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
Item 2. Properties
Flight Equipment
As of December 31, 2004, US Airways operated the following jet and regional jet aircraft:
(1) All owned aircraft are pledged as collateral for various secured financing agreements.
(2) The terms of the leases expire between 2005 and 2023.
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.
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.
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.
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
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
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
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.
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.
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.
Item 6.
Item 6. Selected Financial Data
Statements of Operations (in millions) (1)
(1) Includes unusual items. See Note 16 to the Company’s Notes to the Financial Statements for related information.
Balance Sheets (in millions)
(2) Includes debt, capital leases and postretirement benefits other than pensions (noncurrent). Also includes liabilities
subject to compromise at December 31, 2004 and December 31, 2002.
Item 7.
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
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).
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.”
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:
• Lower, simplified pricing and lower distribution costs. US Airways has already taken steps
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
website and more airport technology will also lower distribution costs, enhance customer
service and improve airport processing.
• Enhanced low-cost product offering. US Airways customers will continue to benefit from a
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.
• Network enhancements. Leveraging its strong positions in major Northeast markets,
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.
• Lower unit operating costs. In conjunction with more point-to-point flying, US Airways
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.
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
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
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.
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):
(a) During the quarter ended June 30, 2003, the Company recorded a $35 million charge in connection with its
intention not to take delivery of certain aircraft scheduled for future delivery.
(b) During the fourth quarter of 2002, US Airways conducted an impairment analysis in accordance with Statement
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.
(c) During the fourth quarter of 2002, US Airways recorded a curtailment credit of $120 million related to certain
postretirement benefit plans and a $30 million curtailment charge related to certain defined benefit pension
plans.
(d) In September 2001, US Airways announced that in connection with its reduced flight schedule it would
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.
(e) During the fourth quarter of 2002, US Airways recognized an impairment charge of $21 million related to
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.
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):
(a) Reflects the discharge or reclassification of liabilities subject to compromise in the Prior Bankruptcy. Most of
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.
(b) As of March 31, 2003, the Company restructured aircraft debt and lease agreements related to 119 aircraft in
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.
(c) Effective March 31, 2003, US Airways terminated its qualified and nonqualified pilot defined benefit pension
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.
(d) Damage and deficiency claims largely arose as a result of the Company electing to either restructure, abandon
or reject aircraft debt and leases during the bankruptcy proceedings.
(e) Includes aircraft (seven A319s for 2003 and 34s, two B757-200s and one B737-400 for 2002) that
were legally abandoned as part of the Prior Bankruptcy. Related aircraft liabilities were adjusted for each
aircraft’s expected allowed collateral value.
(f) As a result of schedule reductions made in connection with the Prior Bankruptcy, US Airways terminated or
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
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.
Selected Operating and Financial Statistics (1)
* Denotes scheduled service only (excludes charter service).
(1) Operating statistics include free frequent flyer travelers and the related miles they flew. System statistics encompass all wholly owned airline subsidiaries of US Airways Group, including US Airways, Allegheny (through June 2004), Piedmont, PSA, as well as operating and financial results from capacity purchase agreements with Mesa, Chautauqua, Trans States and Midway (through October 2003). Where noted, revenues and expenses associated with US Airways’ capacity purchase arrangements with certain affiliated airlines and US Airways’ regional jet division, MidAtlantic, have been excluded from US Airways’ financial results for purposes of mainline financial statistical calculation and to provide better comparability between periods (see details below).
(2) Percentage of aircraft seating capacity that is actually utilized (RPMs/ASMs).
(3) Passenger transportation revenue divided by RPMs.
(4) Mainline passenger revenue excludes US Airways Express and MidAtlantic passenger revenue of $1,379 million, $1,208 million, and $1,058 million for the years ended December 31, 2004, 2003 and 2002, respectively.
(5) Passenger transportation revenue divided by ASMs (a measure of unit revenue).
(6) Mainline operating revenues divided by ASMs (a measure of unit revenue). Mainline operating revenues exclude US Airways Express and MidAtlantic operating revenues of $1,385 million, $1,214 million and $1,063 million for the years ended December 31, 2004, 2003 and 2002, respectively.
(7) Total Operating Expenses divided by ASMs (a measure of unit cost).
(8) Mainline operating expenses exclude US Airways capacity purchases of $1,304 million, $1,145 million, and $1,094 million for the years ended December 31, 2004, 2003 and 2002, respectively, and MidAtlantic operating expenses of $79 million for the year ended December 31, 2004. Operating expenses for each period include unusual items as follows:
• For the year ended December 31, 2003, operating expenses include an aircraft order penalty of $35 million (0.07¢) and government compensation of $212 million (0.41¢).
• For the year ended December 31, 2002, operating expenses include aircraft impairment and related charges of $392 million (0.70¢), a benefit on the pension and postretirement curtailment of $90 million (0.16¢), an impairment charge related to capitalized gates at certain airports of $21 million (0.04¢) and a reduction to the involuntary severance accrual of $3 million (0.01¢).
(9) Includes fuel taxes and transportation charges and excludes service fees.
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.
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).
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
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
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
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
21, 2004, the Company amended the ATSB Loan to allow this cross-collateralization. At the
same time GE waived the application of the credit rating condition precedent for regional jet
financing through September 30, 2004, thus securing the continued financing support from GE
through September 2004.
As a result of the September 12, 2004 Chapter 11 filing, the Company failed to meet the
conditions precedent for continued financing of regional jets and temporarily ceased taking
delivery of new regional jet aircraft. As a result, the Company incurred aircraft order
cancellation penalties of $7 million in the fourth quarter of 2004. These penalties were offset
against purchase deposits held by the aircraft manufacturers.
Pursuant to the Regional Jet Leasing Term Sheet, GECC or its affiliates will provide leases
for up to 31 regional jet aircraft. The aircraft to be leased will consist of 70- to 100-seat regional
jet aircraft manufactured by Bombardier and/or Embraer in a mix and subject to such other terms
to be agreed mutually by GECC and US Airways. During the first quarter of 2005, GECC will
lease six CRJ-700s to US Airways with terms expiring on the earlier of the Debtors’ emergence
from Chapter 11 and June 30, 2005. These leases may be extended upon the Debtors’ emergence
from Chapter 11. To effectuate the contemplated regional jet leasing, US Airways and GECC agreed to
reinstate that portion of the RJ Lease Transaction and Debt Financing Agreement, dated as of
December 18, 2003 (RJ Lease Agreement), pursuant to which GECC has agreed to provide
single investor lease transactions (provided that the obligations under the reinstated RJ Lease
Agreement will not be afforded administrative expense status), subject to additional terms and
conditions.
In December 2004, the Company reached aircraft leasing and financing agreements with
Embraer and Bombardier, which were approved by the Bankruptcy Court in January 2005.
Pursuant to the agreement reached with Embraer, the Company purchased and took delivery of
three ERJ-170 aircraft in January 2005 and committed to purchase and take delivery of three
additional ERJ-170 aircraft by March 31, 2005. The purchase of the three ERJ-170s delivered in
January 2005 was financed by Embraer through a mortgage loan facility and the application of
$17 million of existing purchase deposits held by Embraer. Additionally, $12 million of
purchase deposits held by Embraer will be used to fund an Embraer loan reserve. Embraer shall
apply the reserve funds in the amounts and on the dates as and when payments are due under the
Embraer loans during the period from October 1, 2004 through July 31, 2005 in full satisfaction
of the Company’s payment obligations with respect to such Embraer loans during such period.
Upon delivery of the first three ERJ-170s, which occurred in January 2005, unless the Company
assumes the Embraer aircraft purchase agreement pursuant to Section 365 of the Bankruptcy
Code, no further obligations arise on the part of the Company or Embraer with respect to the
purchase and delivery of any aircraft, other than those obligations that arise from or are related to
the purchase and delivery of the final three ERJ-170s in March 2005. Embraer and the Company
have agreed to negotiate a new delivery schedule upon the Company’s assumption of the
Embraer aircraft purchase agreement or upon the occurrence of certain other events.
In the event that the Company fails to take delivery by March 31, 2005 of the remaining three
ERJ-170 aircraft, damages will accrue on account of the Company’s failure to take delivery of
such aircraft from and after April 1, 2005 at the rate of $162,795 per month per aircraft until the
later of (i) 30 days after the Company emerges from the current Chapter 11 proceedings and (ii)
July 31, 2005, at which time Embraer’s obligation to deliver such aircraft will terminate and its
damages with respect to such undelivered aircraft may be as much as $10 million (rather than at
the rate of $162,795 per month), with Embraer having the right to apply any remaining purchase
deposits against Embraer’s aggregate damages.
Under the agreement reached with Bombardier, the Company acquired three new CRJ-700
aircraft in January 2005. The purchase was financed through the application of $28 million of
existing purchase deposits held by Bombardier, $2 million in cash and a finance lease facility
with DVB Bank. Additionally, $4 million of existing purchase deposits held by Bombardier were
used to satisfy existing defaults and cure payments. So long as the Company continues to operate
under the protection of Chapter 11 in compliance with the Bankruptcy Code, no obligations will
arise on the part of the Company or Bombardier with respect to the purchase and delivery of any
aircraft.
As of December 31, 2004, the aircraft manufacturers held purchase deposits of $138 million
related to the acquisition of aircraft.
Other
US Airways relies heavily on credit card processing for its sales, and utilizes credit card
issuers and third-party service providers to process credit card transactions under agreements
which require the Company to provide cash collateral and to comply with certain other financial
and nonfinancial requirements. If US Airways fails to meet any such conditions, these issuers
and providers can require additional cash collateral and, under certain circumstances, terminate
such credit card processing agreements. The termination of credit card agreements would have a
material adverse affect on US Airways’ financial condition and results of operations.
During the second quarter of 2004, US Airways amended its agreement with American
Express Travel Related Services Company, Inc. (American Express). The new agreement has
been extended to December 31, 2006 and provides for additional cash collateral to reduce the
exposure borne by American Express against potential customer liabilities relating to unflown
tickets purchased by customers using the American Express card. The agreement required
additional cash collateral in the event that US Airways’ regional jet financing programs were
terminated or if the Company failed to demonstrate by September 30, 2004 its ability to
successfully implement its Transformation Plan. This amendment effectively aligned the
American Express agreement with the arrangements in place for certain other credit card
processors. As the result of the Company’s financial position and various triggers in the
American Express agreement, the Company deposited an additional $64 million in cash collateral
during the third quarter of 2004.
Statements of Cash Flow Discussion
As discussed in “Results of Operations” above, the Successor Company’s financial statements
are not comparable with the Predecessor Company’s financial statements. However, for
purposes of discussion of liquidity and capital resources, 2004 has been compared to the full year
2003 as included, in part, in the Company’s Statements of Cash Flows.
For 2004, the Company’s operating activities before reorganization items used net cash of $95
million, compared to 2003, which used net cash of $81 million. Included in 2003 cash flows
from operating activities is $218 million received from TSA in connection with the Emergency
Wartime Act. Cash flows from operating activities for 2004 were favorably impacted by an
increase in accounts payable and other accrued expenses as a result of the Chapter 11 filing in
September 2004, as the Company received liquidity protection under the automatic stay
provisions of the Bankruptcy Code related to prepetition liabilities. Cash flows from operating
activities were also favorably impacted for this reason during the Prior Bankruptcy for the period
from August 2002 to March 2003. Cash flows for all periods have been adversely affected by the
same factors that adversely affected financial results, as discussed in “Results of Operations,”
including reductions in unit revenue and significant increases in fuel prices.
For 2004, net cash provided by investing activities was $102 million. Investing activities
include a $358 million decrease in short term investments, reflecting a shift to cash and cash
equivalents, and an increase in restricted cash of $76 million. The increase in restricted cash in
2004 and 2003 reflects the additional cash collateral deposits required by the Company’s credit
card processors, letters of credit and trust accounts described below, partially offset by the
decline in cash collateral required for fuel hedging. Capital expenditures and net equipment
purchase deposit activity in 2004 of $198 million reflect the early return of aircraft purchase
deposits by an aircraft manufacturer of $31 million in the first quarter of 2004.
For 2003, net cash used for investing activities was $268 million. Investing activities
included cash outflows of $208 million related to capital expenditures, including $174 million
for purchase deposits on future regional jet aircraft deliveries and payments made in connection
with the delivery of two regional jets with the balance related to rotables, ground equipment and
miscellaneous assets. The increase in short-term investments in 2003 reflects activity intended to
increase the returns on the Company’s higher cash balances. The Company also received
proceeds of $237 million from US Airways Group (upon its receipt of proceeds from the RSA
Investment Agreement) which were used to pay down two intercompany loans then outstanding
from US Airways Group. Other investing in 2003 also reflects $24 million in proceeds received
related to the sale of the Company’s investment in Hotwire, Inc.
For 2002, net cash provided by investing activities was $86 million. Investing activities
included cash outflows of $135 million related to capital expenditures. Capital expenditures
included $106 million for three A321 aircraft (two other A321s were purchased in noncash
transactions) with the balance related to rotables, ground equipment and miscellaneous assets.
Proceeds from disposition of property includes, among other things, proceeds related to surplus
aircraft and related parts. During the first quarter of 2002, US Airways entered into agreements
to sell 97 surplus DC-9, B737-200 and MD-80 aircraft. The increase in short-term investments
reflects proceeds from the sale of short-term investments.
The Company, in the ordinary course of business, withholds from employees and collects
from passengers funds that are required to be paid to applicable governmental authorities, which
funds include withholding for payroll taxes, transportation excise taxes, passenger facility
charges, transportation security charges and other related fees. During the second quarter of
2002, the Company established trusts to fund these obligations. The initial funding (which
totaled approximately $201 million) and the net cash flows of the trusts are reflected in Decrease
(increase) in restricted cash on the Company’s Statements of Cash Flows. The funds in the trust
accounts, which totaled $138 million and $164 million as of December 31, 2004 and 2003,
respectively, are classified as Restricted cash on the Company’s Balance Sheets, including $99
million and $124 million in current Restricted cash and $39 million and $39 million in
noncurrent Restricted cash, respectively.
The Company used $185 million in cash for financing activities in 2004. Principal payments
on debt and capital lease obligations of $425 million include $255 million of prepayments made
in connection with amendments to the ATSB Loan in March and May 2004. The financing
activities in 2003 were significantly impacted by the Company’s emergence from the Prior
Bankruptcy in March 2003.
Net cash provided by financing activities during 2003 was $782 million. US Airways
received proceeds of $1 billion from the ATSB Loan. Additionally, prior to emergence from
Chapter 11 the Company borrowed $69 million under a debtor-in-possession facility provided by
RSA (RSA DIP Facility) and $62 million under a debtor-in-possession liquidity facility provided
by General Electric (GE DIP Facility). The Company borrowed $114 million under an exit
liquidity facility provided by GE and $20 million under a credit facility provided by GE. The
Company also received proceeds of $34 million related to a private placement offering by
US Airways Group described below. The Company used a portion of the proceeds it received in
connection with its emergence from Chapter 11 to repay $369 million that was then outstanding
under the RSA DIP Facility (including the $69 million discussed above) on March 31, 2003. The
Company also used a portion of the proceeds to repay the $62 million then outstanding under the
GE DIP Facility. The Company also made principal payments of debt of $85 million, including a
$24 million required prepayment on the ATSB Loan, related to the sale of its investment in
Hotwire, Inc.
Net cash provided by financing activities during 2002 was $334 million. US Airways
received proceeds of $116 million from the mortgage financing of three A321 aircraft (two other
A321s were financed in noncash transactions). Additionally, US Airways received proceeds of
$33 million with the private placement of pass through certificates that partially financed five
previously delivered A330 aircraft and $18 million from an engine manufacturer credit facility.
The Company also borrowed $300 million under the RSA DIP Facility and $75 million under a
senior secured debtor-in-possession financing facility provided by Credit Suisse First Boston,
Cayman Islands Branch, and Bank of America, N.A., with participation from the Texas Pacific
Group (Original DIP facility). The Company used a portion of the RSA DIP Facility funds to
repay the full $75 million that was then outstanding under the Original DIP Facility. Prior to the
2002 bankruptcy filing, the Company made scheduled principal repayments of debt in the
amount of $77 million. Subsequent to the 2002 bankruptcy filing, the Company made principal
repayments of debt of $56 million, including $38 million to the engine manufacturer credit facility.
US Airways Group sold 4,679,000 shares of its Class A Common Stock at a price of $7.34
per share before transaction fees during August 2003 in a private placement transaction with
Aviation Acquisition L.L.C., Goldman, Sachs and Co. and OCM Principal Opportunities Fund II,
L.P. These shares related to Class A Common Stock retained by US Airways Group from those
shares allocated to employees pursuant to the 2003 Plan and vested at July 31, 2003. The
retained shares represented the employee tax withholding obligation with respect to the vested
portion of the restricted stock grants. The amount of withholding was determined on the basis of
a price of $7.34 per Class A common share and applicable federal, state, and local taxes. The net
proceeds related to this transaction of $34 million were advanced by US Airways Group to
US Airways and offset the Company’s remittance to taxing authorities.
Contractual Obligations
The following table provides detail of the Company’s future cash contractual obligations as of
December 31, 2004, including classification of the ATSB Loan as current and without regard to
liabilities subject to compromise (dollars in millions).
(1) Excludes related interest amounts.
(2) Includes aircraft obligations financed under enhanced equipment trust certificates.
(3) As long as the Company operates under the protection of Chapter 11 in compliance with the Bankruptcy
Code and unless the Company assumes the aircraft purchase agreements pursuant to Section 365 of the
Bankruptcy Code, neither the Company nor the aircraft manufacturers have any obligation in respect to
the purchase or delivery of regional jet aircraft beyond the commitments for deliveries in the first quarter
of 2005 discussed below.
(4) The minimum determinable payments associated with these acquisition agreements for all firm-order
aircraft include progress payments, payments at delivery, spares, capitalized interest and nonrefundable
deposits.
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.
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.
As a result of regional jet aircraft acquisitions, the Company believes it is probable that it will
not take delivery of certain previously ordered narrow-body aircraft and recorded an accrual of
$35 million for related penalties during the three months ended June 30, 2003. In the event that
the Company fails to take delivery by March 31, 2005 of the remaining three ERJ-170 aircraft,
damages will accrue on account of the Company’s failure to take delivery of such aircraft from
and after April 1, 2005 at the rate of $162,795 per month per aircraft until the later of (i) 30 days
after the Company emerges from the current Chapter 11 proceedings and (ii) July 31, 2005, at
which time Embraer’s obligation to deliver such aircraft will terminate and its damages with
respect to such undelivered aircraft may be as much as $10 million (rather than at the rate of
$162,795 per month), with Embraer having the right to apply any remaining purchase deposits
against Embraer’s aggregate damages.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual
arrangement involving an unconsolidated entity under which a company has (1) made guarantees,
(2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative
instruments classified as equity or (4) any obligation arising out of a material variable interest in
an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to
the company, or that engages in leasing, hedging or research and development arrangements
with the company.
The Company has no off-balance sheet arrangements of the types described in the first three
categories that it believes may have a material current or future effect on its financial condition,
liquidity or results of operations. Certain guarantees that the Company does not expect to have a
material current or future effect on its financial condition, liquidity or results of operations are
disclosed in Note 7(e) to the Financial Statements included in Item 8 of this report.
The Company does have obligations arising out of variable interests in unconsolidated
entities. In 2003, the Company adopted Financial Accounting Standards Board Interpretation No.
46, “Consolidation of Variable Interest Entities” (FIN 46), which addresses the accounting for
these variable interests. An entity is subject to FIN 46 and is called a variable interest entity
(VIE) if it has (1) equity that is insufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, or (2) equity investors that cannot
make significant decisions about the entity’s operations, or that do not absorb the expected losses
or receive the expected returns of the entity. A VIE is consolidated by its primary beneficiary,
which is the party involved with the VIE that has a majority of the expected losses or a majority
of the expected residual returns or both, as a result of ownership, contractual or other financial
interests in the VIE. The adoption of FIN 46 did not materially affect the Company’s financial
statements. In reaching this conclusion, the Company identified certain lease arrangements that
were within the scope of FIN 46. This included a review of 62 aircraft operating leases for which
the Company was the lessee and a pass through trust established specifically to purchase, finance
and lease the aircraft to the Company served as lessor. These trusts, which issue certificates (also
known as Enhanced Equipment Trust Certificates or EETC), allow the Company to raise the
financing for several aircraft at one time and place such funds in escrow pending the purchase or
delivery of the relevant aircraft. The trusts are also structured to provide for certain credit
enhancements, such as liquidity facilities to cover certain interest payments, that reduce the risks
to the purchasers of the trust certificates and, as a result, reduce the cost of aircraft financing to
the Company. Each of these leases contains a fixed-price purchase option that allows the
Company to purchase the aircraft at predetermined prices on specified dates during the latter part
of the lease term. However, the Company does not guarantee the residual value of the aircraft,
and the Company does not believe it is the primary beneficiary under these lease arrangements
based upon its cash flow analysis.
The Company also reviewed long-term operating leases at a number of airports, including
leases where the Company is also the guarantor of the underlying debt. Such leases are typically
with municipalities or other governmental entities. FIN 46, as revised in December 2003,
provided a scope exception that generally precludes the consolidation of governmental
organizations or financing entities established by a governmental organization. The Company
believes that its arrangements meet the scope exception.
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and results of operations are
based upon the Company’s Financial Statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Critical accounting policies are defined as those that are reflective of significant judgments and
uncertainties and potentially result in materially different results under different assumptions and
conditions. The Company has identified the following critical accounting policies that impact the
preparation of its financial statements. See also Note 2, Summary of Significant Accounting
Policies, for additional discussion of the application of these estimates and other accounting
policies.
Impairment of Goodwill
Effective January 1, 2002 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 142
requires management to make judgments about the fair value of the reporting unit to determine
whether goodwill is impaired. The reporting unit is US Airways Group. The Company believes
that this accounting estimate is a “critical accounting estimate” because: (1) goodwill is a
significant asset and (2) the impact that recognizing an impairment would have on the assets
reported on the Balance Sheet, as well as the Statement of Operations, could be material. Goodwill
is tested annually for impairment or more frequently if events or changes in circumstances indicate
that it might be impaired. The Company assesses the fair value of the reporting unit considering
both the income approach and market approach. Under the market approach, the fair value of the
reporting unit is based on quoted market prices and the number of shares outstanding for
US Airways Group common stock. Under the income approach, the fair value of the reporting unit
is based on the present value of estimated future cash flows. The income approach is dependent on
a number of factors including estimates of future market growth trends, forecasted revenues and
expenses, expected periods the assets will be utilized, appropriate discount rates and other
variables. The Company bases its estimates on assumptions that it believes to be reasonable, but
which are unpredictable and inherently uncertain. Actual future results may differ from those
estimates. The Company concluded that the fair value of the reporting unit was in excess of the
carrying value and therefore not impaired during 2004. Cash flow projections for the Company’s
2004 test were prepared on a going-concern basis. Additionally, in the third and fourth quarters of
2004, the carrying value of the Company’s net assets was less than zero. See Note 2(g) to the
Financial Statements for details regarding past goodwill impairment tests.
Impairment of Long-Lived Assets and Intangible Assets
The Company assesses the impairment of long-lived assets and intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Factors
which could trigger an impairment review include the following: significant changes in the manner
of use of the assets; significant underperformance relative to historical or projected future operating
results; or significant negative industry or economic trends. The Company determines that an
impairment has occurred when the future undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of those items. Cash flow estimates are based on
historical results adjusted to reflect the Company’s best estimate of future market and operating
conditions. The net carrying value of assets not recoverable is reduced to fair value. Estimates of
fair value represent the Company’s best estimate based on appraisals, industry trends and reference
to market rates and transactions. Changes in industry capacity and demand for air transportation
can significantly impact the fair value of aircraft and related assets. The Company recorded an
aircraft impairment charge of $392 million in 2002. See “Description of Unusual Items” above for
details regarding this impairment charge.
