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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
_________________________
USAir Group, Inc.
(Commission file number: 1-8444)
and
USAir, Inc.
(Commission file number: 1-8442)
(Exact names of registrants as specified in their charters)
Delaware USAir Group, Inc. 54-1194634
(State of incorporation USAir, Inc. 53-0218143
of both registrants) (I.R.S. Employer Identification Nos.)
USAir Group, Inc.
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 418-5306
(Registrant's telephone number)
USAir, Inc.
2345 Crystal Drive, Arlington, Virginia 22227
(Address of principal executive offices)
(703) 418-7000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Registrant Title of each class on which registered
- ---------- ------------------- ----------------------
USAir Group, Inc. Common stock, par New York Stock Exchange
value $1.00 per
share
Preferred Share New York Stock Exchange
Purchase Rights
expiring 1996
Depositary Shares, New York Stock Exchange
each representing
1/100 of a share
of $437.50 Series
B Cumulative Convert-
ible Preferred Stock
Name of each exchange
Registrant Title of each class on which registered
- ---------- ------------------- ----------------------
USAir, Inc. 12-7/8% Senior New York Stock Exchange
Debentures due
2000
Indicate by check mark whether the registrants (1) have filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and
(2) have been subject to such filing requirements for the past 90
days.
Yes x No
------------- -------------
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained in this
Form 10-K, and will not be contained, to the best of the regis-
trants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of USAir Group,
Inc. held by non-affiliates on February 28, 1994 was approximately
$1,390,034,000. On February 28, 1994, there were outstanding
59,265,000 shares (exclusive of 1,815,000 shares held in treasury)
of common stock of USAir Group, Inc. and 1,000 shares of common
stock of USAir, Inc.
The registrant USAir, Inc. meets the conditions set forth in
General Instructions J(1)(a) and (b) of Form 10-K and is therefore
participating in the filing of this form in the reduced disclosure
format permitted by such Instructions.
USAir Group, Inc.
and
USAir, Inc.
Form 10-K
Year Ended December 31, 1993
TABLE OF CONTENTS
Part I Page
Item 1. Business 1
Significant Impact of Low Cost, Low Fare Competition 1
British Airways Announcement Regarding Additional
Investment in the Company; Code Sharing 4
Major Airline Operations 5
Commuter Airline Operations 12
USAM Corp. 12
Employees 13
Jet Fuel 19
Insurance 20
Industry Conditions 20
Regulation 22
British Airways Investment Agreement 26
Item 2. Properties 37
Flight Equipment 37
Ground Facilities 39
Item 3. Legal Proceedings 41
Item 4. Submission of Matters to a Vote
of Security Holders 43
Part II
Item 5A. Market for USAir Group's Common Equity
and Related Stockholder Matters 44
Item 5B. Market for USAir's Common Equity and
Related Stockholder Matters 44
Item 6. Selected Financial Data 45
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 46
i
TABLE OF CONTENTS
(Continued)
Part II (Continued) Page
Item 8A. Financial Statements and Supplementary
Information - USAir Group, Inc. 69
Item 8B. Financial Statements and Supplementary
Information - USAir, Inc. 111
Item 9. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure 140
Part III
Item 10. Directors and Executive Officers of
USAir Group, Inc. 141
Item 11. Executive Compensation 151
Item 12. Security Ownership of Certain Beneficial
Owners and Management 168
Item 13. Certain Relationships and Related
Transactions 172
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 173
Financial Statements - USAir Group, Inc. 173
Financial Statements - USAir, Inc. 173
Financial Statement Schedules 173
Reports on Form 8-K 174
Exhibits 174
Signatures
USAir Group, Inc. 180
USAir, Inc. 183
ii
PART I
Item 1. BUSINESS
USAir Group, Inc. ("USAir Group" or the "Company") is a
corporation organized under the laws of the State of Delaware. The
Company's executive offices are located at 2345 Crystal Drive,
Arlington, Virginia 22227 (telephone number (703) 418-5306). USAir
Group's primary business activity is ownership of all the common
stock of USAir, Inc. ("USAir"), Pennsylvania Commuter Airlines,
Inc. (which is operating as Allegheny Commuter Airlines) ("Alleghe-
ny"), Piedmont Airlines, Inc. ("Piedmont") (formerly Henson
Aviation, Inc.), Jetstream International Airlines, Inc. ("Jet-
stream"), USAir Fuel Corporation ("USAir Fuel"), USAir Leasing and
Services, Inc. ("USAir Leasing and Services") and Material Services
Company, Inc. In May 1987, the Company acquired Pacific Southwest
Airlines ("PSA"), which merged into USAir on April 9, 1988. In
November 1987 the Company completed its acquisition of Piedmont
Aviation, Inc. ("Piedmont Aviation"), which merged into USAir on
August 5, 1989. On July 15, 1992, the Company sold three wholly-
owned subsidiaries, Piedmont Aviation Services, Inc., Air Service,
Inc. and Aviation Supply Corporation. The former subsidiaries were
engaged in fixed base operations and the sale and repair of
aircraft and aircraft components. During the third quarter of
1992, the Company merged one wholly-owned subsidiary, Allegheny
Commuter Airlines, Inc. into another, Pennsylvania Commuter
Airlines, Inc.
Significant Impact of Low Cost, Low Fare Competition
As discussed in greater detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the
dramatic expansion of low fare competitive service in many of
USAir's markets in the eastern U.S. during the first quarter of
1994 and USAir's competitive response in February 1994 by reducing
its fares up to 70 percent in those markets and other affected
markets in order to preserve its market share led the Company to
announce that it expected to experience greater losses in 1994 than
it experienced in 1993.
In September 1993, Southwest Airlines, Inc. ("Southwest"), a
low cost, low fare, "no frills" air carrier which had not previous-
ly provided service to or in the eastern U.S., inaugurated service
to Chicago and Cleveland from Baltimore/ Washington International
Airport ("BWI") at fares substantially below those previously
offered by USAir and other airlines in the same markets. BWI is
one of USAir's hub airports. Unlike the other major U.S. air
carriers, Southwest does not structure its operations around
connecting hub airports, relying instead on high frequency point-
to-point service. USAir responded by matching most of Southwest's
fares and increasing the frequency of service in related markets.
1
On March 22, 1994, Southwest announced that on May 26, 1994,
and June 6, 1994, it will expand service between BWI and Chicago.
Southwest also announced that on May 26, 1994, it will initiate its
low fare service between BWI and St. Louis, and on July 8, 1994,
between BWI and Birmingham, Alabama and Louisville, Kentucky. At
this time, USAir has not determined its response to the Southwest
announcement.
In October 1993, Continental Airlines ("Continental"), which
had reorganized under bankruptcy proceedings earlier in 1993,
inaugurated low fare service on certain routes in the eastern U.S.
USAir is a competitor in most of the markets served by these
routes. While Continental initiated service to certain cities,
such as Charleston, South Carolina; Greensboro, North Carolina; and
Jacksonville, Florida; most of the markets included as part of its
new program (for example, Baltimore) were previously served by
Continental through its hubs at Newark, Cleveland, and Houston.
However, under its new program, Continental linked certain of these
cities independently of its hubs while continuing to provide many
of the same services that are available on its hub flights,
including advance seat assignment, frequent traveler mileage
credits and interline connections. Under its new program,
Continental served approximately 80 city pair markets, from which
USAir has historically realized approximately 4% of its total
passenger revenue. When Continental started the new program it was
uncertain whether the program was an experiment or a beachhead from
which Continental planned to expand further. USAir, therefore,
made a measured response by matching most of the low fares offered
by Continental.
On January 31, 1994, Continental increased its competitive
threat. It announced that by March 9, 1994, it would expand the low
fare program to approximately 356 city pair markets, most of which
USAir served and from which USAir has historically realized
approximately 8% of its passenger revenue. Moreover, if secondary
markets within a 90-mile radius, or a reasonable driving distance,
were viewed as being included in Continental's new program, markets
from which USAir has historically realized approximately 36% of its
passenger revenue were affected. Contemporaneously, Continental
announced that it would substantially reduce service at its Denver
hub and redeploy significant aircraft and personnel resources to
the eastern U.S. Although Continental's balance sheet continues to
have significant leverage following its bankruptcy reorganization,
its liquidity position improved substantially as a result of equity
and debt infusions completed as part of that reorganization.
Moreover, Continental completed a common stock offering in December
1993, which may indicate the market's receptivity to its efforts to
raise additional funds. Continental has operating (including
labor) costs that are substantially lower than those of USAir and
the other major air carriers.
2
On February 8, 1994, in response to the expansion of Continen-
tal and to avoid loss of market share in the eastern U.S., USAir
lowered in primary and secondary markets affected by the Continen-
tal expansion, by as much as 50%, the fares most commonly used by
business travelers on many east coast routes. In addition, USAir
lowered leisure fares by as much as 70% in the same markets. In
many of the markets, free companion fares are available with
business fares. These reduced fares have no expiration date.
However, USAir could adjust the fares at some time in the future.
Increases in traffic which are stimulated by the lower fares
offered by Southwest, Continental and USAir will not offset USAir's
reduced revenue resulting from lower yields in these markets.
USAir believes that Southwest, Continental or other low cost
carriers with a significant cost advantage over USAir likely will
expand their operations to additional markets. For example, in
December 1993, Southwest completed its acquisition of Morris Air,
a regional air carrier with operations concentrated in the western
U.S. This acquisition could enable Southwest to divert resources
to expand its operations in the eastern U.S. Furthermore, media
reports indicate that Southwest has entered into a long-term
agreement for the use of four additional gates at BWI, where it
currently operates from two gates. On March 4, 1994, Continental
further escalated prospective competition by announcing that it
will further reduce operations at its Denver, Colorado hub and
establish a flight crew base at Greensboro, North Carolina. These
measures are likely to increase losses at USAir because they could
enable Continental, which has significantly lower costs than USAir,
to expand further its high frequency, low fare service described
above in additional short-haul markets served by USAir with
substantial detriment to USAir. In addition, other low cost
carriers may enter other USAir markets. For example, America West
Airlines ("America West") announced on February 15, 1994 that it
will commence service on April 18, 1994 between Columbus, Ohio
where it operates a hub and Philadelphia, where USAir has a hub
operation. Other carriers, including some of the larger carriers,
have also indicated their intent to develop similar low-fare short-
haul service.
In March 1994, USAir announced that it expected a pre-tax loss
for the quarter ended March 31, 1994 of approximately $200 million
and that it expected a pre-tax loss for the full year of 1994 in
excess of the $350 million loss reported for 1993. USAir, whose
operating costs are among the highest in the domestic airline
industry, believes that it must reduce those costs significantly if
it is to survive in this low fare competitive environment. The
largest single component of USAir's operating costs, approximately
40 percent, relates to personnel costs. USAir also announced in
March 1994 that it had initiated discussions with the leaders of
its unionized employees regarding efforts to reduce these costs,
including reductions in wages, improvements in productivity and
other cost savings.
