, renewable annually for each of the next two years,
and a $250 million, 3-year revolving loan facility. The Facilities are
collateralized by a group of aircraft and slots. The Company has the right to
prepay any loans or terminate the commitment, in whole or in part, at any time
without premium or penalty. On March 15, 2000, the Company received loan
proceeds of $500 million from its Facilities. The effective interest rate for
borrowing against the Facilities is a floating rate based on the London
Interbank Offered Rate (LIBOR). On May 4, 2000, the Company repaid the $500
million it had drawn against its Facilities.
In addition, during the first six months of 2000 the Company borrowed
$514 million to finance new Airbus aircraft deliveries.
6
6. COMMITMENTS TO PURCHASE FLIGHT EQUIPMENT
As of June 30, 2000, the Company had 101 A320-family aircraft on firm
order, 183 A320-family aircraft subject to reconfirmation prior to scheduled
delivery and options for 63 additional A320-family aircraft. With respect to
the firm-order A320-family aircraft, 37 are expected to be delivered during
the balance of 2000 and the remaining A320-family aircraft are expected to be
delivered in the years 2001 through 2006. As of June 30, 2000, the Company had
five A330-300 aircraft on firm order and options for 20 additional A330-300
aircraft. With respect to the firm-order A330-300 aircraft, two are expected
to be delivered during the balance of 2000 and the remaining A330-300 aircraft
are expected to be delivered in the years 2001 through 2004.
The minimum determinable payments associated with the Company's
acquisition agreements for Airbus aircraft (including progress payments,
payments at delivery, buyer-furnished equipment, spares, capitalized interest,
penalty payments, cancellation fees and/or nonrefundable deposits) were
estimated at $1.28 billion for the six months ended December 31, 2000, $1.14
billion in 2001, $494 million in 2002, $290 million in 2003 and $501 million
thereafter.
7. MERGER AGREEMENT
On May 23, 2000, the Company entered into an Agreement and Plan of Merger
with UAL Corporation (UAL), United Airlines' parent corporation, and Yellow
Jacket Acquisition Corp., a wholly-owned subsidiary of UAL which has been
formed for the purpose of this merger, pursuant to which the merger subsidiary
will be merged into US Airways Group. As a result, US Airways Group would be
the surviving corporation and would become a wholly-owned subsidiary of UAL.
In the merger, all of the shares of US Airways Group common stock held by
stockholders of the Company (other than US Airways Group, UAL Corporation and
Yellow Jacket Acquisition Corp. and other than dissenting stockholders who
perfect their appraisal rights) will be converted into the right to receive
the cash merger consideration of $60.00 per share. Consummation of the merger
is subject to various conditions set forth in the Agreement and Plan of
Merger, including, but not limited to, the receipt of regulatory approvals and
approval by the stockholders of US Airways Group. At this time, the Company
cannot predict the outcome of the regulatory and other approvals necessary for
the consummation of the merger, nor can the Company predict what effect, if
any, the merger might have on it or its operations.
If the merger between the Company and a subsidiary of UAL Corporation is
consummated, the combined company may be required to divest some of its routes
and slots for competitive reasons. To address the potential competitive
issues, the companies have entered into a Memorandum of Understanding with
Robert Johnson, a Director of the Company, under which Mr. Johnson would buy
certain assets from the Company and create a new airline to operate out of
Reagan National Airport. The Company would retain the routes formerly operated
by US Airways Shuttle and the assets necessary to fly to its hubs at
Pittsburgh, Charlotte and Philadelphia.
(this space intentionally left blank)
7
US Airways, Inc.
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 2000 and 1999 (unaudited)
(in millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Operating Revenues
Passenger transportation $1,972 $1,838 $3,656 $3,499
US Airways Express
transportation revenues 231 206 422 382
Cargo and freight 38 34 76 73
Other 158 170 304 334
----- ----- ----- -----
Total Operating Revenues 2,399 2,248 4,458 4,288
Operating Expenses
Personnel costs 814 755 1,625 1,499
Aviation fuel 264 150 517 269
Commissions 91 118 173 230
Aircraft rent 107 90 215 187
Other rent and landing fees 98 97 200 196
Aircraft maintenance 105 95 208 182
Other selling expenses 104 85 201 177
Depreciation and amortization 85 71 167 144
US Airways Express capacity
purchases 185 159 364 305
Other 385 361 762 739
----- ----- ----- -----
Total Operating Expenses 2,238 1,981 4,432 3,928
----- ----- ----- -----
Operating Income 161 267 26 360
Other Income (Expense)
Interest income 34 56 59 105
Interest expense (66) (47) (123) (97)
Interest capitalized 5 4 8 8
Gain on sale of investment - 274 - 274
Other, net (2) 4 (4) 17
----- ----- ----- -----
Other Income (Expense), Net (29) 291 (60) 307
----- ----- ----- -----
Income (Loss) Before Taxes and
Cumulative Effect of Accounting
Change 132 558 (34) 667
Provision (Credit) for
Income Taxes 54 219 (3) 261
----- ----- ----- -----
Income (Loss) Before Cumulative
Effect of Accounting Change 78 339 (31) 406
Cumulative Effect of Accounting
Change, Net of Applicable Income
Taxes of $63 Million - - (103) -
----- ----- ----- -----
Net Income (Loss) $ 78 $ 339 $ (134) $ 406
===== ===== ===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
8
US Airways, Inc.
Condensed Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999
(in millions)
June 30, December 31,
2000 1999
---- ----
ASSETS
Current Assets
Cash $ 29 $ 13
Cash equivalents 589 215
Short-term investments 384 624
Receivables, net 404 385
Receivables from related parties, net 153 229
Materials and supplies, net 207 192
Deferred income taxes 360 341
Prepaid expenses and other 191 185
----- -----
Total Current Assets 2,317 2,184
Property and Equipment
Flight equipment 6,242 5,396
Ground property and equipment 1,036 970
Less accumulated depreciation
and amortization (2,912) (2,786)
----- -----
4,366 3,580
Purchase deposits for flight
Equipment 97 46
----- -----
Total Property and Equipment 4,463 3,626
Other Assets
Goodwill, net 430 438
Other intangibles, net 258 278
Receivable from parent company 321 281
Other assets, net 790 690
----- -----
Total Other Assets 1,799 1,687
----- -----
$8,579 $7,497
===== =====
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 311 $ 116
Accounts payable 508 414
Traffic balances payable and unused tickets 1,084 635
Accrued aircraft rent 148 227
Accrued salaries, wages and vacation 304 336
Other accrued expenses 490 638
----- -----
Total Current Liabilities 2,845 2,366
Noncurrent Liabilities
Long-term debt, net of current maturities 2,388 2,100
Accrued aircraft rent 321 277
Deferred gains, net 496 499
Postretirement benefits other than pensions 1,331 1,298
Employee benefit liabilities and other 1,546 1,143
----- -----
Total Noncurrent Liabilities 6,082 5,317
Commitments and Contingencies
Stockholder's Equity (Deficit)
Common stock - -
Paid-in capital 2,398 2,406
Retained earnings (deficit) (716) (582)
Receivable from parent company (2,030) (2,010)
----- -----
Total Stockholder's Equity (Deficit) (348) (186)
----- -----
$8,579 $7,497
===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
9
US Airways, Inc.
