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, 2000
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, 2000
----- -------------
Common Stock ($0.01 par value) 51,338,457
UAL Corporation and Subsidiary Companies Report on Form 10-Q
------------------------------------------------------------
For the Quarter Ended June 30, 2000
-----------------------------------
Index
-----
PART I. FINANCIAL INFORMATION Page No.
------ --------------------- -------
Item 1. Financial Statements
Condensed Statements of Consolidated 3
Financial Position - as of June 30, 2000
(Unaudited) and December 31, 1999
Statements of Consolidated Operations 5
(Unaudited) - for the three months and
six months ended June 30, 2000 and 1999
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the six
months ended June 30, 2000 and 1999
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 19
Market Risk
PART II. OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
----------
Exhibit Index 24
-------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
June 30,
2000 December 31,
Assets (Unaudited) 1999
------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 661 $ 310
Short-term investments 503 379
Receivables, net 1,688 1,284
Inventories, net 361 340
Deferred income taxes 221 222
Prepaid expenses and other 392 400
------ ------
3,826 2,935
------ ------
Operating property and equipment:
Owned 18,650 17,695
Accumulated depreciation and
amortization (5,503) (5,207)
------ ------
13,147 12,488
------ ------
Capital leases 2,921 3,022
Accumulated amortization (589) (645)
------ ------
2,332 2,377
------ ------
15,479 14,865
------ ------
Other assets:
Investments in affiliates 379 533
Intangibles, net 580 568
Aircraft lease deposits 581 594
Prepaid rent 592 585
Other, net 938 883
------ ------
3,070 3,163
------ ------
$22,375 $20,963
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
June 30,
2000 December 31,
Liabilities and Stockholders' Equity (Unaudited) 1999
------------------------------------ ----------- -----------
<S> <C> <C>
Current liabilities:
Short-term borrowings $ - $ 61
Current portions of long-term debt
and capital lease obligations 314 282
Advance ticket sales 1,994 1,412
Accounts payable 1,150 967
Other 3,331 2,689
------ ------
6,789 5,411
------ ------
Long-term debt 2,554 2,650
------ ------
Long-term obligations under capital leases 2,202 2,337
------ ------
Other liabilities and deferred credits:
Deferred pension liability 126 70
Postretirement benefit liability 1,566 1,489
Deferred gains 949 986
Other 1,990 1,876
------ ------
4,631 4,421
------ ------
Company-obligated mandatorily redeemable
preferred securities of a
subsidiary trust 99 100
------ ------
Preferred stock committed to
Supplemental ESOP 751 893
------ ------
Stockholders' equity:
Preferred stock - -
Common stock at par 1 1
Additional capital invested 4,395 4,099
Retained earnings 2,262 2,138
Unearned ESOP preferred stock - (28)
Accumulated other comprehensive income 182 352
Treasury stock (1,484) (1,402)
Other (7) (9)
------ ------
5,349 5,151
------ ------
Commitments and contingent
liabilities (See note)
$22,375 $20,963
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)
Three Months
Ended June 30
2000 1999
---- ----
<S> <C> <C>
Operating revenues:
Passenger $ 4,567 $ 3,989
Cargo 233 227
Other 309 325
------ ------
5,109 4,541
------ ------
Operating expenses:
Salaries and related costs 1,589 1,420
ESOP compensation expense 55 182
Aircraft fuel 589 420
Commissions 252 291
Purchased services 429 379
Aircraft rent 223 219
Landing fees and other rent 247 244
Depreciation and amortization 247 213
Special charges 61 -
Aircraft maintenance 163 176
Other 649 564
------ ------
4,504 4,108
------ ------
Earnings from operations 605 433
------ ------
Other income (expense):
Interest expense (94) (91)
Interest capitalized 20 17
Interest income 20 12
Equity in earnings (loss) of
affiliates (1) 15
Gain on sale of Galileo stock - 669
Miscellaneous, net (14) (3)
------ ------
(69) 619
------ ------
Earnings before income taxes,
distributions on preferred securities
and extraordinary item 536 1,052
Provision for income taxes 199 379
------ ------
Earnings before distributions on
preferred securities and
extraordinary item 337 673
Distributions on preferred
securities, net of tax (1) (1)
Extraordinary loss on early
extinguishment of debt, net of tax - (3)
------ ------
Net earnings $ 336 $ 669
====== ======
Per share, basic:
Earnings before extraordinary item $ 6.61 $ 12.26
Extraordinary loss on early
