Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K.

ANNUAL REPORT PURSUANT TO SECTION 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2002

or

For the transition period from            to            

US Airways Group, Inc.

(DEBTOR AND DEBTOR-IN-POSSESSION)

(Exact name of registrant as specified in its charter)

State of Incorporation: Delaware

2345 Crystal Drive, Arlington, Virginia 22227

(Address of principal executive offices)

(703) 872-7000

(Registrant’s telephone number, including area code)

(Commission file number: 1-8444)

(I.R.S. Employer Identification No: 54-1194634)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common stock, par value $1.00 per share (Common Stock)

Indicate by check mark whether the registrant (1) has 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 registrant was required to file such reports), and (2) has 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 is not contained herein, and will not be contained, to the best of the registrant’s 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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  x    No  ¨

The aggregate market value of the voting stock of US Airways Group, Inc. held by non-affiliates on June 28, 2002 was approximately $245,000,000. On February 28, 2003, there were outstanding approximately 68,077,000 shares of Common Stock.

(this space intentionally left blank)

US Airways Group, Inc.

Form 10-K

Year Ended December 31, 2002

Table of Contents

(table of contents continued on following page)

US Airways Group, Inc.

Form 10-K

Year Ended December 31, 2002

Table of Contents

(continued)

Part I

Item 1. Business

Overview

US Airways Group, Inc. (US Airways Group or the Company) is a corporation 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) 872-7000).

US Airways Group’s primary business activity is the operation of a major network air carrier through its ownership of the common stock of US Airways, Inc. (US Airways), Allegheny Airlines, Inc. (Allegheny), Piedmont Airlines, Inc. (Piedmont), PSA Airlines, Inc. (PSA), MidAtlantic Airways, Inc. (MidAtlantic), US Airways Leasing and Sales, Inc. (US Airways Leasing and Sales), Material Services Company, Inc. (MSC) and Airways Assurance Limited, LLC (AAL). In connection with the agreement between US Airways and its pilots, the Company expects to structure MidAtlantic as a division of US Airways rather than as a separate subsidiary of the Company.

As discussed in more detail below, on August 11, 2002 (Petition Date), the Company and its seven domestic subsidiaries (collectively, the Debtors), which account for substantially all of the operations of the Company, including its principal operating subsidiary US Airways, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code) in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division (Bankruptcy Court or Court) (Case Nos. 02-83984-SSM through 02-83991-SSM). The Debtors’ cases are being jointly administered under the caption “In re US Airways Group, Inc., et al., Case No. 02-83984-SSM.” The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

US Airways, which is also a corporation 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 2002, US Airways accounted for approximately 83% of the Company’s operating revenues on a consolidated basis. US Airways enplaned approximately 47 million passengers in 2002 and was the seventh largest U.S. air carrier (as ranked by revenue passenger miles (RPMs)). As of December 31, 2002, US Airways operated 280 jet aircraft (see Part I, Item 2 “Properties” for additional information related to aircraft operated by US Airways) and provided regularly scheduled service at 91 airports in the continental United States, Canada, Mexico, France, Germany, Italy, Spain, the Netherlands, the United Kingdom and the Caribbean. US Airways expects to begin service to Ireland in May 2003. US Airways’ executive offices are located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone number (703) 872-7000). US Airways’ internet address is www.usairways.com.

The Company’s operations consist of two segments: US Airways and US Airways Express. The US Airways segment includes the operations of US Airways jet service. The US Airways Express segment includes operations from three wholly-owned airlines and three affiliate regional jet operators as of December 31, 2002. As mentioned above, US Airways accounted for approximately 83% of the Company’s operating revenues on a consolidated basis in 2002. 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 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 Boston’s Logan International Airport (Logan), New York’s LaGuardia Airport (LaGuardia) and Washington’s Ronald Reagan Washington

1

National Airport (Reagan National). Measured by departures, US Airways is among the largest at each of the foregoing airports and is the largest air carrier in many smaller eastern U.S. cities such as Buffalo, Hartford, Richmond, and Rochester. US Airways is also a leading airline from the Northeast U.S. to Florida. US Airways’ East coast-based hubs, combined with its strong presence at many East coast airports, have made it the largest intra-East coast carrier, comprising 35% of the industry’s intra-East coast revenues based on the most recent industry revenue data available.

US Airways Leasing and Sales, MSC and AAL operate in support of the Company’s airline subsidiaries in areas such as the procurement of aviation fuel, assisting with maintenance contracts, the marketing of surplus assets and insurance.

Filings with the Securities and Exchange Commission (SEC) for US Airways Group and US Airways, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are accessible free of charge at investor.usairways.com/edgar.cfm.

Update on Chapter 11 Proceedings

Chapter 11 Reorganization

The following discussion provides general background information regarding the Debtors’ Chapter 11 cases, but is not intended to be an exhaustive summary. For additional information regarding the effect of these cases on the Debtors, investors should refer to the Bankruptcy Code and to the disclosure statement approved by the Bankruptcy Court on January 17, 2003 and filed with US Airways Group’s Current Report on Form 8-K, dated January 31, 2003 and filed with the SEC on February 4, 2003 (Disclosure Statement).

In response to a series of adverse events that led to severe financial losses, in mid-2002, US Airways Group’s management undertook a comprehensive restructuring effort to achieve cost competitiveness through economic concessions from key stakeholders, such as employees, aircraft lenders and lessors and other vendors in order to allow the Company to reduce costs, create financial flexibility and restore its long-term viability and profitability. Despite extensive negotiations and substantial progress in obtaining concessions, the Company was unable to achieve sufficient cost savings from a sufficient number of its key stakeholders to enable it to restructure on a consensual basis outside of Chapter 11 of the Bankruptcy Code. Accordingly, faced with declining seasonal revenues and cash flow, the Company determined it was necessary to file for relief under Chapter 11 as a means of completing the restructuring process and putting the Company in a position to return to profitability.

On August 11, 2002, the Company and its seven domestic subsidiaries, which account for substantially all of the operations of the Company, including its principal operating subsidiary, US Airways, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (Case Nos. 02-83984-SSM through 02-83991-SSM). The reorganization cases are being jointly administered under the caption “In re US Airways Group, Inc., et al., Case No. 02-83984-SSM.” The Debtors continue to operate their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

At hearings held on August 12, 2002, the Bankruptcy Court granted the Debtors’ first day motions for various relief designed to stabilize their operations and business relationships with customers, vendors, employees and others and entered orders granting authority to the Debtors to, among other things: (a) pay pre-petition and post-petition employee wages, salaries, benefits and other employee obligations; (b) pay vendors and other providers in the ordinary course for goods and services received from and after the Petition Date; (c) honor customer service programs, including the Debtors’ Dividend Miles program and its ticketing programs; (d) honor

2

obligations arising prior to the Petition Date related to the Company’s interline, clearinghouse, code sharing and other similar agreements; (e) pay certain pre-petition taxes and fees, including transportation excise taxes, payroll taxes and passenger facilities charges; and (f) pay certain other obligations. The Bankruptcy Court also gave interim approval for US Airways Group to borrow $75 million under a proposed $500 million senior secured debtor-in-possession financing facility provided by Credit Suisse First Boston, Cayman Islands Branch, and Bank of America, N.A., with participation from Texas Pacific Group (Original DIP Facility). At that time, US Airways Group also announced its entry into a memorandum of understanding with Texas Pacific Group (TPG) for a $200 million equity investment upon emergence from bankruptcy (the TPG MOU). Such proposed investment was subject to higher or otherwise better offers. As required by the Bankruptcy Code, the United States Trustee appointed an official committee of unsecured creditors (the Official Committee). The Official Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court.

On September 25, 2002, each of the Debtors filed with the Bankruptcy Court their respective “Schedules of Assets and Liabilities and Statements of Financial Affairs” (Initial Schedules and Statements) and the corresponding explanatory notes (Explanatory Notes), which set forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions contained in the Explanatory Notes. On December 2, 2002, certain of the Debtors filed amendments to the Initial Schedules and Statements to add certain new creditors thereto. The deadline for filing proofs of claim with the Bankruptcy Court was November 4, 2002 (General Bar Date), with a limited exception for governmental entities, which had until February 7, 2003 to file proofs of claim (Governmental Units Bar Date). The Debtors’ claims agent received approximately 4,500 timely-filed proofs of claims as of the General Bar Date totaling approximately $61 billion in the aggregate, and approximately 350 proofs of claims timely-filed by governmental entities totaling approximately $225 million in the aggregate. As is typical in reorganization cases, differences between amounts scheduled by the Debtors and claims by creditors are being investigated and resolved in connection with the claims resolution process. The aggregate amount of claims filed with the Bankruptcy Court far exceeds the Debtors’ estimate of such liability. The Debtors believe that many of these claims are duplicative, based upon contingencies that have not occurred, or otherwise are overstated, and are therefore invalid. The Plan of Reorganization (defined below) provides for a disputed claims resolution process. In light of the number of creditors of the Debtors, the claims resolution process may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known. Until the disputed claims resolution process is finalized and the amount of allowed claims determined in connection therewith, distributions to general unsecured claimants under the Plan of Reorganization will not be made. On February 27, 2003, the Debtors filed an exhibit to its Plan of Reorganization listing the contracts that were assumed and rejected.

On September 26, 2002, after receiving an offer on September 25, 2002, the Company entered into a definitive investment agreement with the Retirement Systems of Alabama to be the proposed Plan of Reorganization equity sponsor, superseding the TPG MOU. On January 17, 2003, the Company and the Retirement Systems of Alabama entered into an amendment to the investment agreement (as amended, the RSA Investment Agreement) which provides that the Retirement Systems of Alabama Holdings LLC (RSA) will replace The Retirement Systems of Alabama as the investor under the RSA Investment Agreement. Under the RSA Investment Agreement, which is a keystone to the Plan of Reorganization, RSA will invest $240 million in cash and is expected to hold approximately 36.2%, on a fully-diluted basis, of the equity in, and the right to designate eight of 15 directors of, the reorganized US Airways Group immediately upon emergence from Chapter 11 pursuant to a confirmed plan of reorganization, as more fully described in the Disclosure Statement (the RSA Investment). Just as with the TPG MOU, the RSA Investment was subject to higher or otherwise better offers, to be solicited by the Debtors in accordance with the amended bidding procedures (Amended Bidding Procedures) approved by the Bankruptcy Court. The Amended Bidding Procedures established November 15, 2002 as the deadline for submission to the Debtors of competing plan proposals. No competing proposals were received by the Debtors and, accordingly, RSA was designated as the winning plan sponsor.

3

US Airways Group also accepted a commitment from The Retirement Systems of Alabama for a fully-underwritten $500 million debtor-in-possession financing facility on substantially the same terms as the Original DIP Facility (RSA DIP Facility or DIP Facility). The RSA DIP Facility replaced the Original DIP Facility. See “Debtor-In-Possession Financing” and “RSA Investment” below for more information regarding the RSA DIP Facility and RSA Investment.

Under the Bankruptcy Code, the Debtors had the exclusive right for 120 days after the Petition Date to file a plan of reorganization and, if they did so, 60 additional days to obtain necessary acceptances of their plan. Such periods were subject to extension by the Bankruptcy Court for cause. On December 12, 2002, the Bankruptcy Court extended the Debtors’ exclusive period to propose a plan of reorganization (Filing Period) through January 31, 2003, and to solicit acceptances of such plan (Solicitation Period) through April 1, 2003. On February 20, 2003, the Bankruptcy Court once again extended the Filing Period and Solicitation Period through March 31, 2003 and May 30, 2003, respectively.

Bankruptcy law does not permit solicitation of votes on a reorganization plan until the Bankruptcy Court approves the applicable disclosure statement relating to the reorganization plan. On December 20, 2002, the Debtors filed the “Joint Plan of Reorganization of US Airways Group, Inc. and Affiliated Debtors and Debtors-in-Possession” and the related disclosure statement. On January 17, 2003, the Debtors filed the “First Amended Joint Plan of Reorganization of US Airways Group, Inc. and Affiliated Debtors and Debtors-in-Possession” (Plan of Reorganization) and related Disclosure Statement. On January 16 and January 17, 2003, the Bankruptcy Court held hearings on the Disclosure Statement and, on January 17, 2003, entered an order approving the Disclosure Statement as containing information adequate to enable creditors whose votes are being solicited to make an informed judgment whether to accept or reject the Plan of Reorganization and, among other things, authorized a balloting and solicitation process. That solicitation process commenced on January 31, 2003 when the Debtors mailed solicitation packages to creditors and concluded on March 10, 2003, which was the date by which creditors’ ballots were to be received by the Debtors’ voting agent in order to be counted. March 10, 2003 also marked the deadline by which objections to the Plan of Reorganization were to be filed with the Bankruptcy Court. In addition, the Bankruptcy Court scheduled March 18, 2003 as the date for commencement of a hearing on confirmation of the Plan of Reorganization.

The Plan of Reorganization constitutes a separate plan of reorganization for each of the Debtors. In accordance with the Bankruptcy Code, the Plan of Reorganization divides claims against, and interests in, each of the Debtors into classes (Classes of Claims and Interests) according to their relative seniority and other criteria and provides the same treatment for each claim or interest of a particular class unless the holder of a particular claim or interest agrees to a less favorable treatment of its claim or interest. Among other things, the Plan of Reorganization generally provides for full payment of all allowed administrative and priority claims, and the distribution of shares of new equity in reorganized US Airways Group to unsecured creditors of the Debtors in satisfaction of their allowed claims, which distribution is estimated to have a value, as disclosed in the Disclosure Statement, expected to be between 1.2 percent to 1.8 percent of total allowed unsecured claims. US Airways Group’s existing subordinated creditors and equity security holders are not entitled to any distribution under the Plan of Reorganization. Investors should refer to the Plan of Reorganization and the Disclosure Statement for a complete statement of its terms.

On March 18, 2003, the Bankruptcy Court entered an order confirming the Plan of Reorganization (Confirmation Order). While the Plan of Reorganization has been confirmed by the Bankruptcy Court, it has not yet been consummated. The Plan of Reorganization will be consummated on the business day determined by the Debtors on which all conditions to the consummation of the Plan of Reorganization have been satisfied or waived and is the day upon which the Plan of Reorganization is substantially consummated (the Effective Date). Provided that the conditions precedent to consummation are either satisfied or waived in accordance with

4

the Plan of Reorganization, the Effective Date of the Plan of Reorganization is expected to occur on or about March 31, 2003, unless such date is extended by the Debtors. The following are the conditions precedent to the occurrence of the Effective Date: (i) the Bankruptcy Court shall have entered one or more orders (which may include the Confirmation Order) authorizing the assumption of unexpired leases and executory contracts by the Debtors as contemplated by the Plan of Reorganization; (ii) all conditions precedent to the funding under the RSA Investment Agreement shall have been satisfied or waived in accordance with the terms thereof and the funding under such agreement shall have occurred; (iii) the $900 million loan guarantee (ATSB Guarantee) from the Air Transportation Stabilization Board ( Stabilization Board—see “ATSB Loan” below) shall have been executed and delivered by all of the parties thereto, and all conditions precedent to the consummation thereof shall have been waived or satisfied in accordance with the terms thereof, and funding as agreed upon under the ATSB Guarantee shall have occurred; (iv) the tentative agreements reached in December 2002, between US Airways and the employee groups represented by the Association of Flight Attendants, the Communication Workers of America, the International Association of Machinists and Aerospace Workers and the Transport Workers Union modifying earlier restructuring agreements to incorporate additional cost reductions shall have been ratified and executed by the parties thereto; (v) requisite actions shall have been taken such that the pension funding requirements with respect to the employee defined benefit pension plans maintained by US Airways shall be consistent with the pro forma financial projections appended to the Disclosure Statement; and (vi) the Confirmation Order shall remain unstayed. There can be no assurance that all conditions will be satisfied by March 31, 2003.

The Chapter 11 filing triggered defaults on substantially all debt and lease obligations of the Debtors. Subject to certain exceptions under the Bankruptcy Code, the Debtors’ Chapter 11 filing automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim were enjoined unless and until the Bankruptcy Court lifted the automatic stay.