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 (unaudited)
(in millions)
2000 1999
---- ----
Cash flows from operating activities
Net income (loss) $ (134) $ 406
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities
Depreciation and amortization 167 144
Gains on dispositions of property (1) (5)
Gain on sale of investment - (274)
Amortization of deferred gains and credits (20) (14)
Cumulative effect of accounting change, net
of applicable income taxes 103 -
Other (13) (42)
Changes in certain assets and liabilities
Decrease (increase) in receivables (92) (44)
Decrease (increase) in materials and supplies,
prepaid expenses and pension assets (20) 13
Decrease (increase) in deferred income taxes (57) (61)
Increase (decrease) in traffic balances
payable and unused tickets 283 115
Increase (decrease) in accounts payable
and accrued expenses 235 358
Increase (decrease) in postretirement
benefits other than pensions, noncurrent 33 59
----- -----
Net cash provided by (used for)
operating activities 484 655
Cash flows from investing activities
Capital expenditures (817) (500)
Proceeds from dispositions of property 4 38
Proceeds from exercise of Sabre options 81 -
Proceeds from sale of investment - 307
Decrease (increase) in short-term investments 229 40
Funding of parent company's common stock purchases (20) (670)
Funding of parent company's aircraft purchase deposits (57) (93)
Other 3 2
----- -----
Net cash provided by (used for)
investing activities (577) (876)
Cash flows from financing activities
Proceeds from the sale-leaseback of aircraft - 300
Proceeds from issuance of long-term debt 1,014 -
Principal payments on long-term debt (531) (81)
----- -----
Net cash provided by (used for)
financing activities 483 219
----- -----
Net increase (decrease) in Cash and Cash equivalents 390 (2)
----- -----
Cash and Cash equivalents at beginning of period 228 604
----- -----
Cash and Cash equivalents at end of period $ 618 $ 602
===== =====
Noncash investing and financing activities
Reduction of parent company receivable-assignment
of aircraft purchase rights by parent company $ 160 $ 72
Supplemental Information
Cash paid during the period for interest,
net of amount capitalized $ 96 $ 90
Net cash paid (received) during the period for
income taxes $ (51) $ 55
See accompanying Notes to Condensed Consolidated Financial Statements.
10
US AIRWAYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include the
accounts of US Airways, Inc. (US Airways) and its wholly-owned subsidiaries US
Airways Investment Management Company, Inc. and US Airways Finance Company.
US Airways is a wholly-owned subsidiary of US Airways Group, Inc. (US Airways
Group). These interim period statements should be read in conjunction with the
Consolidated Financial Statements contained in US Airways' Annual Report to
the United States Securities and Exchange Commission (SEC) on Form 10-K for
the year ended December 31, 1999.
Management believes that all adjustments necessary for a fair statement
of results have been included in the Condensed Consolidated Financial
Statements for the interim periods presented, which are unaudited. All
significant intercompany accounts and transactions have been eliminated. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain 1999 amounts have been reclassified to conform with 2000
classifications.
(B) FREQUENT TRAVELER PROGRAM
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. Although SAB 101 does not change existing accounting
rules on revenue recognition, changes in accounting to apply the guidance in
SAB 101 may be accounted for as a change in accounting principle. On January
1, 2000, US Airways changed its method of accounting for the sale of mileage
credits in its Dividend Miles program from recognizing revenue when credits
are sold, to deferring a portion of revenue attributable to future
transportation and recognizing it as passenger revenue when the service is
provided. The remaining portion of sales proceeds will continue to be
recognized immediately as a component of Other operating revenues. US
Airways believes the new method results in a better matching of revenue with
the period in which travel services are provided. In connection with the
change, US Airways recognized a $103 million, net of applicable income taxes,
cumulative effect charge on January 1, 2000.
(this space intentionally left blank)
11
The pro forma 1999 amounts below are provided to show what US Airways
would have reported if the new accounting policy had been in effect in periods
prior to 2000.
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
Pro Forma Pro Forma
2000 1999 2000 1999
---- ---- ---- ----
Operating Revenues
Passenger transportation $1,972 $1,873 $3,656 $3,566
US Airways Express
transportation revenues 231 206 422 382
Cargo and freight 38 34 76 73
Other 158 127 304 250
----- ----- ----- -----
Total Operating Revenues $2,399 $2,240 $4,458 $4,271
===== ===== ===== =====
Income (Loss) Before Cumulative Effect
of Accounting Change $ 78 $ 335 $ (31) $ 396
===== ===== ===== =====
2. COMPREHENSIVE INCOME
Comprehensive income (loss) was $78 million and $140 million for the
three months ended June 30, 2000 and 1999, respectively, and $(133) million
and $229 million for the six months ended June 30, 2000 and 1999,
respectively. Comprehensive income encompasses net income and "other
comprehensive income," which includes all other non-owner transactions and
events that change stockholder's equity. Other comprehensive income is
composed primarily of changes in the fair value of US Airways' equity
investments.
3. OPERATING SEGMENTS AND RELATED DISCLOSURES
US Airways has two reportable operating segments: US Airways and US
Airways Express. The US Airways segment includes the operations of US Airways
(excluding US Airways' wholly-owned subsidiaries). The US Airways Express
segment only includes certain revenues and expenses related to US Airways
Group's three wholly-owned regional airlines and from marketing agreements
with two non-owned US Airways Express air carriers.
