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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13

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

(Mark One)

or

US Airways Group, Inc.

(Exact name of registrant as specified in its charter)

State of Incorporation: Delaware

2345 Crystal Drive, Arlington, Virginia 22227

(Address of principal executive offices)

(703) 872-7000

(Registrant’s telephone number, including area code)

(Commission file number: 1-8444)

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

As of June 30, 2003, there was no public market for the Company’s Class A Common Stock or Class B Common Stock.

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

On March 1, 2004, there were outstanding approximately 52,158,415 shares of Class A Common Stock and 5,000,000 shares of Class B Common Stock.

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US Airways Group, Inc.

Form 10-K

Year Ended December 31, 2003

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US Airways Group, Inc.

Form 10-K

Year Ended December 31, 2003

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Part I

Item 1. Business

Overview

US Airways Group, Inc. (US Airways Group or the Company) is a corporation organized under the laws of the State of Delaware. The Company’s executive offices are located at 2345 Crystal Drive, Arlington, Virginia 22227 (telephone number (703) 872-7000). The Company’s internet address is usairways.com.

US Airways Group’s primary business activity is the operation of a major network air carrier through its ownership of the common stock of US Airways, Inc. (US Airways), Allegheny Airlines, Inc. (Allegheny), Piedmont Airlines, Inc. (Piedmont), PSA Airlines, Inc. (PSA), MidAtlantic Airways, Inc. (MidAtlantic), US Airways Leasing and Sales, Inc. (US Airways Leasing and Sales), Material Services Company, Inc. (MSC) and Airways Assurance Limited, LLC (AAL).

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

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

US Airways, which is also a corporation organized under the laws of the State of Delaware, is the Company’s principal operating subsidiary. US Airways is a certificated air carrier engaged primarily in the business of transporting passengers, property and mail. US Airways enplaned approximately 41 million passengers in 2003 and was the seventh largest U.S. air carrier (as ranked by revenue passenger miles (RPMs)). As of December 31, 2003, US Airways operated 282 jet aircraft (see Item 2 “Properties” for additional information related to aircraft operated by US Airways) and provided regularly scheduled service at 90 airports in the continental United States, Canada, Mexico, France, Germany, Italy, Spain, Ireland, the Netherlands, the United Kingdom and the Caribbean.

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Certain air carriers have code share arrangements with US Airways to operate under the trade name “US Airways Express.” Typically, under a code share arrangement, one air carrier places its designator code and sells tickets on the flights of another air carrier (its code share partner). US Airways Express carriers are an integral component of the Company’s operating network. Due to the relatively small local traffic base at its hubs, US Airways relies heavily on feed traffic from its US Airways Express affiliates who carry passengers from low-density markets to US Airways’ hubs. As of December 2003, the US Airways Express network served 143 airports in the continental U.S., Canada and the Bahamas, including 44 airports also served by US Airways. During 2003, US Airways Express air carriers enplaned approximately 13.2 million passengers (of these approximately 5.9 million passengers were enplaned by the Company’s wholly owned regional airlines and 5.7 million passengers were enplaned by third-party carriers operating under capacity purchase agreements and approximately 1.6 million passengers were enplaned by carriers operating under “prorate” agreements – see below), approximately 50% of whom connected to the Company’s flights. The Company uses its US Airways Express operations to feed connecting traffic at its hubs from low density markets that are uneconomical for US Airways to serve with large jets. In addition, US Airways Express operators offer complementary service in existing US Airways markets by operating flights during off-peak periods between US Airways flights.

The US Airways Express code share arrangements are either in the form of a capacity purchase or a “prorate” agreement. The three wholly owned regional airlines and the regional jet affiliate operators are capacity purchase relationships. The regional jet affiliates with a capacity purchase agreement are Chautauqua Airlines (Chautauqua), Mesa Airlines, Inc. (Mesa), Trans States Airlines, Inc. (Trans States) and Midway Airlines Corporation (Midway) prior to Midway ceasing service. The capacity purchase agreements provide that all revenues (passenger, mail and freight) go to US Airways. In return, US Airways agrees to pay predetermined fees to such airlines for operating an agreed number of aircraft, without regard to the number of passengers onboard. In addition, these agreements provide that certain variable costs, such as fuel and airport landing fees, will be reimbursed 100% by US Airways. US Airways controls marketing, scheduling, ticketing, pricing and seat inventories. The regional jet capacity purchase agreements have expirations from 2008 to 2013 and provide for optional extensions at the Company’s discretion. The carriers with a prorate agreement are non-owned turboprop operators and include all or a portion of the turboprop operations of Colgan Airlines, Inc. (Colgan), Trans States, Shuttle Acquisition LLC (Shuttle America), and Air Midwest, Inc. (Air Midwest). The prorate agreements provide for affiliate carriers to pay certain service fees to US Airways as well as a prorated share of revenue for connecting customers. US Airways is responsible for pricing and marketing of connecting services to and from the prorate carrier. The prorate carrier is responsible for pricing and marketing the local, point to point markets. All US Airways Express carriers use US Airways’ reservation systems, and have logos, service marks, aircraft paint schemes and uniforms similar to those of US Airways.