Notwithstanding the above general discussion of the automatic stay, however, the Debtors’ right to retain and operate certain aircraft, aircraft engines and other equipment defined in section 1110 of the Bankruptcy Code that are leased or subject to a security interest or conditional sale contract are specifically governed by section 1110 of the Bankruptcy Code. That section provides, in relevant part, that unless the Debtors, within 60 days after the Petition Date (Section 1110 Deadline), agree to perform all of the obligations (Section 1110 Agreement) under the lease, security agreement, or conditional sale contract and cure all defaults thereunder (other than defaults constituting a breach of provisions relating to the filing of the Chapter 11 cases, the Debtors’ insolvency or other financial condition of the Debtors) within the time specified in section 1110, the right of the lessor, secured party or conditional vendor to take possession of such equipment in compliance with the provisions of the lease, security agreement, or conditional sale contract and to enforce any of its other rights or remedies under such lease, security agreement, or conditional sale contract is not limited or otherwise affected by the automatic stay, by any other provision of the Bankruptcy Code, or by any power of the Bankruptcy Court. Until the occurrence of the Effective Date, the provisions of section 1110 may materially impact the Debtors’ options with respect to its fleet optimization strategy.

In order to address the fleet-related issues raised by section 1110, the Debtors entered into various stipulations and agreements with their respective aircraft lessors and mortgagees including, but not limited to, stipulations to extend the section 1110 deadline (Section 1110 Deadline Extension) and Section 1110 Agreements. By March 31, 2003, the Debtors expect that every aircraft in the Debtors’ fleet will be subject to a restructuring agreement, a Section 1110 Agreement or a Section 1110 Deadline Extension, the agreement with respect to the aircraft will have been assumed, or such aircraft will have been abandoned or rejected. The Debtors may

5

make further adjustments to their aircraft fleet consistent with the Plan of Reorganization and the Confirmation Order. As of December 31, 2002, the Debtors had rejected or abandoned 85 aircraft including 57 aircraft that were parked prior to the Petition Date.

On January 30, 2003, the Debtors filed a motion requesting (i) a determination from the Bankruptcy Court that the Debtors satisfy the financial requirements for a “distress termination” of the defined benefit Retirement Income Plan for Pilots of US Airways, Inc. (Pilot Retirement Plan) under section 404(c)(2)(B)(ii)(IV) of the Employee Retirement Income Security Act of 1974, as amended, and approval of such pension plan’s termination and (ii) the authorization of the implementation of a defined contribution retirement plan for its pilots (Distress Termination Motion). A hearing on the Distress Termination Motion began on February 21, 2003 and continued thereafter from February 24 through March 1, 2003. On March 2, 2003, the Bankruptcy Court authorized the Debtors to terminate the Pilot Retirement Plan on March 31, 2003 subject to a determination, under the arbitration procedures established by the collective bargaining agreement and the Railway Labor Act, that the proposed termination does not violate the collective bargaining agreement between US Airways and the Air Line Pilots Association (ALPA). The Bankruptcy Court authorized US Airways to establish, effective as of the date of termination, a follow-on defined contribution retirement plan for the pilots of US Airways, on terms consistent with the letter agreement of December 13, 2002, between US Airways and ALPA. On March 21, 2003, the Company and ALPA reached agreement on a replacement pension plan to be effective April 1, 2003. The agreement was ratified by the ALPA Master Executive Council and is subject to approval by the Pension Benefit Guaranty Corporation (PBGC) and final approval by the Bankruptcy Court. On March 24, 2003, the Debtors filed a motion with the Bankruptcy Court seeking supplemental authority to implement the new defined contribution plan. The motion is expected to be heard on March 28, 2003. The Company anticipates receiving final PBGC approval prior to the proposed plan termination on March 31, 2003.

Debtor-In-Possession Financing

On September 26, 2002, the Bankruptcy Court approved the Company’s designation of RSA as its proposed Plan of Reorganization equity sponsor and granted interim approval of the $500 million RSA DIP Facility on substantially the same terms as the Original DIP Facility. The Bankruptcy Court also granted US Airways Group the authority to borrow up to $300 million under the RSA DIP Facility. On September 27, 2002, the Company borrowed $300 million under the RSA DIP Facility and used a portion of such funds to repay the $75 million that was outstanding under the Original DIP Facility. A final order approving the RSA DIP Facility was entered by the Bankruptcy Court on November 8, 2002. On March 7, 2003, an additional $69 million was borrowed under the RSA DIP Facility.

The RSA DIP Facility consists of a $250 million term loan facility and a $250 million revolving credit facility (with a $50 million letter of credit sub-facility) and is guaranteed by each of the Debtors (other than US Airways Group). The RSA DIP Facility is secured by first priority liens on all unencumbered present and future assets of the Debtors and by best priority available junior liens on all other assets of the Debtors, other than certain specified assets, including assets which are subject to financing agreements that are entitled to the benefits of section 1110 of the Bankruptcy Code to the extent such financing agreements prohibit such junior liens. The Company has the option of borrowing under the RSA DIP Facility at an interest rate of the prime rate plus 2.5% or LIBOR plus 4.0%.

The maturity date of the RSA DIP Facility is the earlier of the effective date of a plan of reorganization of the Debtors or September 30, 2003. The RSA DIP Facility may be accelerated upon the occurrence of an event of default under the RSA DIP Facility and contains customary mandatory prepayment events including, among other things, the occurrence of certain asset sales and the issuance of certain debt or equity securities.

6

The definitive documentation relating to the RSA DIP Facility contains covenants that require the Company to satisfy ongoing financial requirements including operating results, cash receipts and liquidity. Such covenants also limit, among other things, the Debtors’ ability to borrow additional money, pay dividends and make additional corporate investments.

Under the RSA DIP Facility, borrowing availability is determined by a formula based on a percentage of eligible assets. The eligible assets consist of certain previously unencumbered aircraft, aircraft engines, spare parts, flight simulators, real property (including interests in certain airport facilities), takeoff and landing slots, ground equipment and accounts receivable. The underlying values of such assets may fluctuate periodically due to prevailing market conditions, and fluctuations in value may have an impact on the borrowing availability under the RSA DIP Facility. Availability may be further limited by additional reserves imposed by the administrative agent and the collateral agent as they deem necessary in their reasonable credit judgment.

The remaining $131 million of availability under the RSA DIP Facility, subject to the limitation on borrowing availability discussed above, will be available to the Company after certain conditions are met, including (i) the entry by the Bankruptcy Court of a final order approving the terms and conditions of the RSA DIP Facility documents; (ii) the minimum statutory and regulatory review periods shall have expired with respect to US Airways’ marketing agreements with United Air Lines, Inc. (United) and neither the U.S. Department of Transportation nor any other applicable governmental authority or third party has filed any material objection to such marketing agreements which has not been resolved; (iii) (a) the receipt of written confirmation from the Stabilization Board of its conditional approval for the ATSB Guarantee under the Air Transportation Safety and System Stabilization Act (Stabilization Act), subject to confirmation by the Bankruptcy Court of a plan of reorganization reasonably acceptable to the Stabilization Board, (b) the approval by the Stabilization Board of a substantially final draft of the plan of reorganization and disclosure statement to be filed in the cases, and (c) the Company demonstrating to the reasonable satisfaction of RSA that it is likely to satisfy all of the conditions to the issuance of the ATSB Guarantee; and (iv) banks, financial institutions and other institutional lenders satisfactory to the Company and RSA delivering commitments to lend at least the $100 million “at-risk” portion of the $1 billion Stabilization Board guaranteed loan. The Company met the condition described in clause (i) above when the Bankruptcy Court entered a final order approving the RSA DIP Facility on November 8, 2002. With respect to the marketing agreements described in clause (ii) above, on October 2, 2002, the U.S. Department of Transportation announced that it had completed its review of US Airways’ marketing agreements with United and had determined to end the statutory waiting period for such agreements. The Company met the conditions described in clauses (iii)(a) and (iii)(b) above when the Company received written confirmation from the Stabilization Board of its conditional approval of the ATSB Guarantee by letter on February 11, 2003 and the Plan of Reorganization, which was reasonably acceptable to the Stabilization Board, was confirmed by the Bankruptcy Court on March 18, 2003. The Company met the condition in clause (iv) above when it secured commitments from its “at-risk” lenders.

On March 20, 2003, the Company notified RSA that it was not in compliance with a material financial covenant under the DIP Facility. Under the terms of the DIP Facility, RSA could exercise one or more remedies, including but not limited to, a cancellation of its commitment to lend under the DIP Facility as well as the right, upon five business days’ notice, to recover the collateral for the loan. The Company is in discussions with RSA regarding the funding of the remaining $131 million available under the DIP Facility and a potential waiver or standstill agreement while the Company completes the final stages of emergence from Chapter 11.

7

RSA Investment

The RSA Investment Agreement covers certain matters, including but not limited to, board composition, the Company’s post-emergence capital structure and the replacement of the Retirement Systems of Alabama with the Retirement Systems of Alabama Holdings LLC as the investor under the RSA Investment Agreement. RSA will invest $240 million in cash and is expected to hold approximately 36.2%, on a fully-diluted basis, of the equity in the reorganized US Airways Group immediately upon emergence from Chapter 11 pursuant to the confirmed Plan of Reorganization. If the RSA Investment is consummated in accordance with its terms, RSA is expected to have a voting interest of approximately 71.6% in the reorganized US Airways Group immediately upon emergence from Chapter 11 pursuant to the confirmed Plan of Reorganization and would hold eight of 15 seats on US Airways Group’s Board of Directors. The RSA Investment is subject to customary conditions to closing as well as the Company’s achievement of certain financial and operational benchmarks. The RSA Investment, if consummated, contemplates the cancellation of the common stock of US Airways Group (Common Stock).

Notice and Hearing Procedures for Trading in Claims and Equity Securities

In connection with the Company’s bankruptcy filing, on August 12, 2002, the Bankruptcy Court entered an interim order (Interim NOL Order) to assist the Debtors in monitoring and preserving their net operating losses (NOLs) by imposing certain notice and hearing procedures on trading in (i) claims against the Debtors (Claims) or (ii) equity securities in the Company. In general, the Interim NOL Order applied to any person or entity that, directly or indirectly, beneficially owns, or was about to enter into a transaction pursuant to which it would directly or indirectly beneficially own, (i) an aggregate principal amount of Claims equal to or exceeding $50 million (including a lease or leases under which one or more of the Debtors are lessees and pursuant to which payments of $50 million or more, in the aggregate, are or will become due) or (ii) three million or more shares of Common Stock. Under the Interim NOL Order, such persons or entities were required to provide 30 calendar days advance notice to the Court, the Debtors, and Debtors’ counsel prior to purchasing or selling any Claims or Common Stock, and the Debtors had 30 calendar days after receipt of such notice to object to any proposed transfer described therein. If the Debtors filed an objection, such transaction would not be effective unless approved by a final and nonappealable order of the Bankruptcy Court. If the Debtors did not object within such 30 day period, such transaction may have proceeded solely as set forth in the notice. Moreover, the Interim NOL Order required that any person or entity who, directly or indirectly, beneficially owned $50 million or more in Claims or three million or more shares of Common Stock file and serve a notice setting forth the size of their holdings on or before the later of (i) 40 days after the effective date of the notice of entry of the Interim NOL Order or (ii) 10 days after becoming such a beneficial owner. Pursuant to the Interim NOL Order, any purchase, sale or other transfer of Claims or equity securities in the Company in violation of these procedures was null and void ab initio as an act in violation of the automatic stay under section 362 of the Bankruptcy Code.

After holding a final hearing on the Interim NOL Order on September 26, 2002, the Bankruptcy Court entered the final order on October 2, 2002 (Final NOL Order), which modified certain aspects of the Interim Order. The modifications include, among others, (i) an increase from $50 million to $100 million of the Claims threshold amount for determining which creditors are subject to the notice and objection procedures of the Final NOL Order and (ii) a decrease from 30 calendar days to 10 business days of the period during which the Debtors may object to a notice of proposed transfer of Claims or Common Stock. The Common Stock threshold amount for determining which equity holders are subject to the notice and objection procedures of the Final NOL Order remains unchanged from the Interim NOL Order.

8

ATSB Loan

As part of its restructuring efforts, US Airways sought and received conditional approval for a $900 million loan guarantee under the Stabilization Act from the Stabilization Board in connection with a proposed $1 billion loan financing (the ATSB Loan). US Airways applied for this loan and related guarantee in order to provide additional liquidity necessary to carry out its restructuring plan. On February 11, 2003, the Stabilization Board issued a letter to US Airways reaffirming its approval of the ATSB Guarantee, subject to certain conditions. The Stabilization Board’s conditions for issuance of the ATSB Guarantee included, among other things, the execution and delivery of legally binding agreements acceptable to the Stabilization Board containing economic concessions from key stakeholders, confirmation of the Plan of Reorganization by the Bankruptcy Court, a resolution of US Airways pension funding issue approved by the Pension Benefit Guarantee Corporation and, if necessary, the Bankruptcy Court, resolution of certain collateral issues, as well as customary closing documentation.

It is expected that the ATSB Loan will consist of a $1 billion term loan facility to US Airways, $900 million of which will be guaranteed by the Stabilization Board. The ATSB Loan will also be guaranteed by each of the Debtors (other than US Airways). The ATSB Loan will be secured by first priority liens on substantially all of the unencumbered present and future assets of the Debtors (including certain previously unencumbered aircraft, aircraft engines, spare parts, flight simulators, real property, takeoff and landing slots, ground equipment and accounts receivable), other than certain specified assets, including assets which are subject to other financing agreements. The ATSB Loan is expected to bear interest as follows: (i) 90% of the ATSB Loan will bear interest (a) if funded through a participating lender’s commercial paper conduit program, at a rate of interest equal to the conduit provider’s weighted average cost related to the issuance of certain commercial paper notes and other short-term borrowings plus 0.30% or (b) if not funded through such commercial paper conduit program, at a rate of interest equal to LIBOR plus 0.40% and (ii) 10% of the ATSB Loan will bear interest at LIBOR plus 4.0%. In addition, it is expected that US Airways will be charged an annual guarantee fee in respect of the ATSB Guarantee equal to 4.0% of the Stabilization Board’s exposure under the ATSB Guarantee, with such guarantee fee increasing by ten basis points annually. In addition, it is expected that the Stabilization Board will receive warrants that will enable it to purchase approximately 10% of the Company’s common stock on a fully diluted basis.

The maturity date of the ATSB Loan is expected to be six and one-half years following the funding date. In addition, it is expected that the ATSB Loan will require semi-annual amortization payments commencing in October 2006, each such amortization payment to be in the amount of $125 million, with a final scheduled principal payment of $250 million due on the maturity date of the ATSB Loan.

The ATSB Loan will be subject to acceleration upon the occurrence of an event of default under the ATSB Loan and will contain mandatory prepayment events including, among other things, (i) the occurrence of certain asset sales and the issuance of certain debt or equity securities and (ii) from excess cash flow should the value of the collateral pledged in respect of the ATSB Loan decrease below a specified coverage level.

It is expected that the definitive documentation relating to the ATSB Loan will contain covenants that will require US Airways to satisfy ongoing financial requirements including operating results, fixed charge coverage and liquidity. Such covenants also limit, among other things, the Debtors’ ability to pay dividends, make additional corporate investments and acquisitions, enter into mergers and consolidations and modify certain concessions obtained as part of the Chapter 11 restructuring.

Definitive documentation for the ATSB Loan has not yet been completed and funding of the ATSB Loan is subject to certain conditions precedent which have not yet been satisfied. While the

9

Company expects to satisfy such conditions in the near future, there is no assurance that it will satisfy such conditions.

