UNITED STATES
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, 1996 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.
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(Exact name of registrant as specified in its charter)
Delaware 36-2675206
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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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, 1997
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
I(1)(a) and I(1)(b) of Form 10-K and is filing this form with the
reduced disclosure format pursuant to General Instructions I(2)(b)
and I(2)(c).
PART I
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ITEM 1. BUSINESS.
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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) 700-4000.
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 1996.
United is a major commercial air transportation company.
Airline Operations
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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, which serves the United States,
29 foreign countries and two territories, is the world's largest
airline as measured by revenue passenger miles flown. At the end of
1996, United served 139 airports. During 1996, United averaged 2,198
departures daily, flew a total of 117 billion revenue passenger
miles, and carried an average of 224,000 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.
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 existing
segments, and (3) entering into marketing agreements with smaller
U.S. air carriers which serve less populated destinations, and with
foreign carriers to better serve existing markets as well as provide
service to destinations that United could not serve itself for
economic or regulatory reasons. See "Alliances and Marketing
Arrangements."
Since October 1994, United has operated a service, "Shuttle by
United", designed to compete with low cost carriers on routes under
750 miles. While Shuttle by United is concentrated on the West
Coast, it has expanded to cover service between Denver and Las Vegas
and between Denver and Phoenix in February 1997. As of February
1997, Shuttle by United was operating daily 452 flights on 23 routes
between 20 cities in the western U.S. Shuttle by United is
strategically important to United by providing critical feed traffic
and market presence in the western U.S.
Pacific. Asian traffic is currently served from six U.S. cities
via United's Tokyo hub to Bangkok, Beijing, Hong Kong, Seoul,
Shanghai and Singapore. In addition, United provides nonstop flights
from San Francisco to Hong Kong, Osaka, Seoul and Taipei; from Los
Angeles to Hong Kong and Osaka; and from Honolulu and Guam to Osaka.
Additionally, United provides service from Osaka to Seoul. 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 other Asian points. During 1996
United began new service from Kansai to Seoul.
South Pacific traffic to Sydney is served from Los Angeles and
San Francisco, while traffic to Auckland and Melbourne is served from
Los Angeles. Based on reports filed with the Department of
Transportation, in 1996, United was the leading U.S. carrier in the
Pacific in revenue passenger miles and available seat miles. During
1996, United's Pacific division accounted for 21% of United's
revenues.
Europe. Service between the U.S. and Europe is provided by:
flights from six U.S. cities to London with connecting service at
London to Amsterdam and New Delhi; flights from three U.S. cities to
Paris; nonstop service from Washington Dulles to Amsterdam, Brussels,
Frankfurt, Milan and Zurich; and nonstop service from Chicago to
Dusseldorf and Frankfurt. United plans to initiate a second nonstop
flight between Chicago and London Heathrow in April 1997 operating
from April to the end of October.
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. Seven Latin American cities are
served nonstop from Miami, three nonstop flights from Los Angeles,
three from New York-Kennedy, and one each from Chicago-O'Hare and
Washington Dulles. United plans to initiate nonstop service from
Chicago to Sao Paulo, Brazil in November 1997.
Operating revenues attributed to United's foreign operations,
including service between the U.S. and foreign destinations, were
approximately $5.6 billion in 1996, $5.3 billion in 1995 and $4.9
billion in 1994.
Alliances and Marketing Arrangements. United, in cooperation
with other airlines, has formed alliances that seek to increase the
customer's choice of destinations and simplify the travel experience.
Alliances include "code share" flights which are operated by one
airline, but are listed with special flight code numbers as a flight
of each airline. Alliances with international carriers have allowed
United to participate in markets that it is unable to serve on-line
for commercial or governmental reasons and to add new on-line United
destinations and frequencies. Through joint frequent flyer
participation, code sharing of operations, reservations, baggage
handling, flight schedules and other 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 states of the former Soviet Union.
United and Lufthansa received antitrust immunity on May 20, 1996 from
the U.S. Department of Transportation, allowing the carriers to
expand and enhance their level of cooperation.
United also implemented a code-share alliance in 1996 with the
Scandinavian flag carrier, SAS. United, Lufthansa and SAS received
integrated antitrust immunity for their three-way alliance on
November 1, 1996. Other major alliance partners include Air Canada,
Ansett (which operates in both Australia and New Zealand) and British
Midland. 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; that agreement has been approved
in part; final approval is pending before the U.S. Department of
Transportation. Also, United has entered into similar alliance
arrangements with Air New Zealand and Mexicana which are expected to
be implemented in 1997. United's other alliance partners include
Aloha Airlines, Gulfstream International Airlines, Inc., TW Express,
ALM Antillean Airlines, Emirates, Saudi Arabian Airlines, Cayman
Airways, Aeromar and Aeromexico.
In addition, United has a marketing program in North America,
known as the United Express program, under which six independent
regional carriers, utilizing mainly turboprop equipment, feed United
hubs and international gateways. Currently, the carriers in the
United Express program provide service on United to 179 airports.
Cargo Service. United's cargo operations accounted for
approximately 5% of the Company's operating revenues in 1996. In
1997, United entered the Asian and trans-Pacific cargo markets by
introducing all cargo service between the U.S. and Asia operating
DC-10-30F aircraft. United began operating two DC-10-30F aircraft
in March 1997 serving Chicago, Los Angeles, Anchorage, Osaka, Manila
and Taipei; and in September 1997 United plans to operate another
two aircraft which will expand service to New York, San Francisco
and Tokyo.
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, Shuttle by
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. The program contains certain
restrictive provisions including expiration dates and blackout dates
and capacity controlled bookings, which substantially limit the use
of the awards on certain flights.
Under the Mileage Plus program, award travel is priced at two
levels, Saver Awards which have restrictions and Standard Awards
which, for a higher mileage redemption level, carry no restrictions.
Saver Awards and Standard Awards require 25,000 and 40,000 miles,
respectively, for economy class travel within the continental United
States. Effective for travel January 1998 and beyond, United
announced a requirement of a Saturday night stay and 14 day advance
purchase for Saver Award travel. In addition, flight miles earned on
paid Air Canada, Lufthansa, SAS and Thai Airways International
flights will be credited toward Mileage Plus Premier status starting
in 1997.
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.
At December 31, 1996 and 1995, it was estimated that the total
number of outstanding awards was approximately 6.1 million and 6.0
million, respectively. United estimated that 4.7 million and 4.6
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, 1996 and
1995. 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 1.5 million, 1.8
million and 1.9 million for the years 1996, 1995 and 1994,
respectively. Such awards represented 7%, 8.2% and 9.1% 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.
Selected Operating Statistics
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The following table sets forth certain selected operating data
for United:
Year Ended December 31
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1996 1995 1994 1993 1992
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Revenue Aircraft Miles
(millions) (a) 839 817 776 756 695
Revenue Aircraft
Departures 785,820 780,864 731,284 746,665 721,504
Available Seat Miles
(millions) (b) 162,843 158,569 152,193 150,728 137,491
Revenue Passenger Miles
(millions) (c) 116,697 111,811 108,299 101,258 92,690
Revenue Passengers
(thousands) 81,945 78,808 74,241 69,814 66,692
Average Passenger Journey
(miles) 1,424 1,419 1,459 1,450 1,390
Average Flight Length
(miles) 1,068 1,046 1,062 1,013 964
Passenger Load Factor (d) 71.7% 70.5% 71.2% 67.2% 67.4%
Break-even Load Factor (e) 66.0% 66.1% 68.2% 65.5% 70.6%
Average Yield Per Revenue
Passenger Mile
(in cents) (f) 12.4 11.8 11.3 11.6 11.3
Cost Per Available Seat
Mile Excluding ESOP
Charges (in cents) (g) 8.91 8.55 8.64 -- --
Cost Per Available Seat
Mile (in cents) (h) 9.3 8.9 8.8 8.5 8.9
Average Fare Per Revenue
Passenger $176.52 $167.84 $165.61 $169.00 $153.17
Average Daily Utilization
of each Aircraft
(hours:minutes) (i) 8:47 8:42 8:28 8:30 8:19
(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
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Seasonal and Other Factors. The Company'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 and, thus, UAL, in the second and third
quarters.
The results of operations in the air travel business
historically fluctuate 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 (passenger revenue 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, capacity growth, labor and fuel costs,
competition from other airlines, taxes, U.S. and international
government policies and other factors, will continue to impact its
operating results.
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 in some markets to
these lower cost structures has been the consummation of the employee
stock ownership transaction which took place on July 12, 1994 and
allowed United to lower its labor costs and introduce Shuttle by
United, a short-haul, high frequency operation.
United's marketing strategy is driven by four principal factors:
schedule convenience, customer satisfaction, frequent flyer program
and price. United seeks to attract travelers through convenient
scheduling, high quality service, a frequent flyer program designed
to reward and recognize 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 "Alliances and Marketing
Arrangements").
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 markets Apollo CRS products and services
to travel agencies 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.
Government Regulation
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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
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.
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.
Airport Access. United's operations at Chicago-O'Hare
International Airport, JFK International, New York LaGuardia and
Washington National, are limited by the "high density traffic rule"
administered by the FAA. Under this rule, take-off and landing
rights ("slots") required for the conduct of domestic flight
operations may be bought, sold or traded. 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.
United currently holds a sufficient number and distribution of
slots at airports subject to the high density rule to support its
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 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 the 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.
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.
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.