3
The outcome of those discussions is uncertain. There are
recent examples of companies in the airline industry which have
obtained employee concessions in agreements also resulting in the
recapitalization of the companies, including employee ownership
stakes and employee participation in corporate governance as well
as the restructuring of debt and lease obligations. In other
cases, airlines have filed for bankruptcy protection under Chapter
11 of the bankruptcy code, and some airlines have ceased operation
altogether when their operating costs remained excessive in
relation to their revenues, and their liquidity became insufficient
to sustain their operations. In addition, other factors beyond the
Company's control, such as a downturn in the economy, a dramatic
increase in fuel prices or intensified industry fare wars, could
have a material adverse effect on the Company's and USAir's
prospects and financial condition. Because the Company and USAir
are highly leveraged and currently do not have access to bank
credit and receivables facilities which had supplied a substantial
portion of their liquidity, they could be more vulnerable to these
factors than their financially stronger competitors. See "Managem-
ent's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
British Airways Announcement Regarding Additional Investment in the
Company; Code Sharing
As described in greater detail in "British Airways Investment
Agreement" below, on January 21, 1993, the Company and British
Airways Plc ("BA") entered into an Investment Agreement (as
subsequently amended, the "Investment Agreement"). Pursuant to the
Investment Agreement, on the same date, BA invested $300 million in
certain preferred stock of the Company. In June 1993, pursuant to
BA's exercise of its preemptive and optional purchase rights under
the Investment Agreement which were triggered by the issuance by
the Company to the public, and under certain employee benefit
plans, of certain shares of common stock, BA purchased $100.7
million of additional series of preferred stock of the Company.
The Company has benefitted from the additional equity provided by
BA and also from the resulting enhancement of the Company's image
in the marketplace and in the investment community. However, on
March 7, 1994, BA announced that because of the Company's continued
substantial losses it would make no additional investments in the
Company until the outcome of the Company's efforts to reduce its
costs is known. See "Significant Impact of Low Fare, Low Cost
Competition" above and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and
Capital Resources." At the same time, BA indicated it would
continue to cooperate with USAir on the code sharing arrangements
discussed below.
In addition, since January 1993, pursuant to the Investment
Agreement, BA and USAir have entered into code sharing arrangements
whereby certain USAir flights carry the airline designator code of
4
both USAir and BA. Code sharing is a common practice in the
airline industry whereby one carrier sells the flights of another
carrier (its code sharing partner) as if it provides those flights
with its own equipment and personnel. On March 17, 1994, the U.S.
Department of Transportation (the "DOT") issued an order renewing
for one year all of the code share authority it had previously
approved for USAir and BA which includes authority to code share to
64 airports in the U.S. through 12 gateways and to Mexico City
through Philadelphia. The DOT did not act on other pending
applications by BA and USAir for expanded code share authority.
Major Airline Operations
USAir, a certificated air carrier engaged primarily in the
business of transporting passengers, property and mail, is the
Company's principal operating subsidiary, accounting for more than
93% of USAir Group's operating revenues in 1993. USAir is one of
nine passenger carriers classified as "major" airlines (those with
annual revenues greater than $1 billion) by the United States
Department of Transportation (the "DOT"). USAir enplaned more than
54.0 million passengers in 1993, and is the sixth largest United
States air carrier ranked by revenue passenger miles ("RPMs")
flown.
At January 31, 1994, USAir provided regularly scheduled jet
service through 118 airports to more than 154 cities in the
continental United States, Canada, the Bahamas, Bermuda, the Cayman
Islands, Puerto Rico, Germany, France and the Virgin Islands.
USAir ceased serving the United Kingdom in January 1994. See
"British Airways Investment Agreement". USAir's executive offices
are located at 2345 Crystal Drive, Arlington, Virginia 22227
(telephone number (703) 418-7000), and its primary connecting hubs
are located at the Pittsburgh, Charlotte/Douglas, Philadelphia and
Baltimore/Washington International ("BWI") Airports. A substantial
portion of USAir's RPMs is flown within or to and from the eastern
United States. USAir Group and USAir incurred substantial
operating and net losses during 1991, 1992 and 1993.
During the first quarter of 1992, USAir's RPMs decreased over
the same period in 1991, however, yield, or passenger revenue per
RPM, improved. The decline in traffic was attributable to the May
1991 Restructuring (discussed below) and the economic recession.
It is not possible to estimate accurately how many business and
leisure travelers decided not to travel during 1991 and 1992 as a
result of the recession and perceived weak recovery. During the
second quarter of 1992, American Airlines, Inc. ("American")
introduced a four-tier fare structure which resulted in the
proliferation of deeply discounted promotional fares in the second
and third quarters of 1992. Although the promotional fares
significantly stimulated traffic during the second and third
quarters of 1992, yields suffered substantial declines versus
comparable periods in 1991.
5
Although yields at USAir recovered and improved significantly
in the fourth quarter of 1992 and in the first three quarters of
1993, yields started to erode in the fourth quarter of 1993 and
declined versus the comparable quarter of 1992 due to proliferation
of discount and promotional fares which were designed to stimulate
passenger traffic. Yields have continued to be weak in the first
quarter of 1994 due primarily to USAir's action to reduce fares to
remain competitive with low cost low fare carriers which had
entered many of USAir's markets in the eastern U.S. During 1993,
systemwide traffic remained relatively weak. In addition, the
domestic airline industry was characterized in 1991 - 1993 by
substantial losses, excess capacity, intense competition and
certain carriers operating under the protection of Chapter 11 of
the Bankruptcy Code. Any of these factors or other developments,
including the emergence of America West from bankruptcy, the entry
or potential entry of low cost carriers in USAir's markets and a
resurgence in low fare competition from these and other carriers
could have a material adverse effect on the Company's yields,
liquidity and financial condition. See "Significant Impact of Low
Fare, Low Cost Competition" above and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
For information on possible further effects of the recent
economic recession, increased competition from low cost, low fare
carriers, possible restructuring of the Company and USAir,
consolidation in the domestic airline industry and globalization of
the airline industry, see Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
USAir implemented several operational changes during the
period 1991 through 1993 in efforts to return to profitability and
has announced plans for additional action in 1994.
On May 2, 1991, USAir ceased operating its fleet of 18 British
Aerospace BAe 146-200 ("BAe-146") aircraft, ceased serving eight
airports in California, Oregon and Washington, and eliminated some
flights at Baltimore/Washington and Cleveland Hopkins International
Airports. Although other service was added to partially offset
these reductions, the net effect was a decrease of approximately
three percent in USAir's system available seat miles ("ASMs"), and
a net reduction in scheduled departures of ten percent from January
1991 service levels. In connection with this restructuring, USAir
closed four flight crew bases, two heavy maintenance facilities and
one reservations office (these measures are collectively referred
to as the "May 1991 Restructuring"). (In April 1993, USAir
reintroduced long-haul service at John Wayne Airport in Orange
County, California, one of the airports that USAir ceased serving
in the May 1991 Restructuring).
6
Effective January 7, 1992, USAir discontinued its hub
operations at Dayton, Ohio due to operating losses there. Daily
jet departures from Dayton were reduced from 72 to 23. The
majority of USAir's jet flights between Dayton and smaller and
medium-sized "spoke" cities was shifted to USAir's hub at Pitts-
burgh, Pennsylvania, and there was no reduction in total systemwide
capacity as a result of this action.
In September 1993, USAir announced steps to reduce projected
operating costs in 1994 by approximately $200 million. These
measures include a workforce reduction of approximately 2,500 full
time positions, revision of USAir's vacation, holiday and sick
leave policy and a review of planned 1994 capital expenditures.
The workforce reduction, which USAir anticipates will be completed
by the end of the first quarter of 1994, will be comprised
primarily of the elimination of approximately 1,800 customer
service, 200 flight attendant and 200 maintenance positions. USAir
recorded a non-recurring charge of approximately $68.8 million
primarily in the third quarter of 1993 for severance, early
retirement and other personnel-related expenses in connection with
the workforce reduction.
In March 1994, USAir initiated discussions with the leadership
of its unionized employees regarding reductions in wages, improve-
ments in productivity and other cost savings as a result of the
entry of low cost low fare carriers in many of its markets and
USAir's response to this low fare competition. See "Significant
Impact of Low Cost, Low Fare Competition" above and Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
In counterpoint to the reductions outlined above, USAir has
also taken, or plans to take, the following steps to augment or
enhance its service.
In December 1991, USAir reached agreements with General
Electric Capital Corporation ("GE Capital") and with The Boeing
Company ("Boeing") to acquire up to 40 757-200 aircraft during
1992-1997. USAir agreed to lease ten aircraft owned by GE Capital
and formerly operated by Eastern Air Lines ("Eastern"). In
December 1992, USAir agreed to sublease an additional 757-200
aircraft from Boeing that was formerly operated by Eastern. USAir
added these 11 aircraft to its operating fleet during 1992. USAir
also agreed with Boeing to purchase 15 new 757-200 aircraft in 1993
and 1994, and took options to purchase 15 more 757-200s in 1996 and
1997. In April 1993, USAir and Boeing reached an agreement to
exercise the options on 757-200 aircraft previously scheduled for
delivery in 1996-1997 and accelerate their delivery to 1995-1996,
and to convert a firm order for a 767-200 aircraft, originally
scheduled for delivery in 1994, to a firm order for a 757-200
aircraft, also scheduled for delivery in 1994. Boeing granted
USAir options to purchase 15 additional 757-200 aircraft for 1995
7
and beyond, three of which have expired. In addition, Boeing
relieved USAir of its obligation to purchase 20 of its 60 firm
orders for Boeing 737 series aircraft and agreed to reschedule
delivery of the remaining 40 on order. No new firm order 737
aircraft are scheduled to be delivered to USAir between 1994-1996,
while 12 new 737 aircraft will be delivered annually in the years
1997-1999 and four will be delivered in the year 2000. USAir is
using the Boeing 757-200 aircraft, which seats approximately 190
passengers, on long-haul routes and in high demand markets where
potential passenger traffic may not currently be accommodated on
smaller aircraft at peak travel times. USAir considers the 757-200
aircraft to be more suitable for these missions than the Boeing
767-200 and Boeing 737 aircraft types. The above actions supple-
ment USAir's agreements with Boeing in 1990 and 1991 to defer
delivery of several 737 and 767 aircraft originally scheduled for
the 1991-1994 period. Overall, the deferrals have substantially
reduced USAir's capital commitments and financing needs during that
time period. USAir is engaged in negotiations with Boeing
regarding, among other things, the current schedule of new aircraft
deliveries. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Item 8A. Note 4 to the Company's Consolidat-
ed Financial Statements.
On January 17, 1992, USAir purchased 62 jet take-off and
landing slots and 46 commuter slots at New York City's LaGuardia
Airport ("LaGuardia") and six jet slots at Washington National
Airport from Continental Airlines ("Continental") for $61 million.
USAir also assumed Continental's leasehold obligations associated
with the East End Terminal, which commenced operations on Septem-
ber 12, 1992, and a flight kitchen at LaGuardia. USAir acquired
all 46 commuter slots and 24 of the jet slots at LaGuardia on
February 1, 1992; the remaining 38 jet slots at LaGuardia and all
six jet slots at Washington National Airport were transferred to
USAir on May 1, 1992. As a result of the acquisition, USAir
expanded its operations at LaGuardia including the initiation of
non-stop service to eight additional cities, four of which are in
Florida. The New York-Florida markets are among the largest in the
nation. USAir Express carriers used the commuter slots to expand
service primarily to cities in the northeastern United States.
(See "Commuter Airline Operations"). Expansion into these jet and
commuter markets enhanced USAir's presence in the New York area and
in the northeast. In addition, the East End Terminal permitted
USAir to consolidate its mainline, commuter and USAir Shuttle
operations in adjoining facilities, which USAir believes are the
most comfortable and convenient at LaGuardia. USAir sold substan-
tially all the assets associated with the flight kitchen operation
on October 9, 1992.
USAir Group reached an agreement during 1992 with the
creditors of the Trump Shuttle to manage and operate the Shuttle
under the name "USAir Shuttle" for a period of up to ten years.
