UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission File No. 33-21220
UNITED AIR LINES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2675206
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Location: 1200 East Algonquin Road, Elk Grove Township, Illinois 60007
Mailing Address: P. O. Box 66100, Chicago, Illinois 60666
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
--------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Series A Debentures due 2004 New York Stock Exchange
Series B Debentures due 2014 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
----
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
The number of shares of common stock outstanding as of February 28,
1998 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
------
ITEM 1. BUSINESS.
United Air Lines, Inc. ("United" or the "Company") was
incorporated under the laws of the State of Delaware on December 30,
1968. The world headquarters of the Company are located at 1200 East
Algonquin Road, Elk Grove Township, Illinois 60007. The Company's
mailing address is P.O. Box 66100, Chicago, Illinois 60666. The
telephone number for the Company is (847) 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 1997.
United is a major commercial air transportation company, engaged in
the transportation of persons, property and mail throughout the
United States and abroad.
Airline Operations
- ------------------
During 1997, United carried, on average, more than 230,000
passengers per day and flew more than 121 billion revenue passenger
miles. It is the world's largest airline as measured by revenue
passenger miles flown, providing passenger service in 27 countries.
United has a global network of hubs primarily designed to fly
travelers between North America (domestic segment) and the Pacific,
Latin America and Europe (international segment). North American
hubs include Chicago, Denver, Los Angeles, San Francisco, and
Washington, D.C. (Dulles). United also operates a major hub in
Tokyo. Operating revenues attributed to United's North America
segment were approximately $11.2 billion in 1997, $10.7 billion in
1996, and $9.6 billion in 1995. Operating revenues attributed to
United's international segment were approximately $6.1 billion in
1997, $5.6 billion in 1996 and $5.3 billion in 1995.
Since October 1994, United has operated a service, Shuttle by
United (R) within its domestic segment. This service is designed to
compete with low-cost carriers on routes under 750 miles. While
Shuttle by United is principally concentrated on the West Coast, it
has expanded to offer approximately 466 daily flights on 24 routes
between 20 cities in the western United States. Shuttle by United
provides critical feed traffic, at competitive prices, for United.
Pacific. Via its Tokyo hub, United provides passenger service
between its U.S. gateway cities (Chicago, Honolulu, Los Angeles, New
York, and San Francisco) and the Asian cities of Bangkok, Beijing,
Hong Kong, Seoul, Shanghai and Singapore. United provides nonstop
service between Chicago and Hong Kong; between San Francisco and each
of Hong Kong, Osaka, Seoul and Taipei; between Los Angeles and each
of Hong Kong and Osaka; and between Honolulu and each of Tokyo and
Osaka. Additionally, United provides service between Osaka and
Seoul, and between Hong Kong and each of Singapore and New Delhi.
During 1997, United served the Guam-Osaka and Manila-Seoul markets,
but on February 20, 1998, all Guam service and all Manila passenger
service were terminated. Cargo service in Manila continues.
On January 30, 1998, the U.S. and Japanese governments agreed to
expand the 1952 air services agreement between the two countries.
One of the benefits under the new agreement is that certain carriers,
including United, will have no limits on the number of frequencies
they can operate. Accordingly, on April 8, 1998, United will
increase nonstop service between Chicago and Tokyo from six flights
each week to 14 weekly fights. On July 8, 1998, United will begin
daily nonstop service between Chicago and Osaka.
In addition, the agreement allows code-sharing between U.S. and
Japanese carriers. The new agreement also settles long-standing
disputes regarding the utilization of "beyond Japan" flying rights.
United holds significant traffic rights beyond Japan and as capacity
increases at Japan's two major airports, Narita and Kansai, United
plans to add service from Japan to other Asian points.
United serves the South Pacific market with flights between
Sydney and each of Los Angeles and San Francisco, and between
San Francisco and each of Auckland and Melbourne. In 1997, United
was the leading U.S. carrier in the Pacific in terms of available
seat miles. United's Pacific operations accounted for 20% of
United's revenues in 1997.
Europe. United provides nonstop passenger service between six
U.S. cities and London, as well as service between London and each of
Amsterdam and New Delhi; nonstop service between Paris and each of
Chicago, San Francisco, and Washington Dulles; nonstop service
between Washington Dulles and each of Amsterdam, Brussels, Frankfurt,
Milan and Zurich (discontinued as of March 1, 1998); and nonstop
service between Chicago and each of Dusseldorf and Frankfurt. In
April 1997, United initiated a second nonstop flight between Chicago
and London Heathrow and plans to add a third seasonal flight in April
1998, pending government approval. New service between Munich and
Washington Dulles will begin June 1998. In 1997, United's Atlantic
operations accounted for 10% of United's revenues.
The European Commission is investigating transatlantic
alliances, including the alliance between United, Lufthansa, and SAS,
and their impact upon competition. The Commission has proposed
certain conditions, such as frequency reductions, slot forfeitures,
prohibitions on combining frequent flyer programs, and restrictions
on display screens of computer reservation systems, which, if
implemented, may impair the efficiency of United's alliance with
Lufthansa and SAS.
Latin America. United provides nonstop passenger service
between Miami and each of Buenos Aires, Caracas, Lima, Montevideo,
Rio de Janeiro, Santiago and Sao Paolo; between Los Angeles and each
of Guatemala City, Mexico City, and San Salvador; between New York
Kennedy and each of Buenos Aires, Caracas, Rio de Janeiro, and San
Juan; between Chicago and each of Mexico City, San Juan, and Sao
Paolo; and one flight between Mexico City and each of Denver, San
Francisco, and Washington Dulles. Service between Chicago and Sao
Paulo was initiated in November 1997. United also provides service
between Costa Rica and each of Guatemala City and Mexico City. In
April 1998, United will add nonstop service between Chicago and
Guatemala City, as well as a second flight between Chicago and Mexico
City. In July 1998, nonstop service will be added between Washington
Dulles and San Salvador. In 1997, United's Latin America operations
accounted for 5% of United's revenues.