extinguishment of debt, net - (0.05)
------ ------
Net earnings $ 6.61 $ 12.21
====== ======
Per share, diluted:
Earnings before extraordinary item $ 2.86 $ 5.80
Extraordinary loss on early
extinguishment of debt, net - (0.02)
------ ------
Net earnings $ 2.86 $ 5.78
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions, Except Per Share)
Six Months
Ended June 30
2000 1999
---- ----
<S> <C> <C>
Operating revenues:
Passenger $ 8,535 $ 7,669
Cargo 450 435
Other 669 598
------ ------
9,654 8,702
------ ------
Operating expenses:
Salaries and related costs 3,013 2,829
ESOP compensation expense 147 364
Aircraft fuel 1,128 815
Commissions 501 574
Purchased services 832 759
Aircraft rent 444 438
Landing fees and other rent 475 467
Depreciation and amortization 478 424
Special charges 102 -
Aircraft maintenance 352 354
Other 1,324 1,099
------ ------
8,796 8,123
------ ------
Earnings from operations 858 579
------ ------
Other income (expense):
Interest expense (192) (184)
Interest capitalized 40 36
Interest income 36 23
Equity in earnings (loss) of affiliates (2) 39
Gain on sale of Galileo stock - 669
Miscellaneous, net (26) 14
------ ------
(144) 597
------ ------
Earnings before income taxes, distributions
on preferred securities, extraordinary
item and cumulative effect 714 1,176
Provision for income taxes 265 423
------ ------
Earnings before distributions on
preferred securities, extraordinary
item and cumulative effect 449 753
Distributions on preferred securities,
net of tax (3) (3)
Extraordinary loss on early
extinguishment of debt, net of tax - (3)
Cumulative effect of accounting
change, net of tax (209) -
------ ------
Net earnings $ 237 $ 747
====== ======
Per share, basic:
Earnings before extraordinary item
and cumulative effect $ 8.02 $ 13.27
Extraordinary loss on early
extinguishment of debt, net - (0.05)
Cumulative effect of accounting
change, net (4.14) -
------ ------
Net earnings $ 3.88 $ 13.22
====== ======
Per share, diluted:
Earnings before extraordinary item
and cumulative effect $ 3.48 $ 6.33
Extraordinary loss on early
extinguishment of debt, net - (0.03)
Cumulative effect of accounting
change, net (1.80) -
------ ------
Net earnings $ 1.68 $ 6.30
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In Millions)
Six Months
Ended June 30
2000 1999
---- ----
<S> <C> <C>
Cash and cash equivalents at
beginning of period $ 310 $ 390
------ ------
Cash flows from operating activities 2,102 1,592
------ ------
Cash flows from investing activities:
Additions to property and equipment (1,143) (1,306)
Proceeds on disposition of
property and equipment 6 141
Proceeds on sale of common shares
in Galileo - 766
Decrease (increase) in short-term
investments (124) 194
Other, net (154) (25)
------ ------
(1,415) (230)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 200 286
Repayment of long-term debt (279) (456)
Principal payments under capital
lease obligations (98) (165)
Purchase of equipment debt certificates
under Company leases - (47)
Repurchase of common stock (81) -
Decrease in short-term borrowings (61) (184)
Aircraft lease deposits 5 (25)
Dividends paid (41) -
Other, net 19 (17)
------ ------
(336) (608)
------ ------
Increase in cash and cash equivalents 351 754
------ ------
Cash and cash equivalents at end
of period $ 661 $ 1,144
====== ======
Cash paid during the period for:
Interest (net of amounts capitalized) $ 151 $ 133
Income taxes $ 19 $ 55
Non-cash transactions:
Capital lease obligations incurred $ 3 $ 482
Net unrealized gain (loss) on
investments $ (170) $ 495
See accompanying notes to consolidated financial statements.
</TABLE>
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 1999.
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 1999 Annual Report on
Form 10-K contains additional discussion of the agreements,
stock to be issued to employees and the related accounting
treatment. Shares earned in 1999 were allocated in March 2000
as follows: 434,465 shares of Class 2 ESOP Preferred Stock were
contributed to the Non-Leveraged ESOP and an additional 248,572
shares were allocated in "book entry" form under the
Supplemental Plan. Also, 2,390,931 shares of Class 1 ESOP
Preferred Stock were allocated under the Leveraged ESOP.
Finally, an additional 857,096 shares of Class 1 and Class 2
ESOP Preferred Stock have been committed to be released by the
Company since January 1, 2000.
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 before cumulative effect 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.