8
Under the agreement, USAir Group has an option to purchase the
shuttle operation on or after October 10, 1996. The USAir Shuttle
commenced operations in April 1992 between New York City, Boston
and Washington D.C.
Effective August 1, 1992, USAir leased 28 take-off and landing
slots at Washington National Airport from Northwest Airlines, Inc.
("Northwest"). USAir is using the slots to offer expanded service
from Washington to five Florida cities and New Orleans. In August
1993, USAir purchased eight of these slots from Northwest. USAir
continues to lease the remaining slots from Northwest.
On October 1, 1992, USAir moved its hub operation at Pitts-
burgh, which is the largest on its system, to the new Pittsburgh
International Airport terminal, where USAir leases 53 of 75 gates.
USAir believes that the Pittsburgh hub, one of the largest hub
airports (measured by departures) in the U.S., is one of the most
efficient connecting complexes in the nation.
Effective February 1, 1993, USAir and USAir Express service
within the state of Florida commenced operating under the brand
name "USAir Florida Shuttle". In addition, USAir started hourly
service between Miami and Tampa and Miami and Orlando. On
February 1, 1993 total USAir and USAir Express daily departures in
the intra-Florida markets and to cities outside Florida increased
approximately 27% over February 1992 levels. To enhance customer
service and bolster brand loyalty within the state, USAir offered
special benefits, bonus miles and upgrades to Florida residents
participating in its Frequent Traveler Program. (See Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - General Economic Conditions and Industry
Capacity.")
By June 1993 USAir increased capacity between key cities on
the west coast of the U.S. and cities in the midwestern and eastern
parts of the nation as it realigned west coast schedules and
increased its emphasis on long-haul flights. Much of the increase
in capacity was achieved by replacing smaller aircraft types with
757-200 aircraft.
During 1993 and thus far in 1994 USAir and BA have gradually
implemented code sharing arrangements pursuant to the Investment
Agreement. As of March 1, 1994, USAir and BA had implemented code
sharing to 34 of the 65 airports currently authorized by the DOT.
See "British Airways Announcement Regarding Additional Investment
in the Company; Code Sharing" above and "British Airways Investment
Agreement" below.
In March 1994, USAir (i) purchased from United Air Lines, Inc.
("United") certain takeoff and landing slots at Washington National
Airport and New York LaGuardia Airport; (ii) purchased from United
9
certain gates and related space at Orlando International Airport
and (iii) granted to United options to purchase certain gates and
related space, and a right of first refusal to purchase certain
takeoff and landing slots, at Chicago O'Hare International Airport.
In December 1993, USAir reached an agreement with United to
negotiate a code sharing agreement with United regarding USAir's
flights to and from Miami and United's flights between Miami and
Latin America. Consummation of the code sharing agreement is
subject to a number of conditions, including governmental approvals
and definitive documentation. At this time, USAir cannot predict
when the transactions contemplated by the code sharing agreement
with United will be consummated. In September 1993, USAir received
a civil investigative demand from the U.S. Department of Justice
("DOJ") related to an investigation of violations of Section 1 of
the Sherman Act in connection with USAir's agreement with United
regarding the above transactions. Although there can be no
certainty, USAir does not believe the DOJ will seek to overturn the
transactions described in (i), (ii) and (iii) above.
In 1994, USAir has implemented and plans to implement certain
changes to its service on certain short-haul routes to reduce the
cost and increase the efficiency of those operations. In addition,
in the second half of 1993 and early 1994, USAir experienced
increased competition from low cost, low fare carriers. See
"Significant Impact of Low Cost, Low Fare Competition" and Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Low Cost, Low Fare Competition".
In response to the entry of certain low cost, low fare
competitors at BWI and as part of USAir's measures to reduce the
cost and increase the efficiency of its shorthaul service, USAir
has substantially expanded its operations at BWI. As of March
1994, USAir had 121 daily jet departures at that airport compared
to 91 daily jet departures in March 1993. See Item 7. "Manage-
ment's Discussion and Analysis of Financial Condition and Results
of Operations - Low Cost, Low Fare Competition."
In November 1993, USAir commenced service between BWI and St.
Thomas, Virgin Islands and between Charlotte and Tampa and Grand
Cayman, Cayman Islands. In addition, USAir commenced nonstop
service from Philadelphia to Mexico City in March 1994 and will
commence non-stop service from Tampa to Mexico City in May 1994.
As a result of seasonal adjustments, increased service to
existing markets and service to new destinations, on May 8, 1994,
USAir also plans to increase daily jet departures at its Pittsburgh
hub from 327 to 355 and at its Charlotte hub from 323 to 334.
In summary, in 1993, USAir continued to try to capitalize on
its strong franchise in the northeastern U.S. and in Florida, based
on measures it had implemented in 1991 and 1992. By the end of the
third quarter of 1993, however, due to continued fare discounting,
a resurgence of low fare competition from low cost carriers,
10
persistent consumer price consciousness and, despite significant
countermeasures, increased operating expenses, it became clear that
for USAir to remain competitive, it needed to reduce costs and
become more efficient. This realization resulted in, among other
steps, the reduction in force of 2,500 full-time positions
initiated in 1993, the innovations in short-haul service and the
initiation of discussions with the leadership of USAir's unionized
employees regarding wage reductions, improved productivity and
other costs savings described in "Significant Impact of Low Cost,
Low Fare Competition" above and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Low
Cost, Low Fare Competition." USAir is engaged in formulating
additional plans to reduce its operating costs in 1994.
USAir's operating statistics during the years 1989 through
1993 are set forth in the following table:
Years Ended December 31, 1993 1992 1991 1990 1989
- -----------------------------------------------------------------
Revenue Passengers (1)
(Thousands)* 53,678 54,655 55,600 60,059 61,152
Average Passenger
Journey (Miles)* 656.2 642.2 613.7 591.9 551.0
Revenue Passenger
Miles ("RPMs")
(Millions)* 35,221 35,097 34,120 35,551 33,697
Available Seat Miles
(Millions)* 59,485 59,667 58,261 59,484 55,610
Passenger Load
Factor (2)* 59.2% 58.8% 58.6% 59.8% 60.6%
Breakeven Load
Factor (3) (5) 61.7% 63.2% 62.7% 64.5% 60.6%
Passenger Revenue
per ASM* 10.22c 9.70c 9.76c 9.67c 10.00c
Total Revenue per
ASM (5) 11.04c 10.38c 10.33c 10.19c 10.48c
Cost per ASM (4) (5) 11.09c 10.82c 10.77c 10.83c 10.45c
Yield (Revenue per
RPM)* 17.27c 16.49c 16.67c 16.18c 16.50c
* Scheduled service only.
c = cents
(1) Statistics for 1989 are set forth on a pro forma basis to
include the jet operations of Piedmont Aviation as if it had
merged into USAir effective January 1, 1989.
(2) Passenger load factor is the percentage of aircraft seating
capacity that is actually utilized (RPMs/ASMs).
(3) Breakeven load factor represents the percentage of aircraft
seating capacity that must be utilized, based on fares in
effect during the period, for USAir to break even at the pre-
tax income level, adjusted to exclude non-recurring and
11
special items.
(4) Adjusted to exclude non-recurring and special items.
(5) Financial statistics for 1993 exclude revenue and expense
generated under the BA wet lease arrangement.
Commuter Airline Operations
Most commuter airlines in the United States are affiliated
with a major or regional jet carrier. USAir provides reservations
and, at certain stations, ground support services, in return for
service fees, to 10 commuter carriers (including Allegheny,
Piedmont and Jetstream) which operate under the name "USAir
Express." At certain other stations, the commuter carriers
commenced performing ground support for their operations in 1993.
These airlines share USAir's two-letter designator code and feed
connecting traffic into USAir's route system at several points,
including its major hub operations at Pittsburgh, Charlotte,
Philadelphia and BWI. At January 5, 1994, USAir Express carriers
served 181 airports in the United States, Canada and the Bahamas,
including 88 also served by USAir. During 1993, USAir Express'
combined operations enplaned approximately 8.7 million passengers.
Piedmont's collective bargaining agreement with the Air Line
Pilots Association ("ALPA"), which represents its pilot employees,
became amendable on December 1, 1992. On February 22, 1994, the
National Mediation Board (the "NMB"), which had assigned a mediator
to the negotiations between Piedmont and ALPA on a new agreement,
declared these negotiations at an impasse and commenced a thirty-
day "cooling-off" period. Upon the expiration of this period at
midnight on March 25, 1994, the Piedmont pilots would be free to
strike and Piedmont could resort to self-help measures. As USAir's
largest commuter affiliate, Piedmont provides significant passenger
feed to USAir. In addition, if the Piedmont pilots commence a
strike, other USAir Express or USAir employees could refuse to
cross picket lines or engage in sympathy strikes. USAir would view
such activity as violative of applicable contracts and the Railway
Labor Act and would pursue all legal remedies to halt it.
Suspension of the operations of Piedmont, other USAir Express
carriers or USAir for a prolonged period due to strikes or self-
help measures could have a material adverse effect on the Company's
and USAir's financial condition and prospects.
USAM Corp.
At December 31, 1992, USAM Corp. ("USAM"), a subsidiary of
USAir, owned 11% of the Covia Partnership ("Covia") which owned and
operated a computerized reservation system ("CRS"). In September
1993, Covia purchased the assets of the corporation that owned and
operated the Galileo CRS which provided CRS services to travel
agent subscribers in Europe. Covia was then separated into three
entities. As a result, at December 31, 1993, USAM owns 11% of the
Galileo International Partnership, approximately 11% of the Galileo
12
Japan Partnership and approximately 21% of the Apollo Travel
Services Partnership.
The Galileo International Partnership owns and operates the
Galileo CRS ("Galileo"). Galileo Japan Partnership markets CRS
services in Japan. Apollo Travel Services markets CRS services in
the U.S. and Mexico. Galileo is the second largest of the four
such systems in the U.S. based on revenues generated by travel
agency subscribers. A subsidiary of United controls 38% of the
partnership, and the other partners exclusive of USAir's interest
are subsidiaries of BA, Swissair, KLM Royal Dutch Airlines,
Alitalia, Air Canada, Olympic Airways, Austrian Airlines, Aer
Lingus and TAP Air Portugal.
CRSs play a significant role in the marketing and distribution
of airline tickets. During 1993, travel agents issued tickets
which generated the majority of USAir's passenger revenues. Most
travel agencies use one or more CRSs to obtain information about
airline schedules and fares and to book their clients' travel.
Employees
At December 31, 1993, USAir Group's various subsidiaries
employed approximately 48,500 full-time equivalent employees.
USAir employed approximately 5,400 pilots, 10,100 maintenance and
related personnel, 12,300 station personnel, 4,100 reservations
personnel, 8,600 flight attendants and 4,900 personnel in other
administrative and miscellaneous job categories, while the commuter
and other subsidiaries employed approximately 1,000 pilots, 800
maintenance personnel, 400 station personnel, 400 flight attendants
and 500 personnel in other administrative and miscellaneous job
categories. Approximately 24,400, or 50%, of the employees of
USAir Group's subsidiaries are covered by collective bargaining
agreements with various labor unions.
As indicated in "Significant Impact of Low Cost, Low Fare
Competition" above and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations," because
of the entry of low cost low fare carriers in certain of USAir's
markets and USAir's response to this market penetration, in March
1994 USAir initiated discussions with the leadership of its
unionized employees for wage reductions, improved productivity and
other cost savings. USAir must reduce its operating costs
significantly if it is to survive in this low fare competitive
environment.