Airline Industry and the Company’s Position in the Marketplace

Most of the markets in which US Airways Group’s airline subsidiaries operate are highly competitive. These 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 maximize revenue per available seat mile. Discount and promotional fares are often non-refundable and subject to various restrictions such as minimum stay requirements, advance ticketing, limited seating and change fees. 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 nonstop flights, markets served and the time certain flights are operated. To a lesser extent, competition can involve other products, such as frequent flier programs and airport clubs. Despite numerous competitive pressures, the Company has remained the leading carrier at 71 of the 148 airports it serves on the East coast.

A substantial portion of US Airways flights are to or from cities in the eastern United States. Accordingly, severe weather, air traffic control problems and downturns in the economy in the eastern United States adversely affect US Airways Group’s results of operations and financial condition. With its concentration in the eastern United States, US Airways’ average stage length (i.e., trip distance) is shorter than those of other major airlines. This makes US Airways more susceptible than other major airlines to competition from surface transportation (e.g., automobile, trains, etc.).

US Airways considers the growth of low-cost competition and the growing presence of competitors’ regional jets in certain of its markets to be its foremost competitive threats. Recent years have seen the entrance and growth of low-cost 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), AirTran Airways, Inc. and JetBlue Airways. Southwest has steadily increased operations within the eastern United States since first offering service in this region in late 1993. The Company anticipates further low-cost competition in the industry in the future.

Other major airlines have substantially increased the number of regional jets in the eastern United States. Regional jets are faster, quieter, more comfortable than turboprops and generally preferred by customers over turboprops. The Company continues to add regional jets to its fleet (see “US Airways Express Network” below); however, it continues to lose significant market share in markets where its turboprop affiliates compete with other major airline affiliates which operate regional jets.

In August 2002, Continental Airlines, Delta Air Lines, and Northwest Airlines entered into a marketing alliance (CO/DL/NW Alliance). Implementation of that alliance is subject to a number of conditions imposed by the Department of Justice and the Department of Transportation (DOT). The carriers have objected to the DOT imposed conditions and indicated an intention to proceed without accepting them. However, to date, no substantive components of the alliance have been implemented and the carriers are in further discussion with the DOT. Should the CO/DL/NW Alliance be implemented without conditions similar to those indicated by the DOT, it could negatively impact the Company’s business and the benefits that the Company may ultimately realize from its own alliance with United, which is described below (See “Marketing Agreements with United Air Lines, Inc.”).

10

The growth of low cost carriers and the rise of price transparency due to the internet have resulted in continued pricing pressure for the Company. A decline in overall industry traffic since 2001 has also not been matched by an equivalent reduction in industry capacity, resulting in an oversupply situation that also has depressed yields. As fares have lowered and the range of fares has become more transparent, the gap between the lowest fares and the highest fares on any given route has come under increasing scrutiny. In response, the Company has undertaken several initiatives to modify the rules regarding the lowest priced tickets. In addition, several competitors have instituted revised fare structures centered on a lower fare for walk-up business travel. Given the Company’s route network and its corresponding dependence on business travelers, these new fare structures pose a threat to revenues to the extent that they encroach into the Company’s network.

In recent years, the Company’s profitability was significantly eroded by competitive pressures (including the incursion of both regional jets and low-cost carriers into its operating territories), unfavorable economic trends, and rising fuel and labor costs. The May 2000 proposed merger of United and US Airways Group was designed to address this profitability erosion by adding US Airways Group into a global network. During the merger period, which ended in the termination of the agreement after failing to receive approval from the United States Department of Justice in late July 2001, the Company was precluded from restructuring its operations as a stand-alone carrier. Following the merger termination, the Company embarked on a phased, stand-alone restructuring plan to address the problems facing its airline subsidiaries; however, this plan was preempted by the September 11^th terrorist attacks.

US Airways was one of the airlines most significantly affected by the events of September 11^th. Not only were US Airways operations shut down entirely for three days in September, but Reagan National, at which US Airways is the largest carrier, was closed until October 4, 2001. Service was not fully restored there until May 2002. In addition, the East coast in general has been the part of the country most affected in the aftermath of the attacks. US Airways Group’s airline subsidiaries compete heavily with trains and automobiles as a result of their short-haul network and, as such, have been more affected than other airlines. The increased airport security charges and procedures have also had a disproportionate impact on short-haul travel.

In response to these adverse events, the Company, led by a new management team headed by David N. Siegel, who joined the Company in March 2002, implemented a plan to return the Company to profitability. The plan first required significant cost savings from key constituent groups including employees, vendors, aircraft lenders/lessors and financiers and other groups. Second, the plan sought to boost revenues and enhance competitiveness by the increased use of regional jets to service markets in an efficient manner. Finally, the Company sought to enhance revenues by entering into a strategic alliance for code sharing with domestic and international airlines. To obtain sufficient liquidity to implement the restructuring plan, the Company sought and obtained approval for a $1 billion, six and one-half year term loan, $900 million of which will be guaranteed by the federal government’s Stabilization Board, subject to certain conditions.

While the Company was able to successfully negotiate cost savings from many of its employee groups, the Company determined that it was unlikely to conclude consensual negotiations with all of the remaining labor groups, various vendors, aircraft lenders/lessors and financiers in a time frame necessary to complete an out-of-court restructuring. Factors contributing to this conclusion included the large number of lenders/lessors and financiers, the inability of trustees to modify payment terms of public equipment financings without the unanimous consent of holders of widely-held trust certificates and the Company’s inability to reject/abandon surplus aircraft leases, return excess aircraft and extinguish applicable obligations outside of Chapter 11. Faced with declining seasonal revenues, the Company filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code for it and its domestic subsidiaries to maximize their liquidity position and their prospects for a successful reorganization. As described above, on March 18, 2003 the Bankruptcy Court confirmed the Company’s Plan of Reorganization subject to certain conditions and the Company currently expects to complete its

11

emergence on or about March 31, 2003.

On March 20, 2003, the Company announced that the formal commencement of military action against Iraqi required the airline to take immediate steps to limit the war’s impact on its restructuring. The Company said it is evaluating actions that must be taken to actively manage the economic and operating challenges presented by the war. The Company also disclosed that its passenger bookings had been severely impacted as customers delayed or cancelled their travel plans, with transatlantic bookings the most heavily impacted. The Company noted that all of the airline’s labor contracts contain a provision that allows it to implement a 5 percent pay deferral for up to 18 months for all union, management and administrative employees, in conjunction with this military action. The Company is evaluating cost-reduction or deferral initiatives, with pay deferral and capacity reductions among the actions being considered.

US Airways Express Network

Certain air carriers have code share arrangements with US Airways to operate 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 wholly-owned regional airlines). Typically, under a code share arrangement, one air carrier places its designator code and sells tickets on the flights of another air carrier (its code share partner). US Airways Express carriers are an integral component of the Company’s operating network. Due to the relatively small local traffic base at its hubs, US Airways relies heavily on feed traffic from its US Airways Express affiliates who carry passengers from low-density markets to US Airways’ hubs. As of December 2002, the US Airways Express network served 157 airports in the continental U.S., Canada and the Bahamas, including 46 airports also served by US Airways. During 2002, US Airways Express air carriers enplaned approximately 13 million passengers (of these approximately 7 million passengers were enplaned by the Company’s wholly-owned regional airlines), approximately 58% of whom connected to the Company’s flights. The Company uses its US Airways Express operations to feed connecting traffic at its hubs from low density markets that are uneconomical for US Airways to serve with large jets. In addition, US Airways Express operators offer complementary service in existing US Airways markets by operating flights in scheduling gaps between US Airways flights.

The US Airways Express code share arrangements are either in the form of a capacity purchase or a “prorate” agreement. The three regional wholly-owned airlines and the regional jet affiliate operators are capacity purchase relationships. The regional jet affiliates with a capacity purchase agreement are Chautauqua Airlines (Chautauqua), Mesa Airlines, Inc. (Mesa), Trans States Airlines, Inc. (Trans States), Midway Airlines Corporation (Midway) and Republic Airlines (Republic). The capacity purchase agreements provide that all revenues (passenger, mail and freight) go to US Airways. In return, US Airways agrees to pay predetermined fees to such airlines for operating an agreed number of aircraft, without regard to the number of passengers onboard. In addition, these agreements provide that certain variable costs, such as fuel and airport landing fees, be reimbursed 100% by US Airways. US Airways controls marketing, scheduling, ticketing, pricing and seat inventories. The regional jet capacity purchase agreements have expirations from 2008 to 2012 and provide for optional extensions at the Company’s discretion. The carriers with a prorate agreement are non-owned turboprop operators and include all or a portion of the turboprop operations of Colgan Airlines, Inc. (Colgan), Trans States, Shuttle Acquisition LLC (Shuttle America), and Air Midwest, Inc. (Air Midwest). The prorate agreements provide for affiliate carriers to pay certain service fees to US Airways as well as a prorated share of revenue for connecting customers. US Airways is responsible for pricing and marketing of connecting services to and from the prorate carrier. The prorate carrier is responsible for pricing and marketing the local, point to point markets. All US Airways Express carriers use US Airways’ reservation systems, logos, service marks, aircraft paint schemes and uniforms similar to US Airways.

12

US Airways’ agreements with its pilots provides that it may operate up to 465 regional jets, subject to certain restrictions. As of December 31, 2002, the regional jet affiliates operated 70 regional jets as US Airways Express. Additional regional jets up to 465 are subject to the “Jets for Jobs” protocol and related agreements with US Airways pilots. The Jets for Jobs protocol provides for 50% of new regional jet flight crew opportunities created as a result of increased use of regional jets at US Airways to be offered to furloughed US Airways pilots. The Jets for Jobs protocol requires consensus by the pilots union at each regional carrier where additional regional jets will be flown. Allegheny, PSA, Piedmont, Mesa and Midway pilots have all agreed to Jets for Jobs.

In an attempt to boost revenues and enhance competitiveness, the Company has begun to implement a key component to its overall restructuring plan - increased use of regional jets. To this end, in October 2002, US Airways reached agreement with Mesa to fly 20 additional 50-seat regional jets as part of the US Airways Express network. Some of these additional Mesa aircraft started flying in February 2003 and all are expected to enter service during calendar year 2003. In December 2002, US Airways reached an agreement with Midway to fly 18 50-seat regional jets as part of the US Airways Express network. These aircraft began to enter service in January 2003 and all such new service is expected to be complete during 2003. In December 2002, US Airways and Chautauqua reached an agreement to fly an additional nine regional jet aircraft that will enter into service in the second half of 2003. Also, US Airways and Republic agreed to a new Jet Service Agreement that provides for an additional 23 regional jets that will enter service in 2003 and 2004. Both the Chautauqua and the Republic agreements remain contingent on Jets for Job-related pilot provisions. An agreement between US Airways and Midway provides for a US Airways option, at its sole discretion, to add up to 48 additional aircraft. In connection with the Midway agreement, the Company has provided debtor-in-possession financing to Midway and will receive a substantial equity stake in the reorganized Midway, subject to consummation of binding agreements and completion of Midway’s reorganization.

The additional Mesa, Midway, Chautauqua and Republic regional jets are subject to certain conditions, including but not limited to, aircraft availability, the affiliate’s ability to finance the additional aircraft at agreed upon economic terms, and in the case of Chautauqua and Republic, each remains contingent upon a pilot agreement on Jets for Jobs. In addition, US Airways’ pilots have filed a grievance with the Company with respect to the interpretation and implementation of provisions of the Jets for Jobs protocol at Mesa. Because each of these situations is subject to an agreement on labor practices or economic terms by multiple parties, the implementation of the Company’s restructuring plan with respect to increased use of regional jets could be adversely affected.

Marketing Agreements with United Air Lines, Inc.

US Airways reached comprehensive marketing agreements with United in July 2002. The agreements received approvals from the pilot unions for both US Airways and United. The Department of Transportation announced on October 2, 2002, that it had concluded its review of the agreements. These agreements are in the process of being implemented. Once fully implemented, US Airways and United passengers will be able to contact either airline and make a single reservation that involves travel on either or both airlines (code share travel) through new streamlined ticketing, baggage handling and check-in procedures. In addition, US Airways and United customers have the opportunity to earn Dividend Miles and Mileage Plus Miles on both airlines and members of either airlines’ airport club may access both airline’s airport clubs under certain conditions. US Airways and United customers will also have the opportunity to redeem Dividend Miles and Mileage Plus awards on both airlines. The first elements of the marketing agreements began October 14, 2002, with the introduction of reciprocal airport lounge access between the two carriers’ club programs, as well as interline electronic ticketing. The ability for passengers to earn frequent flier miles on flights operated by either of the two airlines began November 1, 2002. The first code share flights began in January of 2003.

13

United, as well as its parent company, UAL Corporation (UAL), and certain of its affiliates, filed for protection under Chapter 11 of the Bankruptcy Code on December 9, 2002. United requested bankruptcy court authority immediately to assume these agreements and the court granted United’s request.

Restructuring Cost Savings

The Company has projected total savings from its restructuring efforts averaging approximately $1.9 billion per year over the period through 2008. Savings are comprised of employee cost reductions, restructured aircraft obligations, and other savings from vendors and affiliates and from process reengineering benefits. Employee cost reductions are expected to yield approximately $1.0 billion in annual savings as a result of pay and benefit reductions and changes in work rules. These savings estimates include the impact of contractual and inflationary cost increases that would have occurred during this period. Restructured aircraft obligations and changes in the mix of the operating fleet are expected to generate $460 million to $500 million in average annual savings and changes in vendor contracts, management concessions, and process reengineering initiatives are expected to generate at least $400 million in annual savings. For 2003, however, the improvement in expenses is expected to be approximately $1.5 billion compared to pre-restructured 2003 expenses due to timing and other differences in certain cash costs as compared to expenses. The estimated savings are subject to change with changes in the Company’s operating environment and level of operations over the forecast period.

Industry Regulation and Airport Access

The Company’s airline subsidiaries operate under certificates of public convenience and necessity or commuter authority issued by the 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 periodic routine inspections to major overhauls. From time-to-time, the FAA issues airworthiness 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, expanded flight data recorder parameters; cargo hold smoke detection/fire suppression systems; enhanced ground proximity warning systems; fuselage pressure bulkhead reinforcement; fuselage lap joint inspection rework; increased inspections and maintenance procedures to be conducted on certain aircraft; increased cockpit security; fuel quality system improvements; and domestic reduced vertical separation.

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 locales, including Boston, Washington, D.C., Chicago, San Diego, San Francisco and Orange County (California), among others, 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.

14

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”). 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. Although such taxes are not operating expenses to the Company, they represent an additional cost to the Company’s customers.

The Aviation and Transportation Security Act (Security Act) was enacted in November 2001. Under the Security Act, substantially all aspects of civil aviation passenger security screening were federalized and a new Transportation Security Administration (TSA) under the DOT was created. The TSA was then transferred to the Department of Homeland Security pursuant to the Homeland Security Act of 2002. The Security Act, among other matters, mandates improved flight deck security; carriage at no charge of federal air marshals; enhanced security screening of passengers, baggage, cargo, mail, employees and vendors; enhanced security training; regulations issued in connection therewith require fingerprint-based background checks of all employees and vendor employees with access to secure areas of airports; and provision of passenger data to U.S. Customs. Funding for the TSA is provided by a new fee collected by air carriers from their passengers of $2.50 per flight, but not more than $5.00 per one-way trip, and a new fee on air carriers that is limited to the amount that carrier spent on passenger security screening in 2000. Implementation of the requirements of the Security Act have resulted and will continue to result in increased costs for US Airways, Allegheny, Piedmont and PSA and their passengers and has and will likely continue to result in service disruptions and delays.