<TABLE>
<CAPTION>
Earnings Attributable to Common Three Months Six Months
Stockholders (Millions) Ended June 30 Ended June 30
------------------------------- 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income before cumulative effect
and extraordinary item $ 336 $ 672 $ 446 $ 750
Preferred stock dividends and other (3) (32) (41) (63)
---- ---- ---- ----
Earnings attributable to common
stockholders (Basic and Diluted) $ 333 $ 640 $ 405 $ 687
==== ==== ==== ====
Shares (Millions)
-----------------
Weighted average shares outstanding(Basic) 50.5 52.2 50.5 51.8
Convertible ESOP preferred stock 65.4 56.7 65.0 55.4
Other 0.9 1.4 0.9 1.4
----- ----- ----- -----
Weighted average number of shares(Diluted) 116.8 110.3 116.4 108.6
===== ===== ===== =====
Earnings Per Share (before cumulative
effect and extraordinary item)
-------------------------------------
Basic $ 6.61 $12.26 $ 8.02 $13.27
Diluted $ 2.86 $ 5.80 $ 3.48 $ 6.33
</TABLE>
Other Comprehensive Income
--------------------------
Total comprehensive income for the three- and six-month
periods ending June 30, 2000 was $261 million and $67 million,
respectively, compared to $1,164 million and $1,242 million for
the three- and six-month periods ending June 30, 1999,
respectively. Other comprehensive income consisted of net
unrealized gains (losses) on securities of $(75) million and
$(170) million for the three- and six-month periods ending June
30, 2000, respectively and $495 million for both the three- and
six-month periods ending June 30, 1999.
Investments
-----------
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 ($428 million, net of tax). This sale reduced
United's holdings in Galileo from 32 percent to approximately 15
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.
Segment Information
-------------------
United has a global route network designed to transport
passengers and cargo between destinations in North America, the
Pacific, Latin America and Europe. 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:
<TABLE>
<CAPTION>
(In Millions) Three Months Ended June 30, 2000
Reportable
Latin Segment Consolidated
Domestic Pacific Atlanic America Total Other Total
-------- ------- ------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $3,536 $ 769 $ 597 $ 196 $5,098 $ 11 $5,109
Fully distributed earnings* $517 $ 35 $ 76 $ 14 $ 642 $ 10 $ 652
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Three Months Ended June 30, 1999
Reportable
Latin Segment Consolidated
Domestic Pacific Atlanic America Total Other Total
-------- ------- ------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $3,194 $ 636 $ 520 $ 180 $4,530 $ 11 $4,541
Fully distributed earnings* $458 $ 27 $ 68 $ 2 $ 555 $ 10 $ 565
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Six Months Ended June 30, 2000
Reportable
Latin Segment Consolidated
Domestic Pacific Atlanic America Total Other Total
-------- ------- ------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $6,726 $1,458 $1,043 $ 404 $9,631 $ 23 $9,654
Fully distributed earnings* $750 $ 67 $ 87 $ 37 $ 941 $ 22 $ 963
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Six Months Ended June 30, 1999
Reportable
Latin Segment Consolidated
Domestic Pacific Atlanic America Total Other Total
-------- ------- ------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $6,081 $1,284 $ 929 $ 386 $8,680 $ 22 $8,702
Fully distributed earnings* $723 $ 28 $ 84 $ 18 $ 853 $ 18 $ 871
</TABLE>
*Fully distributed earnings before special charges, gain on
sale, income taxes, cumulative effect of accounting change and
extraordinary loss on debt.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(In Millions) 2000 1999 2000 1999
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total fully distributed earnings
for reportable segments $ 642 $ 555 $ 941 $ 853
Special charges (61) - (102) -
Gain on sale - 669 - 669
UAL subsidiary earnings 10 10 22 18
ESOP compensation expense (55) (182) (147) (364)
---- ---- ---- ----
Total earnings before income taxes,
distributions on preferred
securities, extraordinary item
and cumulative effect $ 536 $1,052 $ 714 $1,176
==== ===== ==== =====
</TABLE>
Accounting Changes
------------------
During the first quarter of 2000, UAL changed its method of
accounting for the sale of mileage to participating partners in
its Mileage Plus program, in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements."
Under the new accounting method, a portion of revenue from the
sale of mileage (previously recognized in other revenue) is
deferred and recognized as passenger revenue when the
transportation is provided. Accordingly, UAL has recorded a
charge of $209 million, net of tax, for the cumulative effect of
a change in accounting principle to reflect the application of
the accounting method to prior years. This change resulted in a
reduction to revenues of approximately $12 million and $17
million in the second quarter and six-month periods of 2000,
respectively and would have impacted the second quarter and six-
month periods of 1999 by $18 million and $25 million,
respectively. As of June 30, 2000, the deferred revenue balance
relating to Mileage Plus was $389 million.
