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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934
                         COMMISSION FILE NUMBER 1-12649

                       AMERICA WEST HOLDINGS CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                    <C>
                    DELAWARE                                              86-0847214
(STATE OR OTHER JURISDICTION OF INCORPORATION OR             (I.R.S. EMPLOYER IDENTIFICATION NO.)
                 ORGANIZATION)
               51 W. THIRD STREET                                       (602) 693-0800
              TEMPE, ARIZONA 85281                      (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                CODE)
</TABLE>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
              TITLE OF EACH CLASS                         NAME OF EACH EXCHANGE ON WHICH REGISTERED:
              -------------------                         ------------------------------------------
<S>                                                    <C>
      CLASS B COMMON STOCK, $.01 PAR VALUE                         NEW YORK STOCK EXCHANGE
</TABLE>

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

                         COMMISSION FILE NUMBER 1-10140

                          AMERICA WEST AIRLINES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                    <C>
                    DELAWARE                                              86-0418245
(STATE OR OTHER JURISDICTION OF INCORPORATION OR             (I.R.S. EMPLOYER IDENTIFICATION NO.)
                 ORGANIZATION)
          4000 E. SKY HARBOR BOULEVARD                                  (602) 693-0800
          PHOENIX, ARIZONA 85034-3899                   (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                CODE)
</TABLE>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
              TITLE OF EACH CLASS                         NAME OF EACH EXCHANGE ON WHICH REGISTERED:
              -------------------                         ------------------------------------------
<S>                                                    <C>
  CLASS B COMMON STOCK WARRANT, $.01 PAR VALUE                     NEW YORK STOCK EXCHANGE
</TABLE>

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                      Senior Unsecured Notes Due 2005
                              (Title of Class)

    Indicate by check mark whether each of the registrants (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 (sec.229.405 under the Securities Exchange Act of 1934) is
not contained herein, and will not be contained, to the best of each 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. [X]

    As of March 23, 1998, there were 44,561,732 shares of America West Holdings
Corporation Class B Common Stock, $.01 par value, and 5,456,934 warrants to
purchase America West Holdings Corporation Class B Common Stock, $.01 par value,
from America West Airlines, Inc., respectively, issued and outstanding. As of
such date, based on the closing sales price, 41,962,390 shares of Class B Common
Stock, having an aggregate market value of approximately $1,018,000,000 were
held by non-affiliates. For purposes of the above statement only, all directors
and executive officers of the registrants are assumed to be affiliates. As of
March 23, 1998, all outstanding equity securities of America West Airlines, Inc.
were owned by America West Holdings Corporation.

    With respect to America West Airlines, Inc., indicate by check mark whether
the registrant has filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.  Yes [X]  No [ ]

                      DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the proxy statement related to America West Holdings
Corporation's 1998 annual meeting of stockholders, which proxy statement will be
filed under the Securities Exchange Act of 1934 within 120 days of the end of
America West Holdings Corporation's fiscal year ended December 31, 1997, are
incorporated by reference into Part III of this Form 10-K.

    AMERICA WEST AIRLINES, INC., A WHOLLY OWNED SUBSIDIARY OF AMERICA WEST
HOLDINGS CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED
DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION J(2).
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                               TABLE OF CONTENTS

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                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
PART I
Item 1.   Business....................................................    3
Item 2.   Properties..................................................   15
Item 3.   Legal Proceedings...........................................   15
Item 4.   Submission of Matters to a Vote of Security Holders.........   16
PART II
Item 5.   Market for Registrants' Common Equity and Related
          Stockholder Matters.........................................   17
Item 6.   Selected Consolidated Financial Data........................   19
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   20
Item 8A.  Consolidated Financial Statements and Supplementary
          Data -- America West Holdings Corporation...................   28
Item 8B.  Financial Statements and Supplementary Data -- America West
          Airlines, Inc...............................................   50
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   68
PART III
Item 10.  Directors and Executive Officers of the Registrants.........   68
Item 11.  Executive Compensation......................................   68
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   68
Item 13.  Certain Relationships and Related Transactions..............   68
PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................   68
</TABLE>

Note Concerning Forward-Looking Information

     This Report contains various forward-looking statements and information
that are based on management's beliefs as well as assumptions made by and
information currently available to management. When used in this document, the
words "anticipate," "estimate," "project," "expect" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, projected
or expected. Among the key factors that may have a direct bearing on the
Company's results are competitive practices in the airline and travel industries
generally and particularly in the Company's principal markets, the ability of
the Company to meet existing financial obligations in the event of adverse
industry or economic conditions or to obtain additional capital to fund future
commitments and expansion, the Company's relationship with employees and the
terms of future collective bargaining agreements and the impact of current and
future laws and governmental regulations affecting the airline and travel
industries and the Company's operations. For additional discussion of such risks
see "Business -- Risk Factors," included in Item 1 of this Report on Form 10-K.
Any forward-looking statements speak only as of the date such statements are
made.

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                                     PART I

     This combined Form 10-K is filed by each of America West Holdings
Corporation ("Holdings") and America West Airlines, Inc. ("AWA"). Information
contained herein relating to AWA is filed by each of Holdings and AWA on its own
behalf. Holdings is a Delaware corporation and became the holding company for
AWA effective midnight December 31, 1996. In January 1998, The Leisure Company,
a Delaware corporation ("Leisure Co."), began operations as a new leisure travel
subsidiary of Holdings to develop and grow the Company's vacation package tour
business. Holding's only material assets are the capital stock of AWA and
Leisure Co. Unless otherwise indicated, the term the "Company" refers
collectively to Holdings and AWA and Leisure Co., its wholly owned subsidiaries.

ITEM 1.  BUSINESS

1997 IN REVIEW

     Holdings reported record pretax income, net income and revenues for the
fourth quarter and full year 1997. Diluted earnings per share in 1997 rose 60%
to $1.63 compared with $1.02 in 1996 (excluding a non-cash, non-recurring
special charge of $65.1 million pretax incurred during the third quarter of
1996). See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."

OVERVIEW

     Holdings is the parent company of AWA and Leisure Co. Management believes
that the holding company structure improves the Company's ability to manage
separate business segments effectively and that Holdings provides a platform for
further expansion of the Company's travel-related businesses. The Company
intends to continue to evaluate investment and expansion opportunities that
would allow the Company to capitalize on the key strengths and market positions
of AWA and Leisure Co.

     AWA is the ninth largest commercial airline carrier in the United States,
operating through its principal hubs located in Phoenix, Arizona and Las Vegas,
Nevada, and a mini-hub located in Columbus, Ohio. AWA is the lowest cost major
airline in the United States. The Company's operating cost per available seat
mile ("CASM") for 1997 was 7.27 cents, which was approximately 23% less than the
average CASM of the other major domestic airlines. At December 31, 1997, AWA
served 60 destinations, including six destinations in Mexico and one in Canada,
with a fleet of 102 aircraft. AWA offered service to an additional 32
destinations through alliance arrangements with other airlines.

     In January 1998, Holdings commenced operations of Leisure Co. to develop
and grow the Company's vacation package tour business. Leisure Co. arranges and
sells vacation packages that include hotel accommodations, airfare, ground
transportation and a variety of entertainment options. Leisure Co.'s most
recognizable brand is the America West Vacations product. Leisure Co. occupies a
substantial position in the Las Vegas destination market and arranges packages
for travel to other traditional vacation destinations including Arizona,
California, Florida, Canada and Mexico.

STRATEGY

     The Company's strategy is to maximize profitability and cash flow by
capitalizing on the Company's key competitive strengths while maintaining
financial flexibility. The principal elements of the Company's strategy are to
grow the Company's existing lines of business, to maintain the Company's
strategic cost advantage and to ensure financial flexibility.

  Grow the Company's Existing Lines of Business

     AWA.  The Company intends to grow its airline operation by continuing to
add service to new destinations and increasing frequency to existing
destinations from Phoenix and Las Vegas because it believes that significant
opportunities to grow those hubs exist. The Phoenix and Las Vegas markets are
among the fastest growing in the United States, and the Company believes that
its Phoenix hub is undersized relative to its potential. In execution of this
strategy, AWA has increased available seat miles ("ASMs") 21%

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over the past two years with the majority of this growth focused on
strengthening AWA's position at Phoenix. During this period, eight new cities
have been added to AWA's route network and frequencies to key business markets
have been increased.

     The Company has expanded its reach outside of its core markets through
alliances. AWA has codesharing arrangements with Continental Airlines, Northwest
Airlines and British Airways as well as a commuter agreement with Mesa Airlines.
These alliances allow AWA to expand its passenger base without significant
increases in capital or operating expense and in some cases achieve cost savings
through the reduction of redundant labor and facilities. The Company believes
that alliances are an efficient means of developing new markets and increasing
travel opportunities for its customers and plans to continue to pursue such
relationships with both domestic and international carriers.

     Leisure Co.  The Company also believes that there are significant
opportunities to expand its profitable vacation package business. Historically,
AWA has packaged air travel with hotel rooms and ground transportation to
provide affordable vacation packages under the America West Vacations brand.
Over time, the Company has developed strong relationships in vacation markets,
particularly Las Vegas, created additional brands and developed a highly
efficient marketing and distribution operation. Effective January 1, 1998,
Leisure Co. began operations as a separate subsidiary of Holdings. Management
believes that there exist significant opportunities for Leisure Co. to grow
the volume and profitability of this line of business by broadening its client
base and available product line.

  Maintain its Strategic Cost Advantage

     The Company is committed to maintaining AWA's low cost structure, which
offers AWA a significant competitive advantage over other major airlines. AWA
has achieved this low cost structure primarily through employee productivity,
favorable labor costs per ASM and industry-leading aircraft utilization. In
1997, the Company widened its strategic cost advantage versus the industry
as AWA's CASM decreased 2.2% (excluding the $65.1 million charge in 1996
referenced above).

  Ensure Financial Flexibility

     The airline and travel industries are cyclical in nature. Because of this,
an important element of the Company's strategy is to maintain financial
flexibility as protection against a downturn in the business cycle. A key
component of this strategy is AWA's aircraft leasing plan. As of December 31,
1997 and through the end of 2001, leases for 24 aircraft will expire. As a
result, if economic conditions change adversely during that period,
AWA can delay the growth of its fleet and its aircraft-related financial
obligations by electing to not renew these aircraft leases and not replace these
aircraft. Another component of this strategy is the Company's compensation
system, which includes a variable pay element based largely on the
Company's performance. In December 1997, the Company further enhanced its
financial flexibility by establishing a $100 million senior secured revolving
credit facility with certain financial institutions.

AWA

  Operations

     AWA is the ninth largest commercial airline carrier in the United States,
operating through its principal hubs located in Phoenix, Arizona and Las Vegas,
Nevada, and a mini-hub located in Columbus, Ohio. AWA is the lowest cost major
airline in the United States. At December 31, 1997, AWA served 60 destinations,
including six destinations in Mexico and one in Canada, with a fleet of 102
aircraft. AWA offered service to an additional 32 destinations through alliance
agreements with other airlines.

     AWA seeks to maximize its market share by operating primarily through its
hub airports. AWA is the leading airline serving Phoenix, Las Vegas and
Columbus, based upon revenue passenger miles. The Company believes that the
success of its operations in Phoenix and

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Las Vegas is in part due to those cities' airports being among the world's
largest 25 in passenger numbers and those cities being among the fastest
growing in the nation. In addition, the Company believes that its hubs are well
positioned for continued growth due to their geographically favorable locations
with strategic access to key Southwest and West Coast markets, relatively low
operating costs, year-round fair weather and modern, uncongested facilities.

     AWA is committed to maintaining the airline's reliability and providing
quality customer service. During 1997, AWA initiated a Pride in All We Do
campaign aimed at improving the airline's baggage handling, on-time performance
and all other aspects of its customer service. As a result of initiatives
developed by this program, the Company's mishandled baggage rate, as recorded by
the Department of Transportation (the "DOT"), was the best in the industry
during 1997. In addition, AWA was ranked No. 1 in customer satisfaction among
the major United States airlines for short-haul flights in the 1997 Airline
Customer Satisfaction -- U.S. Flights study conducted by Frequent Flyer Magazine
and J.D. Power & Associates.

  Alliances

     AWA has alliance agreements with Continental Airlines, British Airways,
Northwest Airlines and Mesa Airlines ("Mesa"). AWA's alliance agreement with
Continental Airlines provides for codesharing arrangements, coordinating flight
schedules, sharing ticket counter space, linking frequent flyer programs and
membership clubs, and coordinating ground handling operations. Through
codesharing, each airline is able to offer additional destinations to its
customers without materially increasing operating expenses and capital
expenditures. AWA has achieved cost savings from the Continental Airlines
alliance primarily through the consolidation of airport facilities and resources
and the elimination of duplicative costs for labor and equipment at key
locations.

     AWA's alliance agreement with British Airways includes codesharing
arrangements and reciprocal frequent flyer privileges and allows British Airways
to offer connecting service to and from British Airways' service to Phoenix, San
Francisco and Columbus to certain destinations served by AWA. AWA also provides
ground-handling services for British Airways at Phoenix. Through AWA's codeshare
agreement with Northwest Airlines, AWA provides connecting service from
Northwest Airlines' Pacific routes to Las Vegas and Phoenix.

     AWA's codesharing agreement with Mesa establishes Mesa as a feeder
carrier for the Company at its Phoenix hub and adds 17 destinations in
the southwestern United States to the Company's route network. The codesharing
agreement with Mesa provides for coordinated flight schedules, passenger
handling and computer reservations under the AWA flight designator code,
thereby allowing passengers to purchase one airfare for their entire trip.
On codesharing flights, Mesa operates under the name "America West
Express" and has incorporated AWA's color scheme and commercial logo on certain
aircraft utilized on these routes.

     In March 1998, as a result of certain breaches of the codesharing
agreement by Mesa, AWA delivered a notice advising Mesa of AWA's intent to
terminate the codesharing agreement. Subsequently, AWA and Mesa have
agreed to an interim arrangement whereby Mesa will continue to provide
codesharing services through June 30, 1998 and the parties are currently
negotiating for a new long term codesharing agreement. If the Company is unable
to reach an agreement with Mesa, it intends to negotiate with other
regional airlines to provide feeder service to the Company at its Phoenix hub.

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  Aircraft

     At December 31, 1997, AWA operated a fleet of 62 Boeing 737s, 26 Airbus
A320s and 14 Boeing 757s as follows:

<TABLE>
<CAPTION>
                                                                                    AVERAGE
                                                                                   REMAINING
                                                         NUMBER      AVERAGE         LEASE
              AIRCRAFT TYPE                STATUS(1)    AIRCRAFT    AGE (YRS.)    TERM (YRS.)
              -------------                ---------    --------    ----------    ------------
<S>                                        <C>          <C>         <C>           <C>
B737-100.................................  Owned             1         28.2             --
B737-200.................................  Leased           14         17.1            3.5
B737-200.................................  Owned             5         18.8             --
B737-300.................................  Leased           31         10.8            4.8
B737-300.................................  Owned            11          9.2             --
B757-200.................................  Leased           12         11.4            7.4
B757-200.................................  Owned             2          8.3             --
A320-200.................................  Leased           26          6.7           10.4
                                                           ---         ----           ----
                                                           102         11.0            6.7
                                                           ---         ----           ----
</TABLE>

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(1) Each of the aircraft that is designated as owned serves as collateral for a
    loan pursuant to which the aircraft was acquired by AWA or serves as
    collateral for a non-purchase money loan or is leased pursuant to a finance
    lease.

     As of December 31, 1997 and through December 2001, leases for 24 of AWA's
aircraft are scheduled to terminate. Two of such aircraft were returned to
lessors in January 1998. Also, the Company has agreed to lease three Airbus
A320s for delivery in the first half of 1998.

     At December 31, 1997, AWA had firm commitments for a total of 22 Airbus
A319-100 and 12 Airbus A320-200 aircraft for delivery beginning in 1998.
Delivery of those aircraft are scheduled as follows: three in 1998, 13 in 1999,
11 in 2000 and seven in 2001. As a result of the leases for the three Airbus
A320s referenced above, AWA has a right to cancel the last three deliveries. AWA
also has an order for an additional 12 A320 aircraft, which AWA has the right to
cancel. AWA also has options to purchase an additional 40 A320 family aircraft
during 2001 through 2005 and certain rights to convert firmly ordered A319s to
A320s or larger A321 aircraft. See "Risk Factors -- Leverage; Future Capital
Requirements" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

  Frequent Flyer Program

     All major United States airlines have established frequent flyer programs
to encourage travel on that particular carrier. AWA offers the FlightFund
program which allows members to earn mileage credits by flying AWA, by using the
services of other program participants such as hotels, car rental firms and
other specialty services and by flying certain partner carriers. Through AWA's
alliance agreement with both Continental Airlines and British Airways, each
airlines' frequent flyer members have reciprocal rights in the other airlines'
programs. When a FlightFund member accumulates mileage credits of 20,000 miles,
AWA issues mileage award certificates that can be redeemed for various travel
awards, including first class upgrades and tickets on AWA or other airlines
participating in AWA's frequent flyer program. Most travel awards are subject to
blackout dates and capacity controlled seating. Mileage award certificates
automatically expire after three years. Travel is valid up to one year from the
date of ticketing. FlightFund awards may also be redeemed for flights to certain
international destinations and Hawaii. AWA is required to purchase space on
other airlines to accommodate such award redemption.

     The Company accounts for the FlightFund program under the incremental cost
method whereby travel awards are valued at the incremental cost of carrying one
additional passenger based on expected redemptions. Costs including passenger
food, beverages, supplies, fuel, liability insurance, purchased space on other
airlines and denied boarding compensation are accrued as frequent flyer program
participants accumulate mileage to their accounts. Such unit costs are based
upon expenses expected to be incurred on a per passenger basis. No profit or
overhead margin is included in the accrual for these incremental costs. The
number of FlightFund travel awards redeemed for round-trip travel for the years
ended December 31, 1997, 1996 and 1995, was 3.2%, 2.3% and 2.3% of total revenue
passenger miles, respectively. The Company does not believe that the usage of
free travel awards results in any significant displacement of revenue passengers
due to AWA's ability to manage frequent flyer travel.

LEISURE CO. OPERATIONS

     Leisure Co. arranges and sells vacation packages that include hotel
accommodations, airfare, ground transportation and a variety of entertainment
options. Leisure Co.'s focus is to provide a customer-friendly combination of
low price and high quality vacation products by combining for sale packages that

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include hotel accommodations, rental cars and amenities such as amusement park
admissions, golf tee times and ski lift tickets. Leisure Co. has taken advantage
of the positive consumer recognition of its America West Vacations brand by
promoting two new products, America West Golf Vacations and America West Ski
Vacations. In 1997, while it was a division of AWA, America West Vacations
served approximately 551,000 customers, generated approximately $211 million in
gross package sales and sold approximately 828,000 room nights and
approximately 179,000 rental car days. During 1998, Leisure Co. expects to
introduce new lines of vacation products, consider acquisition opportunities
and enter into strategic alliances with airlines in addition to AWA to broaden
both its scope of services and its client base.

     Leisure Co.'s charter business specializes in charter flights for sports
teams and large tour groups. The Company plans to report separate summary
financial data for Leisure Co. beginning in 1998.

EMPLOYEES

     At January 1, 1998, the Company employed 8,921 full-time and 2,718
part-time employees, for an equivalent of 9,615 full-time employees. Of these,
AWA and Leisure Co. employed 8,607 and 314 full time employees, respectively.

     The Company's businesses are labor intensive. Wages, salaries and benefits
represented approximately 24.4% of the Company's consolidated operating expenses
for the year ended December 31, 1997. To encourage increased productivity by its
workforce, the Company awards performance bonuses to eligible non-executive,
non-union employees provided certain annually established operating income and
operating performance targets are attained. AWA awards performance bonuses from
5% to 25% of base pay and Leisure Co. awards performance bonuses from 2.5% to
20% of base pay. In each case, eligibility is determined at the time of
distribution. In March 1998, the Company paid performance bonuses equal to 5%
of eligible employees' base pay in respect of 1997 performance to eligible
employees of AWA and Leisure Co.

LABOR RELATIONS

     There have been numerous attempts by unions to organize AWA's employees,
and the Company expects such organization efforts to continue in the future.
Several groups of AWA's employees have selected union representation and
negotiations for initial collective bargaining agreements are in progress.
The Company cannot predict at this time the outcome or the terms of any future
collective bargaining agreement and therefore the effect, if any, on AWA's
operations or financial performance. None of Leisure Co.'s employees are
represented by unions. See "Risk Factors -- Labor Relations."

     AWA's pilots are represented by the Airline Pilots Association. In May
1995, a five-year collective bargaining agreement with AWA's pilots became
effective. The terms of this contract are consistent with AWA's productivity
objectives and include a single pay scale for all aircraft type, flexible
work rules and AWA's right to enter into alliances.

     In September 1994, the National Mediation Board ("NMB") certified the
Association of Flight Attendants ("AFA") as the collective bargaining
representative of AWA's flight attendants. In October 1997, AWA and AFA reached
a tentative agreement on a five-year collective bargaining agreement, but the
membership rejected that tentative agreement in December 1997. AWA and AFA
recommenced negotiations in March 1998.

     In January 1996, the International Brotherhood of Teamsters ("IBT") filed
an application with the NMB seeking certification as the bargaining
representative for AWA's mechanics, including related personnel. Following a
representation election in April 1996, the NMB certified IBT as the
collective bargaining representative for that work group. The Company is
currently litigating the certification of IBT. To comply with a court
ruling, the Company has commenced negotiations with IBT.

     In September 1996, the Transportation Workers Union ("TWU") was certified
to represent AWA's approximately 40 dispatchers. A tentative agreement was
reached by AWA and TWU in March 1998, but has not yet been ratified.

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     Attempts by TWU to represent AWA's approximately 1,900 fleet service
workers and IBT to represent AWA's approximately 45 stock clerks were not
successful as those unions lost representation elections among those work groups
in 1997 and early 1998, respectively.

COMPETITION AND MARKETING

     The airline industry is highly competitive. AWA competes with a number of
major airlines on medium-and long-haul routes through its hubs and with a number
of carriers for short-haul flights at its Phoenix and Las Vegas hubs and its
Columbus mini-hub. AWA competes with other major full service airlines based on
price and, due to its low cost structure, is able to compete with other low cost
carriers in its short haul local markets. The entry of additional carriers in
many of AWA's markets (as well as increased competition from or the introduction
of new services by established carriers) could negatively impact AWA's results
of operations.

     Most tickets for travel on AWA are sold by travel agents. Travel agents
generally receive commissions based on the price of tickets sold. Airlines often
pay additional commissions in connection with special revenue programs.
Accordingly, airlines compete not only with respect to the price of tickets sold
but also with respect to the amount of commissions paid. Beginning September
30, 1997, AWA reduced the travel agency base commission rate from 10% to 8%
following similar reductions by most of its major competitors. Unlike the
majority of its competitors, AWA does not cap travel agency commissions at $50
per ticket.

     Most tickets sold by travel agents are sold through computer reservations
systems that are controlled by airlines. Those computer reservations systems
have, from time to time, significantly increased the cost of making
reservations, which costs are borne by airlines, including AWA. To address these
issues, AWA has taken a number of actions. In early 1996, AWA implemented
electronic or paperless ticketing to respond to customer needs and to reduce
distribution costs for tickets booked directly through the Company, and during
1997, based on revenues approximately 29% of its tickets were processed
electronically. During 1997, AWA introduced the ability for customers to book
tickets directly through its Internet site located at www.americawest.com, thus
avoiding the more expensive computer reservations systems. While booking through
the Internet site was less than 1% of total 1997 bookings, growth in this
channel was dramatic, with December 1997 Internet bookings growing 120% over
June 1997 bookings. Federal regulations have been promulgated that are intended
to diminish preferential schedule displays and other practices with respect to
the computer reservation systems that place AWA and other similarly situated
users at a competitive disadvantage to the airlines controlling the systems.

     Leisure Co.'s business is also highly competitive. Leisure Co. competes
with two types of vacation packagers, wholesalers, who use multiple airlines and
offer diversified product lines, and tour operators, who distribute their
product directly to the consumer as well as through travel agents. See "Risk
Factors -- Competition; Industry Conditions."

FACILITIES

     Holding's, AWA's and Leisure Co.'s principal facilities include the
Company's corporate headquarters in Tempe, Arizona and facilities associated
with AWA's hub operations in Phoenix, Las Vegas and Columbus. The Company
currently leases approximately 369,000 square feet of general office and other
space in Phoenix and Tempe for its corporate administrative offices. In
November 1997, Holdings announced its plan to build a 225,000 square foot, nine
story corporate headquarters complex at the site of AWA's original headquarters
facility in Tempe. The new building will accommodate the headquarters
and administrative functions of Holdings, AWA and Leisure Co. and will allow the
Company to reduce occupancy and administrative costs by consolidating functions
currently housed in several leased buildings. Occupancy is scheduled for early
1999, which coincides with the expiration of leases for the Company's principal
existing office facilities.

     AWA operates from Terminal 4 of Phoenix Sky Harbor International Airport
and leases 31 gates and administrative offices comprising an aggregate of
approximately 263,000 square feet of space at December 31, 1997. AWA also leases
an additional 39,000 square feet of space at the airport for pilot training and
cargo and ground service facilities. AWA also owns a 475,000 square foot
maintenance and technical support facility on land leased from the City of
Phoenix, which includes four hangar bays, hangar shops, two flight simulator

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<PAGE>   9

bays, pilot training facilities and warehouse and commissary facilities. The
Company and Phoenix Sky Harbor International Airport expect to announce
in the near future plans to build a new concourse which will contain an
additional 14 gates and approximately 65,000 square feet of space to be leased
by AWA.

     In Las Vegas, AWA leases approximately 79,000 square feet of space at
McCarran International Airport, which includes 13 gates and adjoining holding
room areas. At its Port Columbus International Airport mini-hub, AWA leases
30, 000 square feet and seven gates.

     Space for ticket counters, gates and back offices has also been obtained at
each of the other airports served by AWA, either by lease from the airport
operator or by sublease from another airline. Pursuant to AWA's alliance
agreement with Continental Airlines, certain of the station operations for both
carriers have been consolidated in an effort to reduce operating expenses.

GOVERNMENT REGULATIONS

     The airline industry is highly regulated as more fully described below.
Currently, the vacation package industry is substantially unregulated.

  DOT Oversight

     AWA operates under a certificate of public convenience and necessity issued
by the DOT. Although regulation of domestic routes and fares was abolished by
the Airline Deregulation Act of 1978, the DOT retains the authority to alter or
amend AWA's certificate or to revoke such certificate for intentional
failure to comply with the terms and conditions of the certificate. In addition,
the DOT has jurisdiction over international tariffs and pricing, international
routes, computer reservation systems, and economic and consumer protection
matters such as advertising, denied boarding compensation, smoking and codeshare
arrangements and has the authority to impose civil penalties for violation of
the United States Transportation Code or DOT regulations.