Many major U.S. airports impose passenger facility charges. The ability of airlines to contest increases in these charges is restricted by federal legislation, DOT regulations and judicial decisions. Legislation enacted in 2000 permitted airports to increase passenger facility charges effective April 1, 2001. With certain exceptions, air carriers pass these charges on to passengers. However, the ability of the Company to pass-through security fees and passenger facility charges 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. In April 2000, legislation was enacted which eliminates slot restrictions beginning in 2001 at O’Hare and in 2007 at LaGuardia and Kennedy. Among other things, the legislation encouraged the development of air service to smaller communities from slot-controlled airports. During the interim period while slot restrictions remained in effect at LaGuardia, airlines could apply for slot exemptions to serve smaller communities using aircraft with a maximum seating capacity of less than 71. In connection with this, the Company and several other airlines increased service from LaGuardia which led to excessive flight delays. In response to such delays, the FAA implemented a slot lottery system in December 2000 limiting the number of new flights at LaGuardia. As a result, several airlines, including US Airways, were required to reduce the number of flights added at LaGuardia in connection with this legislation. The resulting allocation of slots from the slot lottery system was initially scheduled to expire on September 15, 2001, but on August 3, 2001, the FAA announced an extension until October 26, 2002. On July 8, 2002, the FAA announced another extension until October 30, 2004. Based on the excessive flight delays resulting from the initial grant of slot exemptions, along with LaGuardia’s limited ability to expand operations due to land and airspace constraints, the Company believes that it is likely some form of slot restrictions will remain despite their scheduled elimination in 2007.

As a result of the September 11^th terrorist attacks, the FAA closed Reagan National, where the Company has substantial operations, until October 4, 2001, after which the FAA permitted carriers to reinstate service in phases. As of March 2002, the Company was operating 77% of its pre-September 11^th departures. On March 13, 2002, the FAA announced that airlines were authorized to return to their pre-September 11^th service levels at Reagan National effective April

15

15, 2002.

The availability of international routes to domestic air carriers is regulated by agreements between the U.S. and foreign governments. Changes in U.S. or foreign government aviation policy could result in the alteration or termination of these agreements and affect US Airways’ international operations.

Employees

As of December 31, 2002, on a full-time equivalent basis, the Company employed 37,100 active employees. US Airways employed 31,400 full-time equivalent employees including approximately 7,600 station personnel, 6,900 flight attendants, 6,000 mechanics and related employees, 4,100 pilots, 1,800 reservations personnel, and 5,000 personnel in administrative and miscellaneous job categories. On a full-time equivalent basis, the Company’s remaining subsidiaries employed 5,700 employees including approximately 2,900 station personnel, 1,100 pilots, 500 flight attendants, 800 mechanics and related employees, and 400 personnel in administrative and miscellaneous job categories.

As of December 31, 2002, approximately 31,700, or 84%, of the Company’s active employees were covered by collective bargaining agreements with various labor unions.

The status of US Airways’ labor agreements with its major employee groups as of December 31, 2002 is as follows:

IAMAW    International Association of Machinists and Aerospace Workers

CWA          Communications Workers of America

AFA           Association of Flight Attendants

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. The military action in the Middle East, continued political unrest in Venezuela and adverse weather during the 2002-2003 winter season continue to impact the supply and demand for oil and consequently the price. 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 liquidity, results of operations and financial condition. For 2002, 2001 and 2000, aviation fuel expenses, including fuel-related taxes, were 9.8%, 11.8% and 13.8%, respectively, of the Company’s total operating expenses (as adjusted to exclude unusual items for comparability purposes).

US Airways periodically participates in arrangements designed to reduce its exposure to significant increases in the price of aviation fuel (see Note 3(a) to the Company’s Notes to Consolidated Financial Statements for additional information).

See “Selected US Airways Operating and Financial Statistics” in MD&A for additional information related to aviation fuel.

16

Distribution Channels

During 2002, US Airways ceased paying base commissions to travel agencies in the U.S. US Airways continues to participate in contractual relationships with certain travel agencies that pay them a bonus commission, often called an override, based on sales on the airline. Total commissions paid to travel agencies accounted for approximately 1.6%, 2.8% and 3.7% of US Airways’ total operating expenses (as adjusted to exclude unusual items for comparability purposes) for the years 2002, 2001 and 2000, respectively.

Growing usage of electronic distribution systems, including electronic tickets and internet booking channels, has helped the Company to reduce its cost while changing the dynamics of ticket purchasing. The Company began selling electronic tickets in 1996. During 2002, electronic ticket sales represented 90% of all ticket sales. The Company currently charges a $25 fee to customers, except for certain elite status frequent fliers, who choose a paper ticket when an electronic ticket is available.

Consumers are increasingly using online travel agencies to buy tickets. The largest of these, Orbitz, Travelocity, and Expedia, now each handle a meaningful volume of ticket purchases for the Company. Travelocity and Expedia each are increasingly charging suppliers for preferential display and promotion in their sites, a practice that is not allowed in the traditional global distribution systems environment. As a result, these sites have become more expensive distribution channels for the Company, especially as traditional distribution, travel agencies, have become less expensive through the elimination of base commissions. Orbitz is not acting this way today, and as a result is a lower cost channel for the Company. The Company’s own website, usairways.com, continues to be developed and expanded as it provides the lowest ticketing cost of any distribution channel. During the fourth quarter of 2002, sales from all internet bookings comprised 20% of total sales. Approximately half of the internet bookings were through usairways.com.

Frequent Traveler Program

Under US Airways’ Dividend Miles frequent traveler program (FTP), participants generally receive mileage credits for each paid flight segment on US Airways, US Airways 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 receive additional mileage credits. Participants can also receive additional mileage credits through special promotions periodically offered by US Airways and may also earn mileage credits by utilizing certain credit cards and purchasing services from various FTP 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.

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, 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.

17

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 do not expire provided that the participant earns or redeems any amount of Dividend Miles at least once every 36 months.

As of December 31, 2002 and 2001, Dividend Miles participants had accumulated mileage credits for approximately 7,011,000 awards and 6,817,000 awards, respectively. Because US Airways expects that some potential awards will never be redeemed, calculations of FTP liabilities are based on approximately 79% 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 and a portion of mileage credits of Dividend Miles participants who have excessive balances are excluded from calculations of FTP liabilities. The liability for the accumulated Dividend Miles was $90 million and $89 million as of December 31, 2002 and 2001, 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.

The number of awards redeemed for free travel during the years ending December 31, 2002, 2001 and 2000 was approximately 1.3 million, 1.1 million and 1.1 million, respectively, representing approximately 6% of US Airways’ RPMs in those years. 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; directors and officers; 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, 2002, US Airways operated the following jet aircraft:

18

As of December 31, 2002, the Company’s wholly-owned regional airline subsidiaries operated the following turboprop aircraft:

As of December 31, 2002, the Company has firm orders for 38 Airbus aircraft scheduled for delivery between 2005 and 2009. During the first quarter of 2003, the Company reached an agreement in principle with AVSA. S.A.R.L. to convert its firm orders for 37 A320-family aircraft and one A330-300 aircraft into firm orders for 19 A320-family aircraft and ten A330-200 aircraft. The Company currently expects to return certain leased aircraft including a Boeing 767-200 aircraft, a Boeing 757-200ER aircraft and a Boeing 737-400 aircraft by April 2003. The Company expects to add two Boeing 737-400 aircraft to its fleet to maintain a minimum US Airways fleet count of 279.

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, 2002, the Company owned or leased the following aircraft which were not considered part of its operating fleet presented in the tables above. These aircraft were either parked at storage facilities or, as shown in the far right column, leased or subleased to third parties.

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. US Airway’s commitment under CRAF is to provide up to its entire widebody fleet of ten 767-200ER aircraft and nine A330-300 aircraft in support of military missions. US Airways is reimbursed at prescribed and compensatory rates when aircraft are activated under CRAF.

In February 2003, AMC activated Stage One of CRAF. US Airways’ commitment for Stage One is to provide two A330-300 aircraft for missions as required by AMC. Currently AMC has allowed the Company to replace its A330-300 aircraft commitment with two 767-200ER aircraft, allowing the company to maintain its full Transatlantic schedule during the Stage One activation. Because the two 767-200ER aircraft provide fewer total seats than two A330-300 aircraft, AMC has the option to call up a third 767-200ER aircraft to make up this difference. If AMC chooses to activate CRAF Stage Two, in addition to providing more A330-300 aircraft the Company may be required to provide up to six 767-200ER aircraft for use in the Aeromed medical program. Under the Aeromed medical program, AMC will convert the aircraft into “flying hospitals.” Currently, only US Airways and Delta are participants in the Aeromed medical program. Participation in the Aeromed medical program leads to increased peacetime U.S. Government revenues for the Company, compensating for schedule disruptions which will result from the CRAF deployments.

19

Ground Facilities

The Company leases the majority of its ground facilities, including executive and administrative offices in Arlington, Virginia adjacent to Reagan National Airport; its principal operating, overhaul and maintenance bases at the Pittsburgh and Charlotte/Douglas International Airports; training facilities in Pittsburgh and Charlotte; central reservations offices in Pittsburgh and Winston-Salem (North Carolina); and line maintenance bases and local ticket, cargo and administrative offices throughout its system. US Airways owns a training facility in Winston-Salem and a reservation facility in Orlando. The Orlando facility was closed on January 10, 2003 and is currently available for sale. During 2002, the Company also closed its Tampa maintenance hangar and sold its San Diego reservation center.

Terminal Construction Projects

The Company’s airline subsidiaries utilize public airports for their flight operations under lease arrangements with the government entities that own or control these airports. Airport authorities frequently require airlines to execute long-term leases to assist in obtaining financing for terminal and facility construction. Any future requirements for new or improved airport facilities and passenger terminals at airports at which the Company’s airline subsidiaries operate could result in additional expenditures and long-term commitments for these subsidiaries. Several significant projects, which affect large airports in US Airways’ route system, are discussed below.

In 2000, US Airways reached an agreement with the Philadelphia Authority for Industrial Development (PAID) and the City of Philadelphia to finance the construction of a new aircraft maintenance hangar, as well as the fit-out of two new US Airways Clubs and other improvements at the Philadelphia International Airport. The new aircraft maintenance hangar was completed in November 2000. PAID issued approximately $71 million in special facility revenue bonds to finance these projects. See MD&A contained in Item 7 for developments related to the bonds.

In 2000, US Airways reached an agreement with the City of Charlotte to finance the construction of a crew training center expansion, a new aircraft maintenance hangar and other improvements at the Charlotte/Douglas International Airport. The City of Charlotte issued approximately $35 million in special facility revenue bonds to finance these projects. Construction of the crew training center addition and the new aircraft maintenance hangar was completed in March 2001.

In 1999, the signatory airlines, including US Airways, 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 that is expected to be completed by June 2005. The bond issue also includes $71 million for the expansion of domestic and international terminals. An expanded US Airways Express terminal was completed in February 2002. The international terminal expansion, which includes a federal customs and immigration facility, is expected to be operational by June 2003.

In 1999, US Airways and the Massachusetts Port Authority (MassPort) reached an agreement to further renovate and expand US Airways’ terminal facilities at Logan. MassPort issued approximately $33 million of special facility bonds to finance various improvements. The renovations and expansions were completed in June 2001.

In 1998, US Airways reached an agreement with 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

20

aircraft and new federal customs and immigration facilities and is currently expected to be partially operational by the end of April 2003. The US Airways Express facility, completed in June 2001, can accommodate 38 turboprop and/or regional jet aircraft. PAID has issued approximately $632 million in airport revenue bonds to finance the two terminals, ramp control tower, and related projects.

Item 3. Legal Proceedings

On August 11, 2002, the Company and seven of its domestic subsidiaries, including US Airways, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (Case Nos. 02-83984-SSM through 02-83991-SSM). The reorganization cases are being jointly administered under the caption “In re US Airways Group, Inc., et al., Case No. 02-83984-SSM.” Each of the Debtors continues to operate its business and manage its property as a debtor-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. As a result of the filing, attempts to collect, secure or enforce remedies with respect to pre-petition claims against the Debtors are subject to the automatic stay provisions of section 362(a) of the Bankruptcy Code. The Chapter 11 cases are discussed in greater detail in Item 1, “Update on Chapter 11 Proceedings.”

On January 7, 2003, the Internal Revenue Service (IRS) issued a notice of proposed adjustment to the Company proposing to disallow $573 million of capital losses that the Company sustained in the tax year 1999 on the sale of stock of USLM Corporation (USLM). On February 5, 2003, the IRS filed a proof of claim with the Bankruptcy Court asserting the following claims with respect to USLM: (1) secured claims for U.S. federal income tax and interest of $0.7 million; (2) unsecured priority claims for U.S. federal income tax of $68 million and interest of $14 million; and (3) an unsecured general claim for penalties of $25 million. The Company currently is negotiating the resolution of the amount of U.S. federal income taxes, interest, and penalties due with the IRS Examination Office and IRS Appeals Office. The Company believes that it will have sufficient net operating losses to carry back to tax years in which the IRS has proposed income adjustments with respect to USLM and eliminate the $68 million in proposed U.S. federal income taxes. The Company cannot predict the amount of any ultimate proposed adjustment for USLM, or the likelihood that any IRS determination would be sustained.

On January 30, 2003, the Company filed a motion seeking the Bankruptcy Court’s approval of a distress termination of the Pilot Retirement Plan. On March 2, 2003, the Bankruptcy Court entered an order approving the termination of the Pilot Retirement Plan, but declined to rule on whether the termination of the Pilot Retirement Plan would violate the collective bargaining agreement (CBA) between US Airways and the Air Line Pilots Association (ALPA). The Bankruptcy Court’s order included a finding that unless the Pilot Retirement Plan is terminated, the Company will be unable to pay all of its debts pursuant to a plan of reorganization and will be unable to continue in business outside the chapter 11 reorganization process. The Bankruptcy Court authorized US Airways to establish, effective as of the date of termination, a follow-on defined contribution retirement plan for the pilots of US Airways, on terms consistent with the letter agreement of December 13, 2002, between US Airways and ALPA.

ALPA filed a grievance alleging that the distress termination violates the CBA. Under the Employee Retirement Income Security Act of 1974, as amended (ERISA), the PBGC is required to suspend processing of a termination if the termination would violate the terms and conditions of an existing collective bargaining agreement. On March 21, 2003, the Company and ALPA reached agreement on a replacement pension plan to be effective April 1, 2003 and ALPA agreed to withdraw its grievance. The agreement was ratified by the ALPA Master Executive Council and is subject to approval by the PBGC and final approval by the Bankruptcy Court. On March 24, 2003, the Debtors filed a motion with the Bankruptcy Court seeking supplemental authority to implement the new defined contribution plan. The motion is expected to be heard on March 28, 2003.

21

If the Pilot Retirement Plan is terminated, the PBGC will have a claim for the amount of the Pilot Retirement Plan’s unfunded benefit liabilities, as well as a claim for any minimum funding contributions due and unpaid on the date of plan termination. The PBGC has filed twenty-one proofs of claim in the aggregate amount of approximately $3.8 billion and asserts joint and several liability against the Debtors for seven defined benefit pension plans sponsored and maintained by US Airways Group for unfunded pension liability as of October 31, 2002, contingent upon plan termination. The PBGC has agreed to withdraw its proofs of claim in the aggregate amount of approximately $1.7 billion filed in connection with the non-pilot pension plans as of March 18, 2003 upon the occurrence of the Effective Date of the Plan of Reorganization. The PBGC claimed priority treatment for some or all of these claims. The Debtors have contested both the amount and priority of the PBGC’s remaining claims with respect to the termination of the Pilot Retirement Plan.

Eighteen pilots who, had it not been for the filing of the Notice of Intent to Terminate, would have received lump sum payments under the US Airways Pilot Defined Benefit Retirement Plan on either February 1, 2003 or March 1, 2003, filed grievances alleging that without ALPA’s consent to terminate the plan, the Company cannot escape its contractual obligation to pay these lump sums by virtue of filing the Notice of Intent to Terminate. The grievances have not been scheduled for a hearing between an arbitrator and are the subject of ongoing settlement discussions.

