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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

or

For the transition period from              to             

US Airways, Inc.

(Debtor-in-Possession)

(Exact name of registrant as specified in its charter)

State of Incorporation: Delaware

2345 Crystal Drive, Arlington, Virginia 22227

(Address of principal executive offices)

(703) 872-7000

(Registrant’s telephone number, including area code)

(Commission file number: 1-8442)

(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 registrant’s knowledge, in

definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or

any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2

of the Act).    Yes  ¨    No  x

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

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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 Exchange Act of 1934 subsequent to the

distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

On February 18, 2005 there were outstanding 1,000 shares of Common Stock.

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US Airways, Inc.

Form 10-K

Year Ended December 31, 2004

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(table of contents continued on following page)

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US Airways, Inc.

Form 10-K

Year Ended December 31, 2004

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(continued)

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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 42 million passengers in 2004 and was the

seventh largest U.S. air carrier (as ranked by revenue passenger miles (RPMs)). As of December 31,

2004, US Airways operated 281 jet aircraft and 22 regional jet aircraft (see Item 2 “Properties” for

additional information related to aircraft operated by US Airways) and provided regularly scheduled

service at 89 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.

As discussed in more detail below, on September 12, 2004, 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

Nos. 04-13819-SSM through 04-13823-SSM). On the same day, US Airways Group and four of its

other subsidiaries (collectively with US Airways, the Debtors) also filed voluntary petitions for relief

under Chapter 11 of the Bankruptcy Code. The Debtors continue to operate their businesses as “Debtors-

in-Possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable

provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Each of the Debtors in these

cases had previously filed a voluntary petition for relief under Chapter 11 on August 11, 2002 (the Prior

Bankruptcy). The Debtors emerged from the Prior Bankruptcy under the First Amended Joint Plan of

Reorganization of US Airways Group, Inc. and Affiliated Debtors and Debtors-in-Possession, As

Modified (the 2003 Plan), which was confirmed pursuant to an order of the Bankruptcy Court on March

18, 2003 and became effective on March 31, 2003. In accordance with AICPA Statement of Position

90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” and in

connection with the Prior Bankruptcy, the Company adopted fresh-start reporting on March 31, 2003.

References in the Financial Statements and the Notes to the Financial Statements 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 giving effect to the cancellation of then-existing

common stock and the issuance of new securities in accordance with the 2003 Plan, and the 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, because

they are, in effect, those of a new entity.

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 that are uneconomical for US Airways to

serve with large jets to US Airways’ hubs. As of December 2004, the US Airways Express network

served 127 airports in the continental United States, Canada and the Bahamas, including 42 airports also

served by US Airways. During 2004, US Airways Express air carriers enplaned approximately 15.2

million passengers, approximately 48% of whom connected to the Company’s flights. Of these 15.2

million passengers, approximately 6.2 million were enplaned by US Airways Group’s wholly owned

regional airlines, approximately 7.4 million were enplaned by third-party carriers operating under

capacity purchase agreements and approximately 1.6 million were enplaned by carriers operating under

prorate agreements, as described below. In addition, US Airways Express operators offer

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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 capacity purchase or

prorate agreements. US Airways Group’s two wholly owned regional airlines and the regional jet

affiliate operators are capacity purchase relationships. The regional jet affiliates with capacity purchase

agreements are Chautauqua Airlines (Chautauqua), Mesa Airlines, Inc. (Mesa), Trans States Airlines,

Inc. (Trans States) and Midway Airlines Corporation (Midway) prior to Midway ceasing service in

October 2003. 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 prorate agreements are

non-owned turboprop operators and include all or a portion of the turboprop operations of Colgan

Airlines, Inc., Trans States, Shuttle Acquisition LLC (through October 2004) and Air Midwest, Inc. The

prorate agreements provide for affiliate carriers to pay certain service fees to US Airways as well as to

receive 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.

In April 2004, MidAtlantic Airways (MidAtlantic), US Airways’ new regional jet division, began

operating as part of the US Airways Express network. As of December 31, 2004, MidAtlantic operates

22 Embraer ERJ-170 regional jets with 72 seats. These larger regional jets help fill the gap between 50-

seat and 120-seat fleet-types, allow for a better match with demand in certain existing markets and have

enabled US Airways to add flights to markets it did not previously serve. MidAtlantic served

approximately one million passengers in 2004.

US Airways’ major connecting hubs are at airports in Charlotte and Philadelphia. The Company also

has substantial operations at Boston’s Logan International Airport (Logan), New York’s LaGuardia

Airport (LaGuardia), Pittsburgh International Airport (Pittsburgh) 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 United

States 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 approximately 30%

of the industry’s intra-East coast revenues based on the most recent industry revenue data available.

For the year ended December 31, 2004, passenger revenues accounted for approximately 90% of the

Company’s operating revenues. Cargo revenues and other sources accounted for 10% of the Company’s

operating revenues in 2004. The Company’s results are seasonal with operating results typically highest

in the second and third quarters due to US Airways’ combination of business traffic and North-South

leisure traffic in the eastern United States during those periods.

Available Information

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 such report is filed

with or furnished to the Securities and Exchange Commission (SEC).

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Chapter 11 Proceedings

Before emerging from the Prior Bankruptcy in 2003, the Company examined virtually every phase of

its contracts and operations and had significantly reduced costs. The Company reduced its mainline

capacity, realigned its network to maximize yield, initiated a business plan to use more regional jets and

procured financing for these aircraft, and expanded its alliances with other carriers. However, after

emerging from the Prior Bankruptcy, the Company continued to incur substantial losses from operations.

The primary factors contributing to these losses include the reduction in domestic industry unit revenue

and significant increases in fuel prices. The downward pressure on domestic industry revenue is a result

of the rapid growth of low-fare, low-cost airlines, the increasing transparency of fares through Internet

sources and other changes in fare structures that have resulted in substantially lower fares for many

business and leisure travelers. The competitive environment continued to intensify throughout 2004,

particularly in key markets such as Philadelphia, Washington, D.C., Boston and New York.

Throughout the spring and summer of 2004, the Company communicated with key stakeholders and

the public its plan to transform US Airways into a fully competitive and profitable airline (the

Transformation Plan). A key element of the Transformation Plan is significant reductions in labor costs

through changes to the Company’s collective bargaining agreements. The Company aggressively sought

the necessary agreements to allow full implementation of the Transformation Plan without the need for

filing new Chapter 11 cases but was unable to do so in a timely manner. As a result of the recurring

losses, declining available cash, and risk of defaults or cross defaults under certain key financing and

operating agreements, it was necessary for the Debtors to file voluntary petitions for reorganization

under Chapter 11 of the Bankruptcy Code on September 12, 2004.

At hearings held on September 13, 2004, the Bankruptcy Court granted the Company’s first day

motions for relief designed to stabilize its operations and business relationships with customers, vendors,

employees and others, and entered orders granting permission to the Debtors to, among other things: (a)

pay employee wages and continue benefits, such as medical and dental insurance; (b) honor prepetition

obligations to customers and continue customer programs, including US Airways’ Dividend Miles

program; (c) pay for fuel under existing supply contracts, and honor existing fuel supply, distribution and

storage agreements; (d) assume certain contracts related to interline agreements with other airlines; (e)

pay prepetition obligations to certain foreign vendors, foreign service providers and foreign

governments; and (f) continue maintenance of existing bank accounts and existing cash management

systems. The Bankruptcy Court also approved the interim agreement reached between the Company, the

Air Transportation Stabilization Board (ATSB) and the lenders under the $1 billion loan, obtained upon

emergence from the Prior Bankruptcy and substantially guaranteed by the ATSB, to allow the Company

continued use of the cash collateral securing the loan (see further discussion below).

Since filing for bankruptcy on September 12, 2004, the Company has achieved cost-savings

agreements with all of its collective bargaining groups. Through a motion filed under Section 1113(e) of

the Bankruptcy Code on September 24, 2004, the Company sought interim relief from collective

bargaining agreements (CBAs) with the Air Line Pilots Association (ALPA), Association of Flight

Attendants-Communications Workers of America (AFA), Transport Workers Union (TWU),

Communications Workers of America (CWA) and International Association of Machinists and

Aerospace Workers (IAM). On October 15, 2004, the Bankruptcy Court approved base rates of pay

reductions of 21% through February 15, 2005 or entry of an order approving a new CBA or granting

final relief under Section 1113(c) of the Bankruptcy Code. Reductions to pension contributions and

certain work rule changes were also approved. The interim relief order did not apply to ALPA or TWU,

whose members reached and ratified CBAs prior to the interim relief going into effect. CBAs with the

CWA and AFA were reached in December 2004 and were subsequently ratified. On January 6, 2005,

the Bankruptcy Court approved the Company’s request to reject the IAM CBAs and approved the

termination of US Airways’ three defined benefit plans. The IAM subsequently ratified Company cost-

savings proposals on January 21, 2005. As part of these negotiations and subsequent ratifications, all

collective bargaining groups had their pension plans reduced or eliminated. In addition, the Bankruptcy

Court has also approved various settlement agreements between the Company and the court-appointed

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Section 1114 Committee representing retirees other than those represented by the IAM to begin the

significant curtailment of postretirement benefits.

In addition to the cost savings achieved with labor groups, the Company also implemented pay and

benefit reductions for its current management and other non-union employees, including reductions to

base pay, workforce reductions and modifications to vacation and sick time accruals. The Company also

implemented modifications to its defined contribution pension plans and will implement modifications

to retiree benefits in 2005. The pay rate and defined contribution plan reductions went into effect

October 11, 2004 and the reductions to retiree medical benefits will become effective March 1, 2005.

