1
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 June 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
-------- ----------
(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
---------------------------------------------------------
(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 July 31, 1999
------ -------------
Common Stock ($0.01 par value) 52,959,884
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UAL Corporation and Subsidiary Companies Report on Form 10-Q
For the Quarter Ended June 30, 1999
Index
PART I. FINANCIAL INFORMATION Page No.
- ------ --------------------- -------
Item 1. Financial Statements
Condensed Statements of Consolidated 3
Financial Position - as of June 30, 1999
(Unaudited) and December 31, 1998
Statements of Consolidated Operations 5
(Unaudited) - for the three months and
six months ended June 30, 1999 and 1998
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the six
months ended June 30, 1999 and 1998
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 19
PART II. OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
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PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
- ------ --------------------
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
June 30,
1999 December 31,
(Unaudited) 1998
-------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1,144 $ 390
Short-term investments 231 425
Receivables, net 1,360 1,138
Inventories, net 275 384
Deferred income taxes 252 256
Prepaid expenses and other 295 315
-------- --------
3,557 2,908
-------- --------
Operating property and equipment:
Owned 17,034 16,125
Accumulated depreciation and amortization (5,215) (5,174)
-------- --------
11,819 10,951
-------- --------
Capital leases 3,027 2,702
Accumulated amortization (599) (599)
-------- --------
2,428 2,103
-------- --------
14,247 13,054
-------- --------
Other assets:
Investments in affiliates 882 304
Intangibles, net 669 676
Aircraft lease deposits 535 545
Prepaid rent 657 631
Other 497 441
-------- --------
3,240 2,597
-------- --------
$ 21,044 $ 18,559
======== ========
See accompanying notes to consolidated financial statements.
4
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
June 30,
1999 December 31,
(Unaudited) 1998
---------- ------------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ -- $ 184
Current portions of long-term debt and
capital lease obligations 277 274
Advance ticket sales 1,814 1,429
Accounts payable 1,054 1,151
Other 2,856 2,630
-------- --------
6,001 5,668
-------- --------
Long-term debt 2,693 2,858
-------- --------
Long-term obligations under capital leases 2,374 2,113
-------- --------
Other liabilities and deferred credits:
Deferred pension liability 230 89
Postretirement benefit liability 1,505 1,424
Deferred gains 1,022 1,180
Other 1,542 1,123
-------- --------
4,299 3,816
-------- --------
Company-obligated mandatorily redeemable
preferred securities of a subsidiary trust 100 100
-------- --------
Equity put options -- 32
-------- --------
Preferred stock committed to Supplemental ESOP 780 691
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock at par 1 1
Additional capital invested 3,860 3,517
Retained earnings 1,713 1,028
Unearned ESOP preferred stock (83) (121)
Accumulated other comprehensive income 493 (2)
Treasury stock (1,186) (1,140)
Other (1) (2)
-------- --------
4,797 3,281
-------- --------
Commitments and contingent liabilities (See note)
$ 21,044 $ 18,559
======== ========
See accompanying notes to consolidated financial statements.
5
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)
Three Months
Ended June 30
-----------------
1999 1998
------- -------
Operating revenues:
Passenger $ 3,989 $ 3,948
Cargo 227 224
Other 325 270
------- -------
4,541 4,442
------- -------
Operating expenses:
Salaries and related costs 1,420 1,300
ESOP compensation expense 182 232
Aircraft fuel 420 435
Commissions 291 328
Purchased services 379 376
Aircraft rent 219 219
Landing fees and other rent 244 228
Depreciation and amortization 213 192
Aircraft maintenance 176 141
Other 564 521
------- -------
4,108 3,972
------- -------
Earnings from operations 433 470
------- -------
Other income (expense):
Interest expense (91) (93)
Interest capitalized 17 30
Interest income 12 14
Equity in earnings of affiliates 15 21
Gain on sale of Galileo stock 669 --
Miscellaneous, net (3) (13)
------- -------
619 (41)
------- -------
Earnings before income taxes, distributions on
preferred securities and extraordinary item 1,052 429
Provision for income taxes 379 146
------- -------
Earnings before distributions on preferred
securities and extraordinary item 673 283
Distributions on preferred securities, net of tax (1) (1)
Extraordinary loss on early extinguishment of debt, net of tax (3) --
------- -------
Net earnings $ 669 $ 282
======= =======
Per share, basic:
Earnings before extraordinary item $ 12.26 $ 4.43
Extraordinary loss on early extinguishment of debt, net (0.05) --
------- -------
Net earnings $ 12.21 $ 4.43
======= =======
Per share, diluted:
Earnings before extraordinary item $ 5.80 $ 2.44
Extraordinary loss on early extinguishment of debt, net (0.02) --
------- -------
Net earnings $ 5.78 $ 2.44
======= =======
See accompanying notes to consolidated financial statements.
