SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 33-21220
UNITED AIR LINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2675206
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Location: 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 (847) 952-4000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
--------------------- ------------------------
Series A Debentures due 2004 New York Stock Exchange
Series B Debentures due 2014 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
The number of shares of common stock outstanding as of March 1, 1996
was 200. The Registrant is a wholly-owned subsidiary of UAL
Corporation, and there is no market for the Registrant's common
stock.
The Registrant meets the conditions set forth in General Instructions
J(1)(a) and J(1)(b) of Form 10-K and is omitting herein information
in response to Items 4, 10, 11, 12 and 13.
PART I
ITEM 1. BUSINESS.
United Air Lines, Inc. ("United" or the "Company") was
incorporated under the laws of the State of Delaware on December 30,
1968. The world headquarters of the Company are located at 1200 East
Algonquin Road, Elk Grove Township, Illinois 60007. The Company's
mailing address is P.O. Box 66100, Chicago, Illinois 60666. The
telephone number for the Company is (847) 952-4000.
United is the principal subsidiary of UAL Corporation, a
Delaware corporation ("UAL"), and is wholly-owned by UAL. United
accounted for virtually all of UAL's revenues and expenses in 1995.
United is a major commercial air transportation company.
UAL is the world's largest majority employee-owned company. A
recapitalization that occurred in July 1994 (the "Recapitalization")
provided an approximately 55% equity and voting interest in UAL
common stock to United employees who are members of the Air Line
Pilots Association, International, the International Association of
Machinists and Aerospace Workers and U.S. non-union management and
salaried employees through an employee stock ownership plan ("ESOP").
In addition, separate from this U.S.-based ESOP, UAL has also
established employee stock programs covering most of the Company's
employees in Argentina, Australia, Canada, France, Germany, Hong
Kong, Japan, Mexico, Netherlands, New Zealand, Philippines,
Singapore, Switzerland, Taiwan and the United Kingdom. As of March
1, 1996, approximately 14,500 shares of UAL common stock have been
allocated to such plans. Subject to the requirements of local law,
UAL intends to implement similar programs for employees located in
the remaining foreign countries.
Airline Operations
United has been engaged in the air transportation of persons,
property and mail since 1934, and certain of its predecessors began
operations as early as 1926. United is the world's largest airline
as measured by revenue passenger miles flown. At the end of 1995,
United served 144 airports in the United States and 30 foreign
countries and three territories. During 1995, United averaged 2,172
departures daily, flew a total of 112 billion revenue passenger
miles, and carried an average of 215,521 passengers per day.
United provides its domestic and international service
principally through a system of hub airports at major cities. Each
hub provides United flights to a network of spoke destinations as
well as flights to the other United hubs. This arrangement permits
travelers to fly from point of origin to more destinations without
changing carriers. United has a global network of hubs primarily
designed to fly travelers between North America and the Pacific,
Latin America and Europe. North American hubs include Chicago,
Denver, Washington, D.C., San Francisco and Los Angeles. United also
operates a major hub operation at Tokyo, allowing United to
participate in intra-Pacific traffic. Latin America services are
operated from Miami, New York City and Los Angeles gateways, of which
the Miami and New York City gateways account for over 75% of the
traffic to South America. European service was initiated in 1991 and
is provided to London, Paris, Amsterdam, Milan, Brussels, Zurich and
Frankfurt from several of United's U.S. hubs.
In December 1995, United became a truly global carrier with the
start up of around the world service, operating New York - London -
New Delhi - Hong Kong - Los Angeles - New York, in both directions.
During the last several years, United has strengthened the
revenue generating capability of its hub airports by: (1) adding new
spokes (routes to new cities); (2) adding frequencies on previously
operated route segments; and (3) entering into marketing agreements
with smaller U.S. air carriers which serve less populated
destinations, and with foreign carriers which serve destinations that
United could not serve itself for economic or regulatory reasons.
Under the United Express program, six independent regional
carriers, utilizing mainly turboprop equipment, feed United hubs and
international gateways. Currently, the carriers in the United
Express program provide seamless service on United to 195 cities
where true on-line United service is not commercially viable. Also,
North American traffic is served by code-sharing agreements United
has with five independent air carriers.
Since October 1994, United has operated a new service, "Shuttle
by United", designed to compete with low cost carriers on routes
under 750 miles. As of February 1996, Shuttle by United was
operating daily 366 flights on 14 routes between 12 West Coast
cities. Shuttle by United is strategically important to United in
domestic, transcontinental, Latin American and Pacific markets by
providing critical feed traffic and market presence on the West
Coast.
Alliances with other international carriers have allowed United
to participate in markets that it is unable to serve on-line for
commercial or governmental reasons. Through joint frequent flyer
participation, code sharing of operations, and enhanced customer
service coordination, the alliance carriers' goal is to provide each
of their customers a seamless global travel network. United's
principal global alliance partner is Germany's flag carrier,
Lufthansa. Through Lufthansa, United has dramatically increased its
trans-Atlantic operations to Europe and beyond, including Eastern
Europe and the former Soviet Union. With the U.S. and Germany having
initialed a new "open skies" civil aviation agreement to liberalize
air travel between the two countries, United and Lufthansa filed an
application with the U.S. Department of Transportation on February
29, 1996 seeking antitrust immunity to expand and enhance their
existing alliance.
Other major alliance partners include Ansett, Air Canada,
British Midland and Aloha. After the U.S. and Thailand entered into
a new bilateral agreement, United and Thai Airways International
began planning for the implementation of the code-sharing provisions
of their comprehensive marketing arrangement, which will be subject
to U.S. Department of Transportation approval. Also, United has
entered into a similar comprehensive marketing arrangement with SAS
which will be implemented in 1996.
Pacific. Asian traffic is currently served from six U.S. cities
via United's Tokyo hub to Beijing, Shanghai, Seoul, Hong Kong,
Bangkok and Singapore. In addition, United provides nonstop flights
from San Francisco to Hong Kong, Osaka, Seoul and Taipei; from
Honolulu and Guam to Osaka; and from Los Angeles to Hong Kong and
Osaka. South Pacific traffic to Sydney is served from Los Angeles
and San Francisco, while traffic to Auckland and Melbourne is served
from Los Angeles. In addition, United expects to expand its
international service at Los Angeles on May 1, 1996 with a second
daily nonstop flight to Tokyo. United also has a comprehensive code-
sharing agreement with Ansett which operates in both Australia and
New Zealand.
United holds significant traffic rights "beyond" Japan and as
capacity at Japan's two major airports, Narita and Kansai, increases,
United hopes to add service from Japan to Kuala Lumpur, Ho Chi Minh
City, Jakarta and other Asian points. United has increased its focus
on the fast growing South China area with new service from Hong Kong
to New Delhi and increased service to San Francisco. Based on
reports filed with the Department of Transportation, in 1995, United
was the leading U.S. carrier in the Pacific in revenue passenger
miles and available seat miles. During 1995, United's Pacific
Division accounted for 22% of United's revenues.
Latin America. Service between the U.S. and Latin America is
provided by flights to twelve Latin American cities in ten countries
from a number of cities in the U.S. Eight Latin American cities are
served nonstop from Miami (with the introduction of service to Lima,
Peru and Belo Horizonte, Brazil in 1995 and the termination of
service to Central America, other than Mexico City), three nonstop
from Los Angeles, and three from New York-Kennedy. United also has
code-sharing agreements with one independent air carrier in this
region.
Europe. Service between the U.S. and Europe is provided by:
flights from six U.S. cities to London (including Chicago which was
started on September 7, 1995) with connecting service at London to
Amsterdam, New Delhi and Brussels; flights from three U.S. cities to
Paris; nonstop service from Washington Dulles to Amsterdam, Brussels,
Frankfurt, Milan and Zurich (service to Rome and Madrid was
discontinued in September 1995 and January 1996, respectively); and
nonstop service from Chicago to Frankfurt. In addition, United
expects to commence daily nonstop service on June 6, 1996 to
Dusseldorf, Germany from Chicago. This will serve to further
strengthen United's route system and alliance with Lufthansa, which
will code share on the Chicago - Dusseldorf flight. European and
Middle Eastern traffic is also served by United's code-sharing
agreements with three independent air carriers, including Lufthansa,
which will increase to four with the implementation of United's
comprehensive marketing arrangement with SAS.
Operating revenues attributed to United's foreign operations
were approximately $5.3 billion in 1995, $4.9 billion in 1994 and
$4.5 billion in 1993.
Selected Operating Statistics
The following table sets forth certain selected operating data
for United:
Year Ended December 31
----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenue Aircraft Miles
(millions) (a) 817 776 756 695 635
Revenue Aircraft
Departures 780,864 731,284 746,665 721,504 691,402
Available Seat Miles
(millions) (b) 158,569 152,193 150,728 137,491 124,100
Revenue Passenger Miles
(millions) (c) 111,811 108,299 101,258 92,690 82,290
Revenue Passengers
(thousands) 78,808 74,241 69,814 66,692 62,003
Average Passenger
Journey (miles) 1,419 1,459 1,450 1,390 1,327
Average Flight Length
(miles) 1,046 1,062 1,013 964 918
Passenger Load Factor (d) 70.5% 71.2% 67.2% 67.4% 66.3%
Break-even Load Factor (e) 66.1% 68.2% 65.5% 70.6% 69.7%
Average Yield Per Revenue
Passenger Mile
(in cents) (f) 11.8 11.3 11.6 11.3 11.5
Cost Per Available Seat
Mile Excluding ESOP
Charges (in cents) (g) 8.55 8.64 -- -- --
Cost Per Available Seat
Mile (in cents) (h) 8.9 8.8 8.5 8.9 9.0
Average Fare Per Revenue
Passenger $167.84 $165.61 $169.00 $157.17 $153.17
Average Daily Utilization
of each Aircraft
(hours:minutes) (i) 8:42 8:28 8:30 8:19 8:13
(a) "Revenue aircraft miles" means the number of miles flown in
revenue producing service.
(b) "Available seat miles" represents the number of seats available
for passengers multiplied by the number of miles those seats are
flown.
(c) "Revenue passenger miles" represents the number of miles flown
by revenue passengers.
(d) "Passenger load factor" represents revenue passenger miles
divided by available seat miles.
(e) "Break-even load factor" represents the number of revenue
passenger miles at which operating earnings would have been zero
(based on the actual average yield) divided by available seat miles.
(f) "Average yield per revenue passenger mile" represents the
average revenue received for each mile a revenue passenger is
carried.
(g) "Cost per available seat mile excluding ESOP charges" represents
operating expenses less ESOP compensation expense and one-time
expenses relating to the recapitalization (1994 only) divided by
available seat miles.
(h) "Cost per available seat mile" represents operating expenses
divided by available seat miles.
(i) "Average daily utilization of each aircraft" means the average
air hours flown in service per day per aircraft for the total fleet
of aircraft.
Industry Conditions
Seasonal and Other Factors. United's results of operations for
interim periods are not necessarily indicative of those for an entire
year, because the air travel business is subject to seasonal
fluctuations. United's first and fourth quarter results normally are
affected by reduced travel demand in the fall and winter, and
United's operations are often affected adversely by winter weather.
In the past, these fluctuations have generally resulted in better
operating results for United in the second and third quarters.
The results of operations in the air travel business have also
fluctuated significantly in the past in response to general economic
conditions. In addition, the airline business is characterized by a
high degree of operating leverage. As a result, the economic
environment and small fluctuations in United's yield per revenue
passenger mile and cost per available seat mile can have a
significant impact on operating results. The Company anticipates
that seasonal factors and general economic conditions, in addition to
industrywide fare levels, labor and fuel costs, the competition from
other airlines, international government policies, and other factors,
will continue to impact United's operations.
Competition and Fares. The airline industry is highly
competitive. In domestic markets, new and existing carriers are free
to initiate service on any route. United faces competition from
other carriers on virtually every route it serves. In United's
domestic markets, these competitors include all of the other major
U.S. airlines as well as smaller carriers, some of which have lower
cost structures than United. United's response to these lower cost
structures has been the consummation of the Recapitalization which
allowed United to lower its labor costs and to introduce Shuttle by
United, a short-haul, high frequency operation.
United's marketing strategy is driven by four principal
competitive factors: schedule convenience, overall customer service,
frequent flyer programs and price. United seeks to attract travelers
through convenient scheduling, high quality service, frequent flyer
programs designed to reward customer loyalty and competitive pricing.
From time to time, excess aircraft capacity and other factors
such as the cash needs of financially distressed carriers induce
airlines to engage in "fare wars." Such factors can have a material
adverse impact on the Company's revenues. The Company maintains
yield and inventory management programs designed to manage the number
of seats offered in various fare categories in order to enhance the
effectiveness of fare promotions and maximize revenue production on
each flight.
In its international service, United competes not only with U.S.
carriers but also with national flag carriers of foreign countries,
which in certain instances enjoy forms of governmental support which
are not available to U.S. carriers. Competition on certain
international routes is subject to varying degrees of governmental
regulations (see "Government Regulation").
United has advantages over foreign air carriers in its ability
to generate U.S.-origin-destination traffic from its integrated
domestic route systems, and because foreign carriers are prohibited
by law from carrying local passengers between two points in the
United States. On the other hand, U.S. carriers in many cases are
constrained from carrying passengers to points beyond designated
international gateway cities due to limitations in air service
agreements or restrictions imposed unilaterally by foreign
governments. To compensate for these structural limitations, U.S.
and foreign carriers have entered into alliances and marketing
arrangements which allow the carriers to provide feed to each other's
flights. (See "Airline Operations").
Airport Access. United's operations at its principal domestic
hub, Chicago-O'Hare International Airport ("O'Hare"), as well as at
three other airports, JFK International ("Kennedy"), New York
LaGuardia ("LaGuardia"), and Washington National ("National"), are
limited by the "high density traffic rule" administered by the
Federal Aviation Administration ("FAA"). Under this rule, take-off
and landing rights ("slots") required for the conduct of domestic
flight operations may be bought, sold or traded. As of December 31,
1995, United held 756 domestic air carrier slots at O'Hare, 34 at
National, 63 at LaGuardia, and 11 at Kennedy. United also holds ten
commuter slots at O'Hare. In addition, Air Wisconsin, Inc., an
indirect wholly-owned subsidiary of UAL, held or owned the beneficial
interest in 38 air carrier slots and 118 commuter slots at O'Hare
which are either operated by United or leased to United Express
carriers serving O'Hare. Under the high density rule, carriers are
required to relinquish slots to the FAA for reallocation if they fail
to meet certain minimum use standards.
Slots for international services at O'Hare are allocated by the
FAA seasonally to both U.S. and foreign carriers based upon the
carriers' historic operations and requests for additional capacity.
The FAA holds a certain number of slots in reserve for this purpose.
Current FAA regulations provide that carriers holding 100 or more
domestic slots at O'Hare may receive slots from the FAA for
international services only if the total number of slots allocated to
that carrier does not exceed the total number allocated to that
carrier as of February 23, 1990. Under this rule, United is eligible
to receive 17 international slots from the FAA each season.
Prior to October 1993, the FAA was authorized to withdraw
domestic slots from carriers at O'Hare to provide slots to satisfy
international requests. Congress has since capped the number of
slots the FAA could withdraw for this purpose at the number of slots
that had been withdrawn from a carrier as of October 31, 1993. As of
that date, the FAA had withdrawn from United 33 daily slots, defined
as slots which United operated three days or more per week. United
continues to be subject, each season, to the withdrawal of as many as
33 daily slots.
United currently has a sufficient number and distribution of
slots it holds at airports subject to the high density rule to
support its current operations, although its ability to expand could
be constrained if sufficient additional slots were not available on
satisfactory terms. If an alternative to the current system were to
be proposed and adopted, no assurance can be given that such an
alternative would preserve United's investment in slots already
acquired or that slots adequate for future operations would be
available.
United currently has a sufficient number of leased gates and
other airport facilities at the cities it serves to meet its current
and near term needs. From time to time, expansion by United at
certain airports may be constrained by insufficient availability of
gates on attractive terms. United's ability to expand its
international operations in Asia, the South Pacific, Europe and Latin
America is subject to restrictions at many of the airports in these
regions, including noise curfews, slot controls and absence of
adequate airport facilities.
Mileage Plus Program. United established the Mileage Plus
frequent flyer program to retain and develop passenger loyalty by
offering awards to frequent travelers for their business. Mileage
Plus members earn mileage credit for flights on United, United
Express and certain other participating airlines, or by utilizing
services of other program participants, including hotels, car rental
companies and bank credit card issuers. United sells mileage credits
to the other companies participating in the program. Mileage credits
can be redeemed for free, discounted or upgraded travel on United and
other participating airlines, or for other travel industry awards.
Mileage Plus, Inc., a wholly-owned subsidiary of United, administers
frequent flyer bonus programs for United.
When an award level is attained, a liability is recorded for the
incremental costs of accrued credits under the Mileage Plus program
based on the expected redemptions. United's incremental costs
include the costs of providing service for an otherwise vacant seat
including fuel, meals, certain incremental personnel and ticketing
costs. The incremental costs do not include any contribution to
overhead or profit.
Effective February 1, 1995, United increased the mileage levels
for Mileage Plus domestic award travel on a prospective basis
requiring 25,000 miles, instead of the previous 20,000 miles, for
award tickets issued for economy class travel within the continental
United States. In addition, United made certain other mileage award
level changes as well as a change to a bank-account type of system to
track mileage. The program also contains certain restrictive
provisions including blackout dates and capacity controlled bookings,
which substantially limit the use of the awards on certain flights.
Awards earned after July 1989 have an expiration date three years
from date earned.
