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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, 1999
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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, New York
Group, Inc. par value $1.00 Stock Exchange
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 29, 2000 was approximately
$1,214,000,000. On February 29, 2000, there were outstanding approximately
66,549,000 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 I(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, Proxy Statement* (excluding
11, 12 and 13 therefrom the subsections
entitled "Human Resources
Committee Report on Executive
Compensation" 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 17, 2000.
(this space intentionally left blank)
US AIRWAYS GROUP,INC.
AND
US AIRWAYS, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Overview 1
Airline Industry and the Company's
Position in the Marketplace 2
Industry Regulation and Airport Access 4
Certain Ownership Matters 5
Executive Officers 6
Employees 7
Aviation Fuel 9
Distribution Channels 9
Frequent Traveler Program 9
Insurance 11
Item 2. Properties 11
Flight Equipment 11
Ground Facilities 12
Terminal Construction Projects 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5A. Market for US Airways Group's Common
Equity and Related Stockholder Matters 15
Stock Exchange Listing 15
Market Prices of Common Stock 15
Foreign Ownership Restrictions 16
Item 5B. Market for US Airways' Common Equity
and Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Consolidated Statements of
Operations-US Airways Group 16
Consolidated Balance Sheets-
US Airways Group 16
Selected Operating and Financial
Statistics-US Airways 17
(table of contents continued on following page)
US AIRWAYS GROUP, INC.
AND
US AIRWAYS, INC.
Form 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
(CONTINUED)
Page
----
Item 7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 18
Results of Operations 26
Liquidity and Capital Resources 31
Outlook for 2000 35
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 36
Item 8A. Consolidated Financial Statements for
US Airways Group, Inc. 38
Item 8B. Consolidated Financial Statements for
US Airways, Inc. 74
Item 9. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure 105
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 and Management 105
Item 13. Certain Relationships and Related
Party Transactions 106
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 106
Consolidated Financial Statements 106
Consolidated Financial Statement Schedules 106
Exhibits 106
Reports on Form 8-K 111
SIGNATURES
US Airways Group, Inc. 112
US Airways, Inc. 114
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's primary business activity is the ownership of 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 Leasing and Sales, Inc. (US Airways
Leasing and Sales), Material Services Company, Inc. (MSC), USLM Corporation
(USLM) and Airways Assurance Limited, LLC (AAL). US Airways owns all of the
common stock of US Airways Investment Management Company, Inc. (USIM,
formerly USAM Corp.).
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 1999, US Airways accounted for
approximately 88% of the Company's operating revenues on a consolidated
basis. US Airways enplaned almost 56 million passengers in 1999 and is
currently the sixth largest domestic air carrier (as ranked by revenue
passenger miles (RPMs)). As of December 31, 1999, US Airways operated 383
jet aircraft (see Part I, Item 2 "Properties" for additional information
related to aircraft operated by US Airways) and provided regularly scheduled
service at 107 airports in the continental United States, Canada, Mexico,
France, Germany, Italy, Spain, the United Kingdom and the Caribbean.
US Airways' executive offices are located at 2345 Crystal Drive, Arlington,
Virginia 22227 (telephone number (703) 872-7000). US Airways' internet
addresses are usairways.com and flymetrojet.com.
The Company's operations consist of two segments: US Airways and
US Airways Express. As mentioned above, US Airways accounted for
approximately 88% of the Company's operating revenues on a consolidated
basis in 1999. In addition, the Company derived 89% of its operating
revenues from scheduled-service passenger transportation in 1999. The
Company's results are seasonal with operating results typically highest in
the second and third quarters due to US Airways' combination of business
traffic and North-South leisure traffic in the Eastern United States (U.S.)
during those periods.
US Airways' major connecting hubs are at airports in Charlotte,
Philadelphia and Pittsburgh. US Airways also has substantial operations at
the Baltimore/Washington International Airport (BWI), Boston's Logan
International Airport (Logan), New York's LaGuardia Airport (LaGuardia) and
Washington's Ronald Reagan Washington National Airport (Reagan 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 U.S. cities such as Albany, Buffalo, Hartford, Richmond,
Rochester and Syracuse. US Airways is also the leading airline from the
Northeast U.S. to Florida. US Airways currently has approximately 85% of
its departures and approximately 57% of its capacity (available seat miles
or ASMs) deployed in the Eastern U.S.
During 1999, US Airways had code share arrangements with eight air
carriers which operated under the trade name "US Airways Express,"
including Allegheny, Piedmont and PSA (see Part I, Item 2 "Properties" for
information related to aircraft operated by the Company's three wholly-
owned regional airlines). Typically under a code share arrangement one air
carrier places its
1
designator code and sells tickets on the flights of another air carrier
(its code share partner). US Airways provides reservations and, at certain
stations, ground support and other 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' connecting hubs. As of
December 31, 1999, US Airways Express served 175 airports in the
continental U.S., Canada and the Bahamas, including 73 airports also served
by US Airways. During 1999, US Airways Express air carriers enplaned
approximately 11 million passengers (including approximately 7 million
passengers enplaned by Allegheny, Piedmont and PSA), approximately 58% of
whom connected to US Airways flights.
US Airways purchases all of the capacity (ASMs) generated by
Allegheny, Piedmont and PSA. US Airways determines the markets in which
these air carriers operate, sets the fares in those markets and earns the
related passenger transportation revenues. In January 1998 and July 1999,
US Airways began purchasing the capacity in certain markets of Mesa
Airlines, Inc. (Mesa) and Chautauqua Airlines, Inc. (Chautauqua),
respectively. Mesa and Chautauqua operate regional jets in certain markets
as part of US Airways Express.
US Airways also has a code share arrangement with Shuttle, which
operates under the trade name "US Airways Shuttle." Shuttle provides high
frequency service between LaGuardia and Logan and between LaGuardia and
Reagan National. On December 30, 1997, the Company exercised its right to
purchase Shuttle from its prior owners. US Airways managed Shuttle's
operations prior to the purchase.
US Airways also code shares with the airline Deutsche BA on certain
intra-Germany flights.
US Airways Leasing and Sales, MSC and AAL operate in support of the
Company's five airline subsidiaries in areas such as procurement, including
the procurement of aviation fuel, assisting with maintenance contracts, the
marketing of surplus assets and insurance.
In May 1999, the Company created USLM to more efficiently manage its
postretirement medical and life insurance benefits for employees who had
retired or were eligible for retirement as of January 1, 1998 from
US Airways and certain other subsidiaries. USLM is intended to achieve
significant retiree benefit cost reductions, while maintaining or
increasing benefit value to retirees and their eligible dependents.
The Company has agreements for the acquisition of up to 400 new
single-aisle aircraft and up to 30 new widebody aircraft. As of December
31, 1999, US Airways had introduced 40 of the new single-aisle aircraft
into its operating fleet. Deliveries of the new widebody aircraft are
scheduled to begin in the first quarter of the year 2000. The Company's
aircraft acquisition agreements are discussed in detail in Part II, Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (hereafter referred to as "MD&A" in this section of this
report) as well as Note 6(a) to the Company's Notes to Consolidated
Financial Statements.
AIRLINE INDUSTRY AND THE COMPANY'S POSITION IN THE MARKETPLACE
Historically, the demand for air transportation has tended to mirror
general economic conditions. Since early 1995, general domestic economic
conditions have been relatively favorable as has been the level of demand
for air transportation. Over this time period, the Company has experienced
favorable pricing and capacity trends as a result of these economic
conditions. However, in 1999 increased capacity growth in the Company's
core operating regions has resulted in pricing pressures from our
competitors.
2
Most of the markets in which the Company's airline subsidiaries
operate are highly competitive. 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. 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.
A substantial portion of the Company's flights are to or from cities in
the Eastern U.S. Accordingly, severe weather, downturns in the economy and
air traffic control problems in the Eastern U.S. adversely affect the
Company's results of operations and financial condition.
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. Southwest has steadily
increased operations within the Eastern U.S. since first offering service
in this region in late 1993. Delta Air Lines, Inc.'s (Delta) low-fare
product, "Delta Express," operates primarily in this region and has grown
substantially since its 1996 launch. US Airways has the highest cost
structure of all major domestic air carriers. The Company considers the
growth of low-cost, low-fare competition in certain of its markets to be
its foremost competitive threat.
US Airways' contract with its pilots became effective on January 1,
1998 and is helping US Airways to compete effectively with low-cost, low-
fare competitors. Besides other cost-saving provisions, the contract
allowed US Airways to introduce its own low-cost, low-fare product,
"MetroJet." MetroJet began operations on June 1, 1998 with five aircraft
and service from BWI to four eastern cities. By the end of 1999, MetroJet
had grown to 42 aircraft serving 22 cities. The Company considers MetroJet
to be an effective competitive response to low-cost, low-fare competition.
The Company's long-term strategic objective is to establish US Airways
as a competitive global airline. As part of its efforts to achieve this
objective, US Airways has substantially expanded its international
operations in recent years. In connection with this expansion, US Airways
introduced an international business class product, "Envoy Class" and will
introduce a premium first class cabin on the new Airbus widebody aircraft.
In support of additional international growth plans, as well as to further
enhance its international service, seven Airbus widebody aircraft are
scheduled for delivery in 2000. US Airways plans to use these aircraft
primarily in its transatlantic markets.
The Company's Airbus aircraft are more fuel-efficient, are 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. In addition, the Company added new regional jet service in 1998 and
1999 on certain routes operated by US Airways Express. The Company has taken
other initiatives to improve its competitive position in the marketplace
including a contract with Sabre Inc. (Sabre) in 1998, which is expected to
provide substantial long-term cost savings and enhancements in the
information services area.
3
INDUSTRY REGULATION AND AIRPORT ACCESS
The Company's airline subsidiaries operate under certificates of public
convenience and necessity issued by the U.S. Department of Transportation
(DOT). Such certificates 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 the
certificates. 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, the Company's airline subsidiaries
have FAA-approved maintenance programs for each type of aircraft they
operate that provide 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 the
Company's airline subsidiaries or one or more of the aircraft types they
operate. In recent years, for example, the FAA has issued or proposed such
mandates relating to, among other things, flight data recorders that measure
more parameters than most original equipment flight data recorders, cargo
hold fire detection/suppression systems, ground proximity warning systems,
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.
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.
The airline industry is also 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 the Company's airline subsidiaries.
The Company's airline subsidiaries are obligated to collect a federal
excise tax on domestic and international air transportation (commonly
referred to as the "ticket tax"). Effective for travel commencing October 1,
1997, legislation was enacted that reduced the domestic ticket tax from
10.0% of fare to 9.0% (decreasing to 8.0% on October 1, 1998 and to 7.5% on
October 1, 1999 then remaining at 7.5% through September 30, 2007), added a
new segment fee of $1.00 per passenger (increasing to $3.00 by the year
2002, subject to adjustment for inflation thereafter through September 30,
2007), changed the current $6.00 international departure tax to $12.00 and
added a $12.00 international arrival tax (the latter two taxes each
increased to $12.20 on January 1, 1999, subject to adjustment for inflation
thereafter through September 30, 2007). The Company's airline subsidiaries
collect these taxes, along with certain other U.S. and foreign taxes and
user fees on air transportation, and pass through the collected amounts to
the appropriate governmental agencies. 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. Although such taxes are not
operating expenses to the Company, they represent an additional cost to the
Company's customers.
Several airports have increased substantially the rates charged to
airlines. The ability of airlines to contest these increases is restricted
by federal legislation, DOT regulations and judicial decisions. Legislation
was introduced in Congress in early 1999 that would permit airports to
increase the passenger facility charges from up to $3 to $4 or $5 per
departing or connecting passenger at such airports under certain
circumstances. With certain exceptions, air carriers pass
4
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
(Kennedy), Chicago O'Hare International Airport (O'Hare), LaGuardia and
Reagan 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. US Airways and Shuttle hold a
substantial number of slots at both LaGuardia and Reagan National. The DOT
has historically reallocated slots to other air carriers and reserves the
right to add or 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, could, if adopted, significantly affect
operations at the high-density traffic airports or expand slot controls to
other airports. Some of these 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. Legislation
pending before Congress would eliminate the high-density rule at Kennedy,
O'Hare and LaGuardia. Passage of such legislation could have a significant
impact on the Company's results of operations and financial condition.
These slots are valuable assets and important to the Company's overall
business strategy. The Company cannot predict whether any of the current
proposals before Congress will be adopted or, if adopted, precisely how
their implementation would impact the operations of the Company's airline
subsidiaries at LaGuardia.
Legislation has been enacted that provides for increased review of
airline joint ventures by the DOT. In April 1998, the DOT issued proposed
rules designed to regulate perceived anti-competitive behavior directed at
new entrants in the airline industry. Legislation was enacted requiring,
among other things, the National Research Council of the National Academy
of Sciences to complete a comprehensive study pertaining to competitive
issues in the airline industry prior to the DOT's implementation of those
rules. The Company cannot predict whether or when any proposed rules will
be adopted.
Working with members of Congress, Air Transport Association members
developed a voluntary Airline Customer Service Commitment, which was
announced in June 1999. As a result of this commitment, members of Congress
agreed not to pursue various consumer-oriented legislative proposals at
this time. In return, U.S. air carriers agreed voluntarily to publish and
implement plans to address consumer concerns in a variety of areas.
US Airways has developed a customer service commitment plan, which took
effect on December 15, 1999.
The availability of international routes to domestic air carriers is
regulated by agreements between the U.S. and foreign governments. See MD&A
for additional information related to the Company's international
operations, including the Company's recent expansion of international
operations and its efforts to introduce service in additional international
markets.
CERTAIN OWNERSHIP MATTERS
During 1999 and 1998, the Company purchased 36.0 million shares of its
common stock at a cost of $1.9 billion. In addition, on March 12, 1998,
Berkshire Hathaway, Inc. exercised its right to convert the Company's Series
H Preferred Stock into 9.2 million shares of the Company's common stock. The
Company subsequently retired the Series H Preferred Stock. The Company had
previously retired its Series F Preferred Stock (May 1997), its Series T
Preferred Stock (May 1997), and its Series B Preferred Stock (September
1997). With the retirement of these preferred stock issuances, the Company
had retired all of its preferred stock and eliminated annual dividends of
approximately $79 million.
5
EXECUTIVE OFFICERS
The following individuals are the executive officers of US Airways
Group and US Airways as of March 15, 2000:
Name Age Position
- - ---- --- --------
Stephen M. Wolf 58 Chairman, US Airways Group and US Airways
Rakesh Gangwal 46 President and Chief Executive Officer of
Airways Group and US Airways
Lawrence M. Nagin 59 Executive Vice President-Corporate Affairs and
General Counsel, US Airways Group and USAirways
N. Bruce Ashby 39 Senior Vice President-Corporate Development,
US Airways
B. Ben Baldanza 38 Senior Vice President-Marketing, US Airways
Michelle V. Bryan 43 Senior Vice President-Human Resources,
US Airways
Christopher Doan 53 Senior Vice President-Maintenance, US Airways
Thomas A. Mutryn 46 Senior Vice President-Finance and Chief
Financial Officer, US Airways Group and US
Airways
Gregory T. Taylor 46 Senior Vice President-Planning, US Airways
Anita P. Beier 44 Vice President and Controller, 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.
The business experience of the officers listed in the table above
since at least January 1, 1995 is summarized below:
Mr. Wolf is Chairman of the Board of Directors of US Airways Group and
US Airways. He was elected to those positions upon joining both companies
in January 1996. Mr. Wolf was Chief Executive Officer of US Airways Group
from January 1996 until November 1998 and Chief Executive Officer of
US Airways from January 1996 until May 1998. 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 Corp. (UAL) and United Air Lines, Inc. (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.
Mr. Gangwal was elected President and Chief Executive Officer of
US Airways Group in November 1998 and President and Chief Executive Officer
of US Airways in May 1998. Mr. Gangwal had been President and Chief
Operating Officer of both companies since February 1996. From November 1994
until February 1996, Mr. Gangwal was Executive Vice President-Planning and
Development for Compagnie Nationale Air France. 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.
Gangwal is a Director of Boise Cascade Corp.
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 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.
Mr. Ashby served as Vice President-Financial Planning and Analysis of
US Airways from April 1996 until his election as Senior Vice President-
Planning of US Airways in January 1998. In June 1999, Mr. Ashby was elected
Senior Vice President-Corporate Development of
6
US Airways. He previously served as Vice President-Marketing Development at
Delta from June 1995 to April 1996, and in several management positions at
United from January 1989 to June 1995, including Vice President-Financial
Planning and Analysis and Vice President and Treasurer.
Mr. Baldanza joined US Airways in September 1999 as Senior Vice
President-Marketing from Grupo Taca. Mr. Baldanza served as Managing
Director and Chief Operating Officer at Grupo Taca since April 1997. Mr.
Baldanza previously served in a variety of management roles after joining
Continental Airlines, Inc. (Continental) in 1994, where he rose to become
Executive Vice President-Marketing, before joining Grupo Taca. Prior to
joining Continental, Mr. Baldanza served in a variety of roles at American
Airlines, Inc. (American) and Northwest Airlines Corporation (Northwest).
Ms. Bryan joined US Airways in 1983 as a staff attorney. She was
elected Corporate Secretary and Assistant General Counsel of US Airways in
1988. In 1995, Ms. Bryan was named Vice President and Deputy General
Counsel of US Airways, retaining her position as US Airways' Corporate
Secretary. She was also named Corporate Secretary of US Airways Group in
1996. Ms. Bryan was elected Senior Vice President-Human Resources of
US Airways in January 1999.
Mr. Doan joined US Airways in March of 1997. Prior to joining US
Airways, Mr. Doan was Vice President of Technical Operations at 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. Mutryn joined US Airways Group and US Airways in November 1998
from United. At United, Mr. Mutryn served as Director of Financial Analysis
and Vice President-Revenue Management from 1989 until his election as Vice
President and Treasurer in July 1995. Mr. Mutryn held a variety of
positions at American from 1983 to 1989.
Mr. Taylor was elected Senior Vice President-Planning in June 1999.
Mr. Taylor joined US Airways in November 1998 as Vice President-Financial
Planning and Analysis and in January 1999 became Vice President-Express
Division. Prior to joining US Airways, Mr. Taylor was Vice President of
Revenue Management at United since July 1995. While at United, Mr. Taylor
held a variety of positions from 1975 to 1998, including Director of
Pricing, Director of Inventory Management and Director of Financial
Planning and Analysis.
Ms. Beier joined US Airways in June 1999 from CSX Corporation. At CSX
Corporation, Ms. Beier held a number of positions in financial management,
including Vice President-Financial Planning. Prior to being named Vice
President-Financial Planning at CSX Corporation in September 1998, Ms.
Beier was Chief Financial Officer of American Commercial Lines in 1997-
1998. Ms. Beier served in a variety of financial positions in economic and
financial analysis, budgeting and accounting at CSX Corporation from 1981
to 1997.
EMPLOYEES
As of December 31, 1999, on a full-time equivalent basis, the Company
employed 46,300 employees. US Airways employed 41,600 full-time equivalent
employees including approximately 10,300 station personnel, 8,900 flight
attendants, 7,400 mechanics and related employees, 5,600 pilots, 3,200
reservations personnel, and 6,100 personnel in administrative and
miscellaneous job categories. On a full-time equivalent basis, the
Company's remaining subsidiaries employed 4,700 employees including
approximately 1,500 station personnel, 1,300 pilots, 800 flight attendants,
600 mechanics and related employees, and 400 personnel in administrative
and miscellaneous job categories.
7
As of December 31, 1999, approximately 41,800, or 85%, of the
Company's employees 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.
The status of US Airways' labor agreements as of March 15, 2000 is as
follows:
Date
Contract
Union(1) Class or Craft Employees(2) Amendable
- - -------- -------------- ------------ ---------
ALPA Pilots 5,600 01/02/03
AFA Flight attendants 8,900 01/01/97 (3)
CWA Passenger service employees 9,700 12/13/04
IAMAW Mechanics and related employees 7,700 10/11/04
IAMAW Fleet service employees 6,700 10/11/04
TWU Flight crew training instructors 160 05/03/04
TWU Flight simulator engineers 55 08/02/97 (4)
TWU Dispatch employees 200 01/31/07
(1) ALPA Air Line Pilots Association, International
AFA Association of Flight Attendants
CWA Communications Workers of America
IAMAW International Association of Machinists and Aerospace Workers
TWU Transport Workers' Union
(2) Approximate actual number of employees covered by the contract.
(3) Currently in negotiations.
(4) Tentative agreement pending ratification by union membership.
On April 1, 1999, US Airways' fleet service employees ratified an
initial labor contract. On May 3, 1999, US Airways' flight crew training
instructors ratified a new collective bargaining agreement. On July 29,
1999, US Airways' flight dispatchers ratified a new collective bargaining
agreement. On October 6, 1999, US Airways' mechanics and related employees
ratified a new five-year contract. On November 30, 1999, US Airways'
passenger service employees ratified an initial labor contract. All of the
new contracts are based on pay parity with other major domestic airlines.
US Airways is in mediation over an amendable labor agreement with the
AFA. The National Mediation Board (NMB), which has been assisting in these
negotiations, declared an impasse in the talks in February 2000 and
requested the parties to submit to binding arbitration. The AFA rejected
arbitration, which triggered a 30-day cooling off period ending at 12:01
a.m. on March 25, 2000. The AFA has publicly threatened that, if a contract
is not reached by March 25, 2000, it would conduct an organized campaign it
has named "CHAOS" (Create Havoc Around Our System). Also, the AFA has
announced that this includes striking flights, which would have the effect
of disrupting service and stranding customers throughout US Airways'
system. If US Airways were to try to operate a schedule under such
conditions, in which it would not know from hour to hour which flights would
be subject to strike, it expects that its customers would lose confidence
that they can rely on US Airways to provide them reliable service. Since US
Airways does not wish to subject its customers to this risk, US Airways
publicly announced that while it intends to continue to negotiate with the
AFA, it will be left with no choice but to cease operations on March 25,
2000 if no agreement is reached with the AFA. US Airways anticipates that
the impact associated with the 30-day cooling off period and a cessation of
operations, if any, will have a material adverse effect on its results of
operations, particularly its short-term revenues. US Airways cannot
predict the outcome of such negotiations at this time.
The Company is unable to predict how long it will take to conclude
collective bargaining
8
talks with respect to labor contracts that are currently amendable. In
addition, the Company is unable to determine the final terms and conditions
of an amended contract or whether or not labor discussions will result in a
disruption of US Airways' operations.
A five-year labor contract between US Airways and its pilots became
effective January 1, 1998. The contract includes various provisions that
the Company believes are helping 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 and
allowing US Airways to launch MetroJet. As discussed in MD&A, US Airways
faces significant pressure in certain markets from competitors with lower
cost structures.
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 1999, 1998, and 1997, aviation fuel expenses, including fuel-
related taxes, were 8.6%, 8.1%, and 10.3%, respectively, of the Company's
total operating expenses (as adjusted to exclude nonrecurring and unusual
items and certain other expenses for comparability purposes). See Part II,
Item 6 "Selected Financial Data" for additional information related to
aviation fuel.
DISTRIBUTION CHANNELS
Travel agencies sold approximately 80% of US Airways' tickets during
1999. Total commissions paid to travel agencies accounted for
approximately 5.7%, 6.8% and 7.7% of US Airways' total operating expenses
(as adjusted to exclude nonrecurring and unusual items and certain other
expenses for comparability purposes) for the years 1999, 1998 and 1997,
respectively. See MD&A "Other Information" for additional discussion of
fees paid to travel agencies.
Computerized Reservation Systems (CRSs) play a significant role in the
marketing and distribution of airline tickets. As mentioned above, a
majority of US Airways' tickets are sold via travel agencies. Most travel
agencies use one or more CRSs to obtain information about airline schedules
and fares and to book their clients' travel. During 1999, the Company sold
its investments in CRSs. Previously, the Company owned 6.7% of Galileo
International, Inc. (Galileo), as a result of transactions arising from the
1997 initial public offering (IPO) of Galileo and its subsequent merger
with the Apollo Travel Services Partnership. A portion of the Company's
holdings in Galileo was sold as part of the IPO. See MD&A for additional
information concerning the 1999 and 1997 transactions.
Growing usage of electronic distribution systems helps the Company
reduce its costs. Two facets of electronic distribution are electronic
tickets and Internet bookings. The Company began selling electronic tickets
in 1996. By the end of 1999, electronic ticket sales represented 62% of all
ticket sales. During 1999, Internet bookings comprised 6% of the Company's
total bookings. US Airways' customers booked approximately half of these
Internet bookings through its web sites (usairways.com and
flymetrojet.com). In addition, US Airways began participating in
priceline.com Incorporated's (Priceline) internet-based electronic commerce
system. Sites such as priceline.com are increasingly becoming important
distribution channels for airline tickets.
FREQUENT TRAVELER PROGRAM
Under US Airways' Dividend Miles frequent traveler program (FTP),
participants generally
9
receive mileage credits for each paid flight segment on US Airways
(including MetroJet), Shuttle and US Airways Express. Participants can
also receive mileage for each paid flight segment on one of US Airways' FTP
airline partners. Participants flying on first class or Envoy class tickets
generally receive additional mileage credits. Participants may also earn
mileage credits by utilizing certain credit cards and purchasing services
from various partners. Mileage credits earned by FTP participants can be
redeemed for various travel awards, including upgrades to first class or
Envoy class and tickets on US Airways or on one of US Airways' FTP airline
partners. Mileage credits may not be brokered, bartered or sold, and have
no cash value.
In July 1998, US Airways and American entered into agreements whereby
participants of each airlines' FTP may redeem mileage credits for award
travel on either airline. Participants may also "pool" mileage credits
between FTPs. Each company compensates the other when relieved of an
obligation to provide a travel award.
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 the highest-level Dividend
Miles participants is generally not permitted on blackout dates, which
correspond to certain holiday periods or peak travel dates. 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 with
or 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. No profit or overhead margin
is included in the accrual for incremental costs. US Airways periodically
reviews the assumptions made to calculate its FTP liability for
reasonableness and makes adjustments to these assumptions as necessary. US
Airways pays certain partner airlines for travel award redemptions on the
partner airline's flights. Conversely, certain partner airlines pay US
Airways for Dividend Miles earned by US Airways' FTP participants on the
partner airline's flights.
In January 1999, US Airways announced changes to its FTP. Mileage
credits earned prior to January 1, 2000 do not expire. Mileage credits
earned on or after January 1, 2000 may expire, in certain circumstances. In
addition, effective September 1999, the number of mileage credits required
for award travel redemption changed. For example, the number of mileage
credits necessary for an award for domestic travel was reduced depending on
the travel date and itinerary.
As of December 31, 1999 and 1998, Dividend Miles participants had
accumulated mileage credits for approximately 5,905,000 awards and
4,692,000 awards, respectively. The increase is due, in part, to the
January 1999 program revisions, discussed above. Because US Airways expects
that some potential awards will never be redeemed, calculations of FTP
liabilities are based on approximately 84% 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 are excluded from calculations of FTP liabilities. The
liability for the accumulated Dividend Miles was $97 million and $85
million as December 31, 1999 and 1998, respectively. 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.
US Airways' customers redeemed approximately 1.1 million, 0.9 million
and 0.9 million awards for free travel on US Airways during 1999, 1998 and
1997, respectively, representing
10
approximately 6%, 5% and 5% of US Airways' RPMs in those years,
respectively. These low percentages as well as the use of certain inventory
management techniques (see above) minimize the displacement of revenue
passengers by passengers traveling on Dividend Miles award tickets.
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 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 current insurance policies.
ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
As of December 31, 1999, US Airways and Shuttle operated the following
jet aircraft:
Passenger Average
Type Capacity Age(years) Owned(1) Leased(2) Total
---- --------- --------- ------- -------- -----
Boeing 767-200ER 200 10.5 8 4 12
Boeing 757-200 182 9.2 23 11 34
Boeing 727-200 (3) 163 26.8 4 - 4
Boeing 737-400 144 10.0 19 35 54
Airbus A320 (3) 142 0.6 6 6 12
McDonnell Douglas MD-80 141 17.8 15 16 31
Boeing 737-300 126 12.7 11 74 85
Airbus A319 120 0.6 5 23 28
Boeing 737-200 112 17.7 56 3 59
Douglas DC-9-30 100 24.4 27 7 34
Fokker 100 97 9.1 36 4 40
---- --- --- ---
12.7 210 183 393
==== === === ===
(1) Of the owned aircraft, 175 were pledged as collateral for various
secured financing obligations aggregating $2.6 billion as of
December 31, 1999.
(2) The terms of the leases expire between 2000 and 2019.
(3) All B727-200s and six A320s are operated by Shuttle.
As of December 31, 1999, the Company's three wholly-owned regional
airline subsidiaries operated the following turboprop aircraft:
Passenger Average
Type Capacity Age(years) Owned(1) Leased(2) Total
---- --------- --------- ------- -------- -----
de Havilland Dash 8 37 8.5 29 75 104
Dornier 328-110 32 4.3 - 26 26
--- -- --- ---
7.7 29 101 130
=== == === ===
(1) The terms of the leases expire between 2000 and 2012.
11
The Company has agreements for the acquisition of up to 400 new
single-aisle aircraft and up to 30 new widebody aircraft. As of December
31, 1999, the Company had added 40 of the new single-aisle aircraft into
its operating fleet. US Airways expects to take delivery of 50 additional
new single-aisle aircraft and seven widebody aircraft in 2000. Deliveries
of the new widebody aircraft are scheduled to begin in the first quarter of
the year 2000. The Company currently expects to retire 36 aircraft in 2000.
The Company's aircraft acquisition agreements are discussed in detail in
MD&A.
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, 1999, 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.
Average Leased/
Type Age(years) Owned(1) Leased(2) Total Subleased
---- --------- ------- -------- ----- ---------
Boeing 737-200 17.3 5 - 5 -
Boeing 727-200 28.9 8 - 8 -
British Aerospace
BAe-146-200 15.1 - 3 3 -
British Aerospace
Jetstream 3100 12.7 - 14 14 14
Douglas DC-9-30 26.0 13 - 13 -
Fokker F28-1000 26.0 10 - 10 10
Fokker F28-4000 14.0 - 11 11 11
---- -- -- -- --
20.2 36 28 64 35
==== == == == ==
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 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 twelve B767-200ER 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
The Company leases the majority of its ground facilities, including
executive and administrative offices in Arlington, Virginia adjacent to
Reagan National; its principal operating, overhaul and maintenance bases at
the Pittsburgh, Tampa and Charlotte/Douglas International Airports; 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 in
Fairfax County (Virginia), a training facility in Winston-Salem (North
Carolina) and reservations facilities in San Diego and Orlando.
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
12
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.
In 1999, the Signatory Airlines at Charlotte/Douglas International
Airport granted a Majority In Interest (MII) Approval for the issuance of
$191 million in general airport revenue bonds for airfield projects and
various terminal projects. The MII includes $80 million for land
acquisitions for a future third parallel runway. The bond issue also
includes $68 million for terminal projects. The annual operating expenses of
US Airways are expected to increase by $1.2 million.