Historically, USAir implemented a workforce reduction program
in September 1990, in response to the economic recession and
financial losses that caused USAir to decrease its planned capacity
growth for 1991. More than 3,600 positions were eliminated through
layoffs, furloughs and voluntary separations in connection with
that program. A further reduction of more than 3,500 positions
13
resulted from the May 1991 Restructuring. In September 1993, USAir
announced steps to reduce projected operating costs in 1994. These
measures will include a workforce reduction of approximately 2,500
full time positions and certain other cost reductions discussed
under "Major Airline Operations".
In addition, USAir believes that it was largely successful in
implementing during 1992 and 1993 the elements of the comprehensive
cost reduction program that it announced in October 1991. The cost
reduction program included salary and wage reductions for a fixed
time period, suspension of longevity/step increases in wages and
salary, the freeze of a defined benefit pension plan applicable to
non-contract employees, productivity improvements, contributions by
employees for a portion of the cost of medical and dental benefits
and implementation of a new managed care program intended to reduce
the cost and retard the growth of these benefits. Consistent with
this program, USAir sought concessionary contracts with each of its
unions and stated that salary reductions for non-contract employees
would take effect only when the first major union agreed to wage
reductions.
In the second quarter of 1992, ALPA, which represents USAir's
pilot employees, reached agreement on a new contract which becomes
amendable on May 1, 1996. The new contract included wage reduc-
tions and suspension of longevity/step increases which resulted in
savings of approximately $58 million over the twelve-month period
which began June 1992. Additional savings of approximately $15
million resulted from productivity improvements over the same
period. If fully implemented, USAir expects the productivity
improvements will save the airline up to approximately $83 million
annually. In addition, the pilots agreed to participate in
contributory managed care medical and dental programs, which USAir
expects will save approximately $10 million annually.
In June 1993, the wages of pilot employees reverted to pre-
reduction levels, and on September 1, 1993, in accordance with the
terms of ALPA's agreement with USAir, pilot employees received a
2.5% increase in their wages. These employees are scheduled to
receive further wage increases on (i) July 1, 1994, of approximate-
ly 6.9%; (ii) July 1, 1995 of 2%; and (iii) January 1, 1996 of 1%.
In accordance with its previously announced policy, when ALPA
agreed to the cost reduction program, USAir imposed wage reductions
and suspension of longevity/step increases on its non-contract
employees for the twelve-month period commencing in June 1992.
USAir estimates that it saved approximately $32 million from these
measures. Earlier in 1992, USAir had implemented the contributory
managed care medical and dental programs for non-contract employ-
ees, which result in approximately $20 million in annual savings.
Prior to January 1, 1992, USAir exclusively paid contributions to
the basic defined benefit pension plan for its non-contract
employees. USAir froze this pension plan at the end of 1991, which
14
resulted in a one-time book gain of approximately $107 million in
1991. USAir implemented a defined contribution pension plan for
these employees on January 1, 1993, which is composed of three
components: contributions by USAir based on a percentage of salary,
a partial match by USAir of employee contributions to a savings
plan and a profit-sharing plan.
On October 8, 1992, following a four-day strike, USAir reached
agreement with the International Association of Machinists ("IAM"),
which represents USAir's mechanics and related employees, on a new
contract which becomes amendable on October 1, 1995. The new
contract included wage reductions and suspension of longevity/step
increases for the twelve-month period commencing October 1992,
which USAir estimates resulted in savings of approximately $20
million. USAir also estimates that productivity improvements,
which are also provided for in the new contract, resulted in
savings of approximately $22 million in 1993 and will result in
savings of $45 million annually if the improvements are fully
implemented. In addition, IAM employees agreed to participate in
contributory managed care medical and dental programs, which USAir
expects will save approximately $14 million annually.
In November 1993, the wages of the IAM-represented employees
reverted to pre-reduction levels and on November 1, 1993, in
accordance with the terms of the IAM's agreement with USAir, the
wages of these employees increased by 2%. These employees are
scheduled to receive further wage increases on June 1, 1994 and
April 1, 1995 of approximately 3.9% and 4.7%, respectively.
In February 1993, USAir announced that it had reached a
tentative agreement with the Association of Flight Attendants
("AFA"), which represents its flight attendant employees, on a new
contract which would become amendable on January 1, 1997. The
contract, which was ratified by the AFA membership in March 1993,
provides for wage reductions and suspension of longevity/step
increases for a twelve-month period commencing April 1, 1993, which
USAir expects will result in savings of approximately $10 million.
USAir also estimates that productivity improvements, which are also
provided for in the new contract, will result in savings of
approximately $18 million over the twelve-month period commencing
April 1, 1993 and $43 million annually if the improvements are
fully implemented. In addition, AFA employees agreed to partici-
pate in contributory managed care medical and dental programs,
which USAir expects will save approximately $7 million annually.
In March 1994, the wages of the flight attendant employees
will revert to pre-reduction levels, and on April 1, 1994, in
accordance with the terms of the AFA agreement with USAir, the
wages of these employees will increase by 3%. These employees are
scheduled to receive further wage increases on January 31, 1995 and
January 31, 1996 of approximately 4% commencing on each date.
15
On March 31, 1993 the Transport Workers Union (the "TWU"),
which represents 175 flight dispatch employees, reached agreement
with USAir on a contract which becomes amendable on September 1,
1996. The agreement provides for productivity improvements. These
employees also participate in wage reductions, suspension of
longevity/step increases and contributory managed care medical and
dental programs because of their non-contract status when those
measures were implemented for non-contract employees. The defined
benefit plan for the flight dispatch employees was frozen on
December 31, 1991 because of their non-contract status at that
time.
On July 29, 1993, USAir reached agreement with the TWU, which
also represents approximately 60 USAir flight simulator engineers,
on a new four-year contract which becomes amendable on August 1,
1997. The contract will result in savings of approximately
$140,000 over the 12-month period commencing August 1, 1993, in the
form of temporary salary reductions and suspension of longevi-
ty/step increases. In addition, the flight simulator engineers
agreed to participate in contributory managed care medical and
dental programs which the Company expects will save approximately
$50,000 annually. In addition, the defined benefit pension plan
for these employees was frozen effective August 31, 1993, and will
be replaced by a defined contribution pension plan beginning
September 1, 1994.
Taken together, the above measures provided for temporary wage
reductions and suspension of longevity/step increases in wages that
USAir estimates saved approximately $120 million during the period
June 1992 through March 1994. These concessions provide for
productivity improvements which are expected to save USAir
approximately $55 million during the same period. If fully
implemented, these productivity enhancements may save an additional
$171 million annually. All employees affected by these changes
have also agreed to participate in contributory managed care
medical and dental program which are expected to save approximately
$51 million annually. In exchange for the concessions agreed upon
by its unionized employees, USAir included "no furlough" provisions
in each of the new labor agreements with the ALPA, IAM, AFA and
TWU, which prohibit USAir from furloughing employees hired on or
before the effective date of the agreements during the term of each
respective contract.
USAir recorded a non-recurring charge of approximately $36.8
million in the fourth quarter of 1993 based on a projection of the
repayment of the amount of the temporary wage and salary reductions
discussed above in the event that the employees who sustained the
pay cuts leave the employ of USAir. USAir will adjust this
accounting charge in subsequent periods to reflect the change in
the present value of the liability and changes in actuarial
assumptions including, among other things, actual experience with
the rate of attrition for these employees and whether such
16
employees have received payments under the profit sharing program
discussed in the next paragraph.
In exchange for the pay reductions and pension freeze,
affected employees will participate in a profit sharing program and
have been, or will be, granted options to purchase USAir Group
common stock. The profit sharing program is designed to recompense
those employees whose pay has been reduced in an amount equal to
(i) two times salary foregone plus; (ii) one times salary foregone
(subject to a minimum of $1,000) for the freeze of pension plans
described above. Estimated savings of approximately $23 million
attributable to the suspension of longevity/step increases will not
be subject to repayment through the profit sharing program. For
each year the profit sharing program is in effect, pre-tax profits,
as defined in the program, of USAir Group would be distributed to
participating employees as follows:
25% of the first $100 million in pre-tax profits
35% of the next $100 million in pre-tax profits
40% of the pre-tax profits exceeding $200 million
This profit sharing program will be in effect until USAir employees
are recompensed for salary and pension benefits forgone and is
independent of the profit sharing plan which is an element of the
new defined contribution pension plan for non-contract employees
discussed above.
Under the stock option program, employees whose pay has been
reduced have received or will receive options to purchase 50 shares
of USAir Group common stock at $15 per share for each $1,000 of
salary reduction. The options were, or become, exercisable
following the twelve-month period of the salary reduction program
for each group of employees. Generally, participating employees
have five years from the grant date to exercise such options. As
of December 31, 1993, USAir Group had granted options to purchase
approximately five million shares of common stock to USAir
employees under the program. At December 31, 1993, the market
value of a share of USAir Group common stock was $12.875.
Certain unions are engaged in efforts to unionize USAir's
customer service and reservations employees. The Railway Labor Act
(the "RLA") governs, and the NMB has jurisdiction over, such
campaigns. Under the RLA, the NMB could order an election among a
class or craft of eligible employees if a union submitted an
application to the NMB supported by the authorization cards from at
least 35% of the applicable class or craft of employees. If the
NMB ordered an election and a majority of the eligible employees
voted for representation, USAir would be required to negotiate a
collective bargaining agreement with the union that wins the
election. On January 28, 1994, the IAM, United Steelworkers of
America ("USWA") and International Brotherhood of Teamsters filed
applications with the NMB requesting that an election be held among
17
USAir's fleet service employees, a class or craft of approximately
8,000 workers included among USAir's customer service employees.
On March 1, 1994, after determining that each of the three
applicant unions had submitted the required number of authorization
cards, the NMB declared an election among the fleet service agents.
At this time, the NMB has not determined the dates for the mailing
or tabulation of ballots, however, USAir expects this process will
be completed by the end of the third quarter of 1994. USAir cannot
predict the outcome of the election, nor can it predict, if a union
is certified, when a collective bargaining agreement would be
negotiated or what its terms would be. On March 21, 1994, the USWA
filed an additional application with the NMB requesting an election
among USAir's passenger service employees, a class or craft of
approximately 10,000 workers included among USAir's customer
service employees. The NMB is in the process of determining
whether this application is supported by sufficient authorization
cards to warrant an election. USAir cannot predict whether an
election will be held among the passenger service class or craft
and if an election were held, the outcome. Nor can it predict if
a union is certified when a collective bargaining agreement would
be negotiated or what its terms would be. If unions are certified
to represent the fleet service employees and the passenger service
employees, substantially all of USAir's non-management employees
would be unionized. USAir also cannot predict whether any union
might submit authorization cards to the NMB sufficient to obtain an
election among any other class or craft of employees.
Except as noted, the following table presents the status of
USAir's labor agreements as of December 31, 1993:
Approximate Date
Number of Contract
Union Class or Craft Employees Amendable
- ----- -------------- ---------- ---------
AFA - flight attendants 8,600 1/97
ALPA - pilots 5,400 5/96
IAM - mechanics and related employees 8,600 10/95
TWU - flight crew training instructors 50 1/93
TWU - flight simulator engineers 60 8/97
TWU - dispatch employees 170 9/96
As indicated under "Significant Impact of Low Fare, Low Cost
Competition," in March 1994, USAir initiated discussions with the
leadership of its unionized employees regarding wage reductions,
improved productivity and other cost savings. If these discussions
are successful, the terms of the above labor agreements will be
18
renegotiated. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Low Cost, Low Fare
Competition."