Financial information for each reportable operating segment is set forth
below (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
---------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
Operating Revenues:
US Airways $2,168 $2,042 $4,036 $3,906
US Airways Express 231 206 422 382
----- ----- ----- -----
$2,399 $2,248 $4,458 $4,288
===== ===== ===== =====
Income (Loss) Before Taxes and Cumulative
Effect of Accounting Change:
US Airways $ 76 $ 233 $ (113) $ 309
US Airways Express 46 47 58 78
All Other (1) 10 278 21 280
----- ----- ----- -----
$ 132 $ 558 $ (34) $ 667
===== ===== ===== =====
(1) 1999 amounts include a $274 million gain on the sale of Galileo
International, Inc. stock.
12
4. RELATED PARTY TRANSACTIONS
US Airways provides various loans to US Airways Group including the
advancing of funds to purchase US Airways Group's common stock which is
recorded as a reduction of Stockholder's Equity. Interest, at market rates,
was accrued on these advances through September 30, 1999 at which time such
advances became non-interest bearing. Interest income related to this
receivable was $32 million and $56 million for the three and six months ended
June 30, 1999, respectively.
5. LONG-TERM DEBT
Please refer to Note 5 in US Airways Group's Notes to Condensed
Consolidated Financial Statements on page 6 of this report related to long-
term debt.
6. COMMITMENTS TO PURCHASE FLIGHT EQUIPMENT
Please refer to Note 6 in US Airways Group's Notes to Condensed
Consolidated Financial Statements on page 7 of this report related to
commitments to purchase flight equipment.
7. MERGER AGREEMENT
Please refer to Note 7 in US Airways Group's Notes to Condensed
Consolidated Financial Statements on page 7 of this report related to US
Airways Group's merger agreement with UAL Corporation.
8. SUBSEQUENT EVENT
Effective July 1, 2000, Shuttle, Inc. (Shuttle) was merged into
US Airways. The operations of the former Shuttle subsequent to June 30, 2000
will be included in US Airways' consolidated financial statements. Shuttle was
formerly a wholly-owned subsidiary of US Airways Group. US Airways now
operates Shuttle's service between LaGuardia and Logan International Airport
and LaGuardia and Reagan National Airport.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL INFORMATION
Part I, Item 2 of this report should be read in conjunction with Part II,
Item 7 of US Airways Group, Inc.'s (US Airways Group or the Company) and US
Airways, Inc.'s (US Airways) Annual Report to the United States Securities and
Exchange Commission (SEC) on Form 10-K for the year ended December 31, 1999.
The information contained herein is not a comprehensive discussion and
analysis of the financial condition and results of operations of the Company
and US Airways, but rather updates disclosures made in the aforementioned
filing.
Certain information contained herein should be considered "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 which is subject to a number of risks and uncertainties.
The preparation of forward-looking statements requires the use of estimates of
future revenues, expenses, activity levels and economic and market conditions,
many of which are outside the Company's control. Specific factors that could
cause actual results to differ materially from those set forth in the forward-
looking statements include: economic conditions; labor costs; financing costs;
aviation fuel costs; the anticipated merger of the Company and a subsidiary of
UAL Corporation (UAL); 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;
13
other operational matters discussed below and other risks and uncertainties
listed from time to time in the Company's reports to the SEC. Other factors
and assumptions not identified above are also involved in the preparation of
forward-looking statements, 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.
FINANCIAL OVERVIEW
For the second quarter of 2000, the Company's operating revenues were
$2.4 billion, operating income was $168 million, net income was $80 million
and diluted earnings per common share was $1.17. For the comparative period in
1999, operating revenues were $2.3 billion, operating income was $279 million,
net income was $317 million and diluted earnings per common share was $4.26.
The Company's results for the three months ended June 30, 1999 include certain
nonrecurring and unusual items.
For the first six months of 2000, the Company's operating revenues were
$4.5 billion, operating income was $29 million, loss before cumulative effect
of accounting change was $35 million and diluted loss per common share before
cumulative effect of accounting change was $0.52. For the comparative period
in 1999, operating revenues were $4.4 billion, operating income was $368
million, income before cumulative effect of accounting change was $363 million
and diluted earnings per common share before cumulative effect of accounting
change was $4.67. The Company's results for the six months ended June 30, 1999
include certain nonrecurring and unusual items.
The major factors that influenced the Company's financial performance for
the first six months of 2000 included significantly higher fuel prices,
severe weather along the Eastern United States (U.S.) in January and June,
reduced passenger traffic stemming from the then-threatened March 25, 2000
shutdown (see "Update on Strategic Objectives Progress" below) and passenger
apprehensions of flying on or around December 31, 1999. Nevertheless, as
discussed below the Company made significant progress in its five-point
business plan.
UPDATE ON STRATEGIC OBJECTIVES PROGRESS
The Company's actions continue to follow its five-point business plan:
- Achieve a competitive cost structure,
- Exploit the route network,
- Rationalize the fleet,
- Change the culture of the company,
- Become the "Carrier of Choice."
Since the end of 1999, the Company made additional progress related to
its five-point business plan.
In recent years, US Airways has worked closely with its employees covered
by collective bargaining agreements to create labor contracts that are
mutually beneficial to US Airways and the employees. Through the end of 1999,
US Airways had achieved this with all major employee groups except those
represented by the Association of Flight Attendants (AFA), which represents US
Airways' flight attendant employees. The AFA had publicly threatened that it
would conduct an organized strike campaign it had named "CHAOS" (Create
Havoc Around Our System) if no agreement was reached by March 25, 2000, the
end of a 30-day cooling off period. In response, US Airways announced that it
would shut down its operations on that date if an agreement was not reached.
On March 25, 2000, US Airways reached a tentative agreement with the AFA,
which was
14
later ratified by the union membership on May 1, 2000. With this
ratification, US Airways now believes that all labor contracts with its major
employee groups are cost competitive with other major U.S. network carriers.
US Airways continues to expand international service. A majority of
transatlantic passengers originate their travel from the Eastern U.S., the
Company's primary operating region. US Airways began to bolster international
operations to take advantage of its strategic position in 1996. From March to
June 2000, US Airways received its first five A330-300 widebody aircraft. US
Airways introduced three-class transatlantic service on the A330 when it was
placed into service on May 4th between Philadelphia and Paris. Since the end
of 1999, US Airways added service between Charlotte and both Paris and
Frankfurt on April 13th and May 11th, respectively, between Philadelphia and
Manchester, England on May 25th and between Pittsburgh and London's Gatwick
Airport on July 17th. In addition, US Airways will resume daily nonstop service
between Philadelphia and Amsterdam effective April 11, 2001.