In 1999, US Airways and the Massachusetts Port Authority (MassPort)
reached an agreement to further renovate and expand US Airways' terminal
facilities. MassPort issued approximately $33 million of special facility
bonds to finance various improvements. US Airways will be responsible for
the awarding of contracts and construction of the project and expects
substantial completion in the second quarter 2001. As a result of this
project, US Airways expects that its annual operating expenses will increase
by $3.6 million.
In 1998, US Airways reached agreement with the Philadelphia Authority
for Industrial Development (PAID) and the City of Philadelphia to construct
a new international terminal and a new US Airways Express terminal at the
Philadelphia International Airport, one of US Airways' connecting hubs and
US Airways' principal international gateway. The international terminal will
include 12 gates for widebody aircraft and new federal inspection facilities
and is currently expected to be operational by December 2001. The new US
Airways Express facility will be capable of accommodating approximately 30
regional aircraft and is currently expected to be operational by January
2001. PAID has issued $443.7 million in airport revenue bonds to finance the
two terminals, ramp control tower, and related projects. Upon completion of
the project, US Airways expects that its annual cost of operations will
increase by approximately $30 million.
ITEM 3. LEGAL PROCEEDINGS
US Airways is involved in legal proceedings arising out of an aircraft
accident in September of 1994 near Pittsburgh in which 127 passengers and
five crew members lost their lives. With respect to this accident, the
National Transportation Safety Board (NTSB) held hearings in January and
November of 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 four
cases currently pending before the federal judicial panel for multi-district
litigation. 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.
In May 1995, the Company, US Airways and the Retirement Income Plan for
Pilots of US Airways, Inc. were sued in federal district court for the
District of Columbia by 481 active and retired pilots alleging that
defendants had incorrectly interpreted the 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. In February 1999, the U.S. Court of Appeals
upheld the district court's decision originally granted in May 1996 in the
defendants' favor. In May 1999, the plaintiffs filed a petition for
certiorari with the U.S. Supreme Court. In October 1999, the U.S. Supreme
Court denied the plaintiff's petition for certiorari. The U.S. District
Court has retained jurisdiction over one count of the complaint alleging
violation of a disclosure requirement under
13
ERISA. The Company believes there are no significant penalties likely to
result from this claim. Certain of the plaintiffs have filed a claim before
the US Airways Pilot Retirement Board requesting arbitration of their claim
for benefits which they believe were erroneously calculated.
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 would allow IFPC's and US Airways'
claims to be fully litigated. At the present time, the parties are engaged
in written discovery. 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 and BritAir Acquisition Corp. Inc. (collectively, "BA"),
American and American's parent company, AMR Corporation (collectively,
"AA"). The Company and US Airways claimed that BA, 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 BA (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 BA. The
Court dismissed the remaining claims against BA and AA. On February 6, 1998,
BA filed its answer to the complaint along with counterclaims against the
Company and US Airways. BA's counterclaims alleged that US Airways breached
the Investment Agreement by terminating the Code Share Agreement between
British Airways and US Airways (Code Share Agreement) and that US Airways
breached the Code Share Agreement by providing certain allegedly
confidential information to specific third parties. In addition, British
Airways sought 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. On January
29, 1999, the Company, US Airways and BA jointly filed a pre-trial order
with the Court, and on February 5, 1999, the Court placed the lawsuit on its
trial-ready calendar. On February 5, 1999, BA filed a motion for summary
judgment seeking dismissal of the Company's and US Airways' claims and a
finding that the Company and US Airways are liable for breach of the Code
Share Agreement. Subsequently, the Company and US Airways filed a memorandum
of law opposing BA's motion. On March 6, 2000 the Company, US Airways and
BA announced the settlement of this lawsuit.
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. US Airways was
identified by the City and County of San Francisco as a potentially
responsible party. US Airways and the City and County of San Francisco have
entered into an agreement to resolve this matter and the court entered an
order in August 1999 granting a good faith settlement approval for US
Airways and several other settling defendants in the lawsuit.
The Company and US Airways have been named as defendants in three
lawsuits recently filed in U.S. District Court for the Eastern District of
Michigan. Northwest Airlines is also named as a defendant in each action,
while Delta Air Lines and the Airlines Reporting Corporation are named
14
as defendants in two of the cases. The complaints are brought on behalf of a
class of airline passengers who originated or terminated their trips at the
defendant carriers' respective hubs. These passengers allege that they paid
excessive fares due to the respective airlines' enforcement of ticketing
rules which prohibit the use of a connecting segment coupon which is part of
a through-fare ticket where the passenger does not fly or intend to fly the
entire ticketed itinerary. Plaintiffs allege monopolization and restraint of
trade in violation of federal antitrust laws. They seek recovery of
unquantified treble-damages and an injunction prohibiting future enforcement
of the rules at issue. The Company and US Airways believe the claims are
without merit and intend to pursue a vigorous defense.
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 1999.
PART II
ITEM 5A. MARKET FOR US AIRWAYS GROUP'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
STOCK EXCHANGE LISTINGS
US Airways Group's Common Stock, $1 par value (Common Stock), is
traded on the New York Stock Exchange (Symbol U). As of February 29, 2000,
there were approximately 24,000 stockholders of record.
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
------ ---- ---
1999 Fourth Quarter $ 33 5/8 $ 25 1/16
Third Quarter 47 11/16 24 1/8
Second Quarter 59 5/8 43
First Quarter 64 43 3/16
1998 Fourth Quarter 58 9/16 34 3/4
Third Quarter 83 1/4 47
Second Quarter 82 1/8 63 5/8
First Quarter 76 7/8 56 9/16
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.
15
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 STOCKHOLER
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 a covenant contained in its 9 5/8%
Senior Notes (due February 2001). In addition, its $500 million senior
secured credit facilities limit the ability of US Airways to pay cash
dividends by requiring that US Airways maintain a minimum unrestricted cash
balance on US Airways. However, these covenants do not restrict US Airways
from lending or advancing funds to US Airways Group.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS-US AIRWAYS GROUP (IN MILLIONS, EXCEPT
PER SHARE AMOUNTS) (1)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating Revenues $8,595 $8,688 $8,514 $8,142 $7,474
Operating Expenses 8,459 7,674 7,930 7,705 7,153
----- ----- ----- ----- -----
Operating Income $ 136 $1,014 $ 584 $ 437 $ 322
Income Before Taxes $ 345 $ 902 $ 672 $ 275 $ 128
Provision (Credit) for
Income Taxes 148 364 (353) 12 9
----- ----- ----- ----- -----
Net Income $ 197 $ 538 $1,025 $ 263 $ 119
Net Earnings Applicable
to Common Stockholders $ 197 $ 532 $ 961 $ 175 $ 34
Basic Earnings per
Common Share (2) $ 2.69 $ 5.75 $12.32 $ 2.73 $ 0.55
Diluted Earnings per
Common Share (2) $ 2.64 $ 5.60 $ 9.87 $ 2.35 $ 0.55
Cash dividends per
Common Share $ - $ - $ - $ - $ -
CONSOLIDATED BALANCE SHEETS-US AIRWAYS GROUP (IN MILLIONS)
As of December 31,
-------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total Assets $7,685 $7,870 $8,372 $7,531 $ 6,955
Long-Term
Obligations (3) (4) $3,552 $3,266 $4,142 $4,552 $ 4,572
Series B Preferred
Stock (4) $ - $ - $ - $ 213 $ 213
Common Stockholders'
Equity (Deficit) (4) $ (117) $ 593 $ 725 $ (798) $(1,049)
Total Stockholders'
Equity (Deficit) (4) $ (117) $ 593 $ 725 $ (584) $ (836)
Shares of Common Stock
Outstanding (5) 66.3 83.8 91.5 64.3 63.4
(1) Certain years include nonrecurring and unusual items (See Note 14 to
the Company's Notes to Consolidated Financial Statements for related
information).
(footnotes continued on following page)
16
(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 common share.
The Company's Earnings per Common Share figures for the years 1995
and 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 and 1995 do not include any effects from deferred dividends on
preferred stock.
(5) 1998 and 1997 activity included conversions of preferred stock into
Common Stock.
Note: Numbers may not add or calculate due to rounding.
SELECTED OPERATING AND FINANCIAL STATISTICS-US AIRWAYS (1)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenue passengers
(thousands)* 55,812 57,990 58,659 56,640 56,674
Total RPMs (millions) (2) 41,563 41,370 41,749 39,220 38,079
RPMs (millions)* 41,478 41,253 41,579 38,943 37,618
Total ASMs (millions) (3) 59,246 56,861 58,500 57,208 58,678
ASMs (millions)* 59,136 56,723 58,294 56,885 58,163
Passenger load factor* (4) 70.1% 72.7% 71.3% 68.5% 64.7%
Break-even load factor (5) 69.6% 65.7% 66.4% 67.9% 64.9%
Yield* (6) 16.51c 17.02c 17.10c 17.46c 16.66c
Passenger revenue per ASM* (7) 11.58c 12.38c 12.20c 11.95c 10.78c
Revenue per ASM (8) 12.96c 13.80c 13.50c 13.19c 11.80c
Cost per ASM (9) 12.90c 12.34c 12.33c 12.69c 11.40c
Average passenger
journey (miles)* 743 711 709 688 664
Average stage length (miles)* 616 597 591 578 560
Revenue aircraft
miles (millions)* 437 422 435 426 444
Cost of aviation
fuel per gallon (10) 58.63c 51.83c 67.43c 70.51c 56.83c
Cost of aviation fuel
per gallon, excluding
fuel taxes (11) 52.44c 45.95c 61.26c 64.09c 53.23c
Gallons of aviation fuel
consumed (millions) 1,143 1,109 1,129 1,107 1,137
Operating aircraft at year-end 383 376 376 390 394
Full-time equivalent
employees at year-end 41,636 38,210 38,533 40,160 39,891
* Scheduled service only (excludes charter service).
(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 and
unusual items (see Note 13 to US Airways' Notes to Consolidated
Financial Statements for additional information) 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. Revenues and expenses
associated with US Airways' capacity purchase arrangements with
certain affiliated airlines and the wet lease arrangement are also
excluded from financial statistical calculations.
(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.
17
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 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; 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 served by the Company's airline subsidiaries;
other operational matters discussed below 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
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 1999, the Company's operating income was $136 million, income
before taxes was $345 million, net income was $197 million and earnings per
common share (EPS) was $2.64 on a diluted basis. For 1998, the Company's
operating income was $1.0 billion, income before taxes was $902 million,
net income was $538 million and EPS was $5.60 on a diluted basis. The
comparative amounts for 1997 were $584 million, $672 million, $1.0 billion
and $9.87, respectively. The Company's financial results for each of these
years include the nonrecurring and unusual items detailed in "Results of
Operations" below.
The Company experienced relatively favorable domestic economic
conditions during 1999, 1998, and 1997. Industry pricing and capacity
conditions were generally favorable during 1998 and 1997, and the Company's
operating performance was particularly strong in 1998. More recently in
1999, increased capacity growth in the Company's primary operating regions
has resulted in competitive pressures on pricing (particularly from
competitors with lower cost structures) and fuel prices have increased
substantially. Also during 1999, a number of other factors negatively
influenced the Company's financial performance including inclement weather;
pilot training constraints; air traffic control delays and cancellations;
aircraft shortages resulting from delays in aircraft returning from
regularly scheduled maintenance and certain matters involving the Company's
information systems.
STRATEGIC OBJECTIVES
In 1999, the Company faced a number of challenges that impacted its
financial condition and results of operations. However, the Company also
made substantial progress towards achieving its long-term strategic
objectives. The Company's actions follow its five-point business plan:
- - -- Achieve a competitive cost structure,
- - -- Exploit the route network,
- - -- Rationalize the fleet,
- - -- Change the culture of the company,
18
- - -- Become the "Carrier of Choice."
In 1999, a number of the Company's employees, who are covered by
collective bargaining agreements with various unions, ratified new labor
agreements that embraced the pay "parity" provision linking compensation
for US Airways' employees to the weighted average cost for comparable
positions at the four largest domestic airlines, plus 1%. These groups are
as follows:
Effective
Union (1) Class or Craft Employees (2) Date
- - -------- -------------- ------------- -------
CWA Passenger service
employees 9,700 12/13/99
IAMAW Mechanics and
related employees 7,700 10/11/99
IAMAW Fleet service employees 6,700 04/05/99
TWU Flight crew training
instructors 160 05/03/99
TWU Dispatch employees 200 07/30/99
(1) CWA Communications Workers of America
IAMAW International Association of Machinists and
Aerospace Workers
TWU Transport Workers' Union
(2) Approximate actual number of employees covered by the
contract.
US Airways implemented the pay parity concept with its non-union
administrative representative group in 1999 as well. US Airways' pilots
(approximately 5,600 employees) contract became effective January 1, 1998
and has a five-year term. This contract, the Company's first parity-based
contract, also includes provisions that allowed the Company to launch its
low-cost, low-fare product, MetroJet, and to fly regional jets as part of
US Airways Express, discussed below.
US Airways is in mediation over an amendable labor agreement with the
AFA. The National Mediation Board (NMB), which has been assisting in these
negotiations, declared an impasse in the talks in February 2000 and
requested the parties to submit to binding arbitration. The AFA rejected
arbitration, which triggered a 30-day cooling off period ending at 12:01
a.m. on March 25, 2000. The AFA has publicly threatened that, if a contract
is not reached by March 25, 2000, it would conduct an organized campaign it
has named "CHAOS" (Create Havoc Around Our System). Also, the AFA has
announced that this includes striking flights, which would have the effect
of disrupting service and stranding customers throughout US Airways'
system. If US Airways were to try to operate a schedule under such
conditions, in which it would not know from hour to hour which flights
would be subject to strike, it expects that its customers would lose
confidence that they can rely on US Airways to provide them reliable
service. Since US Airways does not wish to subject its customers to this
risk, US Airways publicly announced that while it intends to continue to
negotiate with the AFA, it will be left with no choice but to cease
operations on March 25, 2000 if no agreement is reached with the AFA. US
Airways anticipates that the impact associated with the 30-day cooling off
period and a cessation of operations, if any, will have a material adverse
effect on its results of operations, particularly its short-term revenues.
While management is committed to and believes that a mutually
acceptable labor agreement with the AFA will ultimately be reached, US
Airways cannot predict the outcome of such negotiations at this time. As of
March 15, 2000, US Airways had received proceeds of $500 million from its
senior secured credit facilities (Facilities). While management cannot
predict, with any degree of certainty, the duration, if any, of a shutdown,
management believes that if a shutdown were to occur, US Airways has
available sources of financing, including existing cash, borrowings under
the Facilities, and potentially available financing sufficient to meet its
obligations during the period of time management believes such a shutdown
might reasonably last.
In March 2000, US Airways reached a tentative agreement with its
flight simulator engineers,
19
who are represented by the TWU (approximately 55 employees). In addition,
US Airways is in negotiations with a number of employee groups
(approximately 335 employees total) represented by the IAMAW or CWA.
During February 2000, US Airways received notice from the NMB that both the
IAMAW and CWA are seeking representation of the office clerical employees
(up to approximately 3000 employees). US Airways is unable to determine
the timing of when the mediation and negotiations will be concluded and
contracts established, or the final terms and conditions of such contracts.
See Part I, Item 1 "Business: Employees" for additional information related
to the Company's workforce.
During 1997 and 1998, the Company entered into agreements with a
subsidiary of Airbus Industrie G.I.E. (Airbus) to purchase up to 430 new
aircraft, including 400 single-aisle A320-family (A320-family) aircraft and
30 widebody A330 (A330) aircraft. The new Airbus aircraft play an important
part in the Company's long-term strategy of establishing US Airways as a
competitive global airline. These new single-aisle aircraft will replace
certain older aircraft operated by the Company's airline subsidiaries. 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.
US Airways and Shuttle, Inc. (Shuttle), a wholly-owned subsidiary of
the Company, continue to introduce new A320-family aircraft into their
operations. As of December 31, 1999, the Company had acquired 40 new A320-
family aircraft. The Company retired 29 aircraft in 1999, including 21
aircraft operated by US Airways (Douglas DC-9-30 (DC-9-30) and Boeing 737-
200 (B737-200) aircraft) and eight Boeing 727-200 (B727-200) aircraft
operated by Shuttle. US Airways' first widebody A330 aircraft is scheduled
to enter revenue service in the second quarter of 2000.
As of December 31, 1999, the Company had 114 additional A320-family
aircraft on firm order, including 50 scheduled for delivery in 2000 and the
remaining scheduled for delivery in the years 2001 to 2003. The Company's
aircraft acquisition agreement with Airbus also includes 196 aircraft
subject to reconfirmation prior to scheduled delivery and options for 50
additional aircraft. The Company also entered into an agreement with CFM
International, Inc. (CFMI) for jet engines to power the A320-family
aircraft. As part of its agreement with CFMI, GE Engine Services, Inc. will
maintain these engines under a long-term renewable agreement.
The agreement with Airbus for the A330 aircraft includes ten firm
widebody aircraft orders, four widebody aircraft subject to reconfirmation
prior to scheduled delivery and options for 16 additional widebody
aircraft. Of the ten firm-order A330 aircraft, seven are scheduled for
delivery in 2000. The Company can substitute other Airbus widebody aircraft
for the A330s, including the A330-200 or members of the A340-Series, for
orders other than the first ten aircraft. The Company reached an agreement
with Pratt & Whitney for jet engines to power US Airways' A330s and to
provide long-term maintenance for these engines. The A330s are expected to
operate primarily in transatlantic markets. See Note 6(a) to the Company's
Notes to Consolidated Financial Statements contained in Part II, Item 8A of
this report and "Liquidity and Capital Resources" below for additional
information related to the Company's commitments to purchase flight
equipment.
A majority of transatlantic passengers originate their travel from the
Eastern United States (U.S.), the Company's primary operating region. US
Airways began to bolster its international operations to take advantage of
its strategic position in 1996. In 1999, US Airways added certain key routes
to its transatlantic service.
In March 1999, US Airways announced that it obtained commercially
viable takeoff and landing slots at London's Gatwick Airport (Gatwick) that
permitted the initiation of the long-awaited service from Charlotte. US
Airways began operating the Charlotte-London service on
20
June 12, 1999. Also in June 1999, US Airways increased its service between
Philadelphia and Paris (Charles de Gaulle) to two daily flights, in
addition to the daily Pittsburgh-Paris flight. In October 1999, US Airways
announced that it would begin daily Charlotte-Paris service and Charlotte-
Frankfurt service beginning on April 13, 2000 and May 18, 2000,
respectively. In October 1999, US Airways also announced that it would
begin daily flights between Philadelphia-Manchester, England beginning on
May 25, 2000. US Airways temporarily suspended Philadelphia-Amsterdam
service effective June 12, 1999. US Airways also added additional
transatlantic service during 1998: Philadelphia-London (Gatwick Airport)
and Philadelphia-Amsterdam in April 1998, Pittsburgh-Paris in October 1998
and a second Philadelphia-London flight in early November 1998. For the
year 1999, transatlantic operations increased 21% over 1998 levels and
accounted for approximately 10% of US Airways' capacity, as measured in
ASMs.
US Airways has filed with the U.S. Department of Transportation (DOT)
for authority to serve Gatwick from Pittsburgh and London's Heathrow
Airport (Heathrow) from Charlotte, Philadelphia, Pittsburgh and Boston.
US Airways anticipates moving its operations at Gatwick to Heathrow when
possible (the availability of operating rights at Heathrow is currently
constrained by the bilateral aviation treaty between the U.S. and the
United Kingdom (U.K.)). The U.S. and U.K. governments have been discussing
modifications to the bilateral aviation treaty to allow increased
competition at Heathrow for many years. US Airways continues to explore
other international opportunities.
In December 1997, in support of its growing international presence, US
Airways launched an improved international business class product called
"Envoy Class." Envoy Class offers travelers sleeper-quality seats, personal
in-arm video entertainment systems, improved dining and other amenities,
all at business class fares. In the second quarter of 2000, US Airways will
begin to offer a premium first class cabin in addition to Envoy Class for
transatlantic passengers aboard its A330 aircraft.
Philadelphia International Airport is US Airways' primary
international gateway. US Airways began major expansion and improvements to
its facilities at Philadelphia in 1999 including a new international
terminal, which is currently expected to be operational by December 2001,
and a new facility for US Airways Express operations, which is currently
expected to be operational by January 2001.
On December 30, 1997, the Company purchased Shuttle, which operates
under the trade name "US Airways Shuttle." Shuttle provides high frequency
service between the following city pairs: New York (LaGuardia)-Boston
(Logan) and LaGuardia-Washington (Ronald Reagan Washington National Airport
(Reagan National)). As of December 31, 1999, Shuttle operated four B727-200
and six A320 aircraft.
In December 1997, US Airways entered into an agreement with Sabre Inc.
(Sabre) under which Sabre assumed responsibility, as of January 1, 1998, for
substantially all of US Airways' information technology requirements. US
Airways and Sabre achieved a significant milestone on December 5, 1998, when
US Airways' reservation, airport customer service and aircraft tracking
systems were converted from US Airways' previous systems. For a period after
the cutover, US Airways experienced delays in processing passengers while
all employees became proficient on the new systems. This transition is now
completed, and US Airways is also using a variety of Sabre systems including
Sabre's origin and destination yield management system.
US Airways Express carriers contribute greatly to the Company's
financial performance. The Company owns three of the eight regional airline
subsidiaries that operate as US Airways Express. Non-owned carriers operate
as US Airways Express under service agreements. Under US Airways' labor
agreement with its pilots, the Company may currently operate up to 35
21
regional jets as part of US Airways Express. As of December 31, 1999, US
Airways Express carriers operated 19 regional jets. An additional 15
regional jets will join the US Airways Express fleet in 2000. 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. In
January 1998 and July 1999, US Airways began purchasing the capacity in
certain markets of Mesa Airlines, Inc. (Mesa) and Chautauqua Airlines, Inc.
(Chautauqua), respectively. Mesa and Chautauqua operate regional jets in
certain markets as part of US Airways Express. The Company's wholly-owned
regional airlines added a total of 7 deHavilland Dash 8 turboprop aircraft
to their fleets in 1999 bringing their total fleet to 130 aircraft. During
1999, US Airways Express system capacity increased 7.4% and revenue
passengers miles (RPMs) increased 5.6% from 1998 levels.
The Company has taken many steps during the past few years to improve
customers' perception of the airline. To achieve this goal, US Airways
began providing training to all of its employee groups to underscore the
importance of excellent customer service. To address consumer and
Congressional concerns regarding customer service issues in the industry,
US Airways, along with several other airlines, announced "Customer
Commitment" plans. US Airways' plan includes the following 12-points:
- - -- Offer customers the lowest fare for which they are
eligible and assist them in finding those fares;
- - -- Give timely information on flight delays or
cancellations with announcements every 15-20 minutes;
- - -- Provide on-time baggage delivery;
- - -- Support an increase in the lost-baggage liability limit;
- - -- Permit customers to cancel a purchased ticket within 24
hours without penalty;
- - -- Make prompt refunds;
- - -- Clearly disclose policies for passengers with special
needs;
- - -- Improve handling of long on-board delays;
- - -- Supply basic information and policies about "oversold"
flights;
- - -- Furnish details about the frequent traveler program;
- - -- Respond promptly to customer complaints or requests for
information;
- - -- Seek consistency of service by US Airways Express
partners.
The Company also announced a permanently-staffed employee suggestion
program in 1999 that gives each employee an opportunity to contribute to US
Airways' efforts to become the "Carrier of Choice." This program enables
employees to initiate changes that improve their work environment and the
Company's culture. Additionally, the Company created numerous task forces,
drawn from all levels of the organization, to improve internal workflows
and identify solutions to operational problems.
CURRENT COMPETITIVE POSITION
The Company's foremost competitive threat continues to be the growth
of low-cost, low-fare competition in its primary operating region, the
Eastern U.S. As of January 2000, approximately 85% of US Airways'
departures and approximately 57% of US Airways' capacity, as measured in
available seat miles (ASMs), were deployed in this region. In 1999,
competition in the Company's core East Coast regions increased
substantially. Capacity growth in the Eastern U.S. was nearly double the
overall industry growth rate. Southwest Airlines Co. (Southwest) has
continued to expand its operations in the region. Delta Air Lines, Inc.'s
(Delta) low-fare product, "Delta Express," and other such airlines that
operate in this region have grown substantially in recent years. The rate
of industry capacity growth for the Eastern U.S. is expected to decline in
2000.
US Airways' unit operating cost, or operating cost per available seat
mile (ASM), is the
22
highest of all the major domestic air carriers. US Airways' unit operating
cost was 12.90 cents for 1999. By contrast, Delta reported unit operating
costs of 8.89 cents for calendar year 1999. US Airways also competes with
other low-cost, low fare competitors. Southwest, for example, reported unit
operating costs of 7.48 cents for the same period.
MetroJet, US Airways' competitive response to low-cost, low-fare
competition, has grown rapidly since its introduction in June 1998 from
five aircraft. As of December 1999, MetroJet operations included 42
aircraft offering 222 daily departures with service to 22 cities. In 1999,
MetroJet began offering advanced seat assignments. MetroJet accounted for
approximately 11% of US Airways' 1999 capacity, as measured in ASMs. The
Company anticipates holding MetroJet's capacity at the current level for
the next few quarters.
US Airways is taking other steps to address its high unit cost
structure and enhance its competitive position. As mentioned in "Strategic
Objectives," above, the Company implemented the parity concept in labor
agreements with a number of employee groups linking compensation of certain
US Airways' employees to the weighted average cost for comparable positions
at the four largest domestic airlines. The Company expects that the
introduction of the Airbus-family of aircraft, in conjunction with retiring
its DC-9-30 and MD-80 fleets and certain B737-200 aircraft, will ultimately
reduce US Airways' unit operating cost. The Airbus aircraft are more fuel-
efficient and less costly to maintain than the aircraft that they will
replace. Because the transition to the new equipment types was in process
during 1999, US Airways did not enjoy the aforementioned cost reductions
during this period. In fact, its costs increased primarily due to increased
pilot, mechanic and flight attendant training costs in addition to other
integration cost. As the transition to Airbus-family of aircraft
progresses, the Company will likely experience an increase in Aircraft
rent, Depreciation and amortization and Interest expenses to partially
offset the aforementioned benefits. See "Results of Operations" below.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition in Financial Statements," which provides guidance
concerning the timing of revenue recognition and related matters. The
Company will implement SAB 101 effective January 1, 2000. As a result, the
Company will modify its revenue recognition policy for the sale of mileage
credits, or Dividend Miles, sold to partners.
The portion of proceeds from sales of Dividend Miles that represents
the Company's obligation to provide future travel to Dividend Miles members
will be deferred and recognized as a component of Passenger transportation
revenues when the service is rendered. The remaining portion of the sales
proceeds will continue to be recognized immediately as a component of Other
operating revenues.
The Company will recognize a cumulative effect of adopting SAB 101 as
a change in accounting principle as of January 1, 2000. The cumulative
effect of accounting change, net of applicable income taxes, is estimated
to be $103 million. The charge represents the difference between the
Retained earnings (deficit) balance as of December 31, 1999, presented in
the accompanying Consolidated Balance Sheets, and what that balance would
have been had the Company applied SAB 101 for all previous periods.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). This statement
establishes accounting and reporting standards for derivative instruments
and requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at
fair value. The statement, as amended, is effective for fiscal years
beginning after June 15, 2000. The Company
23
will adopt the statement effective January 1, 2001. The Company does not
believe that the implementation of SFAS 133 will have a material adverse
effect on its financial condition or results of operations.
EFFECTS OF THE YEAR 2000
The Company operates computer software applications, systems and
products that support important business functions, including reservations,
flight operations and financial systems, that would not have properly
processed dates on or after January 1, 2000 (commonly referred to as the
"Year 2000" or "Y2K" problem) unless steps to remediate the error had been
taken. In order to address this situation, the Company implemented a plan
that addressed the Company's information technology and non-information
technology arenas. The Company had two teams of full-time staff in place.
One team coordinated Y2K compliance efforts with Sabre for those
information technology systems managed by Sabre. A second team, headed by
the Company's Senior Vice President-Corporate Development, coordinated Y2K
compliance efforts for non-information technology systems and those
information technology systems not managed by Sabre.
As of March 15, 2000, the Company is not aware of any material Y2K-
related problems experienced by its information technology and non-
information technology systems. In addition, the Company has not been
informed by any other companies, governmental agencies or other entities on
which it relies that any such parties experienced any material Y2K-related
problems. The Company cannot guarantee, however, that it or the other
companies, governmental agencies or other entities on which it relies will
not experience any Y2K-related problems in the future. If such problems
occur, the Company cannot give assurance that such problems will not result
in the Company experiencing a material adverse effect on its business,
financial condition or results of operations.
As of December 31, 1999, aggregate expenses incurred by the Company to
become Y2K compliant, apart from expenses related to the Sabre
relationship, amounted to approximately $10 million, including $8 million
in 1999 and $2 million in 1998. These amounts are also exclusive of the
cost of any equipment that needed to be replaced. With respect to the cost
of Sabre's Y2K compliance program, the Company cannot completely quantify
the costs for Y2K compliance of its information technology systems because
such costs have been incorporated into the costs of the broader conversion
plan to Sabre systems. However, the Company estimates that it incurred
aggregate expenses of $32 million, including $11 million in 1999 and $21
million in 1998, for Sabre services that are related solely to Y2K
compliance efforts on the systems, unrelated to the broader conversion
plan. The Company anticipates paying Sabre less than $0.5 million during
2000 related to Y2K compliance services. Overall, the Company believes that
the cost of becoming Y2K compliant did not and will not have a material
adverse effect on the business, financial condition or results of
operations of the Company.
OTHER INFORMATION
US Airways lowered the base commissions it pays travel agencies
effective October 1999. The Company currently pays a 5% base commission
rate with a $50 maximum payment for roundtrip travel and a $25 maximum for
one-way travel for tickets purchased within the domestic U.S., including
Puerto Rico and the U.S. Virgin Islands. Similar reductions apply to
tickets purchased in the U.S. and Canada for travel to international
locations. US Airways previously paid an 8% base commission rate with
identical maximum payments. Prior to the introduction of the revised rate
structures, noted above, the standard commission rate was generally 10% of
ticket price with identical maximum payments. US Airways also pays travel
agencies additional "incentive" commissions under certain circumstances,
such as reaching certain volume sales targets. On October 25, 1999, the DOT
initiated a proceeding involving the Company and other major airlines
seeking a reversal of the October 1999 reduction in travel agency
commissions.
24
On May 27, 1999, US Airways Investment Management Company, Inc.
(USIM), a wholly-owned subsidiary of US Airways, agreed to sell its
ownership interest in Galileo International, Inc. (Galileo). Galileo owns,
operates and markets the Galileo computerized reservation system (CRS),
which is the world's second largest CRS system, as measured by revenues
generated by travel agent subscribers. The transaction, which closed on
June 3, 1999, resulted in cash proceeds of approximately $307 million and a
pretax gain of approximately $274 million. USIM's interest, 7,000,400
shares of Galileo common stock, was sold as part of a secondary common
stock offering completed by Galileo.