On March 6, 2003, the Retired Pilots Association of US Airways (known as the “Soaring Eagles”) filed a Notice of Appeal from the Bankruptcy Court’s March 2, 2003 Order granting in part, and denying in part the Debtors’ Motion Seeking (1) A Determination That They Satisfy The Financial Requirements For A Distress Termination of the Retirement Income Plan for Pilots of US Airways, Inc., and Approval of Such Pension Plan’s Termination, and (2) Approval of a new Defined Contribution Plan for Pilots (March 2nd Order). Subsequently, three additional Notices of Appeal were filed from the March 2nd Order on behalf of ALPA, a group of eighteen pilots collectively referred to as the “Lump Sum Eligible Pilots,” and a group of forty-nine active pilots collectively referred to as the “Menear Claimants Pilot Group.” None of these appeals have been set for a hearing. In connection with the March 21, 2003 agreement noted above, ALPA agreed to withdraw its appeal with prejudice.

The Company and US Airways have been named as defendants in two lawsuits filed in United States District Court for the Eastern District of Michigan. Delta Air Lines is also named as a defendant in both actions, while Northwest Airlines and the Airlines Reporting Corporation are named as defendants in one additional action. The complaints were filed 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 that prohibit the use of a connecting segment coupon that 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 trebled damages from all named defendants in the amount of $390 million and an injunction prohibiting future enforcement of the rules at issue. On May 16, 2002, the court denied the defendant airlines’ motion for summary judgment and granted the plaintiffs’ motion for class certification in each of the cases. On May 31, 2002, the Company and US Airways filed a petition with the United States Court of Appeals for the Sixth Circuit seeking a discretionary review of the certification order. On November 21, 2002, the petition for permission to appeal the class certification decision was denied. On December 4, 2002, Delta and Northwest filed a rehearing petition seeking en banc review of the initial Sixth Circuit denial. On February 24, 2003, Northwest and Delta’s petition for rehearing en banc was denied. Notwithstanding the district court’s denial of summary judgment and the petition, the Company and US Airways believe the claims are without merit and intend to pursue a vigorous defense once the stay is lifted. The plaintiffs filed a motion to lift the automatic stay under section 362(a) to allow the litigation to proceed against the Company and US Airways. The Company and US Airways filed a response in opposition to the motion, and the motion was heard by the Bankruptcy Court on

22

December 12, 2002. On December 13, 2002, the Bankruptcy Court ordered that the automatic stay remain in place until April 15, 2003.

US Airways is named as a defendant along with most of the major domestic airlines, several national carriers and a number of international carriers, in a class action lawsuit on behalf of all United States-based travel agents filed in federal court in North Carolina. The complaint alleges violation of the federal antitrust laws with respect to commission rate reductions and/or commission cap reductions implemented by various airlines in 1997, 1998, 1999, 2001 and 2002. Plaintiffs seek unspecified damages for lost commissions as well as injunctive relief. The case against US Airways is subject to the automatic stay provisions of section 362(a) of the Bankruptcy Code. Discovery has now closed and the other defendants have filed motions for summary judgment. On March 6, 2003, the Court issued an order setting a September 2, 2003 trial date.

A declaratory judgment against certain airlines including the Company is being sought in Quebec Superior Court that, if obtained, would require the Company and such other named airlines to pay commissions to travel agents under the IATA rules. The amount of commissions sought has not been specified. Under Quebec civil procedure, a motion for a declaratory judgment must be supported by an affidavit from each plaintiff. As of August 13, 2002, more than 30 plaintiffs have filed affidavits indicating their participation in this lawsuit. During a hearing held August 29, 2002, the plaintiffs advised the court that they were dismissing the Company from the case. The parties filed a motion stipulating to dismissal of the case against the Company on November 13, 2002.

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. The plaintiffs appealed the district court’s dismissal and 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 plaintiffs’ petition for certiorari. The U.S. District Court retained jurisdiction over one count of the complaint alleging violation of a disclosure requirement under ERISA. In August 2000, the U.S. District Court dismissed the remaining count without prejudice, giving plaintiffs the right to reinstate their claims after completion of the arbitration. Certain of the plaintiffs have filed a claim before the US Airways Pilot Retirement Board requesting arbitration of their claim for benefits that they believe were erroneously calculated. The Retirement Board has selected an arbitrator to decide certain issues related to the plaintiffs’ claims for benefits. The Company is unable to predict at this time the ultimate resolution of these proceedings.

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. On March 19, 1997, the automatic stay provided for in the Bankruptcy Code was lifted, which allowed IFPC’s and US Airways’ claims to be fully litigated. As a result of the Debtors’ commencement of chapter 11 proceedings, this case is subject to the automatic stay provisions of

23

section 362(a) of the Bankruptcy Code. 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 September 29, 2000, US Airways intervened in a proceeding that was originally brought on January 26, 1998 by the Pennsylvania Department of Environmental Protection (DEP) against Allegheny County, Pennsylvania and the Allegheny County Aviation Administration (ACAA) alleging that a variety of airfield and aircraft deicing activities at Greater Pittsburgh International Airport (Airport) violate the requirements of (a) a 1994 Consent Order and Adjudication issued to Allegheny County and air carrier tenants at the Airport, (b) the Airport’s National Pollutant Discharge Elimination System Permit, and (c) the Pennsylvania Clean Streams Law. The action was brought before the Pennsylvania Environmental Hearing Board. During March 2001, the Environmental Hearing Board approved Allegheny County’s motion to withdraw the appeal without prejudice, thereby terminating the appeal. However, during the course of settlement discussions leading to the termination of the appeal, the DEP advised Allegheny County and US Airways that DEP (i) will require additional measures to be taken to control deicing materials at the airport, and (ii) will assess a civil penalty against Allegheny County and US Airways for the alleged violations described above. The ACAA, US Airways and the DEP have continued to work together with the goal of fashioning an ultimate resolution to the deicing issues. The Company does not believe that the settlement of this matter will have a material adverse effect on its financial condition, results of operations or liquidity.

Claims arising out of the litigation proceedings discussed above, if ultimately determined to have merit, will likely constitute prepetition general unsecured nonpriority claims in the Chapter 11 cases and will thus be subject to the discharge and distribution provisions contained in the Plan of Reorganization.

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 2002.

Part II

Item 5.    Market for US Airways Group’s Common Equity and Related Stockholder Matters

Stock Exchange Listing

US Airways Group’s Common Stock, $1 par value (Common Stock), was publicly traded on the New York Stock Exchange (NYSE) under the Symbol “U” through September 24, 2002. As a result of the Company’s Chapter 11 filing, the New York Stock Exchange (NYSE) issued a statement on August 14, 2002 that the Company’s Common Stock would be suspended immediately. Shortly thereafter, an application was made to the SEC by the NYSE to delist the Common Stock. The SEC approved the delisting and the Common Stock was delisted effective September 25, 2002. As a result, on September 25, 2002, the Common Stock began trading on the over the counter market under the Symbol “UAWGQ.” As of February 28, 2003, there were approximately 24,500 shareholders of record.

Market Prices of Common Stock

The high and low sale prices of the Company’s Common Stock were:

24

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.

The Company, organized under the laws of the State of Delaware, is subject to Sections 160 and 170 of the Delaware General Corporation Law with respect to the payment of dividends on or the repurchase or redemption of its capital stock. The Company is restricted from engaging in any of these activities unless it maintains a capital surplus. In addition, the Company may not pay dividends or purchase its Common Stock in accordance with provisions contained in the RSA DIP Facility.

As discussed in Item 1 above, the Plan of Reorganization contemplates the cancellation of the Company’s existing equity securities and the issuance of new equity securities to certain investors, creditors and employees.

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.

Equity Compensation Plans

The below table provides information related to the Company’s equity compensation plans as of December 31, 2002 (in thousands, except per share amounts). See Note 8(d) to the Company’s Notes to Consolidated Financial Statements for additional information.

As discussed above, the Plan of Reorganization contemplates the cancellation of the Company’s existing equity securities. Accordingly, all securities shown in the above table will be cancelled upon the occurrence of the Effective Date.

25

Item 6. Selected Financial Data

Consolidated Statements of Operations (in millions, except per share amounts) (1)

Consolidated Balance Sheets (in millions)

26

Pro Forma Consolidated Statements of Operations (in millions, except per share amounts) (1)

The pro forma amounts below are provided to show what US Airways would have reported if the new accounting policy related to Dividend Miles revenue recognition had been in effect in periods prior to 2000. See Note 2(i) in Part II, Item 8 for additional information related to the revenue recognition change.

Note: Numbers may not add or calculate due to rounding.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Information

Certain of the information contained herein should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, that reflect the Company’s current views with respect to current events and financial performance. Such forward looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the Company’s operations and business environment which may cause the actual results of the Company to be materially different from any future results, express or implied, by such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: the ability of the Company to continue as a going concern; the ability of the Company to operate pursuant to the terms of the DIP facility and any exit financing facilities that become effective following consummation of the First Amended Plan of Reorganization of US Airways Group, Inc. and Its Affiliated Debtors and Debtors-in-Possession, As Modified (Amended Plan); the Company’s ability to obtain court approval with respect to motions in the Chapter 11 cases prosecuted by it from time to time; the ability of the Company to consummate the Amended Plan and the transactions contemplated by it; risks associated with third parties seeking and obtaining court approval to terminate or shorten the exclusivity period for the Company to propose and confirm one or more plans of reorganization, for the appointment of a Chapter 11 trustee or to convert the cases to Chapter 7 cases should the Amended Plan not be consummated; the ability of the Company to

27

obtain and maintain normal terms with vendors and service providers; the Company’s ability to maintain contracts that are critical to its operations; the potential adverse impact of the Chapter 11 cases on the Company’s liquidity or results of operations should the Amended Plan not be consummated; the ability of the Company to fund and execute its business plan; the ability of the Company to attract, motivate and/or retain key executives and associates; the ability of the Company to attract and retain customers; demand for transportation in the markets in which the Company operates; economic conditions; labor costs; financing costs; aviation fuel costs; security-related costs; competitive pressures on pricing (particularly from lower-cost competitors); weather conditions; government legislation and regulation; consumer perceptions of the Company’s products; acts of war or terrorism; and other risks and uncertainties listed from time to time in the Company’s reports to the United States Securities and Exchange Commission. 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 other than as required by law. Similarly, these and other factors, including the terms of any reorganization plan ultimately confirmed and consummated can affect the value of the Company’s various pre-petition liabilities, common stock and/or other equity securities. While no assurance can be given as to what values, if any, ultimately will be ascribed in the bankruptcy cases to each of these constituencies, it should be noted that the Amended Plan, which was confirmed on March 18, 2003, affords no distribution to the Company’s equity security holders and cancels such equity securities. Accordingly, the Company urges that the appropriate caution be exercised with respect to existing and future investments in any of these liabilities and/or securities.

Financial Overview for 2002

For 2002, the Company’s operating revenues were $6.98 billion, operating loss was $1.32 billion, loss before cumulative effect of accounting change was $1.66 billion and diluted loss per common share before cumulative effect of accounting change was $24.45. For 2001, operating revenues were $8.29 billion, operating loss was $1.68 billion, loss before cumulative effect of accounting change was $2.12 billion and diluted loss per common share before cumulative effect of accounting change was $31.59. As a result of the Company’s Chapter 11 filing as well as the September 11^th terrorist attacks and the related aftermath, the Company’s results for both 2002 and 2001 include unusual items (see discussion in “Results of Operations” below).

The weak economic conditions that began in 2001 continued throughout 2002. In the aftermath of the September 11^th terrorist attacks, airline passenger demand dropped precipitously industry-wide. The decline in high-yield business traffic, which was down significantly prior to the terrorist attacks, was exacerbated after these attacks as many companies imposed corporate travel restrictions due to the further weakening of the general economy. In response to these adverse events, the Company, led by a new management team headed by David N. Siegel, who joined the Company in March 2002, implemented a plan to return the Company to profitability. The Company was able to successfully negotiate cost savings from many of its employee groups. However, the Company determined that it was unlikely to conclude consensual negotiations with all of the remaining labor groups, various vendors, aircraft lenders/lessors and financiers in a time frame necessary to complete an out-of-court restructuring. Factors contributing to this conclusion include the large number of lenders/lessors and financiers, the inability of trustees to modify payment terms of public equipment financings without the unanimous consent of holders of widely-held trust certificates and the Company’s inability to reject/abandon surplus aircraft leases, return excess aircraft and extinguish applicable obligations without relief under Chapter 11 of the Bankruptcy Code. Faced with declining seasonal revenues, the Company filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code for it and its domestic subsidiaries to maximize their liquidity position and their prospects for a successful reorganization. Refer to “Update on Chapter 11 Proceedings” contained in Item 1 for more details.

28

Subsequent to its Chapter 11 filing, the Company’s remaining organized labor groups ratified restructuring agreements, the Company transitioned its aircraft negotiations to either rejecting aircraft debt and leases under the provisions of the Bankruptcy Code or working with lessors and lenders under the section 1110 process, and the Company continued to pursue savings from vendors as well from reengineering internal processes. In December 2002 and January 2003, the Company’s organized labor groups agreed to a second round of restructuring agreements, including changes in benefits and productivity improvements. As of February 28, 2003, the Company has substantially achieved savings expected to average approximately $1.9 billion annually over the period through 2008. See “Restructuring Cost Savings” in Item 1 for more information. During the third and fourth quarters of 2002, expenses associated with severance, asset impairment, and other reorganization-related costs offset the early benefits of the company’s cost reductions.

The Company continues to face a weak revenue environment. The airline industry recovery that appeared to be underway during the first half of 2002 stalled. As a result, airlines have consistently been offering steep discounts and attempts to raise prices have repeatedly failed in the face of competitive pressure. In light of its Chapter 11 filing on August 11, 2002, US Airways suffered additional revenue impact as passenger bookings deteriorated for a short period subsequent to the filing. In September, industry revenue also began declining versus previous, already depressed levels. If the current negative trends in industry revenues persist, or should there be another shock to industry demand due to acts of war or terrorism, the implications for the Company’s recovery could be significant.

Aviation fuel is typically the Company’s second largest expense. 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. The military action in the Middle East, continued political unrest in Venezuela and adverse weather during the 2002-2003 winter season continue to impact the supply and demand for oil and consequently the price. 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 liquidity, results of operations and financial condition. Furthermore, the implications of a sharp increase in the price of aviation fuel for a prolonged period of time for the Company’s recovery would be significant. To manage this risk, the Company utilizes financial instruments designed to reduce the Company’s exposure related to fuel price increases. As of February 28, 2003 the Company had hedges in place for approximately 30% of its remaining 2003 consumption (51% for March, 58% for the second quarter of 2003, 0% for the third quarter of 2003, and 25% for the fourth quarter of 2003). Refer to Item 7A below for more information.

Results of Operations

The following section pertains to activity included in the Company’s Consolidated Statements of Operations (contained in Part II, Item 8) and to changes in selected US Airways operating and financial statistics (see “Selected US Airways Operating and Financial Statistics” below). Except where noted, operating statistics referred to in this section are for scheduled service only. The pro forma amounts and certain noted operating and financial statistics presented herein for US Airways are adjusted to show what US Airways would have reported if the merger of Shuttle, Inc. (Shuttle) had occurred on January 1, 2000. See Note 2 in Part II, Item 8 for additional information related to the Shuttle merger.

29

2002 Compared With 2001

Operating Revenues–Passenger transportation revenues decreased $1.36 billion. Passenger transportation revenues for US Airways decreased $1.36 billion due to an 8.9% decrease in yield and a 12.9% decrease in RPMs. Passenger transportation revenues related to the wholly-owned regional airlines were flat year-over-year reflecting a decrease in yield of 10.6% that was offset by an increase of 11.1% in RPMs. The unfavorable yield variances reflect a decline in business traffic as many companies imposed corporate travel restrictions due to the further weakening of the general economy, particularly after September 11^th. In addition, the airline industry engaged in heavy price discounting to stimulate the industry-wide soft demand related to the sluggish economic conditions as well as the threat of war in Iraq and further terrorist attacks. The decrease in US Airways’ RPMs primarily is due to the schedule reductions that were initiated after September 11^th and again after the Company’s bankruptcy filing in August 2002. Cargo and freight revenues decreased 14.6% primarily as a result of lower mail revenues, which reflect mail carriage restrictions imposed by the Federal Aviation Administration in the aftermath of September 11^th. Other operating revenues increased principally due to revenues generated from sales of capacity (available seat miles or ASMs) on regional jet affiliates. RPMs under these arrangements increased 33% reflecting the increased deployment of regional jets in the US Airways Express network. The increased revenues resulting from sales of capacity on the regional jet affiliates are offset by increased expenses recognized in the Other operating expenses category related to purchases of the capacity (see below). The increased revenues were partially offset by decreases in mileage credit sales and revenues related to lease of surplus aircraft.