At December 31, 1995 and 1994, it was estimated that the total
number of outstanding awards was approximately 6.0 million and 7.8
million, respectively. United estimated that 4.6 million and 5.8
million, respectively, of such awards could be expected to be
redeemed and, accordingly, had recorded a liability amounting to $195
million and $195 million, respectively, at December 31, 1995 and
1994. The difference between the awards expected to be redeemed and
the total awards outstanding is the estimate, based on historical
data, of awards (1) which will never be redeemed, (2) which will be
redeemed for other than free trips, or (3) which will be redeemed on
Partner carriers.
The number of awards used on United were 1.8 million, 1.9
million and 1.6 million for the years 1995, 1994 and 1993,
respectively. Such awards represented 8.2%, 9.1% and 7.5% of
United's total revenue passenger miles for each period, respectively.
With these percentages, seat availability and restrictions on the use
of free travel awards, the displacement, if any, of revenue
passengers by users of Mileage Plus awards is minimal.
Computer Reservations Systems. Travel agents account for a
substantial percentage of United's sales. The use of electronic
distribution systems has been a key factor in the marketing and
distribution of airlines' products.
United, through a wholly-owned subsidiary, owns 38% of Galileo
International Partnership ("Galileo"), formerly known as Covia, and
77% of Apollo Travel Services Partnership ("ATS"). These two general
partnerships own and market computer reservation system ("CRS")
products and services. Galileo owns the Apollo and Galileo CRSs and
markets CRS services worldwide through a system of national
distribution companies. ATS, directly or through its wholly-owned
subsidiaries, is responsible for marketing, sales and support of
Apollo CRS products and services in the United States, Mexico and the
Caribbean.
Competition among CRS vendors is intense, and services similar
to those offered by ATS and Galileo are marketed by several air
carriers and other concerns, both in the United States and worldwide.
In the European and Pacific CRS market, various consortia of foreign
carriers have formed CRSs to be marketed in countries in which the
owning carriers have a substantial presence.
On February 15, 1995, United introduced a new travel agency
commission payment plan that offers a maximum of $50 for any round-
trip domestic ticket and a maximum of $25 for any one-way domestic
ticket.
Lawsuits have been filed challenging the reductions by United
and other carriers in the commissions paid to travel agencies for
ticketing of air transportation alleging, among other things, a
conspiracy to restrain trade among the carriers in violation of
antitrust laws. (See Item 3. Legal Proceedings. Travel Agency
Commission Litigation.) United believes it has the right to make the
aforementioned changes to such commissions, and will defend itself
vigorously in the pending litigation.
On August 28, 1995, United introduced its electronic ticketing
service, E-TicketSM, on all of its 2,000 daily domestic flights.
United first introduced this electronic ticketing option in November
1994 on Shuttle by United flights. In addition, United introduced in
November 1995 a disk-based version of United ConnectionSM, which
gives consumers the option to reserve and purchase airline tickets,
rental cars and hotel rooms via personal computer.
Government Regulation
General. All carriers engaged in air transportation in the
United States are subject to regulation by the Department of
Transportation ("DOT") and the Federal Aviation Administration
("FAA") under federal aviation laws. The DOT has authority to
regulate certain economic and consumer protection aspects of air
transportation. It is empowered to issue certificates of public
convenience and necessity for domestic air transportation upon a
carrier's showing of fitness; to authorize the provision of foreign
air transportation by U.S. carriers; to prohibit unjust
discrimination; to prescribe forms of accounts and require reports
from air carriers; to regulate methods of competition, including the
provision and use of computerized reservation systems; and to
administer regulations providing for consumer protection, including
regulations governing the accessibility of air transportation
facilities for handicapped individuals. United's operations require
certificates of public convenience and necessity issued by the DOT
(or specific exemptions therefrom), and an air carrier operating
certificate and related operations specifications issued by the FAA.
United's operations also require licenses issued by the aviation
authorities of the foreign countries United serves. Foreign aviation
authorities may from time to time impose a greater degree of economic
regulation than exists with respect to United's domestic operations.
In connection with its international services, United is
required to file with the DOT and observe tariffs establishing the
fares charged and the rules governing the transportation provided.
In certain cases, fares and schedules require the approval of the DOT
and the relevant foreign governments.
In addition, United's operating authorities in international
markets are governed by the aviation agreements between the United
States and foreign countries. United's ability to serve some foreign
markets and its expansion in many foreign markets is presently
restricted by lack of aviation agreements allowing such service or,
in some cases, by the restrictive terms of such agreements. In
addition, the Government of Japan has, for over a year, deferred its
approval of an Osaka-Seoul flight scheduled by United. Japan
maintains that it will not approve new services beyond Japan by U.S.
carriers until the U.S. and Japan renegotiate the U.S.-Japan Air
Services Agreement. United has urged the U.S. Government to compel
Japan to honor the bilateral rights of U.S. carriers. United
continually urges the U.S. Government to negotiate increased access
to such restricted markets.
Shifts in United States or foreign government aviation policies
can lead to the alteration or termination of existing air service
agreements that the U.S. has with other governments, which could
diminish the value of United's international route authority. While
such events are generally the subject of inter-governmental
negotiations, there are no assurances that United's operating rights
under the bilateral aviation agreements and DOT-issued certificates
of public convenience and necessity can be preserved in such cases.
Safety. The FAA has regulatory jurisdiction over flight
operations generally, including equipment, ground facilities,
maintenance, communications and other matters. In order to ensure
compliance with its operational and safety standards, the FAA
requires air carriers to obtain operating, airworthiness and other
certificates.
United's aircraft and engines are maintained in accordance with
the standards and procedures recommended and approved by the
manufacturers and the FAA. For all of its engines, United utilizes a
"condition monitoring" maintenance program so that the schedule for
engine removals and overhauls is based on performance trend
monitoring of engine operating data. In addition, all engines
contain time-limited components, each of which has a maximum amount
of time (measured by operating hours) or a maximum number of
operating cycles (measured by takeoffs and landings) after which the
component must be removed from the engine assembly and overhauled or
scrapped. Similarly, United's FAA-approved maintenance program
specifies the number of days, hours or operating cycles between
inspections and overhauls of the airframes and their component parts.
The nature and extent of each inspection and overhaul is specifically
prescribed by the approved maintenance program.
From time to time, the FAA issues airworthiness directives
("ADs") which require air carriers to undertake inspections and to
make unscheduled modifications and improvements on aircraft, engines
and related components and parts. The ADs sometimes cause United to
incur substantial, unplanned expense and occasionally aircraft or
engines must be removed from service prematurely in order to undergo
mandated inspections or modifications on an accelerated basis. The
issuance of any particular AD may have a greater or lesser impact on
United compared to its competitors depending upon the equipment
covered by the directive.
Since 1988 the airlines, in cooperation with the FAA, have been
engaged in an in-depth review of the adequacy of existing maintenance
procedures applicable to older versions of most of the aircraft types
in general use in the airline industry. These include certain of the
Boeing and Douglas aircraft used by United. As a part of this
program, the FAA has issued ADs requiring interim inspections and
remedial maintenance procedures. While certain of these aging
aircraft ADs have necessitated unscheduled removals from service and
increased maintenance costs, compliance is not expected to have a
material adverse impact on United's costs or operations.
Both the DOT and the FAA have authority to institute
administrative and judicial proceedings to enforce federal aviation
laws and their own regulations, rules and orders. Both civil and
criminal sanctions may be assessed for violations.
Environmental Regulations. The Airport Noise and Capacity Act
of 1990 ("ANCA") requires the phase-out by December 31, 1999 of Stage
2 aircraft operations, subject to certain waivers. The FAA has
issued final regulations which require carriers to modify or reduce
the number of Stage 2 aircraft operated by 25% by December 31, 1994,
50% by December 31, 1996, 75% by December 31, 1998 and 100% by
December 31, 1999. Alternatively, a carrier could satisfy compliance
requirements by operating a fleet that is at least 55% Stage 3 by
December 31, 1994, 65% Stage 3 by December 31, 1996, 75% Stage 3 by
December 31, 1998 and 100% Stage 3 by December 31, 1999. At December
31, 1995, United operated 390 Stage 3 aircraft representing 70% of
United's total operating fleet, and thus is in compliance with these
regulations.
The ANCA generally recognizes the rights of operators of
airports with noise problems to implement local noise abatement
procedures so long as such procedures do not interfere unreasonably
with interstate or foreign commerce or the national air
transportation system. ANCA generally requires FAA approval of local
noise restrictions on Stage 3 aircraft first effective after October
1990, and establishes a regulatory notice and review process for
local restrictions on Stage 2 aircraft first proposed after October
1990. While United has had sufficient scheduling flexibility to
accommodate local noise restrictions imposed to the present, United's
operations could be adversely affected if locally-imposed regulations
become more restrictive or widespread.
The Environmental Protection Agency regulates operations,
including air carrier operations, which affect the quality of air in
the United States. United has made all necessary modifications to
its operating fleet to meet emission standards issued by the
Environmental Protection Agency ("EPA").
Federal and state environmental laws require that underground
storage tanks (USTs) be upgraded to new construction standards and
equipped with leak detection by December 22, 1998. These
requirements are phased into effect based on the age, construction
and use of existing tanks. United operates a number of underground
and above ground storage tanks throughout its system, primarily used
for the storage of fuels and deicing fluids. A program for the
removal or upgrading of USTs and remediation of any related
contamination has been ongoing since 1987. Compliance with these
federal and state UST regulations is not expected to have a material
adverse effect on United's financial condition.
United has been identified by the EPA as a potentially
responsible party with respect to Superfund sites involving soil and
groundwater contamination at the Bay Area Drum Site in San Francisco,
California, the Chemsol, Inc. Site in Piscataway, New Jersey, the
Petrochem/Ekotek Site in Salt Lake City, Utah, the Monterey Park Site
at Monterey Park, California, the West Contra Costa Sanitary Landfill
Site in Richmond, California, and the Douglasville Site in Berks
County, Pennsylvania. Because of the limited nature of the volume of
pollutants allegedly contributed by United to the above Superfund
sites, the outcome of these matters is not expected to have a
material adverse effect on United's financial condition.
United is aware of soil and groundwater contamination present on
its leaseholds at several U.S. airports, with the most significant
locations being San Francisco International Airport, John F. Kennedy
International Airport in New York, Seattle Tacoma International
Airport, Stapleton International Airport in Denver (which closed in
1995) and Los Angeles International Airport in California. United is
investigating these sites, assessing its obligations under applicable
environmental regulations and lease agreements and, where
appropriate, remediating these sites. Remediation of these sites,
for which United may be responsible, is not expected to have a
material adverse effect on United's financial condition.
Other Government Matters. Besides the DOT and the FAA, other
federal agencies with jurisdiction over certain aspects of United's
operations are the Department of Justice (Antitrust Division and
Immigration and Naturalization Service), the Equal Employment
Opportunity Commission, the Occupational Safety and Health
Administration, the Department of Labor (Office of Federal Contract
Compliance Programs of the Employment Standards Administration), the
National Labor Relations Board, the National Mediation Board, the
National Transportation Safety Board, the Treasury Department (U.S.
Customs Service), the Federal Communications Commission (use of radio
facilities by aircraft), and the United States Postal Service
(carriage of domestic and international mail). In connection with
its service to cities in other countries, United is subject to
varying degrees of regulation by foreign governments.
In time of war or during an unlimited national emergency or
civil defense emergency declared by the President or the Congress of
the United States, or in a situation short of this if approved by the
Director of the Office of Emergency Preparedness, the Commander in
Chief, Military Airlift Command, or any official designated by the
President to coordinate all civil and defense mobilization
activities, United may be required to provide airlift services to the
Military Airlift Command under the Civil Reserve Air Fleet Program.
As of February 1, 1996, up to 27 B747 and 12 DC-10 aircraft in
United's fleet could be subject to these requirements.
Fuel
United's results of operations are significantly affected by the
price and availability of jet fuel. Based on 1995 fuel consumption,
every $.01 change in the average annual price-per-gallon of jet fuel
caused a change of approximately $28 million in United's annual fuel
costs. The table below shows United's fuel expenses, fuel
consumption, average price per gallon and fuel as a percent of total
operating expenses for annual periods from 1991 through 1995:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Fuel expense,
including tax
(in millions) $1,680 $1,585 $1,718 $1,679 $1,674
Gallons consumed
(in millions) 2,822 2,697 2,699 2,529 2,338
Average cost per
gallon (in cents) 59.5 58.8 63.6 66.4 71.6
% of total
operating 12% 12% 13% 14% 15%
expenses
United's average fuel cost per gallon in 1995 was 1.2% higher
than in 1994. Changes in fuel prices are industry-wide occurrences
that benefit or harm United's competitors as well as United. Lower
fuel prices may be offset by increased price competition and lower
revenues for all air carriers, including United. There can be no
assurance that United will be able to increase its fares in response
to any increases in fuel prices in the future.
In order to assure adequate supplies of fuel and to provide a
measure of control over fuel costs, United ships fuel on major
pipelines, maintains fuel storage facilities, and trades fuel to
locations where it is needed. In 1995, almost all of United's fuel
was purchased under contracts with major U.S. and international oil
companies. Most of these contracts are terminable by United on short
notice. United also purchases minor volumes of fuel on the spot
market at some domestic locations. Although United has not
experienced any problem with fuel availability in the past few years
and does not anticipate any in the near future, it is impossible to
predict the future availability of jet fuel. If there were major
reductions in the availability of jet fuel, United's business would
be adversely affected.
The Omnibus Budget Reconciliation Act of 1993 imposed a 4.3 cent
per gallon tax on commercial aviation jet fuel purchased for use in
domestic operations. The industry was successful in obtaining a two
year exemption from the tax which expired October 1, 1995. An
additional two year extension of the industry's exemption is included
in the budget reconciliation package currently stalled in Congress.
Since the fate of the jet fuel tax is caught in the budget impasse,
United as well as other carriers have been paying the tax since
October 1, 1995 and United cannot predict the ultimate outcome of the
fuel tax issue.
Insurance
United carries liability insurance of a type customary in the
air transportation industry, in amounts which it deems adequate,
covering passenger liability, public liability and property damage
liability. Insurance is subject to price fluctuations from time to
time. The amount recoverable by United under aircraft hull insurance
covering all damage to its aircraft is not subject to any deductible
amount in the event of a total loss.
Employees - Labor Matters
At December 31, 1995, United had approximately 82,160 employees
(approximately eleven percent of whom are part-time employees).
Approximately 61% of United's employees were represented by various
labor organizations.
The employee groups, number of employees, labor organization and
current contract status for each of United's major collective
bargaining groups as of December 31, 1995 are as follows:
Number of Contract Open
Employee Group Employees Union For Amendment
-------------- --------- ----- -------------
Mechanics, ramp
servicemen & other
ground employees 23,031 IAM July 12, 2000 *
Flight attendants 18,703 AFA March 1, 1996
Pilots 8,120 ALPA April 12, 2000 *
___________________________
* However, certain provisions become amendable at a later date.
United's relations with these labor organizations are governed
by the Railway Labor Act. Under this Act, collective bargaining
agreements between United and these organizations become amendable
upon the expiration of their stated term. If either party wishes to
modify the terms of any such agreement, it must notify the other
party before the contract becomes amendable. After receipt of such
notice, the parties must meet for direct negotiations and, if no
agreement is reached, either party may request that a mediator be
appointed. If no agreement is reached, the National Mediation Board
may determine, at any time, that an impasse exists and may proffer
arbitration. Either party may decline to submit to arbitration. If
arbitration is rejected, a 30-day "cooling off" period commences,
following which the labor organization may strike and the airline may
resort to "self-help," including the imposition of its proposed
amendments and the hiring of replacement workers.
In February 1996, United and the Association of Flight
Attendants (the "AFA") reached tentative agreement on a new contract.
This agreement is subject to ratification by United's flight
attendants. If ratified, the new agreement will replace the current
contract. Ratification results are expected in April 1996.
ITEM 2. PROPERTIES.
Flight Equipment
As of December 31, 1995, United's operating aircraft fleet
totaled 558 jet aircraft, of which 266 were owned and 292 were
leased. These aircraft are listed below:
Average Average
Aircraft Type No. of Seats Owned Leased* Total Age (Years)
------------- ------------ ----- ------ ----- -----------
A320-200 144 -- 29 29 1
B727-222A 147 59 16 75 17
B737-200 109 45 -- 45 27
B737-200A 109 24 -- 24 16
B737-300 126 10 91 101 7
B737-500 108 27 30 57 4
B747-100 393 17 -- 17 24
B747-200 346 2 7 9 17
B747-400 389 3 21 24 4
B757-200 188 33 55 88 4
B767-200 168 19 -- 19 13
B767-300ER 211 3 20 23 3
B777-200 292 -- 8 8 0
DC10-10 287 23 8 31 20
DC10-30 298 1 7 8 16
TOTAL OPERATING
FLEET 266 292 558 11
=== === === ==
* United's aircraft leases have initial terms of 4 to 26 years,
and expiration dates range from 1999 through 2021. Under the
terms of leases for 283 of the aircraft in the operating fleet,
United has the right to purchase the aircraft at the end of the
lease term, in some cases at fair market value and in others at
fair market value or a percentage of cost.
As of December 31, 1995, 64 of the 266 aircraft owned by United
were encumbered under transaction agreements.
In 1995 United took delivery of 16 new aircraft, eight B777-200s
and eight A320-200s. United also retired one B747-100 aircraft.
As of December 31, 1995, United had 26 B777-200s, four B747-400s
and four B757-200s on order which are scheduled to be delivered
between 1996 and 1999, and United has arrangements with Airbus
Industrie ("Airbus") and A320 engine manufacturer International Aero
Engines to lease an additional 21 A320-200 aircraft, which are
scheduled for delivery through 1998. The following table sets forth
United's firm aircraft orders, options and expected delivery
schedules as of December 31, 1995:
Order Status Aircraft Type Number To Be Delivered Delivery Rate
------------ ------------- ------ --------------- -------------
Firm Orders B747-400 4 1996-1997 0-1 per month
B757-200 4 1996 0-2 per month
B777-200 26 1996-1999 0-2 per month
--
Total-Firms 34*
Options** A320-200 45 1997-2001 0-3 per month
B737*** 137 1998-2002 0-5 per month
B747-400 40 1998-2003 0-2 per year
B757-200 29 1998-1999 0-2 per month
B767-300ER 5 1998-1999 0-1 per month
B777-200 34 1998-2000 0-1 per month
---
Total-Options 290
________________
* In addition, United has agreed to lease an additional 21 A320-200
aircraft. Deliveries of these aircraft are expected to occur
between 1996 and 1998.