On July 30, 1997, 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). At that time, USIM 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 USIM received shares in
Galileo in the same proportion as its partnership interest in GIP. As part
of the IPO, USIM sold some of its Galileo shares and its interest in
Galileo was reduced from 11% to approximately 6.7%, which USIM ultimately
sold in 1999, as described above. In connection with the 1997 sell down of
Galileo and the sale of ATS, USIM received cash proceeds of $224 million
and recognized a pretax gain of $180 million.
In September 1997, The Boeing Company (Boeing) filed suit against US
Airways in state court in King County, Washington seeking unspecified
damages, estimated at approximately $220 million, for alleged breach of two
aircraft purchase agreements concerning, respectively, eight Boeing 757-200
aircraft and 40 Boeing 737-Series aircraft. On October 31, 1997, US Airways
filed an answer and counterclaims to Boeing's complaint denying liability
and seeking recovery from Boeing of approximately $35 million in equipment
purchase deposits. On April 23, 1998 the parties reached a settlement
terminating all obligations with respect to both purchase agreements.
Pursuant to the settlement, the litigation has been dismissed with
prejudice as to both Boeing's claims and US Airways' counterclaims.
In 1997, US Airways announced certain efficiency measures including
retiring 22 aircraft from its operating fleet, closing a flight crew base,
two reservation centers and three maintenance facilities. The Company
recognized certain nonrecurring items as a result of these actions
(nonrecurring and unusual items are discussed in "Results of Operations"
below). Later in 1997, US Airways decided to retire additional DC-9-30
aircraft resulting in total impairment charges of $77 million. In December
1999, US Airways decided to retire certain DC-9-30 and B737-200 aircraft
resulting in an impairment charge of $64 million. These impairment charges
resulted from decisions to retire aircraft earlier than previously planned.
The Company and its subsidiaries are subject to a wide range of
government regulation. Besides taxes on income, property and aviation fuel,
among other taxes, 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 federal excise tax on domestic air transportation
(commonly referred to as the "ticket tax"), and pass through the collected
amounts to the appropriate governmental agencies. Although taxes such as
the ticket tax are not operating expenses to the Company, they represent an
additional cost to the Company's customers. In addition, especially in
regards to international operations and certain high-traffic domestic
airports, 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
operations and financial condition. Besides the effect of certain
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 additional costs to its
customers. Additional information related to
25
government regulation can be found in Part I, Item 1 of this report under
"Business: Industry Regulation and Airport Access."
RESULTS OF OPERATIONS
The following section pertains to activity included in the Company's
Consolidated Statements of Operations and to changes in selected US Airways
operating and financial statistics (which are contained in Part II, Item 8A
and Part II, Item 6 of this report, respectively). Except where noted,
operating statistics referred to in this section are for scheduled service
only.
1999 COMPARED WITH 1998
Operating Revenues-Passenger transportation revenues decreased $141 million
or 1.8%, including a $173 million decrease attributable to US Airways,
partially offset by an increase of $27 million and $5 million for the
Company's three wholly-owned regional airlines and Shuttle, respectively.
With regards to US Airways' decrease, revenue passenger miles (RPMs) were
flat year-over-year and yield was down 3.0% reflecting pricing pressures.
The increase in Passenger transportation revenues for the Company's three
wholly-owned regional airlines is due primarily to a 5.7% increase in RPMs
primarily resulting from a 5.5% increase in capacity (as measured by ASMs).
Cargo and freight revenues decreased 11.3% due primarily to lower mail
volume and lower freight yields. Other operating revenues increased 9.7%
due principally to revenues generated from sales of capacity (ASMs) on Mesa
and Chautauqua (Chautauqua agreement began in July 1999) 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-Excluding nonrecurring and unusual items, operating
expenses increased 9.6% while ASMs increased 4.3%. The Company recognized
certain nonrecurring and unusual items in both 1999 and 1998. The table
below shows where these items were recorded in the Company's Consolidated
Statements of Operations (dollars in millions; brackets indicate an
expense).
1999 1998
---- ----
Operating Expenses
Aircraft rent (1) $ 14 $3
Aircraft maintenance (1) 1 -
Depreciation and amortization (2) (60) -
--- -
(45) 3
Other Income (Expense)
Gains on sales of investments (3) 274 -
Other, net (4) 17 -
--- -
291 -
--- -
Net amount reflected in Income
Before Income Taxes $246 $3
=== =
(1) Aircraft rent credits and lease return provisions
recognized in conjunction with US Airways' purchase off
lease and sale or lease terminations of its
nonoperating British Aerospace BAe-146-200 (BAe-146)
aircraft. During 1994, US Airways accrued a substantial
portion of the future rent obligations related to these
aircraft (US Airways removed these aircraft from its
operating fleet in 1991).
(2) Charges result from an analysis performed in accordance
with the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121). In general,
SFAS 121 requires an impairment charge to be recognized
when the net undiscounted future cash flows from an
asset's use (including any anticipated proceeds from
disposition) are less than the asset's current book
value and the asset's current book value exceeds its
fair value. The impairment charge reflects writing-down
the asset to fair value. The impairment charge was $64
million, related to the planned retirement of the
Company's remaining DC-9-30 and 17 B737-200 aircraft.
In addition, US Airways also recorded a $4 million
expense credit related to the sale of a previously
abandoned maintenance facility.
(3) Resulted from USIM's sale of its Galileo stock. See
"Other Information" above for details.
(4) US Airways recorded gains related to proceeds received
in connection with its holdings in Equant N.V.
26
Personnel costs increased 9.0% which reflects several factors. First,
full-time equivalent employees increased 9.0% as a result of growth demands
and training requirements. Overtime hours in 1999 were much higher as a
result of inclement weather experienced in the first quarter (winter
storms) and the third quarter (hurricanes) as well as the concerted effort
undertaken during the fourth quarter to reduce the backlog of aircraft in
need of routine maintenance service. In addition, certain employee groups
received wage increases and lump sum payments during 1999 and the Company's
pension expense was higher as a result of using a lower discount rate.
Aviation fuel expenses increased 16.7% due primarily to a 13.1% increase in
the average price of fuel per gallon. Commissions expenses decreased due to
fewer revenue passengers and the revised commission rate structure (see
"Other Information" above for details on revised commission rate
structure). Aircraft rent expenses increased 8.4% excluding nonrecurring
and unusual items (see above) due to rent expense associated with the
Airbus deliveries in 1999 and 1998. Aircraft maintenance increased 11.2%
due primarily to MetroJet integration costs and a $10 million favorable
insurance claim recognized in 1998. Depreciation and amortization expenses
increased 7.2%, if nonrecurring and unusual items are excluded, due
primarily to amortization of costs capitalized as part of the conversion to
Sabre information systems. Other operating expenses increased 18.0% due
primarily to expenses associated with US Airways' information services
management contract with Sabre (see "Effects of the Year 2000" above for
related information), expenses associated with purchases of capacity from
Mesa and Chautauqua, passenger amenity costs, and expenses associated with
the Dividend Miles frequent traveler program.
Other Income (Expense)-Interest income decreased 40.5% due to decreased
cash equivalents and short-term investments. The decrease can be linked to
the Company's common stock purchase activity and increased purchase
deposits for new flight equipment (see "Liquidity and Capital Resources"
below). Interest expense decreased as the result of lower average
outstanding long-term debt during 1999. Besides normal principal
repayments, US Airways retired early certain debt in 1999 and 1998 with
principal amounts totaling $47 million and $434 million, respectively. The
increase in Interest capitalized reflects US Airways' 1998 write-off of
capitalized interest on equipment purchase deposits with Boeing in
conjunction with the settlement of litigation between US Airways and Boeing
(as discussed above under "Other Information") combined with higher
purchase deposit balances relating to future Airbus aircraft deliveries.
Gains on sales of investments relates to USIM's sale of its interest in
Galileo (see "Other Information" above for details of this transaction).
Other, net for 1999 includes $17 million related to gains recognized in
connection with US Airways' sales of a portion of its holdings in Equant
N.V. In July 1998, US Airways incurred prepayment penalties of $15 million
associated with the early extinguishment of its $300 million principal
amount 10% Senior Notes.
Provision (Credit) for Income Taxes-The Company's effective income tax rate
for financial reporting purposes increased to approximately 43% for 1999
from approximately 40% for 1998.
Preferred Dividend Requirement-With the retirement of the Company's
Series H Preferred Stock in March 1998, the Company no longer has preferred
stock outstanding.
Earnings per Common Share-EPS calculations have been affected by: the
conversion of the Series H Preferred stock into common stock (9.2 million
shares) in March 1998; and the purchase of 18.1 million and 17.9 million
shares of common stock (treasury stock) in 1999 and 1998, respectively.
Selected US Airways Operating and Financial Statistics-The Company's
financial results for 1999 were adversely affected by inclement weather
(snow/ice storms, hurricanes) in the eastern United States, the recent
conversion of certain of the Company's information systems (including
reservations, airport customer services and flight tracking systems) to
those provided by Sabre,
27
competitive pressures and operational difficulties. The effects on
US Airways' operations of the inclement weather, compounded by the systems
conversions, were particularly acute during the first quarter of 1999. The
new systems resulted in changes to many basic work processes-temporarily
affecting the efficiency at which certain processes were performed
(including increased employee overtime). In the first quarter of 1999,
US Airways was forced to cancel approximately 5.6% of its flights. In
contrast, US Airways' flight cancellation rate averaged 2.5% in the first
quarters of 1998 and 1997. The information systems difficulties lingered
into the second quarter of 1999. In addition, US Airways did not have
enough flight crew training instructors to meet the increased demand for
training. This negatively affected the Company's financial results for the
second and third quarters of 1999. The increased training requirements stem
from certain structural transformations, including the integration of
Airbus aircraft into US Airways' operating fleet, the growth of MetroJet
(i.e., the need to reconfigure aircraft) and the retirement of certain
older aircraft. US Airways also experienced delays in returning aircraft to
service from regularly scheduled maintenance. Furthermore, air traffic
control (ATC) cancellations were significantly worse in 1999 than 1998. For
example, during the third quarter of 1999 such cancellations averaged 32
per day versus 12 for the prior year period. Due to the maintenance-related
delays, ATC delays, and flight crew instructor shortage, US Airways'
departure cancellation rate averaged 6.5% in the third quarter of 1999
compared to an average rate of 2.5% in the third quarter of 1998 and 1.9%
in the third quarter of 1997. By fourth quarter 1999, conditions had
partially improved resulting in a 2.7% cancellation rate compared to 2.5%
in the prior year period. The Company believes that the backlog of aircraft
waiting for regularly scheduled maintenance will be resolved by July 1,
2000. To address the flight crew training instructor issue, the Company
increased the number of instructors during 1999 by 42%.
The unusually large number of cancellations of planned flights
increased US Airways' unit cost (cost per ASM) during 1999 since it was
geared to operate a larger schedule. As US Airways cancelled flights, its
costs did not decrease proportionally-only incremental expenses such as
aviation fuel, landing fees and commissions were avoided. At the same time,
US Airways lost a portion of the revenue from the cancelled flights.
Although ASMs did increase, the effects of this were more than offset by
the expense basis used for the calculation (nonrecurring and unusual items,
which are discussed above, are excluded from unit operating cost
calculations for comparability purposes). US Airways added 28 A320-family
aircraft to its operating fleet in 1999 and removed 21 older aircraft from
its operating fleet.
1998 COMPARED WITH 1997
The Company purchased Shuttle on December 30, 1997. Because the
Company's acquisition of Shuttle was accounted for using the purchase
method, only Shuttle's financial results post-acquisition are included in
the Company's results of operations.
Operating Revenues-Passenger transportation revenues increased $114 million
or 1.5%, including an increase of $172 million attributable to Shuttle, an
increase of $34 million attributable to the Company's three wholly-owned
regional airlines, partially offset by a $91 million decrease in
US Airways' passenger transportation revenues. The increase in Passenger
transportation revenues for the Company's three wholly-owned regional
airlines is due primarily to an increase in RPMs. The decrease for US
Airways is due primarily to a decrease in both RPMs and yield. See
"Selected US Airways Operating and Financial Statistics" below for
additional information related to US Airways' passenger transportation
revenues. Cargo and freight revenues decreased due primarily to lower mail
volume in 1998. In addition, activity during the third quarter of 1997 was
favorably affected by an employee strike at United Parcel Service, Inc.
Other operating revenues increased 11.8% due principally to revenues
generated from sales of capacity (ASMs) on Mesa (the agreement began in
January 1998), an increase in frequent traveler mileage credits sold to
partners in US Airways' Dividend Miles frequent traveler program and an
increase in cancellation fees revenues. The increased revenues resulting
28
from sales of capacity on Mesa 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 recognized certain activity including
nonrecurring and unusual items in both 1998 and 1997. The table below shows
where these items were recorded in the Company's Consolidated Statements of
Operations (dollars in millions; brackets indicate an expense, except for
the tax benefits recognized in 1997).
1998 1997
---- ----
Operating Expenses
Personnel costs (1) $- $(122)
Aircraft rent (2) 3 1
Other rent and landing fees (3) - (5)
Depreciation and amortization (4) - (89)
- ---
3 (215)
Other Income (Expense)
Gains on sales of investments (5) - 180
- ---
- 180
- ---
Net amount reflected in Income
Before Income Taxes $3 $ (35)
= ===
Provision (Credit) for Income Taxes (6) $- $(467)
= ===
(1) Includes a $115 million charge recognized in the fourth
quarter of 1997 in accordance SFAS 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 325 US Airways pilots. This program
is expected to result in significant net long-term
savings in both wages and benefits expenses. The
remaining $7 million represents severance for employees
displaced as a result of certain efficiency measures
the Company announced in the second quarter of 1997
(see "Other Information" above).
(2) Aircraft rent credits recognized in conjunction with
US Airways' disposal (1998) or subleasing (1997) of
nonoperating BAe-146 aircraft. During 1994, US Airways
accrued a substantial portion of the future rent
obligations related to these aircraft (US Airways
removed these aircraft from its operating fleet in
1991).
(3) Accrual of future lease obligations at certain
facilities abandoned as a result of the efficiency
measures the Company announced in May 1997 (see also
"Other Information" above).
(4) Charges result from an analysis performed in accordance
with the provisions of SFAS 121. The 1997 charges
include an $18 million impairment charge related to
US Airways' retirement of 17 DC-9-30 aircraft as a
result of the efficiency measures the Company announced
in May 1997 and a $59 million impairment charge
resulting from US Airways' late-September 1997 decision
to retire certain DC-9-30 aircraft over the next
several years. The remaining components of this charge
relate to facilities abandoned as a result of the
efficiency measures the Company announced in May 1997
(see also "Other Information" above).
(5) Resulted from USIM's sale of its investment in Apollo
Travel Services Partnership and a sell-down of its
interest in Galileo, both of which occurred in July
1997.
(6) As discussed under Provision (Credit) for Income Taxes
below, US Airways recognized certain tax benefits
totaling $467 million in the fourth quarter of 1997.
Excluding nonrecurring and unusual items (see above), Personnel costs
increased marginally as decreases in stock-based compensation, medical and
dental expenses were more than offset by the effects of including Shuttle's
personnel costs in the Company's 1998 financial results and higher
training-related activity in 1998. The increased training-related activity
stems from US Airways' integration of Airbus aircraft into its operating
fleet (training for pilots, flight attendants and mechanics) and the
implementation of several new information systems managed by Sabre
(training for customer service and reservations employees). Personnel costs
decreases resulting from employees who took positions with Sabre at the
beginning of 1998 were mitigated by increases in employees in other
employee classifications, most notably pilots (recalls from furlough). See
also Other operating expenses below. Aviation fuel expenses decreased
significantly due primarily to lower average fuel prices in 1998.
Commissions expenses also decreased significantly reflecting the revised
commission rate structure the Company established in September 1997.
Aircraft rent expenses in 1997 were adversely affected by adjustments
totaling $15 million recorded during 1997 related to US Airways' F28-4000
aircraft. In 1998, US Airways bought four previously-leased operating
aircraft upon lease expiration. US Airways
29
added six leased Airbus A319 aircraft to its operating fleet in December
1998 (see also "Strategic Objectives" above and "Liquidity and Capital
Resources" below). Aircraft maintenance decreased $27 million or 5.9% if
Shuttle's maintenance expenses are excluded. US Airways' maintenance
expenses for 1997 were adversely affected by the timing of when certain
expenses were recorded associated with "power-by-the-hour" maintenance
service agreements. In addition, expenses stemming from unserviceable
(scrap) maintenance materials, primarily related to JT8D jet engines, were
$24 million higher in 1997. Depreciation and amortization expenses were
relatively unchanged if nonrecurring and unusual items are excluded. Other
operating expenses increased $208 million or 16.5% due primarily to
expenses associated with US Airways' information services management
contract with Sabre (see "Effects of the Year 2000" above for related
information), amounts recorded during the second quarter of 1998 related to
US Airways' settlement of litigation with Boeing (as discussed above under
"Other Information") and expenses associated with purchases of capacity
from Mesa. As a result of US Airways' information services agreement with
Sabre, certain expenses categorized as Personnel costs and Depreciation and
amortization in 1997 have been supplanted by expenses categorized as Other
operating expenses (e.g., outside services).
Other Income (Expense)-Interest income was relatively unchanged year-over-
year, but decreased 27.3% for the fourth quarter of 1998 compared to the
fourth quarter of 1997 due to a decrease in cash equivalents and short-term
investments. The decrease can be linked to the Company's common stock
purchase activity and increased purchase deposits for new flight equipment
(see "Liquidity and Capital Resources" below). Interest expense decreased
as the result of lower average outstanding long-term debt. In 1998, besides
normal principal repayments, US Airways retired early certain debt with
principal amounts totaling $434 million. The decrease in Interest
capitalized reflects US Airways' write-off of capitalized interest on
equipment purchase deposits with Boeing in conjunction with the settlement
of litigation between US Airways and Boeing (as discussed above under
"Other Information") partially offset by capitalized interest on equipment
purchase deposits for Airbus aircraft. The decrease in Equity in earnings
of affiliates results from USIM discontinuing the equity method of
accounting for certain investments in July 1997. In 1998, US Airways
recognized gains in the Other, net category totaling $17 million related to
asset dispositions. The comparable amount for 1997 was $18 million. In
addition, US Airways incurred prepayment penalties of $15 million
associated with the early extinguishment of its $300 million principal
amount 10% Senior Notes in July 1998.
Provision (Credit) for Income Taxes-The Company's effective income tax rate
for financial reporting purposes increased to approximately 40% for 1998
from approximately 17% for 1997 excluding income tax benefits of $467
million that the Company recognized during the fourth quarter of 1997.
These income tax benefits, which are reflected in the line item, "Provision
(Credit) for Income Taxes" on the Company's Consolidated Statements of
Operations (which are included in Part II, Item 8A of this report), stem
primarily from net operating losses and other tax credits generated in
prior years. The Company recognized these income tax benefits for financial
reporting purposes based on its expectations of future earnings levels and
the fact that certain of these income tax benefits do not expire or would
be realized in future periods irrespective of future earnings levels.
Preferred Dividend Requirement-With the retirement of the Company's
Series H Preferred Stock in March 1998, the Company no longer has preferred
stock outstanding. In addition to dividends on the Series H Preferred
Stock, the preferred dividend requirement of $64 million for 1997 reflects
dividend requirements for the Company's Series F and Series T Preferred
Stock, both of which were retired in May 1997, and its Series B Preferred
Stock, which was retired in September 1997.
Earnings per Common Share-EPS calculations have been affected by: the
conversion of the Series F Preferred Stock into common stock (14.5 million
shares) in May 1997; the purchase of
30
the remaining shares of Series F Preferred stock (1.0 million equivalent
shares of common stock) in May 1997; the purchase of the Series T Preferred
Stock (3.8 million equivalent shares of common stock) in May 1997; the
conversion/redemption of the Series B Preferred Stock (in total, 10.6
million equivalent shares of common stock); the conversion of the Series H
Preferred stock into common stock (9.2 million shares) in March 1998; and
the purchase of 17.9 million shares of common stock (treasury stock) in
1998.
Selected US Airways Operating and Financial Statistics-A 0.8% decrease in
RPMs and a 0.5% decrease in yield resulted in a 1.3% decrease in US
Airways' Passenger transportation revenues year-over-year. For the fourth
quarter of 1998 compared to the fourth quarter of 1997, RPMs increased
2.1%, but yield fell 4.6%. The yield decrease quarter-over-quarter is
attributable to an increase in US Airways' capacity (ASMs), an increase in
average stage length and increased competitive pressures-both in terms of
capacity and fares in certain markets (particularly in Florida and European
markets). Although MetroJet's growth positively influences US Airways' unit
operating cost (cost per ASM) its growth puts downward pressure on yield.
US Airways' unit operating cost was relatively unchanged as the
effects of a 2.8% decrease in capacity were offset by a decrease in the
expense basis used for the calculation (nonrecurring and unusual items,
which are discussed above, are excluded from unit operating cost
calculations for comparability purposes). US Airways retired six DC-9-30
aircraft from its operating fleet in 1998 and added six A319 aircraft to
its operating fleet in the fourth quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company's Cash, Cash equivalents and
Short-term investments totaled $870 million. The Company's ratio of current
assets to current liabilities (current ratio) was 0.8 and 1.0 as of
December 31, 1999 and 1998, respectively (the Company's Consolidated
Balance Sheets are contained in Part II, Item 8A of this report). The
decrease is principally attributable to the Company's common stock purchase
activity and purchase deposits for flight equipment, both of which are
discussed below. The Company's debt to equity ratio as of December 31, 1999
increased due primarily to the Company's stock purchase activity during
1999 (see below).
For 1999, the Company's operating activities provided net cash of $603
million (as presented in the Company's Consolidated Statements of Cash
Flows, which are contained in Part II, Item 8A of this report). For 1999,
operating activities were adversely impacted by a $341 million decrease in
net income. This was offset by a $176 million decrease in taxes paid. For
1998 and 1997, the Company's operating activities provided net cash of $1.3
billion and $870 million, respectively. Operating cash flows during 1997
were adversely affected by profit sharing payments totaling $129 million
and the effects of remitting to the federal government ticket taxes
totaling $180 million collected from passengers in 1996. The profit sharing
payments the Company made to employees during the first quarter of 1997
ended the Company's obligation for profit sharing under its 1992 Salary
Reduction Plan (the liability had been accrued in prior years). With the
reinstatement of the ticket tax during March 1997, the Company resumed
ticket tax remittances to the federal government (the effects of ticket
taxes are discussed above in "Other Information"). The ticket tax was not
in effect during the periods January 1, 1996-August 26, 1996 and January 1,
1997-March 6, 1997. Approximately 0.2 million and 3.9 million stock
appreciation rights related to the Company's 1992 Stock Option Plan were
exercised during 1998 and 1997, respectively, resulting in cash outflows of
$8 million and $55 million during 1998 and 1997, respectively. This plan
ceased as of August 1, 1998.
US Airways contributed $76 million, $53 million and $113 million to
its defined benefit plans in 1999, 1998 and 1997, respectively. In
addition, US Airways made payments of $101 million and $100 million to
Voluntary Employee Beneficiary Association (VEBA) trusts in December of
31
1999 and 1998, respectively. The contributions to the VEBA trusts are
reflected as an operating use of cash in the Company's Consolidated
Statements of Cash Flows. US Airways estimates that it will need to
contribute $19 million to its defined benefit plans in 2000 in order to
meet statutory minimum pension funding requirements.
During December 1999, US Airways exercised the first tranche of its
Sabre options. US Airways received cash proceeds of $81 million in January
2000. The proceeds are reflected as a component of Receivables, net on the
Company's and US Airways' Consolidated Balance Sheets.
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.
For 1999, investing activities included cash outflows of $1.4 billion
related to capital expenditures and cash inflows of $50 million related to
asset dispositions. Capital expenditures included $1.2 billion for new
aircraft (including purchase deposits), $41 million to purchase thirteen
aircraft upon lease expiration, with the balance related to rotables,
ground equipment (including training equipment) and miscellaneous assets.
Asset dispositions includes the proceeds from US Airways' sale of 16
aircraft. During June 1999, US Airways received $307 million related to the
disposition of its Galileo stock (see "Other Information" above). The net
cash used for investing activities during 1999 was $1.1 billion.
For 1998, investing activities included cash outflows of $642 million
related to capital expenditures and cash inflows of $112 million related to
asset dispositions. Capital expenditures included $274 million for new
aircraft (including purchase deposits), $52 million to purchase four
aircraft upon lease expiration, with the balance related to obtaining
computer equipment and software (primarily related to US Airways'
information services management agreement with Sabre), other ground
equipment and miscellaneous assets. Asset dispositions include proceeds of
$47 million from US Airways' sale of substantially all of its information
systems and related assets to Sabre and proceeds of $38 million from
US Airways' sale of 17 nonoperating aircraft. Restricted cash and
investments increased $41 million due primarily to US Airways' return to
using cash to collateralize letters of credit for workers' compensation
policies (US Airways previously collateralized such policies with certain
owned flight equipment). The net cash used for investing activities during
1998 was $292 million.
Investing activities during 1997 included cash outflows of $280
million for capital expenditures and cash inflows of $85 million related to
asset dispositions. Progress payments for new aircraft totaled $77 million
for 1997. US Airways' cash outflows related to asset acquisitions included
$126 million for aircraft and aircraft-related assets. US Airways purchased
nine aircraft upon lease expiration during 1997, including four BAe-146
aircraft that 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 million that resulted from USIM's sale of
its interest in ATS and proceeds of $62 million related to USIM's sell-down
of its interest in Galileo. On December 30, 1997, the Company purchased
Shuttle for $190 million. The net cash used for investing activities during
1997 was $372 million.
Net cash provided by financing activities in 1999 was $145 million.
This included proceeds of $758 million from the sale-leaseback of 23 A320-
family aircraft. Included in the proceeds from issuance of long-term debt
is $308 million of proceeds received upon the mortgage of ten A320-family
aircraft and nine Dash-8 aircraft. Besides scheduled principal repayments
of $70 million,
32
US Airways retired early certain long-term debt with a face amount of $47
million in 1999. In 1999, the Company purchased 18.1 million shares of
Common Stock in open market transactions. The related cash outflows totaled
$821 million. Since January of 1998, the Company has announced six stock
purchase programs. Each program is authorized by the Company's Board of
Directors and permits the Company to purchase either a certain number of
shares or a cumulative dollar amount. The overall purpose of these programs
is to increase shareholder value and to offset the potential share dilution
of stock options given to certain employees. As of December 31, 1999, five
of the programs were substantially completed. To date, the Company had not
purchased any shares under the sixth program, which authorizes the purchase
of up to $500 million of its common stock.
Net cash used for financing activities in 1998 was $1.4 billion. This
included proceeds of $189 million from the sale-leaseback of six A320-
family aircraft. Besides scheduled principal repayments of $152 million,
US Airways retired early certain long-term debt with a face amount of $434
million in 1998. On July 1, 1998, US Airways retired its 10% Senior Notes,
which had a principal amount of $300 million. The transaction resulted in a
cash outflow of $315 million, including prepayment penalties of $15
million. Annual interest payments associated with the debt obligations
retired early totaled $38 million. US Airways also paid $75 million to
retire the first series of its 1993 Pass-Through Certificates in August
1998. The retirement was according to the terms of the obligation (no
prepayment penalties). In 1998, the Company purchased 17.9 million shares
of Common Stock in open market transactions. The related cash outflows
totaled $1.1 billion. On March 12, 1998, Berkshire Hathaway, Inc. exercised
its right to convert the Company's Series H Preferred Stock into 9.2 million
shares of the Company's Common Stock. The Company subsequently retired its
Series H Preferred Stock. The Company had previously retired its Series F
Preferred Stock (May 1997), its Series T Preferred Stock (May 1997), and its
Series B Preferred Stock (September 1997). With the retirement of these
preferred stock issuances, the Company had retired all of its preferred
stock and eliminated annual dividends of approximately $79 million. See
Notes 7 and 8(b) to the Company's Notes to Consolidated Financial Statements
for additional information.
Net cash used for financing activities in 1997 was $355 million. The
Company paid dividends totaling $181 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 $127 million. British Airways 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 resulting from stock options exercises
totaled $39 million for 1997.
Although the Company has significantly reduced its higher cost
outstanding debt and preferred stock obligations over the last several
years, the Company continues to be highly leveraged. The Company and its
subsidiaries require substantial working capital in order to meet scheduled
debt and lease payments and to finance day-to-day operations. The Company's
agreements to acquire new Airbus aircraft, accompanying jet engines and
ancillary assets have increased the Company's financing needs and will
significantly add to the Company's financial obligations. Eastern U.S.
operations comprise a substantial portion of the route structure of the
Company's airline subsidiaries. Although a competitive strength in some
regards, the regional concentration of significant operations results in
the Company being susceptible to changes in certain regional conditions
that may adversely affect the Company's financial condition or results of
operations. 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. Adverse changes
in certain factors that are generally outside the Company's control,
33
such as an economic downturn, additional government regulation, intensified
competition from lower-cost competitors or further increases in the cost of
aviation fuel, could have a materially adverse effect on the Company's
financial condition, results of operations and future prospects. The
Company's financial condition and results of operations are also
particularly susceptible to adverse changes in general economic and market
conditions due to US Airways' high cost structure relative to its major
competitors (see related discussion above under "Current Competitive
Position").
In December 1999, the Company entered into $500 million of senior
secured credit facilities (Facilities) with a syndicate of financial
institutions. The Facilities are structured as a $250 million, 364-day
revolving loan facility and a $250 million, 3-year revolving loan facility.
As of December 31, 1999, no borrowings under these Facilities were
outstanding. Terms of the Facilities are described in Note 4 to the
Company's Notes to Consolidated Financial Statements contained in Part II,
Item 8A of this report.
In the fourth quarter of 1999, US Airways entered into an agreement
with the Massachusetts Port Authority (MassPort) to guarantee the principal
and interest payments in connection with $33 million of revenue bonds being
issued by MassPort. The proceeds of the bonds will be used to finance the
improvement and expansion of certain passenger terminal facilities for
US Airways at Boston's Logan International Airport. US Airways expects to
enter into similar transactions with municipalities in Philadelphia and
Charlotte during 2000.
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 $2.22 billion in 2000, $1.29 billion in 2001,
$457 million in 2002 and $424 million in 2003. 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 $4.8 billion. The Company
estimates that non-aircraft capital expenditures for 2000 will total
approximately $130 million. The Company expects to satisfy its short-term
liquidity requirements through a combination of third-party financing, cash
on hand and cash generated from operations. The Company expects to finance
a substantial portion of the cost of new aircraft with a combination of
enhanced equipment trust certificates or similar debt and/or leveraged
leases. In the third quarter of 1999 and the fourth quarter of 1998, US
Airways completed offerings of $468 million and $448 million, respectively,
of pass through certificates. Simultaneously with these offerings, the
Company completed private placement transactions totaling $122 million and
$141 million, respectively. The proceeds of the 1998 financing were used
to finance 23 A320-family aircraft that were delivered during the period
October 1998 through July 1999. The proceeds of the 1999 financing, which
have been partially used, are to finance 18 A320-family aircraft and two
A330 aircraft that either have been delivered or are scheduled for delivery
during the period August 1999 to April 2000. In the first quarter of 2000,
US Airways completed a $282 million offering of pass through certificates.