The Company has reached agreements with certain of its lessors and lenders restructuring existing

aircraft lease and debt financings. On November 19, 2004, the Bankruptcy Court approved the

Company’s agreements for the continued use and operation of substantially all of its mainline and

Express fleet. As discussed in detail below, the Company reached a comprehensive agreement with GE

Capital Aviation Services (GECAS) and GE Engine Service (GEES) on aircraft leasing and financing

and engine services, which will provide the Company with short-term liquidity, reduced debt, lower

aircraft ownership costs, enhanced engine maintenance services, and operating leases for new regional

jets. The Company also reached agreements with EMBRAER-Empresa Brasileria de Aeronautica SA

(Embraer) and Bombardier, Inc. (Bombardier) providing for continued use and operation of its aircraft,

short term liquidity and new financing for regional jets, which were approved by the Bankruptcy Court

in January 2005.

The Company has notified all known or potential creditors of the Chapter 11 filing for the purposes

of identifying and quantifying all prepetition claims. The Chapter 11 filing triggered defaults on

substantially all debt and lease obligations. Subject to certain exceptions under the Bankruptcy Code,

the Chapter 11 filing automatically stayed the continuation of any judicial or administrative proceedings

or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior

to September 12, 2004. The deadline for filing proofs of claim with the Bankruptcy Court was February

3, 2005, with a limited exception for governmental entities, which have until March 11, 2005.

The potential adverse publicity associated with the Chapter 11 filings and the resulting uncertainty

regarding the Company’s future prospects may hinder the Company’s ongoing business activities and its

ability to operate, fund and execute its business plan by impairing relations with existing and potential

customers; negatively impacting the ability of the Company to attract and retain key employees; limiting

the Company’s ability to obtain trade credit; limiting the Company’s ability to effectively hedge rising

aviation fuel costs; and impairing present and future relationships with vendors and service providers.

As a result of the Chapter 11 filings, realization of assets and liquidation of liabilities are subject to

significant uncertainty. While operating as debtors-in-possession under the protection of Chapter 11,

and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business,

US Airways may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other

than those reflected in the financial statements. Further, a plan of reorganization could materially change

the amounts and classifications reported in the historical financial statements, which do not give effect to

any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a

consequence of confirmation of a plan of reorganization.

To exit Chapter 11 successfully, the Company must obtain confirmation by the Bankruptcy Court of a

plan of reorganization. The Company currently has the exclusive right to file a plan of reorganization

until March 31, 2005 and solicit acceptance of the plan through June 30, 2005. Under the terms of the

agreement reached with General Electric, the Company has until March 15, 2005 to file a plan of

reorganization. These deadlines could potentially be extended. A plan of reorganization would, among

other things, resolve all prepetition obligations, set forth a revised capital structure and establish the

corporate governance subsequent to exiting from bankruptcy. The Company is currently working

towards emerging from Chapter 11 mid-year 2005, but that timing is dependent upon, among other

things, the timely and successful confirmation and implementation of a plan of reorganization. The

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ultimate recovery to creditors, if any, will not be determined until confirmation of a plan of

reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11

cases to these constituencies or what type or amount of distributions, if any, they would receive.

Financing during the Chapter 11 Proceedings

As part of its reorganization under the Prior Bankruptcy, US Airways received a $900 million loan

guarantee (ATSB Guarantee) under the Air Transportation Safety and System Stabilization Act from the

ATSB in connection with a $1 billion term loan financing (ATSB Loan). In connection with the

September 12, 2004 Chapter 11 filing, the ATSB and the lenders under the ATSB Loan agreed to

authorize the Company to continue to use cash collateral securing the ATSB Loan on an interim basis.

Therefore, in lieu of debtor-in-possession financing, the Company has access to the cash collateralizing

the ATSB Loan as working capital, subject to certain on-going conditions and limitations. This interim

agreement was approved by the Bankruptcy Court on September 13, 2004 as part of the first day

motions, and was scheduled to expire on October 15, 2004. The Bankruptcy Court approved two

subsequent agreements extending the Company’s ability to use the cash collateral, including an

agreement approved on January 13, 2005 extending the Company’s use of cash collateral through June

30, 2005, subject to certain conditions and limitations. Under the current agreement, the Company may

continue to access such cash collateral to support daily operations so long as it maintains an agreed

minimum amount of cash on hand each week. The amount declines from approximately $500 million at

the end of January to $341 million on June 30, 2005, with weekly cash levels permitted as low as $325

million in March 2005. See “Liquidity and Capital Resources” in Item 7. Management’s Discussion and

Analysis of Financial Condition and Results of Operation, for a complete discussion on the Company’s

financing while in Chapter 11.

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 may be 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 to be its foremost competitive

threat. 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., 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 began service at the Philadelphia

International Airport, a hub airport for US Airways. Southwest has also announced that it will begin

service from Pittsburgh International Airport, a former hub, in May 2005. In January 2005, Delta

Airlines, Inc. (Delta) announced a broad low-fare pricing scheme. The Company anticipates continued

low-fare 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

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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.). 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. Additional terrorist attacks or fear of such

attacks, even if not made directly on the airline industry, including elevated national threat warnings,

negatively affect the Company and the airline industry.

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), 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 in late July 2001 after failing to receive approval from

the United States Department of Justice, 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 its airline subsidiaries; however,

this plan was preempted by the September 11^th terrorist attacks, which was then followed by the filing

for Chapter 11 in the Prior Bankruptcy in August 2002.

Marketing Agreements with Other Airlines

The Company has entered into a number of bilateral and multilateral alliances with other airlines to

provide customers with more choices and to access markets worldwide that the Company does not serve

directly. In May 2004, US Airways joined the Star Alliance, the world’s largest airline alliance, with 15

member airlines servicing 772 destinations in 133 countries. 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. Expanded benefits for customers include network expansion

through code share service, Dividend Miles benefits, airport lounge access, convenient single-ticket

pricing, and one-stop check-in and coordinated baggage handling.

US Airways also has comprehensive marketing agreements with United, a member of the Star

Alliance, which began in July 2002. 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. US Airways also has marketing agreements with Lufthansa, Spanair,

bmi and other Star Alliance carriers, as well as 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 certificates. Airlines are also regulated by the U.S. Federal Aviation

Administration (FAA), a division of the DOT, primarily in the areas of flight operations, maintenance,

ground facilities and other technical matters. Pursuant to these regulations, the Company 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.

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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 and San Francisco, 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 and actions could affect operations and increase operating

costs for the airline industry, including the Company.

US Airways is obligated to collect a federal excise tax on domestic and international air transportation

(commonly referred to as the “ticket tax”). US Airways 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. 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; fingerprint-based background checks of all employees and vendor

employees with access to secure areas of airports pursuant to regulations issued in connection with the

Security Act; and the provision of passenger data to U.S. Customs. Funding for TSA is provided, in

part, by a fee collected by air carriers from their passengers of $2.50 per flight segment (which is

proposed to increase to up to $5.50 per flight segment in 2005, but not more than $8.00 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. Implementation of the requirements of the Security Act have resulted and will

continue to result in increased costs for US Airways, Piedmont and PSA and their passengers and has

and will likely continue to result in service disruptions and delays.

Most 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

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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, and subsequently

announced a further extension through October 30, 2005. As a result of the 2007 slot elimination, the

FAA has indicated an intent to rethink its approach to regulating operations at LaGuardia. Several

proposals, including auctions, congestion pricing and other market-based solutions, are being considered

along with more traditional regulatory approaches.

At Reagan National an additional eleven roundtrips were awarded by the DOT, pursuant to the Vision

100–Century of Aviation Reauthorization Act, which created additional slots for distribution by the

DOT. Although US Airways participated in the proceeding and was awarded slots, most of the slots

were awarded to new entrant carriers.

Where the FAA has seen congestion and delay increases, it has stepped in and worked with

the carriers to freeze operations at current or somewhat reduced levels. Specifically, incumbent

carriers, including US Airways, are not permitted to increase operations at Chicago O’Hare as a

result of an agreement reached between the FAA and these airlines in August 2004. US Airways

expects that the current operations freeze will continue at least through the summer 2005 travel

season. FAA rulemaking to address congestion issues at crowded airports is expected sometime

in 2005. It is not yet clear how many airports or issues will be encompassed by the rulemaking,

the exact timing and outcome of which cannot be ascertained at this time.

As a result of widely-reported operational difficulties experienced by US Airways during the

Christmas 2004 time period, the DOT’s Inspector General (IG) commenced an inquiry into the

causes of the operational problems. The IG plans to issue a report summarizing its findings,

including recommendations for avoiding similar incidents in the future. The Company is

cooperating with the IG in its inquiry.

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.

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Employees

As of December 31, 2004, on a full-time equivalent basis, US Airways employed

approximately 24,600 active employees including approximately 6,600 station personnel, 5,600

flight attendants, 4,600 mechanics and related employees, 3,100 pilots, 1,600 reservations

personnel and 3,100 personnel in administrative and miscellaneous job categories.

As of December 31, 2004, approximately 89% 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, 2004 is as

follows:

Aviation Fuel

Aviation fuel is typically the Company’s second largest expense. Because the operations of

the airline are dependent upon aviation fuel, increases in aviation fuel costs could materially and

adversely affect liquidity, results of operations and financial condition. The following table

shows aircraft fuel consumption and costs for 2002-2004:

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.