Passenger Revenue Recognition
The Company recognizes passenger transportation revenue and related commission expense
when transportation is rendered. Passenger ticket sales collected prior to the transportation
taking place are reflected in Traffic balances payable and unused tickets on the Balance Sheet.
Due to various factors including refunds, exchanges, unused tickets and transactions involving
other carriers, certain amounts are recorded based on estimates. These estimates are based upon
historical experience and have been consistently applied to record revenue. The Company
routinely performs evaluations of the liability that may result in adjustments which are
recognized as a component of Passenger transportation revenue. Actual refund, exchange and
expiration activity may vary from estimated amounts. The Company has experienced changes in
customer travel patterns resulting from various factors, including new airport security measures,
concerns about further terrorist attacks and an uncertain economy, resulting in more forfeited
tickets and fewer refunds. Therefore, during the fourth quarter of 2003, a $34 million favorable
adjustment was made to Passenger transportation revenue to reflect an increase in expired tickets.
Frequent Traveler Program
US Airways’ Dividend Miles frequent traveler program awards miles to passengers who fly
on US Airways, US Airways Express, Star Alliance carriers and certain other airlines that
participate in the program. US Airways also sells mileage credits to participating airline partners
and non-airline business partners. The Company has an obligation to provide this future travel
and has therefore recognized an expense and recorded a liability for mileage awards to
passengers redeeming on US Airways or an airline partner. Outstanding miles may be redeemed
for travel on any airline that participates in the program, in which case US Airways pays a
designated amount to the transporting carrier.
Members may not reach the threshold necessary for a free ticket and outstanding miles may
not be redeemed for free travel. Therefore, the Company estimates how many miles will never
be used for an award and excludes those miles from the estimate of the liability. A portion of the
mileage credits of Dividend Miles participants who have excessive balances are also excluded
from the liability. Estimates are also made for the number of miles that will be used per award
and the number of awards that will be redeemed on partner airlines. These estimates are based
upon past customer behavior. Estimated future travel awards for travel on US Airways are
valued at the estimated average incremental cost of carrying one additional passenger.
Incremental costs include unit costs for passenger food, beverages and supplies, credit card fees,
fuel, communications, insurance and denied boarding compensation. No profit or overhead
margin is included in the accrual for incremental costs. For travel awards on partner airlines, the
liability is based upon the gross payment to be paid to the other airline for redemption on the
other airline. A change to these costs estimates, actual redemption activity or award redemption
level could have a significant impact on the liability in the year of change as well as future years.
Incremental changes in the liability resulting from participants earning or redeeming mileage
credits or changes in assumptions used for the related calculations are recorded as part of the
regular review process.
As of December 31, 2004 and 2003, Dividend Miles participants had accumulated mileage
credits for approximately 4.0 million and 6.3 million awards, respectively. The reduction in
estimated awards from 2003 to 2004 is a result of changes in the program and related
assumptions, including the increase in redemptions on partner airlines. Because US Airways
expects that some potential awards will never be redeemed, the calculation of the frequent
traveler liability is based on approximately 80% of potential awards. The liability for the future
travel awards was $73 million and $85 million as of December 31, 2004 and 2003, respectively.
The number of awards redeemed for free travel during the years ending December 31, 2004,
2003 and 2002 was approximately 1.5 million, 1.2 million and 1.3 million, respectively,
representing approximately 8% of US Airways’ RPMs in each of those years. These low
percentages as well as the use of certain inventory management techniques minimize the
displacement of revenue passengers by passengers traveling on Dividend Miles award tickets. In
addition to the awards issued for travel on US Airways, approximately 20% of the total awards
redeemed in 2004 were for travel on partner airlines.
US Airways defers a portion of the revenue from the sale of mileage credits to participating
airline and non-airline partners. The deferred revenue is recognized over the period in which the
credits are expected to be redeemed for travel. A change to either the period over which the
credits are used or the estimated fair value of credits sold could have a significant impact on
revenue in the year of change as well as future years.
Pensions and Other Postretirement Benefits
The Company accounts for its defined benefit pension plans using Statement of Financial
Accounting Standards No. 87, “Employer’s Accounting for Pensions” (SFAS 87) and its other
postretirement benefit plans using Statement of Financial Accounting Standards No. 106,
“Employer’s Accounting for Postretirement Benefits Other than Pensions” (SFAS 106). Under
both SFAS 87 and SFAS 106, expense is recognized on an accrual basis over employees’
approximate service periods. Expenses calculated under SFAS 87 and SFAS 106 are generally
independent of funding decisions or requirements. Exclusive of fresh-start charges, curtailment
and settlement items, the Company recognized defined benefit pension plan expense of $67
million, $51 million, $49 million, and $323 million for the year ended December 31, 2004, the
nine months ended December 31, 2003, the three months ended March 31, 2003 and the year
ended December 31, 2002, respectively, and other postretirement benefit expense of $105
million, $96 million, $36 million, and $145 million for the year ended December 31, 2004, the
nine months ended December 31, 2003, the three months ended March 31, 2003 and the year
ended December 31, 2002, respectively.
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 three mainline defined benefit plans under section 4041(c)(2)(B)(ii)(IV) of
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 PBGC and US Airways. 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.
During hearings in late 2004 and January 2005, the Bankruptcy Court approved various
settlement agreements between US Airways and its unions, and between the Company and the
court-appointed Section 1114 Committee (representing retirees other than those represented by
the IAM) to begin the significant curtailments of the Company’s other postretirement benefits.
The Company’s unfunded obligations for these benefits aggregated $1.4 billion as of September
30, 2004, the most recent valuation date.
Fresh-start Reporting
In accordance with SOP 90-7, the Company adopted fresh-start reporting upon emergence
from the Prior Bankruptcy. Accordingly, the Company valued its assets, liabilities and equity at
fair value. The excess of the reorganization value over tangible assets and identifiable intangible
assets has been reflected as Goodwill on the Balance Sheet. Estimates of fair value represent the
Company’s best estimate based on independent appraisals and valuations and, where the
foregoing are not available, industry trends and by reference to market rates and transactions.
US Airways Group’s fresh-start equity value of $438 million at March 31, 2003 was determined
with the assistance of financial advisors. The estimates and assumptions are inherently subject to
significant uncertainties and contingencies beyond the control of the Company. Accordingly,
there can be no assurance that the estimates, assumptions, and values reflected in the valuations
will be realized, and actual results could vary materially. See Note 13 to the Financial Statements
for further detail related to the fresh-start fair value adjustments.
Recent Accounting and Reporting Developments
In September 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) Emerging Issues Task Force (EITF) Issue 03-1-1, Effective Date of Paragraphs
10-20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,” which delays the effective date for the recognition and
measurement guidance in EITF Issue No. 03-1. In addition, the FASB has issued a proposed FSP
to consider whether further application guidance is necessary for securities analyzed for
impairment under EITF Issue No. 03-1. The Company continues to assess the potential impact
that the adoption of the proposed FSP could have on its financial statements.
In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 151, “Inventory Costs” (SFAS 151), which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material. SFAS 151 will be effective for
inventory costs incurred beginning January 1, 2006. The Company does not believe the adoption
of SFAS 151 will have a material impact on its financial statements.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”
(SFAS 153), which eliminates the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary assets that do not
have commercial substance. SFAS 153 will be effective for nonmonetary asset exchanges
occurring after July 1, 2005. The Company is currently evaluating the impact of SFAS 153 on its
financial statements.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” (SFAS
123(R)), which establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based on the grant-
date fair value of the award. This eliminates the exception to account for such awards using the
intrinsic method previously allowable under Accounting Principle Board Opinion No. 25. SFAS
123(R) will be effective for the Company’s interim reporting period beginning July 1, 2005. The
Company previously adopted the fair value recognition provisions of SFAS 123, “Accounting for
Stock-Based Compensation,” upon emergence from the Prior Bankruptcy on March 31, 2003.
Accordingly, the Company believes SFAS 123(R) will not have a material impact on its financial
statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risk exposures include commodity price risk (i.e., the price
paid to obtain aviation fuel), interest rate risk and equity price risk. The potential impact of
adverse increases in the aforementioned risks and general strategies employed by the Company to
manage such risks are discussed below. The risks identified below are consistent from year to
year.
The following sensitivity analyses do not consider the effects that an adverse change may
have on the overall economy nor do they consider additional actions the Company may take to
mitigate its exposure to such changes. Actual results of changes in prices or rates may differ
materially from the following hypothetical results.
Commodity Price Risk
Aviation fuel is typically the Company’s second largest expense. Prices and availability of all
petroleum products are subject to political, economic and market factors that are generally
outside of the Company’s control. Accordingly, the price and availability of aviation fuel, as
well as other petroleum products, can be unpredictable. Prices may be affected by many factors,
including: the impact of political instability on crude production, especially in Russia and OPEC
countries; unexpected changes to the availability of petroleum products due to disruptions in
distribution systems or refineries; unpredicted increases to oil demand due to weather or the pace
of economic growth; inventory levels of crude, refined products and natural gas; and other
factors, such as the relative fluctuation between the U.S. dollar and other major currencies and
influence of speculative positions on the futures exchanges. Because the operations of the
Company are dependent upon aviation fuel, increases in aviation fuel costs could materially and
adversely affect the Company’s liquidity, results of operations and financial condition.
The Company utilizes financial derivatives, including fixed price swap agreements, collar
structures and other similar instruments, to manage some of the risk associated with changes in
aviation fuel prices. As of December 31, 2004, the Company had no open fuel hedge positions in
place, but will recognize approximately $2 million per month for previously liquidated hedges
representing approximately 4% of its 2005 anticipated jet fuel requirements. The Company had
$22 million of unrealized gains related to fuel hedge positions recorded in Accumulated other
comprehensive loss, net of income tax effect on its Balance Sheet as of December 31, 2004.
Interest Rate Risk
Exposure to interest rate risk relates primarily to the Company’s cash equivalents and short-
term investments portfolios and debt obligations. As of December 31, 2004 and 2003, the
Company had $1.63 billion and $1.53 billion of variable-rate debt outstanding, respectively.
Assuming a hypothetical 10% increase in average interest rates during 2005 as compared to
2004, interest expense would increase by $8 million. Additional information regarding the
Company’s debt obligations as of December 31, 2004 is as follows (dollars in millions):
As a result of the Company’s Chapter 11 filing, the fair value of the debt outstanding could not
be reasonably determined as of December 31, 2004.
As noted in “Contractual Obligations” above, US Airways Group has future aircraft purchase
commitments of $1.93 billion. It expects to lease or mortgage a majority of those commitments.
Changes in interest rates will impact the cost of such financings.
Equity Price Risk
US Airways holds Sabre Holdings Corporation (Sabre) stock options that have a fair value
and carrying value of $10 million as of December 31, 2004. Fair value is computed using the
Black-Scholes stock option pricing model. A hypothetical ten percent decrease in the
December 31, 2004 value of the Sabre stock price would decrease the fair value of the stock
options by $2 million. See Note 3(b) to the Company’s Notes to the Financial Statements for
information related to the fair value of these options.
Item 8.
Item 8. Financial Statements and Supplementary Data
Management’s Annual Report on Internal Control over Financial Reporting
Management of US Airways, Inc. (the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal
control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. The Company’s internal control
over financial reporting includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company;
• provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors
of the Company; and
• provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2004. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based on our assessment and those criteria, management believes that the Company maintained
effective internal control over financial reporting as of December 31, 2004.
The Company’s independent registered public accounting firm has issued an attestation report
on management’s assessment of the Company’s internal control over financial reporting. That
report has been included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
US Airways, Inc.:
We have audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting that US Airways, Inc. (the
Company) maintained effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based
on criteria established in Internal Control-Integrated Framework issued by COSO. Also, in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control-
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of US Airways, Inc. as of December 31,
2004 and 2003, and the related statements of operations, stockholders’ equity (deficit) and cash
flows for the year ended December 31, 2004 and the nine months ended December 31, 2003 for
the Successor Company and the three months ended March 31, 2003 and the year ended
December 31, 2002 for the Predecessor Company and our report dated February 25, 2005
expressed an unqualified opinion on those financial statements. Our report included an
explanatory paragraph that states that the Company’s significant recurring losses, accumulated
deficit and voluntary petition seeking to reorganize under Chapter 11 of the federal bankruptcy
laws raise substantial doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
McLean, Virginia
February 25, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
US Airways, Inc.:
We have audited the accompanying balance sheets of US Airways, Inc. as of December 31, 2004
and 2003, and the related statements of operations, stockholders’ equity (deficit) and cash flows
for the year ended December 31, 2004 and the nine months ended December 31, 2003 for the
Successor Company and the three months ended March 31, 2003 and the year ended December
31, 2002 for the Predecessor Company. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of US Airways, Inc. as of December 31, 2004 and 2003, and the results of
its operations and its cash flows for the year ended December 31, 2004 and the nine months
ended December 31, 2003 for the Successor Company and the three months ended March 31,
2003 and the year ended December 31, 2002 for the Predecessor Company, in conformity with
U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has incurred significant recurring losses from
operations, has an accumulated deficit and as discussed in Note 1 to the financial statements,
filed a voluntary petition seeking to reorganize under Chapter 11 of the federal bankruptcy laws
which raise substantial doubt about its ability to continue as a going concern. Although the
Company is currently operating as a debtor-in-possession under the jurisdiction of the
Bankruptcy Court, the continuation of the business as a going concern is contingent upon, among
other things: (1) the ability to maintain compliance with all terms of its ATSB Loan; (2) the
ability of the Company to successfully achieve required cost savings to complete its
restructuring; (3) the ability of the Company to generate cash from operations and to maintain
adequate cash on hand; (4) the resolution of the uncertainty as to the amount of claims that will
be allowed and as to a number of disputed claims which are materially in excess of amounts
reflected in the accompanying financial statements; (5) the ability of the Company to confirm a
plan of reorganization under the Bankruptcy Code and obtain the required debt and equity
financing to emerge from bankruptcy protection; and (6) the Company’s ability to achieve
profitability. Management’s plans in regard to these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 1 to the financial statements, on March 18, 2003, the Bankruptcy Court
confirmed the Company’s Plan of Reorganization (the 2003 Plan) related to its prior Chapter 11
proceeding. The 2003 Plan became effective on March 31, 2003 and the Company emerged from
the prior Chapter 11 proceeding. In connection with its emergence from the prior Chapter 11
proceeding, the Company adopted fresh-start reporting pursuant to Statement of Position 90-7,
“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” as of March 31,
2003. As a result, the financial statements of the Successor Company are presented on a different
basis than those of the Predecessor Company and, therefore, are not comparable in all respects.
As discussed in Notes 2(m) and 9 to the financial statements, effective April 1, 2003, the
Company changed its method of accounting for stock-based compensation as described by
Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure”.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004, based on criteria established in “Internal Control-
Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 25, 2005 expressed an unqualified opinion
on management’s assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
McLean, Virginia
February 25, 2005
US Airways, Inc.
(Debtor-in-Possession)
Statements of Operations
(dollars in millions)
See accompanying Notes to the Financial Statements.
US Airways, Inc
(Debtor-in-Possession)
Balance Sheets
(dollars in millions)
See accompanying Notes to the Financial Statements.
US Airways, Inc.
(Debtor-in-Possession)
Statements of Cash Flows
(in millions)
See accompanying Notes to the Financial Statements
US Airways, Inc.
(Debtor-in-Possession)
Statements of Stockholder’s Equity (Deficit)
Three Years Ended December 31, 2004
(in millions)
(continued on following page)
US Airways, Inc.
(Debtor-in-Possession)
Statements of Stockholder’s Equity (Deficit)
Three Years Ended December 31, 2004
(in millions)
See accompanying Notes to the Financial Statements.
US Airways, Inc.
Notes to the Financial Statements
1. Chapter 11 Reorganization
Chapter 11 Proceedings
On September 12, 2004, US Airways, Inc. (US Airways or the Company), 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, Inc. (US Airways Group), US Airways’ parent company, 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. 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.
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 Note 4 for further discussion of the ATSB Loan and subsequent
amendments).
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 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 the three mainline 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. See Note 5(a) for further detail on the termination of US Airways’
three defined benefit plans. 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.
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 Note 4.
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 these constituencies or what type or amount of distributions,
if any, they would receive.
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.
Financial Statement Presentation
The accompanying financial statements have been prepared in accordance with AICPA
Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code” (SOP 90-7), and on a going-concern basis. SOP 90-7 requires that the financial
statements for periods following the Chapter 11 filing through emergence distinguish transactions
and events that are directly associated with the reorganization from the ongoing operations of the
business. Accordingly, revenues, expenses, realized gains and losses and provisions for losses
directly associated with the reorganization and restructuring of the business are reported separately
as Reorganization items, net in the Statements of Operations. Reorganization items, net as shown
on the Statement of Operations related to the current Chapter 11 proceedings as well as the Prior
Bankruptcy consist of the following (in millions):
(a) Reflects the discharge or reclassification of liabilities subject to compromise in the Prior Bankruptcy.
Most of 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.
(b) As of March 31, 2003, the Company restructured aircraft debt and lease agreements related to 119
aircraft in connection with its Chapter 11 reorganization including the conversion of 52 mortgages to
operating leases. The restructured terms generally provide for shorter lease periods and lower lease
rates.
(c) Effective March 31, 2003, US Airways terminated its qualified and nonqualified pilot defined benefit
pension plans. The Pension Benefit Guaranty Corporation (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 Company’s estimate of the PBGC claim.
(d) Damage and deficiency claims largely are a result of the Company’s election to either restructure,
abandon or reject aircraft debt and leases during the bankruptcy proceedings.
(e) As the result of the Company’s bankruptcy filing in September 2004, the Company failed to meet the
conditions precedent for continued financing of regional jets and was not able to take delivery of
scheduled aircraft and therefore incurred penalties of $7 million in the fourth quarter of 2004.
(f) Includes aircraft (seven A319s for 2003 and 34s, two B757-200s and one B737-400 for 2002)
that were legally abandoned as part of the Prior Bankruptcy. Related aircraft liabilities were adjusted
for each aircraft’s expected allowed collateral value.
(g) As a result of schedule reductions made in connection with Prior Bankruptcy, US Airways terminated
or 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.
SOP 90-7 also requires that prepetition liabilities subject to compromise should be distinguished
from both prepetition liabilities that are not subject to compromise and postpetition liabilities.
Liabilities subject to compromise are reported at the amounts expected to be allowed by the
Bankruptcy Court, even if they may be settled for lesser amounts. The following table summarizes
the components of Liabilities Subject to Compromise included in the Company’s Balance Sheets as
of December 31, 2004 (in millions):
2. Summary of Significant Accounting Policies
(a) Nature of operations
US Airways, a Delaware corporation, 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
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.
Most of the operations of the Company are in competitive markets. Competitors include other air
carriers along with other modes of transportation. Although a competitive strength in some regards,
the concentration of significant operations in the eastern U.S. results in US Airways being susceptible
to changes in certain regional conditions that may have an adverse effect on the Company’s financial
condition and results of operations.
Personnel costs represent the Company’s largest expense category. As of December 31, 2004, the
Company employed approximately 24,600 active full-time equivalent employees. Approximately 89%
of the Company’s active employees are covered by collective bargaining agreements with various
labor unions.
(b) Basis of presentation and use of estimates
The accompanying Financial Statements include the accounts of US Airways and US Airways
Investment Management Company, Inc. (USIM), a wholly owned subsidiary of US Airways through
June 30, 2002. Effective July 1, 2002, USIM and USLM Corporation, a wholly owned subsidiary
of US Airways Group, were merged into US Airways. US Airways is a wholly owned subsidiary of
US Airways Group. All significant intercompany accounts and transactions have been eliminated.
However, as discussed further in Note 12, US Airways’ financial results are significantly influenced
by related party transactions. Certain prior year amounts have been reclassified to conform with the
2004 presentation.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. The principal areas of
judgment relate to impairment of goodwill, impairment of long-lived assets and intangible assets,
passenger revenue recognition, frequent traveler program, pensions and other postretirement
benefits and fresh-start reporting.
As discussed above, SOP 90-7 requires that the financial statements for periods following the
Chapter 11 filing through emergence distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the business. The Balance Sheet as of
December 31, 2004 also distinguishes prepetition liabilities subject to compromise from both those
prepetition liabilities that are not subject to compromise and from postpetition liabilities. Liabilities
subject to compromise are reported at the amounts expected to be allowed, even if they may be
settled for lesser amounts. In addition, cash used for reorganization items is disclosed separately in
the Statements of Cash Flows.
In accordance with SOP 90-7 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 application of fresh-start reporting. Fresh-start reporting requires assets
and liabilities be adjusted to fair value on the emergence date. The term “cost” as used in the
Successor Company’s Notes to the Financial Statements is after giving effect to such adjustments.
See Note 13 for information related to fresh-start reporting.
The 2003 Plan constituted a separate plan of reorganization for US Airways and each of
US Airways Group’s other domestic subsidiaries (collectively with US Airways, 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.
Pursuant to a definitive agreement and in connection with emergence from the Prior Bankruptcy,
RSA invested $240 million in cash in Reorganized US Airways Group (the RSA Investment
Agreement) in exchange for approximately 36.2%, on a fully-diluted basis, of the equity in
Reorganized US Airways Group. As of March 31, 2003, in connection with its investment, RSA
was granted a voting interest of approximately 71.6% in Reorganized US Airways Group and
entitled to designate and vote to elect eight of 15 directors to Reorganized US Airways Group’s
Board of Directors.
(c) Cash equivalents and Short-term investments
Cash equivalents and Short-term investments consist primarily of cash in money market
securities of various banks, commercial paper and asset-backed securities of various financial
institutions, other companies with high credit ratings and securities backed by the U.S. Government.
All highly liquid investments purchased within three months of maturity are classified as Cash
equivalents. All other highly liquid investments are classified as Short-term investments.
US Airways classifies securities underlying its Cash equivalents and Short-term investments as
“available-for-sale” in accordance with Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). Cash equivalents
are stated at cost, which approximates fair value due to the highly liquid nature and short maturities
of the underlying securities. Short-term investments are stated at fair value with the offsetting
unrecognized gain or loss reflected as a separate component of Stockholder’s Equity (Deficit)
within Accumulated other comprehensive income (loss).
(d) Restricted cash
Restricted cash includes deposits in trust accounts primarily to fund certain taxes and fees and
collateralize letters of credit and workers’ compensation claims, credit card processing collateral and
fuel hedge collateral. Restricted cash is stated at cost which approximates fair value. See Note 3(b)
for further information.
(e) Materials and supplies, net
Inventories of materials and supplies are valued at the lower of cost or fair value. Costs are
determined using average costing methods and are charged to operations as consumed. An allowance
for obsolescence is provided for flight equipment expendable and repairable parts.
(f) Property and Equipment
Property and equipment is stated at cost or, if acquired under capital lease, at the lower of the
present value of minimum lease payments or fair value of the asset at the inception of the lease.
Interest expenses related to the acquisition of certain property and equipment are capitalized as an
additional cost of the asset or as a leasehold improvement if the asset is leased. Costs of major
improvements that enhance the usefulness of the asset are capitalized and depreciated over the
estimated useful life of the asset or the modifications, whichever is less.
Depreciation and amortization expense for principal asset classifications is calculated on a straight-
line basis to an estimated residual value. Depreciable lives are 25-30 years for operating flight
equipment, 30 years for facilities and 5-10 years for other ground property and equipment. Rotable
parts and assemblies are depreciated over the estimated fleet life of the associated aircraft, on a group
basis. The cost of property acquired under capital lease and improvements to leased assets are
depreciated over the term of the lease on a straight-line basis. When property and equipment is sold,
any gain or loss is recognized in the Other, net category of Other Income (Expense).
US Airways monitors the recoverability of the carrying value of its long-lived assets. Under the
provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (SFAS 144), US Airways recognizes an “impairment charge”
when the expected net undiscounted future cash flows from an asset’s use (including any proceeds
from disposition) are less than the asset’s carrying value and the asset’s carrying value exceeds its fair
value.