  FAA Funding

     On August 5, 1997, President Clinton signed into law new aviation ticket
taxes as part of larger tax legislation designed to balance the nation's budget,
provide targeted tax relief and fund air traffic control, other Federal Aviation
Administration ("FAA") programs and airport development. As enacted, these new
taxes will be imposed through September 30, 2007. Included in the new law is a
phase-in of a modified federal air transportation excise tax structure with a
system that includes: a domestic excise tax starting at 9%, declining to 7.5% by
1999; a domestic segment tax starting at $1.00 and increasing to $3.00 by 2003;
and an increase in taxes imposed on international travel that will be from $6.00
per international departure to an arrival and departure tax of $12.00 (each
way). Both the domestic segment tax and the international arrival and departure
tax are indexed for inflation. The legislation also includes a 7.5% excise tax
on certain amounts paid to an air carrier for the right to provide mileage and
similar awards (e.g., purchase of frequent flyer miles by a credit card
company). As a result of competitive pressures, AWA and other airlines have
been limited in their ability to pass on the cost of these taxes to passengers
through fare increases.

     In December 1997, the National Civil Aviation Review Commission (the
"NCARC") completed its Report to Congress on FAA funding and recommended
implementation of a cost based user fee system for air carriers. Congress is
presently considering the recommendations of the NCARC, which may result in
enactment of a new funding mechanism. The Company cannot currently estimate the
effect the new combination of ticket and segment taxes, or any change in those
taxes as recommended by the NCARC, will have on its operating results. There can
be no assurance that the new taxes or such changes will not have a material
adverse effect on the Company's financial condition and results of operations.

  Fuel Tax

     In August 1993, the federal government increased taxes on fuel, including
aircraft fuel, by 4.3 cents per gallon. The Company's annual operating expenses
increased by approximately $16.2 million for 1997 because of such fuel tax
increases. Total fuel taxes paid by the Company in 1997 were $24.9 million.

                                        9
<PAGE>   10

  Passenger Facility Charges

     During 1990, Congress enacted legislation to permit airport authorities,
with prior approval from the DOT, to impose passenger facility charges ("PFCs")
as a means of funding local airport projects. These charges, which are intended
to be collected by the airlines from their passengers, are limited to $3.00 per
enplanement, and to no more than $12.00 per round trip. Congress is currently
considering the reauthorization of airport funding programs, which could include
an increase in the current PFC cap. As a result of competitive pressure, AWA and
other airlines have been limited in their ability to pass on the cost of the
PFCs to passengers through fare increases.

  Slot Restrictions

     At New York City's John F. Kennedy Airport and LaGuardia Airport, Chicago's
O'Hare International Airport and Washington's Ronald Reagan Washington National
Airport, which have been designated "High Density Airports" by the FAA, there
are restrictions on the number of aircraft that may land and take off during
peak hours. In the future, these take-off and landing time slot restrictions and
other restrictions on the use of various airports and their facilities may
result in further curtailment of services by, and increased operating costs for,
individual airlines, including AWA, particularly in light of the increase in the
number of airlines operating at such airports. In general, the FAA rules
relating to allocated slots at the High Density Airports contain provisions
requiring the relinquishment of slots for nonuse and permit carriers, under
certain circumstances, to sell, lease or trade their slots to other carriers.
All slots must be used on 80% of the dates during each two-month reporting
period. Failure to satisfy the 80% use rate will result in loss of the slot
which would revert to the FAA and be reassigned through a lottery arrangement.

     AWA currently utilizes two slots at Kennedy Airport, four slots at
LaGuardia Airport, four slots at O'Hare Airport and six slots at Washington
National Airport during the restricted periods. AWA utilizes these slots more
than the requisite 80% use rate. Four of the slots at Washington National
Airport are subject to expiration in December 1999, and AWA intends to file a
timely application for renewal. Approval of such application is discretionary
by the FAA. AWA has filed for special exemptions from the Secretary of
Transportation for additional slots at both O'Hare and LaGuardia Airports.
If these exemptions are granted, AWA would be able to increase its level of
service at both airports.

  Noise Abatement and Other Restrictions

     The Airport Noise and Capacity Act of 1990 provides, with certain
exceptions, that after December 31, 1999, no person may operate certain large
civilian turbo-jet aircraft in the United States that do not comply with Stage
III noise levels, which is the FAA designation for the quietest commercial jets.
These regulations require carriers to phase out their noisier jets or equip them
with hush kits to comply with noise abatement regulations. At December 31, 1997,
AWA's fleet consisted of 102 aircraft, all of which meet Stage III noise
reduction requirements except for 20 aircraft that meet the FAA's Stage II (but
not Stage III) noise reduction requirements and must be retired or significantly
modified prior to December 31, 1999. The Company has decided to install hush
kits on 14 aircraft to comply with Stage III requirements, and the required
capital expenditures for such modifications are currently estimated to be
approximately $1.2 million per aircraft although certain of these costs may be
borne by the lessors of such aircraft. All necessary modification work on the 14
aircraft will be completed in advance of the December 31, 1999 deadline. Two of
the remaining six aircraft were returned to lessors in 1998 and management
expects to retire the four remaining non-compliant aircraft.

     Numerous airports served by AWA, including those at Boston, Burbank,
Denver, Long Beach, Los Angeles, Minneapolis-St. Paul, New York City, Orange
County, San Diego, San Francisco, San Jose and Washington, D.C. have imposed
restrictions such as curfews, limits on aircraft noise levels, mandatory flight
paths, runway restrictions and limits on the number of average daily departures,
which limit the ability of air carriers to provide service to or increase
service at such airports. AWA's Boeing 757-200s, Boeing 737-300s and Airbus
A320s all comply with the current noise abatement requirements of the airports
listed above.

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<PAGE>   11

  Aircraft Maintenance and Operations

     AWA is subject to the jurisdiction of the FAA with respect to aircraft
maintenance and operations, including equipment, dispatch, communications,
training, flight personnel and other matters affecting air safety. The FAA has
the authority to issue new or additional regulations. To ensure compliance with
its regulations, the FAA conducts regular safety audits and requires AWA to
obtain operating, airworthiness and other certificates, which are subject to
suspension or revocation for cause. In addition, a combination of FAA and
Occupational Safety and Health Administration regulations on both federal and
state levels apply to all of AWA's ground-based operations. AWA is also subject
to the jurisdiction of the Department of Defense with respect to its voluntary
participation in their Commercial Passenger Airlift program administered by the
Air Force's Air Mobility Command.

  Aging Aircraft Maintenance

     The FAA issued several Airworthiness Directives ("ADs") in 1990 mandating
changes to the older aircraft maintenance programs. These ADs were issued to
ensure that the oldest portion of the nation's aircraft fleet remains airworthy
and require structural modifications to or inspections of those aircraft. All of
AWA's currently affected aircraft are in compliance with the aging aircraft
mandates. AWA constantly monitors its fleet of aircraft to ensure safety levels
that meet or exceed those mandated by the FAA and the DOT.

  Additional Security and Safety Measures

     In 1996 and 1997 the President's Commission on Aviation Safety and Security
issued recommendations and the U.S. Congress and the FAA adopted increased
safety and security measures designed to increase airline passenger safety and
security and protect against terrorist acts. Such measures have resulted in
additional operating costs to the airline industry. Examples of increased safety
and security measures include the introduction of a domestic passenger manifest
requirement, increased passenger profiling, enhanced pre-board screening of
passengers and carry-on baggage, positive bag match for profile selections,
continuous physical bag search at checkpoints, additional airport security
personnel, expanded criminal background checks for selected airport employees,
significantly expanded use of bomb-sniffing dogs, certification of screening
companies, aggressive testing of existing security systems, expansion of aging
aircraft inspections to include non-structural components, development of
objective methods for carriers to monitor and improve their own level of safety
and installation of new ground proximity warning systems on all commercial
aircraft. The Company cannot forecast, what additional security and safety
requirements may be imposed in the future or the costs or revenue impact that
would be associated with complying with such requirements.

  Environmental Matters

     The Company is subject to regulation under major environmental laws
administered by federal, state and local agencies, including laws governing air,
water and waste discharge activities. While the Company strives to comply with
environmental laws and regulations, the Company has incurred and may incur costs
to comply with applicable environmental laws, including soil and groundwater
cleanup and other related response costs. The Company believes, however, that
under current environmental laws and regulations these costs would not have a
material adverse effect on the Company's financial condition and results of
operations.

     The Comprehensive Environmental Response Compensation and Liability Act of
1980, also known as Superfund, and comparable state laws impose liability
without regard to fault on certain classes of persons that may have contributed
to the release or threatened release of a "hazardous substance" into the
environment. These persons include the owner or operator of a facility and
persons that disposed or arranged for the disposal of hazardous substances. Many
airports in the United States, including Phoenix Sky Harbor International
Airport, are the subject of Superfund investigations or state implemented
groundwater investigations.

                                       11
<PAGE>   12

Although AWA occupies facilities at some of these affected airports, the Company
does not believe that its operations have been included within the ambit of any
of these investigations.

     The trend in environmental regulation is to place more restrictions and
limitations on activities that may affect the environment, and the Company
expects that the costs of compliance will continue to increase.

RISK FACTORS

  Competition; Industry Conditions

     The airline industry is highly competitive and industry earnings are
volatile. From 1990 to 1992, the airline industry experienced unprecedented
losses due to high fuel costs, general economic conditions, intense price
competition and other factors. Airlines compete on the basis of pricing,
scheduling (frequency and flight times), on-time performance, frequent flyer
programs and other services. The airline industry is susceptible to price
discounting, which involves the offering of discount or promotional fares to
passengers. Any such fares offered by one airline are normally matched by
competing airlines, which may result in lower industry yields without a
corresponding increase in traffic levels. Also, in recent years several new
carriers have entered the industry, typically with low cost structures. In some
cases, new entrants have initiated or triggered price discounting. The entry of
additional new carriers in many of AWA's markets, as well as increased
competition from or the introduction of new services by established carriers,
could negatively impact the Company's financial condition and results of
operations. In addition, the introduction of broadly available, deeply
discounted fares would result in lower yields for the entire industry
and could have a material adverse effect on the Company's financial condition
and results of operations.

     Most of the AWA's markets are highly competitive and are served by larger
carriers with substantially greater financial resources than the Company. At its
Phoenix and Las Vegas hubs, the Company's principal competitor is Southwest
Airlines. A number of the Company's larger competitors have proprietary
reservation systems providing them with certain competitive advantages.

     The results of operations in the air travel business historically fluctuate
in response to general economic conditions. The airline industry is sensitive to
changes in economic conditions that affect business and leisure travel and is
highly susceptible to unforeseen events, such as political instability, regional
hostilities, recession, fuel price escalation, inflation, adverse weather
conditions or other adverse occurrences that result in a decline in air travel.
Any event that results in decreased travel or increased competition among
airlines could have a material adverse effect on the Company's financial
condition and results of operations.

     Leisure Co.'s business is also highly competitive. Leisure Co. competes
with wholesalers and tour operators, some of which have substantially greater
financial and other resources than Leisure Co.

     The Company's results of operations for interim periods are not necessarily
indicative of those for an entire year, because the travel business is subject
to seasonal fluctuations. Due to the greater demand for air and leisure travel
during the summer months, revenues in the airline and leisure travel industries
in the second and third quarters of the year tend to be greater than revenues
in the first and fourth quarters of the year. See "Competition and Marketing."

  Leverage; Future Capital Requirements

     At December 31, 1997, the Company had $327 million of long-term
indebtedness (including current maturities). The Company does not have available
significant unencumbered assets and thus may be less able than certain of its
competitors to withstand adverse industry conditions or a prolonged economic
recession. In addition, at December 31, 1997, AWA had firm commitments for a
total of 22 Airbus A319-100 and 12 Airbus A320-200 aircraft for delivery
beginning in 1998. The aggregate net cost of such aircraft is based on formulae
that include certain price indices (including indices for various aircraft
components such as metal products) for periods preceding the various delivery
dates. Based on an assumed 3.5% annual price escalation, the Company estimates
such aggregate net cost to be approximately $1.2 billion. AWA has arranged for
financing for up to one-half of the commitment relating to such aircraft, but
will require substantial capital from external sources to meet its remaining
financial commitment. There can be no assurance that AWA will

                                       12
<PAGE>   13

be able to obtain such capital in sufficient amounts or on acceptable terms, and
a default by AWA of its purchase commitments could have a material adverse
effect on the Company's financial condition and results of operations.

  Labor Relations

     There have been numerous attempts by unions to organize the employees of
AWA, and the Company expects such organization efforts to continue in the
future. Several groups of AWA's employees have selected union representation
and negotiations for initial collective bargaining agreements are in progress.
The Company cannot predict which, if any, other employee groups may seek union
representation or the outcome or the terms of any future collective bargaining
agreement and therefore the effect, if any, on the Company's financial condition
and results of operations. If negotiations with unions over collective
bargaining agreements prove to be unsuccessful, following specified "cooling
off" periods, the unions may initiate a work action, including a strike, which
could have a material adverse effect on the Company's financial condition and
results of operations. See "Labor Relations."

  Concentration of Voting Power, Influence of Certain Principal Stockholders

     TPG Partners, L.P. ("TPG") (together with its affiliates TPG Parallel I,
L.P. ("TPG Parallel") and Air Partners II, L.P. ("Air Partners II")) and
Continental Airlines collectively control approximately 57.4% of the total
voting power of Holdings. As a result, if such stockholders act in concert they
will be able to elect a majority of their designees to the Board of Directors
and otherwise control Holdings. Continental Airlines is engaged in the airline
industry and is a party to an alliance agreement with the Company. Each of TPG,
TPG Parallel and Air Partners II are controlled by TPG Advisors, Inc., a
Delaware corporation, whose executive officers and directors, through their
positions in Air Partners, L.P., a significant shareholder of Continental
Airlines, may be deemed to own beneficially a significant percentage of
Continental Airlines' common stock. There can be no assurance that the
controlling stockholders identified above will not seek to influence Holdings in
a manner that would favor their own personal interests over the interests of the
Company.

  Aircraft Fuel

     Aircraft fuel costs constitute approximately 14% of the Company's total
operating expenses during 1997. At current consumption levels, a one cent per
gallon change in the price of jet fuel would affect the Company's annual
operating results by approximately $3.9 million in 1998. Accordingly, a
substantial increase in the price of jet fuel or the lack of adequate fuel
supplies in the future would have an adverse effect on the Company's financial
condition and results of operations.

     AWA purchases its fuel from petroleum refiners and suppliers on standard
trade terms under master agreements. Although the Company is currently able to
obtain adequate supplies of jet fuel, future supplies and price trends may
change as a result of geopolitical developments, regional production patterns,
environmental concerns and other unpredictable events.

     In 1996, AWA implemented a fuel hedging program to manage the risk from
fluctuating jet fuel prices. The program's objectives are to provide some
protection against extreme, upward movements in the price of jet fuel and to
protect AWA's ability to meet its annual fuel expense budget. Under the program,
AWA may enter into certain protective cap and fixed price swap transactions with
approved counterparties for future periods generally not exceeding 12
months. This program will primarily address AWA's exposure associated with its
East Coast fuel requirements, which correlate well with risk management vehicles
having adequate market liquidity.

     Due to the scope and nature of its route system, AWA purchases a
substantially greater share of jet fuel on the United States West Coast than its
larger competitors. West Coast jet fuel prices tend to be more volatile than jet
fuel prices in other domestic markets. Further, the propensity of West Coast jet
fuel prices to move independently from the other United States jet fuel markets
renders many conventional hedging techniques ineffective in managing this
portion of the Company's jet fuel price risk.

                                       13
<PAGE>   14

  Aviation Ticket Taxes

     On August 5, 1997 President Clinton signed into law new aviation ticket
taxes to be imposed through September 30, 2007. As a result of competitive
pressures, AWA and other airlines have been limited in their ability to pass
on the cost of these taxes to passengers through fare increases.

  Security and Safety Measures

     Congress recently adopted increased safety and security measures designed
to increase airline passenger security and protect against terrorist acts. Such
measures have resulted in additional operating costs to the airline industry.
The Aviation Safety Commission's report recommends the adoption of further
measures aimed at improving the safety and security of air travel. The Company
cannot forecast what additional security and safety requirements may be imposed
in the future or the costs or revenue impact that would be associated with
complying with such requirements, although such costs and revenue impact could
be significant. See "Government Regulations -- Additional Security and Safety
Measures."

  Other Regulatory Matters

     Laws and regulations have been proposed from time to time that could
significantly increase the cost of airline operations by imposing additional
requirements or restrictions on operations. The Company cannot predict what laws
and regulations will be adopted or what changes to international air
transportation agreements will be effected, if any, or how they will affect the
Company, and there can be no assurance that laws or regulations currently
proposed or enacted in the future will not adversely affect the Company's
financial condition and results of operations. See "Government Regulations."

  Substantial Restrictions and Covenants

     Certain loan agreements and debt instruments of the Company contain
significant operating and financial restrictions on the Company. The terms of
such agreements and instruments affect, and in many cases significantly limit or
prohibit, among other things, the ability of the Company to repay indebtedness
prior to its stated maturity, sell assets or engage in mergers or acquisitions.
In addition, under certain of such agreements and instruments, the Company is
required to maintain specified levels of stockholder's equity and adjusted cash
and maintain certain specified financial ratios. While the Company is currently
in compliance with these restrictions and requirements, such restrictions and
requirements could also limit the ability of the Company to effect future
financings, make needed capital expenditures, withstand a future downturn in the
Company's business or the economy in general or otherwise conduct necessary
corporate activities. A failure by the Company to comply with these restrictions
and requirements could lead to a default under the terms of such indebtedness.
In the event of default, the holders of such indebtedness could elect to declare
all of the funds borrowed pursuant thereto due and payable together with accrued
and unpaid interest. In such event, there can be no assurance that the Company
would be able to make such payments or borrow sufficient funds from alternative
sources to make such payments. Even if additional financing could be obtained,
there can be no assurance that it would be on terms that are favorable or
acceptable to the Company.

     In the event of certain changes of control, with respect to Holdings or
AWA, the Company will be required to offer to purchase certain amounts of
the indebtedness referred to above, in each case subject to certain conditions.
There can be no assurance that the Company will be able to raise sufficient
funds to meet its obligations in connection with such a change of control. In
addition, in the event of certain asset dispositions, the Company will be
required under certain circumstances to use the excess proceeds to offer to
purchase certain amounts of such indebtedness.

  Year 2000 Compliance

     Many currently installed computer systems and software products are coded
to accept two digit entries in the date code field. These date code fields will
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. Any programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
the computer shutting down or performing incorrect computations. As a result, in
less than two years, computer systems and software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Many of the

                                       14
<PAGE>   15

Company's systems, including information and computer systems and automated
equipment, will be affected by the Year 2000 issue. The Company is also heavily
reliant on the FAA's management of the nation's air traffic control system,
local authorities' management of the airports at which AWA operates, and
vendors to provide goods (fuel, catering, etc.), services (telecommunications,
data networks, satellites, etc.) and data (frequent flyer partnerships,
alliances, etc.).

     The Company is in the process of identifying the programs and
infrastructure that could be affected by the Year 2000 issue and is developing
an implementation plan to resolve the problem on a timely basis. The Company
anticipates that the plan will require the Company to devote a considerable
amount of internal resources and hire substantial external resources to assist
with the implementation and monitoring of the issue and require the replacement
of certain equipment and modification of certain software. The Company expects
that the costs to be incurred by the Company to deal with this issue will be
material and is currently in the process of quantifying such amount. If the
Company's plan is not successfully or timely developed or implemented,
additional costs may be incurred, and the Company may need to devote more
internal resources to the process, either of which could have a material adverse
effect on the Company's financial condition and results of operations. The
Company is also in the process of discussing with the FAA, airport authorities
and its vendors the potential impact the Year 2000 issue will have on their
systems. Problems encountered by the FAA, those airports and vendors in
connection with the Year 2000 issue may have a material adverse effect on the
Company's financial condition and results of operations.

  Volatility of Stock Price

     The stock market has experienced significant price and volume fluctuations
that have affected the market prices of equity securities of companies in the
airline industry and that often have been unrelated to the operating performance
of such companies. These broad market fluctuations may adversely affect the
market price of the Class B Common Stock of Holdings (the "Class B Common
Stock") and Warrants to purchase Class B Common Stock (the "Warrants"). In
addition, the market price of the Company's Class B Common Stock and Warrants is
volatile and subject to fluctuations in response to quarterly variations in
operating results, announcements of new services by the Company or its
competitors, changes in financial estimates by securities analysts or other
events or factors, many of which are beyond the Company's control. See "Item 5.
Market for Registrants' Common Equity and Related Stockholder Matters."

ITEM 2.  PROPERTIES

     For a description of the Company's properties, see Item 1 of Part I of this
Report on Form 10-K.

ITEM 3.  LEGAL PROCEEDINGS

     The Company leases six aircraft which may be subject to a claim in an
unspecified amount as a result of the Internal Revenue Service potentially
disallowing investment tax credits and accelerated depreciation claimed by the
lessor of such aircraft. Under the terms of indemnity agreements, if such tax
benefits were fully or partially disallowed, AWA's monthly payment obligation
under the agreements could be increased by up to approximately $15,000 per
aircraft (approximately $1,080,000 per year for all six aircraft) for the period
from 1991 to 2013. The payment increase applicable to periods prior to the
determination of an indemnity obligation would be payable monthly over a
24-month period, with interest calculated at a specified prime rate. AWA is
unable to predict whether the Internal Revenue Service will prevail in matters
asserted against the lessor and, consequently, whether AWA will incur any
liability in connection with such claims or the amount of any such liability, if
incurred. Based on information and relevant documents available to the Company,
however, management currently believes that it is unlikely that the disposition
of these matters will have a material adverse effect on the Company's financial
condition and results of operations.

     Holdings and AWA are named defendants in a number of additional lawsuits
and proceedings arising in the ordinary course of business. While the outcome of
the contingencies, lawsuits or other proceedings cannot be predicted with
certainty, management currently expects that any liability arising from such
matters, to the

                                       15
<PAGE>   16

extent not provided for through insurance or otherwise, will not have a material
adverse effect on the financial condition and results of operations of the
Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below is information respecting the names, ages as of March 27,
1998, positions and offices with the Company of the executive officers of the
Company.

WILLIAM A. FRANKE, AGE 60.  Chairman of the Board and Chief Executive Officer of
Holdings; Chairman of the Board of AWA -- (Executive Committee). Mr. Franke was
named Chairman of the Board of Directors of AWA in September 1992. From January
1, 1994 to February 4, 1997, Mr. Franke served as AWA's Chief Executive Officer
and from May 23, 1996 to February 4, 1997, he served as AWA's President. Mr.
Franke has served in his present capacities with Holdings since January 1, 1997.
In addition to his responsibilities at the Company, Mr. Franke serves as
president of Franke & Company, Inc., a financial services company he has owned
since May 1987 and as a managing partner of Newbridge Latin America L.P., a
private equity fund. Mr. Franke serves as a director of Phelps Dodge Corp.,
Central Newspapers Inc., the Air Transport Association of America, Beringer Wine
Estates, Inc., Mtel Latin America, Inc. and Alpargatas S.A.I.C. Mr. Franke
serves as a Director and Chairman of the Board of Airplanes Limited and is a
controlling trustee and chairman of Airplanes U.S. Trust, entities involved in
aircraft financing and leasing.

RICHARD R. GOODMANSON, AGE 50.  President and Director of Holdings; President,
Chief Executive Officer and Director of AWA. Mr. Goodmanson joined AWA as
Executive Vice President and Chief Operating Officer in June 1996 and became a
member of the Company's Board of Directors effective on October 15, 1996. On
February 4, 1997, Mr. Goodmanson was elected President of Holdings and President
and Chief Executive Officer of AWA. From 1992 until 1996, Mr. Goodmanson
served as Senior Vice President of Operations at Frito-Lay, Inc. From 1980
until 1992, Mr. Goodmanson was a principal at the consulting firm of McKinsey
and Company, Inc.

RONALD A. ARAMINI, AGE 52.  Senior Vice President -- Operations of AWA. Mr.
Aramini joined AWA in September 1996. From October 1993 until September 1996,
Mr. Aramini served as President and Chief Executive Officer of Allegheny
Airlines, a Pennsylvania-based regional airline subsidiary of US Air Group, Inc.
Before that, he served for three years at Air Wisconsin, including in positions
as Vice President -- Operations, Senior Vice President -- Operations and
President and Chief Executive Officer. Prior to his position at Air Wisconsin,
Mr. Aramini served in various positions at Continental Airlines.

JOHN R. GAREL, AGE 39.  President and Chief Executive Officer of The Leisure
Company. Mr. Garel joined AWA in April 1995 as Senior Vice
President -- Marketing and Sales and was elected to his current position in July
1997. From 1993 until early 1995, Mr. Garel was the Chief Executive Officer of
Cadmus Journal Services, a division of Cadmus Communications. From 1990 until
1992, Mr. Garel served as Vice President, Financial Planning and Analysis of
Northwest Airlines and, thereafter, as Vice President, Market Development and
Area Marketing. Prior to that, Mr. Garel worked for American Airlines in several
management capacities.

BRUCE A. JOHNSON, AGE 41.  Senior Vice President -- Human Resources of AWA. Mr.
Johnson joined AWA in July 1997. From 1993 until July 1997, Mr. Johnson
worked in a variety of capacities for Ryder Systems, including Vice President of
Human Resources. Prior to 1993, Mr. Johnson's work experience included senior
level human resource positions with IBM, SEQUA Corp., Frito-Lay and I.T.T.

STEPHEN L. JOHNSON, AGE 41.  Senior Vice President -- Corporate Affairs of AWA
and Holdings. Mr. Johnson joined the Company in February 1995 as Vice
President -- Legal Affairs. In December 1995, Mr. Johnson was elected to the
position of Senior Vice President -- Legal Affairs and in December 1997, Mr.
Johnson was elected to his current positions. From 1993 to 1994, Mr. Johnson
served as Senior Vice

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<PAGE>   17

President and General Counsel to GE Capital Aviation Services Limited. From 1989
to 1993, Mr. Johnson was employed by GPA Group plc, from 1991 to 1993 as Senior
Vice President and General Counsel to GPA's Leasing Division. Prior to joining
GPA, Mr. Johnson was engaged in the private practice of law.

W. DOUGLAS PARKER, AGE 36.  Senior Vice President and Chief Financial Officer of
AWA and Holdings. Mr. Parker joined the Company in June 1995 as Chief Financial
Officer. In July 1997, Mr. Parker's responsibilities were expanded to include
oversight of AWA's schedule planning, pricing and yield management. From 1991
through June of 1995, Mr. Parker worked at Northwest Airlines, most recently as
Vice President -- Assistant Treasurer and Vice President -- Financial Planning
and Analysis. From 1986 through 1991, Mr. Parker served in various financial
management positions at American Airlines.

