UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995, Commission File Number 33-21220*
UNITED AIR LINES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-2675206
(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 66100, Chicago, Illinois 60666
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (708) 952-4000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class October 31, 1995
Common Stock ($5 par value) 200
* Registrant is the wholly-owned subsidiary of UAL Corporation
(File 1-6033). Registrant became subject to filing periodic
reports under the Securities Exchange Act of 1934 as a result of
a public offering of securities which became effective June 3,
1988 (Registration Nos. 33-21220 and 22-18246).
United Air Lines, Inc. and Subsidiary Companies
Report on Form 10-Q
For the Quarter Ended September 30, 1995
Index
Part I. Financial Information Page No.
Item 1. Financial statements:
Condensed statement of consolidated 3
financial position - as of September 30, 1995
(unaudited) and December 31, 1994
Statement of consolidated operations 5
(unaudited) - for the three months and nine
months ended September 30, 1995 and 1994
Condensed statement of consolidated 7
cash flows (unaudited) - for the nine
months ended September 30, 1995 and 1994
Notes to consolidated financial 8
statements (unaudited)
Item 2. Management's discussion and analysis 12
of financial condition and results of
operations
Part II. Other Information
Item 1. Legal Proceedings 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Condensed Statement of Consolidated Financial Position
(In Millions)
September 30,
1995 December 31,
Assets (Unaudited) 1994
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 422 $ 444
Short-term investments 1,126 857
Receivables, net 1,114 887
Related party receivables - 77
Inventories, net 304 285
Deferred income taxes 139 155
Prepaid expenses and other 345 335
3,450 3,040
Operating property and equipment:
Owned 11,004 10,811
Accumulated depreciation and amortization (5,054) (4,775)
5,950 6,036
Capital leases 1,386 1,132
Accumulated amortization (490) (447)
896 685
6,846 6,721
Other assets:
Intangibles, net 739 762
Deferred income taxes 331 479
Related party receivables 552 570
Other 474 380
2,096 2,191
$12,392 $11,952
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Condensed Statement of Consolidated Financial Position
(In Millions)
September 30,
1995 December 31,
Liabilities and Stockholder's Equity (Unaudited) 1994
<S> <C> <C>
Current liabilities:
Short-term borrowings $ - $ 269
Current portions of long-term debt
and capital lease obligations 334 439
Advance ticket sales 1,322 1,020
Accounts payable 737 657
Other 2,611 2,508
5,004 4,893
Long-term debt 2,505 2,849
Long-term obligations under capital leases 918 727
Other liabilities and deferred credits:
Deferred pension liability 251 520
Postretirement benefit liability 1,211 1,148
Deferred gains 1,245 1,363
Other 500 459
3,207 3,490
Minority interest 57 49
Stockholder's equity:
Common stock - -
Additional capital invested 45 -
ESOP capital 803 266
Retained earnings (deficit) 171 (214)
Unearned ESOP preferred stock (285) (83)
Other (33) (25)
701 (56)
Commitments and contingent liabilities
(See note)
$12,392 $11,952
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statement of Consolidated Operations (Unaudited)
(In Millions)
Three Months
Ended September 30
1995 1994
<S> <C> <C>
Operating revenues:
Passenger $3,694 $3,400
Cargo 197 169
Other operating revenues 224 230
4,115 3,799
Operating expenses:
Salaries and related costs 1,137 1,160
ESOP compensation expense 139 88
Aircraft fuel 435 425
Commissions 409 389
Aircraft rent 258 231
Purchased services 277 244
Depreciation and amortization 182 184
Landing fees and other rent 216 166
Food services 146 141
Aircraft maintenance 100 102
Personnel expenses 76 62
Other operating expenses 272 297
3,647 3,489
Earnings from operations 468 310
Other income (expense):
Interest expense (90) (99)
Interest capitalized 9 12
Interest income 25 18
Equity in earnings of affiliates 14 6
Miscellaneous, net (24) (86)
(66) (149)
Earnings before income taxes 402 161
Provision for income taxes 155 80
Net earnings $ 247 $ 81
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statement of Consolidated Operations (Unaudited)
(In Millions)
Nine Months
Ended September 30
1995 1994
<S> <C> <C>
Operating revenues:
Passenger $10,006 $ 9,273
Cargo 557 501
Other operating revenues 676 690
11,239 10,464
Operating expenses:
Salaries and related costs 3,397 3,578
ESOP compensation expense 336 88
Aircraft fuel 1,225 1,174
Commissions 1,115 1,083
Aircraft rent 768 687
Purchased services 782 698
Depreciation and amortization 519 539
Landing fees and other rent 600 470
Food services 400 355
Aircraft maintenance 302 329
Personnel expenses 209 186
Other operating expenses 777 840