** Rate of deliveries with respect to option aircraft assumes that
all options are exercised and that all orders subject to recon
firmation are confirmed by United.
*** Models 300, 400 and 500, at United's discretion.
Ground Facilities
In the vicinity of O'Hare, United owns a 106 acre complex
consisting of over one million square feet of office space for its
world headquarters, a computer facility and a training center.
United operates reservation centers in or near eight U.S. cities -
Chicago, Denver, Detroit, Honolulu, Los Angeles, San Francisco,
Seattle and Washington, D.C. United also operates 138 city ticket
offices in the U.S., plus offices in the Pacific and European
countries served by United. In addition, United operates four mini-
reservations centers in Rockford, Illinois, Moreno Valley and Suisun,
California and at its maintenance facility in Indianapolis, Indiana.
United's Maintenance Operation Center ("MOC") at San Francisco
International Airport occupies 129 acres of land, three million
square feet of floor space and 12 aircraft hangar docks, under leases
expiring in 2003, with an option to extend for ten years. Heavy
maintenance of aircraft and component maintenance for most of
United's fleet occurs at the MOC. United also has a major facility
at the Oakland, California airport which is dedicated to airframe
maintenance and which includes a hangar with sufficient space to
accommodate maintenance work on four wide-bodied aircraft
simultaneously. As of December 31, 1995, United employed
approximately 10,000 mechanics, inspectors, engineers and maintenance
support personnel at the MOC and approximately 1,400 at the Oakland
facility. United also has line aircraft maintenance facilities at 64
domestic and international locations.
United's Indianapolis Maintenance Center ("IMC") opened in 1994
and operates under a lease with the Indianapolis Airport Authority
which expires November 30, 2031. IMC is a major aircraft maintenance
and overhaul facility and is being used for maintenance of Boeing 737
aircraft. United is significantly expanding its operations at IMC in
order to maintain its fleets of Boeing 757 and 767 aircraft at the
facility in the future, construction of which began in 1995. In
connection with incentives received, United has agreed to reach an
aggregate $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.
On February 28, 1995, United relocated its Denver hub operations
to the new Denver International Airport. Under a new 30-year lease
and use agreement, expiring in 2023, United occupies 44 gates and
over one million square feet of exclusive terminal building space.
With the opening of the new airport, Stapleton International Airport
was closed to all aircraft operations. United's flight training
center will continue to be located near Stapleton and is under lease,
including options to extend, until 2018. This flight training center
consists of four buildings with a total of 300,000 square feet
located on 22 acres of land adjoining Stapleton. The flight training
center accommodates 26 flight simulators and over 90 computer-based
training stations, as well as cockpit procedures trainers, autoflight
system trainers and emergency evacuation trainers.
United has entered into various leases relating to its use of
airport landing areas, gates, hangar sites, terminal buildings and
other airport facilities in most of the municipalities it serves.
Major leases expire at Chicago O'Hare in 2018, San Francisco in 2011,
Denver in 2023 and Washington Dulles in 2015. In many cases United
has constructed, at its expense, the buildings it occupies on its
leased properties. In general, buildings and fixtures constructed by
United on leased land are the property of the lessor upon the
expiration of such leases. United also has leased and improved
ticketing, sales and general office space in the downtown and
outlying areas of most of the larger cities in its system. United
believes its facilities are suitable and adequate for its current
requirements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in legal proceedings
incidental to the ordinary course of its business. Such proceedings
include claims brought by and against the Company or its subsidiaries
including claims seeking substantial compensatory and punitive
damages. Such claims arise from routine commercial disputes as well
as incidents resulting in bodily injury and damage to property. The
Company believes that the potential liabilities in all of the bodily
injury and property damage actions are adequately insured and none of
the other actions are expected to have any material adverse effect on
the Company or its subsidiaries.
1. Travel Agency Commission Litigation -- On February 13, 1995 and
dates thereafter United 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 announced a cap on ticket sales
commissions payable to travel agencies by the carriers. The cases
are now consolidated before the federal court in Minneapolis. The
court, on August 23, 1995, denied the plaintiffs' motion for
preliminary injunction as well as the defendants' motion for summary
judgment. 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. On
December 21, 1995, the carriers filed a motion to obtain damages
discovery from absent class members, which the magistrate judge
denied on January 22, 1996. In his decision, the magistrate rejected
defendants' arguments that plaintiffs' efforts to mitigate damages
allegedly suffered as a result of the commission caps were relevant
to the litigation. The defendants appealed the magistrate's decision
to the district court.
2. Summers et al. v. State Street Bank and Trust Company et al. --
On April 14, 1995, plaintiffs filed a class action complaint (the
"Complaint") against State Street Bank and Trust Company ("State
Street"), the UAL Corporation Employee Stock Ownership Plan (the
"Plan") and the UAL Corporation Supplemental ESOP (the "Supplemental
Plan") 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 Plan or the Supplemental Plan. 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 by the Plan and Supplemental Plan
of UAL preferred stock. The Plan and Supplemental Plan are nominal
defendants; no relief is sought from them. The complaint seeks a
declaration that State Street has violated ERISA, restoration by
State Street to the Plan and Supplemental Plan of the amount of an
alleged "overpayment" for 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. The defendants filed a motion to dismiss the complaint in its
entirety on July 12, 1995.
United may be affected by legal proceedings brought by owners of
property located near certain airports. Plaintiffs generally seek to
enjoin certain aircraft operations and/or to obtain damages against
airport operators and air carriers as a result of alleged aircraft
noise or air pollution. Any liability or injunctive relief imposed
against airport operations or air carriers could result in higher
costs to United and other air carriers.
The ultimate disposition of the matters discussed in this Item
3, and other claims affecting the Company, are not expected to have a
material adverse effect on the Company's financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
United is a wholly-owned subsidiary of UAL.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(In Millions, Except Per Share)
<S> <C> <C> <C> <C> <C>
Operating revenues $14,895 $13,887 $13,168 $11,688 $10,703
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 371 66 (17) (386) (335)
Extraordinary loss on early
extinguishment of debt,
net of tax (30) - (19) - -
Cumulative effect of
accounting changes,
net of tax - (26) - (547) -
Net earnings (loss) 341 40 (36) (933) (335)
Total assets at year-end 11,393 11,952 12,153 12,067 9,907
Long-term debt and capital
lease obligations, including
current portion, at year-end 3,553 4,015 3,614 3,628 2,531
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section contains forward-looking statements which are identified
with an asterisk (*). Factors that could significantly impact the expected
results implied in the forward-looking statements are listed in the last
paragraph of the section, "Outlook for 1996."
On July 12, 1994, the shareholders of UAL Corporation ("UAL") approved
a plan of recapitalization that provides an approximately 55% equity and
voting interest in UAL to certain employees of United Air Lines, Inc.
("United") in exchange for wage concessions and work-rule changes. The
employees' equity interest is being allocated to individual employee
accounts through the year 2000 under Employee Stock Ownership Plans
("ESOPs") which were created as a part of the recapitalization. Since the
ESOP shares are being allocated over time, the current ownership interest
held by employees is substantially less than 55%. The entire ESOP voting
interest is currently exercisable, which generally will be voted by the ESOP
trustee at the direction of, and on behalf of, the employees participating
in the ESOPs.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity -
United's total of cash and cash equivalents and short-term investments
was $567 million at December 31, 1995, compared to $1.301 billion at
December 31, 1994. Operating activities during the year generated $1.587
billion. Cash was used primarily to repay long-term debt, reduce short-term
borrowings and fund net additions to property and equipment. In addition to
the early extinguishment of $738 million in principal amount of various debt
securities, United made mandatory repayments of long-term debt totalling
$100 million. Payments under capital lease obligations amounted to $79
million during the year and short-term borrowings were reduced by $269
million.
In 1995, United took delivery of eight new Airbus A320 aircraft and
eight new Boeing B777 aircraft, financed primarily through lease
transactions. Four of the B777s were purchased and then sold and leased
back under operating leases. Of the remaining new aircraft acquired, eight
were acquired under operating leases and four under capital leases. In
addition, United acquired 39 previously leased aircraft, 9 B727s, 24 B737s
and 6 DC-10s, upon termination of operating leases. Including these
aircraft, total property additions amounted to $1,111 million. Property
dispositions, including the sale and leaseback of the four B777 aircraft,
resulted in proceeds of $459 million.
As of December 31, 1995, United had a working capital deficit of
$1.971 billion as compared to $1.853 billion at December 31, 1994.
Historically, United has operated with a working capital deficit and, as in
the past, United expects to meet all of its obligations as they become due.
In addition, United may from time to time repurchase debentures on the open
market, in privately negotiated purchases or otherwise, as part of its
efforts to reduce its obligations and improve its balance sheet.
In the second quarter of 1995, United repaid all $269 million of its
outstanding short-term borrowings. However, United continues to have the
ability to borrow up to $270 million under this commercial paper facility
through February 1997.
Prior Years -
Operating activities in 1994 generated cash flows of $1.193 billion,
which was offset by a dividend of $1.041 billion paid to UAL in connection
with the recapitalization. This distribution was partially funded by net
proceeds of $735 million on the issuance of debentures. Other financing
activities included principal payments under debt and capital lease
obligations of $255 million and $87 million, respectively, and a $46 million
reduction of short-term borrowings. Property additions, including the
acquisition of two B747 aircraft and aircraft spare parts, amounted to $627
million. Property dispositions resulted in proceeds of $425 million.
During 1993, United's balance of cash and cash equivalents decreased
$169 million while short-term investments decreased $114 million. Operating
activities resulted in cash flows of $818 million, which more than offset
cash used for net property additions and financing activities. Investing
activities, including the short-term investment decrease and net property
additions, used $232 million. Property additions amounted to $1.484
billion, including the purchase of 34 aircraft, and property dispositions
resulted in proceeds of $1.156 billion, including the sale and leaseback of
18 aircraft. In all, 10 B737 aircraft, 16 B757 aircraft, 4 B747 aircraft, 8
B767 aircraft and 5 A320 aircraft were acquired, through purchases or
leases. Financing activities used $755 million. Reductions in short-term
borrowings, capital lease obligations and long-term debt, including the
early extinguishment of $500 million of senior subordinated notes, more than
offset cash proceeds from the issuance of long-term debt.
Capital Commitments -
At December 31, 1995, commitments for the purchase of property and
equipment, principally aircraft, approximated $3.6 billion, after deducting
advance payments. An estimated $1.4 billion is due to be spent in 1996,
$1.6 billion in 1997, $0.4 billion in 1998 and $0.2 billion in 1999 and
thereafter. The major commitments are for the purchase of 26 B777 aircraft,
4 B747 aircraft and 4 B757 aircraft. The B777s are scheduled to be
delivered through 1999, and the B747s and B757s are expected to be delivered
in 1996 and 1997.
In addition to the above aircraft orders, United has arrangements with
Airbus Industrie ("Airbus") and International Aero Engines to lease 21 A320
aircraft, which are scheduled for delivery through 1998. At December 31,
1995, United also had options for an additional 137 B737 aircraft, 29 B757
aircraft, 34 B777 aircraft, 40 B747 aircraft, 5 B767 aircraft and 45 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 not exercised.
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, United's fleet plan provides for
only slight growth in its operating fleet through the end of 1997.
In October 1995, certain employees of the Boeing Company ("Boeing")
began a labor strike, now settled, which affected Boeing's ability to
deliver as scheduled certain new aircraft which United had 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.
In connection with the construction of the Indianapolis Maintenance
Center, United agreed to reach an aggregate $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.
Capital Resources -
Funds necessary to finance aircraft acquisitions are expected to be
obtained from internally generated funds, irrevocable external financing
arrangements or other external sources.
In May 1995, United issued $246 million principal amount 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 December 31, 1995, up to $795 million of
securities could be issued under the shelf registration, 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 restated certificate of incorporation.
In January 1996, United offered $165 million principal amount in pass
through certificates under the shelf registration statement, lowering the
amount available for public offering under the shelf to $631 million. The
pass through certificates were issued to refinance two aircraft under
operating leases.
At December 31, 1995, United's senior unsecured debt was rated BB by
Standard and Poor's and Baa3 by Moody's Investors Service Inc.
Immediately following UAL's announcement in October 1995 that it was
studying the possibility of submitting a proposal to acquire USAir Group,
Inc. ("USAir"), S & P placed United's securities on CreditWatch with
negative implications. In November 1995, UAL announced that it had ended
its evaluation of USAir and would not submit a proposal to acquire the
company. With this announcement, S & P reaffirmed its ratings of United's
securities.
RESULTS OF OPERATIONS
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, increasing
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 United's 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. The amount of the non-cash compensation expense in the
future cannot be predicted because it is based on the future market value of
UAL's stock. Additionally, it is anticipated that tax provisions (credits)
in future periods could be impacted by permanent differences between tax
deductions and book expenses related to the ESOPs.
Summary of Results -
United's earnings from operations were $832 million in 1995, compared
to operating earnings of $513 million in 1994. United's net earnings in
1995 were $341 million, compared to net earnings of $40 million in 1994.
The 1995 earnings include an extraordinary loss of $30 million, after tax,
on early extinguishment of debt. 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.
1995 Compared with 1994 -
In the first quarter of 1995, United implemented a new travel agency
commission payment plan that offers a maximum of $50 for any round-trip
domestic airline ticket and a maximum of $25 for any one-way domestic
ticket. The new commission plan resulted in a reduction of approximately
$80 million in United's commission expense for 1995 from what would have
otherwise been incurred. Lawsuits have been filed challenging this payment
plan (see "Contingencies").
Operating Revenues. Operating revenues increased $1,008 million
(7%). United's revenue per available seat mile increased 3% to 9.39 cents.
Passenger revenues increased $932 million (8%) due primarily to a 3%
increase in United's revenue passenger miles and a 4% increase in yield to
11.79 cents. Yield increases in the domestic (4%), Pacific (5%) and
Atlantic (9%) markets were offset by a 5% decrease in Latin America yield.
Both domestic and international revenue passenger miles increased by 3%.
Available seat miles increased 4% systemwide, as increases of 8% and 4% on
Pacific and domestic routes, respectively, were partially offset by a
decrease of 3% in the Atlantic. As a result, United's system passenger load
factor decreased 0.7 points to 70.5%.
Cargo revenues increased $72 million (11%). Freight ton miles
increased 6% and mail ton miles increased 19%. A 3% higher freight yield
was offset by a lower mail yield for an overall increase in cargo yield of
2%. Other operating revenues include a $43 million (30%) increase in
Mileage Plus partner related revenues, offset by a $50 million (24%)
decrease in fuel sales to third parties.
Operating Expenses. Operating expenses increased $689 million (5%).
United's cost per available seat mile also increased 1% from 8.79 cents to
8.87 cents, which includes the non-cash ESOP compensation expense. Without
this expense, United's cost per available seat mile would have been 8.55
cents versus 8.64 cents in 1994. ESOP compensation expense increased $322
million, reflecting a higher average common stock price in 1995 combined
with a shorter expense period in 1994, as the recapitalization took place on
July 12, 1994. Landing fees and other rent increased $179 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 7%.
Aircraft rent increased $76 million (8%) as a result of new A320 and B777
aircraft on operating leases. Food services costs increased $53 million
(11%) due to new catering arrangements resulting from the 1994 sale of
certain flight kitchens, increased passenger volumes and quality
improvements in the First and Connoisseur class services. Purchased
services increased $115 million (12%) due principally to volume-related
increases in computer reservations fees and credit card discounts. An
increase of $95 million (6%) in aircraft fuel reflects a capacity related
increase in United's consumption of 5% and an increase in United's average
price per gallon to 59.5 cents from 58.8 cents. The increase in average
price per gallon reflects a charge of approximately $20 million resulting
from the new federal fuel tax, that took effect October 1, 1995.
Commissions increased $45 million (3%) due principally to increased
commissionable revenues partially offset by the effects of the new travel
agents commission payment plan. Personnel expenses increased $37 million
(15%) due primarily to increased layover costs incurred principally in
support of international operations.
Salaries and related costs decreased $153 million (3%) primarily due
to the full year effect of savings resulting from wage and benefit
reductions for employees participating in the ESOPs and to $48 million of
one-time ESOP related costs recorded in 1994, partially offset by higher
average wage rates for other employee groups and increased staffing in
certain customer-oriented positions. Other operating expenses decreased $76
million (7%) due mainly to lower fuel sales.
Other Income and Expense. Other expense amounted to $224 million in
1995 compared to $360 million in 1994. Interest income increased $17
million (25%) due to higher average interest rates earned on investments.
Equity in earnings of affiliates increased $28 million as a result of
increased earnings at Galileo. Included in "Miscellaneous, net" in 1995
were foreign exchange losses of $20 million, a $17 million gain on property
dispositions and a $23 million charge for minority interests in Apollo
Travel Services Partnership ("ATS"). "Miscellaneous, net" in 1994 included
charges of $121 million for fees and costs incurred in connection with the
recapitalization, a $22 million charge for minority interests in ATS and
foreign exchange gains of $15 million.
Income Tax Provision. The income tax provision for 1994 was
significantly impacted by the nondeductibility of certain recapitalization
costs.
1994 Compared with 1993 -
United's results of operations improved in 1994 as compared to 1993.
