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, 1998
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
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate 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, 1998
----- ----------------
Common Stock ($0.01 par value) 53,126,436
UAL Corporation and Subsidiary Companies Report on Form 10-Q
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For the Quarter Ended September 30, 1998
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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, 1998
(Unaudited) and December 31, 1997
Statements of Consolidated Operations 5
(Unaudited) - for the three months and
nine months ended September 30, 1998 and 1997
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the nine
months ended September 30, 1998 and 1997
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. OTHER INFORMATION
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Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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Exhibit Index 24
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
September 30, December 31,
1998 1997
Assets (Unaudited) ----
-----------
Current assets:
Cash and cash equivalents $ 447 $ 295
Short-term investments 447 550
Receivables, net 1,405 1,051
Inventories, net 364 355
Deferred income taxes 241 244
Prepaid expenses and other 287 453
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3,191 2,948
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Operating property and equipment:
Owned 15,894 14,196
Accumulated depreciation and
amortization (5,147) (5,116)
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10,747 9,080
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Capital leases 2,727 2,319
Accumulated amortization (625) (625)
------ ------
2,102 1,694
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12,849 10,774
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Other assets:
Investments in affiliates 296 223
Intangibles, net 691 703
Aircraft lease deposits 491 318
Prepaid rent 650 60
Other 732 777
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2,860 2,081
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$ 18,900 $ 15,803
====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
September 30, December 31,
1998 1997
Liabilities and Stockholders' Equity (Unaudited) ----
-----------
Current liabilities:
Current portions of long-term debt
and capital lease obligations $ 325 $ 406
Advance ticket sales 1,682 1,267
Accounts payable 1,233 1,030
Other 2,668 2,545
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5,908 5,248
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Long-term debt 2,732 2,092
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Long-term obligations under
capital leases 2,035 1,679
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Other liabilities and deferred credits:
Postretirement benefit liability 1,480 1,361
Deferred gains 1,153 1,210
Other 1,474 1,261
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4,107 3,832
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Company-obligated mandatorily
redeemable preferred securities
of a subsidiary trust 101 101
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Preferred stock committed to
Supplemental ESOP 711 514
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Stockholders' equity:
Preferred stock - -
Common stock at par 1 1
Additional capital invested 3,531 2,876
Retained earnings 1,000 309
Unearned ESOP preferred stock (297) (177)
Other (929) (672)
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3,306 2,337
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Commitments and contingent
liabilities (See note)
$ 18,900 $ 15,803
====== ======
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
1998 1997
---- ----
Operating revenues:
Passenger $ 4,263 $ 4,147
Cargo 228 225
Other 292 268
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4,783 4,640
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Operating expenses:
Salaries and related costs 1,350 1,264
ESOP compensation expense 173 256
Aircraft fuel 470 510
Commissions 354 409
Purchased services 384 329
Aircraft rent 221 235
Landing fees and other rent 221 202
Depreciation and amortization 199 182
Aircraft maintenance 165 153
Other 551 537
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4,088 4,077
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Earnings from operations 695 563
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Other income (expense):
Interest expense (92) (73)
Interest capitalized 26 25
Interest income 15 13
Equity in earnings of affiliates 19 17
Gain on sale of partnership interest - 275
Gain on sale of affiliate's stock - 103
Miscellaneous, net (15) (10)
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(47) 350
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Earnings before income taxes and
distributions on preferred securities 648 913
Provision for income taxes 222 333
------ ------
Earnings before distributions on
preferred securities 426 580
Distributions on preferred
securities, net of tax (1) (1)
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Net earnings $ 425 $ 579
====== ======
Per share, basic: $ 6.91 $ 9.39
====== ======
Per share, diluted: $ 3.71 $ 5.61
====== ======
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
1998 1997
---- ----
Operating revenues:
Passenger $ 11,777 $ 11,628
Cargo 666 634
Other 837 881
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13,280 13,143
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Operating expenses:
Salaries and related costs 3,959 3,732
ESOP compensation expense 663 666
Aircraft fuel 1,346 1,559
Commissions 1,000 1,159
Purchased services 1,098 946
Aircraft rent 672 707
Landing fees and other rent 651 644
Depreciation and amortization 582 533
Aircraft maintenance 462 447
Other 1,559 1,582