US Airways Group’s major connecting hubs are at airports in Charlotte, Philadelphia and Pittsburgh. The Company also has substantial operations at Boston’s Logan International Airport (Logan), New York’s LaGuardia Airport (LaGuardia) and Washington’s Ronald Reagan Washington National Airport (Reagan National). Measured by departures, US Airways is among the largest at each of the foregoing airports. US Airways is also a leading airline from the Northeast U.S. to Florida. US Airways’ East coast-based hubs, combined with its strong presence at many East coast airports, have made it among the largest intra-East coast carriers, comprising 29% of the industry’s intra-East coast revenues based on the most recent industry revenue data available.

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For the year ended December 31, 2003, passenger revenues accounted for 90% of the Company’s consolidated operating revenues. Cargo revenues and other sources accounted for 10% of the Company’s consolidated operating revenues in 2003. The Company’s results are seasonal with operating results typically highest in the second and third quarters due to US Airways’ combination of business traffic and North-South leisure traffic in the eastern U.S. during those periods.

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

A copy of this annual report on Form 10-K, as well as other annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are accessible free of charge at investor.usairways.com/edgar.cfm as soon as reasonably possible after filed with or furnished to the Securities and Exchange Commission.

Airline Industry and the Company’s Position in the Marketplace

Most of the markets in which US Airways Group’s airline subsidiaries operate are highly competitive. These airline subsidiaries compete to varying degrees with other air carriers and with other forms of transportation. US Airways competes with at least one major airline on most of its routes between major cities. Airlines, including US Airways, typically use discount fares and other promotions to stimulate traffic during normally slack travel periods to generate cash flow and to maximize revenue per available seat mile. Discount and promotional fares are often non-refundable and subject to various restrictions such as minimum stay requirements, advance ticketing, limited seating and change fees. US Airways has often elected to match discount or promotional fares initiated by other air carriers in certain markets in order to compete in those markets. Competition between air carriers also involves certain route structure characteristics, such as flight frequencies, availability of nonstop flights, markets served and the time certain flights are operated. To a lesser extent, competition can involve other products, such as frequent flier programs and airport clubs.

US Airways considers the growth of low-fare low-cost competition and the growing presence of competitors’ regional jets in certain of its markets to be its foremost competitive threats. Recent years have seen the entrance and growth of low-fare low-cost competitors in many of the markets in which the Company’s airline subsidiaries operate. These competitors, based on low costs of operations and low-fare structures, include Southwest Airlines Co. (Southwest), AirTran Airways, Inc., Frontier Airlines, Inc. (Frontier) and JetBlue Airways. Southwest has steadily increased operations within the eastern United States since first offering service in this region in late 1993. In May 2004, Southwest and Frontier will commence service at the Philadelphia International Airport, a hub airport for US Airways. The Company anticipates further low-fare low-cost competition in the industry in the future.

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

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Other major airlines have substantially increased the number of regional jets in the eastern United States. Regional jets are faster, quieter, more comfortable than turboprops and generally preferred by customers over turboprops. As described below, the Company continues to add regional jets to its fleet, in part, to regain lost market share in markets where its turboprop affiliates competed with other major airline affiliates which operate regional jets.

US Airways’ agreement with its pilots provides that it may operate up to 465 regional jets, subject to certain restrictions. As of December 31, 2003, the third-party regional jet affiliates and PSA operated 113 regional jets as part of US Airways Express. Additional regional jets up to 465 are subject to the “Jets for Jobs” protocol and related agreements with US Airways’ pilots. The Jets for Jobs protocol provides for 50% of new regional jet pilot opportunities created as a result of increased use of regional jets at US Airways to be offered to furloughed US Airways’ pilots. The Jets for Jobs protocol requires consensus by the pilots union at each regional carrier where additional regional jets will be flown. Allegheny, PSA, Piedmont, Mesa, Trans States and Chautauqua pilots have all agreed to Jets for Jobs.