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, 1996, United operated 427 Stage 3 aircraft
representing 72% 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 and Resource Conservation
and Recovery Act 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 sites, the outcome of these matters is not
expected to have a material adverse effect on United's financial
condition. In addition, United is aware of soil and groundwater
contamination present on its leaseholds at several U.S. airports.
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 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, the Department of the Air Force Air Mobility Command ("AMC")
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 AMC under the Civil Reserve Air Fleet
Program. As of February 1, 1997, up to 26 B747 and 13 DC-10 aircraft
in United's fleet could be subject to these requirements.
Fuel
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United's results of operations are significantly affected by the
price and availability of jet fuel. Based on 1996 fuel consumption,
every $.01 change in the average annual price-per-gallon of jet fuel
caused a change of approximately $29 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 1992 through 1996:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Fuel expense,
including tax
(in millions) $2,082 $1,680 $1,585 $1,718 $1,679
Gallons consumed
(in millions) 2,883 2,822 2,697 2,699 2,529
Average cost per
gallon (in cents) 72.2 59.5 58.8 63.6 66.4
% of total
operating expenses 14% 12% 12% 13% 14%
United's average fuel cost per gallon in 1996 was 21.3% higher
than in 1995. Changes in fuel prices are industry-wide occurrences
that benefit or harm United's competitors as well as United although
fuel hedging activities may affect the degree to which fuel price
changes affect individual companies. 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.
United purchases its fuel under supply contracts with U.S. and
international oil companies. To assure adequate supplies of fuel and
provide a measure of control over fuel costs, United ships fuel on
major pipelines and stores fuel close to its major hub 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.
Insurance
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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. 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
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UAL is the world's largest majority employee-owned company. At
December 31, 1996, UAL and its subsidiaries had approximately
87,628 employees, of which approximately 85,921 were employed by
United (approximately twelve percent of whom are part-time employees)
and 1,707 were employed by United's subsidiaries. Approximately 60%
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, 1996 are as follows:
Number of Contract Open
Employee Group Employees Union For Amendment
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Mechanics, ramp
servicemen & other
ground employees 23,933 IAM July 12, 2000 *
Flight attendants 19,419 AFA March 1, 1996
Pilots 8,432 ALPA April 12, 2000 *
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* 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
(the "NMB") 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. However, if the NMB
determines that a dispute threatens substantially to interrupt
interstate commerce and notifies the President, the President can
delay a strike for a limited time by creating an emergency board to
investigate the dispute and report to the President.
For information regarding the status of the mid-term wage
adjustment and other labor agreement negotiations, see "Other
Information - Labor Agreements and Wage Adjustments" of Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 2. PROPERTIES.
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Flight Equipment
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As of December 31, 1996, United's operating aircraft fleet
totaled 564 jet aircraft, of which 266 were owned and 298 were
leased. These aircraft are listed below:
Average Average
Aircraft Type No. of Seats Owned Leased* Total Age (Years)
------------- ------------ ----- ------- ----- -----------
A320-200 144 4 32 36 2
B727-222A 147 59 16 75 18
B737-200 109 38 0 38 28
B737-200A 109 24 0 24 17
B737-300 126 10 91 101 8
B737-500 108 27 30 57 5
B747-100 434 14 0 14 25
B747-200 346 2 7 9 18
B747-400 387 5 21 26 5
B757-200 188 37 55 92 5
B767-200 168 19 0 19 14
B767-300ER 206 3 20 23 4
B777-200 292 3 13 16 1
DC10-10 287 18 8 26 21
DC10-30 298 3 5 8 17
TOTAL OPERATING
FLEET 266 298 564 11
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* United's aircraft leases have initial terms of 4 to 26 years,
and expiration dates range from 1998 through 2020. Under the
terms of leases for 289 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, 1996, 61 of the 266 aircraft owned by United
were encumbered under debt agreements.
In 1996 United took delivery of 21 new aircraft, seven A320-
200s, two B747-400s, four B757-200s and eight B777-200s. United also
retired fifteen aircraft, seven B737-200s, three B747-100s and five
DC10-10s.
As of December 31, 1996, United had 24 A319-100s, 14 A320-200s,
20 B777-200s, 21 B747-400s and six B757-200s on order which are
scheduled to be delivered between 1997 and 2002. The following table
sets forth United's firm aircraft orders and expected delivery
schedules as of December 31, 1996:
Aircraft Type Number To Be Delivered Delivery Rate
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A319-100 24 1997-1999 0-3 per month
A320-200 14 1997-1998 0-2 per month
B747-400 21 1997-2002 0-2 per month
B757-200 6 1997-1999 0-1 per month
B777-200 20 1997-1999 0-3 per month
--
Total 85
For further information regarding United's leases and
commitments, see Notes (8) and (13), respectively, to Consolidated
Financial Statements included in Item 8, "Financial Statements and
Supplementary Data" and "Liquidity and Capital Resources - Capital
Commitments" of Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Ground Facilities
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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'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 lease
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 has a major facility at the
Oakland, California airport which is dedicated to airframe
maintenance. United also has line aircraft maintenance facilities at
64 domestic and international locations.
United's Indianapolis Maintenance Center ("IMC") operates under
a lease with the Indianapolis Airport Authority which expires in
2031. IMC is a major aircraft maintenance and overhaul facility and
is being used for maintenance of Boeing 737 and 757 aircraft. United
is expanding its operations at IMC to maintain its fleets of Boeing
767 aircraft at the facility in the future.
United operates under a lease and use agreement expiring in 2025
at Denver International Airport and occupies 44 gates and over one
million square feet of exclusive or preferential use terminal
building space. United's flight training center located at the
former Stapleton International Airport was purchased by United from
the City and County of Denver in January, 1997. This flight training
center presently consists of four buildings with a total of more than
300,000 square feet located on 22 acres of land. An additional
building is currently under construction by United and, when
completed, the training center will accommodate 36 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,
Washington Dulles in 2014 and Los Angeles in 2021. 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.
ITEM 3. LEGAL PROCEEDINGS.
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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 -- United and six other
airlines were sued in various courts around the nation by travel
agents and the American Society of Travel Agents claiming as a class
action that the carriers acted collusively in violation of federal
antitrust laws when they imposed a cap on ticket sales commissions
payable to travel agencies by the carriers. The cases were
consolidated before the federal court in Minneapolis. As relief, the
plaintiffs sought 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 September 3, 1996, the
remaining parties (one defendant had settled earlier in the case)
agreed to settle the case by defendants' payment of money in return
for the plaintiffs' dismissal with prejudice of this lawsuit and a
full release. United's share of the settlement is $19.5 million.
The caps on ticket sales commissions were unaffected by this
settlement. The court approved the final settlement on January 28,
1997.
2. Summers et al. v. State Street Bank and Trust Company et al. --
On April 14, 1995, plaintiffs filed a class action complaint against
State Street Bank and Trust Company ("State Street"), the UAL
Corporation Employee Stock Ownership Plan and the UAL Corporation
Supplemental ESOP (together, the "Plans") in the United States
District Court for the Northern District of Illinois. The complaint
was brought on behalf of a putative class of all persons who are, or
were as of July 12, 1994, participants or beneficiaries of the Plans.
Plaintiffs alleged that State Street breached various fiduciary
duties under the Employee Retirement Income Security Act of 1974
("ERISA") in connection with the 1994 purchase of UAL preferred stock
by the Plans. The Plans were nominal defendants; no relief was
sought from them. The complaint sought a declaration that State
Street violated ERISA, restoration to the Plans by State Street 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. On March 29, 1996 the
judge granted defendants' motion to dismiss in its entirety. On
April 15, 1996 the defendants filed with the court a motion for
attorneys' fees and costs under ERISA. Thereafter, plaintiffs filed
a notice of appeal of the judge's decision in favor of State Street
and an opposition to defendants' motion for attorneys' fees and
costs. The United States Court of Appeals for the Seventh Circuit
upheld the judge's decision in favor of State Street. State Street's
motion to recover its attorneys' fees is pending before the district
court.
3. GEC-Marconi Claim -- On April 4, 1996 United filed suit in the
Circuit Court of Cook County, Illinois, Law Division, against GEC-
Marconi Inflight Systems Overseas, Ltd. ("GMIS"), its Boeing 777
inseat video vendor, claiming breach of contract for GMIS's failure
to deliver the contracted product in the specified time frame, and
seeking monetary and injunctive relief. United also named in the
suit GEC-Marconi Inflight Systems, Inc. ("GMIS, Inc."), its 777 video
maintenance provider, seeking declaratory relief on the maintenance
contract. On July 19, 1996 GMIS and GMIS, Inc. filed a counterclaim
against United seeking in excess of $240 million for various alleged
breaches of contract by United, plus consequential damages and
attorney's fees and costs, relating to the same product purchase
agreement (which, in addition, included a Boeing 747 and 767 retrofit
order that United terminated on April 4, 1996) and maintenance
service agreement which form the basis of United's complaint, as well
as an alleged June 1996 "agreement" that had been the subject of
negotiations between the parties but was never signed by United
regarding interim arrangements between the parties. GMIS and GMIS,
Inc. also seek injunctive relief to enforce the alleged "agreement"
and prevent United from obtaining substitute goods from other
vendors. On August 1, GMIS and GMIS, Inc. filed an emergency motion
on the claims for injunctive relief. On August 28, the judge denied
GMIS' and GMIS, Inc.'s motion for a preliminary injunction. On
October 28, 1996 GMIS filed a Petition for Replevin seeking to
recover certain spare parts and consigned inventory currently in
United's possession. On November 26, 1996, the court denied GMIS's
petition upon United's motion. On December 23, 1996, United filed an
amended complaint, and GMIS filed an amended counterclaim on December
31, 1996. The parties have exchanged preliminary discovery
documents.