(g) Goodwill and Other intangibles, net
Goodwill is the cost in excess of fair value of the tangible and identifiable intangible assets of
businesses acquired. Excess reorganization value resulting from the application of SOP 90-7 upon
emergence from bankruptcy is also reported and accounted for as goodwill. The provisions of
Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS
142) require that a two-step impairment test be performed on goodwill. In the first step, the Company
compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit
exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and the
Company is not required to perform further testing. If the carrying value of the net assets of the
reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second
step in order to determine the implied fair value of the goodwill and compare it to the carrying value of
the goodwill. If the carrying value of goodwill exceeds its implied fair value, then the Company must
record an impairment loss equal to the difference. The Company tested its goodwill for impairment
during the fourth quarter of 2004, the third quarter of 2004 (as a result of its Chapter 11 filing), the
fourth quarter of 2003, the third quarter of 2002 (as a result of its prior Chapter 11 filing) and the
second quarter of 2002 (in connection with its transition to SFAS 142). The Company concluded in
each test that fair value of the reporting unit was in excess of the carrying value. In the third and
fourth quarters of 2004, the Company’s cash flows were prepared on a going-concern basis.
Additionally, the carrying value of the Company’s net assets was less than zero. The Company
assessed the fair value of the reporting unit considering both the income approach and market
approach for 2003. Under the market approach, the fair value of the reporting unit is based on quoted
market prices for US Airways Group common stock and the number of shares outstanding of
US Airways Group common stock. Under the income approach, the fair value of the reporting unit is
based on the present value of estimated future cash flows.
In connection with fresh-start reporting upon emergence from the Prior Bankruptcy, the Company
recognized route authorities and trademarks on its Consolidated Balance Sheets. As of December 31,
2004 and 2003, the Company had $32 million and $36 million of route authorities on the Balance
Sheets, respectively. The carrying value of trademarks was $33 million as of December 31, 2004 and
2003. Route authorities and trademarks are classified as indefinite lived assets under SFAS 142.
Indefinite-lived assets are not amortized but instead are reviewed for impairment annually and more
frequently if events or circumstances indicate that the asset may be impaired. In the second quarter of
2004, the Company wrote off an indefinite lived foreign slot.
SFAS 142 requires that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and reviewed for impairments in
accordance with SFAS 144. The following table provides information relating to the Company’s
intangible assets subject to amortization as of December 31, 2004 and 2003 (in millions):
The intangible assets subject to amortization generally are amortized over 25 years for airport
take-off and landing slots, over the term of the lease for airport gate leasehold rights and over five
years for capitalized software costs on a straight-line basis and are included in Depreciation and
amortization on the Statements of Operations. As a result of the depressed revenue environment in
the airline industry, during the fourth quarter of 2002, the Company conducted an impairment
analysis of its airport take-off and landing slots and airport gate leasehold rights and determined that
certain airport gate leasehold rights were impaired. The Company estimated fair market value using
third-party appraisals. This culminated in an impairment charge of $21 million reflected in Special
items on the Statement of Operations. For the year ended December 31, 2004, the nine months
ended December 31, 2003, the three months ended March 31, 2003, and the year ended
December 31, 2002, the Company recorded amortization expense of $35 million, $43 million, $11
million, and $51 million (exclusive of the impairment charge discussed above), respectively, related
to its intangible assets. The Company expects to record annual amortization expense of $26 million
in 2005; $24 million in 2006; $22 million in 2007; $21 million in 2008 and $19 million in 2009
related to these intangible assets.
(h) Other assets, net
Other assets, net consist primarily of deposits held by vendors, unamortized debt issuance cost,
and long-term investments.
(i) Frequent traveler program
US Airways accrues the estimated incremental cost of travel awards earned by participants in its
Dividend Miles frequent traveler program when the requisite mileage award levels are achieved.
For travel awards on partner airlines, the liability is based on the average contractual amount to be
paid to the other airline per redemption. US Airways also sells mileage credits to certain
participating airlines and marketing partners. US Airways defers the portion of revenue attributable
to future transportation and recognizes it as passenger transportation revenue when the service is
provided. The remaining portion of sales proceeds is recognized immediately as a component of
Other operating revenues.
(j) Derivative financial instruments
Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (SFAS 133) requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If
the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a hedging derivative’s change in fair value is immediately recognized in
earnings.
The Company’s results of operations can be significantly impacted by changes in the price of
aircraft fuel. To manage this risk, the Company periodically enters into fixed price swap agreements,
collar structures and other similar instruments. These agreements substantially fix the Company’s
cash flows related to fuel expense. Because jet fuel derivatives are significantly less liquid and
relatively more expensive, the Company primarily uses heating oil and crude oil contracts to manage
its exposure to the movement of aircraft fuel prices. The changes in the market value of the heating oil
and crude oil contracts have a high correlation to changes in aircraft fuel prices. The agreements
generally qualify as cash flow hedges under SFAS 133. The Company does not purchase or hold any
derivative financial instruments for trading purposes.
The Company records the fair market value of its fuel hedge contracts on its Balance Sheets. On an
ongoing basis, the Company adjusts its balance sheet to reflect the current fair market value of its fuel
hedge contracts. The related gains or losses on these contracts are deferred in accumulated other
comprehensive income until the hedged fuel is recognized into earnings. However, to the extent that
the absolute change in the value of the fuel hedge contract exceeds the absolute change in the value of
the aircraft fuel purchase being hedged, the difference is considered “ineffective” and is immediately
recognized in earnings as either gain or loss. The amount recognized in earnings may reverse in
following periods if the relationship reverses. The fuel hedge contracts’ gains and losses including
those classified as “ineffective” are recognized to Aviation fuel on the Company’s Statements of
Operations, except for those related to hedging purchases of aviation fuel under its capacity purchase
agreements, which are recorded to US Airways Express capacity purchases.
The Company holds stock options in Sabre Holding Corporation (Sabre) and warrants in a number
of e-commerce companies as a result of service agreements with them. On an ongoing basis, the
Company adjusts its balance sheet to reflect changes in the current fair market value of the stock
options and warrants to Other, net on its Statements of Operations. See Note 3 for more information
on the Company’s derivative financial instruments.
(k) Deferred gains and credits, net
In connection with fresh-start reporting upon emergence from the Prior Bankruptcy, aircraft
operating leases were adjusted to fair value. The present value of the difference between the
contractual lease rates and the fair market value rates was recorded as a deferred credit in the
accompanying Balance Sheet. The deferred credit is decreased on a straight-line basis as a
reduction in aircraft rent expense over the applicable lease periods, generally three to 21 years. In
periods prior to the adoption of fresh-start reporting, gains on aircraft sale and leaseback
transactions were deferred and amortized over the terms of the leases as a reduction of the related
aircraft rent expense.
The gain related to the exercise of Sabre options is deferred and amortized over the contract
period as a reduction to Other operating expenses. See Note 3 for more information concerning the
Sabre options.
(l) Passenger transportation revenues
Revenue is recognized when the transportation service is rendered. Passenger ticket sales are
recorded as a liability (Traffic balances payable and unused tickets) and subsequently relieved either
through carriage of the passenger, refund to the passenger, expiration of the passenger ticket or
billing from another air carrier which provided the service. Due to various factors including
refunds, exchanges, unused tickets and transactions involving other carriers, certain amounts are
recorded based on estimates. These estimates are based upon historical experience and have been
consistently applied to record revenue. The Company routinely performs evaluations of the liability,
which may result in adjustments that are recognized as a component of Passenger transportation
revenue. Actual refund, exchange and expiration activity may vary from estimated amounts. Except
when noted, such differences have historically not been material. During the fourth quarter of 2003,
a $34 million favorable adjustment was made to Passenger transportation revenue to reflect an
increase in expired tickets. This adjustment was attributable to the Company experiencing changes
in customer travel patterns resulting from various factors, including new airport security measures,
concerns about further terrorist attacks and an uncertain economy, which resulted in more forfeited
tickets and fewer refunds.
US Airways purchases capacity (available seat miles) generated by US Airways Group’s wholly
owned regional air carriers and the capacity of Mesa Airlines, Inc. (Mesa), Chautauqua Airlines,
Inc. (Chautauqua) and Trans States Airlines, Inc. (Trans States) in certain markets. US Airways also
purchased the capacity of Midway Airlines Corporation (Midway) prior to Midway’s liquidation
during the fourth quarter of 2003. Mesa, Chautauqua and Trans States operate regional jet aircraft in
these markets as part of US Airways Express. US Airways recognizes revenues related to these
arrangements as Passenger transportation revenue when transportation service is rendered by these
affiliates or the related tickets otherwise expire. Liabilities related to tickets sold for travel on these
air carriers are also included in US Airways’ Traffic balances payable and unused tickets and are
subsequently relieved in the same manner as described above.
See Note 2(i) above for information on the sale of Dividend Miles that are recognized as a
component of Passenger transportation revenue.
(m) Stock-based compensation
The Predecessor Company applied the provisions of Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (APB 25) and related interpretations to account for
awards of stock-based compensation granted to employees. Upon emergence, the Successor Company
adopted the fair value method of recording stock-based employee compensation contained in
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”
(SFAS 123) and accounted for this change in accounting principle using the “prospective method” as
described by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123” (SFAS 148).
Accordingly, the fair value of all Successor Company stock option and warrant grants, as determined
on the date of grant, will be amortized as compensation expense in the Statements of Operations over
the vesting period.
The following table illustrates the effect on net income (loss) as if the fair value based recognition
provisions of SFAS 123 had been applied to all outstanding and unvested stock option awards in each
period presented for the Predecessor Company (in millions).
In order to calculate the pro forma stock-based compensation shown above, US Airways used the
Black-Scholes stock option pricing model with the following weighted-average assumptions for the
years ended December 31, 2002: stock volatility of 80.1%; risk-free interest rates of 4.2%; expected
stock option lives of four years; and no dividend yield. There were no stock options awarded in the
three months ended March 31, 2003. See Note 9 for more information on stock-based
compensation.
(n) Maintenance and repair costs
Maintenance and repair costs for owned and leased flight equipment are charged to operating
expense as incurred.
(o) Selling expenses
Selling expenses include commissions, credit card fees, computerized reservations systems fees
and advertising and promotional expenses. Advertising and promotional expenses are expensed
when incurred. Advertising and promotional expenses for the year ended December 31, 2004, the
nine months ended December 31, 2003, three months ended March 31, 2003, and the year ended
December 31, 2002 were $27 million, $15 million, $5 million and $30 million, respectively.
(p) Recent Accounting Pronouncements
In September 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) Emerging Issues Task Force (EITF) Issue 03-1-1, Effective Date of Paragraphs 10-
20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,” which delays the effective date for the recognition and
measurement guidance in EITF Issue No. 03-1. In addition, the FASB has issued a proposed FSP to
consider whether further application guidance is necessary for securities analyzed for impairment
under EITF Issue No. 03-1. The Company continues to assess the potential impact that the adoption
of the proposed FSP could have on its financial statements.
In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
151, “Inventory Costs” (SFAS 151), which clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material. SFAS 151 will be effective for
inventory costs incurred beginning January 1, 2006. The Company does not believe the adoption of
SFAS 151 will have a material impact on its financial statements.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”
(SFAS 153), which eliminates the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS 153 will be effective for nonmonetary asset exchanges occurring after
July 1, 2005. The Company is currently evaluating the impact of SFAS 153 on its financial
statements.
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” (SFAS 123(R)),
which establishes standards for transactions in which an entity exchanges its equity instruments for
goods or services. This standard requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of the
award. This eliminates the exception to account for such awards using the intrinsic method
previously allowable under Accounting Principle Board Opinion No. 25. SFAS 123(R) will be
effective for the Company’s interim reporting period beginning July 1, 2005. The Company
previously adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based
Compensation,” upon emergence from the Prior Bankruptcy on March 31, 2003. Accordingly, the
Company believes SFAS 123(R) will not have a material impact on its financial statements.
3. Financial Instruments
(a) General
On January 1, 1998, as part of a comprehensive information technology services agreement with
Sabre, US Airways was granted two tranches of stock options (SHC Stock Options) to acquire up to
6,000,000 shares of Class A Common Stock, $.01 par value, of Sabre Holdings Corporation (SHC
Common Stock), Sabre’s parent company. Each tranche included 3,000,000 stock options. In
December 1999, US Airways exercised the first tranche of stock options at an exercise price of $27
per option and received proceeds of $81 million in January 2000 in lieu of receiving SHC Common
Stock. Realized gains resulting from the exercise of Sabre options are subject to a clawback
provision. Under the clawback provision, if US Airways elects to terminate its information
technology service agreement with Sabre it will be required to pay Sabre an amount equal to the
gain multiplied by the ratio of the remaining months in the contract period over 180 months. The
deferred gain from the 1999 exercise is amortized on a straight-line basis over a contractually
determined period ending December 2012. In February 2000, SHC declared a cash dividend
resulting in a dilution adjustment to the terms of the second tranche. The adjusted terms of the
second tranche include stock options to acquire 3,406,914 shares of SHC Common Stock at an
exercise price of $23.78 subject to an $111.83 per share cap on the fair market value of the
underlying common stock. These options are exercisable during a ten-year period beginning January
2, 2003.
The Company utilizes fixed price swap agreements and other similar instruments to manage its
exposure related to jet fuel price changes. For the year ended December 31, 2004, the nine months
ended 2003, and the three months ended March 31, 2003, the Company recognized gains of
approximately $130 million, $14 million, and $27 million, respectively, related to its fuel hedging
activities. During the three months ended March 31, 2003, the gain included $4 million related to
hedge ineffectiveness. During 2002, the Company recognized gains of approximately $18 million
including a gain of $1 million related to hedge ineffectiveness. These recognized gains were primarily
included in Aviation fuel on the Company’s Statements of Operations. As of December 31, 2004, the
Company had no open fuel hedge positions in place, but will recognize approximately $2 million per
month for previously liquidated hedges representing approximately 4% of its 2005 anticipated jet fuel
requirements. The Company had $22 million of unrealized gains related to fuel hedge positions
recorded in Accumulated other comprehensive loss, net of income tax effect on its Balance Sheet as of
December 31, 2004. These gains will be realized in the 2005 results.
(b) Fair value of financial instruments
In accordance with the provisions of SFAS 115, the fair values for US Airways’ short-term
investments are determined based upon quoted market prices. Cash equivalents and restricted cash are
carried at cost which approximates fair value. US Airways estimated the fair values of its note
receivable and long-term debt by discounting expected future cash flows using current rates offered to
US Airways for notes receivable and debt with similar maturities. The estimated fair value of the
remaining SHC Stock Options (including the clawback provision) was calculated using the Black-
Scholes stock option pricing model. The fair values of the fuel contracts are obtained from dealer
quotes. These values represent the estimated amount US Airways would receive or pay to terminate
such agreements as of the valuation date.
US Airways holds warrants in a number of e-commerce companies as a result of entering into
service agreements with them. The carrying amount of the warrants is equal to the estimated fair
value, which is calculated using the Black-Scholes stock option pricing model. The carrying
amount of these warrants was not material as of December 31, 2004 and 2003.
The estimated fair values of US Airways’ financial instruments, none of which are held for trading
purposes, are summarized as follows (in millions; brackets denote a liability):
(a) Classified as ‘available for sale’ in accordance with SFAS 115. See also Note 2(c).
(b) Carrying amount included in Receivables, net on the Company’s Balance Sheets, except for the noncurrent portion
($3 million at December 31, 2003) which is included in Other assets, net.
(c) Carrying amount included in Other assets, net on the Company’s Balance Sheets.
(d) Includes Long-term debt classified as subject to compromise as of December 31, 2004. See also Notes 1 and 4.
(e) Carrying amount included in Prepaid expenses and other on the Company’s Balance Sheets.
(f) As a result of the Company’s Chapter 11 filing, the fair value of the debt outstanding could not be reasonably
determined as of December 31, 2004.
4. Debt, Including Capital Lease Obligations
Details of the Company’s debt are as follows (in millions):
(1) December 31, 2004 obligations were classified as subject to compromise. See Note 1 for further discussion.
(2) For the year ended December 31, 2004 and the nine months ended December 31, 2003, $12 million and $9 million of debt discount was amortized and included in interest expense on the Statement of Operations.
Maturities of debt and debt under capital leases for the next five years, including the classification
of the ATSB Loan as current and without regard to liabilities subject to compromise, are as follows (in
millions):
ATSB Loan
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) 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.
The maturity date of the ATSB Loan is October 1, 2009. The ATSB Loan is subject to
acceleration upon the occurrence of an event of default, after expiration of applicable notice and/or
cure periods. The ATSB Loan contains certain mandatory prepayment events including, among
other things, (i) the occurrence of certain asset sales and the issuance of certain debt or equity
securities and (ii) the value of the collateral pledged in respect of the ATSB Loan decreasing
below specified coverage levels.
The Company’s Chapter 11 filing in September 2004, was an event of default under the terms of
the ATSB Loan. The Company has entered into an agreement, which has been subsequently
extended, with the approval of the Bankruptcy Court, for the continued use of the cash securing the
ATSB Loan (Cash Collateral Agreement). The initial agreement was extended until January 15,
2005 and the current agreement, subject to certain conditions and limitations, will expire on June
30, 2005. Under the Cash Collateral Agreement, the Company is required to maintain a certain
amount of unrestricted cash 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. As of December 31, 2004, the Company
was in compliance with the Cash Collateral Agreement; therefore, 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. In light of rising fuel prices
and continued downward pressure on fares across the industry, there can be no assurance that the
Company will be able to comply with the Cash Collateral Agreement. If the Company is unable to
meet the aforementioned financial covenants, as amended, it would be in default under the ATSB
Loan and the ATSB would have the right to accelerate the ATSB Loan and exercise other remedies
against US Airways. Such acceleration would have a material adverse effect on the Company’s
future liquidity, results of operation and financial condition.
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. The effective
interest rate of the ATSB Loan was 10.91% for the year ended December 31, 2004 and 6.0% for the
nine months ended December 31, 2003.
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).
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.
In connection with the ATSB Guarantee, the ATSB received 7,635,000 warrants that enable
it to purchase shares of Reorganized US Airways Group’s Class A Common Stock at $7.42 per share.
The value attributed to the warrants at issuance is being amortized over the term of the warrants.
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 CRJ200 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 of 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 and cross-
defaulted with all other obligations owned by any Debtor to General Electric Credit Corporation
(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 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 the
holders’ election, into shares of common stock of the reorganized Company (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 the
NASDAQ Stock Market 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.
Interest rates on $1.63 billion and $1.53 billion principal amount of long-term debt as of
December 31, 2004 and 2003, respectively, are subject to adjustment to reflect changes in floating
interest rates. As of December 31, 2004, the weighted average effective interest rate was 7.9% for
the Equipment financing agreements.
5. Employee Pension and Benefit Plans
Substantially all of US Airways’ employees meeting certain service and other requirements are
eligible to participate in various pension, medical, dental, life insurance, disability and survivorship
plans.
(a) Defined benefit and other postretirement benefit plans
US Airways sponsors several qualified defined benefit plans and other postretirement benefit
plans for certain employees. Effective March 31, 2003, US Airways terminated its qualified and
nonqualified pilot defined benefit pension plans. The PBGC was appointed trustee of the qualified
plan effective with the termination. Liabilities related to pension plans covering foreign employees
are calculated in accordance with generally accepted accounting principles and funded in
accordance with the laws of the individual country.
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 Pension Benefit Guaranty
Corporation (PBGC) and US Airways. 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.
During hearings in late 2004 and January 2005, the Bankruptcy Court approved various
settlement agreements between US Airways and its unions, and between US Airways and the court-
appointed Section 1114 Committee (representing retirees not represented by the unions) to begin the
significant curtailments of postretirement benefits.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Medicare Prescription Drug Act) became law in the United States. The Medicare
Prescription Drug Act introduces a prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least
actuarially equivalent to the Medicare benefit. The Company elected to recognize the effects of the
Medicare Prescription Drug Act in the quarter ended June 30, 2004, as permitted by FASB Staff
Position FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003.”
The recognition of this subsidy resulted in a reduction in expense of $20 million for the year
ended December 31, 2004 and a $198 million actuarial gain that will be amortized over the
remaining period to expected retirement. Significant assumptions included in the re-measurement
of the accumulated postretirement benefit obligation are a 6.25% discount rate and a reduction in
retiree participation in the Company-sponsored plan as certain defined drug benefit caps make the
plan more costly to retirees than Medicare.
The following table sets forth changes in the fair value of plan assets, benefit obligations and the
funded status of the plans as of the measurement date of September 30, 2004 and 2003, in addition
to the amounts recognized in US Airways’ Balance Sheets as of December 31, 2004, December 31,
2003 and March 31, 2003 (in millions):
Components of the amounts recognized in US Airways’ Balance Sheets (in millions):
(1) For plans with accumulated benefit obligations in excess of plan assets, the aggregate projected benefit obligations,
accumulated benefit obligations and plan assets were $2.70 billion, $2.68 billion and $1.72 billion, respectively, as
of September 30, 2004 and $2.55 billion, $2.53 billion and $1.63 billion, respectively, as of September 30, 2003.
(2) In 2003, US Airways recognized curtailments and settlements related to the termination of certain defined
benefit pension plans. These curtailments and settlements were recognized in accordance with Statement of
Financial Accounting Standards No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits.”
The accumulated benefit obligation for defined benefit pension plans was $2.68 billion and $2.53
billion as of September 30, 2004 and 2003.
The following table presents the weighted average assumptions used to determine benefit
obligations:
US Airways discounted both its future pension obligations and its other postretirement benefit
obligations using a rate of 6.00% at September 30, 2004 and 2003. The assumed discount rate is
based on the current rates earned on long-term bonds that receive one of the two highest ratings
given by a recognized rating agency.
The assumed health care cost trend rates are 9% in 2005 and 2006, decreasing to 5% in 2010,
and thereafter. This compares to a health care cost trend rate of 9% in 2004 decreasing to 5% in
2009 and thereafter. The assumed health care cost trend rates have a significant effect on amounts
reported for retiree health care plans. A one-percentage point change in the health care cost trend
rates would have the following effects on Other Postretirement Benefits as of September 30, 2004
(in millions):
Weighted average assumptions used to determine net periodic benefit cost were as follows:
Components of the net and total periodic cost for Pension Benefits (in millions):
Components of the net and total periodic cost for Other Postretirement Benefits (in millions):
The change in the additional minimum pension liability included in Other comprehensive
income (loss) was $(34) million, $(86) million, and $880 million for the year ended December 31,
2004, nine months ended December 31, 2003, and the three months ended March 31, 2003,
respectively. See Note 8 for a reconciliation of the components of Other comprehensive income.
Because US Airways does not expect to make further contributions to the three mainline defined
benefit pension plans, future contributions to the remaining plans are expected to be immaterial.
US Airways expects to contribute $63 million to its other postretirement plans in 2005. Prior to the
termination of the US Airways defined benefit plans in January 2005, the following benefits, which
reflect expected future service, as appropriate, were expected to be paid from the plans (in millions):
US Airways assumed that its pension plans’ assets would generate a long-term rate of return of
7.33% at September 30, 2004. This rate is equivalent to the assumed rate of 8.00% used at
September 30, 2003. The expected long-term rate of return assumption is developed by evaluating
input from the plan’s investment consultants, including their review of asset class return
expectations and long-term inflation assumptions.
The weighted average asset allocations at September 30, 2004 and 2003, by asset category are as
follows:
US Airways targeted asset allocation is approximately 46% equity securities, 45% debt
securities, and 9% real estate. US Airways believes that its long-term asset allocation on average
will approximate the targeted allocation. US Airways regularly reviews its actual asset allocation
and periodically rebalances its investments to its targeted allocation when considered appropriate.
(b) Defined contribution pension plans
US Airways sponsors several defined contribution pension plans for certain employees.
US Airways makes cash contributions to certain plans based on the employee’s age, compensation and
elected contributions. US Airways also participates in a multi-employer plan for certain employees.