To reduce the exposure to changes in fuel prices, the Company periodically enters into certain

fixed price swaps, collar structures and other similar derivative contracts. The Company’s

current financial position and credit rating negatively affect its ability to hedge fuel in the future.

See “Selected Operating and Financial Statistics” in Item 7. Management’s Discussion and

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Analysis of Financial Condition and Results of Operation, for additional information related to

aviation fuel.

Airline Ticket Distribution

The now common usage of electronic tickets within North America, and the rapid expansion

in Europe and the rest of the world, has allowed for the streamlining of processes and the

increased efficiency of customer servicing and support. The Company began to support the

issuance of electronic tickets in 1996. During 2004, electronic tickets represented 96% of all

tickets issued to customers flying US Airways. The addition of a $50 surcharge to most

customers requiring paper tickets has allowed the Company to continue to support the

exceptional requests, while offsetting any cost variance associated with the issuance and postal

fulfillment of paper tickets. Airlines based in North America have recently proposed a requested

mandate that airlines move to 100% electronic ticketing over the next couple of years, which will

only serve to enhance customer service and control costs for ticketing services supported by the

airline and distribution partners.

The shift of consumer bookings from traditional travel agents, airline ticket offices and

reservation centers to online travel agent sites (e.g., Orbitz, Travelocity, Expedia and others) as

well as airline direct websites (e.g., usairways.com) continues to grow within the industry.

Historically, traditional and online travel agencies used 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. The

growth of the airline direct websites and travel agent sites (e.g., Orbitz) that connect directly to

airline host systems, effectively by-passing the traditional connection via GDSs, helps the

Company reduce distribution costs from the channels of distribution on the internet. In the fourth

quarter of 2004, the Company received over 31% of its sales from internet sites. The Company’s

direct website, usairways.com, comprised over 12% of Company sales, while the rest of the

internet sites accounted for the remaining 19% of Company sales.

Due to the continued pressure on legacy airlines to lower distribution fees more aggressively

than anytime in the past in order to compete with low-cost airlines, many “new-comers” have

entered the distribution industry. New low-cost GDSs, such as ITA Software, G2 Switchworks,

Navitaire and others, are providing airlines with alternative economic models to do business with

traditional travel agents. These new low-cost GDSs substantially reduce the fees charged to

airlines by this distribution channel.

In an effort to further reduce distribution costs through internal channels, US Airways and

other airlines have instituted service fees for interaction in channels requiring specialized service

such as reservation call centers ($5.00 per ticket), Airline Ticket Offices ($10.00 per ticket) and

City Ticket Offices ($10.00), while continuing to offer free service via the airlines’ websites.

The goals of these service fees are to reduce the cost to provide customer service as required by

the traveler and promote the continued goal of shifting customers to the Company’s lowest cost

distribution channel, usairways.com. Internal channels of distribution account for 25% of all

Company sales.

In July 2004, the DOT eliminated most regulations governing GDSs. Airlines and GDSs

continue to have open dialogue regarding possible cost savings.

Frequent Traveler Program

US Airways operates a frequent traveler program known as “Dividend Miles” under which

participants earn mileage credits for each paid flight segment on US Airways, US Airways

Shuttle, US Airways Express, Star Alliance carriers, and certain other airlines that participate in

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the program. Participants flying on first class or Envoy class tickets receive additional mileage

credits. Participants can also receive 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 non-airline partners. Mileage credits can be redeemed for

various free, discounted, or upgraded travel awards on US Airways, Star Alliance carriers or

other participating airlines.

US Airways and the other participating 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.

Insurance

The Company maintains insurance of the types and in amounts deemed adequate to protect

themselves and their 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 2005. The Secretary of Transportation may extend this policy until December 31, 2005.

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.

There can be no assurances that the Company can maintain insurance coverages and costs at

its current levels.

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Item 2. Properties

Flight Equipment

As of December 31, 2004, US Airways operated the following jet and regional jet aircraft:

As of December 31, 2004, US Airways Group had 19 A320-family aircraft on firm order

scheduled for delivery in the years 2007 through 2009. US Airways Group also had ten A330-

200 aircraft on firm order scheduled for delivery in the years 2007 through 2009. On February 3,

2005, the Bankruptcy Court approved the Company’s agreement with Airbus providing for,

among other things, delivery of the 19 A320-family aircraft in years 2008 through 2010 and

delivery of the ten A330-200 aircraft in years 2008 through 2009.

Pursuant to the Regional Jet Leasing Term Sheet of the Master Memorandum of

Understanding approved by the Bankruptcy Court in December 2004, General Electric Credit

Corporation (GECC) or its affiliates will provide lease financing for up to 31 regional jet aircraft.

The aircraft to be financed will consist of 70- to 100-seat regional jet aircraft manufactured by

Bombardier and/or Embraer in a mix and subject to other terms to be agreed mutually by GECC

and US Airways. In the first quarter of 2005, GECC will lease six Bombardier CRJ-700s to

US Airways with terms expiring on the earlier of the Company’s emergence from Chapter 11 and

June 30, 2005; these leases may be extended upon the Company’s emergence from bankruptcy.

The Company acquired three new Embraer ERJ-170 aircraft in January 2005 and has firm

orders for three additional ERJ-170 aircraft scheduled to be delivered by March 31, 2005. The

Company also acquired three new CRJ-700 aircraft in January 2005.

The Company maintains inventories of spare engines, spare parts, accessories and other

maintenance supplies sufficient to meet its operating requirements.

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As of December 31, 2004, the Company owned or leased the following aircraft that 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 107 50-seat regional jet aircraft

as part of US Airways Express as of December 31, 2004.

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.

The Company’s 767-200ER aircraft are committed to the Aeromed Program of CRAF. Under

this program, the aircraft are converted to flying hospitals for transportation of injured troops.

US Airways, Delta and United are participants in the Aeromed Program. Participation in this

program provides increased U.S. government revenues for the Company. Since the CRAF

activation of 2003, US Airways has not provided “voluntary” lift to AMC, due to operational

limitations.

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. The Pittsburgh reservations

call and service center will be closed in 2005 and consolidated into one location in Winston-

Salem.

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.

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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.

Item 3. Legal Proceedings

On September 12, 2004, US Airways filed a voluntary petition for relief under Chapter 11 of

the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District

of Virginia, Alexandria Division (Case Nos. 04-13819-SSM through 03-13823-SSM). The

Company continues to operate its business and manage its property as a debtor-in-possession

pursuant to Sections 1107 and 1108 of the Bankruptcy Code. As a result of the current Chapter

11 filing, attempts to collect, secure or enforce remedies with respect to prepetition claims

against the Company are subject to the automatic stay provisions of Section 362(a) of the

Bankruptcy Code.

On February 26, 2004, a company called I.A.P. Intermodal, LLC filed suit against

US Airways Group and its wholly owned airline subsidiaries in the United States District Court

for the Eastern District of Texas 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 and its subsidiaries were formally served with the

complaint on June 21, 2004. US Airways Group is unable to ascertain at this time the likelihood

or potential scale of liability. On the same date, the same plaintiff filed what the Company

believes to be substantially similar cases against nine other major airlines, including British

Airways, Northwest Airlines Corporation (Northwest), Korean Airlines Co., Ltd., Deutsche

Lufthansa AG, Air France, Air Canada, Singapore Airlines Ltd., Delta, and Continental Airlines,

Inc., and had filed a suit against the parent company of American Airlines in December 2003.

This action was stayed as to US Airways Group and its wholly owned subsidiaries as a result of

the bankruptcy filing on September 12, 2004.

The Port Authority of New York and New Jersey filed a proof of claim against US Airways in

the Prior Bankruptcy. The claim was in the amount of $8.5 million and it alleged environmental

contamination and building deficiencies at LaGuardia. US Airways’ liability and defenses to

such liability were unaffected by the Prior 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 that

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 in

connection with the Prior Bankruptcy 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

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had accepted the tentative agreement with the IRS, including a settlement of all federal income

taxes through the end of 2002. Due to the bankruptcy filing on September 11, 2004, which

suspended payment of prepetition liabilities, final payment terms under the agreement have not

been submitted to the Bankruptcy Court for approval.

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. That grant

of summary judgment was affirmed by the Fourth Circuit Court of Appeals. 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 prepetition and continuing

postpetition damages. The Bankruptcy Court determined that the entire claim was prepetition

and unsecured, and the plaintiffs appealed this decision to the District 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. Following the Fourth Circuit’s decision to affirm the

summary judgment ruling, the plaintiffs dismissed their appeal of the Bankruptcy Court decision.

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 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. After a trial, the Bankruptcy

Court, on June 7, 2004, determined the value of the Limbach and Limbach/Parker claims to be

$2,542,843. Limbach and Limbach/Parker are challenging on appeal various rulings of the

Bankruptcy Court, including the amount of the claim and its status as an unsecured claim.

US Airways has also filed an appeal. Limbach and Limbach/Parker have filed an action in state

court against the City of Philadelphia (the City) and the Philadelphia Authority for Industrial

Development (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 their 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. On May 21, 2004, the City and PAID filed a Motion for Summary Judgment seeking

dismissal of the lawsuit. 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 Prior Bankruptcy.

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. Proceedings in

the Bankruptcy Court were stayed by the bankruptcy filing on September 12, 2004.