10,430 10,027
Earnings from operations 809 437
Other income (expense):
Interest expense (275) (260)
Interest capitalized 31 31
Interest income 67 47
Equity in earnings of affiliates 41 20
Miscellaneous, net (43) (130)
(179) (292)
Earnings before income taxes and
cumulative effect of accounting change 630 145
Provision for income taxes 246 89
Earnings before cumulative
effect of accounting change 384 56
Cumulative effect of accounting change,
net of tax - (26)
Net earnings $ 384 $ 30
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Condensed Statement of Consolidated Cash Flows (Unaudited)
(In Millions)
Nine Months
Ended September 30
1995 1994
<S> <C> <C>
Cash and cash equivalents at beginning of
period $ 444 $ 285
Cash flows from operating activities 1,440 1,119
Cash flows from investing activities:
Additions to property and equipment (742) (416)
Proceeds on disposition of property and
equipment 327 413
Increase in short-term investments (269) (249)
Decrease in related party receivables 94 24
Other, net (14) 23
(604) (205)
Cash flows from financing activities:
Repayment of long-term debt (510) (108)
Issuance of long-term debt - 735
Principal payments under capital
lease obligations (66) (78)
Decrease in short-term borrowings (269) (46)
Cash dividend to parent company - (1,041)
Other, net (13) -
(858) (538)
Increase (decrease) in cash
and cash equivalents (22) 376
Cash and cash equivalents at end of period $ 422 $ 661
Cash paid during the period for:
Interest (net of amounts capitalized) $ 231 $ 207
Income taxes $ 6 $ 3
Non-cash transactions:
Capital lease obligations incurred $ 277 $ -
Long-term debt incurred in connection
with additions to equipment $ 23 $ 18
Unrealized gain on investments $ 4 $ 2
</TABLE>
See accompanying notes to consolidated financial statements.
United Air Lines, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
The Company
United Air Lines, Inc. ("United") is a wholly-owned subsidiary of
UAL Corporation ("UAL").
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
United believes that the disclosures are adequate to make the
information presented not misleading. In management's opinion, all
adjustments (which, except for the effects on the 1994 periods of the
employee investment transaction, include only normal recurring
adjustments) necessary for a fair presentation of the results of
operations for the three and nine month periods have been made. These
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in United's Annual
Report on Form 10-K for the year 1994.
ESOP Compensation Expense
"ESOP compensation expense" represents the estimated average fair
value of ESOP convertible preferred stock committed to be released to
employees for the period, net of amounts used to satisfy dividend
requirements for previously allocated ESOP convertible preferred shares,
under Employee Stock Ownership Plans which were created as a part of the
July 1994 employee investment transaction and recapitalization. ESOP
compensation expense is credited directly to stockholder's equity.
Other Income (Expense) - Miscellaneous
<TABLE>
"Miscellaneous, net" consisted of the following:
Third Quarter Nine-month Period
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Foreign exchange gains
(losses) $(16) $ - $(14) $ 9
Gains on dispositions
of property 5 2 6 5
Minority interests in
Apollo Travel Services (6) (6) (18) (18)
Recapitalization
transaction costs - (80) - (121)
Other (7) (2) (17) (5)
$(24) $(86) $(43) $(130)
</TABLE>
Income Taxes
The provisions for income taxes for the 1995 third quarter and
nine-month period are based on the estimated annual effective tax rate,
which differs from the federal statutory rate of 35% principally due to
state income taxes and certain nondeductible expenses. The provisions
for income taxes for the 1994 third quarter and nine-month period were
based on the actual effective tax rate for the periods, and include the
effects of nondeductible expenses related to the employee investment
transaction and recapitalization. Deferred tax assets are recognized
based upon United's history of operating earnings and expectations for
future taxable income.
Accounting Change
United adopted Statement of Financial Accounting Standards
("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits,"
effective January 1, 1994. The effect of adopting SFAS No. 112 was a
cumulative charge for recognition of the transition liability of $42
million, before tax benefits of $16 million.
Affiliates
United owns 38% of the Galileo International Partnership
("Galileo") through a wholly-owned subsidiary. United's investment in
Galileo, which owns the Apollo and Galileo computer reservations
systems, is carried on the equity basis. United also owns 77% of the
Apollo Travel Services Partnership and its accounts are consolidated.