Cash contributions are a function of hours worked times a negotiated contribution rate. Prior to the
reductions implemented in connection with its restructured labor agreements and non-union wage and
benefits reductions in late 2004, the Company’s contributions ranged up to 12% of the employee’s
compensation. Expenses related to these plans, excluding expenses related to the US Airways
Employee Stock Ownership Plan (ESOP) and the US Airways pilot defined contribution plans (see
below), were approximately $ 49 million, $38 million, $12 million, and $64 million for the year ended
December 31, 2004, the nine months ended December 31, 2003, three months ended March 31, 2003
and the year ended December 31, 2002, respectively. See Note 5(d) for information related to
US Airways’ ESOP.
In connection with its previous reorganization under Chapter 11 of the Bankruptcy Code,
US Airways terminated the Retirement Income Plan for Pilots of US Airways, Inc. and the related
nonqualified pilot plan effective March 31, 2003. US Airways implemented a qualified and
nonqualified defined contribution plan for pilots effective April 1, 2003. The defined contribution
amount was individually determined based on a target normal retirement date balance of
approximately $1 million for a career US Airways pilot. The target balance included the estimated
value of other retirement benefits including, but not limited to, the estimated benefit pilots are
expected to receive from the PBGC, the trustee for the terminated pilot defined benefit plan. Effective
October 15, 2004, each pilot’s contribution rate became the lessor of the original rate or 10% of
eligible compensation. Expenses for this plan were $134 million for each of the year ended December
31, 2004 and the nine months ended December 31, 2003.
(c) Postemployment benefits
US Airways provides certain postemployment benefits to its employees. Such benefits include
disability-related and workers’ compensation benefits for certain employees. US Airways accrues
for the cost of such benefit expenses once an appropriate triggering event has occurred.
(d) Employee stock ownership plan (ESOP)
In August 1989, US Airways established an ESOP. US Airways Group sold 2,200,000 shares of
its common stock to an Employee Stock Ownership Trust (the Trust) to hold on behalf of
US Airways’ employees, exclusive of officers, in accordance with the terms of the Trust and the
ESOP. The trustee placed those shares in a suspense account pending their release and allocation to
employees. US Airways provided financing to the Trust in the form of a 9 3/4% loan for $111
million for its purchase of shares and US Airways contributed an additional $2 million to the Trust.
US Airways made a yearly contribution to the Trust sufficient to cover the Trust’s debt service
requirement. The contributions were made in amounts equal to the periodic loan payments as they
came due, less dividends available for loan payment. Since US Airways Group did not pay
dividends on any shares held by the Trust for the three months ended March 31, 2003 or the year
ended December 31, 2002, the Trust did not utilize dividends to service its debt during those
periods. The initial maturity of the loan was 30 years. As the loan was repaid over time, the trustee
systematically released shares of the common stock from the suspense account and allocated them
to participating employees. Each participant’s allocation was based on the participant’s
compensation, the total compensation of all ESOP participants and the total number of shares being
released. For each year after 1989, a minimum of 71,933 shares were released from the suspense
account and allocated to participant accounts. Annual contributions made by US Airways, and
therefore loan repayments made by the Trust, were $9 million in each of 2003 and 2002. The
interest portion of these contributions was $7 million in each of 2003 and 2002. US Airways
recognized compensation expense related to the ESOP of $4 million in 2002 based on shares
allocated to employees (the “shares allocated” method). In June 2002, US Airways Group engaged
Aon Fiduciary Counselors (Aon) as an independent fiduciary of the ESOP, with the authority to
make all decisions related to sale of the stock held in the ESOP. In September 2002, Aon sold all
shares that were allocated to participant accounts. All unallocated shares in the ESOP were
cancelled in accordance with the Company’s 2003 Plan. As a result, the Company recognized a
charge of $50 million in 2002 representing the remaining unamortized deferred compensation to
Reorganization items, net on the Company’s Statement of Operations. Effective March 31, 2003,
the ESOP was terminated as provided in the 2003 Plan. The note payable to US Airways was
cancelled under the provisions of the 2003 Plan. Participant accounts were distributed by
December 31, 2003.
(e) Profit sharing plans
Under the Defined Contribution Retirement Program, US Airways makes additional
contributions to participant accounts for certain employees when US Airways Group achieves
certain prescribed pre-tax margin levels. US Airways did not make any profit sharing contributions
relating to 2004, 2003 or 2002.
6. Income Taxes
US Airways accounts for income taxes according to the provisions in Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes.” US Airways files a consolidated
federal income tax return with its parent company, US Airways Group. US Airways Group and its
wholly owned subsidiaries allocate tax and tax items, such as net operating losses (NOL) and net
tax credits, between members of the group based on their proportion of taxable income and other
items. Accordingly, US Airways’ tax expense is based on its taxable income, taking into
consideration it’s allocated tax loss carryforwards/carrybacks and tax credit carryforwards.
In assessing the realizability of the deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will be realized. The Company
recorded a valuation allowance against its net deferred tax asset. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income (including reversals of
deferred tax liabilities) during the periods in which those temporary differences will become
deductible.
The components of the provision (credit) for income taxes are as follows (in millions):
The significant components of the deferred income tax provision (credit) for the year ended
December 31, 2004, the nine months ended December 31, 2003, the three months ended March 31,
2003 and the year ended December 31, 2002 are as follows (in millions):
A reconciliation of taxes computed at the statutory federal tax rate on income (loss) before
income taxes to the provision (credit) for income taxes is provided below (in millions):
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and liabilities as of December 31, 2004 and 2003 are as follows (in millions):
Included in the employee benefit deferred tax assets at December 31, 2004 and 2003, among other
items, are $661 million and $630 million, respectively, related to obligations of postretirement medical
benefits.
As of December 31, 2004, US Airways had a $745 million federal net operating loss carryforward
expiring 2024, $25 million of alternative minimum tax credits which do not expire, and $1.8 billion of
state net operating loss carryforwards primarily expiring from 2006 to 2024. US Airways filed for
bankruptcy protection on September 12, 2004. As a result, the tax attributes are expected to be
substantially reduced or totally eliminated by cancellation of debt income that will result from the
bankruptcy proceedings. Additionally, US Airways Group may have a change of ownership upon
emergence from bankruptcy, in which case Internal Revenue Code Section 382 would substantially
limit the annual usage of any remaining tax attributes that were generated prior to the change in
ownership.
At December 31, 2003, the federal and state net operating loss carryforwards were reduced by
discharge of indebtedness income of $1.2 billion that resulted from the August 2002 bankruptcy
proceedings. In addition, an Internal Revenue Code Section 382 change of ownership occurred for
US Airways Group upon emergence from the Prior Bankruptcy and issuance of new common stock to
creditors. Section 382 substantially limited the annual usage of tax attributes that were generated prior
to the change in ownership.
The federal income tax returns of the Company through 2002 have been examined and settled with
the Internal Revenue Service. The Company is not currently under examination.
The following table is a summary of pretax book income and taxable income prior to net operating
loss carryforwards for the year ended December 31, 2004, the nine months ended December 31, 2003,
the three months ended March 31, 2003 and the year ended December 31, 2002 (in millions):
The reason for significant differences between taxable and pretax book income primarily relates
to discharge of indebtedness income, bankruptcy-related charges, employee pension and
postretirement benefit costs, employee-related accruals and leasing transactions.
7. Commitments and Contingencies
(a) Commitments to purchase flight equipment
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.
In December 2004, the Company reached aircraft leasing and financing agreements with
Embraer and Bombardier, which were approved by the Bankruptcy Court in January 2005.
Pursuant to the agreement reached with Embraer, the Company purchased and took delivery of three
ERJ-170 aircraft in January 2005 and committed to purchase and take delivery of three additional
ERJ-170 aircraft by March 31, 2005. The purchase of the three ERJ-170s delivered in January 2005
was financed by Embraer through a mortgage loan facility and the application of $17 million of
existing purchase deposits held by Embraer. Additionally, $12 million of purchase deposits held by
Embraer will be used to fund an Embraer loan reserve. Embraer will apply the reserve funds in the
amounts and on the dates as and when payments are due under the Embraer loans during the period
from October 1, 2004 through July 31, 2005 in full satisfaction of the Company’s payment
obligation with respect to such Embraer loans during such period. Upon delivery of the first three
ERJ-170s, which occurred in January 2005, unless the Company assumes the Embraer aircraft
purchase agreement pursuant to Section 365 of the Bankruptcy Code, no further obligations arise
on the part of the Company or Embraer with respect to the purchase and delivery of any aircraft,
other than those obligations that arise from or are related to the purchase and delivery of the final
three ERJ-170s in March 2005. Embraer and the Company have agreed to negotiate a new delivery
schedule upon the Company’s assumption of the Embraer aircraft purchase agreement or upon the
occurrence of certain other events.
In the event that the Company fails to take delivery by March 31, 2005 of the remaining three
ERJ-170 aircraft, damages will accrue on account of the Company’s failure to take delivery of such
aircraft from and after April 1, 2005 at the rate of $162,795 per month per aircraft until the later of
(i) 30 days after the Company emerges from Chapter 11 and (ii) July 31, 2005, whereupon
Embraer’s obligation to deliver such aircraft will terminate and its damages with respect to such
undelivered aircraft may be as much as $10 million (rather than at the rate of $162,795 per month),
with Embraer having the right to apply any remaining purchase deposits against Embraer’s
aggregate damages.
Under the agreement reached with Bombardier, the Company acquired three new CRJ-700
aircraft in January 2005. The purchase was financed through the application of $28 million of
existing pre-delivery purchase deposits held by Bombardier, $2 million in cash and a financed lease
facility with DVB Bank. Additionally $4 million of existing purchase deposits held by Bombardier
were used to satisfy existing defaults and cure payments. So long as the Company continues to
operate under the protection of Chapter 11 in compliance with the Bankruptcy Code, no obligations
shall arise on the part of the Company or Bombardier with respect to the purchase and delivery of
any aircraft.
(b) Leases
US Airways leases certain aircraft engines and ground equipment, in addition to the majority of its
ground facilities. Ground facilities include executive offices, maintenance facilities and ticket and
administrative offices. Public airports are utilized for flight operations under lease arrangements with
the municipalities or agencies owning or controlling such airports. Substantially all leases provide that
the lessee must pay taxes, maintenance, insurance and certain other operating expenses applicable to
the leased property. Some leases also include renewal and purchase options. US Airways subleases
certain leased aircraft and ground facilities under noncancelable operating leases expiring in various
years through the year 2023.
The following amounts related to capital leases are included in Property and equipment as of
December 31, 2004 and 2003 (in millions):
As of December 31, 2004, obligations under capital and noncancelable operating leases for future
minimum lease payments were as follows (in millions):
For the year ended December 31, 2004, the nine months ended December 31, 2003, the three
months ended March 31, 2003 and the year ended December 31, 2002, rental expense under
operating leases was $758 million, $565 million, $185 million, and $792 million, respectively.
US Airways also leases certain owned flight equipment to both third and related parties (see
Note 12(b)) under noncancelable operating leases that expire in the years 2005 through 2023. The
future minimum rental receipts associated with these leases are: $45 million in 2005, $43 million in
2006, $42 million in each of 2007 through 2009 and $414 million thereafter.
The following amounts relate to aircraft leased under such agreements as reflected in flight
equipment as of December 31, 2004 and 2003 (in millions):
(c) Regional jet capacity purchase agreements
US Airways has entered into capacity purchase agreements with certain regional jet operators.
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 the regional 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 future
minimum noncancelable commitments under the regional jet capacity purchase agreements are $257
million in 2005, $262 million in 2006, $268 million in 2007 and $266 million in 2008, $202 million
in 2009 and $266 million thereafter.
(d) 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 the 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 Airlines, Inc. (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 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
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 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 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.
(e) Guarantees
US Airways guarantees the payment of principal and interest on certain special facility revenue
bonds issued by municipalities to build or improve certain airport and maintenance facilities which
are leased to US Airways. Under such leases, US Airways is required to make rental payments
through 2023, sufficient to pay maturing principal and interest payments on the related bonds. As of
December 31, 2004, the principal amount outstanding of these bonds was $79 million.
The Company enters into real estate leases in substantially all cities that it serves. It is common
in such commercial lease transactions for the Company as the lessee to agree to indemnify the lessor
and other related third parties for tort liabilities that arise out of or relate to the Company’s use or
occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising
from the negligence of the indemnified parties, but usually excludes any liabilities caused by their
gross negligence or willful misconduct. Additionally, the Company typically indemnifies such
parties for any environmental liability that arises out of or relates to its use of the leased premises.
In aircraft financing agreements, the Company typically indemnifies the financing parties,
trustees acting on their behalf and other related parties against liabilities that arise from the
manufacture, design, ownership, financing, use, operation and maintenance of the aircraft and for
tort liability, whether or not these liabilities arise out of or relate to the negligence of these
indemnified parties, except for their gross negligence or willful misconduct. In aircraft financing
transactions structured as leveraged leases, the Company typically indemnifies the lessor with
respect to adverse changes in U.S. tax laws.
The Company expects that it would be covered by insurance (subject to deductibles) for most
tort liabilities and related indemnities described above with respect to real estate leases and aircraft
it operates. The Company cannot estimate the potential amount of future payments under the
foregoing indemnities and guarantees.
(f) Concentration of credit risk
US Airways invests available cash in money market securities of various banks, commercial
paper and asset-backed securities of various financial institutions, other companies with high credit
ratings and securities backed by the U.S. Government.
As of December 31, 2004, most of US Airways’ receivables related to tickets sold to individual
passengers through the use of major credit cards or to tickets sold by other airlines and used by
passengers on US Airways or its regional airline affiliates. These receivables are short-term, mostly
being settled within seven days after sale. Bad debt losses, which have been minimal in the past, have
been considered in establishing allowances for doubtful accounts. US Airways does not believe it is
subject to any significant concentration of credit risk.
8. Accumulated other comprehensive income (loss), net of income tax effect
Comprehensive income encompasses net income and “other comprehensive income,” which
includes all other non-owner transactions and events that change stockholders’ equity. US Airways’
other comprehensive income includes unrealized gains (losses) on available-for-sale securities,
certain changes in the fair value of certain derivative instruments and an adjustment for minimum
pension liability, each shown net of income tax effects.
As presented in the accompanying Statements of Stockholders’ Equity (Deficit), US Airways
recognized comprehensive loss of $621 million, including a net loss of $578 million and other
comprehensive loss of $43 million, for the year ended December 31, 2004. For the nine months
ended December 31, 2003 US Airways recognized a comprehensive loss of $215 million including
a net loss of $160 million and other comprehensive loss of $55 million. US Airways recognized
comprehensive income of $2.48 billion, including net income of $1.61 billion and other
comprehensive income of $870 million, for the three months ended March 31, 2003. For the year
ended December 31, 2002, US Airways recognized a comprehensive loss of $2.38 billion, including a
net loss of $1.66 billion and other comprehensive loss of $717 million.
The activity within Other comprehensive income (loss) and the related income tax effects are as
follows (in millions):
There was no tax effect on any element of Other comprehensive income (loss) during the year
ended December 31, 2004, the nine months ended December 31, 2003, the three months ended
March 31, 2003 and the year ended December 31, 2002.
9. Stock-Based Compensation
(a) Successor Company
Upon emergence from the Prior Bankruptcy, the Successor Company adopted the fair value
method of recording stock-based employee compensation contained in SFAS 123 and accounted for
this change in accounting principle using the “prospective method” as described by SFAS 148.
Accordingly, the fair value of all Successor Company stock option and warrant grants, as
determined on the date of grant, will be amortized as compensation expense (an element of
Personnel costs) in the Statement of Operations over the vesting period. The Company has
disclosed in Note 2(m) the effect on net income (loss) and net earnings (loss) per common share as
if the fair value based recognition provisions of SFAS 123 had been applied to all outstanding and
unvested stock option awards in each Predecessor Company period presented.
23,028,687 shares of Class A Common Stock of US Airways Group allocated to employees
pursuant to collective bargaining agreements were valued at $169 million in the aggregate and were
included as deferred compensation as a reduction to Stockholders’ Equity (Deficit) upon emergence
from the Prior Bankruptcy. US Airways records the deferred compensation as compensation
expense as the related shares vest.
As of December 31, 2004, there were 4,750,000 shares of US Airways Group Class A Common
Stock and 2,220,570 each of Class A-1 Warrants and shares of Class A Preferred Stock authorized
to be granted to US Airways’ management. Through December 31, 2004, 3,962,593 shares of
US Airways Group Class A Common Stock, 2,118,490 each of Class A-1 warrants and Class A
Preferred Stock, and 466,640 options to purchase Class A Common Stock were granted to
US Airways’ management. Grants of Class A Common Stock, stock options and warrants generally
vest over four years. The Company records compensation expense over the vesting period. The
following table summarizes the activity of US Airways’ stock options and warrants granted since
emergence from the Prior Bankruptcy:
The weighted average fair value of stock option and warrants granted during the year ended
December 31, 2004 was $0.80 and $2.70, respectively. The weighted average fair value for warrants
granted during the nine month period ended December 31, 2003 was $3.38.
The following table summarizes additional information regarding the warrants and options
outstanding as of December 31, 2004:
The Company granted 835,160 and 3,627,923 shares of restricted Class A Common Stock during
the year ended December 31, 2004 and the nine months ended December 31, 2003. There were
1,997,108 non-vested shares of restricted stock outstanding as of December 31, 2004.
The weighted average fair value per share of US Airways Group Class A Common Stock grants
was $1.87 and $7.42 in the year ended December 31, 2004 and the nine months ended December
31, 2003, respectively. In order to calculate the stock-based compensation for stock options and
warrants using the fair value method provisions in SFAS 123, US Airways used the Black-Scholes
stock option pricing model with the following weighted-average assumptions:
US Airways recognized compensation expense related to US Airways Group Class A Common
Stock, stock option and stock warrant grants to US Airways employees of $50 million and $135
million for the year ended December 31, 2004 and the nine months ended December 31, 2003,
respectively.
The ultimate recovery, if any, to holders of US Airways Group’s common stock will not be
determined until confirmation of a plan of reorganization. The plan of reorganization could result
in holders of US Airways Group’s common stock and related equity securities receiving no
distribution on account of their interest and cancellation of the equity.
(b) Predecessor Company
The Predecessor Company accounted for deferred compensation and the related amortization by
applying the provisions of APB 25 and related interpretations. In accordance with APB 25, deferred
compensation related to grants of US Airways Group common stock to employees (Stock Grants)
was recognized based on the fair market value of the stock on the date of grant. Except on limited
occasions, no deferred compensation was recognized when options to purchase US Airways Group
common stock were granted to employees (Option Grants) because the exercise price of the stock
options was set equal to the fair market value of the underlying stock on the date of grant. Any
deferred compensation was amortized as Personnel costs over the applicable vesting period.
US Airways recognized expenses related to Stock Grants of $1 million, $3 million for the three
months ended March 31, 2003 and the year ended December 31, 2002. Deferred compensation
related to Stock Grants was $5 million as of December 31, 2002.
The weighted average fair value per stock option for stock options which had an exercise price
equal to the fair market value of a share of US Airways Group common stock at the date of grant
was $3 for 2002. There were no such grants in the three months ended March 31, 2003. The
weighted average fair value per stock option for stock options that had an exercise price greater than
the fair market value of a share of US Airways Group common stock was $3 for 2002. There were
no such grants in the three months ended March 31, 2003. There were no grants of stock options
that had an exercise price lower than the fair market value of US Airways Group common stock
during the three months ended March 31, 2003 or the year ended December 31, 2002.
10. Stockholder’s Equity and Dividend Restrictions
(a) Common stock and dividend restrictions
US Airways Group owns all of US Airways’ outstanding common stock, par value $1 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, US Airways may not pay dividends
in accordance with provisions contained in the ATSB Loan.
(b) Receivable from parent company
See Note 12(a).
(c) Distributions to affiliate, net
In May 1999, US Airways Group created USLM Corporation (USLM) to more efficiently
manage its postretirement medical, dental and life insurance benefits for employees who had retired
or were eligible for retirement as of January 1, 1998 from US Airways. Effective July 1, 2002,
USLM Corporation merged into US Airways.
Prior to the merger, USLM paid a portion of the postretirement benefit liabilities on behalf of
US Airways. However, US Airways continued to record all postretirement benefit liabilities and
related expenses in its financial statements. In connection with this arrangement, US Airways had
notes payable of $558 million and $16 million, each bearing interest at 8.25%, to fund USLM
operations. During 2002, US Airways paid interest of $24 million to USLM of which $24 million
was used to reduce US Airways’ liabilities for this population of retirees.
11. Operating Segments and Related Disclosures
US Airways Group is managed as a single business unit that provides air transportation for
passengers and cargo. This allows it to benefit from an integrated revenue pricing and route
network that includes US Airways, Piedmont, PSA and third-party carriers that fly under capacity
purchase agreements as part of US Airways Express. The flight equipment of all these carriers is
combined to form one fleet which is deployed through a single route scheduling system. When
making resource allocation decisions, the chief operating decision maker evaluates flight
profitability data, which considers aircraft type and route economics, but gives no weight to the
financial impact of the resource allocation decision on an individual carrier basis. The objective in
making resource allocation decisions is to maximize consolidated financial results, not the
individual results of US Airways, Piedmont and PSA.
Information concerning operating revenues in principal geographic areas is as follows (in
millions):
12. Related Party Transactions
(a) Parent company
US Airways provides funds to and receives dunds from US Airways Group which arise in the
normal course of business and bear interest at market rates, which are reset quarterly. US Airways
had a net payable to US Airways Group of $52 million for the year ended December 31, 2004 and a
net receivable from US Airways Group for these loans of $1 million as of December 31, 2003.
US Airways recorded interest expense of $2 million for the year ended December 31, 2004,
interest income of $1 million for the three months ended March 31, 2003 and $9 million for the year
ended December 31, 2002 related to the above transactions. No interest income was recorded
for the nine months ended December 31, 2003.
(b) Airline subsidiaries of US Airways Group
US Airways purchases all of the capacity (available seat miles or ASMs) generated by
US Airways Group’s wholly owned regional airline subsidiaries at a rate per ASM that is
periodically determined by US Airways and, concurrently, recognizes revenues that result primarily
from passengers being carried by these affiliated companies. The rate per ASM that US Airways
pays is based on estimates of the costs incurred to supply the capacity. US Airways recognized
US Airways Express capacity purchase expense of $472 million for the year ended December 31,
2004, $349 million for the nine months ended December 31, 2003, $112 million for the three
months ended March 31, 2003, and $559 million for the year ended December 31, 2002, related to
this program.
US Airways provides various services to these regional airlines including passenger handling,
maintenance and catering. US Airways recognized other operating revenues of $71 million for the
year ended December 31, 2004, $40 million for the nine months ended December 31, 2003, $12
million for the three months ended March 31, 2003, and $63 million related to these services for the
year ended December 31, 2002. These regional airlines also perform passenger and ground
handling for US Airways at certain airports for which US Airways recognized other operating
expenses of $126 million for the year ended December 31, 2004, $55 million for the nine months
ended December 31, 2003, $15 million for the three months ended March 31, 2003, and $71 million
for the year ended December 31, 2002, related to these expenses. US Airways also leases or
subleases certain aircraft to these regional airline subsidiaries. US Airways recognized other
operating revenues related to these arrangements of $55 million for the year ended December 31,
2004, $12 million for the nine months ended December 31, 2003, $2 million for the three months
ended March 31, 2003, and $7 million for the year ended December 31, 2002.
US Airways’ receivables from and payables to these regional airlines were $16 million and $39
million, respectively, as of December 31, 2004 and $10 million and $48 million, respectively, as of
December 31, 2003.
(c) Other US Airways Group subsidiaries
US Airways purchases a portion of its aviation fuel from US Airways Group’s wholly owned
subsidiary, Material Services Company, Inc. (MSC), which acts as a fuel wholesaler to US Airways
in certain circumstances. US Airways’ aviation fuel purchases from MSC were $34 million for the
year ended December 31, 2004, $9 million for the nine months ended December 31, 2003, $11
million for the three months ended March 31, 2003, and $13 million for the year ended
December 31, 2002. US Airways’ payable to MSC was $4 million and $8 million as of
December 31, 2004 and 2003, respectively.