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, 2000, commitments for the purchase of property
and equipment, principally aircraft, approximated $4.5 billion,
after deducting advance payments. An estimated $1.4 billion
will be spent during the remainder of 2000, $1.9 billion in 2001
and $1.2 billion in 2002 and thereafter. The major commitments
are for the purchase of A319, A320, B747, B767 and B777
aircraft, which are scheduled to be delivered through 2002. The
above numbers include a recent conversion of 12 option aircraft
to firm orders to be delivered in 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 $1.2 billion at June 30, 2000, compared to $689
million at December 31, 1999. Cash flows from operating
activities amounted to $2.1 billion. Financing activities
included principal payments under debt and capital lease
obligations of $279 million and $98 million, respectively.
Additionally, the Company issued, and subsequently retired, $200
million in long-term debt during the period to finance the
acquisition of aircraft.
Property additions, including aircraft and aircraft spare
parts, amounted to $1.1 billion. Property dispositions resulted
in proceeds of $6 million. In the first six months of 2000,
United took delivery of two A319, four A320, one B747, two B767
and two B777 aircraft. All of these aircraft were purchased.
In addition, United retired three DC10 aircraft in the first six
months.
At June 30, 2000, commitments for the purchase of property
and equipment, principally aircraft, approximated $4.5 billion,
after deducting advance payments. Of this amount, an estimated
$1.4 billion is expected to be spent during the remainder of
2000. 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 $858 million in the
first six months of 2000, compared to operating earnings of $579
million in the first six months of 1999. UAL's net earnings
before the cumulative effect of an accounting change were $446
million ($3.48 per share, diluted), compared to net earnings
before an extraordinary loss on early extinguishment of debt of
$750 million in the same period of 1999 ($6.33 per share,
diluted).
In the second quarter of 2000, UAL's earnings from
operations were $605 million compared to operating earnings of
$433 million in the second quarter of 1999. UAL had net
earnings in the 2000 second quarter of $336 million ($2.86 per
share, diluted), compared to net earnings before the
extraordinary loss of $672 million ($5.80 per share, diluted) in
the same period of 1999.
The 2000 earnings for the quarter and six months include a
special charge of $15 million, net of tax, for seven leased B747-
238 aircraft that will continue to be leased but will no longer
be used for operating purposes beyond 2000 and a special charge
of $23 million, net of tax, for the retirement of the inflight
video system on certain B777-222 aircraft, which is being
replaced by an enhanced and more reliable inflight video system.
In addition, the 2000 earnings for the six-month period include
a special charge of $26 million, net of tax, associated with the
asset write-down and losses related to subleases on non-
operating British Aerospace Advanced Turbo-Prop ("ATP") aircraft
previously used in the United Express operation.
The 1999 earnings include a gain of $428 million, net of
tax, on the sale of a portion of United's investment in Galileo
(see "Investments" 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. As of April 2000,
all ESOP preferred shares are considered earned and assumed
outstanding for diluted earnings per share under generally
accepted accounting principles (GAAP). Beginning with the third
quarter 2000, Fully Distributed and GAAP quarterly earnings will
be the same; however, year-to-date results will continue to be
reported on a Fully Distributed basis for the year 2000 using the
methodology described above. A comparison of results reported on
a Fully Distributed basis to results reported under GAAP is as
follows (in millions, except per share):
<TABLE>
<CAPTION>
Three Months Ended
June 30, 2000 June 30, 1999
GAAP Fully GAAP Fully
(diluted) Distributed (diluted) Distributed
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net income $ 336 $ 370 $ 669 $ 761
----- ----- ----- -----
Per share, diluted:
Earnings before special charges,
gain on sale and extraordinary
item $ 3.19 $ 3.47 $ 1.92 $ 2.86
Special charges (0.33) (0.33) - -
Gain on sale - - 3.88 3.43
Extraordinary item - - (0.02) (0.02)
----- ----- ----- -----
Earnings per share $ 2.86 $ 3.14 $ 5.78 $ 6.27
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 June 30, 1999
GAAP Fully GAAP Fully
(diluted) Distributed (diluted) Distributed
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net income $ 237 $ 326 $ 747 $ 949
Per share, diluted:
Earnings before special charges,
gain on sale,cumulative effect
and extraordinary item $ 4.04 $ 5.08 $ 2.38 $ 4.40
Special charges (0.56) (0.55) - -
Gain on sale - - 3.95 3.43
Cumulative effect of
accounting change (1.80) (1.79) - -
Extraordinary item - - (0.03) (0.02)
----- ----- ----- -----
Earnings per share $ 1.68 $ 2.74 $ 6.30 $ 7.81
===== ===== ===== =====
</TABLE>
Specific factors affecting UAL's consolidated operations
for the second quarter and first six months of 2000 are described
below.