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11,992 11,975
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Earnings from operations 1,288 1,168
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Other income (expense):
Interest expense (265) (213)
Interest capitalized 82 75
Interest income 44 36
Equity in earnings of affiliates 62 64
Gain on sale of partnership interest - 275
Gain on sale of affiliate's stock - 103
Miscellaneous, net (38) (36)
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(115) 304
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Earnings before income taxes and
distributions on preferred securities 1,173 1,472
Provision for income taxes 401 542
------ ------
Earnings before distributions on
preferred securities 772 930
Distributions on preferred securities (4) (4)
------ ------
Net earnings $ 768 $ 926
====== ======
Per share, basic: $ 11.97 $ 14.68
====== ======
Per share, diluted: $ 6.57 $ 9.02
====== ======
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
1998 1997
---- ----
Cash and cash equivalents at
beginning of period $ 295 $ 229
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Cash flows from operating activities 2,854 2,397
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Cash flows from investing activities:
Additions to property and equipment (2,390) (2,170)
Proceeds on disposition of
property and equipment 413 41
Proceeds on disposition of ATS
Partnership interest - 539
Decrease (increase) in short-term
investments 103 (126)
Other, net (40) (20)
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(1,914) (1,736)
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Cash flows from financing activities:
Proceeds from issuance of long-term
debt 830 -
Repayment of long-term debt (247) (95)
Principal payments under capital
lease obligations (271) (116)
Purchase of equipment certificates
under Company operating leases (693) -
Repurchase of common stock (247) (54)
Dividends paid (8) (8)
Aircraft lease deposits (160) (107)
Other, net 8 19
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(788) (361)
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Increase (decrease) in cash and
cash equivalents 152 300
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Cash and cash equivalents at end
of period $ 447 $ 529
====== ======
Cash paid during the period for:
Interest (net of amounts
capitalized) $ 163 $ 118
Income taxes $ 129 $ 219
Non-cash transactions:
Capital lease obligations incurred $ 636 $ 477
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
------------------------------------------------------
The Company
- -----------
UAL Corporation ("UAL") 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 1997.
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 1997 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 1997 were allocated in March 1998
as follows: 97,406 shares of Class 2 ESOP Preferred Stock were
contributed to the Non-Leveraged ESOP and an additional 889,031
shares were allocated in "book entry" form under the
Supplemental Plan. Additionally, 2,087,531 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, 1998.
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 dividends on
ESOP Preferred Stock and other tax credits, partially offset by
state income taxes 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
- -----------------
Basic earnings per share were computed by dividing net
income available to common stockholders by the weighted average
number of shares of common stock outstanding during the year. In
addition, diluted earnings per share amounts include potential
common shares including ESOP shares committed to be released.
Earnings Attributable to Common Three Months Ended Nine Months Ended
Stockholders (Millions) September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Net Income $ 425 $ 579 $ 768 $ 926
Preferred stock dividends and other (25) (19) (77) (57)
---- ---- ---- ----
Earnings attributable to common
stockholders (Basic and Diluted) $ 400 $ 560 $ 691 $ 869
==== ==== ==== ====
Shares (Millions)
Weighted average shares
outstanding (Basic) 57.9 59.6 57.7 59.2
Convertible ESOP preferred stock 48.4 37.3 45.8 34.4
Other 1.5 2.9 1.6 2.7
----- ---- ----- ----
Weighted average number of
shares (Diluted) 107.8 99.8 105.1 96.3
===== ==== ===== ====
Earnings Per Share
Basic $6.91 $9.39 $11.97 $14.68
Diluted $3.71 $5.61 $ 6.57 $ 9.02
Long-Term Debt and Lease Obligations
- ------------------------------------
In March 1998, the Company, through a special-purpose
financing entity which is consolidated, issued $604 million of
commercial paper to refinance certain lease commitments.
Although the issued commercial paper has short maturities, the
Company expects to continually rollover this obligation
throughout the 5-year life of its supporting liquidity facility
or bank standby facility. As such, the commercial paper is
classified as a long-term obligation in the Company's statement
of financial position.
The proceeds from the commercial paper, as well as $65
million from internally generated funds, were used to refinance
$669 million face-value of equipment certificates supporting
leveraged lease transactions between United and various lessors.
During the second quarter, the Company purchased an additional
$24 million face-value of equipment certificates using internally
generated funds. While the terms of the original leases between
United and these lessors remain unchanged, these actions
effectively satisfy future minimum payments under these leases of
$976 million, which are scheduled for payment as follows:
(In millions)
After
1998 1999 2000 2001 2002 2002 Total
---- ---- ---- ---- ---- ---- -----
$12 $59 $60 $60 $54 $731 $976
Additionally, in connection with the acquisition of one
B747, four A319 aircraft, and several aircraft simulators, the
Company issued $226 million of secured notes during the nine-
month period.