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.
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Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
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STOCKHOLDER MATTERS.
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United is a wholly-owned subsidiary of UAL.
Item 6. Selected Financial Data
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<TABLE>
<CAPTION>
(In Millions) Year Ended December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $16,317 $14,895 $13,887 $13,168 $11,688
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 601 371 66 (17) (386)
Extraordinary loss on
early extinguishment of
debt, net of tax (67) (30) - (19) -
Cumulative effect of
accounting changes,
net of tax - - (26) - (547)
Net earnings (loss) 534 341 40 (36) (933)
Total assets at year-end 12,901 11,393 11,952 12,153 12,067
Long-term debt and capital
lease obligations,
including current portion 3,309 3,553 4,015 3,614 3,628
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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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 1997."
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 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 $624 million at December 31, 1996,
compared to $567 million at December 31, 1995. Operating
activities during the year generated $2.397 billion. Cash
was used primarily to repay long-term debt and to fund net
additions to property and equipment. In addition to the
early extinguishment of $627 million in principal amount of
various debt securities, United made mandatory repayments of
long-term debt totaling $150 million and payments under
capital lease obligations of $111 million during the year.
Financing activities also included deposits of an equivalent
$110 million in Japanese yen with certain banks in
connection with the financing of certain capital lease
transactions.
In 1996, United took delivery of seven A320, eight
B777, four B757 and two B747 aircraft. Thirteen of these
aircraft were purchased, three were acquired under operating
leases and five were acquired under capital leases.
Property additions, including aircraft spare parts,
facilities and ground equipment, amounted to $1.537 billion,
while property dispositions resulted in proceeds of $55
million.
Included in cash and cash equivalents at December 31,
1996 were $30 million of securities held by third parties
under securities lending agreements, as well as collateral
in the amount of 102% of the value of the securities lent.
United is obligated to reacquire the securities from the
borrower at the end of the contract.
As of December 31, 1996, United had a working capital
deficit of $2.381 billion as compared to $1.971 billion at
December 31, 1995. 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 on the
open market, in privately negotiated purchases or otherwise,
debentures as part of its efforts to reduce its obligations
and improve its balance sheet.
United has an agreement with a syndicate of banks for
a $750 million revolving credit facility expiring in 2002.
Interest on drawn amounts under the facility is calculated
at floating rates based on the London interbank offered rate
("LIBOR") plus a margin which is subject to adjustment based
on certain changes in the credit ratings of United's long-
term senior unsecured debt. Among other restrictions, the
credit facility contains a covenant which restricts United's
ability to grant liens on or otherwise encumber certain
identified assets with a market value of approximately $1.1
billion.
During the second quarter, United reduced the maximum
available borrowings under a separate short-term borrowing
facility from $270 million to $227 million. This agreement
has been extended through February 1998.
Prior Years. Operating activities in 1995 generated
cash flows of $1.587 billion. Cash was used primarily to
repay long-term debt, reacquire preferred stock, 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 totaling
$100 million. Payments under capital lease obligations
amounted to $79 million during the year and short-term
borrowings were reduced by $269 million. Property
additions, including the acquisition of 39 previously leased
aircraft, amounted to $1.111 billion. Property dispositions
resulted in proceeds of $459 million.
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.
Capital Commitments -
At December 31, 1996, commitments for the purchase of
property and equipment, principally aircraft, approximated
$6.9 billion, after deducting advance payments. An
estimated $2.9 billion is due to be spent in 1997, $1.9
billion in 1998, $1.0 billion in 1999 and $1.1 billion in
2000 and thereafter. The above amounts reflect firm orders
for 21 B747, 6 B757, 20 B777, 14 A320 and 24 A319 aircraft
to be delivered through 2002. However, these amounts do not
include a recent order for an additional three A320 and four
A319 aircraft. Under the Company's current fleet plan, the
above aircraft will principally be used to replace older
aircraft which will be retired. As a result, the Company
expects only modest growth in its passenger fleet through
2002.
During the third quarter, United renegotiated its
financing arrangements with Airbus Industrie and
International Aero Engines for the acquisition of A320-200
aircraft. In connection therewith, United relinquished its
right to return such aircraft upon eleven months' notice.
As a result, the Company's capital commitments include the
14 A320s still to be delivered through 1998, and the
Company's future minimum lease payment disclosures now
include the A320s already delivered under operating lease.
This increase in future minimum lease payments of
approximately $1.9 billion has no impact on the reported
monthly rent expense for these aircraft.
Consistent with UAL's strategic plan and the Company's
focus on attracting more high yield passengers, UAL's Board of
Directors has authorized an investment of approximately $400
million in United's onboard product, including new aircraft
seats and other cabin improvements. This amount, which is
expected to be spent during the next three years, is not
reflected in the above commitments.
In connection with the construction of the
Indianapolis Maintenance Center, United agreed to spend an
aggregate $800 million on capital investments 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 payments to the city of
Indianapolis and state of Indiana.
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.
At December 31, 1996, up to $631 million of securities
could be issued under an effective shelf registration
statement UAL and United have on file with the Securities
and Exchange Commission. Securities that can be issued
under the shelf include 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.
At December 31, 1996, United's senior unsecured debt
was rated BB by Standard and Poor's ("S & P") and Baa3 by
Moody's Investors Service Inc. ("Moody's"). In November
1996, S & P revised its ratings outlook for United's
securities from stable to positive.
Results of Operations
The results of operations in the airline business
historically fluctuate 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, capacity growth, low-cost competition, general
economic conditions, labor and fuel costs, taxes, U.S. and
international governmental policies and other factors will
continue to affect its operating results.
The July 1994 employee investment transaction and
recapitalization resulted in non-cash compensation charges
for stock periodically committed to be released to employees
during the term of the ESOPs. 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
common stock. Further, 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 $1.130 billion
in 1996, compared to operating earnings of $832 million in
1995. United's net earnings in 1996 were $534 million
compared to net earnings of $341 million in 1995. These
earnings include extraordinary losses of $67 million and $30
million, after tax, on early extinguishment of debt, in 1996
and 1995, respectively.
1996 Compared with 1995 -
Operating Revenues. Operating revenues increased
$1.422 billion (10%). United's revenue per available seat
mile increased 7% to 10.02 cents. Passenger revenues
increased $1.238 billion (9%) due to a 4% increase in
United's revenue passenger miles and a 5% increase in yield
to 12.35 cents. The following analysis by market is based
on information reported to the U.S. Department of
Transportation ("DOT"):
Yield increases in the domestic (7%), Atlantic (7%)
and Latin American (4%) markets were partially offset by a
4% decrease in Pacific yield. Domestic yield increased as a
result of a larger proportion of high yield business traffic
and fare levels influenced by the expiration of the Federal
passenger excise tax from January through August. (See
"Outlook for 1997"). A weaker Japanese yen versus the
dollar had a significant negative impact on 1996 Pacific
yield. (See "Foreign Operations"). Both domestic and
international revenue passenger miles increased by 4%.
Available seat miles increased 3% for the system, reflecting
increases of 4% in the Pacific and Latin American and 3% in
domestic markets. Atlantic available seat miles remained
unchanged. As a result, system passenger load factor
increased 1.2 points to 71.7%.
Cargo revenues increased $16 million (2%). Freight
ton miles increased 6% and mail ton miles increased 5%. A
6% lower freight yield was only partially offset by a 3%
higher mail yield for an overall decrease in cargo yield of
3%.
Other operating revenues increased $168 million (18%)
due to increases in frequent flyer program partner related
revenues, contract maintenance and fuel sales to third
parties.
Operating Expenses. Operating expenses increased
$1.124 billion (8%). United's cost per available seat mile
increased 5% from 8.87 cents to 9.32 cents. ESOP
compensation expense increased $181 million (36%),
reflecting a higher average common stock price in 1996.
Aircraft fuel increased $402 million (24%) due to a 2%
increase in consumption and a 21% increase in the average
price per gallon of fuel from 59.5 cents to 72.2 cents.
Without the increases in ESOP compensation expense and
aircraft fuel, United's cost per available seat mile would
have increased 2%. Salaries and related costs increased
$193 million (4%) due principally to increased staffing in
certain customer-oriented positions. Other expenses
increased $167 million (9%) due principally to costs
associated with sales to third parties of fuel, contract
maintenance and other work. Purchased services increased
$125 million (12%) due principally to volume-related
increases in computer reservations fees, credit card
discounts and communication charges. Aircraft maintenance
increased $42 million (10%) due to increased purchased
maintenance, as well as the timing of maintenance cycles.
Depreciation and amortization increased $35 million (5%) due
principally to a $30 million charge to reduce the carrying
value of aircraft seats that will be replaced under a plan
to improve the Company's onboard product. Commissions were
flat year over year despite an increase in commissionable
revenues due to lower average commission rates. These lower
rates were partially attributable to the full year effects
of a new travel agent commission plan introduced in 1995.
Aircraft rent decreased $57 million (6%) due to the
acquisition of 39 aircraft off-lease in the second half of
1995.
Other Income and Expense. Other expense amounted to
$160 million in 1996 compared to $224 million in 1995.