In 1994, United recorded net earnings of $40 million, compared to a 1993 net
loss of $36 million. Included in 1994 were $169 million of pretax expenses
incurred in connection with the recapitalization, of which $48 million were
recorded in operating expenses. The 1994 results also include an after-tax
charge of $26 million 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.
The 1993 results include an extraordinary loss of $19 million on the early
extinguishment of debt.
Prior to the September 1993 merger of the Covia Partnership ("Covia")
and Galileo Ltd., United's investments in these companies were carried on
the equity basis. United now owns 77% of ATS, one of the companies formed
in the merger, and its accounts are consolidated with those of United. As a
result, United's consolidated operating revenues and expenses increased. In
addition, the sales of flight kitchen assets in late 1993 and early 1994 had
the effect of reducing United's salaries and related costs and increasing,
to a lesser degree, food services. These changes have affected the 1994
comparisons to 1993 as indicated in the discussion which follows.
Operating Revenues. Operating revenues increased $719 million (5%).
Revenue per available seat mile increased 4% to 9.12 cents. Passenger
revenues increased $496 million (4%) due primarily to a 7% increase in
revenue passenger miles, partially offset by a 3% decrease in yield to 11.31
cents. Domestic revenue passenger miles increased by 7% while international
increased by 8%. Available seat miles increased 1% systemwide, as increases
of 6% in the Pacific and 2% in the Atlantic were partially offset by
decreases of 1% on domestic routes and 3% in Latin America. As a result,
system passenger load factor increased 4.0 points to 71.2%.
Cargo revenues increased $28 million (4%), due to increased freight
revenues partially offset by decreased mail revenues. Freight and mail
revenue ton miles each increased 3%; however, freight yield increased 5%
while mail yield decreased 8%. Other operating revenues increased $195
million (27%) primarily as a result of the consolidation of ATS and an
increase in fuel sales.
Operating Expenses. Operating expenses increased $501 million (4%).
United's cost per available seat mile also increased 3% from 8.54 cents to
8.79 cents, which includes certain one-time costs relating to the
recapitalization and ESOP compensation expense. Without these costs,
United's cost per available seat mile would have been 8.64 cents. Food
services increased $162 million (51%) due to the new catering arrangements
resulting from the flight kitchen sales as discussed above. Commissions
increased $112 million (9%) due principally to increased commissionable
revenues. An increase of $91 million (11%) in aircraft rent reflects rent
associated with a higher number of aircraft on operating leases, including
new aircraft acquired in the past year. Aircraft maintenance increased $44
million (12%) as a result of increased vendor-provided maintenance due to
the timing of maintenance cycles. Other operating expenses increased $85
million (10%) due to the consolidation of ATS and higher fuel sales.
Aircraft fuel expense decreased $133 million (8%), due to an 8%
decrease in United's average price per gallon of fuel to 58.8 cents and a
slight decrease in fuel consumption. Purchased services decreased $27
million (3%), as certain services, principally computer reservations and
communications, were provided by ATS subsequent to the merger. Salaries and
related costs decreased $15 million primarily due to lower wage rates for
employees participating in the ESOPs and a lower number of employees as a
result of the flight kitchen sales, partially offset by higher average wage
rates for other employee groups, higher costs associated with medical
benefits and $48 million of one-time costs related to the recapitalization.
Other Income and Expense. Other expense amounted to $360 million in
1994 compared to $321 million in 1993. Interest expense increased $15
million (4%) due to higher average interest rates resulting from the
debentures issued in July 1994, partially offset by the benefit of the
extinguishment of $500 million of subordinated debt in 1993. Interest
capitalized decreased $10 million (20%) as a result of lower advance
payments on new aircraft and lower capitalized interest rates. Interest
income decreased $7 million (9%) due primarily to interest received in 1993
in connection with the final settlement of certain pension benefits.
United's equity in results of affiliates changed from a loss of $30 million
in 1993 to earnings of $20 million in 1994 due primarily to a charge
recorded by Galileo International in 1993 for the cost of eliminating
duplicate facilities and operations after the merger of Covia and Galileo
Ltd. Included in "Miscellaneous, net" in 1994 were charges of $121 million
for fees and costs incurred in connection with the employee investment
transaction and recapitalization, a $22 million charge for minority
interests in ATS and foreign exchange gains of $15 million. Included in
1993 was a $59 million charge to reduce the net book value of 15 DC-10
aircraft to estimated realizable value, a $17 million gain resulting from
the final settlement of certain pension benefits and foreign exchange losses
of $20 million.
Income Tax Provision. The income tax provision for 1994 was
significantly impacted by the nondeductibility of certain recapitalization
costs and the statutory change in the deductibility of other expenses.
OTHER INFORMATION
Deferred Tax Asset -
United's consolidated balance sheet at December 31, 1995 includes a
net deferred tax asset of $478 million, compared to $634 million at December
31, 1994. The net deferred tax asset is composed of approximately $1.9
billion of deferred tax assets and approximately $1.4 billion of deferred
tax liabilities. The deferred tax assets include, among other things, $593
million related to obligations for postretirement and other employee
benefits, $450 million related to gains on sales and leasebacks, $263
million related to alternative minimum tax ("AMT") credit carryforwards and
$123 million of federal and state net operating loss ("NOL") carryforwards.
The AMT credit carryforwards do not expire; the federal NOL carryforwards
begin to expire in 2009 if not utilized prior to that time.
Management believes that a majority of the deferred tax assets will be
realized through reversals of existing deferred tax liabilities with similar
reversal patterns. To realize the benefits of the remaining deferred tax
assets relating to temporary differences, United needs to generate
approximately $1.1 billion in future taxable income.
Although United experienced book and tax losses in 1993, United had
book income in 1994 and 1995 and taxable income in 1994. United had a tax
loss in 1995 due to the implementation of certain discretionary tax-planning
strategies.
<TABLE>
<CAPTION>
Following is a summary of United's pretax book income and taxable income,
and the significant differences between them, for the last three years (in
millions):
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Pretax book income (loss) $ 608 $ 153 $ (26)
Gains on sale and leasebacks, net
of amortization (50) 73 15
Depreciation, capitalized interest
and transfers of tax benefits (240) (268) (313)
Rent expense and other lease costs (131) 132 130
Pension expense (291) (145) (156)
Other employee benefits 104 155 37
Gains on asset dispositions, net
of amortization (13) 39 (34)
ESOP transaction costs (10) 63 -
Loss on debt extinguishment (48) - (27)
Other, net (127) (41) 124
----- ----- -----
Taxable income (loss) $(198) $ 161 $(250)
===== ===== =====
</TABLE>
While the loss in 1993 was largely attributable to events beyond
management's control, including the unanticipated duration of the recession
in both the U. S. and other areas of the world and the proliferation of
numerous low-cost air carriers, United has taken several steps to reduce
costs and improve profitability. Most notably, the 1994 employee investment
transaction and recapitalization was partially responsible for United's
improved operating results in 1994 and 1995, and should continue to
favorably impact United's financial results.
United's ability to generate sufficient amounts of taxable income from
future operations is dependent upon numerous factors, including general
economic conditions, inflation, fuel costs, the state of the industry and
other factors beyond management's control. There can be no assurances that
United will meet its expectation of future taxable income. However, based
on the above factors, the extended period over which postretirement benefits
will be recognized, and the indefinite carryforward period for AMT credits,
management believes it is more likely than not that future taxable income
will be sufficient to utilize the deferred tax assets at December 31, 1995.
Contingencies -
United has been named as a Potentially Responsible Party at certain
Environmental Protection Agency ("EPA") cleanup sites which have been
designated as Superfund Sites. United's alleged proportionate contributions
at the sites are minimal; however, at sites where the EPA has commenced
litigation, potential liability is joint and several. Additionally, United
has participated and is participating in remediation actions at certain
other sites, primarily airports. The estimated cost of these actions is
accrued when it is determined that it is probable that United is liable.
Such accruals have not been material. Environmental regulations and
remediation processes are subject to future change, and determining the
actual cost of remediation will require further investigation and
remediation experience. Therefore, the ultimate cost cannot be determined
at this time. However, while such cost may vary from United's current
estimate, United believes the difference between its accrued reserve and the
ultimate liability will not be material.
Litigation challenging United's new travel agency commission 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. The plaintiffs are seeking a declaration
that the new payment plan is illegal and recovery of damages, trebled.
United has certain other contingencies resulting from this and other
litigation and claims 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 such contingencies
and prior experience, that the ultimate disposition of these contingencies
is not likely to materially affect United's financial condition, operating
results or liquidity.*
The 1994 recapitalization resulted in new labor agreements for certain
employee groups and a new corporate governance structure, which was designed
to achieve balance between the various employee-owner groups and public
shareholders. 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. Some of the factors that could significantly impact the
continued success of the recapitalization include United's ability to
achieve enduring costs savings through productivity improvements and the
renegotiation of labor agreements at the end of the investment period.
Energy Tax -
The Omnibus Budget Reconciliation Act of 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, and
resulted in an increase to 1995 operating expenses of approximately $20
million. Based on United's 1995 domestic fuel consumption of 1.8 billion
gallons, the new fuel tax would have increased United's 1995 operating
expenses by approximately $57 million over what was recorded, had it been in
effect for the entire year. United and other carriers have lobbied
vigorously to have the tax repealed. The ultimate fate of the tax is
unknown at this time due to the federal budget stalemate. United cannot
predict the ultimate outcome of this issue.
Foreign Operations -
United generates revenues and incurs expenses in numerous foreign
currencies. These expenses include reservation and ticket office services,
customer service expenses, 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 typically for Japanese
yen and Australian dollars. During 1995, yen-denominated operating revenue
net of yen-denominated operating expense was approximately 57.5 billion yen
(approximately $600 million), and Australian dollar-denominated operating
revenue net of Australian dollar-denominated operating expense was
approximately 179 million Australian dollars (approximately $130 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.
United expects that it will continue to be affected by the
above-mentioned factors, but cannot predict how foreign exchange rates will
move in the future.
United's foreign operations involve insignificant amounts of physical
assets; however, there are sizeable intangible assets related to
acquisitions of foreign route authorities. Operating authorities in
international markets are governed by bilateral aviation agreements between
the United States and foreign countries. Changes in U.S. or foreign
government aviation policies can lead to the alteration or termination of
existing air service agreements that could adversely impact the value of
United's international route authority. Significant changes in such
policies could also have a material impact on United's operating revenues
and results of operations.
New Accounting Standards -
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
which will be adopted during the first quarter of 1996. SFAS 121 requires
that the carrying values of long-lived assets, including certain
identifiable intangibles, held and used by an entity be reviewed for
impairment, and potentially written down, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS 121 is not expected to have a material
impact on United's 1996 consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS No. 123 establishes a fair value based method of accounting for stock
options. Entities have the option of either adopting the measurement
criteria of the statement for accounting purposes, thereby recognizing an
amount in results of operations on a prospective basis, or disclosing in the
footnotes the pro forma effects of the new measurement criteria. United
intends to adopt the pro forma disclosure features of SFAS No. 123, which
are effective for fiscal years beginning after December 15, 1995.
Outlook for 1996 -
Worldwide economic growth should be slightly higher than in 1995 but
specific regional changes will vary. Recoveries in Japan and Mexico are
expected to offset the slightly slower growth in the Pacific Basin and
Western Europe. The U.S. Real Gross Domestic Product (GDP) is expected to
slow to the 2.0% to 2.5% range.
The international air travel market performance is forecast to improve
with moderate industry capacity growth and yields that will likely increase
with healthy traffic growth. U.S. domestic industry capacity growth is
expected to be 1 to 2 percentage points higher in 1996 compared to 1995,
partly due to the growth of low-cost carriers. Despite the faster capacity
growth, U.S. industry unit revenue growth is expected to remain near the
1995 rate due to stronger traffic and yields.
The Company anticipates continued strong performance in 1996. The
Company expects available seat miles to increase 3.0% to 3.5% and revenue
passenger miles are expected to increase 4% to 6%, resulting in a small
increase in load factor. Total revenue growth is expected to approximate
the 1995 growth rate. Costs per available seat mile excluding ESOP charges
are expected to increase from 1% to 2%, with the new fuel tax having a
significant negative impact.
United expects to take delivery of 21 aircraft in 1996, consisting of
B777-200s, A320s, B747-400s and B757-200s, while retiring 20 B747-100s,
DC-10s and B737-200s.
The information included in the above outlook section, as well as
certain statements made throughout the Management's Discussion and Analysis
of Financial Conditions and Results of Operations that are identified by an
asterisk (*), is forward-looking and involves risks and uncertainties that
could result in actual results differing materially from expected results.
It is not reasonably possible to itemize all of the many factors and
specific events that could affect the outlook of an airline operating in the
global economy. Some factors that could significantly impact expected
capacity, load factors, revenues, expenses and cash flows include the
airline pricing environment, fuel costs, low-fare carrier expansion,
capacity decisions of other carriers, actions of the U.S. and foreign
governments, foreign currency exchange rate fluctuations, inflation, the
general economic environment, and other factors discussed herein. With
respect to the forward-looking statement set forth in the "Contingencies"
section, some of the factors that could affect the ultimate disposition of
these contingencies are changes in applicable laws, the development of facts
in individual cases, settlement opportunities and the actions of plaintiffs,
judges and juries.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
United Air Lines, Inc.:
We have audited the accompanying statement of consolidated financial
position of United Air Lines, Inc. (a Delaware corporation) and subsidiary
companies as of December 31, 1995 and 1994, and the related statements of
consolidated operations, consolidated cash flows and consolidated
shareholder's equity for each of the three years in the period ended
December 31, 1995. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
United Air Lines, Inc. and subsidiary companies as of December 31, 1995
and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule referenced in
Item 14(a)(2) herein is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 28, 1996
<TABLE>
<CAPTION>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(In Millions)
Year Ended December 31
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Operating revenues:
Passenger $13,227 $12,295 $11,799
Cargo 757 685 657
Other operating revenues 911 907 712
------- ------- -------
14,895 13,887 13,168
------- ------- -------
Operating expenses:
Salaries and related costs 4,527 4,680 4,695
ESOP compensation expense 504 182 -
Aircraft fuel 1,680 1,585 1,718
Commissions 1,471 1,426 1,314
Purchased services 1,062 947 974
Aircraft rent 1,009 933 842
Landing fees and other rent 810 631 624
Depreciation and amortization 724 725 722
Food services 532 479 317
Aircraft maintenance 407 410 366
Personnel expenses 285 248 260
Other operating expenses 1,052 1,128 1,041
------- ------- -------
14,063 13,374 12,873
------- ------- -------
Earnings from operations 832 513 295
------- ------- -------
Other income (expense):
Interest expense (359) (362) (347)
Interest capitalized 42 41 51
Interest income 85 68 75
Equity in earnings (loss) of affiliates 48 20 (30)
Miscellaneous, net (40) (127) (70)
------- ------- -------
(224) (360) (321)
------- ------- -------
Earnings (loss) before income taxes,
extraordinary item and cumulative
effect of accounting change 608 153 (26)
Provision (credit) for income taxes 237 87 (9)
------- ------- -------
Earnings (loss) before extraordinary item and
cumulative effect of accounting change 371 66 (17)
Extraordinary loss on early
extinguishment of debt, net of tax (30) - (19)
Cumulative effect of accounting change, net - (26) -
------- ------- -------
Net earnings (loss) $ 341 $ 40 $ (36)
======= ======= =======
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(In Millions)
December 31
Assets 1995 1994
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 142 $ 444
Short-term investments 425 857
Receivables, less allowance for doubtful
accounts (1995 - $19; 1994 - $22) 947 887
Related party receivables 1 77
Aircraft fuel, spare parts and supplies, less
obsolescence allowance (1995 - $38;
1994 - $44) 298 285
Deferred income taxes 240 155
Prepaid expenses and other 380 335
------- -------
2,433 3,040
------- -------
Operating property and equipment:
Owned -
Flight equipment 7,778 7,479
Advances on flight equipment 735 713
Other property and equipment 2,700 2,619
------- -------
11,213 10,811
Less - Accumulated depreciation and amortization 5,153 4,775
------- -------
6,060 6,036
------- -------
Capital leases -
Flight equipment 1,362 1,028
Other property and equipment 102 104
------- -------
1,464 1,132
Less - Accumulated amortization 503 447
------- -------
961 685
------- -------
7,021 6,721
------- -------
Other assets:
Intangibles, less accumulated amortization
(1995 - $209; 1994 - $195) 736 762
Deferred income taxes 238 479
Related party receivables 481 570
Other 484 380
------- -------
1,939 2,191
------- -------
$11,393 $11,952
======= =======
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(In Millions, Except Share Data)
December 31
Liabilities and Shareholder's Equity 1995 1994
------- -------
<S> <C> <C>
Current liabilities:
Short-term borrowings $ - $ 269
Long-term debt maturing within one year 84 364
Related party debt maturing within one year 43 -
Current obligations under capital leases 98 75
Advance ticket sales 1,100 1,020
Accounts payable 682 657
Accrued salaries, wages and benefits 868 841
Accrued aircraft rent 748 803
Other accrued liabilities 780 864
------- -------
4,403 4,893
------- -------
Long-term debt 2,338 2,849
------- -------
Long-term obligations under capital leases 990 727
------- -------
Other liabilities and deferred credits:
Deferred pension liability 368 512
Postretirement benefit liability 1,225 1,148
Deferred gains 1,214 1,363
Accrued aircraft rent 272 213
Other 326 254
------- -------
3,405 3,490
------- -------
Minority interest 59 49
------- -------
Commitment under Supplemental ESOP 60 -
------- -------
Shareholder's equity:
Common stock, $5 par value; authorized,
1,000 shares; outstanding 200 shares - -
Additional capital invested - -
ESOP capital 822 266
Accumulated deficit (413) (214)
Unearned ESOP preferred stock (175) (83)
Pension liability adjustment (76) (16)
Other (20) (9)
------- -------
138 (56)
------- -------
Commitments and contingent liabilities (Note 15)
------- -------
$11,393 $11,952
======= =======
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
Year Ended December 31
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 444 $ 285 $ 454
------- ------- -------
Cash flows from operating activities:
Net earnings (loss) 341 40 (36)
Adjustments to reconcile to net cash provided by
operating activities -
ESOP compensation expense 504 182 -
Cumulative effect of accounting change - 26 -
Extraordinary loss on debt extinguishment 30 - 19
Pension funding in excess of expense (275) (114) (95)
Deferred postretirement benefit expense 125 145 89
Depreciation and amortization 724 725 722
Provision (credit) for deferred income taxes 214 58 (59)
Undistributed (earnings) losses of affiliates (38) (19) 48
Decrease (increase) in receivables (60) 205 (20)
Decrease (increase) in related party
receivables 1 (197) (39)
Decrease (increase) in other current assets (107) 40 15
Increase (decrease) in advance ticket sales 80 (16) (31)
Increase (decrease) in accrued income taxes (74) 68 39
Increase (decrease) in accounts payable
and accrued liabilities 44 (142) 35
Amortization of deferred gains (79) (85) (83)
Other, net 157 277 214
------- ------- -------
1,587 1,193 818
------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (1,111) (627) (1,484)
Proceeds on disposition of property and equipment 459 425 1,156
Decrease (increase) in short-term investments 432 (160) 114
Decrease (increase) in loans to affiliates 166 (6) (22)
Other, net (19) 28 4
------- ------- -------
(73) (340) (232)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 735 99
Repayment of long-term debt (838) (255) (664)
Principal payments under capital leases (79) (87) (55)
Dividend to parent company (600) (1,041) -
Decrease in short-term borrowings (269) (46) (135)
Other, net (30) - -
------- ------- -------
(1,816) (694) (755)
------- ------- -------
Increase (decrease) in cash and cash equivalents
during the year (302) 159 (169)
------- ------- -------
Cash and cash equivalents at end of year $ 142 $ 444 $ 285
======= ======= =======
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
UNITED AIR LINES, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY
(In Millions)
Unearned
Additional ESOP
Common Capital ESOP Accumulated Preferred
Stock Invested Capital Deficit Stock Other Total
------ ---------- ------- --------- --------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 - 816 - (59) - (19) 738
---- ----- ---- ----- ----- ----- -------
Year ended December 31, 1993:
Net loss - - - (36) - - (36)
Pension liability
adjustment - - - - - (45) (45)
Unearned compensation of
parent company
restricted stock plan - 16 - - - (16) -
Other - 7 - - - 10 17
---- ----- ---- ----- ----- ----- -------
Balance at December 31, 1993 - 839 - (95) - (70) 674
---- ----- ---- ----- ----- ----- -------
Year ended December 31, 1994:
Net earnings - - - 40 - - 40
Dividend to parent company - (884) - (160) - - (1,044)
Unearned compensation from
issuance of ESOP
preferred stock - - 227 - (227) - -
Unearned compensation of
parent company
restricted stock plan - 10 - - - (10) -
Amortization of unearned
compensation under
ESOPs and restricted
stock plan - - 39 - 144 21 204
Pension liability
adjustment - - - - - 37 37
Other - 35 - 1 - (3) 33
---- ----- ---- ----- ----- ----- -------
Balance at December 31, 1994 $ - $ - $266 $(214) $ (83) $ (25) $ (56)
---- ----- ---- ----- ----- ----- -------
Year ended December 31, 1995:
Net earnings - - - 341 - - 341
Dividend to parent company - (60) - (540) - - (600)
Unearned compensation from
issuance of ESOP
preferred stock - - 535 - (535) - -
Unearned compensation of
parent company
restricted stock plan - 26 - - - (26) -
Amortization of unearned
compensation under
ESOPs and restricted
stock plan - - 69 - 435 8 512
Pension liability
adjustment - - - - - (60) (60)
Other - 34 (48) - 8 7 43
---- ----- ---- ----- ----- ----- -------
Balance at December 31, 1995 $ - $ - $822 $(413) $(175) $ (96) $ 138
==== ===== ==== ===== ===== ===== =======
The accompanying notes to consolidated financial
statements are an integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
United Air Lines, Inc. ("United" or "the Company") is a wholly-owned
subsidiary of UAL Corporation ("UAL"). United is a major commercial air
transport carrier, providing passenger and cargo service to 104 airports in
the United States and 30 foreign countries at the end of 1995. United's
principal foreign markets are in the Pacific, Europe and Latin America.