The proceeds of this financing will be used to partially finance five A330
aircraft with scheduled delivery dates from April 2000 to December 2000.
After the completion of this offering, the Company has an unused portion of
an outstanding shelf registration for the issuance of $750 million in
public debt securities which it intends to utilize during 2000 for aircraft
financings for aircraft with scheduled delivery dates in 2000. Furthermore,
the Company intends to replenish its shelf registration to enable it to
offer more public securities during 2000.
Through December 31, 1999, US Airways has used cash to purchase all
A320-family aircraft and completed leveraged lease transactions or secured
loan transactions soon after delivery. US Airways has obtained commitments
or letters of intent that will provide financing for at least 25% of the
anticipated purchase price of its remaining firm-order Airbus aircraft.
However, additional financing or internally-generated funds will be needed
to satisfy the Company's
34
capital commitments for the balance of firm-order aircraft commitments and
for other aircraft-related expenditures. Other capital expenditures, such
as for training simulators, rotables and other aircraft components, are
also expected to increase in conjunction with the acquisition of the new
aircraft and jet engines. There can be no assurance that sufficient
financing will be available for all aircraft and other capital expenditures
not covered by committed financing.
On February 8, 2000, Standard & Poor's (S&P) downgraded its ratings on
US Airways Group and US Airways citing "persistent weak operating
performance and a very aggressive financial policy." The most noteworthy of
the downgrades was to US Airways' senior secured debt which was downgraded
from "B+" to "B." US Airways senior secured debt includes its enhanced
equipment trust certificates which to date has served as the primary source
of financing for its new Airbus aircraft. Moody's Investor Services
(Moody's) also downgraded US Airways' senior secured debt ratings in
October 1999. Credit ratings issued by agencies such as S&P and Moody's
affect a company's ability to issue debt or equity securities and the
effective rate at which such financings are undertaken.
OUTLOOK FOR 2000
The Company's ability to achieve its outlook for 2000 for capacity
growth, results of operations and financial condition will be negatively
affected by the impact associated with the 30-day cooling off period and a
cessation of operations, if any, which may result from a failure to
successfully resolve negotiations with the Company's Flight Attendants.
US Airways' capacity (as measured by ASMs) is expected to increase
approximately 8 to 10% for full-year 2000 compared to full-year 1999. The
year-over-year increase in capacity will be attributable to operating
performance improvements, which will contribute approximately 3 percentage
points of the expected increase, as well as 1.5 points resulting from
larger aircraft replacing retiring smaller aircraft and an additional 2
points from growth in transatlantic operations. The remaining 1.5 to 3.5
percentage points increase will be due to growth in the core network and
annualization of the MetroJet expansion that occurred during 1999.
Departure completion factor is expected to rebound from 95.5% in 1999 to
98% in 2000. Unit revenues are expected to decline year-over-year.
Despite higher fuel prices, which are expected to be approximately 40%
over 1999 levels, and higher pay rates, unit cost for 2000 is expected to
decline by 4% year-over-year. More specifically, the Company's growth is
expected to allow it to become more productive and to spread overhead over
a larger base. Commission expense is expected to decline by $78 million,
driven by a decrease in average commission rate of 6.3% in 1999 to 4.9% in
2000. Information technology and communication costs are planned to be down
$30 million or 9%, reflecting steady-state costs vs. the transition
activities seen in 1999. Labor unit costs, despite the year-over-year
increases in rates of pay are expected to improve by 3%, driven by
improvements in productivity and better completion factors. Aircraft rent
is expected to be up about 10%, as the Company plans to lease roughly 30%
of its 2000 deliveries. Maintenance materials and repairs are planned to be
flat with 1999. Other selling expenses are expected to climb by 11%, and
depreciation and amortization should increase 5%, after adjusting for
1999's impairment charge. With regards to Other income (expense) items,
aircraft financings are expected to drive interest expense up by 34%, while
interest income is expected to fall approximately 20%.
In the near term, the Company is expecting a loss for the first quarter
of 2000. Even though the Company expects unit costs less fuel costs to be
flat for the quarter, unit revenues will be under pressure due to the
impact from uncertainties associated with the open contract with the flight
attendants, the capacity imbalances in the route network and the lingering
revenue impacts due to the passenger ill-will caused by the disappointing
operational performance of the 1999 third quarter.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures include commodity price
risk (i.e., the price paid to obtain aviation fuel), interest rate risk,
equity price risk and foreign currency exchange rate risk. The potential
impact of adverse increases in the aforementioned risks and general
strategies employed by the Company to manage such risks are discussed
below.
COMMODITY PRICE RISK
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 1999 and 1998, aviation fuel expenses represented
8.6% and 8.1%, respectively, of the Company's total operating expenses (as
adjusted to exclude certain nonrecurring and unusual items). Based upon the
Company's 1999 fuel consumption, a 10% increase in the average annual price
per gallon of aircraft fuel would increase the Company's annual aviation
fuel expenses by $73 million. See related information in Part I, Item 1
"Business: Aviation Fuel."
INTEREST RATE RISK
Exposure to interest rate risk relates primarily to the Company's cash
equivalents and short-term investments portfolios and long-term debt
obligations.
Considering the Company's average balance and typically short duration
of cash equivalents and short-term investments during 1999, an assumed 10%
decrease in the average interest earned on these financial instruments
would not materially impact the Company's results of operations. The
Company's short-term investment portfolio is considered "available-for-
sale" in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS 115).
As of December 31, 1999, the Company had $88 million of variable-rate
debt outstanding; assuming a 10% increase in average interest rates during
2000 as compared to 1999, interest expense would increase $1 million.
Additional information regarding the Company's long-term debt obligations
(dollars in millions):
Expected Maturity Date 12/31/99
---------------------------------------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Fixed-rate debt $106 $240 $80 $188 $113 $1,394 $2,121 $2,000
Weighted avg. interest rate 8.9% 9.4% 9.7% 9.7% 9.7% 9.5%
Variable-rate debt $ 4 $ 5 $ 6 $ 7 $ 8 $ 58 $ 88 $ 81
Weighted avg. interest rate 9.4% 9.4% 9.4% 9.4% 9.4% 9.4%
The Company is highly leveraged and has entered into agreements to
acquire up to 430 new aircraft and accompanying jet engines. These
agreements increase the Company's financing needs and will significantly add
to its financial obligations. The Company's efforts to reduce its exposure
to interest rate risk have included the early retirement of certain long-
term debt and other obligations and scheduled retirement of other debt
obligations (see Notes 4, 7 and 8(b) to the Company's Notes to Consolidated
Financial Statements for additional information).
36
EQUITY PRICE RISK
As of December 31, 1999, US Airways held equity financial instruments
in the form of stock options or depositary certificates for priceline.com
Incorporated, Sabre Holdings Corporation, Netcentives Inc. and Equant N.V.
As of December 31, 1999, the carrying values for these investments was not
material. See Note 2(b) to the Company's Notes to Consolidated Financial
Statements for information related to the fair value of these investments.
The market risk associated with these equity financial instruments is
the potential loss in fair value resulting from a decrease in the market
price of the common stock.
FOREIGN CURRENCY EXCHANGE RATE RISK
An aggregate of $28 million of future principal payments of the
Company's long-term debt due in 2000 is payable in Japanese Yen, as
discussed in Note 2(a) to the Company's Notes to Consolidated Financial
Statements. This foreign currency exposure has been hedged to maturity by
the Company's participation in foreign currency contracts.
(this space intentionally left blank)
37
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, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period
ended December 31, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
KPMG LLP
McLean, VA
March 10, 2000 except as to Note 15, which
is as of March 15, 2000
38
US Airways Group, Inc.
Consolidated Statements of Operations
Year Ended December 31,
- - ------------------------------------------------------------------
(dollars in millions, except per share amounts)
1999 1998 1997
---- ---- ----
Operating Revenues
Passenger transportation $ 7,685 $ 7,826 $ 7,712
Cargo and freight 149 168 181
Other 761 694 621
------ ------ ------
Total Operating Revenues 8,595 8,688 8,514
Operating Expenses
Personnel costs 3,380 3,101 3,179
Aviation fuel 727 623 805
Commissions 484 519 595
Aircraft rent 466 440 475
Other rent and landing fees 430 417 420
Aircraft maintenance 498 448 451
Other selling expenses 379 372 372
Depreciation and amortization 401 318 401
Other 1,694 1,436 1,232
------ ------ ------
Total Operating Expenses 8,459 7,674 7,930
------ ------ ------
Operating Income 136 1,014 584
Other Income (Expense)
Interest income 66 111 108
Interest expense (193) (223) (256)
Interest capitalized 38 3 13
Gains on sales of investments 274 - 180
Equity in earnings of affiliates 1 1 30
Other, net 23 (4) 13
------ ------ ------
Other Income (Expense), Net 209 (112) 88
------ ------ ------
Income Before Income Taxes 345 902 672
Provision (Credit) for
Income Taxes 148 364 (353)
------ ------ ------
Net Income 197 538 1,025
Preferred Dividend Requirement - (6) (64)
------ ------ ------
Earnings Applicable to
Common Stockholders $ 197 $ 532 $ 961
====== ====== ======
Earnings per Common Share
Basic $ 2.69 $ 5.75 $ 12.32
Diluted $ 2.64 $ 5.60 $ 9.87
Shares Used for Computation (000)
Basic 73,316 92,413 78,054
Diluted 74,603 96,211 103,180
See accompanying Notes to Consolidated Financial Statements.
39
US Airways Group, Inc.
Consolidated Balance Sheets
December 31,
- - -----------------------------------------------------------------------
(dollars in millions, except per share amount)
ASSETS 1999 1998
---- ----
Current Assets
Cash $ 31 $ 29
Cash equivalents 215 583
Short-term investments 624 598
Receivables, net 387 355
Materials and supplies, net 226 228
Deferred income taxes 348 347
Prepaid expenses and other 265 224
------ ------
Total Current Assets 2,096 2,364
Property and Equipment
Flight equipment 5,672 5,188
Ground property and equipment 1,011 915
Less accumulated depreciation
and amortization (2,919) (2,641)
------ ------
3,764 3,462
Purchase deposits for flight equipment 285 198
------ ------
Total Property and Equipment 4,049 3,660
Other Assets
Goodwill, net 569 593
Other intangibles, net 358 475
Investment in marketable equity securities - 301
Other assets, net 613 477
------ ------
Total Other Assets 1,540 1,846
------ ------
$ 7,685 $ 7,870
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 116 $ 71
Accounts payable 474 430
Traffic balances payable and unused tickets 635 752
Accrued aircraft rent 236 166
Accrued salaries, wages and vacation 341 329
Other accrued expenses 699 521
------ ------
Total Current Liabilities 2,501 2,269
Noncurrent Liabilities
Long-term debt, net of current maturities 2,113 1,955
Accrued aircraft rent 279 332
Deferred gains, net 500 337
Postretirement benefits other than pensions 1,323 1,240
Employee benefit liabilities and other 1,086 1,144
------ ------
Total Noncurrent Liabilities 5,301 5,008
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, par value $1 per share,
issued 101,172,000 shares and
101,177,000 shares, respectively 101 101
Paid-in capital 2,268 2,283
Retained earnings (deficit) (551) (748)
Common stock held in treasury,
at cost, 34,920,000 shares and
17,422,000 shares, respectively (1,852) (1,069)
Deferred compensation (83) (99)
Accumulated other comprehensive income,
net of income tax effect - 125
------ ------
Total Stockholders' Equity (Deficit) (117) 593
------ ------
$ 7,685 $ 7,870
====== ======
See accompanying Notes to Consolidated Financial Statements.
40
US Airways Group, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
- - ------------------------------------------------------------------------
(in millions)
1999 1998 1997
----- ----- -----
Cash flows from operating activities
Net income $ 197 $ 538 $1,025
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 401 318 401
Losses (gains) on dispositions of property (5) (17) (16)
Gains on sales of investments (274) - (180)
Amortization of deferred gains and credits (32) (28) (28)
Other 52 72 35
Changes in certain assets and liabilities
Decrease (increase) in receivables 49 (55) 40
Decrease (increase) in materials and supplies,
prepaid expenses and pension assets (42) (154) 38
Decrease (increase) in deferred income taxes (44) 193 (454)
Increase (decrease) in traffic balances
payable and unused tickets (117) 45 (14)
Increase (decrease) in accounts payable
and accrued expenses 335 272 (36)
Increase (decrease) in postretirement
benefits other than pensions, noncurrent 83 67 59
----- ----- -----
Net cash provided by (used for)
operating activities 603 1,251 870
Cash flows from investing activities
Capital expenditures (1,448) (642) (280)
Proceeds from sales of investments 307 - 224
Proceeds from dispositions of property 50 112 85
Decrease (increase) in short-term investments (25) 275 (235)
Decrease (increase) in restricted cash
and investments (19) (41) 18
Acquisition of Shuttle, Inc. - - (190)
Other 21 4 6
----- ----- -----
Net cash provided by (used for)
investing activities (1,114) (292) (372)
Cash flows from financing activities
Proceeds from the sale-leaseback of aircraft 758 189 -
Proceeds from issuance of long-term debt 320 - -
Principal payments on long-term debt (117) (556) (88)
Issuances of Common Stock - 8 39
Purchases of Common Stock (821) (1,081) -
Sales of treasury stock 5 5 2
Redemptions of preferred stock,
including redemption premiums - - (127)
Dividends paid on preferred stock - (6) (181)
----- ----- -----
Net cash provided by (used for)
financing activities 145 (1,441) (355)
----- ----- -----
Net increase (decrease)
in Cash and Cash equivalents (366) (482) 143
----- ----- -----
Cash and Cash equivalents at beginning of year 612 1,094 951
----- ----- -----
Cash and Cash equivalents at end of year $ 246 $ 612 $1,094
===== ===== =====
Noncash investing and financing activities
Conversions of preferred stock
into Common Stock $ - $ 358 $ 497
Net unrealized gain (loss) on
available-for-sale securities $ (1) $ 73 $ 104
Reductions of purchase deposits for
flight equipment $ - $ 61 $ -
Acquisition of Shuttle, Inc.
Fair value of assets acquired $ - $ - $ 258
Cash paid - - (190)
----- ----- -----
Liabilities assumed $ - $ - $ 68
===== ===== =====
Supplemental Information
Interest paid, net of amounts capitalized $ 176 $ 233 $ 246
Income taxes paid $ 58 $ 234 $ 95
See accompanying Notes to Consolidated Financial Statements.
41
US Airways Group, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Three Years Ended December 31, 1999
- - ------------------------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
Accumulated other
comprehensive income,
net of income tax effect
------------------------
Unrealized Adjustment
Series B Retained Common Deferred gain on for minimum Compre-
Preferred Common Paid-in earnings Stock held compen- available-for- pension hensive
Stock Stock capital (deficit) in treasury sation sale securities liability Total income
--------- ------ ------- --------- ----------- -------- --------------- ----------- ----- -------
Balance as of
December 31, 1996 $ 213 $ 64 $1,387 $(2,118) $ - $(95) $ - $(35) $ (584)
Conversion of 4,257,000
depositary shares (213) 11 202 - - - - - -
Conversion of 28,000
shares of Series F
Preferred Stock - 14 262 - - - - - 276
Grant of 162,000 shares of
non-vested stock - - 4 - - (4) - - -
Reversion of 89,000 shares
of previously-granted
non-vested stock - - (1) - - 1 - - -
Acquisition of 125,000
shares of Common Stock
from certain employees - - - - (5) - - - (5)
Exercise of 2,119,000
Options - 2 43 - 2 - - - 47
Dividends declared
(preferred stock)
Series H-$225.24 per share - - - (81) - - - - (81)
Series F-$1,137.00
per share - - - (34) - - - - (34)
Series T-$991.22 per share - - - (10) - - - - (10)
Series B-$13.49 per share - - - (56) - - - - (56)
Redemption premiums on
repurchases of Redeemable
Cumulative Convertible
Preferred Stock - - - (6) - - - - (6)
Amortization of
deferred compensation - - - - - 18 - - 18
Tax benefit from employee
stock option exercises - - 9 - - - - - 9
Unrealized gain on
available-for-sale
securities - - - - - - 104 - 104 $ 104
Minimum pension liability
change - - - - - - - 22 22 22
Net income - - - 1,025 - - - - 1,025 1,025
---- ---- ----- ------ ------ --- --- --- ------ -----
Total comprehensive income $1,151
=====
Balance as of
December 31, 1997 $ - $ 91 $1,906 $(1,280) $ (3) $(80) $104 $(13) $ 725
Purchase of 17,924,000
shares of Common Stock - - - - (1,099) - - - (1,099)
Conversion of 358,000
shares of Series H
Preferred Stock - 9 349 - - - - - 358
Grant of 453,000 shares
of non-vested stock
and 2,300,000 stock
options - - 30 - 17 (47) - - -
Reversion of 71,000
shares of previously-
granted non-vested stock - - (2) - - 2 - - -
(continued on following page)
42
US Airways Group, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
Three Years Ended December 31, 1999
- - ------------------------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
Accumulated other
comprehensive income,
net of income tax effect
------------------------
Unrealized Adjustment
Series B Retained Common Deferred gain on for minimum Compre-
Preferred Common Paid-in earnings Stock held compen- available-for- pension hensive
Stock Stock capital (deficit) in treasury sation sale securities liability Total income
--------- ------ ------- --------- ----------- -------- --------------- ----------- ----- -------
Acquisition of 91,000
shares of Common Stock
from certain employees - - - - (4) - - - (4)
Exercise of 704,000
stock options - 1 7 - 7 - - - 15
Reissuance of shares
held in treasury for
less than cost - - (13) - 13 - - - -
Dividends paid-Series H
Preferred Stock
$18.50 per share - - - (6) - - - - (6)
Amortization of deferred
compensation - - - - - 26 - - 26
Tax benefit related to
employee stock option
exercises - - 6 - - - - - 6
Unrealized gain on
available-for-sale
securities - - - - - - 73 - 73 $ 73
Minimum pension liability
change - - - - - - - (39) (39) (39)
Net income - - - 538 - - - - 538 538
---- ---- ----- ------ ------ --- --- --- ------ -----
Total comprehensive income $ 572
=====
Balance as of
December 31, 1998 $ - $ 101 $2,283 $ (748) $(1,069) $(99) $177 $(52) $ 593
Purchase of 18,103,000
shares of Common Stock - - - - (817) - - - (817)
Grant of 387,000 shares
of non-vested stock - - - - 14 (14) - - -
Acquisition of 18,000
shares of Common Stock
from certain employees - - - - (1) - - - (1)
Exercise of 234,000
stock options - - - - 6 - - - 6
Reissuance of shares
held in treasury for
less than cost - - (15) - 15 - - - -
Amortization of deferred
compensation - - - - - 30 - - 30
Unrealized loss on
available-for-sale
securities - - - - - - (1) - (1) $ (1)
Reclassification of
realized gain on sale
of marketable equity
securities - - - - - - (176) - (176) (176)
Minimum pension liability
change - - - - - - - 52 52 52
Net income - - - 197 - - - - 197 197
---- ---- ----- ----- ------ --- --- --- --- ---
Total comprehensive income $ 72
===
Balance as of
December 31, 1999 $ - $ 101 $ 2,268 $ (551) $(1,852) $(83) $ - $ - $ (117)
==== ==== ===== ====== ====== === === === ======
See accompanying Notes to Consolidated Financial Statements.
43
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. Principal subsidiaries include US Airways,
Inc. (US Airways), Shuttle, Inc. (Shuttle), Allegheny Airlines, Inc.
(Allegheny), Piedmont Airlines, Inc. (Piedmont), and PSA Airlines, Inc.
(PSA). All significant intercompany accounts and transactions have been
eliminated. Certain 1998 and 1997 amounts have been reclassified to conform
with 1999 classifications.
US Airways is the Company's principal operating subsidiary and
accounted for approximately 88% of the Company's operating revenues in 1999
on a consolidated basis. US Airways is a major United States (U.S.) air
carrier engaged primarily in the business of transporting passengers,
property and mail. US Airways enplaned approximately 56 million passengers
during 1999 and is currently the sixth largest domestic air carrier, as
ranked by revenue passenger miles (RPMs). US Airways operates predominantly
in the Eastern U.S. with major connecting hubs at 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 (Reagan National).
Allegheny, Piedmont and PSA (which collectively enplaned approximately
7 million passengers in 1999) are regional air carriers that, along with
five non-owned regional airline carriers with which the Company has
marketing agreements form "US Airways Express." US Airways Express also has
a majority of its operations in the Eastern U.S.
On December 30, 1997, the Company purchased Shuttle for $190 million.
Shuttle's assets included takeoff and landing rights at both LaGuardia and
Reagan National airports. For accounting purposes the acquisition was
treated as a purchase and, accordingly, Shuttle's results of operations for
December 31, 1997 and for subsequent periods have been included in the
Company's Consolidated Statements of Operations. In addition, Shuttle's
assets and liabilities were re-valued at fair value as of the acquisition
date and included in the Company's Consolidated Balance Sheets as of
December 31, 1997. The purchase of Shuttle resulted in goodwill, as
discussed in Note 1(f).
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.
(b) OPERATING ENVIRONMENT
Most of the operations of the Company's airline subsidiaries are in
competitive markets. Competitors include other air carriers along with
other methods of transportation.
US Airways 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 its
competitiveness. In addition, although a competitive strength in some
regards, the concentration of
44
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. In addition, the Company's agreements to acquire up to 430 new
Airbus aircraft, accompanying jet engines and ancillary assets are expected
to increase its financing needs and result in a significant increase in its
financial obligations.
Personnel costs represent the Company's largest expense category. As
of December 31, 1999, the Company's various subsidiaries employed
approximately 46,300 full-time equivalent employees. Approximately 41,800
(85%) of the Company's employees are covered by collective bargaining
agreements with various unions or will be covered by collective bargaining
agreements for which negotiations are in progress. During 1999, several
contracts between US Airways and its larger employee groups were ratified.
However, negotiations with US Airways flight attendant group and a few
smaller employee groups remain open (See Note 15). The Company cannot
predict the ultimate outcome of any of these negotiations or the timing of
any new agreements.
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. The Company's airline subsidiaries have a diversified
aviation fuel supplier network and sometimes use certain risk management
techniques in order to help ensure aviation fuel availability and partially
protect themselves 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)
within Accumulated other comprehensive income, net of income tax effect.
(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. Interest expenses related
to the acquisition of certain property and equipment are capitalized as an
additional cost of the asset or as a leasehold improvement if the asset is
leased. Costs of major improvements are capitalized for both owned and
leased assets. Maintenance and repairs are recognized as operating expenses
as incurred.
Depreciation and amortization expense for principal asset
classifications is calculated on a straight-line basis to an estimated
residual value. Depreciable lives are 11-30 years for operating flight
equipment, 25-30 years for facilities and 3-10 years for other ground
property and equipment.
45
The cost of property acquired under capital lease and improvements to
leased assets are depreciated over the term of the lease on a straight-line
basis. When property and equipment is sold or retired any gain or loss is
recognized in the Other, net category of Other Income (Expense).
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 for Long-Lived Assets to Be Disposed Of" (SFAS 121), the Company
recognizes an "impairment charge" when the expected 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.
(f) GOODWILL AND OTHER INTANGIBLES, NET
Goodwill, the cost in excess of fair value of identified net assets
acquired, is amortized as Depreciation and amortization on a straight-line
basis over 40 years. The 1987 acquisitions of Pacific Southwest Airlines
(Pacific Southwest) and Piedmont Aviation, Inc. (Piedmont Aviation)
resulted in $629 million of goodwill. As of December 31, 1999 and 1998,
accumulated amortization related to these acquisitions was $191 million and
$176 million, respectively. Goodwill of $4 million resulting from an
investment was written-off in 1999 due to the sale of Galileo stock. As of
December 31, 1999 and 1998, goodwill resulting from the acquisition of
Shuttle was $138 million and $140 million, respectively. As of December
31, 1999 and 1998 Shuttle's accumulated amortization was $7 million and $4
million, respectively (see also Note 1(a)).
Other intangible assets consist mainly of purchased operating rights
at various airports, capitalized software costs developed for internal use
and the intangible asset associated with the underfunded amounts of certain
pension plans. Operating rights and capitalized software costs are
amortized on a straight-line basis as Depreciation and amortization expense
over periods ranging from five to 25 years. The intangible pension asset
is recognized in accordance with Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions" (SFAS 87). As of
December 31, 1999 and 1998, accumulated amortization related to other
intangible assets was $217 million and $169 million, respectively.
The Company periodically evaluates the period of amortization of its
goodwill and intangible assets and determines if such assets are impaired
by comparing the carrying values with estimated future undiscounted cash
flows. This analysis is performed separately for the goodwill which
resulted from each acquisition and for the other intangibles. Based on the
most recent analyses, the Company believes that goodwill and other
intangible assets were not impaired as of December 31, 1999.
(g) INVESTMENT IN MARKETABLE EQUITY SECURITIES
US Airways Investment Management Company, Inc.'s (USIM, formerly USAM
Corp.), a wholly-owned subsidiary of US Airways, investment in Galileo
International, Inc. (Galileo) was classified as "available-for-sale" under
SFAS 115 and recorded at fair value as of December 31, 1998.
46
(h) OTHER ASSETS, NET
Other assets, net consist primarily of noncurrent pension assets,
restricted cash and investments and unamortized debt issuance. Restricted
cash are deposits in trust accounts primarily to collateralize letters of
credit and workers' compensation policies.
(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 the requisite mileage award levels are achieved. US Airways also sells
mileage credits to participating partners in Dividend Miles and recognizes
the resulting revenues as Other operating revenues when the credits are
sold.
In 1998, US Airways and American Airlines, Inc. (American) announced a
marketing relationship that gives customers combined access to both
companies' frequent traveler programs. Under the program, members who
belong to US Airways' Dividend Miles and American's AAdvantage are able to
claim awards for airline travel on both airlines and to combine miles when
claiming travel awards on either airline. Each airline compensates the
other when relieved of an obligation to provide a travel award. US Airways
records its obligation to American as a component of Other operating
expenses.
US Airways is party to several other agreements that enable US
Airways' and other airlines' customers to earn and redeem travel awards on
each other's frequent traveler program. Increasingly, such agreements
require financial settlement for such activity. US Airways records cash
inflows from these arrangements as a component of Other operating revenues
and cash outflows from these arrangements as a component of Other operating
expenses.
In December 1999, the United States Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in
Financial Statements," which provides guidance concerning the timing of
revenue recognition and related matters. As a result, the Company will
implement SAB 101 effective January 1, 2000 and will change its method of
revenue recognition for the sale of mileage credits.
The portion of proceeds from sales of Dividend Miles that represents
the Company's obligation to provide future travel to Dividend Miles members
will be deferred and recognized as a component of Passenger transportation
revenues when the service is rendered. The remaining portion of the sales
proceeds will continue to be recognized immediately as a component of Other
operating revenues.
The Company will recognize a cumulative effect of adopting SAB 101 as
a change in accounting principle as of January 1, 2000. The cumulative
effect of accounting change, net of applicable income taxes, is estimated
to be $103 million. The charge represents the difference between the
Retained earnings (deficit) balance as of December 31, 1999, presented in
the accompanying Consolidated Balance Sheets, and what that balance would
have been had the Company applied SAB 101 for all previous periods.
(j) DEFERRED GAINS, NET
Gains on aircraft sale and leaseback transactions are deferred and
amortized over the terms of the leases as a reduction of the related
aircraft rent expense. Gains related to the exercise of Sabre Inc. (Sabre)
options are deferred and amortized over contractually determined periods as
a reduction to other operating expenses. See Note 2 for additional
information concerning the Sabre options.
47
(k) PASSENGER TRANSPORTATION REVENUES
Revenue is recognized when the transportation service is rendered.
Passenger ticket sales are recorded as a liability (Traffic balances
payable and unused tickets) and subsequently relieved either through
carriage of the passenger, refund to the passenger or billing from another
air carrier which provided the service. Periodic evaluations of the
liability result in adjustments which are recognized as a component of
passenger transportation revenues.
(l) STOCK-BASED COMPENSATION
The Company applies the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and
related interpretations to account for awards of stock-based compensation
granted to employees.
(m) OTHER SELLING EXPENSES
Other selling expenses include credit card fees, computerized
reservations systems fees and advertising and promotional expenses.
Advertising and promotional expenses for 1999, 1998 and 1997 were $41
million, $36 million and $46 million, respectively (such costs are expensed
when incurred).
(n) EARNINGS PER COMMON SHARE
Earnings per Common Share (EPS) is presented on both a basic and
diluted basis in accordance with the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Basic EPS is computed
by dividing net income 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) for the years ended December 31, 1999,
1998 and 1997.
1999 1998 1997
---- ---- ----
Earnings applicable to common stockholders:
Earnings applicable to common stockholders (basic) $197 $532 $ 961
Preferred dividend requirement - 6 58
--- --- -----
Earnings applicable to common stockholders (diluted) $197 $538 $1,019
=== === =====
Common shares:
Weighted average common shares outstanding (basic) 73 92 78
Incremental shares related to outstanding stock options 2 2 2
Incremental shares related to convertible preferred
stock issuances - 2 23
--- --- ----
Weighted average common shares outstanding (diluted) 75 96 103
=== === =====
EPS-Basic $2.69 $5.75 $12.32
EPS-Diluted $2.64 $5.60 $9.87
Note: EPS amounts may not recalculate due to rounding.
48
2. FINANCIAL INSTRUMENTS
(a) TERMS OF CERTAIN FINANCIAL INSTRUMENTS
On January 1, 1998, as part of a comprehensive information technology
services agreement with Sabre, US Airways was granted two tranches of stock
options (SHC Stock Options) to acquire up to 6,000,000 shares of Class A
Common Stock, $.01 par value, of Sabre Holdings Corporation (SHC Common
Stock), Sabre's parent company. Each tranche included 3,000,000 stock
options. In December 1999, US Airways exercised the first tranche of stock
options at an exercise price of $27 and received proceeds of $81 million in
January 2000 in lieu of receiving SHC Common Stock. The related deferred
gain is amortized on a straight-line basis over a contractually determined
period ending December 2012. Stock options in the second tranche have an
exercise price of $27 and are exercisable during a ten-year period
beginning January 2, 2003, but are subject to a $127 per share cap on the
fair market value of the underlying common stock. Under certain
circumstances, and under certain conditions, US Airways may select an
alternative vehicle of substantially equivalent value in place of receiving
SHC Common Stock.