MICHAEL A. SMITH, AGE 44.  Senior Vice President -- Marketing and Sales of AWA.
Mr. Smith joined AWA in November 1997. From 1977 through 1997, Mr. Smith served
in various management positions with American Airlines, most recently as
managing director -- European sales and marketing.

MICHAEL R. CARREON, AGE 44.  Vice President and Controller of AWA. Mr. Carreon
joined AWA in December 1994 as Senior Director -- Corporate Audit and in January
1996 was elected to his current position. From 1986 to 1994, Mr. Carreon held
accounting and audit-related management positions at United Airlines. From 1981
through 1986, he served in the Audit Services Practice of Arthur Andersen & Co.
in Chicago.

C.A. HOWLETT, AGE 54.  Vice President -- Public Affairs of AWA and Holdings. Mr.
Howlett joined AWA in January 1995. On January 1, 1997, he was appointed Vice
President -- Public Affairs of Holdings. Prior to 1995, Mr. Howlett maintained a
government relations practice as a principal at the law firm of Lewis and Roca
in Phoenix. Mr. Howlett's prior work experience included senior positions with
Salt River Project, the City of Phoenix and The White House where he served as
special assistant to President Ronald Reagan for intergovernmental affairs.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Effective midnight December 31, 1996, AWA became a direct wholly owned
subsidiary of Holdings. Each share of Class A Common Stock of AWA was exchanged
for one share of Class A Common Stock of Holdings and each share of Class B
Common Stock of AWA was exchanged for one share of Class B Common Stock of
Holdings. As a result, Holdings became the successor issuer to AWA of the Class
A and Class B Common Stock. Also, each Warrant, which previously entitled
holders to purchase from AWA one share of Class B Common Stock of AWA, now
entitles the holders to purchase from AWA one share of Class B Common Stock of
Holdings. The Class A Common Stock of Holdings, par value $.01 per share (the
"Class A Common Stock"), is not publicly traded. The Class B Common Stock, par
value $.01 per share, and Warrants have been traded on the New York Stock
Exchange under the symbol "AWA" and "AWAws," respectively, since August
26, 1994.

                                       17
<PAGE>   18

     The following table sets forth, for the periods indicated, the high and low
sales prices of the Class B Common Stock and the Warrants as reported on the New
York Stock Exchange.

<TABLE>
<CAPTION>
                                                                CLASS B
                                                             COMMON STOCK         WARRANTS
                                                             -------------      -------------
                                                             HIGH      LOW      HIGH      LOW
                                                             ----      ---      ----      ---
<S>                                                          <C>       <C>      <C>       <C>
Year Ended December 31, 1996
  First Quarter............................................  $22 1/4   $15 1/2  $11 7/8   $6 3/8
  Second Quarter...........................................   23 3/4    18 3/4   13 7/8    9 3/8
  Third Quarter............................................   21 7/8    10 7/8   11 5/8    4 3/4
  Fourth Quarter...........................................   16 3/8    11        8 1/8    5
Year Ended December 31, 1997
  First Quarter............................................   16 3/8    13 3/8    8 1/2    6 1/4
  Second Quarter...........................................   16 1/2    14 3/8    7 5/8    4 5/8
  Third Quarter............................................   16        12        6        3 3/4
  Fourth Quarter...........................................   18 15/16  13 1/2    7 11/16  4 1/2
</TABLE>

     As of December 31, 1997, there were five record holders of Class A Common
Stock, approximately 12,529 record holders of Class B Common Stock and
approximately 11,727 record holders of Warrants.

     Holdings has not paid cash dividends in any of the last two fiscal years
and does not anticipate paying cash dividends in the foreseeable future.
Holdings expects that it will retain all available earnings generated by the
Company's operations for the development and growth of its business. Any future
determination as to the payment of dividends will be made at the discretion of
the Board of Directors of Holdings and will depend upon the Company's operating
results, financial condition, capital requirements, general business conditions
and such other factors as the Board of Directors deems relevant. Certain debt
instruments of the Company restrict the Company's ability to pay cash dividends
on its Common Stock and make certain other restricted payments (as defined
therein). Under these restrictions, as of December 31, 1997, the Company's
ability to pay dividends, together with any other restricted payments, would be
limited to an aggregate of $118 million. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

     In September 1995 the Company adopted a stock repurchase program. The
program was amended in December 1995 and August 1997. During 1995 through 1997,
the Company purchased approximately 1.5 million shares of Class B Common Stock
and 4.1 million Warrants. As of December 31, 1997, the program authorized the
Company to purchase approximately 2.3 million shares of issued and outstanding
Class B Common Stock and all of the remaining 6.2 million publicly-traded
Warrants. In January 1998, the Company repurchased 100,000 shares of Class A
Common Stock, 545,927 shares of Class B Common Stock and 799,767 Warrants.

     AWA has 1,000 shares of Common Stock outstanding, all of which are owned by
Holdings. There is no established public trading market for AWA's Common Stock.
AWA has not paid any dividends to Holdings. AWA's ability to pay cash dividends
on its Common Stock is restricted by the debt instruments and in the manner
described above.

                                       18
<PAGE>   19
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

                      SELECTED CONSOLIDATED FINANCIAL DATA

         The selected consolidated data presented below under the captions
"Consolidated Statements of Income Data" and "Consolidated Balance Sheet Data"
as of and for the years ended December 31, 1997, 1996 and 1995, the period
August 26 through December 31, 1994, and the period January 1 through August 25,
1994 and the year ended December 31, 1993 are derived from the consolidated
financial statements of the Company, which consolidated financial statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The selected consolidated data should be read in conjunction with
the consolidated financial statements for the respective periods, the related
notes and the independent auditors' report. The independent auditors' report as
of and for the years ended December 31, 1996, 1995 and the period August 26,
1994 through December 31, 1994, and the period January 1, 1994 through August
25, 1994 contains an explanatory paragraph that states the consolidated
financial statements of the Company upon its emergence from bankruptcy
reorganization in 1994 ("Reorganized Company") reflect the impact of adjustments
to reflect the fair value of assets and liabilities under fresh start reporting.
As a result, the consolidated financial statements of the Reorganized Company
are presented on a different basis than those of the predecessor company and,
therefore, are not comparable in all respects.


<TABLE>
<CAPTION>
                                                               REORGANIZED COMPANY                           PREDECESSOR COMPANY
                                           -----------------------------------------------------------  ----------------------------
                                                                                          AUGUST 26 TO  JANUARY 1 TO    YEAR ENDED
                                                     YEAR ENDED DECEMBER 31,              DECEMBER 31,   AUGUST 25,     DECEMBER 31,
                                              1997            1996            1995           1994           1994           1993
                                           -----------    -----------     -----------     -----------    -----------    -----------
                                                                            (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>            <C>             <C>             <C>            <C>             <C>
Consolidated Statements of
   Income Data:
Operating revenues ....................    $ 1,874,956    $ 1,739,526     $ 1,550,642     $   469,766    $   939,028    $ 1,325,364
Operating expenses ....................      1,713,130      1,670,860       1,395,910         430,895        831,522      1,204,310
Operating income ......................        161,826         68,666         154,732          38,871        107,506        121,054
Income (loss) before income taxes
   and extraordinary items (a) ........        140,001         34,493         108,378          19,736       (201,209)        37,924
Income taxes ..........................         65,031         24,883          53,608          11,890          2,059            759
Income (loss) before
   extraordinary items ................         74,970          9,610          54,770           7,846       (203,268)        37,165
Extraordinary gain (loss) (b) .........             --         (1,105)           (984)             --        257,660             --
Net income ............................         74,970          8,505          53,786           7,846         54,392         37,165
Earnings per share: (c)
    Basic:
       Before extraordinary items .....           1.68            .21            1.21             .17           n.m.           n.m.
       Extraordinary items (b) ........             --           (.02)           (.02)             --           n.m.             --
       Net income .....................           1.68            .19            1.19             .17           n.m.           n.m.
    Diluted:
       Before extraordinary items .....           1.63            .20            1.18             .17           n.m.           n.m.
       Extraordinary items (b) ........             --           (.02)           (.02)             --           n.m.             --
       Net income .....................           1.63            .18            1.16             .17           n.m.           n.m.
Shares used for computation
    Basic .............................         44,529         44,932          45,158          45,128           n.m.           n.m.
    Diluted ...........................         46,071         47,733          46,327          45,183           n.m.           n.m.
Consolidated Balance Sheet Data
    (at end of period):
Total assets ..........................    $ 1,546,791    $ 1,597,650     $ 1,588,709     $ 1,545,092    $        --    $ 1,016,743
Long-term debt, less current
   maturities (d) .....................        272,760        330,148         373,964         465,598             --        620,992
Total stockholders' equity (deficiency)        683,570        622,753         649,472         595,446             --       (254,262)
</TABLE>

------------------


                                       19
<PAGE>   20
   (a)   Includes net expense incurred by the predecessor company in connection
         with its reorganization of $273.7 million for the period January 1
         through August 25, 1994, and $25.0 million for the year ended December
         31, 1993, respectively.

   (b)   Includes (i) an extraordinary loss of $1.1 million in 1996 resulting
         from the partial prepayment of its 10 3/4% Senior Unsecured Notes; (ii)
         an extraordinary loss of $984,000 in 1995 resulting from the exchange
         of debt by the Company; and (iii) an extraordinary gain of $257.7
         million in 1994 resulting from the discharge of indebtedness pursuant
         to the consummation of its plan of reorganization.

   (c)   Historical per share data for the predecessor company is not meaningful
         because the Company has been recapitalized and has adopted fresh start
         reporting as of August 25, 1994.

   (d)   Includes certain balances reported as estimated liabilities subject to
         Chapter 11 proceedings for the predecessor company.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         Holdings' primary business activity is ownership of all the capital
stock of AWA. Management's Discussion and Analysis of Financial Condition and
Results of Operations presented below relates to the consolidated financial
statements of Holdings presented in Item 8A. Financial statements for AWA,
Holdings' wholly owned subsidiary, are presented in Item 8B.

1997 IN REVIEW

Record Financial Results

         In 1997 Holdings earned $75.0 million in consolidated net income, the
highest level of annual earnings in the Company's history. Diluted earnings per
share for the year were $1.63. The Company's EBITDAR (operating income before
depreciation, amortization, rent and non-recurring charges) margin for 1997 was
29.0%. The Company believes EBITDAR margin is the best measure of relative
airline operating performance. 1997 marks the third consecutive year the Company
has led major domestic airlines in this important financial measure.

Improved Revenue Performance

         Total operating revenues increased 7.8% to $1.9 billion in 1997 from
the Company's previous record of $1.7 billion in 1996. On a year-over-year
comparative basis, passenger revenue per available seat mile ("RASM") was
depressed in 1997 by a shorter lapse of the 10% federal air transportation
excise tax and a 6.4% increase in stage length. Despite these effects, 1997 RASM
remained relatively flat when compared with 1996. Importantly, year-over-year
revenue performance in 1997 improved significantly as the year progressed. In
the third and fourth quarters of 1997, RASM grew by 1.4% and 4.2%, respectively,
when compared with the 1996 quarters. Factors contributing to these 1997 gains
included continued enhancement of the Company's 1996 revenue management
initiatives, improved operating performance and a rational industry pricing
environment.

Low Unit Costs

         The Company widened its strategic cost advantage versus other major
domestic airlines. In 1997, the Company's operating cost per available seat mile
("CASM") was 7.27 cents. This reflects a 2.2% reduction when compared with 1996
(after adjusting for the third quarter $65.1 million nonrecurring special
charge) and was approximately 23% less than the average CASM of the other major
domestic airlines. CASM for the other domestic major airlines increased by 1.1%.
Factors contributing to this improvement included tight cost controls, stable
labor costs and the highest aircraft utilization in the industry (12.3 hours per
day for 1997, up from 11.8


                                       20
<PAGE>   21
hours per day in 1996).

Debt Reduction/Expanded Liquidity

         During 1997, the Company continued to improve its financial position
while implementing its strategic growth plan.

-     Cash flows provided by operating activities were used to reduce total
      long-term debt (including current maturities) from $376 million at
      December 31, 1996 to $327 million at December 31, 1997, a reduction of
      13%. Over the last three years, the Company has reduced total debt by
      approximately $204 million or 38%.

-     In December 1997, the Company established a two-year $100 million
      revolving credit facility, which is secured by certain assets of the
      airline. This facility provides financial flexibility in the event
      economic conditions adversely change. (See Note 2, "Long-Term Debt" in
      Notes to Consolidated Financial Statements.)

Equity Purchases

         In August 1997, Holdings' Board of Directors approved the extension of
the Company's existing stock repurchase program through December 31, 1999. The
program authorizes the purchase of up to 2.5 million shares of the Company's
Class B Common Stock and all of AWA's publicly traded warrants, in private or
open market transactions as circumstances warrant. In 1997, the Company
purchased $16 million of equity as part of its program. Including a January 1998
transaction, the Company has purchased over $78 million of its equity in the
last two years.

SELECTED OPERATING DATA

         The table below sets forth selected operating data for the Company.

<TABLE>
<CAPTION>
                                                                            PERCENT    PERCENT
                                               YEAR ENDED DECEMBER 31,      CHANGE      CHANGE
                                               1997      1996      1995    1997-1996  1996-1995
                                               ----      ----      ----    ---------  ---------
<S>                                           <C>       <C>        <C>     <C>        <C>
Aircraft (end of period) .................       102       101        93      1.0        8.6
Average daily aircraft utilization (hours)      12.3      11.8      11.4      4.2        3.5
Available seat miles (in millions) .......    23,568    21,625    19,421      9.0       11.3
Block hours (in thousands) ...............       455       424       373      7.3       13.7
Average stage length (miles) .............       779       732       686      6.4        6.7
Average passenger journey (miles) ........     1,134     1,042       986      8.8        5.7
Revenue passenger miles (in millions) ....    16,204    15,321    13,313      5.8       15.1
Load factor (percent) ....................      68.8      70.9      68.5     (3.0)       3.5
Passenger enplanements (in thousands) ....    18,331    18,178    16,848       .8        7.9
Yield per revenue passenger mile (cents) .     10.89     10.69     10.91      1.9       (2.0)
Revenue per available seat mile:
    Passenger (cents) ....................      7.49      7.57      7.48     (1.1)       1.2
    Total (cents) ........................      7.96      8.04      7.98     (1.0)        .8
Fuel consumption (gallons in millions) ...       377       351       312      7.4       12.5
Fuel price (cents per gallon) ............     64.56     66.49     55.82     (2.9)      19.1
Full-time equivalent employees
    (end of period) ......................     9,615     9,652     8,712     (0.4)      10.8
</TABLE>


                                       21
<PAGE>   22
         The table below sets forth the major components of operating expense
per available seat mile ("ASM") for the Company for the applicable years.

<TABLE>
<CAPTION>
                                                                              PERCENT   PERCENT
                                                    YEAR ENDED DECEMBER 31,    CHANGE    CHANGE
                                                     1997    1996    1995    1997-1996  1996-1995
                                                     ----    ----    ----    ---------  ---------
                                                          (in cents)
<S>                                                  <C>     <C>     <C>     <C>        <C>
Salaries and related costs ......................    1.77    1.78    1.97       (0.6)     (9.6)
Aircraft rents ..................................     .95     .94     .89        1.1       5.6
Other rents and landing fees ....................     .51     .52     .56       (1.9)     (7.1)
Aircraft fuel ...................................    1.03    1.08     .90       (4.6)     20.0
Agency commissions ..............................     .64     .62     .64        3.2      (3.1)
Aircraft maintenance materials and repairs ......     .62     .58     .34        6.9      70.6
Depreciation and amortization ...................     .21     .24     .25       (12.5)    (4.0)
Amortization of reorganization value in excess of
    amounts applicable to identifiable assets ...     .10     .12     .17       (16.7)    (29.4)
Restructuring and other nonrecurring
    special charges .............................      --     .30     .05         --      n.m.
Other ...........................................    1.44    1.55    1.42       (7.1)      9.2
                                                     ----    ----    ----
                                                     7.27    7.73    7.19       (6.0)      7.5
                                                     ====    ====    ====
</TABLE>

RESULTS OF OPERATIONS

         The following discussion provides an analysis of the Company's results
of operations and reasons for material changes therein for the years ended
December 31, 1997, 1996 and 1995.

     1997 COMPARED WITH 1996

         In 1997, the Company realized consolidated net income of $75 million,
the highest in the Company's history. For 1996, the Company recognized net
income of $8.5 million which included a pretax, nonrecurring special charge of
$65.1 million (see Note 14, "Restructuring and Other Nonrecurring Special
Charges" in Notes to Consolidated Financial Statements). Excluding the
nonrecurring special charge, the Company would have recorded net income of $48.7
million in 1996.

         Total operating revenues were $1.9 billion in 1997 as compared to $1.7
billion in 1996. Passenger revenues for 1997 were $1.8 billion, an increase of
7.7% over the prior year. Cargo and other revenues increased 8.8% to $110.8
million in 1997.

         Capacity as measured by ASMs increased 9% in 1997 compared to 1996 as
the Company continued its strategic growth plan. Revenue passenger miles
("RPMs") increased 5.8% in 1997 to 16.2 billion RPMs. Load factor for the 1997
period decreased 2.1 points to 68.8% as the capacity increase of 9% more than
offset the 5.8% increase in RPMs. Revenue per passenger mile (yield) increased
1.9%, and RASM decreased 1.1% in 1997 from 1996.

         CASM decreased to 7.27 cents in 1997 from 7.73 cents in 1996 primarily
due to the $65.1 million nonrecurring special charge incurred in 1996. Excluding
the nonrecurring special charge, CASM decreased 2.2% in 1997 from 1996. The
changes in the components of operating expense per available seat mile
(excluding the nonrecurring special charge) are explained as follows:


                                       22
<PAGE>   23
         -   Aircraft rents per ASM increased 1.1% primarily due to the net
             addition of one leased aircraft to the fleet in 1997 and higher
             rental rates for replacement aircraft.

         -   Rentals and landing fees per ASM decreased 1.9% primarily due to
             the 9% increase in ASMs.

         -   Aircraft fuel expense per ASM decreased 4.6% due to a 2.9% decrease
             in the average price per gallon of fuel (64.56 cents vs 66.49
             cents) and the 9% increase in ASMs which was offset in part by a
             7.4% increase in fuel consumption.

         -   Agency commissions per ASM increased 3.2% primarily due to a higher
             mix of commissionable revenue.

         -   Aircraft maintenance materials and repairs expense per ASM
             increased 6.9% or $20.8 million due primarily to an increase in
             capitalized maintenance cost which has increased capitalized
             maintenance amortization expense by $26.5 million in 1997 compared
             to 1996. The unamortized balance of capitalized maintenance grew to
             $122.9 million as of December 31, 1997, an increase of $20.4
             million from December 31, 1996.

         -   Depreciation and amortization expense per ASM decreased 12.5%
             primarily due to the 9% increase in ASMs and certain ramp equipment
             being depreciated to net realizable value in 1996.

         -   Amortization of reorganization value in excess of identifiable
             assets expense per ASM decreased 16.7% primarily due to the 9%
             increase in ASMs and to the reduction in the unamortized balance of
             excess reorganization value due to the utilization of tax
             attributes of the pre-reorganized Company, including net operating
             loss carryforwards ("NOL"), amounting to $60 million in 1997 and
             $16.7 million in 1996.

         -   Other operating expenses per ASM decreased 7.1% to 1.44 cents from
             1.55 cents per ASM primarily due to the 9% increase in ASMs and a
             decline in interrupted trip expense due to improved airline
             operating performance.

         Net nonoperating expenses decreased $12.4 million to $21.8 million in
1997 from $34.2 million in 1996. The 36.1% decrease in cost resulted primarily
from a net decrease in interest expense of $14.6 million due to reduced levels
of debt, and a $5 million reversal of previously accrued interest related to the
restructuring of the aircraft order with AVSA S.A.R.L., an affiliate of Airbus
Industrie ("AVSA").

         Income tax expense for financial reporting purposes in 1997 increased
to $65 million from $24.9 million in 1996 due principally to higher pretax
income. Due to the Company's significant NOL, cash income taxes for 1997 are
estimated to be less than $6 million.

         The Company incurred an extraordinary charge in 1996 of $1.1 million,
net of income tax benefit of $918,000, for the prepayment of $25 million of its
$75 million 10 3/4% Senior Unsecured Notes.

     1996 COMPARED WITH 1995

         In 1996, the Company realized net income of $8.5 million which included
a pretax, nonrecurring special charge of $65.1 million and income tax expense
for financial reporting purposes of $24.9 million. Excluding the nonrecurring
special charge, the Company would have recorded net income of $48.7 million.
Comparative amounts for 1995 were net income of $60.3 million (excluding a $10.5
million pretax restructuring charge), and income tax expense of $53.6 million.

         The decline in pretax income (excluding the nonrecurring special charge
and before extraordinary item) for the 1996 period resulted from untimely
revenue decisions made in June and July of 1996, high jet fuel prices and
operating dependability difficulties encountered during the summer of 1996.
Industry capacity increases into Las Vegas and aggressive fare sale activity
also adversely impacted 1996.

         Total operating revenues were $1.7 billion in 1996 compared to $1.6
billion in 1995. Passenger revenues for 1996 were $1.6 billion, an increase of
12.8% over the prior year. Cargo and other revenues increased 3.4%


                                       23
<PAGE>   24
to $101.8 million in 1996.

         Capacity, as measured by ASMs, increased 11.3% in 1996 compared to 1995
as the Company initiated its strategic growth plan. Revenue passenger miles
increased 15.1% in 1996. Load factor for the 1996 period increased by 3.5% (2.4
points) to a Company record of 70.9%, despite the 11.3% capacity increase. Yield
decreased 2.0%, and RASM increased by 1.2%, in 1996 from 1995.

         CASM increased to 7.73 cents in 1996 from 7.19 cents in 1995 primarily
due to a nonrecurring special charge of $65.1 million and increases in jet fuel
prices. The changes in the components of operating expense per ASM (excluding
the nonrecurring special charge of .30 cents per ASM in 1997 and the
restructuring charge of .05 cents per ASM in 1995 ) are explained as follows:

         -   The 9.6% decrease in salaries and related costs per ASM was
             primarily related to the $12.1 million reduction in salaries
             related to the Company's outsourcing of its heavy aircraft
             maintenance in December 1995 and a reduction in AWArd Pay and
             incentive pay due to the Company's decline in income. In addition,
             the Company continued to improve productivity as full-time
             equivalent head count increased 10.8% versus an 11.3% increase in
             ASMs.

         -   Aircraft rents per ASM increased 5.6% primarily due to a net
             addition of eight leased aircraft to the fleet during 1996.

         -   Rentals and landing fees per ASM decreased primarily due to the
             11.3% increase in ASMs.

         -   The average price per gallon of aircraft fuel increased 19.1% to
             66.49 cents in 1996 from 55.82 cents in 1995. This increase in fuel
             price increased 1996 operating expense by approximately $37.5
             million.

         -   Aircraft maintenance materials and repairs expense per ASM
             increased 70.6% due primarily to an increase in capitalized
             maintenance which increased capitalized maintenance amortization
             expense by $27.7 million in 1996 when compared with 1995. The
             unamortized balance of capitalized maintenance grew to $102.5
             million at December 31, 1996, an increase of $47.5 million from
             December 31, 1995. In addition, maintenance expense per ASM
             increased further in the 1996 period due to the classification for
             accounting purposes of fees paid to outside vendors to complete
             aircraft maintenance following the outsourcing of that work in late
             1995. This increase in maintenance expense was substantially offset
             by a reduction in maintenance payroll expense as discussed above.

         -   Amortization of reorganization value in excess of identifiable
             assets expense per ASM decreased 29.4% primarily due to the
             reduction in the unamortized balance of excess reorganization value
             as the result of (i) utilization of tax attributes of the
             pre-reorganization Company, including NOL, (such reduction
             amounting to $16.7 million in 1996 and $50 million in 1995), and
             (ii) recognition of a deferred tax asset of $74.7 million in 1995.

         -   Other operating expenses per ASM increased 9.2% primarily due to
             the 4.3 cents per gallon federal fuel tax for which the Company
             became liable commencing October 1, 1995, an increase in
             interrupted trip expense due to the operating dependability
             difficulties discussed above, and an increase in passenger traffic
             related costs.

         -   Contributing to the increase in operating cost per ASM was the
             effect of the first class installation program that was completed
             in late 1995 which reduced 1996 ASMs by 2.6% but had no significant
             effect on operating costs.

         Net nonoperating expenses decreased $12.2 million to $34.2 million in
1996 from $46.4 million in 1995 due primarily to a net decrease in interest
expense resulting from reduced levels of debt and lower interest rates.

         Income tax expense for financial reporting purposes in 1996 decreased
to $24.9 million from $53.6 million in 1995 due principally to lower pretax
income.


                                       24
<PAGE>   25
         The Company incurred extraordinary charges in 1996 and 1995 of $1.1
million and $984,000, respectively, for the partial prepayment of its 10 3/4%
Senior Unsecured Notes. These amounts were net of income tax benefit of $918,000
and $984,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

         Unrestricted cash and cash equivalents and short-term investments
totaled $172.3 million at December 31, 1997 which was relatively unchanged from
December 31, 1996. Net cash provided by operating activities decreased to $206
million in 1997 from $230.3 million in 1996, due principally to the payment in
1997 of approximately $43 million in federal transportation excise taxes which
were collected in 1996. Net cash used in investing activities decreased to
$129.9 million in 1997 from $199.0 million in 1996, a decrease of $69.1 million,
primarily due to the change in short-term investments in 1997. Net cash used in
financing activities decreased to $41.3 million for the year ended December 31,
1997 from $118.2 million in the 1996 period. This was principally due to a $30
million draw-down of the revolving credit facility in December 1997, which was
subsequently repaid in February 1998, and a higher level of equity purchases and
a $25 million debt repayment in 1996.

         Operating with a working capital deficiency is common in the airline
industry as tickets sold for transportation which has not yet been provided are
classified as a current liability while the related income producing assets, the
aircraft, are classified as non-current. The Company's working capital
deficiency at December 31, 1997 is $162 million, a decrease of 5% from December
31, 1996.

         As of December 31, 1997, the Company had $327 million of long-term debt
(including current maturities) which consists primarily of principal
amortization of notes payable secured by certain of the Company's aircraft.
Management expects to fund these requirements with cash from operations or
refinance these obligations, subject to availability and market conditions at
such time.

         At December 31, 1997, AWA had a commitment to AVSA to purchase a total
of 34 Airbus aircraft, with three to be delivered in 1998, and options to
purchase an additional 40 Airbus aircraft. An additional 12 Airbus aircraft are
subject to reconfirmation by AWA. (See Note 12, "Commitments and Contingencies"
in Notes to Consolidated Financial Statements.) The net cost of firm commitments
under the aircraft order is approximately $1.2 billion based on a 3.5% annual
price escalation.

         Although the Company has arranged for financing for up to one-half of
such commitment, the Company will require substantial capital from external
sources to meet the remaining financial commitments. The Company intends to seek
additional financing (which may include public debt financing or private
financing) in the future when and as appropriate. There can be no assurance that
sufficient financing will be obtained for all aircraft. A default by the Company
under the AVSA purchase commitment could have a material adverse effect on the
Company.

