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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, 2003

Or

For the transition period from                  to                 

US Airways, Inc.

(Exact name of registrant as specified in its charter)

State of Incorporation: Delaware

2345 Crystal Drive, Arlington, Virginia 22227

(Address of principal executive offices)

(703) 872-7000

(Registrant’s telephone number, including area code)

(Commission file number: 1-8442)

(I.R.S. Employer Identification No: 53-0218143)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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.  ¨

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

There is currently no public market for the registrant’s Common Stock.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

On March 1, 2004, there were outstanding 1,000 shares of Common Stock.

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US Airways, Inc.

Form 10-K

Year Ended December 31, 2003

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US Airways, Inc.

Form 10-K

Year Ended December 31, 2003

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Part I

Item 1. Business

Overview

US Airways, Inc. (US Airways or the Company) is a corporation organized under the laws of the State of Delaware and is a wholly owned subsidiary of US Airways Group, Inc. (US Airways Group). US Airways is a certificated air carrier engaged primarily in the business of transporting passengers, property and mail. US Airways enplaned approximately 41 million passengers in 2003 and was the seventh largest U.S. air carrier (as ranked by revenue passenger miles (RPMs)). As of December 31, 2003, US Airways operated 282 jet aircraft (see Item 2 “Properties” for additional information related to aircraft operated by US Airways) and provided regularly scheduled service at 90 airports in the continental United States, Canada, Mexico, France, Germany, Italy, Spain, Ireland, the Netherlands, the United Kingdom and the Caribbean. US Airways’ executive offices are located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone number (703) 872-7000). The Company’s internet address is usairways.com.

On August 11, 2002 (Petition Date), US Airways filed a voluntary petition 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) (Case No. 02-83985-SSM). On the same date, US Airways Group, US Airways’ parent company, and six of its other subsidiaries (collectively with US Airways, the Filing Entities) also filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The reorganization cases were jointly administered under the caption “In re US Airways Group, Inc., et al., Case No. 02-83984-SSM.” During the pendency of the Chapter 11 cases, US Airways continued to operate its business as a debtor-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.

The Filing Entities emerged from bankruptcy protection under the First Amended Joint Plan of Reorganization of US Airways Group, Inc. and Affiliated Debtors and Debtors-in-Possession, As Modified (Plan of Reorganization), which (i) was confirmed pursuant to an order of the Bankruptcy Court on March 18, 2003 and (ii) after each of the conditions precedent to consummation was satisfied or waived, became effective on March 31, 2003 (Effective Date). In accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” the Company adopted fresh-start reporting on the Effective Date. Refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding the Company’s bankruptcy reorganization. References to “Predecessor Company” refer to the Company prior to March 31, 2003. References to “Successor Company” refer to the Company on and after March 31, 2003, after application of fresh-start reporting. As a result of the application of fresh-start reporting, the Successor Company’s financial statements are not comparable with the Predecessor Company’s financial statements.

Certain air carriers have code share arrangements with US Airways to operate under the trade name “US Airways Express.” 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 2003, the US Airways Express network served 143 airports in the continental U.S., Canada and the Bahamas, including 44 airports also served by US Airways. During 2003, US Airways Express air carriers enplaned approximately 13.2 million

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passengers (of these approximately 5.9 million passengers were enplaned by the Company’s wholly owned regional airlines and 5.7 million passengers were enplaned by third-party carriers operating under capacity purchase agreements and approximately 1.6 million passengers were enplaned by carriers operating under “prorate” agreements – see below), approximately 50% 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 during off-peak periods between US Airways flights.

The US Airways Express code share arrangements are either in the form of a capacity purchase or a “prorate” agreement. Allegheny Airlines, Inc. (Allegheny), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA), which are wholly owned subsidiaries of US Airways Group, 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) and Midway Airlines Corporation (Midway) prior to Midway ceasing service. 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, will 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 2013 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, and have logos, service marks, aircraft paint schemes and uniforms similar to those of US Airways.

US Airways’ major connecting hubs are at airports in Charlotte, Philadelphia and Pittsburgh. The Company also has substantial operations at Boston’s Logan International Airport (Logan), New York’s LaGuardia Airport (LaGuardia) and Washington’s Ronald Reagan Washington National Airport (Reagan National). Measured by departures, US Airways is among the largest at each of the foregoing airports. 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 among the largest intra-East coast carriers, comprising 29% of the industry’s intra-East coast revenues based on the most recent industry revenue data available.

For the year ended December 31, 2003, passenger revenues accounted for 91% of the Company’s consolidated operating revenues. Cargo revenues and other sources accounted for 9% of the Company’s consolidated operating revenues in 2003. 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.

A copy of this annual report on Form 10-K, as well as other 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 as soon as reasonably possible after filed with or furnished to the Securities and Exchange Commission.

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Airline Industry and the Company’s Position in the Marketplace

Most of the markets in which US Airways operates are highly competitive. US Airways competes 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.

US Airways considers the growth of low-fare 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-fare low-cost competitors in many of the markets in which the Company operates. These competitors, based on low costs of operations and low-fare structures, include Southwest Airlines Co. (Southwest), AirTran Airways, Inc., Frontier Airlines, Inc. (Frontier) and JetBlue Airways. Southwest has steadily increased operations within the eastern United States since first offering service in this region in late 1993. In May 2004, Southwest and Frontier will commence service at the Philadelphia International Airport, a hub airport for US Airways. The Company anticipates further low-fare low-cost competition in the industry in the future.

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 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., automobiles, trains, etc.).

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. As described below, the Company continues to add regional jets to its fleet, in part, to regain lost market share in markets where its turboprop affiliates competed with other major airline affiliates which operate regional jets.

US Airways’ agreement with its pilots provides that it may operate up to 465 regional jets, subject to certain restrictions. As of December 31, 2003, the third-party regional jet affiliates and PSA operated 113 regional jets as part of 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 pilot 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, Trans States and Chautauqua pilots have all agreed to Jets for Jobs.

In recent years, the Company’s profitability was significantly eroded by competitive pressures (including the incursion of regional jets, the expansion of low-fare low-cost carriers and the entry of additional carriers into its operating territories, including key focus cities and hubs),

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unfavorable economic trends, and rising fuel and labor costs. The May 2000 proposed merger of United Airlines (United) and US Airways Group was designed to address this profitability erosion by adding US Airways Group into a global network. During the period in which the merger was pending, which ended in the termination of the merger agreement after failing to receive approval from the United States Department of Justice in late July 2001, the Company was effectively 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 it; 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 competes 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, which constitutes a significant portion of the Company’s flying.

The Company, with a new management team headed by David N. Siegel, who joined the Company in March 2002, began to implement 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 strategic alliances with domestic and international airlines.

While the Company was able to negotiate certain 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. In August 2002, faced with declining seasonal revenues, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code for it to maximize its liquidity position and its prospects for a successful reorganization. As described above, on March 18, 2003 the Bankruptcy Court confirmed the Company’s Plan of Reorganization and the Company emerged from bankruptcy protection on March 31, 2003. As part of its reorganization, US Airways received a $900 million loan guarantee (ATSB Guarantee) under the Air Transportation Safety and System Stabilization Act (Stabilization Act) from the Air Transportation Stabilization Board in connection with a $1 billion term loan financing (the ATSB Loan). The Company required this loan and related guarantee in order to provide the additional liquidity necessary to carry out its restructuring plan. The ATSB Loan was funded on the Effective Date.

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Marketing Agreements with Other Airlines

US Airways entered into comprehensive marketing agreements with United in July 2002. As a result of these agreements, US Airways and United passengers are able to contact either airline and make a single reservation that involves travel on either or both airlines (code share travel) through 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 either airline and members of either airlines’ airport club may access both airlines’ airport clubs when traveling on flights operated by the host airline. US Airways and United customers may also redeem Dividend Miles and Mileage Plus awards on both airlines. The agreement also includes provisions for US Airways to join United in the Star Alliance, which extended an invitation to US Airways on May 31, 2003. Membership in the Star Alliance will further enhance the value of US Airways’ domestic and international route network by allowing customers access to the global marketplace. US Airways expects to join the Star Alliance in the second quarter of 2004. 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 immediately requested bankruptcy court authority to assume these agreements and the court granted United’s request.

In October and December 2003, US Airways entered into similar marketing agreements with Lufthansa Airlines and Spanair, respectively. US Airways also has marketing agreements with several smaller regional carriers in the Caribbean, operating collectively as the “GoCaribbean” network.

Industry Regulation and Airport Access

US Airways operates under a certificate of public convenience and necessity issued by the Department of Transportation (DOT). This certificate may be altered, amended, modified or suspended by the DOT if the public convenience and necessity so require, or may be revoked for failure to comply with the terms and conditions of the certificate. Airlines are also regulated by the U.S. Federal Aviation Administration (FAA), a division of the DOT, primarily in the areas of flight operations, maintenance, ground facilities and other technical matters. Pursuant to these regulations, the Company has FAA-approved maintenance programs for each type of aircraft it operates 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 or one or more of the aircraft types it operates. In recent years, for example, the FAA has issued or proposed such mandates relating to, among other things, 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 tank flammability reductions 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, CA, 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

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operating costs for the airline industry, including the Company.

The Company is obligated to collect a federal excise tax on domestic and international air transportation (commonly referred to as the “ticket tax”). The Company collects these taxes, along with certain other U.S. and foreign taxes and user fees on air transportation, and passes through the collected amounts to the appropriate governmental agencies. Although such taxes are not operating expenses of 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, in part, by a fee collected by air carriers from their passengers of $2.50 per flight segment, but not more than $5.00 per one-way trip, and a fee on air carriers that is limited to the amount that the carrier spent on passenger security screening in 2000 and will, beginning in October 2004 (the beginning of the next fiscal year for the Federal Government), be modified to allocate the total amount spent by all carriers combined in 2000 to each carrier under a methodology that remains to be determined by the TSA. Implementation of the requirements of the Security Act have resulted and will continue to result in increased costs for US Airways and its 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), 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 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 legislation, 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

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despite their scheduled elimination in 2007.

At Reagan National an additional eleven roundtrips are to be awarded by the DOT, pursuant to the recently passed Vision 100–Century of Aviation Reauthorization Act, which created additional slots for distribution by the DOT. Although US Airways is participating in the proceeding, past DOT procedure suggests that other carriers, particularly new entrants, will secure additional service rights at Reagan National. Other low-cost low-fare new entrant carriers also have ongoing efforts to obtain additional slots at LaGuardia.