Alliances and Marketing Arrangements. United has formed
alliances with other airlines to participate in markets that it
cannot serve directly for commercial or governmental reasons. An
alliance is a collaborative marketing arrangement between carriers
which can include joint frequent flyer participation, coordination of
reservations, baggage handling, and flight schedules, and code-
sharing of operations. "Code-sharing" is an agreement under which a
carrier's flights can be marketed under the two-letter airline
designator code of another carrier. Through an alliance, carriers
can provide their customers a seamless global travel network under
their own airline code.
In May 1997, United, Lufthansa, Air Canada, SAS and Thai Airways
formed the Star Alliance (TM), an integrated worldwide transport network
which provides customers with global recognition and a wide range of
other benefits. The Star Alliance should enable its member carriers
to more effectively compete with other worldwide alliances. In
October 1997, Varig joined the alliance. United holds antitrust
immunity with Lufthansa, SAS and Air Canada.
Other alliance air carriers include Aeromar, Aeromexico, Air New
Zealand, ALM Antillean, Aloha, Ansett (which operates in both
Australia and New Zealand), British Midland, Cayman Airways,
Continental Connection, Emirates, Gulfstream International, Mexicana,
Saudi Arabian, and TW Express.
In addition, United has a marketing program in North America,
known as the United Express (R) program, under which independent
regional carriers, utilizing turboprop equipment and some regional
jets, feed United hubs and international gateways. The carriers in
the United Express program provide service to United at 182 airports.
Cargo Service. United's cargo division accounts for
approximately 5% of the Company's operating revenues. In 1997,
United introduced all-cargo service between the U.S. and Asia,
operating four DC10-30F freighter aircraft. United also opened two
cargo facilities: a cargo consolidation center in Charlotte, North
Carolina to serve the Southeastern and mid-Atlantic states and a
transfer center at John F. Kennedy International Airport in New York.
A large cargo transfer facility is currently being constructed in
Honolulu and is scheduled to open during the second quarter of 1998.
The Hawaii facility is expected to be a major connection point for
Japanese traffic to and from the U.S. mainland, and for local traffic
in and out of Hawaii.
Frequent Flyer Program. United established the Mileage Plus (R)
frequent flyer program to retain and develop passenger loyalty by
offering awards to frequent travelers. Mileage Plus members earn
mileage credit for flights on United, Shuttle by United, United
Express and certain other participating airlines, or for utilizing
the services of other program participants, such as hotels, car
rental companies and bank credit card issuers. Mileage credits can
be redeemed for free, discounted or upgraded travel awards on United
and other participating airlines, or for other travel industry
awards. The redemption of awards under the program is restricted
with expiration dates, blackout periods and capacity controlled
bookings, limiting the use of the awards on certain flights.
When an award level is attained, liability is recorded for the
incremental costs of accrued credits based on expected redemptions.
United's incremental costs include the additional costs of providing
service for what would otherwise be a vacant seat, such as fuel,
meal, personnel and ticketing costs. The incremental costs do not
include any contribution to overhead or profit.
At December 31, 1997, the estimated number of outstanding awards
was approximately 6.2 million, as compared with 6.1 million at the
end of the prior year. United estimates that 4.7 million of such
awards will ultimately be redeemed and, accordingly, has recorded a
liability amounting to $195 million, which is unchanged from the
previous year. Based on historical data, the difference between the
awards expected to be redeemed and the total awards outstanding
arises because: (1) some awards will never be redeemed, (2) some
will be redeemed for non-travel benefits, and (3) some will be
redeemed on partner carriers.
The number of Mileage Plus awards used on United in 1997 was 1.8
million, compared to 1.5 million in 1996 and 1.8 million in 1995.
Such awards represented 8% of United's total revenue passenger miles
in 1997, 7% in 1996 and 8% in 1995. These low percentages, as well
as seat availability restrictions on the use of travel awards, keep
displacement, if any, of revenue passengers by users of Mileage Plus
awards to a minimum.
Industry Conditions
- -------------------
Seasonality. 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.
Thus, operating results for the Company are generally better in the
second and third quarters.
Competition. The airline industry is highly competitive. In
domestic markets, new and existing carriers are free to initiate
service on any route. United's domestic competitors include all of
the other major U.S. airlines as well as regional carriers, some of
which have lower cost structures than United.
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 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 because of its ability to generate U.S. origin-destination
traffic from its integrated domestic route systems, and because
foreign carriers are prohibited by U.S. law from carrying local
passengers between two points in the United States. On the other
hand, U.S. carriers in many cases are constrained from carrying
passengers to points beyond designated international gateway cities
due to limitations in air service agreements or restrictions imposed
unilaterally by foreign governments. To compensate for these
structural limitations, U.S. and foreign carriers have entered into
alliances and marketing arrangements which allow the carriers to
provide feed to each other's flights. (See "Airline Operations -
Alliances and Marketing Arrangements").
Distribution Channels. Travel agents account for a substantial
percentage of United's sales. In September 1997, as part of its
ongoing effort to control costs, United reduced the base travel
agency commission rate to 8% for tickets sold within the U.S., and
imposed a cap of $50.
The use of electronic distribution systems is also an important
cost control initiative of United. In 1997, United expanded the
capabilities of its web site by offering Internet ticketing. The
U.S. government and the European Commission are considering placing
restrictions on the Internet products offered directly by the
airlines as they review the larger issue of additional restrictions
on the industry of computer reservation systems.