Interest capitalized, primarily on aircraft advance
payments, increased $35 million (83%). Interest expense
decreased $69 million (19%) due to the prepayment of long-
term debt in 1995 and 1996. Interest income decreased $41
million (42%) due to lower investment balances. Equity in
earnings of affiliates increased $16 million (33%) due to
higher earnings from the Galileo International Partnership
resulting from increased booking revenues. Included in
other expense for 1996 is a $20 million charge for the
settlement of litigation related to the travel agency
commission cap implemented by the Company in 1995.
1995 Compared with 1994 -
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. The following analysis by market is
based on information reported to the DOT:
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. 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 reflected 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 a new travel agents commission
payment plan.
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.
Other Information
Labor Agreements and Wage Adjustments -
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. The labor agreements
with employees represented by the Air Line Pilots
Association, International ("ALPA") and the International
Association of Machinists and Aerospace Workers ("IAM")
become amendable in the year 2000, the end of the ESOP
period.
The various agreements supporting the July 1994
recapitalization provide that employees represented by ALPA
and the IAM, and non-union United States salaried and
management employees ("SAM Employees") may receive mid-term
wage increases beginning in 1997. The Company recently
announced that it had reached tentative agreements with both
the ALPA and the IAM concerning mid-term wage adjustments.
Included in the agreements are a 5% increase for each union
group in July 1997 and a second 5% increase in July 1998.
Further, the agreement with ALPA calls for a corresponding
5% increase in both 1997 and 1998 to "book rates" (book
rates are used to compute certain other employee benefits),
and the agreement with the IAM also provides for lump sum
payments for all IAM employees and increases in hourly
license premium and skill pay for mechanics. Although not
finalized, management has indicated it expects the SAM
Employees to receive an increase patterned after the IAM
tentative agreement. Assuming such an increase for SAM
Employees, the cost to the Company in 1997 for all of these
wage and benefit adjustments will be approximately $120
million. These costs are included in the Company's outlook
for 1997 (See "Outlook for 1997").
In early 1997, management articulated a broader plan
for addressing employee compensation at the end of the ESOP
period, known as Vision 2000. The goal of Vision 2000 is to
put employee compensation costs (including the effects of
base pay, benefits and work rules) on a competitive level
with peer group compensation elsewhere in the industry at
the conclusion of the ESOP period, and the establishment of
a universal variable pay plan so that all employees can
benefit when the Company prospers.* Within this framework
the Company agreed to further changes in wages and benefits
as part of the tentative agreements reached with ALPA and
the IAM. These agreements also provide for restoration of
wage rates for the two groups to levels that existed prior
to the recapitalization in July 1994, as well as restoration
of the Company's contribution to the pilots defined
contribution plan from its current rate of 1% to its pre-
ESOP rate of 9%. The restoration of these wages and
benefits would become effective at the conclusion of the
ESOP period. The ultimate cost to the Company of Vision
2000, particularly given that peer group compensation is
subject to change between now and the year 2000, is not
determinable, however these costs are expected to be
competitive within the industry.
The tentative agreements reached with ALPA and the IAM
are subject to ratification by both groups of employees.
Employees covered under IAM's "all other agreement" had
previously agreed to a mid-term wage adjustment calling for
wage increases of 3% in each of 1997 and 1998 and 2% in each
of 1999 and 2000 with eligibility for lump-sum profit
sharing payments in 1998 and 1999 of up to 2%, depending on
the Company's performance in 1997 and 1998, respectively.
This group will have an opportunity to ratify the provisions
of the new agreement as a substitute for their current
negotiated arrangement.
United's contract with the Association of Flight
Attendants ("AFA") became amendable March 1, 1996. On April
9, 1996, United announced that the flight attendants had
rejected a previously announced tentative agreement. United
and the AFA are involved in traditional negotiations under
the Railway Labor Act, which historically have taken several
years to complete. While negotiations continue, the terms
of United's current flight attendant agreement will remain
in effect.
Foreign Operations -
United generates revenues and incurs expenses in
numerous foreign currencies. These expenses include
aircraft leases, commissions, catering, personnel costs,
reservation and ticket office services, customer service
expenses and aircraft maintenance. 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, Hong Kong dollars and Australian dollars. During 1996,
yen-denominated operating revenue net of yen-denominated
operating expense was approximately 61 billion yen
(approximately $560 million), Hong Kong dollar-denominated
operating revenue net of Hong Kong dollar-denominated
operating expense was approximately 1,727 million Hong Kong
dollars (approximately $223 million) and Australian dollar-
denominated operating revenue net of Australian dollar-
denominated operating expense was approximately 193 million
Australian dollars (approximately $152 million).
Other non-operating income (expense) is also affected
by transaction gains and losses resulting from exchange rate
fluctuations. The foreign exchange gains and losses
recorded by United result from the impact of exchange rate
changes on translation of foreign currency-denominated
assets and liabilities. To the extent that yen-denominated
liability balances are predictable, United currently
attempts to minimize transaction gains and losses by
investing in yen-denominated time deposits or entering into
yen forwards to offset the impact of rate changes. (See
"Risk Management"). In addition, United has entered into
foreign currency swap and forward contracts to reduce
exposure to currency fluctuations in connection with other
long-term yen-denominated obligations.
United's foreign operations involve insignificant
amounts of physical assets; however, there are sizable
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.
Risk Management -
United mitigates its exposure to fluctuations in any
single foreign currency by carrying passengers and cargo in
both directions between the U.S. and almost every major
economic region in the world. Also, United reduces its
exposure to transaction gains and losses by converting
excess local currencies generated to U.S. dollars. Further,
the Company has attempted to minimize some of its exposure
to jet fuel price changes by utilizing fixed price contracts
with suppliers for up to 10% of its annual consumption
needs. With the exception of these efforts, historically
the Company has done little to actively manage the impact of
these risks on expected future cash flows from operations.
In 1997, United intends to become more active in
hedging its risks related to foreign currency fluctuations
and movements in jet fuel prices through the use of various
derivative financial instruments including, but not limited
to, options, forwards, swaps and futures contracts. The
Company's Risk Tolerance Committee, a group of senior
officers of the Company, is responsible for setting
acceptable levels of risk and reviewing risk management
activities, subject to oversight by UAL's Board of Director's
Audit Committee. United's goal is not to speculate in these
areas, but rather to make its financial results more stable
and predictable.
Deferred Tax Assets -
United's consolidated balance sheet at December 31,
1996 includes a net deferred tax asset of $350 million,
compared to $478 million at December 31, 1995. The net
deferred tax asset is composed of approximately $1.917
billion of deferred tax assets and $1.567 billion of
deferred tax liabilities. The deferred tax assets include,
among other things, $643 million related to obligations for
postretirement and other employee benefits, $428 million
related to gains on sales and leasebacks, $229 million
related to alternative minimum tax ("AMT") credit
carryforwards which do not expire and $8 million of state
net operating loss ("NOL") carryforwards.
Management believes that a majority of the deferred
tax assets will be realized through reversals of existing
deferred tax liabilities with similar reversal patterns and
the balance will be realized as a result of generating
future taxable income.
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 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, 1996.
Safety and Security Measures -
During 1996, President Clinton formed a special
commission to review aviation safety and airport security.
In February 1997, the commission issued its final report
calling for increased safety and security measures and
improvements in the air traffic control infrastructure.
Although the extent of specific programs and their related
implementation schedules are still not clear, further
increases in government-mandated security measures may have
an adverse affect on the Company's results of operations
and financial condition depending upon such factors as the
ability of United to pass through any new Federal taxes,
surcharges or additional operating expenses to customers.
Any effective increase in the cost of air transportation
may dampen passenger and cargo traffic levels and have a
dilutive effect on yield.
Airport Rents and Landing Fees -
United is charged facility rental and landing fees at
virtually every airport at which it operates. In recent
years, many airports have increased or sought to increase
rates charged to airlines as a means of compensating for
increasing demands upon airport revenues. Airlines have
challenged certain of these increases through litigation and
in some cases have not been successful. The Federal
Aviation Administration ("FAA") and the DOT have instituted
an administrative hearing process to judge whether rate
increases are legal and valid. However, to the extent the
limitations on such charges are relaxed or the ability of
airlines to challenge such charges is restricted, the rates
charged by airports may increase substantially. Management
cannot predict the magnitude of any such increase.
Environmental and Legal 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.
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.*
Outlook for 1997 -
Real Gross Domestic Product in the U.S. is expected to
continue to grow moderately at a rate of 2.0% to 2.5%. U.S.
domestic airline industry capacity growth is expected to
grow 2% to 3% in 1997, a slight decrease from its 1996
growth rate. The growth rate of small, low-cost carriers is
expected to be lower in 1997 than 1996.
The Company anticipates continued strong performance
in 1997. Available seat miles are expected to increase
3.5%, with revenue per available seat mile up approximately
3%. Costs per available seat mile excluding ESOP charges
are expected to increase approximately 2%. This unit cost
forecast reflects lower fuel prices in 1997 than in 1996.
It also assumes a mid-term wage adjustment, for all employee
groups participating in the ESOP (see "Labor Agreements and
Wage Adjustments").
For the first quarter, United expects total system
revenue per available seat mile to increase by 6% to 7%
versus the same period last year, on 3.5% higher capacity.
System load factor should approximate 70%. Costs per
available seat mile excluding ESOP charges are expected to
increase 4% (excluding fuel also the expected increase is 2%
to 3%) over the first quarter of 1996.
United expects the Federal passenger excise tax, which
expired again on December 31, 1996 to be reinstated in March
1997. While the authority to collect this tax is scheduled
to expire once again at the end of the third quarter, the
Company expects a replacement funding mechanism, either
reinstatement of the current tax or a substitute user-based
fee system, to go into effect at the end of this period.