United also owns 77% of the Apollo Travel Services Partnership ("ATS"),
which markets the Apollo computer reservations system to travel agencies in
the United States, Mexico and the Caribbean.
(a) Consolidation-
The consolidated financial statements include the accounts of United
and all of its majority-owned affiliates. All significant intercompany
transactions are eliminated.
(b) Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Accounting Changes-
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits," resulting in a cumulative after-tax charge of $26
million (see Note 12) and SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (see Note 13).
(d) Airline Revenues-
Passenger fares and cargo revenues are recorded as operating revenues
when the transportation is furnished. The value of unused passenger tickets
is included in current liabilities.
(e) Foreign Currency Transactions-
Monetary assets and liabilities denominated in foreign currencies are
converted at exchange rates in effect at the balance sheet date. The
resulting foreign exchange gains and losses are charged or credited directly
to income. United has entered into a foreign currency swap contract to
reduce certain exposure to currency fluctuations. Foreign currency gains
and losses on the contract are included in income currently, exactly
offsetting the foreign currency losses and gains on the obligations.
(f) Cash and Cash Equivalents and Short-term Investments-
Cash in excess of operating requirements is invested in short-term,
highly liquid, income-producing investments. Investments with a maturity of
three months or less on their acquisition date are classified as cash and
cash equivalents. Other investments are classified as short-term
investments.
(g) Aircraft Fuel, Spare Parts and Supplies-
Aircraft fuel and maintenance and operating supplies are stated at
average cost. Flight equipment spare parts are stated at average cost less
an obsolescence allowance.
(h) Operating Property and Equipment-
Owned operating property and equipment is stated at cost. Property
under capital leases, and the related obligation for future minimum lease
payments, are initially recorded at an amount equal to the then present
value of those lease payments.
Depreciation and amortization of owned depreciable assets is based on
the straight-line method over their estimated service lives. Leasehold
improvements are amortized over the remaining period of the lease or the
estimated service life of the related asset, whichever is less. Aircraft
are depreciated to estimated salvage values, generally over lives of 10 to
30 years; buildings are depreciated over lives of 25 to 45 years; and other
property and equipment are depreciated over lives of 3 to 15 years.
Properties under capital leases are amortized on the straight-line
method over the life of the lease, or in the case of certain aircraft, over
their estimated service lives. Lease terms are 10 to 30 years for aircraft
and flight simulators and 25 years for buildings. Amortization of capital
leases is included in depreciation and amortization expense.
Maintenance and repairs, including the cost of minor replacements, are
charged to maintenance expense accounts. Costs of additions to and renewals
of units of property are charged to property and equipment accounts.
(i) Intangibles-
Intangibles consist primarily of route acquisition costs, slots and
intangible pension assets (see Note 11). Route acquisition costs and slots
are amortized over 40 years and 5 years, respectively.
(j) Mileage Plus Awards-
United accrues the estimated incremental cost of providing free travel
awards earned under its Mileage Plus frequent flyer program (including
awards earned from mileage credits sold) when such award levels are reached.
United, through its wholly-owned subsidiary, Mileage Plus, Inc., sells
mileage credits to participating partners in the Mileage Plus program. The
resulting revenue is recorded in other operating revenues during the period
in which the credits are sold.
(k) Deferred Gains-
Gains on aircraft sale and leaseback transactions are deferred and
amortized over the lives of the leases as a reduction of rental expense.
(l) Interest Rate Swap Agreements-
United has entered into interest rate swap agreements to hedge its
interest rate exposure on certain obligations. The differential to be paid
or received under the swap agreements is charged or credited to interest
expense or rental expense depending on the obligation.
(2) Employee Investment Transaction and Recapitalization
On July 12, 1994, the shareholders of UAL approved a plan of
recapitalization to provide an approximately 55% equity interest in UAL to
certain employees of United in exchange for wage concessions and work-rule
changes. The employees' equity interest is being allocated to individual
employees through the year 2000 under Employee Stock Ownership Plans
("ESOPs") which were created as a part of the recapitalization (see Note
10). Pursuant to the terms of the plan of recapitalization, holders of old
UAL common stock received approximately $2.1 billion in cash and the
remaining 45% of the equity in the form of new common stock. In connection
with the recapitalization, United issued $370 million of 10.67% debentures
due in 2004 and $371 million of 11.21% debentures due in 2014 and paid a
dividend of $1.041 billion to UAL. Through December 31, 1995, the Company
has repaid $10 million of the 10.67% debentures and $140 million of the
11.21% debentures.
(3) 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. Included in the Company's accumulated deficit is
approximately $97 million of undistributed earnings of Galileo and its
predecessor companies. United also owns 77% of ATS, whose accounts are
consolidated. The revenues generated by ATS are insignificant in comparison
to United's consolidated total; however, ATS operates with significantly
higher earnings margins than United, and thus is a material contributor to
consolidated net earnings.
Prior to a September 1993 merger, United owned 50% of the Covia
Partnership ("Covia") and 25.6% of Galileo Ltd., Galileo's and ATS's
predecessor companies. Under operating agreements with Covia prior to the
merger, United provided certain computer support services for, and purchased
computer reservations services, communications and other information from,
Covia. Revenues derived from the sale of services to Covia amounted to
approximately $21 million in 1993. The cost to United of services purchased
from Covia amounted to approximately $168 million in 1993. Under operating
agreements with Galileo subsequent to the merger, 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 $238 million in 1995, $233
million in 1994 and $58 million in 1993. The cost to United of services
purchased from Galileo amounted to approximately $104 million in 1995, $94
million in 1994 and $47 million in 1993. Galileo's net earnings (loss) were
$49 million in 1994 and $(141) million in 1993.
(4) Other Income (Expense) - Miscellaneous
<TABLE>
<CAPTION>
Other income (expense) - miscellaneous, net consisted of the following:
1995 1994 1993
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Foreign exchange gains (losses) $ (20) $ 15 $(20)
Amortization of hedge
transaction costs (4) (6) (6)
Net gains on disposition of property
or rights 17 7 2
Minority interests (23) (22) (1)
Recapitalization transaction costs - (121) -
Write down of aircraft to
net realizable value - - (59)
Gain on settlement of 1985
annuity purchases - - 17
Other (10) - (3)
----- ----- ----
$ (40) $(127) $(70)
===== ===== ====
</TABLE>
(5) Income Taxes
United, its subsidiaries and other affiliated companies file a
consolidated federal income tax return with UAL. Under an intercompany
tax allocation policy, United and its subsidiaries compute, record, and
pay UAL for their own tax liability as if they were separate companies
filing separate returns. In determining their own tax liabilities, United
and each of its subsidiaries take into account all tax credits or benefits
generated and utilized as separate companies, and they are compensated for
the aforementioned tax benefits only if they would be able to use those
benefits on separate company bases.
In 1995, United incurred a regular tax loss but had an alternative
minimum tax ("AMT") liability. The federal income tax liability is the
greater of the tax computed using the regular tax system or the tax under
the AMT system. Certain preferences, mainly depreciation adjustments,
have caused alternative minimum taxable income and the resulting AMT
liability to exceed regular taxable income and the regular tax liability.
The excess of the AMT liability over the regular tax liability produces
AMT credits which are carried forward indefinitely.
<TABLE>
<CAPTION>
The provision (credit) for income taxes is summarized as follows:
1995 1994 1993
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Current-
Federal $ 20 $ 25 $ 50
State 3 3 -
----- ----- -----
23 28 50
----- ----- -----
Deferred-
Federal 191 54 (68)
State 23 5 9
----- ----- -----
214 59 (59)
----- ----- -----
$ 237 $ 87 $ (9)
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
The income tax provision (credit) differed from amounts computed at the
statutory federal income tax rate, as follows:
1995 1994 1993
-------- -------- -------
(In Millions)
<S> <C> <C> <C>
Income tax provision (credit)
at statutory rate $ 213 $ 54 $ (9)
State income taxes, net of
federal income tax benefit 17 5 6
Nondeductible employee meals 23 22 8
Nondeductible ESOP transaction costs - 21 -
Foreign tax credits (2) (3) (3)
Rate change effect - (14) (9)
Other, net (14) 2 (1)
----- ----- -----
Income tax provision (credit)
as reported $ 237 $ 87 $ (9)
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1995 and 1994 are as
follows:
1995 1994
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
(In Millions)
<S> <C> <C> <C> <C>
Employee benefits, including
postretirement medical $ 593 $ 92 $ 536 $ 13
Depreciation, capitalized
interest and transfers of
tax benefits - 1,062 - 1,044
Gains on sale and leasebacks 450 - 472 -
Rent expense 310 - 254 -
AMT credit carryforward 263 - 260 -
Net operating loss
carryforwards 123 - 40 -
Other 175 282 323 194
------ ------- ------ -------
$1,914 $1,436 $1,885 $1,251
====== ======= ====== =======
</TABLE>
At December 31, 1995, United and its subsidiaries had $263 million of
federal AMT credit carryforwards available for an indefinite period, $40
million of state tax benefit from net operating loss carryforwards
expiring between 1997 and 2011, $83 million of federal tax benefit from
net operating loss carryforwards expiring between 2009 and 2011, and $19
million of foreign tax credit carryforwards expiring between 1997 and 2001.
United's ability to generate sufficient amounts of taxable income
from future operations is dependent upon numerous factors, including
general economic conditions, inflation, fuel costs, the state of the
industry and other factors beyond management's control. There can be no
assurances that United will meet its expectation of future taxable income.
However, based on the above factors, the extended period over which
postretirement benefits will be recognized, and the indefinite
carryforward period for AMT credits, management believes it is more likely
than not that future taxable income will be sufficient to utilize the
deferred tax assets at December 31, 1995.
(6) Short-Term Borrowings
At December 31, 1994, United had outstanding $269 million in
short-term borrowings, bearing an average interest rate of 5.63%.
Receivables amounting to $426 million were pledged by United to secure
repayment of such outstanding borrowings. In the second quarter of 1995,
United repaid all of these outstanding borrowings. The maximum available
amount of borrowings under this arrangement is $270 million.
(7) Long-Term Debt
<TABLE>
<CAPTION>
A summary of long-term debt, including current maturities, as of
December 31 is as follows (interest rates are as of December 31, 1995):
1995 1994
------- -------
(In Millions)
<S> <C> <C>
Secured notes, 6.65% to 11.54%, averaging
8.37%, due through 2014 $ 957 $ 1,230
Debentures, 6.75% to 11.21%, averaging 9.91%,
due 1997 to 2021 1,419 1,741
Deferred purchase certificates, Japanese yen-
denominated, 7.75%, due through 1998 - 200
Promissory notes, 6.24% to 6.46%, averaging
6.39%, due through 1998 61 62
------- -------
2,437 3,233
Less: Unamortized discount on debt (15) (20)
Current maturities (84) (364)
------- -------
$ 2,338 $ 2,849
======= =======
</TABLE>
In addition to scheduled principal payments, in 1995 the Company
repaid $223 million in principal amount of secured notes and $322 million
in principal amount of debentures prior to maturity. These obligations
were scheduled to mature at various times from 2004 through 2021. The
Company also repaid all of its outstanding yen-denominated deferred
purchase certificates, which were due through 1998. An extraordinary loss
of $30 million, net of tax benefits of $18 million, was recorded in the
fourth quarter, reflecting amounts paid in excess of the debt carrying
value.
At December 31, 1995, United had outstanding a total of $207 million
of long-term debt bearing interest at rates 85 to 128 basis points over
the London interbank offered rate ("LIBOR"). In connection with certain
of these debt financings, United has entered interest rate swap agreements
to effectively fix interest rates at December 31, 1995 between 8.554% and
8.6% on $69 million of notional amount (see Note 14).
Maturities of long-term debt for each of the four years after 1996
are: 1997 -- $181 million; 1998 -- $86 million; 1999 -- $44 million; and
2000 -- $47 million. Various assets, principally aircraft, having an
aggregate book value of $1.077 billion at December 31, 1995, were pledged
as security under various loan agreements.
At December 31, 1995, UAL and United had an effective shelf
registration statement on file with the Securities and Exchange Commission
to offer up to $795 million of securities, including secured and unsecured
debt, equipment trust and pass through certificates, equity or a
combination thereof. In January 1996, United offered $165 million
principal amount in pass through certificates under the shelf registration
statement, lowering the remaining amount available for public offering
under the shelf to $631 million.
During 1993, United retired $500 million of senior subordinated
notes. The notes were scheduled to mature in 1995 ($150 million) and 1998
($350 million). An extraordinary loss of $19 million, after tax benefits
of $9 million, was recorded as a result of the retirement.
(8) Lease Obligations
The Company leases aircraft, airport passenger terminal space,
aircraft hangars and related maintenance facilities, cargo terminals,
other airport facilities, real estate, office and computer equipment and
vehicles.
<TABLE>
<CAPTION>
Future minimum lease payments as of December 31, 1995, under capital
leases (substantially all of which are for aircraft) and operating leases
having initial or remaining noncancelable lease terms of more than one
year are as follows:
Operating Leases Capital
Aircraft Non-aircraft Leases
-------- ------------ --------
(In Millions)
<S> <C> <C> <C>
Payable during-
1996 $ 845 $ 423 $ 180
1997 833 418 177
1998 841 408 182
1999 838 407 158
2000 854 397 135
After 2000 12,597 7,595 834
------- ------ ------
Total minimum lease
payments $ 16,808 $9,648 1,666
======== ======
Imputed interest (at rates of 5.3%
to 12.2%) (578)
------
Present value of minimum lease payments 1,088
Current portion (98)
------
Long-term obligations under capital leases $ 990
======
</TABLE>
As of December 31, 1995, United leased 292 aircraft, 49 of which
were under capital leases. These leases have terms of 4 to 26 years, and
expiration dates range from 1999 through 2021. Under the terms of leases
for 283 of the aircraft, United has the right of first refusal to
purchase, at the end of the lease term, certain aircraft at fair market
value and others at either fair market value or a percentage of cost.