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UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)
Six Months
Ended June 30
-------------------
1999 1998
-------- -------
Operating revenues:
Passenger $ 7,669 $ 7,514
Cargo 435 439
Other 598 544
------- -------
8,702 8,497
------- -------
Operating expenses:
Salaries and related costs 2,829 2,609
ESOP compensation expense 364 490
Aircraft fuel 815 876
Commissions 574 645
Purchased services 759 713
Aircraft rent 438 452
Landing fees and other rent 467 431
Depreciation and amortization 424 383
Aircraft maintenance 354 297
Other 1,099 1,008
------- -------
8,123 7,904
------- -------
Earnings from operations 579 593
------- -------
Other income (expense):
Interest expense (184) (173)
Interest capitalized 36 56
Interest income 23 30
Equity in earnings of affiliates 39 43
Gain on sale of Galileo stock 669 --
Miscellaneous, net 14 (24)
------- -------
597 (68)
------- -------
Earnings before income taxes, distributions on preferred
securities and extraordinary item 1,176 525
Provision for income taxes 423 179
------- -------
Earnings before distributions on preferred
securities and extraordinary item 753 346
Distributions on preferred securities, net of tax (3) (3)
Extraordinary loss on early extinguishment of debt, net of tax (3) --
------- -------
Net earnings $ 747 $ 343
======= =======
Per share, basic:
Earnings before extraordinary item $ 13.27 $ 5.05
Extraordinary loss on early extinguishment of debt, net (0.05) --
------- -------
Net earnings $ 13.22 $ 5.05
======= =======
Per share, diluted:
Earnings before extraordinary item $ 6.33 $ 2.80
Extraordinary loss on early extinguishment of debt, net (0.03) --
------- -------
Net earnings $ 6.30 $ 2.80
======= =======
See accompanying notes to consolidated financial statements.
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UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In Millions)
Six Months
Ended June 30
--------------------
1999 1998
------- ---------
Cash and cash equivalents at beginning
of period $ 390 $ 295
------- -------
Cash flows from operating activities 1,592 1,787
------- -------
Cash flows from investing activities:
Additions to property and equipment (1,306) (1,580)
Proceeds on disposition of property and
equipment 141 351
Proceeds on sale of common shares in Galileo 766 --
Decrease in short-term investments 194 111
Other, net (25) (40)
------- -------
(230) (1,158)
------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 286 823
Repayment of long-term debt (456) (103)
Principal payments under capital
lease obligations (165) (209)
Purchase of equipment certificates under
Company operating leases (47) (693)
Increase (decrease) in short-term borrowings (184) 10
Aircraft lease deposits (25) (149)
Other, net (17) (15)
------- -------
(608) (336)
------- -------
Increase in cash and cash equivalents 754 293
------- -------
Cash and cash equivalents at end of period $ 1,144 $ 588
======= =======
Cash paid during the period for:
Interest (net of amounts capitalized) $ 133 $ 111
Income taxes $ 55 $ 67
Non-cash transactions:
Capital lease obligations incurred $ 482 $ 465
Net unrealized gain on investment in Galileo $ 496 $ --
See accompanying notes to consolidated financial statements.
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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 six-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 recapitalization, stock to be issued to
employees and the related accounting treatment. Since January 1, 1999, an
additional 1,536,986 shares of Class 1 and Class 2 ESOP Preferred Stock have
been committed to be released.
