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, 1999
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
---------------
(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
----- -----
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, 1999
----- ----------------
Common Stock ($0.01 par value) 53,524,340
UAL Corporation and Subsidiary Companies Report on Form 10-Q
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For the Quarter Ended September 30, 1999
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Index
- -----
PART I. FINANCIAL INFORMATION Page No.
- ------ --------------------- -------
Item 1. Financial Statements
Condensed Statements of Consolidated 3
Financial Position - as of September 30,
1999(Unaudited) and December 31, 1998
Statements of Consolidated Operations 5
(Unaudited) - for the three months and
nine months ended September 30, 1999 and 1998
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the nine
months ended September 30, 1999 and 1998
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 20
Market Risk
PART II. OTHER INFORMATION
- ------- -----------------
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
- ----------
Exhibit Index 23
- -------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
September 30, December 31,
1999 1998
Assets (Unaudited) ------------
- ------ -----------
Current assets:
Cash and cash equivalents $ 915 $ 390
Short-term investments 483 425
Receivables, net 1,500 1,138
Inventories, net 343 384
Deferred income taxes 227 256
Prepaid expenses and other 307 315
------ ------
3,775 2,908
------ ------
Operating property and equipment:
Owned 17,350 16,125
Accumulated depreciation and
amortization (5,257) (5,174)
------ ------
12,093 10,951
------ ------
Capital leases 3,027 2,702
Accumulated amortization (624) (599)
------ ------
2,403 2,103
------ ------
14,496 13,054
------ ------
Other assets:
Investments in affiliates 671 304
Intangibles, net 538 676
Aircraft lease deposits 592 545
Prepaid rent 627 631
Other 510 441
------ ------
2,938 2,597
------ ------
$ 21,209 $ 18,559
====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
September 30, December 31,
1999 1998
Liabilities and Stockholders' Equity (Unaudited)
- ------------------------------------ ------------- ------------
Current liabilities:
Short-term borrowings $ - $ 184
Current portions of long-term debt
and capital lease obligations 260 274
Advance ticket sales 1,735 1,429
Accounts payable 1,015 1,151
Other 2,940 2,630
------ ------
5,950 5,668
------ ------
Long-term debt 2,676 2,858
------ ------
Long-term obligations under capital leases 2,391 2,113
------ ------
Other liabilities and deferred credits:
Deferred pension liability 12 89
Postretirement benefit liability 1,543 1,424
Deferred gains 1,004 1,180
Other 1,560 1,123
------ ------
4,119 3,816
------ ------
Company-obligated mandatorily redeemable
preferred securities of a subsidiary trust 100 100
------ ------
Equity put options - 32
------ ------
Preferred stock committed to
Supplemental ESOP 815 691
------ ------
Stockholders' equity:
Preferred stock - -
Common stock at par 1 1
Additional capital invested 4,165 3,517
Retained earnings 2,040 1,028
Unearned ESOP preferred stock (213) (121)
Accumulated other comprehensive income 356 (2)
Treasury stock (1,182) (1,140)
Other (9) (2)
------ ------
5,158 3,281
------ ------
Commitments and contingent liabilities (See note)
$ 21,209 $ 18,559
====== ======
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
------------------
1999 1998
---- ----
Operating revenues:
Passenger $ 4,282 $ 4,263
Cargo 223 228
Other 340 292
------ ------
4,845 4,783
------ ------
Operating expenses:
Salaries and related costs 1,420 1,350
ESOP compensation expense 175 173
Aircraft fuel 465 470
Commissions 316 354
Purchased services 408 384
Aircraft rent 217 221
Landing fees and other rent 235 221
Depreciation and amortization 214 199
Aircraft maintenance 168 165
Other 608 551
------ ------
4,226 4,088
------ ------
Earnings from operations 619 695
------ ------
Other income (expense):
Interest expense (89) (92)
Interest capitalized 19 26
Interest income 21 15
Equity in earnings(loss) of affiliates (1) 19
Miscellaneous, net (6) (15)
------ ------
(56) (47)
------ ------
Earnings before income taxes and
distributions on preferred securities 563 648
Provision for income taxes 203 222
------ ------
Earnings before distributions on
preferred securities 360 426
Distributions on preferred securities,
net of tax (1) (1)
------ ------
Net earnings $ 359 $ 425
====== ======
Per share, basic: $ 6.18 $ 6.91
====== ======
Per share, diluted: $ 2.89 $ 3.71
====== ======
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
------------------
1999 1998
---- ----
Operating revenues:
Passenger $ 11,951 $ 11,777
Cargo 658 666
Other 937 837
------ ------
13,546 13,280
------ ------
Operating expenses:
Salaries and related costs 4,249 3,959
ESOP compensation expense 539 663
Aircraft fuel 1,280 1,346
Commissions 890 1,000