Recently, US Airways announced new service to the Caribbean. In the fall
of 2000, US Airways will introduce service between Philadelphia and both Aruba
and Santo Domingo, between New York LaGuardia and Nassau, between Pittsburgh
and Cancun and between Charlotte and St. Thomas.
With regards to rationalizing the fleet, the Company received 13 A320-
family aircraft and 5 A330 aircraft into its fleet and retired four DC-9-30
aircraft and one B737-200 aircraft during the six months ended June 30, 2000.
The Airbus aircraft are more fuel efficient, are less costly to maintain, have
greater range capabilities and provide certain customer service advantages
over the aircraft they replace. During 2000, the Company expects to take
delivery of 50 A320-family aircraft and seven A330 aircraft and retire 17
B737-200 aircraft, four B727-200 aircraft and 13 DC-9-30 aircraft.
UAL CORPORATION ACQUISITION
On May 23, 2000, the Company entered into an Agreement and Plan of Merger
with UAL Corporation, United Airlines' parent corporation, and Yellow Jacket
Acquisition Corp., a wholly-owned subsidiary of UAL which has been formed for
the purpose of this merger, pursuant to which the merger subsidiary will be
merged into US Airways Group. As a result, US Airways Group would be the
surviving corporation and would become a wholly-owned subsidiary of UAL. In
the merger, all of the shares of US Airways Group common stock held by
stockholders of the Company (other than US Airways Group, UAL Corporation and
Yellow Jacket Acquisition Corp. and other than dissenting stockholders who
perfect their appraisal rights) will be converted into the right to receive
the cash merger consideration of $60.00 per share. Consummation of the merger
is subject to various conditions set forth in the Agreement and Plan of
Merger, including, but not limited to, the receipt of regulatory approvals and
approval by the stockholders of US Airways Group. At this time, the Company
cannot predict the outcome of the regulatory and other approvals necessary for
the consummation of the merger, nor can the Company predict what effect, if
any, the merger might have on it or its operations.
If the merger between the Company and a subsidiary of UAL Corporation is
consummated, the combined company may be required to divest some of its routes
and slots for competitive reasons. To address the potential competitive
issues, the companies have entered into a Memorandum of Understanding with
Robert Johnson, a Director of the Company, under which Mr. Johnson would buy
certain assets from the Company and create a new airline to operate out of
Reagan National Airport. The Company would retain the routes formerly operated
by US Airways Shuttle and the assets necessary to fly to its hubs at
Pittsburgh, Charlotte and Philadelphia.
15
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions involving
Stock Compensation--an interpretation of APB Opinion No. 25." Among other
issues, FIN 44 clarifies the application of Accounting Principles Board
Opinion No. 25 (APB 25) regarding (a) the definition of employee for purposes
of applying APB 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. The provisions of FIN 44 that affect the Company are being
applied on a prospective basis effective July 1, 2000. The provisions of FIN
44 do not have a material impact on its results of operations or financial
condition.
OTHER INFORMATION
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. Although SAB 101 does not change existing accounting
rules on revenue recognition, changes in accounting to apply the guidance in
SAB 101 may be accounted for as a change in accounting principle. On January
1, 2000, the Company changed its method of accounting for the sale of mileage
credits in its Dividend Miles program from recognizing revenue when credits
are sold, to deferring a portion of revenue attributable to future
transportation and recognizing it as passenger revenue when the service is
provided. The remaining portion of sales proceeds will continue to be
recognized immediately as a component of Other operating revenues. The
Company believes the new method results in a better matching of revenue with
the period in which travel services are provided. In connection with the
change, the Company recognized a $103 million, net of applicable income taxes,
cumulative effect charge on January 1, 2000.
The Federal Aviation Administration has designated John F. Kennedy
International Airport (Kennedy) and LaGuardia Airport (LaGuardia) in New York,
O'Hare International Airport in Chicago (O'Hare) and Ronald Reagan Washington
National Airport in Washington, D.C. (Reagan National) as "high density
traffic airports" and has limited the number of departure and arrival slots
at those airports. In April 2000, legislation was enacted which eliminates
slot restrictions beginning in 2001 at O'Hare and in 2007 at LaGuardia and
Kennedy. As a result of this legislation, the Company performed an evaluation
in the second quarter in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." As a result of the evaluation, the
Company determined that the slots are not currently impaired.
Among other things, the legislation encourages the development of air
service to smaller communities from slot-controlled airports. In connection
with this, the Company has been implementing a plan to increase service to
such communities from LaGuardia. Also, several airlines have announced
increases in regional jet flights from New York's LaGuardia airport to cities
in the East, South and Midwest, which are served by the Company. At this
time, the Company cannot predict the outcome of the announced plans.
Regional jet aircraft add a great deal of flexibility to the US Airways
system because they can operate effectively in markets too small for
US Airways' jet service and with stage lengths too great for turboprop
aircraft. The number of regional aircraft operated by US Airways is limited
by provisions in US Airways' pilot labor contract. In April 2000, US Airways'
pilots ratified an agreement whereby US Airways can increase the number of
regional jet aircraft operated from approximately 35 to approximately 70. US
Airways is currently evaluating where and when it will deploy the additional
aircraft.
16
RESULTS OF OPERATIONS
The following section pertains to activity included in the Company's
Condensed Consolidated Statements of Operations (which are contained in Part
I, Item 1A of this report) and in "Selected US Airways Operating and
Financial Statistics" below. Except where noted, operating statistics
referred to below are for scheduled service only.
THREE MONTHS ENDED JUNE 30, 2000
COMPARED WITH THE
THREE MONTHS ENDED JUNE 30, 1999
OPERATING REVENUES-Passenger transportation revenues increased $149 million.