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.
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 common shares issuable
upon conversion of ESOP shares committed to be released.
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Earnings Attributable to Common Stockholders (Millions)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- -------------------
1999 1998 1999 1998
-------------------- -------------------
Earnings before extraordinary item and preferred stock dividends $ 672 $ 282 $ 750 $ 343
Preferred stock dividends (32) (25) (63) (52)
------- ------- ------- -------
Earnings attributable to common stockholders before
extraordinary item (Basic and Diluted) $ 640 $ 257 $ 687 $ 291
======= ======= ======= =======
Shares (Millions)
Weighted average shares outstanding (Basic) 52.2 57.9 51.8 57.6
Convertible ESOP preferred stock 56.7 45.7 55.4 44.4
Other 1.4 1.7 1.4 1.8
------- ------- ------- -------
Weighted average number of shares (Diluted) 110.3 105.3 108.6 103.8
======= ======= ======= =======
Earnings Per Share (before extraordinary item)
Basic $ 12.26 $ 4.43 $ 13.27 $ 5.05
Diluted $ 5.80 $ 2.44 $ 6.33 $ 2.80
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 June 30, 1999
- ------------- --------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
Revenue $ 3,194 $636 $180 $520 $ 4,530 $ 11 $ 4,541
Fully distributed earnings
before income taxes $ 851 $161 $ 38 $174 $ 1,224 $ 10 $ 1,234
(In Millions) Three Months Ended June 30, 1998
- ------------- --------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
Revenue $ 3,059 $690 $192 $490 $ 4,431 $ 11 $ 4,442
Fully distributed earnings
before income taxes $ 561 $ 2 $ 5 $ 84 $ 652 $ 9 $ 661
(In Millions) Six Months Ended June 30, 1999
- ------------- ------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
Revenue $ 6,081 $ 1,284 $386 $929 $ 8,680 $ 22 $ 8,702
Fully distributed earnings
before income taxes $ 1,116 $ 162 $ 54 $190 $ 1,522 $ 18 $ 1,540
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(In Millions) Six Months Ended June 30, 1998
- ------------- ------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- ----- ----- -----
Revenue $ 5,788 $ 1,405 $416 $866 $ 8,475 $ 22 $ 8,497
Fully distributed earnings
before income taxes $ 853 $ 1 $ 36 $109 $ 999 $ 16 $ 1,015
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30 June 30
------------------------ ------------------------
(In Millions) 1999 1998 1999 1998
- ------------- --------- ------- ------- ------
Total fully distributed earnings
for reportable segments $ 1,224 $ 652 $ 1,522 $ 999
UAL subsidiary earnings 10 9 18 16
Less: ESOP compensation expense 182 232 364 490
------- ----- ------- -----
Total earnings before income taxes, extraordinary
item and distributions on preferred securities $ 1,052 $ 429 $ 1,176 $ 525
======= ===== ======= =====
Included in 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
June 30, 1999 ($852 million) is reflected in Investments in Affiliates on the
balance sheet and the market value over United's investment is classified
net-of-tax ($496 million) in accumulated other comprehensive income. Equity
earnings in Galileo were $17 million and $18 million for the three-month periods
ended June 30, 1999 and 1998, respectively and $40 million and $38 million for
the six-month periods ended June 30, 1999 and 1998, respectively.
United owns approximately 2.1 million depository certificates in
Equant, a provider of international data network services to multinational
businesses and a single source for global desktop communications. Each
depository certificate represents a beneficial interest in an Equant common
share. These depository certificates are currently subject to certain
transferability restrictions and are carried at their original cost, which is
nominal. At June 30, 1999, the estimated fair value of United's investment in
Equant is approximately $198 million.
GetThere.com, formerly Internet Travel Network, is a leading provider
of internet-based travel planning products tailored to individual, corporate,
travel supplier and travel agency
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customers. United has a minority interest in GetThere.com consisting of
convertible preferred stock, warrants and options. United's holdings are
convertible into an approximate 25 percent interest in GetThere.com. 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 will account for its investment in
BuyTravel.com using the equity method of accounting.