Government Regulation
- ---------------------
General. All carriers engaged in air transportation in the
United States are subject to regulation by the U.S. Department of
Transportation ("DOT"). The DOT has authority to: issue
certificates of public convenience and necessity for domestic air
transportation and, through the Federal Aviation Administration
("FAA"), air-carrier operating certificates; authorize the provision
of foreign air transportation by U.S. carriers; prohibit unjust
discrimination; prescribe forms of accounts and require reports from
air carriers; regulate methods of competition, including the
provision and use of computerized reservation systems; and administer
regulations providing for consumer protection, including regulations
governing the accessibility of air transportation facilities for
handicapped individuals. United holds certificates of public
convenience and necessity, as well as air-carrier operating
certificates, and therefore is subject to DOT regulations. The FAA
administers the U.S. air traffic control system and oversees aviation
safety issues.
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.
United's ability to serve some foreign markets and its expansion in
many foreign markets is presently restricted by lack of aviation
agreements allowing such service or, in some cases, by the
restrictive terms of such agreements.
In connection with its international services, United is
required to file with the DOT and to 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. Shifts in United States or foreign
government aviation policies can lead to the alteration or
termination of existing air service agreements between the U.S. and
other governments, and could diminish the value of United's
international route authority. United's operating rights under the
air services agreements may not be preservable in such cases.
Airport Access. Take-off and landing rights ("slots") at
Chicago O'Hare International Airport, New York John F. Kennedy
International, New York LaGuardia and Reagan National airports, are
limited by the "high density traffic rule." Under this rule, slots
may be bought, sold or traded. The DOT, however, can require
carriers to relinquish slots for reallocation if they fail to meet
certain minimum-use standards.
For the past few years, the DOT has been confiscating slots from
incumbent carriers at Chicago O'Hare, including United, to provide
more opportunities for foreign carriers. In 1997, the DOT began
creating slots at certain slot-controlled airports to allow the entry
of start-up carriers. United has petitioned the DOT for the return
of United's confiscated O'Hare slots under the theory that
confiscation is no longer necessary if the DOT has the ability to
create new slots. United holds a sufficient number of slots at
airports subject to the high-density rule, but its ability to expand
could be constrained if sufficient additional slots are not available
on satisfactory terms.
United currently has a sufficient number of leased gates and
other airport facilities, but expansion by United may be constrained
at certain airports by insufficient availability of gates on
attractive terms or other factors, for example, noise restrictions.
Safety. The FAA has regulatory jurisdiction over flight
operations generally, including equipment, ground facilities,
maintenance, communications and other matters. 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 when aircraft or engines are
removed from service prematurely in order to undergo mandated
inspections or modifications. 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.
Civil and criminal sanctions may be assessed for not complying with
the ADs.
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 "Stage 2" and
"Stage 3" terminology is industry vernacular referring to permissible
noise levels under various aircraft operating conditions. The
specific noise limitations are technical, but in general, Stage 3
aircraft will produce less overall noise than Stage 2 aircraft. By
the year 2000, all commercial aircraft within the United States must
meet the stricter Stage 3 noise requirements or be grounded. United
will generally meet Stage 3 requirements by retiring Stage 2 aircraft
and replacing them with newer Stage 3 aircraft, and by retrofitting
the remaining Stage 2 aircraft with special equipment (known in the
industry as "hushkits"). Most of the hushkits will be acquired
through a swap of retired or retiring DC10-10 aircraft. The cost of
acquiring the remaining hushkits is included in the Company's capital
commitments disclosed under "Liquidity and Capital Resources" of Item
7.
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 in based on the age, construction and use of
existing tanks. United operates a number of underground and above-
ground storage tanks throughout its system. They are 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. In 1998, United will complete the upgrades.
United has been identified as a potentially responsible party in
state and federal recovery actions involving soil and groundwater
contamination. United estimates the total cost of remediation to
range from $20 million to $40 million.
United meets EPA emissions standards by replacing older aircraft
with newer models and by upgrading to newer engines which have more
efficient fuel burn.
Other Government Matters. Other federal agencies with
jurisdiction over certain aspects of United's operations include the
Department of Justice (Antitrust Division and Immigration and
Naturalization Service); the Equal Employment Opportunity Commission;
the Department of Labor (Occupational Safety and Health
Administration, and 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).
United is also subject to varying degrees of regulation by foreign
governments. In time of war or certain other national emergencies,
the U.S. government may require United to provide airlift services
under the Civil Reserve Air Fleet Program.
Fuel
- ----
United's results of operations are significantly affected by the
price and availability of jet fuel. It is estimated that every $.01
change in the average annual price-per-gallon of jet fuel causes a
change of approximately $30 million in United's annual fuel costs.
The average price per gallon of jet fuel in 1997 declined 3.7%.
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. To assure adequate supplies of fuel and to
provide a measure of control over fuel costs, United ships fuel on
major pipelines and stores fuel close to its major hub locations.
Insurance
- ---------
United carries liability insurance of a type customary in the
air transportation industry, in amounts which it deems adequate,
covering passenger liability, public liability and property damage
liability. The amount recoverable by United under aircraft-hull
insurance covering all damage to its aircraft is not subject to any
deductible amount in the event of a total loss.
Employees - Labor Matters
- -------------------------
At December 31, 1997, the Company had more than 91,000
employees. Approximately 61% of United's employees are 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, 1997 are as follows:
Number of Contract Open
Employee Group Employees Union For Amendment
-------------- --------- ----- -------------
Mechanics, ramp
service & other
ground employees 25,653 IAM July 22, 2000
Flight attendants 21,283 AFA March 1, 2006
Pilots 9,087 ALPA April 12, 2000
___________________________
In October 1997, the flight attendants ratified a new ten-year
collective bargaining agreement with the Company.
