FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-6033
UAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-2675207
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 East Algonquin Road, Elk Grove Township, Illinois 60007
Mailing Address: P. O. Box 66919, Chicago, Illinois 60666
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class October 31, 1997
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Common Stock ($0.01 par value) 58,782,762
UAL Corporation and Subsidiary Companies Report on Form 10-Q
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For the Quarter Ended September 30, 1997
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Index
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PART I. FINANCIAL INFORMATION Page No.
- - ------ --------------------- -------
Item 1. Financial Statements
Condensed Statements of Consolidated 3
Financial Position - as of September 30,
1997 (Unaudited) and December 31, 1996
Statements of Consolidated Operations 5
(Unaudited) - for the three months and
nine months ended September 30, 1997 and 1996
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the nine
months ended September 30, 1997 and 1996
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis 13
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
- - ------- -----------------
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
- - ----------
Exhibit Index 24
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
September 30,
1997 December 31,
Assets (Unaudited) 1996
- - ------ ----------- ----
Current assets:
Cash and cash equivalents $ 529 $ 229
Short-term investments 594 468
Receivables, net 1,241 962
Inventories, net 349 369
Deferred income taxes 209 227
Prepaid expenses and other 302 427
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3,224 2,682
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Operating property and equipment:
Owned 13,889 12,325
Accumulated depreciation
and amortization (5,252) (5,380)
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8,637 6,945
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Capital leases 2,199 1,881
Accumulated amortization (603) (583)
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1,596 1,298
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10,233 8,243
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Other assets:
Intangibles, net 507 524
Deferred income taxes 139 132
Aircraft lease deposits 271 168
Other 1,012 928
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1,929 1,752
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$ 15,386 $ 12,677
======= =======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
September 30,
1997 December 31,
Liabilities and Stockholders' Equity (Unaudited) 1996
- - ------------------------------------ ----------- ----
Current liabilities:
Long-term debt maturing
within one year $ 303 $ 165
Current obligations under
capital leases 166 132
Advance ticket sales 1,447 1,189
Accounts payable 1,066 994
Other 3,007 2,523
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5,989 5,003
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Long-term debt 1,436 1,661
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Long-term obligations under
capital leases 1,640 1,325
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Other liabilities and deferred credits:
Deferred pension liability 165 178
Postretirement benefit liability 1,340 1,290
Deferred gains 1,101 1,151
Other 913 776
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3,519 3,395
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Company-obligated mandatorily
redeemable preferred securities
of a subsidiary trust 102 102
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Equity put warrants 61 -
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Minority interest - 31
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Preferred stock committed to
Supplemental ESOP 293 165
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Stockholders' equity:
Preferred stock - -
Common stock at par 1 1
Additional capital invested 2,799 2,160
Retained earnings (deficit) 305 (566)
Unearned ESOP preferred stock (282) (202)
Other (477) (398)
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2,346 995
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Commitments and contingent
liabilities (See note) ------- -------
$ 15,386 $ 12,677
======= =======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)
Three Months
Ended September 30
1997 1996
---- ----
Operating revenues:
Passenger $ 4,147 $ 4,003
Cargo 225 191
Other 268 294
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4,640 4,488
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Operating expenses:
Salaries and related costs 1,264 1,171
ESOP compensation expense 256 157
Aircraft fuel 510 538
Commissions 409 397
Purchased services 329 303
Aircraft rent 235 236
Landing fees and other rent 202 205
Depreciation and amortization 182 217
Aircraft maintenance 153 106
Other 537 548
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4,077 3,878
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Earnings from operations 563 610
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Other income (expense):
Interest expense (73) (71)
Interest capitalized 25 18
Interest income 13 10
Equity in earnings of affiliates 17 16
Gain on sale of partnership interest 275 -
Gain on sale of affiliate's stock 103 -
Miscellaneous, net (10) (28)
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350 (55)
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Earnings before income taxes,
distributions on preferred
securities and extraordinary item 913 555
Provision for income taxes 333 208
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Earnings before distributions on
preferred securities and
extraordinary item 580 347
Distributions on preferred
securities, net of tax (1) -
Extraordinary loss on early
extinguishment of debt, net of tax - (7)
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Net earnings $ 579 $ 340
======= =======
Earnings per share:
Earnings before extraordinary item $ 5.61 $ 3.85
Extraordinary loss on early
extinguishment of debt, net of tax - (0.08)
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Net earnings $ 5.61 $ 3.77
======= =======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)
Nine Months
Ended September 30
1997 1996
---- ----
Operating revenues:
Passenger $ 11,628 $ 10,975
Cargo 634 558
Other 881 853
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13,143 12,386
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Operating expenses:
Salaries and related costs 3,732 3,513
ESOP compensation expense 666 488
Aircraft fuel 1,559 1,504
Commissions 1,159 1,108
Purchased services 946 876
Aircraft rent 707 716
Landing fees and other rent 644 624
Depreciation and amortization 533 588
Aircraft maintenance 447 336
Other 1,582 1,563
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11,975 11,316