On October 4, 2004, the System Board of Adjustment (the System Board) issued a ruling in

which the Company’s outsourcing of heavy maintenance visits was deemed to be in violation of

the collective bargaining agreement between US Airways and the IAM as the representative of

Mechanic and Related Employees. The System Board ordered the Company to cease and desist

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from outsourcing the work, and ordered that affected employees be made whole. The System

Board did not specify any particular monetary remedy and none has since been decided or agreed

upon by the parties. However, the Bankruptcy Court’s order granting in part the Company’s

motion for relief under Section 1113(e) of the Bankruptcy Code included relief from any

restrictions on the Company’s right to outsource the work covered by this award through

February 15, 2005. Neither the Company’s Section 1113(e) motion nor the Bankruptcy Court’s

order addressed the make-whole portion of this award. On November 12, 2004, the Company

filed a motion asking the Bankruptcy Court for permission to reject the IAM collective

bargaining agreement under which the grievance had been filed. On January 6, 2005, the

Bankruptcy Court granted the Company’s motion. On January 21, 2005, the IAM ratified a new

collective bargaining agreement to replace the one that had been rejected, and as part of the new

agreement, the IAM agreed not to pursue any claims for damages associated with the rejection of

the previous agreement.

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 is also named as a defendant in

both actions, while Northwest and the Airlines Reporting Corporation were sued separately 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 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 was lifted when the Company emerged from

bankruptcy on March 31, 2003, but the action was subsequently stayed once more as a result of

the Company’s bankruptcy filing on September 12, 2004.

In May 1995, US Airways Group, US Airways and the Retirement Plan for Pilots of

US Airways, Inc. (Pilot 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 Pilot 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 Railway

Labor Act because the Pilot 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 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 filed a claim before the US Airways Pilot Retirement Board, requesting

arbitration of their claim for benefits that they believe were erroneously calculated, and the

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Retirement Board selected an arbitrator to decide certain issues related to the plaintiffs’ claims

for benefits. However, the Pilot Retirement Plan was terminated on March 31, 2003, and on

April 1, 2003 the Pension Benefit Guaranty Corporation (PBGC) became trustee of the plan.

Also, claims related to this matter were expunged in the Prior Bankruptcy. Accordingly, the

Company does not believe there is any continuing risk of material liability associated with this

matter.

On September 29, 2000, US Airways intervened in a proceeding that was originally brought

on January 26, 1998, by the Pennsylvania Department of Environment Protection (DEP) against

Allegheny County, Pennsylvania and the Allegheny County Aviation Administration (ACAA),

alleging that a variety of airfield and aircraft de-icing activities at 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 Environment 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 de-icing

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 de-icing

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.

Part II

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

      Purchases of Equity Securities

US Airways Group owns all of US Airways’ outstanding common stock, par value $1 per

share. 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” in Item 7. Management’s Discussion and Analysis of

Financial Condition and Results of Operation below for more information, including information

related to dividend restrictions associated with the ATSB Loan.

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Item 6. Selected Financial Data

Statements of Operations (in millions) (1)

Balance Sheets (in millions)

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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 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 continue as a going concern; the ability of the Company to obtain and maintain any

necessary financing for operations and other purposes, whether debtor-in-possession financing or

other financing; the ability of the Company to maintain adequate liquidity; the ability of the

Company to absorb escalating fuel costs; the Company’s ability to obtain court approval with

respect to motions in the Chapter 11 proceedings prosecuted by it from time to time; the ability

of the Company to develop, prosecute, confirm and consummate one or more plans of

reorganization with respect to the Chapter 11 proceedings; risks associated with third parties

seeking and obtaining court approval to terminate or shorten the exclusivity period for the

Company to propose and confirm one or more plans of reorganization, to appoint a Chapter 11

trustee or to convert the cases to Chapter 7 cases; 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 potential adverse impact of the Chapter 11

proceedings on the Company’s liquidity or results of operations; 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 fund and execute its Transformation Plan during the Chapter 11

proceedings and in the context of a plan of reorganization and thereafter; 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; 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 continued military activities in Iraq; 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. Similarly, these and other factors,

including the terms of any reorganization plan ultimately confirmed, can affect the value of the

Company’s various prepetition liabilities. Accordingly, the Company urges that the appropriate

caution be exercised with respect to existing and future investments in any of these liabilities.

Chapter 11 Proceedings

On September 12, 2004, US Airways filed a voluntary petition for relief under Chapter 11 of

the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia,

Alexandria Division (Case Nos. 04-13819-SSM through 04-13823-SSM). On the same day,

US Airways Group, US Airways’ parent company and four of its other subsidiaries (collectively

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the Debtors) also filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.

Each of the Debtors in these cases had previously filed a voluntary petition for relief under

Chapter 11 on August 11, 2002 (the Prior Bankruptcy). The Debtors emerged from the Prior

Bankruptcy under the First Amended Joint Plan of Reorganization of US Airways Group, Inc.

and Affiliated Debtors and Debtors-in-Possession, As Modified (the 2003 Plan), which was

confirmed pursuant to an order of the Bankruptcy Court on March 18, 2003 and became effective

on March 31, 2003. 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 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 giving effect to the cancellation of the then-existing common

stock and the issuance of new securities in accordance with the 2003 Plan and 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.

Before emerging from the Prior Bankruptcy in 2003, the Company examined virtually every

phase of its contracts and operations and had significantly reduced costs. The Company reduced

its mainline capacity, realigned its network to maximize yield, initiated a business plan to use

more regional jets and procured financing for these aircraft, and expanded its alliances with other

carriers. However, after emerging from the Prior Bankruptcy, the Company continued to incur

substantial losses from operations. The primary factors contributing to these losses include the

reduction in domestic industry unit revenue and significant increases in fuel prices. The

downward pressure on domestic industry revenue is a result of the rapid growth of low-fare, low-

cost airlines, the increasing transparency of fares through Internet sources and other changes in

fare structures that have resulted in substantially lower fares for many business and leisure

travelers. The competitive environment continued to intensify throughout 2004, particularly in

key markets such as Philadelphia, Washington, D.C., Boston and New York.

Throughout the spring and summer of 2004, the Company communicated with key

stakeholders and the public its plan to transform US Airways into a fully competitive and

profitable airline (the Transformation Plan). A key element of the Transformation Plan is

significant reductions in labor costs through changes to the Company’s collective bargaining

agreements. The Company aggressively sought the necessary agreements to allow full

implementation of the Transformation Plan without the need for filing new Chapter 11 cases but

was unable to do so in a timely manner. As a result of the recurring losses, declining available

cash, and risk of defaults or cross defaults under certain key financing and operating agreements,

it was necessary for the Debtors to file voluntary petitions for reorganization under Chapter 11 of

the Bankruptcy Code on September 12, 2004.

At hearings held on September 13, 2004, the Bankruptcy Court granted the Company’s first

day motions for relief designed to stabilize its operations and business relationships with

customers, vendors, employees and others and entered orders granting permission to the Debtors

to, among other things: (a) pay employee wages and continue benefits, such as medical and

dental insurance; (b) honor prepetition obligations to customers and continue customer programs,

including US Airways’ Dividend Miles program; (c) pay for fuel under existing supply contracts,

and honor existing fuel supply, distribution and storage agreements; (d) assume certain contracts

related to interline agreements with other airlines; (e) pay prepetition obligations to certain

foreign vendors, foreign service providers and foreign governments; and (f) continue

maintenance of existing bank accounts and existing cash management systems. The Bankruptcy

Court also approved the interim agreement reached between the Company, the ATSB and the

lenders under the $1 billion loan, obtained upon emergence from the Prior Bankruptcy and

substantially guaranteed by the ATSB, to allow the Company continued use of the cash collateral

securing the loan (see further discussion below).

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Since filing for bankruptcy on September 12, 2004, the Company has achieved cost-savings

agreements with all of its collective bargaining groups. Through a motion filed under Section

1113(e) of the Bankruptcy Code on September 24, 2004, the Company sought interim relief from

their collective bargaining agreements (CBAs) with ALPA, AFA, TWU, CWA and IAM. On

October 15, 2004, the Bankruptcy Court approved base rates of pay reductions of 21% through

February 15, 2005 or entry of an order approving a new CBA or granting final relief under

Section 1113(c) of the Bankruptcy Code. Reductions to pension contributions and certain work

rule changes were also approved. The interim relief order did not apply to ALPA or TWU,

whose members reached and ratified CBAs prior to the interim relief going into effect. CBAs

with the CWA and AFA were reached in December 2004 and were subsequently ratified. On

January 6, 2005, the Bankruptcy Court approved the Company’s request to reject the IAM CBAs

and approved the termination of the three mainline defined benefit plans. The IAM subsequently

ratified Company cost-savings proposals on January 21, 2005. In addition, the Bankruptcy Court

has also approved various settlement agreements between the Company and the court-appointed

Section 1114 Committee representing retirees other than those represented by the IAM to begin

the significant curtailment of postretirement benefits.

On November 12, 2004, US Airways filed a motion requesting a determination from the

Bankruptcy Court that US Airways satisfied the financial requirements for a “distress

termination” of the Retirement Plan for Flight Attendants in the Service of US Airways, Inc.