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, 2003, on a full-time equivalent basis, US Airways employed 26,700 active employees including approximately 7,000 station personnel, 5,800 flight attendants, 5,100 mechanics and related employees, 3,400 pilots, 1,800 reservations personnel and 3,600 personnel in administrative and miscellaneous job categories.

As of December 31, 2003, approximately 88% 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, 2003 is as follows:

Aviation Fuel

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 its control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices may be affected by many factors, including: the impact of political instability on crude production, especially in Russia and OPEC countries; unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries; unpredicted increases to oil demand due to weather or the pace of economic growth; inventory levels of crude, refined products and natural gas; and other factors, such as the relative fluctuation between the U.S. dollar and other major currencies and influence of speculative positions on the futures exchanges. Because the operations of the airline are dependent upon aviation fuel, significant increases in aviation fuel costs could materially and adversely affect liquidity, results of operations and financial condition. Furthermore, the

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implications of a sharp increase in the price of aviation fuel for a prolonged period of time would be significant. To manage some of this risk, the Company utilizes certain financial instruments designed to reduce its exposure related to fuel price increases. See “Selected Operating and Financial Statistics” in MD&A for additional information related to aviation fuel.

Distribution Channels

Growing usage of electronic distribution systems, including electronic tickets and internet booking channels, has helped the Company reduce its cost of distribution while changing the dynamics of ticket purchasing. The Company began selling electronic tickets in 1996. During 2003, electronic ticket sales represented 92% of all ticket sales. The Company currently charges a $50 fee to customers, except for certain elite status frequent fliers, who choose a paper ticket when an electronic ticket is available.

Distribution trends continue to evolve in the industry. Consumer reliance on traditional travel agencies is shrinking, while usage of online travel agencies is increasing. Both traditional and online travel agencies typically use Global Distribution Systems (GDS), such as Sabre, to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee, the “GDS fee”, that is charged to the airline. Bookings made directly with the airline, through its reservation call centers or website, do not incur a GDS fee. As a result, it is less expensive for the Company to sell through direct channels when possible and the Company continues to invest in this channel shift. Among the three largest online agencies, Orbitz distinguishes itself from Travelocity and Expedia by using a direct connection to the Company’s inventory systems, thus avoiding the GDS fee. Orbitz is a lower cost distribution channel as a result, though it is still more expensive than sales through the Company’s website, usairways.com. By July 2004, the DOT will eliminate most regulations governing GDS. The impact of this change is unknown but could impact the cost of distributing tickets. Consistent with the direct sale strategy, the Company continues to develop usairways.com. During the fourth quarter of 2003, sales from all internet bookings comprised 24% of total sales. Bookings through usairways.com comprised approximately 9% of total sales.

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 a bonus commission, often called an override, based on sales on the airline.

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.

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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 routinely reviews the assumptions made to calculate its FTP liability for reasonableness and makes adjustments to these assumptions as necessary.

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, 2003 and 2002, Dividend Miles participants had accumulated mileage credits for approximately 6,272,000 and 7,011,000 awards, respectively. Because US Airways expects that some potential awards will never be redeemed, calculations of FTP liabilities are based on approximately 80% 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 $85 million and $90 million as of December 31, 2003 and 2002, 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 FTP awards redeemed for free travel during the years ending December 31, 2003, 2002 and 2001 was approximately 1.2 million, 1.3 million and 1.1 million, respectively, representing approximately 7% of US Airways’ RPMs in each of 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 maintains insurance of the types and in amounts deemed adequate to protect itself and its property. Principal coverage includes: liability for injury to members of the public, including passengers; damage to property of the Company and others; loss of or damage to flight equipment, whether on the ground or in flight; fire and extended coverage; directors and officers; fiduciary; and workers’ compensation and employer’s liability. In addition to customary deductibles, the Company self-insures for all or a portion of its losses from claims related to environmental liabilities and medical insurance for employees.

Since September 11, 2001, the Company and other airlines have been unable to obtain coverage for liability to persons other than employees and passengers for claims resulting from acts of terrorism, war or similar events (war risk coverage) at reasonable rates from the commercial insurance market. US Airways has, as have most other U.S. airlines, therefore purchased its war risk coverage through a special program administered by the FAA. The Emergency Wartime Supplemental Appropriations Act extended this insurance protection until August 2004. The Secretary of Transportation may extend this policy until December 31, 2004. If the federal insurance program terminates, the Company would likely face a material increase in the cost of war risk coverage, and because of competitive pressures in the industry, the Company’s ability to pass this additional cost to passengers would be limited.

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Item 2. Properties

Flight Equipment

As of December 31, 2003, US Airways operated the following jet aircraft:

As of December 31, 2003, US Airways Group has 19 A320-family aircraft on firm order scheduled for delivery in the years 2007 through 2009. US Airways Group also has 10 A330-200 aircraft on firm order scheduled for delivery in the years 2007 through 2009. In addition, US Airways Group has firm orders for 53 CRJ Series 200, 50-seat single-class aircraft and 25 CRJ 701, 70-seat single-class aircraft. All firm-order CRJ aircraft are scheduled to be delivered by April 2005. US Airways Group also has firm orders for 85 Embraer ERJ-170, 72-seat aircraft, with the first delivery scheduled for March 2004. US Airways Group has the option to convert the ERJ-170s to ERJ-175s with 76 seats. All ERJ-170 deliveries are scheduled to be received by September 2006.

The Company maintains inventories of spare engines, spare parts, accessories and other maintenance supplies sufficient to meet its operating requirements.

As of December 31, 2003, 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 or related parties.

As discussed in Item 1, “Overview” above, the Company has code share agreements in the form of capacity purchase agreements with certain US Airways Express regional jet affiliate operators. Collectively, these regional jet affiliate operators flew 106 50-seat regional jet aircraft as part of US Airways Express as of December 31, 2003.

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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 Airways’ 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 compensatory rates when aircraft are activated under CRAF. US Airways is reimbursed during peacetime proportionally to its commitment.

In February 2003, AMC activated Stage One of CRAF. US Airways’ commitment under Stage One is to provide two A330-300 aircraft for missions as required by AMC. AMC 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 activation. During the final phase of this activation, the Company did provide an A330-300 for several missions. AMC cooperated with the Company to cause the least amount of schedule disruption during activation. During the Stage One activation, which ended in June 2003, US Airways completed fifty missions for the Air Force in the support of Operation Enduring and Iraqi Freedom. The majority of the missions were to Kuwait City from domestic military bases. If AMC had activated CRAF Stage Two, in addition to providing more A330-300 aircraft, the Company could have been required to provide up to six 767-200ER aircraft for use in the Aeromed medical program. Under the Aeromed program, the 767-200ER aircraft are converted to “flying hospitals” for transportation of injured troops. US Airways and Delta are participants in the Aeromed Program. Participation in this program provides increased peacetime U.S. government revenues for the Company.

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 International Airport 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. See also “Pittsburgh Leases” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Terminal Construction Projects

The Company utilizes public airports for its 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 operates could result in additional expenditures and long-term commitments.

In 1998, US Airways reached an agreement with the Philadelphia Authority for Industrial Development (PAID) and the City of Philadelphia to construct a new international terminal and a new US Airways Express terminal at the Philadelphia International Airport, one of US Airways’ connecting hubs and US Airways’ principal international gateway. The international terminal includes 12 gates for widebody aircraft and new federal customs and immigration facilities. The international terminal gates were put into operation in May 2003 and the ticket lobby opened in September 2003. The US Airways Express facility, completed in June 2001, can accommodate 38 regional aircraft.

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Item 3. Legal Proceedings

Under the Plan of Reorganization, all claims that arose or accrued prior to the Effective Date against the Filing Entities are subject to the terms of the Plan of Reorganization and any attempt to collect, secure or enforce remedies with respect to such claims against the Company outside of the claims administration process set forth in the Plan of Reorganization are, with few exceptions, enjoined under the terms of the Plan of Reorganization and applicable law. The Chapter 11 case is discussed in greater detail in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

On February 26, 2004, a company called I.A.P. Intermodal, LLC filed suit against US Airways Group and its wholly owned airline subsidiaries alleging that the defendants infringed upon three patents held by plaintiffs, all of which patents are entitled “Method to Schedule a Vehicle in Real-Time to Transport Freight and Passengers.” Plaintiff seeks various injunctive relief as well as costs, fees and treble damages. US Airways Group has not yet been formally served but has received a courtesy copy of the complaint. US Airways Group is unable to ascertain at this time the likelihood or potential scale of liability. It should be noted that on the same date, the same plaintiff filed what we believe to be substantially similar cases against nine other major airlines, including British Airways, Northwest Airlines Corp., Korean Air Lines Co. Ltd., Deutsche Lufthansa AG, Air France, Air Canada, Singapore Airlines Limited, Delta Airlines and Continental Airlines, and had filed a suit against the parent company of American Airlines in December, 2003.

The Port Authority of New York and New Jersey filed a proof of claim against US Airways in the bankruptcy proceeding. The claim was in the amount of $8.5 million and it alleged environmental contamination and building deficiencies at LaGuardia Airport. US Airways’ liability and defenses to such liability were unaffected by its bankruptcy. US Airways has received no notice, inquiry or other communication from the Port Authority other than in connection with the proof of claim, and therefore is unable to evaluate at this time the validity of the underlying claim, the degree to which US Airways might share responsibility with other parties, or the cost of cleanup or correction of the alleged building deficiencies.

On January 7, 2003, the Internal Revenue Service (IRS) issued a notice of proposed adjustment to US Airways Group proposing to disallow $573 million of capital losses US Airways Group 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. On May 8, 2003, US Airways Group reached a tentative agreement with the IRS on the amount of U.S. federal income taxes, interest, and penalties due subject to final approval from the Joint Committee on Taxation. By letter dated September 11, 2003, US Airways Group was notified that the Joint Committee on Taxation had accepted the tentative agreement with the IRS, including a settlement of all federal income taxes through the end of 2002.