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

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

The Company, with a new management team headed by David N. Siegel, who joined the Company in March 2002, began to implement a plan to return the Company to profitability. The plan first required significant cost savings from key constituent groups including employees, vendors, aircraft lenders/lessors and financiers and other groups. Second, the plan sought to boost revenues and enhance competitiveness by the increased use of regional jets to service markets in an efficient manner. Finally, the Company sought to enhance revenues by entering into strategic alliances with domestic and international airlines.

While the Company was able to negotiate certain cost savings from many of its employee groups, the Company determined that it was unlikely to conclude consensual negotiations with all of the remaining labor groups, various vendors, aircraft lenders/lessors and financiers in a time frame necessary to complete an out-of-court restructuring. Factors contributing to this conclusion included the large number of lenders/lessors and financiers, the inability of trustees to modify payment terms of public equipment financings without the unanimous consent of holders of widely-held trust certificates and the Company’s inability to reject/abandon surplus aircraft leases, return excess aircraft and extinguish applicable obligations outside of Chapter 11. In

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

Marketing Agreements with Other Airlines

US Airways entered into comprehensive marketing agreements with United in July 2002. As a result of these agreements, US Airways and United passengers are able to contact either airline and make a single reservation that involves travel on either or both airlines (code share travel) through streamlined ticketing, baggage handling and check-in procedures. In addition, US Airways and United customers have the opportunity to earn Dividend Miles and Mileage Plus Miles on either airline and members of either airlines’ airport club may access both airlines’ airport clubs when traveling on flights operated by the host airline. US Airways and United customers may also redeem Dividend Miles and Mileage Plus awards on both airlines. The agreement also includes provisions for US Airways to join United in the Star Alliance, which extended an invitation to US Airways on May 31, 2003. Membership in the Star Alliance will further enhance the value of US Airways’ domestic and international route network by allowing customers access to the global marketplace. US Airways expects to join the Star Alliance in the second quarter of 2004. United, as well as its parent company, UAL Corporation (UAL), and certain of its affiliates, filed for protection under Chapter 11 of the Bankruptcy Code on December 9, 2002. United immediately requested bankruptcy court authority to assume these agreements and the court granted United’s request.

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

Industry Regulation and Airport Access

The Company’s airline subsidiaries operate under certificates of public convenience and necessity or commuter authority issued by the Department of Transportation (DOT). Such certificates may be altered, amended, modified or suspended by the DOT if the public convenience and necessity so require, or may be revoked for failure to comply with the terms and conditions of the certificates. Airlines are also regulated by the U.S. Federal Aviation Administration (FAA), a division of the DOT, primarily in the areas of flight operations, maintenance, ground facilities and other technical matters. Pursuant to these regulations, the Company’s airline subsidiaries have FAA-approved maintenance programs for each type of aircraft they operate that provide for the ongoing maintenance of such aircraft, ranging from periodic routine inspections to major overhauls. From time-to-time, the FAA issues airworthiness directives and other regulations affecting the Company’s airline subsidiaries or one or more of the aircraft types they operate. In recent years, for example, the FAA has issued or proposed such mandates relating to, among other things, enhanced ground proximity warning systems; fuselage pressure bulkhead reinforcement; fuselage lap joint inspection rework; increased inspections and maintenance procedures to be conducted on certain aircraft; increased cockpit security; fuel tank flammability reductions and domestic reduced vertical separation.

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The DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate or foreign commerce or the national transportation system. Certain locales, including Boston, Washington, D.C., Chicago, San Diego, San Francisco and Orange County, CA, among others, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. In some instances these restrictions have caused curtailments in services or increases in operating costs and such restrictions could limit the ability of US Airways to expand its operations at the affected airports. Authorities at other airports may consider adopting similar noise regulations.

The airline industry is also subject to increasingly stringent federal, state and local laws protecting the environment. Future regulatory developments could affect operations and increase operating costs for the airline industry, including the Company’s airline subsidiaries.

The Company’s airline subsidiaries are obligated to collect a federal excise tax on domestic and international air transportation (commonly referred to as the “ticket tax”). The Company’s airline subsidiaries collect these taxes, along with certain other U.S. and foreign taxes and user fees on air transportation, and pass through the collected amounts to the appropriate governmental agencies. Although such taxes are not operating expenses of the Company, they represent an additional cost to the Company’s customers.