Effective July 1, 2000, the activities of a certain division of MSC were transferred into
US Airways and MSC began receiving a portion of its fuel inventory from US Airways. As a result,
US Airways’ receivable from MSC was $12 million and $10 million as of December 31, 2004 and
2003, respectively.
(d) RSA
As of March 31, 2003, RSA held approximately 36.2%, on a fully-diluted basis, of US Airways
Group’s equity, had a voting interest of approximately 71.6% and was entitled to designate and vote
to elect eight of 15 directors to Reorganized US Airways Group’s Board of Directors. Total
amounts due to RSA at December 31, 2004 and 2003 included $54 million and $73 million,
respectively, of the initial $100 million at-risk amounts under the ATSB Loan. Interest expense on
RSA’s portion of the ATSB Loan was $5 million with interest payments of $5 million for the year
ended December 31, 2004. Interest expense on RSA’s portion of the ATSB Loan was $3 million
with interest payments of $2 million for the nine months ended December 31, 2003. See also Notes
2(b) and 4 for additional information with regard to the terms of RSA’s investment in US Airways
Group and the ATSB Loan.
13. Fresh-start Reporting
In connection with its emergence from the Prior Bankruptcy on March 31, 2003, US Airways
adopted fresh-start reporting in accordance with SOP 90-7. Accordingly, the Company valued its
assets, liabilities and equity at fair value. The excess of the reorganization value over tangible
assets and identifiable intangible assets has been reflected as Goodwill on the Balance Sheet.
Estimates of fair value represent the Company’s best estimate based on independent appraisals and
valuations and, where the foregoing are not available, industry trends and by reference to market
rates and transactions. US Airways Group’s equity value of $438 million at March 31, 2003 was
determined with the assistance of financial advisors. In determining the equity value, the financial
advisors and US Airways Group considered several matters, including the following: (i) certain
recent financial information of US Airways Group; (ii) certain financial projections prepared by
US Airways Group in connection with the ATSB Loan and RSA Investment Agreement including
the underlying assumptions; (iii) the equity transactions encompassed by the RSA Investment
Agreement; (iv) a discounted cash flow analysis prepared on a going concern basis; (v) current and
historical market values of publicly traded companies that are in businesses reasonably comparable
to US Airways Group and (vi) certain additional economic and industry conditions. The
Company’s equity value of $349 million was determined based on a review of each of US Airways
Group’s subsidiaries’ fair value of assets and liabilities. The Company received third party
appraisals for certain assets and liabilities subsequent to March 31, 2003. Changes in the fair value
of these assets and liabilities from the previously estimated values had an impact on the reported
value of Goodwill. During the three months ended March 31, 2004, the Company increased
goodwill and other accrued expenses by $15 million related to the valuation of the Company’s
deferred tax liabilities.
14. Valuation and Qualifying Accounts and Reserves (in millions)
(a) See also Note 16.
(b) Allowance for obsolescence of inventories eliminated upon adoption of fresh-start reporting. See also Note 13.
15. Selected Quarterly Financial Information (in millions) (Unaudited)
The comparability of quarterly results in 2003 was impacted by the emergence from the Prior
Bankruptcy in March 2003 and certain other unusual events. See also Note 16. The sum of the four
quarters may not equal the totals for the year due to rounding.
16. Unusual Items
(a) Special Items
Special items included within the Company’s Statements of Operations include the following
components (dollars in millions):
(a) During the quarter ended June 30, 2003, the Company recorded a $35 million charge in connection with its
intention not to take delivery of certain aircraft scheduled for future delivery.
(b) During the fourth quarter of 2002, US Airways conducted an impairment analysis in accordance with Statement
of 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.
(c) During the fourth quarter of 2002, US Airways recorded a curtailment credit of $120 million related to certain
postretirement benefit plans and a $30 million curtailment charge related to certain defined benefit pension
plans.
(d) In September 2001, US Airways announced that in connection with its reduced flight schedule it would
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.
(e) During the fourth quarter of 2002, US Airways recognized an impairment charge of $21 million related to
capitalized gates at certain airports in accordance with SFAS 142. The carrying values of the affected gates were
reduced to fair value based on a third party appraisal.
(b) 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 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.
(c) Gain on Sale of Hotwire, Inc.
During the fourth quarter of 2003, US Airways recorded a $30 million gain on the sale of its
investment in Hotwire, Inc. The gain is reflected in Other, net on the Company’s Statement of
Operations.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to include in this Annual
Report on Form 10-K a report on management’s assessment of the effectiveness of the Company’s
internal control over financial reporting, as well as an attestation report from the Company’s
independent registered public accounting firm on management’s assessment of the effectiveness of
the Company’s internal control over financial reporting. Management’s annual report on internal
control over financial reporting and the related attestation report from the Company’s independent
registered public accounting firm are located in Item 8. Financial Statements of US Airways and are
incorporated herein by reference.
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports it files or submits under the
Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission’s rules
and forms. An evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2004.
Based on that evaluation, the Company’s CEO and CFO have concluded that the Company’s
disclosure controls and procedures were effective as of such date.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during
the quarter ended December 31, 2004 that have materially affected or are reasonably likely to
materially affect the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of US Airways
Introduction
On August 11, 2002, US Airways Group and seven of its domestic subsidiaries, which accounted
for substantially all of US Airways Group’s operations, including US Airways Group’s principal
operating subsidiary US Airways, filed voluntary petitions 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. US Airways Group emerged from bankruptcy protection under the First
Amended Joint Plan of Reorganization of US Airways Group, Inc. and Affiliated Debtors and
Debtors-in-Possession, as modified (the 2003 Plan) on March 31, 2003, which was confirmed
pursuant to the Bankruptcy Court’s confirmation order on March 18, 2003 and, after each of the
conditions precedent to consummation was satisfied or waived, became effective on March 31, 2003.
In connection with the consummation of the 2003 Plan on March 31, 2003, Retirement Systems of
Alabama Holdings LLC (RSA) made an equity investment in US Airways Group in the amount of
$240 million. In exchange for its $240 million investment, RSA received 20,652,593 shares of Class
A Common Stock, 5,000,000 shares of Class B Common Stock, 75,000 shares of Class B Preferred
Stock, 1,380,570 Class A-1 Warrants and 1,380,570 shares of Class A Preferred Stock, representing
approximately 36.2%, on a fully-diluted basis, of US Airways Group’s equity and approximately
71.6% of US Airways Group’s outstanding voting interests. RSA is the sole holder of US Airways
Group’s Class B Common Stock and Class B Preferred Stock.
At the time the 2003 Plan became effective, RSA was entitled, pursuant to the terms of its
investment agreement, to designate eight of the 15 members of US Airways Group’s Board of
Directors. RSA is also entitled, until September 26, 2007 and as long as it retains at least 50% of the
shares of Class A Common Stock acquired pursuant to its investment, to nominate eight directors for
election to the Board. The investment agreement further provides that the remaining nominees for
director must consist of US Airways Group’s chief executive officer and two individuals who are not
employees or affiliates of US Airways Group or RSA, as well as the four directors elected by the Class
C Preferred Stock, as described below. Until September 26, 2007, RSA has agreed to vote all of its
shares of voting capital stock received in connection with the consummation of the 2003 Plan in favor
of all of the directors nominated in accordance with the investment agreement at each annual meeting
of US Airways Group’s stockholders or at any meeting of US Airways Group’s stockholders at which
members of its Board of Directors are to be elected. Of the 15 directors of US Airways Group, ten
serve as directors of US Airways.
On September 12, 2004, US Airways, along with US Airways Group and its other domestic
subsidiaries, filed voluntary petitions 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.
US Airways does not know what the Board structure will be upon consummation of a new plan of
reorganization. As a result of the Chapter 11 filings, the current Board structure may change.
Board of Directors
The Board of Directors of US Airways currently consists of ten members, each of whom is also a
director of US Airways Group. The directors are elected by US Airways Group, the sole stockholder
of US Airways. Directors are elected to hold office for one year or until the election and qualification
of their successors. There are no family relationships among the directors or the executive officers.
Information Regarding Directors
Set forth below is certain information as of February 1, 2005, regarding the Company’s directors,
including their ages and principal occupations (which have continued for at least the past five years
unless otherwise noted).
Served as
director
since
David G. Bronner, 60
Dr. Bronner has been the Chief Executive Officer of Retirement Systems of
Alabama since 1973. He serves as Executive Director of the Public
Education Employees’ Health Insurance, and is a member of the State
Employees’ Insurance Board. He is a member of the Editorial Board,
Southern Business & Economics Journal, Auburn University at Montgomery,
a member of the Board of Visitors, University of Alabama School of
Business, New Water Corporation and Children First. Dr. Bronner has been
Chairman of US Airways Group’s and US Airways’ Board of Directors since
April 2003 and is a member of the Strategy and Finance Committee of the
Board of Directors.
Robert L. Johnson, 58
Mr. Johnson has served the Chief Executive Officer of BET Holdings, Inc., a
subsidiary of Viacom Inc. (media-entertainment holding company) from
1980 to the present. Mr. Johnson also serves as a Director of the Hilton
Hotels Corporation, the American Film Institute, Johns Hopkins University,
Strayer Education, Jazz @ Lincoln Center and Lowe’s Companies. He is a
member of the Audit and Strategy and Finance Committees of the Board of
Directors. He is also a director of US Airways Group.
Cheryl G. Krongard, 49
Ms. Krongard retired in 2004 as a Senior Partner of Apollo Management,
L.P. Ms. Krongard was the Chief Executive Officer of Rothschild Asset
Management from 1994 to April 15, 2000. She served as Senior Managing
Director for Rothschild North America from 1994 until 2000. She serves on
the board of directors of the Iowa State University Foundation and is a
lifetime governor elected in 1997. She is also chairperson of the Investment
Committee for the Iowa State University Foundation. Ms. Krongard is also a
member of the Dean’s Advisory Council, Iowa State University College of
Business, and a Trustee of the Mount Sinai Medical Center. Ms. Krongard
also serves as a Director of the City Meals on Wheels and Educate, Inc., a
publicly traded company engaged in tutoring and learning (formerly Sylvan
Learning). Ms. Krongard is Chairman of the Corporate Governance and
Nominating and Strategy and Finance Committees and a member of the
Human Resources Committee of the Board of Directors. She is also a
director of US Airways Group.
Bruce R. Lakefield, 61
Mr. Lakefield is the President and Chief Executive Officer and a director of
US Airways Group and US Airways. Mr. Lakefield served as Chairman and
Chief Executive Officer of Lehman Brothers International from 1995 until
1999. He has served as a Senior Advisor to the Investment Policy
Committee of HGK Asset Management since 2000. Mr. Lakefield serves as
a Non-Executive Director of Constellation Corporation PLC and a member
of the Board of Directors of Magic Media, Inc. He is a member of the
Strategy and Finance Committee of the Board of Directors.
John A. McKenna, Jr., 37
Mr. McKenna has served as Director and Managing Director of Houlihan
Lokey Howard & Zukin, Inc. since 1999. He served as Vice President of
Wasserstein Perella & Co. during 1998 and 1999. Prior to 1998, he served
in various capacities at Houlihan Lokey Howard & Zukin, Inc. Mr.
McKenna has been a Panelist on restructuring and investment banking topics
Served as
director
since
before the World Bank and the American Bankruptcy Institute. He is a
member of the Audit and Strategy and Finance Committees of the Board of
Directors. He is also a director of US Airways Group.
Hans Mirka, 68
Mr. Mirka served as Senior Vice President, International Division for
American Airlines, Inc. from 1992 until his retirement in 1998. He also
served as Executive Vice President and General Manager for Pan American
World Airways, Inc. from 1984 until 1989 and Vice President, Field Sales
and Services for Continental Airlines until 1984. He is Chairman of the
Human Resources Committee and a member of the Strategy and Finance
Committee of the Board of Directors. He is also a director of US Airways
Group.
George M. Philip, 57
Mr. Philip has served as the Executive Director of the New York State
Teachers’ Retirement System since 1995. He has also served as Chief
Investment Officer of the New York State Teachers’ Retirement System
since 1992. Mr. Philip served as the Assistant Executive Director of the New
York State Teachers’ Retirement System from 1992-1995 and as Chief Real
Estate Investment Officer from 1988-1992. Mr. Philip has served in various
positions with the New York State Teachers’ Retirement System from 1971.
Mr. Philip is the past President of the Executive Committee of the National
Council on Teacher Retirement. Mr. Philip also serves as Chair of the
University of Albany Council, the St. Peter’s Hospital Board of Directors,
the Catholic Health East Investment Committee, and the St. Peter’s Hospital
Investment Committee. Mr. Philip is a member of the Board of Directors of
the Saratoga Performing Arts, the NYSE Pension Managers Advisory
Committee and the State Academy of Public Administration. Mr. Philip is
Chairman of the Audit Committee and a member of the Human Resources
Committee of the Board of Directors. He is also a director of US Airways
Group.
William D. Pollock, 48
Capt. Pollock is Chairman of the US Airways Air Line Pilots Association
(ALPA) Master Executive Council. An 19-year veteran of US Airways, he
holds a captain position on the A320. His previous ALPA experience
includes serving as MEC Vice Chairman for three years and MEC
Legislative Affairs Committee Chairman for more than 12 years. As a
veteran pilot for US Airways, Pollock has flown the and B-737. In the
Navy, he served 21 years of combined active and reserve service and flew
the P-3 Orion. He is also a director of US Airways Group.
Ronald E. Stanley, 57
Mr. Stanley is the current Executive Vice President and Chief Financial
Officer of US Airways Group and US Airways, which position he has served
since October 2004. Mr. Stanley has served as a Director of Scholefield,
Turnbull & Partners, a business travel consulting firm based in London,
England since 2000. Mr. Stanley served as Chief Operating Officer and a
member of the Executive Committee and Board of Directors of HSBC
Equator from 2000 until 2002. Mr. Stanley also serves as a director of
Decatour Foundry, Inc., a private company. He served as Senior Vice
President & General Manager of Royal Bank of Canada (RBC) Group,
Chairman and CEO of Royal Bank of Canada Europe Limited and a member
of the Executive Committee of RBC Dominion Securities from 1995 to
1999. He is also a director of US Airways Group.
Served as
director
since
William T. Stephens, 61
Mr. Stephens has served as General Counsel of the Retirement Systems of
Alabama since 2000, and previously from 1980 to 1998. From 1998 to
2000, Mr. Stephens served as Deputy Director resident in the Montgomery,
Alabama headquarters of Retirement Systems of Alabama. Mr. Stephens is a
Director of New Water Street Corporation, a director of the American
Village Citizenship Trust, and a member of the Alumni Advisory Council,
Auburn University School of Engineering. He is a member of the Strategy
and Finance Committee of the Board of Directors. He is also a director of
US Airways Group.
Audit Committee and Audit Committee Financial Expert
The Audit Committee of the Board of Directors, in consultation with the Company’s financial
officers and the Company’s independent auditors, assists in establishing the scope of the annual
audit. The Audit Committee (1) reviews annual and quarterly financial statements and periodic
reports filed with the Securities and Exchange Commission (SEC), (2) appoints, ensures the
independence of, and oversees the performance of the Company’s independent auditors, (3) reviews
the annual programs of the internal audit staff and (4) reviews programs designed to protect and
maintain the Company’s assets, including insurance, internal controls and internal security
programs. The Audit Committee has been established in accordance with Section 3(a)(58)(A) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Audit Committee
operates under a charter approved by the Board of Directors. The charter is posted on the
Company’s website at www.usairways.com. The Audit Committee is composed of Messrs. Philip,
Johnson and McKenna, and Mr. Philip is the Chairman of the Committee. The Board has
determined that Mr. Philip is the audit committee financial expert currently serving on the Audit
Committee and that Mr. Philip is independent as defined in NASDAQ listing standards.
Information Regarding Executive Officers
The following individuals are the executive officers of US Airways and US Airways Group
(where noted) as of February 1, 2005:
Name
Age
Position
Bruce R. Lakefield
President and Chief Executive Officer, US Airways Group and US Airways
Ronald E. Stanley
Executive Vice President and Chief Financial Officer, US Airways Group and
US Airways
N. Bruce Ashby
Executive Vice President - Marketing and Planning of US Airways and
President - US Airways Express
Alan W. Crellin
Executive Vice President - Operations, US Airways
Elizabeth K. Lanier
Executive Vice President - Corporate Affairs, General Counsel and Secretary,
US Airways Group and US Airways
Anita P. Beier
Senior Vice President - Finance and Controller, US Airways Group and
US Airways
Christopher L. Chiames
Senior Vice President - Corporate Affairs of US Airways
Jerrold A. Glass
Senior Vice President - Employee Relations of US Airways
Andrew P. Nocella
Senior Vice President - Planning of US Airways
John Prestifilippo
Senior Vice President - Maintenance of US Airways
Mr. Ashby joined US Airways as Vice President - Financial Planning and Analysis from April
1996 until his election as Senior Vice President - Planning of US Airways in January 1998. In June
1999, Mr. Ashby was elected Senior Vice President - Corporate Development of US Airways
Group and US Airways. Mr. Ashby served as Senior Vice President - Alliances of US Airways
Group and US Airways and President - US Airways Express from March 2003 to January 2005. In
January 2005, Mr. Ashby was elected Executive Vice President - Marketing and Planning and will
continue as President - US Airways Express. He previously served as Vice President - Marketing
Development at Delta Air Lines from June 1995 to April 1996, and in several management
positions at United from January 1989 to June 1995, including Vice President - Financial Planning
and Analysis and Vice President and Treasurer.
Mr. Crellin joined US Airways in 1988 as a result of the acquisition of Pacific Southwest
Airlines. He was promoted to serve as Vice President - Ground Services of US Airways in 1995.
Mr. Crellin served as Senior Vice President - Customer Service of US Airways from 2000 until his
election as Executive Vice President - Operations in January 2002. Prior to joining US Airways,
Mr. Crellin held a variety of management positions with Pacific Southwest Airlines from 1971 to
1988, including Vice President - Customer Service.
Ms. Lanier joined US Airways Group and US Airways in March 2003 as Executive Vice
President - Corporate Affairs and General Counsel, and was appointed as Secretary of US Airways
Group and US Airways in January 2004. Previously, Ms. Lanier was Senior Vice President -
General Counsel for Trizec Properties, Inc. from April to December 2002, and prior to that, Vice
President - General Counsel for General Electric Power Systems from 1998 to 2002, and Vice
President and Chief of Staff for Cinergy Corporation from 1996 to 1998. Ms. Lanier has been a
member of the board of directors of Patina Oil & Gas Corporation since 1998. She serves as a
member of the audit committee and chair of the corporate governance and nominating committee of
Patina. Ms. Lanier was associated with Davis Polk & Wardwell and was an associate and partner of
Frost & Jacobs, now Frost Brown Todd, LLC.
Ms. Beier joined US Airways in June 1999 from CSX Corporation as Vice President - Finance
and Controller. In May 2004, Ms. Beier was promoted to Senior Vice President - Finance and
Controller, and she is responsible for the management of all accounting functions for US Airways
Group and its subsidiaries and for monitoring the Company’s restructuring. At CSX Corporation,
Ms. Beier held a number of positions in financial management, including Vice President - Financial
Planning. Prior to being named Vice President-Financial Planning at CSX Corporation in
September 1998, Ms. Beier was Chief Financial Officer of American Commercial Lines in 1997-
1998. Ms. Beier served in a variety of financial positions in economic and financial analysis,
budgeting and accounting at CSX Corporation from 1981 to 1997.
Mr. Chiames joined US Airways in May 2002 as Senior Vice President - Corporate Affairs. Mr.
Chiames is responsible for US Airways’ government relations and corporate communications
functions. Mr. Chiames has almost 15 years of airline industry experience, including leadership of
Burson-Marsteller’s transportation and tourism public affairs practice from 2001 to 2002 and
Managing Director of Public Relations at American Airlines, Inc. from 1996 to 2001.
Mr. Glass joined US Airways in April 2002 as Senior Vice President - Employee Relations and
is a recognized expert in airline and railroad labor and employee relations issues. Mr. Glass joined
US Airways from J. Glass and Associates, of which he was the founder and where he served as
President from 1989 until April 2002. At US Airways, he is responsible for labor relations, human
resources policy and development, compensation, corporate learning and development, recruiting
and benefits.
Mr. Nocella joined US Airways in April 2002 as Vice President - Planning and Scheduling. He
served as Vice President - Revenue Management and Pricing of US Airways from December 2002
to June 2003. Mr. Nocella served as Vice President - Network and Revenue Management from
June 2003 until his election as Senior Vice President - Planning in January 2005. At US Airways,
he is responsible for route planning, scheduling, pricing and yield management functions. Prior to
joining US Airways, Mr. Nocella served as Vice President, Planning and Scheduling of America
West Airlines from April 1997 to April 2002, and in several management positions at Continental
Airlines from December 1993 to March 1997.
Mr. Prestifilippo joined US Airways in August 2002 as Senior Vice President - Maintenance.
With nearly 20 years of airline maintenance management experience, Mr. Prestifilippo previously
held the position of Vice President - Technical Services and Operations for Continental Express
Airlines from 1986 to 2001 and other senior-level management positions for Continental Express
and Continental Airlines.
Section 16(a) Beneficial Ownership Reporting Compliance
Because US Airways does not have a class of equity securities registered pursuant to Section 12 of
the Exchange Act, no reports are required to be filed under Section 16(a) of the Exchange Act.
Code of Ethics
The Company has a code of ethics that applies to all employees, officers, directors and agents of
US Airways Group and its wholly owned subsidiaries, including its principal executive officer,
principal financial officer and principal accounting officer. A copy of this code, the “Business Conduct
and Ethics Policy,” is available on the Company’s website at usairways.com (under the “About
US Airways - Investor Relations” caption). The Company intends to disclose any changes in or
waivers from its code of ethics by posting such information on its website or by filing a Report on
Form 8-K.
Item 11.
Item 11. Executive Compensation
Compensation of Directors
Because all US Airways directors are also members of the Board of Directors of US Airways
Group, the directors do not receive any additional compensation for serving on the Board of Directors
of US Airways.
Compensation of Executive Officers
The following Summary Compensation Table sets forth the total compensation paid for the fiscal
years ended December 31, 2004, 2003 and 2002 to the individuals who served as Chief Executive
Officer of US Airways Group and US Airways during the 2004 fiscal year, each of the four other most
highly compensated executive officers who were serving as executive officers as of December 31,
2004 of US Airways Group, US Airways or any other subsidiary of US Airways Group and one
additional individual for whom disclosures would have been provided but who was not serving as an
executive officer as of December 31, 2004 of US Airways Group, US Airways or any other subsidiary
of US Airways Group (collectively referred to as the “named executive officers”).
The amounts shown in the table below for Restricted Stock Awards reflect amounts granted by
US Airways Group since US Airways Group and its subsidiaries emerged from the prior Chapter 11
reorganization on March 31, 2003. The ultimate recovery, if any, to holders of US Airways Group’s
common stock will not be determined until confirmation of a plan of reorganization. The plan of
reorganization could result in holders of US Airways Group’s common stock and related equity
securities receiving no distribution on account of their interest and cancellation of the equity. The
named executive officers also had previous restricted stock awards granted by US Airways Group’s
predecessor company, but these shares were cancelled as a part of the 2003 Plan and the named
executive officers received no consideration for this cancellation. The prior awards are described in
the footnotes to the table.
Summary Compensation Table
(1) Mr. Lakefield was appointed as President and Chief Executive Officer of US Airways Group and US Airways on
April 19, 2004 following the departure of Mr. Siegel on that date. Mr. Cohen terminated his employment effective
April 30, 2004. Mr. Baldanza served as Senior Vice President-Marketing and Planning through December 31,
2004, but terminated his employment effective January 15, 2005.
(2) Amounts reflected for Mr. Crellin were earned in 2001 and paid in 12 monthly installments beginning in June 2002.
Amounts reflected for Ms. Lanier and Messrs. Siegel and Cohen were paid in connection with their commencement
of employment by US Airways and in lieu of foregone compensation from prior employers due to the change of
employment. Awards for Mr. Glass were paid in connection with his commencement of employment by
US Airways.