United has 29 Airbus A320-200 aircraft under 24- to 26-year operating
leases which are cancelable upon 11 months' notice during the initial 10
years of the leases.
During 1995, United terminated operating leases for 39 aircraft (9
B727s, 24 B737s and 6 DC-10s) by exercising its right to acquire them.
Operating property and equipment increased by $400 million as a result of
the acquisition of these aircraft. The reductions in future minimum lease
payments from 1996 through 1998 due to these lease terminations are
reflected in the above table.
Amounts charged to rent expense, net of minor amounts of sublease
rentals, were $1.469 billion in 1995, $1.222 billion in 1994, and $1.208
billion in 1993. Included in rent expense was $22 million in contingent
rentals, resulting from changes in interest rates for operating leases
under which the rent payments are based on variable interest rates. In
connection with certain of these leases, United has entered interest rate
swap agreements (see Note 14).
(9) Related Party Transactions
Air Wis Services, Inc., a wholly-owned subsidiary of UAL, owns Air
Wisconsin, Inc. At December 31, 1995, United had outstanding loans from
Air Wisconsin, Inc. in the amount of $43 million. At December 31, 1994,
United had outstanding loans to Air Wisconsin, Inc. in the amount of $86
million. Both loans bore interest at market rates.
In December 1995, UAL contributed the net assets of its wholly-owned
subsidiary Mileage Plus, Inc. ("MPI") to United. MPI administers the
Mileage Plus frequent flyer progam (see Note 1(j)). Consolidation of MPI
had an insignificant impact on the financial condition, results of
operations and cash flows of United for all periods presented. As a
result, prior periods have not been restated to reflect this change.
In 1995 and 1994, United paid a cash dividend of $600 million and
$1.041 billion, respectively, to UAL. At December 31, 1995 and 1994,
United had accounts receivable from UAL of $482 million and $561 million,
respectively.
Certain officers and key employees of United participate in UAL
stock award plans. Under UAL's incentive stock option program, stock
appreciation rights ("SARs") were granted in tandem with certain stock
options prior to 1992. On exercise of these SARs, holders would receive
in cash 100% of the appreciation in fair market value of the UAL shares
subject to the SAR. The estimated payment value of SARs, net of market
value adjustments, was charged to United's earnings over the vesting
period. In 1992, all active officers relinquished their SARs but retained
the tandem stock options. This action left relatively few SARs
outstanding, the last of which were exercised in 1995.
As a result of the 1994 recapitalization, all outstanding options
became fully vested at the time of the transaction and the holders of such
options became eligible to utilize the cashless exercise features of stock
options. For outstanding options eligible for cashless exercise, changes
in the market price of the stock are charged to earnings currently. At
December 31, 1995, option holders were eligible for cashless exercise in
connection with 480,610 outstanding options with an average exercise price
of $119.95 per old share of UAL common stock. The expense recorded for
SARs and cashless exercises was $27 million in 1995, $15 million in 1994
and $1 million in 1993.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 establishes a fair value based method of accounting for stock options.
Entities have the option of either adopting the measurement criteria of
the statement for accounting purposes, thereby recognizing an amount in
results of operations on a prospective basis, or disclosing in the
footnotes the pro forma effects of the new measurement criteria. The
Company intends to adopt the pro forma disclosure features of SFAS No.
123, which are effective for fiscal years beginning after December 15,
1995.
Key officers and employees of United have also been awarded shares
of restricted UAL stock. These restricted shares generally vest over a
five-year period. Nonvested shares are subject to certain transfer
restrictions and forfeiture under certain circumstances. Unearned
compensation, representing the fair market value of the stock on the date
of award, is amortized to salaries and related costs over the vesting
period. As a result of the 1994 recapitalization, all outstanding
restricted shares became vested at the time of the transaction and $12
million of compensation expense was recorded for the remaining balance of
unearned compensation attributable to the outstanding shares.
In 1994, subsequent to the recapitalization, 112,767 restricted
shares of new UAL common stock were awarded, and in 1995, an additional
223,213 restricted shares were awarded. As of December 31, 1995, 267,963
shares were restricted and still nonvested. Additionally, 3,750 shares
were reserved for future award under the plan. In 1995, 1994 and 1993,
10,750, 9,800 and 9,000 shares, respectively, were forfeited and returned
to treasury stock.
(10) Employee Stock Ownership Plans
The ESOPs established as part of the 1994 recapitalization cover
United's pilots, U.S. management and salaried employees, and U.S. union
ground employees. The ESOPs include a "Leveraged ESOP," a "Non-Leveraged
ESOP" and a "Supplemental ESOP." Both the Leveraged ESOP and the
Non-Leveraged ESOP are tax qualified plans while the Supplemental ESOP is
not a tax qualified plan. The purpose of having the three ESOPs is to
deliver the agreed-upon shares to employees in a manner which utilizes the
tax incentives available to tax qualified ESOPs to the greatest degree
possible. Accordingly, shares are delivered to employees primarily
through the Leveraged ESOP, secondly, through the Non-Leveraged ESOP, and
lastly, through the Supplemental ESOP.
The equity interests are being delivered to employees through two
classes of UAL preferred stock (Class 1 and Class 2 ESOP Preferred Stock,
collectively "ESOP Preferred Stock"). The Class 1 ESOP Preferred Stock is
being delivered to an ESOP trust in seven separate sales through January
1, 2000 under the Leveraged ESOP, two of which have already taken place.
Based on Internal Revenue Code limitations, shares of the Class 2 ESOP
Preferred Stock are either contributed to the Non-Leveraged ESOP or
allocated as "book entry" shares to the Supplemental ESOP, annually
through the year 2000.
The Leveraged ESOP and Non-Leveraged ESOP are being accounted for
under AICPA Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP"). For the Leveraged ESOP, as
shares of the Class 1 ESOP Preferred Stock are sold to an ESOP trust, the
Company reports the issuance as a credit to additional capital invested
and a corresponding charge to unearned ESOP preferred stock. As the
shares are earned by employees in exchange for services performed, the
shares are committed to be released. ESOP compensation expense is
recorded for the average fair value of the shares committed to be released
during the period with a corresponding credit to unearned ESOP preferred
stock for the cost of the shares. Any difference between the fair value
of the shares and the cost of the shares is charged or credited to ESOP
capital. For the Non-Leveraged ESOP, the Class 2 ESOP Preferred Stock is
recorded as ESOP capital as the shares are committed to be contributed in
exchange for employee services, with the offsetting entry to ESOP
compensation expense. The ESOP compensation expense is based on the
average fair value of the shares committed to be contributed, in
accordance with the SOP. The Supplemental ESOP is being accounted for
under Accounting Principles Board Opinion 25, "Accounting for Stock Issued
to Employees." The unearned ESOP preferred stock, ESOP capital, ESOP
compensation expense and commitment outstanding under the Supplemental
ESOP are recorded by United since participants in the ESOPs are employees
of United.
Shares of ESOP Preferred Stock are legally released or allocated to
employee accounts as of year end. Dividends on the ESOP Preferred Stock
are also paid at the end of the year. Dividends on unallocated shares are
used by the ESOP to pay down the loan from UAL and are not considered
dividends for financial reporting purposes. Dividends on allocated shares
are satisfied by releasing shares from the ESOP's suspense account to the
employee accounts and are charged to equity.
ESOP compensation expense was $504 million in 1995. During 1994,
the Company recorded $182 million of ESOP compensation expense for the
period July 13 through December 31, 1994. During 1995, 1,131,912 shares
of Class 1 ESOP Preferred Stock, and 304,070 shares of Class 2 ESOP
Preferred Stock were allocated to employee accounts, and another 12,402
shares of Class 2 ESOP Preferred were allocated in the form of "book
entry" shares, effective December 31, 1994. At December 31, 1995, the
year-end allocation of Class 1 ESOP Preferred Stock to employee accounts
had not yet been completed. There were 2,402,310 shares of Class 1 ESOP
Preferred Stock committed to be released and 1,105,466 shares held in
suspense by the ESOP as of December 31, 1995. For the Class 2 ESOP
Preferred Stock, 671,663 shares were committed to be contributed to
employees at December 31, 1995. The fair value of the unearned ESOP
shares recorded on the balance sheet at December 31, 1995 and 1994 was
$230 million and $79 million, respectively.
For the Class 2 ESOP Preferred Stock committed to be contributed to
employees under the Supplemental ESOP, employees can elect to receive
their "book entry" shares in cash upon termination of employment. The
estimated fair value of such shares at December 31, 1995 was $60 million.
(11) Retirement Plans
The Company has various retirement plans which cover substantially
all employees. Defined benefit plans covering certain employees
(primarily union ground employees) provide a stated benefit for specified
periods of service, while defined benefit plans for other employees
provide benefits based on employees' years of service and average
compensation for a specified period of time before retirement. Pension
costs are funded to at least the minimum level required by the Employee
Retirement Income Security Act of 1974. The Company also provides several
defined contribution plans which cover substantially all U. S. employees
who have completed one year of service. For certain groups of employees
(primarily pilots, salaried employees hired after February 1, 1994 and
employees of Mileage Plus, Inc.), the Company contributes an annual amount
on behalf of each participant, calculated as a percentage of the
participants' earnings or a percentage of the participants' contributions.
<TABLE>
<CAPTION>
The following table sets forth the defined benefit plans' funded
status and amounts recognized in the statements of consolidated financial
position as of December 31:
1995 1994
Accumulated Accumulated
Benefits Benefits
Exceed Exceed
Assets Assets
----------- -----------
(In Millions)
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation $5,309 $4,191
====== ======
Actuarial present value of
projected benefit obligation $5,774 $4,577
Plan assets at fair value 4,947 3,785
------ ------
Projected benefit obligation
in excess of plan assets 827 792
Unrecognized net loss (356) (13)
Prior service cost not yet recognized
in net periodic pension cost (482) (523)
Remaining unrecognized net asset (15) (3)
Adjustment required to
recognize minimum liability 400 302
------ ------
Pension liability recognized in the
statements of consolidated financial
position $ 374 $ 555
====== ======
</TABLE>
For the valuation of pension obligations as of December 31, 1995 and
1994, the weighted average discount rates used were 7.25% and 8.75%,
respectively, and the rate of increase in compensation for both 1995 and
1994 was 3.15%. Substantially all of the accumulated benefit obligation
is vested.
Total pension expense for all retirement plans (including defined
contribution plans) was $193 million in 1995, $350 million in 1994, and
$346 million in 1993.
Plan assets are invested primarily in governmental and corporate
debt instruments and corporate equity securities. The expected average
long-term rate of return on plan assets at December 31, 1995, 1994 and
1993 was 9.75%.
<TABLE>
<CAPTION>
The net periodic pension cost of defined benefit plans included the
following components:
1995 1994 1993
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 173 $ 216 $ 186
Interest cost on projected
benefit obligation 396 379 356
Actual (return) loss on
plan assets (934) 28 (310)
Net amortization and deferral 545 (351) 19
----- ----- -----
Net periodic pension cost $ 180 $ 272 $ 251
===== ===== =====
</TABLE>
Changes in interest rates or rates of inflation may impact the
assumptions used in the valuation of pension obligations, including
discount rates and rates of increase in compensation, resulting in
increases or decreases in United's pension liability and net periodic
pension cost.
(12) Other Employee Benefits
The Company provides certain health care benefits, primarily in the
U. S., to retirees and eligible dependents. Benefits are generally funded
from company assets on a current basis, although amounts sufficient to pay
claims incurred, but not yet paid, are held in trust at year-end. Certain
plan benefits are subject to co-payments, deductibles and other limits
described in the plans and the benefits are reduced once a retiree becomes
eligible for Medicare. The Company also provides certain life insurance
benefits to retirees. The assets to fund retiree life insurance benefits
are being held in a deposit trust administration fund with a major
insurance company. The Company has reserved the right, subject to
collective bargaining agreements, to modify or terminate the health care
and life insurance benefits for both current and future retirees.
<TABLE>
<CAPTION>
Information on the plans' funded status, on an aggregate basis at
December 31, follows (in millions):
1995 1994
------ ------
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 536 $ 383
Other fully eligible participants 210 183
Other active participants 676 590
------ ------
Total accumulated postretirement
benefit obligation 1,422 1,156
Unrecognized net gain (loss) (54) 138
Fair value of plan assets (99) (95)
------ ------
Accrued postretirement benefit obligation $1,269 $1,199
====== ======
</TABLE>
<TABLE>
<CAPTION>
Net postretirement benefit costs included the following components (in
millions):
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost - benefits attributed to
service during the period $ 37 $ 46 $ 38
Amortization of unrecognized net
loss (gain) (5) 3 3
Actual return on assets (7) - -
Interest cost on benefit obligation 100 95 92
---- ---- ----
Net postretirement benefit costs $125 $144 $133
==== ==== ====
</TABLE>
The discount rates used to estimate the accumulated postretirement
benefit obligation as of December 31, 1995 and 1994 were 7.25% and 8.75%,
respectively. The assumed health care cost trend rates were 8.5% and 10%
for 1995 and 1994, respectively, declining annually to a rate of 4% by the
year 2001 and remaining level thereafter. The effect of a 1% increase in
the assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation at December 31, 1995, by $179 million and
the aggregate of the service and interest cost components of net
postretirement benefit cost for 1995 by $19 million.
The Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. SFAS No. 112 requires
recognition of the liability for postemployment benefits during the period
of employment. Such benefits include company paid continuation of group
life insurance and medical and dental coverage for certain employees after
employment but before retirement. 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. The ongoing expenses related
to postemployment benefits will vary based on actual claims experience.
Changes in interest rates or rates of inflation may impact the
assumptions used in the valuation of postretirement and postemployment
obligations, including discount rates, resulting in increases or decreases
in United's liability and net periodic cost.
(13) Investments in Debt Securities
<TABLE>
<CAPTION>
The following information pertains to the Company's investments in
debt and equity securities that are included in "Cash and cash equivalents"
and "Short-term investments":
December 31, 1995 Gross
(in millions) Aggregate Unrealized Average
----------------- Fair Holding Cost Maturity
Value Gains Basis (Months)
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government agency
debt securities $ 140 $(1) $ 139 11
Corporate debt securities 108 (1) 107 7
Other debt securities 20 - 20 11
Held-to-maturity:
U.S. government agency
debt securities $ 60 $ - $ 60 10
Corporate debt securities 99 (1) 98 5
Other debt securities 136 - 136 5
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994 Gross
(in millions) Aggregate Unrealized Average
----------------- Fair Holding Cost Maturity
Value Losses Basis (Months)
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government agency
debt securities $ 276 $ 2 $ 278 9
Corporate debt securities 282 2 284 10
Other debt securities 121 1 122 8
Held-to-maturity:
U.S. government agency
debt securities $ 80 - $ 80 6
Corporate debt securities 184 - 184 4
Other debt securities 352 - 352 2
</TABLE>
The net unrealized holding gains on available-for-sale securities
of $3 million in 1995 and losses of $5 million in 1994 have been
recorded as a component of shareholders' equity, net of related tax
benefits. The proceeds from sales of available-for-sale securities were
$275 million and $158 million in 1995 and 1994, respectively. Such
sales resulted in insignificant gross realized gains and losses, based
on the cost of the specific securities sold. These gains and losses
were included in interest income for each respective year.
(14) Financial Instruments and Risk Management
The Company attempts to manage its exposure to interest rates,
foreign exchange rates, and, to a limited extent, jet fuel prices
through the use of various derivative financial instruments. The Risk
Tolerance Committee ("RTC"), a group of the Company's senior officers,
is responsible for setting acceptable levels of risk and reviewing risk
management activities. Except for minor investments in certain futures
and options contracts to assist in opportunistic purchases of jet fuel
under limits set by the RTC, the Company uses derivative financial
instruments only for the purpose of hedging existing commitments or
obligations, not for generating trading profits.
Credit Exposures of Derivatives
The Company's theoretical risk in the derivative financial
instruments described below is the cost of replacing the contracts at
current market rates in the event of default by any of the
counterparties. However, the Company does not anticipate such default
as counterparties are selected based on credit ratings and the relative
market positions with each counterparty are monitored by the RTC and
their designates. Furthermore, the risk of such default is mitigated by
provisions in the contracts which require either party to post
increasing amounts of collateral as the value of the contract moves
against them, subject to certain thresholds. Counterparty credit risk
is further minimized by settlements throughout the duration of the
contract.
Interest Rate Risk Management
United has entered interest rate swap agreements in order to
manage the interest rate exposure associated with certain variable rate
debt and leases. The swap agreements have remaining terms averaging 15
years, corresponding to the terms of the related debt or lease
obligations. Under the agreements, United makes payments to
counterparties at fixed rates and in return receives payments based on
variable rates indexed to LIBOR. At December 31, 1995, a notional
amount of $471 million of interest rate swap agreements effectively
fixed interest rates between 8.02% and 8.65% on such obligations. The
notional amounts of the swaps do not represent amounts exchanged between
the parties and, therefore, are not a measure of the Company's exposure
resulting from its use of the swaps. Rather, the amounts exchanged are
based on interest rates applied to the notional amounts. The fair
values to United of interest rate swap agreements at December 31, 1995
and 1994 were $(46) million and $26 million, respectively, taking into
account interest rates in effect at the time.