Under operating agreements with Galileo, United purchases computer
reservation services from Galileo and provides marketing, sales and
communication services to Galileo. Revenues derived from the sale of
services to Galileo amounted to approximately $59 million in the 1995
third quarter, $60 million in the 1994 third quarter, $183 million in
the 1995 nine-month period and $178 million in the 1994 nine-month
period. The cost to United of services purchased from Galileo amounted
to approximately $28 million in the 1995 third quarter, $24 million in
the 1994 third quarter, $80 million in the 1995 nine-month period and
$70 million in the 1994 nine-month period.
Short-term Borrowings
In the second quarter of 1995, United repaid all $269 million of
its outstanding short-term borrowings. United has the ability to borrow
up to $270 million under this short-term facility, which was recently
extended through February 1996.
Prepayment of Obligations
In September 1995, United retired $91 million of outstanding
Japanese yen-denominated deferred purchase certificates. The remaining
balance of these certificates, amounting to $104 million, will be
retired in the fourth quarter. The certificates were scheduled for
repayment periodically through 1998. In connection with the obligations
referred to above, United had entered into a foreign currency swap
contract, which was designated as a hedge, to reduce exposure to
currency fluctuations. The portion of this swap contract related to the
debt retired in September was terminated at the same time as the
obligations. Similarly, the portion of the swap contract related to the
remaining debt balance will be terminated in the fourth quarter. The
retirement has thus far resulted, and is expected to result in the
aggregate, in an insignificant loss.
In September 1995, United also terminated related operating leases
for 15 aircraft, by exercising its right to acquire the aircraft.
Operating property and equipment increased $200 million as a result of
the acquisition of these aircraft. In the fourth quarter, United will
terminate operating leases for an additional 24 aircraft, acquiring the
aircraft and increasing operating property and equipment by
approximately $200 million. Termination of these leases will reduce
future minimum lease payments, as reported at December 31, 1994, by $130
million in each of 1996 and 1997 and by $166 million in 1998.
In addition to scheduled principal payments and the deferred
purchase certificate retirement, United repaid $150 million in principal
amount of debentures and $223 million in principal amount of secured
notes in the first nine months of 1995, resulting in an insignificant
loss.
In October 1995, United repaid prior to maturity an additional $19
million in principal amount of debentures.
Shelf Registration Statement
In May 1995, United issued $246 million of pass through
certificates under an effective shelf registration statement UAL and
United have on file with the Securities and Exchange Commission. The
pass through certificates were issued to finance or refinance certain
aircraft under operating leases. At September 30, 1995, up to $789
million of securities could be issued under the shelf registration
statement, including secured and unsecured debt, equipment trust and
pass through certificates, equity or a combination thereof. United's
ability to issue equity securities is limited by its certificate of
incorporation, which was restated in connection with the
recapitalization.
Contingencies and Commitments
United 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 United is subject and its prior
experience, that the ultimate disposition of these contingencies is not
expected to materially affect United's consolidated financial position
or results of operations.
At September 30, 1995, commitments for the purchase of property
and equipment, principally aircraft, approximated $3.8 billion, after
deducting advance payments. An estimated $0.3 billion will be spent
during the remainder of 1995, $1.5 billion in 1996, $1.3 billion in
1997, $0.5 billion in 1998 and $0.2 billion in 1999 and thereafter. The
major commitments are for the purchase of 27 B777 aircraft (11 of which,
beginning in 1997, are longer-range "B" market versions), two B747
aircraft and four B757 aircraft. The B777s are scheduled to be
delivered through 1999 and the B747s and B757s are expected to be
delivered in 1996.
In addition to aircraft orders, United has arrangements with
Airbus Industrie and International Aero Engines to lease an additional
21 A320 aircraft, which are scheduled for delivery through 1998. At
September 30, 1995, United also had options for an additional 144 B737
aircraft, 31 B757 aircraft, 34 B777 aircraft, 43 B747 aircraft, 6 B767
aircraft and 47 A320 aircraft. These option amounts have been reduced
to reflect the recent confirmation of two B747 options, the replacement
of two B767 options with the B757 orders mentioned above and
cancellation of certain options. Under the terms of certain of these
remaining options which are exercisable during 1996 and 1997, United
would forfeit significant deposits on such options it does not exercise.