Periodically, the Company uses risk management strategies to reduce
its exposure to certain market uncertainties such as increased fuel prices
and foreign currency exposure. 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 may participate in arrangements designed to reduce its
exposure to significant increases in the price of aviation fuel. These
arrangements have the net effect of increasing or decreasing US Airways'
aviation fuel expense in the period in which they are settled. While
US Airways was not a participant in fuel swap contracts as of December 31,
1999 or 1998, US Airways previously entered into fuel swap contracts that
resulted 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. The total notional gallons under these
contracts, all of which were settled during 1998, were approximately 47
million as of December 31, 1997 (US Airways entered into contracts prior to
December 31, 1997 which effectively closed certain hedging arrangements
covering approximately 17 million gallons). For contracts open as of
December 31, 1997, US Airways paid fixed prices ranging from $0.496 to
$0.600 per notional gallon and received a variable price per gallon based
on market prices.
An aggregate of $28 million of future principal payments of US
Airways' long-term debt due in 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 are 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 is carried at
cost which approximates fair value. At December 31, 1999 and 1998, US
Airways' long-term investments represent an interest in Netcentives Inc.
(Netcentives), an interest in priceline.com Incorporated (Priceline), an
interest in Equant N.V. (Equant) and ownership interests in privately held
companies which have no readily determinable market values. The Company
estimated the fair values of its note receivable and long-term debt by
discounting expected future cash flows using current rates offered to the
Company for notes receivable and debt with similar maturities. The
estimated fair value of the SHC Stock Options was calculated using the
Black-Scholes stock option pricing model and is presented in the table
below in accordance with Statement of Financial Accounting Standards No.
119, "Disclosures about Derivative
49
Financial Instruments and Fair Value of Financial Instruments" (SFAS 119).
These financial instruments are classified as held for "purposes other than
trading" under SFAS 119 due primarily to certain restrictions, including
limitations on US Airways' ability to exercise or sell these stock options.
The fair values of 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.
In September 1999, US Airways entered into an agreement with
Netcentives which sets forth the terms and conditions under which Dividend
Miles from US Airways' frequent traveler program may be sold utilizing
Netcentives' internet-based electronic commerce system. In connection with
the agreement, US Airways received a warrant to purchase up to 100,000
shares of Netcentives' common stock for $11 per share in October 1999,
subject to adjustment in certain circumstances. The warrant became
exercisable as to 60% of the total number of shares in October 1999, and an
additional 20% of the total number of shares will become exercisable at the
end of each anniversary thereafter, subject to an exclusivity arrangement
with Netcentives. The warrant is not considered marketable under the
provisions of SFAS 115. The warrant, and the shares issuable when the
warrant is exercised, are not registered under the Securities Act of 1933.
The estimated fair value of the warrant was $6 million as of December 31,
1999 and was calculated using the Black-Scholes stock option pricing model.
In November 1999, US Airways entered into an agreement with Priceline
which sets forth the terms and conditions under which ticket inventory
provided by US Airways may be sold utilizing Priceline's internet-based
electronic commerce system. In connection with the agreement, US Airways
received warrants to purchase up to 1.5 million shares of Priceline's
common stock for $52.625 per share, subject to adjustment in certain
circumstances. The warrants may become exercisable in phases if certain
performance thresholds are met. To the extent the performance thresholds
are not met, the warrants will become exercisable on November 17, 2004 for
a period of six months. The warrants are not considered marketable under
the provisions of SFAS 115. These warrants, and the shares issuable when
the warrants are exercised, are not registered under the Securities Act of
1933. US Airways has certain registration rights relating to the shares.
The fair value of these warrants was $18 million as of December 31, 1999
and was determined using valuations obtained from third parties.
US Airways is a member of the SITA Foundation (SITA), the principal
asset of which is its equity interest in Equant, an international data
network service company. In February and December 1999, SITA sold a portion
of its interest in Equant in secondary public offerings and distributed the
pro rata proceeds to certain of its members (including US Airways) that
elected to participate in the offerings. US Airways sold approximately 58%
of its ownership in Equant and recorded pre-tax gains of $17 million. As of
December 31, 1999, US Airways held depository certificates that may become
convertible into approximately 164,000 shares of Equant. These certificates
are not considered marketable under the provisions of SFAS 115. The
estimated fair value of these depository certificates was $18 million and
$26 million as of December 31, 1999 and 1998, respectively, and was based
upon the publicly-traded market value of Equant common stock. The carrying
amount (cost basis) of US Airways' investment in these depository
certificates as of December 31, 1999 and 1998 was de minimis.
50
The estimated fair values of the Company's financial instruments, none
of which are held for trading purposes, are summarized as follows (in
millions; brackets denote a liability):
December 31,
-------------------------------------------
1999 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Short-term investments (1) $ 624 $ 624 $ 598 $ 598
Investment in marketable equity securities (1) - - 301 301
Restricted cash and long-term investments 130 154 113 140
Note receivable (2) 23 23 27 27
SHC Stock Options - 76 - 119
Long-term debt (excludes capital lease obligations) (2,209) (2,081) (1,999) (2,244)
Foreign currency contracts:
In a net receivable (payable) position - 1 - (1)
(1) Classified as "available-for-sale" in accordance with SFAS 115. See also Notes 1(c) and 1(g).
(2) Current carrying amount included in Other assets, net on the Company's Consolidated Balance
Sheets, except for the current portion of the note receivable ($5 million) which is included in
Receivables, net.
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 appropriate to
significantly reduce the valuation allowance applicable to its deferred tax
assets. The Company believed, based on prior earnings and future earnings
projections, that it was more likely than not that the Company would be
able to utilize tax benefits accumulated through December 31, 1997 in
future periods. Accordingly, as of December 31, 1997, the valuation
allowance was decreased by $642 million, 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
are as follows (in millions):
1999 1998 1997
---- ---- ----
Current provision:
Federal $165 $155 $101
State 27 16 7
--- --- ---
Total current 192 171 108
--- --- ---
Deferred provision:
Federal (27) 166 (406)
State (17) 27 (55)
--- --- ----
Total deferred (44) 193 (461)
--- --- ----
Provision (credit) for income taxes $148 $364 $(353)
=== === ====
In 1999, the Company was subject to federal regular income tax.
Approximately $173 million in federal alternative minimum tax (AMT) credits
were utilized to reduce the federal current tax liability. In addition,
approximately $189 million in state net operating loss carryforwards were
utilized to reduce the state current tax liability.
51
A reconciliation of taxes computed at the statutory federal tax rate
on earnings before income taxes to the provision (credit) for income taxes
is provided below (in millions):
1999 1998 1997
---- ---- ----
Tax provision computed at federal statutory rate $121 $316 $ 235
Book expenses not deductible for tax purposes 21 19 17
State income tax provision (credit), net of
federal tax benefit 7 28 (31)
Reduction of federal valuation allowance - - (569)
Other (1) 1 (5)
--- --- ----
Provision (credit) for income taxes $148 $364 $(353)
=== === ====
Effective tax rate 43% 40% (52)%
=== === ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1999
and 1998 (in millions):
1999 1998
---- ----
Deferred tax assets:
Leasing transactions $ 160 $ 172
Gain on sale and leaseback transactions 158 137
Employee benefits 825 709
Alternative minimum tax credit carryforwards 2 157
Other deferred tax assets 171 125
Valuation allowance (2) (2)
----- -----
Net deferred tax assets 1,314 1,298
----- -----
Deferred tax liabilities:
Depreciation and amortization 957 969
Other deferred tax liabilities 34 50
----- -----
Total deferred tax liabilities 991 1,019
----- -----
Net deferred tax assets 323 279
Less: current deferred tax assets (348) (347)
----- -----
Noncurrent deferred tax liabilities $ (25) $ (68)
===== =====
The noncurrent net deferred tax liabilities are included in Employee
benefits liabilities and other in the Company's Consolidated Balance
Sheets.
Included in the employee deferred tax assets at December 31, 1999 and
1998, among other items, are $548 and $482 million, respectively, related
to obligations of postretirement medical benefits and $2 million of
alternative minimum tax credits, which do not expire. During 1998, the
Company increased deferred tax assets and reduced goodwill by $2 million to
adjust Shuttle's deferred tax assets acquired on December 30, 1997. The
Company had state net operating loss carryforwards of $154 million as of
December 31, 1999 which primarily expire from 2006 to 2011. Certain changes
in stock ownership can result in a limitation on the amount of net
operating loss and tax credit carryovers that can be utilized each year.
The Company determined it had undergone such an ownership change in 1998
that did not impact the utilization of federal tax attributes during 1998
or 1999. 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 projected taxable income and reversals of
existing taxable temporary differences. 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 noncurrent
deferred tax liability of $95 million as of December 31, 1998, for
unrealized gains on available-for-sale investments pursuant to SFAS 115 and
a noncurrent deferred
52
tax asset of $33 million as of December 31, 1998, 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 millions):
1999 1998 1997
---- ---- ----
Pretax book income $ 345 $902 $ 672
Taxable income $1,037 $854 $1,053
The reasons for significant differences between taxable income and
pretax book income in 1999 and 1997 primarily relate to employee pension
and postretirement benefit costs, employee related accruals, leasing
transactions, gains on sale-leaseback transactions, investment gains and
certain aircraft impairment charges.
4. LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS
Details of long-term debt are as follows (in millions):
December 31,
------------------
1999 1998
---- ----
Senior Debt:
9 5/8% Senior Notes due 2001 $ 175 $ 175
6.8% to 11.7% Equipment Financing Agreements,
Installments due 2000 to 2019 1,993 1,795
8.6% Airport Facility Revenue Bond due 2022 28 28
Other 13 1
----- -----
2,209 1,999
Capital Lease Obligations 20 27
----- -----
Total 2,229 2,026
Less Current Maturities (116) (71)
----- -----
$2,113 $1,955
===== =====
Maturities of long-term debt and debt under capital leases for the
next five years (in millions):
2000 $ 116
2001 248
2002 90
2003 199
2004 125
Thereafter 1,451
-----
$2,229
=====
Interest rates on $88 million principal amount of long-term debt as of
December 31, 1999 are subject to adjustment to reflect prime rate and other
rate changes.
In 1999, the Company retired early certain long-term debt with a
principal amount of $47 million.
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, both with associated
annual commitment fees of approximately 0.625%. 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
53
any time without premium or penalty. There were no outstanding borrowings
under this agreement as of December 31, 1999 (See Note 15). The
anticipated effective interest rate for borrowing against the Facilities
would be a floating rate based on the London Interbank Offered Rate
(LIBOR). Both the effective interest rate and the annual commitment fees
are based on the Company's ratings by Moody's and Standard & Poor's.
Equipment financings totaling $2.0 billion and the Facilities were
collateralized by aircraft, engines and slots with a net book value of
approximately $2.6 billion as of December 31, 1999.
5. EMPLOYEE PENSION AND BENEFIT PLANS
Substantially all of the Company's employees meeting certain service
and other requirements are eligible to participate in various pension,
medical, life insurance, disability and survivorship and employee stock
ownership plans.
(a) DEFINED BENEFIT AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors several qualified and nonqualified defined
benefit plans and other postretirement benefit plans for certain employees.
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.
The following table sets forth changes in the fair value of plan
assets, benefit obligations and the funded status of the plans as of
September 30, 1999 and 1998 (except for subsidiaries other than
US Airways which are as of December 31, 1999 and 1998), in addition to the
amounts recognized in the Company's Consolidated Balance Sheets as of
December 31, 1999 and 1998, respectively (in millions):
Other
Defined Benefit Postretirement
Pension Plans (1) Benefits
----------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Fair value of plan assets at the beginning of the period $ 3,237 $ 3,154 $ - $ -
Actual return on plan assets 463 254 1 -
Employer contributions 95 39 37 31
Plan participants' contributions - - 3 2
Gross benefits paid (2) (276) (210) (30) (33)
------ ------ ------ ------
Fair value of plan assets at the end of the period 3,519 3,237 11 -
------ ------ ------ ------
Benefit obligation at the beginning of the period 4,674 3,912 1,229 1,018
Service cost 184 144 43 37
Interest cost 323 296 85 77
Plan participants' contributions - - 3 2
Plan amendments (3) 38 - - -
Actuarial (gain) loss (702) 531 (144) 128
Settlements - 1 - -
Gross benefits paid (2) (276) (210) (30) (33)
------ ------ ------ ------
Benefit obligation at the end of the period 4,241 4,674 1,186 1,229
------ ------ ------ ------
Funded status of the plan (722) (1,437) (1,175) (1,229)
Unrecognized actuarial (gain) loss 129 1,018 (78) 66
Unrecognized prior service cost 123 91 (105) (117)
Unrecognized transition obligation (15) (20) - -
Contributions for October to December 4 21 4 27
------ ------ ------ ------
Net liability recognized in the Company's
Consolidated Balance Sheets $ (481) $ (327) $(1,354) $(1,253)
====== ====== ====== ======
54
Components of the amounts recognized in the Company's Consolidated Balance Sheets:
Other
Defined Benefit Postretirement
Pension Plans (1) Benefits
----------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Prepaid benefit cost $ 409 $ 310 $ - $ -
Accrued benefit cost (890) (637) (1,354) (1,253)
Adjustment for minimum pension liability (2) (180) - -
Intangible asset 2 95 - -
Accumulated other comprehensive income - 85 - -
----- ----- ------ ------
Net liability recognized in the Company's
Consolidated Balance Sheets $ (481) $ (327) $(1,354) $(1,253)
===== ===== ====== ======
(1) For plans with accumulated benefit obligations in excess of plan assets, the aggregate
accumulated benefit obligations and plan assets were $172 million and zero, respectively,
as of September 30, 1999, and $3,640 million and $3,179 million, respectively, as of September
30, 1998 (except for subsidiaries other than US Airways which are as of December 31, 1999 and
1998, respectively).
(2) Gross benefits paid in 1999 and 1998 include lump sum payments for pilots made pursuant
to a special termination benefits charge of $115 million recorded in 1997 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).
(3) In October 1999, the Company amended the Pension Plan for Employees of US Airways, Inc. Who
are Represented by the International Association of Machinists and Aerospace Workers to
reflect certain benefit level increases ratified under the new labor contract for employees
covered under this plan. In addition, the US Airways, Inc. Supplementary
Retirement Benefit Plan was amended during 1999 to reflect changes in certain executive
retirement agreements.
The following table presents the weighted average assumptions used to
determine the actuarial present value of Pension Benefits and Other
Postretirement Benefits:
Other
Defined Benefit Postretirement
Pension Plans Benefits
---------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Discount rate 7.8% 6.8% 7.8% 6.8%
Expected return on plan assets 9.5% 9.5% 5.0% NA
Rate of compensation increase 3.3% 3.3% 4.6% 4.6%
The assumed health care cost trend rate is 6% in 2000, 5% in 2001 and
4.8% in 2002 and thereafter. The assumed health care cost trend rate has a
significant effect on amounts reported for retiree health care plans. A 1%
change in the health care cost trend would have the following effects on
Other Postretirement Benefits as of September 30, 1999 (except for
subsidiaries other than US Airways which are as of December 31, 1999; in
millions):
1% Increase 1% Decrease
----------- -----------
Effect on total service and interest costs $ 16 $ (14)
Effect on postretirement benefit obligation $126 $(117)
55
Total periodic cost for Pension Benefits and Other Postretirement
Benefits (in millions):
Other
Defined Benefit Postretirement
Pension Plans Benefits
------------------ ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Service cost $ 184 $ 144 $ 131 $ 43 $ 37 $ 35
Interest cost 323 296 259 85 77 71
Expected return on plan assets (308) (279) (237) (1) - -
Amortization of:
Transition asset (5) (5) (5) - - -
Prior service cost 7 4 6 (12) (12) (12)
Actuarial (gain) / loss 32 17 17 1 (1) (4)
---- ---- ---- --- --- ---
Net periodic cost 233 177 171 116 101 90
Settlements - 1 - - - -
Special termination benefits - - 115 - - -
---- ---- ---- --- --- ---
Total periodic cost $ 233 $ 178 $ 286 $116 $101 $ 90
==== ==== ==== === === ===
The Company recorded a $1 million charge to Personnel costs for the
termination of two pension plans in 1998 and a $115 million charge to
Personnel costs in 1997 related to an early retirement program offered to 325
US Airways pilots. These charges were recorded in accordance with SFAS 88.
See Note 8(f) for the amount included within other comprehensive income
arising from a change in the additional minimum pension liability.
(b) DEFINED CONTRIBUTION PENSION PLANS
The Company sponsors several defined contribution pension plans for
certain employees. The Company's contributions to these plans are based on
various percentages of the employee's compensation. Expenses related to these
plans, excluding expenses related to the US Airways Employee Stock Ownership
Plan (ESOP) and any profit sharing contributions, were approximately $65
million, $40 million and $59 million for the years 1999, 1998 and 1997,
respectively. Expenses for 1998 include a $17 million credit related to a
favorable legal settlement regarding employer matching contributions. See
Notes 5(d) and 5(e) for information related to the Company's ESOP and profit
sharing contributions.
(c) POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment benefits to 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 an appropriate triggering event has
occurred.
(d) 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 million for its purchase of shares and US
Airways contributed an additional $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, 1999, 1998 and 1997, the Trust did
56
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(e)
regarding the profit sharing component of US Airways' ESOP. Annual
contributions made by US Airways, and therefore loan repayments made by the
Trust, were $19 million, $27 million and $11 million in 1999, 1998 and 1997,
respectively. The interest portion of these contributions were $8 million,
$10 million and $10 million in 1999, 1998 and 1997, respectively.
Approximately 1,018,000 shares of US Airways Group common stock have been
released or committed to be released as of December 31, 1999. US Airways
recognized compensation expense related to the ESOP of $4 million, $8 million
and $11 million in 1999, 1998 and 1997, respectively, based on shares
allocated to employees (the "shares allocated" method). Deferred compensation
related to the ESOP amounted to approximately $61 million, $65 million and
$72 million as of December 31, 1999, 1998 and 1997, respectively.
See Note 1(l) with respect to the Company's accounting policies for
stock-based compensation.
(e) 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, certain 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 foregone plus (ii) one time salary foregone (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 $214 million
and made cash distributions to participants of $214 million under this
program. After a first quarter 1997 payment of $129 million, 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 Group's 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(d)). US Airways did not make any provision for profit sharing
contributions in connection with the profit sharing component of the ESOP
during 1999. US Airways' ESOP-related expenses included $4 million and $7
million in 1998 and 1997, respectively, related to this profit sharing
program. Under the DCRP, US Airways makes additional contributions to
participant accounts when US Airways Group achieves certain prescribed pre-
tax margin levels. US Airways' payments relating to 1998 and 1997 were $29
million and $24 million, respectively, for the profit sharing component of
the DCRP.
57
6. COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS TO PURCHASE FLIGHT EQUIPMENT
As of December 31, 1999, the Company had 114 A320-Family aircraft on
firm order, 196 aircraft subject to reconfirmation prior to scheduled
delivery and options for 50 additional aircraft. With respect to the firm-
order aircraft, 50 are expected to be delivered in 2000 and the remaining are
expected to be delivered in the years 2001 through 2003. The Company also
entered into an agreement with CFM International, Inc. (CFMI) for jet engines
to power the A320-family aircraft. As part of its agreement with CFMI, GE
Engine Services, Inc. will maintain these engines under a long-term renewable
agreement.
In July 1998, the Company reached an agreement with Airbus for the
purchase of up to 30 widebody A330-300 aircraft. The agreement includes ten
firm aircraft orders, four aircraft subject to reconfirmation prior to
scheduled delivery and options for 16 additional aircraft. Of the ten firm-
order A330-300 aircraft, seven are scheduled for delivery in the year 2000.
The Company can substitute other Airbus widebody aircraft for the A330-300s,
including the A330-200 or members of the A340-Series, for orders other than
the first ten aircraft. In October 1998, the Company reached an agreement
with Pratt & Whitney for jet engines to power these aircraft and to provide
long-term maintenance for the engines.
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 $2.22 billion in 2000, $1.29 billion in 2001, $457 million
in 2002 and $424 million in 2003.
(b) LEASES
The Company's airline subsidiaries lease certain aircraft, engines and
ground equipment, in addition to the majority of their ground facilities.
Ground facilities include executive offices, maintenance facilities 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 2023.
The following amounts related to capital leases are included in property
and equipment (in millions):
December 31,
-------------
1999 1998
---- ----
Flight equipment $ 63 $ 82
Less accumulated amortization (46) (60)
--- ---
$ 17 $ 22
=== ===
58
As of December 31, 1999, obligations under capital and noncancelable
operating leases for future minimum lease payments (in millions):
Capital Operating
Leases Leases
------- ---------
2000 $ 7 $ 806
2001 5 825
2002 5 754
2003 5 738
2004 4 715
Thereafter - 5,569
-- -----
Total minimum lease payments 26 9,407
Less sublease rental receipts - (23)
-----
Total minimum operating lease payments $9,384
=====
Less amount representing interest (6)
--
Present value of future minimum capital
lease payments 20
Less current obligations under capital leases (5)
--
Long-term obligations under capital leases $15
==
For 1999, 1998 and 1997, rental expense under operating leases was $795
million, $755 million and $804 million, respectively. Rental expense for
1999, 1998 and 1997 excludes credits of $14 million, $3 million and $1
million, respectively, related to US Airways' subleasing of British Aerospace
BAe-146-200 (BAe-146) aircraft (see Note 14). Rental expense for 1997 also
excludes $5 million related to expenses recognized by US Airways in
conjunction with certain efficiency measures (see Note 14(c)).
The Company's airline subsidiaries also lease certain owned flight
equipment to third parties under noncancelable operating leases that expire
in the years 2000 and 2001. The future minimum rental receipts associated
with these leases are $5 million in 2000 and $5 million in 2001.
The following amounts relate to aircraft leased under such agreements as
reflected in flight equipment (in millions):
December 31,
--------------
1999 1998
---- ----
Flight equipment $ 35 $ 52
Less accumulated depreciation (28) (37)
--- ---
$ 7 $ 15
=== ===
(c) LEGAL PROCEEDINGS
US Airways is involved in legal proceedings arising out of an aircraft
accident in September of 1994 near Pittsburgh in which 127 passengers and
five crew members lost their lives. With respect to this accident, the
National Transportation Safety Board (NTSB) held hearings in January and
November of 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 four
cases currently pending before the federal judicial panel for multi-district
litigation. 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.
In May 1995, the Company, US Airways and the Retirement Income Plan for
Pilots of US Airways, Inc. were sued in federal district court for the
District of Columbia by 481 active and
59
retired pilots alleging that defendants had incorrectly interpreted the 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. In February 1999, the
U.S. Court of Appeals upheld the district court's decision originally granted
in May 1996 in the defendants' favor. In May 1999, the plaintiffs filed a
petition for certiorari with the U.S. Supreme Court. In October 1999, the
U.S. Supreme Court denied the plaintiff's petition for certiorari. The U.S.
District Court has retained jurisdiction over one count of the complaint
alleging violation of a disclosure requirement under ERISA. The Company
believes there are no significant penalties likely to result from this claim.
Certain of the plaintiffs have filed a claim before the US Airways Pilot
Retirement Board requesting arbitration of their claim for benefits which
they believe were erroneously calculated.
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 would allow IFPC's and US Airways' claims to
be fully litigated. At the present time, the parties are engaged in written
discovery. 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 and BritAir Acquisition Corp. Inc. (collectively, "BA"), American and
American's parent company, AMR Corporation (collectively, "AA"). The Company
and US Airways claimed that BA, 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 BA (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 BA. The Court dismissed the
remaining claims against BA and AA. On February 6, 1998, BA filed its answer
to the complaint along with counterclaims against the Company and US Airways.
BA's counterclaims alleged that US Airways breached the Investment Agreement
by terminating the Code Share Agreement between British Airways and US
Airways (Code Share Agreement) and that US Airways breached the Code Share
Agreement by providing certain allegedly confidential information to specific
third parties. In addition, British Airways sought 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. On January 29, 1999, the Company, US Airways and BA jointly
filed a pre-trial order with the Court, and on February 5, 1999, the Court
placed the lawsuit on its trial-ready calendar. On February 5, 1999, BA filed
a motion for summary judgment seeking dismissal of the Company's and US
Airways' claims and a finding that the Company and US Airways are liable for
breach of the Code Share Agreement. Subsequently, the Company and US Airways
filed a memorandum of law opposing BA's motion. On March 6, 2000, the
Company, US Airways and BA announced the settlement of this lawsuit.
The City and County of San Francisco have sued a number of San Francisco
International
60
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. US Airways was identified by the
City and County of San Francisco as a potentially responsible party. US
Airways and the City and County of San Francisco have entered into an
agreement to resolve this matter and the court entered an order in August
1999 granting a good faith settlement approval for US Airways and several
other settling defendants in the lawsuit.
The Company and US Airways have been named as defendants in three
lawsuits recently filed in U.S. District Court for the Eastern District of
Michigan. Northwest Airlines is also named as a defendant in each action,
while Delta Air Lines and the Airlines Reporting Corporation are named as
defendants in two of the cases. The complaints are brought on behalf of a
class of airline passengers who originated or terminated their trips at the
defendant carriers' respective hubs. These passengers allege that they paid
excessive fares due to the respective airlines' enforcement of ticketing
rules which prohibit the use of a connecting segment coupon which is part of
a through-fare ticket where the passenger does not fly or intend to fly the
entire ticketed itinerary. Plaintiffs allege monopolization and restraint of
trade in violation of federal antitrust laws. They seek recovery of
unquantified treble-damages and an injunction prohibiting future enforcement
of the rules at issue. The Company and US Airways believe the claims are
without merit and intend to pursue a vigorous defense.
(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, 1999 the
principal amount of these bonds outstanding was $110 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 U.S. Government.
As of December 31, 1999, most of the Company's receivables related to
tickets sold to individual passengers through the use of major credit cards
or to tickets sold by other airlines 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.
61
7. REDEEMABLE PREFERRED STOCK
As of December 31, 1999, the Company had no outstanding redeemable
preferred stock. As discussed below, the Company retired two series of
redeemable preferred stock during May 1997 and a third series during March
1998.
On March 12, 1998, the holders of the Company's 9 1/4% Series H Senior
Cumulative Convertible Preferred Stock, without par value (Series H Preferred
Stock) converted 358,000 shares into 9.2 million shares of the Company's
Common Stock. The Company subsequently retired its Series H Preferred Stock.
The Series H Preferred Stock was issued in exchange for the Company's 9 1/4%
Series A Cumulative Convertible Redeemable Preferred Stock, without par value
(Series A Preferred Stock), during August 1997. The terms of the Series H
Preferred Stock were substantially similar to the terms of the Series A
Preferred Stock.
On May 21, 1997, British Airways Plc (British Airways) converted
28,059.364 shares of Series F Cumulative Convertible Senior Preferred Stock,
without par value (Series F Preferred Stock) into 14.5 million 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 (1,940.636 shares) and all of 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 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) for $126
million (which included a premium of $5 million for the shares of Series F
Preferred Stock repurchased and $1 million for the Series T Preferred Stock).
British Airways' holdings stemmed from a 1993 investment agreement between
the two companies which was terminated in March 1997.
The Company paid dividends totaling $6 million and $81 million to the
holders of the Series H Preferred Stock (including amounts related to the
former Series A Preferred Stock) during 1998 and 1997, respectively. In
addition, the Company paid dividends totaling $44 million on its Series F and
Series T Preferred Stock during 1997. Dividend payments during 1997 for all
three series 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 its outstanding redeemable preferred stock
issuances.
8. STOCKHOLDERS' EQUITY
(a) PREFERRED STOCK AND SENIOR PREFERRED STOCK
As of December 31, 1999, the Company had 5.0 million authorized shares
of Preferred Stock, without nominal or par value, 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 7.
(b) 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
62
issuance of 10.6 million shares of Common Stock.
The Company paid dividends totaling $56 million to the holders of the
Series B Preferred Stock during 1997 prior to its conversion/redemption.
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.
(c) COMMON STOCK
As of December 31, 1999, the Company had 150.0 million authorized shares
of common stock, par value $1.00 per share (Common Stock), of which 101.2
million shares were issued (including shares of Common Stock held in treasury
as discussed in Note 8(d)) and 19.3 million shares were reserved for
offerings under stock option, stock incentive and employee retirement and
nonemployee director stock purchase 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. The Company is restricted in engaging in
any of these activities unless it maintains a capital surplus. There are a
number of methods for calculating capital surplus. Based on a recent
valuation conducted on behalf of the Company, as of December 31, 1999 the
Company believes that its capital surplus under Delaware Law was in excess of
the remaining balances of the Company's current common stock purchase
programs.
See Note 7 for information related to preferred stock converted into
Common Stock during 1998.
(d) TREASURY STOCK
The Company held 34.9 million shares and 17.4 million shares of Common
Stock in treasury as of December 31, 1999 and 1998, respectively.
The Company has several common stock purchase programs whereby the
Company had purchased 18.1 million shares for $817 million during 1999 and
17.9 million shares for $1,099 million during 1998. The Company's Board of
Directors also authorized another stock purchase program in September 1999,
for up to $500 million of the Company's Common Stock. As of December 31,
1999, the Company had not purchased any of its Common Stock under this
program.
During 1999 and 1998, employees surrendered 18,000 shares and 91,000
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.
(e) STOCK-BASED COMPENSATION
As of December 31, 1999, approximately 18.4 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-
63
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 $14
million, $7 million and $6 million in 1999, 1998 and 1997, respectively, and
compensation expense related to stock option grants of $ 12 million, $12
million and $1 million in 1999, 1998 and 1997, respectively. In addition,
the Company recognized compensation expense related to stock appreciation
rights (SARs), the Company's only variable stock-based compensation
instrument, of $1 million and $33 million in 1998 and 1997, respectively.
Deferred compensation related to Common Stock grants was $21 million and $22
million as of December 31, 1999 and 1998, respectively, and deferred
compensation related to stock option grants was $1 million and $13 million as
of December 31, 1999 and 1998, respectively. Deferred compensation is
amortized as Personnel costs over the applicable vesting period. The Company
granted 0.4 million, 0.5 million and 0.2 million shares of Common Stock
during 1999, 1998 and 1997, respectively. The weighted average fair value
per share of Common Stock granted in 1999, 1998 and 1997 was $37, $52 and
$25, respectively.
A five-year labor contract between US Airways and its pilots became
effective January 1, 1998. A provision of the labor contract established the
1998 Pilot Stock Option Plan of US Airways Group, Inc. (1998 Plan). The 1998
Plan authorizes the Company to grant in six separate series 11.5 million
stock option awards to its pilots over the five-year life of the labor
contract (with exercise prices established based on the fair market value of
the Company's common stock over a time period preceding each grant). Options
granted under the first series and second through fifth series are subject to
a two-year and one-year vesting period, respectively. Options granted under
the last series are not subject to any vesting period. All awards under the
1998 Plan expire ten years after grant.
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 1.5 million 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 10.4 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, 1999 have a vesting period
of five years or less.