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Earnings from operations 1,168 1,070
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Other income (expense):
Interest expense (213) (230)
Interest capitalized 75 57
Interest income 36 40
Equity in earnings of affiliates 64 53
Gain on sale of partnership interest 275 -
Gain on sale of affiliate's stock 103 -
Miscellaneous, net (36) (53)
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304 (133)
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Earnings before income taxes,
distributions on preferred
securities and extraordinary item 1,472 937
Provision for income taxes 542 357
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Earnings before distributions on
preferred securities and
extraordinary item 930 580
Distributions on preferred
securities, net of tax (4) -
Extraordinary loss on early
extinguishment of debt, net of tax - (66)
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Net earnings $ 926 $ 514
======= =======
Per share, primary:
Earnings before extraordinary item $ 9.01 $ 6.37
Extraordinary loss on early
extinguishment of debt, net of tax - (0.82)
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Net earnings $ 9.01 $ 5.55
======= =======
Per share, fully diluted:
Earnings before extraordinary item $ 9.01 $ 6.20
Extraordinary loss on early
extinguishment of debt, net of tax - (0.80)
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Net earnings $ 9.01 $ 5.40
======= =======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In Millions)
Nine Months
Ended September 30
1997 1996
---- ----
Cash and cash equivalents at
beginning of period $ 229 $ 194
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Cash flows from operating activities 2,397 1,964
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Cash flows from investing activities:
Additions to property and equipment (2,170) (1,101)
Proceeds on disposition of
property and equipment 41 20
Proceeds on disposition of ATS
Partnership interest 539 -
Decrease (increase) in short-term
investments (126) 486
Other, net (20) (21)
------ ------
(1,736) (616)
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Cash flows from financing activities:
Repayment of long-term debt (95) (674)
Conversion of subordinated debentures - (324)
Principal payments under capital
lease obligations (116) (92)
Repurchase of common stock (54) -
Dividends paid (8) (18)
Other, net (88) (190)
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(361) (1,298)
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Increase (decrease) in cash
and cash equivalents 300 50
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Cash and cash equivalents at
end of period $ 529 $ 244
====== ======
Cash paid during the period for:
Interest (net of amounts capitalized) $ 118 $ 190
Income taxes $ 219 $ 181
Non-cash transactions:
Capital lease obligations incurred $ 477 $ 497
Long-term debt incurred in
connection with additions
to equipment $ - $ 77
Increase in equity in connection
with the conversion of subordinated
debentures to common stock $ - $ 217
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
The Company
- - -----------
UAL Corporation ("UAL" or the "Company") is a holding
company whose principal subsidiary is United Air Lines, Inc.
("United").
Interim Financial Statements
- - ----------------------------
The consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to or as
permitted by such rules and regulations, although UAL believes
that the disclosures are adequate to make the information
presented not misleading. In management's opinion, all
adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the results of operations
for the three and nine month periods have been made. These
financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included
in UAL's Annual Report on Form 10-K for the year 1996.
Accounting Policies - Derivative Financial Instruments
- - ------------------------------------------------------
Foreign Currency
----------------
From time to time, United enters into Japanese yen forward
exchange contracts to minimize gains and losses on the
revaluation of short-term yen-denominated liabilities. The yen
forwards typically have a 30-day maturity and are marked to fair
value at the end of each accounting period. The unrealized mark-
to-market gains and losses generally offset the losses and gains
recorded on the liabilities.
United has also entered into forwards and swaps to reduce
exposure to currency fluctuations on yen-denominated capital
lease obligations. The forwards' and swaps' cash flows mirror
those of the capital leases. The premiums on the forwards and
swaps, as measured at inception, are being amortized over their
respective lives as components of interest expense. Any gains or
losses realized upon the early termination of these forwards and
swaps are deferred and recognized in income over the remaining
life of the underlying exposure.
Finally, the Company has begun to hedge the risks of
exchange rate volatility on its anticipated future net yen cash
flows by purchasing yen put options with little or no intrinsic
value. The amount and duration of these options are synchronized
with specific expected yen inflows, and thus, the put options
have been designated as a hedge. The Company also sells yen call
options from time to time. The premiums on yen option contracts
are amortized over the lives of the contracts. Unrealized gains
on purchased put option contracts are deferred until contract
expiration and then recognized as a component of passenger
revenue, and unrealized losses on written call options are
recorded in "Miscellaneous, net" at the end of each accounting
period.
Interest Rates
--------------
United has entered into swaps to reduce exposure to
interest rate fluctuations in connection with certain debt,
capital leases and operating leases. The swaps' cash flows mirror
those of the underlying exposures. The premiums on the swaps, as
measured at inception, are being amortized over their respective
lives as components of interest expense. Any gains or losses
realized upon the early termination of these swaps are deferred
and recognized in income over the remaining life of the
underlying exposure.
Aircraft Fuel
-------------
United uses a collar option strategy to hedge a portion of
its price risk related to future aircraft fuel purchases. The
collars, which have been designated a hedge, involve the purchase
of fuel call options with the simultaneous sale of fuel put
options with identical expiration dates. Premiums on fuel collar
option contracts are deferred and amortized over the life of the
contract. Gains or losses recognized upon contract expiration
are recorded as a component of aircraft fuel expense. In
addition, to a limited extent, United trades short-term heating
oil futures contracts. Unrealized losses on these contracts are
recorded currently in income while unrealized gains are deferred
until contract expiration. Both gains and losses are recorded as
a component of aircraft fuel expense.