         As of December 31, 1997, the Company's fleet consisted of 102 aircraft
of which 20 aircraft met the FAA's Stage II (but not Stage III) noise reduction
requirements and must be retired or significantly modified prior to the year
2000. The Company has decided to install hush kits on 14 aircraft to comply with
Stage III requirements and the required capital expenditures for such
modifications are currently estimated to be approximately $1.2 million per
aircraft. Two aircraft have been returned in 1998 and management expects to
retire the four remaining non-compliant aircraft.

         Capital expenditures for the years ended December 31, 1997, 1996 and
1995 were approximately $155 million, $155.7 million and $107.4 million,
respectively. Capital expenditures for capitalized maintenance were $86.5
million and $87.2 million for the years ended December 31, 1997 and 1996,
respectively. Capital expenditures for 1998 are expected to increase to
approximately $184 million due principally to an increase in capitalized
maintenance and expenditures for computer systems and equipment. The Company
currently intends


                                       25
<PAGE>   26
to fund such expenditures with cash from operations.

OTHER INFORMATION

YEAR 2000 COMPLIANCE

         Many currently installed computer systems and software products are
coded to accept two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. Any programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in the computer shutting down or performing incorrect computations. As a result,
in less than two years, computer systems and software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements. Many of
the Company's systems, including information and computer systems and automated
equipment, will be affected by the Year 2000 issue. The Company is also heavily
reliant on the FAA's management of the nation's air traffic control system,
local authorities' management of the airports at which AWA operates, and
vendors to provide goods (fuel, catering, etc.), services (telecommunications,
data networks, satellites, etc.) and data (frequent flyer partnerships,
alliances, etc.).

         The Company is in the process of identifying the programs and
infrastructure that could be affected by the Year 2000 issue and is developing
an implementation plan to resolve the problem on a timely basis. The Company
anticipates that the plan will require the Company to devote a considerable
amount of internal resources and hire substantial external resources to assist
with the implementation and monitoring of the issue and require the replacement
of certain equipment and modification of certain software. The Company expects
that the costs to be incurred by the Company to deal with this issue will be
material and is currently in the process of quantifying such amount. If the
Company's plan is not successfully or timely developed or implemented,
additional costs may be incurred, and the Company may need to devote more
internal resources to the process, either of which could have a material adverse
effect on the Company's financial condition and results of operations. The
Company is also in the process of discussing with the FAA, airport authorities
and its vendors the potential impact the Year 2000 issue will have on their
systems. Problems encountered by the FAA, the airport authorities and vendors in
connection with the Year 2000 issue may have a material adverse effect on the
Company's financial condition and results of operations.

INCOME TAXES

         At December 31, 1997, the Company had NOL general business tax credit
carryforwards and alternative minimum tax credit carryforwards of approximately
$376.8 million, $12.7 million and $3.8 million, respectively. Under Section 382
of the Internal Revenue Code of 1986, as amended, if a loss corporation has an
"ownership change" within a designated testing period, its ability to use its
NOL and credit carryforwards is subject to certain limitations. The Company is a
loss corporation within the meaning of Section 382. The issuance of certain
common stock by the Company pursuant to the plan of reorganization resulted in
an ownership change within the meaning of Section 382. This ownership change has
resulted in an annual limitation (the "Section 382 Limitation") upon the
Company's ability to offset any post-change taxable income with pre-change NOL.
Should the Company generate insufficient taxable income in any post-change
taxable year to utilize fully the Section 382 Limitation of that year, any
excess limitation will be carried forward to use in subsequent tax years,
provided the pre-change NOL has not been exhausted and the carryforward period
has not expired. The alternative minimum tax credit may be carried forward
indefinitely and is available to reduce future income tax payable.

         The Company's reorganization and the associated implementation of fresh
start reporting in 1994 gave rise to significant items of expense for financial
reporting purposes that are not deductible for income tax purposes. In large
measure, it is these nondeductible expenses that result in an effective tax rate
(for financial reporting purposes) significantly greater than the current U.S.
corporate statutory rate of 35%. Nevertheless, the


                                       26
<PAGE>   27
Company's actual cash income tax liability (i.e., income taxes payable) is
considerably lower than income tax expense shown for financial reporting
purposes.

GOVERNMENT REGULATIONS

         On August 5, 1997, President Clinton signed into law new aviation
ticket taxes as part of larger tax legislation designed to balance the nation's
budget, provide targeted tax relief and fund air traffic control, other FAA
programs and airport development. As enacted, these new taxes will be imposed
through September 30, 2007. Included in the new law is a phase-in of a modified
federal air transportation excise tax structure with a system that includes: a
domestic excise tax starting at 9%, declining to 7.5% by 1999; a domestic
segment tax starting at $1.00 and increasing to $3.00 by 2003; and an increase
in taxes imposed on international travel that will be from $6 per international
departure to an arrival and departure tax of $12 (each way). Both the domestic
segment tax and the international arrival and departure tax are indexed for
inflation. The legislation also includes a 7.5% excise tax on certain amounts
paid to an air carrier for the right to provide mileage and similar awards
(e.g., purchase of frequent flyer miles by a credit card company). As a result
of competitive pressures, AWA and other airlines have been limited in their
ability to pass on the cost of these taxes to passengers through fare increases.

         In 1996 and 1997 the President's Commission on Aviation Safety and
Security issued recommendations and the U.S. Congress and the Federal Aviation
Administration adopted increased safety and security measures designed to
increase airline passenger safety and security and protect against terrorist
acts. Such measures have resulted in additional operating costs to the airline
industry. Examples of increased safety and security measures include the
introduction of a domestic passenger manifest requirement, increased passenger
profiling, enhanced pre-board screening of passengers and carry-on baggage,
positive bag match for profile selections, continuous physical bag search at
checkpoints, additional airport security personnel, expanded criminal background
checks for selected airport employees, significantly expanded use of
bomb-sniffing dogs, certification of screening companies, an aggressive testing
of existing security systems, expansion of aging aircraft inspections to include
non-structural components, development of objective methods for carriers to
monitor and improve their own level of safety and installation of new ground
proximity warning systems on all commercial aircraft. The Company cannot
forecast, what additional security and safety requirements may be imposed in the
future or the costs or revenue impact that would be associated with complying
with such requirements.

FORWARD LOOKING INFORMATION

         This discussion contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. When used in this
document, the words "anticipate," "estimate," "project," "expect" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated, projected or expected. Among the key factors that may have a direct
bearing on the Company's results are competitive practices in the airline and
travel industries generally and particularly in the Company's principal markets,
the ability of the Company to meet existing financial obligations in the event
of adverse industry or economic conditions or to obtain additional capital to
fund future commitments and expansion, the Company's relationship with employees
and the terms of future collective bargaining agreements and the impact of
current and future laws and governmental regulations affecting the airline and
travel industries and the Company's operations. For additional discussion of
such risks see "Business -- Risk Factors," included in Item 1 of this Report on
Form 10-K. Any forward-looking statements speak only as of the date such
statements are made.

ITEM 8A. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - AMERICA WEST
         HOLDINGS CORPORATION

         Consolidated balance sheets of Holdings as of December 31, 1997 and
1996, and the related consolidated statements of income, cash flows and
stockholders' equity for each of the years in the three-year period ended
December 31, 1997, together with the related notes and the report of KPMG Peat
Marwick LLP, independent certified public accountants, are set forth on the
following pages.


                                       27
<PAGE>   28
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
America West Holdings Corporation:

         We have audited the accompanying consolidated balance sheets of America
West Holdings Corporation and subsidiary as of December 31, 1997 and 1996 and
the related consolidated statements of income, cash flows and stockholders'
equity for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of America West
Holdings Corporation and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.


                                    KPMG Peat Marwick LLP


Phoenix, Arizona
February 27, 1998


                                       28
<PAGE>   29
                        AMERICA WEST HOLDINGS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                              1997            1996
                                                                                           -----------     -----------
<S>                                                                                        <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents ........................................................    $   172,303     $   137,499
     Short-term investments ...........................................................             --          39,131
     Accounts receivable, less allowance for doubtful accounts of
          $3,850 in 1997 and $3,091 in 1996 ...........................................         87,538         106,215
     Expendable spare parts and supplies, less allowance for obsolescence
          of $2,495 in 1997 and $1,713 in 1996 ........................................         27,135          21,423
     Prepaid expenses .................................................................         36,917          47,545
                                                                                           -----------     -----------
               Total current assets ...................................................        323,893         351,813
                                                                                           -----------     -----------
Property and equipment:
     Flight equipment .................................................................        783,384         669,654
     Other property and equipment .....................................................        143,172         107,993
     Equipment purchase deposits ......................................................         45,246          56,665
                                                                                           -----------     -----------
                                                                                               971,802         834,312
     Less accumulated depreciation and amortization ...................................        276,430         163,718
                                                                                           -----------     -----------
                                                                                               695,372         670,594
                                                                                           -----------     -----------
Other assets:
     Restricted cash ..................................................................         57,158          26,433
     Reorganization value in excess of amounts allocable to identifiable assets, net ..        363,268         447,044
     Deferred income taxes ............................................................         74,700          74,700
     Other assets, net ................................................................         32,400          27,066
                                                                                           -----------     -----------
                                                                                               527,526         575,243
                                                                                           -----------     -----------
                                                                                           $ 1,546,791     $ 1,597,650
                                                                                           ===========     ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Current maturities of long-term debt .............................................    $    54,000     $    46,238
     Accounts payable .................................................................        140,908         115,458
     Air traffic liability ............................................................        173,149         214,056
     Accrued compensation and vacation benefits .......................................         37,267          30,085
     Accrued taxes ....................................................................         36,064          72,047
     Other accrued liabilities ........................................................         44,554          44,836
                                                                                           -----------     -----------
          Total current liabilities ...................................................        485,942         522,720
                                                                                           -----------     -----------
Long-term debt, less current maturities ...............................................        272,760         330,148
Deferred credits and other liabilities ................................................        104,519         122,029
Commitments and contingencies
Stockholders' equity:
     Preferred stock, $.01 par value.  Authorized 48,800,000 shares; no shares issued .             --              --
     Class A common stock, $.01 par value.  Authorized 1,200,000 shares; issued and
          outstanding 1,200,000 shares ................................................             12              12
     Class B common stock, $.01 par value.  Authorized 100,000,000 shares; issued and
          outstanding 44,782,404 shares in 1997, and 44,626,056 shares in 1996 ........            448             446
     Additional paid-in capital .......................................................        565,546         577,267
     Retained earnings ................................................................        145,107          70,137
                                                                                           -----------     -----------
                                                                                               711,113         647,862
     Less:  Cost of Class B common stock in treasury, 1,486,168 shares in 1997
          and 1,353,911 shares in 1996 ................................................        (27,543)        (25,109)
                                                                                           -----------     -----------
               Total stockholders' equity .............................................        683,570         622,753
                                                                                           -----------     -----------
                                                                                           $ 1,546,791     $ 1,597,650
                                                                                           ===========     ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       29
<PAGE>   30
                        AMERICA WEST HOLDINGS CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                      (IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                               1997            1996            1995
                                                            -----------     -----------     -----------
<S>                                                         <C>             <C>             <C>
Operating revenues:
   Passenger ...........................................    $ 1,764,206     $ 1,637,762     $ 1,452,261
   Cargo ...............................................         51,699          46,519          44,425
   Other ...............................................         59,051          55,245          53,956
                                                            -----------     -----------     -----------
      Total operating revenues .........................      1,874,956       1,739,526       1,550,642
                                                            -----------     -----------     -----------

Operating expenses:
   Salaries and related costs ..........................        418,212         385,840         382,032
   Aircraft rents ......................................        223,423         202,237         173,571
   Other rents and landing fees ........................        119,470         111,947         108,264
   Aircraft fuel .......................................        243,423         233,522         174,195
   Agency commissions ..................................        151,293         133,015         124,146
   Aircraft maintenance materials and repairs ..........        146,618         125,768          65,925
   Depreciation and amortization .......................         48,590          52,937          49,083
   Amortization of reorganization value in excess of
      amounts allocable to identifiable assets .........         23,776          25,263          31,958
   Restructuring and other nonrecurring special charges              --          65,098          10,500
   Other ...............................................        338,325         335,233         276,236
                                                            -----------     -----------     -----------
      Total operating expenses .........................      1,713,130       1,670,860       1,395,910
                                                            -----------     -----------     -----------

Operating income .......................................        161,826          68,666         154,732
                                                            -----------     -----------     -----------

Nonoperating income (expenses):
   Interest income .....................................         10,646          12,861          15,045
   Interest expense, net ...............................        (32,249)        (46,866)        (58,598)
   Gain (loss) on disposition of property and equipment          (1,710)          1,288          (2,734)
   Other, net ..........................................          1,488          (1,456)            (67)
                                                            -----------     -----------     -----------
      Total nonoperating expenses, net .................        (21,825)        (34,173)        (46,354)
                                                            -----------     -----------     -----------

      Income before income taxes and extraordinary items        140,001          34,493         108,378
Income taxes ...........................................         65,031          24,883          53,608
                                                            -----------     -----------     -----------
      Income before extraordinary items ................         74,970           9,610          54,770
Extraordinary items, net of tax ........................             --          (1,105)           (984)
                                                            -----------     -----------     -----------
      Net income .......................................    $    74,970     $     8,505     $    53,786
                                                            ===========     ===========     ===========

Earnings per share:
   Basic:
      Income before extraordinary items ................    $      1.68     $       .21     $      1.21
      Extraordinary items ..............................             --            (.02)           (.02)
                                                            -----------     -----------     -----------
      Net income .......................................    $      1.68     $       .19     $      1.19
                                                            ===========     ===========     ===========
   Diluted:
      Income before extraordinary items ................    $      1.63     $       .20     $      1.18
      Extraordinary items ..............................             --            (.02)           (.02)
                                                            -----------     -----------     -----------
      Net income .......................................    $      1.63     $       .18     $      1.16
                                                            ===========     ===========     ===========
Shares used for computation:
   Basic ...............................................         44,529          44,932          45,158
                                                            ===========     ===========     ===========
   Diluted .............................................         46,071          47,733          46,327
                                                            ===========     ===========     ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       30
<PAGE>   31
                        AMERICA WEST HOLDINGS CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         1997          1996          1995
                                                                       ---------     ---------     ---------
<S>                                                                    <C>           <C>           <C>
Cash flows from operating activities:
   Net income .....................................................    $  74,970     $   8,505     $  53,786
   Adjustments to reconcile net income to net cash provided by
      operating activities:
      Depreciation and amortization ...............................       48,590        52,937        49,083
      Amortization of capitalized maintenance .....................       66,143        39,679        11,934
      Amortization of reorganization value ........................       23,776        25,263        31,958
      Income taxes attributable to reorganization items and other .       59,444        23,091        52,913
      Amortization of deferred credits ............................      (10,405)      (11,563)      (10,952)
      Nonrecurring special charge .................................           --        65,098        10,500
      Extraordinary items and other ...............................        5,843         3,989         8,183
   Changes in operating assets and liabilities:
      Decrease (increase) in accounts receivable, net .............       18,677       (37,121)      (11,172)
      Increase in expendable spare parts and supplies, net ........       (5,712)       (3,793)       (4,819)
      Decrease (increase) in prepaid expenses .....................       10,551        (2,252)      (14,031)
      Increase in other assets, net ...............................      (32,464)       (3,173)       (7,312)
      Increase in accounts payable ................................       25,450        26,301        10,308
      Increase (decrease) in air traffic liability ................      (40,907)       22,312        64,388
      Increase (decrease) in accrued compensation
          and vacation benefits ...................................        7,182       (11,531)       15,340
      Increase (decrease) in accrued taxes ........................      (35,983)       37,688         7,298
      Increase (decrease) in other accrued liabilities ............         (282)        8,315          (663)
      Decrease in other liabilities ...............................       (8,871)      (13,411)       (6,314)
                                                                       ---------     ---------     ---------
         Net cash provided by operating activities ................      206,002       230,334       260,428
                                                                       ---------     ---------     ---------
   Cash flows from investing activities:
      Purchases of property and equipment .........................     (154,969)     (155,742)     (107,387)
      Sale (purchase) of short-term investments ...................       39,131       (39,131)           --
      Other .......................................................      (14,017)       (4,082)           (9)
                                                                       ---------     ---------     ---------
         Net cash used in investing activities ....................     (129,855)     (198,955)     (107,396)
                                                                       ---------     ---------     ---------
   Cash flows from financing activities:
      Proceeds from issuance of debt ..............................       30,000            --        29,300
      Repayment of debt ...........................................      (55,411)      (79,216)     (137,421)
      Acquisition of treasury stock ...............................       (2,434)      (23,964)       (1,540)
      Acquisition of warrants .....................................      (13,342)      (18,141)           --
      Other .......................................................         (156)        3,074        (1,585)
                                                                       ---------     ---------     ---------
         Net cash used in financing activities ....................      (41,343)     (118,247)     (111,246)
                                                                       ---------     ---------     ---------
   Net increase (decrease) in cash and cash equivalents ...........       34,804       (86,868)       41,786
                                                                       ---------     ---------     ---------
   Cash and cash equivalents at beginning of year .................      137,499       224,367       182,581
                                                                       ---------     ---------     ---------
   Cash and cash equivalents at end of year .......................    $ 172,303     $ 137,499     $ 224,367
                                                                       =========     =========     =========
   Cash, cash equivalents and short-term investments at end of year    $ 172,303     $ 176,630     $ 224,367
                                                                       =========     =========     =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       31
<PAGE>   32
                        AMERICA WEST HOLDINGS CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                        (IN THOUSANDS EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                            CLASS A      CLASS B    ADDITIONAL                   CLASS B
                                             COMMON       COMMON      PAID-IN      RETAINED     TREASURY
                                             STOCK        STOCK       CAPITAL      EARNINGS       STOCK         TOTAL
                                           ---------    ---------    ---------     ---------    ---------     ---------
<S>                                        <C>          <C>          <C>           <C>          <C>           <C>
BALANCE AT JANUARY 1, 1995 ............    $      12    $     439    $ 587,149     $   7,846    $      --     $ 595,446
                                           ---------    ---------    ---------     ---------    ---------     ---------
Issuance of 4,057 shares and
  170,667 shares of common
   stock pursuant to the
   exercise of stock warrants
   and stock options ..................           --            2        1,543            --           --         1,545
Issuance of 30,334 shares
   of restricted stock ................           --           --          235            --           --           235
Acquisition of 112,000 shares of
   treasury stock .....................           --           --           --            --       (1,540)       (1,540)
Net income ............................           --           --           --        53,786           --        53,786
                                           ---------    ---------    ---------     ---------    ---------     ---------
BALANCE AT DECEMBER 31, 1995 ..........           12          441      588,927        61,632       (1,540)      649,472
                                           ---------    ---------    ---------     ---------    ---------     ---------
Issuance of 12,725 shares and
   314,001 shares of common
   stock pursuant to the exercise
   of stock warrants and stock
   options ............................           --            3        3,071            --           --         3,074
Issuance of 158,000 shares of
   restricted stock ...................           --            2        2,761            --           --         2,763
Purchase of 1,270,000 shares and return
   of 21,911 shares of treasury stock .           --           --          293            --      (24,257)      (23,964)
Issuance of 50,000 shares of
   treasury stock .....................           --           --          356            --          688         1,044
Repurchase of 2,187,475
   warrants at $8.29 per warrant ......           --           --      (18,141)           --           --       (18,141)
Net income ............................           --           --           --         8,505           --         8,505
                                           ---------    ---------    ---------     ---------    ---------     ---------
BALANCE AT DECEMBER 31, 1996 ..........           12          446      577,267        70,137      (25,109)      622,753
                                           ---------    ---------    ---------     ---------    ---------     ---------
Issuance of 5,534 shares and
   140,167 shares of common
   stock pursuant to the exercise
   of stock warrants and stock
   options ............................           --            2        1,452            --           --         1,454
Issuance of 10,647 shares of
   Class B common stock ...............           --           --          169            --           --           169
Acquisition of 132,300 shares of
   treasury stock .....................           --           --           --            --       (2,434)       (2,434)
Issuance of 43 shares of treasury stock           --           --           --            --           --            --
Repurchase of 1,911,523
   warrants at $6.98 per warrant ......           --           --      (13,342)           --           --       (13,342)
Net income ............................           --           --           --        74,970           --        74,970
                                           ---------    ---------    ---------     ---------    ---------     ---------
BALANCE AT DECEMBER 31, 1997 ..........    $      12    $     448    $ 565,546     $ 145,107    $ (27,543)    $ 683,570
                                           =========    =========    =========     =========    =========     =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       32
<PAGE>   33
                        AMERICA WEST HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996, AND 1995


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         America West Holdings Corporation ("Holdings"), a Delaware corporation,
became the holding company for America West Airlines, Inc. ("AWA"), effective
midnight, December 31, 1996. Holdings' primary business activity is ownership of
all the capital stock of AWA, the ninth largest commercial airline carrier in
the United States serving 60 destinations in the U.S., Canada and Mexico.

     (a)  Basis of Presentation

               The consolidated financial statements include the accounts of
Holdings and its wholly owned subsidiary AWA (collectively, the "Company"). The
Company's consolidated financial statements give effect to the formation of the
holding company discussed above for all periods presented. All significant
inter-company balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.

     (b)  Cash, Cash Equivalents and Short-term Investments

               Cash equivalents consist of all highly liquid debt instruments
purchased with original maturities of three months or less. Short-term
investments consist of cash invested in certain debt securities with original
maturities greater than 90 days. The debt securities are classified as held to
maturity and are carried at amortized cost which approximates fair value.

     (c)  Expendable Spare Parts and Supplies

               Flight equipment expendable spare parts and supplies are valued
at average cost. An allowance for obsolescence is provided, over the estimated
useful life of the related aircraft and engines, for spare parts expected to be
on hand at the date the aircraft are retired from service.

     (d)  Property and Equipment

               Property and equipment are recorded at cost. Interest capitalized
on advance payments for aircraft acquisitions and on expenditures for aircraft
improvements are part of these costs. Interest capitalized for the years ended
December 31, 1997 and 1995 was $600,000 and $2.7 million, respectively. No
interest was capitalized for the year ended December 31, 1996. Property and
equipment is depreciated and amortized to residual values over the estimated
useful lives or the lease term, whichever is less, using the straight-line
method.

               The estimated useful lives for the Company's ground property and
equipment range from three to 12 years for owned property and equipment and up
to 30 years for the reservation and training center and technical support
facilities. The estimated useful lives of the Company's owned aircraft, jet
engines, flight equipment and rotable parts range from 11 to 22 years. Leasehold
improvements relating to flight equipment and other property on operating leases
are amortized over the life of the lease or the life of the asset, whichever is
shorter.

     (e)  Restricted Cash

               Restricted cash includes cash deposits securing certain letters
of credit.


                                       33
<PAGE>   34
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


     (f)  Aircraft Maintenance and Repairs

               Routine maintenance and repairs are charged to expense as
incurred. The cost of major scheduled airframe, engine and certain component
overhauls are capitalized and amortized over the periods benefited and are
included in aircraft maintenance materials and repairs expense. Additionally, an
accrual for the estimated cost of scheduled airframe and engine overhauls
required to be performed on leased aircraft prior to their return to the lessors
has been recorded.

     (g)  Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets

               Reorganization value in excess of amounts allocable to
identifiable assets is amortized on a straight line basis over 20 years.
Accumulated amortization at December 31, 1997 and 1996 was $92.1 million and
$68.4 million, respectively. The Company assesses the recoverability of this
asset based upon expected future undiscounted cash flows and other relevant
information.

     (h)  Frequent Flyer Awards

               The Company maintains a frequent travel award program known as
"FlightFund" that provides a variety of awards to program members based on
accumulated mileage. The estimated cost of providing the free travel, using the
incremental cost method as adjusted for estimated redemption rates, is
recognized as a liability and charged to operations as program members
accumulate mileage.

     (i)  Deferred Credit-Operating Leases

               Rents for operating leases were adjusted to fair market value
when the Company emerged from bankruptcy in 1994. The net present value of the
difference between the stated lease rates and the fair market rates has been
recorded as a deferred credit in the accompanying consolidated balance sheets.
The deferred credit will be increased through charges to interest expense and
decreased on a straight-line basis as a reduction in rent expense over the
applicable lease periods. At December 31, 1997 and 1996, the unamortized balance
of the deferred credit was $85.3 million and $95.6 million, respectively.

     (j)  Passenger Revenue

               Passenger revenue is recognized when transportation is provided.
Ticket sales for transportation which has not yet been provided are recorded as
air traffic liability. Passenger traffic commissions and related fees are
expensed when the related revenue is recognized. Passenger traffic commissions
and related fees not yet recognized are included as a prepaid expense.

     (k)  Advertising Costs

               The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 1997, 1996 and 1995 was
$25.8 million, $26.6 million and $25.2 million, respectively.

     (l)  Income Taxes

               Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.


                                       34
<PAGE>   35
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


     (m)  Stock Options

               The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation, the Company provides pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and subsequent years as if the fair-value-based method defined in SFAS No.
123 had been applied. (See Note 4, "Stock Options and Awards".)

     (n)  Earnings Per Share ("EPS")

         On December 15, 1997, the Company adopted SFAS No. 128, Earnings Per
Share, which standardizes the reporting for EPS into basic EPS and diluted EPS,
and has restated all prior period EPS data to conform to SFAS No. 128.

      (o)  Use of Estimates

         Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

2.       LONG-TERM DEBT

               Long-term debt at December 31 consists of the following:

<TABLE>
<CAPTION>
                                                                                    1997        1996
                                                                                  --------    --------
                                                                                   (IN THOUSANDS)
<S>                                                                               <C>         <C>
SECURED
Notes payable, primarily fixed interest rates of 7.06% to 10.79%, averaging
   9.73%, installments due 1999 through 2008 .................................    $194,008    $234,494
Borrowings under lines of credit, floating interest rates of one month
   LIBOR + 1.625%, averaging 7.59%, interest only due through 1999 (a) .......      30,000       8,277
Industrial development revenue bonds, variable interest rate of 3.3% to 4.95%,
   averaging 4.02%, due 2016 (b) .............................................      29,300      29,300
                                                                                  --------    --------
                                                                                   253,308     272,071
                                                                                  --------    --------
UNSECURED
10 3/4% Senior Unsecured Notes, face amount of $50 million, interest
   only payment until due in 2005 (c) ........................................      48,197      48,197
Notes payable, interest rates of 6.5% to 90-day LIBOR +3%, averaging
   7.99%, installments due through 2000 ......................................      24,905      55,910
Other ........................................................................         350         208
                                                                                  --------    --------
                                                                                    73,452     104,315
                                                                                  --------    --------
Total long-term debt .........................................................     326,760     376,386
Less:  current maturities ....................................................      54,000      46,238
                                                                                  --------    --------
                                                                                  $272,760    $330,148
                                                                                  ========    ========
</TABLE>

----------


                                       35
<PAGE>   36
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


(a)      In December 1997, AWA obtained a $100 million senior secured revolving
         credit facility with a group of financial institutions that has a five
         year term comprised of a two year revolving credit arrangement, with an
         option to extend the expiration date for one additional year or convert
         outstanding borrowings into a three year term loan. Borrowings under
         this credit facility will accrue interest at either the "base rate"
         (prime rate or the rate which is 1/2 of 1% in excess of the Federal
         Funds Effective Rate) or the "adjusted eurodollar rate" (LIBOR rate
         adjusted for certain reserve requirements in respect to "Eurodollar
         liabilities") plus the applicable margin based on Moody's rating of
         AWA's senior unsecured notes. The credit agreement is secured by
         certain assets of AWA. As of December 31, 1997, AWA had drawn $29.9
         million to pledge as cash collateral for the industrial development
         revenue bonds letter of credit discussed in (b) below. This was
         subsequently repaid in February 1998.