The Aviation and Transportation Security Act (Security Act) was enacted in November 2001. Under the Security Act, substantially all aspects of civil aviation passenger security screening were federalized and a new Transportation Security Administration (TSA) under the DOT was created. The TSA was then transferred to the Department of Homeland Security pursuant to the Homeland Security Act of 2002. The Security Act, among other matters, mandates improved flight deck security; carriage at no charge of federal air marshals; enhanced security screening of passengers, baggage, cargo, mail, employees and vendors; enhanced security training; regulations issued in connection therewith require fingerprint-based background checks of all employees and vendor employees with access to secure areas of airports; and provision of passenger data to U.S. Customs. Funding for the TSA is provided, in part, by a fee collected by air carriers from their passengers of $2.50 per flight segment, but not more than $5.00 per one-way trip, and a fee on air carriers that is limited to the amount that the carrier spent on passenger security screening in 2000 and will, beginning in October 2004 (the beginning of the next fiscal year for the Federal Government), be modified to allocate the total amount spent by all carriers combined in 2000 to each carrier under a methodology that remains to be determined by the TSA. Implementation of the requirements of the Security Act have resulted and will continue to result in increased costs for US Airways, Allegheny, Piedmont and PSA and their passengers and has and will likely continue to result in service disruptions and delays.

Many major U.S. airports impose passenger facility charges. The ability of airlines to contest increases in these charges is restricted by federal legislation, DOT regulations and judicial decisions. Legislation enacted in 2000 permitted airports to increase passenger facility charges effective April 1, 2001. With certain exceptions, air carriers pass these charges on to passengers. However, the ability of the Company to pass-through security fees and passenger facility charges to its customers is subject to various factors, including market conditions and competitive factors.

The FAA has designated John F. Kennedy International Airport (Kennedy), LaGuardia and Reagan National as “high-density traffic airports” and limited the number of departure and arrival slots available to air carriers at those airports. In April 2000, legislation was enacted which eliminates slot restrictions in 2007 at LaGuardia and Kennedy. Among other things, the legislation encouraged the development of air service to smaller communities from slot-controlled airports. During the interim period while slot restrictions remained in effect at LaGuardia, airlines could apply for slot exemptions to serve smaller communities using aircraft

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with a maximum seating capacity of less than 71. In connection with this legislation, the Company and several other airlines increased service from LaGuardia which led to excessive flight delays. In response to such delays, the FAA implemented a slot lottery system in December 2000 limiting the number of new flights at LaGuardia. As a result, several airlines, including US Airways, were required to reduce the number of flights added at LaGuardia in connection with this legislation. The resulting allocation of slots from the slot lottery system was initially scheduled to expire on September 15, 2001, but on August 3, 2001, the FAA announced an extension until October 26, 2002. On July 8, 2002, the FAA announced another extension until October 30, 2004. Based on the excessive flight delays resulting from the initial grant of slot exemptions, along with LaGuardia’s limited ability to expand operations due to land and airspace constraints, the Company believes that it is likely some form of slot restrictions will remain despite their scheduled elimination in 2007.

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

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

Employees

As of December 31, 2003, on a full-time equivalent basis, the Company employed 31,700 active employees. US Airways employed 26,700 active employees including approximately 7,000 station personnel, 5,800 flight attendants, 5,100 mechanics and related employees, 3,400 pilots, 1,800 reservations personnel and 3,600 personnel in administrative and miscellaneous job categories. The Company’s remaining subsidiaries employed 5,000 employees including approximately 2,500 station personnel, 900 pilots, 500 flight attendants, 600 mechanics and related employees and 500 personnel in administrative and miscellaneous job categories.

As of December 31, 2003, approximately 84% of the Company’s active employees were covered by collective bargaining agreements with various labor unions.

The status of US Airways’ labor agreements with its major employee groups as of December 31, 2003 is as follows:

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Aviation Fuel

Aviation fuel is typically the Company’s second largest expense. Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of its control. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, can be unpredictable. Prices may be affected by many factors, including: the impact of political instability on crude production, especially in Russia and OPEC countries; unexpected changes to the availability of petroleum products due to disruptions in distribution systems or refineries; unpredicted increases to oil demand due to weather or the pace of economic growth; inventory levels of crude, refined products and natural gas; and other factors, such as the relative fluctuation between the U.S. dollar and other major currencies and influence of speculative positions on the futures exchanges. Because the operations of the airline subsidiaries are dependent upon aviation fuel, significant increases in aviation fuel costs could materially and adversely affect liquidity, results of operations and financial condition. Furthermore, the implications of a sharp increase in the price of aviation fuel for a prolonged period of time would be significant. To manage some of this risk, the Company utilizes certain financial instruments designed to reduce its exposure related to fuel price increases. See “Selected Operating and Financial Statistics” in MD&A for additional information related to aviation fuel.