Purchased services 1,166 1,098
Aircraft rent 656 672
Landing fees and other rent 703 651
Depreciation and amortization 637 582
Aircraft maintenance 523 462
Other 1,705 1,559
------ ------
12,348 11,992
------ ------
Earnings from operations 1,198 1,288
------ ------
Other income (expense):
Interest expense (273) (265)
Interest capitalized 56 82
Interest income 44 44
Equity in earnings of affiliates 38 62
Gain on sale of Galileo stock 669 -
Miscellaneous, net 7 (38)
------ ------
541 (115)
------ ------
Earnings before income taxes,
distributions on preferred
securities and extraordinary item 1,739 1,173
Provision for income taxes 626 401
------ ------
Earnings before distributions on
preferred securities and
extraordinary item 1,113 772
Distributions on preferred securities,
net of tax (4) (4)
Extraordinary loss on early
extinguishment of debt, net of tax (3) -
------ ------
Net earnings $ 1,106 $ 768
====== ======
Per share, basic:
Earnings before extraordinary item $ 19.44 $ 11.97
Extraordinary loss on early
extinguishment of debt, net (0.05) -
------ ------
Net earnings $ 19.39 $ 11.97
====== ======
Per share, diluted:
Earnings before extraordinary item $ 9.22 $ 6.57
Extraordinary loss on early
extinguishment of debt, net (0.03) -
------ ------
Net earnings $ 9.19 $ 6.57
====== ======
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
------------------
1999 1998
---- ----
Cash and cash equivalents at beginning
of period $ 390 $ 295
------ ------
Cash flows from operating activities 2,161 2,854
------ ------
Cash flows from investing activities:
Additions to property and equipment (1,758) (2,390)
Proceeds on disposition of property
and equipment 147 413
Proceeds on sale of common shares
in Galileo 766 -
Decrease (increase) in short-term
investments (58) 103
Other, net (56) (40)
------ ------
(959) (1,914)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 286 830
Repayment of long-term debt (492) (247)
Principal payments under capital
lease obligations (209) (271)
Decrease in short-term borrowings (184) -
Purchase of equipment certificates
under Company operating leases (47) (693)
Repurchase of common stock (42) (247)
Dividends paid (11) (8)
Aircraft lease deposits (25) (160)
Other, net 47 8
------ ------
(677) (788)
------ ------
Increase in cash and cash equivalents 525 152
------ ------
Cash and cash equivalents at end
of period $ 915 $ 447
====== ======
Cash paid during the period for:
Interest (net of amounts capitalized) $ 180 $ 163
Income taxes $ 224 $ 129
Non-cash transactions:
Capital lease obligations incurred $ 482 $ 636
Net unrealized gain on investment
in Galileo $ 360 $ -
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
1998.
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 1998 Annual Report
on Form 10-K contains additional discussion of the
agreements, stock to be issued to employees and the related
accounting treatment. Since January 1999, 2,305,479 shares
of Class 1 and Class 2 ESOP Preferred Stock have been
committed to be released by the Company.
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 items.
Operating Property and Equipment
- --------------------------------
Effective April 1, 1999, United revised its estimate
of depreciable lives on certain of its aircraft types to 25
years and increased the residual value of these aircraft to
10 percent. Previously, lives on these aircraft ranged
from 20 to 23 years and residual values ranged from 4.5
percent to 7.3 percent. United also shortened the
estimated depreciable lives on certain other aircraft from
10 years to 4 years. These changes reduced United's
depreciation expense by $30 million for the nine months
ended September 30, 1999.
Per Share Amounts
- -----------------
Basic earnings per share represents net income
available to common stockholders divided 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 common shares
issuable upon conversion of ESOP shares committed to be
released.
Earnings Attributable to Common Three Months Ended Nine Months Ended
Stockholders (Millions) September 30 September 30
- ------------------------------- ------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $ 359 $ 425 $1,106 $ 768
Preferred stock dividends and other (31) (25) (94) (77)
----- ----- ----- -----
Earnings attributable to common
stockholders (Basic and Diluted) $ 328 $ 400 $1,012 $ 691
===== ===== ===== =====
Shares (Millions)
- -----------------
Weighted average shares
outstanding (Basic) 53.1 57.9 52.2 57.7
Convertible ESOP preferred stock 59.2 48.4 56.7 45.8
Other 1.0 1.5 1.3 1.6
----- ----- ----- -----
Weighted average number of
shares (Diluted) 113.3 107.8 110.2 105.1
===== ===== ===== =====
Earnings Per Share
Basic $ 6.18 $ 6.91 $19.39 $11.97
Diluted $ 2.89 $ 3.71 $ 9.19 $ 6.57
Segment Information
- -------------------
United has a global route network designed to transport
passengers and cargo between Domestic, Pacific, Latin
American and European destinations. These regions
constitute United's four reportable segments.