Foreign Exchange Risk Management
A strengthening (weakening) of foreign currencies versus the U.S.
dollar 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 attempts to mitigate its exposure to fluctuations
in any single currency by carrying passengers and cargo in both
directions between the U.S. and almost every major economic region in
the world. As a result of rate fluctuations, United is also exposed to
transaction gains and losses which it attempts to manage as follows:
United is party to a foreign currency swap contract to reduce
exposure to currency fluctuations in connection with 8.1 billion of
Japanese yen-denominated lease obligations. The contract effectively
fixes future lease principal payments at an indirect yen exchange rate
of 95.63. At December 31, 1995, the swap contract had a notional amount
of $84 million, which will reduce periodically through 2004 as payments
are made under the leases. The fair value of the currency swap contract
to United at December 31, 1995 was approximately $8 million based on the
change in the yen to dollar exchange rate and interest rates in the U.S.
and Japan.
United incurs certain other identifiable Japanese yen-denominated
liabilities as a result of operations (commissions) and financing
activities (accrued rent on aircraft operating leases and interest on
capital leases). United minimizes transaction gains and losses by
investing in yen-denominated time deposits to offset the impact of rate
changes. Where no significant liability exists to offset, United
mitigates its exposure to foreign exchange fluctuations by converting
excess local currencies generated into U.S. dollars.
Fuel Price Risk Management
United enters into contracts with certain fuel suppliers to
purchase fuel at a fixed average price over a given period of time,
typically one year, to protect against increases in jet fuel prices. At
December 31, 1995, United had contracted 134 million gallons or
approximately 5.0% of its expected 1996 fuel needs at fixed average
prices.
At December 31, 1995, the fair values of futures and options
contracts used for opportunistic purchases of jet fuel were
insignificant.
Balance Sheet Financial Instruments: Fair Values
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents, short-term investments classified as
"held-to-maturity," and short-term borrowings approximate fair value due
to the immediate or short-term maturities of these financial
instruments. Investments in debt securities classified as
"available-for-sale" are stated at fair value based on the quoted market
prices for the securities (see Note 13).
The fair value of long-term debt, including debt due within one
year, is primarily based on the quoted market prices for the same or
similar issues or on the then current rates offered for debt with
similar terms and maturities. The fair value of long-term debt,
including debt due within one year, at December 31, 1995 and 1994 was
$2.719 billion and $2.938 billion, respectively, compared with carrying
values of $2.422 billion and $3.213 billion.
Financial Guarantees
Special facility revenue bonds have been issued by certain
municipalities to build or improve airport and maintenance facilities
leased by United. Under the lease agreements, United is required to
make rental payments in amounts sufficient to pay the maturing principal
and interest payments on the bonds. At December 31, 1995, $1.069
billion principal amount of such bonds was outstanding. As of December
31, 1995, UAL and United had jointly guaranteed $35 million of such
bonds and United had guaranteed $1.051 billion of such bonds, including
accrued interest.
Transfers of the tax benefits of accelerated depreciation and
investment tax credits associated with the acquisition of certain
equipment have been made previously by United to various tax lessors
through tax lease transactions. Proceeds from tax benefit transfers
were recognized as income in the year the lease transactions were
consummated. The subject equipment is being depreciated for book
purposes. United has agreed to indemnify (guaranteed in some cases by
UAL) the tax lessors against loss of such benefits in certain
circumstances and has agreed to indemnify others for loss of tax
benefits in limited circumstances for certain used aircraft purchased by
United subject to previous tax lease transactions. Certain tax lessors
have required that letters of credit be issued in their favor by
financial institutions as security for United's indemnity obligations
under the leases. The outstanding balance of such letters of credit
totaled $49 million at December 31, 1995. At that date, United had
granted mortgages on aircraft and engines having a total book value of
$216 million as security for indemnity obligations under tax leases and
letters of credit.
Concentration of Credit Risk
The Company does not believe it is subject to any significant
concentration of credit risk. Most of the Company's receivables result
from sales of tickets to individuals through geographically dispersed
travel agents, company outlets or other airlines, often through the use
of major credit cards. These receivables are short term, generally
being settled shortly after the sale.
(15) Commitments, Contingent Liabilities and Uncertainties
The Company 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 the Company 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. United records liabilities for legal or
environmental claims against it in accordance with generally accepted
accounting principles. These amounts are recorded based on the
Company's assessments of the likelihood of their eventual settlements.
The amounts of these liabilities could increase in the near term, based
on revisions to estimates relating to the various claims.
At December 31, 1995, commitments for the purchase of property and
equipment, principally aircraft, approximated $3.6 billion after
deducting advance payments. An estimated $1.4 billion is due to be
spent during 1996, $1.6 billion in 1997, $0.4 billion in 1998 and $0.2
billion in 1999 and thereafter. The major commitments are for the
purchase of 26 B777 aircraft, 4 B747 aircraft and 4 B757 aircraft. The
B777s are scheduled to be delivered through 1999 and the B747s and B757s
are expected to be delivered in 1996 and 1997.
In addition to the above aircraft orders, United has arrangements
with Airbus and International Aero Engines to lease an additional 21
A320 aircraft, which are scheduled for delivery through 1998. At
December 31, 1995, United also had purchase options for 137 B737
aircraft, 29 B757 aircraft, 34 B777 aircraft, 40 B747 aircraft, 5 B767
aircraft and 45 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 not exercised.
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, United expects only
slight growth in its operating fleet through the end of 1997.
The Indianapolis Maintenance Center began operation in March 1994.
When complete, it is expected to be the facility used for performing
maintenance on B737, B757 and B767 aircraft. Construction of certain
parts of the facility are still in process. The facilities are being
financed primarily with tax-exempt bonds and other capital sources. In
connection with the construction of the Indianapolis Maintenance Center,
United agreed to reach an aggregate $800 million capital spending target
by the year 2001 and employ at least 7,500 individuals by the year 2004.
In the event such targets are not reached, United may be required to
make certain additional payments under related agreements.
Approximately 61% of United's employees are represented by various
labor organizations. In connection with the 1994 employee investment
transaction, members of the Air Line Pilots' Association and the
International Association of Machinists and Aerospace Workers entered
labor contracts with United which become amendable in 2000. The
contract with the Association of Flight Attendants ("AFA") becomes
amendable March 1, 1996. On February 7, 1996, United's management and
the AFA announced that they had reached tentative agreement on a new
contract. The agreement is subject to ratification by United's flight
attendants. If ratified, the contract will replace the current
agreement. The voting process will not conclude until April 1996.
(16) Foreign Operations
United conducts operations in various foreign countries,
principally in the Pacific, Europe and Latin America. Operating
revenues from foreign operations were approximately $5.309 billion in
1995, $4.920 billion in 1994 and $4.500 billion in 1993. Due to the
nature of the airline industry, United's foreign operations involve
insignificant amounts of physical assets; however, there are sizeable
intangible assets related to acquisitions of foreign route authorities.
Operating authorities in international markets are governed by bilateral
aviation agreements between the United States and foreign countries.
Changes in U.S. or foreign government aviation policies can lead to the
alteration or termination of existing air service agreements that could
diminish the value of United's international route authority.
(17) Statement of Consolidated Cash Flows - Supplemental Disclosures
<TABLE>
<CAPTION>
Supplemental disclosures of cash flow information and non-cash
investing and financing activities were as follows:
1995 1994 1993
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts
capitalized) $313 $291 $319
Income taxes 6 5 43
Non-cash transactions:
Capital lease obligations
incurred 374 - 70
Long-term debt incurred in
connection with additions
to equipment 26 21 487
Increase in pension intangible 2 13 19
Net unrealized gain (loss)
on investments 4 (3) -
</TABLE>
(18) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
(In Millions)
<S> <C> <C> <C> <C> <C>
1995:
Operating revenues $3,320 $3,804 $4,115 $3,656 $14,895
Earnings from operations 38 303 468 23 832
Earnings (loss) before
extraordinary item (17) 154 247 (13) 371
Extraordinary loss on early
extinguishment of debt - - - (30) (30)
Net earnings (loss) $ (17) $ 154 $ 247 $ (43) $ 341
1994:
Operating revenues $3,173 $3,492 $3,799 $3,423 $13,887
Earnings (loss) from
operations (44) 171 310 76 513
Earnings (loss) before
cumulative effect of
accounting changes (79) 54 81 10 66
Cumulative effect of
accounting changes (26) - - - (26)
Net earnings (loss) $ (105) $ 54 $ 81 $ 10 $ 40
</TABLE>
The Company adopted 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.
In connection with the July 1994 recapitalization, the Company
incurred pretax costs of $19 million, $22 million and $128 million in the
first, second and third quarters, respectively, including transaction
costs and severance payments to certain former United employees. Of these
costs, $48 million were recorded as operating expenses in the third
quarter, while the remaining costs were recorded in "Miscellaneous, net."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) 1. Financial Statements. The financial statements required by
this item are listed in Item 8, "Financial Statements and
Supplementary Data" herein.
2. Financial Statement Schedules. The financial statement
schedule required by this item is listed below and included in this
report on page F-1 after the signature page hereto.
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1995, 1994 and 1993
All other schedules are omitted because they are not applicable,
not required or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits. The following is an index of exhibits included in
this report or incorporated herein by reference.
3.1 Restated Certificate of Incorporation as filed in Delaware
on July 12, 1994 (filed as Exhibit 3.1 to United Air Lines,
Inc.'s ("United") Form 10-Q for the quarter ended June 30,
1994 and incorporated herein by reference).
3.2 By-laws, as amended on December 1, 1995.
4.1 United's indebtedness under any single instrument does not
exceed 10% of United's total assets on a consolidated basis.
Copies of such instruments will be furnished to the
Securities and Exchange Commission upon request.
10.1 Change Order No. 7 dated September 19, 1995 to the Agreement
dated December 18, 1990 between The Boeing Company and
United Air Lines, Inc. (and United Worldwide Corporation)
for acquisition of 777-200 aircraft (as previously amended
and supplemented, the "777-200 Purchase Agreement" (filed as
Exhibit 10.7 to UAL's Form 10-K for the year ended December
31, 1990, and incorporated herein by reference; supplements
thereto filed as (i) Exhibits 10.1, 10.2 and 10.22 to UAL's
Form 10-Q for the quarter ended June 30, 1993, (ii) Exhibit
10.2 to UAL's Form 10-K for the year ended December 31,
1993, (iii) Exhibit 10.14 to UAL's Form 10-Q for the quarter
ended June 30, 1994, (iv) Exhibits 10.27 and 10.28 to UAL's
Form 10-K for the year ended December 31, 1994, (v) Exhibits
10.2 and 10.3 to UAL's Form 10-Q for the quarter ended March
31, 1995, and (vi) Exhibits 10.4, 10.5 and 10.6 to UAL's
Form 10-Q for the quarter ended June 30, 1995)). (Exhibit
10.1 hereto is filed as Exhibit 10.37 to UAL's Form 10-K for
the year ended December 31, 1995, and is incorporated herein
by reference with a request for confidential treatment of
certain portions thereof.)
10.2 Change Order No. 8 dated October 17, 1995 to the 777-200
Purchase Agreement. (Exhibit 10.2 hereto is filed as
Exhibit 10.38 to UAL's Form 10-K for the year ended December
31, 1995, and is incorporated herein by reference with a
request for confidential treatment of certain portions
thereof.)
10.3 Supplemental Agreement No. 3 dated October 27, 1995 to the
777-200 Purchase Agreement. (Exhibit 10.3 hereto is filed
as Exhibit 10.39 to UAL's Form 10-K for the year ended
December 31, 1995, and is incorporated herein by reference
with a request for confidential treatment of certain
portions thereof.)
10.4 Letter Agreement No. 6-1162-JME-118 dated December 19, 1995
to the 777-200 Purchase Agreement. (Exhibit 10.4 hereto is
filed as Exhibit 10.40 to UAL's Form 10-K for the year ended
December 31, 1995, and is incorporated herein by reference
with a request for confidential treatment of certain
portions thereof.)
10.5 Supplemental Agreement No. 7 dated as of December 29, 1995
to the Agreement dated December 18, 1990 between The Boeing
Company and United Air Lines, Inc. (and United Worldwide
Corporation) for acquisition of 747-400 aircraft (as
previously amended and supplemented, the "747-400 Purchase
Agreement" (filed as Exhibit 10.8 to UAL's Form 10-K for the
year ended December 31, 1990, and incorporated herein by
reference; supplements thereto filed as (i) Exhibits 10.4
and 10.5 to UAL's Form 10-K for the year ended December 31,
1991, (ii) Exhibits 10.3, 10.4, 10.5, 10.6 and 10.22 to
UAL's Form 10-Q for the quarter ended June 30, 1993, (iii)
Exhibit 10.3 to UAL's Form 10-K for the year ended December
31, 1993, (iv) Exhibit 10.14 to UAL's Form 10-Q for the
quarter ended June 30, 1994, (v) Exhibits 10.29 and 10.30 to
UAL's Form 10-K for the year ended December 31, 1994, (vi)
Exhibits 10.4 through 10.8 to UAL's Form 10-Q for the
quarter ended March 31, 1995, and (vii) Exhibits 10.7 and
10.8 to UAL's Form 10-Q for the quarter ended June 30,
1995)). (Exhibit 10.5 hereto is filed as Exhibit 10.41 to
UAL's Form 10-K for the year ended December 31, 1995, and is
incorporated herein by reference with a request for
confidential treatment of certain portions thereof.)
10.6 Amendment No. 4 dated November 27, 1995 to the Agreement
dated August 10, 1992 between AVSA, S.A.R.L., as seller, and
United Air Lines, Inc., as buyer, for the acquisition of
Airbus Industrie A320-200 model aircraft (as previously
amended and supplemented, "A320-200 Purchase Agreement"
(filed as Exhibit 10.14 to UAL's Form 10-K for the year
ended December 31, 1992, and incorporated herein by
reference; supplements thereto filed as (i) Exhibits 10.4
and 10.5 to UAL's Form 10-K for the year ended December 31,
1993, (ii) Exhibits 10.15 and 10.16 to UAL's Form 10-Q for
the quarter ended June 30, 1994, (iii) Exhibit 10.31 to
UAL's Form 10-K for the year ended December 31, 1994, and
(iv) Exhibit 10.9 to UAL's Form 10-Q for the quarter ended
June 30, 1995)). (Exhibit 10.6 hereto is filed as Exhibit
10.42 to UAL's Form 10-K for the year ended December 31,
1995, and is incorporated herein by reference with a request
for confidential treatment of certain portions thereof.)
12.1 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Form 8-K dated February 2, 1996 to report certain documents
relating to United Airlines Pass Through Certificates, Series 1996-A.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 29th day of February, 1996.
UNITED AIR LINES, INC.
By: /s/ Gerald Greenwald
Gerald Greenwald
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on the 29th day of February, 1996
by the following persons on behalf of the registrant and in the
capacities indicated.
/s/ Gerald Greenwald
Gerald Greenwald
Chairman of the Board and Chief
Executive Officer and a Director
(principal executive officer)
/s/ Douglas A. Hacker
Douglas A. Hacker
Senior Vice President and Chief
Financial Officer and a Director
(principal financial officer)
/s/ Frederic F. Brace
Frederic F. Brace
Vice President - Financial
Analysis and Controller
(principal accounting officer)
/s/ John A. Edwardson
John A. Edwardson
Director
/s/ Paul G. George
Paul G. George
Director
/s/ James E. Goodwin
James E. Goodwin
Director
/s/ Joseph R. O'Gorman
Joseph R. O'Gorman
Director
/s/ Stuart I. Oran
Stuart I. Oran
Director
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Schedule II--Valuation and Qualifying Accounts
For the Year Ended December 31, 1995
Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- ---------- --------- -------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 22 $ 20 $ - $ 23(1) $ 19
Obsolescence allowance -
Flight equipment spare parts $ 44 $ 14 $ 3 $ 23(1) $ 38
- ----------------
(1) Deduction from reserve for purpose for which reserve was created.
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Schedule II--Valuation and Qualifying Accounts
For the Year Ended December 31, 1994
Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- ---------- --------- -------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 22 $ 25 $ - $ 25(1) $ 22
Obsolescence allowance -
Flight equipment spare parts $ 69 $ 12 $ 5 $ 42(2) $ 44
(1) Deduction from reserve for purpose for which reserve was created.
(2) Includes deduction from reserve for parts dispositions and write-offs and $22 million of reserves transferred in
connection with parts transferred to fixed asset accounts.
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Schedule II--Valuation and Qualifying Accounts
For the Year Ended December 31, 1993
Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- ---------- --------- -------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 12 $19 $ 7 $ 16(1) $ 22
Obsolescence allowance -
Flight equipment spare parts $ 46 $12 $26 $ 15(1) $ 69
(1) Deduction from reserve for purpose for which reserve was created.
</TABLE>
Exhibit 3.2
As Amended
December 1, 1995
UNITED AIR LINES, INC.
By-Laws
April 25, 1985
ARTICLE I
STOCKHOLDERS' MEETINGS
SECTION 1. Annual Meetings. The annual meeting of
stockholders shall be held at an hour and date to be determined
by the Board of Directors.
SECTION 2. Special Meetings. A special meeting of the
stockholders may be called to be held at any time by the
Secretary at the direction and request of any two members of the
Board of Directors, or as otherwise authorized by the Certificate
of Incorporation or by law.
SECTION 3. Place of Meetings. All meetings of the
stockholders of the Corporation shall be held at such places,
within or without the State of Delaware, as may from time to time
be fixed by the Board of Directors or as specified or fixed in
the respective notices or waivers of notices thereof.
SECTION 4. Notice of Meetings. Except as otherwise
required by statute, written notice of each meeting of
stockholders, whether annual or special, shall be given to each
stockholder of record entitled to vote, not less than 10 nor more
than 60 days before the date of the meeting, by delivering such
notice personally or by mail in a postage-prepaid envelope
addressed to him at his address as it appears on the stock books
of the Corporation. Every notice of a meeting of stockholders
shall state the place, date and hour of the meeting. Notice of
special meetings shall state the purpose(s) for which the meeting
is called. Any stockholder may, prior to, at the meeting or
subsequent thereto, waive notice of any meeting, in writing
signed by himself or his duly appointed attorney-in-fact.