(b)      The industrial development revenue bonds are backed by an irrevocable
         direct pay letter of credit which is secured by $29.9 million in cash.
         The interest rate on the bonds varies weekly and from January 1, 1997
         to December 31, 1997 ranged from 3.3% to 4.95%. The bondholders have
         the right to put the bonds back to the Company on a weekly basis if the
         bonds bear interest at a weekly rate or monthly if the bonds bear
         interest at a monthly rate. If the bonds are put back to the Company,
         the remarketing agent or the transfer agent will, at the direction of
         the Company, remarket such bonds. Any bonds not remarketed will be
         retired utilizing the $29.9 million letter of credit which represents
         the principal amount plus 60 days of interest at a maximum rate of 12%.
         The letter of credit was extended in November 1997 for one year and is
         subject to mandatory redemption under certain circumstances. The
         estimated annual cost for the letter of credit is approximately
         $192,000.

(c)      The 10 3/4% Senior Unsecured Notes mature on September 1, 2005 and
         interest is payable in arrears semi-annually commencing on March 1,
         1996. The 10 3/4% Senior Unsecured Notes may be redeemed at the option
         of the Company on or after September 1, 2001 at any time in whole or
         from time to time in part, at a redemption price equal to the following
         percentage of principal redeemed, plus accrued and unpaid interest to
         the date of redemption, if redeemed during the 12-month period
         beginning:

<TABLE>
<CAPTION>
                  SEPTEMBER 1,                                  PERCENTAGE
                  ------------                                  ----------
<S>                                                             <C>
                  2000................................           105.375%
                  2001................................           103.583%
                  2002................................           101.792%
                  2003 and thereafter.................           100.000%
</TABLE>

         Secured financings totaling $253.3 million are collateralized by
assets, primarily aircraft and engines, with a net book value of $315.4 million
at December 31, 1997.


         At December 31, 1997, the estimated maturities of long-term debt are as
follows:

<TABLE>
                                                              (IN THOUSANDS)
<S>                                                            <C>
                  1998................................         $  54,000
                  1999................................            64,832
                  2000................................            19,898
                  2001................................            19,805
                  2002................................            19,632
                  Thereafter..........................           148,593
                                                               ---------
                                                               $ 326,760
                                                               =========
</TABLE>


                                       36
<PAGE>   37
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


         Certain of the Company's long-term debt agreements contain minimum cash
balance requirements, leverage ratios, coverage ratios, limitations on
investments and restricted payments including cash dividends, and other
financial covenants with which the Company was in compliance at December 31,
1997.

3.       CAPITAL STOCK

         Effective midnight, December 31, 1996, AWA became a wholly-owned
subsidiary of Holdings and each share of AWA Class A and Class B Common Stock
was exchanged for one share of Holdings Class A or Class B Common Stock.
Holdings' Class B Common Stock is listed on the New York Stock Exchange.

         On August 25, 1994, AWA issued approximately 10.4 million warrants to
purchase Class B Common Stock with an exercise price of $12.74 per share. The
warrants are exercisable by the holders any time before August 25, 1999 and 10.4
million shares of Class B Common Stock were reserved for the exercise of these
warrants. As of December 31, 1997, approximately 4.1 million warrants have been
repurchased by AWA for approximately $31 million. As of December 31, 1997,
22,588 warrants have been exercised at $12.74 per share. As part of the holding
company formation transaction, the AWA warrants became rights to acquire shares
of Holdings Class B Common Stock. AWA has made arrangements for the issuance of
Holdings Class B Common Stock upon the exercise of such warrants by purchasing
an option from Holdings to acquire such stock. AWA issued a $62.4 million note
payable to Holdings due December 31, 2005 with an interest rate of 11%.
Subsequently, Holdings made a capital contribution to AWA by issuing a note
payable to AWA for $62.4 million due December 31, 2045 with an interest rate of
10 7/8%.

     Preferred Stock

         The Company's Board of Directors by resolution may authorize the
issuance of the Preferred Stock as a class, in one or more series, having the
number of shares, designations, relative voting rights, dividend rights,
liquidation and other preferences and limitations that the Board of Directors
fixes, without any stockholder approval. No shares of Preferred Stock have been
issued.

     Common Stock

         The holders of Class A Common Stock are entitled to fifty votes per
share, and the holders of Class B Common Stock are entitled to one vote per
share, on all matters submitted to a vote of common stockholders except that
voting rights of non-U.S. citizens are limited. The Class A Common Stock is
convertible into an equal number of Class B shares at any time at the election
of the holders of the Class A Common Stock.

         Holders of Common Stock of all classes participate equally as to any
dividends or distributions on the Common Stock, except that dividends payable in
shares of Common Stock, or securities to acquire Common Stock, will be made in
the same class of Common Stock as that held by the recipient of the dividend.
Holders of Common Stock have no right to cumulate their votes in the election of
directors. The Common Stock votes together as a single class, subject to the
right to a separate class vote in certain instances required by law.

         Pursuant to a Stockholder's Agreement, the Company, TPG Partners, L.P.
("TPG"), TPG Parallel, Air Partners II and Continental Airlines, Inc.
("Continental") will vote all shares of the Common Stock owned by them in favor
of the reelection of the initially designated Independent Directors for as long
as such Independent Directors continue to serve or until the day before the
1998 Annual Meeting.


                                       37
<PAGE>   38
4.       STOCK OPTIONS AND AWARDS

         Under the 1994 Incentive Equity Plan, as amended (the "Plan"), the
Company's Board of Directors may grant stock options to officers and key
employees. The maximum number of shares of Class B Common Stock authorized for
issuance under the Plan is 7.5 million shares of which 3.4 million shares are
available for grant. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant, generally become exercisable
over a three-year period and expire if unexercised at the end of 10 years.

               Stock option activity during the years indicated is as follows:

<TABLE>
<CAPTION>
                                                                  WEIGHTED-
                                                   NUMBER OF       AVERAGE
                                                     SHARES     EXERCISE PRICE
                                                  ----------    --------------
<S>                                               <C>           <C>
Balance at December 31, 1994:                      1,147,000        $ 8.73
    Granted .................................      1,396,000        $12.39
    Exercised ...............................       (170,667)       $ 8.75
    Canceled ................................       (204,000)       $ 9.30
                                                  ----------        ------

Balance at December 31, 1995:                      2,168,333        $11.03
    Granted .................................      2,058,000        $15.55
    Exercised ...............................       (314,001)       $ 9.28
    Canceled ................................       (374,332)       $12.27
                                                  ----------        ------

Balance at December 31, 1996:                      3,538,000        $13.68
    Granted .................................        479,000        $15.54
    Exercised ...............................       (140,167)       $ 9.87
    Canceled ................................       (425,333)       $13.74
                                                  ----------        ------
Balance at December 31, 1997:                      3,451,500        $14.09
                                                  ==========        ======
</TABLE>

         At December 31, 1997, options outstanding and exercisable by price
range are as follows:

<TABLE>
<CAPTION>
                                   WEIGHTED                                       WEIGHTED
                                    AVERAGE          WEIGHTED         OPTIONS      AVERAGE
   RANGE OF         OPTIONS        REMAINING          AVERAGE        CURRENTLY    EXERCISE
EXERCISE PRICES   OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE     PRICE
---------------   -----------   ----------------   --------------   -----------   --------
<S>               <C>           <C>                <C>              <C>           <C>
$ 8.00 - $11.99      685,000          7.1              $ 8.85          606,334     $ 8.83
$12.00 - $12.00      842,500          8.8              $12.00           81,100     $12.00
$12.01 - $15.00      757,000          8.6              $13.43          319,333     $13.02
$15.01 - $19.63      759,000          9.0              $17.94          303,000     $17.51
$19.64 - $23.00      408,000          8.2              $21.24          161,998     $21.00
                   ---------          ---              ------        ---------     ------
                   3,451,500          8.4              $14.09        1,471,765     $13.04
                   =========          ===              ======        =========     ======
</TABLE>

         The per share weighted-average fair value of stock options granted
during 1997, 1996 and 1995 was $5.39, $6.48 and $4.73, respectively, on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield of 0.0%, risk-free
interest rate of 5.7%, volatility of 44.8% and an expected life of four years;
1996 - expected dividend yield 0.0%, risk-free interest rate of 6.3%, volatility
of 43.13% and an expected life of four years; 1995 - expected dividend yield
0.0%, risk-free interest rate of 6.5%, volatility of 37%, and an expected life
of four years.


                                       38
<PAGE>   39
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


         The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                             1997        1996          1995
                                           --------    --------      --------
                                          (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                   <C>                  <C>         <C>           <C>
Net income:           As reported          $ 74,970    $  8,505      $ 53,786
                                           ========    ========      ========
                      Pro forma            $ 72,214    $  6,343      $ 52,704
                                           ========    ========      ========
Earnings per share:
  Basic               As reported          $   1.68    $   0.19      $   1.19
                                           ========    ========      ========
                      Pro forma            $   1.62    $   0.14      $   1.17
                                           ========    ========      ========
  Diluted             As reported          $   1.63    $   0.18      $   1.16
                                           ========    ========      ========
                      Pro forma            $   1.57    $   0.13      $   1.14
                                           ========    ========      ========
</TABLE>

         Pro forma net income reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.

         Under the Plan, the Company granted 158,000 shares and 30,334 shares of
Class B Common Stock as restricted stock to certain officers in 1996 and 1995,
respectively. There were no grants of restricted stock in 1997. The Company
recognized compensation expense of $944,000, $785,000 and $235,000 related to
restricted stock in 1997, 1996 and 1995, respectively. At December 31, 1997,
139,222 shares of restricted stock were vested.

         The Plan also provides for the issuance of restricted stock and grant
of stock options to non-employee directors. The Company has granted options to
purchase 156,000 shares of Class B Common Stock to members of the Board of
Directors who are not employees of the Company. The options have a ten-year term
and are exercisable six months after the date of grant. As of December 31, 1997,
the options were exercisable at prices ranging from $8.00 to $19.75 per share.
On December 31, 1997, 819 shares of Class B Common Stock were granted to each
non-employee member of the Board of Directors (10,647 shares in total) pursuant
to the Plan.

5.       EMPLOYEE BENEFIT PLAN

         The Company has a 401(k) defined contribution plan, covering
essentially all employees of the Company. Participants may contribute from 1 to
15% of their pretax earnings to a maximum of $9,500 in 1997. The Company's
matching contribution is determined annually by the Board of Directors. The
Company's contribution expense to the plan totaled $6.1 million, $5.9 million
and $5.9 million in 1997, 1996 and 1995, respectively.

6.       FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

(a)      Fair Value of Financial Instruments

     Cash Equivalents, Short-term Investments and Receivables

         The carrying amount approximates fair value because of the short-term
nature of these instruments.


                                       39
<PAGE>   40
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


     Long-term Debt

         At December 31, 1997 and 1996, the fair value of long-term debt was
approximately $330 million and $379 million, respectively, based on quoted
market prices for the same or similar debt including debt of comparable
remaining maturities.

(b)      Fuel Price Risk Management

         Under its fuel hedging program, the Company may enter into certain
protective cap and fixed price swap transactions with approved counterparties
for a period generally not exceeding twelve months. Gains and losses on such
transactions are recorded as adjustments to fuel expense when the underlying
fuel being hedged is used. As of December 31, 1997, the Company had entered into
cap and swap transactions hedging approximately 14% of its projected 1998 fuel
requirements. As of February 26, 1998, approximately 38% of the Company's 1998
fuel requirements are hedged.

         The Company is exposed to credit risks in the event any counterparty
fails to meet its obligations. The Company does not anticipate such
non-performance as counterparties are selected based on credit ratings, exposure
to any one counterparty is limited based on formal guidelines and the relative
market positions with such counterparties are closely monitored.

(c)      Concentration of Credit Risk

         The Company does not believe it is subject to any significant
concentration of credit risk. Most of the Company's receivables result from
tickets sold to individual passengers through the use of major credit cards or
to tickets sold by other airlines and used by passengers on AWA. These
receivables are short-term, generally being settled shortly after the sale.

7.       INCOME TAXES

         The Company recorded income tax expense (exclusive of extraordinary
items) as follows:

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                1997         1996         1995
                                               -------      -------      -------
                                                        (IN THOUSANDS)
<S>                                            <C>          <C>          <C>
Current Taxes:
   Federal ..............................      $ 2,483      $   943      $   505
   State ................................        3,104          849          190
                                               -------      -------      -------
         Total current taxes ............        5,587        1,792          695
                                               -------      -------      -------
Deferred taxes ..........................           --           --           --
                                               -------      -------      -------
Income taxes attributable to
   reorganization items and other .......       59,444       23,091       52,913
                                               -------      -------      -------
Total income tax expense ................      $65,031      $24,883      $53,608
                                               =======      =======      =======
</TABLE>

         The Company's emergence from bankruptcy reorganization in 1994 and the
associated implementation of fresh start reporting gave rise to significant
items of expense for financial reporting purposes that are not deductible for
income tax purposes. In large measure, it is these nondeductible (for income tax
purposes) expenses that result in an effective tax rate (for financial reporting
purposes) significantly greater than the current U.S. corporate statutory rate
of 35%. Nevertheless, the Company's actual cash income tax liability (i.e.,
income


                                       40
<PAGE>   41
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


taxes payable) is considerably lower than income tax expense shown for financial
reporting purposes. This difference in financial expense compared to actual
income tax liability is in part attributable to the utilization of certain tax
attributes of the predecessor company that serve to reduce the Company's actual
income tax liability. The excess of financial expense over the Company's actual
income tax liability ($59.4 million for 1997) is applied to reduce the balance
of the Company's reorganization value in excess of amounts allocable to
identifiable assets.

         For the years ended December 31, 1996 and 1995, the Company recognized
income tax benefits of $918,000 and $984,000, respectively, arising from
extraordinary charges.

         Income tax expense, exclusive of extraordinary items, differs from
amounts computed at the federal statutory income tax rate as follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                  1997        1996        1995
                                                --------    --------    --------
                                                         (IN THOUSANDS)
<S>                                             <C>         <C>         <C>
Income tax expense at U.S. statutory rate ..    $ 49,000    $ 12,073    $ 37,932
State income taxes, net of federal income
   tax benefit .............................       5,655       1,984       4,505
Nondeductible amortization of reorganization
   value in excess of amounts allocable
   to identifiable assets ..................       8,322       8,842      11,188
Other, net .................................       2,054       1,984         (17)
                                                --------    --------    --------
   Total ...................................    $ 65,031    $ 24,883    $ 53,608
                                                ========    ========    ========
</TABLE>

         As of December 31, 1997, the Company has available net operating loss
carryforwards ("NOL"), business tax credit carryforwards and alternative minimum
tax credit carryforwards for Federal income tax purposes of approximately $376.8
million, $12.7 million and $3.8 million, respectively. The NOL expire during the
years 2005 through 2009 while the business credit carryforwards expire during
the years 1998 through 2006. However, such carryforwards are not fully available
to offset federal (and in certain circumstances, state) alternative minimum
taxable income. Further, as a result of a statutory "ownership change" (as
defined for purposes of Section 382 of the Internal Revenue Code) that occurred
as a result of the Company's reorganization in 1994, the Company's ability to
utilize its NOL and business tax credit carryforwards may be restricted. The
alternative minimum tax credit may be carried forward without expiration and is
available to offset future income tax payable.

         Composition of Deferred Tax Items:

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of December
31, the significant components of the Company's deferred tax assets and
liabilities are a result of the temporary differences related to the items
described as follows:


                                       41
<PAGE>   42
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


<TABLE>
<CAPTION>
                                                                            1997          1996
                                                                          ---------     ---------
                                                                              (IN THOUSANDS)
<S>                                                                       <C>           <C>
Deferred income tax liabilities
    Property and equipment, principally depreciation and "fresh start"
    differences ......................................................    $(122,164)    $(111,989)
                                                                          ---------     ---------
Deferred tax assets
    Aircraft leases ..................................................       26,663        32,789
    Net operating loss carryforwards .................................      144,396       190,548
    Tax credit carryforwards .........................................       16,585        13,861
    Other ............................................................       37,768        37,924
                                                                          ---------     ---------
       Total deferred tax assets .....................................      225,412       275,122
                                                                          ---------     ---------
     Valuation allowance .............................................      (28,548)      (88,433)
                                                                          ---------     ---------
          Net deferred tax asset .....................................    $  74,700     $  74,700
                                                                          =========     =========
</TABLE>

         SFAS No. 109, Accounting for Income Taxes, requires a "more likely than
not" criterion be applied when evaluating the realizability of a deferred tax
asset. In 1997 the Company reduced the valuation allowance by $59.9 million from
its 1996 balance principally for the portion of its NOL (a predecessor company
tax attribute) that it anticipates will, more likely than not, be utilized. The
remaining valuation allowance of $28.5 million is necessary because at this time
the Company has not determined it is more likely than not that the balance of
the deferred tax assets will be fully realized. The Company continues to monitor
the valuation allowance and will make adjustments as appropriate. If in future
tax periods, the Company were to recognize additional tax benefits related to
items attributable to the predecessor company such as net operating loss and
other carryforwards, such benefits would be applied to reduce further
reorganization value in excess of amounts allocable to identifiable assets.

8.       SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS

         Supplemental disclosure of cash flow information and non-cash investing
and financing activities were as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            1997       1996       1995
                                                           -------    -------    -------
                                                                  (IN THOUSANDS)
<S>                                                        <C>        <C>        <C>
Non-cash transactions:
   Notes payable issued for equipment purchase deposits    $10,500    $26,112    $ 5,723
Cash transactions:
   Interest paid, net of amounts capitalized ..........     30,830     37,555     50,293
   Income taxes paid ..................................        205        498        795
</TABLE>

9.       INVESTMENTS IN DEBT SECURITIES

         Cash equivalents and short-term investments as of December 31 are
classified as follows:


                                       42
<PAGE>   43
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


<TABLE>
<CAPTION>
                                                                                    1997        1996
                                                                                  --------    --------
                                                                                     (IN THOUSANDS)
<S>                                                                               <C>         <C>
Debt securities issued by the U.S. Treasury and other U.S. government agencies    $ 39,214    $ 36,973
Corporate notes ..............................................................     132,275      90,418
Bankers acceptances ..........................................................          --      49,141
Other debt securities ........................................................         149          98
                                                                                  --------    --------
                                                                                   171,638     176,630
Cash .........................................................................         665          --
                                                                                  --------    --------
           Total cash, cash equivalents and short-term investments ...........    $172,303    $176,630
                                                                                  ========    ========
</TABLE>

10.      EXTRAORDINARY GAINS AND LOSSES

         In June 1996, the Company had an extraordinary loss of $1.1 million net
of an income tax benefit of $918,000 for the write-off of debt issuance costs
relating to the prepayment of $25 million of its 10 3/4% Senior Unsecured Notes.
In August 1995, the Company had an extraordinary loss of $984,000, net of a tax
benefit of $984,000 for the write-off of debt issuance costs relating to the
prepayment of $48 million of its $123 million 11 1/4% Senior Unsecured Notes and
the exchange of the remaining $75 million of such notes for $75 million of 10
3/4% Senior Unsecured Notes.

11.      EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                    ---------------------------------------------
                                                        1997            1996             1995
                                                    ------------    ------------     ------------
                                                   (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S>                                                 <C>             <C>              <C>
BASIC EARNINGS PER SHARE

Income before extraordinary items ..............    $     74,970    $      9,610     $     54,770
Extraordinary items, net .......................              --          (1,105)            (984)
                                                    ------------    ------------     ------------
Income applicable to common stock ..............    $     74,970    $      8,505     $     53,786
                                                    ============    ============     ============

Weighted average common shares outstanding .....      44,528,575      44,931,953       45,158,433

Basic earnings per share:
  Income before extraordinary items ............    $       1.68    $        .21     $       1.21
  Extraordinary items ..........................              --            (.02)            (.02)
                                                    ------------    ------------     ------------
  Net income ...................................    $       1.68    $        .19     $       1.19
                                                    ============    ============     ============

DILUTED EARNINGS PER SHARE

Income before extraordinary items ..............    $     74,970    $      9,610     $     54,770
Extraordinary items, net .......................              --          (1,105)            (984)
                                                    ------------    ------------     ------------
Income applicable to common stock ..............    $     74,970    $      8,505     $     53,786
                                                    ============    ============     ============

Share computation:
  Weighted average common shares outstanding ...      44,528,575      44,931,953       45,158,433
  Assumed exercise of stock options and warrants       1,542,375       2,800,982        1,168,742
                                                    ------------    ------------     ------------
  Weighted average common shares
        outstanding as adjusted ................      46,070,950      47,732,935       46,327,175
                                                    ============    ============     ============
</TABLE>


                                       43
<PAGE>   44
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                    ---------------------------------------------
                                                        1997            1996             1995
                                                    ------------    ------------     ------------
<S>                                                 <C>             <C>              <C>
Diluted earnings per share:
  Income before extraordinary items ............    $       1.63    $        .20     $       1.18
  Extraordinary items ..........................              --            (.02)            (.02)
                                                    ------------    ------------     ------------
  Net income ...................................    $       1.63    $        .18     $       1.16
                                                    ============    ============     ============
</TABLE>

     For the years ended December 31, 1997, 1996 and 1995, options of 1,089,016,
597,080 and 326,010, respectively, are not included in the computation of
diluted EPS because the option exercise prices were greater than the average
market price of common stock. (See Note 16, "Subsequent Events.")

12.      COMMITMENTS AND CONTINGENCIES

         (a)  Leases

         As of December 31, 1997, the Company had 83 aircraft under operating
leases with remaining terms ranging from one week to approximately 20 years. The
Company has options to purchase certain of the aircraft at fair market values at
the end of the lease terms. Certain of the agreements require security deposits,
minimum return provisions and maintenance reserve payments and provide the
aircraft lessors with the option during the lease term to reset their respective
rentals to the greater of the existing rentals being paid under the leases or
the then current fair market rates. The Company also leases certain terminal
space, ground facilities and computer and other equipment under noncancelable
operating leases.

         At December 31, 1997, the scheduled future minimum cash rental payments
under noncancelable operating leases with initial terms of more than one year
are as follows:

<TABLE>
<CAPTION>
                                              (IN THOUSANDS)
<S>                                           <C>
1998.................................           $   255,650
1999.................................               246,509
2000.................................               228,911
2001.................................               198,489
2002.................................               169,661
Thereafter...........................               834,413
                                                -----------
                                                $ 1,933,633
                                                ===========
</TABLE>

         Rent expense (excluding landing fees) was approximately $308 million,
$281 million and $251 million for the years ended December 31, 1997, 1996 and
1995, respectively.

         Collectively, the operating lease agreements require security deposits
with lessors of $12.1 million and bank letters of credit of $17.2 million. The
letters of credit are collateralized by $17.2 million of restricted cash as of
December 31, 1997.

     (b)  Revenue Bonds

         Special facility revenue bonds issued by a municipality have been used
to fund the acquisition of leasehold improvements at the Phoenix Sky Harbor
International Airport in space which has been leased by the Company. Under the
operating lease agreements with the airport, the Company is required to make
rental payments sufficient to pay principal and interest when due on the bonds.
Payment of principal and interest at


                                       44
<PAGE>   45
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


8.3% on the Series 1994A Bonds ends on January 1, 2006 and payment of principal
and interest at 8.2% on the Series 1994B Bonds ends on January 1, 1999. At
December 31, 1997, the aggregate outstanding balance of Series 1994 Bonds was
$13.6 million.

     (c)  Aircraft Acquisitions

         At December 31, 1997, AWA had firm commitments to AVSA for a total of
22 Airbus A319-100 and 12 Airbus A320-200 aircraft with delivery beginning in
1998 to 2001 at a net cost of approximately $1.2 billion based on a 3.5% annual
price escalation. An additional 12 A320s are scheduled for delivery in 2000 to
2002 and are subject to reconfirmation no later than 21 months prior to
delivery. The agreements with AVSA provide, subject to certain conditions,
aircraft and "backstop" financing assistance. The agreement also includes
options to purchase an additional 40 A320 family aircraft during 2001 through
2005, certain rights to convert firmly ordered A319s to A320s or larger A321
aircraft.

         The Company has an agreement with International Aero Engines ("IAE")
which provides for the purchase by the Company of six new V2500-A5 spare engines
scheduled for delivery beginning in 1998 through 2000 for use on certain of the
A320 fleet. Such engines have an estimated aggregate cost of $42 million. One
engine was delivered in February 1998.

         The following table reflects estimated cash payments under the aircraft
and engine purchase contracts. Actual payments may vary due to inflation factor
adjustments and changes in the delivery schedule of the equipment. The estimated
cash payments include progress payments that will be made in cash, as opposed to
being financed under an existing progress payment financing facility.

<TABLE>
<CAPTION>
                                                (IN THOUSANDS)
<S>                                             <C>
1998....................................          $   110,408
1999....................................              466,457
2000....................................              420,700
2001....................................              167,990
                                                  -----------
                                                  $ 1,165,555
                                                  ===========
</TABLE>

         In June 1997, America West Airlines 1997-1 Pass Through Trusts issued
$93.9 million of Pass Through Trust Certificates in connection with the
refinancing of four Airbus A320 aircraft. The combined effective interest rate
on the financing is 7.41%. The proceeds of the transaction were used to
refinance the indebtedness incurred by the owners of the aircraft leased to AWA.
Under the arrangements, the financial benefits of the transactions are shared
among AWA, the equity investors in leverage leases covering the aircraft and
U.S. subsidiaries of GPA Group plc ("GPA"), the original lessees under the
restructured leases. Benefits to AWA include a reduction in rental expense
approximating $250,000 per year through 2013. The pass through certificates are
not direct obligations of, or guaranteed by, the Company, and the corresponding
debt and interest expense are not included in the Company's consolidated
financial statements.

     (d)  Contingent Legal Obligations

        Holdings and AWA are named defendants in a number of additional lawsuits
and proceedings arising in the ordinary course of business. While the outcome of
the contingencies, lawsuits or other proceedings cannot be predicted with
certainty, management currently expects that any liability arising from such
matters, to the extent not provided for through insurance or otherwise, will not
have a material adverse effect on the financial condition and results of
operations of the Company.