(AFA Plan), the Pension Plan for Employees of US Airways, Inc. Who Are Represented by the

International Association of Machinists and Aerospace Workers (IAM Plan), and the Retirement

Plan for Certain Employees of US Airways, Inc. (CE Plan) under section 4041(c)(2)(B)(ii)(IV) of

the Employee Retirement Income Security Act of 1974, as amended (ERISA), and approval of

each such plan’s termination. These plans were projected to have benefit obligations and plan

assets aggregating $2.7 billion and $1.7 billion, respectively, as of September 30, 2004, the most

recent valuation date. On January 6, 2005, the Bankruptcy Court entered an order (i) finding that

the financial requirements under section 4041(c)(2)(B)(ii)(IV) of ERISA for a distress

termination of the plans had been met and (ii) approving termination of the plans. The AFA Plan

and the IAM Plan were terminated effective January 10, 2005, by agreement between the PBGC

and the Company. The CE Plan was terminated effective January 17, 2005, by agreement

between the PBGC and US Airways. Effective February 1, 2005, the PBGC was appointed

trustee for each of the three plans.

In addition to the cost savings achieved with labor groups, the Company also implemented

pay and benefit reductions for its current management and other non-union employees, including

reductions to base pay, workforce reductions and modifications to vacation and sick time

accruals. The Company also implemented modifications to its defined contribution pension

plans and will implement modifications to retiree benefits in 2005. The pay rate and defined

contribution plan reductions went into effect October 11, 2004 and the reductions to retiree

medical benefits will become effective March 1, 2005.

The Company has reached agreements with certain of its lessors and lenders restructuring

existing aircraft lease and debt financings. On November 19, 2004, the Bankruptcy Court

approved the Company’s agreements for the continued use and operation of substantially all of

its mainline and Express fleet. As discussed in detail below, the Company reached a

comprehensive agreement with GE Capital Aviation Services (GECAS) and GE Engine Service

(GEES) on aircraft leasing and financing and engine services, which will provide the Company

with short-term liquidity, reduced debt, lower aircraft ownership costs, enhanced engine

maintenance services, and operating leases for new regional jets. The Company also reached

agreements with EMBRAER-Empresa Brasileria de Aeronautica SA (Embraer) and Bombardier,

Inc. (Bombardier) providing for continued use and operation of its aircraft, short term liquidity

and new financing for regional jets, which were approved by the Bankruptcy Court in January

2005. These agreements are discussed in more detail in “Liquidity and Capital Resources.”

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The Company has notified all known or potential creditors of the Chapter 11 filing for the

purposes of identifying and quantifying all prepetition claims. The Chapter 11 filing triggered

defaults on substantially all debt and lease obligations. Subject to certain exceptions under the

Bankruptcy Code, the Chapter 11 filing automatically stayed the continuation of any judicial or

administrative proceedings or other actions against the Debtors or their property to recover on,

collect or secure a claim arising prior to September 12, 2004. The deadline for filing proofs of

claim with the Bankruptcy Court was February 3, 2005, with a limited exception for

governmental entities, which have until March 11, 2005.

The potential adverse publicity associated with the Chapter 11 filings and the resulting

uncertainty regarding the Company’s future prospects may hinder the Company’s ongoing

business activities and its ability to operate, fund and execute its business plan by impairing

relations with existing and potential customers; negatively impacting the ability of the Company

to attract and retain key employees; limiting the Company’s ability to obtain trade credit; limiting

the Company’s ability to effectively hedge rising aviation fuel costs; and impairing present and

future relationships with vendors and service providers.

As a result of the Chapter 11 filings, realization of assets and liquidation of liabilities are

subject to significant uncertainty. While operating as a debtor-in-possession under the protection

of Chapter 11, and subject to Bankruptcy Court approval or otherwise as permitted in the normal

course of business, US Airways may sell or otherwise dispose of assets and liquidate or settle

liabilities for amounts other than those reflected in the financial statements. Further, a plan of

reorganization could materially change the amounts and classifications reported in the historical

financial statements, which do not give effect to any adjustments to the carrying value of assets

or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of

reorganization.

To exit Chapter 11 successfully, the Company must obtain confirmation by the Bankruptcy

Court of a plan of reorganization. The Company currently has the exclusive right to file a plan of

reorganization until March 31, 2005 and solicit acceptance of the plan through June 30, 2005.

Under the terms of the agreement reached with General Electric, the Company has until March

15, 2005 to file a plan of reorganization. These deadlines could potentially be extended. A plan

of reorganization would, among other things, resolve all prepetition obligations, set forth a

revised capital structure and establish the corporate governance subsequent to exiting from

bankruptcy. The Company is currently working towards emerging from Chapter 11 mid-year

2005, but that timing is dependent upon, among other things, the timely and successful

confirmation and implementation of a plan of reorganization. The ultimate recovery to creditors,

if any, will not be determined until confirmation of a plan of reorganization. No assurance can

be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these

constituencies or what type or amount of distributions, if any, they would receive.

Transformation Plan

The Company continues to implement its Transformation Plan, which is built on several

aspects of proven success in the airline industry, beyond the necessary lower labor costs that have

been achieved. Those include lower overall costs, a simplified fare structure and expanded

services in the eastern United States, the Caribbean and Latin America. Specifically, the

Company has taken or is currently undertaking the following initiatives:

to simplify its fares by introducing its GoFares pricing plan in many markets served from

Philadelphia, Washington, D.C., and Fort Lauderdale, and has stated its intent to expand that

pricing plan across its system in conjunction with achieving lower costs. A redesigned

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website and more airport technology will also lower distribution costs, enhance customer

service and improve airport processing.

combination of product offerings that is unique among low-cost carriers, including two-class

service, international flights to Europe, the Caribbean, Latin America and Canada, service to

airports that business travelers prefer, access to a global network via the Star Alliance, a

premium frequent flyer program and competitive onboard service.

US Airways intends to use its airport slot and facilities assets to offer nonstop service to more

major business and leisure destinations. Pittsburgh is no longer a hub and service has been

reduced in accordance with previously announced operational changes. Fort Lauderdale is

being expanded to handle additional Latin America service. Operations at Charlotte are being

expanded and new routes from Reagan National are being introduced. In addition, changes

are being made to the scheduling practices at Philadelphia to improve reliability, adding new

destinations in the Caribbean and Latin America and introducing service to Barcelona and

Venice in May.

intends to fly its fleet more hours per day as it decreases the time aircraft sit on the ground at

hubs, waiting for connecting passengers. Productivity increases will be gained through this

more efficient scheduling in conjunction with the contractual labor changes.

Prior Bankruptcy Information

As discussed above, the Company emerged from the Prior Bankruptcy under the 2003 Plan.

The 2003 Plan constituted a separate plan of reorganization for US Airways and each of

US Airways Group’s other domestic subsidiaries (collectively, the Filing Entities). In

accordance with the Bankruptcy Code, the 2003 Plan 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 2003 Plan 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 ATSB, 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 PBGC, in satisfaction of their allowed claims. For a

complete discussion of the distributions provided for under the 2003 Plan, see the 2003 Plan

confirmed by the Bankruptcy Court on March 18, 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.

On March 31, 2003, RSA invested $240 million in cash in Reorganized US Airways Group

pursuant to an investment agreement (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 March 31, 2003, in connection with its investment, RSA was granted a voting interest of

approximately 71.6% in Reorganized US Airways Group and became entitled to designate and

vote to elect eight of 15 directors to Reorganized US Airways Group’s Board of Directors. See

Note 12(d) in the Notes to the Financial Statements for a summary of the related party

transactions with RSA.

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Results of Operations

As discussed above, the Company emerged from the Prior Bankruptcy and adopted fresh-start

reporting on March 31, 2003. 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, 2004 has been

compared to the full year 2003 as included, in part, in the Company’s 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.

2004 Compared With 2003

Operating Revenues–Operating revenues increased $311 million, or 4.6%. Passenger

transportation revenues increased $212 million or 3.5%. Revenue passenger miles (RPMs) were

up 8.7%, which increased revenues by $536 million, partially offset by a 4.9% decrease in yield,

which decreased revenues by $324 million. Passenger transportation revenues were negatively

impacted by the Company’s bankruptcy proceedings. Passenger transportation revenue in 2003

included a favorable $34 million adjustment to the traffic balances payable account for unused

and now expired tickets. Cargo and freight revenue was flat. Other operating revenue increased

as a result of an increase in service fee revenue from the wholly owned subsidiaries of

US Airways Group and affiliates and revenue associated with certain marketing arrangements.

Operating Expenses–Operating expenses increased by $415 million, or 5.9%. Operating

expenses excluding Government compensation and Asset impairments and other special items

increased 3.3% on a capacity increase (as measured by available seat miles or ASMs) of 5.8%.

Personnel costs decreased 9.2% due to lower employee pension, medical and dental, and

postretirement medical benefit expense, an $89 million decrease in stock-based compensation

expense related to the issuance of US Airways Group Class A Common Stock to employees

covered by collective bargaining agreements following emergence from the Prior Bankruptcy in

2003, reduced headcount in 2004 and lower wage rates in the fourth quarter of 2004 as the result

of interim or permanent relief from labor contracts. These decreases were partially offset by an

increase in expense associated with long-term disability. Aviation fuel increased 31.3% primarily

due to higher average fuel prices and, to a lesser extent, schedule-driven increases in

consumption. US Airways Express capacity purchases increased 13.9% reflecting in purchased

ASMs from third-party regional jet operators and other airline subsidiaries of US Airways Group.