On January 30, 2003, the Filing Entities filed a motion requesting (i) a determination from the Bankruptcy Court that the Filing Entities satisfy the financial requirements for a “distress termination” of the defined benefit Retirement Income Plan for Pilots of US Airways, Inc. (Pilots Retirement Plan) under section 4041(c)(2)(B)(ii)(IV) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and approval of such pension plan’s termination and (ii) authorization to implement a defined contribution retirement plan for its pilots (Distress Termination Motion). On March 2, 2003, the Bankruptcy Court entered an order (March 2 Order) finding that the financial requirements under section 4041(c)(2)(B)(ii)(IV) of ERISA for a distress termination of the Pilots Retirement Plan had been met and approving termination of the Pilots Retirement Plan subject to a determination, under the arbitration procedures established by

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the collective bargaining agreement and the Railway Labor Act (RLA), that the proposed termination did 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 defined contribution plan to be effective April 1, 2003 in accordance with the terms and conditions set forth in Letter of Agreement #85, which resolved all disputes between the Company and ALPA regarding the distress termination of the Pilots Retirement Plan (including the grievance filed by ALPA on February 3, 2003). The agreement was ratified by the ALPA Master Executive Council, approved by the Pension Benefit Guarantee Corporation (PBGC) and was granted final approval by the Bankruptcy Court at a hearing on March 28, 2003. The Pilots Retirement Plan was terminated by agreement between the PBGC and the Company effective as of March 31, 2003, and the PBGC was appointed trustee of the Pilots Retirement Plan.

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 Order. Subsequently, three additional Notices of Appeal were filed from the March 2 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.” ALPA withdrew its Notice of Appeal at a hearing on March 28, 2003. Also at the March 28 hearing, the Company’s settlement with the Lump Sum Eligible Pilots concerning Pilots Retirement Plan benefits was read into the record. On June 11, 2003, the Menear Claimants Pilot Group withdrew their appeal. Pursuant to their settlement with the Company, the Lump Sum Eligible Pilots dismissed their appeal. On May 28, 2003, the federal district court denied the Soaring Eagles’ Notice of Appeal. On June 26, 2003, the Soaring Eagles appealed the district court’s decision to the Court of Appeals in the Fourth Circuit. While the Company believes strongly that it ultimately will prevail on the Soaring Eagles appeal, there can be no guarantee of such an outcome.

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. On October 30, 2003, the federal court granted a motion for summary judgment dismissing all claims against airline defendants other than the carriers then in bankruptcy, including US Airways, because proceedings had been stayed against those bankrupt defendants. Plaintiffs have filed a notice of appeal to the Fourth Circuit Court of Appeals. Subsequently, on January 28, 2004, the federal court in North Carolina dismissed all claims against US Airways. The plaintiffs in this proceeding had also filed a claim in Bankruptcy Court for pre-petition and continuing post-petition damages. The Bankruptcy Court determined that the entire claim was pre-petition and unsecured, and the plaintiffs appealed this decision to the Bankruptcy Court. The parties agreed to stay this appeal pending the outcome of the plaintiffs’ appeal of the grant of summary judgment in the North Carolina action. If the Fourth Circuit affirms the summary judgment ruling, plaintiffs will dismiss the appeal of the Bankruptcy Court ruling. If not, the appeal of the Bankruptcy Court ruling will be reinstated.

Williard, Inc. (Williard) together with the joint venture of Williard and Len Parker Associates (Williard/Parker) was awarded construction contracts with US Airways for work to be performed at the Philadelphia International Airport. On May 29, 2002, US Airways terminated the largest contract between the parties. Williard and Williard/Parker sued US Airways in Pennsylvania

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state court for over $14 million in damages representing termination costs and lost profits, along with other alleged contractual damage claims. Subsequently, Limbach Company LLC (Limbach) alleged that it purchased the claims of Williard. Limbach and Limbach/Parker filed proofs of claim in the Bankruptcy Court, and those claims have not yet been resolved, although on October 23, 2003, the Bankruptcy Court granted US Airways’ motion for partial summary judgment on more than $9 million of these claims. Limbach and Limbach/Parker have filed an action in state court against the City of Philadelphia (the City) and PAID and received permission to include US Airways as a co-defendant, provided that Limbach and Limbach/Parker did not make any claims against US Airways in that action. In the lawsuit against the City and PAID, Limbach and Limbach/Parker are seeking the same sums as in its earlier lawsuit and proofs of claim against US Airways, but this time under the equitable theories of third party beneficiary, quantum meruit and constructive trust. The court in the Philadelphia action dismissed US Airways from the lawsuit and dismissed the third party beneficiary claims against the City and PAID. These rulings are subject to appeal at a later date. Should Limbach and/or Limbach/Parker recover in the Bankruptcy proceeding, those damages would be paid as pre-petition, unsecured claims. Should Limbach and/or Limbach/Parker recover in the Philadelphia Action against the City and PAID, that award would be paid at 100 cents on the dollar. US Airways may have an obligation to indemnify the City and PAID under its agreements related to the airport development, which US Airways assumed as part of the bankruptcy process. Therefore, any recovery by Limbach and/or Limbach/Parker against the City and PAID could result in an indemnification claim that US Airways may have to pay at full value.

The International Association of Machinists and Aerospace Workers and its District Lodge 141-M (IAM) filed a lawsuit in the United States District Court for the Western District of Pennsylvania on October 7, 2003, seeking a temporary restraining order and preliminary injunction to enjoin US Airways’ use of an outside vendor for ten narrow-body Airbus aircraft “S”-Checks. The IAM contended that the US Airways-IAM collective bargaining agreement obligates US Airways to use its own employees to perform the “S”-Checks, and that using an outside vendor constitutes a “major dispute” under the RLA requiring maintenance of the status quo. Following briefing and oral argument, the District Court issued a preliminary injunction order and opinion on October 21, 2003, in which it found the dispute between the parties to be a major dispute under the RLA and prohibited US Airways from using any outside vendor for the narrow-body Airbus “S”-Checks. US Airways filed a Notice of Appeal to the Third Circuit and an Emergency Motion for Stay of Preliminary Injunction Pending Appeal and Memorandum of Law in Support Thereof with the District Court on October 21, 2003. On October 24, 2003 the District Court modified the injunction to permit US Airways to permit the outside vendor to complete work on one partially disassembled aircraft, but otherwise denied US Airways’ request for a stay pending appeal. On October 27, 2003, US Airways filed a motion for the expedited appeal to the Third Circuit. On November 5, 2003, the Court of Appeals for the Third Circuit granted US Airways’ motion for an expedited appeal but denied US Airways’ emergency motion for stay of the preliminary injunction pending appeal. On February 3, 2004, the Third Circuit reversed the decision of the District Court and lifted the preliminary injunction. The Third Circuit ruled that the dispute over US Airways’ ability to use an outside vendor to perform “S”-Checks was a “minor” dispute, meaning that it is subject to grievance arbitration under the parties’ labor agreement, and that US Airways has no obligation to maintain the status quo pending resolution of the dispute. This decision was upheld by the Third Circuit Court of Appeals on March 2, 2004, which ruled that this dispute must be resolved through arbitration.

US Airways Group and US Airways have been named as defendants in two lawsuits filed in federal 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 were sued in a third 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

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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 treble 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, US Airways Group 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, US Airways Group and US Airways believe the claims are without merit and intend to pursue a vigorous defense. The automatic stay under section 362(a) of the Bankruptcy Code has been lifted since the Company’s emergence from bankruptcy on March 31, 2003.

The Company has been named as a defendant, along with most of the major domestic, several national and a number of international carriers, in a class action lawsuit on behalf of all United States-based travel agents filed in federal district court for the Northern District of California. The complaint alleges violation of the federal antitrust laws with respect to commission rate reductions and/or commission cap reductions implemented by various airlines beginning in or around September 1997, in or around October 1999, in or around August 2001, in or around March 2002 and continuing through the date of the filing of the complaint. Plaintiffs seek unspecified damages for lost commissions as well as injunctive relief, costs and attorneys’ fees and other relief. On June 30, 2003, the Bankruptcy Court issued a contempt order and awarded sanctions against Tam Travel Agents for knowingly and willfully violating the discharge injunction contained in the Plan of Reorganization. Plaintiff’s counsel subsequently filed a stipulation of dismissal of the claims in federal district court for the Northern District of California.

The Company has been named as a defendant, along with most of the major domestic carriers, in a class action lawsuit on behalf of certain Ohio-based travel agents, captioned as Paula Fausky d/b/a TIMELESS TRAVEL, et.al vs. American Airlines, et.al, and filed in federal court for the Northern District of Ohio, Eastern Division. The complaint alleges violation of the federal antitrust laws with respect to commission rate reductions and/or commission cap reductions implemented by various airlines beginning in or around 1995, in or around mid to late September of 1997, beginning in October of 1998, beginning on October 7, 1999, and beginning in August of 2001. Plaintiffs seek unspecified damages for lost commissions as well as injunctive relief, costs and attorneys’ fees and other relief. On June 12, 2003, plaintiffs filed a Motion of Voluntary Dismissal of the complaint against the Company in federal district court for the Northern District of Ohio, Eastern District.

In May 1995, US Airways Group, US Airways and the Pilots Retirement Plan were sued in federal district court for the District of Columbia by 481 active and retired pilots alleging that defendants had incorrectly interpreted the plan provisions and erroneously calculated benefits under the Pilots Retirement 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 RLA because the Pilots Retirement 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

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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.

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.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable as US Airways is a wholly owned subsidiary of US Airways Group.

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Part II

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

US Airways Group owns all of US Airways’ outstanding common stock, par value $1 (US Airways Common Stock). US Airways’ board of directors has not authorized the payment of dividends on the common stock since 1988.

US Airways, 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. US Airways is restricted from engaging in any of these activities unless it maintains a capital surplus. In addition, under the provisions of certain debt agreements, including the ATSB Loan, US Airways’ ability to pay dividends is restricted. See “Liquidity and Capital Resources” below for more information, including information related to dividend restrictions associated with the ATSB Loan.

Item 6. Selected Financial Data

Consolidated Statements of Operations (in millions) (1)

Consolidated Balance Sheets (in millions)

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Pro Forma Consolidated Statements of Operations (in millions) (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. On January 1, 2000, US Airways changed its method of accounting for the sale of mileage credits in its Dividend Miles program from recognizing all revenue when credits are sold, to deferring the portion of revenue attributable to future transportation and recognizing it as passenger revenue when the service is provided. The remaining portion of sales proceeds is recognized immediately as a component of Other operating revenues. US Airways believes the new method results in a better matching of revenue with the period in which travel services are provided. In connection with the change, US Airways recognized a $103 million, net of applicable income taxes, cumulative effect charge on January 1, 2000.