See"-Commuter Airline Operations" for information regarding
negotiations between Piedmont and ALPA.
Jet Fuel
USAir and USAir Fuel have contracts with 25 different fuel
suppliers to meet a large percentage of USAir's current jet fuel
requirements. The contracts for these jet fuel purchases are
generally for one-year terms and expire at various dates. The
pricing provisions of these agreements may be based upon many
factors including crude oil, heating oil or jet fuel market
conditions. In some cases, USAir has the right to terminate the
agreements if contract prices become unacceptable. As market
conditions permit, USAir also may purchase a portion of its fuel on
the spot market at day-to-day prices depending upon availability,
price and purchasing strategy.
The most important single factor affecting petroleum product
prices, including the price of jet fuel, continues to be the
actions of the OPEC countries in setting targets for the produc-
tion, and pricing of crude oil. In addition, jet fuel prices are
affected by the markets for heating oil, diesel fuel, automotive
gasoline and natural gas. Seasonally, second and third quarter jet
fuel prices are typically lower than during the first and fourth
quarters as the demand for heating oil, which competes with jet
fuel for refinery production, subsides and refiners switch to
gasoline production which also increases the output of jet fuel.
Due primarily to OPEC's unwillingness or inability to restrain
crude oil production and recession-dampened demand for petroleum
products by the industrialized nations, USAir benefitted during
1993 from a general downward trend in jet fuel prices. For 1993,
USAir's jet fuel cost averaged approximately 58.4 cents per gallon
(versus an average of 61 cents in 1992) with quarterly averages of
59.8, 59.5, 56.7, and 57.7 cents.
USAir continues to adjust its jet fuel purchasing strategy to
take advantage of the best available prices while attempting to
ensure that supplies are secure. While USAir believes that jet
fuel prices will remain relatively stable in 1994, all petroleum
product prices continue to be subject to unpredictable economic,
political and market factors. Also, the balance among supply,
demand and price has become more reactive to world market condi-
tions. Accordingly, the price and availability of jet fuel, as
well as other petroleum products, continues to be unpredictable.
In addition, USAir has entered into agreements to hedge the price
of a portion of its jet fuel needs, which may have the net effect
of increasing or decreasing USAir's fuel expense. See Note 1 to
19
Consolidated Financial Statements of USAir. In early August 1993,
the Clinton Administration's budget package was enacted. The
budget package included a 4.3 cent per gallon tax on transportation
fuels beginning October 1, 1993. The airline industry is exempt
from the tax until October 1, 1995. Imposition of the fuel tax
will increase USAir's operating expenses. If the fuel tax had been
in effect on January 1, 1993, USAir's fuel expense in 1993 would
have increased by approximately $50 million.
The following table sets forth statistics about USAir's jet
fuel consumption and cost for each of the last three years:
Gallons Average Percentage
Calendar Consumed Total Cost Cost Per of Operating
Year (Millions) (Millions) Gallon Expenses (1)
- -------- ---------- ---------- -------- ------------
1993 1,161 $677.9 $0.58 10.2%
1992 1,183 $720.6 $0.61 11.1%
1991 1,168 $769.4 $0.66 12.2%
(1) Operating expenses have been adjusted to exclude non-recurring
and special items.
Insurance
The Company and its subsidiaries maintain insurance of the
types and in amounts deemed adequate to protect them and their
property. Principal coverage includes liability for bodily injury
to or death of members of the public, including passengers; damage
to property of the Company, its subsidiaries and others; loss of or
damage to flight equipment, whether on the ground or in flight;
fire and extended coverage; and workers' compensation and em-
ployer's liability. Effective February 1, 1991, the Company
reduced the hull insurance coverage on its narrowbody aircraft from
replacement value to the higher of book value or the loss value
required by applicable leases or other contractual provisions.
Coverage for environmental liabilities is expressly excluded from
the Company's insurance policies.
Industry Conditions
The airline industry has historically been cyclical, in that
demand for air transportation has tended to mirror general economic
conditions. Although airline traffic and operating revenues
generally benefitted from the economic growth that occurred through
much of the 1980s, the Company and the industry have been adversely
affected by the recent economic recession. Historically, the
Company's airline operations have also been subject to seasonal
variations in demand. First and fourth quarter results have often
been adversely affected by winter weather and, with certain
exceptions, reduced travel demand, while the second and third
20
quarters generally have been characterized by more favorable
weather conditions as well as higher levels of passenger travel.
The restructuring of USAir's route system in recent years to
emphasize its strengths in the northeastern U.S. and to capitalize
in the first, second and fourth quarters on passenger traffic to
Florida may result in changes in historic seasonality.
Most of USAir's operations are in competitive markets. USAir
and its commuter affiliates experience competition in varying
degrees with other air carriers and with all forms of surface
transportation. USAir competes with at least one major airline on
most of its routes between major cities. Vigorous price competi-
tion exists in the airline industry, and competitors have frequent-
ly offered sharply reduced discount fares in many of these markets.
Airlines use discount fares and other promotions to stimulate
traffic during normally slack travel periods, to generate cash flow
and to increase relative market share in selected markets.
Discount and promotional fares are often subject to various
restrictions such as minimum stay requirements, advance ticketing,
limited seating and refund penalties. USAir has often elected to
match those discount or promotional fares. In 1993, Southwest
Airlines, Inc. and Continental, two low cost carriers, entered
several of USAir's markets in the eastern U.S. and commenced low
fare service. Continental substantially expanded its low fare
operations in the first quarter of 1994, and, in anticipation of
that expansion, USAir substantially reduced its fares in many
markets. See "Significant Impact of Low Fare, Low Cost Competi-
tion" above and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Low Cost, Low Fare
Competition." USAir expects that it will continue to face vigorous
price competition. To the extent that low fares continue and their
depressive effect on revenues is not offset by stimulation of
additional traffic or by reduced costs, USAir's and the Company's
earnings and liquidity will continue to be materially and adversely
affected.
Of the eleven airlines classified as "major" carriers by the
DOT in January 1991, two have ceased operations, one is currently
operating under Chapter 11 of the Bankruptcy Code and two filed for
bankruptcy protection, reorganized and emerged from bankruptcy in
1993. Eastern, which declared bankruptcy in March 1989, ceased
operations in January 1991. Pan American World Airways filed for
Chapter 11 protection from creditors in January 1991 and ceased
operations in December 1991. Continental, America West and Trans
World Airlines ("TWA") filed for bankruptcy in December 1990, June
1991 and January 1992, respectively. Continental and TWA reorga-
nized and emerged from bankruptcy in April 1993 and November 1993,
respectively. America West is seeking to emerge from bankruptcy in
1994. In addition, Midway Airlines, a smaller carrier that had
been a competitor of USAir at Philadelphia, declared bankruptcy in
March 1991 and ceased operations in November 1991.
21
Airlines operating under Chapter 11 often engage in discount
pricing to generate the cash flow necessary for their survival. In
addition, when these airlines emerge from bankruptcy they may have
substantially reduced their debt and lease obligations and other
operating costs, as was the case when Continental and TWA emerged.
These reduced costs may permit the reorganized carriers to enter
new markets and offer discount fares, which may be intended to
generate cash flow, preserve and enhance market share and rehabili-
tate the carriers' image in the marketplace. Since its reorganiza-
tion, Continental has entered many of USAir's markets in the
eastern U.S. and offered fares that were substantially lower than
those that were previously available. See "Significant Impact of
Low Fare, Low Cost Competition" above and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Low Cost Low Fare Competition." The availability of
the assets of bankrupt carriers has enabled certain financially
stronger participants in the market, including, to a lesser extent,
USAir, to consolidate their position by purchasing routes,
aircraft, takeoff and landing slots and other assets. While
substantial capacity has been removed in certain domestic markets,
these bankruptcies and failures illustrate the difficulties facing
the airline industry today.
Regulation
All domestic airlines, including USAir and its commuter
affiliates, are subject to regulation by the FAA under the Federal
Aviation Act of 1958, as amended. The Federal Aviation Administra-
tion ("FAA") has regulatory jurisdiction over flight operations
generally, including equipment, ground facilities, security
systems, maintenance and other safety matters. To assure compli-
ance with its operational standards, the FAA requires air carriers
to obtain operations, airworthiness and other certificates, which
may be suspended or revoked for cause. The FAA also conducts
safety audits and has the power to impose fines and other sanctions
for violations of aviation safety and security regulations.
USAir has developed extensive maintenance programs which
consist of a series of phased checks for each aircraft type. These
checks are performed at specified intervals measured either by time
flown or by the number of takeoffs and landings ("cycles")
performed. They range from daily "walkaround" inspections, to more
involved overnight maintenance checks, to exhaustive and time-
consuming overhauls. The "Q Check", for example, requires more
than 7,000 personnel-hours of work and includes stripping the
airframe, extensively testing the airframe structure and a large
number of parts and components, and reassembling the overhauled
airframe with new or rebuilt components. Aircraft engines are
subject to phased, or continuous, maintenance programs designed to
detect and remedy potential problems before they occur. The
service lives of certain parts and components of both airframes and
engines are time or cycle controlled. Parts and other components
22
are replaced or overhauled prior to the expiration of their time or
cycle limits. The FAA approves all airline maintenance programs,
including changes to the programs. In addition, the FAA licenses
the mechanics who perform the inspections and repairs, as well as
the inspectors who monitor the work.
The FAA frequently issues airworthiness directives, often in
response to specific incidents or reports by operators or manufac-
turers, requiring operators of specified equipment to perform
prescribed inspections, repairs or modifications within stated time
periods or number of cycles.
In response to several incidents involving older aircraft, the
FAA, in cooperation with airframe manufacturers and operators, has
developed mandatory programs requiring extensive testing, modifica-
tions and repairs to certain models of older aircraft as a
condition of their continuing in service beyond specified time
periods or number of cycles. USAir is modifying its Boeing 727-
200, Boeing 737-200 and Douglas DC-9-30 aircraft to comply with the
first phase of the "aging aircraft" requirements, which requires
that a series of structural modifications be performed. The second
phase, announced in November 1990, involves intensified corrosion
control and detection procedures. Many of USAir's aircraft will be
brought into compliance well in advance of the FAA's time and cycle
requirements, because the work is scheduled to be accomplished in
conjunction with other maintenance.
A continuing regulatory issue currently facing the airline
industry involves air traffic delays and landing rights. While the
volume of aircraft operations in domestic airspace has increased
during recent years, the capacity of the national air traffic
control system has not kept pace. This situation causes frequent
and significant air traffic delays, especially at the nation's
busiest airports. These delays have led the FAA to require monthly
reporting by air carriers of on-time performance and have prompted
various proposals for reform of the FAA, which oversees and
regulates the air traffic control system.
The National Commission to Ensure a Strong Competitive Airline
Industry (the "Airline Commission") issued its report in August
1993. Among other things, the Airline Commission recommended that:
(1) the air traffic control system be modernized and the FAA air
traffic control functions be performed by an independent federal
corporation; (2) the federal regulatory burden be reduced; (3) the
airlines be granted certain tax relief; and (4) the bankruptcy
process be shortened. The Airline Commission also favored raising
the statutory limit on foreign ownership of voting securities in
U.S. airlines to 49 percent under certain circumstances. It
further urged that the current international system of bilateral
agreements be replaced with multilateral arrangements. In
addition, the Airline Commission recommended that the DOT review
the airlines' business, capital or financial plans with the
23
assistance of a presidentially appointed advisory committee and, if
an airline repeatedly failed to heed warnings or concerns of the
DOT Secretary, the DOT could "exercise its existing authority,"
among other things, to revoke an airline's operating certificate.