Other Comprehensive Income
- --------------------------
On January 1,1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which establishes standards for displaying
comprehensive income and its components in a full set of general
purpose financial statements. The reconciliation of net income
to comprehensive net income is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Net earnings, as reported $ 425 $ 579 $ 768 $ 926
Other comprehensive income 1 - - (2)
---- ---- ---- ----
Total comprehensive income $ 426 $ 579 $ 768 $ 924
==== ==== ==== ====
Accumulated other comprehensive income included in other
stockholders' equity was $(2) million and $(2) million at
September 30, 1998 and December 31, 1997, respectively.
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 repurchase of up to $500 million of the Company's
common stock. As of September 30, 3.6 million shares had been
repurchased and returned to treasury at a total cost of $247
million. During October, an additional 1.9 million shares were
repurchased and returned to treasury at a total cost of $121
million.
Equity Put Warrants
- -------------------
In connection with the Company's stock repurchase program,
UAL sold two million equity put warrants at various strike prices
in November. 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 $64.04 to $65.46, expire
at various dates through January 5, 1999 and are exercisable only
at maturity.
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, 1998, commitments for the purchase of
property and equipment, principally aircraft, approximated $7.2
billion, after deducting advance payments. An estimated $0.5
billion will be spent during the remainder of 1998, $2.5 billion
in 1999, $1.8 billion in 2000 and $2.4 billion in 2001 and
thereafter. The major commitments are for the purchase of B777,
B747, B767, B757, A320 and A319 aircraft, which are scheduled to
be delivered through 2002. The above amounts include
commitments for the August 1998 order with Airbus Industrie for
an additional 10 A319 and 12 A320 aircraft to be delivered
through 2001. These commitments, combined with aircraft
retirements, are part of the Company's plan to eventually
increase the fleet to an expected 645 aircraft at the end of
2001.
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 $894 million at September 30, 1998, compared to
$845 million at December 31, 1997. Cash flows from operating
activities for the nine-month period amounted to $2.9 billion.
Financing activities included principal payments under debt and
capital lease obligations of $247 million and $271 million,
respectively and deposits of an equivalent $160 million in
Japanese yen, French francs and German marks with certain banks
in connection with the financing of capital lease transactions.
Additionally, the Company issued $830 million in debt during the
period and used part of the proceeds to purchase $693 million in
equipment certificates under Company operating leases. See
"Long-Term Debt and Lease Obligations" in the Notes to
Consolidated Financial Statements for further details.
Property additions, including aircraft and aircraft spare
parts, amounted to $2.4 billion, while property dispositions
resulted in proceeds of $413 million. In the nine months of
1998, United took delivery of ten A320, thirteen A319, four
B777, two B757, four B767 and three B747 aircraft. Thirty-one
of the aircraft were purchased and five were acquired under
capital leases. Eight of the aircraft purchased during the
period were later sold and then leased back. In addition,
United acquired four B727 and two DC10-10 aircraft off lease
during the first nine months and retired twenty-five B737, four
B747 and two DC10 aircraft.
At September 30, 1998, commitments for the purchase of
property and equipment, principally aircraft, approximated $7.2
billion, after deducting advance payments. Of this amount, an
estimated $0.5 billion is expected to be spent during the
remainder of 1998. For further details, see "Contingencies and
Commitments" in the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
Summary of Results
------------------
UAL's earnings from operations were $1,288 million in the
first nine months of 1998, compared to $1,168 million in the
first nine months of 1997. UAL's net earnings were $768 million
($11.97 per share, basic; $6.57 per share, diluted), compared to
net earnings of $926 million during the same period of 1997
($14.68 per share, basic; $9.02 per share, diluted). The 1997
nine-month period includes an after-tax one-time gain of $235
million ($3.97 per share, basic; $2.44 per share diluted) on the
ATS/Galileo transaction (see "Sale of Affiliate").
In the third quarter of 1998, UAL's earnings from
operations were $695 million compared to $563 million in the
third quarter of 1997. UAL had net earnings in the 1998 third
quarter of $425 million ($6.91 per share, basic; $3.71 per
share, diluted), compared to net earnings of $579 million in the
same period of 1997 ($9.39 per share, basic; $5.61 per share,
diluted). The 1997 third quarter period includes an after-tax
one-time gain of $235 million ($3.93 per share, basic; $2.35 per
share diluted) on the ATS/Galileo transaction (see "Sale of
Affiliate").