Related Party Transactions
During the first nine months of 1995, Air Wisconsin, Inc. repaid
the entire $86 million balance of its outstanding loan from United and
extended loans to United, amounting to $42 million at September 30, 1995.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
United's total of cash and cash equivalents and short-term
investments was $1.548 billion at September 30, 1995, compared to $1.301
billion at December 31, 1994. Cash flows from operating activities
amounted to $1.440 billion. Investing activities, excluding the
increase in short-term investments, resulted in cash outflows of $335
million. Financing activities included principal payments under debt
and capital lease obligations of $510 million and $66 million,
respectively, and the repayment of $269 million of short-term
borrowings. Included in the debt payments above was the retirement of
$449 million of long-term debt prior to maturity.
In the first nine months of 1995, United took delivery of eight
A320 aircraft under operating leases. During the period, United also
took delivery of seven B777 aircraft, three under capital leases and
four which were initially purchased. Of the four B777 aircraft
purchased, three were subsequently sold and leased back under operating
leases. In addition, United acquired 15 previously leased aircraft, 9
B727s and 6 DC10s, upon termination of operating leases. Property
additions, including aircraft and spare parts, amounted to $742 million.
Property dispositions, including the sale and leaseback of the three
B777s, resulted in proceeds of $327 million.
In the fourth quarter of 1995, United will retire prior to
maturity the remaining balance, $104 million, of Japanese
yen-denominated debt and terminate related operating leases for 24
aircraft by acquiring the aircraft from the lessor. United may from
time to time purchase on the open market in privately negotiated
purchases or otherwise debentures as part of its efforts to reduce its
obligations and improve its balance sheet.
At September 30, 1995, commitments for the purchase of property
and equipment, principally aircraft, approximated $3.8 billion, after
deducting advance payments. An estimated $0.3 billion will be spent
during the remainder of 1995, $1.5 billion in 1996, $1.3 billion in
1997, $0.5 billion in 1998 and $0.2 billion in 1999 and thereafter. The
major commitments are for the purchase of 27 B777 aircraft (11 of which,
beginning in 1997, are longer-range "B" market versions), two B747
aircraft and four B757 aircraft. The B777s are scheduled to be
delivered through 1999 and the B747s and B757s are expected to be
delivered in 1996.
In addition to aircraft orders, United has arrangements with
Airbus Industrie and International Aero Engines to lease 21 A320
aircraft, which are scheduled for delivery through 1998. At September
30, 1995, United also had options for an additional 144 B737 aircraft,
31 B757 aircraft, 34 B777 aircraft, 43 B747 aircraft, 6 B767 aircraft
and 47 A320 aircraft. Under the terms of certain of these options which
are exercisable during 1996 and 1997, United would forfeit significant
deposits on such options it does not exercise. Funds necessary to
finance aircraft acquisitions are expected to be obtained from
internally generated funds, irrevocable external financing arrangements
or other external sources.
In April 1995, United announced that, under a revised fleet plan,
it would use most of the new aircraft to be delivered through 1997 to
replace older aircraft in its fleet. As a result, the number of
aircraft in United's operating fleet is expected to increase by 19
during that time, compared to an increase of 48 aircraft called for by
United's previous fleet plan. In October 1995, certain employees of the
Boeing Company ("Boeing") began a labor strike, which will affect
Boeing's ability to deliver as scheduled certain new aircraft which
United has on order. Specifically, three B777 aircraft which were
scheduled for delivery in the fourth quarter of 1995 are now expected to
be delivered in 1996. United expects to make schedule adjustments to
minimize the effects of the strike on its operations; however,
continuation of the strike may impact planned growth in capacity for
1996.
In May 1995, United issued $246 million of pass through
certificates under an effective shelf registration statement UAL and
United have on file with the Securities and Exchange Commission. The
pass through certificates were issued to finance or refinance certain
aircraft under operating leases. At September 30, 1995, up to $789
million of securities could be issued under the shelf registration
statement, including secured and unsecured debt, equipment trust and
pass through certificates, equity or a combination thereof. UAL's
ability to issue equity securities is limited by its certificate of
incorporation, which was restated in connection with the
recapitalization.
In June 1995, the Indianapolis Airport Authority issued $221
million of special facility bonds, guaranteed by United, related to the
maintenance facilities being constructed at its Indianapolis Maintenance
Center. In connection with the construction of the Indianapolis
Maintenance Center, United agreed to reach an $800 million capital
spending target by the year 2001 and employ at least 7,500 individuals
by the year 2004. In the event that such targets are not reached,
United may be required to make certain additional payments under related
agreements.