A reconciliation of the total amounts reported by
reportable segments to the applicable amounts in the
financial statements follows:
(In Millions) Three Months Ended September 30, 1999
- ------------- -------------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ----------
Revenue $3,340 $ 722 $ 201 $ 571 $4,834 $11 $4,845
Fully distributed earnings
before income taxes $ 500 $ 100 $ 22 $ 106 $ 728 $10 $ 738
(In Millions) Three Months Ended September 30, 1998
- ------------- -------------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ----------
Revenue $3,269 $ 760 $ 209 $ 534 $4,772 $11 $4,783
Fully distributed earnings
before income taxes $ 625 $ 48 $ 13 $ 124 $ 810 $11 $ 821
(In Millions) Nine Months Ended September 30, 1999
- ------------- -------------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ----------
Revenue $9,421 $2,006 $ 587 $1,500 $13,514 $32 $13,546
Fully distributed earnings
before income taxes $1,616 $ 262 $ 76 $ 296 $ 2,250 $28 $ 2,278
(In Millions) Nine Months Ended September 30, 1998
- ------------- -------------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ----------
Revenue $9,057 $2,165 $ 625 $1,400 $13,247 $33 $13,280
Fully distributed earnings
before income taxes $1,478 $ 49 $ 49 $ 233 $ 1,809 $27 $ 1,836
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(In Millions) 1999 1998 1999 1998
- ------------- ---- ---- ---- ----
Total fully distributed earnings
for reportable segments $ 728 $ 811 $2,250 $1,810
UAL subsidiary earnings 10 10 28 26
Less: ESOP compensation expense 175 173 539 663
---- ---- ----- -----
Total earnings before income taxes,
extraordinary item and distributions
on preferred securities $ 563 $ 648 $1,739 $1,173
==== ==== ===== =====
Included in the nine months ended September 30, 1999
Domestic, Pacific, Latin American and Atlantic fully
distributed earnings before income taxes is $393 million,
$134 million, $36 million and $106 million, respectively, of
pre-tax gain on the sale of Galileo stock.
Investments in Affiliates
- -------------------------
In June 1999, United sold 17,500,000 common shares of
Galileo International, Inc. ("Galileo") in a secondary
offering for $766 million, resulting in a pre-tax gain of
approximately $669 million. This sale reduced United's
holdings in Galileo from 32 percent to approximately 17
percent, requiring United to discontinue the equity method
of accounting for its investment in Galileo. United has
classified its remaining 15,940,000 shares of Galileo common
stock as available-for-sale. The market value of these
shares at September 30, 1999 ($642 million) is reflected in
Investments in Affiliates on the balance sheet and the
market value in excess of United's investment is classified
net-of-tax ($359 million) in accumulated other comprehensive
income. Equity earnings in Galileo were $16 million for the
three-month period ended September 30, 1998, and $40 million
and $54 million for the nine-month periods ended September
30, 1999 and 1998, respectively.
United owns approximately 2.1 million depositary
certificates in Equant, a provider of international data
network services to multinational businesses and a single
source for global desktop communications. Each depositary
certificate represents a beneficial interest in an Equant
common share. These depositary certificates are currently
subject to certain transferability restrictions and are
carried at their original cost, which is nominal. At
September 30, 1999, the estimated fair value of United's
investment in Equant is approximately $171 million.
GetThere.com is a leading provider of internet-based
travel planning products tailored to individual, corporate,
travel supplier and travel agency customers. United has a
minority interest in GetThere.com consisting of convertible
preferred stock, warrants and options. After investing $19
million in exchange for preferred shares and warrants,
United's holdings are convertible into an approximate 22
percent equity interest in GetThere.com. In October 1999,
GetThere.com filed an initial public offering for 5.0
million common shares. United has participation rights
allowing for the purchase of 10 percent of the shares
offered in the initial public offering. United accounts for
its investment in GetThere.com using the equity method of
accounting.
In July 1999, United and Buy.com agreed to form a joint
venture (BuyTravel.com) to sell travel on all major
airlines, as well as hotels, car rentals and cruises via the
Internet. Both United and Buy.com will have a 50 percent
interest in BuyTravel.com. United also received warrants
exercisable for 2.0 million shares of Buy.com common stock.
United will account for its investment in BuyTravel.com using
the equity method of accounting.
Other Comprehensive Income
- --------------------------
Total comprehensive income for the three- and nine-
month periods ending September 30, 1999 was $222 million
and $1,464 million, respectively, compared to $426 million
and $768 million for the three- and nine-month periods
ending September 30, 1998, respectively. Other
comprehensive income (loss) consisted of net unrealized
gains (losses) on securities of $(137) million and $358
million for the three- and nine-month periods ending
September 30, 1999, respectively, and $1 million for the
three-month period ending September 30, 1998. There was no
other comprehensive income during the nine-month period
ending September 30, 1998.