On a pro forma basis, passenger revenues for US Airways increased $99 million
due to an 11.5% increase in revenue passenger miles (RPMs) partially offset by
a 5.6% decrease in yield. See "Selected US Airways Operating and Financial
Statistics" below for additional information related to US Airways' RPMs and
Note 1(b) in Part I, Items 1A and 1B for additional information related to the
Dividend Miles revenue recognition change. Passenger transportation revenues
for Shuttle, Inc. and the three wholly-owned regional airlines increased $6
million and $9 million, respectively, due primarily to increased RPMs. Other
operating revenues were relatively flat. However, on a pro forma basis these
revenues would have increased by $37 million. The increase is principally due
to revenues generated from sales of capacity (available seat miles or ASMs) on
Mesa Airlines, Inc. (Mesa) and Chautauqua Airlines, Inc. (Chautauqua-this
agreement began in July 1999), revenues from sales of fuel to affiliated third
parties (rate-driven) and an increase in frequent traveler mileage credits
sold to partners. The increased revenues resulting from sales of capacity on
Mesa and Chautauqua are partially offset by increased expenses recognized in
the Other operating expenses category related to purchases of the capacity
(see below).
OPERATING EXPENSES-The Company's results for the second quarter of 1999 and
the six months ended June 30, 1999 include certain activity categorized as
nonrecurring and unusual items. The table below shows where these items were
recorded in the Company's Condensed Consolidated Statements of Operations
(dollars in millions). The nonrecurring items recognized in Operating Expenses
were credits to the respective expense line item. All credits were recognized
in the second quarter except the credit to Other, net (first quarter).
Operating Expenses
Aircraft rent $ 11
Aircraft maintenance 1
Depreciation and amortization 4
---
16
---
Other Income (Expense)
Gain on sale of investment 274
Other, net 10
---
284
---
Amount reflected in Income (Loss) Before Taxes $300
===
The credits to Aircraft rent and Aircraft maintenance reflect a partial
reversal of previously accrued lease obligations and lease return provisions,
respectively, related to US Airways' nonoperating BAe-146 aircraft. The credit
to Depreciation and amortization reflects the partial reversal of an accrual
related to the abandonment of a maintenance facility. US Airways was able to
sell certain leasehold improvements at the facility for an amount higher than
anticipated when the accrual was established. All of these expense credits are
considered nonrecurring items because they relate to nonrecurring items
disclosed in prior periods, principally 1994 for the BAe-146 activity and 1997
for the facilities-related credit. The gain on the sale of investment resulted
from the sale of a common stock investment in Galileo International, Inc. by
US Airways Investment
17
Management Company, Inc. The credit to Other, net reflects a $10 million gain
which resulted from the sale of approximately 30% of US Airways' interest in
Equant n.v.
The Company's Personnel costs increased 8.0% due to capacity driven
increases in full time equivalents and flight hours and to certain wage
increases. Aviation fuel increased significantly due primarily to average
fuel prices increasing 62.8% over their prior year level. Commissions
decreased 23.8% due primarily to an October 1999 revision in the general
commission rate paid to travel agents from 8% to 5%. Aircraft rent increased
7.8%, excluding the effects of the prior period nonrecurring item, reflecting
lease expense associated with Airbus aircraft delivered during 1999. Other
selling expenses increased 21.1% as US Airways conducted an expanded
advertising campaign dubbed "Win Back" targeted at passengers electing to
fly other airlines as a result of past operational issues. Depreciation and
amortization increased 13.6%, excluding the effects of the prior period
nonrecurring item, due to the purchase of new Airbus aircraft and higher
depreciation expenses associated with reducing the remaining depreciable life
of certain DC-9-30 and B737-200 aircraft. Other operating expenses increased
due to expenses from sales of fuel to affiliated third parties (rate-driven),
expenses related to purchases of capacity (ASMs) on Mesa and Chautauqua
(Chautauqua agreement began in July 1999) and crew travel (primarily capacity
related).
OTHER INCOME (EXPENSE)-Interest income increased due to higher investment
balances than prior year. US Airways invested the proceeds of $500 million
related to its senior secured credit facilities in interest-bearing cash
equivalents for the period March 15, 2000 to May 4, 2000, the repayment date.
Interest expense increased due to more debt outstanding, including the $500
million senior secured credit facilities.
EARNINGS (LOSS) PER COMMON SHARE-Second quarter 2000 earnings per common share
was adversely affected by lower net income partially offset by the effect of a
lower share number stemming from the share repurchases that occurred mostly in
1999.
SIX MONTHS ENDED JUNE 30, 2000
COMPARED WITH THE
SIX MONTHS ENDED JUNE 30, 1999
OPERATING REVENUES-Passenger transportation revenues increased $177 million.
On a pro forma basis, passenger revenues for US Airways increased $90 million
due to a 6.6% increase in RPMs partially offset by a 3.9% decrease in yield.
See "Selected US Airways Operating and Financial Statistics" below for
additional information related to US Airways' RPMs and Note 1(b) in Part I,
Items 1A and 1B for additional information related to the Dividend Miles
revenue recognition change. Passenger transportation revenues related to the
three wholly-owned regional airlines increased $12 million reflecting
favorable yield and RPM trends. Passenger transportation revenues for
Shuttle, Inc. increased $8 million due primarily to a 10.9% increase in RPMs.
Other operating revenues were relatively flat. However, on a pro forma basis
these revenues would have increased by $78 million. The increase is
principally due to revenues generated from sales of capacity (available seat
miles or ASMs) on Mesa and Chautauqua, revenues from sales of fuel to
affiliated third parties (rate-driven) and an increase in frequent traveler
mileage credits sold to partners. The increased revenues resulting from sales
of capacity on Mesa and Chautauqua are partially offset by increased expenses
recognized in the Other operating expenses category related to purchases of
the capacity (see below).
OPERATING EXPENSES- The Company's Personnel costs increased 8.6% due to
capacity driven increases in full time equivalents, flight hours and certain
wage rates. Aviation fuel increased significantly due primarily to average
fuel prices increasing 81.5% over their prior year level. Commissions
decreased 25.2% due primarily to an October 1999 revision in the general
commission rate paid to travel agents from 8% to 5%. Aircraft rent increased
8.7%, excluding the effects of the prior period nonrecurring item, reflecting
lease expense associated with Airbus
18
aircraft delivered during 1999. Aircraft maintenance increased 7.1%, excluding
the effects of the prior period nonrecurring item, as the Company successfully
eliminated the backlog of aircraft waiting for scheduled maintenance. Other
selling expenses increased 13.8% as US Airways conducted an expanded
advertising campaign dubbed "Win Back" targeted at passengers electing to
fly other airlines as a result of past operational issues. Depreciation and
amortization increased 13.0%, excluding the effects of the prior period
nonrecurring item, due to the purchase of new Airbus aircraft and higher
depreciation expenses associated with reducing the remaining depreciable life
of certain DC-9-30 and B737-200 aircraft. Other operating expenses increased
due to expenses from sales of fuel to affiliated third parties (rate-driven),
expenses related to purchases of capacity (ASMs) on Mesa and Chautauqua
(Chautauqua agreement began in July 1999) and crew travel (primarily capacity
related). These increases were partially offset by lower expenses associated
with US Airways' information systems contract with Sabre. Expenses in 1999
related to the Sabre contract were higher than normal due to a high number of
scheduled data migration projects during that period.