In October 1995, UAL announced that it is conducting an evaluation
of USAir Group, Inc. ("USAir") to determine whether it should submit a
proposal to acquire USAir's business and operations. UAL expects to
make a decision during the fourth quarter as to whether it will submit
an offer. There can be no assurance that UAL will submit any proposal
to USAir or, if submitted, as to the terms and conditions of any such
proposal, or that any transaction will be consummated. Such an
acquisition of USAir's business could have a significant impact on
United's financial position, results of operations and liquidity.
Immediately following this announcement, Standard and Poor's placed UAL
and United securities on CreditWatch with negative implications.
RESULTS OF OPERATIONS
United's results of operations for interim periods are not
necessarily indicative of those for an entire year, as a result of
seasonal factors to which it is subject. First and fourth quarter
results are normally affected by reduced travel demand in the fall and
winter and United's operations, particularly at its Chicago and Denver
hubs, are adversely affected by winter weather on occasion.
The results of operations in the airline business historically
fluctuate significantly in response to general economic conditions.
This is because small fluctuations in yield (passenger revenue per
revenue passenger mile) and cost per available seat mile can have a
significant effect on operating results. United anticipates
industrywide fare levels, low-cost competition, general economic
conditions, fuel costs, international governmental policies and other
factors will continue to affect its operating results.
The July 1994 employee investment transaction and recapitalization
resulted in wage and benefit reductions and work-rule changes which were
designed to reduce cash operating expenses. These cash expense
reductions are offset by non-cash compensation charges for stock
periodically committed to be released to employees under the ESOPs and
additional interest expense on the debentures issued at the time of the
recapitalization.
As a result of the recapitalization, United's capital structure
became more highly leveraged. With the increase in debt and reduction
in equity resulting from the recapitalization, United's exposure to
certain industry risks could be greater than might have been the case
prior to the recapitalization. In addition, the transaction resulted in
new labor agreements for certain employee groups and a new corporate
governance structure for UAL, which was designed to achieve balance
between the various employee-owner groups and public stockholders. The
new labor agreements and governance structure could inhibit management's
ability to alter strategy in a volatile, competitive industry by
restricting certain operating and financing activities, including the
sale of assets and the issuance of equity securities and the ability to
furlough employees. United's ability to react to competition may be
hampered further by the fixed long-term nature of these various
agreements. The continued success of the recapitalization will be
dependent upon a number of factors, including the state of the
competitive environment in the airline industry, competitive responses
to United's efforts, United's ability to achieve enduring cost savings
through productivity improvements and the renegotiation of labor
agreements at the end of the investment period.
United generates revenues and incurs expenses in numerous foreign
currencies. These expenses include reservation and ticket office
services, customer service, aircraft maintenance, catering, commissions,
aircraft leases and personnel costs. Changes in foreign currency
exchange rates impact operating income through changes in foreign
currency-denominated operating revenues and expenses. Despite the
adverse (favorable) effects a strengthening (weakening) foreign currency
will have on U.S. originating traffic, a strengthening (weakening) of
foreign currencies tends to increase (decrease) reported revenue and
operating income because United's foreign currency-denominated operating
revenue generally exceeds its foreign currency-denominated operating
expense for each currency. United's biggest net exposures are for
Japanese yen and Australian dollars. During the first nine months of
1995, yen-denominated operating revenue net of yen-denominated operating
expense was approximately 26.4 billion yen (approximately $296 million),
and Australian dollar-denominated operating revenue net of Australian
dollar-denominated operating expense was approximately 134 million
Australian dollars (approximately $99 million).
Other non-operating income (expense) is also affected as a result
of transaction gains and losses resulting from rate fluctuation. The
foreign exchange gains and losses recorded by United result from the
impact of exchange rate changes on foreign currency denominated assets
and liabilities. To the extent yen-denominated liability balances are
predictable, United attempts to minimize transaction gains and losses by
investing in yen-denominated time deposits to offset the impact of rate
changes. In addition, United entered into a foreign currency swap
contract in 1994 to reduce exposure to currency fluctuations in
connection with other long-term yen-denominated obligations. Where no
significant liability exists to offset, United mitigates its exposure to
foreign exchange rate fluctuations by converting excess local currencies
generated to U.S. dollars. At September 30, 1995, yen-denominated
assets in excess of yen-denominated liabilities were used to hedge
certain operating lease obligations.
United expects that it will continue to be affected by the above
mentioned factors, but cannot predict how foreign currency exchange
rates will move in the future.