Retirement and Postretirement Plans
- -----------------------------------
On June 30, 1999, the Company re-measured its pension
and postretirement plans due to the addition to the plan of
approximately 6,000 public contact employees hired after
January 1, 1994 (see "Labor Agreements" in Management's
Discussion and Analysis of Financial Condition and Results
of Operations). The assumptions used for the re-
measurement of the plans were unchanged from December 31,
1998, except for a revision in the discount rate from 7.0%
to 7.75%. As of June 30, 1999, the projected benefit
obligation and the fair value of plan assets for the
pension plans are $7,472 million and $7,946 million,
respectively. The projected benefit obligation and the
fair value of plan assets for the postretirement plans are
$1,512 million and $114 million, respectively.
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, 1999, commitments for the purchase
of property and equipment, principally aircraft,
approximated $4.7 billion, after deducting advance
payments. An estimated $0.9 billion will be spent during
the remainder of 1999, $1.8 billion in 2000, $1.6 billion
in 2001 and $0.4 billion in 2002 and thereafter. The major
commitments are for the purchase of B777, B747, B767, A320
and A319 aircraft, which are scheduled to be delivered
through 2002.
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 $1.398 billion at September 30, 1999,
compared to $815 million at December 31, 1998. Cash flows
from operating activities for the nine-month period
amounted to $2.2 billion. Financing activities included
principal payments under debt and capital lease obligations
of $492 million and $209 million, respectively, and $25
million in aircraft lease deposits. Additionally, the
Company issued, and subsequently retired, $286 million in
debt to finance the acquisition of aircraft.
Property additions, including aircraft and aircraft
spare parts, amounted to $1.8 billion, while property
dispositions resulted in proceeds of $147 million. During
1999, United took delivery of two A320, eight A319, four
B777, two B757, three B767 and seven B747 aircraft.
Fourteen of the aircraft were purchased and twelve were
acquired under capital leases. In addition, United
acquired two B727 aircraft off-lease during 1999 and
retired five DC10 and six B747 aircraft.
United has certain non-core investments with market
values substantially in excess of their acquisition cost.
It is United's policy to monetize its non-core investments.
In June 1999, United sold 17.5 million shares of common
stock of Galileo receiving aggregate proceeds of $766
million. These proceeds will be used to achieve United's
financial goals which include investing in its core
business, improving its credit worthiness and returning
cash to shareholders.
At September 30, 1999, commitments for the purchase
of property and equipment, principally aircraft,
approximated $4.7 billion, after deducting advance
payments. Of this amount, an estimated $0.9 billion is
expected to be spent during the remainder of 1999. 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 $1.198 billion in
the nine months ended September 30 1999, compared to $1.288
billion for the same period in 1998. UAL's net earnings
before an extraordinary loss on early extinguishment of
debt were $1.109 billion ($9.22 per share, diluted),
compared to net earnings of $768 million during the same
period of 1998 ($6.57 per share, diluted). The 1999 nine-
month earnings include a pre-tax gain of $669 million
($3.88 per share) on the sale of a portion of United's
investment in Galileo (see "Investments in Affiliates" in
the Notes to Consolidated Financial Statements).
In the third quarter of 1999, UAL's earnings from
operations were $619 million compared to operating earnings
of $695 million in the third quarter of 1998. UAL had net
earnings in the 1999 third quarter of $359 million ($2.89
per share, diluted), compared to net earnings of $425
million in the same period of 1998 ($3.71 per share,
diluted).
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. 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, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
GAAP Fully GAAP Fully GAAP Fully GAAP Fully
(diluted) Distributed (diluted) Distributed (diluted) Distributed (diluted) Distributed
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Net income, before
gain on sale and
extraordinary item $ 359 $ 456 $ 425 $ 516 $ 681 $ 993 $ 768 $1,152
------ ------ ------ ------ ------ ------ ------ ------
Per Share, Diluted:
Earnings before
gain on sale and
extraordinary item $ 2.89 $ 3.75 $ 3.71 $ 4.02 $ 5.34 $ 8.16 $ 6.57 $ 8.93
Gain on sale - - - - 3.88 3.43 - -
Extraordinary item - - - - (0.03) (0.03) -
------ ------ ------ ------ ------ ------ ------ ------
Per share $ 2.89 $ 3.75 $ 3.71 $ 4.02 $ 9.19 $11.56 $ 6.57 $ 8.93
====== ====== ====== ====== ====== ====== ====== ======
The current relationship of earnings and earnings per share
as computed on a GAAP basis versus a Fully Distributed basis
may not be representative of the relationship in future periods
because of various factors. These factors include, but are not
limited to, the dependence of ESOP compensation expense on the
common stock price; trends and commitments with respect to wages;
and the convergence of shares assumed outstanding under the GAAP
basis as compared to the Fully Distributed basis.
Specific factors affecting UAL's consolidated operations for the
third quarter and first nine months of 1999 are described below.