(3) The figures in this column for 2004 and 2003 reflect the value of shares of US Airways Group’s Class A Common
Stock subject to certain restrictions (Restricted Stock) on the date of grant using the per share value of the stock on
the date of grant, as further described in footnotes 11 through 17 below. Additionally, in connection with
US Airways Group’s and its subsidiaries’ Prior Bankruptcy, under the 2003 Plan all outstanding shares of common
stock of US Airways Group’s predecessor corporation were cancelled on March 31, 2003, the effective date of the
2003 Plan. Consequently, all shares of predecessor corporation restricted stock granted to the named executive
officers in 2002 have been cancelled, as further described below. The aggregate number of shares of Restricted
Stock held by each of Ms. Lanier and Messrs. Lakefield, Crellin, Glass, Baldanza, Siegel and Cohen on
December 31, 2004, and the respective fair market value of the stock on such date were, respectively: Mr. Lakefield
- 471,200 shares, $537,168; Mr. Crellin - 188,400 shares, $214,776; Ms. Lanier - 188,400 shares, $214,776; Mr.
Glass - 188,400 shares, $214,776; Mr. Baldanza - 188,400 shares, $214,776; Mr. Siegel - 0 shares, $0; and Mr.
Cohen - 1,594 shares, $1,817. The Restricted Stock is entitled to the same dividends, if any, payable on
outstanding shares of Class A Common Stock. The ultimate recovery, if any, to holders of US Airways Group’s
common stock will not be determined until confirmation of a plan of reorganization. The plan of reorganization
could result in holders of US Airways Group’s common stock and related equity securities receiving no distribution
on account of their interest and cancellation of the equity.
(4) Amount disclosed for 2004 includes $29,371 for tax liability related to temporary living expenses, $9,835 in income
and tax liability payments related to personal travel provided by US Airways, $2,663 for tax liability payments
related to premiums paid by US Airways on a life insurance policy (as described in footnote 19) and $39,500 for
director fees paid for service as a member of the Board of Directors of US Airways Group through April 19, 2004,
which consists of fees paid for board and committee meeting attendance. Amount disclosed for 2003 includes
$73,250 for director fees paid for service as a member of the Board of Directors of US Airways Group, which
amount includes an annual retainer, fees paid for board and committee meeting attendance, and service as Chairman
of the Human Resources and Strategy and Finance Committees, and $4,149 in income and tax liability payments
related to personal travel provided by US Airways.
(5) Amount disclosed for 2004 includes $9,000 paid for automobile expenses, $7,668 in income and tax liability
payments related to personal travel provided by US Airways, $4,386 for tax liability payments related to premiums
paid by US Airways on a life insurance policy (as described in footnote 19) and $198,886 for tax liability payments
related to company contributions under the US Airways Funded Executive Defined Contribution Plan (as described
in footnote 19). Amount disclosed for 2003 includes $9,000 paid for automobile expenses, $1,081 in income and
tax liability payments related to personal travel provided by US Airways, $2,730 for tax liability payments related
to premiums paid by US Airways on a life insurance policy and $214,557 for tax liability payments related to
company contributions under the US Airways Funded Executive Defined Contribution Plan. Amount disclosed for
2002 includes $10,229 in income and tax liabilities incurred in connection with certain compensation related
expenses, $8,250 paid for automobile expenses and $637 for income and tax liability payment related to personal
travel provided by US Airways.
(6) Amount disclosed for 2004 includes $33,908 for tax liability related to temporary living expenses, $9,000 paid for
automobile expenses, $16,904 in income and tax liability payments related to personal travel provided by
US Airways, $2,346 for tax liability payments related to premiums paid by US Airways on a life insurance policy
(as described in footnote 19) and $121,020 for tax liability payments related to company contributions under the
US Airways Funded Executive Defined Contribution Plan (as described in footnote 19). Amount disclosed for
2003 includes $30,345 for tax liability related to temporary living expenses, $6,750 paid for automobile expenses,
$20,650 in income and tax liability payments related to personal travel provided by US Airways, $2,275 for tax
liability payments related to premiums paid by US Airways on a life insurance policy and $124,472 for tax liability
payments related to company contributions under the US Airways Funded Executive Defined Contribution Plan.
(7) Amount disclosed for 2004 includes $710 for tax and financial planning services, $9,000 paid for automobile
expenses, $11,686 in income and tax liability payments related to personal travel provided by US Airways, $2,116
for tax liability payments related to premiums paid by US Airways on a life insurance policy (as described in
footnote 19) and $146,069 for tax liability payments related to company contributions under the US Airways
Funded Executive Defined Contribution Plan (as described in footnote 19). Amount disclosed for 2003 includes
$1,055 for tax and financial planning services, $5,250 paid for automobile expenses, $13,272 in income and tax
liability payments related to personal travel provided by US Airways, $1,606 for tax liability payments related to
premiums paid by US Airways on a life insurance policy and $159,991 for tax liability payments related to
company contributions under the US Airways Funded Executive Defined Contribution Plan. Amount disclosed for
2002 includes $4,887 for income and tax liability payments related to personal travel provided by US Airways.
(8) Amount disclosed for 2004 includes $10,000 for tax and financial planning services, $9,000 paid for automobile
expenses, $7,788 in income and tax liability payments related to personal travel provided by US Airways, $1,020
for tax liability payments related to premiums paid by US Airways on a life insurance policy (as described in
footnote 19) and $169,138 for tax liability payments related to company contributions under the US Airways
Funded Executive Defined Contribution Plan (as described in footnote 19). Amount disclosed for 2003 includes
$10,000 for tax and financial planning services, $5,250 paid for automobile expenses, $3,229 in income and tax
liability payments related to personal travel provided by US Airways, $1,187 for tax liability payments related to
premiums paid by US Airways on a life insurance policy and $182,214 for tax liability payments related to
company contributions under the US Airways Funded Executive Defined Contribution Plan. Amount disclosed for
2002 includes $13,884 in income and tax liabilities incurred in connection with certain compensation related
expenses and $3,157 for income and tax liability payment related to personal travel provided by US Airways.
(9) Amount disclosed for 2004 includes $12,000 for tax and financial planning services, $6,000 paid for automobile
expenses, $26,815 in income and tax liability payments related to personal travel provided by US Airways, $579 for
tax liability payments related to premiums paid by US Airways on a life insurance policy (as described in footnote
19) and $493,441 for tax liability payments related to company contributions under the US Airways Funded
Executive Defined Contribution Plan (as described in footnote 19). Amount disclosed for 2003 includes $8,570 for
tax and financial planning services, $18,000 paid for automobile expenses, $1,996 for tax liability payments related
to premiums paid by US Airways on a life insurance policy and $21,369 in income and tax liability payments
related to personal travel provided by US Airways. Amount disclosed for 2002 includes $31,663 for tax liability
related to relocation and moving expenses, $13,500 paid for automobile expenses and $2,474 in income and tax
liability payments related to personal travel provided by US Airways.
(10) Amount disclosed for 2004 includes $2,517 for tax liability related to temporary living expenses, $3,000 paid for
automobile expenses, $8,710 in income and tax liability payments related to personal travel provided by
US Airways, $350 for tax liability payments related to premiums paid by US Airways on a life insurance policy (as
described in footnote 19) and $44,584 for tax liability payments related to company contributions under the
US Airways Funded Executive Defined Contribution Plan (as described in footnote 19). Amount disclosed for
2003 includes $1,500 for tax and financial planning services, $31,465 for tax liability related to temporary living
expenses, $9,000 paid for automobile expenses, $13,701 in income and tax liability payments related to personal
travel provided by US Airways, $1,211 for tax liability payments related to premiums paid by US Airways on a life
insurance policy and $199,807 for tax liability payments related to company contributions under the US Airways
Funded Executive Defined Contribution Plan. Amount disclosed for 2002 includes $31,392 for tax liability related
to temporary living expenses, $6,000 paid for automobile expenses and $3,131 for income and tax liability
payments related to personal travel provided by US Airways.
(11) Amount disclosed for 2004 reflects an award of 471,200 shares of Restricted Stock to Mr. Lakefield effective May
19, 2004 based on a per share value of $1.46 on the grant date, vesting 25% on each of April 19, 2005, 2006, 2007
and 2008. Amount disclosed for 2003 reflects an award of 1,362.4 deferred stock units granted to Mr. Lakefield
effective July 31, 2003, under the US Airways Group, Inc. 2003 Nonemployee Director Deferred Stock Unit Plan,
based on a per share value of $7.34 on the grant date. The deferred stock units are payable solely in cash upon
termination of service as a member of the Board of US Airways Group. The deferred stock units are entitled to
dividend equivalents if any dividends are paid on US Airways Group’s Class A Common Stock.
(12) The amount disclosed for 2003 reflects an award of (a) 102,584 shares of Restricted Stock effective July 31, 2003,
vesting 50% on June 30, 2005 and 50% on January 1, 2006, based on a per share value of $7.34 on the grant date,
and (b) 85,816 shares of Restricted Stock effective October 16, 2003, vesting 100% on January 1, 2006, based on a
per share value of $8.35 on the grant date. Because US Airways Group’s Class A Common Stock was not listed on
the grant dates, the $7.34 per share value is based on the per share value determined pursuant to the 2003 Plan and
also subsequently paid in a private placement of US Airways Group’s Class A Common Stock in August 2003, and
the $8.35 per share value is based on the weighted average trading price on the over-the-counter bulletin board for
the five preceding days, due to the low trading volume on October 16, 2003. Mr. Crellin had shares of restricted
stock of US Airways Group’s predecessor corporation which were canceled on March 31, 2003, the effective date
of the 2003 Plan, and Mr. Crellin received no payment with respect to such cancellation. These cancelled shares
were received pursuant to (a) an award effective January 16, 2002 of 10,000 shares of restricted common stock of
US Airways Group’s predecessor corporation, vesting 25% on each of January 16, 2003 and the three succeeding
anniversaries thereafter, with a value of $56,100 based on the closing price ($5.61) on the grant date; and (b) an
award effective October 16, 2001 of 15,000 shares of restricted common stock of US Airways Group’s predecessor
corporation, vesting 25% on November 15, 2001, 25% on December 1, 2002 and 25% on each of October 16, 2003
and October 16, 2004, with a value of $80,400 based on the closing price ($5.36) on the grant date.
(13) Amount disclosed for 2003 reflects an award of 188,400 shares of Restricted Stock effective July 31, 2003, vesting
50% on June 30, 2005 and 50% on January 1, 2006, based on a per share value of $7.34 on the grant date. Because
US Airways Group’s Class A Common Stock was not listed on the grant date, the $7.34 per share value is based on
the per share value determined pursuant to the 2003 Plan and also subsequently paid in a private placement of
US Airways Group’s Class A Common Stock in August 2003.
(14) The amount disclosed for 2003 reflects an award of 188,400 shares of Restricted Stock effective July 31, 2003,
vesting 50% on June 30, 2005 and 50% on January 1, 2006, based on a per share value of $7.34 on the grant date.
Because US Airways Group’s Class A Common Stock was not listed on the grant date, the $7.34 per share value is
based on the per share value determined pursuant to the 2003 Plan and also subsequently paid in a private
placement of US Airways Group’s Class A Common Stock in August 2003. Mr. Glass also had shares of restricted
stock of US Airways Group’s predecessor corporation which were canceled on March 31, 2003, the effective date
of the 2003 Plan, and Mr. Glass received no payment with respect to such cancellation. These cancelled shares
were received pursuant to an award effective April 8, 2002 of 25,000 shares of restricted common stock of
US Airways Group’s predecessor corporation, vesting 34% on April 8, 2003 and 33% on each of April 8, 2004 and
April 8, 2005, with a value of $151,000 based on the closing price ($6.04) on the grant date.
(15) The amount disclosed for 2003 reflects an award of 188,400 shares of Restricted Stock effective July 31, 2003,
vesting 50% on June 30, 2005 and 50% on January 1, 2006, based on a per share value of $7.34 on the grant date.
Because US Airways Group’s Class A Common Stock was not listed on the grant date, the $7.34 per share value is
based on the per share value determined pursuant to the 2003 Plan and also subsequently paid in a private
placement of US Airways Group’s Class A Common Stock in August 2003. All of Mr. Baldanza’s shares of
Restricted Stock were forfeited upon his termination of employment on January 15, 2005. Mr. Baldanza had shares
of restricted stock of US Airways Group’s predecessor corporation which were canceled on March 31, 2003, the
effective date of the 2003 Plan, and Mr. Baldanza received no payment with respect to such cancellation. These
cancelled shares were received pursuant to an award effective October 16, 2001 of 15,000 shares of restricted
common stock of US Airways Group’s predecessor corporation, vesting 25% on November 15, 2001, 25% on
December 1, 2002 and 25% on each of October 16, 2003 and October 16, 2004, with a value of $80,400 based on
the closing price ($5.36) on the grant date.
(16) The amount disclosed for 2003 reflects an award of 1,130,400 shares of Restricted Stock to Mr. Siegel, based on a
per share value of $7.34 on the grant date, vesting no later than January 1, 2006. Upon his termination of
employment on April 19, 2004, the shares became fully vested. Because US Airways Group’s Class A Common
Stock was not listed on the grant date, the $7.34 per share value is based on the per share value determined pursuant
to the 2003 Plan and also subsequently paid in a private placement of US Airways Group’s Class A Common Stock
in August 2003. Mr. Siegel also had shares of restricted stock of US Airways Group’s predecessor corporation
which were canceled on March 31, 2003, the effective date of US Airways Group’s 2003 Plan, and Mr. Siegel
received no payment with respect to such cancellation. These cancelled shares were received pursuant to an award
effective March 11, 2002 of 350,000 shares of restricted common stock of US Airways Group’s predecessor
corporation, vesting 100% on March 11, 2005, with a value of $2,359,000 based on the closing price ($6.74) on the
grant date.
(17) The amount disclosed for 2003 reflects an award of 376,800 shares of Restricted Stock effective July 31, 2003,
vesting 50% on January 1, 2005 and 50% on January 1, 2006, based on a per share value of $7.34 on the grant date.
Upon his termination of employment on April 30, 2004, the shares became fully vested. Because US Airways
Group’s Class A Common Stock was not listed on the grant date, the $7.34 per share value is based on the per share
value determined pursuant to the 2003 Plan and also subsequently paid in a private placement of US Airways
Group’s Class A Common Stock in August 2003. Mr. Cohen had shares of restricted stock of US Airways Group’s
predecessor corporation which were canceled on March 31, 2003, the effective date of the 2003 Plan, and Mr.
Cohen received no payment with respect to such cancellation. These cancelled shares were received pursuant to an
award effective April 8, 2002 of 100,000 shares of restricted common stock of US Airways Group’s predecessor
corporation, vesting 34% on April 8, 2003, and 33% on each of April 8, 2004 and April 8, 2005, with a value of
$604,000 based on the closing price ($6.04) on the grant date.
(18) Amounts shown for 2004 reflect options granted in 2004 by US Airways Group, as described under “Option
Grants” below. Amounts shown for 2003 for all named executive officers other than Mr. Lakefield reflect Class A-
1 Warrants of US Airways Group (Warrants) granted in 2003 with an exercise price of $7.42 per share. Amounts
shown for 2003 for Mr. Lakefield include options exercisable for 5,000 shares of Class A Common Stock of
US Airways Group granted pursuant to its 2003 Nonemployee Director Stock Incentive Plan. Amounts shown for
2002 reflect options exercisable for shares of common stock of US Airways Group’s predecessor corporation, all of
which were cancelled on March 31, 2003, the effective date of the 2003 Plan. The respective officer did not
receive any payment in connection with the cancellation of the options.
(19) As further described herein, amounts disclosed include the value of life insurance benefits for the named executive
officers and contributions to various defined contribution pension plans. Under the US Airways life insurance plan,
individual life insurance coverage is available to executive officers, with US Airways paying the premium
associated with this coverage. The following amounts reflect the dollar value of premiums paid by US Airways on
life insurance policies in 2004 for its named executives: Mr. Lakefield - $3,805; Mr. Crellin - $6,321; Ms. Lanier
- $3,381; Mr. Glass - $3,050; Mr. Baldanza - $1,470; Mr. Siegel - $780; and Mr. Cohen - $500. Amounts
disclosed for 2004 include US Airways contributions to the US Airways Funded Executive Defined Contribution
Plan and accruals under the US Airways Unfunded Executive Defined Contribution Plan, which were adopted
during 2003 to replace supplemental retirement arrangements in effect before US Airways Group and US Airways’
prior bankruptcy reorganization, and which provide supplemental retirement benefits to the executives. The
US Airways Funded Executive Defined Contribution Plan also provides for full funding of the benefits in a secular
trust. The following amounts reflect the value of the benefits accrued under the US Airways Unfunded Executive
Defined Contribution Plan during 2004 to the named executives: Mr. Lakefield - $0; Mr. Crellin - $73,580; Ms.
Lanier - $32,786; Mr. Glass - $34,614; Mr. Baldanza - $34,991; Mr. Siegel - $91,714; and Mr. Cohen - $8,988.
The following amounts reflect the value of the benefits contributed to the US Airways Funded Executive Defined
Contribution Plan during 2004 to the named executives: Mr. Lakefield - $0; Mr. Crellin - $274,649; Ms. Lanier -
$167,122; Mr. Glass - $201,715; Mr. Baldanza - $233,566; Mr. Siegel - $681,419; and Mr. Cohen - $61,568.
During 2004, US Airways also made contributions to Mr. Siegel’s accounts in US Airways’ tax-qualified defined
contribution plans, in the amount of $14,677. The other named executives did not receive company contributions
under US Airways’ tax-qualified defined contribution plans during 2004. The amount reflected for 2004 also
includes $43,077 in temporary living expenses for Mr. Lakefield, $46,443 in temporary living expenses for Ms.
Lanier and $3,581 in temporary living expenses for Mr. Cohen. As a result of his termination of employment with
US Airways Group and US Airways, Mr. Siegel was paid a cash severance payment in the amount of $4,725,410
and $75,000 for accrued but unused vacation time, each of which is included in the 2004 amount. In addition, Mr.
Siegel was paid $681,419 in settlement of his benefits under the US Airways Funded Executive Defined
Contribution Plan. This amount has been previously included, as described above, and is not separately shown in
the total in the column. Also included in the 2004 amount is $65,000 paid to Mr. Siegel as reimbursement for legal
fees incurred in connection with his separation agreements. As a result of his termination of employment with
US Airways Group and US Airways, Mr. Cohen was paid a cash severance payment in the amount of $1,520,000
and $3,033 for accrued but unused vacation time, each of which is included in the 2004 amount. In addition, Mr.
Cohen was paid $338,458 in settlement of his benefits under the US Airways Funded Executive Defined
Contribution Plan. This amount has been previously included in the Summary Compensation Table and is not
separately shown in the total included in the column. Also included in the 2004 amount is $10,000 paid to Mr.
Cohen as reimbursement for legal fees incurred in connection with his separation agreement.
Option Grants
The following table sets forth information regarding the number and terms of options granted
by US Airways Group to the named executive officers pursuant to US Airways Group’s 2003
Stock Incentive Plan, as amended and restated, during the fiscal year ended December 31, 2004.
Options Grants in Last Fiscal Year
(1) The options vests 25% on each anniversary of April 19, 2004.
(2) The total number of stock options granted to employees in 2004 was 472,340.
(3) Amounts represent hypothetical gains assuming exercise at the end of the option term and assuming rates of stock
price appreciation of 5% and 10% compounded annually from the date the options were granted to their expiration
date. The 5% and 10% assumed rates of appreciation are mandated by the rules of the SEC. These assumptions are
not intended to forecast future appreciation of US Airways Group’s stock price. The potential realizable value
computation does not take into account federal or state income tax consequences of option exercises or sales of
appreciated stock. The actual gains, if any, on the option exercises will depend on the future performance of
US Airways Group’s Class A Common Stock, the option holder’s continued employment through applicable
vesting periods and the date on which the options are exercised and the underlying shares are sold. The closing
price of US Airways Group’s Class A Common Stock on February 18, 2005 was $1.16 per share. The ultimate
recovery, if any, to holders of US Airways Group’s common stock will not be determined until confirmation of a
plan of reorganization. The plan of reorganization could result in holders of US Airways Group’s common stock
and related equity securities receiving no distribution on account of their interest and cancellation of the equity.
Option and Warrant Exercises
There were no option or Warrant exercises by the named executive officers during the fiscal year
ended December 31, 2004. The following table sets forth (i) the number of shares covered by
options and Warrants (both exercisable and unexercisable) as of December 31, 2004 and (ii) the
respective value for “in-the-money” options and Warrants, which represents the positive spread
between the exercise price of existing options and Warrants and the fair market value of
US Airways Group’s Class A Common Stock at December 31, 2004.
Aggregate Option/Warrant Exercises in Last Fiscal Year and
Fiscal Year-End Option/Warrant Values
Retirement Benefits
Qualified Retirement Plan. US Airways previously maintained a defined benefit retirement plan
(the Retirement Plan) for its salaried employees which provided noncontributory benefits based upon
years of service and the employee’s highest three-year average annual compensation during the last ten
calendar years of service. The Retirement Plan was frozen in 1991, but benefits accrued as of the date
the plan was frozen remain outstanding until they are paid to participants. Under the Retirement Plan,
benefits were generally payable commencing at age 65. However, the Retirement Plan provided
reduced early retirement benefits commencing as early as age 55. Benefits under the Retirement Plan
were integrated with the Social Security program. Compensation under the Retirement Plan included
the employee’s total compensation as reported on Form W-2, plus exclusions from income due to
employee elections under Sections 401(k), 125 and 132(f)(4) of the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code), minus any imputed income due to the exercise of stock options,
income resulting from group term insurance, income imputed due to air pass privileges, expense
reimbursements and deferred compensation received in the form of a lump sum distribution. This
definition of compensation excludes the following items reported as compensation under the Summary
Compensation Table: (i) imputed income from stock options, (ii) income resulting from group term
insurance, (iii) income imputed due to air pass privileges, and (iv) certain expense reimbursements.
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, which the Bankruptcy Court approved on January 6, 2005. The Retirement 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 the plan. Other than Mr. Crellin, none of the
named executive officers participated in the Retirement Plan. Mr. Crellin has two years of Credited
Service under the Retirement Plan. Assuming retirement effective January 1, 2005 and payment in the
form of a single life annuity under the Retirement Plan, Mr. Crellin would receive payments of
$1,896.85 per month through January 31, 2009, reduced to $1,799.48 per month from February 1,
2009 through November 30, 2013, and further reduced to $1,755.22 per month on and after December
1, 2013. If the payment were made in the form of a joint and 50% survivor annuity with Mr. Crellin’s
spouse as beneficiary under the Retirement Plan, Mr. Crellin would receive payments of $1,701.47 per
month through January 31, 2009, reduced to $1,614.13 per month from February 1, 2009 through
November 30, 2013, and further reduced to $1,574.43 per month on and after December 1, 2013, and
upon Mr. Crellin’s death his surviving spouse would receive 50% of the monthly payment amounts for
her life. As a result of the termination of the Retirement Plan, Mr. Crellin’s benefits may be reduced.
Executive Defined Contribution Plans. Messrs. Crellin, Glass and Baldanza and Ms. Lanier will
receive a defined contribution benefit under the US Airways Funded Executive Defined Contribution
Plan and the US Airways Unfunded Executive Defined Contribution Plan (the Executive Plans), and
Mr. Siegel and Mr. Cohen received benefits under the Executive Plans in connection with the
termination of their employment during 2004. Under the Executive Plans, a contribution is credited to
each participant each year, the amount of which is individually determined based upon age, service
and projected earnings (including target annual bonus) such that the annual contribution to the
Executive Plans and an assumed 8% investment return will achieve a target annual benefit of 50% of
final average earnings (based on total cash compensation) at normal retirement age (age 62) when
combined with the executive’s benefits under the tax-qualified retirement plans maintained by
US Airways. The annual contribution to the Funded Executive Defined Contribution Plan may not
exceed 64% of the executive’s earnings for the year, and the annual allocation to the Unfunded
Executive Defined Contribution Plan may not exceed 16% of the executive’s earnings for the year.