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 approach 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 method, 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. No adjustments
are made to Fully Distributed earnings to take into account
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 (in
millions, except per share):
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
GAAP Fully GAAP Fully GAAP Fully GAAP Fully
(diluted) Distributed (diluted) Distributed (diluted) Distributed (diluted) Distributed
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Net Income $ 425 $ 516 $ 579 $ 734 $ 768 $1,152 $ 926 $1,325
Per share $3.71 $4.02 $5.61 $5.53 $6.57 $ 8.93 $9.02 $ 9.99
Specific factors affecting UAL's consolidated operations
for the third quarter and first nine months of 1998 are
described below.
Third Quarter 1998 Compared with Third Quarter 1997
---------------------------------------------------
Operating revenues increased $143 million (3%) and
United's revenue per available seat mile (unit revenue)
decreased very slightly to 10.39 cents compared to 10.43 cents a
year ago. Passenger revenues increased $116 million (3%)
despite a 2% decrease in yield from 12.33 to 12.10 cents due to
a 5% increase in United's revenue passenger miles. Available
seat miles across the system were up 4% over the third quarter
of 1997, resulting in a passenger load factor increase of 0.8
point to 76.1%. The following analysis by market is based on
information reported to the U.S. Department of Transportation:
Increase (Decrease)
-------------------
Available Seat Miles Revenue Per Revenue
(Capacity) Revenue Passenger Miles Passenger Mile(Yield)
-------------------- ----------------------- ---------------------
Domestic 6% 8% 4%
Pacific (9%) (6%) (20%)
Atlantic 10% 8% (5%)
Latin America 20% 8% (10%)
Domestic yields increased as the U.S. economy continued to
expand and industry capacity growth remained relatively modest.
Results were also helped by the pilot strike at Northwest
Airlines. Pacific yields continue to be negatively impacted by
the weakness of most Pacific currencies compared to the U.S
dollar, especially the Japanese yen, and the effects of the
Asian economic turmoil on demand for travel. Year-over-year in
the third quarter of 1998 the Japanese yen was 18% weaker
compared to the U.S. dollar. Yields in other international
markets have been impacted by a negative pricing environment
resulting from excess industry capacity and weakened economies.
Cargo revenues increased $3 million (1%) on increased
freight ton miles of 3%. A 1% higher freight yield was offset
by a 5% lower mail yield, resulting in 1% decrease to cargo
yield for the period. Other operating revenues increased $24
million (9%) due to growth in frequent flyer program partner-
related revenues and contract sales to third parties.
Operating expenses increased $11 million (0.3%) and
United's cost per available seat mile inclusive of ESOP
compensation expense decreased 3%, from 9.19 cents to 8.90
cents. Without the ESOP compensation expense, United's cost per
available seat mile would have been 8.52 cents, a decrease of 1%
from the 1997 third quarter. ESOP compensation expense
decreased $83 million (32%), reflecting a decrease in the
estimated average fair value of ESOP stock committed to be
released to employees as a result of the lower average price of
UAL's common stock in the 1998 third quarter. Purchased
services increased $55 million (17%) due to increases in
computer reservations fees, credit card discounts,
communications expense and Year 2000 related spending.
Depreciation and amortization increased $17 million (9%) due to
an increase in the number of owned aircraft and aircraft under
capital lease. Salaries and related costs increased $86 million
(7%) due to ESOP mid-term wage adjustments which took place in
July 1998 and increased staffing in certain customer-contact
positions. Commissions decreased $55 million (13%) due to a
change in the commission structure implemented in the third
quarter of 1997 as well as a slight decrease in commissionable
revenues. Aircraft fuel decreased $40 million (8%) due to a 10%
decrease in the cost of fuel from 65.3 cents to 58.5 cents a
gallon. Aircraft maintenance increased $12 million (8%) due to
an increase in engine overhauls. Aircraft rent decreased $14
million (6%) due to refinancing aircraft under operating lease.
Other expenses increased $14 million (3%) as a result of higher
advertising and promotion expense and cost of contract sales
partly offset by the sale of ATS.
Other expense amounted to $47 million in the third quarter
of 1998 compared to $28 million in the third quarter of 1997
(excluding the gain on the ATS/Galileo transaction - see "Sale
of Affiliate"). Interest expense increased $19 million (26%)
due to the issuance of long-term debt in 1997 and 1998.
Interest income increased $2 million (15%) due to higher
investment balances.