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

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

General Information

Certain of the statements contained herein should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the current views of US Airways, Inc. (US Airways or the Company) with respect to current events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should,” and “continue” or similar words. These forward-looking statements may also use different phrases. 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 operate pursuant to the terms of its financing facilities (particularly the financial covenants); the ability of the Company to obtain and maintain normal terms with vendors and service providers; the Company’s ability to maintain contracts that are critical to its operations; 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; the ability of the Company to maintain satisfactory labor relations; demand for transportation in the markets in which the Company operates; economic conditions; labor costs; financing availability and costs; aviation fuel costs; security-related and insurance costs; competitive pressures on pricing (particularly from lower-cost competitors) and on demand (particularly from low-cost carriers and multi-carrier alliances); weather conditions; government legislation and regulation; impact of the Iraqi war and the Iraqi occupation; other acts of war or terrorism; and other risks and uncertainties listed from time to time in the Company’s reports to the SEC. There may be other factors not identified above of which the Company is not currently aware that may affect matters discussed in the forward-looking statements, and 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.

Introduction

While the Company emerged from bankruptcy in March 2003, it still incurred a significant loss from operations for the year. Some of the key factors causing these results were the impact of the hostilities in Iraq on passenger demand, rapid growth of low cost competition, the continued pressure on industry pricing and significant increases in fuel prices. Many of these factors are expected to continue into 2004 and beyond and are discussed below. In addition, also discussed below are key issues regarding financing arrangements which are critical to the ongoing operation of the Company.

Although the U.S. economy improved in 2003 resulting in modestly favorable travel trends, the Company faced weak passenger demand during the first half of the year due to the war and subsequent continued hostilities in Iraq and the Company continues to face intense competition from the growing presence of low-fare low-cost airlines and competitors’ regional jets in its markets. The rapid growth of low-fare low-cost airlines has had a profound impact on industry revenues that poses a threat to traditional network carriers. Using the advantage of low unit costs, these carriers offer lower passenger fares, particularly those targeted at business passengers, in order to shift demand from traditional network carriers. As a result of growth, these low-fare low-cost carriers now transport approximately 25% of all domestic U.S. passengers compared to less

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than 10% a decade ago. They now compete for, and thus influence industry pricing on, approximately 75% of all U.S. domestic passenger ticket sales compared to less than 20% a decade ago. Low-fare low-cost airlines are increasingly offering passenger amenities, such as in-flight entertainment and leather seating, which were once traditionally offered by only network carriers. In addition, low-fare low-cost airlines are receiving an increasing number of operating rights in slot-restricted airports. The threat from low-fare low-cost airlines accelerated noticeably in 2003 as the capital markets opened up to them resulting in their ordering hundreds of aircraft. Several low-fare low-cost airlines, including Southwest Airlines and Frontier Airlines, have launched service or announced plans to launch service at Philadelphia, a hub airport for US Airways. The surge in aircraft orders and better recent financial performance relative to traditional network carriers suggest that the low-fare low-cost airline threat will significantly intensify over the next few years. The growing presence of competitors’ regional jets also poses a threat to the Company. Regional jets are faster, quieter and more comfortable than turboprops and generally preferred by customers over turboprops. In recent years, the Company has lost significant market share in markets where it operates with turboprop aircraft and competitors have introduced regional jet service. As discussed below, the Company is implementing a plan to deploy additional regional jets and introduced 43 regional jets into its network during 2003, a 61% increase.

In addition to the growing presence of low-fare low-cost airlines and competitors’ regional jets in its markets, other industry trends have resulted in continued ticket pricing pressure for the Company. A decline in overall industry revenue since 2001 has not been matched by an equivalent reduction in industry capacity, resulting in an oversupply situation that continues to depress fares relative to past averages. The increasing transparency of fares available through internet sources and other changes in fare structures which result in lower fares for many business travelers contribute to the pressure on pricing.

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 its control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices may be affected by many factors, including the impact of political instability on crude production, especially in Russia and OPEC countries; unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries; unpredicted increases to oil demand due to weather or the pace of economic growth; inventory levels of crude, refined products and natural gas; and other factors, such as the relative fluctuation between the U.S. dollar and other major currencies and influence of speculative positions on the futures exchanges. Because the operations of the Company are dependent upon aviation fuel, significant increases in aviation fuel costs could materially and adversely affect 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 would be significant. Recent increases in fuel prices coincided with the decline in the value of the U.S. dollar which negatively impacted fuel prices in 2003. If this trend persists, the Company faces the risk of sustained high fuel prices. The Company utilizes financial instruments designed to reduce its exposure related to fuel price increases (see Item 7A “Quantitative and Qualitative Disclosures about Market Risk” below for more information).

As discussed in more detail below, the Company emerged from bankruptcy on March 31, 2003. In connection with this, US Airways received a $900 million loan guarantee (ATSB Guarantee) under the Air Transportation Safety and System Stabilization Act (Stabilization Act) from the Air Transportation Stabilization Board (Stabilization Board) in connection with a $1 billion term loan financing (the ATSB Loan). The definitive documentation relating to the ATSB Loan contains covenants that require the Company to satisfy ongoing financial requirements, including debt ratio, fixed charge coverage ratio and minimum liquidity levels. The ATSB Loan contains covenants that also limit, among other things, the Company’s ability to pay dividends on

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its common stock, make additional corporate investments and acquisitions, enter into mergers and consolidations and modify certain concessions obtained as part of the Chapter 11 reorganization. Effective March 12, 2004, US Airways obtained covenant relief for the measurement periods beginning June 30, 2004 through December 31, 2005. If the Company is unable to meet these financial covenants, as amended, the Company would be in default under the ATSB Loan and the Stabilization Board would have the right to accelerate the ATSB Loan and exercise other remedies against the Company. Such acceleration would have a material adverse effect on the Company’s future liquidity, results of operations and financial condition.

A key component to the Company’s overall restructuring plan is the increased usage of regional jets. The Company uses regional jets to fly into low-density markets where large-jet flying is not economical as well as replace turbo props with regional jets to better meet customer preferences. US Airways’ agreement with its pilots provides that it may operate up to 465 regional jets, subject to certain restrictions (see Item 1 “Airline Industry and the Company’s Position in the Marketplace” for more details regarding the restrictions). In May 2003, US Airways Group entered into agreements to purchase a total of 170 regional jets from Bombardier, Inc. (Bombardier) and Empresa Brasileira de Aeronautica S.A. Through December 31, 2003, the Company had taken delivery of seven aircraft under the Bombardier purchase contract. The order equally splits between the two regional jet manufacturers a combination of 170 firm orders and 380 options to purchase regional jets. The Company has secured approximately 85% to 90% of the necessary financing for its firm-order regional jet aircraft. These financings include commitments from General Electric (GE) and from the respective airframe manufacturers and are subject to certain credit standards or financial tests. Among the applicable credit standards under the aircraft financing commitments is the requirement that US Airways Group or US Airways maintains a minimum corporate credit rating of “B-” by Standard & Poor’s (S&P) or “B3” by Moody’s Investor Service (Moody’s) and customary conditions precedent including a material adverse change clause with prospective application. On January 9, 2004, S&P downgraded both US Airways Group and US Airways to a “B-” rating and US Airways Group and US Airways remain on CreditWatch. US Airways Group and US Airways cannot be certain that they will be able to maintain these ratings, particularly in view of the ongoing weakness in the airline industry and the net losses experienced by the Company. If US Airways Group or US Airways, as the case may be, is unable to maintain at least its current corporate credit rating of “B-” from S&P, GE and/or any of the airframe manufacturers may, at their sole discretion, elect not to provide financing for the regional jet orders as described above. In such event, since US Airways currently does not have available any alternative financing sources, US Airways may be unable to execute its regional jet business plan which would likely have a material adverse effect on the Company’s future liquidity, results of operations (i.e., revenue contribution from regional jet operations) and financial condition.

The competitive environment is putting increasing pressure on controlling costs. Despite the recent emergence from bankruptcy and the resulting cost reductions, the Company may not be able to effectively counteract decreasing revenues and increasing costs through its cost reduction initiatives, revised business plan, customer service initiatives and revised pricing structures. Moreover, its liquidity and borrowing options are limited and it may be severely impacted should there be a prolonged economic downturn, further decreases in demand for air travel or substantial increases in fuel costs. The inability to achieve sustained profitability may negatively impact the Company’s ability to satisfy its obligations as they become due, obtain future equity or debt financing or to do so on economical terms and sustain or expand the business.

Given the Company’s significant operating losses and the factors described above, the Company is pursuing a plan to further reduce cost per available seat mile by at least 25% built around a complete business remodeling that will allow it to be profitable in a variety of competitive environments. Key elements of this plan include marketing and distribution techniques, employee compensation, benefits and work rules, and airline scheduling and

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operations. The Company has targeted mid-year 2004 for implementation of many of the actions needed to achieve the cost reductions. However, since the plan will require changes in the Company’s collective bargaining agreements, there can be no assurance that this date can be met. Failure by the Company to achieve the above-described competitive cost structure will force it to reexamine its strategic options.

Chapter 11 Reorganization

Background

On August 11, 2002 (Petition Date), US Airways filed a voluntary petition 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) (Case No. 02-83985-SSM). On the same date, US Airways Group, US Airways’ parent company, and six of its other subsidiaries (collectively with US Airways, the Filing Entities) also filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The reorganization cases were jointly administered under the caption “In re US Airways Group, Inc., et al., Case No. 02-83984-SSM.” During the pendency of the Chapter 11 cases, US Airways continued to operate its business as a debtor-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.

The Filing Entities emerged from bankruptcy protection under the First Amended Joint Plan of Reorganization of US Airways Group, Inc. and Affiliated Debtors and Debtors-in-Possession, As Modified (Plan of Reorganization), which (i) was confirmed pursuant to an order of the Bankruptcy Court on March 18, 2003 and (ii) after each of the conditions precedent to consummation was satisfied or waived, became effective on March 31, 2003 (Effective Date). In accordance with AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” (SOP 90-7) the Company adopted fresh-start reporting on the Effective Date.

The Plan of Reorganization constituted a separate plan of reorganization for each of the Filing Entities. In accordance with the Bankruptcy Code, the Plan of Reorganization divided claims against, and interests in, each of the Filing Entities into classes according to their relative seniority and other criteria and provided the same treatment for each claim or interest of a particular class unless the holder of a particular claim or interest agreed to a less favorable treatment of its claim or interest. Among other things, the Plan of Reorganization generally provided for full payment of all allowed administrative and priority claims, and the distribution of shares (or warrants to purchase shares) of new equity in the reorganized US Airways Group, Inc. (Reorganized US Airways Group) to the Stabilization Board, the Retirement Systems of Alabama Holdings LLC (RSA), the Company’s management and labor unions, General Electric Capital Corporation and Bank of America, N.A., and to unsecured creditors of the Filing Entities, including the Pension Benefit Guarantee Corporation (PBGC), in satisfaction of their allowed claims. The distribution to unsecured creditors is currently estimated to have a value of between 0.65 percent and 0.90 percent of total allowed unsecured claims. The ultimate distribution percentage may fall outside of this range. See “Claims Resolution” below. Persons holding equity in US Airways Group prior to the Effective Date were not entitled to any distribution under the Plan of Reorganization and their shares of common stock were cancelled. For a complete discussion of the distributions provided for under the Plan of Reorganization, investors should refer to the Plan of Reorganization confirmed by the Bankruptcy Court on March 18,

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2003 and filed with US Airways Group’s Current Report on Form 8-K, dated March 18, 2003 and filed with the SEC on April 2, 2003.