                                       45
<PAGE>   46
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


13.      RELATED PARTY TRANSACTIONS

         In March 1997, AWA purchased 1.91 million of its publicly traded
warrants from TPG and certain of its affiliates for approximately $13.3 million.
In February 1996, certain stockholders of the Company who held shares of Class B
Common Stock registered under the Company's shelf registration statement sold
7.2 million of such shares pursuant to an underwritten public offering. The
selling stockholders were affiliates of TPG, Mesa Air Group ("Mesa"),
Continental and Lehman Brothers Inc., ("Lehman"). The shares offered were
purchased by the selling stockholders in connection with AWA's emergence from
bankruptcy in August 1994.

         The Company has entered into various aircraft leasing arrangements with
GPA at terms comparable to those obtained from third parties for similar
transactions. The Company currently leases four aircraft from GPA and the rental
payments for such leases amounted to $31.9 million, $62.4 million and $68
million for the years ended December 31, 1997, 1996 and 1995, respectively. As
of December 31, 1997, the Company was obligated to pay approximately $279
million under the GPA leases which expire at various dates through the year
2013. During 1996, GPA sold 900,000 shares of Class B Common Stock and the
Company repurchased 1.4 million warrants from GPA that GPA received when the
Company emerged from bankruptcy.

         As part of the Company's reorganization in 1994, both Continental and
Mesa made an investment in the Company, and the Company entered into an alliance
agreement with Continental. Pursuant to a code-sharing agreement entered into
with Mesa in December 1992, the Company has collected a per-passenger charge for
facilities, reservations and other services from Mesa for enplanements in
Phoenix on the Mesa system. Such payments by Mesa to the Company totaled $3.5
million, $3.5 million and $2.9 million for the years ended December 31, 1997,
1996 and 1995, respectively. The Company is also a party to agreements with
Continental related to code-sharing arrangements and ground handling operations.
The Company paid Continental approximately $25.2 million, $21.7 million and $14
million and also received approximately $13.4 million, $13 million and $11
million in 1997, 1996 and 1995, respectively, from Continental pursuant to these
agreements.

         Mr. John F. Fraser, a director of the Company, is chairman of the board
of Air Canada. The Company has entered into a maintenance contract with Air
Canada on terms comparable to those obtained from third parties for similar
transactions. The Company's payments in 1997 under the maintenance contract were
$5.9 million.

14.      RESTRUCTURING AND OTHER NONRECURRING SPECIAL CHARGES

         During the third quarter of 1996, the Company recorded a nonrecurring
special charge of approximately $65.1 million. Approximately $49.7 million of
the charge was associated with the Company's renegotiation of an aircraft
purchase agreement with AVSA, the re-evaluation of the Company's facilities, and
the completion of its plan for the disposition of certain aircraft inventories
and equipment. The charge included $18.8 million for cancellation penalty
payments and the write-off of capitalized interest on advance payments; a
provision for maintenance costs on certain leased aircraft currently scheduled
to be returned due to accelerated deliveries under the new AVSA agreement; $7.5
million to reduce the carrying value of certain under-utilized facilities and
$23.4 million to write-down certain aircraft related inventories and equipment
to estimated fair value. The remaining $15.4 million of the charge represented
loss contingencies based on estimated settlements of pending and threatened
litigation. The $65.1 million represented the Company's best estimate of the
expected charge.

         In December 1995, the Company recorded a $10.5 million restructuring
charge. The amount included severance costs of approximately $9.5 million for
approximately 500 employees, and $1.0 million for other costs related to the
outsourcing of the heavy aircraft maintenance work.


                                       46
<PAGE>   47
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


15.      QUARTERLY FINANCIAL DATA (UNAUDITED)

         Summarized quarterly financial data for 1997 and 1996 follows (in
thousands of dollars except per share amounts):

<TABLE>
<CAPTION>
                                   1ST          2ND          3RD          4TH
                                 QUARTER      QUARTER      QUARTER      QUARTER
                                 -------      -------      -------      -------
<S>                              <C>          <C>          <C>          <C>
1997
Operating revenues .........     462,187      477,756      462,122      472,891
Operating income ...........      33,463       50,583       36,984       40,796
Nonoperating expense, net ..      (7,526)      (7,819)      (1,343)      (5,137)
Income tax expense .........     (11,983)     (19,756)     (17,719)     (15,573)
Net income .................      13,954       23,008       17,922       20,086
Earnings per share:
  Basic ....................         .31          .52          .40          .45
  Diluted ..................         .30          .50          .40          .43

<CAPTION>
                                   1ST          2ND          3RD          4TH
                                 QUARTER      QUARTER      QUARTER      QUARTER
                                 -------      -------      -------      -------
<S>                             <C>          <C>          <C>          <C>
1996
Operating revenues .........    $413,150     $463,949     $422,518     $439,909
Operating income (loss) (a)       34,318       62,083      (53,143)      25,408
Nonoperating expense, net ..      (8,898)      (8,293)      (8,377)      (8,605)
Income tax (expense) benefit     (11,693)     (24,268)      15,813       (4,735)
Net income (loss) ..........      13,727       28,417      (45,707)      12,068
Earnings (loss) per share:
  Basic ....................         .30          .63        (1.03)         .27
  Diluted ..................         .28          .57        (1.03)         .27
</TABLE>

(a)      During the third quarter of 1996, the Company recorded a nonrecurring
         special charge of $65.1 million. (See Note 14, "Restructuring and Other
         Nonrecurring Special Charges".)

16.      SUBSEQUENT EVENTS

     (a) Stock Buyback

         In January 1998, Holdings paid $14.3 million for the repurchase of its
outstanding common stock and AWA repurchased $5.7 million of its publicly traded
warrants. The equity was acquired in a private transaction with Mesa and in a
series of open-market purchases. The private transaction involved the purchase
of all of the Company's equity held by Mesa including 100,000 shares of Class A
Common Stock, 200,727 shares of Class B Common Stock and 799,767 warrants. In
addition, the Company purchased 345,200 shares of Class B Common Stock on the
open market. The equity repurchases were made pursuant to the stock repurchase
program encompassing 2.5 million shares of Class B Common Stock and all
outstanding warrants.


                                       47
<PAGE>   48
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


     (b)  The Leisure Company ("Leisure Co")

         In January, 1998, the Company transferred net assets of $32 million
from AWA to Leisure Co, a leisure travel subsidiary which will manage the former
America West Vacations division and its sports and ad hoc charter business. In
1997, the America West Vacations division, the predecessor to Leisure Co,
generated approximately $211 million in gross package sales and handled
approximately 551,000 passengers.


                                       48
<PAGE>   49
                        AMERICA WEST HOLDINGS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


ITEM 8B. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - AMERICA WEST AIRLINES,
         INC. ("AWA")

         Balance sheets of AWA as of December 31, 1997 and 1996, and the related
statements of income, cash flows and stockholder's equity for each of the years
in the three-year period ended December 31, 1997, together with the related
notes and the report of KPMG Peat Marwick LLP, independent certified public
accountants, are set forth on the following pages.


                                       49
<PAGE>   50
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholder
America West Airlines, Inc.:

         We have audited the accompanying balance sheets of America West
Airlines, Inc. as of December 31, 1997 and 1996, and the related statements of
income, cash flows and stockholder's equity for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of America West
Airlines, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.


                                    KPMG Peat Marwick LLP


Phoenix, Arizona
February 27, 1998


                                       50
<PAGE>   51
                           AMERICA WEST AIRLINES, INC.
                                 BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996
                        (IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                           1997          1996
                                                                                        ----------    ----------
<S>                                                                                     <C>           <C>
ASSETS

Current assets:
   Cash and cash equivalents .......................................................    $  171,638    $  137,499
   Short-term investments ..........................................................            --        39,131
   Accounts receivable, less allowance for doubtful accounts of
      $3,850 in 1997 and $3,091 in 1996 ............................................        88,138       106,215
   Expendable spare parts and supplies, less allowance for obsolescence
      of $2,495 in 1997 and $1,713 in 1996 .........................................        27,135        21,423
   Prepaid expenses ................................................................        36,917        47,545
                                                                                        ----------    ----------
      Total current assets .........................................................       323,828       351,813
                                                                                        ----------    ----------
Property and equipment:
   Flight equipment ................................................................       783,384       669,654
   Other property and equipment ....................................................       143,172       107,993
   Equipment purchase deposits .....................................................        45,246        56,665
                                                                                        ----------    ----------
                                                                                           971,802       834,312
   Less accumulated depreciation and amortization ..................................       276,430       163,718
                                                                                        ----------    ----------
                                                                                           695,372       670,594
                                                                                        ----------    ----------
Other assets:
   Restricted cash .................................................................        57,158        26,433
   Reorganization value in excess of amounts allocable to identifiable assets, net .       363,268       447,044
   Deferred income taxes ...........................................................        74,700        74,700
   Other assets, net ...............................................................        33,005        27,093
                                                                                        ----------    ----------
                                                                                           528,131       575,270
                                                                                        ----------    ----------
                                                                                        $1,547,331    $1,597,677
                                                                                        ==========    ==========
LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
   Current maturities of long-term debt ............................................    $   54,000    $   46,238
   Accounts payable ................................................................       140,908       115,458
   Air traffic liability ...........................................................       173,149       214,056
   Accrued compensation and vacation benefits ......................................        37,277        30,085
   Accrued taxes ...................................................................        36,376        72,047
   Other accrued liabilities .......................................................        43,574        44,836
                                                                                        ----------    ----------
      Total current liabilities ....................................................       485,284       522,720
                                                                                        ----------    ----------
Long-term debt, less current maturities ............................................       272,760       330,148
Deferred credits and other liabilities .............................................       104,519       122,029
Commitments and contingencies
Stockholder's equity:
   Class B common stock, $.01 par value.  Authorized 1,000 shares;  issued and
      outstanding 1,000 shares .....................................................            --            --
   Additional paid-in capital ......................................................       539,301       552,643
   Retained earnings ...............................................................       145,467        70,137
                                                                                        ----------    ----------

          Total stockholder's equity ...............................................       684,768       622,780
                                                                                        ----------    ----------
                                                                                        $1,547,331    $1,597,677
                                                                                        ==========    ==========
</TABLE>

                 See accompanying notes to financial statements.


                                       51
<PAGE>   52
                           AMERICA WEST AIRLINES, INC.
                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 1997             1996            1995
                                                              -----------     -----------     -----------
<S>                                                           <C>             <C>             <C>
Operating revenues:
     Passenger ...........................................    $ 1,764,206     $ 1,637,762     $ 1,452,261
     Cargo ...............................................         51,699          46,519          44,425
     Other ...............................................         59,051          55,245          53,956
                                                              -----------     -----------     -----------
          Total operating revenues .......................      1,874,956       1,739,526       1,550,642
                                                              -----------     -----------     -----------
Operating expenses:
     Salaries and related costs ..........................        418,212         385,840         382,032
     Aircraft rents ......................................        223,423         202,237         173,571
     Other rents and landing fees ........................        119,470         111,947         108,264
     Aircraft fuel .......................................        243,423         233,522         174,195
     Agency commissions ..................................        151,293         133,015         124,146
     Aircraft maintenance materials and repairs ..........        146,618         125,768          65,925
     Depreciation and amortization .......................         48,590          52,937          49,083
     Amortization of reorganization value in excess of
        amounts allocable to identifiable assets .........         23,776          25,263          31,958
     Restructuring and other nonrecurring special charges              --          65,098          10,500
     Other ...............................................        337,578         335,233         276,236
                                                              -----------     -----------     -----------
        Total operating expenses .........................      1,712,383       1,670,860       1,395,910
                                                              -----------     -----------     -----------
Operating income .........................................        162,573          68,666         154,732
                                                              -----------     -----------     -----------
Nonoperating income (expenses):
     Interest income .....................................         17,432          12,861          15,045
     Interest expense, net ...............................        (39,110)        (46,866)        (58,598)
     Gain (loss) on disposition of property and equipment          (1,710)          1,288          (2,734)
     Other, net ..........................................          1,488          (1,456)            (67)
                                                              -----------     -----------     -----------
        Total nonoperating expenses, net .................        (21,900)        (34,173)        (46,354)
                                                              -----------     -----------     -----------
        Income before income taxes and extraordinary items        140,673          34,493         108,378
Income taxes .............................................         65,343          24,883          53,608
                                                              -----------     -----------     -----------
     Income before extraordinary items ...................         75,330           9,610          54,770
Extraordinary items, net of tax ..........................             --          (1,105)           (984)
                                                              -----------     -----------     -----------
     Net income ..........................................    $    75,330     $     8,505     $    53,786
                                                              ===========     ===========     ===========
</TABLE>

                 See accompanying notes to financial statements.


                                       52
<PAGE>   53
                           AMERICA WEST AIRLINES, INC.
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                      1997          1996          1995
                                                                    ---------     ---------     ---------
<S>                                                                 <C>           <C>           <C>
Cash flows from operating activities:
  Net income ...................................................    $  75,330     $   8,505     $  53,786
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Depreciation and amortization ..............................       48,590        52,937        49,083
    Amortization of capitalized maintenance ....................       66,143        39,679        11,934
    Amortization of reorganization value .......................       23,776        25,263        31,958
    Income taxes attributable to reorganization items and other        59,444        23,091        52,913
    Amortization of deferred credits ...........................      (10,405)      (11,563)      (10,952)
    Nonrecurring special charge ................................           --        65,098        10,500
    Extraordinary items and other ..............................        5,674         3,989         8,183
Changes in operating assets and liabilities:
  Decrease (increase) in accounts receivable, net ..............       18,077       (37,121)      (11,172)
  Increase in expendable spare parts and supplies, net .........       (5,712)       (3,793)       (4,819)
  Decrease (increase) in prepaid expenses ......................       10,551        (2,252)      (14,031)
  Increase in other assets, net ................................      (33,042)       (3,173)       (7,312)
  Increase in accounts payable .................................       25,450        26,301        10,308
  Increase (decrease) in air traffic liability .................      (40,907)       22,312        64,388
  Increase (decrease) in accrued compensation
     and vacation benefits .....................................        7,192       (11,531)       15,340
  Increase (decrease) in accrued taxes .........................      (35,671)       37,688         7,298
  Increase (decrease) in other accrued liabilities .............       (1,262)        8,315          (663)
  Decrease in other liabilities ................................       (8,871)      (13,411)       (6,314)
                                                                    ---------     ---------     ---------
      Net cash provided by operating activities ................      204,357       230,334       260,428
                                                                    ---------     ---------     ---------
Cash flows from investing activities:
  Purchases of property and equipment ..........................     (154,969)     (155,742)     (107,387)
  Sale (purchase) of short-term investments ....................       39,131       (39,131)           --
  Other ........................................................      (14,017)       (4,082)           (9)
                                                                    ---------     ---------     ---------
      Net cash used in investing activities ....................     (129,855)     (198,955)     (107,396)
                                                                    ---------     ---------     ---------
Cash flows from financing activities
  Proceeds from issuance of debt ...............................       30,000            --        29,300
  Repayment of debt ............................................      (55,411)      (79,216)     (137,421)
  Acquisition of warrants ......................................      (13,342)      (18,141)           --
  Acquisition of treasury stock ................................           --       (23,964)       (1,540)
  Other ........................................................       (1,610)        3,074        (1,585)
                                                                    ---------     ---------     ---------
    Net cash used in financing activities ......................      (40,363)     (118,247)     (111,246)
                                                                    ---------     ---------     ---------
    Net increase (decrease) in cash and cash equivalents .......       34,139       (86,868)       41,786
                                                                    ---------     ---------     ---------
Cash and cash equivalents at beginning of year .................      137,499       224,367       182,581
                                                                    ---------     ---------     ---------
Cash and cash equivalents at end of year .......................    $ 171,638     $ 137,499     $ 224,367
                                                                    =========     =========     =========
Cash, cash equivalents and short-term investments at end of year    $ 171,638     $ 176,630     $ 224,367
                                                                    =========     =========     =========
</TABLE>

                 See accompanying notes to financial statements.


                                       53
<PAGE>   54
                           AMERICA WEST AIRLINES, INC.
                       STATEMENTS OF STOCKHOLDER'S EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                        (IN THOUSANDS EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                CLASS A       CLASS B     ADDITIONAL                   CLASS B
                                                COMMON        COMMON        PAID-IN      RETAINED     TREASURY
                                                 STOCK         STOCK        CAPITAL      EARNINGS       STOCK         TOTAL
                                               ---------     ---------     ---------     ---------    ---------     ---------
<S>                                            <C>           <C>           <C>           <C>          <C>           <C>
BALANCE AT JANUARY 1, 1995 ................    $      12     $     439     $ 587,149     $   7,846    $      --     $ 595,446
                                               ---------     ---------     ---------     ---------    ---------     ---------
Issuance of 4,057 shares and
  170,667 shares of common
   stock pursuant to the
   exercise of stock warrants
   and stock options ......................           --             2         1,543            --           --         1,545
Issuance of 30,334 shares
   of restricted stock ....................           --            --           235            --           --           235
Acquisition of 112,000 shares of
   treasury stock .........................           --            --            --            --       (1,540)       (1,540)
Net income ................................           --            --            --        53,786           --        53,786
                                               ---------     ---------     ---------     ---------    ---------     ---------
BALANCE AT DECEMBER 31, 1995 ..............           12           441       588,927        61,632       (1,540)      649,472
                                               ---------     ---------     ---------     ---------    ---------     ---------
Issuance of 12,725 shares and
   314,001 shares of common
   stock pursuant to the exercise
   of stock warrants and stock
   options ................................           --             3         3,071            --           --         3,074
Issuance of 158,000 shares of
   restricted stock .......................           --             2         2,761            --           --         2,763
Purchase of 1,270,000 shares and return
   of 21,911 shares of treasury stock .....           --            --           293            --      (24,257)      (23,964)
Issuance of 50,000 shares of treasury stock           --            --           356            --          688         1,044
Repurchase of 2,187,475
   warrants at $8.29 per warrant ..........           --            --       (18,141)           --           --       (18,141)
Net income ................................           --            --            --         8,505           --         8,505
Purchase of stock option from
   Holdings ...............................           --            --       (62,373)           --           --       (62,373)
Contribution of capital by
   Holdings ...............................           --            --        62,400            --           --        62,400
Reorganization as wholly-
  owned subsidiary of Holdings ............          (12)         (446)      (24,651)           --       25,109            --
                                               ---------     ---------     ---------     ---------    ---------     ---------
BALANCE AT DECEMBER 31, 1996 ..............    $      --     $      --     $ 552,643     $  70,137    $      --     $ 622,780
                                               ---------     ---------     ---------     ---------    ---------     ---------
Repurchase of 1,911,523
   warrants at $6.98 per warrant ..........           --            --       (13,342)           --           --       (13,342)
Net income ................................           --            --            --        75,330           --        75,330
                                               ---------     ---------     ---------     ---------    ---------     ---------
BALANCE AT DECEMBER 31, 1997 ..............    $      --     $      --     $ 539,301     $ 145,467    $      --     $ 684,768
                                               =========     =========     =========     =========    =========     =========
</TABLE>

                 See accompanying notes to financial statements.


                                       54
<PAGE>   55
                           AMERICA WEST AIRLINES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996, AND 1995

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         America West Holdings Corporation ("Holdings"), a Delaware corporation,
became the holding company for America West Airlines, Inc. ("AWA"), effective
midnight, December 31, 1996. Holdings' primary business activity is ownership of
all the capital stock of AWA, the ninth largest commercial airline carrier in
the United States serving 60 destinations in the U.S., Canada and Mexico.

      (a)  Cash, Cash Equivalents and Short-term Investments

         Cash equivalents consist of all highly liquid debt instruments
purchased with original maturities of three months or less. Short-term
investments consist of cash invested in certain debt securities with original
maturities greater than 90 days. The debt securities are classified as held to
maturity and are carried at amortized cost which approximates fair value.

     (b)  Expendable Spare Parts and Supplies

         Flight equipment expendable spare parts and supplies are valued at
average cost. An allowance for obsolescence is provided, over the estimated
useful life of the related aircraft and engines, for spare parts expected to be
on hand at the date the aircraft are retired from service.

     (c)  Property and Equipment

         Property and equipment are recorded at cost. Interest capitalized on
advance payments for aircraft acquisitions and on expenditures for aircraft
improvements are part of these costs. Interest capitalized for the years ended
December 31, 1997 and 1995 was $600,000 and $2.7 million, respectively. No
interest was capitalized for the year ended December 31, 1996. Property and
equipment is depreciated and amortized to residual values over the estimated
useful lives or the lease term, whichever is less, using the straight-line
method.

         The estimated useful lives for AWA's ground property and equipment
range from three to 12 years for owned property and equipment and up to 30 years
for the reservation and training center and technical support facilities. The
estimated useful lives of AWA's owned aircraft, jet engines, flight equipment
and rotable parts range from 11 to 22 years. Leasehold improvements relating to
flight equipment and other property on operating leases are amortized over the
life of the lease or the life of the asset, whichever is shorter.

     (d)  Restricted Cash

         Restricted cash includes cash deposits securing certain letters of
credit.

     (e)  Aircraft Maintenance and Repairs

         Routine maintenance and repairs are charged to expense as incurred. The
cost of major scheduled airframe, engine and certain component overhauls are
capitalized and amortized over the periods benefited and are included in
aircraft maintenance materials and repairs expense. Additionally, an accrual for
the estimated cost of scheduled airframe and engine overhauls required to be
performed on leased aircraft prior to their return to the lessors has been
recorded.


                                       55
<PAGE>   56
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


     (f)  Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets

         Reorganization value in excess of amounts allocable to identifiable
assets is amortized on a straight line basis over 20 years. Accumulated
amortization at December 31, 1997 and 1996 was $92.1 million and $68.4 million,
respectively. AWA assesses the recoverability of this asset based upon expected
future undiscounted cash flows and other relevant information.

     (g)  Frequent Flyer Awards

         AWA maintains a frequent travel award program known as "FlightFund"
that provides a variety of awards to program members based on accumulated
mileage. The estimated cost of providing the free travel, using the incremental
cost method as adjusted for estimated redemption rates, is recognized as a
liability and charged to operations as program members accumulate mileage.

     (h)  Deferred Credit-Operating Leases

         Rents for operating leases were adjusted to fair market value when AWA
emerged from bankruptcy in 1994. The net present value of the difference between
the stated lease rates and the fair market rates has been recorded as a deferred
credit in the accompanying balance sheets. The deferred credit will be increased
through charges to interest expense and decreased on a straight-line basis as a
reduction in rent expense over the applicable lease periods. At December 31,
1997 and 1996, the unamortized balance of the deferred credit was $85.3 million
and $95.6 million, respectively.

     (i)  Passenger Revenue

         Passenger revenue is recognized when transportation is provided. Ticket
sales for transportation which has not yet been provided are recorded as air
traffic liability. Passenger traffic commissions and related fees are expensed
when the related revenue is recognized. Passenger traffic commissions and
related fees not yet recognized are included as a prepaid expense.

     (j)  Advertising Costs

         AWA expenses the costs of advertising as incurred. Advertising expense
for the years ended December 31, 1997, 1996 and 1995 was $25.8 million, $26.6
million and $25.2 million, respectively.

     (k)  Income Taxes

         Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.

     (l)  Use of Estimates

         Management of AWA has made certain estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.


                                       56
<PAGE>   57
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


     (m)  Reclassification

         Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.

2.       LONG-TERM DEBT

         Long-term debt at December 31 consists of the following:

<TABLE>
<CAPTION>
                                                                                    1997        1996
                                                                                  --------    --------
                                                                                    (IN THOUSANDS)
<S>                                                                               <C>         <C>
SECURED
Notes payable, primarily fixed interest rates of 7.06% to 10.79%, averaging
   9.73%, installments due 1999 through 2008 .................................    $194,008    $234,494
Borrowings under lines of credit, floating interest rates of one-month
   LIBOR+ 1.625%, averaging 7.59%, installments due through 1999 (a)  ........      30,000       8,277
Industrial development revenue bonds, variable interest rate of 3.3% to 4.95%,
   averaging 4.02%, due 2016 (b) .............................................      29,300      29,300
                                                                                  --------    --------
                                                                                   253,308     272,071
                                                                                  --------    --------
UNSECURED
10 3/4% Senior Unsecured Notes, face amount of $50 million, interest
   only payments until due in 2005 (c) .......................................      48,197      48,197
Notes payable, interest rates of 6.5% to 90-day LIBOR +3%, averaging
   7.99%, installments due through 2000 ......................................      24,905      55,910
Other ........................................................................         350         208
                                                                                  --------    --------
                                                                                    73,452     104,315
                                                                                  --------    --------
Total long-term debt .........................................................     326,760     376,386
Less:  current maturities ....................................................      54,000      46,238
                                                                                  --------    --------
                                                                                  $272,760    $330,148
                                                                                  ========    ========
</TABLE>

----------
(a)      In December 1997, AWA obtained a $100 million senior secured revolving
         credit facility with a group of financial institutions that has a five
         year term comprised of a two year revolving credit arrangement, with an
         option to extend the expiration date for one additional year or convert
         outstanding borrowings into a three year term loan. Borrowings under
         this credit facility will accrue interest at either the "base rate"
         (prime rate or the rate which is 1/2 of 1% in excess of the Federal
         Funds Effective Rate) or the "adjusted eurodollar rate" (LIBOR rate
         adjusted for certain reserve requirements in respect to "Eurodollar
         liabilities") plus the applicable margin based on Moody's rating of
         AWA's senior unsecured notes. The credit agreement is secured by
         certain assets of AWA. As of December 31, 1997, AWA had drawn $29.9
         million to pledge as cash collateral for the industrial development
         revenue bonds letter of credit discussed in (b) below. This was
         subsequently repaid in February 1998.

(b)      The industrial development revenue bonds are backed by an irrevocable
         direct pay letter of credit which is secured by $29.9 million in cash.
         The interest rate on the bonds varies weekly and from January 1, 1997
         to December 31, 1997 ranged from 3.3% to 4.95%. The bondholders have
         the right to put the bonds back to AWA on a weekly basis if the bonds
         bear interest at a weekly rate or monthly if the bonds bear interest at
         a monthly rate. If the bonds are put back to AWA, the remarketing agent
         or the transfer agent will, at the direction of AWA, remarket such
         bonds. Any bonds not remarketed will be retired utilizing the $29.9
         million letter of credit facility which represents the principal amount
         plus 60 days of interest at a maximum rate of 12%. The letter of credit
         was extended in November 1997 for one year


                                       57
<PAGE>   58
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


         and is subject to mandatory redemption under certain circumstances. The
         estimated annual cost for the letter of credit is approximately
         $192,000.