OTHER INCOME (EXPENSE)-Interest income increased due to higher investment
balances than prior year. US Airways invested the proceeds of $500 million
related to its senior secured credit facilities in interest-bearing cash
equivalents for the period March 15, 2000 to May 4, 2000, the repayment date.
Interest expense increased due to more debt outstanding, including the $500
million senior secured credit facilities.
PROVISION (CREDIT) FOR INCOME TAXES-The Company's tax credit for the six
months ended June 30, 2000 was $4 million. That amount was computed based on
the loss before taxes of $39 million partially offset by cumulative permanent
differences.
EARNINGS (LOSS) PER COMMON SHARE-Earnings per common share was adversely
affected by lower net income and by the effect of a lower share number
stemming from the share repurchases that occurred mostly in 1999.
<TABLE>
SELECTED US AIRWAYS OPERATING AND FINANCIAL STATISTICS (NOTE 1)
<CAPTION>
Three Months
Ended June 30,
-------------- Increase
2000 1999 (Decrease)
---- ---- -----------
<S> <C> <C> <C>
Revenue passengers (thousands)* 15,554 14,755 5.4 %
Total RPMs (millions) (Note 2) 12,155 10,910 11.4 %
RPMs (millions)* 12,138 10,886 11.5 %
Total ASMs (millions) (Note 3) 16,266 14,846 9.6 %
ASMs (millions)* 16,247 14,817 9.7 %
Passenger load factor* (Note 4) 74.7 % 73.5 % 1.2 pts.
Break-even load factor (Note 5) 72.1 % 65.7 % 6.4 pts.
Yield* (Notes 6 and 12) 16.24 c 17.20 c (5.6) %
Passenger revenue per ASM* (Notes 7 and 12) 12.14 c 12.64 c (4.0) %
Revenue per ASM (Notes 8 and 12) 13.33 c 13.70 c (2.7) %
Cost per ASM (Note 9) 12.62 c 12.37 c 2.0 %
Average passenger journey (miles)* 780 738 5.7 %
Average stage length (miles)* 645 612 5.4 %
Revenue aircraft miles (millions)* 118 110 7.3 %
Cost of aviation fuel per gallon (Note 10) 85.29 c 52.40 c 62.8 %
Cost of aviation fuel per gallon,
excluding fuel taxes (Note 11) 78.98 c 46.22 c 70.9 %
Gallons of aviation fuel consumed (millions) 309 286 8.0 %
Scheduled mileage completion factor* 97.1 % 97.6 % (0.5) pts.
Number of aircraft in operating fleet at period-end 395 382 3.4 %
Full-time equivalent employees at period-end 42,653 39,599 7.7 %
* Scheduled service only (excludes charter service).
c = cents
</TABLE>
<TABLE>
SELECTED US AIRWAYS OPERATING AND FINANCIAL STATISTICS (NOTE 1)
<CAPTION>
Six Months
Ended June 30,
-------------- Increase
2000 1999 (Decrease)
---- ---- -----------
<S> <C> <C> <C>
Revenue passengers (thousands)* 28,357 27,752 2.2 %
Total RPMs (millions) (Note 2) 21,830 20,483 6.6 %
RPMs (millions)* 21,798 20,439 6.6 %
Total ASMs (millions) (Note 3) 31,324 28,980 8.1 %
ASMs (millions)* 31,284 28,924 8.2 %
Passenger load factor* (Note 4) 69.7 % 70.7 % (1.0) pts.
Break-even load factor (Note 5) 71.6 % 65.4 % 6.2 pts.
Yield* (Notes 6 and 12) 16.77 c 17.45 c (3.9) %
Passenger revenue per ASM* (Notes 7 and 12) 11.69 c 12.33 c (5.2) %
Revenue per ASM (Notes 8 and 12) 12.88 c 13.42 c (4.0) %
Cost per ASM (Note 9) 12.99 c 12.55 c 3.5 %
Average passenger journey (miles)* 769 736 4.5 %
Average stage length (miles)* 630 613 2.8 %
Revenue aircraft miles (millions)* 229 215 6.5 %
Cost of aviation fuel per gallon (Note 10) 86.98 c 47.92 c 81.5 %
Cost of aviation fuel per gallon,
excluding fuel taxes (Note 11) 80.58 c 41.78 c 92.9 %
Gallons of aviation fuel consumed (millions) 594 561 5.9 %
Scheduled mileage completion factor* 96.9 % 96.8 % 0.1 pts.
Number of aircraft in operating fleet at period-end 395 382 3.4 %
Full-time equivalent employees at period-end 42,653 39,599 7.7 %
* Scheduled service only (excludes charter service).
c = cents
(See footnotes on following page)
19
Note 1. Operating statistics include US Airways' "mainline" operations as well as the
operations of its low-cost product, MetroJet. Operating statistics include free
frequent travelers and the related miles they flew. Revenues and expenses
associated with US Airways' capacity purchase arrangements with certain affiliated
airlines have been excluded from US Airways' financial results for purposes of
financial statistical calculations for better comparability between periods.
Note 2. Revenue passenger miles-Revenue passengers multiplied by the number of miles they
flew.
Note 3. Available seat miles-Seats available multiplied by the number of miles flown (a
measure of capacity).
Note 4. Percentage of aircraft seating capacity that is actually utilized (RPMs/ASMs).
Note 5. Percentage of aircraft seating capacity utilized that equates to US Airways
breaking-even at the pre-tax income level.
Note 6. Passenger transportation revenue divided by RPMs.
Note 7. Passenger transportation revenue divided by ASMs (a measure of unit revenue).
Note 8. Total Operating Revenues divided by ASMs (a measure of unit revenue).
Note 9. Total Operating Expenses divided by ASMs (a measure of unit cost).