However, the Company is unable to determine what effect, if
any, reinstatement of the tax will have on the domestic
pricing environment.
In 1997, United expects to introduce a dedicated fleet
of four DC10-30 cargo freighters to its cargo operations.
All of the aircraft are currently in the Company's passenger
fleet, and after being converted to freighters, two will be
brought into the cargo operations during the first quarter
and two during the third quarter. As a result, cargo
revenues and to a lesser extent the related costs are
expected to increase significantly in 1997. For the first
quarter, cargo revenues are expected to be 8% to 9% higher
than the first quarter of 1996.
United expects to take delivery of 31 aircraft in
1997, consisting of 4 A319s, 5 A320s, 6 B747s, 2 B757s and
14 B777s and retire 23 aircraft from its existing passenger
fleet.
The information included in the above outlook section,
as well as certain statements made throughout the
Management's Discussion and Analysis of Financial Condition
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, yields, revenues,
expenses, unit costs, capital spending, cash flows and
margins include the airline pricing environment, willingness
of customers to travel, fuel cost, low-fare carrier
expansion, capacity decisions of other carriers, cost of
safety and security measures, actions of the U.S. and foreign
governments, foreign currency exchange rate fluctuations,
inflation, the economic environment of the airline industry,
the general economic environment, the price of UAL common
stock and other factors discussed herein. With respect to
the forward-looking statement set forth in the
"Environmental and Legal 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. With respect to the forward-looking statements set
forth in the "Labor Agreements and Wage Adjustments"
section, some of the factors that could affect the ability
of the Company to achieve its goals are the ratification of
the mid-term wage agreements, wage rates of peer groups at
the Company's competitors, compensation levels in the
industry and the status of the Company's relationships with
the union groups.
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,
1996 and 1995, 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, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for
each of the three years in the period ended December 31,
1996, 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 26, 1997
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations
(In Millions)
Year Ended December 31
Operating revenues: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Passenger $14,465 $13,227 $12,295
Cargo 773 757 685
Other operating revenues 1,079 911 907
------ ------ ------
16,317 14,895 13,887
------ ------ ------
Operating expenses:
Salaries and related costs 4,720 4,527 4,680
ESOP compensation expense 685 504 182
Aircraft fuel 2,082 1,680 1,585
Commissions 1,466 1,471 1,426
Purchased services 1,187 1,062 947
Aircraft rent 952 1,009 933
Landing fees and other rent 851 810 631
Depreciation and amortization 759 724 725
Aircraft maintenance 449 407 410
Other operating expenses 2,036 1,869 1,855
------ ------ ------
15,187 14,063 13,374
------ ------ ------
Earnings from operations 1,130 832 513
------ ------ ------
Other income (expense):
Interest expense (290) (359) (362)
Interest capitalized 77 42 41
Interest income 44 85 68
Equity in earnings of affiliates 64 48 20
Miscellaneous, net (55) (40) (127)
------ ------ ------
(160) (224) (360)
------ ------ ------
Earnings before income taxes,
extraordinary item and
cumulative effect of
accounting change 970 608 153
Provision for income taxes 369 237 87
------ ------ ------
Earnings before extraordinary
item and cumulative effect of
accounting change 601 371 66
Extraordinary loss on early
extinguishment of debt, net of tax (67) (30) -
Cumulative effect of accounting
change, net of tax - - (26)
------ ------ ------
Net earnings $ 534 $ 341 $ 40
====== ====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
December 31
Assets 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 203 $ 142
Short-term investments 421 425
Receivables, less allowance for
doubtful accounts (1996 - $24;
1995 - $19) 951 947
Related party receivables 4 1
Aircraft fuel, spare parts and
supplies, less obsolescence
allowance (1996 - $31; 1995 - $38) 369 298
Deferred income taxes 228 240
Prepaid expenses and other 446 380
------ ------
2,622 2,433
------ ------
Operating property and equipment:
Owned -
Flight equipment 8,393 7,778
Advances on flight equipment 943 735
Other property and equipment 2,989 2,700
------ ------
12,325 11,213
Less - Accumulated depreciation
and amortization 5,380 5,153
------ ------
6,945 6,060
------ ------
Capital leases -
Flight equipment 1,775 1,362
Other property and equipment 106 102
------ ------
1,881 1,464
Less - Accumulated amortization 583 503
------ ------
1,298 961
------ ------
8,243 7,021
------ ------
Other assets:
Intangibles, less accumulated
amortization (1996 - $230;
1995 - $209) 522 736
Deferred income taxes 122 238
Related party receivables 374 481
Aircraft lease deposits 168 71
Other 850 413
------ ------
2,036 1,939
------ ------
$12,901 $11,393
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
December 31
Liabilities and Shareholder's Equity 1996 1995
---- ----
<S> <C> <C>
Current liabilities:
Long-term debt maturing within
one year $ 164 $ 84
Related party debt maturing
within one year 60 43
Current obligations under
capital leases 130 98
Advance ticket sales 1,189 1,100
Accounts payable 987 682
Accrued salaries, wages and benefits 904 868
Accrued aircraft rent 776 748
Other accrued liabilities 793 780
------ ------
5,003 4,403
------ ------
Long-term debt 1,633 2,338
------ ------
Long-term obligations under
capital leases 1,322 990
------ ------
Other liabilities and deferred credits:
Deferred pension liability 178 368
Postretirement benefit liability 1,290 1,225
Deferred gains 1,151 1,214
Accrued aircraft rent 352 272
Other 414 326
------ ------
3,385 3,405
------ ------
Minority interest 31 59
------ ------
Preferred stock committed to
Supplemental ESOP 165 60
------ ------
Shareholder's equity:
Common stock, $5.00 par value;
authorized 1,000 shares;
outstanding 200 shares - -
Additional capital invested 15 -
ESOP capital 1,441 822
Retained earnings (deficit) 121 (413)
Unearned ESOP preferred stock (202) (175)
Pension liability adjustment (1) (76)
Other (12) (20)
------ ------
1,362 138
------ ------
Commitments and contingent
liabilities (Note 13)
$ 12,901 $ 11,393
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Cash Flows
(In Millions)
Year Ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents at
beginning of year $ 142 $ 444 $ 285
----- ----- -----
Cash flows from operating activities:
Net earnings 534 341 40
Adjustments to reconcile to net
cash provided by operating activities -
ESOP compensation expense 685 504 182
Cumulative effect of accounting
change - - 26
Extraordinary loss on debt
extinguishment 67 30 -
Pension funding in excess of expense (279) (275) (114)
Deferred postretirement benefit
expense 130 125 145
Depreciation and amortization 759 724 725
Provision for deferred income taxes 83 214 58
Undistributed earnings of affiliates (49) (38) (19)
Decrease (increase) in receivables (4) (60) 205
Decrease (increase) in related
party receivables (3) 1 (197)
Decrease (increase) in other
current assets (104) (107) 40
Increase (decrease) in advance
ticket sales 89 80 (16)
Increase (decrease) in accrued
income taxes 25 (74) 68
Increase (decrease) in accounts
payable and accrued liabilities 303 44 (142)
Amortization of deferred gains (63) (79) (85)
Other, net 224 157 277
----- ----- -----
2,397 1,587 1,193
----- ----- -----
Cash flows from investing activities:
Additions to property and equipment (1,537) (1,111) (627)
Proceeds on disposition of
property and equipment 55 459 425
Decrease (increase) in short-term
investments 4 432 (160)
Decrease (increase) in loans to
affiliates 107 166 (6)
Other, net 16 (19) 28
----- ----- -----
(1,355) (73) (340)
----- ----- -----
Cash flows from financing activities:
Proceeds from issuance of
long-term debt - - 735
Repayment of long-term debt (777) (838) (255)
Principal payments under capital leases(111) (79) (87)
Dividend to parent company - (600) (1,041)
Decrease in short-term borrowings - (269) (46)
Aircraft lease deposits (110) (77) -
Other, net 17 47 -
----- ----- -----
(981) (1,816) (694)
----- ----- -----
Increase (decrease) in cash and cash
equivalents during the year 61 (302) 159
----- ----- -----
Cash and cash equivalents at
end of year $ 203 $ 142 $ 444
===== ===== =====
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc and Subsidiary Companies
Statements of Consolidated Shareholder's Equity
(In Millions, Except Per Share)
Unearned
Additional Retained ESOP
Common Capital ESOP Earnings Preferred
Stock Invested Capital (Deficit) Stock Other Total
----- -------- ------- --------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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 and
amortization from issuance
of ESOP preferred stock - - 266 - (83) - 183
Unearned compensation and
amortization of parent
company restricted stock plan - 10 - - - 11 21
Pension liability adjustment - - - - - 37 37
Other - 35 - 1 - (3) 43
---- ---- ---- ---- ---- ---- ----
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 and
amortization from issuance
of ESOP preferred stock - - 604 - (100) - 504
Unearned compensation and
amortization of parent
company restricted stock plan - 26 - - - (18) 8
Pension liability adjustment - - - - - (60) (60)
Other - 34 (48) - 8 7 1
---- ---- ---- ---- ---- ---- ----
Balance at December 31, 1995 - - 822 (413) (175) (96) 138
Year ended December 31, 1996:
Net earnings - - - 534 - - 534
Unearned compensation and
amortization from issuance
of ESOP preferred stock - - 735 - (50) - 685
Unearned compensation and
amortization of parent
company restricted stock plan - - - - - 10 10
Pension liability adjustment - - - - - 75 75
Other - 15 (116) - 23 (2) (80)
---- ---- ----- ---- ---- ---- -----
Balance at December 31, 1996 $ - $ 15 $1,441 $ 121 $(202) $ (13) $1,362
---- ---- ----- ---- ---- ---- -----
See accompanying notes to consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
- -----------------------------------------------
(a) Basis of Presentation - United Air Lines, Inc.