Third Quarter 1999 Compared with Third Quarter 1998
---------------------------------------------------
Operating revenues increased $62 million (1%) and
United's revenue per available seat mile (unit revenue)
increased slightly to 10.50 cents compared to 10.39 cents a
year ago. Despite a 1% decrease in revenue passenger
miles, passenger revenues increased $19 million (0.4%) due
to a 2% increase in yield from 12.10 to 12.29 cents. In
addition, third quarter 1998 revenues were favorably
impacted by a strike at Northwest airlines. Available seat
miles across the system were up slightly over the third
quarter of 1998; however, passenger load factor decreased
1.0 point to 75.1%. The following analysis by market is
based on information reported to the U.S. Department of
Transportation:
Increase (Decrease)
-------------------
Available Seat Revenue Passenger Miles Revenue Per Revenue
Miles (Capacity) (Traffic) Passenger Mile (Yield)
---------------- ----------------------- ----------------------
Domestic 5% 1% 1%
Pacific (18%) (16%) 10%
Atlantic 14% 14% (7%)
Latin America (13%) (4%) -
System - (1%) 2%
Pacific yields improved on capacity reductions in the
region and improving Asian economies. Atlantic yield
continues to be impacted by a negative pricing environment
resulting from excess industry capacity. Improving
economic conditions and industry capacity reductions
resulted in increased unit revenue in the Latin market
although yields remained flat year-over-year.
Cargo revenues decreased $5 million (2%) despite a
slight increase in freight ton miles, as freight yields
declined 3% for the period. Other operating revenues
increased $48 million (16%) due to growth in frequent flyer
program partner-related revenues and fuel sales to third
parties.
Operating expenses increased $138 million (3%) and
United's cost per available seat mile inclusive of ESOP
compensation expense increased 3%, from 8.90 cents to 9.18
cents. Without the ESOP compensation expense, United's
cost per available seat mile would have been 8.80 cents, an
increase of 3% from the 1998 third quarter. Salaries and
related costs increased $70 million (5%) primarily due to
increased staffing in certain customer-contact positions.
Commissions decreased $38 million (11%) due to a change in
the commission structure implemented in the third quarter
of 1998 and lower commissionable revenues. Purchased
services increased $24 million (6%) due to increases in
computer reservations fees, credit card discounts and Year
2000 related spending. Depreciation and amortization
increased $15 million (8%) due to an increase in the number
of owned aircraft partially offset by changes in
depreciable lives of certain aircraft. Other operating
expense increased $57 million (10%) primarily due to costs
associated with fuel sales to third parties.
Other expense amounted to $56 million in the third
quarter of 1999 compared to $47 million in the third
quarter of 1998. Interest capitalized decreased $7 million
(27%) as a result of a lower weighted average interest
rate. Equity in earnings of affiliates decreased $20
million primarily due to the sale of the Company's
investment in Galileo (see "Investments in Affiliates" in
the Notes to Consolidated Financial Statements).
Nine Months 1999 Compared with Nine Months 1998
-----------------------------------------------
Operating revenues increased $266 million (2%) and
United's revenue per available seat mile (unit revenue)
remained the same at 10.18 cents. Passenger revenues
increased $174 million (1%) because of a slight increase in
yield from 12.45 to 12.50 cents and a 1% increase in
United's revenue passenger miles. Available seat miles
across the system were up 2%; however passenger load factor
decreased 0.6 points to 71.5%. The following analysis by
market is based on information reported to the U.S.
Department of Transportation:
Increase (Decrease)
-------------------
Available Seat Revenue Passenger Miles Revenue Per Revenue
Miles (Capacity) (Traffic) Passenger Mile (Yield)
---------------- ----------------------- ----------------------
Domestic 5% 2% 1%
Pacific (13%) (11%) (2%)
Atlantic 17% 16% (7%)
Latin America (7%) (2%) (5%)
System 2% 1% -
Despite improving second and third quarter Pacific
yields, weak first quarter demand for travel in Pacific
markets continues to negatively impact year-to-date yields.
Yields in other international markets have been impacted by
a negative pricing environment resulting from excess
industry capacity.
Cargo revenues decreased $8 million (1%) despite
increased freight ton miles of 2%. A 2% decline in freight
yield together with a 3% lower mail yield, resulted in a 3%
decrease in cargo yield for the period. Other operating
revenues increased $100 million (12%) due to increases in
frequent flyer program partner-related revenues and fuel
sales to third parties.
Operating expenses increased $356 million (3%) and
United's cost per available seat mile, inclusive of ESOP
compensation expense increased 1%, from 9.21 cents to 9.29
cents. Without the ESOP compensation expense, United's
cost per available seat mile would have been 8.89 cents, an
increase of 2% from the 1998 nine-month period. ESOP
compensation expense decreased $124 million (19%),
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. Salaries and related costs
increased $290 million (7%) due to ESOP mid-term wage
adjustments which took place in July 1998 and increased
staffing in certain customer-contact positions. Aircraft
fuel decreased $66 million (5%) due to a 6% decrease in the
cost of fuel from 59.4 cents to 55.7 cents a gallon.