Second Quarter 2000 Compared with Second Quarter 1999
-----------------------------------------------------
Operating revenues increased $568 million (13%) and
United's revenue per available seat mile (unit revenue)
increased 14% to 11.57 cents. Passenger revenues increased $578
million (15%) due to a 7% increase in yield to 13.62 cents.
United's revenue passenger miles increased 7%, while available
seat miles across the system were down 1% over the second
quarter of 1999, resulting in a passenger load factor increase
of 5.5 points to 75.6%. The following analysis by market is
based on information reported to the U.S. Department of
Transportation:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Available Seat Revenue Passenger Miles Revenue Per Revenue
Miles (Capacity) (Traffic) Passenger Mile (Yield)
---------------- ----------------------- ----------------------
<S> <C> <C> <C>
Domestic (4%) 4% 8%
Pacific 11% 18% 7%
Atlantic 3% 6% 11%
Latin America (13%) 5% 6%
System (1%) 7% 7%
</TABLE>
Cargo revenues increased $6 million (3%), despite a
decrease in cargo yield of 1%. Other operating revenues
decreased $16 million (5%) primarily due to the decrease in
frequent-flyer program partner-related revenues as a result of a
change in accounting principle.
Operating expenses increased $396 million (10%) and
United's cost per available seat mile (unit cost) increased 11%,
from 9.23 cents to 10.21 cents. Salaries and related costs
increased $169 million (12%) due to increased salaries in April
2000 as a result of the end of the ESOP. ESOP compensation
expense decreased $127 million (70%) as the Company discontinued
recording ESOP compensation expense when the final ESOP shares
were committed to be released in April 2000. Aircraft fuel
increased $169 million (40%) due to a 38% increase in the cost
of fuel from 54.5 cents to 75.0 cents a gallon. Commissions
decreased $39 million (13%) due to a change in the commission
structure implemented in the fourth quarter of 1999. Purchased
services increased $50 million (13%) due to increases in
computer reservations fees and credit card discounts.
Depreciation and amortization increased $34 million (16%) due to
an increase in the number of owned aircraft. Other operating
expenses increased $85 million (15%) primarily due to costs
associated with fuel sales to third parties.
Other non-operating expense amounted to $69 million in the
second quarter of 2000 compared to $50 million in the second
quarter of 1999 (excluding the gain on the Galileo transaction -
see "Investments" in the Notes to Consolidated Financial
Statements). Equity in earnings of affiliates decreased $16
million as a result of the Company discontinuing the equity
method of accounting for its investment in Galileo.
Miscellaneous, net includes $3 million in losses on currency
options and $4 million in foreign exchange losses in the second
quarter 2000 compared to $2 million in gains on currency options
and $3 million in foreign exchange losses in the 1999 second
quarter.
Six Months 2000 Compared with Six Months 1999
---------------------------------------------
Operating revenues increased $952 million (11%) and
United's revenue per available seat mile (unit revenue)
increased 11% to 11.12 cents. Passenger revenues increased $866
million (11%) due to an 8% increase in yield to 13.60 cents.
United's revenue passenger miles increased 3%, while available
seat miles across the system remained unchanged, resulting in a
passenger load factor increase of 2.4 points to 72.0%. The
following analysis by market is based on information reported to
the U.S. Department of Transportation:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Available Seat Revenue Passenger Miles Revenue Per Revenue
Miles (Capacity) (Traffic) Passenger Mile (Yield)
---------------- ----------------------- ----------------------
<S> <C> <C> <C>
Domestic (1%) 3% 8%
Pacific 4% 5% 9%
Atlantic 3% 4% 10%
Latin America (12%) 1% 3%
System - 3% 8%
</TABLE>
Cargo revenues increased $15 million (3%), despite a
decrease in cargo yield of 3%. Other operating revenues
increased $71 million (12%) due to increased fuel sales to third
parties, partially offset by the decrease in frequent-flyer
program partner-related revenues as a result of a change in
accounting principle.
Operating expenses increased $673 million (8%) and
United's cost per available seat mile (unit cost) increased 8%,
from 9.36 cents to 10.11 cents. Salaries and related costs
increased $184 million (7%) due to increased salaries in April
2000 as a result of the end of the ESOP. ESOP compensation
expense decreased $217 million (60%) as the Company discontinued
recording ESOP compensation expense once the final ESOP shares
were committed to be released in April 2000. Aircraft fuel
increased $313 million (38%) due to a 36% increase in the cost
of fuel from 54.4 cents to 74.1 cents a gallon. Commissions
decreased $73 million (13%) due to a change in the commission
structure implemented in the fourth quarter of 1999. Purchased
services increased $73 million (10%) due to increases in
computer reservations fees and credit card discounts.