Employee Stock Ownership Plans
- - ------------------------------
Pursuant to amended labor agreements which provide for
wage and benefit reductions and work-rule changes which
commenced July 1994, UAL has agreed to issue convertible
preferred stock to employees. Note 2 of the Notes to
Consolidated Financial Statements in the 1996 Annual Report on
Form 10-K contains additional discussion of the agreements,
stock to be issued to employees and the related accounting
treatment. Shares earned in 1996 were allocated in March 1997
as follows: 190,307 shares of Class 2 ESOP Preferred Stock were
contributed to the Non-Leveraged ESOP and an additional 537,917
shares were allocated in "book entry" form under the
Supplemental Plan. Additionally, 2,345,745 shares of Class 1
ESOP Preferred Stock were allocated under the Leveraged ESOP.
Finally, an additional 2,305,479 shares of Class 1 and Class 2
ESOP Preferred Stock have been committed to be released by the
Company since January 1, 1997.
In August 1997, UAL sold 1,848,629 shares of Class 1 ESOP
Preferred Stock to the ESOP Trustee; this was the fourth of seven
such sales.
Other Income (Expense) - Miscellaneous
- - --------------------------------------
"Miscellaneous, net" consisted of the following:
Third Quarter Nine-month Period
1997 1996 1997 1996
---- ---- ---- ----
Foreign exchange losses $ (5) $ (2) $ (15) $ (9)
Minority interests (1) (6) (15) (18)
Travel agency litigation
settlement - (20) - (20)
Other (4) - (6) (6)
---- ---- ---- ----
$ (10) $ (28) $ (36) $ (53)
==== ==== ==== ====
Income Taxes
- - ------------
The provisions for income taxes are based on the
estimated annual effective tax rate, which differs from the
federal statutory rate of 35% principally due to state income
taxes, dividends on ESOP Preferred Stock and certain
nondeductible expenses. Deferred tax assets are recognized
based upon UAL's history of operating earnings and expectations
for future taxable income.
Per Share Amounts
- - -----------------
During the nine-month period ended September 30, 1996, UAL
repurchased 2,553 shares of its Series B preferred stock at an
aggregate cost of $84 million to be held in treasury. These
transactions had no effect on earnings; however, the difference
between the fair value of the consideration given and the
carrying value of the preferred stock acquired is included in
the computation of earnings per share.
Per share amounts were calculated after providing for
dividends on preferred stock, including ESOP convertible
preferred stock, of $19 million in the 1997 third quarter, $15
million in the 1996 third quarter, $57 million in the 1997 nine-
month period and $47 million in the 1996 nine-month period.
Primary per share amounts for all periods were based on weighted
average common shares and common equivalents outstanding,
including ESOP shares committed to be released. In addition,
fully diluted per share amounts assume the conversion of
convertible debentures (for periods not actually converted) and
elimination of related interest.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," which established standards for
computing and reporting earnings per share. SFAS No. 128 is
effective for periods ending after December 15, 1997; earlier
application is not permitted. Restatement of all prior-period
earnings per share data is required. On a pro forma basis, 1997
earnings per share would be as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Basic Earnings Per Share 9.39 14.66
Diluted Earnings Per Share 5.61 9.01
Prepayment of Long-Term Obligations
- - -----------------------------------
On March 7, 1997, Air Wis Services, Inc. ("Air Wis"), a
wholly owned subsidiary of UAL, issued a notice of redemption for
all of its outstanding 7 3/4% convertible subordinated
debentures, due 2010. On April 8, $16 million of debentures
outstanding were redeemed at 100% of the principal amount plus
accrued interest.
During the nine months ended September 30, 1996, UAL
repaid prior to maturity $535 million in principal amount of
various debt securities, resulting in an extraordinary loss of
$66 million, after a tax benefit of $40 million. Of this
amount, $63 million was repaid during the third quarter,
resulting in a $7 million extraordinary loss, net of tax
benefits of $4 million. The securities were scheduled for
repayment periodically through 2021.
Related Party Transactions
- - --------------------------
In July 1997, United completed the sale of its 77% general
partnership interest in the Apollo Travel Services Partnership to
Galileo International, Inc. See "Sale of Affiliate" in Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Stock Repurchases
- - -----------------
During the third quarter, UAL's Board of Directors
authorized the purchase of up to $250 million of the Company's
common stock using a portion of the proceeds from the sale of the
Apollo Travel Services Partnership. Through October 31, 1997,
1,271,000 shares had been repurchased and returned to treasury at
a total cost of $108 million.
Equity Put Warrants
- - -------------------
In connection with the Company's stock repurchase program,
UAL sold 750,000 equity put warrants at various strike prices
during the third quarter. The put warrants entitle the holders
to sell shares of UAL common stock to the Company at specified
prices. The warrants have strike prices ranging from $76.53 to
$84.21, expire at various dates through December 1, 1997 and are
exercisable only at maturity. The maximum potential repurchase
obligation of $61 million has been reclassified from
stockholders' equity to equity put warrants at September 30.
Contingencies and Commitments
- - -----------------------------
UAL has certain contingencies resulting from litigation
and claims (including environmental issues) incident to the
ordinary course of business. Management believes, after
considering a number of factors, including (but not limited to)
the views of legal counsel, the nature of contingencies to which
UAL is subject and its prior experience, that the ultimate
disposition of these contingencies is not expected to materially
affect UAL's consolidated financial position or results of
operations.
At September 30, 1997, commitments for the purchase of
property and equipment, principally aircraft, approximated $5.7
billion, after deducting advance payments. An estimated $0.8
billion will be spent during the remainder of 1997, $2.4 billion
in 1998, $1.3 billion in 1999, and $1.2 billion in 2000 and
thereafter. The major commitments are for the purchase of B777,
B747, B767, B757, A319 and A320 aircraft, which are scheduled to
be delivered through 2002.