Other Comprehensive Income
Total comprehensive income for the three- and six-month periods ending
June 30, 1999 was $1,164 million and $1,242 million, respectively, compared to
$281 million and $342 million for the three- and six-month periods ending June
30, 1998, respectively. Other comprehensive income consisted of net unrealized
gains (losses) on securities of $495 million for the three- and six-month
periods ending June 30, 1999 and $(1) million for the three- and six-month
periods ending June 30, 1998, respectively.
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 did not have a significant
impact on United's results of operations.
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 June 30, 1999, commitments for the purchase of property and
equipment, principally aircraft, approximated $5.5 billion, after deducting
advance payments. An estimated $1.3 billion will be spent during the remainder
of 1999, $2.0 billion in 2000, $1.9 billion in 2001 and $0.3 billion in 2002 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.
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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 $1.4 billion at June 30, 1999, compared to $815 million at December 31,
1998. Cash flows from operating activities for the six-month period amounted to
$1.6 billion. Financing activities included principal payments under debt and
capital lease obligations of $456 million and $165 million, respectively and $25
million in aircraft lease deposits. Additionally, the Company issued, and
subsequently retired, $286 million in debt during the period to finance the
acquisition of aircraft.
Property additions, including aircraft and aircraft spare parts,
amounted to $1.3 billion, while property dispositions resulted in proceeds of
$141 million. In the first six months of 1999, United took delivery of two A320,
eight A319, three B777, two B757, two B767 and six B747 aircraft. Eleven of the
aircraft were purchased and 12 were acquired under capital leases. In addition,
United acquired two B727 aircraft off-lease during the first six months and
retired four DC10 and three 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 June 30, 1999, commitments for the purchase of property and
equipment, principally aircraft, approximated $5.5 billion, after deducting
advance payments. Of this amount, an estimated $1.3 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 $579 million in the first six
months of 1999, compared to operating earnings of $593 million in the first six
months of 1998. UAL's net earnings before an extraordinary loss on early
extinguishment of debt were $750 million ($6.33 per share, diluted), compared to
net earnings of $343 million during the same period of 1998 ($2.80 per share,
diluted).
In the second quarter of 1999, UAL's earnings from operations were
$433 million compared to operating earnings of $470 million in the second
quarter of 1998. UAL had net earnings in the 1999 second quarter of $672 million
($5.78 per share, diluted) before the extraordinary loss, compared to net
earnings of $282 million in the same period of 1998 ($2.44 per share, diluted).
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The 1999 earnings include a pre-tax gain of $669 million ($3.95 per
share for the six-month period; $3.88 per share for the quarter) on the sale of
a portion of United's investment in Galileo (see "Investments in Affiliates" in
the Notes to Consolidated Financial Statements).
Management believes that a more complete understanding of UAL's
results may 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 Six Months Ended
------------------ ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 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 $ 244 $ 349 $ 282 $418 $322 $ 537 $343 $ 637
----- ----- ----- ----- ----- ----- ----- -----
Per Share, Diluted:
Earnings before gain on
sale and extraordinary
item $1.92 $2.86 $2.44 $3.24 $2.38 $4.40 $2.80 $4.91
Gain on sale 3.88 3.43 - - 3.95 3.43 - -
Extraordinary item (0.02) (0.02) - - (0.03) (0.02) - -
----- ----- ----- ----- ----- ----- ----- -----
$5.78 $6.27 $2.44 $3.24 $6.30 $7.81 $2.80 $4.91
===== ===== ===== ===== ===== ===== ===== =====
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
second quarter and first six months of 1999 are described below.
14
Second Quarter 1999 Compared with Second Quarter 1998
-----------------------------------------------------
Operating revenues increased $99 million (2%) and United's revenue per
available seat mile (unit revenue) decreased 1% to 10.19 cents. Passenger
revenues increased $41 million (1%) partially due to a slight increase in
United's revenue passenger miles. Strong domestic performance provided an
overall increase in yield from 12.58 to 12.69 cents. The slight increase in
revenue passenger miles in conjunction with system available seat miles
increasing 4% reduced passenger load factor to 70.1% as compared to 72.6%. The
following analysis by market is based on information reported to the U.S.