Depreciation and amortization increased $54 million (13%) due to
an increase in the number of owned aircraft. Other operating
expenses increased $225 million (21%) primarily due to costs
associated with fuel sales to third parties.
Other non-operating expense amounted to $144 million in
2000 compared to $72 million in 1999 (excluding the gain on the
Galileo transaction - see "Investments" in the Notes to
Consolidated Financial Statements). Equity in earnings of
affiliates decreased $41 million as a result of the Company
discontinuing the equity method of accounting for its investment
in Galileo. Miscellaneous, net includes $10 million in losses
on foreign currency options and $1 million in other foreign
exchange gains in the first six months of 2000, compared to $16
million in gains on written yen call options and $4 million of
other foreign exchange gains for the same period in 1999.
LABOR AGREEMENTS
----------------
On April 12, 2000, the Company's contract with the Air Line
Pilots' Association International ("ALPA") became amendable. The
Company has been in negotiations with ALPA since December 1998
for a new contract. However, on April 14, 2000, United and ALPA,
in a joint meeting with the National Mediation Board ("NMB"),
briefed the NMB on the status of negotiations and formally
requested their mediation assistance.
On July 12, 2000, the Company's contracts with the
International Association of Machinists and Aerospace Workers
("IAM") became amendable. The Company has been in negotiations
with the IAM since January for new contracts. Under the terms
of the Railway Labor Act, United's current agreements with ALPA
and the IAM will remain in effect while negotiations continue.
US AIRWAYS ACQUISITION
----------------------
UAL and US Airways Group, Inc. ("US Airways") announced
May 24 that their boards of directors had approved a definitive
merger agreement pursuant to which US Airways will be acquired
by United in an all-cash transaction valued at $4.3 billion.
The combination of United and US Airways will deliver
significant benefits to millions of passengers and hundreds of
communities throughout the United States. The new network will
make traveling more convenient for passengers, connecting US
Airways' eastern U.S. markets with United's east-west and
international markets. The merger is conditioned upon, among
other things, the approvals of US Airways stockholders,
regulatory clearance and other customary closing conditions. As
part of the agreement with US Airways, UAL has agreed to pay a
$50 million termination fee, under certain conditions, in the
event the merger does not take place. In addition, US Airways
has agreed to pay UAL a termination fee of $150 million, plus up
to a maximum of $10 million for reimbursement of expenses, under
certain conditions, if the merger does not take place.
COMMON STOCK DIVIDENDS
----------------------
As part of the Company's initiatives to return cash to
stockholders, UAL instituted a $0.3125 dividend on UAL common
stock in the second quarter. Accordingly, UAL paid $36 million
in dividends on June 15 to shareholders of record May 30, 2000.
A second dividend of $0.3125 was declared and paid on August 1
to shareholders of record July 14, 2000.
E-COMMERCE AND MILEAGE PLUS
---------------------------
United continues to deliver on its commitment to create
shareholder value by further developing its core airline
business, enhancing the Company's relationships with its
customers and building strategic businesses that leverage the
value of the United franchise.
In January, United announced its intentions to launch an e-
commerce subsidiary that will be dedicated to maximizing the
sale of travel products over the Internet and Internet- enabled
devices. Accordingly, United has established an e-commerce
division, consisting of a cross-functional team of nearly 70
employees from United's marketing and technical disciplines to
develop and expand lower-cost distribution channels and develop
new customer interfaces for enhancing customer service
opportunities; ultimately, this group will be transferred to the
new subsidiary.
A major part of this initiative is the recently redesigned
united.com web site. Gross air bookings on united.com in the
first six months of 2000 grew over 130 percent from the same
period last year. Total passenger revenue from sales over the
Internet reached $204 million in the second quarter compared to
$80 million in the same period of 1999. In addition, United
continues to build its Internet network by establishing and
expanding its partnerships with companies such as GetThere.com,
BuyTravel.com and Priceline.com. These investments build upon
United's long-standing investments in technology ventures such
as Galileo International, Inc. and Equant N.V., which are valued
at $332 million and $60 million, respectively at June 30, 2000.
United's Mileage Plus frequent flyer program continues to
grow due to such partnerships as First USA Mileage Plus Visa and
Master Card, MCI WorldCom and E*TRADE. Revenue from third-party
mileage sales reached $220 million during the first six months
of 2000, compared to $187 million in 1999, as adjusted for the
change in accounting principle.
OUTLOOK FOR 2000
----------------
During the second quarter, the Company experienced
significant operational difficulties due to weather and air
traffic control limitations, as well as labor-related delays and
cancellations due in part to a dramatic reduction in the number
of pilots volunteering to work overtime. The impact of these
crew-related disruptions was approximately $50 million in the
second quarter and the Company has attempted to mitigate the
impact by reducing the schedule by approximately 2% through
September.