ITEM 2. PROPERTIES.
Flight Equipment
- ----------------
As of December 31, 1997, United's operating aircraft fleet
totaled 575 jet aircraft, of which 271 were owned and 304 were
leased. These aircraft are listed below:
Average Average
Aircraft Type No. of Seats Owned Leased* Total Age (Years)
------------- ------------- ----- ------- ----- -----------
A319-100 126 0 4 4 0
A320-200 144 8 33 41 3
B727-200 147 59 16 75 19
B737-200 109 28 0 28 29
B737-200A 109 24 0 24 18
B737-300 129 10 91 101 9
B737-500 112 27 30 57 6
B747-100 444 9 0 9 26
B747-200 347 2 7 9 19
B747-400 384 10 21 31 5
B757-200 188 39 55 94 6
B767-200 168 19 0 19 15
B767-300 206 5 18 23 5
B777-200 292 13 17 30 1
DC10-10 288 15 7 22 21
DC10-30 298 1 3 4 19
DC10-30F N/A 2 2 4 18
TOTAL OPERATING
FLEET 271 304 575 11
=== === === ==
* 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 297 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, 1997, 68 of the 271 aircraft owned by United
were encumbered under debt agreements.
In 1997 United took delivery of 30 new aircraft: four A319-100s,
five A320-200s, five B747-400s, two B757-200s, and fourteen B777-
200s. United also retired 19 aircraft: ten B737-200s, five B747-100s
and four DC10-10s.
As of December 31, 1997, United had on order twenty-four A319-
100s, twelve A320-200s, nineteen B747-400s, four B757-200s, eight
B767-300s, six B777-200s, all of which are scheduled for delivery
between 1998 and 2002. The following table sets forth United's
firm aircraft orders and expected delivery schedules as of
December 31, 1997:
Aircraft Type Number To Be Delivered Delivery Rate
------------- ------ --------------- -------------
A319-100 24 1998-1999 0-3 per month
A320-200 12 1998-1999 0-3 per month
B747-400 19 1998-2002 0-2 per month
B757-200 4 1998-1999 0-1 per month
B767-300 8 1998-2000 0-1 per month
B777-200 6 1998-1999 0-2 per month
Total 73
On February 26, 1998, the UAL board of directors approved an order
for 30 new Airbus aircraft, which are not included in the above schedule.
For further discussion, see "Liquidity and Capital Resources - Capital
Commitments" of Item 7.
Ground Facilities and Equipment
- -------------------------------
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. United also has
leased ticketing, sales and general office space in the downtown and
outlying areas of most of the larger cities in its system. In
suburban Chicago, United owns a 106-acre complex consisting of more
than 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 2007, with an option to extend for 10 years. United also
has a major facility at the Oakland, California airport, dedicated to
airframe maintenance.
United's Indianapolis Maintenance Center ("IMC") is operated
under a lease with the Indianapolis Airport Authority that expires in
2031. IMC is a major aircraft maintenance and overhaul facility and
is being used for maintenance of Boeing B737, B757 and B767 aircraft.
United is expanding its operations at IMC to maintain its fleet of
Airbus A320 aircraft at the facility beginning in 1998.
At Denver International Airport, United operates under a lease
and use agreement expiring in 2025, and occupies 44 gates and more
than 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 and will
accommodate 36 flight simulators and more than 90 computer-based
training stations.
ITEM 3. LEGAL PROCEEDINGS.
No material legal actions pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
United is a wholly-owned subsidiary of UAL.
Item 6. Selected Financial Data and Operating Statistics
- ----------------------------------------------------------
<TABLE>
<CAPTION>
(In Millions, Except Rates) Year Ended December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $17,335 $16,317 $14,895 $13,887 $13,168
Earnings (loss) before
extraordinary item and
cumulative effect of
accounting changes 941 601 371 66 (17)
Extraordinary loss on
early extinguishment of
debt, net of tax (9) (67) (30) - (19)
Cumulative effect of
accounting changes,
net of tax - - - (26) -
Net earnings (loss) 932 534 341 40 (36)
Total assets at year-end 16,107 12,901 11,393 11,952 12,153
Long-term debt and
capital lease obligations,
including current portion 4,259 3,309 3,553 4,015 3,614
Revenue passengers 84 82 79 74 70
Revenue passenger miles 121,426 116,697 111,811 108,299 101,258
Available seat miles 169,110 162,843 158,569 152,193 150,728
Passenger load factor 71.8% 71.7% 70.5% 71.2% 67.2%
Breakeven passenger
load factor 66.0% 66.0% 66.1% 68.2% 65.5%
Passenger revenue per
passenger mile (in cents) 12.6 12.4 11.8 11.3 11.6
Operating revenue per
available seat mile
(in cents) 10.3 10.0 9.4 9.1 8.7
Operating expense per
available seat mile
(in cents) 9.5 9.3 8.9 8.8 8.5
Operating expense per
available seat mile
excluding ESOP charges
(in cents) 8.9 8.9 8.6 8.6 -
Fuel gallons consumed 2,964 2,883 2,822 2,697 2,699
Average price per gallon
of jet fuel (in cents) 69.5 72.2 59.5 58.8 63.6
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -----------------------------------------------------------
This section contains forward-looking statements which
are identified with an asterisk (*). Factors that
could significantly impact the expected results
referenced in the forward-looking statements are listed
in the last paragraph of the section, "Outlook for
1998."
On July 12, 1994, the stockholders 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 is 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 $777 million at December 31, 1997,
compared to $624 million at December 31, 1996. Operating
activities during the year generated $2.562 billion and the
Company's sale of its interest in the Apollo Travel Services
Partnership provided $539 million in cash proceeds (see
"Sale of Affiliate"). Cash was used primarily to fund net
additions to property and equipment.