Aircraft rent increased 3.8% as a result of new leases due to the conversion of mortgaged aircraft

to leased aircraft and the addition of new regional jet leases. Other rent and landing fees were

flat as a result of decreases in landing fees offsetting increased airport rental expenses. Selling

expenses decreased 3.2% due to a decrease in commissions partially offset by increases to

advertising expense and sales volume driven increases in credit card fees. Depreciation and

amortization decreased 1.8% due to lower book values on the existing fleet as a result of fresh-

start reporting effective March 31, 2003 and due to reduced amortization associated with

capitalized software, partially offset by depreciation associated with new regional jets and the

write-off of certain ground equipment and an indefinite lived foreign slot. Other operating

expenses increased 7.1% due to increases in the cost associated with the redemption of Dividend

Miles for travel on partner airlines and future travel on US Airways as well as increases to costs

associated with passenger and baggage screening and navigation fees, partially offset by

decreases in insurance expenses and schedule-related expenses including passenger food

expenses. 2003 included $28 million in reductions to an accrual upon the resolution of

previously outstanding contingencies. Refer to “Description of Unusual Items” below for

information on Special items and Government compensation.

Other Income (Expense)–Other Income (Expense), net decreased $1.9 billion primarily as a

result of the reorganization items directly associated with the emergence from the Prior

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Bankruptcy. See “Description of Unusual Items” below for additional information on the

components of Reorganization items, net in 2003. In 2004, reorganization items consisted of $27

million of professional fees, $7 million in aircraft order cancellation penalties, and $2 million in

damage and deficiency claims associated with the rejection of certain aircraft, offset by $4

million in interest income on accumulated cash as a result of the current Chapter 11 proceedings.

Interest income decreased as the result of the reclassification of interest income on cash, cash

equivalents and short term investments to Reorganization items, net subsequent to the Chapter 11

filing on September 12, 2004. Interest expense was flat as a result of the conversion of

mortgaged aircraft to leased aircraft and the abandonment of certain aircraft in the Prior

Bankruptcy, offset by interest related to the ATSB Loan and penalty interest incurred as a result

of the current Chapter 11 proceedings. Other, net income in 2004 includes $13 million related to

a business interruption insurance recovery and a $2 million gain on the sale of four aircraft, while

the 2003 results reflect a $30 million gain recognized in connection with the Company’s sale of

its investment in Hotwire, Inc.

Provision (Credit) for Income Taxes–The Company recorded an income tax benefit of $7 million

for the year ended December 31, 2004, as compared to $6 million of income tax expense in 2003.

The benefit recognized in 2004 related to revisions to prior estimates upon completion of the

Company’s 2003 tax return. The Company continues to record a full valuation allowance against

its net deferred tax assets due to the uncertainty regarding their ultimate realization.

Selected Operating and Financial Statistics–System capacity (as measured by ASMs) increased

5.8% and passenger volume (as measured by RPMs) increased 8.7% in 2004. These increases

resulted in a 73.5% system passenger load factor, representing a 2.0 percentage point increase

over 2003. However, system yield declined by 4.9% reflecting the continued downward pressure

on fares. Weather conditions related primarily to hurricanes adversely impacted the Company’s

operating and financial performance in 2004 and 2003. US Airways full-time equivalent

employees at December 31, 2004 declined 8.1% reflecting the headcount reduction measures put

in place in connection with the Company’s Transformation Plan.

2003 Compared With 2002

Operating Revenues–Operating revenues decreased $153 million, or 2.2%. Passenger

transportation revenues decreased $149 million or 2.4%. 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 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 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 14.7% due to favorably restructured leases and lease rejections made in connection

with the Company’s Prior Bankruptcy, 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 6.2% due to sales

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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 20.9% 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 9.7% 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 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

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 Prior Bankruptcy. 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.

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Description of Unusual Items

Special Items–Special items included within operating expenses on the Company’s Statements of

Operations include the following components (dollars in millions):

intention not to take delivery of certain aircraft scheduled for future delivery.

of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”

(SFAS 144) on its B737-300, B737-400, B757-200 and B767-200 aircraft fleets as a result of changes to the

aircraft’s recoverability periods (the planned conversion of owned aircraft to leased aircraft) as well as

indications of possible material changes to the market values of these aircraft. The analysis revealed that

estimated undiscounted future cash flows generated by these aircraft were less than their carrying values for four

B737-300s, 15 B737-400s, 21 B757-200s and three B767-200s. In accordance with SFAS 144, the carrying

values were reduced to fair market value. This analysis resulted in a pretax charge of $392 million.

Management estimated fair market value using third-party appraisals and recent leasing transactions.

postretirement benefit plans and a $30 million curtailment charge related to certain defined benefit pension

plans.

terminate or furlough approximately 11,000 employees across all employee groups. Approximately 10,200 of

the affected employees were terminated or furloughed on or prior to January 1, 2002. Substantially all the

remaining affected employees were terminated or furloughed by May 2002. US Airways’ headcount reduction

was largely accomplished through involuntary terminations/furloughs. In connection with this headcount

reduction, US Airways offered a voluntary leave program to certain employee groups. Voluntary leave program

participants generally received extended benefits (e.g. medical, dental, life insurance) but did not receive any

furlough pay benefit. In accordance with Emerging Issues Task Force Issue No. 94-3, US Airways recorded a

pretax charge of $75 million representing the involuntary severance pay and the benefits for affected employees

during the third quarter of 2001. In the fourth quarter of 2001, US Airways recognized a $10 million charge

representing the estimated costs of extended benefits for those employees who elected to take voluntary leave

and a $2 million reduction in accruals related to the involuntary severance as a result of employees electing to

accept voluntary furlough. During the quarters ended June 30, 2003 and 2002, the Company recognized $1

million and $3 million, respectively, in reductions to severance pay and benefit accruals related to the

involuntary termination or furlough of certain employees.

capitalized gates at certain airports in accordance with Statement of Financial Accounting Standards No. 142,

“Goodwill and Other Intangible Assets.” The carrying values of the affected gates were reduced to fair value

based on a third party appraisal.

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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

Statements of Operations. Such items consist of the following (dollars in millions):

these obligations were only entitled to receive such distributions of cash and common stock as provided under

the 2003 Plan. A portion of the liabilities subject to compromise in the Prior Bankruptcy were restructured

and continued, as restructured, to be liabilities of the Company.

connection with its Prior Bankruptcy including the conversion of 52 mortgages to operating leases. The

restructured terms generally provide for shorter lease periods and lower lease rates.

plans. The PBGC was appointed trustee of the qualified plan effective with the termination. The Company

recognized a gain in connection with the termination which is partially offset by the PBGC claim.

or reject aircraft debt and leases during the bankruptcy proceedings.

were legally abandoned as part of the Prior Bankruptcy. Related aircraft liabilities were adjusted for each

aircraft’s expected allowed collateral value.

furloughed approximately 6,600 employees across all employee groups. Substantially all affected employees

were terminated or furloughed prior to March 31, 2003. US Airways’ headcount reduction was largely

accomplished through involuntary terminations/furloughs. In connection with this headcount reduction,

US Airways offered a voluntary leave program to certain employee groups. Voluntary leave program

participants generally received extended benefits (e.g. medical, dental, life insurance) but did not receive any

furlough pay benefit.

Government Compensation– In April 2003, President George W. Bush signed into law the

Emergency Wartime Supplemental Appropriations Act (Emergency Wartime Act), which

included $2.4 billion for reimbursement to the airlines for certain aviation-related security

expenses. Certain airlines that received the aviation-related assistance were required to 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 would require the carrier to repay to

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the government the amount reimbursed for airline security fees. The Company complied with

this limitation on executive compensation. The Company’s security fee reimbursement was $212

million, net of amounts 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.

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Selected Operating and Financial Statistics (1)

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Liquidity and Capital Resources

As of December 31, 2004, the Company’s Cash, Cash equivalents and Short-term investments

totaled $734 million compared to $1.28 billion as of December 31, 2003. All of the Company’s

unrestricted cash constitutes cash collateral under the ATSB Loan.

The Company requires substantial liquidity in order to meet scheduled debt and lease

payments and to finance day-to-day operations. As a result of the recurring losses, decline in

available cash, and risk of defaults or cross defaults under certain key financing and operating

agreements, the Company filed a voluntary petition for reorganization under Chapter 11 of the

Bankruptcy Code on September 12, 2004. The Company has been operating with the use of the

ATSB cash collateral since its Chapter 11 filing on September 12, 2004.

The Company currently estimates its cash balance will continue to decline through the first

quarter of 2005. The projected decline in cash is a result of continued net losses during winter

months, front-loaded transition costs to achieve a competitive cost structure and approximately

$302 million in aircraft debt and lease payments due in the first quarter of 2005. Failure to make

debt and lease payments would result in the loss of those aircraft which are essential to the

Transformation Plan. The Company projects modest accumulation of cash for several months

beginning in the second quarter of 2005. Failure to have continued use of the ATSB cash

collateral could necessitate asset sales and layoffs, and result in an inability to continue operating.

On February 18, 2005, the Company announced that it reached agreement with Eastshore

Aviation, LLC, an investment entity owned by Air Wisconsin Airlines Corporation and its

shareholders (Air Wisconsin), on a $125 million financing commitment to provide a substantial

portion of the equity funding for a plan of reorganization. The $125 million facility will be in the

form of a debtor-in-possession term loan, to be drawn in the amount of $75 million, upon

approval by Bankruptcy Court, and as early as February 28, 2005, and two subsequent $25

million increments. This loan would be second only to the ATSB Loan with regard to the

Company’s assets that are pledged as collateral. Upon emergence from Chapter 11, the $125

million financing package would then convert to equity in the reorganized US Airways Group.