RSA Investment

Pursuant to a definitive agreement, on the Effective Date, RSA invested $240 million in cash in Reorganized US Airways Group (the RSA Investment Agreement) in exchange for approximately 36.2%, on a fully-diluted basis, of the equity in Reorganized US Airways Group. As of the Effective Date, in connection with its investment, RSA was granted a voting interest of approximately 71.6% in Reorganized US Airways Group and entitled to designate and vote to elect eight of 15 directors to Reorganized US Airways Group’s Board of Directors. See also Note 13(d) in the Notes to the Consolidated Financial Statements for a summary of the related party transactions with RSA.

ATSB Loan

As part of its restructuring efforts, US Airways received a $900 million loan guarantee under the Stabilization Act from the Stabilization Board in connection with a $1 billion term loan financing. The Company required this loan and related guarantee in order to provide the additional liquidity necessary to carry out its restructuring plan. The ATSB Loan was funded on the Effective Date. The ATSB Loan is secured by substantially all unencumbered assets of US Airways Group and its subsidiaries and is guaranteed by US Airways Group and each of US Airways Group’s domestic subsidiaries other than US Airways. See “Liquidity and Capital Resources” below for more information, including information related to covenants associated with the ATSB Loan.

Claims Resolution

Pursuant to the bankruptcy process, the Filing Entities’ claims agent received approximately 5,300 timely-filed proofs of claims totaling approximately $65 billion in the aggregate, exclusive of approximately $16 billion in claims from Allegheny County, Pennsylvania (Allegheny County) and Allegheny County Airport Authority (ACAA) which have been resolved (see “Pittsburgh Leases” below) and approximately 350 proofs of claims timely-filed by governmental entities totaling approximately $225 million in the aggregate. As of December 31, 2003, the Filing Entities have filed objections totaling approximately $60 billion. The Plan of Reorganization provides for a disputed claims resolution process. The Plan of Reorganization provides for 4,968,720 shares of Class A Common Stock and 3,048,030 each of Class A-1 Warrants and shares of Class A Preferred Stock of Reorganized US Airways Group to be issued to unsecured creditors. Distributions of these shares and warrants through December 2003 totaled approximately 1.8 million shares of Class A Common Stock and 1.1 million each of Class A-1 Warrants and shares of Class A Preferred Stock to unsecured creditors. The effects of these distributions were reflected in the Company’s financial statements upon emergence and will not have any further impact on the results of operations. A number of significant claims, including certain aircraft related claims, remain to be resolved. Accordingly, ultimate allocations and distributions of new equity to claimants in Reorganized US Airways Group on account thereof, are not presently known.

On December 30, 2003, the Bankruptcy Court allowed the $2.1 billion claim by the PBGC related to the termination of US Airways’ pilot pension plan. Given that this plan met the standards of a distress termination and the PBGC’s claim is to be treated as a general unsecured claim, the Company does not have any additional financial exposure associated with this decision and the PBGC will receive a settlement in the form of stock.

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Pittsburgh Leases

Pittsburgh International Airport currently serves as a hub for US Airways. On July 25, 2003, US Airways, Allegheny County and ACAA reached an agreement resolving and releasing all bankruptcy claims filed by Allegheny County and ACAA against US Airways with regard to Pittsburgh International Airport. The agreement resolves all bankruptcy claims, including claims relating to the rejections of the airline operating agreements and other related terminal lease agreements effective January 5, 2004. Under the agreement, in exchange for the release of all claims, Allegheny County and ACAA entered into a stipulation under which Allegheny County and ACAA will be granted an allowed general unsecured claim in the amount of $211 million to be shared with claims of other unsecured creditors receiving distributions of equity in accordance with the Plan of Reorganization (see “Claims Resolution” above).

On January 5, 2004, US Airways entered into a long-term lease agreement for 10 gates and related terminal and support facilities at Pittsburgh International Airport, to replace the lease that was rejected as part of the Company’s Chapter 11 reorganization. Under the agreement, US Airways will lease ten gates and associated operations and ticketing space on a signatory basis through 2018. The balance of 40 gates and other facilities currently used by US Airways and US Airways Express carriers at Pittsburgh will be leased on a month-to-month, non-signatory basis.

Additionally, US Airways has entered into a three-year lease agreement, effective January 5, 2004, for its current on-airport support facilities at Pittsburgh International Airport, including maintenance hangars, cargo, mail sorting and foodservice facilities. This includes an option for either party to terminate such agreement with respect to all or part of the facilities after the first year.

US Airways will continue to negotiate with ACAA, Allegheny County and the Commonwealth of Pennsylvania in the hope that a broader agreement can be reached in order to maintain its hub operations at Pittsburgh. State and local officials are exploring whether new revenue sources can be devoted to relieve airlines operating at Pittsburgh of some of the cost of servicing the $640 million debt load the airport currently carries. In the meantime, US Airways has agreed to operate a schedule close to its existing service at Pittsburgh through September 2004 in order to allow negotiations to continue.

Results of Operations

As discussed above, the Company emerged from Chapter 11 and adopted fresh-start reporting on March 31, 2003. References to “Predecessor Company” refer to the Company prior to March 31, 2003. References to “Successor Company” refer to the Company on and after March 31, 2003, after application of fresh-start reporting. As a result of the application of fresh-start reporting, the Successor Company’s financial statements are not comparable with the Predecessor Company’s financial statements. However, for purposes of discussion of the results of operations, full year 2003 has been compared to 2002 as included, in part, in the Company’s Consolidated Statements of Operations (which are contained in Part II, Item 8 of this report) and in “Selected Operating and Financial Statistics” below. Except where noted, operating statistics referred to below are for scheduled service only.

2003 Compared With 2002

Operating Revenues–Operating revenues decreased $153 million, or 2.2%. Passenger transportation revenues decreased $149 million or 2.4%. Revenue passenger miles (RPMs) declined 4.4% which decreased revenues by $277 million, partially offset by a 2.1% improvement in yield which increased revenues by $127 million. Passenger transportation

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revenue for 2003 includes a favorable $34 million adjustment to the traffic balances payable account for unused and now expired tickets. Other operating revenue was flat as increased mileage credit sales were offset by lower ticket change and cancellation fees.

Operating Expenses–Operating expenses declined by $1.23 billion, or 14.9%. Operating expenses excluding Government compensation and Asset impairments and other special items were lower by 9.2% on a capacity decrease (as measured by available seat miles or ASMs) of 6.9%. Personnel costs decreased 19.4% due to lower headcount levels, wage rates and employee pension and benefit expenses partially offset by $125 million of stock-based compensation expenses resulting from the issuance of common stock to employees covered by collective bargaining agreements following emergence from Chapter 11. Aviation fuel increased 6.6% due to higher average fuel prices partially offset by schedule-driven decreases in consumption. US Airways Express capacity purchases increased 4.7% reflecting a 9.3% increase in purchased ASMs from third-party regional jet operators and other airline subsidiaries of US Airways Group. Aircraft rent decreased 15.0% due to favorably restructured leases and lease rejections made in connection with the Company’s Chapter 11 filing, which was partially offset by new leases as a result of the conversion of mortgaged aircraft to leased aircraft. Other rent and landing fees were flat as a result of schedule-driven decreases in landing fees offsetting increased airport rental expenses associated with the new terminal in Philadelphia. Selling expenses decreased 6.0% due to sales volume driven decreases in credit card fees and sales- and rate-driven decreases in computer reservation system fees. Travel agent commission rates decreased due to the elimination of the base domestic commissions in March 2002 and increases in internet bookings which are less costly to the Company. Depreciation and amortization decreased 21.5% due to fewer owned aircraft in the operating fleet and lower book values on the existing fleet as a result of fresh-start reporting. Other operating expenses decreased 9.8% due to decreases in insurance expenses and schedule-related expenses including passenger food expenses and crew travel expenses and a $17 million and $12 million reduction to an accrual upon the resolution of previously outstanding contingencies. Refer to “Description of Unusual Items” below for information on Asset impairments and other special items and Government compensation.

Other Income (Expense)–Other Income (Expense), net increased $2.3 billion from an expense of $593 million in 2002 to income of $1.7 billion in 2003. The increase is primarily due to $1.9 billion of income as a result of Reorganization items, net. Interest income decreased due to lower return rates partially offset by higher average investment balances. Interest expense decreased as a result of the conversion of mortgaged aircraft to leased aircraft and the abandonment of certain aircraft partially offset by interest related to the ATSB Loan. Other, net income increased as a result of a $30 million gain recognized in connection with the Company’s sale of its investment in Hotwire, Inc. and mark-to-market adjustments on certain stock options held by the Company. Refer to “Description of Unusual Items” below for information on Reorganization items, net.

Provision (Credit) for Income Taxes–The Company’s federal and state income tax expense was $6 million in 2003 representing an effective tax rate of 0.4%. This differed from statutory rates primarily due to utilization of net operating loss carryforwards. During 2001, the Company recognized a valuation allowance against its net deferred tax asset. The Company continues to record a full valuation allowance against its net deferred tax assets due to the uncertainty regarding their ultimate realization. As a result of the March 2002 enactment of the Job Creation and Worker Assistance Act of 2002 (Job Act), the Company recognized an income tax credit equal to the Company’s carryback potential. The Job 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 $53 million related to 2001 losses realizable due to the enactment of the Job Act and recorded in the period of enactment. The Company continued to record a valuation allowance

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against its net deferred tax asset which resulted in a 2002 effective tax rate of 13%.

Selected Operating and Financial Statistics–System capacity (as measured by ASMs) decreased 6.9% and passenger volume (as measured by RPMs) decreased 4.4% in 2003. These decreases resulted in a 71.5% system passenger load factor, representing a 1.9 percentage point increase over 2002. System yield improved 2.1% reflecting a modest improvement in economic conditions. Both RPMs and ASMs were significantly affected by the schedule reductions initiated following the Company’s Chapter 11 filing. In addition, hurricanes Isabel, Fabian and Henri adversely impacted the Company’s operating and financial performance in 2003. US Airways full-time equivalent employees at December 31, 2003 declined 12.4% reflecting the headcount reduction measures put in place in connection with the Company’s 2002 restructuring.