Operating Expenses–Operating expenses declined 16.8%. Excluding unusual items for both 2002 and 2001 (see “Unusual Items” below), the Company’s operating expenses were lower by 14.6% on a capacity decrease of 15.5% at US Airways. The Company’s Personnel costs decreased 12.6% due to lower headcount levels and wage rate and salary reductions relating to the Company’s restructuring. This was partially offset by increases in employee pension and benefit expenses. Aviation fuel decreased 29.1% due to lower average fuel prices and schedule-driven decreases in consumption. Aircraft rent decreased 8.4% due to the reduction in the number of leased aircraft that were operated. Other rent and landing fees decreased 4.5% due to schedule-driven reductions in landings partially offset by higher landing fee rates. Aircraft maintenance decreased 23.9% reflecting the retirement of older aircraft as well as the closure of the US Airways engine shop in Pittsburgh, PA in the fourth quarter of 2001. Other selling expenses decreased 14.7% due to sales volume driven decreases in credit card fees and computer reservation service fees. Depreciation and amortization decreased 24.7% due to the retirement of the F100, B737-200, MD80 and DC9 aircraft fleets partially offset by the purchase of new Airbus aircraft. In addition, the Company ceased amortizing its goodwill effective January 1, 2002 in connection with its adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This favorably impacted expenses by $19 million. Commissions decreased 54.1% due to lower ticket sales and lower average commission rates. Commission rates decreased due to the elimination of the base domestic commissions in March 2002, increases in internet bookings which are less costly to the Company and generally lower maximum payments to travel agents implemented in August 2001. Other operating expenses decreased 3.8% due to decreases in schedule-related expenses including passenger food expenses, crew travel expenses and interrupted trip expenses. These decreases were partially offset by increased expenses related to purchases of capacity (ASMs) on regional jet affiliates, higher insurance expenses and higher security expenses. Refer to “Unusual Items” below for information on Asset impairments and other special items and Airline stabilization act grant.

Other Income (Expense)–Interest income decreased due to lower average investment balances and return rates. Interest expense increased due to more debt outstanding. Refer to “Unusual Items” below for information on Reorganization items, net and Merger termination fee.

30

Provision (Credit) for Income Taxes–During 2001, the Company recognized a valuation allowance against its net deferred tax asset. As a result of the March 2002 enactment of the Job Creation and Worker Assistance Act of 2002 (Act), the Company recognized an income tax credit equal to the Company’s carryback potential. The Act provides, among other things, an extension of the net operating loss carryback period to five years from two years for net operating losses arising from tax years that end in 2001 or 2002 and the elimination of the 90% limitation for alternative minimum tax purposes on those loss carrybacks. The tax credit recorded in 2002 includes $74 million related to 2001 losses realizable due to the enactment of the Act and recorded in the period of enactment. The Company continued to record a valuation allowance against its net deferred tax asset which resulted in a 2002 effective tax rate of 13%. The effective tax rate was 32% for the first six months of 2001 after which the Company recorded a valuation allowance which resulted in an effective tax rate of 15%. The tax credit for the first six months of 2001 results from the tax benefits associated with the pretax losses offset by the tax effects of the Company’s permanent tax differences.

Selected US Airways Operating and Financial Statistics–Capacity (as measured by ASMs) decreased 15.5% and passenger volume (as measured by RPMs) decreased 12.9% in 2002. These decreases resulted in a 71.0% passenger load factor, representing a 2.1 percentage point increase over 2001. Full year comparisons are rendered less meaningful due to the events of September 11^th. Commercial flights were suspended for almost three days and resumed gradually once the FAA allowed resumption of operations. In addition, the Company made very significant schedule changes as a result of the conditions after September 11^th. Yields decreased 8.9% for 2002 reflecting fewer high-yield ticket sales (i.e. business sales) and heavy price discounting used to stimulate the industry-wide soft demand related to the sluggish economic conditions as well as the threat of war in Iraq and further terrorist attacks.

2001 Compared With 2000

Operating Revenues–Passenger transportation revenues decreased $1.18 billion. Passenger transportation revenues for US Airways decreased $1.07 billion on a pro forma basis due to a 12.0% decrease in yield and a 2.3% decrease in RPMs. Passenger transportation revenues related to the wholly-owned regional airlines decreased $104 million reflecting a decrease in yield of 8.0% and a decrease of 7.7% in RPMs. The unfavorable yield variance reflects a decline in business traffic as many companies imposed corporate travel restrictions as the general economy weakened, particularly after September 11^th. In addition, the airline industry engaged in heavy price discounting to entice customers to fly post-September 11^th. The decrease in RPMs primarily is due to the post-September 11^th schedule reductions for US Airways. Cargo and freight revenues were flat. Higher freight revenues reflecting the larger cargo-carrying capability of the Airbus aircraft were offset by lower mail revenues. Mail revenues were down sharply in the fourth quarter of 2001 reflecting mail carriage restrictions imposed by the FAA. Other operating revenues increased principally due to revenues generated from sales of capacity (available seat miles or ASMs) on regional jet affiliates. These affiliates operated an average of 56 aircraft in 2001 versus 26 aircraft in 2000. The increased revenues resulting from sales of capacity on the regional jet affiliates are partially offset by increased expenses recognized in the Other operating expenses category related to purchases of the capacity (see below). In addition, cancellation fee revenues increased reflecting a rate increase from $75 to $100 per cancellation that went into effect during the first quarter of 2001.

Operating Expenses–Operating expenses increased 7.0%. Excluding Asset impairments and other special items and the Airline stabilization act grant (see “Unusual Items” below), operating expenses were flat on essentially the same level of capacity. The Company’s Personnel costs increased 2.4% due to higher wage rates and benefit costs partially offset by lower headcount levels late in the year relating to the Company’s post-September 11^th restructuring. Effective May 1, 2001 most US Airways pilots received 17.0% wage rate increases pursuant to the “parity plus 1%” provision in their labor contract. Aviation fuel decreased 14.1% due primarily to lower average fuel prices. Aircraft rent increased 10.4% reflecting rent expense associated with new

31

leased aircraft. Other rent and landing fees were flat as schedule-driven reductions in landings were offset by landing fee rate increases. Aircraft maintenance increased 5.6% due to aircraft engine repair timing factors. Other selling expenses decreased 12.2% due to lower advertising expenditures and sales volume driven decreases in credit card fees. Depreciation and amortization increased 6.2% due to the purchase of new Airbus aircraft partially offset by less depreciation resulting from the aircraft impairment charges. Commissions decreased 24.8% due to lower ticket sales and lower average commission rates. Commission rates decreased due to increases in internet bookings which are less costly to the Company. In addition, the Company revised its travel agent commission rate structure. Effective August 24, 2001, the maximum payment to travel agents was generally reduced. Other operating expenses increased due to expenses related to purchases of capacity (ASMs) on regional jet affiliates and higher insurance rates partially offset by lower schedule-driven expenses such as crew travel and passenger food as well as expenses associated with US Airways’ information systems contract with Electronic Data Systems Corporation (EDS).

Other Income (Expense)–Interest income decreased due to lower average investment balances and return rates. Interest expense increased due to more aircraft-related debt outstanding and airport construction financing. Other, net for 2000 includes an $18 million impairment charge related to warrants the Company held in priceline.com Incorporated (Priceline). Refer to “Unusual Items” below for information on Merger termination fee.

Provision (Credit) for Income Taxes–During 2001, the Company recorded a net tax provision of $272 million including a valuation allowance against its net deferred tax asset. The Company’s tax credit for 2000 was $57 million, representing an effective tax rate of 26%.

Selected US Airways Operating and Financial Statistics–Capacity (as measured by ASMs) was slightly lower and passenger volume (as measured by RPMs) decreased 2.3% in 2001 on a pro forma basis. These decreases resulted in a 68.9% passenger load factor, representing a 1.4 percentage point decrease over 2000. Full year comparisons are rendered less meaningful due to the events of September 11^th. Commercial flights were suspended for almost three days and resumed gradually once the FAA allowed resumption of operations. As a result of the conditions after September 11^th, the Company adopted a restructuring plan which included very significant schedule changes. By comparison to the prior year, fourth quarter 2001 capacity decreased 19.9%, passenger volume decreased 26.9% and passenger load factor decreased 6.1 percentage points. Load factor year-over-year comparisons improved each month during the fourth quarter: October down 8.5 percentage points, November down 7.1 percentage points and December down 2.6 percentage points. Yields decreased 15.3% and 12.0% for the fourth quarter and full year 2001, respectively. The yield decreases reflect fewer high-yield ticket sales (i.e. business sales) which is typical when there is a general economic slowdown as corporations move to impose travel restrictions. The lower yields also reflect heavy price discounting used to entice customers to fly post-September 11^th.

32

Unusual Items

Asset Impairments and Other Special Items–Asset impairments and other special items included within the Company’s Consolidated Statements of Operations includes the following components (dollars in millions):

33

Reorganization Items, Net–Reorganization items, net represents amounts incurred as a direct result of the Company’s Chapter 11 filing and are presented separately in the Company’s Consolidated Statement of Operations. Such items consist of the following (dollars in millions):

34

Airline Stabilization Act Grant–Through December 31, 2002, the Company had received approximately $317 million (US Airways received $306 million and the Company’s Express subsidiaries received $11 million) from the U.S. Government under the Stabilization Act. The rules governing the distribution were finalized during the year and an adjustment of $3 million was recognized in 2002 to reduce the amount of compensation received. The payments partially compensated the Company for its direct and incremental losses incurred beginning on September 11, 2001 and ending on December 31, 2001.

Merger Termination Fees–In connection with the merger termination agreement, UAL paid $50 million to US Airways. Separately, US Airways paid a merger termination fee of approximately $2 million to Robert L. Johnson, a member of the Board of Directors of the Company and US Airways, representing reimbursement for his expenses in connection with his activities to establish a new airline which would have addressed certain potential competitive issues surrounding the proposed merger transaction, and supported regulatory approval of the new airline. This amount is included in Other, net on the Company’s Consolidated Statements of Operations (see “Other Information” below).

Priceline Impairment–During the fourth quarter of 2000, the Company recognized an $18 million pretax impairment charge in Other, net on the Consolidated Statement of Operations related to warrants the Company held in priceline.com Incorporated.

Selected US Airways Operating and Financial Statistics (1)

* Scheduled service only (excludes charter service).

(footnotes continued on following page)

35

Liquidity and Capital Resources

As of December 31, 2002, the Company’s Cash, Cash equivalents and Short-term investments totaled $634 million compared to $1.08 billion as of December 31, 2001 (the Company’s Consolidated Balance Sheets are contained in Part II, Item 8 of this report).

Statements of Cash Flow Narrative

For 2002, the Company’s operating activities used net cash of $302 million (as presented in the Company’s Consolidated Statements of Cash Flows, which are contained in Part II, Item 8 of this report). Operating cash flows were adversely affected by the same factors that adversely affected financial results during that period (see discussion in “Results of Operations” above). Included in net cash used for operating activities for 2002 is an income tax refund of $169 million received by the Company primarily as a result of the enactment of the Job Creation and Worker Assistance Act of 2002, $53 million of compensation received under the Stabilization Act and payments of $188 million of ticket taxes for which remittance was deferred until January 2002 under the Stabilization Act. As a result of filing for bankruptcy in August 2002, the Company received liquidity protection under the automatic stay provisions of the Bankruptcy Code related to prepetition liabilities. While difficult to quantify, this impacted cash flows from operating activities favorably after the Petition Date. For 2001, the Company’s operating activities used net cash of $112 million. Operating cash flows were adversely impacted by the weak economic environment that was prevalent most of the year and the precipitous drop in operating revenues after September 11^th. Operating cash flows were favorably impacted by $264 million of grants pursuant to the Stabilization Act and $188 million of ticket taxes deferrals (see above). For 2000, the Company’s operating activities provided net cash of $697 million reflecting operating results partially offset by income taxes refunded in 2000.

For 2002, net cash provided by investing activities was $22 million. Investing activities included cash outflows of $146 million related to capital expenditures. Capital expenditures included $106 million for three A321 aircraft (two other A321s were purchased in noncash transactions) with the balance related to rotables, ground equipment and miscellaneous assets. Proceeds from disposition of property includes, among other things, proceeds related to surplus aircraft and related parts. During the first quarter of 2002, US Airways entered into agreements to sell 97 surplus DC-9, B737-200 and MD-80 aircraft. Decrease (increase) in short-term investments reflects proceeds from the sale of short-term investments. The Company’s cash and cash equivalents and short-term investments as of December 31, 2001 include funds which, in the ordinary course of business, it withholds from employees and collects from passengers. These funds are required to be paid to applicable governmental authorities, and include withholding for payroll taxes, transportation excise taxes, passenger facility charges and transportation security charges. During the second quarter of 2002, the Company established trusts to fund these obligations. The initial funding (which totaled approximately $201 million) and the net cash flows of the trust are reflected in Decrease (increase) in restricted cash on the Company’s Consolidated Statements of Cash Flows. The funds in the trust accounts, which totaled $208 million as of December 31, 2002, are classified as Restricted cash on the Company’s Consolidated Balance Sheets, including $146 million in current Restricted cash and $62 million in noncurrent Restricted cash.

36

For 2001, investing activities included cash outflows of $1.14 billion related to capital expenditures. Capital expenditures included $992 million for the purchase of 23 A321 aircraft and three A330 aircraft as well as purchase deposits on future aircraft deliveries with the balance related to rotables, ground equipment and miscellaneous assets. The net cash used for investing activities was $867 million.

For 2000, investing activities included cash outflows of $1.98 billion related to capital expenditures. Capital expenditures included $1.68 billion for the purchase of 50 A320-family aircraft and six A330 aircraft as well as purchase deposits on future aircraft deliveries with the balance related to rotables, ground equipment and miscellaneous assets. During January 2000, US Airways received $81 million related to its December 1999 exercise of certain Sabre options. The net cash used for investing activities was $2.00 billion.

Net cash provided by financing activities during 2002 was $334 million. US Airways received proceeds of $116 million from the mortgage financing of three A321 aircraft (two other A321s were financed in noncash transactions). Additionally, US Airways received proceeds of $33 million with the private placement of pass through certificates that partially finance five previously delivered A330s and $18 million from an engine manufacturer credit facility (see below). The Company also borrowed $300 million under the RSA DIP Facility and $75 million under the Original DIP Facility. The Company used a portion of the RSA DIP Facility funds to repay the full $75 million that was then outstanding under the Original DIP Facility. Prior to the bankruptcy filing, the Company made scheduled principal repayments of long-term debt in the amount of $77 million. Subsequent to the bankruptcy filing, the Company made principal repayments of debt of $56 million including $38 million to the engine manufacturer credit facility.

Net cash provided by financing activities during 2001 was $1.03 billion. This included proceeds of $344 million from the sale-leaseback of eight A320-family aircraft, $389 million from the engine manufacturer credit facility and $562 million from the mortgages of ten A320-family aircraft and three A330 aircraft. In addition, US Airways received $22 million from special facility revenue bond financings (see below). These proceeds were partially offset by the scheduled principal repayments of long-term debt in the amount of $290 million including the February 1, 2001 repayment of US Airways’ $175 million 9 ⁵/8% Senior Notes.

Net cash provided by financing activities during 2000 was $1.60 billion. US Airways received proceeds of $500 million from its secured revolving credit facilities in March 2000 and $794 million from mortgages of 17 A320-family aircraft and six A330 aircraft. In addition, US Airways received $46 million from special facility revenue bond financings (see below) and $910 million from sale-leaseback transactions for 28 A320-family aircraft. These proceeds were partially offset by the early January purchase of 0.6 million shares of Common Stock on the open market for $20 million, the $500 million repayment of the secured revolving credit facilities on May 4, 2000 and scheduled principal repayments of long-term debt of $118 million.