Department of Transportation:
Increase (Decrease)
-------------------
Revenue Per Revenue
Capacity (ASMs) Traffic (RPMs) Passenger Mile (Yield)
--------------- -------------- ----------------------
Domestic 6% 1% 3%
Pacific (11%) (13%) 2%
Atlantic 20% 17% (9%)
Latin America (6%) (1%) (6%)
System 4% -% 1%
Despite capacity reductions in the region, weak demand for travel in
the Pacific markets led to a decline in load factor. The improvements in Pacific
yield were offset by a 2-point decline in load factor resulting in flat unit
revenue. Yields in other international markets continue to be impacted by weak
economies, a negative pricing environment and excess industry capacity.
Cargo revenues increased $3 million (1%) on increased freight ton
miles of 5%. Freight yield decreased 3% and mail yield decreased 2% for a total
decrease in cargo yield of 3% for the period. Other operating revenues increased
$55 million (20%) due to increases in frequent flyer program partner-related
revenues and fuel sales to third parties.
Operating expenses increased $136 million (3%) while United's cost
per available seat mile decreased 0.2%, from 9.25 cents to 9.23 cents, including
ESOP compensation expense. Without the ESOP compensation expense, United's cost
per available seat mile would have been 8.82 cents, an increase of 1% from the
1998 second quarter. ESOP compensation expense decreased $50 million (22%),
reflecting a decrease in the estimated average fair value of ESOP stock
committed to be released to employees. Salaries and related costs increased $120
million (9%) due to ESOP mid-term wage adjustments which took place in July 1998
and to increased staffing in certain customer-contact positions. Aircraft
maintenance increased $35 million (25%) due to an increase in heavy maintenance
visits. Depreciation and amortization increased $21 million (11%) due to an
increase in the number of owned aircraft and losses on disposition of aircraft
partially offset by changes in depreciable lives on certain aircraft. Other
expenses increased $43 million (8%) largely due to costs associated with fuel
sales to third parties. Commissions decreased $37 million (11%) due to a change
in the commission structure implemented in the third quarter of 1998 and lower
commissionable revenues. Aircraft fuel decreased $15 million (3%) as a 6%
decrease in the cost of fuel from 58.0 cents to 54.5 cents a gallon more than
offset increased consumption.
Other expense amounted to $50 million in the second quarter of 1999
(excluding the gain on the Galileo transaction - see "Investments in Affiliates"
in the Notes to Consolidated
15
Financial Statements) compared to $41 million in the second quarter of 1998.
Interest capitalized decreased $13 million (43%) as a result of lower advance
payments on the acquisition of aircraft and a lower weighted average interest
rate. Miscellaneous, net included foreign exchange gains of $2 million in the
second quarter of 1999 compared to foreign exchange losses of $7 million in the
second quarter of 1998.
Six Months 1999 Compared with Six Months 1998
---------------------------------------------
Operating revenues increased $205 million (2%) and United's revenue
per available seat mile (unit revenue) decreased 1% to 10.01 cents. Passenger
revenues increased $155 million (2%) despite a slight decrease in yield from
12.67 to 12.61 cents. Available seat miles across the system were up 3%
resulting in a passenger load factor 69.6%, down 0.3 points. The following
analysis by market is based on information reported to the U.S. Department of
Transportation:
Increase (Decrease)
-------------------
Revenue Per Revenue
Capacity (ASMs) Traffic (RPMs) Passenger Mile (Yield)
--------------- -------------- ----------------------
Domestic 5% 3% 1%
Pacific (10%) (8%) (3%)
Atlantic 18% 17% (8%)
Latin America (4%) (1%) (7%)
System 3% 3% -%
Despite capacity reductions in the region, weak demand for travel in
Pacific markets continues to negatively impact yields. Yields in other
international markets continue to be impacted by weak economies, a negative
pricing environment and excess industry capacity.