2002 Compared With 2001

Operating Revenues– Operating revenues decreased $1.34 billion, or 16.2%. Passenger transportation revenues decreased $1.26 billion or 16.7%. RPMs declined 10.9% which decreased revenues by $822 million combined with a 6.5% decrease in yield which decreased revenues by $433 million. 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 RPMs 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 14.5% 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 revenue decreased due to lower mileage credit sales and revenues related to lease of surplus aircraft.

Operating Expenses–Operating expenses declined $1.64 billion, or 16.6%. Excluding Government compensation and Asset impairments and other special items the Company’s operating expenses were lower by 14.2% on a capacity decrease of 13.1%. The Company’s Personnel costs decreased 14.4% due to lower headcount levels and wage rate and salary reductions relating to the Company’s reorganization. This was partially offset by increases in employee pension and benefit expenses. Aviation fuel decreased 30.6% due to lower average fuel prices and schedule-driven decreases in consumption. US Airways Express capacity purchases increased 20.5% reflecting an 19.1% increase in purchased ASMs from third-party regional jet operators and other airline subsidiaries of US Airways Group. Aircraft rent decreased 8.4% due to the reduction in the number of leased aircraft that were operated. Other rent and landing fees decreased 6.8% due to schedule-driven reductions in landings partially offset by higher landing fee rates. Aircraft maintenance decreased 33.2% 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. Selling expenses decreased 32.5% due to elimination of the base domestic commissions in March 2002 and increases in internet bookings which are less costly to the Company and generally lower maximum payments to travel agents implemented in August 2001 as well as sales volume driven decreases in credit card fees and computer reservation service fees. Depreciation and amortization decreased 26.1% 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. Other operating expenses decreased 11.6% due to decreases in schedule-related expenses including passenger food expenses, crew travel expenses and interrupted trip expenses. These decreases were partially offset by higher insurance expenses and higher security expenses. Refer to “Description of Unusual Items” below for information on Asset impairments and other

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special items and Government compensation.

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

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 Act, the Company recognized an income tax credit equal to the Company’s carryback potential. The tax credit recorded in 2002 includes $53 million related to 2001 losses realizable due to the enactment of the Job 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 33% for the first six months of 2001 after which the Company recorded a valuation allowance which resulted in an effective tax rate of 12%. 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 Operating and Financial Statistics–System capacity (as measured by ASMs) decreased 13.1% and passenger volume (as measured by RPMs) decreased 10.9% in 2002. These decreases resulted in a 69.6% system passenger load factor, representing a 1.7 percentage point increase over 2001. Full year comparisons are rendered less meaningful due to the events of September 11^th. 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 Company made very significant schedule changes as a result of the conditions after September 11^th. System yield decreased 6.5% 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.

Description of 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):

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

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Government Compensation–In April 2003, President George W. Bush signed into law the 2003 Emergency Wartime Supplemental Appropriations Act (Emergency Wartime Act), which included $2.4 billion for reimbursement to the airlines for certain aviation-related security expenses. The Emergency Wartime Act included the following key provisions: (1) $2.3 billion of the appropriation was for grants to be made by the Transportation Security Administration (TSA) to U.S. air carriers based on the proportional share each carrier paid or collected as of the date of enactment of the legislation for passenger security and air carrier security fees; (2) the TSA would not impose passenger security fees during the period beginning June 1, 2003 and ending September 30, 2003; (3) $100 million of the appropriation would be available to compensate air carriers for the direct costs associated with the strengthening of flight deck doors and locks on aircraft; (4) aviation war risk insurance provided by the federal government was extended until August 2004; and (5) certain airlines that receive the aviation-related assistance must agree to limit the total cash compensation for certain executive officers during the 12-month period beginning April 1, 2003 to an amount equal to the annual salary paid to that officer during the air carrier’s fiscal year 2002. Any violation of this agreement will require the carrier to repay to the government the amount reimbursed for airline security fees. The Company does not anticipate any difficulties in complying with this limitation on executive compensation and believes the likelihood of repaying the government for the amount of the security fee reimbursement is remote. The Company’s security fee reimbursement was $212 million, net of $4 million due to certain affiliates, and was recorded as a reduction to operating expenses during the second quarter of 2003. In September 2003, the Company received approximately $6 million of compensation associated with flight deck door expenditures which was recorded as an offset to capital costs.

On September 22, 2001, President Bush signed into law the Stabilization Act which provides, among other things, for $5 billion in payments to compensate U.S. air carriers for losses incurred as a result of the September 11, 2001 terrorist attacks. US Airways received $306 million from the U.S. Government under the Stabilization Act. The rules governing the distribution were finalized during 2002 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.

Gain on Sale of Hotwire, Inc.–During the fourth quarter of 2003, US Airways recorded a $30 million gain on the sale of its investment in Hotwire, Inc. The gain is reflected in Other, net on the Company’s Consolidated Statement of Operations.

Merger Termination Fees–In connection with the merger termination agreement in June 2001, UAL Corporation 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. These amounts are included in Other, net on the Company’s Consolidated Statements of Operations.

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Selected Operating and Financial Statistics (1)

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Liquidity and Capital Resources

As discussed in “Results of Operations” above, the Successor Company’s financial statements are not comparable with the Predecessor Company’s financial statements. However, for purposes of discussion of liquidity and capital resources, full year 2003 has been compared to 2002 as included, in part, in the Company’s Consolidated Statements of Cash Flows (which are contained in Part II, Item 8 of this report).

As of December 31, 2003, the Company’s Cash, Cash equivalents and Short-term investments totaled $1.28 billion compared to $629 million as of December 31, 2002 (the Company’s Consolidated Balance Sheets are contained in Part II, Item 8 of this report).

The Company continues to be highly leveraged. Substantially all of its assets including aircraft and engines are subject to liens securing indebtedness. The Company requires substantial working capital in order to meet scheduled debt and lease payments and to finance day-to-day operations. The Company needs to satisfy covenants in the ATSB Loan as noted below. The industry is highly competitive. In order to preserve and enhance its industry position, the Company continuously reviews its strategies for the use of its assets, including exiting non-performing markets and expansion into new markets, both alone and with partners, in order to deploy its resources most effectively.

Statements of Cash Flow Discussion

For 2003, the Company’s operating activities before reorganization items used net cash of $81 million compared to operating activities for 2002 which used net cash of $315 million. Included in 2003 cash flow from operating activities is $218 million received from the TSA in connection with the Emergency Wartime Act. 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 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. Operating cash flows for 2003 were adversely affected by the same factors that adversely affected financial results during 2002 (see discussion in “Results of Operations” above) including depressed economic conditions and relatively high fuel prices. 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 through the Effective Date. For 2001, the Company’s operating activities used net cash of $146 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 in 2001 were favorably impacted by $264 million of grants pursuant to the Stabilization Act and $188 million of ticket taxes deferrals noted above.

For 2003, net cash used for investing activities was $268 million. Investing activities included cash outflows of $208 million related to capital expenditures, including $174 million for purchase deposits on future regional jet aircraft deliveries and payments made in connection with the delivery of two regional jets with the balance related to rotables, ground equipment and miscellaneous assets. Increase in short-term investments reflects activity required to increase returns on the Company’s higher cash balances. Increase in restricted cash reflects additional collateral deposits related to the Company’s third party credit card processor, workers’ compensation insurance provider and fuel hedging program, partially offset by lower balances in trust accounts (see below). The Company also received proceeds of $237 million from US Airways Group (upon its receipt of proceeds from the RSA Investment Agreement) which were used to pay down two intercompany loans then outstanding from US Airways Group.

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Other investing reflects $24 million in proceeds received related to the sale of the Company’s investment in Hotwire, Inc.

For 2002, net cash provided by investing activities was $86 million. Investing activities included cash outflows of $135 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.

For 2001, investing activities included cash outflows of $1.07 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 $840 million.

The Company, in the ordinary course of business, withholds from employees and collects from passengers funds that are required to be paid to applicable governmental authorities, and include withholding for payroll taxes, transportation excise taxes, passenger facility charges, transportation security charges and other related fees. 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 $164 million and $208 million as of December 31, 2003 and 2002, respectively, are classified as Restricted cash on the Company’s Consolidated Balance Sheets, including $124 million and $146 million in current Restricted cash and $39 million and $62 million in noncurrent Restricted cash, respectively.

Net cash provided by financing activities during 2003 was $782 million. US Airways received proceeds of $1 billion from the ATSB Loan. Additionally, prior to emergence from Chapter 11 the Company borrowed $69 million under a debtor-in-possession facility provided by RSA (RSA DIP Facility) and $62 million under a debtor-in-possession liquidity facility provided by General Electric (GE DIP Facility). The Company borrowed $114 million under an exit liquidity facility provided by GE and $20 million on a credit facility provided by GE (see below). The Company also received proceeds of $34 million related to a private placement offering (see below). The Company used a portion of the proceeds it received in connection with its emergence from Chapter 11 to repay $369 million that was then outstanding under the RSA DIP Facility (including the $69 million discussed above) on the Effective Date. The Company also used a portion of the proceeds to repay the $62 million then outstanding under the GE DIP Facility. The Company also made principal payments of debt of $85 million including a $24 million required prepayment on the ATSB Loan related to the sale of Hotwire, Inc.

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 financed 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 a 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 the Texas Pacific Group (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.

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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. 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.

Financings During Chapter 11 and Post Effective Date Financings

As part of its reorganization, US Airways received a $900 million loan guarantee under the Stabilization Act from the Stabilization Board in connection with a $1 billion term loan financing. The Company required this loan and related guarantee in order to provide the additional liquidity necessary to carry out its restructuring plan. The ATSB Loan was funded on the Effective Date. The ATSB Loan is guaranteed by US Airways Group and by each of US Airways Group’s domestic subsidiaries (other than reorganized US Airways). The ATSB Loan is secured by first priority liens on substantially all of the unencumbered present and future assets of the reorganized Filing Entities (including certain cash and investments accounts, 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 bears interest as follows: (i) 90% of the ATSB Loan bears 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 bears interest at LIBOR plus 4.0%. In addition, US Airways is charged an annual guarantee fee in respect of the ATSB Guarantee equal to 4.0% of the Stabilization Board’s guaranteed amount (initially $900 million) under the ATSB Guarantee, with such guarantee fee increasing by ten basis points annually. In addition, the Stabilization Board received 7,635,000 warrants that enable it to purchase shares of Reorganized US Airways Group’s Class A Common Stock at $7.42 per share.