Under the 1992 Stock Option Plan of US Airways Group, Inc. (1992 Plan),
certain 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 had five years from the grant date to exercise such
stock options (see Note 5(e) 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 was
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
canceled its tandem stock option and, conversely, the exercise of any stock
option canceled its tandem SAR. The SARs had the same expiration date as the
tandem stock options. In August 1998, the remaining awards under the 1992
Plan expired and the plan ceased. The 1984 Stock Option and Stock
Appreciation Rights Plan of US Airways 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, 1999 and 1998. The
64
Company may no longer grant awards under the 1992 and 1984 Plans. All awards
previously granted under both of these plans have vested.
The US Airways 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.
The following table summarizes stock option transactions pursuant to the
Company's various stock option and incentive plans for the years ended
December 31, 1999, 1998 and 1997:
1999 1998 1997
--------------------------------------------------
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 7,868 $37 4,633 $18 9,782 $17
Granted (1) 507 $45 2,598 $61 951 $27
Granted (2) - - 2,300 $51 - -
Granted (3) 1,840 $53 - - - -
Exercised (234) $21 (704) $20 (2,119) $19
Forfeited (4) (259) $48 (945) $53 (3,795) $16
Expired (47) $40 (14) $15 (186) $24
----- ----- ------
Outstanding at
end of year 9,675 $41 7,868 $37 4,633 $18
Exercisable at
end of year 2,974 2,558 2,792
(1) Exercise price was equal to the fair market value of a share of Common
Stock at measurement date for grant.
(2) Exercise price was lower than the fair market value of a share of Common
Stock at measurement date for grant.
(3) Exercise price was greater than the fair market value of a share of
Common Stock at measurement date for grant.
(4) Activity during 1998 and 1997 includes 0.1 million and 3.5 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 $27, $34 and $18 for 1999, 1998 and 1997,
respectively. The weighted average fair value per stock option for stock
options which have an exercise price greater than the fair market value of a
share of Common Stock at date of grant was $28 for 1999. There were no such
grants during 1998 and 1997. 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 $41 for 1998.
There were no such grants during 1999 and 1997.
65
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 12/31/99 Life Price Exercisable Price
- - --------------- ----------- ----------- -------- ----------- --------
(000) (years) (000)
$ 4.00 to $12.00 48 5.0 $8 48 $8
$12.01 to $20.00 2,499 6.1 $14 2,193 $13
$20.01 to $40.00 750 6.3 $26 344 $25
$40.01 to $60.00 5,571 8.7 $51 211 $47
$60.01 to $76.00 807 8.6 $70 177 $70
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 1999, 1998 and 1997, respectively:
stock volatility of 50.3%, 51.4% and 52.6%; risk-free interest rates of 5.4%,
5.5% and 6.6%; expected stock option life of eight years and no dividend
yield in each year.
1999 1998 1997
---- ---- ----
(in millions, except per share data)
Net Income As reported $197 $538 $1,025
Pro forma $127 $507 $1,018
Earnings Applicable to As reported $197 $532 $961
Common Stockholders Pro forma $127 $500 $954
EPS-Basic As reported $2.69 $5.75 $12.32
Pro forma $1.73 $5.41 $12.23
EPS-Diluted As reported $2.64 $5.60 $9.87
Pro forma $1.69 $5.33 $9.83
The pro forma net income and EPS information presented above reflects
stock options granted during 1995 and in later years. 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.
(f) ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX EFFECT
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS
130 establishes standards for the reporting and presentation of comprehensive
income and its components in financial
66
statements. Comprehensive income encompasses net income and "other
comprehensive income," which includes all other non-owner transactions and
events that change stockholders' equity (see Note 1(g)). The Company's other
comprehensive income includes unrealized gains on available-for-sale
securities and an adjustment for minimum pension liability, both shown net of
income tax effects.
Unrealized gains on available-for-sale securities are accounted for 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. In accordance with
SFAS 87, the Company recorded an adjustment for minimum pension liability as
of December 31, 1998 and 1997. 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).
As presented in the accompanying Consolidated Statements of
Stockholders' Equity (Deficit), the Company recognized comprehensive income
of $72 million for the year ended December 31, 1999, including net income of
$197 million and other comprehensive loss of $125 million. For the year ended
December 31, 1998, the Company recognized comprehensive income of $572
million, including net income of $538 million and other comprehensive income
of $34 million. For the year ended December 31, 1997, the Company recognized
comprehensive income of $1,151 million, including net income of $1,025
million and other comprehensive income of $126 million.
(this space intentionally left blank)
67
The components of other comprehensive income and the related income tax
effects are as follows (in millions):
1999 1998 1997
------------------------- ------------------------- ------------------------
Before Tax Net Before Tax Net Before Tax Net
tax effect of tax tax effect of tax tax effect of tax
effect (expense) effect effect (expense) effect effect (expense) effect
------ --------- ------ ------ --------- ------ ------ --------- ------
Unrealized gain (loss)
on available-for-sale
securities:
Unrealized gain (loss)
during the period $ (1) $ - $ (1) $112 $(39) $ 73 $160 $(56) $104
Reclassification
adjustment for gains
included in net income
during the period (272) 96 (176) - - - - - -
---- --- ---- --- --- --- --- --- ---
Unrealized gain (loss),
net of reclassification
adjustment (273) 96 (177) 112 (39) 73 160 (56) 104
Change in adjustment for
minimum pension liability 85 (33) 52 (69) 30 (39) 19 3 22
---- --- ---- --- --- --- --- --- ---
Other comprehensive
income (loss) $(188) $ 63 $(125) $ 43 $ (9) $ 34 $179 $(53) $126
==== === ==== === === === === === ===
9. OPERATING SEGMENTS AND RELATED DISCLOSURES
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial statements for
public companies. SFAS 131 also establishes standards for related disclosures
about products and services, and geographic areas. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
The Company has two reportable operating segments: US Airways and US
Airways Express. The US Airways segment includes the operations of US Airways
(excluding USIM) and Shuttle. 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. Both reportable operating segments are engaged in the business of
transporting passengers, property and mail, but have different operating and
economic characteristics. US Airways offers air transportation using
exclusively jets. Its cost structure is higher than US Airways Express due
to, among other things, higher labor and operating equipment costs. US
Airways Express provides air transportation using primarily turboprop
aircraft. Its route network is designed to feed traffic into US Airways'
route system at several points, primarily at US Airways' hubs. 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. See
also Notes 1 (a) and 1 (b).
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (see Note 1). Intersegment
sales are accounted for at fair value as if the sales were to third parties.
The Company evaluates segment performance based on several factors, of which
the primary financial measure is income before taxes.
68
Financial information for each reportable operating segment is set forth
below (in millions):
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Operating Revenues:
US Airways external $7,793 $7,956 $7,842
US Airways intersegment 67 62 55
US Airways Express external 798 727 616
US Airways Express intersegment 33 26 26
All Other 4 5 56
Intersegment elimination (100) (88) (81)
----- ----- -----
$8,595 $8,688 $8,514
===== ===== =====
Depreciation and amortization:
US Airways $ 387 $ 304 $ 387
US Airways Express 14 14 14
All Other - - -
----- ----- -----
$ 401 $ 318 $ 401
===== ===== =====
Interest income:
US Airways $ 187 $ 182 $ 114
US Airways Express 2 2 2
All Other 96 22 25
Intercompany elimination (219) (95) (33)
----- ----- -----
$ 66 $ 111 $ 108
===== ===== =====
Interest expense:
US Airways $ 205 $ 235 $ 267
US Airways Express 4 4 5
All Other 173 79 17
Intercompany elimination (189) (95) (33)
----- ----- -----
$ 193 $ 223 $ 256
===== ===== =====
Equity in earnings of affiliates:
US Airways $ - $ - $ -
US Airways Express - - -
All Other (1) 1 1 30
----- ----- -----
$ 1 $ 1 $ 30
===== ===== =====
Income (Loss) Before Taxes:
US Airways $ 18 $ 775 $ 338
US Airways Express 132 155 118
All Other (1) 195 (28) 216
----- ----- -----
$ 345 $ 902 $ 672
===== ===== =====
Capital Expenditures:
US Airways $1,419 $ 624 $ 271
US Airways Express 10 5 8
All Other 19 13 1
----- ----- -----
$1,448 $ 642 $ 280
===== ===== =====
Assets (2):
US Airways $6,376 $7,164
US Airways Express 166 167
All Other 1,143 539
----- -----
$7,685 $7,870
===== =====
(1) See related information in Note 10.
(2) Substantially all located in the United States.
69
Information concerning operating revenues (based on revenue passenger
miles and yield) in principal geographic areas is as follows (in millions):
1999 1998 1997
---- ---- ----
United States $8,006 $8,143 $7,977
Foreign 589 545 537
----- ----- -----
$8,595 $8,688 $8,514
===== ===== =====
See Note 14 for information regarding nonrecurring and unusual items.
10. USIM'S SALE OF CERTAIN INVESTMENTS
On May 27, 1999, USIM agreed to sell its ownership interest in Galileo.
Galileo owns, operates and markets the Galileo Computer Reservation System
(CRS), which is the world's second largest CRS system, as measured by
revenues generated by travel agent subscribers. The transaction, which closed
on June 3, 1999, resulted in cash proceeds of approximately $307 million and
a pretax gain of approximately $274 million. USIM's interest, 7,000,400
shares of Galileo common stock, was sold as part of a secondary common stock
offering completed by Galileo.
On July 30, 1997, 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). At that time, USIM 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 USIM received shares in
Galileo in the same proportion as its partnership interest in GIP. As part of
the IPO, USIM sold some of its Galileo shares and its interest in Galileo was
reduced from 11% to approximately 6.7%, which USIM ultimately sold in 1999,
as described above. In connection with the 1997 sell down of Galileo and the
sale of ATS, USIM received cash proceeds of $224 million and recognized a
pretax gain of $180 million. See also Note 1(g).
11. RELATED PARTY TRANSACTIONS
US Airways had various agreements with British Airways for ground
handling at certain airports, contract training and other services. US
Airways recognized other operating revenues of $2 million for the first five
months of 1997 related to services US Airways performed for British Airways.
US Airways terminated the code share and other business arrangements between
the two companies during1997. See Note 7 for additional information related
to the Company's relationship with British Airways.
During 1999, 1998 and 1997, employees surrendered 18,000 shares, 91,000
shares and 125,000 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)).
70
12. VALUATION AND QUALIFYING ACCOUNTS
Allowance For
----------------------------
Uncollectible Inventory
Accounts Obsolescence
------------- ------------
(in millions)
Balance as of December 31, 1996 $12 $146
Additions charged to expense 14 10
Amounts charged to allowance (9) (9)
Other (1) 1 1
-- ---
Balance as of December 31, 1997 18 148
Additions charged to expense 9 12
Amounts charged to allowance (5) (45)
-- ---
Balance as of December 31, 1998 22 115
Additions charged to expense 15 48
Amounts charged to allowance (7) (38)
-- ---
Balance as of December 31, 1999 $30 $125
== ===
(1) Reserves of Shuttle, which was acquired by US Airways Group in 1997
(see Note 1(a)).
13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions, except per share amounts)
1999
Operating Revenues $2,072 $2,286 $2,102 $2,135
Operating Income (Loss) $ 89 $ 279 $ (111) $ (121)
Net Income (Loss) $ 46 $ 317 $ (85) $ (81)
Earnings (Loss) Applicable to
Common Stockholders $ 46 $ 317 $ (85) $ (81)
Earnings (Loss) per
Common Share
Basic $ 0.57 $ 4.34 $(1.19) $(1.16)
Diluted $ 0.56 $ 4.26 $(1.19) $(1.16)
1998
Operating Revenues $2,063 $2,297 $2,208 $2,121
Operating Income $ 192 $ 374 $ 270 $ 178
Net Income $ 98 $ 194 $ 142 $ 104
Earnings Applicable to
Common Stockholders $ 92 $ 194 $ 142 $ 104
Earnings per Common Share
Basic $ 0.98 $ 1.99 $ 1.54 $ 1.20
Diluted $ 0.96 $ 1.95 $ 1.51 $ 1.18
See also Note 14.
Note: The sum of the four quarters may not equal the totals for the year
due to rounding.
71
14. NONRECURRING AND UNUSUAL ITEMS
(a) 1999
The Company's results include: (i) $14 million pretax credit to
Aircraft rent (including a fourth quarter credit of $3 million and a second
quarter credit of $11 million, both due to the reversal of previously accrued
lease obligations upon the purchase off lease and sale or lease termination
of eight BAe-146 aircraft); (ii) $1 million pretax credit to Aircraft
maintenance (recorded during the second quarter due to the reversal of lease
return provisions upon the purchase off lease and sale of five BAe-146
aircraft); and (iii) $4 million pretax credit to Depreciation and
amortization expense (recorded during the second quarter due to an accrual
reversal upon the sale of a previously abandoned maintenance facility). 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.
In the fourth quarter of 1999, in connection with changes to the
Company's fleet plan, the Company announced plans to retire its remaining DC-
9-30 aircraft in 2000 and 2001, and certain of its B737-200 aircraft in 2000.
In accordance with provisions of SFAS 121, an impairment charge is recognized
when an asset's carrying value exceeds its estimated future cash flows
(undiscounted and without interest) from operations and the eventual
disposition of the asset. The amount of the charge is the difference between
the asset's carrying value and its fair value. Management has determined that
the expected future cash flows for certain of these aircraft will be less
than their carrying value. Consequently, an impairment charge of $64 million
was recorded to Depreciation and amortization expense in the fourth quarter
of 1999 to reduce the carrying values of these assets to fair value, as
determined by published sources, recent transactions involving sales of
similar aircraft and market trends in aircraft dispositions.
Pretax gains of $10 million and $7 million were recognized to Other, net
during the first and fourth quarters, respectively, related to the sales of
portions of US Airways' holdings in Equant, an international data network
service provider. Additionally, the Company recorded a $274 million pretax
gain on the sale of marketable equity securities that resulted from USIM's
sale of its common stock investment in Galileo during the second quarter of
1999. See Notes 1(g) and 10.
(b) 1998
The Company's results include expense credits related to the early
termination of leases for two BAe-146 aircraft during the third quarter.
US Airways reversed $3 million of previously accrued rent obligations related
to these aircraft (recorded as a credit to Aircraft rent expense). See also
Note 14(a) above.
(c) 1997
The Company's results include: (i) $122 million in pretax charges to
Personnel costs (including a fourth quarter charge of $115 million related to
an early retirement program for pilots (see also Note 5(a)) and a second
quarter charge of $7 million related to estimated employee severance payments
due to efficiency measures US Airways announced during May 1997); (ii) a $1
million pretax 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 also Note 14(a) above); (iii)
$5 million pretax charges in Other rent and landing fees (including a third
quarter charge of $2 million to write-down certain equipment to be disposed
of and a second quarter charge of $3 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
72
measures); (iv) $89 million pretax charges in Depreciation and amortization
(including third quarter charges of $11 million related to the May 1997
efficiency measures to write-down certain equipment to be disposed of and a
$59 million SFAS 121 impairment charge resulting from US Airways' September
1997 decision to retire its DC-9-30 aircraft fleet over the next several
years, and second quarter charges of $1 million to write-off certain
leasehold improvements and an $18 million SFAS 121 impairment charge to
write-down certain DC-9-30 aircraft, both related to the May 1997 efficiency
measures); and (v) $180 million pretax gain recorded in Gains on sales of
investments which resulted from USIM's sale of certain investments as
discussed in Note 10. The Company also recognized certain tax benefits in
1997, as discussed in Note 3.
15. SUBSEQUENT EVENT
US Airways is in mediation over an amendable labor agreement with the
AFA. The National Mediation Board (NMB), which has been assisting in these
negotiations, declared an impasse in the talks in February 2000 and requested
the parties to submit to binding arbitration. The AFA rejected arbitration,
which triggered a 30-day cooling off period ending at 12:01 a.m. on March 25,
2000. The AFA has publicly threatened that, if a contract is not reached by
March 25, 2000, it would conduct an organized campaign it has named "CHAOS"
(Create Havoc Around Our System) to disrupt service throughout US Airways'
system. In response, US Airways publicly announced that, while it intends to
continue to negotiate with the AFA, it will cease operations on March 25,
2000 if no agreement is reached with the AFA. US Airways anticipates that
the impact associated with the 30-day cooling off period and a cessation of
operations, if any, will have a material adverse effect on its results of
operations, particularly its short-term revenues.
While management is committed to and believes that a mutually acceptable
labor agreement with the AFA will ultimately be reached, US Airways cannot
predict the outcome of such negotiations at this time. As of March 15, 2000,
US Airways had received proceeds of $500 million from its Facilities (see
Note 4). While management cannot predict, with any degree of certainty, the
duration, if any, of a shutdown, management believes that if a shutdown were
to occur US Airways has available sources of financing, including existing
cash, borrowings under the Facilities, and potentially available financing
sufficient to meet its obligations during the period of time management
believes such a shutdown might reasonably last.
(this space intentionally left blank)
73
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, 1999 and 1998, and the related
consolidated statements of operations, stockholder's equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1999.
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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
McLean, VA
March 10, 2000 except as to Note 14, which
is as of March 15, 2000
74
US Airways, Inc.
Consolidated Statements of Operations
Year Ended December 31,
- - -----------------------------------------------------------------------
(in millions)
1999 1998 1997
---- ---- ----
Operating Revenues
Passenger transportation $6,848 $7,021 $7,112
US Airways Express transportation
revenues 780 711 605
Cargo and freight 145 164 177
Other 687 660 607
----- ----- -----
Total Operating Revenues 8,460 8,556 8,501
Operating Expenses
Personnel costs 3,142 2,888 3,012
Aviation fuel 670 575 761
Commissions 438 474 554
Aircraft rent 402 381 416
Other rent and landing fees 395 381 402
Aircraft maintenance 397 357 387
Other selling expenses 341 336 346
Depreciation and amortization 370 290 385
US Airways Express capacity purchases 634 550 486
Other 1,532 1,334 1,166
----- ----- -----
Total Operating Expenses 8,321 7,566 7,915
----- ----- -----
Operating Income 139 990 586
Other Income (Expense)
Interest income 199 182 112
Interest expense (195) (224) (260)
Interest capitalized 18 (10) 12
Equity in earnings of affiliates 1 1 30
Gains on sales of investments 274 - 180
Other, net 23 (3) 13
----- ----- -----
Other Income (Expense), Net 320 (54) 87
----- ----- -----
Income Before Income Taxes 459 936 673
Provision (Credit) for Income Taxes 186 377 (379)
----- ----- -----
Net Income $ 273 $ 559 $1,052
===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
75
US Airways, Inc.
Consolidated Balance Sheets
December 31,
- - ----------------------------------------------------------------------
(dollars in millions, except per share amount)
December 31, December 31,
1999 1998
---- ----
ASSETS
Current Assets
Cash $ 13 $ 21
Cash equivalents 215 583
Short-term investments 624 598
Receivables, net 385 351
Receivables from related parties, net 229 169
Materials and supplies, net 192 202
Deferred income taxes 341 291
Prepaid expenses and other 185 174
----- -----
Total Current Assets 2,184 2,389
Property and Equipment
Flight equipment 5,396 4,924
Ground property and equipment 970 886
Less accumulated depreciation and
amortization (2,786) (2,528)
----- -----
3,580 3,282
Purchase deposits for flight equipment 46 -
----- -----
Total Property and Equipment 3,626 3,282
Other Assets
Goodwill, net 438 457
Other intangibles, net 278 391
Investment in marketable equity securities - 301
Receivable from parent company 281 306
Other assets, net 690 572
----- -----
Total Other Assets 1,687 2,027
----- -----
$7,497 $7,698
===== =====
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 116 $ 71
Accounts payable 414 379
Traffic balances payable and
unused tickets 635 757
Accrued aircraft rent 227 155
Accrued salaries, wages and vacation 336 323
Other accrued expenses 638 470
----- -----
Total Current Liabilities 2,366 2,155
Noncurrent Liabilities
Long-term debt, net of current maturities 2,100 1,954
Accrued aircraft rent 277 330
Deferred gains, net 499 335
Postretirement benefits other than pensions 1,298 1,217
Employee benefit liabilities and other 1,143 1,105
----- -----
Total Noncurrent Liabilities 5,317 4,941
Commitments and Contingencies
Stockholder's Equity (Deficit)
Common stock, par value $1 per share,
authorized 1,000 shares issued
and outstanding 1,000 shares - -
Paid-in capital 2,406 2,431
Retained earnings (deficit) (582) (855)
Receivable from parent company (2,010) (1,099)
Accumulated other comprehensive
income, net of income tax effect - 125
----- -----
Total Stockholder's Equity (Deficit) (186) 602
----- -----
$7,497 $7,698
===== =====
See accompanying Notes to Consolidated Financial Statements.
76
US Airways, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
- - ----------------------------------------------------------------------------
(in millions)
1999 1998 1997
----- ----- -----
Cash flows from operating activities
Net income $ 273 $ 559 $1,052
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 370 290 385
Losses (gains) on dispositions of property (5) (17) (15)
Gains on sales of investments (274) - (180)
Amortization of deferred gains and credits (31) (26) (26)
Other (97) 19 26
Changes in certain assets and liabilities
Decrease (increase) in receivables 66 (31) (80)
Decrease (increase) in materials and supplies,
prepaid expenses and pension assets (2) (108) 29
Decrease (increase) in deferred income taxes (95) 184 (422)
Increase (decrease) in traffic balances
payable and unused tickets (123) 55 (14)
Increase (decrease) in accounts payable
and accrued expenses 410 243 (219)
Increase (decrease) in postretirement
benefits other than pensions, noncurrent 81 66 58
----- ----- -----
Net cash provided by (used for)
operating activities 573 1,234 594
Cash flows from investing activities
Capital expenditures (1,189) (489) (194)
Proceeds from sales of investments 307 - 224
Proceeds from dispositions of property 50 112 82
Decrease (increase) in short-term investments (25) 275 (235)
Decrease (increase) in restricted cash
and investments (19) (41) 18
Funding of parent company's common stock purchases (821) (1,081) -
Funding of parent company's aircraft
purchase deposits (220) (135) (84)
Funding of parent company's purchase
of Shuttle, Inc. - - (210)
Other 20 4 35
----- ----- -----
Net cash provided by (used for)
investing activities (1,897) (1,355) (364)
Cash flows from financing activities
Proceeds from the sale-leaseback of aircraft 758 189 -
Proceeds from issuance of long-term debt 308 - -
Principal payments on long-term debt (118) (556) (88)
----- ----- -----
Net cash provided by (used for)
financing activities 948 (367) (88)
----- ----- -----
Net increase (decrease) in Cash and Cash equivalents (376) (488) 142
----- ----- -----
Cash and Cash equivalents at beginning of year 604 1,092 950
----- ----- -----
Cash and Cash equivalents at end of year $ 228 $ 604 $1,092
===== ===== =====
Noncash investing and financing activities
Reduction of parent company receivable-assignment
of aircraft purchase rights by parent company $ 193 $ 22 $ -
Net unrealized gain (loss) on
available-for-sale securities $ (1) $ 73 $ 104
Reduction of purchase deposits for
flight equipment $ - $ 61 $ -
Supplemental Information
Interest paid, net of amounts capitalized $ 176 $ 233 $ 246
Income taxes paid $ 58 $ 228 $ 95
See accompanying Notes to Consolidated Financial Statements.
77
US Airways, Inc.
Consolidated Statements of Stockholder's Equity (Deficit)
Three Years Ended December 31, 1999
- - -------------------------------------------------------------------------------------------------------------------------
(in millions)
Accumulated other
comprehensive income,
net of income tax effect
------------------------
Unrealized Adjustment
Receivable gain on for
Retained from available- minimum
Common Paid-in earnings parent for-sale pension Comprehensive
stock capital (deficit) company securities liability Total income
------ ------- --------- ---------- ---------- ----------- ------- -------------
Balance as of December 31, 1996 $ - $2,416 $(2,466) $ - $ - $(35) $ (85)
Unrealized gain on available-
for-sale securities - - - - 104 - 104 $ 104
Minimum pension liability
change - - - - - 22 22 22
Tax benefit from employee
stock option exercises - 9 - - - - 9 -
Net income - - 1,052 - - - 1,052 1,052
--- ----- ------ ------ --- --- ------ -----
Total comprehensive income $1,178
=====
Balance as of December 31, 1997 - 2,425 (1,414) - 104 (13) 1,102
Unrealized gain on available-
for-sale securities - - - - 73 - 73 $ 73
Minimum pension liability
change - - - - - (39) (39) (39)
Tax benefit from employee
stock option exercises - 6 - - - - 6 -
Funding of parent company's
common stock purchases - - - (1,099) - - (1,099) -
Net income - - 559 - - - 559 559
--- ----- ------ ------ --- --- ------ -----
Total comprehensive income $ 593
=====
Balance as of December 31, 1998 - 2,431 (855) (1,099) 177 (52) 602
Unrealized loss on available-
for-sale securities - - - - (1) - (1) $ (1)
Reclassification for realized
gain on sale of marketable
equity securities - - - - (176) - (176) (176)
Minimum pension liability
change - - - - - 52 52 52
Funding of parent company's
common stock purchases - - - (911) - - (911) -
Distributions to affiliate, net - (25) - - - - (25) -
Net income - - 273 - - - 273 273
--- ----- ----- ----- --- --- ----- ----
Total comprehensive income $ 148
=====
Balance as of December 31, 1999 $ - $ 2,406 $ (582) $(2,010) $ - $ - $ (186)
=== ===== ===== ====== === === =====
See accompanying Notes to Consolidated Financial Statements.
78
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 US Airways
Investment Management Company, Inc. (USIM, formerly USAM Corp.). 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 10, US Airways' financial results are
significantly influenced by related party transactions. Certain 1998 and 1997
amounts have been reclassified to conform with 1999 classifications.
US Airways is a major United States (U.S.) air carrier engaged primarily
in the business of transporting passengers, property and mail. US Airways
operates predominantly in the Eastern U.S. with major connecting hubs at
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
approximately 56 million passengers during 1999 and is currently the sixth
largest domestic air carrier, as ranked by revenue passenger miles (RPMs).
As of December 31, 1999, USIM owned approximately 11% of the Galileo
Japan Partnership (GJP), which markets the Galileo Computer Reservation
System (Galileo CRS) in Japan. USIM accounts for its investment in GJP using
the equity method because it is represented on the board of directors and
therefore participates in policy making processes. Until June 1999, as
discussed in Note 9, USIM held an interest in Galileo International, Inc.
(Galileo), and accounted for this investment using the cost 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.
(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 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 its 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. In
addition, US Airways' parent company has agreements to acquire up to 430 new
Airbus aircraft, accompanying jet engines and ancillary assets. These
agreements are expected to increase US Airways' financing needs and result in
a significant increase in its financial obligations.
Personnel costs represent US Airways' largest expense category. As of
December 31, 1999,
79
US Airways employed approximately 41,600 full-time equivalent employees.
Approximately 38,250 (87%) of US Airways' employees are covered by collective
bargaining agreements with various unions or will be covered by collective
bargaining agreements for which negotiations are in progress. During 1999,
several contracts between US Airways and its larger employee groups were
ratified. However, negotiations with US Airways flight attendant group and a
few smaller employee groups remain open (See Note 14). US Airways cannot
predict the ultimate outcome of any of these negotiations or the timing of
any new agreements.
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 sometimes uses certain
risk management techniques 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) within Accumulated
other comprehensive income, net of income tax effect.
(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. Interest expenses related
to the acquisition of certain property and equipment are capitalized as an
additional cost of the asset or as a leasehold improvement if the asset is
leased. Costs of major improvements are capitalized for both owned and leased
assets. Maintenance and repairs are recognized as operating expenses as
incurred.
Depreciation and amortization expense for principal asset
classifications is calculated on a straight-line basis to an estimated
residual value. Depreciable lives are 17-30 years for operating flight
equipment, 30 years for facilities and 5-10 years for other ground property
and equipment. Improvements to leased assets are depreciated over the term of
the lease of the related asset. The cost of property acquired under capital
lease is amortized on a straight-line basis to Depreciation and amortization
expense over the term of the lease. When property and equipment is sold or
retired any gain or loss is recognized in the Other, net category of Other
Income (Expense).
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
for Long-Lived Assets to Be Disposed Of" (SFAS 121),
80
US Airways recognizes an "impairment charge" when the expected 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.
(f) GOODWILL AND OTHER INTANGIBLES, NET
Goodwill, the cost in excess of fair value of identified net assets
acquired, is amortized as Depreciation and amortization on a straight-line
basis over 40 years. The 1987 acquisitions of Pacific Southwest Airlines
(Pacific Southwest) and Piedmont Aviation, Inc. (Piedmont Aviation) resulted
in $629 million goodwill. As of December 31, 1999 and 1998, accumulated
amortization related to these acquisitions was $191 million and $176 million,
respectively. Goodwill of $4 million resulting from an investment was written
off in 1999 due to the sale of Galileo stock.
Other intangible assets consist mainly of purchased operating rights at
various airports, capitalized software costs developed for internal use and
the intangible asset associated with the underfunded amounts of certain
pension plans. Operating rights and capitalized software costs are amortized
on a straight-line basis as Depreciation and amortization expense over
periods ranging from five to 25 years. The intangible pension asset is
recognized in accordance with Statement of Financial Accounting Standards No
87, "Employers' Accounting for Pensions" (SFAS 87). As of December 31, 1999
and 1998, accumulated amortization related to other intangible assets was
$210 million and $165 million, respectively.
US Airways periodically evaluates the amortization period of its
goodwill and intangible assets and determines if such assets are impaired by
comparing the carrying values with estimated future undiscounted cash flows.
This analysis is performed separately for the goodwill which resulted from
each acquisition and for the other intangibles. Based on the most recent
analyses, US Airways believes that goodwill and other intangible assets were
not impaired as of December 31, 1999.
(g) INVESTMENT IN MARKETABLE EQUITY SECURITIES
USIM's investment in Galileo was classified as "available-for-sale"
under SFAS 115 and recorded at fair value as of December 31, 1998.
(h) OTHER ASSETS, NET
Other assets, net consist primarily of noncurrent pension assets, the
unamortized balance of deferred compensation, restricted cash and investments
and unamortized debt issuance. Deferred compensation resulted mainly from US
Airways' establishment of an employee stock ownership plan (ESOP) in 1989
(see Note 5(d)). Restricted cash are deposits in trust accounts to
collateralize letters of credit and workers' compensation policies.
Other than 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, deferred compensation related to grants of US Airways
Group common stock to employees (Stock Grants) is recognized based on the
fair market value of the stock on the date of grant. Except on limited
occasions, no deferred compensation is recognized when options to purchase US
Airways Group common stock are granted to employees (Option Grants) because
the exercise price of the stock options is set equal to the fair market value
of the underlying stock on the date of grant. Any deferred compensation is
amortized as Personnel costs over the applicable vesting period.
US Airways recognized expenses related to Stock Grants of $14 million,
$7 million and $6 million in 1999, 1998 and 1997, respectively, and expenses
related to Option Grants of $12
81
million, $12 million and $1 million in 1999, 1998 and 1997, respectively.