Financings During Chapter 11 and Post Effective Date Financings

As part of its restructuring efforts, US Airways sought and received approval subject to certain conditions for a $900 million loan guarantee under the Stabilization Act from the Stabilization Board in connection with a proposed $1 billion loan financing. US Airways applied for this loan and related guarantee in order to provide additional liquidity necessary to carry out its restructuring plan. The Stabilization Board’s conditions for issuance of the ATSB Guarantee included, among other things, the execution and delivery of legally binding agreements acceptable to the Stabilization Board containing economic concessions from key stakeholders, confirmation of the Plan of Reorganization by the Bankruptcy Court, a resolution of US Airways pension funding issue approved by the Pension Benefit Guarantee Corporation and, if necessary, the Bankruptcy Court, resolution of certain collateral issues, as well as customary closing documentation. See “ATSB Loan” in Item 1 for more information.

37

On September 26, 2002, the Bankruptcy Court approved the Company’s designation of RSA as its proposed Plan of Reorganization equity sponsor and granted interim approval of the $500 million RSA DIP Facility on substantially the same terms as the Original DIP Facility. The Bankruptcy Court also granted US Airways Group the authority to borrow up to $300 million under the RSA DIP Facility. On September 27, 2002, the Company borrowed $300 million under the RSA DIP Facility and used a portion of such funds to repay the $75 million that was outstanding under the Original DIP Facility. A final order approving the RSA DIP Facility was entered by the Bankruptcy Court on November 8, 2002. On March 7, 2003, an additional $69 million was borrowed under the RSA DIP Facility.

The RSA DIP Facility consists of a $250 million term loan facility and a $250 million revolving credit facility (with a $50 million letter of credit sub-facility) and is guaranteed by each of the Debtors (other than US Airways Group). The RSA DIP Facility is secured by first priority liens on all unencumbered present and future assets of the Debtors and by best priority available junior liens on all other assets of the Debtors, other than certain specified assets, including assets which are subject to financing agreements that are entitled to the benefits of section 1110 of the Bankruptcy Code to the extent such financing agreements prohibit such junior liens. The Company has the option of borrowing under the RSA DIP Facility at an interest rate of the prime rate plus 2.5% or LIBOR plus 4.0%.

The maturity date of the RSA DIP Facility is the earlier of the effective date of a plan of reorganization of the Debtors or September 30, 2003. The RSA DIP Facility may be accelerated upon the occurrence of an event of default under the RSA DIP Facility and contains customary mandatory prepayment events including, among other things, the occurrence of certain asset sales and the issuance of certain debt or equity securities.

The definitive documentation relating to the RSA DIP Facility contains covenants that require the Company to satisfy ongoing financial requirements including operating results, cash receipts and liquidity. Such covenants also limit, among other things, the Debtors’ ability to borrow additional money, pay dividends and make additional corporate investments.

Under the RSA DIP Facility, borrowing availability is determined by a formula based on a percentage of eligible assets. The eligible assets consist of certain previously unencumbered aircraft, aircraft engines, spare parts, flight simulators, real property (including interests in certain airport facilities), takeoff and landing slots, ground equipment and accounts receivable. The underlying values of such assets may fluctuate periodically due to prevailing market conditions, and fluctuations in value may have an impact on the borrowing availability under the RSA DIP Facility. Availability may be further limited by additional reserves imposed by the administrative agent and the collateral agent as they deem necessary in their reasonable credit judgment.

The remaining $131 million of availability under the RSA DIP Facility, subject to the limitation on borrowing availability discussed above, will be available to the Company after certain conditions are met, including (i) the entry by the Bankruptcy Court of a final order approving the terms and conditions of the RSA DIP Facility documents; (ii) the minimum statutory and regulatory review periods shall have expired with respect to US Airways’ marketing agreements with United Air Lines, Inc. (United) and neither the U.S. Department of Transportation nor any other applicable governmental authority or third party has filed any material objection to such marketing agreements which has not been resolved; (iii) (a) the receipt of written confirmation from the Stabilization Board of its conditional approval for the ATSB Guarantee under the Stabilization Act, subject to confirmation by the Bankruptcy Court of a plan of reorganization reasonably acceptable to the Stabilization Board, (b) the approval by the Stabilization Board of a substantially final draft of the plan of reorganization and disclosure statement to be filed in the cases, and (c) the Company demonstrating to the reasonable satisfaction of RSA that it is likely to satisfy all of the conditions to the issuance of the ATSB Guarantee; and (iv) banks, financial institutions and other institutional lenders satisfactory to the

38

Company and RSA delivering commitments to lend at least the $100 million “at-risk” portion of the $1 billion Stabilization Board guaranteed loan. The Company met the condition described in clause (i) above when the Bankruptcy Court entered a final order approving the RSA DIP Facility on November 8, 2002. With respect to the marketing agreements described in clause (ii) above, on October 2, 2002, the U.S. Department of Transportation announced that it had completed its review of US Airways’ marketing agreements with United and had determined to end the statutory waiting period for such agreements. The Company met the conditions described in clauses (iii)(a) and (iii)(b) above when the Company received written confirmation from the Stabilization Board of its conditional approval of the ATSB Guarantee by letter on February 11, 2003 and the Plan of Reorganization, which was reasonably acceptable to the Stabilization Board, was confirmed by the Bankruptcy Court on March 18, 2003. The Company met the condition in clause (iv) above when it secured commitments from its “at-risk” lenders.

On March 20, 2003, the Company notified RSA that it was not in compliance with a material financial covenant under the DIP Facility. Under the terms of the DIP Facility, RSA could exercise one or more remedies, including but not limited to, a cancellation of its commitment to lend under the DIP Facility as well as the right, upon five business days’ notice, to recover the collateral for the loan. The Company is in discussions with RSA regarding the funding of the remaining $131 million available under the DIP Facility and a potential waiver or standstill agreement while the Company completes the final stages of emergence from Chapter 11.

On September 26, 2002, US Airways Group entered into a definitive investment agreement with RSA to be the proposed plan of reorganization equity sponsor, superceding the TPG MOU. On January 17, 2003, the Company and RSA entered into the RSA Investment Agreement covering certain matters, including but not limited to board composition, the Company’s post-emergence capital structure and the replacement of RSA with the Retirement Systems of Alabama Holdings LLC as the investor under the RSA Investment Agreement. RSA will invest $240 million in cash and is expected to hold approximately 36.2%, on a fully-diluted basis, of the equity in the reorganized US Airways Group immediately upon emergence from Chapter 11 pursuant to a confirmed plan of reorganization. This percentage of equity ownership is subject to change based upon definitive agreements in the final plan of reorganization. If the RSA Investment is consummated in accordance with its terms, RSA is expected to have a voting interest of approximately 71.6% in the reorganized US Airways Group immediately upon emergence from Chapter 11 pursuant to a confirmed plan of reorganization and would hold eight of 15 seats on US Airways Group’s Board of Directors. The RSA Investment is subject to customary conditions to closing as well as the Company’s achievement of certain financial and operational benchmarks. As discussed above, the RSA Investment, if consummated, contemplates the cancellation of the Common Stock.

In November 2001, US Airways obtained a $404 million credit facility from General Electric (GE Credit Facility) from which it initially received proceeds of $389 million. During the fourth quarter of 2002, the Company repaid $38 million and subsequently received proceeds of $18 million from the facility. The Company received an additional $18 million during the first quarter of 2003. The GE Credit Facility is secured by collateral including 11 A320-family aircraft and 28 spare engines. As discussed below, the terms of this credit facility were renegotiated so that borrowings bear interest rates of LIBOR plus 3.5% and the term of the facility is extended from 2006 to 2012.

GE is the Company’s largest creditor. In addition to the GE Credit Facility, GE has provided financing or guarantees on 114 of the Company’s aircraft. It also maintains the engines on the Company’s B737-family aircraft, the A320-family aircraft and the B767 aircraft. In connection with its reorganization under Chapter 11, the Company reached a settlement with GE that resolves substantially all aircraft, aircraft engine and loan-related issues. In exchange for equity in the reorganized US Airways Group and certain other concessions, GE i) modified the terms of certain agreements to meet the cost savings requirements of the Company’s business plan published in its Amended Disclosure Statement, ii) is providing a DIP liquidity facility (secured by the same

39

collateral as the GE Credit Facility) of up to $120 million (GE DIP Facility), iii) will provide an exit liquidity facility of up to $360 million that will refinance obligations under the GE DIP Facility and provide additional liquidity, iv) will provide $350 million of lease equity for the financing of regional jets and v) extended the term of the GE Credit Facility (see above).

Every obligation of the Company to GE is generally cross-defaulted to all GE obligations including the GE Credit Facility and are cross-collateralized to the collateral securing the GE Credit Facility. The Company commenced making draws under the GE DIP Facility in January 2003.

The Company believes that substantially all of its needs for funds necessary to consummate the Plan and for post-Effective Date working capital financing will be met by projected operating cash flow, the RSA Investment and the ATSB Loan. Moreover, if the Company requires working capital and financing for aircraft acquisitions greater than that provided by projected operating cash flow, the RSA Investment and the ATSB Loan, it may be required either to (a) obtain other sources of financing or (b) curtail their operations. The Company believes that the recapitalization to be accomplished through the Plan will facilitate the ability to obtain additional or replacement working capital financing. No assurance can be given, however, that any additional replacement financing will be available on terms that are favorable or acceptable to the Company. Moreover, there can be no assurance that the Company will be able to obtain an acceptable credit facility upon expiration of the ATSB Guarantee.

Other

On February 1, 2001, US Airways’ 9 5/8% Senior Notes matured. In connection with this, US Airways paid off these notes, which had a principal amount outstanding of $175 million, using cash on hand.

In September 2000, the City of Charlotte issued $35 million of special facility revenue bonds, the proceeds of which were used to pay the cost of design, acquisition, construction and equipping of certain airport-related facilities to be leased to US Airways at the Charlotte/Douglas International Airport.

In July 2000, the Philadelphia Authority for Industrial Development (PAID) issued $71 million of special facility revenue bonds, the proceeds of which were provided to US Airways in the form of an unsecured loan. US Airways utilized the proceeds to finance various improvements at the Philadelphia International Airport where US Airways has significant operations. The bond proceeds were restricted to expenditures at the Philadelphia International Airport and unspent amounts, which were approximately $22 million as of December 31, 2002, are classified as a component of Other assets, net in the Company’s Consolidated Balance Sheet. On January 16, 2003, the Bankruptcy Court approved a settlement between US Airways and HSBC Bank USA, Trustee (HSBC) which serves as indenture trustee for the PAID loan. The settlement provides for the return of approximately $19 million to the debt holders and payment of approximately $3 million to the Company. HSBC will receive a virtual deficiency claim in the event that the recovery received by holders of general unsecured claims pursuant to the Plan exceeds 10%. This claim will be an obligation of the Company. However, the Company believes that it is unlikely such virtual deficiency claim will ever arise given the estimated recoveries on account of general unsecured claims.

Effective August 15, 2001, US Airways terminated its $190 million 364-day secured revolving credit facility and its $250 million three-year secured revolving credit facility. No amounts were outstanding under these facilities, as of August 15, 2001, or at any time during the calendar year. The Company currently has no revolving credit facility.

40

The following table provides detail of the Company’s future cash contractual obligations, including those obligations subject to compromise, as of December 31, 2002 (dollars in millions). These amounts are subject to change pending the completion of the Company’s reorganization under Chapter 11 of the Bankruptcy Code.

As discussed in “Update on Chapter 11 Proceedings” in Item 1, on March 21, 2003 the Company and ALPA reached agreement to terminate the Pilot Retirement Plan and implement a replacement defined contribution plan in its place, effective April 1, 2003. As noted above, resolution of the pension funding issue is a condition to issuance of the ATSB Guarantee and therefore, to the Company’s emergence from Chapter 11. Under the Pilot Retirement Plan, the Company’s funding requirement would be $1.66 billion between 2003 and 2009. Under the new defined contribution plan, funding requirements are estimated to decline to approximately $960 million over the same period.

The Company’s agreements to acquire new Airbus aircraft, accompanying jet engines and ancillary assets have increased the Company’s financing needs and added to the Company’s financial obligations. Through December 31, 2002, US Airways has used cash to purchase substantially all Airbus aircraft and subsequently financed all the aircraft through leveraged lease transactions or secured loan transactions. Additional financing or internally-generated funds will be needed to satisfy the Company’s capital commitments for the balance of firm-order aircraft commitments and for other aircraft-related expenditures beyond 2002. Other capital expenditures, such as 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.

The Company continues to be highly leveraged. Substantially all of its aircraft and engines are subject to liens securing indebtedness. 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. Although the Company does project that it will begin to generate positive cash flow from operations beginning in 2004, there can be no assurances that the Company can achieve or sustain positive cash flow from operations.

The Company estimates that it had substantial net operating loss (NOL) carryforwards at December 31, 2002, for U.S. federal income tax purposes. The Company anticipates that it will experience an “ownership change” (within the meaning of the U.S. Internal Revenue Code Section 382) on the Effective Date as a result of the issuance of equity to the claimholders and RSA pursuant to the plan of reorganization. As a result, the Company’s ability to use any pre-Effective Date NOLs, capital loss carryovers, and certain other tax attributes to offset its income in any post-

41

Effective Date taxable year (and in the portion of the taxable year of the ownership change following the Effective Date) generally will be limited. Moreover, such Company’s tax attributes will be subject to further limitations if the Company experiences additional future ownership changes or if it does not continue its business enterprise for at least two years following the Effective Date. The Company does not expect to have any meaningful pre-Effective Date NOLs or capital loss carryovers following the consummation of the reorganization transactions.

Because RSA will hold a significant equity position in the reorganized Company following the occurrence of the Effective Date, if RSA disposes of all or some significant amount of this position after the Effective Date, it could cause the reorganized Company to undergo an ownership change. This would generally limit (or possibly eliminate) the reorganized Company’s ability to use post-Effective Date NOLs and other tax attributes.

US Airways utilizes third party service providers to process credit card transactions. As a result of the Chapter 11 filing, these providers have required additional cash collateral to minimize their exposure. If US Airways fails to meet certain financial or nonfinancial covenants, these providers can (i) require additional cash collateral or additional discretionary amounts upon the occurrence of certain events; and (ii) under certain circumstances, terminate such credit card processing agreements. US Airways has received proposals from and is in negotiations with potential credit card processors for Visa and MasterCard transactions, once US Airways emerges from Chapter 11 bankruptcy protection and transitions its current relationship with National Processing Corporation (NPC), a division of National City Bank of Cleveland. US Airways currently has an agreement with NPC which expires March 31, 2003, but which provides for a 45-day extension if a series of milestones are met. Specifically, the 45-day extension with NPC requires that the Company have a confirmed plan of reorganization and a new credit card processing agreement in place by March 31, 2003. The Company then has to substantially complete the plan and close on the ATSB Loan by April 15, 2003, allowing for an extension of the NPC agreement until May 15, 2003. Assuming these conditions are met, US Airways would expect to transition to its new processor in late April or early May. However, there can be no assurance that the current contract can be extended beyond March 31, 2003, if US Airways does not execute an agreement with a new processor by this date. The termination of credit card processing agreements could have a material adverse effect on the Company’s liquidity, financial condition and results of operations.

On August 12, 2002, Standard and Poor’s (S&P) lowered its corporate credit ratings on US Airways Group and US Airways to “D” (Default) from “SD” (Selective Default). Ratings on most issues of US Airways that had not already defaulted were lowered as well, and remain on CreditWatch with developing implications. On August 12, 2002, Moody’s Investor Service (Moody’s) downgraded its Senior Implied Ratings of the Company and US Airways to Caa3 from Caa2 and the rating outlook is negative. Credit ratings issued by agencies such as S&P and Moody’s affect the Company’s ability to issue debt or equity securities and the effective rate at which such financings are undertaken.