During October 1997, The Boeing Company ("Boeing") notified
United that production problems would delay aircraft scheduled to
be delivered between fourth quarter 1997 and mid-1999.
Specifically, deliveries on nine B747s, two B757s and four
B767s scheduled for delivery from the fourth quarter of 1997
through mid-1999 will be delayed from one to two months. United
expects to receive compensation from Boeing and also expects to
make schedule adjustments and take other possible actions to
offset the effects of the delays. As a result, the Company
expects the impact of the announced delivery delays to be
minimal.
United's contract with the Association of Flight
Attendants ("AFA") became amendable March 1, 1996. On October
1, 1997, the AFA ratified a new contract. The agreement,
which will remain in effect through 2006, includes provisions
for increased wages and benefits as well as work rule changes
designed to help the Company achieve its customer satisfaction
objectives.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
UAL's total of cash and cash equivalents and short-term
investments was $1.123 billion at September 30, 1997, compared
to $697 million at December 31, 1996. Cash flows from operating
activities for the nine-month period amounted to $2.397 billion.
Financing activities included principal payments under debt and
capital lease obligations of $95 million and $116 million,
respectively, as well as $54 million for common stock
repurchases.
In the first nine months of 1997, United took delivery of
four A320, eleven B777, five B747 and two A319 aircraft.
Eighteen of these aircraft were purchased and four were acquired
under capital leases. Additionally, United acquired two B767
and one DC10-10 off-lease during the first nine months of 1997.
Property additions, including aircraft spare parts, facilities
and ground equipment, amounted to $2.170 billion, while property
dispositions resulted in proceeds of $41 million.
The Company's sale of its interest in the Apollo Travel
Services Partnership ("ATS") in July 1997 provided $539 million
in cash proceeds (see "Sale of Affiliate"). During the third
quarter, UAL's Board of Directors authorized the purchase of up
to $250 million of the Company's common stock using a portion of
the proceeds. As of October 31, 1997, 1,271,000 shares of
common stock had been repurchased at a total purchase price of
$108 million.
At September 30, 1997, commitments for the purchase of
property and equipment, principally aircraft, approximated $5.7
billion, after deducting advance payments. An estimated $0.8
billion will be spent during the remainder of 1997, $2.4 billion
in 1998, $1.3 billion in 1999, and $1.2 billion in 2000 and
thereafter. The major commitments are for the purchase of B777,
B747, B767, B757, A319 and A320 aircraft, which are scheduled to
be delivered through 2002.
During October 1997, The Boeing Company ("Boeing") notified
United that production problems would delay aircraft scheduled to
be delivered between fourth quarter 1997 and mid-1999.
Specifically, deliveries on nine B747s, two B757s and four
B767s scheduled for delivery from the fourth quarter of 1997
through mid-1999 will be delayed from one to two months. United
expects to receive compensation from Boeing and also expects to
make schedule adjustments and take other possible actions to
offset the effects of the delays. As a result, the Company
expects the impact of the announced delivery delays to be
minimal.
In April 1997, Standard & Poor's raised its credit rating
on United's senior unsecured debt to BB+ from BB and raised its
credit rating on UAL's Series B preferred stock and redeemable
preferred securities to BB- from B+. Moody's Investors Service
Inc.'s ratings on United's senior unsecured debt remains Baa3 and
its ratings on UAL's Series B preferred stock and redeemable
preferred securities remains Ba3.
RESULTS OF OPERATIONS
---------------------
UAL's results of operations for interim periods are not
necessarily indicative of those for an entire year, as a result
of seasonal factors to which United is subject. First and
fourth quarter results are normally affected by reduced travel
demand in the fall and winter and United's operations,
particularly at its Chicago and Denver hubs and at certain east
coast cities, are adversely affected by winter weather on
occasion.
The results of operations in the airline business
historically fluctuate significantly in response to general
economic conditions. This is because small fluctuations in
yield (passenger revenue per revenue passenger mile) and cost
per available seat mile can have a significant effect on
operating results. UAL anticipates industrywide fare levels,
increasing low-cost competition, general economic conditions,
fluctuation of foreign currency exchange rates, fuel costs, U.S.
and international governmental policies and other factors will
continue to affect its operating results.
During the third quarter of 1997, a new law was enacted to
replace the Federal passenger excise tax which expired September
30, 1997. The new legislation includes a gradual reduction in
the 10% airline ticket tax to 7.5% by the year 2002, a phasing
in of a $3 "head tax" per domestic flight segment, an increase
in round-trip international departure and arrival taxes from $6
to $24 per passenger and a tax on the purchase of frequent flyer
miles. The Company expects that the new legislation will
increase United's annual tax burden by approximately $80
million, but is unable to determine how much of this increase it
will be able to pass on to its customers.
During the third quarter of 1997, United implemented
changes to its travel agency commission payment plan, which
lowered the base commission paid to travel agents from 10% to 8%
on all tickets purchased in the U.S. and Canada for both
domestic and international travel. Commissions on domestic
tickets will be a maximum of $25 one-way ($50 round-trip). This
action is expected to save approximately $100 million annually
in commission costs.