Property additions, including aircraft, aircraft spare
parts, facilities and ground equipment, amounted to $2.812
billion, while property dispositions resulted in proceeds of
$83 million. In 1997, United took delivery of fourteen
B777, five B747, two B757, five A320 and four A319 aircraft.
Twenty-four of these aircraft were purchased and six were
acquired under capital leases. Three of the aircraft
purchased during the year were later sold and then leased
back. Additionally, United acquired two B767 and one DC10-
10 off-lease during 1997.
Financing activities included the early extinguishment
of $135 million in principal amount of various debt
securities, mandatory repayments of long-term debt totaling
$135 million, payments under capital lease obligations of
$146 million, deposits of an equivalent $112 million in
Japanese yen, German marks and French francs with certain
banks in connection with the financing of certain aircraft
acquired under capital lease transactions, as well as the
issuance of $597 million of enhanced pass through
certificates.
Included in cash and cash equivalents at December 31,
1997 were $111 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, 1997, United had a working capital
deficit of $2.381 billion as compared to $2.381 billion at
December 31, 1996. Historically, United has operated with a
working capital deficit and, as in the past, United expects
to meet all of its obligations as they become due. In
addition, United may from time to time repurchase debentures
on the open market, in privately negotiated purchases or
otherwise.
United has available a $750 million revolving credit
facility, as well as a separate $227 million short-term
borrowing facility, as described in Note 6 "Short-Term
Borrowings" in the Notes to Consolidated Financial
Statements.
Prior Years. Operating activities in 1996 generated
cash flows of $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. Property additions
amounted to $1.537 billion, while property dispositions
resulted in proceeds of $55 million.
Operating activities in 1995 generated cash flows of
$1.587 billion. Cash was used primarily to repay long-term
debt, reduce short-term borrowings and to 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.
Capital Commitments -
At December 31, 1997, commitments for the purchase of
property and equipment, principally aircraft, approximated
$5.6 billion, after deducting advance payments. Of this
amount an estimated $2.6 billion is due to be spent in 1998.
These amounts do not include a recent order with Airbus
Industrie for an additional 10 A319 and 20 A320 aircraft to
be delivered through 2001. The aircraft included in this
latest order are expected to be used to satisfy growth
opportunities, and thus, the Company now expects its
passenger fleet to grow by at least 30 aircraft by the year
2002. For further details, see Note 13 "Commitments,
Contingent Liabilities and Uncertainties" in the Notes to
Consolidated Financial Statements.
Capital Resources -
Funds necessary to finance aircraft acquisitions are
expected to be obtained from internally generated funds,
external financing arrangements or other external sources.
At December 31, 1997, 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 December
1997, S & P affirmed its ratings and revised its outlook to
positive from stable on United.
Results of Operations
- ---------------------
Summary of Results -
United's earnings from operations were $1.226 billion
in 1997, compared to operating earnings of $1.130 billion in
1996. United's net earnings in 1997 were $932 million,
compared to net earnings of $534 million in 1996. These
earnings include extraordinary losses of $9 million and $67
million, after tax, on early extinguishment of debt, in 1997
and 1996, respectively. In addition, 1997 includes an after-
tax gain on the ATS/Galileo transaction (see "Sale of
Affiliate") of $235 million.
1997 Compared with 1996 -
- -----------------------
Operating Revenues. Operating revenues increased
$1.018 billion (6%) and United's revenue per available seat
mile (unit revenue) increased 2% to 10.25 cents. Passenger
revenues increased $877 million (6%) due to a 4% increase in
United's revenue passenger miles and a 2% increase in yield
to 12.55 cents. Available seat miles across the system were
up 4% year over year resulting in a slight increase to
system passenger load factor of 0.1 points to 71.8%. The
following analysis by market is based on information
reported to the U.S. Department of Transportation ("DOT"):
Latin American revenue passenger miles increased 2%,
despite no increase in capacity. Strengthening economies in
Latin American countries as well as an improved mix of high-
yield passengers helped produce an 8% increase in yield.
Atlantic revenue passenger miles increased 20% on 19% higher
capacity reflecting increased frequencies and the
utilization of larger B777 aircraft. Strong U.S. and
European economies provided a positive pricing environment
resulting in a 3% increase in Atlantic yield. Pacific
revenue passenger miles and yield remained flat despite 3%
higher capacity reflecting a weak Japanese economy and a
stronger U.S. dollar. Domestic revenue passenger miles
increased 3% on 2% higher capacity. Domestic yield
increased 1%, despite the fact that the U.S. airline ticket
tax was in effect for only four months of 1996 versus ten
months of 1997. New legislation, effective October 1, 1997,
includes a gradual reduction in the 10% U.S. airline ticket
tax to 7.5% by the year 2002, a phasing in of a $3 "head
tax" per domestic flight segment over the same period, an
increase in round-trip international departure and arrival
taxes from $6 to $24 per passenger and a tax on the purchase
of frequent flyer miles. The Company expects that the new
legislation will increase United's annual tax burden by
approximately $80 million, but is unable to determine how
much of this increase it will be able to pass on to its
customers.
Cargo revenues increased $119 million (15%) on
increases of 24% in freight ton miles and 6% in mail ton
miles, as a result of a new dedicated freighter operation
utilizing four DC10-30s and the introduction of long-range
B777-200B aircraft. A 5% lower freight yield was only
partially offset by a 2% higher mail yield for an overall
decrease in cargo yield of 4%.
Other operating revenues increased $22 million (2%)
due to increases in frequent flyer program partner related
revenues and fuel sales to third parties, partially offset
by the loss of ATS revenues resulting from its sale in July
1997 (see "Sale of Affiliate").