The maturity date of the ATSB Loan is October 1, 2009. Prior to entering into the March 2004 amendment (see below), the ATSB Loan required semi-annual amortization payments commencing in October 2006, each amortization payment to be in the amount of $125 million, with a final principal payment of $226 million, less any prepayments, due on the maturity date of the ATSB Loan.

The ATSB Loan is subject to acceleration upon the occurrence of an event of default, after expiration of applicable notice and/or cure periods. The ATSB Loan contains certain mandatory prepayment events including, among other things, (i) the occurrence of certain asset sales (except as provided for in the amendment described below) and the issuance of certain debt or equity securities and (ii) the value of the collateral pledged in respect of the ATSB Loan decreasing below specified coverage levels.

The ATSB Loan contains covenants that require the Company to satisfy ongoing financial requirements, including debt ratio, fixed charge coverage ratio and minimum liquidity levels. The ATSB Loan also contains covenants that limit, among other things, the Company’s ability to

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pay dividends, make additional corporate investments and acquisitions, enter into mergers and consolidations and modify certain concessions obtained as part of the Chapter 11 reorganization. The amendment described below does not eliminate any of these covenants.

The ATSB Loan’s financial covenants, modified as described below, were negotiated based upon the future expectations with respect to performance of the Company and of the airline industry. These expectations included assumptions about the extent of a general recovery in the airline industry and the time parameters within which that recovery might occur, as well as the Company’s performance with respect to the rest of the industry. The Company needs to satisfy these financial covenants beginning June 30, 2004.

Effective March 12, 2004, US Airways entered into an amendment to the ATSB Loan which provides for a partial prepayment of the loan and modifications of financial covenants (covenant relief) for the measurement periods beginning June 30, 2004 through December 31, 2005. Existing ratios used in financial covenants have been adjusted and reset to accommodate the Company’s forecast for 2004 and 2005. In exchange for this covenant relief, US Airways will make an immediate voluntary prepayment of $250 million, which will reduce, pro rata, all future scheduled principal payments of the ATSB Loan (rather than shortening the remaining life of the loan). RSA, as one of the lenders under the ATSB Loan, will receive a pro rata portion of the prepayment amount based on the percentage of the original aggregate amount of the ATSB Loan that RSA funded. The disinterested members of the Board of Directors approved the voluntary prepayment, including RSA’s receipt of its pro rata portion of the prepayment amount.

The amendment also provides for US Airways to retain, at its election, up to 25% of the net cash proceeds from any asset sale up to a total of $125 million to the extent that, among other things, definitive documentation for such asset sales is completed by February 28, 2005. In addition, US Airways may now accept a third party secured note as permitted consideration for certain asset sales (including the US Airways Shuttle and wholly owned regional airline assets) as long as certain conditions are met. Such conditions include that such note’s amortization schedule shall be no more favorable than the ATSB Loan, proceeds from such note are used to prepay the ATSB Loan, the credit strength of the ATSB Loan would not be affected adversely as measured by certain ratings tests, and such note be pledged as collateral for the ATSB Loan. Finally, in consideration for the ATSB lenders waiving the provision related to the going concern paragraph in the independent auditor’s report for the Company’s audited financial statements for the year December 31, 2003, US Airways agreed to change the month end minimum unrestricted cash covenant to exceed the lesser of the outstanding ATSB Loan balance or $700 million and to commit that no intra-month end of day unrestricted cash balance would fall below the lesser of the outstanding ATSB Loan balance or $575 million.

If the Company is unable to meet the aforementioned financial covenants, as amended, it would be in default under the ATSB Loan and the Stabilization Board has the right to accelerate the ATSB Loan and exercise other remedies against US Airways. Such acceleration would have a material adverse effect on the Company’s future liquidity, results of operation and financial condition.

In November 2001, US Airways obtained a $404 million credit facility from General Electric (GE Credit Facility). 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 was 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 121 of the Company’s current operating aircraft. It also maintains the engines on the Company’s B737-family aircraft, A320-family aircraft and B767 aircraft. In

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connection with its reorganization under Chapter 11, the Company reached a settlement with GE that resolved substantially all aircraft, aircraft engine and loan-related issues. The Company obtained additional financing from GE in the form of a liquidity facility of up to $360 million (GE Liquidity Facility). Borrowings under the liquidity facility bear interest of LIBOR plus 4.25%. GE received warrants to purchase 3,817,500 shares of Class A Common Stock at $7.42 per share in Reorganized US Airways Group. GE subsequently agreed to provide committed financing for up to 70 regional jets or $1.4 billion utilizing lease equity and/or mortgage debt. See “Introduction” above for a discussion of conditions related to the committed financing.

Every obligation of the Company to GE is generally cross-defaulted to all GE obligations including the GE Credit Facility and is cross-collateralized to the collateral securing the GE Credit Facility.

Contractual Obligations

The following table provides detail of the Company’s future cash contractual obligations as of December 31, 2003 (dollars in millions).

In addition to the commitments summarized above, US Airways is required to make contributions to its defined benefit pension plans. These contributions are required under the minimum funding requirements of the Employee Retirement Pension Plan Income Security Act (ERISA). US Airways’ estimated 2004 minimum required contributions to its defined benefit pension plans are approximately $237 million (this estimate does not assume that Congress passes certain legislation providing for changes to current ERISA funding requirements which would defer certain contributions to be made). Due to uncertainties regarding significant assumptions involved in estimating future required contributions to its defined benefit pension plans, such as interest rate levels, the amount and timing of asset returns and the impact of proposed legislation, US Airways is not able to reasonably estimate its future required contributions beyond 2004. Congress is also considering other legislation that, if passed, would further reduce US Airways’ 2004 minimum required contributions.

As of December 31, 2003, US Airways Group has 19 A320-family aircraft on firm order scheduled for delivery in the years 2007 through 2009. US Airways Group also has 10 A330-200 aircraft on firm order scheduled for delivery in the years 2007 through 2009. In addition, US Airways Group has firm orders for 53 CRJ Series 200, 50-seat single-class aircraft and 25 CRJ 701, 70-seat single-class aircraft. All firm-order CRJ aircraft are scheduled to be delivered by April 2005. US Airways Group also has firm orders for 85 Embraer ERJ-170, 72-seat aircraft, with the first delivery scheduled for March 2004. US Airways Group has the option to convert the ERJ-170s to ERJ-175s with 76 seats. All ERJ-170 deliveries are scheduled to be received by September 2006. As of December 31, 2003, the minimum determinable payments associated with these acquisition agreements for all firm-order aircraft (including progress payments, payments at delivery, spares, capitalized interest, penalty payments, cancellation fees and/or nonrefundable deposits) were estimated to be $1.93 billion in 2004, $854 million in 2005, $414

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million in 2006, $31 million in 2007 and $2 million in 2008. As a result of the recent regional jet aircraft orders, the Company believes it is probable it will not take delivery of certain previously ordered narrow-body aircraft and recorded an accrual of $35 million for related penalties during the three months ended June 30, 2003.

Other

US Airways Group had substantial net operating loss (NOL) carryforwards at December 31, 2002, for federal income tax purposes. However, the NOLs were reduced at December 31, 2003 by discharge of indebtedness income of $1.2 billion from the bankruptcy. In addition, US Airways Group experienced an “ownership change” (within the meaning of 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, US Airways Group’s ability to use NOLs or other tax attributes that remain after the offset of discharge of indebtedness income is limited.

Because RSA holds a significant equity position in Reorganized US Airways Group, if RSA disposes of all or a significant amount of this position, it could cause Reorganized US Airways Group to undergo a new ownership change. This would generally limit (or possibly eliminate) Reorganized US Airways Group’s ability to use post-Effective Date NOLs and other tax attributes.

US Airways utilizes third party service providers to process credit card transactions. If US Airways fails to meet certain conditions, 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. The termination of credit card processing agreements could have a material adverse effect on the Company’s liquidity, financial condition and results of operations.

The Company’s agreement with National Processing Corporation (NPC), a division of National City Bank of Cleveland, for the processing of domestic Visa and MasterCard transactions expired in May 2003. At that time, US Airways reached an agreement with Bank of America, N.A. to commence the processing of these transactions. This new agreement expires in December 2008. US Airways was required to deposit $48 million in additional cash collateral with Bank of America in excess of the amount on deposit with NPC at the commencement of the agreement. The total collateral amount posted with Bank of America is increased or decreased weekly due to changes in unflown ticket liability, credit ratings, cash balances and other financial and non-financial measures. The balance at December 31, 2003 was $159 million and was included in noncurrent restricted cash on the Consolidated Balance Sheet.

US Airways Group sold 4,679,000 shares of its Class A Common Stock at a price of $7.34 per share before transaction fees during August 2003 in a private placement transaction with Aviation Acquisition L.L.C., Goldman, Sachs and Co. and OCM Principal Opportunities Fund II, L.P. These shares relate to Class A Common Stock retained by US Airways Group from those shares allocated to employees pursuant to the Plan of Reorganization and vested at July 31, 2003. The retained shares represent the employee tax withholding obligation with respect to the vested portion of the restricted stock grants. The amount of withholding was determined on the basis of a price of $7.34 per Class A common share and applicable federal, state, and local taxes. The net proceeds received by US Airways Group were $34 million related to this transaction which were advanced to US Airways and offset the Company’s remittance to taxing authorities.

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Off-Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company.

The Company has no off-balance sheet arrangements of the types described in the first three categories that it believes may have a material current or future effect on its financial condition, liquidity or results of operations. Certain guarantees that the Company does not expect to have a material current or future effect on its financial condition, liquidity or results of operations are disclosed in Note 8(e) to the Consolidated Financial Statements included in Item 8 of this report.

The Company does have obligations arising out of variable interests in unconsolidated entities. In 2003, the Company adopted Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities,” which addresses the accounting for these variable interests. See Note 2 to the Consolidated Financial Statements included in Item 8 of this report for a discussion of its off-balance sheet aircraft leases and airport leases.