Nine Months 1998 Compared with Nine Months 1997
-----------------------------------------------
Operating revenues increased $137 million (1%) and
United's revenue per available seat mile (unit revenue)
decreased 2% to 10.18 cents. Passenger revenues increased $149
million (1%) despite a 1% decrease in yield from 12.56 to 12.45
cents due to a 2% increase in United's revenue passenger miles.
Available seat miles across the system were up 3%; however
passenger load factor decreased 0.5 points to 72.1%. The
following analysis by market is based on information reported to
the U.S. Department of Transportation:
Increase (Decrease)
-------------------
Available Seat Miles Revenue Per Revenue
(Capacity) Revenue Passenger Miles Passenger Mile(Yield)
-------------------- ----------------------- ---------------------
Domestic 4% 4% 3%
Pacific (8%) (10%) (13%)
Atlantic 14% 12% (5%)
Latin America 19% 8% (8%)
Pacific yields continue to be negatively impacted by the
weakness of the Japanese yen compared to the dollar, and the
effects of the Asian economic turmoil on demand for travel.
Yields in other international markets have been impacted by a
negative pricing environment resulting from excess industry
capacity and weakened economies.
Cargo revenues increased $32 million (5%) on increased
freight ton miles of 9%. A relatively flat freight yield
together with a 1% lower mail yield, resulted in a 1% decrease
in cargo yield for the period. Other operating revenues
decreased $44 million (5%) due to the sale of the Apollo Travel
Services Partnership ("ATS") in July 1997, partially offset by
increases in frequent flyer program partner-related revenues and
contract sales to third parties.
Operating expenses increased $17 million (0.1%) and
United's cost per available seat mile inclusive of ESOP
compensation expense decreased 3%, from 9.46 cents to 9.22
cents. Without the ESOP compensation expense, United's cost per
available seat mile would have been 8.70 cents, a decrease of 3%
from the 1997 nine-month period. ESOP compensation expense
decreased $3 million (0.5%), reflecting the decrease in the
estimated average fair value of stock committed to the
supplemental ESOP as a result of UAL's lower common stock price.
Purchased services increased $152 million (16%) due to increases
in computer reservations fees, credit card discounts,
communications expense and Year 2000 related spending.
Depreciation and amortization increased $49 million (9%) due to
an increase in the number of owned aircraft and aircraft under
capital lease. Salaries and related costs increased $227
million (6%) due to ESOP mid-term wage adjustments which took
place in July 1998 and increased staffing in certain customer-
contact positions. Commissions decreased $159 million (14%) due
to a change in the commission structure implemented in the third
quarter of 1997 as well as a slight decrease in commissionable
revenues. Aircraft fuel decreased $213 million (14%) due to a
15% decrease in the cost of fuel from 70.1 cents to 59.4 cents a
gallon. Aircraft rent decreased $35 million (5%) due to a
reduction in the number of aircraft under operating lease and
refinancing aircraft under operating lease. Other expenses
decreased $23 million (1%) as a result of the sale of ATS.
Other expense amounted to $115 million in the first nine
months of 1998 compared to $74 million in the first nine months
of 1997 (excluding the gain on the ATS/Galileo transaction - see
"Sale of Affiliate"). Interest expense increased $52 million
(24%) due to the issuance of long-term debt in 1997 and 1998.
Interest income increased $8 million (22%) due to higher
investment balances.
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.
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 & WAGE ADJUSTMENTS
- -----------------------------------
On April 2, 1998, the International Association of
Machinists and Aerospace Workers ("IAM") filed an application
with the National Mediation Board ("NMB") seeking recognition as
the collective-bargaining representative for United's
approximately 19,000 public contact employees (primarily customer
service and reservations sales and service representatives). On
July 17, 1998, the NMB announced that the IAM had received
sufficient votes to represent United's public contact employees.
As a result, the IAM becomes the bargaining representative for
these employees and will begin negotiations regarding a contract
for the affected employees, a process which is expected to last
for several months.
Also in July, United announced its intentions to improve
compensation and benefits for the Company's nearly 2,000
administrative employees hired on or after February 1, 1994
("post-ESOP employees"). Currently, the Company's administrative
employees are being paid under a two-tier wage structure which
went into effect at the time of the 1994 recapitalization.
Effective April 13, 2000, the two-tier wage structure will be
eliminated and post-ESOP employees will be paid on the same basis
as those employees hired prior to February 1, 1994. In addition,
on January 1, 1999, the benefits for post-ESOP employees will
match those of employees hired prior to February 1, 1994,
including company-paid medical, dental and pension. The Company
expects the increase in salaries and related costs resulting from
this change to be immaterial.