Note 10. Includes the base cost of aviation fuel, fuel taxes and transportation charges.
Note 11. Includes the base cost of aviation fuel and transportation charges (excludes fuel
taxes).
Note 12. Effective January 1, 2000, US Airways changed its accounting policy related to
Dividend Miles revenue recognition as described in "Other Information" above.
The 1999 amount has been adjusted to show what US Airways would have reported if
the new accounting policy had been in effect in periods prior to 2000.
</TABLE>
Capacity (as measured by ASMs) increased 9.7% and 8.2% for the three
and six months ended June 30, 2000, respectively. RPMs increased 11.5% and
6.6% for the three and six months ended June 30, 2000, respectively. These
increases resulted in a 74.7% and 69.7% passenger load factor, respectively.
The increase in capacity reflects more aircraft and longer average stage
lengths. RPM growth in the first six months of 2000 was adversely impacted
by severe weather along the Eastern U.S. particularly in January and June,
reduced passenger traffic stemming from the then-threatened March 25, 2000
shutdown and passenger apprehensions of flying on or around December 31,
1999.
US Airways' unit revenue (revenue per ASM) fell 2.7% and 4.0% for the
three and six months ended June 30, 2000, respectively, reflecting
marginally higher revenues on increased capacity. Its unit cost (cost per
ASM) increased 2.0% and 3.5% for the three and six months ended June 30,
2000, respectively, reflecting significantly higher fuel costs partially
offset by lower commission costs and increased capacity. The impact of fuel
costs on unit cost was significant. Unit cost excluding fuel decreased by
3.2% and 2.5% compared to the prior year periods for the three and six
months ended June 30, 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company's Cash, Cash equivalents and Short-
term investments totaled $1.0 billion. The Company's ratio of current assets
to current liabilities (current ratio) was 0.8 (the Company's Condensed
Consolidated Balance Sheets are contained in Part I, Item 1A of this
report). As of December 31, 1999, the Company's Cash, Cash equivalents and
Short-term investments totaled $870 million and the current ratio was 0.8.
For the first six months of 2000, the Company's operating activities
provided net cash of $517 million (as presented in the Company's Condensed
Consolidated Statements of Cash Flows, which are contained in Part I, Item
1A of this report) compared to $652 million for the first six months of
1999. Operating cash flows during the first six months of 2000 were
adversely affected by the same factors that impacted financial results
during that period (see discussion in "Results of Operations").
For the first six months of 2000, investing activities included cash
outflows of $893 million related to capital expenditures. Capital
expenditures included $760 million for new aircraft (including purchase
deposits) with the balance related to rotables, ground equipment (including
training equipment) and miscellaneous assets. During January 2000, US
Airways received $81 million related to its December 1999 exercise of Sabre
options. The net cash used for investing activities for the six months ended
June 30, 2000 was $572 million. For the first six months of
20
1999, investing activities included cash outflows of $611 million related to
capital expenditures and cash inflows of $38 million related to asset
dispositions. Capital expenditures included $545 million for aircraft and
aircraft-related assets, including the purchase of eleven new Airbus A320-
family aircraft, the purchase of eight aircraft that were previously leased
(including five nonoperating BAe-146 aircraft which were immediately sold)
and purchase deposits related to new Airbus aircraft scheduled for future
delivery. Net cash used for the first six months of 1999 was $223 million.
Net cash provided by financing activities during the first six months
of 2000 was $464 million. US Airways received proceeds of $500 million and
$514 million from its senior secured credit facilities (Facilities) in March
2000 and from mortgages of eight A320-family aircraft and five A330
aircraft, respectively. These proceeds were partially offset by the early
January purchase of 0.6 million shares of Common Stock on the open market
for $20 million, the $500 million repayment of the Facilities on May 4, 2000
and scheduled principal repayments of long-term debt of $32 million. Net
cash used for financing activities during the first six months of 1999 was
$435 million, including $670 million related to the Company's purchase of 12
million shares of its common stock. Besides normal debt repayments, US
Airways retired early certain debt with a principal amount of $46 million
during the first six months of 1999. These cash outflows were partially
offset by sale-leaseback transactions for nine of the new Airbus aircraft
purchased in the first six months of 1999 generating proceeds of $300
million.
In July 2000, the Philadelphia Authority for Industrial Development
issued $71 million of revenue bonds, the proceeds from which were provided
to US Airways in the form of an unsecured loan. US Airways intends to
utilize the proceeds to finance various improvements at the Philadelphia
International Airport where US Airways has significant operations.
In August 2000, US Airways completed an offering of enhanced equipment
trust certificates worth $362 million. The proceeds of this financing will
be used to partially finance 20 A320-family aircraft with delivery dates
through October 2000 using sale-leaseback transactions.
The minimum determinable payments associated with the Company's
acquisition agreements for Airbus aircraft (including progress payments,
payments at delivery, buyer-furnished equipment, spares, capitalized
interest, penalty payments, cancellation fees and/or nonrefundable deposits)
were estimated at $1.28 billion for the six months ended December 31, 2000,
$1.14 billion in 2001, $494 million in 2002, $290 million in 2003 and $501
million thereafter. See Note 6 in Part I, Item 1A for additional
information related to Airbus aircraft.
UPDATED OUTLOOK FOR REMAINDER OF 2000
For the third quarter of 2000, unit cost excluding fuel expense, is
expected to decline. US Airways expects to pay approximately 83 cents per
gallon for fuel including taxes which translates into approximately $260
million, of which $60 million is due to higher fuel price. Year-over-year
unit revenue performance for the third quarter is expected to decline.
Available seat miles are expected to increase 17.0% year-over-year for the
third quarter. The expected increase will be due to four factors: a 3.6%
increase in scheduled departures, a 6.5% increase in average stage length, a
2.0% increase in average aircraft size and substantially better departure
completion factor than that experienced in the prior year period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's disclosures
related to certain market risks as reported under Part II, Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," in the
Annual Report of US Airways Group, Inc. and US Airways, Inc. to the U.S.
Securities and Exchange Commission on Form 10-K for the year ended December
31, 1999.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
US Airways is involved in legal proceedings arising out of an aircraft
accident in September 1994 near Pittsburgh in which 127 passengers and five
crew members lost their lives. With respect to this accident, the National
Transportation Safety Board held hearings in January and November 1995, and
held a final hearing in March 1999, at which it issued the final accident
investigation report. The report concluded that the probable cause of the
accident involved a malfunction of the aircraft's rudder system. All
wrongful death cases have been resolved except for three cases currently
pending before the respective Federal District Courts. 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.