Under the Executive Plans, contributions for disabled executives will continue during the period of
disability benefits, and contributions continue for the first twelve months following an executive
starting an absence from work due to the birth, adoption or caring for a child after birth or adoption, or
due to pregnancy. Furthermore, upon termination of an executive on or after the occurrence of a
change in control (as defined in the Executive Plans), US Airways will make an additional
contribution or allocation to the Executive Plans for the year in which the termination of employment
occurs, in the amount equal to the allocations that US Airways would have had to make during the
years for which US Airways would be required to continue to provide such benefits under the
executive’s employment agreement or severance agreement. Participants in the Executive Plans do
not receive employer contributions under the tax-qualified retirement plans sponsored by US Airways
(including the 401(k) and money purchase pension plans) or under any other nonqualified defined
contribution plans associated with the tax-qualified retirement plans.
Messrs. Crellin, Glass and Baldanza and Ms. Lanier receive a benefit based upon three years of
credited service for each of the first five years of service (beginning on date of hire), and thereafter two
years of credited service for each actual year of service up to a maximum of 30 years of credited
service. Contributions and allocations are fully vested. In connection with his termination of
employment on January 15, 2005, Mr. Baldanza received his benefits under the Executive Plans in
accordance with the terms of the respective plans, as described below.
Eighty percent (80%) of the target benefit amount is calculated under the Funded Executive
Defined Contribution Plan and reduced to present value based on actuarial assumption under that plan,
which amount, less the maximum amount of 401(k) contributions permitted for the year, is contributed
to a secular trust on a monthly basis, subject to certain limitations on the total amount that can be
contributed on an annual basis. Participants also receive a payment to cover any income tax liabilities
incurred in connection with the contributions to the secular trust. The remainder of the target benefit
amount is unfunded and is credited to an account with an assumed annual 8% rate of return. Under
letter agreements entered into with Ms. Lanier, Mr. Baldanza, Mr. Crellin and Mr. Glass on October
20, 2004, contributions under the Executive Plans after October 11, 2004 are subject to a 25%
reduction. Distributions from the Funded Executive Defined Contribution Plan will be made to
participants upon termination of employment in a single lump sum payment in cash. Distributions
from the Unfunded Executive Defined Contribution Plan will be made to participants in a single lump
sum payment in cash after the later of termination of employment or attainment of age 62.
Employment and Severance Agreements
US Airways has entered into employment agreements with Bruce R. Lakefield and Elizabeth K.
Lanier. In addition, US Airways is a party to severance agreements, which in substance are
employment agreements as well, with Alan W. Crellin, Jerrold A. Glass and B. Ben Baldanza. The
Company has entered into a Separation Agreement and Supplemental Separation Agreement with
David N. Siegel and a Separation and Consulting Agreement with Neal S. Cohen. All employment-
related agreements with Mr. Lakefield, Mr. Crellin, Ms. Lanier and Mr. Glass have not yet been
assumed and are subject to modification prior to the Company’s emergence from bankruptcy.
Employment Agreement with Bruce R. Lakefield
US Airways Group and US Airways entered into an Employment Agreement with Mr. Lakefield
April 19, 2004, which is filed as Exhibit 10.6 to US Airways’ Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004.
Term of Employment. The agreement provides for Mr. Lakefield to serve as US Airways’ Chief
Executive Officer and President on an at-will basis. Upon a change of control, the agreement will
become effective for a two-year term and terminate at the end of the two-year period.
Salary and Benefits. Under the agreement, Mr. Lakefield is entitled to an annual base salary of
not less than $425,000, subject to annual increases consistent with those provided to other key
employees. Under the agreement, Mr. Lakefield received 471,200 shares of restricted stock and a
nonqualified option to purchase 288,800 shares of Class A Common Stock at a price of $1.59 per
share, each under the 2003 Stock Incentive Plan, which awards vest in 25% increments on each
April 19, beginning in 2005. In addition to base salary, the agreement provides that Mr. Lakefield
will be awarded an annual bonus in accordance with US Airways Group’s Incentive Compensation
Plan (ICP) (or successor plan) and will be eligible to participate in the Long-Term Incentive Plan
(LTIP), each as determined by the Board or the Human Resources Committee. Mr. Lakefield
waived his participation in the ICP and the LTIP until US Airways returns to profitability. Mr.
Lakefield also waived participation in the Executive Plans and in all tax-qualified retirement plans
and nonqualified retirement or deferred compensation plans sponsored by US Airways Group or
US Airways. Mr. Lakefield is entitled to participate in all welfare benefit and fringe benefit plans
provided to other officers. At the time the agreement was executed, those benefits included on-line
first class, positive space travel privileges for business and pleasure for Mr. Lakefield and his
eligible family members, as well as a limited number of non-eligible family members and unrelated
persons, a gross-up payment (up to a maximum of $10,000) to cover his tax liability resulting from
such travel, free access to US Airways Club facilities for him and his eligible family members, and
certain temporary living expenses.
Termination of Employment. Mr. Lakefield’s employment may be terminated at any time by
mutual agreement, and terminates automatically upon his death. US Airways or US Airways Group
may also terminate the agreement upon ten days’ written notice upon Mr. Lakefield’s disability, or
immediately at any time for “cause” (as defined in the agreement). Mr. Lakefield may voluntarily
terminate his employment, which may constitute termination for “good reason” upon certain events
defined in the agreement. In the event of any termination by US Airways or US Airways Group for
cause or by Mr. Lakefield for good reason, the terminating party must give written notice that
indicates the specific termination provision in the agreement that is relied upon and sets forth in
reasonable detail the facts and circumstances that are the basis for the termination, as well as the
termination date, which may not be more than 15 days after the notice date.
Obligations Upon Termination. After two years of service with US Airways Group, including
as a member of the Board, Mr. Lakefield will become vested in lifetime on-line, first class, positive
space travel privileges for business and pleasure for him and his eligible family members. If Mr.
Lakefield’s employment is terminated for cause, due to death or disability, or is voluntarily
terminated by Mr. Lakefield without “good reason,” Mr. Lakefield is entitled to receive all salary
and vacation accrued through the date of termination, within 30 days of the date of termination. If
Mr. Lakefield’s employment is terminated due to death or disability, US Airways must also pay a
prorated annual bonus if annual bonuses are paid to executives for the year in which termination
occurs. If, prior to a change of control, US Airways or US Airways Group terminates Mr.
Lakefield’s employment other than for cause or if Mr. Lakefield terminates his employment for
good reason, (i) Mr. Lakefield is entitled to receive all salary and vacation accrued through the date
of termination, within 30 days of the date of termination, and US Airways must pay a prorated
annual bonus if annual bonuses are paid to executives for the year in which termination occurs, and
(ii) Mr. Lakefield may negotiate a separate severance agreement providing severance pay and/or
additional benefits, subject to his execution of a general release and covenant not to sue the
company. If, within two years after a change of control, US Airways or US Airways Group
terminates Mr. Lakefield’s employment other than for cause or if Mr. Lakefield terminates his
employment for good reason, Mr. Lakefield is entitled to: (i) accrued but unpaid base salary and
vacation; (ii) three times base salary (unreduced for any reductions then in effect) plus target annual
bonus for the year in which termination occurs; (iii) three times the greater of 125% of unreduced
base salary or the target LTIP award that would have been paid for the period ending in the year of
termination; (iv) continuation of medical, dental, vision and prescription drug coverages for Mr.
Lakefield and his dependents for 24 months on the same premium and coverage basis as active
officers (or an equivalent payment); (v) continuation of life insurance coverage for 24 months (or an
equivalent payment); and (vi) on-line travel privileges to Mr. Lakefield and his eligible family
members for life.
Other Obligations. In the event that any of Mr. Lakefield’s compensation (whether required
under the agreement or otherwise) would be subject to an excise tax under Internal Revenue Code
Section 4999, US Airways is required to pay Mr. Lakefield an additional gross-up payment, such
that after payment of all taxes, including interest or penalties, on the gross-up payment, Mr.
Lakefield will retain an amount of the gross-up payment equal to the excise tax (and any penalties
and interest on the excise tax). Mr. Lakefield agreed to hold US Airways Group’s and US Airways’
secret or confidential information, knowledge or data as confidential, including after termination of
employment, and agreed to nonsolicitation of customers and employees for one year after termination.
Employment Agreement with Elizabeth K. Lanier
US Airways’ Employment Agreement with Ms. Lanier is dated as of March 1, 2003 and is filed as
Exhibit 10.5 to US Airways’ Annual Report on Form 10-K for the year ended December 31, 2003.
The Employment Agreement was amended by a letter agreement dated October 20, 2004, which is
filed as Exhibit 10.38 to this Annual Report.
Term of Employment. The agreement provides for Ms. Lanier to serve as US Airways’ Executive
Vice President-Corporate Affairs and General Counsel. Ms. Lanier will serve for an initial term of
three years, to be extended each year by one additional year unless either US Airways or Ms. Lanier
provides notice that the term will not be extended, or, if a shorter period, until the first day of the
month following Ms. Lanier’s 65th birthday (which is defined in the agreement as Ms. Lanier’s
“normal retirement date”). Upon a “change of control” (as defined in the agreement), the term of the
agreement is automatically extended through the third anniversary of the date of the change of control
or through Ms. Lanier’s normal retirement date, whichever is earlier.
Salary and Benefits. Under the agreement, Ms. Lanier is entitled to an annual base salary of not
less than $425,000 for the initial 12 months of the term, subject to a 17% salary reduction. Ms. Lanier
is entitled to salary increases in accordance with increases awarded to other key employees and her
salary generally may not be decreased, except that pursuant to the letter agreement that amended the
employment agreement, Ms. Lanier is currently subject to an additional 10% salary reduction. In
addition to base salary, the agreement provides that Ms. Lanier will be awarded an annual bonus
determined by the Board or the Human Resources Committee in accordance with US Airways
Group’s ICP (or successor plan). Ms. Lanier’s target percentage under the annual ICP each year will
be no less than 60% of her base salary, and her maximum bonus opportunity each year will be no less
than 120% of base salary. Ms. Lanier is eligible to participate in the LTIP with a target percentage no
less than 80% of her base salary, and a maximum percentage no less than 160% of base salary. The
agreement provides that Ms. Lanier will receive supplemental executive retirement benefits (which she
now receives through participation in the Company’s Executive Plans, subject to a 25% reduction
provided in the letter agreement that amended the employment agreement), and is entitled to equity
awards consistent with those provided to other Executive Vice Presidents. Ms. Lanier is also entitled
to participate in all incentive, savings, retirement and welfare benefit plans provided to other key
employees. Under the agreement, Ms. Lanier is entitled to fringe benefits, office and support staff, and
paid vacation, all in accordance with the most favorable practices with respect to other key employees.
During 2004, those benefits included on-line first class, positive space travel privileges for business
and pleasure for Ms. Lanier and her eligible family members, as well as a limited number of non-
eligible family members and unrelated persons, a gross-up payment (up to a maximum of $10,000) to
cover her tax liability resulting from such travel, free access to US Airways Club facilities for her and
her eligible family members, an annual car allowance, and certain relocation benefits including up to
24 months of reasonable temporary living expenses.
Termination of Employment. Ms. Lanier’s employment may be terminated at any time by mutual
agreement, and terminates automatically upon her death. US Airways may also terminate the
agreement upon written notice after six months of Ms. Lanier’s continuous total and permanent
disability, if Ms. Lanier does not return to work within 90 days after the written notice. US Airways
may also terminate the agreement at any time for “cause” (as defined in the agreement). Ms. Lanier
may voluntarily terminate her employment, which may constitute termination for “good reason” upon
certain events defined in the agreement. In the event of any termination by US Airways for cause or
by Ms. Lanier for good reason, the terminating party must give written notice that indicates the
specific termination provision in the agreement that is relied upon and sets forth in reasonable detail
the facts and circumstances that are the basis for the termination, as well as the termination date, which
may not be more than 15 days after the notice date. In the event of a dispute regarding termination, the
agreement and compensation continue in effect until the earlier of the resolution of the dispute or the
end of the term of the agreement.
Obligations Upon Termination. If Ms. Lanier’s employment is terminated for cause, due to death
or disability, or is voluntarily terminated by Ms. Lanier without “good reason,” US Airways must pay
all salary (disregarding any impermissible salary decrease), deferred compensation and vacation
accrued through the date of termination within 30 days of the date of termination. If Ms. Lanier’s
employment is terminated due to death or disability, or is voluntarily terminated by Ms. Lanier without
“good reason,” US Airways must also pay a prorated annual bonus based on the amount of Ms.
Lanier’s annual bonus for the previous fiscal year. If, prior to a change of control and not in
connection with a change of control, US Airways terminates Ms. Lanier’s employment other than for
cause, disability or death or if Ms. Lanier terminates her employment for good reason: (i) US Airways
will pay to Ms. Lanier a lump sum in cash within five days after the date of termination equal to the
aggregate of Ms. Lanier’s accrued but unpaid base salary (disregarding any impermissible reductions),
a prorated annual bonus (based on the higher of the target bonus applicable under the agreement, the
bonus paid during, or the bonus paid with respect to, the most recent fiscal year), two times the sum of
such annual base salary and Ms. Lanier’s target annual bonus for the year in which the termination
occurs, any previously deferred compensation, and any accrued vacation pay; and (ii) for two years
after the date of termination, US Airways will continue benefits to Ms. Lanier and/or her family as if
the agreement had continued. If, after a change of control or prior to a change in control and in
connection with a change of control, US Airways terminates Ms. Lanier’s employment other than for
cause, disability or death or if Ms. Lanier terminates her employment for good reason: (i) US Airways
will pay to Ms. Lanier a lump sum in cash within five days after the date of termination equal to the
aggregate of Ms. Lanier’s accrued but unpaid base salary (disregarding any impermissible reductions),
a prorated annual bonus (based on the higher of the target bonus applicable under the agreement, the
bonus paid during, or the bonus paid with respect to, the most recent fiscal year), three times the sum
of such annual base salary and such annual bonus, any previously deferred compensation, any accrued
vacation pay, and an amount equal to the amount of additional benefits Ms. Lanier would receive
under all US Airways retirement plans if Ms. Lanier continued employment through the term of the
agreement; (ii) for purposes of eligibility for retiree benefits, Ms. Lanier shall be considered to have
remained employed and retired on the last day of the term of the agreement; (iii) for three years after
the date of termination, US Airways will continue benefits to Ms. Lanier and/or her family as if the
agreement had continued; and (iv) at the end of the three-year period, US Airways will continue health
insurance and on-line travel privileges to Ms. Lanier for life. In addition, as a participant in the LTIP,
upon a change of control, she would be eligible for a payment for each three-year performance period
under the LTIP that has not yet been completed in an amount that would have been payable to her if
target performance had been met for each performance period. Further, upon termination of Ms.
Lanier’s employment for any reason following the completion of at least 5 years of service,
US Airways will continue to provide Ms. Lanier with on-line travel privileges for life.
Other Obligations. US Airways agreed to pay Ms. Lanier’s reasonable legal fees and expenses
incurred as a result of any contest by US Airways or others of the validity or enforceability of, or
liability under the agreement, plus interest. In addition, in the event that any of Ms. Lanier’s
compensation (whether required under the agreement or otherwise) would be subject to an excise tax
under Internal Revenue Code Section 4999, US Airways is required to pay Ms. Lanier an additional
gross-up payment, such that after payment of all taxes, including interest or penalties, on the gross-up
payment, Ms. Lanier will retain an amount of the gross-up payment equal to the excise tax (and any
penalties and interest on the excise tax). Ms. Lanier agreed to hold US Airways Group’s and
US Airways’ secret or confidential information, knowledge or data as confidential, including after
termination of employment.
Severance Agreement with Alan W. Crellin
US Airways’ Severance Agreement with Mr. Crellin is dated as of June 26, 2002 and is filed as
Exhibit 10.9 to US Airways’ Annual Report on Form 10-K for the year ended December 31, 2002.
The Severance Agreement was amended by letter agreements dated July 25, 2002 and October 20,
2004, which are filed as Exhibits 10.17 to US Airways’ Annual Report on Form 10-K for the year
ended December 31, 2002 and Exhibit 10.37 to this Annual Report, respectively.
Term of Employment. The agreement provides for Mr. Crellin to serve as Executive Vice President
of US Airways for an initial term of three years, to be extended each year by one additional year unless
either US Airways or Mr. Crellin provides notice that the term will not be extended, or, if a shorter
period, until the first day of the month following Mr. Crellin’s 65th birthday (which is defined in the
agreement as Mr. Crellin’s “normal retirement date”). Upon a “change of control” (as defined in the
agreement), the term of the agreement is automatically extended to the third anniversary of the date of
the change of control or through Mr. Crellin’s normal retirement date, whichever is earlier.
Salary and Benefits. The agreement does not specify Mr. Crellin’s salary and benefits prior to the
date of a change of control. However, pursuant to the letter agreement that amended the severance
agreement, Mr. Crellin became subject to a 17% and an additional 10% salary reduction and a 25%
reduction in retirement plan contributions effective October 11, 2004. Beginning on the date of a
change of control and continuing for a period of three years thereafter, or until Mr. Crellin’s normal
retirement date, if earlier, the agreement provides for minimum salary and benefits that must be
provided to Mr. Crellin. US Airways will pay Mr. Crellin a base salary for the first 12 months of such
period at a rate not less than his base salary in effect on the date of the change of control. Mr. Crellin’s
salary may not be decreased thereafter and must be increased in accordance with pay increases
provided to other executive vice president level employees. In addition, Mr. Crellin will be awarded
an annual bonus determined by the Board or the Human Resources Committee in accordance with
US Airways Group’s ICP or successor plan. In addition to base salary and annual bonus, Mr. Crellin
will be entitled to participate in all incentive, savings, retirement and welfare benefit plans applicable
to executive vice president level employees, under terms at least as favorable as the most favorable
plans provided during the 90-day period prior to the change of control. Mr. Crellin will also be
entitled to fringe benefits, including but not limited to space positive and space available travel
privileges in all classes of service and cabins on all air carriers owned by US Airways and any of its
affiliates, including all carriers owned by any individual, entity or group that has entered into an
agreement that constitutes a change of control, and to paid vacation under terms at least as favorable as
the most favorable travel privileges and vacation program provided during the 90-day period prior to
the change of control. Mr. Crellin will continue to be entitled to all of the foregoing compensation and
benefits, if applicable, during the first six months of Mr. Crellin’s total and permanent disability.
Termination of Employment. Mr. Crellin’s employment may be terminated at any time by mutual
agreement, and terminates automatically upon his death. US Airways may also terminate the
agreement upon written notice after six months of Mr. Crellin’s continuous total and permanent
disability, if Mr. Crellin does not return to work within 90 days after the written notice. US Airways
may also terminate the agreement at any time for “cause” (as defined in the agreement). Mr. Crellin
may voluntarily terminate his employment, which may constitute termination for “good reason” upon
certain events defined in the agreement. In the event of any termination by US Airways for cause or
by Mr. Crellin for good reason within three years after a change of control and before Mr. Crellin’s
normal retirement date, the terminating party must give written notice that indicates the specific
termination provision in the agreement that is relied upon and sets forth in reasonable detail the facts
and circumstances that are the basis for the termination, as well as the termination date, which may not
be more than 15 days after the notice date. For post-change of control terminations, in the event of a
dispute regarding termination, the agreement and compensation continue in effect until the earlier of
the resolution of the dispute, Mr. Crellin’s normal retirement date, or the third anniversary of the date
of the change of control.
Obligations Upon Termination. If Mr. Crellin’s employment is terminated for cause, due to death
or disability, or is voluntarily terminated by Mr. Crellin without “good reason,” US Airways must pay
all salary, deferred compensation and vacation accrued through the date of termination within 30 days
of the date of termination. If termination is due to death or disability and occurs within three years
after a change of control and before Mr. Crellin’s normal retirement date, US Airways must also pay a
prorated annual bonus based on the amount of Mr. Crellin’s annual bonus for the previous fiscal year.
If, prior to a change of control and not in connection with a change of control, US Airways terminates
Mr. Crellin’s employment other than for cause, disability or death or if Mr. Crellin terminates his
employment for good reason, US Airways will pay to Mr. Crellin in a lump sum in cash within 30
days after the date of termination the aggregate of Mr. Crellin’s accrued but unpaid base salary,
deferred compensation and benefits, plus an amount equal to two times the sum of his annual rate of
base salary and his target annual bonus. If, after a change of control, or prior to a change of control but
in connection with a change of control, US Airways terminates Mr. Crellin’s employment other than
for cause, disability or death or if Mr. Crellin terminates his employment for good reason: (i)
US Airways will pay to Mr. Crellin a lump sum in cash within 30 days after the date of termination
equal to the aggregate of Mr. Crellin’s accrued but unpaid base salary (disregarding any impermissible
reductions in Mr. Crellin’s salary), a prorated annual bonus (based on the higher of the target bonus
immediately in effect prior to the change of control, the bonus paid during, or the bonus paid with
respect to, the most recent fiscal year ending after the change of control), three times the sum of such
annual base salary and such annual bonus, any previously deferred compensation, and any accrued
vacation pay; (ii) for three years after the date of termination, US Airways will continue benefits to Mr.
Crellin and/or his family as if the agreement had continued; (iii) for purposes of eligibility for
retirement, Mr. Crellin shall be considered to have remained employed until the third anniversary of
the date of termination; and (iv) US Airways will provide continuation of travel privileges for life. In
addition, as a participant in the LTIP, upon a change of control, he would be eligible for a payment for
each three-year performance period under the LTIP that has not yet been completed in an amount that
would have been payable to him if target performance had been met for each performance period.
Upon termination of Mr. Crellin’s employment for any reason following the fifth anniversary of his
date of employment, he will be entitled to lifetime travel privileges.
Other Obligations. US Airways agreed to pay Mr. Crellin’s reasonable legal fees and expenses
incurred as a result of any contest by US Airways or others of the validity or enforceability of, or
liability under the agreement, plus interest. In the case of a contest regarding (i) payments upon
termination of Mr. Crellin’s employment prior to a change of control and not in connection with a
change of control other than for cause, disability or death or termination by Mr. Crellin for good
reason, or (ii) lifetime travel privileges following Mr. Crellin’s fifth anniversary of employment,
US Airways is only required to make such payments if Mr. Crellin prevails on at least one material
issue in such contest. In addition, in the event that any of Mr. Crellin’s compensation (whether
required under the agreement or otherwise) would be subject to an excise tax under Section 4999 of
the Internal Revenue Code, US Airways is required to pay Mr. Crellin an additional gross-up payment,
such that after payment of all taxes, including interest or penalties, on the gross-up payment, Mr.
Crellin will retain an amount of the gross-up payment equal to the excise tax (and any penalties and
interest on the excise tax). Mr. Crellin agreed to hold US Airways Group’s and US Airways’
confidential and proprietary information as confidential, including after termination of employment. If
Mr. Crellin violates this confidentiality agreement, any payments due under the agreement are
forfeited.
First Amendment to Severance Agreement. US Airways entered into a First Amendment to Mr.
Crellin’s Severance Agreement on March 31, 2003 that is filed as Exhibit 10.3 to US Airways’
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003. The Amendment
provides that (1) no change of control will be deemed to have occurred in connection with transactions
under the RSA investment agreement or in connection with US Airways’ emergence from the Prior
Bankruptcy and (2) any relocation of US Airways’ headquarters outside of the Washington, D.C.
metropolitan area will constitute good reason for Mr. Crellin to terminate his employment.
Severance Agreement with Jerrold A. Glass
US Airways’ Severance Agreement with Mr. Glass is dated as of April 8, 2002 and is filed as
Exhibit 10.10 to US Airways’ Annual Report on Form 10-K for the year ended December 31, 2002.
The Severance Agreement was amended by letter agreements dated July 25, 2002 and October 20,
2004, which are filed as Exhibit 10.18 to US Airways’ Annual Report on Form 10-K for the year
ended December 31, 2002 and Exhibit 10.40 to this Annual Report, respectively.