However, demand for air travel remains strong. Based on
recent booking trends, the Company expects continued strong
revenue growth in the third quarter, although at slightly lower
levels than in the second quarter. Total unit revenues are
expected to rise between 8 percent and 10 percent. Unit costs
are expected to increase 15 percent, based on an average fuel
price of 79 cents per gallon. Excluding fuel, unit costs are
expected to rise 12 percent. The increase reflects lower-than-
planned capacity levels as a result of the schedule adjustments,
as well as wage increases associated with the end of the ESOP
allocation period. Based on the revenue and cost projections,
the Company expects third quarter earnings per share to range
between $2.60 and $3.20.
For the full year, the Company now expects fully
distributed earnings per share to range between $8.25 and $9.75,
excluding special charges. Unit revenues are estimated to range
between 8 percent and 10 percent higher than 1999. Unit costs,
excluding the ESOP charge, are expected to be approximately 12
percent above 1999 levels, based on an average fuel price of 77
cents per gallon.
Information included in the above "Outlook for 2000" and
"US Airways Acquisition" paragraphs is forward-looking and
involves risks and uncertainties that could result in actual
results differing materially from expected results. Factors that
could significantly impact revenues, unit revenues, unit costs,
earnings per share, fully distributed earnings per share and the
results and benefits of the pending merger between United and US
Airways include: the airline pricing environment; industry
capacity decisions; competitors' route decisions; the inability
to obtain regulatory approvals for the United and US Airways
merger; the inability to successfully integrate the businesses of
United and US Airways; costs related to the United and US Airways
merger; the inability to achieve cost-cutting synergies resulting
from the United and US Airways merger; labor integration issues;
the success of the Company's cost-control efforts; the cost of
crude oil and jet fuel; the success of fuel hedging strategies;
the results of union contract negotiations and their impact on
labor costs; operational disruptions as a result of bad weather,
air traffic control-related difficulties and the impact of labor
issues; the growth of e-commerce and off-tariff distribution
channels; the implementation of customer service improvement
strategies; actions of the U.S., foreign and local governments;
the Pacific economic environment and travel patterns; the
stability of the U.S. economy; inflation; the economic
environment of the airline industry and the economic environment
in general .
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 1999. Significant changes which have occurred since
year-end are as follows:
Foreign Currency Risk -
<TABLE>
<CAPTION>
(In millions, except average contract rates) Notional Average Estimated
Amount Contract Rate Fair Value
(Pay)/Receive*
-------- ------------- ------------
<S> <C> <C> <C>
Forward exchange contracts
Japanese Yen - Purchased forwards $ 123 105.96 $ -
- Sold forwards $ 68 105.41 $ -
Hong Kong Dollar - Sold forwards $ 46 7.81 $ -
French Franc - Purchased forwards $ 50 5.05 $ (2)
Euro - Purchased forwards $ 117 1.37 $ (7)
Currency options
Japanese Yen - Purchased put options $ 315 103.02 $ 9
Australian Dollar - Purchased put options $ 66 0.62 $ 2
British Pound - Purchased put options $ 43 1.53 $ 1
Euro - Purchased put options $ 72 0.98 $ 2
Correlation Basket Option - Sold $ 496 N/A $ (2)
</TABLE>
Price Risk (Aircraft fuel) -
<TABLE>
<CAPTION>
(In millions, except average contract rates) Notional Average Estimated
Amount Contract Rate Fair Value
(Pay)/Receive*
-------- ------------- ------------
<S> <C> <C> <C>
Purchased call contracts - Crude oil $ 717 $ 22.53/bbl $ 189
</TABLE>
*Estimated fair values represent the amount United would pay/receive on June
30, 2000 to terminate the contracts.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
------ -----------------
1. Frank, et al. v. United; EEOC v. United
---------------------------------------
On February 7, 1992, a class action lawsuit against United
was filed in federal district court in California alleging
that United's former flight attendant weight program in
effect from 1989 to 1994 unlawfully discriminated against
flight attendants on the grounds of sex, age and other
factors, and seeking monetary relief. On April 29, 1994,
the class was certified as to the sex and age claims.
Following extensive motion practice, on March 10, 1998, the
district court dismissed all the claims against United.
Following an appeal to the Court of Appeals for the Ninth
Circuit, a three judge panel of the Ninth Circuit, on June
21, 2000, overturned the ruling and held that United's
former weight program violated the law. The court ruled
that the plaintiffs were entitled to judgment as a matter of
law on their claims for discrimination based on sex and that
a trial was required for determination on their claims for
age discrimination. In addition, the appellate court
reversed the dismissal of all individual class
representative claims of discrimination and the case was
remanded to the district court for further proceedings.