DEPARTMENT OF TRANSPORTATION POLICY STATEMENT
- ---------------------------------------------
On April 10, 1998, the Department of Transportation ("DOT")
issued a proposed Statement of the Department of Transportation's
Enforcement Policy Regarding Unfair Exclusionary Conduct in the
Air Transportation Industry. The proposed policy sets forth
tentative findings and guidelines for use by the DOT in
evaluating whether major carriers' competitive responses to new
entry warrant enforcement action. On July 24, 1998, United filed
comments on the proposed policy, opposing the policy as being
anti-competitive, anti-consumer and outside of the DOT's
administrative authority.
In a related matter, the Omnibus Consolidated and Emergency
Supplemental Appropriations Act signed by President Clinton on
October 21, 1998, requires certain specified studies to be
prepared and transmitted to Congress concerning the various
factors which may impact competition in the airline industry.
This legislation effectively suspends implementation of the above
stated DOT policy until the required studies are completed.
UNITED-DELTA ALLIANCE
- ---------------------
On April 30, 1998, United announced a tentative, seven-year
bilateral alliance with Delta Air Lines, Inc. ("Delta") that
allowed code-sharing between the carriers, if approved by both
carriers' pilot unions, reciprocal participation in frequent
flyer programs, as well as other areas of marketing cooperation.
United and Delta initially expected to implement code-
sharing on U.S. domestic flights and eventually including
international flights in Latin America and the Pacific, pending
agreement of both companies' foreign alliance partners and the
appropriate governments. During August 1998, the Delta pilots'
union said it would no longer consider the approval of the code-
sharing aspect of the alliance. As a result, Delta has
discontinued consideration of the code-sharing arrangements with
United.
Effective September 1, 1998, United and Delta participate
in each other's frequent flyer programs. Frequent flyer members
can earn miles on United and Delta flights within the United
States, Puerto Rico and the U.S. Virgin Islands and choose to
credit the miles to their frequent flyer account with either
carrier. Effective October 15, participants in United's and
Delta's frequent flyer programs can redeem miles on either
carriers' routes within the United States, Puerto Rico and the
U.S. Virgin Islands.
UPDATE ON YEAR 2000 READINESS
- -----------------------------
The Company, like most corporations, faces potential
problems if software applications, computer equipment and
embedded computer chips fail to recognize calendar dates
beginning in the year 2000. The Company has developed a five-step
process to achieve Year 2000 readiness: Awareness, Inventory,
Assessment, Remediation, and Testing. Awareness consists of the
initial recognition that a program, system, or device could be
date-sensitive and susceptible to malfunction. Inventory refers
to the identification and documentation of all such programs,
systems, and devices. Assessment refers to the evaluation and
determination of what course of action should be taken with
respect to a specific program, system or device. Remediation
refers to the corrective action taken, such as repairing or
replacing, to avoid malfunctions. Testing consists of all
activities undertaken to gain assurance that the remediated
program, system or device will function as expected for dates
after 1999. The Company has established a Year 2000 Program
office to oversee this process.
The above-referenced five-step process is being applied in
four major areas. The first area consists of the information
systems maintained and supported by the Company's Information
Services Division, collectively referred to as information
technology or "IT" systems. The IT systems include, among other
things, (1) the hardware related infrastructure, which includes
voice and data communications networks, and (2) mainframe and non-
mainframe based software applications. The Company develops and
uses these software applications in functions such as
reservations, ticketing, flight scheduling, seat inventory and
customer service.
The second area consists of user maintained applications
that generally are not supported by the Company's Information
Services Division. The third area consists of operational
systems and devices that include, among other things, aircraft
avionics, baggage handling, aircraft ground handling, passenger
loading bridges, and flight simulators. User maintained
applications and operational systems and devices are collectively
referred to as "non-IT systems."
The fourth area consists of the Company's critical business
partners which would include, among others, air traffic control
systems, airport authorities, telecommunications providers, computer
reservation systems, and airframe and engine manufacturers.
As discussed below, the Company remains on target in
completing its five-step process. The awareness and inventory
phases are complete. The assessment phase is complete with
respect to IT and non-IT systems, and substantial progress has
been made in the remediation phase of the IT systems, and with a
few exceptions for non-critical systems, all IT and non-IT
systems will be remediated by March 31, 1999. The assessment
process is still ongoing with respect to critical business
partners.
IT systems. The Company remains on schedule for completing
the remediation of its hardware infrastructure. Remediation and
the initial system testing of the mainframe hardware is expected
to be completed by December 31, 1998, while all other hardware
infrastructure, including data and voice networks, is expected to
be remediated and tested by March 31, 1999. The Company is
developing a plan to remediate desktop computers, all of which
are expected to be remediated by June 30, 1999.