Deferred compensation related to Stock Grants was $21 million and $22 million
as of December 31, 1999 and 1998, respectively, and deferred compensation
related to Option Grants was $1 million and $13 million as of December 31,
1999 and 1998, respectively. Expenses related to Option Grants increased in
1998 due to the grant of 2.3 million stock options to US Airways' pilots. In
addition, US Airways recognized expenses related to stock appreciation rights
(SARs) tied to the fair market value of US Airways Group common stock of $1
million and $33 million in 1998 and 1997, respectively, as the result of a
SAR feature granted to stock option holders under US Airways Group's 1992
Stock Option Plan.
The weighted average fair value per stock option for stock options which
have an exercise price equal to the fair value of a share of US Airways Group
common stock at date of grant was $27, $34, and $18 for 1999, 1998 and 1997,
respectively. The weighted average fair value per stock option for stock
options which have an exercise price greater than the fair value of a share
of US Airways Group common stock was $28 for 1999. There were no such grants
during 1998 and 1997. The weighted average fair value per stock option for
stock options which have an exercise price lower than the fair value of a
share of US Airways Group common stock at date of grant was $41 for 1998.
There were no such grants during 1999 and 1997.
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
1999 would have been reduced from $273 million to $203 million, its net
income for 1998 would have been reduced from $559 million to $528 million,
and its net income for 1997 would have been reduced from $1,052 million to
$1,045 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 1999, 1998 and 1997, respectively:
stock volatility of US Airways Group common stock of 50.3%, 51.4% and 52.6%;
risk-free interest rates of 5.4%, 5.5% and 6.6%; expected stock option life
of eight years and no dividend yield in each year.
The pro forma net income information reflects stock options granted
after December 31, 1994 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
the requisite mileage award levels are achieved. US Airways also sells
mileage credits to participating partners in Dividend Miles and recognizes
the resulting revenues as Other operating revenues when the credits are sold.
In 1998, US Airways and American Airlines, Inc. (American) announced a
marketing relationship that gives customers combined access to both
companies' frequent traveler programs. Under the program, members who belong
to US Airways' Dividend Miles and American's AAdvantage are able to claim
awards for airline travel on both airlines and to combine miles when claiming
travel awards on either airline. Each airline compensates the other when
relieved of an obligation to provide a travel award. US Airways records its
obligation to
82
American as a component of Other operating expenses.
US Airways is party to several other agreements that enable US Airways'
and other airlines' customers to earn and redeem travel awards on each
other's frequent traveler program. Increasingly, such agreements require
financial settlement for such activity. US Airways records cash inflows from
these arrangements as a component of Other operating revenues and cash
outflows from these arrangements as a component of Other operating expenses.
In December 1999, the United States Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in
Financial Statements," which provides guidance concerning the timing of
revenue recognition and related matters. As a result, US Airways will
implement SAB 101 effective January 1, 2000 and will change its method of
revenue recognition for the sale of mileage credits.
The portion of proceeds from sales of Dividend Miles that represents US
Airways' obligation to provide future travel to Dividend Miles members will
be deferred and recognized as a component of Passenger transportation
revenues when the service is rendered. The remaining portion of the sales
proceeds will continue to be recognized immediately as a component of Other
operating revenues.
US Airways will recognize a cumulative effect of adopting SAB 101 as a
change in accounting principle as of January 1, 2000. The cumulative effect
of accounting change, net of applicable income taxes, is estimated to be $103
million. The charge represents the difference between the Retained earnings
(deficit) balance as of December 31, 1999, presented in the accompanying
Consolidated Balance Sheets, and what that balance would have been had
US Airways applied SAB 101 for all previous periods.
(j) DEFERRED GAINS, NET
Gains on aircraft sale and leaseback transactions are deferred and
amortized over the terms of the leases as a reduction of the related aircraft
rent expense. Gains related to the exercise of Sabre Inc. (Sabre) options are
deferred and amortized over contractually determined periods as a reduction
to other operating expenses. See Note 2 for additional information concerning
the Sabre options.
(k) PASSENGER TRANSPORTATION REVENUES
Revenue is recognized when the transportation service is rendered.
Passenger ticket sales are recorded as a liability (Traffic balances payable
and unused tickets) and subsequently relieved either through carriage of the
passenger, refund to the passenger or billing from another air carrier which
provided the service. Periodic evaluations of the liability result in
adjustments which are recognized as a component of passenger transportation
revenues.
US Airways purchases all of the capacity (available seat miles)
generated by US Airways Group's three wholly-owned regional air carriers and
recognizes this revenue as "US Airways Express transportation revenue" when
transportation service is rendered by these affiliates or the related tickets
otherwise expire. Liabilities related to tickets sold for travel on these air
carriers, as well as for travel on Shuttle, Inc. (a wholly-owned subsidiary
of US Airways Group), are also included in US Airways' Traffic balances
payable and unused tickets and are subsequently relieved in the same manner
as described above. See Note 10(b) for additional information related to US
Airways' transactions with its affiliates.
In January 1998 and July 1999, US Airways began purchasing the capacity
of Mesa Airlines, Inc. (Mesa) and Chautauqua Airlines, Inc. (Chautauqua),
respectively, in certain markets. Mesa
83
and Chautauqua operate regional jet aircraft in these markets as part of US
Airways Express.
(l) OTHER SELLING EXPENSES
Other selling expenses include credit card fees, computerized
reservations systems fees and advertising and promotional expenses.
Advertising and promotional expenses for 1999, 1998 and 1997 were $40
million, $36 million and $46 million, respectively (such costs are expensed
when incurred).
2. FINANCIAL INSTRUMENTS
(a) TERMS OF CERTAIN FINANCIAL INSTRUMENTS
On January 1, 1998, as part of a comprehensive information technology
services agreement with Sabre, US Airways was granted two tranches of stock
options (SHC Stock Options) to acquire up to 6,000,000 shares of Class A
Common Stock, $.01 par value, of Sabre Holdings Corporation (SHC Common
Stock), Sabre's parent company. Each tranche included 3,000,000 stock
options. In December 1999, US Airways exercised the first tranche of stock
options at an exercise price of $27 and received proceeds of $81 million in
January 2000 in lieu of receiving SHC Common Stock. The related deferred gain
is amortized on a straight-line basis over a contractually determined period
ending December 2012. Stock options in the second tranche have an exercise
price of $27 and are exercisable during a ten-year period beginning January
2, 2003, but are subject to a $127 per share cap on the fair market value of
the underlying common stock. Under certain circumstances, and under certain
conditions, US Airways may select an alternative vehicle of substantially
equivalent value in place of receiving SHC Common Stock.
Periodically, US Airways uses risk management strategies to reduce its
exposure to certain market uncertainties such as increased fuel prices and
foreign currency exposure. 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 may participate in arrangements designed to reduce its
exposure to significant increases in the price of aviation fuel. These
arrangements have the net effect of increasing or decreasing US Airways'
aviation fuel expense in the period in which they are settled. While
US Airways was not a participant in fuel swap contracts as of December 31,
1999 or 1998, US Airways previously entered into fuel swap contracts that
resulted 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. The total notional gallons under these contracts, all of
which were settled during 1998, were approximately 47 million as of
December 31, 1997 (US Airways entered into contracts prior to December 31,
1997 which effectively closed certain hedging arrangements covering
approximately 17 million gallons). For contracts open as of December 31,
1997, US Airways paid fixed prices ranging from $0.496 to $0.600 per notional
gallon and received a variable price per gallon based on market prices.
An aggregate of $28 million of future principal payments of US Airways'
long-term debt due in 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 are recorded as adjustments to Interest
expense.
84
(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 is carried at cost which
approximates fair value. At December 31, 1999 and 1998, US Airways' long-term
investments represent an interest in Netcentives Inc. (Netcentives), an
interest in priceline.com Incorporated (Priceline), an interest in Equant
N.V. (Equant) and ownership interests in privately held companies which have
no readily determinable market values. US Airways estimated the fair values
of its note receivable and long-term debt by discounting expected future cash
flows using current rates offered to US Airways for notes receivable and debt
with similar maturities. The estimated fair value of the SHC Stock Options
was calculated using the Black-Scholes stock option pricing model and is
presented in the table below in accordance with Statement of Financial
Accounting Standards No. 119, "Disclosures about Derivative Financial
Instruments and Fair Value of Financial Instruments" (SFAS 119). These
financial instruments are classified as held for "purposes other than
trading" under SFAS 119 due primarily to certain restrictions, including
limitations on US Airways' ability to exercise or sell these stock options.
The fair values of 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.
In September 1999, US Airways entered into an agreement with Netcentives
which sets forth the terms and conditions under which Dividend Miles from US
Airways' frequent traveler program may be sold utilizing Netcentives'
internet-based electronic commerce system. In connection with the agreement,
US Airways received a warrant to purchase up to 100,000 shares of
Netcentives' common stock for $11 per share in October 1999, subject to
adjustment in certain circumstances. The warrant became exercisable as to 60%
of the total number of shares in October 1999, and an additional 20% of the
total number of shares will become exercisable at the end of each anniversary
thereafter, subject to an exclusivity arrangement with Netcentives. The
warrant is not considered marketable under the provisions of SFAS 115. The
warrant, and the shares issuable when the warrant is exercised, are not
registered under the Securities Act of 1933. The estimated fair value of the
warrant was $6 million as of December 31, 1999 and was calculated using the
Black-Scholes stock option pricing model.
In November 1999, US Airways entered into an agreement with Priceline
which sets forth the terms and conditions under which ticket inventory
provided by US Airways may be sold utilizing Priceline's internet-based
electronic commerce system. In connection with the agreement, US Airways
received warrants to purchase up to 1.5 million shares of Priceline's common
stock for $52.625 per share, subject to adjustment in certain circumstances.
The warrants may become exercisable in phases if certain performance
thresholds are met. To the extent the performance thresholds are not met, the
warrants will become exercisable on November 17, 2004 for a period of six
months. The warrants are not considered marketable under the provisions of
SFAS 115. These warrants, and the shares issuable when the warrants are
exercised, are not registered under the Securities Act of 1933. US Airways
has certain registration rights relating to the shares. The fair value of
these warrants was $18 million as of December 31, 1999 and was determined
using valuations obtained from third parties.
US Airways is a member of the SITA Foundation (SITA), the principal
asset of which is its equity interest in Equant, an international data
network service company. In February and December 1999, SITA sold a portion
of its interest in Equant in secondary public offerings and distributed the
pro rata proceeds to certain of its members (including US Airways) that
elected to participate in the offerings. US Airways sold approximately 58% of
its ownership in Equant and recorded pre-tax gains of $17 million. As of
December 31, 1999, US Airways held depository certificates that may become
convertible into approximately 164,000 shares of Equant. These
85
certificates are not considered marketable under the provisions of SFAS 115.
The estimated fair value of these depository certificates was $18 million and
$26 million as of December 31, 1999 and 1998, respectively, and was based
upon the publicly-traded market value of Equant common stock. The carrying
amount (cost basis) of US Airways' investment in these depository
certificates as of December 31, 1999 and 1998 was de minimis.
The estimated fair values of US Airways' financial instruments, none of
which are held for trading purposes, are summarized as follows (in millions;
brackets denote a liability):
December 31,
---------------------------------------------
1999 1998
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Short-term investments (1) $ 624 $ 624 $ 598 $ 598
Investment in marketable
equity securities (1) - - 301 301
Restricted cash and long-term
investments 130 154 113 140
Note receivable (2) 23 23 27 27
SHC Stock Options - 76 - 119
Long-term debt (excludes
capital lease obligations) (2,196) (2,068) (1,998) (2,243)
Foreign currency contracts:
In a net receivable
(payable) position - 1 - (1)
(1) Classified as "available-for-sale" in accordance with SFAS 115. See
also Notes 1(c) and 1(g).
(2) Current carrying amount included in Other assets, net on US Airways'
Consolidated Balance Sheets, except for the current portion of the note
receivable ($5 million) which is included in Receivables, net.
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 believed,
based on prior earnings and projections of future earnings, that it was more
likely than not that it would be able to utilize tax benefits accumulated
through December 31, 1997 in future periods. Accordingly, at December 31,
1997, the valuation allowance of $695 million was removed, resulting in a net
deferred income tax asset and an income tax credit for 1997.
86
The components of the provision (credit) for income taxes are as follows
(in millions):
1999 1998 1997
---- ---- ----
Current provision:
Federal $254 $179 $ 118
State 27 14 7
--- --- ---
Total current 281 193 125
--- --- ---
Deferred provision:
Federal (79) 157 (447)
State (16) 27 (57)
--- --- ---
Total deferred (95) 184 (504)
--- --- ---
Provision (credit) for income taxes $186 $377 $(379)
=== === ===
In 1999, US Airways was subject to federal regular income tax.
Approximately $117 million in alternative minimum tax (AMT) credits and $190
million in state net operating loss carryforwards were utilized to reduce the
federal and state current tax liabilities.
A reconciliation of taxes computed at the statutory federal tax rate on
earnings before income taxes to the provision (credit) for income taxes is
provided below (in millions):
1999 1998 1997
---- ---- ----
Tax provision computed at
federal statutory rate $161 $328 $ 236
Book expenses not deductible
for tax purposes 19 17 15
State income tax provision
(credit), net of federal
tax benefit 7 27 (32)
Reduction of federal
valuation allowance - - (595)
Other (1) 5 (3)
--- --- ---
Provision (credit) for income taxes $186 $377 $(379)
=== === ===
Effective tax rate 40% 40% (56)%
=== === ===
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1999
and 1998 (in millions):
1999 1998
---- ----
Deferred tax assets:
Leasing transactions $ 161 $ 171
Gain on sale and leaseback transactions 158 137
Employee benefits 807 693
Alternative minimum tax credit carryforwards - 99
Other deferred tax assets 159 120
----- -----
Net deferred tax assets 1,285 1,220
---- ----
Deferred tax liabilities:
Depreciation and amortization 920 932
Other deferred tax liabilities 29 47
--- ---
Total deferred tax liabilities 949 979
--- ---
Net deferred tax assets 336 241
Less: current net deferred tax assets (341) (291)
--- ---
Noncurrent net deferred tax liabilities $ (5) $ (50)
=== ===
The noncurrent net deferred tax liabilities are included in Employee
benefits liabilities and other in the Company's Consolidated Balance Sheets.
Included in the employee benefit deferred tax assets at December 31, 1999
and 1998, among
87
other items, is $537 million and $471 million, respectively, related to
obligations of postretirement medical benefits. US Airways had state net
operating loss carryforwards of $111 million as of December 31, 1999 which
primarily expire from 2006 to 2011. Certain changes in stock ownership can
result in limitation on the amount of net operating loss and tax credit
carryovers that can be utilized each year. US Airways determined it had
undergone such an ownership change in 1998 that did not impact the
utilization of federal tax attributes attributes during 1998 and 1999. 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 projected taxable income and reversals of existing
taxable temporary differences. 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 noncurrent deferred tax liability of
$95 million as of December 31, 1998, for unrealized gains on available-for-
sale investments pursuant to SFAS 115 and a noncurrent deferred tax asset of
$33 million as of December 31, 1998, 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
millions):
1999 1998 1997
---- ---- ----
Pretax book income $ 459 $936 $ 673
Taxable income $1,126 $870 $1,037
The reasons for significant differences between taxable income and pretax
book income in 1999 and 1997 primarily relate to employee pension and
postretirement benefit costs, employee related accruals, leasing transactions,
gains on sale-leaseback transactions, investment gains and certain aircraft
impairment charges.
4. LONG-TERM DEBT, INCLUDING CAPITAL LEASE OBLIGATIONS
Details of long-term debt are as follows (in millions):
December 31,
---------------
1999 1998
---- ----
Senior Debt:
9 5/8% Senior Notes due 2001 $ 175 $ 175
6.8% to 11.7% Equipment Financing Agreements,
Installments due 2000 to 2019 1,993 1,795
8.6% Airport Facility Revenue Bond due 2022 28 28
----- -----
2,196 1,998
Capital Lease Obligations 20 27
----- -----
Total 2,216 2,025
Less Current Maturities (116) (71)
----- -----
$2,100 $1,954
===== =====
Maturities of long-term debt and debt under capital leases for
the next five years (in millions):
2000 $ 116
2001 248
2002 77
2003 199
2004 125
Thereafter 1,451
-----
$2,216
=====
88
Interest rates on $88 million principal amount of long-term debt as of
December 31, 1999 are subject to adjustment to reflect prime rate and other
rate changes.
In 1999, US Airways retired early certain long-term debt with a
principal amount of $47 million.
On December 10, 1999, US Airways 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, both with associated
annual commitment fees of approximately 0.625%. The Facilities are
collateralized by a group of aircraft and slots. US Airways has the right to
prepay any loans or terminate the commitment, in whole or in part, at any
time without premium or penalty. There were no outstanding borrowings under
this agreement as of December 31, 1999 (See Note 14). The anticipated
effective interest rate for borrowing under the Facilities would be a
floating rate based on the London Interbank Offered Rate (LIBOR). Both the
effective interest rate and the annual commitment fees are based on the US
Airways' ratings by Moody's and Standard & Poor's.
Equipment financings totaling $2.0 billion and the Facilities were
collateralized by aircraft, engines and slots with a net book value of
approximately $2.6 billion as of December 31, 1999.
5. EMPLOYEE PENSION AND BENEFIT PLANS
Substantially all of US Airways' employees meeting certain service and
other requirements are eligible to participate in various pension, medical,
life insurance, disability and survivorship and employee stock ownership
plans.
(a) DEFINED BENEFIT AND OTHER POSTRETIREMENT BENEFIT PLANS
US Airways sponsors several qualified and nonqualified defined benefit
plans and other postretirement benefit plans for certain employees.
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.
The following table sets forth changes in the fair value of plan assets,
benefit obligations and the funded status of the plans as of September 30,
1999 and 1998, in addition to the amounts recognized in US Airways'
Consolidated Balance Sheets as of December 31, 1999 and 1998, respectively (in
millions):
Other
Defined Benefit Postretirement
Pension Plans (1) Benefits
---------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Fair value of plan
assets at the beginning
of the period $3,179 $3,101 $ - $ -
Actual return on plan assets 453 246 1 -
Employer contributions 93 33 37 30
Plan participants' contributions - - 2 2
Gross benefits paid (2) (274) (201) (29) (32)
----- ----- ----- -----
Fair value of plan assets
at the end of the period 3,451 3,179 11 -
----- ----- ----- -----
(table continued on following page)
89
Benefit obligation at the
beginning of the period 4,606 3,850 1,205 996
Service cost 179 139 42 36
Interest cost 318 292 83 76
Plan participants' contributions - - 2 2
Plan amendments (3) 38 - - -
Actuarial (gain) loss (692) 526 (141) 127
Gross benefits paid (2) (274) (201) (29) (32)
----- ----- ----- -----
Benefit obligation at the
end of the period 4,175 4,606 1,162 1,205
----- ----- ----- -----
Funded status of the plan (724) (1,427) (1,151) (1,205)
Unrecognized actuarial
(gain) loss 143 1,019 (76) 66
Unrecognized prior service cost 123 90 (105) (118)
Unrecognized transition
obligation (15) (20) - -
Contributions for October to
December 4 21 4 27
----- ----- ----- -----
Net amount recognized in US Airways'
Consolidated Balance Sheets $ (469) $ (317) $(1,328) $(1,230)
===== ===== ===== =====
Components of the amounts recognized in US Airways' Consolidated Balance
Sheets:
Other
Defined Benefit Postretirement
Pension Plans (1) Benefits
---------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Prepaid benefit cost $ 409 $ 310 $ - $ -
Accrued benefit cost (878) (627) (1,328) (1,230)
Adjustment for minimum
pension liability (2) (180) - -
Intangible asset 2 95 - -
Accumulated other comprehensive
income - 85 - -
--- --- ----- -----
Net amount recognized in US Airways'
Consolidated Balance Sheets $(469) $(317) $(1,328) $(1,230)
=== === ===== =====
(1) For plans with accumulated benefit obligations in excess of plan
assets, the aggregate accumulated benefit obligations and plan assets
were $172 million and zero, respectively, as of September 30, 1999, and
$3,640 million and $3,179 million, respectively, as of September 30,
1998.
(2) Gross benefits paid in 1999 and 1998 include lump sum payments for
pilots made pursuant to a special termination benefits charge of $115
million recorded in 1997 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).
(3) In October 1999, US Airways amended the Pension Plan for Employees of US
Airways, Inc. Who are Represented by the International Association of
Machinists and Aerospace Workers to reflect certain benefit level
increases ratified under the new labor contract for employees covered
under this plan. In addition, the US Airways, Inc. Supplementary
Retirement Benefit Plan was amended during 1999 to reflect changes in
certain executive retirement agreements.
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The following table presents the weighted average assumptions used to
determine the actuarial present value of Pension Benefits and Other
Postretirement Benefits:
Other
Defined Benefit Postretirement
Pension Plans Benefits
--------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Discount rate 7.8% 6.8% 7.8% 6.8%
Expected return on plan assets 9.5% 9.5% 5.0% NA
Rate of compensation increase 3.3% 3.3% 4.6% 4.6%
The assumed health care cost trend rate is 6% in 2000, 5% in 2001 and
4.8% in 2002 and thereafter. The assumed health care cost trend rate has a
significant effect on amounts reported for retiree health care plans. A 1%
change in the health care cost trend would have the following effects on Other
Postretirement Benefits as of September 30, 1999 (in millions):
1% Increase 1% Decrease
----------- -----------
Effect on total service and interest costs $ 15 $ (14)
Effect on postretirement benefit obligation $ 125 $ (116)
Total periodic cost for Pension Benefits and Other Postretirement
Benefits (in millions):
Other
Defined Benefit Postretirement
Pension Plans Benefits
---------------- ----------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Service cost $179 $139 $128 $ 42 $ 36 $ 34
Interest cost 318 292 258 83 76 71
Expected return on plan assets (303) (274) (236) (1) - -
Amortization of:
Transition asset (5) (5) (5) - - -
Prior service cost 7 4 6 (12) (12) (12)
Actuarial (gain)/loss 32 16 17 1 (1) (3)
--- --- --- --- --- ---
Net periodic cost 228 172 168 113 99 90
Special termination benefits - - 115 - - -
--- --- --- --- --- ---
Total periodic cost $228 $172 $283 $113 $ 99 $ 90
=== === === === === ===
US Airways recorded a $115 million charge to Personnel costs in 1997
related to an early retirement program offered to 325 US Airways pilots.
These charges were recorded in accordance with SFAS 88.
See Note 7(c) for the amount included within other comprehensive income
arising from a change in the additional minimum pension liability.
(b) DEFINED CONTRIBUTION PENSION PLANS
US Airways sponsors several defined contribution pension plans for
certain employees. US Airways' contributions to these plans are based on
various percentages of the employee's compensation. Expenses related to these
plans, excluding expenses related to US Airways' ESOP and any profit sharing
contributions, were approximately $61 million, $36 million and $57 million
for the years 1999, 1998 and 1997, respectively. Expenses for 1998 include a
$17 million credit related to a favorable legal settlement regarding employer
matching contributions. See Notes 5(d) and 5(e) for information related to US
Airways' ESOP and profit sharing contributions.
91
(c) POSTEMPLOYMENT BENEFITS
US Airways provides certain postemployment benefits to 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 an appropriate triggering event has occurred.
(d) 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 million for its purchase of shares and US Airways contributed an
additional $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, 1999, 1998 and 1997, 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(e) regarding the profit sharing
component of US Airways' ESOP. Annual contributions made by US Airways, and
therefore loan repayments made by the Trust, were $19 million, $27 million and
$11 million in 1999, 1998 and 1997, respectively. The interest portion of
these contributions were $8 million, $10 million and $10 million in 1999, 1998
and 1997, respectively. Approximately 1,018,000 shares of US Airways Group
common stock have been released or committed to be released as of December 31,
1999. US Airways recognized compensation expense related to the ESOP of $4
million, $8 million and $11 million in 1999, 1998 and 1997, respectively,
based on shares allocated to employees (the "shares allocated" method).
Deferred compensation related to the ESOP amounted to approximately $61
million, $65 million and $72 million as of December 31, 1999, 1998 and 1997,
respectively.
See Note 1(h) with respect to US Airways' accounting policies for stock-
based compensation.
(e) 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, certain US Airways
employees participated in a profit sharing program and were granted stock
options to purchase US Airways Group common stock. 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 foregone plus (ii) one time salary
foregone (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 $214 million and made cash distributions to participants of $214
million under this program. After a first quarter 1997 payment of $129
million, US Airways' obligations under this profit sharing program were
satisfied and this program ceased.
92
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 Group's 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(d)). US Airways did not make any provision for profit sharing
contributions in connection with the profit sharing component of the ESOP
during 1999. US Airways' ESOP-related expenses included $4 million and $7
million in 1998 and 1997, respectively, related to this profit sharing
program. Under the DCRP, US Airways makes additional contributions to
participant accounts when US Airways Group achieves certain prescribed pre-tax
margin levels . US Airways' payments relating to 1998 and 1997 were $29
million and $24 million, respectively for the profit sharing component of the
DCRP.
6. COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS TO PURCHASE FLIGHT EQUIPMENT
As of December 31, 1999, US Airways Group had 114 A320-Family aircraft
on firm order, 196 aircraft subject to reconfirmation prior to scheduled
delivery and options for 50 additional aircraft. With respect to the firm-
order aircraft, 50 are expected to be delivered in 2000 and the remaining are
expected to be delivered in the years 2001 through 2003. US Airways also
entered into an agreement with CFM International, Inc. (CFMI) for jet engines
to power the A320-family aircraft. As part of its agreement with CFMI, GE
Engine Services, Inc. will maintain these engines under a long-term,
renewable agreement.
In July 1998, US Airways Group reached an agreement with Airbus for the
purchase of up to 30 widebody A330-300 aircraft. The agreement includes ten
firm aircraft orders, four aircraft subject to reconfirmation prior to
scheduled delivery and options for 16 additional aircraft. Of the ten firm-
order A330-300 aircraft, seven are scheduled for delivery in the year 2000.
US Airways Group can substitute other Airbus widebody aircraft for the A330-
300s, including the A330-200 or members of the A340-Series, for orders other
than the first ten aircraft. In October 1998, US Airways Group reached an
agreement with Pratt & Whitney for jet engines to power these aircraft and to
provide long-term maintenance for the engines.
The minimum determinable payments associated with US Airways Group'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 $2.22 billion in 2000, $1.29 billion in 2001, $457 million
in 2002 and $424 million in 2003.
See Note 10(a) for information related to transactions between US
Airways and its parent company.
(b) LEASES
US Airways leases certain aircraft, engines and ground equipment, in
addition to the majority of its ground facilities. Ground facilities include
executive offices, maintenance facilities 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
93
leases expiring in various years through the year 2023.
The following amounts related to capital leases are included in property
and equipment (in millions):
December 31,
1999 1998
---- ----
Flight equipment $ 63 $ 82
Less accumulated amortization (46) (60)
----- -----
$ 17 $ 22
===== =====
As of December 31, 1999, obligations under capital and noncancelable operating
leases for future minimum lease payments were as follows (in millions):
Capital Operating
Leases Leases
-------- ---------
2000 $ 7 $ 741
2001 5 763
2002 5 704
2003 5 714
2004 4 703
Thereafter - 5,555
----- -----
Total minimum lease payments 26 9,180
Less sublease rental receipts - (106)
-----
Total minimum operating lease payments $ 9,074
=====
Less amount representing interest (6)
-----
Present value of future minimum capital
lease payments 20
Less current obligations under capital
leases (5)
-----
Long-term obligations under capital leases $ 15
=====
For 1999, 1998 and 1997, rental expense under operating leases was $730
million, $695 million and $741 million, respectively. Rental expense for 1999,
1998 and 1997 excludes credits of $14 million, $3 million and $1 million,
respectively, related to US Airways' subleasing of British Aerospace BAe-146-
200 (BAe-146) aircraft (see Note 13). Rental expense for 1997 also excludes $5
million related to expenses recognized by US Airways in conjunction with
certain efficiency measures (see Note 13(c)).
US Airways also leases certain owned flight equipment to both third and
related parties (see Notes 10(b)) under noncancelable operating leases which
expire in the years 2001 through 2009. The future minimum rental receipts
associated with these leases are: $24 million-2000; $24 million-2001; $16
million-2002; $15 million-2003; $14 million-2004; and $26 million thereafter.
The following amounts relate to aircraft leased under such agreements as
reflected in flight equipment (in millions):
December 31,
--------------
1999 1998
---- ----
Flight equipment $ 220 $ 85
Less accumulated depreciation (47) (53)
---- ---
$ 173 $ 32
==== ===
94
(c) LEGAL PROCEEDINGS
US Airways is involved in legal proceedings arising out of an aircraft
accident in September of 1994 near Pittsburgh in which 127 passengers and five
crew members lost their lives. With respect to this accident, the National
Transportation Safety Board (NTSB) held hearings in January and November of
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 four cases currently
pending before the federal judicial panel for multi-district litigation.
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.
In May 1995, US Airways Group, US Airways and the Retirement Income Plan
for Pilots of US Airways, Inc. were sued in federal district court for the
District of Columbia by 481 active and retired pilots alleging that defendants
had incorrectly interpreted the 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. In February 1999, the U.S. Court of Appeals
upheld the district court's decision originally granted in May 1996 in the
defendants' favor. In May 1999, the plaintiffs filed a petition for certiorari
with the U.S. Supreme Court. In October 1999, the U.S. Supreme Court denied
the plaintiff's petition for certiorari. The U.S. District Court has retained
jurisdiction over one count of the complaint alleging violation of a
disclosure requirement under ERISA. US Airways believes there are no
significant penalties likely to result from this claim. Certain of the
plaintiffs have filed a claim before the US Airways Pilot Retirement Board
requesting arbitration of their claim for benefits which they believe were
erroneously calculated.
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 would allow IFPC's and US Airways' claims to
be fully litigated. At the present time, the parties are engaged in written
discovery. US Airways is unable to predict at this time the ultimate
resolution or potential financial impact of these proceedings on US Airways'
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 and BritAir Acquisition Corp. Inc. (collectively, "BA"), American
and American's parent company, AMR Corporation (collectively, "AA"). US
Airways Group and US Airways claimed that BA, 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 US Airways Group and BA (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
BA. The Court dismissed the remaining claims against BA and AA. On February 6,
1998, BA filed its answer to the complaint along with counterclaims against US
Airways Group and US Airways. BA's
95
counterclaims alleged that US Airways breached the Investment Agreement by
terminating the Code Share Agreement between British Airways and US Airways
(Code Share Agreement) and that US Airways breached the Code Share Agreement
by providing certain allegedly confidential information to specific third
parties. In addition, British Airways sought 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. On January 29, 1999, US Airways Group, US Airways and BA jointly filed
a pre-trial order with the Court, and on February 5, 1999, the Court placed
the lawsuit on its trial-ready calendar. On February 5, 1999, BA filed a
motion for summary judgment seeking dismissal of US Airways Group's and US
Airways' claims and a finding that US Airways Group and US Airways are liable
for breach of the Code Share Agreement. Subsequently, US Airways Group and US
Airways filed a memorandum of law opposing BA's motion. On March 6, 2000, US
Airways Group, US Airways and BA announced the settlement of this lawsuit.