Summary of Results
------------------
UAL's earnings from operations were $1,168 million in the
first nine months of 1997, compared to operating earnings of
$1,070 million in the first nine months of 1996. UAL's net
earnings were $926 million ($9.01 per share, primary and fully
diluted), compared to net earnings of $514 million ($5.55 per
share, primary; $5.40 per share, fully diluted) during the same
period in 1996. The 1997 nine-month period includes an after-
tax gain on the ATS/Galileo transaction (see "Sale of
Affiliate") of $235 million ($2.43 per share, primary and fully
diluted). The 1996 nine-month period includes an extraordinary
loss of $66 million ($0.82 per share, primary; $0.80 per share,
fully diluted) on early extinguishment of debt.
In the third quarter of 1997, UAL's earnings from
operations were $563 million compared to operating earnings of
$610 million in the third quarter of 1996. UAL had net earnings
in the 1997 third quarter of $579 million ($5.61 per share),
compared to net earnings of $340 million in the same period of
1996 ($3.77 per share). The 1997 third quarter results include
the after-tax gain on the ATS/Galileo transaction of $235
million ($2.35 per share, primary and fully diluted). The 1996
third quarter results include an extraordinary loss of $7
million ($0.08 per share) on early extinguishment of debt.
The 1996 per share amounts for the nine-month period also
include the effects on equity of the repurchase of Series B
preferred stock. See "Per Share Amounts" in the notes to
consolidated financial statements.
Management believes that a more complete understanding of
UAL's results can be gained by viewing them on a pro forma,
"fully distributed" basis. This presentation considers all ESOP
shares which will ultimately be distributed to employees
throughout the ESOP (rather than just the shares committed to be
released) to be immediately outstanding and thus fully
distributed. Consistent with this presentation, the ESOP
compensation expense is excluded from fully distributed net
earnings and ESOP convertible preferred stock dividends are not
deducted from earnings attributable to common stockholders.
Also, no adjustments are made to fully distributed earnings to
reflect future salary increases. A comparison of results
reported on a fully distributed basis to results reported under
generally accepted accounting principles (GAAP) is as follows:
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
GAAP Fully GAAP Fully
(fully diluted) Distributed (fully diluted) Distributed
--------------- ----------- --------------- -----------
Net Income $ 579 $ 734 $ 340 $ 437
Per Share:
Earnings before
gain on sale and
extraordinary loss $ 3.26 $ 3.75 $ 3.85 $ 3.34
Gain on ATS/Galileo
transaction, net 2.35 1.77 - -
Extraordinary loss,
net of tax - - (0.08) (0.05)
----- ----- ----- -----
$ 5.61 $ 5.52 $ 3.77 $ 3.29
===== ===== ===== =====
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
GAAP Fully GAAP Fully
(fully diluted) Distributed (fully diluted) Distributed
--------------- ----------- --------------- -----------
Net Income $ 926 $ 1,325 $ 514 $ 819
Per Share:
Earnings before preferred
stock transactions,
gain on sale and
extraordinary loss $ 6.58 $ 8.19 $ 6.45 $ 6.64
Gain on ATS/Galileo
transaction, net 2.43 1.77 - -
Preferred stock
transactions - - (0.25) (0.16)
Extraordinary loss, - - (0.80) (0.50)
net of tax ----- ----- ----- -----
$ 9.01 $ 9.96 $ 5.40 $ 5.98
===== ===== ===== =====
Specific factors affecting UAL's consolidated operations
for the third quarter and first nine months of 1997 are
described below.
Third Quarter 1997 Compared with Third Quarter 1996
---------------------------------------------------
Operating revenues increased $152 million (3%). United's
revenue per available seat mile decreased 1% to 10.43 cents.
Passenger revenues increased $144 million (4%) on a 4% increase
in revenue passenger miles in spite of a 1% decrease in yield to
12.33 cents. The following analysis by market is based on
information reported to the U.S. Department of Transportation:
Domestic revenue passenger miles increased 2%, while
domestic yield decreased 3% from the year before as a result of
the reimposition of the Federal passenger excise tax for the
entire 1997 third quarter. In the Pacific, revenue passenger
miles remained unchanged; however, yield increased 3% from the
same period last year, largely due to a stronger Japanese yen
versus the dollar. Atlantic revenue passenger miles increased
27% with a 4% increase in yield over the same period last year
due to a continued larger proportion of high-yield traffic.
Latin America revenue passenger miles remained unchanged over
the same period last year, with a 7% increase in yield, due to a
strengthening Latin economy. Available seat miles increased 4%
systemwide, reflecting increases of 25% in the Atlantic, 2% on
Domestic routes and 2% in the Pacific. The system passenger
load factor decreased 0.1 point to 75.3%.
Cargo revenues increased $34 million (18%) due to
increases in both freight and mail revenues. Freight ton miles
increased 28% due to the increase in aircraft assigned to the
dedicated freighter operation and the introduction of long-range
B777-200B aircraft, principally in the Atlantic market. Mail
ton miles increased 9%. However, a 6% lower freight yield was
only partially offset by a 3% increase in mail yield. Other
operating revenues decreased $26 million (8%) since ATS revenues
are no longer consolidated after the sale of ATS in July.
Operating expenses increased $199 million (5%) and
United's cost per available seat mile increased 2%, from 9.06
cents to 9.20 cents, including ESOP compensation expense.