(c)      The 10 3/4% Senior Unsecured Notes mature on September 1, 2005 and
         interest is payable in arrears semi-annually commencing on March 1,
         1996. The 10 3/4% Senior Unsecured Notes may be redeemed at the option
         of AWA on or after September 1, 2001 at any time in whole or from time
         to time in part, at a redemption price equal to the following
         percentage of principal redeemed, plus accrued and unpaid interest to
         the date of redemption, if redeemed during the 12-month period
         beginning:

<TABLE>
<CAPTION>
                  SEPTEMBER 1,                                  PERCENTAGE
<S>                                                             <C>
                  2000...................................        105.375%
                  2001...................................        103.583%
                  2002...................................        101.792%
                  2003 and thereafter....................        100.000%
</TABLE>

         Secured financings totaling $253.3 million are collateralized by
assets, primarily aircraft and engines, with a net book value of $315.4 million
at December 31, 1997.

         At December 31, 1997, the estimated maturities of long-term debt are as
follows:

<TABLE>
<S>                                                            <C>
                  1998...................................      $  54,000
                  1999...................................         64,832
                  2000...................................         19,898
                  2001...................................         19,805
                  2002...................................         19,632
                  Thereafter.............................        148,593
                                                               ---------
                                                                 326,760
                                                               =========
</TABLE>

         Certain of AWA's long-term debt agreements contain minimum cash balance
requirements, leverage ratios, coverage ratios, limitations on investments and
restricted payments including cash dividends, and other financial covenants with
which AWA was in compliance at December 31, 1997.

3.       CAPITAL STOCK

         Effective midnight, December 31, 1996, AWA became a wholly-owned
subsidiary of Holdings and each share of AWA Class A and Class B Common Stock
and options to purchase Class B Common Stock were exchanged for one share of
Holdings Class A or Class B Common Stock and options to purchase Class B Common
Stock. Holdings' Class B Common Stock is listed on the New York Stock Exchange.

      Warrants

         On August 25, 1994, AWA issued approximately 10.4 million warrants to
purchase Class B Common Stock with an exercise price of $12.74 per share. The
warrants are exercisable by the holders any time before August 25, 1999 and 10.4
million shares of Class B Common Stock were reserved for the exercise of these
warrants. As of December 31, 1997, approximately 4.1 million warrants have been
repurchased by AWA for approximately $31 million. As of December 31, 1997,
22,588 warrants have been exercised at $12.74 per share. As part of the holding
company formation transaction, the AWA warrants became rights to acquire shares
of Holdings Class B Common


                                       58
<PAGE>   59
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


Stock. AWA has made arrangements for the issuance of Holdings Class B Common
Stock upon the exercise of such warrants by purchasing an option from Holdings
to acquire such stock. AWA issued a $62.4 million note payable to Holdings due
December 31, 2005 with an interest rate of 11%.

         Subsequently, Holdings made a capital contribution to AWA by issuing a
note payable to AWA for $62.4 million due December 31, 2045 with an interest
rate of 10 7/8%. AWA has the right on December 31, 2005 to repay all or a
portion of the then outstanding principal balance of its note payable by
offsetting by an equal amount the then outstanding principal balance of its note
receivable and thus, these notes have been offset in the accompanying financial
statements in accordance with applicable accounting standards.

       Common Stock

         The holders of common stock are entitled to one vote for each share of
stock held by the holder. Holders of common stock have no right to cumulate
their votes in the election of directors. The holders of common stock are
entitled to receive, when and if declared by the Board of Directors, out of the
assets of AWA which are by law available, dividends payable either in cash, in
stock or otherwise.

4.       EMPLOYEE BENEFIT PLAN

         AWA has a 401(k) defined contribution plan, covering essentially all
employees of AWA. Participants may contribute from 1 to 15% of their pretax
earnings to a maximum of $9,500 in 1997. The Company's matching contribution is
determined annually by the Board of Directors. AWA's contribution expense to the
plan totaled $6.1 million, $5.9 million and $5.9 million in 1997, 1996 and 1995,
respectively.

5.       FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

(a)      Fair Value of Financial Instruments

     Cash Equivalents, Short-term Investments and Receivables

         The carrying amount approximates fair value because of the short-term
nature of these instruments.

     Long-term Debt

         At December 31, 1997 and 1996, the fair value of long-term debt was
approximately $330 million and $379 million, respectively, based on quoted
market prices for the same or similar debt including debt of comparable
remaining maturities.

(b)      Fuel Price Risk Management

         Under its fuel hedging program, AWA may enter into certain protective
cap and fixed price swap transactions with approved counterparties for a period
generally not exceeding twelve months. Gains and losses on such transactions are
recorded as adjustments to fuel expense when the underlying fuel being hedged is
used. As of December 31, 1997, AWA had entered into cap and swap transactions
hedging approximately 14% of its projected 1998 fuel requirements. As of
February 26, 1998, approximately 38% of AWA's 1998 fuel requirements are hedged.

         AWA is exposed to credit risks in the event any counterparty fails to
meet its obligations. AWA does not anticipate such non-performance as
counterparties are selected based on credit ratings, exposure to any one
counterparty is limited based on formal guidelines and the relative market
positions with such counterparties are


                                       59
<PAGE>   60
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


closely monitored.

(c)      Concentration of Credit Risk

         AWA does not believe it is subject to any significant concentration of
credit risk. Most of AWA's receivables result from tickets sold to individual
passengers through the use of major credit cards or to tickets sold by other
airlines and used by passengers on AWA. These receivables are short-term,
generally being settled shortly after the sale.

6.       INCOME TAXES

         AWA recorded income tax expense (exclusive of extraordinary items) as
follows:

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                1997         1996         1995
                                               -------      -------      -------
                                                        (IN THOUSANDS)
<S>                                            <C>          <C>          <C>
Current Taxes:
   Federal ..............................      $ 2,622      $   943      $   505
   State ................................        3,277          849          190
                                               -------      -------      -------
         Total current taxes ............        5,899        1,792          695
                                               -------      -------      -------
Deferred taxes ..........................           --           --           --
                                               -------      -------      -------
Income taxes attributable to
   reorganization items and other .......       59,444       23,091       52,913
                                               -------      -------      -------
Total income tax expense ................      $65,343      $24,883      $53,608
                                               =======      =======      =======
</TABLE>

         AWA's emergence from bankruptcy reorganization in 1994 and the
associated implementation of fresh start reporting gave rise to significant
items of expense for financial reporting purposes that are not deductible for
income tax purposes. In large measure, it is these nondeductible (for income tax
purposes) expenses that result in an effective tax rate (for financial reporting
purposes) significantly greater than the current U.S. corporate statutory rate
of 35%. Nevertheless, AWA's actual cash income tax liability (i.e., income taxes
payable) is considerably lower than income tax expense shown for financial
reporting purposes. This difference in financial expense compared to actual
income tax liability is in part attributable to the utilization of certain tax
attributes of the predecessor company that serve to reduce AWA's actual income
tax liability. The excess of financial expense over AWA's actual income tax
liability ($59.4 million for 1997) is applied to reduce the balance of AWA's
reorganization value in excess of amounts allocable to identifiable assets.

         For the years ended December 31, 1996 and 1995, AWA recognized income
tax benefits of $918,000 and $984,000, respectively, arising from extraordinary
charges.

         Income tax expense, exclusive of extraordinary items, differs from
amounts computed at the federal statutory income tax rate as follows:


                                       60
<PAGE>   61
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                 1997        1996        1995
                                               --------    --------    --------
                                                        (IN THOUSANDS)
<S>                                            <C>         <C>         <C>
Income tax expense at U.S. statutory rate .    $ 49,000    $ 12,073    $ 37,932
State income taxes, net of federal income
   tax benefit ............................       5,967       1,984       4,505
Nondeductible amortization of
reorganization value in excess of amounts
   allocable to identifiable assets........       8,322       8,842      11,188
Other, net ................................       2,054       1,984         (17)
                                               --------    --------    --------
   Total ..................................    $ 65,343    $ 24,883    $ 53,608
                                               ========    ========    ========
</TABLE>

         As of December 31, 1997, AWA has available net operating loss
carryforwards ("NOL"), business tax credit carryforwards and alternative minimum
tax credit carryforwards for Federal income tax purposes of approximately $376.8
million, $12.7 million and $3.8 million, respectively. The NOL expire during the
years 2005 through 2009 while the business credit carryforwards expire during
the years 1998 through 2006. However, such carryforwards are not fully available
to offset federal (and in certain circumstances, state) alternative minimum
taxable income. Further, as a result of a statutory "ownership change" (as
defined for purposes of Section 382 of the Internal Revenue Code) that occurred
as a result of AWA's reorganization in 1994, AWA's ability to utilize its NOL
and business tax credit carryforwards may be restricted. The alternative minimum
tax credit may be carried forward without expiration and is available to offset
future income tax payable.

     Composition of Deferred Tax Items:

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of December
31, the significant components of AWA's deferred tax assets and liabilities are
a result of the temporary differences related to the items described as follows:

<TABLE>
<CAPTION>
                                                                            1997          1996
                                                                          ---------     ---------
                                                                               (IN THOUSANDS)
<S>                                                                       <C>           <C>
Deferred income tax liabilities
    Property and equipment, principally depreciation and "fresh start"
    differences ......................................................    $(122,164)    $(111,989)
                                                                          ---------     ---------
Deferred tax assets
    Aircraft leases ..................................................       26,663        32,789
    Net operating loss carryforwards .................................      144,396       190,548
    Tax credit carryforwards .........................................       16,585        13,861
    Other ............................................................       37,768        37,924
                                                                          ---------     ---------
       Total deferred tax assets .....................................      225,412       275,122
                                                                          ---------     ---------
     Valuation allowance .............................................      (28,548)      (88,433)
                                                                          ---------     ---------
          Net deferred tax asset .....................................    $  74,700     $  74,700
                                                                          =========     =========
</TABLE>

         Statement of Financial Accounting Standards ("SFAS"), No. 109,
Accounting for Income Taxes requires a "more likely than not" criterion be
applied when evaluating the realizability of a deferred tax asset. In 1997 AWA
reduced the valuation allowance by $59.9 million from its 1996 balance
principally for the portion of its NOL (a predecessor company tax attribute)
that it anticipates will, more likely than not, be utilized. The remaining
valuation allowance of $28.5 million is necessary because at this time AWA has
not determined it is


                                       61
<PAGE>   62
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


more likely than not that the balance of the deferred tax assets will be fully
realized. AWA continues to monitor the valuation allowance and will make
adjustments as appropriate. If in future tax periods, AWA were to recognize
additional tax benefits related to items attributable to the predecessor company
such as net operating loss and other carryforwards, such benefits would be
applied to reduce further reorganization value in excess of amounts allocable to
identifiable assets.

7.       SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS

         Supplemental disclosure of cash flow information and non-cash investing
and financing activities were as follows:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            1997        1996      1995
                                                           -------    -------    -------
                                                                  (IN THOUSANDS)
<S>                                                        <C>        <C>        <C>
Non-cash transactions:
   Notes payable issued for equipment purchase deposits    $10,500    $26,112    $ 5,723

Cash transactions:
   Interest paid, net of amounts capitalized ..........     30,830     37,555     50,293
   Income taxes paid ..................................        205        498        795
</TABLE>

8.       INVESTMENTS IN DEBT SECURITIES

         Cash equivalents and short-term investments as of December 31 are
classified as follows:

<TABLE>
<CAPTION>
                                                                                    1997        1996
                                                                                  --------    --------
                                                                                     (IN THOUSANDS)
<S>                                                                               <C>         <C>
Debt securities issued by the U.S. Treasury and other U.S. government agencies    $ 39,214    $ 36,973
Corporate notes ..............................................................     132,275      90,418
Bankers acceptances ..........................................................          --      49,141
Other debt securities ........................................................         149          98
                                                                                  --------    --------
           Total cash equivalents and short-term investments .................    $171,638    $176,630
                                                                                  ========    ========
</TABLE>

9.       EXTRAORDINARY GAINS AND LOSSES

         In June 1996, AWA had an extraordinary loss of $1.1 million net of an
income tax benefit of $918,000 for the write-off of debt issuance costs relating
to the prepayment of $25 million of its 10 3/4% Senior Unsecured Notes. In
August 1995, AWA had an extraordinary loss of $984,000, net of a tax benefit of
$984,000 for the write-off of debt issuance costs relating to the prepayment of
$48 million of its $123 million 11 1/4% Senior Unsecured Notes and the exchange
of the remaining $75 million of such notes for $75 million of 10 3/4% Senior
Unsecured Notes.

10.      COMMITMENTS AND CONTINGENCIES

     (a)  Leases

         As of December 31, 1997, AWA had 83 aircraft under operating leases
with remaining terms ranging from one week to approximately 20 years. AWA has
options to purchase certain of the aircraft at fair market


                                       62
<PAGE>   63
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


values at the end of the lease terms. Certain of the agreements require security
deposits, minimum return provisions and maintenance reserve payments and provide
the aircraft lessors with the option during the lease term to reset their
respective rentals to the greater of the existing rentals being paid under the
leases or the then current fair market rates. AWA also leases certain terminal
space, ground facilities and computer and other equipment under noncancelable
operating leases.

         At December 31, 1997, the scheduled future minimum cash rental payments
under noncancelable operating leases with initial terms of more than one year
are as follows:

<TABLE>
<CAPTION>
                                              (IN THOUSANDS)
<S>                                           <C>
1998...................................         $   255,650
1999...................................             246,509
2000...................................             228,911
2001...................................             198,489
2002...................................             169,661
Thereafter.............................             834,413
                                                -----------
                                                $ 1,933,633
                                                ===========
</TABLE>

         Rent expense (excluding landing fees) was approximately $308 million,
$281 million and $251 million for the years ended December 31, 1997, 1996 and
1995, respectively.

         Collectively, the operating lease agreements require security deposits
with lessors of $12.1 million and bank letters of credit of $17.2 million. The
letters of credit are collateralized by $17.2 million of restricted cash as of
December 31, 1997.

     (b)  Revenue Bonds

         Special facility revenue bonds issued by a municipality have been used
to fund the acquisition of leasehold improvements at the Phoenix Sky Harbor
International Airport in space which has been leased by AWA. Under the operating
lease agreements with the airport, AWA is required to make rental payments
sufficient to pay principal and interest when due on the bonds. Payment of
principal and interest at 8.3% on the Series 1994A Bonds ends on January 1, 2006
and payment of principal and interest at 8.2% on the Series 1994B Bonds ends on
January 1, 1999. At December 31, 1997, the aggregate outstanding balance of
Series 1994 Bonds was $13.6 million.

     (c)  Aircraft Acquisitions

         At December 31, 1997, AWA had firm commitments to AVSA for a total of
22 Airbus A319-100 and 12 Airbus A320-200 aircraft with delivery beginning in
1998 to 2001 at a net cost of approximately $1.2 billion based on a 3.5% annual
price escalation. An additional 12 A320s are scheduled for delivery in 2000 to
2002 and are subject to reconfirmation no later than 21 months prior to
delivery. The agreements with AVSA provide, subject to certain conditions,
aircraft and "backstop" financing assistance. The agreement also includes
options to purchase an additional 40 A320 family aircraft during 2001 through
2005, certain rights to convert firmly ordered A319s to A320s or larger A321
aircraft.

         AWA has an agreement with International Aero Engines ("IAE") which
provides for the purchase by AWA of six new V2500-A5 spare engines scheduled for
delivery beginning in 1998 through 2000 for use on


                                       63
<PAGE>   64
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


certain of the A320 fleet. Such engines have an estimated aggregate cost of $42
million. One engine was delivered in February 1998.

         The following table reflects estimated cash payments under the aircraft
and engine purchase contracts. Actual payments may vary due to inflation factor
adjustments and changes in the delivery schedule of the equipment. The estimated
cash payments include progress payments that will be made in cash, as opposed to
being financed under an existing progress payment financing facility.

<TABLE>
<CAPTION>
                                               (IN THOUSANDS)
<S>                                            <C>
1998....................................         $   110,408
1999....................................             466,457
2000....................................             420,700
2001....................................             167,990
                                                 -----------
                                                 $ 1,165,555
                                                 ===========
</TABLE>

         In June 1997, America West Airlines 1997-1 Pass Through Trusts issued
$93.9 million of Pass Through Trust Certificates in connection with the
refinancing of four Airbus A320 aircraft. The combined effective interest rate
on the financing is 7.41%. The proceeds of the transaction were used to
refinance the indebtedness incurred by the owners of the aircraft leased to AWA.
Under the arrangements, the financial benefits of the transactions are shared
among AWA, the equity investors in leverage leases covering the aircraft and
U.S. subsidiaries of GPA Group plc ("GPA"), the original lessees under the
restructured leases. Benefits to AWA include a reduction in rental expense
approximating $250,000 per year through 2013. The pass through certificates are
not direct obligations of, or guaranteed by, AWA, and the corresponding debt and
interest expense are not included in AWA's financial statements.

     (d)  Contingent Legal Obligations

         Holdings and AWA are named defendants in a number of additional
lawsuits and proceedings arising in the ordinary course of business. While the
outcome of the contingencies, lawsuits or other proceedings cannot be predicted
with certainty, management currently expects that any liability arising from
such matters, to the extent not provided for through insurance or otherwise,
will not have a material adverse effect on the financial condition and results
of operations of AWA.

11.      RELATED PARTY TRANSACTIONS

         In March 1997, AWA purchased 1.91 million of its publicly traded
warrants from TPG Partners, L.P. and certain of its affiliates for approximately
$13.3 million. In February 1996, certain stockholders of AWA who held shares of
Class B Common Stock registered under AWA's shelf registration statement sold
7.2 million of such shares pursuant to an underwritten public offering. The
selling stockholders were affiliates of TPG Partners, L.P. ("TPG"), Mesa Air
Group ("Mesa"), Continental Airlines, Inc. ("Continental") and Lehman Brothers,
Inc. ("Lehman"). The shares offered were purchased by the selling stockholders
in connection with AWA's emergence from bankruptcy in August 1994.

         AWA has entered into various aircraft leasing arrangements with GPA at
terms comparable to those obtained from third parties for similar transactions.
AWA currently leases four aircraft from GPA and the rental


                                       64
<PAGE>   65
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


payments for such leases amounted to $31.9 million, $62.4 million and $68
million for the years ended December 31, 1997, 1996 and 1995, respectively. As
of December 31, 1997, AWA was obligated to pay approximately $279 million under
the GPA leases which expire at various dates through the year 2013. During 1996,
GPA sold 900,000 shares of Class B Common Stock and AWA repurchased 1.4 million
warrants from GPA that GPA received when AWA emerged from bankruptcy.

         As part of AWA's reorganization in 1994, both Continental and Mesa made
an investment in AWA, and AWA entered into an alliance agreement with
Continental. Pursuant to a code-sharing agreement entered into with Mesa in
December 1992, AWA has collected a per-passenger charge for facilities,
reservations and other services from Mesa for enplanements in Phoenix on the
Mesa system. Such payments by Mesa to AWA totaled $3.5 million, $3.5 million and
$2.9 million for the years ended December 31, 1997, 1996 and 1995, respectively.
AWA is also a party to agreements with Continental related to code-sharing
arrangements and ground handling operations. AWA paid Continental approximately
$25.2 million, $21.7 million and $14 million and also received approximately
$13.4 million, $13 million and $11 million in 1997, 1996 and 1995, respectively,
from Continental pursuant to these agreements.

         Mr. John F. Fraser, a director of AWA, is chairman of the board of Air
Canada. AWA has entered into a maintenance contract with Air Canada on terms
comparable to those obtained from third parties for similar transactions. AWA's
payments in 1997 under the maintenance contract were $5.9 million.

12.      RESTRUCTURING AND OTHER NONRECURRING SPECIAL CHARGES

         During the third quarter of 1996, AWA recorded a nonrecurring special
charge of approximately $65.1 million. Approximately $49.7 million of the charge
was associated with AWA's renegotiation of an aircraft purchase agreement with
AVSA, the re-evaluation of AWA's facilities, and the completion of its plan for
the disposition of certain aircraft inventories and equipment. The charge
included $18.8 million for cancellation penalty payments and the write-off of
capitalized interest on advance payments; a provision for maintenance costs on
certain leased aircraft currently scheduled to be returned due to accelerated
deliveries under the new AVSA agreement; $7.5 million to reduce the carrying
value of certain under-utilized facilities and $23.4 million to write-down
certain aircraft related inventories and equipment to estimated fair value. The
remaining $15.4 million of the charge represented loss contingencies based on
estimated settlements of pending and threatened litigation. The $65.1 million
represented AWA's best estimate of the expected charge.

         In December 1995, AWA recorded a $10.5 million restructuring charge.
The amount included severance costs of approximately $9.5 million for
approximately 500 employees, and $1.0 million for other costs related to the
outsourcing of the heavy aircraft maintenance work.

13.      QUARTERLY FINANCIAL DATA (UNAUDITED)

         Summarized quarterly financial data for 1997 and 1996 follows (in
thousands of dollars):

<TABLE>
<CAPTION>
                                1ST           2ND           3RD           4TH
                              QUARTER       QUARTER       QUARTER       QUARTER
                             ---------     ---------     ---------     ---------
<S>                          <C>           <C>           <C>           <C>
1997
----
Operating revenues ......    $ 462,187     $ 477,756     $ 462,122     $ 472,891
Operating income ........       33,463        50,583        36,984        41,543
Nonoperating expense, net       (7,545)       (7,837)       (1,362)       (5,156)
Income tax expense ......      (11,974)      (19,749)      (17,708)      (15,912)
Net income ..............       13,944        22,997        17,914        20,475
</TABLE>


                                       65
<PAGE>   66
                           AMERICA WEST AIRLINES, INC.
                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


<TABLE>
<CAPTION>
                                1ST           2ND           3RD           4TH
                              QUARTER       QUARTER       QUARTER       QUARTER
                             ---------     ---------     ---------     ---------
<S>                          <C>           <C>           <C>           <C>
1996
----
Operating revenues ......    $ 413,150     $ 463,949     $ 422,518     $ 439,909
Operating income (loss) (a)     34,318        62,083       (53,143)       25,408
Nonoperating expense, net       (8,898)       (8,293)       (8,377)       (8,605)
Income tax (expense) benefit   (11,693)      (24,268)       15,813        (4,735)
Net income (loss) .......       13,727        28,417       (45,707)       12,068
</TABLE>

(a)      During the third quarter of 1996, AWA recorded a nonrecurring special
         charge of $65.1 million. (See Note 12, "Restructuring and Other
         Nonrecurring Special Charges".)

14.      SUBSEQUENT EVENTS

         (a) Warrant Buyback

         In January 1998, AWA repurchased 799,767 of its publicly traded
warrants for $5.7 million in a private transaction with Mesa.


                                       66
<PAGE>   67
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information respecting continuing directors and nominees of Holdings is
set forth under the caption "Election of Directors" in Holdings' Proxy Statement
relating to its 1998 Annual Meeting of Stockholders and is incorporated by
reference into this Form 10-K Report. The Proxy Statement will be filed with the
Securities and Exchange Commission in accordance with Rule 14a-6(c) promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). With
the exception of the foregoing information and other information specifically
incorporated by reference into this Form 10-K Report, the Proxy Statement is not
being filed as a part hereof. Information respecting executive officers of
Holdings is set forth at Part I of this Report.

         Information respecting compliance with Section 16(a) of the Exchange
Act is set forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated by references into this
Form 10-K Report.

ITEM 11. EXECUTIVE COMPENSATION

         Information concerning executive compensation required by Item 11 is
set forth under the captions "Executive Compensation", "Stock Option Grants and
Exercises", "Employment Agreements" and "Compensation Committee Interlocks" in
the Proxy Statement and is incorporated by reference into this Form 10-K Report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information concerning security ownership of certain beneficial owners
and management required by Item 12 is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
and is incorporated by reference into this Form 10-K Report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information concerning certain relationships and related transactions
required by Item 13 is set forth under the captions "Employment Agreements" and
"Certain Transactions" in the Proxy Statement and is incorporated by reference
into this Form 10-K Report.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)  Financial Statements.

         The following financial statements and the Independent Auditors'
Reports are filed in Part II, Item 8A and 8B of this report on the pages
indicated:

              America West Holdings Corporation

                  Independent Auditors' Report -- page 28.

                  Consolidated Balance Sheets  --  December 31, 1997 and 1996
                  --  page 29.


                                       67
<PAGE>   68
                  Consolidated Statements of Income-Years ended December 31,
                  1997, 1996 and 1995  -- page 30.

                  Consolidated Statements of Cash Flows-Years ended December 31,
                  1997, 1996 and 1995  --  page 31.

                  Consolidated Statements of Stockholders' Equity-Years ended
                  December 31, 1997, 1996 and 1995  -- page 32.

                  Notes to Consolidated Financial Statements -- page 33.

              America West Airlines, Inc.

                  Independent Auditors' Report -- page 50.

                  Balance Sheets  --  December 31, 1997 and 1996  --  page 51.

                  Statements of Income  -- Years ended December 31, 1997, 1996
                  and 1995  --  page 52.

                  Statements of Cash Flows -- Years ended December 31, 1997,
                  1996 and 1995  -- page 53.

                  Statements of Stockholder's Equity  -- Years ended December
                  31, 1997, 1996 and 1995  -- page 54.

                  Notes to Financial Statements -- page 55.

         (b)  Reports on Form 8-K

                  Current Report on Form 8-K dated October 31, 1997 announcing
         the approval of a tentative collective bargaining agreement between AWA
         and The Association of Flight Attendants, AFL-CIO. Current Report on
         Form 8-K dated December 17, 1997 announcing the entering into by AWA of
         a $100 million secured revolving credit facility and the vote against
         the tentative collective bargaining agreement with The Association of
         Flight Attendants, AFL-CIO by the flight attendants.

         (c)  Exhibits

    EXHIBIT
    NUMBER     TITLE
    ------     -----

        2.1 -- Plan of Reorganization of America West Airlines, Inc. ("AWA"), as
               amended under Chapter 11 of the Bankruptcy Code, as amended --
               Incorporated by reference to Exhibit 1 of AWA's Current Report on
               Form 8-K dated August 25, 1994.

        2.2 -- Agreement and Plan of Merger, dated as of December 19, 1996, by
               and among America West Holdings -- Corporation ("Holdings"), AWA
               and AWA Merger, Inc., with an effective date and time as of
               midnight on December 31, 1996 -- Incorporated by reference to
               Exhibit 2.1 to Holdings' Registration Statement on Form 8-B dated
               January 13, 1997.

        3.1 -- Restated Certificate of Incorporation of AWA (included in Exhibit
               2.2 above).

        3.2 -- Restated Bylaws of AWA -- Incorporated by reference to AWA's
               Annual Report on Form 10-K dated December 31, 1994.

        3.3 -- Section 4.18 of the Restated Bylaws of AWA (included in Exhibit
               2.2 above).


                                       68
<PAGE>   69
    EXHIBIT
    NUMBER     TITLE
    ------     -----

        3.4 -- Certificate of Incorporation of Holdings (filed with the
               Secretary of State of the State of Delaware on December 13, 1996)
               -- Incorporated by reference to Exhibit 3.1 of Holdings'
               Registration Statement on Form 8-B dated January 13, 1997.