In January 1994, the Clinton Administration issued a report
which described its program to implement certain of the Airline
Commission's recommendations. Among other things, the Administra-
tion stated that it supported the recommendation described above
regarding the FAA, supported increasing to 49 percent the foreign
ownership restrictions provided there are reciprocal opportunities
for U.S. airlines and investors abroad, and opposed the recommenda-
tions regarding tax relief and the appointment of the advisory
committee discussed above. At this time, it is impossible to
predict whether any of the Airline Commission's recommendations
will be enacted and, if enacted, their effect on USAir. It is also
difficult to anticipate whether the Congress will act in the near
term on any of the proposals requiring legislation.
The FAA, through its High Density Traffic Airport Rule, limits
the number of flight operations at Washington National Airport,
Chicago's O'Hare International Airport and New York City's John F.
Kennedy International and LaGuardia Airports during specified time
periods. Takeoff and landing rights ("slots") are assigned to
airlines serving these high density airports. The FAA has
promulgated regulations governing the allocation and use of slots
that permit them to be traded, leased, purchased and sold. In
addition, in 1992, the FAA amended its regulations governing the
use of slots to require slotholders to increase their average
monthly use of their slots. In 1993, the DOT began a comprehensive
examination of the High Density Rule. As part of its study, the
DOT will determine whether the operating limitations imposed by the
rule can be eliminated or modified to better utilize available
capacity at these airports. USAir holds a substantial number of
slots at LaGuardia and National Airports, including those assigned
a value when the Company acquired Piedmont Aviation. Any DOT
action which would eliminate those slots or compel USAir to
transfer those slots could have a material adverse effect on
USAir's operations and financial position. Revision of the High
Density Rule at National Airport, however, would require legisla-
tion by the Congress. The DOT has indicated that it expects to
complete its study by late 1994.
The FAA also has authority to set noise standards for civil
aircraft. Three noise level categories exist under FAA regula-
tions. Stage 1 aircraft, which were designed before the first FAA
noise regulations were promulgated in 1969, are no longer permitted
to operate in the United States unless retrofitted to meet Stage 2
requirements. Stage 2 aircraft comply with regulations limiting
noise emissions to specified levels. Aircraft designed after 1977
must meet the even more stringent noise limitations of Stage 3. At
December 31, 1993, 260 aircraft, or 62% of USAir's operating fleet
24
(excluding 33 Fokker F28 aircraft exempt from the Stage 3 require-
ments because their gross takeoff weights do not exceed 75,000
pounds), were Stage 3 aircraft. The Airport Noise and Capacity Act
of 1990, with minor qualifications, prohibits operation of Stage 2
aircraft after 1999. Regulations promulgated by the FAA in 1991
require operators to modify or reduce the number of Stage 2
aircraft they operated during 1990 by 25% by the end of 1994, by
50% by the end of 1996, and by 75% by the end of 1998. Alterna-
tively, an operator may elect to operate a fleet that is at least
55% Stage 3 by the end of 1994, 65% Stage 3 by the end of 1996 and
75% Stage 3 by the end of 1998. Modification costs will depend on
the technology that is developed in response to the need, but these
costs could be substantial for some aircraft types. See Note 4 to
the Company's Consolidated Financial Statements. USAir intends to
convert up to 64 of its Boeing 737-200 and 31 of its Douglas DC-9-
30 aircraft from Stage 2 to Stage 3. In May 1993, USAir entered
into agreements to purchase hushkits for a substantial portion of
its Boeing 737-200 fleet. The installation of these hushkits will
bring the aircraft into compliance with federally mandated Stage 3
noise level requirements. These agreements are in addition to a
previously existing agreement to purchase hushkits for certain of
USAir's DC-9-30 aircraft. Installation of the hushkits will be
accomplished during 1994-1999.
Certain airport operators have adopted local regulations
which, among other things, impose curfews, restrict the number of
aircraft operations and require aircraft to meet prescribed decibel
limits. Local noise regulations affect USAir's scheduling
flexibility by requiring that only certain aircraft be scheduled at
certain airports and at specified times of the day.
In compliance with FAA regulations, USAir has implemented a
drug testing program that involves not only education and training,
but also periodic drug testing of personnel performing safety and
security-related work, including pilots, flight attendants,
mechanics, instructors, dispatchers and security screeners, and
drug testing of all newly hired employees regardless of job
classification. The FAA's drug testing regulations are comprehen-
sive and complex. They require, among other things, six categories
of drug tests: pre-employment, probable cause, periodic, random,
post-accident and return to duty. In addition, all USAir Express
operators have drug testing programs in place that comply with the
FAA's drug testing regulations. The DOT has recently promulgated
rules requiring by January 1995 the periodic testing of airline
employees in safety-related jobs for alcohol use. USAir cannot
predict at this time the effect of these new rules.
Several aspects of airlines' operations are subject to
regulation or oversight by Federal agencies other than the FAA.
The DOT has jurisdiction over certain aviation matters such as
international routes and fares, consumer protection and unfair
competitive practices. The antitrust laws are enforced by the DOJ.
25
Labor relations in the air transportation industry are generally
regulated under the RLA, which vests in the NMB certain regulatory
powers with respect to disputes between airlines and labor unions
that arise under collective bargaining agreements. USAir and other
airlines certificated prior to October 24, 1978 are also subject to
regulations issued by the Department of Labor which implement the
statutory preferential hiring rights granted by the Airline
Deregulation Act of 1978 to certain airline employees who have been
furloughed or terminated (other than for cause).
The Company must also comply with federal and state environ-
mental laws and regulations and has developed formal policies and
procedures designed to ensure its ongoing compliance. The Company
expects that its operating expenses will increase in the future as
a result of governmental rulemaking and more stringent enforcement
of applicable existing environmental laws. The Company cannot
predict the magnitude of those increased costs or when they may be
incurred, but in order to conduct their operations, airlines,
including USAir and the USAir Express carriers, release and
discharge pollutants into the environment. For example, USAir and
the other airlines operating at Pittsburgh are subject to a
Pennsylvania consent decree to reduce the runoff of deicing fluid
which has resulted in the construction of new deicing pads, the
cost of which will be passed on to the airlines. In addition, the
Clean Air Act, as amended, as it may be implemented by the various
states, may require operational upgrades and tighter emissions
controls not only on aircraft but also on ground equipment operated
by airlines. The airlines' operations in certain states, for
example, California, where air pollution is a serious problem, may
be affected more significantly than in other states. Moreover,
many airports were constructed before the enactment of various
environmental laws. The cost of correcting environmental problems
at these airports may be passed onto the airlines operating at
these airports through increased rents and fees. See also the
disclosure above regarding the FAA's regulations regarding noise
standards for civil aircraft and noise regulation by other
governmental authorities and Note 4(d) to the Company's Con-
solidated Financial Statements for disclosure regarding capital
commitments related to compliance with these FAA regulations.
British Airways Investment Agreement
The following summary of certain terms of the Investment
Agreement is subject to, and is qualified in its entirety by, the
Investment Agreement and the exhibits thereto, which are exhibits
to this report. On March 7, 1994, BA announced it would make no
additional investments in the Company until the outcome of measures
by the Company to reduce costs and improve its financial results is
known. As of March 1, 1994, BA owned preferred stock in the
Company constituting approximately 22% of the total voting interest
in the Company. See Item 12. "Security Ownership of Certain
Beneficial Owners and Management."
26
Terms of the Series F Preferred Stock On January 21, 1993,
the Company sold, pursuant to the Investment Agreement, 30,000
shares of the Company's Series F Cumulative Convertible Senior
Preferred Stock, without par value, ("Series F Preferred Stock") to
BA for an aggregate purchase price of $300 million. The Series F
Preferred Stock is convertible into shares of Common Stock at a
conversion price of $19.41 and will have a liquidation preference
of $10,000 per share plus an amount equal to accrued dividends.
See "Miscellaneous" for a discussion of an antidilution adjustment
to the conversion price of the Series F Preferred Stock. The
Series F Preferred Stock may be converted at the option of USAir
Group at any time after January 21, 1998 if the average composite
closing market price of Common Stock during any 30-day calendar
period is at least 133% of the conversion price. The Series F
Preferred Stock will be entitled to cumulative quarterly dividends
of 7% per annum when and if declared and to share in certain other
distributions. The Series F Preferred Stock must be redeemed by
USAir Group on January 15, 2008. Each share of the Series F
Preferred Stock will be entitled to a number of votes equal to the
number of shares of Common Stock into which it is convertible and
will vote with the Common Stock and USAir Group's Series A
Cumulative Convertible Preferred Stock, without par value ("Series
A Preferred Stock"), and any other capital stock with general
voting rights for the election of directors, as a single class.
Subject to adjustment, 515.2886 shares of Common Stock are issuable
on conversion per share of Series F Preferred Stock (determined by
dividing the $10,000 liquidation preference per share of Series F
Preferred Stock by the $19.41 conversion price), and 15,458,658
shares of Common Stock would be issuable on conversion of all
Series F Preferred Stock. However, under the terms of any USAir
Group preferred Stock that is or will be held by BA ("BA Preferred
Stock"), conversion rights (and as a result voting rights) may not
be exercised to the extent that doing so would result in a loss of
USAir Group's or any of its subsidiaries' operating certificates
and authorities under Foreign Ownership Restrictions, as defined
under "Board Representation" below, and it is assumed for this
purpose that Series F Preferred Stock will be fully converted
before any other BA Preferred Stock. Under Foreign Ownership
Restrictions, no more than 25% of the Company's voting interest may
be held by persons other than U.S. citizens, including BA. With
respect to dividend rights and rights on liquidation, dissolution
and winding up, the Series F Preferred Stock ranks senior to USAir
Group's $437.50 Series B Cumulative Convertible Preferred Stock,
without par value, and Junior Participating Preferred Stock, Series
D, no par value, and Common Stock, and pari passu with BA Preferred
Stock and Series A Preferred Stock.
Moreover, the Certificate of Designation for the Series F
Preferred Stock provides that if on any one occasion on or prior to
January 21, 1996, any court or regulatory authority issues a final
order that any material part of the Investment Agreement is
27
unenforceable (except pursuant to bankruptcy or like event), then
the conversion price of Series F Preferred Stock shall be reduced
by 10.2564%. In that event, if the then conversion price of the
Series F Preferred Stock were $19.41, it would be reduced to
$17.42.
On March 15, 1993, the DOT issued an order (the "DOT Order")
finding, among other things, that "BA's initial investment of $300
million does not impair USAir's citizenship" under Foreign
Ownership Restrictions as defined under "Board Representation"
below. However, the DOT instituted a proceeding to consider
whether USAir will remain a U.S. citizen if the transactions and
acts contemplated by the Investment Agreement, including the
transactions discussed under "Possible Additional BA Investments"
and "Certain Governance Matters" below, are consummated. The DOT
has suspended indefinitely the period for comments from interested
parties to the proceeding pending its resolution of requests by
other airlines for production of additional documents from USAir.