Without the ESOP compensation expense, United's cost per
available seat mile would have decreased 1%, from 8.69 cents to
8.62. ESOP compensation expense increased $99 million (63%),
reflecting the increase in the estimated average fair value of
ESOP preferred stock committed to be released to employees as a
result of UAL's higher common stock price. Salaries and related
costs increased $93 million (8%) primarily due to mid-term wage
adjustments that took effect July 1. Aircraft maintenance
increased $47 million (44%) due to increased purchased
maintenance, as well as the timing of maintenance cycles.
Purchased services increased $26 million (9%) due principally to
volume-related increases in computer reservations fees, credit
card discounts and communication charges. Depreciation and
amortization expense decreased $35 million (16%) despite the
acquisition of new aircraft, largely due to a $30 million charge
in the 1996 third quarter to reduce the carrying value of
aircraft seats being replaced, as well as lower depreciation on
DC10-10 aircraft which are scheduled for retirement. Fuel
expense decreased $28 million (5%) due to an 8% decrease in the
average price per gallon of fuel to 65.3 cents.
Other income (expense) amounted to $350 million in income
for the third quarter of 1997 compared to $55 million in expense
for the third quarter of 1996. Interest capitalized, primarily
on aircraft advance payments, increased $7 million (39%).
Included in "Miscellaneous, net" in the 1997 third quarter were
foreign exchange losses of $5 million compared to foreign
exchange losses of $2 million in the 1996 third quarter. In
addition, the third quarter of 1997 included a $275 million gain
on the sale of ATS and a $103 million gain on the sale of Galileo
International, Inc. stock. The third quarter of 1996 included a
$20 million charge for the settlement of litigation related to
the travel agency commission cap implemented by the Company in
February 1995.
Nine Months 1997 Compared with Nine Months 1996
-----------------------------------------------
Operating revenues increased $757 million (6%). United's
revenue per available seat mile increased 2% to 10.35 cents.
Passenger revenue increased $653 million (6%), due principally
to a 4% increase in revenue passenger miles and a 2% increase in
yield to 12.56 cents. The following analysis by market is based
on information reported to the U.S. Department of
Transportation:
Domestic revenue passenger miles increased 3% while
domestic yield remained unchanged. In the Pacific, revenue
passenger miles increased 1% with a 3% increase in yield from
the same period last year, largely due to a stronger Japanese
yen versus the dollar. Latin America revenue passenger miles
increased 3% over the same period last year, with an 11% increase
in yield as a result of a strengthening Latin economy. Atlantic
revenue passenger miles increased 20%, while yield increased 4%
due to a larger proportion of high-yield traffic and an improved
fare environment. Available seat miles increased 4% systemwide,
reflecting increases of 19% in the Atlantic, 3% on Domestic
routes and 3% in the Pacific. The system passenger load factor
increased 0.1 point to 72.6%.
Cargo revenues increased $76 million (14%) on increases of
23% in freight ton miles and 6% in mail ton miles, as a result of
a new dedicated freighter operation and the introduction of long-
range B777-200B aircraft. A 7% decrease in freight yield was
partially offset by a 3% increase in mail yield. Other operating
revenues increased $28 million (3%) due to increases in Mileage
Plus partner-related revenues and contract maintenance and fuel
sales to third parties, which were partially offset by the
decrease in ATS revenues after the sale of ATS in July.
Operating expenses increased $659 million (6%) and
United's cost per available seat mile increased 2%, from 9.25 to
9.45 cents, including ESOP compensation expense. Without the
ESOP compensation expense, United's 1997 nine-month cost per
available seat mile would have been 8.93 cents, an increase of
1% from 1996. ESOP compensation expense increased $178 million
(36%), reflecting the increase in the estimated average fair
value of ESOP stock committed to be released to employees as a
result of UAL's higher common stock price. Salaries and
related costs increased $219 million (6%) as a result of
increased staffing in certain customer-oriented positions, as
well as mid-term wage adjustments which took effect July 1.
Aircraft maintenance increased $111 million (33%) due to
increased purchased maintenance as well as the timing of
maintenance cycles. Aircraft fuel increased $55 million (4%)
due to a 3% increase in consumption and a 1% increase in the
average price per gallon of fuel to 70.1 cents. Purchased
services increased $70 million (8%) due principally to volume-
related increases in computer reservations fees, credit card
discounts and communication charges. Depreciation and
amortization decreased $55 million (9%) despite the acquisition
of new aircraft, due to lower depreciation on DC10-10 aircraft
which are scheduled for retirement, a gain on the sale of one
B747-SP aircraft and a $30 million charge in 1996 to reduce the
carrying value of aircraft seats being replaced. Aircraft rent
decreased $9 million (1%) due to a decrease in the number of
aircraft on operating leases.
Other income (expense) amounted to $304 million in income
for the first nine months of 1997 compared to $133 million in
expense for the first nine months of 1996. Interest capitalized,
primarily on aircraft advance payments, increased $18 million
(32%). Interest expense decreased $17 million (7%) due to the
prepayment of long-term debt in 1996. Equity in earnings of
affiliates increased $11 million (21%) due to higher Galileo
International, Inc. ("Galileo") earnings resulting from
increased booking revenues. In addition, the 1997 period
included a $275 million gain on the sale of ATS and a $103
million gain on the sale of Galileo stock. The 1996 period
included a $20 million charge for the settlement of litigation
related to the travel agency commission cap implemented by the
Company in February 1995.