Distribution Channels

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

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

During 2002, US Airways ceased paying base commissions to travel agencies in the U.S. US Airways continues to participate in contractual relationships with certain travel agencies that pay a bonus commission, often called an override, based on sales on the airline.

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Frequent Traveler Program

Under US Airways’ Dividend Miles frequent traveler program (FTP), participants generally receive mileage credits for each paid flight segment on US Airways, US Airways Shuttle and US Airways Express. Participants can also receive mileage for each paid flight segment on one of US Airways’ FTP airline partners. Participants flying on first class or Envoy class tickets receive additional mileage credits. Participants can also receive additional mileage credits through special promotions periodically offered by US Airways and may also earn mileage credits by utilizing certain credit cards and purchasing services from various FTP partners. Mileage credits earned by FTP participants can be redeemed for various travel awards, including upgrades to first class or Envoy class, and tickets on US Airways or on one of US Airways’ FTP airline partners.

US Airways and its FTP airline partners limit the number of seats allocated per flight for award recipients by using various inventory management techniques. Award travel for all but the highest-level Dividend Miles participants is generally not permitted on blackout dates, which correspond to certain holiday periods or peak travel dates. US Airways reserves the right to terminate Dividend Miles or portions of the program at any time. Program rules, partners, special offers, blackout dates, awards and requisite mileage levels for awards are subject to change.

US Airways uses the incremental cost method to account for liabilities associated with Dividend Miles. Estimated future travel awards are valued at the estimated average incremental cost of carrying one additional passenger. Incremental costs include unit costs for passenger food, beverages and supplies, fuel, reservations, communications, insurance and denied boarding compensation. No profit or overhead margin is included in the accrual for incremental costs. US Airways routinely reviews the assumptions made to calculate its FTP liability for reasonableness and makes adjustments to these assumptions as necessary.

In January 1999, US Airways announced changes to its FTP. Mileage credits earned prior to January 1, 2000 do not expire. Mileage credits earned on or after January 1, 2000 do not expire provided that the participant earns or redeems any amount of Dividend Miles at least once every 36 months.

As of December 31, 2003 and 2002, Dividend Miles participants had accumulated mileage credits for approximately 6,272,000 and 7,011,000 awards, respectively. Because US Airways expects that some potential awards will never be redeemed, calculations of FTP liabilities are based on approximately 80% of total accumulated mileage credits. Mileage credits for Dividend Miles participants who have accumulated less than the minimum number of mileage credits necessary to claim an award and a portion of mileage credits of Dividend Miles participants who have excessive balances are excluded from calculations of FTP liabilities. The liability for the accumulated Dividend Miles was $85 million and $90 million as of December 31, 2003 and 2002, respectively. Incremental changes in FTP liabilities resulting from participants earning or redeeming mileage credits or changes in assumptions used for the related calculations are recorded as part of the regular review process.

The number of FTP awards redeemed for free travel during the years ending December 31, 2003, 2002 and 2001 was approximately 1.2 million, 1.3 million and 1.1 million, respectively, representing approximately 7% of US Airways’ RPMs in each of those years. These low percentages as well as the use of certain inventory management techniques (see above) minimize the displacement of revenue passengers by passengers traveling on Dividend Miles award tickets.

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Insurance

The Company and its subsidiaries maintain insurance of the types and in amounts deemed adequate to protect themselves and their property. Principal coverage includes: liability for injury to members of the public, including passengers; damage to property of the Company, its subsidiaries and others; loss of or damage to flight equipment, whether on the ground or in flight; fire and extended coverage; directors and officers; fiduciary; and workers’ compensation and employer’s liability. In addition to customary deductibles, the Company self-insures for all or a portion of its losses from claims related to environmental liabilities and medical insurance for employees.

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

Item 2. Properties

Flight Equipment

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

As of December 31, 2003, the Company’s wholly owned regional airline subsidiaries operated the following turboprop and regional jet aircraft:

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

The Company’s airline subsidiaries maintain inventories of spare engines, spare parts, accessories and other maintenance supplies sufficient to meet their operating requirements.

As of December 31, 2003, the Company owned or leased the following aircraft which were not considered part of its operating fleet presented in the tables above. These aircraft were either parked at storage facilities or, as shown in the far right column, leased or subleased to third parties.