The DOT Order states that the DOT expects and advises USAir Group
and BA not to proceed with the Second Purchase and Final Purchase,
as such terms are defined under "Possible Additional BA Invest-
ments," until the DOT has completed its review of USAir's citizen-
ship. In any event, on March 7, 1994, BA announced that it would
make no additional investments in the Company until the outcome of
measures by the Company to reduce its costs and improve its
financial results is known. See "Significant Impact of Low Fare,
Low Cost Competition" and "British Airways Announcement Regarding
Additional Investments in the Company; Code Sharing" above. The
Company cannot predict the outcome of the proceeding or if the
transactions contemplated under the Investment Agreement, particu-
larly those discussed under "Possible Additional BA Investments"
and "Certain Governance Matters", will be consummated. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of issues and consider-
ations pertaining to globalization of the airline industry and
"Miscellaneous" for information regarding BA's purchase of two
additional series of preferred stock from USAir Group pursuant to
its exercise of optional and preemptive purchase rights under the
Investment Agreement and its decision not to exercise its optional
purchase rights with respect to three additional series of
preferred stock.
Board Representation USAir Group increased the size of its
Board of Directors by three on January 21, 1993 and the Board of
Directors filled the newly created directorships with designees of
BA. Under the terms of the Investment Agreement, USAir Group must
use its best efforts to cause BA to be proportionally represented
on the Board of Directors (on the basis of its voting interest), up
to a maximum representation of 25% of the total number of autho-
rized directors ("Entire Board"), assuming that such proportional
representation is permitted by then applicable U.S. statutory and
DOT regulatory or interpretative foreign ownership restrictions
28
("Foreign Ownership Restrictions"), until the later of the closing
of the Second Purchase, as defined under "Possible Additional BA
Investments" below, and the date on which BA may exercise under
Foreign Ownership Restrictions the rights described under "Certain
Governance Matters" below. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Industry Globalization" for a discussion of currently applicable
Foreign Ownership Restrictions.
U.S.-U.K. Routes Under the Investment Agreement, USAir Group
agreed that as promptly as commercially practicable it would divest
or, if divestiture were not possible, relinquish, all licenses,
certificates and authorities for each of USAir's routes between the
U.S. and the U.K. (the "U.K. Routes") at such time as BA and USAir
implement the code-sharing arrangement contemplated by the
Investment Agreement discussed below. USAir Group and BA have
agreed that they should attempt to mitigate any negative impact on
Company employees or communities served by the U.K. Routes and to
share any losses suffered as a result of such divestiture or
relinquishment with due regard to their respective interests.
Accordingly, BA is operating and marketing certain routes formerly
operated by USAir under a "wet lease." Under a "wet lease," an
airline, in this case USAir, leases its aircraft and cockpit and
cabin crews to another airline, in this case BA, for the purpose of
operating certain routes or flights. The wet leases have an
initial term of one year and may be extended by USAir Group and BA
for a cumulative lease term not to exceed two years and eleven
months. Rentals under the wet lease are based on USAir's costs.
BA will retain the cumulative profits received by it in respect of
these routes on the basis of its fully diluted stock ownership in
USAir Group and pay the balance of the profits to USAir Group
annually. See "Code Sharing" below. If the contemplated profit
sharing cannot be performed, BA will reimburse USAir Group for a
portion of any losses suffered by USAir Group in the divesture or
relinquishment of the U.K. Routes based on a formula set forth in
the Investment Agreement. The route authorities which USAir was
required to sell or relinquish were the Philadelphia-London and
BWI-London route authorities purchased by USAir from TWA in April
1992 for $50 million, and its route authority between Charlotte and
London. Assets related to the U.K. Routes were carried on USAir's
books at approximately $47 million at December 31, 1993 and USAir
expects to recover such amount in full pursuant to the provisions
of the Investment Agreement described above.
During March and April of 1993, USAir reached agreement with
two air carriers to sell the Philadelphia-London and BWI-London
route authorities, provided, among other conditions, governmental
authorities permitted the transfer of these route authorities to
other cities. In June 1993, the DOT denied applications for such
transfers on the grounds that the U.S.-U.K. bilateral air services
agreement does not permit such transfers. In July 1993, the DOT
awarded the Philadelphia-London route authority to American. USAir
29
ceased operating the BWI-London route authority on October 1, 1993
as a result of the implementation of the wet leasing and code
sharing arrangements with BA. See "Code Sharing" below. In April
1993, USAir agreed to sell to the Metropolitan Nashville Airport
Authority, Nashville, Tennessee for $5 million its operating
authority between Charlotte and London Gatwick Airport. In
December 1993, the DOT issued an order which disapproved USAir's
proposed sale of this route to Nashville and awarded the BWI-London
and Charlotte-London route authorities to American, which will
transfer the U.S. gateway cities for these route authorities to
Nashville and Raleigh/Durham, North Carolina. USAir ceased serving
the Charlotte-London route on January 19, 1994 and implemented the
code sharing and wet leasing arrangement with BA in that market on
that date.
Code Sharing BA and USAir Group entered into a code share
agreement on January 21, 1993 (the "Code Share Agreement") pursuant
to which certain USAir flights will carry the airline designator
code of both BA and USAir. Code sharing is a common practice in
the airline industry whereby one carrier sells the flights of
another carrier (its code sharing partner) as if it provides those
flights with its own equipment and personnel. These flights are
intended by USAir Group and BA eventually to include all routes
provided for under the bilateral air services agreement between the
U.S. and the U.K. to the extent possible, consistent with commer-
cial viability and technical feasibility.
The DOT Order, among other things, granted USAir for one year
a statement of authorization, and BA an exemption, for certain code
sharing and wet leasing arrangements contemplated by the Investment
Agreement (the "Initial Code Share Authority"). USAir believes
that the one-year term of the Initial Code Share Authority was
consistent with DOT policy and precedents with respect to other
code sharing arrangements. As contemplated in the Initial Code
Share Authority, USAir can code share with BA to approximately 38
airports in the U.S. beyond the BWI, Philadelphia and Pittsburgh
gateways. Since the DOT Order was issued in March 1993, the DOT
also granted USAir code sharing authorization for 26 additional
U.S. airports and Mexico City through nine additional U.S.
gateways, including Charlotte (the "Supplemental Code Share
Authority"). Although the DOT granted the Supplemental Code Share
Authority for periods shorter than one year in an effort to exert
pressure on the U.K. to liberalize access to the U.K., particularly
London's Heathrow Airport, in negotiations on a revised U.S.-U.K.
bilateral air services agreement, the DOT eventually extended the
Supplemental Code Share Authority to March 17, 1994, the same date
the Initial Code Share Authority expired. As of March 1, 1994,
USAir and BA had implemented the code sharing arrangements for 34
U.S. cities. On March 17, 1994, the DOT issued an order renewing
for one year the code share authorization granted under the Initial
Code Share Authority and Supplemental Code Share Authority. In
January 1994, USAir and BA filed applications to code share to 65
30
additional U.S., and seven additional foreign, destinations via the
same and several additional U.S. gateways. The DOT did not act on
these applications in its March 17, 1994 order.
The Company and BA are in the process of exploring the
economies and synergies that may be possible as a result of the
Code Share Agreement. The Company believes that (i) the code-share
cities in the U.S. will receive greater access to international
markets; (ii) it will have greater access to international traffic;
and (iii) BA's and its customers will benefit from better on-line
connections as well as coordinated check-in and baggage checking
procedures. The Company believes that the code sharing arrange-
ments will generate increased revenues; however, the magnitude of
any increase cannot be estimated at this time. The DOT may
continue to link further renewals of the code share authorization
to the U.K.'s liberalization of U.S. air carrier access to the
U.K.; however, the code sharing arrangements contemplated by the
Code Share Agreement are expressly permitted under the bilateral
air services agreement between the U.S. and U.K. Accordingly,
USAir expects that the existing code share authorization will
continue to be renewed; however, there can be no assurance that
this will occur. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Industry Globaliza-
tion." USAir does not believe that the DOT's failure to renew
further the authorization would result in a material adverse change
in its financial condition; however, if the authorization is not
renewed, consummation of the Second Purchase and the Final
Purchase, as defined under "Possible Additional BA Investments"
below, may be less likely. In any event, on March 7, 1994 BA
announced that it would not make any additional investments in the
Company until the outcome of measures by the Company to reduce
costs and improve its financial results is known. As discussed
under "Possible Additional BA Investments" below, USAir cannot
predict whether or when the Second Purchase or the Final Purchase
will be consummated in any event.
Possible Additional BA Investments On March 7, 1994 BA
announced that it would not make any additional investments in the
Company until the outcome of measures by the Company to reduce
costs and improve its financial results is known. Under the terms
of the Investment Agreement, assuming the Series F Preferred Stock
or any shares issued upon conversion thereof are outstanding and BA
has not sold any shares of preferred stock issued to it by USAir
Group or any common stock or other securities received upon
conversion or exchange of the preferred stock, BA is entitled at
its option to elect to purchase from USAir Group, on or prior to
January 21, 1996, 50,000 shares of Series C Cumulative Convertible
Senior Preferred Stock, without par value ("Series C Preferred
Stock"), at a purchase price of $10,000 per share, to be paid by
BA's surrender of the Series F Preferred Stock and a payment of
$200 million (the "Second Purchase"), and, on or prior to Janu-
ary 21, 1998, assuming that BA has purchased or is purchasing
31
simultaneously Series C Preferred Stock, 25,000 (or more in certain
circumstances) shares of Series E Cumulative Convertible Exchange-
able Senior Preferred Stock, without par value ("Series E Preferred
Stock"), at a purchase price of $10,000 per share (the "Final
Purchase"). Series E Preferred Stock is exchangeable under certain
circumstances at the option of USAir Group into certain USAir Group
debt securities ("BA Notes"). If the DOT approves all the
transactions and as contemplated by the Investment Agreement, at
the election of either BA or USAir Group on or prior to January 21,
1998, BA's purchase of the Series C Preferred Stock (unless
previously consummated) and BA's purchase of the Series E Preferred
Stock would be consummated under certain circumstances. If BA has
not elected to purchase the Series C Preferred Stock by January 21,
1996, then USAir Group may at its option redeem, in whole or in
part, Series F Preferred Stock at the higher of market value or the
price of $10,000 per share, plus accrued dividends. USAir cannot
predict whether or when the Second Purchase and Final Purchase will
be consummated.
Terms of the Series C Preferred Stock and Series E Preferred
Stock The Series C Preferred Stock and Series E Preferred Stock
are substantially similar to Series F Preferred Stock, except as
follows. Series C Preferred Stock will be convertible into shares
of Class B Common Stock or Non-Voting Class C Stock (as such terms
are defined under "Terms of BA Common Stock" below) at an initial
conversion price of approximately $19.79, subject to Foreign
Ownership Restrictions. Each share of Series C Preferred Stock
will be entitled to a number of votes equal to the number of share
of Class B Common Stock into which it is convertible, subject to
Foreign Ownership Restrictions. If shares of Series C Preferred
Stock are transferred to a third party, they convert automatically
at the seller's option into either shares of Common Stock or a like
number of shares of Series G Cumulative Convertible Senior
Preferred Stock. Series E Preferred Stock will be convertible into
shares of Common Stock or Non-Voting Class ET Stock (as defined
under "Terms of BA Common Stock" below) at an initial conversion
price of approximately $21.74, subject to increase if the Series E
Preferred Stock is originally issued on or after January 21, 1997,
subject to Foreign Ownership Restrictions. Each share of Series E
Preferred Stock will be entitled to a number of votes equal to the
number of shares of Common Stock into which it is convertible,
subject to Foreign Ownership Restrictions.