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. Factors such as weather conditions or a decrease in the demand for air transportation in the markets in which the Company operates may adversely affect the Company’s financial condition or results of operations. Adverse changes in certain factors that are generally outside the Company’s control, such as an economic downturn, additional government regulation, intensified competition from lower-cost competitors or increases in the cost of aviation fuel, could have a materially adverse effect on the Company’s liquidity, financial condition, results of operations and future prospects. Other factors that may affect the Company’s actual results include labor costs and consumer perceptions of the Company’s products. The Company is unable to predict the effect that these factors may have on its financial condition or results of operations.

42

The Company will largely rely on cash flows from operations, the ATSB Loan and the RSA Investment to fund its operations in the near term. Although it has taken aggressive action to reduce its costs, including significant reductions in workforce, many of the Company’s costs are fixed over the intermediate to longer term, so that the Company is not able to reduce its costs as quickly as it is able to reduce its capacity. The impact of the current financial crisis on the Company and the sufficiency of its financial resources to absorb that impact will depend on a number of factors, including: (1) the continuing adverse impact of the terrorist attacks and war on the economy in general; (2) the level of air travel demand, mix of business and leisure travel and related yields; (3) the Company’s ability to reduce its operating costs and conserve its financial resources; (4) the higher costs associated with new FAA security directives and any other increased regulation of air carriers; (5) the significantly higher costs of aviation insurance coverage, and the extent to which such insurance (and war-risk coverage for vendors) will continue to be commercially available or available through government sources to the Company and its vendors; (6) the ability of the Company to reduce costs to a level that takes into account the significantly reduced size of its operation, and the timing of those cost reductions; (7) the Company’s ability to raise financing in light of the various factors referred to herein; (8) the price and availability of jet fuel, and the availability to the Company of fuel hedges in light of current industry conditions; and (9) the extent of the decline in value of the aircraft in the Company’s fleet. Due in part to the lack of predictability of future traffic, business-leisure mix and related yields as well as costs of aviation fuel, the Company is unable to predict whether it can absorb that impact. However, given the magnitude of the unprecedented events leading up to the financial crisis and the possible subsequent effects, the adverse impact to the Company’s liquidity, financial condition, results of operations and prospects may continue to be material.

Critical Accounting Policies

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements 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.

The Company believes that the following accounting policies are critical because they are subject to significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions:

Impairment of Long-Lived Assets and Intangible Assets Subject to Amortization–The Company assesses the impairment of long-lived assets and intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors which could trigger an impairment review include the following: significant changes in the manner of use of the assets; significant underperformance relative to historical or projected future operating results; or significant negative industry or economic trends. The Company determines that an impairment has occurred when the future undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Cash flow estimates are based on historical results adjusted to reflect the Company’s best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Estimates of fair value represent the Company’s best estimate based on appraisals, industry trends and reference to market rates and transactions. Changes in industry capacity and demand for air transportation can significantly impact the fair value of aircraft and related assets. Refer to “Unusual Items” above for details regarding impairment charges taken in 2002 and 2001.

43

Impairment of Goodwill–Effective January 1, 2002 the Company adopted the provisions of SFAS 142. Upon adoption, the Company assigned all of it assets and liabilities to its reporting units and ceased amortizing goodwill. All goodwill was assigned to the US Airways reporting unit. SFAS 142 requires management to make judgements about the fair value of the US Airways reporting unit to determine whether goodwill is impaired. The Company believes that this accounting estimate is a “critical accounting estimate” because: (1) goodwill is a significant asset; (2) amortization expense was a significant component of operating expenses; and (3) the impact that recognizing an impairment would have on the assets reported on the balance sheet, as well as the net loss, could be material. Beginning January 1, 2002, goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that the assets might be impaired. In assessing the recoverability of goodwill, the Company must make assumptions about the estimated future cash flows and other factors to determine the fair value. During 2002, the Company tested its goodwill for impairment in connection with the required SFAS 142 transitional test and again after its Chapter 11 filing. See Note 2 to the Consolidated Financial Statements (contained in Item 8) for details regarding these tests.

Passenger Revenue Recognition–The Company recognizes passenger transportation revenue and related commission expense when transportation is rendered. Passenger ticket sales collected prior to the transportation taking place are reflected in Traffic balances payable and unused tickets on the Consolidated Balance Sheets. Due to various factors including refunds, exchanges, unused tickets and transactions involving other carriers, certain amounts are recorded based on estimates. The Company routinely performs evaluations of the liability which may result in adjustments which are recognized as a component of Passenger transportation revenue. Actual refund, exchange and expiration activity may vary from estimated amounts. Such differences have historically not been material.

Accounting for Income Taxes–As of December 31, 2002, the Company has a valuation allowance recorded against its net deferred tax asset of $1.36 billion. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible.

Pensions and Other Postretirement Benefits–The Company accounts for its defined benefit pension plans using Statement of Financial Accounting Standards No. 87, “Employer’s Accounting for Pensions” (SFAS 87) and its other postretirement benefit plans using Statement of Financial Accounting Standards No. 106, “Employer’s Accounting for Postretirement Benefits Other than Pensions” (SFAS 106). Under both SFAS 87 and SFAS 106, expense is recognized on an accrual basis over employees’ approximate service periods. Expenses calculated under SFAS 87 and SFAS 106 are generally independent of funding decisions or requirements. Exclusive of curtailment and settlement items, the Company recognized defined benefit pension plan expense of $326 million, $200 million and $229 million in 2002, 2001 and 2000, respectively, and other postretirement benefit expense of $145 million, $127 million and $118 million in 2002, 2001 and 2000, respectively.

The fair value of the Company’s pension plan assets decreased from $3.14 billion at September 30, 2001 to $2.84 billion at September 30, 2002 (All US Airways plans are measured as of September 30; however, all other subsidiaries plans are measured as of December 31). Lower investment returns, increased benefit payments and declining discount rates have increased the plans’ under-funded status from $2.34 billion at September 30, 2001 to $2.44 billion at September 30, 2002.

The calculation of pension and other postretirement benefit expenses and liabilities requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from the assumptions. The

44

Company believes that the two most critical assumptions for pension plans are the expected long-term rate of return on plan assets and the assumed discount rate and for other postretirement benefit plans are the assumed discount rate and the assumed health care trend rate.

The Company assumed that its pension plans’ assets would generate a long-term rate of return of 8.75% at September 30, 2002. This rate is lower than the assumed rate of 9.5% used at both September 30, 2001 and 2000. The expected long-term rate of return assumption is developed by evaluating input from the plan’s investment consultants, including their review of asset class return expectations and long-term inflation assumptions. The expected long-term rate of return on plan assets is based on a target allocation of assets to the following fund types:

The Company believes that its long-term asset allocation on average will approximate the targeted allocation. The Company regularly reviews its actual asset allocation and periodically rebalances its investments to its targeted allocation when considered appropriate.

Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected long-term rate of return on plan assets by one-half of a percentage point (from 9.5% to 9.0%) would have increased US Airways 2002 pension expense by approximately $17 million.

The Company discounted both its future pension obligations and its other postretirement benefit obligations using a rate of 6.75% at September 30, 2002, compared to 7.5% at September 30, 2001 and 8.0% at September 30, 2000. The assumed discount rate is based on the current rates earned on long-term bonds that receive one of the two highest ratings given by a recognized rating agency. Both liabilities and future expense increase as the discount rate is reduced. Lowering the discount rate by one-half of a percentage point would increase US Airways’ pension and other postretirement liabilities at September 30, 2002 by approximately $395 million and $130 million, respectively. Lowering the discount rate used to calculate US Airways’ pension and post-retirement benefit expenses by one-half of a percentage point would have increased 2002 expenses by approximately $30 million and $6 million, respectively.

At September 30, 2002, the Company assumed a health care cost trend rate of 10% in 2003 decreasing to 5% in 2008 and thereafter when computing its other postretirement benefit liabilities and expenses. This compares to a health care cost trend rate of 7% in 2002 decreasing to 4.5% in 2005 and thereafter assumed as of September 30, 2001. The Company substantially increased its health care cost trend rate as of September 30, 2002 in order to reflect the overall increase in general health care costs which will be partially offset by specific changes in the Company’s plan design. Both the liability and future expense increase as the health care cost trend rate is increased. Increasing the health care cost trend rate by one percentage point would increase the Company’s other postretirement liabilities at September 30, 2002 by approximately $266 million.

Future changes in plan asset returns, assumed discount rates, assumed health care trend rates and various other factors related to the participants in the Company’s pension and other postretirement benefit plans will impact future expenses and liabilities. The Company cannot predict with certainty what these factors will be in the future.

45

Accounting Changes

Effective January 1, 2002, PSA Airlines, Inc. (PSA), a wholly-owned subsidiary of the Company, changed its method of accounting for engine maintenance from accruing on the basis of hours flown to expensing as incurred. While the former method was permitted under GAAP, the Company believes the new method is preferable as an obligation does not exist until the maintenance services have been performed. The new method is the predominant method used in the airline industry and is consistent with the method used by US Airways and the Company’s other subsidiaries. In connection with the change, the Company recognized a $17 million credit representing the cumulative effect of the accounting change. The effect of adopting the new method was immaterial to the Company’s net loss for 2002. The pro forma effect of the accounting change, assuming the Company had adopted the new method as of January 1, 2000, is immaterial to the Company’s net loss for 2001 and 2000.

On January 1, 2002, the Company adopted SFAS 142 under which goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but instead are assessed for impairment at least annually and also between annual tests when a significant triggering event occurs. During the second quarter of 2002, the Company completed its initial assessment. The fair value of US Airways, the sole reporting unit assigned goodwill, exceeded US Airways’ carrying value, indicating that an impairment did not exist. As a result of the Company’s Chapter 11 filing, the Company reassessed its goodwill for impairment during the third quarter of 2002. This reassessment included an analysis of the fair value of the reporting unit using discounted cash flows based on its September 2002 financial projections which were prepared on a going-concern basis. The projections reflect a number of assumptions as to current and projected market conditions including improved revenue trends from the airline industry’s current depressed levels, assume that the Company achieves its targeted cost reductions and assume that the ATSB Guarantee and the RSA Investment are consummated upon emergence from bankruptcy. Based on the results of this assessment, the fair value of the reporting unit exceeded its carrying value which led the Company to conclude that the reporting unit’s goodwill was not impaired as of September 30, 2002. Year 2002 amortization expense was favorably impacted by $19 million as a result of ceasing amortization of goodwill. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairments in accordance with SFAS 144.

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). This statement established accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a hedging derivative’s change in fair value is immediately recognized in earnings. The Company adopted SFAS 133, as amended, on January 1, 2001. This resulted in a $7 million credit, net of income taxes, from a cumulative effect of a change in accounting principle, and a $1 million increase, net of income taxes, in Stockholders’ Equity (Deficit).

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Although SAB 101 does not change existing accounting rules on revenue recognition, changes in accounting to apply the guidance in SAB 101 may be accounted for as a change in accounting principle. On January 1, 2000, the Company changed its method of accounting for the sale of mileage credits in its Dividend Miles program from recognizing revenue when credits are sold, to deferring the portion of revenue attributable to

46

future transportation and recognizing it as passenger revenue when the service is provided. The remaining portion of sales proceeds will continue to be recognized immediately as a component of Other operating revenues. The Company believes the new method results in a better matching of revenue with the period in which travel services are provided. In connection with the change, the Company recognized a $103 million, net of applicable income taxes, cumulative effect charge on January 1, 2000.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) which requires the consolidation by primary beneficiaries of variable interest entities (VIEs), as defined. Public companies will generally be subject to its provisions effective after January 31, 2003 for newly-acquired VIEs and the first fiscal or interim period beginning after June 15, 2003 for VIE holdings acquired prior to February 1, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company’s financial statements. However, as a result of the complexities of this interpretation, the evolving understanding and forthcoming implementation guidance from the FASB, the Company is continuing to evaluate the provisions of FIN 46.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34” (FIN 45). FIN 45 expands on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. It also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. Refer to Note 7(e) to the Company’s Notes to Consolidated Financial Statements for more information regarding guarantees.

In July 2002, the FASB issued Statement of Financial Accounting Standards No.146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146).The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. Previous accounting guidance was provided by Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 replaces EITF 94-3. The principal effect of applying SFAS 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS 145). SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is

47

encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company’s financial statements.

Other Information

On July 27, 2001, the U.S. Department of Justice announced its intention to file suit to block the proposed merger of the Company with a wholly-owned subsidiary of UAL, United’s parent corporation. As a result, the Company, UAL and Yellow Jacket Acquisition Corp. (the UAL wholly-owned subsidiary formed for the purpose of this merger) entered into a termination agreement on July 27, 2001 with respect to that certain Agreement and Plan of Merger, dated as of May 23, 2000, as amended, among the parties. In connection with such termination agreement, UAL paid $50 million to US Airways. Separately, US Airways paid a merger termination fee of approximately $2 million to Robert L. Johnson, a member of the Board of Directors of the Company and US Airways, representing reimbursement for his expenses in connection with his activities to establish a new airline which would have addressed certain potential competitive issues surrounding the proposed merger transaction, and supported regulatory approval of the new airline. The amount paid to Mr. Johnson is included in Other, net on the Company’s Consolidated Statements of Operations.

The Company places significant reliance on its information technology systems. To reduce costs and improve service levels, the Company entered into a long-term agreement with Sabre, Inc. (Sabre) effective January 1, 1998 to provide substantially all of the Company’s information technology requirements. On July 1, 2001, Sabre completed the sale of its airline infrastructure outsourcing business to EDS but retained ownership of its intellectual property. In connection with this sale, US Airways bifurcated its service agreement with Sabre into an agreement with EDS and an agreement with Sabre. EDS became responsible for substantially all of the Company’s information technology requirements except for certain programming and support for most of Sabre’s intellectual property, including Sabre’s reservation and fare pricing systems, which Sabre continues to provide to the Company. The Company does not expect its information technology costs to change materially as a result of these new relationships. In February 2003, the Company assumed the EDS contract after it reached an agreement with EDS with significantly improved terms and conditions upon emergence from bankruptcy.

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 and equity price 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.

The following sensitivity analyses do not consider the effects that an adverse change may have on the overall economy nor do they consider additional actions the Company may take to mitigate its exposure to such changes. Actual results of changes in prices or rates may differ materially from the following hypothetical results.

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. The military action in the Middle East, continued political unrest in Venezuela and adverse weather during the 2002-2003 winter season continue to impact the supply and demand for oil and consequently the price. 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 liquidity, results of operations and financial condition. For 2002

48

and 2001, aviation fuel expenses represented 9.8% and 11.8%, respectively, of the Company’s total operating expenses (as adjusted to exclude unusual items for comparability purposes).

The Company utilizes financial derivatives, including fixed price swap agreements, collar structures and other similar instruments, to manage the risk associated with changes in aviation fuel prices. As of December 31, 2002, the Company had open fuel hedge positions in place to hedge 62% of its first quarter 2003 anticipated jet fuel requirements and 24% of its second quarter 2003 anticipated jet fuel requirements. The fair value of these positions was a net asset of approximately $12 million, which is recorded in Prepaid expenses and other in the Company’s Consolidated Balance Sheet. An immediate hypothetical ten percent increase or decrease in underlying fuel-related commodity prices from the December 31, 2002 prices would change the fair value of the commodity derivative financial instruments in place by $11 million.

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 2002, an assumed 10% decrease in the average interest earned on these financial instruments would not materially impact the Company’s results of operations.

As of December 31, 2002 and 2001, the Company had $745 million and $468 million of variable-rate debt outstanding, respectively. Assuming a hypothetical 10% increase in average interest rates during 2003 as compared to 2002 and normalized for new debt issued, interest expense would increase by $4 million. Additional information regarding the Company’s long-term debt obligations (including liabilities subject to compromise) as of December 31, 2002 is as follows (dollars in millions):