Cargo revenues decreased $4 million (1%) despite increased freight
ton miles of 3%. A 2% lower freight yield and a 4% lower mail yield resulted in
a 3% decrease in cargo yield for the period. Other operating revenues increased
$54 million (10%) due to increases in frequent flyer program partner-related
revenues and fuel sales to third parties.
Operating expenses increased $219 million (3%) and United's cost per
available seat mile decreased slightly, from 9.38 cents to 9.36 cents, including
ESOP compensation expense. Without the ESOP compensation expense, United's cost
per available seat mile would have been 8.94 cents, an increase of 2% from the
1998 six-month period. ESOP compensation expense decreased $126 million (26%),
reflecting the decrease in the estimated average fair value of ESOP stock
committed to be released to employees. Purchased services increased $46 million
(6%) due to increases in computer reservations fees and Y2K expenses.
Depreciation and amortization increased $41 million (11%) 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. Salaries and related
costs increased $220 million (8%) due to ESOP mid-term wage adjustments which
took place in July 1998 and increased staffing in certain customer-contact
positions. Aircraft maintenance increased $57 million (19%) due to an increase
in heavy maintenance visits. Commissions decreased $71 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. Aircraft fuel decreased
$61 million (7%) due to a 9% decrease in the cost of fuel from 59.8 cents
16
to 54.4 cents a gallon. Aircraft rent decreased $14 million (3%) due to aircraft
refinancing completed in the first quarter of 1998.
Other expense amounted to $72 million in the first six months of 1999
(excluding the gain on the Galileo transaction - see "Investments in Affiliates"
in the Notes to Consolidated Financial Statements) compared to $68 million in
the first six months of 1998. Interest capitalized decreased $20 million (36%)
as a result of lower advance payments on the acquisition of aircraft and a lower
weighted average interest rate. Miscellaneous, net included foreign exchange
gains of $23 million in 1999 compared to foreign exchange losses of $11 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.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
- -----------------------------------------
During the second quarter, United reinstated its jet fuel hedging
program. This program now consists of hedging 100% of probable jet fuel
requirements with crude oil purchased call options and fixed price jet fuel
contracts. 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 June 30, 1999, United has purchased call options on approximately
1.4 billion gallons of fuel products, which represents 69% of United's
anticipated third and fourth quarter fuel requirements and 8% of its expected
2000 fuel requirements. At June 30, 1999, United has contracted to purchase
approximately 8% of its anticipated third and fourth quarter fuel requirements.
As of July 31, 1999, United has hedged 100% of its probable third and fourth
quarter jet fuel requirements.
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. The Company has substantially completed the remediation,
initial system testing and business process integration testing of mainframe
hardware and software and other hardware infrastructure including voice and data
networks and all internally developed IT software applications.
Non IT systems. The remediation and testing of date-sensitive, critical
non-IT systems is complete. Re-testing of mission critical systems will continue
throughout the year.
17
Critical Business Partners. The Company has contacted all of its
"Strategic" and "Preferred" Critical Business Partners. United believes these
partners have a satisfactory Year 2000 program in place.
The results of the study undertaken by the Air Transport Association
("ATA") to determine the process domestic airports are using to achieve Year
2000 readiness, shows that most large domestic airports have made substantial
progress towards being Year 2000 ready. A similar project undertaken by the
International Air Transport Association ("IATA") shows that although most
international airports have made progress during the past few months, certain
key airports are behind schedule.
The Company's aircraft manufacturers have concluded that there are no
safety of flight issues related to the Year 2000 date rollover as to their
aircraft.
Concurrent with ensuring that all the systems will be remediated and
tested for the Year 2000 date rollover, the Company continues to develop
contingency plans for all mission critical business processes. These contingency
plans, together with the airline readiness reviews planned during the third
quarter of 1999, are designed to reduce the likelihood that the Company's
operations will be interrupted by Year 2000 related issues. 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 $85 and
$90 million, with approximately 34% being capitalized. To date the Company has
incurred $53 million in project costs ($37 million in expense and $16 million in
capital). During 1999, the Company incurred $25 million in project costs ($14
million in expense and $11 million in capital). During the third quarter, the
Company plans to spend up to $17 million on the replacement of desktop
computers.