("United") is a wholly-owned subsidiary of UAL Corporation
("UAL"). The consolidated financial statements include the
accounts of United and all of its majority-owned affiliates
(collectively "the Company"). All significant intercompany
transactions are eliminated. Investments in affiliates are
carried on the equity basis.
(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) 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.
(d) 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 foreign
currency swap and forward contracts to reduce certain exposure
to currency fluctuations. Foreign currency gains and losses
on the contracts are included in income currently, offsetting
the foreign currency losses and gains on the obligations.
(e) 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.
The proceeds from sales of available-for-sale securities are
included in interest income for each respective year.
From time to time, United lends certain of its securities
classified as cash and cash equivalents and short-term
investments to third parties. United requires collateral in
an amount exceeding the value of the securities and is
obligated to reacquire the securities at the end of the
contract. United accounts for these transactions as secured
lendings rather than sales, and so does not remove the
securities from the balance sheet.
(f) 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.
(g) 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.
(h) Intangibles - Intangibles consist primarily of route
acquisition costs and intangible pension assets (see Note 10).
Route acquisition costs are amortized over 40 years.
(i) 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 Holdings, 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.
(j) 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.
(2) Employee Stock Ownership Plans 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.
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.
The ESOPs established as part of the recapitalization
cover the 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 preferred stock (Class 1 and Class 2
ESOP Preferred Stock, collectively "ESOP Preferred Stock"),
and the voting interests are being delivered through three
separate classes of preferred stocks (Class P, M and S Voting
Preferred Stock, collectively "Voting 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, three 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
classes of preferred stock are described more fully in Note
12, ESOP Preferred Stock.
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 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. Shares
are committed to be released to employees on a pro rata basis
through April 12, 2000. 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 additional capital
invested. For the Non-Leveraged ESOP, the Class 2 ESOP
Preferred Stock is recorded as additional capital invested as
the shares are committed to be contributed, 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."
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 $685 million and $504
million in 1996 and 1995, respectively. During 1994, the
Company recorded $182 million of ESOP compensation expense for
the period July 13 through December 31, 1994. During 1996,
2,402,310 shares of Class 1 ESOP Preferred Stock, 359,577
shares of Class 2 ESOP Preferred Stock and 2,735,905 shares of
Voting Preferred Stock were allocated to employee accounts,
and another 312,086 shares of Class 2 ESOP Preferred Stock
were allocated in the form of "book entry" shares, effective
December 31, 1995. Another 21,970 shares of Class 2 ESOP
preferred stock previously allocated in book entry form were
issued and either contributed to the qualified plan or
converted and sold on behalf of terminating employees. At
December 31, 1996, the year-end allocation of Class 1 ESOP
Preferred Stock to employee accounts had not yet been
completed. There were 2,345,749 shares of Class 1 ESOP
Preferred Stock committed to be released and 1,127,292 shares
held in suspense by the ESOP as of December 31, 1996. For the
Class 2 ESOP Preferred Stock, 728,224 shares were committed to
be contributed to employees at December 31, 1996. The fair
value of the unearned ESOP shares recorded on the balance
sheet at December 31, 1996 and 1995 was $309 million and $230
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, 1996 was $206 million.
(3) Other Income (Expense) - Miscellaneous
- -------------------------------------------
Other income (expense) - "miscellaneous, net"
consisted of the following:
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994
- ------------- ---- ---- ----
<S> <C> <C> <C>
Foreign exchange gains (losses) $ (8) $ (20) $ 15
Net gains on disposition
of property or rights(1) - 17 7
Minority interests (21) (23) (22)
Recapitalization transaction costs - - (121)
Travel agency litigation
settlement (20) - -
Other (6) (14) (6)
---- ---- ----
$ (55) $ (40) $(127)
==== ==== ====
</TABLE>
(1) As a result of the Company's adoption of "Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," net gains
on disposition of property or rights for 1996, which amounted to $11
million, are included in operating expenses as a component of
depreciation and amortization.
(4) 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 retained earnings is approximately
$147 million of undistributed earnings of Galileo and its
predecessor companies.
Under operating agreements with Galileo, United purchases
computer reservations services from Galileo and provides
marketing, sales and communication services to Galileo.
Revenues derived from the sale of services to Galileo amounted
to approximately $249 million in 1996, $238 million in 1995
and $233 million in 1994. The cost to United of services
purchased from Galileo amounted to approximately $114 million
in 1996, $104 million in 1995 and $94 million in 1994.
United also owns 77% of the Apollo Travel Services
Partnership ("ATS"), whose accounts are consolidated. ATS
markets the Apollo computer reservations system to travel
agencies in the United States, Mexico and the Caribbean.
Below is a summary of ATS' contribution to the Company's
consolidated results, net of intercompany eliminations and
minority interests:
<TABLE>
<CAPTION>
(In Millions) Year ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating revenues $ 239 $ 237 $ 244
Operating income $ 86 $ 90 $ 92
Earnings before income taxes $ 70 $ 76 $ 73
</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 1996, the regular tax liability of the Company
exceeded the alternative minimum tax ("AMT") liability
resulting in a utilization of AMT credits. The federal income
tax liability is the greater of the tax computed using the
regular tax system or the tax under the AMT system. However,
if the regular tax liability exceeds the AMT liability and AMT
credits are available, the AMT credits are used to reduce the
net tax liability to the amount of the AMT liability. During
1996, United utilized $34 million of AMT credits.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994
- ------------- ---- ---- ----
<S> <C> <C> <C>
Current -
Federal $ 267 $ 20 $ 25
State 19 3 3
---- ---- ----
286 23 28
Deferred -
Federal 60 191 54
State 23 23 5
---- ---- ----
83 214 59
---- ---- ----
$ 369 $ 237 $ 87
==== ==== ====
</TABLE>
The income tax provision differed from amounts computed
at the statutory federal income tax rate, as follows:
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax provision at
statutory rate $ 339 $ 213 $ 54
State income taxes, net of
federal income tax benefit 28 17 5
Nondeductible employee meals 25 23 22
Nondeductible ESOP
transaction costs - - 21
Foreign tax credits (2) (2) (3)
Rate change effect - - (14)
Other, net (21) (14) 2
---- ---- ----
$ 369 $ 237 $ 87
==== ==== ====
</TABLE>
Temporary differences and carryforwards which give rise
to a significant portion of deferred tax assets and
liabilities for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
(In Millions) 1996 1995
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Employee benefits, including
postretirement medical $ 643 $ 93 $ 593 $ 92
Depreciation, capitalized
interest and transfers of
tax benefits - 1,156 - 1,062
Gains on sale and leasebacks 428 - 450 -
Rent expense 351 - 310 -
AMT credit carryforward 229 - 263 -
Net operating loss
carryforwards 8 - 123 -
Other 258 318 175 282
----- ----- ----- -----
$1,917 $1,567 $1,914 $1,436
===== ===== ===== =====
</TABLE>
At December 31, 1996, United and its subsidiaries had
$229 million of federal AMT credit carryforwards available for
an indefinite period, $5 million of foreign tax credit
carryforwards expiring between 2000 and 2001 and $8 million of
state tax benefit from net operating loss carryforwards
expiring between 1999 and 2011.
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 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, 1996.
(6) Short-Term Borrowings
- --------------------------
United has an agreement with a syndicate of banks for a
$750 million revolving credit facility expiring in 2002.
Interest on drawn amounts under the facility is calculated at
floating rates based on the London interbank offered rate
("LIBOR") plus a margin which is subject to adjustment based
on certain changes in the credit ratings of United's long-term
senior unsecured debt. Among other restrictions, the credit
facility contains a covenant which restricts United's ability
to grant liens on or otherwise encumber certain identified
assets with a market value of approximately $1.1 billion.
During the second quarter of 1996, United reduced the
maximum available amount of borrowings under a separate short-
term borrowing facility from $270 million to $227 million.
This agreement has been extended through February 1998.
(7) Long-Term Debt
- -------------------
A summary of long-term debt, including current
maturities, as of December 31 is as follows (interest rates
are as of December 31, 1996):
<TABLE>
<CAPTION>
(In Millions) 1996 1995
- ------------- ---- ----
<S> <C> <C>
Secured notes, 6.84% to 8.90%,
averaging 8.14%, due through 2014 $ 806 $ 957
Debentures, 6.75% to 11.21%,
averaging 9.61%, due 1997 to 2021 936 1,419
Promissory notes, 6.10% to 11.00%,
averaging 6.44%, due 1997 to 2000 64 61
----- -----
1,806 2,437
Less: Unamortized discount on debt (9) (15)
Current maturities (164) (84)
----- -----
$1,633 $2,338
===== =====
</TABLE>
In addition to scheduled principal payments, in 1996 and
1995 the Company repaid $144 million and $223 million,
respectively, in principal amount of secured notes and $483
million and $322 million, respectively, in principal amount of
debentures prior to maturity. These obligations were
scheduled to mature at various times from 2000 through 2021.