Commissions decreased $110 million (11%) due to a change in
the commission structure implemented in the third quarter
of 1998 as well as a slight decrease in commissionable
revenues. Purchased services increased $68 million (6%)
due to increases in computer reservations fees and year
2000 expenses. Depreciation and amortization increased $55
million (10%) due to an increase in the number of owned
aircraft and losses on disposition of aircraft partially
offset by changes in depreciable lives of certain aircraft.
Aircraft maintenance increased $61 million (13%) due to an
increase in heavy maintenance visits. Other operating
expenses increased $146 million (9%) primarily due to costs
associated with fuel sales to third parties.
Other expense amounted to $128 million in the first
nine months of 1999 (excluding the gain on the Galileo
transaction - see "Investments in Affiliates" in the Notes
to Consolidated Financial Statements) compared to $115
million in the first nine months of 1998. Interest
capitalized decreased $26 million (32%) as a result of
lower advance payments on the acquisition of aircraft and a
lower weighted average interest rate. Equity in earnings
of affiliates decreased $24 million (39%) due primarily to
the sale of the Company's investment in Galileo.
Miscellaneous, net included foreign exchange gains of $10
million in 1999 compared to foreign exchange losses of $24
million in 1998.
LABOR AGREEMENTS
----------------
On May 27, 1999, United's public contact employees
(primarily customer service and reservations sales and
service representatives) ratified the tentative agreement
between the Company and the International Association of
Machinists and Aerospace Workers ("IAM"). The contract
provides for an across-the-board wage increase of 5.5
percent effective April 13, 2000. In addition, certain
employees hired after January 1, 1994 received an immediate
14.5% pay increase and benefits comparable to other affected
employees. Terms of the contract are amendable in July
2000.
The Company's contracts with the Air Line Pilots'
Association International ("ALPA") and the IAM become
amendable in April and July 2000, respectively. The Company
is currently in the process of negotiating a new contract
with ALPA and expects to begin negotiations shortly for a
new contract with the IAM. Wage rates for U.S.-based non-
union employees will be adjusted in April 2000 as well.
These negotiations and wage rate adjustments are
expected to materially increase the Company's salaries and
related costs over 1999 levels. At the same time, once the
final ESOP shares are committed to be released in April
2000, the Company will no longer record ESOP compensation
expense. It is the Company's objective through this wage
adjustment process to provide compensation for its employees
that, on average over the life of the labor contracts, is
competitive with peer group compensation. In this regard,
wages for airline employees over the last year have
increased at faster than historical rates. Thus, to achieve
competitive compensation will result in higher salaries and
related costs than the Company originally anticipated.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
-----------------------------------------
During the second quarter, United reinstated its jet
fuel-hedging program. This program consists of hedging
100% of probable jet fuel requirements with crude oil
purchased call options and fixed price jet fuel contracts.
It is United's goal to hedge 100% of probable jet fuel
purchases for year 2000 by December 1999. The purchased
call options have been designated as a hedge of anticipated
jet fuel purchases; accordingly, gains or losses on hedge
positions are recognized upon contract expiration as a
component of aircraft fuel inventory. At September 30,
1999, United has purchased call options on approximately
1.5 billion gallons of fuel products, which represents 89%
of United's anticipated fourth quarter fuel requirements
and 26% of its expected year 2000 fuel requirements. At
September 30, 1999, United has fixed price purchase
contracts for approximately 11% of its anticipated fourth
quarter fuel requirements and 6% of its expected 2000
requirements.
During the fourth quarter, United will reinstate its
foreign currency hedging program. United's strategy will
consist of purchasing put option contracts with little or
no intrinsic value in yen, euro, Australian dollars and
British pounds. The amount and duration of the options are
synchronized to anticipated sales, and thus the put options
will be designated as a hedge. A component of this
strategy includes selling correlation options in the
previously mentioned currencies. These written options
will not qualify for hedge accounting treatment and will be
marked-to-market with changes in the option's fair value
recorded in earnings.
UPDATE ON YEAR 2000 READINESS*
------------------------------
Readers should refer to "Update on Year 2000 Readiness"
in Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 1998 Annual
Report on Form 10-K for background information.
IT systems, Non-IT systems and Critical Business
Partners. The Company believes it has successfully
completed the five-step readiness plan. The Company
anticipates safe uninterrupted operations of the airlines
into the calendar year 2000. Through the remainder of 1999,
the Company will continue re-testing mission critical IT
systems and non-IT systems.
The Company expects to operate all scheduled domestic
flights into the calendar year 2000. The Company is in the
process of reviewing the air traffic control and airport
systems at international locations to determine if Year 2000
issues warrant cancellation of specific international
routes. Some international flights may be cancelled during
the New Year weekend due to low passenger demand.