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 Goodwill

Effective January 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 142 requires management to make judgments about the fair value of the reporting unit to determine whether goodwill is impaired. The reporting unit is US Airways. The Company believes that this accounting estimate is a “critical accounting estimate” because: (1) goodwill is a significant asset and (2) the impact that recognizing an impairment would have on the assets reported on the balance sheet, as well as statement of operations, could be material. Goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. The provisions of SFAS 142 require that a two-step impairment test be performed on goodwill. In the first step, the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying value of goodwill exceeds its implied fair value, then the Company must record an

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impairment loss equal to the difference. The Company assesses the fair value of the reporting unit considering both the income approach and market approach. Under the market approach, the fair value of the reporting unit is based on quoted market prices and the number of shares outstanding for US Airways Group common stock. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of factors including estimates of future market growth trends, forecasted revenues and expenses, expected periods the assets will be utilized, appropriate discount rates and other variables. The Company bases its estimates on assumptions that it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company concluded that Goodwill was not impaired during 2003. See Note 2(g) to the Consolidated Financial Statements for details regarding past goodwill impairment 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 Sheet. Due to various factors including refunds, exchanges, unused tickets and transactions involving other carriers, certain amounts are recorded based on estimates. These estimates are based upon historical experience and have been consistently applied to record revenue. The Company routinely performs evaluations of the liability that 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. The Company has experienced changes in customer travel patterns resulting from various factors, including new airport security measures, concerns about further terrorist attacks and an uncertain economy, resulting in more forfeited tickets and fewer refunds. Therefore, during the fourth quarter of 2003, a $34 million favorable adjustment was made to Passenger transportation revenue to reflect an increase in expired tickets.

Fresh-start Reporting

In accordance with SOP 90-7, the Company adopted fresh-start reporting upon emergence from Chapter 11. Accordingly, the Company valued its assets, liabilities and equity at fair value. The excess of the reorganization value over tangible assets and identifiable intangible assets has been reflected as Goodwill on the Consolidated Balance Sheet. Estimates of fair value represent the Company’s best estimate based on independent appraisals and valuations and, where the foregoing are not available, industry trends and by reference to market rates and transactions. US Airways Group’s fresh-start equity value of $438 million at March 31, 2003 was determined with the assistance of financial advisors. In determining the equity value, the financial advisors and the Company considered several matters, including the following: (i) certain recent financial information of the Company; (ii) certain financial projections prepared by the Company in connection with the ATSB Loan and RSA Investment Agreement including the underlying assumptions; (iii) the equity transactions encompassed by the RSA Investment Agreement; (iv) a discounted cash flow analysis prepared on a going concern basis; (v) current and historical market values of publicly traded companies that are in businesses reasonably comparable to the Company and (vi) certain additional economic and industry conditions. The foregoing estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. See Note 3(a) to the Consolidated Financial Statements for further detail related to the fresh-start fair value adjustments.

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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 “Description of Unusual Items” above for details regarding impairment charges recognized in 2002 and 2001.

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 fresh-start charges, curtailment and settlement items, the Company recognized defined benefit pension plan expense of $51 million, $49 million, $323 million and $196 million for the nine months ended December 31, 2003, three months ended March 31, 2003 and years 2002 and 2001, respectively, and other postretirement benefit expense of $96 million, $36 million, $145 million and $127 million for the nine months ended December 31, 2003, three months ended March 31, 2003 and years ended December 31, 2002 and 2001, respectively.

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 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.

US Airways assumed that its pension plans’ assets would generate a long-term rate of return of 8.00% at September 30, 2003, its measurement date for most of its pension plans. This rate is lower than the assumed rate of 8.75% used at September 30, 2002. 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 was based on a target allocation of assets to the following fund types:

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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 8.00% to 7.50%) would increase US Airways’ 2004 pension expense by approximately $8 million.

US Airways discounted both its future pension obligations and its other postretirement benefit obligations using a rate of 6.00% at September 30, 2003, compared to 6.75% at September 30, 2002. 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 have increased US Airways’ pension and other postretirement liabilities at September 30, 2003 by approximately $189 million and $124 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 increase 2004 expenses by approximately $3 million and $6 million, respectively.

At September 30, 2003, US Airways assumed a health care cost trend rate of 9% in 2004 decreasing to 5% in 2009 and thereafter when computing its other postretirement benefit liabilities and expenses. This compares to a health care cost trend rate of 10% in 2003 decreasing to 5% in 2008 and thereafter. 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 and service and interest costs as of September 30, 2003 by approximately $258 million and $27 million, respectively.

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.

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Recent Accounting and Reporting Developments

Effective December 8, 2003, the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (Medicare Prescription Drug Act), was signed into law, which provides for a prescription drug benefit under Medicare (Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company’s defined benefit postretirement health care plans do provide a prescription drug benefit.

The Financial Accounting Standards Board (FASB) issued FASB Staff Position 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-1) on January 12, 2004. FSP 106-1 allowed companies to elect a one-time deferral of the recognition of the effects of the Medicare Prescription Drug Act in accounting for its plan under SFAS 106, and in providing disclosures related to the plan required by SFAS 132 (revised 2003) (see below). The FASB allowed the one-time deferral because of the accounting issues raised by the Medicare Prescription Drug Act, in particular, the accounting for the federal subsidy that is not explicitly addressed in SFAS 106, and because uncertainties exist regarding the direct effects of the Medicare Prescription Drug Act and its ancillary effects on plan participants.

For companies electing the one-time deferral, such deferral remains in effect until authoritative guidance on the accounting for the federal subsidy is issued, or until certain other events, such as a plan amendment, settlement or curtailment, occur. The Company is currently evaluating the effects of the Medicare Prescription Drug Act on its other postretirement benefit plan and its participants and has elected the one-time deferral. The accumulated postretirement obligation or net periodic postretirement benefit cost for 2003 does not reflect the effects of the Medicare Prescription Drug Act on its other postretirement plan. Additionally, once the specific authoritative guidance on the accounting for the federal subsidy is issued, such guidance could cause the Company to change previously reported information.

On December 23, 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits–an amendment of FASB Statements No. 87, 88 and 106” (SFAS 132 (revised 2003)). SFAS 132 (revised 2003) is effective for fiscal years ending after December 15, 2003. Interim disclosure requirements under SFAS 132 (revised 2003) will be effective for interim periods beginning after December 15, 2003, and required disclosures related to estimated benefit payments will be effective for fiscal years ending after June 15, 2004.

SFAS 132 (revised 2003) replaces the disclosure requirements in SFAS 87, SFAS 88 and SFAS 106. SFAS 132 (revised 2003) addresses disclosures only and does not address measurement and recognition accounting for pension and postretirement benefits. SFAS 132 (revised 2003) requires additional disclosures related to the description of plan assets including investment strategies, plan obligations, cash flows and net periodic benefit cost of defined benefit pension and other defined benefit postretirement plans. Effective December 31, 2003, the Company adopted the disclosure requirements of SFAS No. 132 (revised 2003). See Note 7 to the Consolidated Financial Statements included in Item 8 of this report for such disclosures.

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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

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. Prices may be affected by many factors, including: the impact of political instability on crude production, especially in Russia and OPEC countries; unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries; unpredicted increases to oil demand due to weather or the pace of economic growth; inventory levels of crude, refined products and natural gas; and other factors, such as the relative fluctuation between the U.S. dollar and other major currencies and influence of speculative positions on the futures exchanges. Because the operations of the Company 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.

The Company utilizes financial derivatives, including fixed price swap agreements, collar structures and other similar instruments, to manage some of the risk associated with changes in aviation fuel prices. As of December 31, 2003, the Company had open fuel hedge positions in place to hedge 30% of its 2004 anticipated jet fuel requirements and 5% of its 2005 anticipated jet fuel requirements. The fair value of these positions was a net asset of approximately $38 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, 2003 prices would change the fair value of the commodity derivative financial instruments in place by $22 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. As long as the Company maintains or improves its cash and short-term investment balance, it is effectively self-hedged against changes in interest rates with regard to its floating rate debt.

As noted in “Contractual Obligations” above, US Airways Group has future aircraft purchase commitments of $3.24 billion. It expects to lease or mortgage a majority of those commitments. Changes in interest rates will impact the cost of such financings.

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As of December 31, 2003 and 2002, the Company had $1.53 billion and $745 million of variable-rate debt outstanding, respectively. Additional information regarding the Company’s long-term debt obligations as of December 31, 2003 is as follows (dollars in millions):

Equity Price Risk

US Airways holds Sabre Holdings Corporation (Sabre) stock options that have a fair value and carrying value of $7 million as of December 31, 2003. Fair value is computed using the Black-Scholes stock option pricing model. A hypothetical ten percent decrease in the December 31, 2003 value of the Sabre stock price would decrease the fair value of the stock options by $2 million. See Note 4(b) to the Company’s Notes to Consolidated Financial Statements for information related to the fair value of these options.

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Item 8. Financial Statements and Supplementary Data

Independent Auditors’ Report

The Stockholder and Board of Directors

US Airways, Inc.:

We have audited the accompanying consolidated balance sheets of US Airways, Inc. and subsidiary as of December 31, 2003 (Successor Company) and 2002 (Predecessor Company), and the related consolidated statements of operations, stockholder’s equity (deficit) and cash flows for the nine months ended December 31, 2003 (Successor Company), the three months ended March 31, 2003 and each of the years in the two-year period ended December 31, 2002 (Predecessor Company). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of US Airways, Inc. and subsidiary as of December 31, 2003 (Successor Company) and 2002 (Predecessor Company), and the results of their operations and their cash flows for the nine months ended December 31, 2003 (Successor Company), the three months ended March 31, 2003 and each of the years in the two-year period ended December 31, 2002 (Predecessor Company), in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s significant recurring losses and other matters regarding, among other things, the Company’s ability to maintain compliance with covenants contained in various financing agreements as well as its ability to finance and operate regional jet aircraft and reduce its operating costs in order to successfully compete with low cost airlines, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2 to the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 1 to the consolidated financial statements, on March 18, 2003, the United States Bankruptcy Court for the Eastern District of Virginia confirmed the Company’s Plan of Reorganization (the Plan). The Plan became effective on March 31, 2003 and the Company emerged from Chapter 11. In connection with its emergence from Chapter 11, the Company adopted fresh-start reporting pursuant to Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” as of March 31, 2003 as further described in Notes 1, 2 and 3 to the consolidated financial statements. As a result, the consolidated financial statements of the Successor Company are presented on a different basis than those of the Predecessor Company and, therefore, are not comparable in all respects. Furthermore, as discussed in Notes 2 and 10 to the consolidated financial statements, effective April 1, 2003, the Company changed its method of accounting for stock-based compensation as described by Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure”; and effective January 1, 2002, the Company changed its method of accounting for its goodwill and other intangible assets as required by Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets.”

KPMG LLP

McLean, Virginia

March 12, 2004

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US Airways, Inc.

Consolidated Statements of Operations

(dollars in millions)