Extraordinary losses of $67 million and $30 million,
respectively, net of tax benefits of $40 million and $18
million, respectively, were recorded, reflecting amounts paid
in excess of the debt carrying value.
At December 31, 1996, United had outstanding a total of
$197 million of long-term debt bearing interest at rates 85 to
128 basis points over LIBOR. In connection with certain of
these debt financings, United has entered interest rate swap
agreements to effectively fix interest rates at December 31,
1996 at 8.554% on $33 million of notional amount (see Note
12).
Maturities of long-term debt for each of the four years
after 1997 are: 1998 - $77 million; 1999 - $47 million; 2000
- - $50 million; and 2001 - $42 million. Various assets,
principally aircraft, having an aggregate book value of $856
million at December 31, 1996, were pledged as security under
various loan agreements.
At December 31, 1996, UAL and United had an effective
shelf registration statement on file with the Securities and
Exchange Commission to offer up to $631 million of securities,
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.
(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.
Future minimum lease payments as of December 31, 1996,
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:
<TABLE>
<CAPTION>
(In Millions) Operating Leases Capital
Aircraft Non-aircraft Leases
-------- ------------ ------
<S> <C> <C> <C>
Payable during -
1997 $ 922 $ 473 $ 231
1998 921 463 235
1999 916 447 210
2000 933 435 186
2001 918 459 261
After 2001 13,277 7,871 1,033
------ ------ ------
Total minimum lease
payments $17,887 $10,148 2,156
====== ======
Imputed interest (at rates of 5.3%
to 12.2%) (704)
Present value of minimum lease payments 1,452
Current portion (130)
-----
Long-term obligations under capital leases $1,322
=====
</TABLE>
As of December 31, 1996, United leased 298 aircraft, 54
of which were under capital leases. These leases have terms
of 4 to 26 years, and expiration dates range from 1997 through
2020.
In connection with the financing of certain aircraft
accounted for as capital leases, United had on deposit at
December 31, 1996 an aggregate 19 billion yen ($168 million)
in certain banks and had pledged an irrevocable security
interest in such deposits to the aircraft lessors. These
deposits will be used to pay off an equivalent amount of
recorded capital lease obligations.
Amounts charged to rent expense, net of minor amounts of
sublease rentals, were $1.450 billion in 1996, $1.469 billion
in 1995, and $1.222 billion in 1994. Included in 1996 rent
expense was $15 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
into interest rate swap agreements (see Note 12).
(9) Related Party Transactions
- -------------------------------
Air Wis Services, Inc., a wholly-owned subsidiary of UAL,
owns Air Wisconsin, Inc. At December 31, 1996 and 1995,
United had outstanding loans from Air Wisconsin, Inc. in the
amount of $60 million and $43 million, respectively. The
loans bear 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 program (see
Note 1(i)). 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, United paid a cash dividend of $600 million to
UAL. At December 31, 1996 and 1995, United had accounts
receivable from UAL of $378 million and $482 million,
respectively.
Certain officers and key employees of United participate
in UAL stock award plans. 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. Under a cashless exercise, the Company
withholds, at the election of the optionee, from shares that
would otherwise be issued upon exercise, that number of shares
having a fair market value equal to the exercise price and/or
related income taxes. For outstanding options eligible for
cashless exercise, changes in the market price of the stock
are charged to earnings currently. The expense recorded for
such eligible options was $15 million for 1996, $27 million in
1995, and $15 million in 1994.
Stock options which were outstanding at the time of the
recapitalization are exercisable for shares of old common
stock, each of which is in turn converted into two shares of
new common stock and $84.81 in cash upon exercise. Subsequent
to the recapitalization, the Company granted stock options
which are exercisable for shares of new common stock.
The Company has also awarded shares of restricted UAL
stock to officers and key employees. These shares generally
vest over a five-year period and are subject to certain
transfer restrictions and forfeiture under certain
circumstances prior to vesting. Unearned compensation,
representing the fair market value of the stock at the
measurement date for the award, is amortized to salaries and
related costs over the vesting period. As a result of the
1994 recapitalization, all outstanding nonvested shares of
restricted stock 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 at that time.
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 establishes a fair value based method of
accounting for stock options. The Company has elected to
continue using the intrinsic value based method of accounting
prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," as permitted by
SFAS No. 123. If the fair value based method accounting
provisions of SFAS No. 123 had been adopted as of the
beginning of 1995, the effect on 1995 and 1996 net earnings
would have been immaterial. The effects on 1995 and 1996 may
not be representative of the effects SFAS No. 123 may have in
future years, because no grants prior to January 1, 1995 have
been considered.
(10) 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. The Company's
goal is to fully fund the estimated present value of its
accumulated benefit obligation under the plans. 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.
The following table sets forth the defined benefit plans'
funded status and amounts recognized in the statements of
financial position as of December 31:
<TABLE>
<CAPTION>
1996 1995
(In Millions) Assets Exceed Accumulated Accumulated
Accumulated Benefits Benefits
Benefits Exceed Assets Exceed Assets
-------- ------------- -------------
<S> <C> <C> <C>
Actuarial present value of
accumulated benefit obligation $ (5,344) $ (235) $ (5,309)
Actuarial present value of
projected benefit obligation $ (5,812) $ (335) $ (5,774)
Plan assets at fair value 5,850 60 4,947
------ ---- ------
Projected benefit obligation in
excess of plan assets 38 (275) (827)
Unrecognized net loss 138 (70) 356
Prior service cost not yet
recognized in net periodic
pension cost 230 216 482
Remaining unrecognized net asset (16) 37 15
Adjustment required to recognize
minimum liability - (86) (400)
------ ---- ------
Pension asset (liability)
recognized in the statements of
consolidated financial position $ 390 $ (178) $ (374)
====== ==== ======
Actuarial assumptions:
Weighted average discount rate 7.75% 7.25%
Rate of increase in compensation 3.15% 3.15%
</TABLE>
Total pension expense for all retirement plans (including
defined contribution plans) was $252 million in 1996, $193
million in 1995, and $350 million in 1994.
Plan assets are invested primarily in governmental and
corporate debt instruments and corporate equity securities.
The net periodic pension cost of defined benefit plans
included the following components:
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994
- ------------- ---- ---- ----
<S> <C> <C> <C>
Service cost - benefits
earned during the year $ 237 $ 173 $ 216
Interest cost on projected
benefit obligation 440 396 379
Actual (return) loss on
plan assets (703) (934) 28
Net amortization and deferral 268 545 (351)
---- ---- ----
Net periodic pension cost $ 242 $ 180 $ 272
==== ==== ====
Expected average long-term
rate of return 9.75% 9.75% 9.75%
</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.
(11) 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.
Information on the plans' funded status, on an aggregate
basis at December 31,
follows:
<TABLE>
<CAPTION>
(In Millions) 1996 1995
- ------------- ---- ----
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 498 $ 536
Other fully eligible participants 193 210
Other active participants 648 676
----- -----
Total accumulated postretirement
benefit obligation 1,339 1,422
Unrecognized net gain (loss) 109 (54)
Fair value of plan assets (103) (99)
----- -----
Accrued postretirement
benefit obligation $1,345 $1,269
===== =====
Discount rate 7.75% 7.25%
</TABLE>
Net postretirement benefit costs included the following
components:
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994
- ------------- ---- ---- ----
<S> <C> <C> <C>
Service cost - benefits
attributed to service during
the period $ 44 $ 37 $ 46
Amortization of unrecognized
net loss (gain) (5) (5) 3
Actual return on assets (7) (7) -
Interest cost on
benefit obligation 98 100 95
---- ---- ----
Net postretirement benefit costs $ 130 $ 125 $ 144
==== ==== ====
</TABLE>
The assumed health care cost trend rates were 7.4% and
8.5% for 1996 and 1995, 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, 1996, by $79 million and
the aggregate of the service and interest cost components of
net postretirement benefit cost for 1996 by $10 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.
(12) Financial Instruments and Risk Management
- -----------------------------------------------
During 1996, the Company attempted to manage its exposure
to interest rates, foreign exchange rates and jet fuel prices
through certain operational decisions and the limited use of
various derivative financial instruments. Except for minor
investments in certain futures and options contracts to assist
in opportunistic purchases of jet fuel, the Company used
derivative financial instruments only for the purpose of
hedging existing commitments or obligations, not for hedging
expected future operating cash flows or for generating trading
profits. In 1997, the Company expects to more actively hedge
the risks associated with foreign exchange rates and jet fuel
prices on expected future operating cash flows through a
greater use of derivative financial instruments.
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. 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, or through the use of mutual put options
where contracts are terminated at certain predefined
intervals. Counterparty credit risk is further minimized by
settlements throughout the duration of the contract.
Interest Rate Risk Management
United has entered into 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 14 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, 1996, a notional amount of
$53 million of interest rate swap agreements effectively fixed
interest rates between 8.55% 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, 1996 and 1995 were $(4) million and $(46) 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. In addition, United reduces its exposure
to foreign exchange fluctuations by converting excess local
currencies generated into U.S. dollars. 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 foreign currency swap and forward
contracts to reduce exposure to currency fluctuations in
connection with 15.3 billion of Japanese yen-denominated debt
and lease obligations. The swap contract effectively fixes
future lease principal payments at an indirect yen exchange
rate of 95.63. At December 31, 1996, 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,
1996 was approximately $1.8 million based on the change in the
yen to dollar exchange rate and interest rates in the U.S. and
Japan. The forward contracts effectively fix future debt
payments at an indirect exchange rate of 116.14. At December
31, 1996, the forward contracts had a notional amount of $67
million, which will reduce periodically through 2001, as
payments are made under the debt agreements. The fair value
of the currency forward contract to United at December 31,
1996 was approximately $(1.9) million.