As part of this agreement, US Airways and Air Wisconsin will enter into an air services

agreement under which Air Wisconsin may, but is not required to, provide regional jet service

under a US Airways Express code share arrangement.

ATSB Loan and Cash Collateral Agreement

As part of its reorganization under the Prior Bankruptcy, US Airways received a $900 million

ATSB Guarantee under the Air Transportation Safety and System Stabilization Act from the

ATSB in connection with a $1 billion term loan financing (ATSB Loan) that was funded on

March 31, 2003. The Company required this loan and related guarantee in order to provide the

additional liquidity necessary to carry out its 2003 Plan. US Airways is the primary obligor

under the ATSB Loan, which is guaranteed by US Airways Group and each of its other domestic

subsidiaries. The ATSB Loan is secured by substantially all of the present and future assets of

the Debtors not otherwise encumbered (including certain cash and investment 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. As of

December 31, 2004, $718 million was outstanding under the ATSB Loan. The ATSB Loan is

reflected as a current liability on the accompanying balance sheet at a book value of $701

million, which is net of $17 million of unamortized discount, and is not subject to compromise.

As of December 31, 2004, the Company’s $734 million in unrestricted cash and short-term

investments was available to support daily operations, subject to certain conditions and

limitations, under the Cash Collateral Agreement described below.

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In connection with the September 12, 2004 Chapter 11 filing, the ATSB and the lenders under

the ATSB Loan agreed to authorize the Company to continue to use cash collateral securing the

ATSB Loan on an interim basis. Therefore, in lieu of debtor-in-possession financing, the

Company has access to the cash collateralizing the ATSB Loan as working capital, subject to

certain on-going conditions and limitations. This interim agreement was approved by the

Bankruptcy Court on September 13, 2004 as part of the first day motions, and was scheduled to

expire on October 15, 2004. The Bankruptcy Court approved two subsequent agreements

extending the Company’s ability to use the cash collateral, including an agreement approved on

January 13, 2005 extending the Company’s use of cash collateral through June 30, 2005, subject

to certain conditions and limitations (Cash Collateral Agreement). Under the current agreement,

the Company may continue to access such cash collateral to support daily operations so long as it

maintains an agreed upon minimum amount of cash on hand each week. The amount declines

from approximately $500 million at the end of January to $341 million on June 30, 2005, with

weekly cash levels permitted as low as $325 million in March 2005. The Company must also

maintain and achieve certain cumulative earnings levels during the period, as defined in the

agreement. Further, the Company must comply with restrictions on its ability to make capital

expenditures. In light of rising fuel prices and continued downward pressure on fares across the

industry, there can be no assurance that the Company can comply with the Cash Collateral

Agreement.

The ATSB Loan also contains covenants that limit, among other things, the Company’s ability

to pay dividends, make additional corporate investments and acquisitions, enter into mergers and

consolidations and modify certain concessions obtained as part of the Prior Bankruptcy. The

ATSB Loan contains certain mandatory prepayment events including, among other things, (i) the

occurrence of certain asset sales and the issuance of certain debt or equity securities and (ii) the

decrease in value of the collateral pledged in respect of the ATSB Loan below specified coverage

levels. The amendments discussed below and the Cash Collateral Agreement have not

eliminated any of these covenants.

The ATSB Loan bears interest as follows: (i) 90% of the ATSB Loan (Tranche A) was funded

through a participating lender’s commercial paper conduit program and bears interest at a rate

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%, and (ii) 10% of the ATSB

Loan (Tranche B) bears interest at LIBOR plus 4.0%. In addition, US Airways is charged an

annual guarantee fee in respect of the ATSB Guarantee currently equal to 4.1% of the ATSB’s

guaranteed amount (initially $900 million) under the ATSB Guarantee, with such guarantee fee

increasing by ten basis points annually. Due to the Company’s September 2004 bankruptcy

filing and subsequent loss of certain regional jet financing, the guarantee fee increased by 2% per

annum and the interest rate on Tranche A and Tranche B each increased by an additional 2% and

4% per annum, respectively, for an effective increase in the interest rate on the loan balance of 4

percentage points.

Prior Amendments to the ATSB Loan during 2004

In March 2004, US Airways and the ATSB amended the financial covenants of the ATSB

Loan to provide covenant relief for the measurement periods beginning June 30, 2004 through

December 31, 2005. The ratios used in the financial covenants were adjusted and reset to align

with the Company’s forecast for 2004 and 2005 as of the date of the amendment, which assumed

a return to profitability by 2005. In exchange for this covenant relief and other changes described

below, US Airways made a voluntary prepayment of $250 million on March 12, 2004, which

reduced, pro rata, all future scheduled principal payments of the ATSB Loan (rather than

shortening the remaining life of the loan).

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The March 2004 amendment permitted US Airways to retain, at its election, up to 25% of the

net cash proceeds from any asset sale for which definitive documentation would be completed by

February 28, 2005, up to a total of $125 million for all asset sales. In addition, the amendment

permitted US Airways to accept a third-party secured note as consideration for certain asset sales

(including the US Airways Shuttle and wholly owned regional airline assets) as long as specified

conditions are met. These conditions include: the note’s amortization schedule will be no more

favorable than the ATSB Loan; proceeds from the note will be used to prepay the ATSB Loan;

the credit strength of the ATSB Loan will not be adversely affected as measured by specified

ratings tests; and the note will be pledged as collateral for the ATSB Loan. Finally, in

consideration for the lenders agreeing to amend the provision related to the going concern

paragraph in the independent auditor’s report for the Company’s audited financial statements for

the year ended December 31, 2003, US Airways agreed to revised covenants relating to

minimum required unrestricted cash balances.

Effective May 21, 2004, US Airways again amended the ATSB Loan to permit use of its

regional jets financed by General Electric (GE) as cross collateral for other obligations of

US Airways to GE. In consideration for this amendment, US Airways agreed to revised

covenants relating to minimum required unrestricted cash balances. In addition, US Airways

agreed to give up the right to retain up to 25% of the net cash proceeds from any asset sale, as

had been permitted by the March 2004 amendment. US Airways made a prepayment of $5

million in connection with this amendment.

The ATSB Loan contains financial covenants that must be satisfied by US Airways at the end

of each fiscal quarter. US Airways was uncertain as to its ability to satisfy these covenants as of

June 30, 2004. Effective June 30, 2004, US Airways and the ATSB amended the ATSB Loan to

remove the uncertainty relating to the Company’s ability to satisfy its financial covenant tests for

the second quarter of 2004. In consideration for this amendment, the Company agreed to change

the loan amortization schedule, by increasing each of the first six principal repayment

installments commencing on October 1, 2006 by approximately $16 million, and reducing the

last principal repayment installment on October 1, 2009 by $94 million.

All of the foregoing rights and obligations of the parties relating to the ATSB Loan are subject

to the terms of the cash collateral orders entered by the Bankruptcy Court and the terms of the

Bankruptcy Code.

General Electric

GE is the Company’s largest creditor. Together with GEES and other affiliates, GE directly

financed or leased a substantial portion of the Company’s aircraft prior to the current Chapter 11

filing. In November 2001, US Airways obtained a $404 million credit facility from GE (2001

GE Credit Facility). The 2001 GE Credit Facility is secured by collateral including 11 A320-

family aircraft and 28 spare engines. As discussed below, borrowings under the 2001 GE Credit

Facility bear interest rates of LIBOR plus 3.5% and the term of the facility is 2012.

In addition to the 2001 GE Credit Facility, GE has provided financing or guarantees on 145 of

the Company’s current operating aircraft. It also maintains the engines on the Company’s B737-

family aircraft, A320-family aircraft, B767 aircraft, EMB-170 aircraft and CRJ-200 aircraft. In

connection with its Prior Bankruptcy, the Company reached a settlement with GE that resolved

substantially all aircraft, aircraft engine and loan-related issues and the Company obtained

additional financing from GE in the form of a liquidity facility of up to $360 million (2003 GE

Liquidity Facility). Borrowings under the liquidity facility bear interest at LIBOR plus 4.25%.

Every obligation of the Company to GE is generally cross-defaulted to the 2001 GE Credit

Facility, the 2003 GE Liquidity Facility, the GE regional jet leases and the GE regional jet

mortgage financings. All of the Company’s obligations to GE are generally cross-collateralized

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and cross-defaulted with all other obligations owned by any Debtor to GECC or any of its

affiliates (collectively, the GE Obligations).

In November 2004, the Company reached a comprehensive agreement with GE and its

affiliates as described in the Master Memorandum of Understanding (Master MOU) that was

approved by the Bankruptcy Court on December 16, 2004. The Master MOU and the

transactions contemplated by the term sheets will provide the Company with short-term liquidity,

reduced debt, lower aircraft ownership costs, enhanced engine maintenance services and

operating leases for new regional jets, while preserving the vast majority of US Airways’

mainline fleet owned by GECAS. The key aspects of the Master MOU are as follows: (i)

agreements providing for continued use by the Company of certain Airbus, Boeing and regional

jet aircraft, and the return to GECC of certain other leased Airbus and Boeing aircraft (the

Aircraft Lease Term Sheet); (ii) GECC will provide a bridge facility of up to approximately $56

million for use by the Debtors during the pendency of the Chapter 11 proceedings (the Bridge

Facility Term Sheet); (iii) GECC will purchase and immediately leaseback to US Airways (a) the

assets securing the 2001 GE Credit Facility and the 2003 GE Liquidity Facility (collectively, the

2001 Credit Facility Assets), and other GE obligations, consisting of 11 Airbus aircraft and 28

spare engines and engine stands, and (b) ten regional jet aircraft currently debt financed by

GECC; (iv) the balance of the 2001 GE Credit Facility will be restructured to provide additional

liquidity of approximately $10 million, subject to the pledge of certain collateral to secure the

2001 GE Credit Facility; (v) subject to the Company’s satisfaction of certain financial tests and

other conditions, GECC will provide lease financing for up to 31 additional regional jet aircraft

(the Regional Jet Leasing Term Sheet); (vi) certain of US Airways’ engine maintenance

agreements with GEES will be modified and assumed; and (viii) upon emergence from

bankruptcy, convertible notes of the reorganized US Airways will be issued to GECC in the

aggregate principal amount of $125 million (the Convertible Note Term Sheet).