United has filed a petition for en banc review by an eleven
judge panel of the Ninth Circuit, in which United seeks a
rehearing. United expects a determination on that request
in the third quarter.
2. United v. Mesa Airlines, Inc. and WestAir Commuter Airlines, Inc.
-----------------------------------------------------------------
On June 23, 1997, United sued Mesa Airlines, Inc. and its
subsidiary, WestAir Commuter Airlines, Inc., in the United
States District Court for the Northern District of Illinois,
seeking an order declaring that United had the right make
certain market adjustments in markets served by WestAir's
United Express service in California. In addition, on
January 22, 1998, United notified Mesa that it was
terminating Mesa's United Express contract and United
amended its complaint to add claims against Mesa for failure
to fly and for monetary damages. Mesa and WestAir filed
claims against United alleging, among other things, wrongful
termination of their contract and fraud, and seeking monetary
damages. Mesa's tort claims, including its claim alleging
fraud, were dismissed upon United's motion and affirmed by
the Seventh Circuit Court of Appeals on July 5, 2000.
Item 4. Submission of Matters to a Vote of Security Holders.
------ ----------------------------------------------------
At the annual meeting of the stockholders of UAL Corporation
on May 18, 2000, the following matters were voted upon:
Description Votes
----------- -----
1. Election of Board of Directors
Public Directors:
Rono J. Dutta 43,298,362 For
993,710 Withheld
James E. Goodwin 43,723,326 For
568,746 Withheld
John F. McGillicuddy 43,690,836 For
601,236 Withheld
James J. O'Connor 43,702,935 For
589,137 Withheld
Paul E. Tierney, Jr. 43,555,737 For
736,335 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:
Frederick C. Dubinsky 1 For
0 Withheld
IAM Director:
John F. Peterpaul 1 For
0 Withheld
SAM Director:
Deval L. Patrick 3 For
0 Withheld
2. Approval of Amendments to 98,728,813 For
Restated Certificate of 10,922,242 Against
Incorporation for Purposes of 1,205,701 Abstain
Dividends
3. Approval of United 79,911,048 For
Employees Performance Incentive 24,176,225 Against
Plan 1,176,017 Abstain
4. Approval of UAL Corporation 67,332,785 For
2000 Incentive Stock Plan 26,832,495 Against
1,330,061 Abstain
5. Ratification of the 97,685,732 For
Appointment of Independent 5,545,213 Against
Public Accountants 2,032,345 Abstain
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 that immediately precedes
such exhibits.
(b) Form 8-K dated May 24, 2000, to report a joint press release
of UAL Corporation and US Airways Group, Inc. announcing the
execution of an Agreement and Plan of Merger.
Form 8-K dated May 31, 2000, 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 May 23, 2000, and filed with the SEC on
June 1, 2000, to file as exhibits (1) the Agreement and
Plan of Merger, dated as of May 23, 2000, among UAL
Corporation, Yellow Jacket Acquisition Corp. and US
Airways Group, Inc., and (2) a Memorandum of
Understanding, dated as of May 23, 2000, among UAL
Corporation, US Airways Group, Inc. and Robert L. Johnson.
Form 8-K/A (Amendment No. 1) dated May 24, 2000 and
filed with the SEC on June 21, 2000, to correct a
clerical error in Exhibit A, attached to Exhibit 2.1
(Agreement and Plan of Merger, dated as of May 23, 2000,
among UAL Corporation, Yellow Jacket Acquisition Corp.
and US Airways Group, Inc.) of the Form 8-K filed by UAL
Corporation on June 1, 2000.
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 4, 2000
Exhibit Index
-------------
Exhibit No. Description
---------- -----------
2.1 Agreement and Plan of Merger, dated as of May 23,
2000, among UAL Corporation, Yellow Jacket
Acquisition Corp. and US Airways Group, Inc.
(including Exhibit A thereto) (filed as Exhibit
2.1 to UAL's Form 8-K/A (Amendment No. 1) dated
May 24, 2000 and filed with the SEC on June 21,
2000 and incorporated herein by reference.
3.1 Restated Certificate of Incorporation of UAL
Corporation, as amended.
10.1 UAL Corporation 2000 Incentive Stock Plan.
10.2 United Employees Performance Incentive Plan.
10.3 Tenth Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of April 28, 2000.
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.
99.1 Memorandum of Understanding, dated as of May 23,
2000, among UAL Corporation, US Airways Group,
Inc., and Robert L. Johnson (filed as Exhibit
99.1 to UAL's Form 8-K/A (Amendment No. 1) dated
May 24, 2000 and filed with the SEC on June 21,
2000 and incorporated herein by reference).