The Company has developed contingency plans for all
mission critical business processes by revising existing
business interruption contingency plans to address
contingencies unique to the Year 2000 date rollover. These
contingency plans include performing processes manually,
repairing or obtaining replacement systems, changing
suppliers and reducing or suspending operations. During the
third quarter, the Company conducted airline readiness
reviews to ensure that all divisions of the Company have
completed their five-step readiness plan, including
validating all contingency plans. In addition, the Company
will set up a corporate Command Center to monitor and
respond to potential Year 2000 issues worldwide.
The Company anticipates that project costs will range
between $80 and $85 million, with approximately 35% being
capitalized. To date the Company has incurred $74 million
in project costs ($43 million in expense and $31 million in
capital). During 1999, the Company incurred $45 million in
project costs ($20 million in expense and $25 million in
capital).
AIR CANADA
- ----------
On October 19, 1999, the Company announced its
intentions, along with Deutsche Lufthansa AG ("Lufthansa"),
to provide a financial package of up to 730 million
Canadian dollars for Air Canada. United's investment in
Air Canada's non-voting convertible preferred shares will
be made through an investment partnership owned by UAL
(40%) and Lufthansa (60%).
The remaining UAL investment in Air Canada will
consist of the purchase from and subsequent leaseback to
Air Canada of three Airbus A330 aircraft and a commitment
by UAL to guarantee a 160 million Canadian dollar line of
credit.
COMMON STOCK DIVIDENDS AND SHARE REPURCHASE
- -------------------------------------------
On November 1, 1999, UAL's Board of Directors
approved a plan to begin paying common stock dividends
totaling $1.25 per common share in the year 2000. The
payment of dividends is contingent upon stockholder
approval of amendments to the Company's charter, which will
be voted on at the UAL annual meeting in May 2000. If
approved, participants in the Company's ESOP plan will be
eligible to receive dividends ($5.00 per year per ESOP
share, as each ESOP share is convertible into four common
shares) in the same manner as public stockholders. In
addition, the Board of Directors approved the repurchase of
up to $300 million of the Company's common stock.
OUTLOOK
-------
The Company expects its 1999 system capacity to grow
2%, which is less than the forecasted industry capacity
growth rate. Unit revenues are estimated to range between
0.5% and 1% higher than 1998.
Unit costs for 1999, excluding the ESOP charge, are
estimated to increase approximately 2%, based on an average
fuel price of approximately 57.5 cents per gallon including
taxes. Among the factors affecting costs will be the cap
in international commissions instituted last year, the
decrease in commissions instituted this year and the level
of spending on Year 2000 (see "Update of Year 2000
Readiness").
The Company forecasts 1999 earnings to range
between $9.75 and $10.05 per Fully Distributed share. The
forecasted range of Fully Distributed earnings per share
excludes the impact of the gain on sale of 17.5 million
shares of Galileo.
The Company expects the positive trends underlying
July and August's strong performance to continue in the
fourth quarter. Therefore, the Company expects fourth
quarter Fully Distributed earnings per share to improve
upon last year's $1.52, and range between $1.60 and $1.90.
Management's Discussion and Analysis of Financial
Condition and Results of Operations contains sections with
forward-looking statements which are identified with an
asterisk (*). Information included in the "Update on Year
2000 Readiness" and the "Outlook for 1999" sections is
forward-looking and actual results could differ materially
from expected results. Factors that could significantly
impact expected capacity, unit revenues, Fully Distributed
unit costs, fuel prices and Fully Distributed earnings per
share include: industry capacity decisions, the airline pricing
environment, fuel prices, actions of travel agents, the
success of the Company's cost-control efforts, actions of
the U.S., foreign and local governments, willingness of
customers to travel, the Pacific economic environment and
travel patterns, foreign currency exchange rate
fluctuations, the stability of the U.S. economy, UAL common
stock price fluctuations, the economic environment of the
airline industry and the global economic environment. Some
factors that could significantly impact the Company's
expected Year 2000 readiness and the estimated cost thereof
include: the effectiveness of the Company's contingency
plans if such plans are needed, and the sufficiency and
effectiveness of the Year 2000 programs of the Company's
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 1998 and "Financial Instruments
and Risk Management" in Management's Discussion and Analysis of Financial
Condition and Results of Operations. Significant changes which have occurred
since year-end are as follows:
Foreign Currency Risk -
- -----------------------
September 30, 1999
------------------
(In millions, except average contract rates) Notional Average Estimated
- -------------------------------------------- Amount Contract Rate Fair Value
-------- ------------- ----------
(Pay)/Receive)*
Forward exchange contracts
Japanese Yen - Purchased forwards $ 113 107.11 $ 1
- Sold forwards $ 62 105.92 $ -
Hong Kong Dollar - Sold forwards $ 77 7.85 $ (1)
French Franc - Purchased forwards $ 50 5.05 $ (1)
Euro - Purchased forwards $ 117 1.37 $ (3)
Currency options
Japanese Yen - Call options $ 30 114.80 $ (3)
- Put options $ 30 115.57 $ -
September 30, 1999
------------------
(In millions, except average contract rates) Notional Average Estimated
- -------------------------------------------- Amount Contract Rate Fair Value
-------- ------------- ----------
(Pay)/Receive)*
Purchased call contracts - Crude oil $ 772 $20.02/bbl $ 130
*Estimated fair values represent the amount United would pay/receive on
September 30, 1999 to terminate the contracts.