OUTLOOK FOR 1999*
- -----------------
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 zero and 1% higher than 1998.
Unit costs for 1999, excluding ESOP charge, are estimated to range
between 1.5% and 2% higher than 1998, based on an average fuel price of
approximately 59 cents per gallon including taxes. Among the factors affecting
costs will be the cap in international commissions instituted last year and the
level of spending on Year 2000 (see "Update on Year 2000 Readiness").
The following guidance pertaining to fully distributed earnings per
share is consistent with the corresponding guidance set forth in UAL's Form 8-K
dated June 7, 1999. The Company forecasts 1999 earnings to range between $9.00
and $11.00 per fully distributed share, with its internal goal being to earn
$11.00 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's earnings per share performance will be helped
by the reduction in share count stemming from the $500 million common stock
repurchase program completed earlier this year.
18
The Company anticipates a modest year-over-year increase in unit
revenue for the third quarter, based on continued strong domestic economic
performance and gradual improvements in the Pacific. Given this positive
environment, the Company expects third quarter fully distributed earnings per
share to range between $3.60 and $4.00.
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, international revenues and profits, unit
revenues, fully distributed 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, willingness of customers to
travel, the Asian 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 results of the system integration testing 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.
19
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 -
June 30, 1999
-----------------------------------------------------------
(In millions, except average contract rates) Notional Average Estimated
Amount Contract Rate Fair Value
--------------- ----------------- ----------------
Forward exchange contracts (Pay)/Receive*
Japanese Yen - Purchased forwards $ 90 118.76 $ (2)
- Sold forward $ 55 120.88 $ -
Hong Kong Dollar - Sold forwards $ 75 7.84 $ (1)
French Franc - Purchased forwards $ 50 5.05 $ -
Euro - Purchased forwards $ 117 1.37 $ (2)
Currency options
Japanese Yen - Call options $ 149 125.08 $ (7)
- Put options $ 148 125.89 $ 1
Price Risk (Aircraft fuel) -
June 30, 1999
-------------------------------------------------------------
(In millions, except average contract rates) Notional Average Estimated
Amount Contract Rate Fair Value
--------------- ----------------- ---------------
(Pay)/Receive*
Purchased call contracts - Crude oil $ 570 $ 17.65/bbl $ 37
*Estimated fair values represent the amount United would pay/receive
on June 30, 1999 to terminate the contracts.
20
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
At the annual meeting of the stockholders of UAL Corporation on May 18,
1999, the following matters were voted upon:
Description Votes
----------- -----
1. Election of Board of Directors
Public Directors:
James E. Goodwin 45,652,763 For
162,211 Withheld
Gerald Greenwald 45,645,933 For
169,041 Withheld
John F. McGillicuddy 45,647,947 For
167,027 Withheld
James J. O'Connor 45,647,965 For
167,009 Withheld
Paul E. Tierney, Jr. 45,614,741 For
200,233 Withheld
Independent Directors:
John W. Creighton, Jr. 4 For
0 Withheld
Richard D. McCormick 4 For
0 Withheld
Hazel R. O'Leary 4 For
0 Withheld
John K. Van de Kamp 4 For
0 Withheld
ALPA Director:
Michael H. Glawe 1 For
0 Withheld
IAM Director:
John F. Peterpaul 1 For
0 Withheld
Salaried/Management Employee Director:
Deval L. Patrick 3 For
0 Withheld
2. Ratification of the Appointment of Independent Public 104,645,089 For
Accountants 2,635,958 Against
1,481,282 Abstain
21
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 April 20, 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.
Form 8-K dated June 7, 1999 to report a press release (United
Airlines May traffic declines 1.3%)
22
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: August 16, 1999
23
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
10.1 Employment Agreement, effective as of April 12, 1999, between
UAL Corporation, United Air Lines, Inc. and James E. Goodwin
10.2 Amendment No. 2 to Employment Agreement, dated as of April 5,
1999, between UAL Corporation and Gerald Greenwald
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