Terms of BA Common Stock To the extent permitted by Foreign
Ownership Restrictions, an amendment to USAir Group's charter,
which is to be filed with the Delaware Secretary of State immedi-
ately prior to the Second Purchase, which BA has announced it will
not complete under current circumstances, will create three new
classes of common stock - Class B Common Stock, par value $1.00 per
share ("Class B Common Stock"), Non-Voting Class C Common Stock,
par value $1.00 per share ("Non-Voting Class C Stock"), and Non-
Voting Class ET Common Stock, par value $1.00 per share ("Non-
32
Voting Class ET Common Stock," collectively with Class B Common
Stock and Non-Voting Class C Common Stock, "BA Common Stock") all
of which may be held only by BA or one of its wholly-owned
subsidiaries. Except with respect to voting and conversion rights,
the BA Common Stock will be substantially identical to the Common
Stock. Shares of BA Common Stock will convert automatically to
shares of Common Stock upon their transfer to a third party.
Subject to Foreign Ownership Restrictions, Class B Common Stock
will be entitled to one vote per share. After the effectiveness of
the above charter amendment, to the extent permitted by Foreign
Ownership Restrictions, Class B Common Stock will vote as a single
class with Series C Preferred Stock on the election of one-fourth
of the directors and the approval of the holders of Class B Common
Stock and Series C Preferred Stock voting as a single class will be
required for certain matters.
Certain Governance Matters Following the Second Purchase,
which BA has announced it will not complete under current circum-
stances, and assuming these changes are permitted under Foreign
Ownership Restrictions, the above charter amendment will fix the
size of USAir Group's Board of Directors at 16, one-fourth of whom
would be elected by BA. In addition, the vote of 80% of the USAir
or USAir Group Boards of Directors will be required for approval of
the following (with certain limited exceptions): (i) any agreement
with the DOT regarding citizenship and fitness matters; (ii) any
annual operating or capital budgets or financing plans; (iii)
incurring capital expenditure not provided for in a budget approved
by the vote of 80% of the board in excess of $10 million in the
aggregate during any fiscal year; (iv) declaring and paying
dividends on any capital stock of USAir Group or any of its
subsidiaries (other than dividends paid only to USAir Group or any
wholly-owned subsidiary of USAir Group and any dividends on
preferred stock); (v) making investments in other entities not
provided for in approved budgets in excess of $10 million in the
aggregate during any fiscal year; (vi) incurring additional debt
(other than certain debt specified in the Investment Agreement) not
in an approved financing plan in excess of $450 million in the
aggregate during any fiscal year; (vii) incurring off-balance sheet
liabilities (e.g., operating leases) not in an approved financing
plan in excess of $50 million in the aggregate during any fiscal
year; (viii) appointment, compensation and dismissal of certain
senior executives; (ix) acquisition, sale, transfer or relinquish-
ment of route authorities or operating rights; (x) entering into
material commercial or marketing agreements or joint ventures; (xi)
issuance of capital stock (or debt or other securities convertible
into or exchangeable for capital stock), other than (A) the stock
options granted to employees in return for pay reductions under the
USAir Group 1992 Stock Option Plan, as described under "Employees"
above, (B) to USAir Group or any direct or indirect wholly owned
subsidiary of USAir Group, (C) pursuant to the terms of USAir Group
securities outstanding when a certain amendment to USAir Group's
charter required in connection with consummation of the Second
33
Purchase becomes effective, or (D) pursuant to the terms of
securities the issuance of which was previously approved by the
vote of 80% of the board; (xii) acquisition of its own equity
securities other than from USAir Group or its subsidiaries, or
pursuant to sinking funds or an approved financing plan; and (xiii)
establishment of a board of directors' committee with power to
approve any of the foregoing. This supermajority vote requirement
would allow any four directors, including those elected by BA, to
withhold approval of the actions described above if they believe
them to be contrary to the best interests of USAir. The super-
majority vote would not be required with regard to the foregoing
actions to the extent they involve the enforcement by USAir Group
of its rights under the Investment Agreement.
Following the Second Purchase, which BA has indicated it will
not complete under current circumstances, to the extent permitted
under Foreign Ownership Restrictions, USAir Group and BA will
integrate certain of their respective business operations pursuant
to certain "Integration Principles" included in the Investment
Agreement. In addition, to the extent permitted by Foreign
Ownership Restrictions or pursuant to specific DOT approval, an
"Integration Committee," headed by the chief executive officers of
USAir Group and BA and by an Executive Vice President-Integration
of USAir Group, would oversee the integration subject to the
ultimate discretion of USAir Group's board of directors. As of the
Final Purchase, which BA has indicated it will not complete under
current circumstances, to the extent permitted by Foreign Ownership
Restrictions, the Investment Agreement provides for the establish-
ment of a committee ("Appointments Committee") of the board of
directors of USAir Group, composed of USAir Group's chief executive
officer, BA's chief executive officer and another director serving
on both USAir Group's and BA's board of directors, to handle all
employment matters relating to managers at the level of vice
president and above, except for certain senior executives.
BA's governance rights after the Second Purchase and the Final
Purchase, which BA has indicated it will not complete under current
circumstances, are subject to reduction if BA reduces its holding
in USAir Group under the following circumstances. If BA sells or
transfers, in one or more transactions, BA Preferred Stock, Common
Stock or BA Common Stock (collectively, Common Stock and BA Common
Stock are hereinafter referred to as "Non-Preferred Stock") issued
directly or indirectly upon the conversion thereof such that the
aggregate purchase price of the BA Preferred Stock, BA Notes, Non-
Preferred Stock or other equity securities of USAir Group held by
BA and its directly or indirectly wholly owned subsidiaries
following such sale or transfer (the "BA Holding") is less than
both two-thirds of the aggregate purchase price of all BA Preferred
Stock, BA Notes, Non-Preferred Stock or other equity securities of
USAir Group acquired by BA and its subsidiaries following Janu-
ary 21, 1993 and $750 million (or $500 million if the Final
Purchase has not occurred), then (i) the number of directors
34
elected by the Class B Common Stock and the Series C Preferred
Stock, voting together as a single class, will be limited to two;
(ii) the directors elected by the Common Stock, Series A Preferred
Stock, Series E Preferred Stock, Series T Preferred Stock, as
defined under "Miscellaneous" below, and other capital stock with
voting rights will no longer be required to include two directors
selected from among the outside directors on the board of directors
of BA; (iii) special class voting rights applicable to the Class B
Common Stock and Series C Preferred Stock will no longer apply and;
(iv) BA will no longer participate in the Appointments Committee.
In addition, if the BA Holding becomes less than both one-third of
the aggregate purchase price of all BA Preferred Stock, BA Notes,
Non-Preferred Stock or other equity securities of USAir Group
acquired by BA and its subsidiaries following January 21, 1993 and
$375 million (or $250 million if the Final Purchase has not
occurred), then the number of directors elected by the Class B
Common Stock and the Series C Preferred Stock, voting together as
a single class, will be reduced to one. If the BA Holding becomes
less than $100 million, then the Class B Common Stock and the
Series C Preferred Stock will no longer vote together as a single
class with respect to the election of any directors of USAir Group,
but will vote together with the Common Stock, the Series A
Preferred Stock and any other class or series of capital stock with
voting rights with respect to the election of directors of USAir
Group.
Miscellaneous Under the terms of the Investment Agreement,
BA has the right to maintain its proportionate ownership (based on
the assumed consummation of the Second Purchase and the Final
Purchase) of USAir Group's securities under certain circumstances
by purchasing shares of certain series of Series T Cumulative
Convertible Exchangeable Senior Preferred Stock, without par value
("Series T Preferred Stock"), Common Stock or BA Common Stock.
Pursuant to these provisions, on June 10, 1993, BA purchased (i)
152.1 shares of Series T-1 Preferred Stock for approximately $1.5
million as a result of certain issuances during the period
January 21 through March 31, 1993 of Common Stock in connection
with the exercise of certain employee stock options and to certain
defined contribution retirement plans; and (ii) 9,919.8 shares of
Series T-2 Preferred Stock for approximately $99.2 million as a
result of USAir Group's issuance on May 4, 1993 of 11,500,000
shares of Common Stock for net proceeds of approximately $231
million pursuant to a public underwritten offering. Because BA
partially exercised its preemptive right in connection with the
Common Stock offering and the offering price was below a certain
level, the conversion price of the Series F Preferred Stock was
antidilutively adjusted on June 10, 1993 from $19.50 to $19.41 per
share. As a result, the Series F Preferred stock is convertible
into 15,458,658 shares of Common Stock or Non-Voting Class ET
Common Stock. On March 7, 1994, BA advised the Company that it
would not exercise its optional purchase rights under the Invest-
ment Agreement to buy three additional series of Series T Preferred
35
Stock triggered by issuances of common stock of the Company
pursuant to certain Company benefit plans during the second, third
and fourth quarters of 1993.
The Investment Agreement also imposes certain restrictions on
BA's right to acquire additional voting securities, participate in
solicitations with respect to USAir Group securities or otherwise
propose or discuss extraordinary transactions concerning USAir
Group. In addition, the Investment Agreement restricts BA's right
to transfer certain securities and requires that prior to transfer-
ring such securities, BA must, in most cases, first offer to sell
the securities to USAir Group. BA has certain rights to require
USAir Group to register for sale USAir Group securities sold to it
pursuant to the Investment Agreement.
USAir Group believes that the investments made by BA, the code
sharing arrangements and consummation of the other transactions
contemplated by the Investment Agreement have enabled and would
further enable it to compete more effectively by (i) increasing
USAir Group's equity capital and strengthening its balance sheet;
(ii) improving its liquidity and access to capital markets; (iii)
providing financial resources to help it withstand adverse economic
conditions and fare competition; (iv) providing financial resources
for the purchase of strategic assets which may be on the market
from time to time; and (v) giving USAir greater access to interna-
tional traffic. However, BA has announced that while it will
continue to code share with USAir, it will not make additional
investments in the Company under current circumstances. It is
unclear whether or when any additional investments by BA will
occur.
36
Item 2. PROPERTIES
Flight Equipment
At December 31, 1993, USAir operated the following jet
aircraft:
Passenger Avg. Age Owned Leased
Type Capacity (Years) (1) (2) Total
---- --------- -------- ----- ------ -----
Boeing 767-200ER
(3) 210 4.9 4 6 10
Boeing 757-200 186 5.5 11 11 22
Boeing 727-200 151 15.0 - 8 8
Boeing 737-400 146 4.1 19 35 54
McDonnell Douglas
MD-80 141 11.9 15 16 31
Boeing 737-300 128 7.0 25 76 101
Boeing 737-200 110 14.4 61 20 81
Douglas DC-9-30 103 20.9 59 14 73
Fokker 100 98 3.1 36 4 40
Fokker F28-4000 68 10.0 4 17 21
---- --- --- ---
10.4 234 207 441
==== === === ===
(1) Of the owned aircraft, 119 were collateral for various secured
financing obligations aggregating $2.0 billion at December 31,
1993, 31 were collateral under USAir Group's Credit Agreement
(see Item 8A, Notes to the Consolidated Financial Statements
of USAir Group).
(2) The terms of the leases expire between 1994 and 2015.
(3) The above table excludes one owned and one leased Boeing 767-
200ER which USAir leased to BA under a wet lease arrangement
at December 31, 1993. See "British Airways Investment
Agreement - U.S.-U.K. Routes."
37
At December 31, 1993, USAir Group's three commuter airline
subsidiaries operated the following propeller-driven aircraft:
Passenger Avg. Age Owned Leased
Type Capacity (Years) (1) (2) Total
---- --------- -------- ----- ------ -----
deHavilland Dash 7 50 12.7 2 3 5
deHavilland Dash 8 37 5.1 33 31 64
Shorts SD3-60 36 8.8 5 12 17
Embraer Model
120 Brasilia 28 6.5 - 7 7
120 Brasilia 30 3.8 -