Operating Expenses. Operating expenses increased $922
million (6%) and United's cost per available seat mile
increased 2% from 9.33 to 9.53 cents, including ESOP
compensation expense. Without the ESOP compensation
expense, United's 1997 cost per available seat mile would
have been 8.94 cents, an increase of less than 1% from 1996.
ESOP compensation expense increased $302 million (44%),
reflecting the increase in the estimated average fair value
of ESOP stock committed to be released to employees as a
result of UAL's higher common stock price. Salaries and
related costs increased $299 million (6%) as a result of
increased staffing in certain customer-contact positions, as
well as mid-term wage adjustments which took effect July 1,
1997. Commissions increased $42 million (3%) due to
increased commissionable revenues, partially offset by the
change in the commission structure which United implemented
in the third quarter of 1997. United lowered the base
commission paid to travel agents from 10% to 8% (up to a
maximum of $50) on all tickets purchased in the U.S. and
Canada for both domestic and international travel. This
action is expected to save approximately $100 million
annually in commission costs. Purchased services increased
$98 million (8%) due principally to volume-related increases
in computer reservations fees, credit card discounts and
communication charges. Aircraft maintenance increased $154
million (34%) due to increased purchased maintenance as well
as the timing of maintenance cycles. Depreciation and
amortization decreased $35 million (5%) despite the
acquisition of new aircraft, due to lower depreciation on
DC10-10 aircraft which are scheduled for retirement, gains
on asset sales of $23 million in 1997 compared to $11
million in 1996, and a $30 million charge in 1996 to reduce
the carrying value of aircraft seats being replaced.
Aircraft fuel decreased $21 million (1%) despite a 3%
increase in consumption, due to a 4% decrease in the price
of fuel from 72.2 cents to 69.5 cents a gallon.
Other Income and Expense. Other income (expense)
amounted to $262 million in income in 1997 compared to $160
million in expense in 1996. Interest capitalized, primarily
on aircraft advance payments, increased $27 million (35%).
Interest income increased $7 million (16%) due to higher
investment balances. In addition, 1997 included a $275
million gain on the sale of ATS and a $103 million gain on
the initial public offering of Galileo stock. 1996 included
a $20 million charge for the settlement of litigation
related to the travel agency commission cap implemented by
the Company in February 1995.
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 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. A weaker
Japanese yen versus the dollar had a significant negative
impact on 1996 Pacific yield. 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 the increase in the estimated average fair value
of ESOP stock committed to be released to employees as a
result of UAL's higher common stock price. 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-
contact 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 $52 million (7%) due principally to a $30 million
charge to reduce the carrying value of aircraft seats.
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 $241 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 Galileo International 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.
Other Information
- -----------------
Sale of Affiliate -
In July 1997, United completed the sale of its
interest in the Apollo Travel Services Partnership ("ATS"),
a 77% owned affiliate whose accounts were consolidated, to
Galileo International, Inc. ("Galileo"), heretofore a 38%
owned affiliate accounted for under the equity method, for
$539 million in cash. This transaction resulted in a pre-
tax gain of approximately $405 million. Of this amount,
$275 million was recognized during the third quarter and the
balance will be recognized over the next 25 years, the
estimated remaining life of the assets acquired by Galileo.
Galileo raised a portion of the proceeds used to
purchase ATS through the completion of an initial public
offering of 16,799,700 shares of its common stock,
representing 16.0% of its economic interest, at $24.50 per
share for net proceeds of approximately $390 million. This
transaction resulted in a reduction of the Company's
ownership in Galileo from 38% to 32%. In accordance with
the Company's policy of recognizing gains or losses on the
sale of a subsidiary's stock, based on the difference
between the offering price and the Company's carrying amount
of such stock, the Company recognized a pre-tax gain of $103
million during the third quarter. Pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 109, the Company
also recorded $40 million of deferred taxes related to this
gain.
In connection with the sale, United entered into an
additional services agreement under which the Company will
provide certain marketing and other services designed to
increase the competitiveness of Galileo's business and to
generate additional bookings and revenues for Galileo.
Under this agreement, United could receive up to $154
million (on a present value basis) in the sixth year
following the sale, based on specified improvements in air
booking revenues over a five-year period.
United continues to account for Galileo under the
equity method and will continue to purchase computer
reservations services under its existing services agreement
with Galileo.
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
stockholders. The 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, the issuance of equity securities and the ability to
furlough employees.
Consistent with the various agreements supporting the
July 1994 recapitalization, in 1997 employees represented by
the Air Line Pilots' Association, International ("ALPA") and
the International Association of Machinists and Aerospace
Workers ("IAM") ratified mid-term wage adjustments providing
for 5% increases in wage rates in July 1997 and 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 provided for lump sum
payments for all IAM employees and increases in hourly
license premium and skill pay for mechanics. These
agreements also provide for restoration of wage rates for
the two groups in the year 2000 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% in the year 2000.
Also during the year, the Company announced the
details of the mid-term wage adjustments for United States
salaried and management employees. Salaried employees
received a 5% increase in July 1997, as well as a lump-sum
payment, and will receive an additional 5% increase in July
1998. Management employees received a 4% increase in July
1997, and will receive an additional 4% increase in July
1998. Also, management employees not participating in the
Company's Incentive Compensation Plan will participate in a
three-year profit-sharing plan that could pay an additional
amount in 1999 and 2000, if the Company meets specific pre-
tax earnings objectives in 1998 and 1999, respectively.
These employees already received the maximum annual profit
sharing payout, 3.75% of annual wages, in February 1998,
based on 1997's financial performance.