Term of Employment. The agreement provides for Mr. Glass to serve as Senior Vice President of
US Airways for an initial term of three years, to be extended each year by one additional year unless
either US Airways or Mr. Glass provides notice that the term will not be extended, or, if a shorter
period, until the first day of the month following Mr. Glass’s 65th birthday (which is defined in the
agreement as Mr. Glass’s “normal retirement date”). Upon a “change of control” (as defined in the
agreement), the term of the agreement is automatically extended to the third anniversary of the date of
the change of control or through Mr. Glass’s normal retirement date, whichever is earlier.
Salary and Benefits. The agreement does not specify Mr. Glass’s salary and benefits prior to the
date of a change of control. However, pursuant to the letter agreements that amended the severance
agreement, Mr. Glass became subject to a 17% and an additional 10% salary reduction and a 25%
reduction in retirement plan contributions effective October 11, 2004. Beginning on the date of a
change of control and continuing for a period of three years thereafter, or until Mr. Glass’s normal
retirement date, if earlier, the agreement provides for minimum salary and benefits that must be
provided to Mr. Glass. US Airways will pay Mr. Glass a base salary for the first 12 months of such
period at a rate not less than his base salary in effect on the date of the change of control. Mr. Glass’s
salary may not be decreased thereafter and must be increased in accordance with pay increases
provided to other senior vice president level employees. In addition, Mr. Glass will be awarded an
annual bonus determined by the Board or the Human Resources Committee in accordance with
US Airways Group’s ICP or successor plan. In addition to base salary and annual bonus, Mr. Glass
will be entitled to participate in all incentive, savings, retirement and welfare benefit plans applicable
to senior vice president level employees, under terms at least as favorable as the most favorable plans
provided during the 90-day period prior to the change of control. Mr. Glass will also be entitled to
fringe benefits, including but not limited to space positive and space available travel privileges in all
classes of service and cabins on all air carriers owned by US Airways and any of its affiliates,
including all carriers owned by any individual, entity or group that has entered into an agreement that
constitutes a change of control, and to paid vacation under terms at least as favorable as the most
favorable travel privileges and vacation program provided during the 90-day period prior to the change
of control. Mr. Glass will continue to be entitled to all of the foregoing compensation and benefits, if
applicable, during the first six months of Mr. Glass’s total and permanent disability
Termination of Employment. Mr. Glass’s employment may be terminated at any time by mutual
agreement, and terminates automatically upon his death. US Airways may also terminate the
agreement upon written notice after six months of Mr. Glass’s continuous total and permanent
disability, if Mr. Glass does not return to work within 90 days after the written notice. US Airways
may also terminate the agreement at any time for “cause” (as defined in the agreement). Mr. Glass
may voluntarily terminate his employment, which may constitute termination for “good reason” upon
certain events defined in the agreement. In the event of any termination by US Airways for cause or
by Mr. Glass for good reason within three years after a change of control and before Mr. Glass’s
normal retirement date, the terminating party must give written notice that indicates the specific
termination provision in the agreement that is relied upon and sets forth in reasonable detail the facts
and circumstances that are the basis for the termination, as well as the termination date, which may not
be more than 15 days after the notice date. For post-change of control terminations, in the event of a
dispute regarding termination, the agreement and compensation continue in effect until the earlier of
the resolution of the dispute, Mr. Glass’s normal retirement date, or the third anniversary of the date of
the change of control.
Obligations Upon Termination. If Mr. Glass’s employment is terminated for cause, due to death or
disability, or is voluntarily terminated by Mr. Glass without “good reason,” US Airways must pay all
salary, deferred compensation and vacation accrued through the date of termination within 30 days of
the date of termination. If termination is due to death or disability and occurs within three years after a
change of control and before Mr. Glass’s normal retirement date, US Airways must also pay a prorated
annual bonus based on the amount of Mr. Glass’s annual bonus for the previous fiscal year. If, prior to
a change of control and not in connection with a change of control, US Airways terminates Mr.
Glass’s employment other than for cause, disability or death or if Mr. Glass terminates his
employment for good reason, US Airways will pay to Mr. Glass in a lump sum in cash within 30 days
after the date of termination the aggregate of Mr. Glass’s accrued but unpaid base salary, deferred
compensation and benefits, plus an amount equal to two times the sum of his annual rate of base salary
and his target annual bonus. If, after a change of control, or prior to a change of control but in
connection with a change of control, US Airways terminates Mr. Glass’s employment other than for
cause, disability or death or if Mr. Glass terminates his employment for good reason: (i) US Airways
will pay to Mr. Glass a lump sum in cash within 30 days after the date of termination equal to the
aggregate of Mr. Glass’s accrued but unpaid base salary (disregarding any impermissible reductions in
Mr. Glass’s salary), a prorated annual bonus (based on the higher of the target bonus immediately in
effect prior to the change of control, the bonus paid during, or the bonus paid with respect to, the most
recent fiscal year ending after the change of control), three times the sum of such annual base salary
and such annual bonus, any previously deferred compensation, and any accrued vacation pay; (ii) for
three years after the date of termination, US Airways will continue benefits to Mr. Glass and/or his
family as if the agreement had continued; (iii) for purposes of eligibility for retirement, Mr. Glass shall
be considered to have remained employed until the third anniversary of the date of termination; and
(iv) US Airways will provide continuation of travel privileges for life. In addition, as a participant in
the LTIP, upon a change of control, he would be eligible for a payment for each three-year
performance period under the LTIP that has not yet been completed in an amount that would have
been payable to him if target performance had been met for each performance period. Upon
termination of Mr. Glass’s employment for any reason following the fifth anniversary of his date of
employment, he will be entitled to lifetime travel privileges.
Other Obligations. US Airways agreed to pay Mr. Glass’s reasonable legal fees and expenses
incurred as a result of any contest by US Airways or others of the validity or enforceability of, or
liability under the agreement, plus interest. In the case of a contest regarding (i) payments upon
termination of Mr. Glass’s employment prior to a change of control and not in connection with a
change of control other than for cause, disability or death or termination by Mr. Glass for good reason,
or (ii) lifetime travel privileges following Mr. Glass’s fifth anniversary of employment, US Airways is
only required to make such payments if Mr. Glass prevails on at least one material issue in such
contest. In addition, in the event that any of Mr. Glass’s compensation (whether required under the
agreement or otherwise) would be subject to an excise tax under Section 4999 of the Internal Revenue
Code, US Airways is required to pay Mr. Glass an additional gross-up payment, such that after
payment of all taxes, including interest or penalties, on the gross-up payment, Mr. Glass will retain an
amount of the gross-up payment equal to the excise tax (and any penalties and interest on the excise
tax). Mr. Glass agreed to hold US Airways Group’s and US Airways’ confidential and proprietary
information as confidential, including after termination of employment. If Mr. Glass violates this
confidentiality agreement, any payments due under the agreement are forfeited.
First Amendment to Severance Agreement. US Airways entered into a First Amendment to Mr.
Glass’s Severance Agreement on March 31, 2003 that is filed as Exhibit 10.33 to this Annual Report.
The Amendment provides that (1) no change of control will be deemed to have occurred in connection
with transactions under the RSA investment agreement or in connection with US Airways’ emergence
from the Prior Bankruptcy and (2) any relocation of US Airways’ headquarters outside of the
Washington, D.C. metropolitan area will constitute good reason for Mr. Glass to terminate his
employment.
Severance Agreement with B. Ben Baldanza
US Airways’ Severance Agreement with Mr. Baldanza is dated as of June 26, 2002 and is filed as
Exhibit 10.14 to US Airways’ Annual Report on Form 10-K for the year ended December 31, 2003.
The Severance Agreement was amended by letter agreements dated July 25, 2002 and October 20,
2004, which are filed as Exhibits 10.18 to Amendment No. 1 to US Airways’ Annual report on Form
10-K for the year ended December 31, 2002) and Exhibit 10.35 to this Annual Report, respectively.
The Severance Agreement was also amended by a First Amendment on March 31, 2003, which is filed
as Exhibit 10.15 to US Airways’ Annual Report on Form 10-K for the year ended December 31, 2003.
The Amendment provided that (1) no change of control was deemed to have occurred in connection
with transactions under the RSA investment agreement or in connection with US Airways’ emergence
from the Prior Bankruptcy and (2) any relocation of US Airways’ headquarters outside of the
Washington, D.C. metropolitan area will constitute good reason for Mr. Baldanza to terminate his
employment. Mr. Baldanza terminated his employment with the Company effective January 15, 2005,
and the Company does not intend to assume the Severance Agreement, as amended, in connection
with the Chapter 11 proceedings.
Term of Employment, Salary and Benefits. The agreement provided for Mr. Baldanza to serve as
Senior Vice President of US Airways for an initial term of three years, to be extended each year by one
additional year unless either US Airways or Mr. Baldanza provided notice that the term will not be
extended. The agreement also provided that Mr. Baldanza’s employment could be terminated at any
time by mutual agreement, and terminated automatically upon his death. US Airways had the right
terminate the agreement in the event of Mr. Baldanza’s continuous total and permanent disability or
for “cause” (as defined in the agreement), and Mr. Baldanza had the right to terminate his employment
for “good reason” upon certain events defined in the agreement. Mr. Baldanza’s voluntary termination
of his agreement effective January 15, 2005 was not for “good reason.”
The agreement did not specify Mr. Baldanza’s salary and benefits prior to the date of a change of
control. However, pursuant to the letter agreements that amended the severance agreement, Mr.
Baldanza had been subject to a 17% and became subject to an additional 10% salary reduction and a
25% reduction in retirement plan contributions effective October 11, 2004. Beginning on the date of a
change of control and continuing for a period of three years thereafter, or until Mr. Baldanza’s normal
retirement date, if earlier, the agreement provided for minimum salary and benefits that must be
provided to Mr. Baldanza.
Obligations Upon Termination. The agreement provided for various payments to Mr. Baldanza
upon termination for cause, for good reason, upon death or disability or due to a change of control,
which are described in detail in US Airways Group’s proxy statement for its 2004 annual meeting of
shareholders. Due to his voluntary termination without good reason, these provisions no longer apply.
As provided in the agreement, upon voluntary termination of the agreement by Mr. Baldanza without
good reason, US Airways paid all salary, deferred compensation and vacation accrued by Mr.
Baldanza through the date of termination.
Other Obligations. Upon termination of Mr. Baldanza’s employment for any reason following the
fifth anniversary of his date of employment, he was entitled to lifetime travel privileges. US Airways
also agreed to pay Mr. Baldanza’s reasonable legal fees and expenses incurred as a result of any
contest by US Airways or others of the validity or enforceability of, or liability under the agreement,
plus interest. In the case of a contest regarding (i) payments upon termination of Mr. Baldanza’s
employment prior to a change of control and not in connection with a change of control other than for
cause, disability or death or termination by Mr. Baldanza for good reason, or (ii) lifetime travel
privileges following Mr. Baldanza’s fifth anniversary of employment, US Airways is only required to
make such payments if Mr. Baldanza prevails on at least one material issue in such contest. In
addition, in the event that any of Mr. Baldanza’s compensation (whether required under the agreement
or otherwise) would be subject to an excise tax under Section 4999 of the Internal Revenue Code,
US Airways is required to pay Mr. Baldanza an additional gross-up payment, such that after payment
of all taxes, including interest or penalties, on the gross-up payment, Mr. Baldanza will retain an
amount of the gross-up payment equal to the excise tax (and any penalties and interest on the excise
tax). Mr. Baldanza agreed to hold US Airways Group’s and US Airways’ confidential and proprietary
information as confidential, including after termination of employment. If Mr. Baldanza violates this
confidentiality agreement, any payments due under the agreement are forfeited. The obligations set
forth in this paragraph will no longer apply if the Company does not assume the Severance
Agreement, as amended, in connection with the Chapter 11 proceedings.
Separation Agreement with David N. Siegel
US Airways Group and US Airways entered into a Separation Agreement with Mr. Siegel dated
April 23, 2004, which is filed as Exhibit 10.10 to US Airways’ Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004.
The agreement provided that Mr. Siegel’s service as President and Chief Executive Officer of
Airways was terminated by Mr. Siegel for “good reason” on April 19, 2004. The agreement
provided for a cash severance payment of $4,725,410, which was paid in a single lump sum. In
addition, 669,600 outstanding Warrants held by Mr. Siegel became fully vested and remain
exercisable until April 1, 2010. 1,130,400 shares of restricted stock held by Mr. Siegel became fully
vested under the agreement. Mr. Siegel is also entitled to continue participating in certain employee
benefits for three years. The agreement required US Airways to reimburse Mr. Siegel up to $15,000
for his legal fees incurred in connection with the separation agreement. The agreement requires Mr.
Siegel to protect US Airways’ and US Airways Group’s confidential information for three years,
and not to solicit customers, clients or employees for six months. The agreement provided for
mutual general releases of claims.
Supplemental Separation Agreement with David N. Siegel
US Airways Group and US Airways entered into a Supplemental Separation Agreement with
Mr. Siegel dated May 19, 2004, which is filed as Exhibit 10.11 to US Airways’ Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004. The Supplemental Separation Agreement
supplemented the initial Separation Agreement described above, and in particular, resolved the
supplemental executive retirement benefits for Mr. Siegel.
Under the agreement, Mr. Siegel became entitled to benefits under the Executive Plans. The
total contribution under the Funded Executive Defined Contribution Plan for Mr. Siegel was
$681,419, which was paid to Mr. Siegel as provided in the plan. In addition, Mr. Siegel received a
tax gross-up payment of $493,441. The allocation under the Unfunded Executive Defined
Contribution Plan for Mr. Siegel was $91,714, which is distributable to Mr. Siegel in accordance
with the terms of that plan. The agreement required Mr. Siegel to cooperate with US Airways and
US Airways Group for six months after the date of his termination of employment and to reasonably
assist on all matters related to his employment and the conduct of business, including any litigation.
US Airways agreed to reimburse Mr. Siegel up to an additional $50,000 for his legal fees incurred
in connection with the separation agreement and supplemental separation agreement. The
agreement also entitled Mr. Siegel to receive $75,000 for accrued but unused vacation time. Mr.
Siegel also agreed not to solicit customers, clients or employees for six months, and the agreement
provided for mutual general releases of claims.
Employment Agreement with David N. Siegel
US Airways’ Employment Agreement with Mr. Siegel was dated as of March 11, 2002 and was
filed as Exhibit 10.41 to US Airways’ Annual Report on Form 10-K for the year ended December 31,
2001. In addition, a letter agreement between US Airways and Mr. Siegel dated as of March 11, 2002,
which supplemented the employment agreement, was filed as Exhibit 10.49 to US Airways’ Annual
Report on Form 10-K for the year ended December 31, 2001. Mr. Siegel’s employment agreement
and the supplementary letter agreement were terminated and superseded by the separation agreement
and supplemental separation agreement described above, except that the following provisions of the
employment agreement survived: (i) US Airways agreed to pay Mr. Siegel’s reasonable legal fees and
expenses incurred as a result of any contest by US Airways or others of the validity or enforceability
of, or liability under, the separation agreement and supplemental separation agreement, plus interest,
and (ii) in the event that any of Mr. Siegel’s compensation would be subject to an excise tax under
Internal Revenue Code Section 4999, US Airways is required to pay Mr. Siegel an additional gross-up
payment, such that after payment of all taxes, including interest or penalties, on the gross-up payment,
Mr. Siegel will retain an amount of the gross-up payment equal to the excise tax (and any penalties
and interest on the excise tax).
Separation and Consulting Agreement with Neal S. Cohen
US Airways Group and US Airways entered into a Separation and Consulting Agreement with
Mr. Cohen dated April 30, 2004, which is filed as Exhibit 10.12 to US Airways’ Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004.
The agreement provided that Mr. Cohen’s service as Executive Vice President and Chief
Financial Officer of Airways was terminated by Mr. Cohen for “good reason” on April 30, 2004.
The agreement provided for a cash severance payment of $1,523,033, which was paid in a single
lump sum. In addition, 223,200 outstanding Warrants held by Mr. Cohen were fully vested and
remain exercisable until April 1, 2010. 376,800 shares of restricted stock held by Mr. Cohen
became fully vested under the agreement. The agreement provided that Mr. Cohen would provide
consulting services for three months, which could be extended by mutual written agreement. For
the consulting services, Mr. Cohen received $50,000 per month, plus $20,000 per month in future
first class travel on Airways at a value of $200 per domestic flight round trip, $400 per Caribbean
flight round trip and $600 per European flight round trip, prorated for partial months. The
agreement required US Airways to reimburse Mr. Cohen up to $10,000 for his legal fees incurred in
connection with the separation agreement. The agreement requires Mr. Cohen to protect
US Airways’ and US Airways Group’s confidential information for one year, and not to solicit
customers, clients or employees for nine months. The agreement provided for mutual general
releases of claims.
Severance Agreement with Neal S. Cohen
US Airways’ Severance Agreement with Mr. Cohen was dated as of April 8, 2002 and was filed as
Exhibit 10.8 to US Airways’ Annual Report on Form 10-K for the year ended December 31, 2002.
Mr. Cohen’s severance agreement was terminated and superseded by the separation agreement
described above.
Compensation Committee Interlocks and Insider Participation
None of the Company’s executive officers or directors serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive officers serving as a
member of the Company’s Board of Directors or Human Resources Committee.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
US Airways Group is the sole shareholder of US Airways, and holds all 1,000 shares of outstanding
common stock.
Item 13.
Item 13. Certain Relationships and Related Transactions
In connection with the consummation of the 2003 Plan, RSA made an equity investment in
US Airways Group equal to $240 million. In exchange for the $240 million investment, RSA received
the following securities of US Airways Group, representing approximately 36.2%, on a fully-diluted
basis, of US Airways Group’s equity: 20,652,593 shares of Class A Common Stock, 5,000,000 shares
of Class B Common Stock, 75,000 shares of Class B Preferred Stock, 1,380,570 Warrants and
1,380,570 shares of Class A Preferred Stock. As of February 1, 2005, in connection with its
investment, RSA held a voting interest of approximately 71.7% in US Airways Group and is entitled
to designate and vote to elect eight of the 15 directors on US Airways Group’s board of directors. Dr.
David G. Bronner and Mr. William T. Stephens, two of the directors of both US Airways Group and
US Airways, are the Manager and Secretary of RSA, respectively.
Until September 26, 2007, RSA has agreed to vote all of the shares of voting capital stock received
in connection with the consummation of the 2003 Plan and then owned by it in favor of all of the
directors nominated in accordance with the investment agreement between US Airways Group and
RSA, which directors include US Airways Group’s chief executive officer, four directors nominated
by the various unions and their affiliates, and two directors identified by US Airways Group’s chief
executive officer, neither of whom is an employee or affiliate of US Airways Group, at each annual
meeting of US Airways Group’s stockholders or at any meeting of the stockholders at which members
of its Board of Directors are to be elected.
RSA funded $75 million of the non-guaranteed portion of the ATSB Loan. For more information
about the ATSB Loan, see Part I, Item 3. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.” In connection with RSA’s
partial funding, it received from US Airways Group 636,249 additional Warrants and 636,249
additional shares of Class A Preferred Stock. With respect to the prepayments of the ATSB Loan,
RSA, as one of the lenders under the ATSB Loan, has received prepayments totaling $21 million
through December 31, 2004, which represented its pro rata portion of the prepayment amount based
on the percentage of the original aggregate amount of the ATSB Loan that RSA funded. As of
December 31, 2004, $54 million was outstanding under RSA’s portion of the ATSB Loan.
See also Note 12 in the Notes to the Financial Statements included in this report for additional
information regarding related party transactions between the Company, US Airways Group and
US Airways Group’s other wholly owned subsidiaries.
Item 14.
Item 14. Principal Accountant Fees and Services.
Audit and Non-Audit Fees
Aggregate fees for professional services rendered for US Airways Group and US Airways by
KPMG LLP as of or for the fiscal years ended December 31, 2004 and 2003 are set forth below. The
aggregate fees included in the Audit category are fees for the fiscal years for the audit of the annual
financial statements and review of quarterly financial statements and statutory and regulatory filings or
engagements. The aggregate fees included in each of the other categories are fees billed in the fiscal
years.
Audit Fees for the fiscal years ended December 31, 2004 and 2003 were for professional services
rendered for the audits of the annual financial statements, the audit of internal control over financial
reporting (2004) and quarterly review of the financial statements included in the Quarterly Reports on
Form 10-Q, including bankruptcy related transactions and the adoption of fresh start reporting (2003).
Audit fees also include statutory audits and consents to the use of audit reports in SEC filings.
Audit-Related Fees as of the fiscal years ended December 31, 2004 and 2003 were for audits of
employee benefit plans and other audit related services.
Tax Fees as of the fiscal years ended December 31, 2004 and 2003 were for tax compliance advice
related primarily to bankruptcy matters, change of ownership and review of tax returns.
There were no fees which fall into the classification of All Other Fees as of the fiscal years ended
December 31, 2004 and 2003.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
Commencing in May 2003, with the effectiveness of new rules adopted under the Sarbanes-
Oxley Act of 2002, the Audit Committee established a practice of pre-approving all services (audit
and non-audit) provided by the Company’s independent auditors and is responsible for determining
whether these services are consistent with the auditor’s independence. The Audit Committee
adopted a pre-approval policy in May 2003 that provides guidelines for the audit, audit-related, tax
and other non-audit services that may be provided to the Company by its independent auditors. The
policy requires the pre-approval of all services at a meeting of the Audit Committee or through the
following detailed process:
• submission by the independent auditors of a detailed description of the audit or non-audit
service being requested by management, including an engagement fee or range of fees for
the service;
 the Company’s analysis and certification that the services are not prohibited services under
the Sarbanes-Oxley Act of 2002 and related rules or regulations;
 the Company’s certification that the services are compatible with the auditors’
independence requirements;
 the review and approval of one authorized member of management (either the General
Counsel or the Executive Vice President - Finance and Chief Financial Officer) before
submitting the proposal to the Chairman of the Audit Committee;
 the analysis and verification by the independent auditor that the services are not prohibited
services under the Sarbanes-Oxley Act of 2002 and related rules or regulations;
 the verification by the independent auditor that the services are compatible with the
auditors’ independence requirements;
 the review and approval by the lead engagement partner before submitting the proposal to
the Chairman of the Audit Committee;
 the approval by the Chairman of the Audit Committee; and
 informing the full Audit Committee of such approval in a timely manner.
Part IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
Financial Statements
The following financial statements of US Airways, Inc. are included in Part II, Item 8 of this report:
 Statements of Operations for the year ended December 31, 2004, the nine months ended
December 31, 2003 (Successor Company), the three months ended March 31, 2003 and the
year ended December 31, 2002 (Predecessor Company)
 Balance Sheets as of December 31, 2004 and December 31, 2003 (Successor Company)
 Statements of Cash Flows for the year ended December 31, 2004, the nine months ended
December 31, 2003 (Successor Company), the three months ended March 31, 2003 and the
year ended December 31, 2002 (Predecessor Company)
 Statements of Stockholders’ Equity (Deficit) for the year ended December 31, 2004, the nine
months ended December 31, 2003 (Successor Company), the three months ended March 31,
2003 and the year ended December 31, 2002 (Predecessor Company)
 Notes to Financial Statements
Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable or not required,
or because the required information is either incorporated herein by reference or included in the
financial statements or notes thereto included in this report.
Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K. Where the amount of securities
authorized to be issued under any of the Company’s long-term debt agreements does not exceed 10
percent of the Company’s assets, pursuant to paragraph (b)(4)(iii) of Item 601 of Regulation S-K, in
lieu of filing such as an exhibit, the Company hereby agrees to furnish to the Commission upon
request a copy of any agreement with respect to such long-term debt.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on February 28, 2005.
US Airways, Inc. (registrant)
By:
/s/ Bruce R. Lakefield
Bruce R. Lakefield, Director, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of US Airways Group in the capacities indicated, on
February 28, 2005.
* Signed pursuant to power of attorney filed herewith.