        3.5 -- Bylaws of Holdings -- Incorporated by reference to Exhibit 3.2 to
               Holdings' Registration Statement on Form 8-B dated January 13,
               1997.

        4.1 -- Indenture for 10 3/4% Senior Unsecured Notes due 2003 --
               Incorporated by reference to AWA's Form S-4 (No. 33-61099).

        4.2 -- Form of Senior Note (included as Exhibit A to Exhibit 4.1 above).

        4.3 -- Warrant Agreement dated August 25, 1994 between AWA and First
               Interstate, N.A., as Warrant Agent -- Incorporated by reference
               to Exhibit 4.3 to AWA's Current Report on Form 8-K dated August
               25, 1994.

        4.4 -- Form of Warrant (included as Exhibit A to Exhibit 4.3 above).

        4.5 -- Supplemental Warrant Agreement dated effective as of December 31,
               1996 between AWA and Harris Trust Company of California, as
               Warrant Agent -- Incorporated by reference to Exhibit 4.3 to
               Holdings' Registration Statement on Form 8-B dated January 13,
               1997.

        4.6 -- Stockholders' Agreement for Holdings effective as of December 31,
               1996 by and among TPG Partners, L.P., TPG Parallel I, L.P., Air
               Partners II, L.P., Continental Airlines, Inc., Mesa Air Group,
               Inc., Robert A. Ewert, David T. Obergfell, William A. Franke,
               Holdings and AWA. -- Incorporated by reference to Exhibit 4.6 to
               the Company's Annual Report on Form 10-K for the year ended
               December 31, 1996.

        4.7 -- Stock Option Agreement dated effective as of December 31, 1996,
               between Holdings and AWA " Incorporated by reference to Exhibit
               4.5 to Holdings' Registration Statement on Form 8-B dated January
               13, 1997.

        4.8 -- Registration Rights Agreement dated August 25, 1994 among AWA,
               AmWest Partners, L.P. and other holders -- Incorporated by
               reference to Exhibit 4.6 to the AWA's Current Report on Form 8-K
               dated August 25, 1994.

        4.9 -- Assumption of Certain Obligations Under Registration Rights
               Agreement executed by Holdings for the benefit of TPG Partners,
               L.P., TPG Parallel I, L.P., Air Partners II, L.P., Continental
               Airlines, Inc., Mesa Airlines, Inc., Lehman Brothers, Inc.,
               Belmont Capital Partners II, L.P. and Belmont Fund, L.P. --
               Incorporated by reference to Exhibit 4.7 to Holdings'
               Registration Statement on Form 8-B dated January 13, 1997.

       4.10 -- Form of Pass Through Trust Agreement, dated as of November 26,
               1996, between AWA and Fleet National Bank, as Trustee --
               Incorporated by reference to AWA's Report on Form 8-K dated
               November 26, 1996.

       4.11 -- Put Termination Agreement, dated as of November 26, 1996 among
               GPA Group plc, GPA Leasing USA I, Inc., GPA Leasing USA Sub I,
               Inc. and AWA. -- Incorporated by reference to Exhibit 4.11 to the
               Company's Annual Report on Form 10-K for the year ended December
               31, 1996.


                                       69
<PAGE>   70
    EXHIBIT
    NUMBER     TITLE
    ------     -----

       10.1 -- Alliance Agreements dated August 25, 1994 between AWA and
               Continental Airlines, Inc. including the Master Ground Handling
               Agreement, the Reciprocal Frequent Flyer Participation Agreement,
               the Code Sharing Agreement, the Cargo Special Pro-Rate Agreement,
               the Reciprocal Club Usage Agreement and the Memorandum of
               Understanding Concerning Technology Transfers -- Incorporated by
               reference to Exhibit 10.12 to AWA's Current Report on Form 8-K
               dated August 25, 1994.

       10.2 -- Service Agreement dated September 4, 1992, as amended on March
               31, 1993, July 31, 1993 and August 25, 1994, between AWA and Mesa
               Airlines Inc. -- Incorporated by reference to Exhibit 10.12 to
               AWA's Current Report on Form 8-K dated August 25, 1994.

       10.3 -- Third Revised Investment Agreement dated April 21, 1994 between
               AWA and AmWest Partners, L.P. -- Incorporated by reference to
               Exhibit 10.A to AWA's Quarterly Report on Form 10-Q for the
               period ended March 31, 1994.

       10.4 -- Third Revised Interim Procedures Agreement dated April 21, 1994
               between AWA's and AmWest Partners, L.P. -- Incorporated by
               reference to AWA's Annual Report on Form 10-K for the year ended
               December 31, 1993.

      +10.6 -- America West Airlines Management Resignation Allowance
               Guidelines, as amended, dated November 18, 1993 -- Incorporated
               by Reference to AWA's Registration Statement on Form S-1 (No.
               33-54243), as amended.

      10.10 -- Official Statement dated August 11, 1986 for the $54,000,000
               Variable Rate Airport Facility Revenue Bonds -- Incorporated by
               reference to Exhibit 10.e to AWA's Quarterly Report on Form 10-Q
               for the period ended September 30, 1986.

      10.11 -- Airport Use Agreement dated July 1, 1989 among the City of
               Phoenix, The Industrial Development Authority of the City of
               Phoenix, Arizona and AWA -- Incorporated by reference to Exhibit
               10-D(9) to AWA's Annual Report on Form 10-K for the year ended
               December 31, 1989.

      10.12 -- First Amendment dated August 1, 1990 to Airport Use Agreement
               Incorporated by reference to -- Exhibit 10-(D) (9) to AWA's
               Quarterly Report on Form 10-Q for the period ended September 30,
               1990.

     +10.18 -- Key Employee Protection Agreement dated as of June 27, 1994
               between AWA and William A. Franke -- Incorporated by reference to
               AWA's Registration Statement on Form S-1 (No. 33-54243), as
               amended.

      10.19 -- Management Rights Agreement dated August 25, 1994 between TPG
               Partners L.P., TPG Genpar, L.P. and AWA -- Incorporated by
               reference to AWA's Registration Statement on Form S-1 (No.
               33-54243), as amended.

      10.20 -- V2500-A5 Support Contract dated December 23, 1994 between AWA
               and IAE International Aero Engines AG, as amended, together with
               Side Letters Nos. 1 and 2 -- Incorporated by reference to AWA's
               Annual Report on Form 10-K for the year ended December 31, 1994.

     +10.21 -- America West 1994 Incentive Equity Plan, as restated on
               December 19, 1996 -- Incorporated by reference to Exhibit 10.41
               to Holdings' Registration Statement on Form 8-B dated January 13,
               1997.


                                       70
<PAGE>   71
    EXHIBIT
    NUMBER     TITLE
    ------     -----

     +10.22 -- First Amendment to America West 1994 Incentive Equity Plan,
               as restated, dated January 1, 1997. -- Incorporated by reference
               to Exhibit 10.22 to the Company's Annual Report on Form 10-K for
               the year ended December 31, 1996.

     +10.23 -- Employment Agreement dated as of February 15, 1997 among
               Holdings, AWA and William A. Franke. -- Incorporated by reference
               to Exhibit 10.23 to the Company's Annual Report on Form 10-K for
               the year ended December 31, 1996.

     +10.24 -- Employment Agreement dated as of February 15, 1997 among
               Holdings, AWA and Richard R. Goodmanson. -- Incorporated by
               reference to Exhibit 10.24 to the Company's Annual Report on Form
               10-K for the year ended December 31, 1996.

      10.25 -- Airbus A320/A319 Purchase Agreement dated September 12, 1997
               between AVSA S.A.R.L and AWA including Letter Agreements Nos.
               1-10 -- Incorporated by reference to Exhibit 10-26 to Holdings'
               Quarterly Report on Form 10-Q for the quarter ended September 30,
               1997.

     *10.26 -- Revolving Credit Agreement dated as of December 12, 1997
               among AWA and The Industrial Bank of -- Japan, Limited, Los
               Angeles Agency as Agent for the Banks.

      *11.1 -- Statement regarding computation of net income per common share.

      *21.1 -- Subsidiaries of Holdings

       23.1 -- Consent of KPMG Peat Marwick LLP included on page 76 of the
               Annual Report on Form 10-K.

       24.1 -- Power of Attorney, pursuant to which amendments to this Annual
               Report on Form 10-K may be filed, is included on the signature
               pages of this Annual Report on Form 10-K.

      *27.1 -- Financial Data Schedule.

      *27.2 -- Restated Financial Data Schedule.
----------
*   Filed herewith.
+  Represents a management contract or compensatory plan or arrangement.

         (d)  Financial Statement Schedules.

              America West Holdings Corporation

                Independent Auditors' Report on Schedule and Consent -- page 76.

                Schedule II: Valuation and Qualifying Accounts -- page 77.

              America West Airlines, Inc.

                Independent Auditors' Report on Schedule -- page 78.

                Schedule II: Valuation and Qualifying Accounts -- page 79.

            All other information and schedules have been omitted as not
      applicable or because the required information is included in the
      financial statements or notes thereto.


                                       71
<PAGE>   72
                                   SIGNATURES


              Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, America West Holdings Corporation
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                    AMERICA WEST HOLDINGS CORPORATION


Date: March 31, 1998                By: /s/ William A. Franke
                                       ---------------------------------
                                       William A. Franke,
                                       Chairman of the Board and
                                       Chief Executive Officer


                                POWER OF ATTORNEY

             We, the undersigned, directors and officers of America West
Holdings Corporation, do hereby severally constitute and appoint William A.
Franke, W. Douglas Parker and Stephen L. Johnson and each or any of them, our
true and lawful attorneys and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, and to file the
same with all exhibits thereto, and all other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys and
agents, and each or any of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys and agents, and each of them, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

              Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed by the following persons on behalf
of the registrant and in the capacities indicated on March 31, 1998.

        Signature                                Title
        ---------                                -----

/s/ William A. Franke          Chairman of the Board and Chief Executive Officer
--------------------------     (Principal Executive Officer)
    William A. Franke

/s/ Richard R. Goodmanson      President and Director
--------------------------
    Richard R. Goodmanson

/s/ W. Douglas Parker          Senior Vice President and Chief Financial Officer
--------------------------     (Principal Financial and Accounting Officer)
    W. Douglas Parker

/s/ Julia Chang Bloch          Director
--------------------------
    Julia Chang Bloch

/s/ Stephen F. Bollenbach      Director
--------------------------
    Stephen F. Bollenbach


                                       72
<PAGE>   73
/s/ Frederick W. Bradley, Jr.  Director
-----------------------------
    Frederick W. Bradley, Jr.

/s/ James G. Coulter           Director
-----------------------------
    James G. Coulter

/s/ John F. Fraser             Director
-----------------------------
    John F. Fraser

/s/ John L. Goolsby            Director
-----------------------------
    John L. Goolsby

/s/ Richard C. Kraemer         Director
-----------------------------
    Richard C. Kraemer

                               Director
-----------------------------
    John R. Power, Jr.

/s/ Frank B. Ryan              Director
-----------------------------
    Frank B. Ryan

/s/ Richard P. Schifter        Director
-----------------------------
    Richard P. Schifter

/s/ John F. Tierney            Director
-----------------------------
    John F. Tierney



                                       73
<PAGE>   74
                                   SIGNATURES


              Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, America West Airlines, Inc. has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                    AMERICA WEST AIRLINES, INC.


Date: March 31, 1998                By:  /s/ William A. Franke
                                       -------------------------------
                                       William A. Franke,
                                       Chairman of the Board


                                POWER OF ATTORNEY

             We, the undersigned, directors and officers of America West
Airlines, Inc., do hereby severally constitute and appoint William A. Franke, W.
Douglas Parker and Stephen L. Johnson and each or any of them, our true and
lawful attorneys and agents, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, and to file the same with
all exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys and agents, and
each or any of them, full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys and agents, and each of them, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

              Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed by the following persons on behalf
of the registrant and in the capacities indicated on March 31, 1998.

        Signature                                Title
        ---------                                -----

/s/ William A. Franke         Chairman of the Board
-----------------------------
    William A. Franke

/s/ Richard R. Goodmanson     President and Director and Chief Executive Officer
-----------------------------
    Richard R. Goodmanson

/s/ W. Douglas Parker         Senior Vice President and Chief Financial Officer
----------------------------- (Principal Financial Officer)
    W. Douglas Parker

/s/ Michael R. Carreon        Vice President and Controller
----------------------------- (Principal Accounting Officer)
    Michael R. Carreon

/s/ Julia Chang Bloch         Director
-----------------------------
    Julia Chang Bloch


                                       74
<PAGE>   75
        Signature                                Title
        ---------                                -----

/s/ Stephen F. Bollenbach      Director
-----------------------------
    Steven F. Bollenbach

/s/ Frederick W. Bradley, Jr.  Director
-----------------------------
    Frederick W. Bradley, Jr.

/s/ James G. Coulter           Director
-----------------------------
    James G. Coulter

/s/ John F. Fraser             Director
-----------------------------
    John F. Fraser

/s/ John L. Goolsby            Director
-----------------------------
    John L. Goolsby

/s/ Richard C. Kraemer         Director
-----------------------------
    Richard C. Kraemer

                               Director
-----------------------------
    John R. Power, Jr.

/s/ Frank B. Ryan              Director
-----------------------------
    Frank B. Ryan

/s/ Richard P. Schifter        Director
-----------------------------
    Richard P. Schifter

/s/ John F. Tierney            Director
-----------------------------
    John F. Tierney


                                       75
<PAGE>   76
              INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT


The Board of Directors and Stockholders
America West Holdings Corporation:

             The audits referred to in our report dated February 27, 1998,
included the related consolidated financial statement schedule as listed in Item
14(d) for the years ended December 31, 1997, 1996 and 1995, included herein. The
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statement schedule based on our audits. In our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

             We consent to incorporation by reference in the Registration
Statements (Form S-8 No. 33-60555) and (Form S-3 No. 333-02129) of America West
Holdings Corporation of our report dated February 27, 1998, relating to the
consolidated balance sheets of America West Holdings Corporation and subsidiary
as of December 31, 1997 and 1996, and the related consolidated statements of
income, cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 1997 and the related consolidated financial
statement schedule, which report appears in the December 31, 1997, annual report
on Form 10-K of America West Holdings Corporation.


                                    KPMG Peat Marwick LLP

Phoenix, Arizona
March 30, 1998


                                       76
<PAGE>   77
                        AMERICA WEST HOLDINGS CORPORATION

                  SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                          BALANCE AT                            BALANCE
                                          BEGINNING                             AT END
             DESCRIPTION                  OF PERIOD   ADDITIONS   DEDUCTIONS   OF PERIOD
             -----------                  ---------   ---------   ----------   ---------
<S>                                       <C>         <C>         <C>          <C>
Allowance for doubtful receivables:
    Year ended December 31, 1997 .......    $3,091      $3,000      $2,241      $3,850
                                            ======      ======      ======      ======
    Year ended December 31, 1996 .......    $2,515      $2,950      $2,374      $3,091
                                            ======      ======      ======      ======
    Year ended December 31, 1995 .......    $3,531      $2,600      $3,616      $2,515
                                            ======      ======      ======      ======

Allowance for obsolescence:
    Year ended December 31, 1997 .......    $1,713      $1,159      $  377      $2,495
                                            ======      ======      ======      ======
    Year ended December 31, 1996 .......    $2,115      $1,523      $1,925      $1,713
                                            ======      ======      ======      ======
    Year ended December 31, 1995 .......    $  483      $1,664      $   32      $2,115
                                            ======      ======      ======      ======
</TABLE>


                                       77
<PAGE>   78
                    INDEPENDENT AUDITORS' REPORT ON SCHEDULE


The Board of Directors and Stockholder
America West Airlines, Inc.:

             The audits referred to in our report dated February 27, 1998,
included the related financial statement schedule as listed in Item 14(d) for
the years ended December 31, 1997, 1996 and 1995, included herein. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.


                                    KPMG Peat Marwick LLP


Phoenix, Arizona
March 30, 1998


                                       78
<PAGE>   79
                           AMERICA WEST AIRLINES, INC.

                  SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                          BALANCE AT                           BALANCE
                                          BEGINNING                            AT END
            DESCRIPTION                   OF PERIOD   ADDITIONS   DEDUCTIONS  OF PERIOD
            -----------                   ---------   ---------   ----------  ---------
<S>                                       <C>         <C>         <C>         <C>
Allowance for doubtful receivables:
    Year ended December 31, 1997 .......    $3,091      $3,000      $2,241      $3,850
                                            ======      ======      ======      ======
    Year ended December 31, 1996 .......    $2,515      $2,950      $2,374      $3,091
                                            ======      ======      ======      ======
    Year ended December 31, 1995 .......    $3,531      $2,600      $3,616      $2,515
                                            ======      ======      ======      ======

Allowance for obsolescence:
    Year ended December 31, 1997 .......    $1,713      $1,159      $  377      $2,495
                                            ======      ======      ======      ======
    Year ended December 31, 1996 .......    $2,115      $1,523      $1,925      $1,713
                                            ======      ======      ======      ======
    Year ended December 31, 1995 .......    $  483      $1,664      $   32      $2,115
                                            ======      ======      ======      ======
</TABLE>


                                       79
<PAGE>   80

                                  EXHIBIT INDEX

    EXHIBIT
    NUMBER     TITLE
    ------     -----

        2.1 -- Plan of Reorganization of America West Airlines, Inc. ("AWA"), as
               amended under Chapter 11 of the Bankruptcy Code, as amended --
               Incorporated by reference to Exhibit 1 of AWA's Current Report on
               Form 8-K dated August 25, 1994.

        2.2 -- Agreement and Plan of Merger, dated as of December 19, 1996, by
               and among America West Holdings -- Corporation ("Holdings"), AWA
               and AWA Merger, Inc., with an effective date and time as of
               midnight on December 31, 1996 -- Incorporated by reference to
               Exhibit 2.1 to Holdings' Registration Statement on Form 8-B dated
               January 13, 1997.

        3.1 -- Restated Certificate of Incorporation of AWA (included in Exhibit
               2.2 above).

        3.2 -- Restated Bylaws of AWA -- Incorporated by reference to AWA's
               Annual Report on Form 10-K dated December 31, 1994.

        3.3 -- Section 4.18 of the Restated Bylaws of AWA (included in Exhibit
               2.2 above).



<PAGE>   81
    EXHIBIT
    NUMBER     TITLE
    ------     -----

        3.4 -- Certificate of Incorporation of Holdings (filed with the
               Secretary of State of the State of Delaware on December 13, 1996)
               -- Incorporated by reference to Exhibit 3.1 of Holdings'
               Registration Statement on Form 8-B dated January 13, 1997.

        3.5 -- Bylaws of Holdings -- Incorporated by reference to Exhibit 3.2 to
               Holdings' Registration Statement on Form 8-B dated January 13,
               1997.

        4.1 -- Indenture for 10 3/4% Senior Unsecured Notes due 2003 --
               Incorporated by reference to AWA's Form S-4 (No. 33-61099).

        4.2 -- Form of Senior Note (included as Exhibit A to Exhibit 4.1 above).

        4.3 -- Warrant Agreement dated August 25, 1994 between AWA and First
               Interstate, N.A., as Warrant Agent -- Incorporated by reference
               to Exhibit 4.3 to AWA's Current Report on Form 8-K dated August
               25, 1994.

        4.4 -- Form of Warrant (included as Exhibit A to Exhibit 4.3 above).

        4.5 -- Supplemental Warrant Agreement dated effective as of December 31,
               1996 between AWA and Harris Trust Company of California, as
               Warrant Agent -- Incorporated by reference to Exhibit 4.3 to
               Holdings' Registration Statement on Form 8-B dated January 13,
               1997.

        4.6 -- Stockholders' Agreement for Holdings effective as of December 31,
               1996 by and among TPG Partners, L.P., TPG Parallel I, L.P., Air
               Partners II, L.P., Continental Airlines, Inc., Mesa Air Group,
               Inc., Robert A. Ewert, David T. Obergfell, William A. Franke,
               Holdings and AWA. -- Incorporated by reference to Exhibit 4.6 to
               the Company's Annual Report on Form 10-K for the year ended
               December 31, 1996.

        4.7 -- Stock Option Agreement dated effective as of December 31, 1996,
               between Holdings and AWA " Incorporated by reference to Exhibit
               4.5 to Holdings' Registration Statement on Form 8-B dated January
               13, 1997.

        4.8 -- Registration Rights Agreement dated August 25, 1994 among AWA,
               AmWest Partners, L.P. and other holders -- Incorporated by
               reference to Exhibit 4.6 to the AWA's Current Report on Form 8-K
               dated August 25, 1994.

        4.9 -- Assumption of Certain Obligations Under Registration Rights
               Agreement executed by Holdings for the benefit of TPG Partners,
               L.P., TPG Parallel I, L.P., Air Partners II, L.P., Continental
               Airlines, Inc., Mesa Airlines, Inc., Lehman Brothers, Inc.,
               Belmont Capital Partners II, L.P. and Belmont Fund, L.P. --
               Incorporated by reference to Exhibit 4.7 to Holdings'
               Registration Statement on Form 8-B dated January 13, 1997.

       4.10 -- Form of Pass Through Trust Agreement, dated as of November 26,
               1996, between AWA and Fleet National Bank, as Trustee --
               Incorporated by reference to AWA's Report on Form 8-K dated
               November 26, 1996.

       4.11 -- Put Termination Agreement, dated as of November 26, 1996 among
               GPA Group plc, GPA Leasing USA I, Inc., GPA Leasing USA Sub I,
               Inc. and AWA. -- Incorporated by reference to Exhibit 4.11 to the
               Company's Annual Report on Form 10-K for the year ended December
               31, 1996.



<PAGE>   82
    EXHIBIT
    NUMBER     TITLE
    ------     -----

       10.1 -- Alliance Agreements dated August 25, 1994 between AWA and
               Continental Airlines, Inc. including the Master Ground Handling
               Agreement, the Reciprocal Frequent Flyer Participation Agreement,
               the Code Sharing Agreement, the Cargo Special Pro-Rate Agreement,
               the Reciprocal Club Usage Agreement and the Memorandum of
               Understanding Concerning Technology Transfers -- Incorporated by
               reference to Exhibit 10.12 to AWA's Current Report on Form 8-K
               dated August 25, 1994.

       10.2 -- Service Agreement dated September 4, 1992, as amended on March
               31, 1993, July 31, 1993 and August 25, 1994, between AWA and Mesa
               Airlines Inc. -- Incorporated by reference to Exhibit 10.12 to
               AWA's Current Report on Form 8-K dated August 25, 1994.

       10.3 -- Third Revised Investment Agreement dated April 21, 1994 between
               AWA and AmWest Partners, L.P. -- Incorporated by reference to
               Exhibit 10.A to AWA's Quarterly Report on Form 10-Q for the
               period ended March 31, 1994.

       10.4 -- Third Revised Interim Procedures Agreement dated April 21, 1994
               between AWA's and AmWest Partners, L.P. -- Incorporated by
               reference to AWA's Annual Report on Form 10-K for the year ended
               December 31, 1993.

       10.6 -- America West Airlines Management Resignation Allowance
               Guidelines, as amended, dated November 18, 1993 -- Incorporated
               by Reference to AWA's Registration Statement on Form S-1 (No.
               33-54243), as amended.

      10.10 -- Official Statement dated August 11, 1986 for the $54,000,000
               Variable Rate Airport Facility Revenue Bonds -- Incorporated by
               reference to Exhibit 10.e to AWA's Quarterly Report on Form 10-Q
               for the period ended September 30, 1986.

      10.11 -- Airport Use Agreement dated July 1, 1989 among the City of
               Phoenix, The Industrial Development Authority of the City of
               Phoenix, Arizona and AWA -- Incorporated by reference to Exhibit
               10-D(9) to AWA's Annual Report on Form 10-K for the year ended
               December 31, 1989.

      10.12 -- First Amendment dated August 1, 1990 to Airport Use Agreement
               Incorporated by reference to -- Exhibit 10-(D) (9) to AWA's
               Quarterly Report on Form 10-Q for the period ended September 30,
               1990.

     +10.18 -- Key Employee Protection Agreement dated as of June 27, 1994
               between AWA and William A. Franke -- Incorporated by reference to
               AWA's Registration Statement on Form S-1 (No. 33-54243), as
               amended.

      10.19 -- Management Rights Agreement dated August 25, 1994 between TPG
               Partners L.P., TPG Genpar, L.P. and AWA -- Incorporated by
               reference to AWA's Registration Statement on Form S-1 (No.
               33-54243), as amended.

      10.20 -- V2500-A5 Support Contract dated December 23, 1994 between AWA
               and IAE International Aero Engines AG, as amended, together with
               Side Letters Nos. 1 and 2 -- Incorporated by reference to AWA's
               Annual Report on Form 10-K for the year ended December 31, 1994.

     +10.21 -- America West 1994 Incentive Equity Plan, as restated on
               December 19, 1996 -- Incorporated by reference to Exhibit 10.41
               to Holdings' Registration Statement on Form 8-B dated January 13,
               1997.



<PAGE>   83
    EXHIBIT
    NUMBER     TITLE
    ------     -----

     +10.22 -- First Amendment to America West 1994 Incentive Equity Plan,
               as restated, dated January 1, 1997. -- Incorporated by reference
               to Exhibit 10.22 to the Company's Annual Report on Form 10-K for
               the year ended December 31, 1996.

     +10.23 -- Employment Agreement dated as of February 15, 1997 among
               Holdings, AWA and William A. Franke. -- Incorporated by reference
               to Exhibit 10.23 to the Company's Annual Report on Form 10-K for
               the year ended December 31, 1996.

     +10.24 -- Employment Agreement dated as of February 15, 1997 among
               Holdings, AWA and Richard R. Goodmanson. -- Incorporated by
               reference to Exhibit 10.24 to the Company's Annual Report on Form
               10-K for the year ended December 31, 1996.

     *10.25 -- Revolving Credit Agreement dated as of December 12, 1997
               among AWA and The Industrial Bank of -- Japan, Limited, Los
               Angeles Agency as Agent for the Banks.

     *10.26 -- Airbus A320/A319 Purchase Agreement dated September 12, 1997
               between AVSA S.A.R.L and AWA including Letter Agreements Nos.
               1-10 -- Incorporated by reference to Exhibit 10-26 to Holdings'
               Quarterly Report on Form 10-Q for the quarter ended September 30,
               1997.

      *11.1 -- Statement regarding computation of net income per common share.

      *21.1 -- Subsidiaries of Holdings

       23.1 -- Consent of KPMG Peat Marwick LLP included on page 76 of the
               Annual Report on Form 10-K.


       24.1 -- Power of Attorney, pursuant to which amendments to this Annual
               Report on Form 10-K may be filed, is included on the signature
               pages of this Annual Report on Form 10-K.

      *27.1 -- Financial Data Schedule.

      *27.2 -- Restated Financial Data Schedule.

----------
*   Filed herewith.
+  Represents a management contract or compensatory plan or arrangement.