Commencing on May 24, 2000, the Company, along with several of its
officers and directors and, in all suits other than one, UAL Corporation,
have been named as defendants in eight, putative class actions filed in the
Court of Chancery of the State of Delaware in and for the New Castle County.
The plaintiffs allege that they have been and will be damaged by the
agreement reached between US Airways Group, UAL Corporation, and Robert
Johnson with respect to the acquisition by an entity established by Mr.
Johnson of certain assets located at Reagan National Airport that are to be
divested by the Company in connection with the consummation of the merger.
The plaintiffs allege, among other things, that the individual defendants
have breached their duty of loyalty and their fiduciary duties in entering
into the agreement with Mr. Johnson. Plaintiffs seek, among other things,
declaratory and injunctive relief, unspecified compensatory damages and
attorney's fees. The Company believes that these actions are without merit
and intends to conduct a vigorous defense.
The Company was also named as a nominal defendant in a derivative
action filed in the Court of Chancery based upon the same allegations. The
derivative plaintiff brought causes of action for (i) breach of fiduciary
duty; (ii) gross mismanagement; and (iii) corporate waste of assets. The
plaintiff in the derivative action seeks, among other things, declaratory
and equitable relief, unspecified compensatory damages and attorney's fees.
The Company believes these actions are also without merit and intends to
conduct a vigorous defense.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
US Airways Group's annual meeting of stockholders was held on May 17,
2000. Proxies for the meeting were solicited by US Airways Group pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
All of management's nominees for the election to the Board of Directors
as listed in US Airways Group's Proxy Statement for the meeting were
elected. In addition, the stockholders also voted on the following proposals
with the following results:
1. Management's proposal regarding ratification of the selection of
auditors of the Company for fiscal year 2000.
For: 53,910,327 Against: 379,627
Abstain: 173,158 Broker Non-Votes: None
22
2. Management's proposal regarding approval of an amendment of the
1996 Stock Incentive Plan of the Company to make available for
grant an additional 3,000,000 shares of Common Stock.
For: 42,941,628 Against: 11,250,377
Abstain: 271,107 Broker Non-Votes: None
3. Stockholder proposal concerning cumulative voting in the election
of directors.
For: 6,558,397 Against: 29,968,449
Abstain: 445,357 Broker Non-Votes: 17,490,909
4. Stockholder proposal concerning confidential voting.
For: 11,148,954 Against: 25,473,230
Abstain: 350,019 Broker Non-Votes: 17,490,909
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
DESIGNATION DESCRIPTION
10.1 Amendment No. 7 dated as of June 29, 2000, to A319/A320/A321
Purchase Agreement dated October 31, 1997 between US Airways Group
and AVSA, S.A.R.L. (portions of this exhibit have been omitted
pursuant to a request for confidential treatment and filed
separately with the SEC).
10.2 Amendment No. 2 dated as of June 29, 2000, to A330/A340 Purchase
Agreement dated November 24, 1998 between US Airways Group and
AVSA, S.A.R.L. (portions of this exhibit have been omitted
pursuant to a request for confidential treatment and filed
separately with the SEC).
10.3 US Airways Group, Inc. Long-Term Incentive Plan as amended and
restated as of May 16, 2000.
10.4 1997 Stock Incentive Plan of US Airways Group, Inc. as amended and
restated as of May 23, 2000.
10.5 1996 Stock Incentive Plan of US Airways Group, Inc. as amended and
restated as of May 23, 2000.
10.6 US Airways Group Nonemployee Director Stock Incentive Plan as
amended and restated as of May 16, 2000.
10.7 US Airways Group Nonemployee Director Deferred Stock Unit Plan as
amended and restated as of May 16, 2000.
27.1 Financial Data Schedule-US Airways Group
27.2 Financial Data Schedule-US Airways
B. REPORTS ON FORM 8-K
DATE OF REPORT SUBJECT OF REPORT
August 10, 2000 Certain forward-looking information was provided by US
Airways to the investment community related to aircraft
fleet and selected operating and financial statistics.
July 24, 2000 Document filed as an Exhibit in connection with, and
incorporated by reference into, US Airways, Inc.'s and
US Airways Group, Inc.'s Registration Statement on Form
S-3 (Registration No. 333-79825). The Registration
Statement and the Prospectus Supplement, dated July 24,
2000 to the Prospectus, dated July 30, 1999, relate to
the offering by US Airways, Inc. of Pass Through
Certificates, Series 2000-2, Class G.
23
July 19, 2000 News release disclosing the results of operations for
both US Airways Group and US Airways for the three and
six months ended June 30, 2000, and selected operating
and financial statistics for US Airways for the same
periods.
July 11, 2000 Certain forward-looking information was provided by US
Airways to the investment community related to aircraft
fleet and selected operating and financial statistics.
June 20, 2000 Certain forward-looking information was provided by US
Airways to the investment community related to aircraft
fleet and selected operating and financial statistics.
May 23, 2000 Form 8-K/A filed to correct a clerical error in
Exhibit A attached to Exhibit 2.1 (Agreement and Plan of
Merger, dated as of May 23, 2000, by and among UAL
Corporation, Yellow Jacket Acquisition Corp. and
US Airways Group, Inc.).
May 23, 2000 Documents filed as exhibits in connection with the
Agreement and Plan of Merger by and among UAL
Corporation, Yellow Jacket Acquisition Corp. and US
Airways Group, Inc. and in connection with the
Memorandum of Understanding by and among UAL
Corporation, US Airways Group, Inc. and Mr. Robert L.
Johnson.
May 23, 2000 Joint press release of US Airways Group, Inc. and UAL
Corporation, announcing an Agreement and Plan of Merger
between US Airways Group, Inc., UAL Corporation and
Yellow Jacket Acquisition Corp., a wholly-owned
subsidiary of UAL Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
US Airways Group, Inc. (Registrant)
Date: August 11, 2000 By: /s/ Anita P. Beier
-------------------
Anita P. Beier
Vice President and Controller
(Chief Accounting Officer)
US Airways, Inc. (Registrant)
Date: August 11, 2000 By: /s/ Anita P. Beier
-------------------
Anita P. Beier
Vice President and Controller
(Chief Accounting Officer)
24