The Omnibus Budget Reconciliation Act of 1993 signed into law on
August 10, 1993, imposes a 4.3 cent per gallon tax on commercial
aviation jet fuel purchased for use in domestic operations. This new
fuel tax became effective October 1, 1995. Based on United's 1994
domestic fuel consumption of 1.7 billion gallons, the new fuel tax is
expected to increase United's operating expenses by approximately $75
million annually.
In the first quarter of 1995, United implemented a new travel
agency commission payment plan that offers a maximum of $50 for
round-trip domestic tickets and a maximum of $25 for one-way domestic
tickets. The new commission plan resulted in a reduction of
approximately $60 million in United's commission expense for the first
nine months of 1995 and United estimates the reduction of commission
expense to be between $20 million and $30 million per quarter on an
on-going basis. Litigation challenging this payment plan has been filed
against United and other airlines who adopted similar payment plans. In
the third quarter of 1995, the defendant airlines' motion for summary
judgment was denied, as was the plaintiff travel agencies' motion for
preliminary injunction. (See Part II, Item 1. Legal Proceedings)
Summary of Results
United's earnings from operations were $809 million in the first
nine months of 1995, compared to operating earnings of $437 million in
the first nine months of 1994. United's net earnings in the 1995
nine-month period were $384 million, compared to net earnings of $30
million in the same period of 1994. The 1994 earnings include a $26
million after tax charge for the cumulative effect of adopting Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," which United adopted effective January 1, 1994.
In the third quarter of 1995, United's earnings from operations
were $468 million, compared to $310 million in the third quarter of
1994. United's net earnings in the third quarter of 1995 were $247
million, compared to net earnings of $81 million in the third quarter of
1994.
Specific factors affecting United's consolidated operations for
the third quarter and first nine months of 1995 are described below.
Third Quarter 1995 Compared with Third Quarter 1994.
Operating revenues increased $316 million (8%). United's revenue
per available seat mile increased 4% to 9.79 cents. Passenger revenues
increased $294 million (9%) due to an 8% increase in yield to 11.87
cents and a 1% increase in revenue passenger miles. Pacific revenue
passenger miles increased 5% and Latin America increased 1%. Atlantic
revenue passenger miles decreased 5% and Domestic was relatively
unchanged. Available seat miles increased 4% systemwide, as increases
of 7% and 6% on Pacific and Domestic routes, respectively, were
partially offset by a 6% decrease in the Atlantic. Latin American
available seat miles were unchanged. The system passenger load factor
decreased 2.9 points to 73.7%.
Cargo revenues increased $28 million (17%), as both freight and
mail revenues increased due to higher cargo volumes. Other operating
revenues decreased $6 million (3%) due mainly to lower fuel sales.
Operating expenses increased $158 million (5%); however, United's
cost per available seat mile increased only slightly, from 8.66 cents to
8.67 cents, including ESOP compensation expense. Without the ESOP
compensation expense, United's cost per available seat mile would have
increased from 8.32 cents to 8.34 cents. ESOP compensation expense
increased $51 million (58%), reflecting the increase in the estimated
average fair value of ESOP stock committed to be released to employees,
and a shorter expense period in 1994, as the employee investment
transaction took place on July 12, 1994. Landing fees and other rent
increased $50 million (30%) due to increased facilities rent,
particularly due to new facilities at Denver International Airport.
Purchased services increased $33 million (14%) due principally to
volume-related increases in computer reservations fees and credit card
discounts. Aircraft rent increased $27 million (12%) as a result of new
aircraft acquired on operating leases. Personnel expenses increased $14
million (23%), reflecting increased layover costs incurred principally
in support of international operations. Aircraft fuel expense increased
$10 million (2%) due to a 4% increase in consumption, partially offset
by a 2% decrease in the average price per gallon of fuel to 58.3 cents.
Salaries and related costs decreased $23 million (2%) primarily
due to $48 million of one-time ESOP related costs recorded in 1994,
partially offset by higher average wage rates for employee groups not
participating in the ESOPs and increased staffing in certain
customer-oriented positions. Aircraft maintenance decreased $2 million
(2%) due principally to the timing of maintenance cycles. Other
operating expenses decreased $25 million (8%) due mainly to lower costs
of fuel sales.