PART II. OTHER INFORMATION
---------------------------
Item 5. Other Information.
- ------ -----------------
On September 23, 1999, the Board of Directors of UAL
Corporation approved an amendment to the by-laws of UAL
Corporation, to require advance notice if a stockholder
wishes to propose business or nominate a public director
at the annual meeting of stockholders. The by-laws now
provide that a stockholder of record may propose
business for the annual meeting of stockholders, if the
stockholder has given written notice to the Secretary
not less than 120 days prior to the first anniversary of
the preceding year's annual meeting of stockholders.
The notice must include the proposed business and
certain other information required by the by-laws, such
as name, address, and share holdings. No business
proposed by a stockholder can be transacted at the
annual meeting of stockholders unless the notice
satisfies the requirements of the by-laws.
A common stockholder of record may nominate candidates
for election as public directors to the Board of
Directors at the annual meeting of stockholders by
giving written notice to the Secretary. The notice must
be received not later than 120 days prior to the first
anniversary of the preceding year's annual meeting of
stockholders, or with respect to a special meeting, not
later than the close of business on the tenth (10th) day
following the day on which notice of the date of the
stockholders' meeting was mailed or public disclosure of
the date of the stockholders' meeting was made,
whichever first occurs. The notice of nomination must
contain the information required by the by-laws. No
nomination by a stockholder will be considered unless
the notice satisfies the requirements of the by-laws.
Accordingly, in order for a stockholder of record to
propose business or nominate a public director at the
year 2000 annual meeting of stockholders, proper notice
must be submitted no later than January 19, 2000. If a
stockholder of record wishes to submit a proposal for
inclusion in the Company's proxy statement and proxy
card for the year 2000 annual meeting, the proposal must
be submitted no later than November 23, 1999 and comply
with the SEC rules. Proposals must be submitted to the
Secretary, Francesca M. Maher, UAL Corporation, P.O. Box
66919, Chicago, Illinois 60666. The amended and
restated by-laws of UAL Corporation are attached to this
Form 10-Q as Exhibit 3.2.
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, 1999, 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
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
Dated: November 11, 1999
Exhibit Index
-------------
Exhibit No. Description
- ---------- -----------
3.2 By-laws of UAL Corporation
10.1 Form of Restricted Stock Agreement, dated as of
July 13, 1999, between UAL Corporation and each of Rono
Dutta, Douglas A. Hacker, and Andrew P. Studdert
10.2 Letter Agreement No. 6-1162-BRB-400 to the
Agreement dated December 18, 1990 between Boeing and
United Air Lines, Inc. ("United") (and United Worldwide
Corporation) for acquisition of Boeing 777-200 aircraft
(as previously amended and supplemented, the "777-200
Purchase Agreement" (filed as Exhibit 10.7 to UAL's
Form 10-K for the year ended December 31, 1990, and
incorporated herein by reference; supplements thereto
filed as (i) Exhibits 10.1, 10.2 and 10.22 to UAL's
Form 10-Q for the quarter ended June 30, 1993, (ii)
Exhibit 10.2 to UAL's Form 10-K for the year ended
December 31, 1993, (iii) Exhibit 10.14 to UAL's
Form 10-Q for the quarter ended June 30, 1994, (iv)
Exhibits 10.27 and 10.28 to UAL's Form 10-K for the
year ended December 31, 1994, (v) Exhibits 10.2 and
10.3 to UAL's Form 10-Q for the quarter ended March 31,
1995, (vi) Exhibits 10.4, through 10.6 to UAL's Form 10-
Q for the quarter ended June 30, 1995, (vii) Exhibits
10.37 through 10.40 to UAL's Form 10-K for the year
ended December 31, 1995, (viii) Exhibits 10.9 through
10.12 and 10.17 through 10.19 to UAL's Form 10-Q for
the quarter ended June 30, 1996, (ix) Exhibits 10.38
through 10.43 to UAL's Form 10-K for the year ended
December 31, 1998, and (x) Exhibit 10.1 to UAL's Form
10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference)). (Exhibit 10.2
hereto is filed with a request for confidential
treatment of certain portions thereof.)
12 Computation of Ratio of Earnings to Fixed Charges
12.1 Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements
27 Financial Data Schedule