The Bridge Facility Term Sheet provides for a loan facility of up to $56 million made

available by GECC to the Debtors in a series of drawdowns commencing on December 20, 2004,

and ending on or before June 30, 2005 (the Bridge Facility). The Company and GECC entered

into the Bridge Facility on December 20, 2004, at which time $20 million was drawn down under

the facility. Interest on the Bridge Facility accrues at the rate of LIBOR plus 4.25% and will be

payable in cash or in kind at the option of the Debtors. The Bridge Facility matures on the date

the Company emerges from Chapter 11 and will be satisfied by the issuance of Convertible Notes

described below. The Bridge Facility is cross-collateralized and cross-defaulted with all other

GE obligations owed by any Debtor to GECC or any of its affiliates and will be granted status as

an administrative expense claim with priority over all other administrative claims other than for

aircraft financing deferrals, which are pari passu, and subordinate only to (i) the super-priority

administrative expense claim of the ATSB and the ATSB Lenders as defined and provided for in

the Cash Collateral Agreement (ii) postpetition wages and benefits, and (iii) any other new

money debtor-in-possession financing.

The 2001 GE Credit Facility will be amended to, among other things: (i) provide the Debtors

with an additional $10 million of liquidity upon consummation of the sale-leaseback of the 2001

GE Credit Facility Assets and CRJ Mortgaged Assets (defined below), (ii) after the prepayment

of the loan balance outstanding under the 2001 GE Credit Facility made in connection with the

sale-leaseback of the 2001 GE Credit Facility Assets and CRJ Mortgaged Assets, as described

below, revise the amortization schedule so that the remaining principal of the loan begins

amortizing over a period of eight quarters following the Debtors’ emergence from bankruptcy

(the Remaining Term), (iii) provide that the interest rate will be LIBOR plus 4.25% for the

Remaining Term, and (iv) provide that the loan will be secured with a third lien position on three

CRJ-700 aircraft (subject to first and second lien positions and conditioned upon consent of such

senior lien holders pursuant to an inter-creditor agreement reasonably acceptable to GECC), a

second lien position on one CRJ-700 aircraft (subject to first lien position and conditioned upon

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consent of such senior lien holders pursuant to an inter-creditor agreement reasonably acceptable

to GECC) and a first lien position on one CF34 spare engine owned by US Airways, with the

aggregate of any senior liens on such collateral not to exceed $62 million. The amendments to

the 2001 GE Credit Facility do not constitute an assumption thereof, but it is anticipated that in

connection with a plan of reorganization, the 2001 GE Credit Facility, as amended, will be

reinstated.

The Aircraft Lease Term Sheet sets forth a comprehensive agreement regarding the treatment

of GECC-owned and mortgaged aircraft pursuant to Section 1110 of the Bankruptcy Code. The

Debtors and GECC have agreed to subject certain of such aircraft to consensual Section 1110(a)

agreements providing for continued use of such aircraft so long as the Company complies with

the terms of such agreements. In certain cases, the Debtors and GECC have agreed to amend

prepetition agreements. Except as set forth in the Master MOU or the Term Sheets attached to

the Master MOU, the Section 1110(a) agreements and any related amendments will not

constitute an assumption of any related underlying agreements, and no such agreement will

constitute a postpetition contract for purposes of, among other things, Sections 365, 503 and 507

of the Bankruptcy Code, but will be subject to the Debtors’ obligations under Section 1110 of the

Bankruptcy Code. After emergence from bankruptcy, US Airways will have an option to

restructure the monthly rental obligations of certain additional B737-400 leases following the

issuance of the Convertible Notes described below, for cash or additional convertible notes of

equal market value.

Subject to the swap of three aircraft contemplated by the Aircraft Lease Term Sheet, GECC

will purchase the two A319 aircraft, the four A320 aircraft, the five A321 aircraft, the 14

CFM56-5B spare engines, the 14 CFM56-3B spare engines, and certain engine stands that

currently secure the 2001 GE Credit Facility and the 2003 GE Liquidity Facility, together with

the nine CRJ-200s and one CRJ-700 aircraft currently mortgage debt financed by GECC

(collectively, the CRJ Mortgaged Assets) for a total purchase price of approximately $640

million, subject to adjustment, at which time the 2001 Credit Facility Assets and the CRJ

Mortgaged Assets will be leased back to US Airways under operating leases having an initial

lease term expiring on the earlier of the Debtors’ emergence from Chapter 11 or June 30, 2005.

The sale proceeds will be applied to repay (in order) the 2003 GE Liquidity Facility in full, the

GECC mortgage-debt financed CRJ aircraft in full, and a portion of the 2001 GE Credit Facility,

leaving a balance thereon of approximately $15 million, subject to adjustment, before the $10

million additional drawdown on the 2001 GE Credit Facility contemplated above. The operating

leases may be extended upon the Debtors’ emergence from bankruptcy, will be cross-defaulted

with all other GE Obligations (other than certain excepted obligations), and will be subject to

return conditions to be agreed upon by the parties.

The Debtors and the GE entities have reached an agreement with respect to five engine repair

and maintenance agreements, and certain other matters. This agreement includes, among other

things, the agreement of US Airways to assume three of such agreements of GEES and certain of

its affiliates to: (i) forgive and release US Airways from certain prepetition obligations, (ii) defer

certain payment obligations arising under such agreements, (iii) extend one maintenance

agreement, (iv) continue certain existing deferrals, and (v) determine the treatment of certain

removal charges.

Pursuant to the Convertible Note Term Sheet, the Debtors have agreed that upon emergence

from Chapter 11, as partial consideration for entering into the Master MOU, an affiliate of GECC

will receive convertible notes of the reorganized US Airways in the aggregate principal amount

of $125 million (Convertible Notes). The Convertible Notes will be convertible at any time, at

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the holders’ election, into shares of common stock of the reorganized US Airways Group (New

Common Stock) at a conversion price equal to the product of (x) 140%-150% (at US Airways’

option) and (y) the average closing price of the New Common Stock for the sixty consecutive

trading days following US Airways’ emergence from bankruptcy and the listing of the New

Common Stock on NASDAQ or a national stock exchange. The Convertible Notes will bear

interest at a rate to be determined no later than thirty days prior to the Debtors’ scheduled date of

emergence from bankruptcy and interest will be payable semi-annually, in arrears, and will

mature in 2020. US Airways will be permitted to redeem some or all of the Convertible Notes at

any time on or after the fifth anniversary of the issuance of such notes, at a redemption price

payable in cash or, subject to certain conditions, New Common Stock. Holders of the

Convertible Notes may require US Airways to repurchase all or a portion of their Convertible

Notes on the fifth and tenth anniversary of the issuance of such notes at 100% of the principal

amount of the Convertible Notes, plus accrued and unpaid interest to the date of repurchase,

payable, at US Airways election, in cash or New Common Stock. The Convertible Notes will be

senior unsecured obligations and will rank equally in right of payment with all existing and

future unsecured senior obligations of the reorganized US Airways. The Convertible Notes will

be guaranteed by the parent holding company of the reorganized US Airways.

Regional Jet Financing

The 2003 Plan sought to boost revenue and enhance competitiveness through the increased

use of regional jets. Regional jets are faster, quieter and more comfortable than turboprops and

are generally preferred by customers over turboprops. In May 2003, the Company entered into

agreements to purchase a total of 170 regional jets from Bombardier and Embraer. The

Company had previously secured financing commitments from GE and from the respective

airframe manufacturers for approximately 85% to 90% of these jets. These commitments were

subject to certain credit or financial tests, as well as customary conditions precedent.

Despite the Company’s failure to meet one of the applicable credit standards as of May 5,

2004, the Company reached agreements with GE, Embraer and Bombardier for continued

financing of regional jet deliveries through September 30, 2004. As part of the agreement

reached with Bombardier, the Company converted 23 CRJ-200 deliveries (50-seat regional jets)

to CRJ-700 deliveries (70-seat regional jets) and retained the right to convert some or all of the

CRJ-700 deliveries to CRJ-900 deliveries (90-seat regional jets). US Airways agreed to refinance

with third parties four aircraft originally financed by Bombardier. DVB Bank AG provided

US Airways with 18 month bridge financing for two aircraft, with the objective of arranging

long-term market financing for these aircraft upon successful implementation of the Company’s

Transformation Plan.

GE’s financing commitment with respect to regional jets through September 30, 2004 was

also conditioned on US Airways gaining permission under its ATSB Loan to use its regional jets

mortgage financed by GE as cross-collateral for other obligations of US Airways to GE. On May