Other expense amounted to $66 million in the third quarter of 1995
compared to $149 million in the third quarter of 1994. Interest expense
decreased $9 million (9%) due to lower average outstanding debt
obligations. Interest income increased $7 million (39%) due to higher
average interest rates on investments. Equity in earnings of affiliates
increased $8 million due primarily to higher Galileo earnings resulting
from increased booking revenues. Included in "Miscellaneous, net" in
the 1995 third quarter was a $5 million gain on the disposition of a
B747 aircraft. Included in the 1994 third quarter was a charge of $80
million for costs incurred in connection with the employee investment
transaction. In addition, the 1995 third quarter included foreign
exchange losses of $16 million, while foreign exchange gains in the 1994
third quarter were insignificant.
Nine Months 1995 Compared with Nine Months 1994.
Operating revenues increased $775 million (7%). Revenue per
available seat mile increased 3% to 9.45 cents. Passenger revenues
increased $733 million (8%) due principally to a 4% increase in revenue
passenger miles and a 4% increase in yield to 11.81 cents. Domestic,
Pacific and Latin American revenue passenger miles increased 5%, 6% and
1%, respectively. Atlantic revenue passenger miles decreased 4%.
Available seat miles increased 5% systemwide, as increases of 11% and 4%
on Pacific and Domestic routes, respectively, were partially offset by a
5% decrease in the Atlantic. As a result, United's system passenger
load factor decreased 0.4 points to 71.0%.
Cargo revenues increased $56 million (11%), as both freight and
mail revenues increased due to higher cargo volumes. Other operating
revenues decreased $14 million (2%) due primarily to a decrease in fuel
sales.
Operating expenses increased $403 million (4%); however, United's
cost per available seat mile decreased from 8.81 cents to 8.77 cents,
including ESOP compensation expense. Without the ESOP compensation
expense, United's 1995 nine month cost per available seat mile would
have been 8.49 cents, a decrease of 2% from 8.69 cents in 1994. ESOP
compensation expense increased $248 million, reflecting primarily a
shorter expense period in 1994, as the employee investment transaction
took place on July 12, 1994. Landing fees and other rent increased $130
million (28%) due to increased facilities rent, primarily due to new
facilities at Denver, and increased landing fees as the number of
systemwide departures increased 9%. Aircraft rent increased $81 million
(12%) as a result of new A320 and B777 aircraft on operating leases.
Purchased services increased $84 million (12%) due principally to
volume-related increases in computer reservations fees and credit card
discounts. Aircraft fuel expense increased $51 million (4%) as fuel
consumption increased 5% and the average price per gallon of fuel
remained relatively unchanged at 58.0 cents. Food services increased
$45 million (13%) due to the new catering arrangements resulting from
the 1994 sale of flight kitchens and increased passenger volumes.
Salaries and related costs decreased $181 million (5%) primarily
due to savings resulting from wage and benefit concessions made by
employees participating in the ESOPs, partially offset by higher average
wage rates for other employee groups and increased staffing in certain
customer-oriented positions. Aircraft maintenance decreased $27 million
(8%) due principally to the removal of certain older aircraft from
United's operating fleet and the timing of maintenance cycles.
Depreciation and amortization expense decreased $20 million (4%), as
certain assets, principally B727 aircraft, are now fully depreciated.
Other operating expenses decreased $63 million (8%) due mainly to lower
fuel sales.
Other expense amounted to $179 million in the first nine months of
1995 compared to $292 million in the same period of 1994. Interest
expense increased $15 million (6%) due primarily to higher average
interest rates caused in large part by the debentures issued in
connection with the recapitalization. Included in "Miscellaneous, net"
in the 1995 nine-month period was a $5 million gain on the disposition
of a B747 aircraft. Included in the 1994 nine-month period was a charge
of $121 million for costs incurred in connection with the employee
investment transaction. In addition, the 1995 and 1994 periods included
foreign exchange gains (losses) of $(14) million and $9 million,
respectively.
The income tax provision for the first nine months of 1994 was
significantly impacted by the nondeductibility of certain
recapitalization costs.
Part II
Other Information
Item 1. Legal Proceedings.
Travel Agency Commission Litigation - On February 13, 1995
and dates thereafter United Air Lines, Inc. and six other airlines
were sued in various courts around the nation by travel agents and
ASTA claiming as a class action that the carriers acted
collusively in violation of federal antitrust laws when they
imposed a cap on ticket sales commissions payable to travel
agencies by the carriers. As a result of an order by the multi-
district panel, the suits are now consolidated before the federal
courts in Minneapolis. The court, on August 23, 1995, denied the
plaintiffs' motion for preliminary injunction as well as the
defendants' motion for summary judgment. The airlines filed an
interlocutory appeal on the denial for summary judgment, which was
also denied. As relief, the plaintiffs seek an order declaring
the carriers' commission cap action to be illegal and the recovery
of damages (trebled) to the agencies resulting from that action.