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. US Airways was identified by the
City and County of San Francisco as a potentially responsible party. US
Airways and the City and County of San Francisco have entered into an
agreement to resolve this matter and the court entered an order in August 1999
granting a good faith settlement approval for US Airways and several other
settling defendants in the lawsuit.
US Airways Group and US Airways have been named as defendants in three
lawsuits recently filed in U.S. District Court for the Eastern District of
Michigan. Northwest Airlines is also named as a defendant in each action,
while Delta Air Lines and the Airlines Reporting Corporation are named as
defendants in two of the cases. The complaints are brought on behalf of a
class of airline passengers who originated or terminated their trips at the
defendant carriers' respective hubs. These passengers allege that they paid
excessive fares due to the respective airlines' enforcement of ticketing rules
which prohibit the use of a connecting segment coupon which is part of a
through-fare ticket where the passenger does not fly or intend to fly the
entire ticketed itinerary. Plaintiffs allege monopolization and restraint of
trade in violation of federal antitrust laws. They seek recovery of
unquantified treble-damages and an injunction prohibiting future enforcement
of the rules at issue. US Airways believe the claims are without merit and
intend to pursue a vigorous defense.
(d) GUARANTEES
As of December 31, 1999, US Airways guaranteed payments of debt and lease
obligations of Piedmont Airlines, Inc. (Piedmont), a wholly-owned subsidiary
of US Airways Group, totaling $29 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, 1999 the
principal amount of these bonds outstanding was $110 million.
96
(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 U.S. Government.
As of December 31, 1999, most of US Airways' receivables related to
tickets sold to individual passengers through the use of major credit cards or
to tickets sold by other airlines 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.
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 limited by a covenant contained in its 9 5/8% Senior Notes (due
February 2001). In addition, its $500 million senior secured credit
facilities limit the ability of US Airways to pay cash dividends by requiring
a minimum unrestricted cash balance on US Airways. 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) RECEIVABLE FROM PARENT COMPANY
See Note 10(a).
(c) ACCUMULATED OTHER COMPREHENSIVE INCOME,NET OF INCOME TAX EFFECT
US Airways adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998. SFAS
130 establishes standards for the reporting and presentation of comprehensive
income and its components in financial statements. Comprehensive income
encompasses net income and "other comprehensive income," which includes all
other non-owner transactions and events that change stockholder's equity (see
Note 1(g)). US Airways' other comprehensive income includes unrealized gains
on available-for-sale securities and an adjustment for minimum pension
liability, both shown net of income tax effects.
Unrealized gains on available-for-sale securities are accounted for 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. In accordance with
SFAS 87, US Airways recorded an adjustment for minimum pension liability as
of December 31, 1998 and
97
1997. 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).
As presented in the accompanying Consolidated Statements of
Stockholder's Equity (Deficit), US Airways recognized comprehensive income of
$148 million for the year ended December 31, 1999, including net income of
$273 million and other comprehensive loss of $125 million. For the year ended
December 31, 1998, US Airways recognized comprehensive income of $593
million, including net income of $559 million and other comprehensive income
of $34 million. For the year ended December 31, 1997, US Airways recognized
comprehensive income of $1,178 million, including net income of $1,052
million and other comprehensive income of $126 million.
The components of other comprehensive income and the related income
tax effects are as follows (in millions):
1999 1998 1997
------------------------- ------------------------- ------------------------
Before Tax Net Before Tax Net Before Tax Net
tax effect of tax tax effect of tax tax effect of tax
effect (expense) effect effect (expense) effect effect (expense) effect
------ --------- ------ ------ --------- ------ ------ --------- ------
Unrealized gain (loss)
on available-for-sale
securities:
Unrealized gain (loss)
during the period $ (1) $ - $ (1) $112 $(39) $ 73 $160 $(56) $104
Reclassification
adjustment for gains
included in net income
during the period (272) 96 (176) - - - - - -
---- --- ---- --- --- --- --- --- ---
Unrealized gain (loss),
net of reclassification
adjustment (273) 96 (177) 112 (39) 73 160 (56) 104
Change in adjustment for
minimum pension liability 85 (33) 52 (69) 30 (39) 19 3 22
---- --- ---- --- --- --- --- --- ---
Other comprehensive
income (loss) $(188) $ 63 $(125) $ 43 $ (9) $ 34 $179 $(53) $126
==== === ==== === === === === === ===
(d) DISTRIBUTIONS TO AFFILIATE, NET
In May 1999, US Airways Group created USLM Corporation (USLM) to more
efficiently manage its postretirement medical and life insurance benefits for
employees who had retired or were eligible for retirement as of January 1,
1998 from US Airways and certain other subsidiaries.
Under this arrangement, USLM pays a portion of the postretirement benefit
liabilities on behalf of US Airways. However, US Airways continues to record
all postretirement benefit liabilities and related expenses in its
consolidated financial statements. In connection with this arrangement,
US Airways has a note payable of $558 million, bearing interest at 8.25%, to
fund USLM operations. During 1999, US Airways paid interest of $29 million to
USLM of which $4 million was used to reduce US Airways' liabilities for this
population of retirees.
US Airways accounts for the effects of these transactions including the
net distribution of $25 million in the Stockholder's equity (deficit) section
of its Consolidated Balance Sheets.
98
8. OPERATING SEGMENTS AND RELATED DISCLOSURES
In 1998, US Airways adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial statements for
public companies. SFAS 131 also establishes standards for related disclosures
about products and services, and geographic areas. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
US Airways has two reportable operating segments: US Airways and US
Airways Express. The US Airways segment includes the operations of US Airways
(excluding USIM). 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. Both reportable operating segments are engaged in the
business of transporting passengers, property and mail, but have different
operating and economic characteristics. US Airways offers air transportation
using exclusively jets. Its cost structure is higher than US Airways Express
due to, among other things, higher labor and operating equipment costs.
US Airways Express provides air transportation using primarily turboprop
aircraft. Its route network is designed to feed traffic into US Airways' route
system at several points, primarily at US Airways' hubs. All Other (as
presented in the table below) reflects the activity of USIM. See also Notes 1
(a) and 1 (b).
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (see Note 1). US Airways
evaluates segment performance based on several factors, of which the primary
financial measure is income before taxes.
Financial information for each reportable operating segment is set forth
below (in millions):
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Operating Revenues:
US Airways $7,680 $7,845 $7,896
US Airways Express 780 711 605
----- ----- -----
$8,460 $8,556 $8,501
===== ===== =====
Depreciation and amortization:
US Airways $ 370 $ 290 $ 385
US Airways Express - - -
----- ----- -----
$ 370 $ 290 $ 385
===== ===== =====
Interest income:
US Airways $ 186 $ 182 $ 114
US Airways Express - - -
All Other 55 11 7
Intercompany eliminations (42) (11) (9)
----- ----- -----
$ 199 $ 182 $ 112
===== ===== =====
(table continued on following page)
99
Interest expense:
US Airways $ 205 $ 235 $ 267
US Airways Express - - -
All Other 32 - 2
Intercompany elimination (42) (11) (9)
----- ----- -----
$ 195 $ 224 $ 260
===== ===== =====
Equity in earnings of affiliates:
US Airways $ - $ - $ -
US Airways Express - - -
All Other (1) 1 1 30
----- ----- -----
$ 1 $ 1 $ 30
===== ===== =====
Income (Loss) Before Taxes:
US Airways $ 15 $ 764 $ 338
US Airways Express 146 161 119
All Other (1) 298 11 216
----- ----- -----
$ 459 $ 936 $ 673
===== ===== =====
Capital Expenditures:
US Airways $1,409 $ 624 $ 271
US Airways Express - - -
All Other - - -
----- ----- -----
$1,409 $ 624 $ 271
===== ===== =====
Assets (2):
US Airways $6,427 $7,392
US Airways Express - -
All Other 1,070 306
----- -----
$7,497 $7,698
===== =====
(1) See related information in Note 9.
(2) Substantially all located in the United States.
Information concerning operating revenues (based on revenue passenger
miles and yield) in principal geographic areas is as follows (in millions):
1999 1998 1997
---- ---- ----
United States $7,871 $8,011 $7,964
Foreign 589 545 537
----- ----- -----
$8,460 $8,556 $8,501
===== ===== =====
See Note 13 for information regarding nonrecurring and unusual items.
9. USIM'S SALE OF CERTAIN INVESTMENTS
On May 27, 1999, USIM agreed to sell its ownership interest in Galileo.
Galileo owns, operates and markets the Galileo Computer Reservation System
(CRS), which is the world's second largest CRS system, as measured by
revenues generated by travel agent subscribers. The transaction, which closed
on June 3, 1999, resulted in cash proceeds of approximately $307 million and
a pretax gain of approximately $274 million. USIM's interest, 7,000,400
shares of Galileo common stock, was sold as part of a secondary common stock
offering completed by Galileo.
On July 30, 1997, 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). At that time, USIM owned
approximately 21% of ATS. Immediately preceding the IPO, Galileo
International Partnership (GIP) was merged with and into a wholly-owned
limited
100
liability company subsidiary of Galileo and USIM received shares in Galileo
in the same proportion as its partnership interest in GIP. As part of the
IPO, USIM sold some of its Galileo shares and its interest in Galileo was
reduced from 11% to approximately 6.7%, which USIM ultimately sold in 1999,
as described above. In connection with the 1997 sell down of Galileo and the
sale of ATS, USIM received cash proceeds of $224 million and recognized a
pretax gain of $180 million. See also Note 1(a) and 1(g).
10. 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 US Airways Group for these loans
was $96 million and $82 million as of December 31, 1999 and 1998,
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 short-term receivable from US Airways Group was $209 million and $132
million as of December 31, 1999 and 1998, respectively.
During 1997, US Airways Group purchased Shuttle, Inc. (Shuttle). US
Airways provided the financing for this transaction at an interest rate of
7.5% until May 1999 and then at a variable market rate thereafter, which is
reset quarterly. As of December 31, 1999 and 1998, Receivable from parent
company, which is a component of Other Assets, included $232 million and $226
million related to Shuttle's financing, respectively, and $49 million and $80
million related to financing for long-term purchase deposits for Airbus
aircraft, respectively.
US Airways is currently advancing funds to US Airways Group to finance
purchases of US Airways common stock. Interest, at market rates, was accrued
on these advances through September 30, 1999 at which time such advances
became non-interest bearing. US Airways reflects the receivable including
interest as a reduction of Stockholder's Equity (Deficit).
US Airways recorded net interest income of $133 million, $72 million and
$1 million in 1999, 1998 and 1997, respectively, related to the above
transactions.
(b) AIRLINE SUBSIDIARIES OF US AIRWAYS GROUP
US Airways purchases all of the capacity (available seat miles or ASMs)
generated by US Airways Group's three wholly-owned regional airline
subsidiaries (Allegheny, Piedmont and PSA) at a rate per ASM that is
determined by US Airways periodically and, concurrently, recognizing revenues
that result primarily 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 capacity purchase (expense) of $454 million, $414 million and $403
million in 1999, 1998 and 1997, respectively, related to this program.
US Airways provides various services including passenger handling,
maintenance and catering. US Airways recognized other operating revenues of
$64 million, $60 million and $55 million related to these services for the
years 1999, 1998 and 1997, 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 $32 million, $26 million and
$22 million for the years 1999, 1998 and 1997, respectively. US Airways also
leases or subleases certain turboprop aircraft to these regional airline
subsidiaries. US Airways recognized other operating
101
revenues related to these arrangements of $7 million, $6 million and $8
million for the years 1999, 1998 and 1997, respectively.
US Airways' receivables from and payables to these regional airlines
were $13 million and $44 million, respectively, as of December 31, 1999 and $
12 million and $39 million, respectively, as of December 31, 1998.
US Airways and Shuttle provide each other with loans, which arise in the
normal course of business and bear interest at market rates, which are reset
quarterly. US Airways' net payable to Shuttle for intercompany loan balances
was $17 million and $11 million as of December 31, 1999 and 1998,
respectively.
US Airways provides various services to Shuttle including management
services, maintenance services, the sale of fuel, the subleasing of certain
facilities, the sale of frequent traveler mileage credits and reservations
support. US Airways recognized other operating revenues related to these
services of $27 million and $10 million for the years 1999 and 1998,
respectively. Effective October 1999, US Airways leased or subleased certain
jet aircraft to Shuttle and recognized Other operating revenues related to
these arrangements of $2 million for 1999.
US Airways receivables from Shuttle were $3 million and $9 million, as
of December 31, 1999 and 1998 respectively. US Airways' Traffic balances
payable and unused tickets balance sheet line item includes $9 million as of
December 31, 1998 related to tickets sold for travel on Shuttle.
US Airways has promissory notes due to US Airways Group and Shuttle of
$10 million and $16 million, respectively. These notes bear interest at
market rates and are included as a component of Employee benefit liabilities
and other on US Airways Consolidated Balance Sheet as of December 31, 1999.
(c) OTHER US AIRWAYS GROUP SUBSIDIARIES
US Airways purchases a portion of its aviation fuel from US Airways
Group's wholly-owned subsidiary Material Services Company (MSC), which acts
as a fuel wholesaler to US Airways in certain circumstances. US Airways'
aviation fuel purchases were $145 million, $125 million and $183 million for
the years 1999, 1998 and 1997, respectively. US Airways' accounts payable to
MSC was $21 million and $10 million as of December 31, 1999 and 1998,
respectively.
Airways Assurance Limited (AAL) was incorporated in June 1998 and is a
wholly-owned subsidiary of US Airways Group. AAL is a captive insurance
company that was formed to manage a portion of US Airways' airline hull and
liability insurance needs. A portion of the premium paid by US Airways to AAL
is commission revenues to AAL and the remaining premium is used to obtain
policies from insurance underwriters.
(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 also had various agreements with British Airways for ground
handling at certain airports, contract training and other services. US
Airways recognized other operating revenues of $2 million for the first five
months of 1997 related to services US Airways performed for British Airways.
102
US Airways terminated the code share and other business arrangements
between the two companies effective March 29, 1997. The wet lease
arrangements were terminated during 1996. In addition, US Airways believes
that British Airways held no ownership interest in US Airways Group after May
22, 1997.
11. VALUATION AND QUALIFYING ACCOUNTS
Allowance For
--------------------------
Uncollectible Inventory
Accounts Obsolescence
------------- ------------
(in millions)
Balance as of December 31, 1996 $ 12 $143
Additions charged to expense 14 9
Amounts charged to allowance (9) (9)
--- ---
Balance as of December 31, 1997 17 143
Additions charged to expense 9 10
Amounts charged to allowance (5) (44)
--- ---
Balance as of December 31, 1998 21 109
Additions charged to expense 15 46
Amounts charged to allowance (6) (37)
--- ---
Balance as of December 31, 1999 $ 30 $118
=== ===
12. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in millions)
1999
Operating Revenues $2,040 $2,248 $2,069 $2,103
Operating Income (Loss) $ 93 $ 267 $ (107) $ (115)
Net Income (Loss) $ 67 $ 339 $ (55) $ (77)
1998
Operating Revenues $2,031 $2,261 $2,177 $2,087
Operating Income $ 189 $ 366 $ 263 $ 171
Net Income $ 101 $ 196 $ 149 $ 114
See also Note 13.
Note: The sum of the four quarters may not equal the totals for the year
due to rounding of quarterly results.
13. NONRECURRING AND UNUSUAL ITEMS
(a) 1999
US Airways' results include: (i) $14 million pretax credit to Aircraft
rent (including a fourth quarter credit of $3 million and a second quarter
credit of $11 million, both due to the reversal of previously accrued lease
obligations upon the purchase off lease and sale or lease termination of
eight BAe-146 aircraft); (ii) $1 million pretax credit to Aircraft
maintenance (recorded during the second quarter due to the reversal of lease
return provisions upon the purchase off lease and sale of five BAe-146
aircraft); and (iii) $4 million pretax credit to Depreciation and
amortization
103
expense (recorded during the second quarter due to an accrual reversal upon
the sale of a previously abandoned maintenance facility). 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. In the fourth quarter of 1999, in
connection with changes to US Airways' fleet plan, US Airways announced plans
to retire its remaining DC-9-30 aircraft in 2000 and 2001, and certain of its
B737-200 aircraft in 2000. In accordance with provisions of SFAS 121, an
impairment charge is recognized when an asset's carrying value exceeds its
estimated future cash flows (undiscounted and without interest) from
operations and the eventual disposition of the asset. The amount of the
charge is the difference between the asset's carrying value and its fair
value. Management has determined that the expected future cash flows for
certain of these aircraft will be less than their carrying value.
Consequently, an impairment charge of $64 million was recorded to
Depreciation and amortization expense in the fourth quarter of 1999 to reduce
the carrying values of these assets to fair value, as determined by published
sources, recent transactions involving sales of similar aircraft and market
trends in aircraft dispositions.
Pretax gains of $10 million and $7 million were recognized to Other, net
during the first and fourth quarters, respectively, related to the sales of
portions of US Airways' holdings in Equant, an international data network
service provider. Additionally, US Airways recorded a $274 million pretax
gain on the sale of marketable equity securities that resulted from USIM's
sale of its common stock investment in Galileo during the second quarter of
1999. See Notes 1(g) and 9.
(b) 1998
US Airways' results include expense credits related to the early
termination of leases for two BAe-146 aircraft during the third quarter. US
Airways reversed $3 million of previously accrued rent obligations related to
these aircraft (recorded as a credit to Aircraft rent expense). See also
Note 13(a) above.
(c) 1997
US Airways' results include: (i) $122 million in pretax charges
recorded in Personnel costs (including a fourth quarter charge of $115
million related to an early retirement program for pilots (see also Note
5(a)) and a second quarter charge of $7 million related to estimated employee
severance payments due to efficiency measures US Airways announced during May
1997); (ii) a $1 million pretax 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 also Note
13(a) above); (iii) $5 million pretax charges recorded in Other rent and
landing fees (including a third quarter charge of $2 million to write-down
certain equipment to be disposed of and a second quarter charge of $3 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 million pretax charges recorded in Depreciation and
amortization (including third quarter charges of $11 million related to the
May 1997 efficiency measures to write-down certain equipment to be disposed
of and a $59 million SFAS 121 impairment charge resulting from US Airways'
September 1997 decision to retire its DC-9-30 aircraft fleet over the next
several years, and second quarter charges of $1 million to write-off certain
leasehold improvements and an $18 million SFAS 121 impairment charge to
write-down certain DC-9-30 aircraft, both related to the May 1997 efficiency
measures); and (v) $180 million pretax gain recorded in Gains on sales of
investments which resulted from USIM's sale of certain investments as
discussed in Note 9. US Airways also recognized certain tax benefits in 1997,
as discussed in Note 3.
104
14. SUBSEQUENT EVENT
US Airways is in mediation over an amendable labor agreement with the
AFA. The National Mediation Board (NMB), which has been assisting in these
negotiations, declared an impasse in the talks in February 2000 and requested
the parties to submit to binding arbitration. The AFA rejected arbitration,
which triggered a 30-day cooling off period ending at 12:01 a.m. on March 25,
2000. The AFA has publicly threatened that, if a contract is not reached by
March 25, 2000, it would conduct an organized campaign it has named "CHAOS"
(Create Havoc Around Our System) to disrupt service throughout US Airways'
system. In response, US Airways publicly announced that, while it intends to
continue to negotiate with the AFA, it will cease operations on March 25,
2000 if no agreement is reached with the AFA. US Airways anticipates that
the impact associated with the 30-day cooling off period and a cessation of
operations, if any, will have a material adverse effect on its results of
operations, particularly its short-term revenues.
While management is committed to and believes that a mutually acceptable
labor agreement with the AFA will ultimately be reached, US Airways cannot
predict the outcome of such negotiations at this time. As of March 15, 2000,
US Airways had received proceeds of $500 million from its Facilities (see
Note 4). While management cannot predict, with any degree of certainty, the
duration, if any, of a shutdown, management believes that if a shutdown were
to occur, US Airways has available sources of financing, including existing
cash, borrowings under the Facilities, and potentially available financing
sufficient to meet its obligations during the period of time management
believes such a shutdown might reasonably last.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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 17, 2000 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 17, 2000 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 17, 2000 and is incorporated herein by
reference.
105
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 17, 2000 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, 1999
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999
- Consolidated Statements of Stockholders' Equity (Deficit)
for each of the three years ended December 31, 1999
- Notes to Consolidated Financial Statements
(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, 1999
- Consolidated Balance Sheets as of December 31, 1999 and 1998
- Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999
- Consolidated Statements of Stockholder's Equity (Deficit)
for each of the three years ended December 31, 1999
- 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
106
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).
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. (AVSA), an affiliate
of aircraft manufacturer Airbus Industrie 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) (portions
of this exhibit were omitted pursuant to a request for
confidential treatment and filed separately with the
Unites States Securities and Exchange Commission
(SEC)).
10.2 Amendment No. 1 dated June 10, 1998 to purchase
agreement dated October 31, 1997 between US Airways
Group and AVSA (incorporated by reference to Exhibit
10.2 to US Airways Group's Annual Report on Form 10-K
for the year ended December 31, 1998) (portions of
this exhibit have been omitted pursuant to a request
for confidential treatment and filed separately with
the SEC).
10.3 Amendment No. 2 dated January 19, 1999 to purchase
agreement dated October 31, 1997 between US Airways
Group and AVSA (incorporated by reference to Exhibit
10.3 to US Airways Group's Annual Report on Form 10-K
for the year ended December 31, 1998) (portions of
this exhibit have been omitted pursuant to a request
for confidential treatment and filed separately with
the SEC).
10.4 Amendment No. 3 dated March 31, 1999 to purchase
agreement dated October 31, 1997 between US Airways
Group and AVSA (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, 1999)
(portions of this exhibit have been omitted pursuant
to a request for confidential treatment and filed
separately with the SEC).
10.5 Amendment No. 4 dated August 31, 1999 to purchase
agreement dated October 31, 1997 between US Airways
Group and AVSA (incorporated by reference to Exhibit
107
10.2 to US Airways Group's Quarterly Report on Form
10-Q for the three months ended September 30, 1999)
(portions of this exhibit have been omitted pursuant
to a request for confidential treatment and filed
separately with the SEC).
10.6 Amendment No. 5 dated October 29, 1999 to purchase
agreement dated October 31, 1997 between US Airways
Group and AVSA (portions of this exhibit have been
omitted pursuant to a request for confidential
treatment and filed separately with the SEC).
10.7 Purchase agreement dated November 24, 1998 between US
Airways Group and AVSA (incorporated by reference to
Exhibit 10.4 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1998)
(portions of this exhibit have been omitted pursuant
to a request for confidential treatment and filed
separately with the SEC).
10.8 Incentive Compensation Plan of US Airways Group, Inc.
as amended and restated January 1, 1997 (incorporated
by reference to Exhibit 10.6 to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1997).
10.9 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).
10.10 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).
10.11 US Airways Group, Inc. Nonemployee Director Stock
Purchase Plan (incorporated by reference to Exhibit A
to US Airways Group's Proxy Statement dated May 19,
1999).
10.12 US Airways Group, Inc. Long-Term Incentive Plan
(incorporated by reference to Exhibit B to US Airways
Group's Proxy Statement dated May 19, 1999).
10.13 1998 Pilot Stock Option Plan of US Airways Group,
Inc. (incorporated by reference to Exhibit 10 to
US Airways Group's Quarterly Report on Form 10-Q for
the three months ended September 30, 1998).
10.14 1997 Stock Incentive Plan of US Airways Group, Inc.
as amended and restated as of November 18, 1997
(incorporated by reference to Exhibit 10.9 to US
Airways Group's Annual Report on Form 10-K for the
year ended December 31, 1997).
10.15 Amendment No. 1 dated September 13, 1999 to the 1997
Stock Incentive Plan of US Airways Group, Inc. as
amended and restated as of November 18, 1997.
10.16 1996 Stock Incentive Plan of US Airways Group, Inc.
as amended and restated as of May 20, 1998
(incorporated by reference to Exhibit 10 to US
Airways Group's Quarterly Report on Form 10-Q for the
three months ended June 30, 1998).
10.17 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).
10.18 US Airways Group Nonemployee Director Deferred Stock
Unit Plan (incorporated
108
by reference to Exhibit 10.12 to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1997).
10.19 Amendment No. 1 dated July 22, 1998 to the US Airways
Group Nonemployee Director Deferred Stock Unit Plan
(incorporated by reference to Exhibit 10.13 to US
Airways Group's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.20 Amendment No. 2 dated March 17, 1999 to the US
Airways Group Nonemployee Director Deferred Stock
Unit Plan (incorporated by reference to Exhibit 10.14
to US Airways Group's Annual Report on Form 10-K for
the year ended December 31, 1998).
10.21 1992 Stock Option Plan of USAir Group (incorporated
by reference to Exhibit A to US Airways Group's Proxy
Statement dated March 31, 1992).
10.22 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).
10.23 Employment Agreement between US Airways Group and US
Airways and the Chairman of both companies
(incorporated by reference to Exhibit 10.18 to
US Airways Group's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.24 Employment Agreement between US Airways Group and US
Airways and the President and Chief Executive Officer
of both companies (incorporated by reference to
Exhibit 10.19 to US Airways Group's Annual Report on
Form 10-K for the year ended December 31, 1998).
10.25 Employment Agreement between US Airways Group and US
Airways and the Senior Vice President-Finance and
Chief Financial Officer of both companies
(incorporated by reference to Exhibit 10.3 to US
Airways Group's Quarterly Report on Form 10-Q for the
three months ended June 30, 1999).
10.26 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).
10.27 Agreement between US Airways and its Chairman 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).
10.28 Agreement between US Airways and its President and
Chief Executive 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).
10.29 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).
109
10.30 Agreement between US Airways and its Senior Vice
President-Corporate Development with respect to
certain employment arrangements (incorporated by
reference to Exhibit 10.24 to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1998.
10.31 Agreement between US Airways and its Senior Vice
President-Finance and Chief Financial Officer
providing supplemental retirement benefits
(incorporated by reference to Exhibit 10.5 to US
Airways Group's Quarterly Report on Form 10-Q for the
three months ended June 30, 1999).
10.32 Agreement between US Airways and its Chairman
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).
10.33 Amendment to the agreement between US Airways and its
Chairman providing supplemental retirement benefits
(incorporated by reference to Exhibit 10.27 to
US Airways Group's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.34 Agreement between US Airways and its President and
Chief Executive 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).
10.35 Amendment to the agreement between US Airways and its
President and Chief Executive Officer providing
supplemental retirement benefits (incorporated by
reference to Exhibit 10.29 to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1998).
10.36 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 on
Form 10-K for the year ended December 31, 1995).
10.37 Agreement between US Airways and its Senior Vice
President-Corporate Development providing
supplemental retirement benefits (incorporated by
reference to Exhibit 10.31 to US Airways Group's
Annual Report on Form 10-K for the year ended
December 31, 1998).
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.
110
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.
B. REPORTS ON FORM 8-K
DATE OF REPORT SUBJECT OF REPORT
February 25, 2000 Underwriting agreement 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 February
25, 2000 to the Prospectus, dated July 30,
1999, relate to the offering by US Airways,
Inc. of Pass Through Certificates, Series
2000-1.
February 23, 2000 News release announcing US Airways'
intention to shut down on March 25, 2000 if
no agreement is reached with its flight
attendants who are represented by the
Association of Flight Attendants by that
date.
February 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.
January 19, 2000 News release disclosing the results of
operations for both US Airways Group and US
Airways for the three months and year ended
December 31, 1999, and selected operating
and financial statistics for US Airways for
the same periods.
January 13, 2000 Certain forward-looking information was
provided by US Airways to the investment
community related to aircraft fleet and
selected operating and financial
statistics.
December 16, 1999 Certain forward-looking information was
provided by US Airways to the investment
community related to aircraft fleet and
selected operating and financial
statistics.
November 15, 1999 Certain forward-looking information was
provided by US Airways to the investment
community related to aircraft fleet and
selected operating and financial
statistics.
November 8, 1999 Certain forward-looking information was
provided by US Airways to the investment
community related to aircraft fleet.
111
SIGNATURES
Pursuant to the requirements of Section 13 or 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, on March 15,
2000.
US AIRWAYS GROUP, INC. (REGISTRANT)
By: /s/ Rakesh Gangwal
--------------------------------
Rakesh Gangwal, Director, President 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 in the capacities indicated, on March 15, 2000.
By: /s/ Rakesh Gangwal
--------------------------------
Rakesh Gangwal, Director, President and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Thomas A. Mutryn
--------------------------------
Thomas A. Mutryn, Chief Financial Officer
(Principal Financial Officer)
By: /s/ Anita P. Beier
--------------------------------
Anita P. Beier, Vice President and Controller
(Chief Accounting Officer)
By: *
--------------------------------
Stephen M. Wolf, Director and Chairman
By: *
--------------------------------
Mathias J. DeVito, Director
By: *
--------------------------------
Peter M. George, Director
By: *
--------------------------------
Robert L. Johnson, Director
By: *
--------------------------------
Robert LeBuhn, Director
By: *
--------------------------------
John G. Medlin, Jr., Director
112
By: *
--------------------------------
Hanne M. Merriman, Director
By: *
--------------------------------
Thomas H. O'Brien, Director
By: *
--------------------------------
Hilda Ochoa-Brillembourg, Director
By: *
--------------------------------
Richard B. Priory, Director
By: *
--------------------------------
Raymond W. Smith, Director
By: /s/ Thomas A. Mutryn
--------------------------------
Thomas A. Mutryn, Attorney-In-Fact
* Signed pursuant to power of attorney filed herewith.
113
SIGNATURES
Pursuant to the requirements of Section 13 or 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, on March 15,
2000.
US AIRWAYS, INC. (REGISTRANT)
By: /s/ Rakesh Gangwal
-------------------------------
Rakesh Gangwal, Director, President 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 and in the capacities indicated, on March 15, 2000.
By: /s/ Rakesh Gangwal
-------------------------------
Rakesh Gangwal, Director, President and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Thomas A. Mutryn
-------------------------------
Thomas A. Mutryn, Chief Financial Officer
(Principal Financial Officer)
By: /s/ Anita P. Beier
--------------------------------
Anita P. Beier, Vice President and Controller
(Chief Accounting Officer)
By: *
--------------------------------
Stephen M. Wolf, Director and Chairman
By: *
--------------------------------
Mathias J. DeVito, Director
By: *
--------------------------------
Peter M. George, Director
By: *
--------------------------------
Robert L. Johnson, Director
By: *
--------------------------------
Robert LeBuhn, Director
By: *
--------------------------------
John G. Medlin, Jr., Director
114
By: *
--------------------------------
Hanne M. Merriman, Director
By: *
--------------------------------
Thomas H. O'Brien, Director
By: *
--------------------------------
Hilda Ochoa-Brillembourg, Director
By: *
--------------------------------
Richard B. Priory, Director
By: *
--------------------------------
Raymond W. Smith, Director
By: /s/ Thomas A. Mutryn
-------------------------------
Thomas A. Mutryn, Attorney-In-Fact
* Signed pursuant to power of attorney filed herewith.
115