SECTION 5. Quorum. Except as otherwise required by law or
by the Certificate of Incorporation, the presence at meetings in
person or by duly authorized proxy, of the holders of a majority
of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business and the vote,
in person or by proxy, of the holders of a majority of the shares
constituting such quorum shall be binding upon all stockholders
of the Corporation. In the absence of a quorum, the meeting may
be adjourned, for not more than 30 days, by a majority of the
voting shares present; no notice of an adjourned meeting need be
given.
SECTION 6. Voting by Corporations. Shares standing in the
name of a corporation may be voted or represented on behalf of
such corporation by the Chairman, President, any Vice President,
the Secretary or any Assistant Secretary of such corporation or
by any person authorized so to do by a proxy or power of attorney
executed by any such officer of such corporation or by authority
of the Board of Directors of such corporation.
SECTION 7. Consents in Lieu of Voting. Whenever the vote
of stockholders at a meeting thereof is required or permitted to
be taken for or in connection with any corporate action, the
meeting and vote of the stockholders may be dispensed with upon
the written consent of stockholders in the manner provided by
law.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. Number and Term of Office. Subject to any
limitations set forth in the Certificate of Incorporation, the
number of directors shall be fixed each year by the stockholders.
Each director shall be elected by a plurality vote of the
stockholders at their annual meeting, or, where applicable, in
accordance with Section 2 below. Each director shall hold office
until the next annual meeting and thereafter until his successor
is duly elected or appointed and qualified, subject, however, to
removal by the stockholders.
SECTION 2. Vacancies. In case of any vacancies in the
Board of Directors not caused by removal, the additional
director(s) may be elected either (a) by a majority of the
directors then in office, although less than a quorum, or (b) by
the stockholders, at either an annual or special meeting.
SECTION 3. Quorum. Except as otherwise required by law or
by the Certificate of Incorporation or as otherwise provided
herein, one-third of the total number of directors shall
constitute a quorum for the transaction of business and the act
of the majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board of Directors.
SECTION 4. Meetings. Regular meetings shall be held at
such time and place(s) as the Board of Directors may from time to
time determine. Special meetings shall be held whenever called
by the Chairman of the Board, the President, or any two
directors. Notice of any special meeting shall be mailed to each
director, not later than five days before the date of such
meeting or communicated to each director personally or by
telegraph or telephone not later than the day before such
meeting. Notice of a meeting need not be given to a director if
waived by him in writing or if he shall be present at the
meeting.
SECTION 5. Action by Unanimous Consent. Any action
required or permitted to be taken at any meeting of the Board of
Directors or any committee thereof may be taken without a
meeting, if all members of the Board of Directors or of such
committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of the
proceedings of the Board of Directors or such committee.
SECTION 6. Telephone Conference or Similar Meeting.
Members of the Board of Directors or of any committee elected or
appointed by the Board of Directors may participate in a meeting
of the Board of Directors or such committee by means of
conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each
other, and any such participation in a meeting shall constitute
presence in person at such meeting.
SECTION 7. Resignations and Removal of Directors. Any
director of the Corporation may resign at any time by giving
written notice thereof to the Secretary. Except as otherwise
provided by law or the Certificate of Incorporation, any director
may be removed, either for or without cause, at any time, by the
affirmative vote of the holders of record of a majority of the
outstanding shares entitled to vote; and the vacancy in the Board
caused thereby may be filled by the stockholders at the same time
or any time thereafter.
SECTION 8. Conduct of Meetings. The Chairman, or if that
office be vacant, the President, shall preside at meetings of the
Board of Directors. In the absence of both, a temporary chairman
shall be elected from the Directors present. The Secretary shall
record all meetings, but in his absence, an Assistant Secretary
or a person appointed for the purpose shall act as Secretary of
the meeting.
ARTICLE III
COMMITTEES
SECTION 1. Appointment. The Board of Directors may, from
time to time, by affirmative vote of a majority of the whole
Board, appoint committees, including an Executive Committee, for
any purpose. Each such committee shall consist of two or more
directors. The Board shall delegate to any such committee, such
powers as the Board may deem appropriate; provided, however, that
no committee shall be authorized to (a) elect any officer of the
corporation, (b) designate the Chief Executive Officer, (c) fill
any vacancy in the Board of Directors or any newly created
directorship, (d) amend these By-Laws or (e) take any action
which under these By-Laws requires the vote of a specified
proportion of the Board of Directors.
SECTION 2. Powers. Any action taken by a committee in
accordance with its purpose and within the powers delegated to it
by the Board of Directors, shall have the same effect as if such
action were taken by the Board of Directors.
SECTION 3. Meetings. A majority of the members of a
committee shall constitute a quorum for the transaction of
business by the committee, and the act of the majority of members
present shall be an act of the committee. Meetings of a
committee may be held by conference telephone and actions may be
taken by consent in lieu of a meeting, subject to the provision
for same applicable to the whole Board of Directors. Notice of
any meeting of a committee shall be communicated to each member
by mail not less than five days before such meeting, or
personally, by telephone or by telegraph not less than one day
prior to such meeting; provided that notice need not be given to
any member if waived by him in writing or if he is present at the
meeting.
SECTION 4. Records. Records shall be kept of the acts and
proceedings of any committee and same shall be reported from time
to time to the Board of Directors.
ARTICLE IV
OFFICERS, EMPLOYEES AND AGENTS
SECTION 1. Officers. The officers of the Corporation who
shall be elected by the Board of Directors, may be a Chairman and
shall be a President, one or more Vice Presidents, a Secretary,
and a Treasurer. The Board of Directors may also appoint one or
more Assistant Secretaries, Assistant Treasurers, and such other
officers and agents as from time to time may appear to be
necessary or advisable in the conduct of the affairs of the
Corporation. Any number of offices may be held by the same
person.
SECTION 2. Term of Office. So far as practicable, each
elected officer shall be elected at the organization meeting of
the Board in each year, and shall hold office until the
organization meeting of the Board in the next subsequent year and
until his successor is chosen or until his earlier death,
resignation or removal in the manner hereinafter provided. Any
officer may be removed at any time, with or without cause, by the
Board of Directors.
SECTION 3. Chief Executive Officer. The Board of Directors
shall designate either the Chairman of the Board of Directors or
the President as the Chief Executive Officer of the Corporation.
As Chief Executive Officer, such officer shall have general and
active control of its business and affairs. He shall have
general power to execute bonds, deeds and contracts in the name
of the Corporation and to affix the corporate seal; to sign stock
certificates; subject to the approval of the Board of Directors,
to select all employees and agents of the Corporation whose
selection is not otherwise provided for and to fix the
compensation thereof; to remove or suspend any employee or agent
who shall not have been selected by the Board of Directors; to
suspend for cause, pending final action by the Board of
Directors, any employee or agent who shall have been selected by
it, and to exercise all the powers usually and customarily
performed by the Chief Executive Officer of a corporation.
SECTION 4. Chairman of the Board. The Board of Directors
may elect a Chairman of the Board, who may, but need not, be
designated Chief Executive Officer of the Corporation. The
Chairman of the Board shall preside at all meetings of
stockholders and of the Board of Directors at which he may be
present, and shall have such other powers and duties as he may be
called upon by the President or the Board of Directors to
perform.
SECTION 5. President. The President, if not designated as
Chief Executive Officer of the Corporation, shall share with the
Chairman of the Board in the general management of the business
and affairs of the Corporation and direction of all other
officers of the Corporation. In the event of the absence,
disability or vacancy in the office of the Chairman of the Board,
the President shall act in his place with authority to exercise
all his powers and perform his duties.
SECTION 6. Vice Presidents. The several Vice Presidents
shall perform all such duties and services as shall be assigned
to or required of them, from time to time, by the Board of
Directors, or the Chief Executive Officer, respectively. In the
event of the absence or disability of both the Chairman of the
Board and the President, the Chief Executive Officer may
designate one of the several Vice Presidents to act in his place
with authority to exercise all of his powers and perform his
duties, provided that the Board of Directors may change such
designation, or if the Chief Executive Officer fails or is unable
to make such designation, the Board may make such designation at
a regular or special meeting called for that purpose.
SECTION 7. Secretary. The Secretary shall attend to the
giving of notice of all meetings of stockholders and of the Board
of Directors and shall keep and attest true records of all
proceedings thereat. He shall have charge of the corporate seal
and have authority to attest any and all instruments or writings
to which the same may be affixed. He shall keep and account for
all books, documents, papers and records of the Corporation,
except those which are hereinafter directed to be in charge of
the Treasurer. He shall have authority to sign stock
certificates, and shall generally perform all the duties usually
appertaining to the office of secretary of a corporation. In the
absence of the Secretary, an Assistant Secretary or Secretary pro
tempore shall perform his duties.
SECTION 8. Treasurer. The Treasurer shall be responsible
for the collection, receipt, care, custody and disbursement of
the funds of the Corporation, and shall deposit or cause to be
deposited all funds of the Corporation in and with such
depositories as the Board of Directors shall, from time to time,
direct. He shall have the care and custody of all securities
owned by the Corporation and shall deposit such securities with
such banks or in such safe deposit vaults, and under such
controls, as the Board of Directors shall, from time to time,
direct. He shall disburse funds of the Corporation on the basis
of vouchers properly approved for payment. He shall be
responsible for the maintenance of detailed records thereof as
may be required. He shall have the power to sign stock
certificates; and to endorse for deposit or collection, or
otherwise, all checks, drafts, notes, bills of exchange or other
commercial paper payable to the Corporation, and to give proper
receipts or discharges therefor. He shall have such other duties
as are commonly incidental to the office of Treasurer or as may
be prescribed by the Board of Directors, the Chief Executive
Officer, or a Vice President designated by the Chief Executive
Officer. In the absence of the Treasurer, an Assistant Treasurer
shall perform his duties.
SECTION 9. Additional Powers and Duties. In addition to
the foregoing especially enumerated duties and powers, the
several officers of the Corporation shall perform such other
duties and exercise such further powers as may be provided in
these By-Laws or as the Board of Directors may, from time to
time, determine, or as may be assigned to them by any competent
superior officer.
SECTION 10. Compensation. The compensation of the Chairman
and the President shall be fixed, from time to time, by the Board
of Directors. The compensation of all other officers of the
Corporation shall be fixed by the Chief Executive Officer,
subject to review at the discretion of the Board of Directors;
provided, that changes in the compensation of any officer of the
Corporation shall not be effective until such time as the Board
of Directors shall have approved or affirmatively declined to
review same.
ARTICLE V
STOCK AND TRANSFERS OF STOCK
SECTION 1. Stock Certificates. Every stockholder shall be
entitled to a certificate signed by the Chairman of the Board, or
the President or a Vice President, and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary,
certifying the number of shares owned by him in the Corporation.
SECTION 2. Transfer Agents and Registrars. The Board of
Directors may, in its discretion, appoint responsible banks or
trust companies from time to time, to act as Transfer Agents and
Registrars of the stock of the Corporation.
SECTION 3. Transfers of Stock. Shares of stock may be
transferred by delivery of the certificates therefor, accompanied
either by an assignment in writing on the back of the
certificates or by written power of attorney to sell, assign and
transfer the same, signed by the record holder thereof; but no
transfer shall affect the right of the Corporation to pay any
dividend upon the stock to the holder of record thereof, or to
treat the holder of record as the holder in fact thereof for all
purposes, and no transfer shall be valid, except between the
parties thereto, until such transfer shall have been made
upon the books of the Corporation.
SECTION 4. Lost Certificates. In case any certificate of
stock shall be lost, stolen or destroyed, the Board of Directors,
in its discretion, may authorize the issue of a substitute
certificate in place of the certificate so lost, stolen or
destroyed, and may cause such substitute certificate to be
countersigned by the appropriate Transfer Agent (if any) and
registered by the appropriate Registrar (if any); provided, that,
in each such case, the applicant for a substitute certificate
shall furnish to the Corporation and to such of its Transfer
Agents and Registrars as may require the same, evidence to their
satisfaction, in their discretion, of the loss, theft or
destruction of such certificate and of the ownership thereof, and
also such security or indemnity as may be required.
SECTION 5. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise
any rights with respect to any change, conversion or exchange of
stock or for the purpose of any other lawful action, the Board of
Directors is authorized, from time to time, to fix, in advance, a
record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days
prior to any other action.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
ARTICLE VI
MISCELLANEOUS
SECTION 1. Fiscal Year. The Fiscal year of the Corporation
shall be the calendar year.
SECTION 2. Corporate Seal. The Board of Directors shall
provide a suitable seal, containing the name of the Corporation.
The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
SECTION 3. Voting of Stocks. Unless otherwise ordered by
the Board of Directors, the Chairman of the Board and President
shall each have full power and authority, in the name of and on
behalf of the Corporation, to attend, act and vote at any meeting
of stockholders of a corporation in which the Corporation may
hold stock, and, in connection with any such meeting, shall
possess and may exercise any and all rights and powers incident
to the ownership of such stock which, as the owner thereof, the
Corporation might possess and exercise. The Board of Directors
from time to time may confer like powers upon any other person or
persons.
Unless otherwise ordered by the Board of Directors, the
Chairman of the Board or the President may exercise the power and
authority granted by this Section 3 through the execution of
proxies to any person or persons or may delegate such power or
authority, including the power and authority to execute proxies,
to any officer, employee or agent of the Corporation.
SECTION 4. Indemnity of Directors, Officers and Employees.
Subject to state law restrictions and any restrictions contained
in the Certificate of Incorporation, the Corporation shall
indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
Corporation), by reason of the fact that he is or was serving at
the request of the Corporation as a fiduciary of any employee
benefit plan, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit
or proceeding if:
(1) he acted in good faith and in a manner he
reasonably believed to be in compliance with the provisions
of the law under which such action, suit or proceeding
arises, and
(2) with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
Advances may be made by the Corporation against costs,
expenses and fees at the discretion of, and upon such terms as
may be determined by the Board of Directors.
The right of indemnification provided hereunder shall not be
deemed exclusive of any other right to which any person may be
entitled under the Certificate of Incorporation or otherwise, or
of any other indemnification which may lawfully be granted to any
person in addition to the indemnification provided hereunder.
Indemnification provided hereunder shall, in the case of death of
a person indemnified, inure to the benefit of his heirs,
executors or other lawful representatives.
For purposes of this By-Law, the term "person" shall mean a
Director, officer or employee of this Corporation.
ARTICLE VII
AMENDMENTS
The holders of a majority of the outstanding shares of the
Corporation may adopt, alter or repeal the By-Laws of this
Corporation and, subject to the right of the stockholders, the
Board of Directors, may adopt, alter or repeal the By-Laws of the
Corporation.
I, THE UNDERSIGNED, Assistant Secretary Of UNITED AIR LINES,
INC., a corporation of the State of Delaware, HEREBY CERTIFY that
the foregoing is a true, correct and complete copy of the By-Laws
of the said Corporation as at present in force.
In WITNESS WHEREOF, I have hereto subscribed my name and
affixed the seal of the said Corporation, this ___ day of
____________, 19__.
Assistant Secretary
<TABLE>
<CAPTION>
Exhibit 12.1
United Air Lines, Inc. and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(In Millions)
<S> <C> <C> <C> <C> <C>
Earnings:
Earnings (loss) before
income taxes and
extraordinary items $ 608 $ 153 $ (26) $(602) $(513)
Undistributed income
of affiliate (38) (19) - (27) (4)
Fixed charges,
from below 1,200 1,046 1,077 964 749
Interest capitalized (42) (41) (51) (92) (91)
------ ------ ------ ----- -----
Earnings $1,728 $1,139 $1,000 $ 243 $ 141
====== ====== ====== ===== =====
Fixed charges:
Interest expense $ 359 $ 362 $ 347 $ 317 $ 211
Interest expense on
affiliate's guaranteed
debt - - 5 - -
Portion of rental expense
representative of the
interest factor 841 684 725 647 538
------ ------ ------ ----- -----
Fixed charges $1,200 $1,046 $1,077 $ 964 $ 749
====== ====== ====== ===== =====
Ratio of earnings to
fixed charges 1.44 1.09 (a) (a) (a)
====== ====== ====== ===== =====
- --------------
(a) Earnings were inadequate to cover fixed charges by $77 million in 1993,
$721 million in 1992, and $608 million in 1991.
</TABLE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our report included in the United Air Lines,
Inc. Form 10-K for the year ended December 31, 1995, into the
Company's previously filed Form S-3 Registration Statement (File
No. 33-46033), as amended, and the Form S-3 Registration
Statement (File No. 33-57192), as amended.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
March 8, 1996
<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 YEAR ENDED
DECEMBER 31, 1995 AND STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF
DECEMBER 31, 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> DEC-31-1995
<PERIOD-TYPE> 12-MOS
<CASH> 142
<SECURITIES> 425
<RECEIVABLES> 966
<ALLOWANCES> 19
<INVENTORY> 298
<CURRENT-ASSETS> 2,433
<PP&E> 12,677
<DEPRECIATION> 5,656
<TOTAL-ASSETS> 11,393
<CURRENT-LIABILITIES> 4,403
<BONDS> 3,328
0
0
<COMMON> 0
<OTHER-SE> 138
<TOTAL-LIABILITY-AND-EQUITY> 11,393
<SALES> 0
<TOTAL-REVENUES> 14,895
<CGS> 0
<TOTAL-COSTS> 14,063
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 359
<INCOME-PRETAX> 608
<INCOME-TAX> 237
<INCOME-CONTINUING> 371
<DISCONTINUED> 0
<EXTRAORDINARY> (30)
<CHANGES> 0
<NET-INCOME> 341
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