Summers et al. v. State Street Bank and Trust Company et al.
On April 14, 1995, plaintiffs filed a class action complaint
against State Street Bank and Trust Company ("State Street"), the
UAL Corporation Employee Stock Ownership Plan and the UAL
Corporation Supplemental Employee Stock Ownership Plan (together,
the "Plans") in the United States District Court for the Northern
District of Illinois. The complaint is brought on behalf of a
putative class of all persons who are, or were as of July 12,
1994, participants or beneficiaries of the Plans. Plaintiffs
allege that State Street breached various fiduciary duties under
the Employee Retirement Income Security Act of 1974 ("ERISA") in
connection with the 1994 purchase of UAL Corporation ("UAL")
preferred stock by the Plans. The Plans are nominal defendants;
no relief is sought from them. The complaint seeks a declaration
that State Street violated ERISA, restoration to the Plans by
State Street of the amount of an alleged "overpayment" for the
stock, and other relief. United is obligated, subject to certain
exceptions, to indemnify State Street for part or all of an
adverse judgment and State Street's defense costs. On July 12,
1995, the defendants filed a motion to dismiss the complaint in
its entirety.
Mileage Plus Class Actions - On December 10, 1993, January
18, 1994, November 3, 1994 and February 9, 1995 class actions were
brought in the Circuit Court of Cook County, Illinois, Chancery
Division, on behalf of members of the Mileage Plus Program. The
actions, as amended, claimed that various changes instituted by
United in the Mileage Plus Program breached United's contracts
with its program members. On October 13, 1995, the court granted
United's motion to dismiss the cases with prejudice.
Item 5. Other Information.
On October 2, 1995, UAL Corporation announced that it is
conducting an evaluation of USAir to determine whether it should
submit a proposal to acquire USAir's business and operations.
There can be no assurance that UAL Corporation will submit any
proposal to USAir, or, if submitted, as to the terms and
conditions of any such proposal, or that any transaction will be
consummated. UAL expects to make a decision during the fourth
quarter as to whether it will submit an offer.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 12.1 - Computation of Ratio of Earnings to Fixed
Charges.
Exhibit 27 - Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the third
quarter of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
UNITED AIR LINES, INC.
By: /s/ Gerald Greenwald
Gerald Greenwald
Chairman and Chief
Executive Officer
By: /s/ Douglas A. Hacker
Douglas A. Hacker
Senior Vice President-Finance
(Principal Financial Officer)
By: /s/ Frederic F. Brace
Frederic F. Brace
Vice President - Financial
Analysis and Controller
(Principal Accounting Officer)
Dated: November 9, 1995
Exhibit Index
Exhibit No. Description
12.1 Computation of Ratio of Earnings to Fixed
Charges.
27 Financial Data Schedule.
<TABLE>
<CAPTION>
Exhibit 12.1
United Air Lines, Inc. and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
Nine Months Ended
September 30
1995 1994
(In Millions)
Earnings:
<S> <C> <C>
Earnings before income taxes $ 630 $ 145
Fixed charges, from below 885 767
Undistributed earnings of affiliates (34) (20)
Interest capitalized (31) (31)
Earnings $ 1,450 $ 861
Fixed charges:
Interest expense $ 275 $ 260
Portion of rental expense
representative of the
interest factor 610 507
Fixed charges $ 885 $ 767
Ratio of earnings to fixed charges 1.64 1.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED
AIR LINES, INC.'S STATEMENT OF CONSOLIDATED OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL
POSITION AS OF SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<PERIOD-TYPE> 9-MOS
<CASH> 422
<SECURITIES> 1,126
<RECEIVABLES> 1,114
<ALLOWANCES> 0
<INVENTORY> 304
<CURRENT-ASSETS> 3,450
<PP&E> 12,390
<DEPRECIATION> 5,544
<TOTAL-ASSETS> 12,392
<CURRENT-LIABILITIES> 5,004
<BONDS> 3,423
0
0
<COMMON> 0
<OTHER-SE> 701
<TOTAL-LIABILITY-AND-EQUITY> 12,392
<SALES> 0
<TOTAL-REVENUES> 11,239
<CGS> 0
<TOTAL-COSTS> 10,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275
<INCOME-PRETAX> 630
<INCOME-TAX> 246
<INCOME-CONTINUING> 384
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 384
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