Remediation and initial testing of all internally developed
IT software applications is expected to be completed by December
31, 1998. Currently about 90% of the affected applications have
been remediated. Of the remediated applications, most have been
fully tested and the rest are in the final testing stage. The
remaining 10% of affected applications are currently being
remediated.
System integration testing for all IT systems that are
critical to the operations is expected to be completed by March
31, 1999, and system integration testing for all other systems is
expected to be completed by June 30, 1999.
Non-IT Systems. The technical assessment stage for non-IT
systems is complete. Most airport systems (including aircraft
ground handling equipment, customer service equipment at airports
and passenger loading bridges) are not date-sensitive and
therefore will not require remediation. Those non-IT systems
that are date-sensitive and critical to the Company's business,
such as aircraft avionics and flight simulators, are scheduled to
be remediated and tested by March 31, 1999, while all others are
expected to be completed by June 30, 1999.
Critical Business Partners. The Company has grouped its
critical business partners into three categories: strategic,
preferred or commodity. The "strategic" category consists of
those partners, such as air traffic control systems, airport
authorities, telecommunications providers, computer reservation
systems, and airframe and engine manufacturers, without which
the Company would cease to operate. The "preferred" category
consists of partners that have substantial interaction with the
Company, but whose absence would not necessarily cause an
immediate or irreversible interruption or cessation of business
operations. The "commodity" category consists of those partners
who provide goods or services that could be readily replaced and
whose absence would not materially impact the business. The Company
has been contacting its "strategic" partners to ascertain their
state of Year 2000 readiness, and the Company expects to have
contacted all of them by December 31, 1998. The other partners
(preferred and commodity) are expected to be contacted by
March 31, 1999.
The Company is working closely with the Air Transport
Association ("ATA"), an industry organization consisting mostly
of North American airlines. The ATA has undertaken a study
to assess the process that major domestic airports are using to
achieve Year 2000 readiness. Preliminary results of that study
suggest most of the larger domestic airports are making progress
toward being Year 2000 ready. Many of the smaller domestic
airports do not, as yet, have detailed Year 2000 plans in place.
A similar project is underway with the International Air
Transport Association to review the Year 2000 process at
international airports. Current information suggests that some
key international airports may be behind schedule.
The Company's aircraft manufacturers have concluded that
there are no flight safety issues. However, the Company
continues to test its aircraft systems and to work with its
manufacturers to ensure Year 2000 readiness.
To date, the Company has projected that it will cost
approximately $70 million ($22 million in capital spending and
$48 million in expense) to make the Company Year 2000 ready. Of
that total, $23 million has already been spent and $10 million is
expected to be spent during the fourth quarter of 1998, while the
remaining $37 million is expected to be spent in 1999. All the
amounts expected to be recognized as expense in 1998 have been
taken into consideration in the earnings outlook discussed in the
"Outlook for the Fourth Quarter and Full Year 1998" section.
Because the Company is still determining the remediation plans
for desktop hardware and some non-IT systems, final costs could
differ significantly from the above estimates.
A series of airline readiness reviews are planned during the
second quarter of 1999 to ensure aircraft, airports, support
groups and critical business partners are prepared for Year 2000
and can provide uninterrupted operations. The Company will
complete a risk analysis and develop risk estimates after
completing the airline readiness reviews. Based on the results
of the airline readiness review, the Company will develop any
contingency plans that are needed. At this point in time, the
Company does not have specific Year 2000 contingency plans in
place.
The Company believes that the current and planned activities
to modify its systems will reduce the risks of a business
interruption. A failure by its systems to be Year 2000 ready could
materially and adversely impact the Company's results of operations,
liquidity and financial condition. The Company also relies heavily
upon its critical business partners in carrying out its normal
business activities. Failure by critical business partners to be
Year 2000 ready could materially and adversely impact the Company's
results of operations, liquidity and financial condition. Due to
the general uncertainty surrounding the Year 2000 problem, and the
uncertainty surrounding the readiness of its critical business partners,
the Company is unable at this time to determine if any failure will
occur or if such failure will have a material impact on the Company's
results of operations, liquidity or financial condition.
Readers are cautioned that the Year 2000 section contains
forward-looking information. Please see the "Outlook" for a list
of some of the factors that could cause actual results to differ
materially from expected results.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), which establishes accounting and reporting
standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the
income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company has not yet quantified the impacts
of adopting SFAS No. 133 on the financial statements. However,
it could increase volatility in earnings and other comprehensive
income.