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 and by entering into yen forward
contracts to offset the impact of rate changes. At December
31, 1996, these forward contracts had a notional amount of $54
million and a fair value to United of $(1.4) million.
Fuel Price Risk Management
United enters into contracts from time to time, 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,
1996, the level of 1997 fuel needs contracted at fixed average
prices was insignificant.
At December 31, 1996, the fair values of futures
contracts used for opportunistic purchases of jet fuel were
insignificant.
Balance Sheet Financial Instruments: Fair Values
At December 31, 1996 and 1995, $418 million and $606
million, respectively, of investments in debt securities
included in cash and cash equivalents and short-term
investments were classified as available-for-sale, and $232
million and $530 million, respectively, were classified as
held-to-maturity. Investments in debt securities classified
as available-for-sale are stated at fair value based on the
quoted market prices for the securities, which does not differ
significantly from their cost basis. Investments classified
as held-to-maturity are stated at cost which approximates
market due to their short-term maturities.
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, 1996 and 1995 was $2.013 billion and
$2.719 billion, respectively, compared with carrying values of
$1.806 billion and $2.437 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, 1996, $1.060 billion
principal amount of such bonds was outstanding. As of
December 31, 1996, UAL and United had jointly guaranteed $35
million of such bonds and United had guaranteed $1.041 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, 1996. At that date, United had granted mortgages
on aircraft and engines having a total book value of $187
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.
(13) 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 and 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, 1996, commitments for the purchase of
property and equipment, principally aircraft, approximated
$6.9 billion, after deducting advance payments. An estimated
$2.9 billion is due to be spent in 1997, $1.9 billion in 1998,
$1.0 billion in 1999 and $1.1 billion in 2000 and thereafter.
The above amounts reflect firm orders for 21 B747, 6 B757, 20
B777, 14 A320 and 24 A319 aircraft to be delivered through
2002. However, these amounts do not include a recent order
for an additional three A320 and four A319 aircraft. Under
the Company's current fleet plan, the above aircraft will
principally be used to replace older aircraft which will be
retired. As a result, the Company expects only modest growth
in its passenger fleet through 2002.
Consistent with UAL's strategic plan and the Company's
focus on attracting more high yield passengers, UAL's Board of
Directors has authorized an investment of approximately $400
million in United's onboard product, including new aircraft
seats and other cabin improvements. This amount, which is
expected to be spent in the next three years, is not reflected
in the above commitments.
In connection with the construction of the Indianapolis
Maintenance Center, United agreed to spend an aggregate $800
million on capital investments 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 payments to the city of Indianapolis and state of
Indiana.
Approximately 60% 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 into labor contracts
with United which become amendable in 2000.
United's contract with the Association of Flight
Attendants ("AFA") became amendable March 1, 1996. On April
9, 1996, United announced that the flight attendants had
rejected a previously announced tentative agreement. United
and the AFA are involved in traditional negotiations under the
Railway Labor Act, which historically have taken two to three
years to complete. While negotiations continue, the terms of
United's current flight attendant agreement will remain in
effect.
(14) Foreign Operations
- -----------------------
Operating authorities in international markets are
governed by bilateral aviation agreements between the U.S. and
foreign countries. Under generally accepted accounting
principles, ("GAAP"), foreign operations are defined as
operations that exist outside the U.S. United derives an
insignificant amount of its operating revenues and operating
income from such operations. However, the Company's results
are significantly impacted by revenues produced from
international flights between the U.S. and foreign
destinations. Based on allocation guidelines provided by the
U.S. Department of Transportation ("DOT"), which classifies
flights between the U.S. and foreign destinations as part of
each respective foreign entity, and thus, differs from the
definition of foreign operations under GAAP, United reported
the following results by geographic entity to the DOT for each
of the last three years:
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994
Operating Operating Operating Operating Operating Operating
Entity Revenue Income Revenue Income Revenue Income
- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $10,717 $ 738 $ 9,586 $ 460 $ 8,966 $ 261
Pacific 3,438 288 3,336 348 3,009 310
Atlantic 1,412 86 1,287 10 1,190 (102)
Latin America 750 18 686 14 722 44
------ ----- ------ ---- ------ -----
Total $16,317 $1,130 $14,895 $ 832 $13,887 $ 513
====== ===== ====== ==== ====== =====
</TABLE>
Additionally, United has sizable intangible assets
related to acquisitions of foreign route authorities. 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.
(15) Statement of Consolidated Cash Flows - Supplemental Disclosures
- ---------------------------------------------------------------------
Supplemental disclosures of cash flow information and non-
cash investing and financing activities were as follows:
<TABLE>
<CAPTION>
(In Millions) 1996 1995 1994
- ------------- ---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts
capitalized) $ 222 $ 313 $ 291
Income taxes 239 6 5
Non-cash transactions:
Capital lease obligations
incurred 503 374 -
Long-term debt incurred in
connection with additions
to equipment 82 26 21
Net unrealized gain
(loss) on investments (1) 4 (3)
Increase (decrease) in
pension intangible (191) 2 13
</TABLE>
(16) Selected Quarterly Financial Data (Unaudited)
- ---------------------------------------------------
<TABLE>
<CAPTION>
(In Millions) 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
1996:
Operating revenues $ 3,723 $ 4,153 $ 4,477 $ 3,964 $16,317
Earnings from operations 64 400 613 53 1,130
Earnings (loss) before
extraordinary item 6 226 348 21 601
Extraordinary loss on early
extinguishment of debt (29) (30) (7) (1) (67)
Net earnings (loss) $ (23) $ 196 $ 341 $ 20 $ 534
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
</TABLE>
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 I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- ------- -----------------------------------------------
AND MANAGEMENT.
--------------
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------- ----------------------------------------------
Omitted pursuant to General Instruction I(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, 1996, 1995 and 1994
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 exhibits required by this item are listed in
the Exhibit Index, which immediately precedes the exhibits filed with
this Form 10-K or incorporated in this report by reference, and is
incorporated herein by this reference.
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K have been filed during the fourth quarter
of 1996.
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 27th day of February, 1997.
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 27th day of February, 1997
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/ 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, 1996
Balance at Additions Charged to Balance
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 19 $ 23 $ - $ 18(1) $ 24
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 38 $ 14 $ 2 $ 23(1) $ 31
=== === === === ===
F-1
- --------------
(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, 1995
(In Millions) Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- ---------- --------- ---------- ------
<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
=== === === === ===
F-2
- ---------------
(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
(In Millions) Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- -------- -------- ---------- ------
<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
=== === === === ===
F-3
_________________
(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 non-
operating property.
</TABLE>
EXHIBIT INDEX
-------------
3.1 Restated Certificate of Incorporation of United Air
Lines, Inc. ("United") (filed as Exhibit 3.1 to United's
Form 10-Q for the quarter ended June 30, 1994 and
incorporated herein by reference).
3.2 By-laws (filed as Exhibit 3.2 to United's Form 10-K for
the year ended December 31, 1995 and incorporated herein
by reference).
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.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
<TABLE>
<CAPTION>
Exhibit 12.1
United Air Lines, Inc. and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31
1996 1995 1994 1993 1992
Earnings: (In Millions)
<S> <C> <C> <C> <C> <C>
Earnings (loss) before
income taxes and
extraordinary items $ 970 $ 608 $ 153 $ (26) $ (602)
Undistributed earnings
of affiliate (49) (38) (19) - (27)
Fixed charges, from below 1,113 1,200 1,046 1,077 964
Interest capitalized (77) (42) (41) (51) (92)
----- ----- ----- ----- -----
Earnings $1,957 $1,728 $1,139 $1,000 $ 243
===== ===== ===== ===== =====
Fixed charges:
Interest expense $ 290 $ 359 $ 362 $ 347 $ 317
Interest expense on
affiliate's guaranteed debt - - - 5 -
Portion of rental expense
representative of the
interest factor 823 841 684 725 647
----- ----- ----- ----- -----
Fixed charges $1,113 $1,200 $1,046 $1,077 $ 964
===== ===== ===== ===== =====
Ratio of earnings to
fixed charges 1.76 1.44 1.09 (a) (a)
===== ===== ===== ===== =====
_____________
(a) Earnings were inadequate to cover fixed charges by $77
million in 1993 and $721 million in 1992.
</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, 1996, 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 5, 1997
<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, 1996 AND STATEMENT OF CONSOLIDATED
FINANCIAL POSITION AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 12-MOS
<CASH> 203
<SECURITIES> 421
<RECEIVABLES> 955
<ALLOWANCES> 24
<INVENTORY> 369
<CURRENT-ASSETS> 2,622
<PP&E> 14,206
<DEPRECIATION> 5,963
<TOTAL-ASSETS> 12,901
<CURRENT-LIABILITIES> 5,003
<BONDS> 2,955
0
0
<COMMON> 0
<OTHER-SE> 1,362
<TOTAL-LIABILITY-AND-EQUITY> 12,901
<SALES> 0
<TOTAL-REVENUES> 16,317
<CGS> 0
<TOTAL-COSTS> 15,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 290
<INCOME-PRETAX> 970
<INCOME-TAX> 369
<INCOME-CONTINUING> 601
<DISCONTINUED> 0
<EXTRAORDINARY> (67)
<CHANGES> 0
<NET-INCOME> 534
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