On October 1, 1997, the Association of Flight
Attendants ("AFA") ratified a new contract which will remain
in effect through March 1, 2006. Included in the contract
was a lump sum payment of 7% in December 1997 and future
lump sum payments of 4% in December 1998 and 1999 and 5% in
2001, 2003 and 2005; as well as minimum 2% wage increases in
2000, 2002 and 2004. Additionally, the contract includes a
series of arbitrations beginning in 2001 which can award
additional compensation increases, subject to meeting Vision
2000 goals as discussed below. The agreement also provides
for benefits and work rule changes and a number of service
quality and productivity enhancements designed to help the
Company achieve its customer satisfaction objectives.
The wage, benefit and work-rule adjustments outlined
above are consistent with the Company's objective, known as
Vision 2000, to put employee compensation on a competitive
level with peer group compensation at the conclusion of the
agreements outlined above. The ultimate cost to the Company
of Vision 2000, particularly given that peer group
compensation is subject to change between now and the
conclusion of the agreements, is not determinable. However,
as a result of these changes, the Company expects that its
annual Salaries and related costs will increase at a faster
rate than its major competitors from now through the year
2000.
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 may 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.
By carrying passengers and cargo in both directions
between the U.S. and almost every major economic region in
the world and by selling its services in each local
currency, United attempts to mitigate its exposure to
fluctuations in any single foreign currency. The Company's
biggest net exposures are typically for Japanese yen, Hong
Kong dollars and Australian dollars. During 1997, yen-
denominated operating revenue net of yen-denominated
operating expense was approximately 62 billion yen
(approximately $541 million), Hong Kong dollar-denominated
operating revenue net of Hong Kong dollar-denominated
operating expense was approximately 1,692 million Hong Kong
dollars (approximately $219 million) and Australian dollar-
denominated operating revenue net of Australian dollar-
denominated operating expense was approximately 218 million
Australian dollars (approximately $161 million). United
hedges some of the risk of exchange rate volatility on its
anticipated future net yen and net Hong Kong dollar cash
flows by purchasing put options for each respective
currency. To reduce some of the costs of this hedging
program, the Company also sells call options in each
currency from time to time. United attempts to reduce its
exposure to transaction gains and losses by converting
excess local currencies generated to U.S. dollars and by
entering into currency forward or exchange contracts. The
total notional amount of outstanding currency options and
forward exchange contracts, and their respective fair market
values as of December 31, 1997, are summarized in Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
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.
In January 1998, the governments of Japan and the
United States announced details of a new four-year aviation
agreement which liberalizes the aviation market between the
U.S. and Japan. Under the accord, United has been
designated an "incumbent carrier" and as such, will be
permitted to offer service between any points in the U.S.
and any points in Japan and will also be entitled to fly
beyond Japan to other points in Asia without restriction.
Further, United will be able to code-share flights with
Japanese, third country or other U.S. airlines if it
chooses. While these rights give more flexibility to the
Company than it had under the previous U.S.-Japan aviation
agreement, many of United's competitors also received
benefits in the form of greater access to the U.S.-Japan
market. Further, access to Tokyo's Narita airport is
constrained by current capacity limitations on takeoff and
landing slots. Thus, while supportive of the new agreement,
the Company is unable to predict what overall effect, if
any, the new agreement will have on its future financial
results as long as the current capacity limitations at
Narita are in existence. However, upon completion of a
second runway at Narita, the Company expects the current
capacity limitations to be relaxed and believes it will be
able to realize significant financial benefits as a result
of the flexibility received under the new U.S.-Japan
aviation agreement.*
Deferred Tax Assets -
United's consolidated balance sheet at December 31,
1997 includes a net deferred tax asset of $162 million,
compared to $350 million at December 31, 1996. The net
deferred tax asset is composed of approximately $2.240
billion of deferred tax assets and $2.078 billion of
deferred tax liabilities. The deferred tax assets include,
among other things, $918 million related to obligations for
postretirement and other employee benefits, $398 million
related to gains on sales and leasebacks, $382 million
related to rent expense and $137 million related to
alternative minimum tax ("AMT") credit carryforwards.
Management believes it is more likely than not that future
taxable income will be sufficient to utilize the deferred
tax assets at December 31, 1997.*
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.
Year 2000 Compliance -
Over the next two years, most large companies will face
a potentially serious business problem because many software
applications and computer equipment developed in the past
may not properly recognize calendar dates beginning in the
year 2000. This problem could cause computers to either
shut down or provide incorrect data. United began taking
measures to address this problem in late 1995 and has
created a Year 2000 Project office, headed by a senior
officer of the Company, to manage and coordinate the
Company's efforts to identify and fix critical date-
sensitive systems. The scope of the Company's efforts is
divided into two major phases, review of internally used
software as well as review of other potential operational
impacts and relationships with key business partners. The
status of the Company's efforts in each of these areas is as
follows:
The Company has completed its assessment of over 40,000
mainframe based and network based programs used internally
in connection with key business applications, and has
estimated that it will cost approximately $15 million to
modify these programs to make them Year 2000 compliant.
Through December 31, 1997, $4 million has been spent and
recognized as expense in the Company's results of
operations. The Company's plan is to have all applications
not compliant as of December 31, 1997 modified and tested by
December 31, 1998.
United has not yet completed its assessment of the
impact of Year 2000 on operational systems such as aircraft
avionics, flight simulators and airport operations as well
as relationships with key business partners, including the
FAA, other governmental agencies and suppliers. This
assessment involves a five stage process: Identification,
Assessment of Impacts, Development of Remediation Approach,
Prioritization of Efforts, and Testing and Implementation of
Remediation Approach. The Company will carry out this task
through a company-wide effort, assisted by consultants, to
address internal issues, and jointly with industry trade
groups, to address issues related to key business partners
which are common to other air carriers. The Company has not
completed the development of the remediation approach for
all affected areas. As a result, the Company cannot
estimate what the total cost will be to implement
remediation efforts for all critical operational systems but
it is possible that such costs will be material. The
Company expects to complete the assessment and development
stages of this plan by September 1998, at which time it
expects to be able to make a reasonable cost estimate.