SALE OF AFFILIATE
- - -----------------
In July 1997, United completed the sale of its interest in
the Apollo Travel Services Partnership ("ATS"), a 77% owned
affiliate whose accounts were consolidated, to Galileo
International, Inc. ("Galileo"), heretofore a 38% owned affiliate
accounted for under the equity method, for $539 million in cash.
This transaction resulted in a pre-tax gain of approximately $405
million. Of this amount, $275 million was recognized during the
third quarter and the balance will be recognized over the next 25
years, the estimated remaining life of the assets acquired by
Galileo.
Galileo raised a portion of the proceeds used to purchase
ATS through the completion of an initial public offering of
16,799,700 shares of its common stock, representing 16.0% of its
economic interest, at $24.50 per share for net proceeds of
approximately $390 million. This transaction resulted in a
reduction of the Company's ownership in Galileo from 38% to 32%.
In accordance with the Company's policy of recognizing gains or
losses on the sale of a subsidiary's stock based on the
difference between the offering price and the Company's carrying
amount of such stock, the Company recognized a pre-tax gain of
$103 million during the third quarter. Pursuant to Statement of
Financial Accounting Standards No. 109, the Company also recorded
$40 million of deferred taxes related to this gain.
In connection with the sale, United entered into an
additional services agreement under which the Company will
provide certain marketing and other services designed to increase
the competitiveness of Galileo's business and to generate
additional bookings and revenues for Galileo. Under this
agreement, United could receive up to $154 million (on a present
value basis) in the sixth year following the sale, based on
specified improvements in air booking revenues over a five-year
period.
United continues to account for Galileo under the equity
method and will continue to purchase computer reservations
services under its existing services agreement with Galileo.
LABOR AGREEMENTS AND WAGE ADJUSTMENTS
- - -------------------------------------
Both the Air Line Pilots Association, International
("ALPA") and the International Association of Machinists and
Aerospace Workers ("IAM") ratified previously announced mid-term
wage adjustments. Included in the agreements were a 5% increase
to wage rates for each union group in July 1997 and a second 5%
increase in July 1998. Further, the agreement with ALPA calls
for a corresponding 5% increase in both 1997 and 1998 to "book
rates" (book rates are used to compute certain other employee
benefits), and the agreement with the IAM provided for lump sum
payments for all IAM employees and increases in hourly license
premium and skill pay for mechanics. These agreements also
provide for restoration of wage rates for the two groups in the
year 2000 to levels that existed prior to the recapitalization in
July 1994, as well as restoration of the Company's contribution
to the pilots' defined contribution plan from its current rate of
1% to its pre-ESOP rate of 9% in the year 2000.
In March 1997, the Company also announced the details of
mid-term wage adjustments for non-union United States salaried
and management employees. Salaried employees received a 5% base
salary increase in July 1997, as well as a lump-sum payment.
They will also receive a 5% increase in July 1998. In addition,
salaried employees hired on or after February 1, 1994 will
receive two additional annual 3.5% pay increases. Management
employees received a 4% increase in July 1997 and will receive an
additional 4% increase in July 1998, and management employees not
participating in the Company's Incentive Compensation Plan will
participate in a three-year profit-sharing plan that could pay an
additional amount in 1998, 1999 and 2000, if the Company meets
specific pre-tax earnings objectives in 1997, 1998 and 1999,
respectively. Depending on financial results, the maximum profit
sharing payout is 3.75% of annual wages.
On October 1, 1997, the Association of Flight Attendants
("AFA") ratified a previously announced agreement on a new
contract which will remain in effect through March 1, 2006.
Included in the contract are lump sum payments of 7% in December
1997, 4% in December 1998 and December 1999, and 5% in 2001,
2003 and 2005; as well as minimum 2% wage increases in 2000,
2002 and 2004. Additionally, the contract includes a series of
arbitrations beginning in 2001 which can award additional
compensation increases, subject to meeting Vision 2000 goals as
discussed below. The agreement also provides for benefits and
work rule changes and a number of service quality and
productivity enhancements designed to help the Company achieve
its customer satisfaction objectives.
The wage, benefit and work-rule adjustments outlined above
are consistent with the Company's objective, known as Vision
2000, to put employee compensation costs on a competitive level
with peer group compensation elsewhere in the industry at the
conclusion of the agreements outlined above. The ultimate cost
to the Company of Vision 2000, particularly given that peer group
compensation is subject to change between now and the conclusion
of the agreements, is not determinable. However, the Company
expects the aggregate after-tax cost of the wage and benefit
adjustments outlined above to be approximately $100 million in
1997. Further, as a result of these changes, the Company expects
that its annual Salaries and related costs will increase at a
faster rate than its major competitors from now through the year
2000.
TENTATIVE AGREEMENT WITH ALPA ON REGIONAL JETS
- - ----------------------------------------------
During September 1997, United and ALPA reached a tentative
agreement on the issue of regional jets that allows air carriers
operating under the United Express program to purchase and fly
those jets (with restrictions) and provides job security for
United's pilots. The agreement is subject to ratification by
ALPA's pilots and the result of the vote is scheduled to be
released on November 18.
OUTLOOK FOR 1997
- - ----------------
Fourth quarter 1997 available seat miles are expected to
grow 4% year over year, with a nearly 7% increase in
international markets and 2% in domestic capacity. Year over
year traffic growth is expected to be at 3%. With a modest
increase in yield, system revenue per available seat mile is
expected to increase 2% from last year's fourth quarter. Fourth
quarter unit costs excluding the ESOP compensation expense are
expected to decrease slightly from last year, assuming a lower
average fuel price for the fourth quarter from last year.