OUTLOOK
- -------
In the fourth quarter of 1998, available seat miles are
expected to increase approximately 3%, with total system
revenue per available seat mile approximating last year within
1% up or down. Costs per available seat mile excluding ESOP
charges are expected to approximate 1% worse than the prior year.
This unit cost forecast assumes the average cost of jet fuel
per gallon in the fourth quarter is lower in 1998 than in 1997.
Industry capacity increases in international markets and
the economic situation in Asia are forecast to adversely affect
international revenue performance.
The Company anticipates its "fully distributed" earnings
per share in 1998 will slightly exceed those for 1997 (see
"Results of Operations, Summary of Results" for further
explanation of this pro forma methodology). At the same time,
the Company is uncertain whether the Pacific operations will be
profitable for the full year. These foregoing expectations are
based on the actual results for the first three quarters of the
year and the following additional assumptions: a continuation
of the current domestic economic environment, continued industry
capacity increases in the international arenas, continued economic
weakness in Asia, fuel prices lower than in 1997 and a yen-dollar
exchange rate closer to October 1998 level than levels in the
first nine months of 1998. (See Item 3 below for the impact of
the appreciation in the Japanese yen versus the U.S. dollar
during October 1998).
In November, United implemented changes to its travel agency
commission rate for international travel purchased in the U.S. and
Canada. Effective November 12, 1998, tickets purchased in the U.S.
and Canada for travel outside those points will earn an 8% base
commission rate with a maximum pay out of $50 one-way ($100
round-trip). This action is expected to save approximately $100
million annually in commission costs.
The information included in the previous paragraphs and in
the paragraph "Update on Year 2000 Readiness" as well as the
asterisked information in Item 3 below, 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, international revenues,
unit revenues, unit costs, fuel prices and fully distributed
earnings per share include: industry capacity decisions, the
airline pricing environment, fuel prices, the success of the
Company's cost-control efforts, actions of the U.S., foreign and
local governments, the Asian economic environment and travel
patterns, foreign currency exchange rate fluctuations, the
economic environment of the airline industry and the general
economic environment. Some factors that could significantly
impact the Company's expected Year 2000 readiness and the
estimated cost thereof include: the results of the technical
assessment, remediation and testing of date-sensitive systems and
equipment and the ability of critical business partners,
including domestic and international airport authorities,
aircraft manufacturers and the Federal Aviation Administration to
achieve Year 2000 readiness.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
For information regarding the Company's exposure to certain
market risks, see Item 7A. Quantitative and Qualitative
Disclosures About Market Risk in UAL's Annual Report on Form 10-K
for the year 1997. Significant changes which have occurred since
year-end are as follows:
Price Risk (Aircraft fuel) -
(In millions, except average contract rates)
- --------------------------------------------
Notional Average Estimated Fair Value as
Amount Contract Rate of September 30, 1998
-------- ------------- -----------------------
Purchased call contracts - Crude oil $ 515 $17.40/bbl $ 24
- Heating oil $ 25 $ 0.42/gal $ 2
Sold put contracts - Crude oil $ 368 $17.46/bbl $ (40)
- Heating oil $ 19 $ 0.43/gal $ (1)
Foreign currency (Japanese Yen) -
(In millions, except average contract rates)
- --------------------------------------------
Notional Average Estimated Fair Value as
Amount Contract Rate of September 30, 1998
-------- ------------- -----------------------
Purchased put contracts $ 356 $130.68 $ 21
Sold call contracts $ 358 $129.68 $ (13)
The appreciation of the Japanese yen during October 1998
decreased the estimated fair value of the sold calls by $35
million to $40 million, some or all of which may be recognized as
an expense in the fourth quarter of 1998 depending upon the
relative value of the Japanese yen versus the U.S. dollar during
and at the end of the period.*
Part II. OTHER INFORMATION
------- -----------------
Item 5. Other Information
- ------ -----------------
In November, United implemented changes to its travel agency
commission rate for international travel purchased in the U.S. and
Canada. Effective November 12, 1998, tickets purchased in the U.S.
and Canada for travel outside those points will earn an 8% base
commission rate with a maximum pay out of $50 one-way ($100
round-trip).
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 22, 1998 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 13, 1998
Exhibit Index
-------------
Exhibit No. Description
- ---------- -----------
10.1 Employment Agreement, dated September 25, 1998,
between John A. Edwardson and United Air Lines, Inc.
and UAL Corporation.
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.