Assuming a lower average fuel price for the fourth
quarter, and a continuing positive airline industry and general
economic environment for the fourth quarter, the Company expects
fourth quarter 1997 "fully distributed" earnings per share to
exceed last year's fourth quarter earnings per share and full
year "fully distributed" earnings per share to exceed those for
1996 (see "Results of Operations, Summary of Results" for
further explanation of this pro forma methodology).
The information included in the previous paragraphs is
forward-looking and involves risks and uncertainties that could
result in actual results differing materially from expected
results. It is not reasonably possible to itemize all of the
many factors and specific events that could affect the outlook
of an airline operating in the global economy. Some factors
that could significantly impact expected capacity, load factors,
revenues, unit revenues, unit costs and earnings per share
include the airline pricing environment, the effect of the U.S.
excise tax on travel, fuel prices, low-fare carrier expansion,
the timing of aircraft deliveries by manufacturers, the success
of the Company's cost reduction efforts, the cost of safety and
security measures, actions of the U.S., foreign and local
governments, foreign currency exchange rate fluctuations, the
price of UAL common stock, the timing of the Company's common
stock repurchase program, inflation, the economic environment of
the airline industry, the general economic environment, and
other factors discussed herein.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
- - ------ -----------------
GEC-Marconi Claim. -- As reported in the Form 10-Q filing for
UAL Corporation ("UAL") for the quarter ended June 30, 1997,
United Air Lines, Inc. ("United") filed suit on April 4, 1996 in
the Circuit Court of Cook County, Illinois, Law Division, against
GEC-Marconi Inflight Systems Overseas, Ltd. ("GMIS"), its Boeing 777
inseat video vendor, claiming breach of contract for GMIS's failure
to deliver the contracted product in the specified time frame, and
seeking monetary and injunctive relief. United also named in the suit
GEC-Marconi Inflight Systems, Inc. ("GMIS, Inc."), its 777 video
maintenance provider, seeking declaratory relief on the maintenance
contract.
On July 19, 1996 GMIS and GMIS, Inc. filed a counterclaim against
United seeking in excess of $240 million for various alleged breaches
of contract by United, plus consequential damages and attorney's fees
and costs, relating to the same product purchase agreement (which, in
addition, included a Boeing 747 and 767 retrofit order that United
terminated on April 4, 1996) and maintenance service agreement which
form the basis of United's complaint, as well as an alleged June 1996
"agreement" that had been the subject of negotiations between the
parties, but was never signed by United regarding interim arrangements
between the parties. GMIS and GMIS, Inc. also sought injunctive relief
to enforce the alleged "agreement" and prevent United from obtaining
substitute goods from other vendors.
On December 23, 1996, United filed an amended complaint, and
GMIS filed an amended counterclaim on December 31, 1996. The parties
exchanged preliminary discovery documents. Each party subsequently
filed a motion to dismiss the respective amended complaint and
counterclaim. The court heard oral arguments on both motions to dismiss.
On May 12, 1997, GMIS and GMIS, Inc. filed suit in the U.S.
District Court for the Northern District of Illinois against
United claiming copyright infringement, misappropriation of trade
secrets and unfair competition as a result of United's alleged
unlawful copying of certain cable drawings which it then provided
to a cable manufacturer. The complaint sought injunctive relief
(including the return of any proprietary information), actual,
exemplary and punitive damages and attorneys fees. The parties then
engaged in comprehensive settlement negotiations.
On September 2, 1997, the parties to the state action and
the federal action entered into a comprehensive settlement
agreement, resulting in the dismissal of both the state and
federal actions, and a release of all claims against the parties
to the action. The lawsuits have been terminated.
Item 6. Exhibits and Reports on Form 8-K.
- - ------ --------------------------------
(a) Exhibits
A list of exhibits included as part of this Form 10-Q is
set forth in an Exhibit Index which immediately precedes
such exhibits.
(b) Form 8-K dated July 21, 1997 to report a cautionary
statement for purposes of the "Safe Harbor for Forward-
Looking Statements" provision of the Private Securities
Litigation Reform Act of 1995.
Form 8-K dated September 18, 1997 to report a press
release in which United Air Lines, Inc., the principal
subsidiary of registrant, announced changes to travel
agent commission structure.
Form 8-K dated October 28, 1997 to report a cautionary
statement for purposes of the "Safe Harbor for Forward-
Looking Statements" provision of the Private Securities
Litigation Reform Act of 1995.
SIGNATURES
- - ----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
UAL CORPORATION
By: /s/ Douglas A. Hacker
---------------------
Douglas A. Hacker
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
Dated: November 6, 1997
Exhibit Index
-------------
Exhibit No. Description
- - ---------- -----------
10.1 UAL Corporation 1995 Directors Plan, as amended
June 26, 1997.
10.2 UAL Corporation Incentive Compensation Plan, as
amended September 18, 1997.
10.3 Sixth Amendment to UAL Corporation Employee Stock
Ownership Plan, as amended August 11, 1997.
10.4 Sixth Amendment to UAL Corporation Supplemental
ESOP, as amended August 11, 1997.
10.5 Employment Agreement between UAL Corporation,
United Air Lines, Inc. and Joseph R. O'Gorman.
11 Calculation of Fully Diluted Net Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements.
27 Financial Data Schedule.