Implementation of all remediation efforts is scheduled to be
completed by March 31, 1999.
The Company has started an ongoing program to review
the status of key supplier Year 2000 compliance efforts.
While the Company believes it is taking all appropriate
steps to assure Year 2000 compliance, it is dependent on key
business partner compliance to some extent. The Year 2000
problem is pervasive and complex as virtually every computer
operation will be affected in some way. Consequently, no
assurance can be given that Year 2000 compliance can be
achieved without costs and uncertainties that might affect
future financial results or cause reported financial
information not to be necessarily indicative of future
operating results or future financial condition.
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.*
New Accounting Pronouncements -
The Financial Accounting Standards Board ("FASB") has
issued SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for displaying comprehensive income
and its components in a full set of general purpose
financial statements; SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which
establishes standards for reporting information about
operating segments in financial statements; and SFAS No.
132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" which revises disclosure
requirements for pension and other postretirement benefit
plans. Each of these statements are effective for fiscal
years beginning after December 15, 1997, and are not
expected to have a material impact on the Company's
financial position or results of operations.
Outlook for 1998 -
The recent economic downturn in Asia, where currency
devaluations and debt crises have negatively affected growth
through most of the region and pushed some countries into
recession, has caused a fall-off in Pacific revenue
passenger miles through the first two months of the year.
As a result, the Company expects full-year system revenues
to be lower than originally planned when it released 1998
revenue and cost guidance last December. In keeping with
the Company's contingency planning, United is taking steps
to respond to and offset the effects on profits from the
weakness of the Asian market. These measures include the re-
allocation of capacity and the revision of discretionary
spending plans. Furthermore, some costs, such as fuel, are
expected to be below earlier estimates, resulting in lower
than previously anticipated full-year expenses.
All factors considered, the Company anticipates
continued strong performance in 1998. Real Gross Domestic
Product in the U.S. is assumed to continue to grow
moderately at a rate of about 2.5% and the system capacity
of U.S. airlines is expected to grow at around 3% in 1998,
approximately the same as its 1997 growth rate. United's
available seat miles are expected to increase 2.5%, with
3.5% growth domestically and 1.5% growth internationally.
Revenue per available seat mile is forecast to be up
approximately 1%. Costs per available seat mile excluding
ESOP charges are expected to increase approximately 1%.
For the first quarter, United expects total system
revenue per available seat mile to decrease by 3.5% versus
the same period last year, on 2.5% higher capacity. Costs
per available seat mile excluding ESOP charges are expected
to decrease approximately 3% over the first quarter of 1997.
The Company's outlook is consistent with the current First
Call consensus earnings estimate of $1.55 per fully
distributed share for the first quarter.
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, unit revenues, fully distributed
unit costs and fully distributed earnings per share include
the airline pricing environment, industry capacity
decisions, willingness of customers to travel, the success
of the Company's cost control efforts, fuel cost, costs of
safety and security measures, actions of the U.S., foreign
and local governments, the effect of the U.S. excise tax on
travel, foreign currency exchange rate fluctuations, the
Asian economic environment and travel patterns, the economic
environment of the airline industry, the general economic
environment 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.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
- --------------------------------------------------------
Interest Rate Risk - United's exposure to market risk
associated with changes in interest rates relates primarily
to its debt obligations and short-term investments. United
does not use derivative financial instruments in its
investments portfolio. United's policy is to manage
interest rate risk through a combination of fixed and
floating rate debt and entering into swap agreements,
depending upon market conditions. A portion of the
borrowings are denominated in foreign currencies which
exposes the Company to risks associated with changes in
foreign exchange rates. In addition, the Company has placed
foreign currency deposits (primarily for Japanese yen,
French francs and German marks) to meet foreign currency
lease obligations designated in the respective currencies.
The unrealized mark-to-market gains or losses on the foreign
currency obligations are offset by the losses or gains on
the foreign currency deposits.
<TABLE>
<CAPTION>
(In millions) Expected Maturity Dates
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash equivalents
Fixed rate $ 268 $ - $ - $ - $ - $ - $ 268 $ 268
Avg. interest rate 6.00% - - - - - 6.00%
Short term investments
Fixed rate $ 419 $ - $ - $ - $ - $ - $ 419 $ 419
Avg. interest rate 5.87% - - - - - 5.87%
Variable rate $ 90 $ - $ - $ - $ - $ - $ 90 $ 90
Avg. interest rate 5.90% - - - - - 5.90%
Foreign currency deposits
Fixed rate-yen deposits $ - $ - $ - $ - $ - $ 254 $ 254 $ 281
Avg. interest rate - - - - - 3.23% 3.23%
Fixed rate-FF deposits $ - $ - $ - $ - $ - $ 4 $ 4 $ 4
Avg. interest rate - - - - - 5.82% 5.82%
Fixed rate-DM deposits $ 2 $ 2 $ 2 $ 2 $ 2 $ 50 $ 60 $ 60
Avg. interest rate 6.86% 6.86% 6.86% 6.86% 6.86% 6.86% 6.86%
LONG TERM DEBT
U.S. Dollar denominated
Fixed rate debt $ 22 $ 24 $ 25 $ 27 $ 30 $1,373 $1,501 $1,725
Avg interest rate 8.54% 8.54% 8.49% 8.45% 8.45% 8.92% 8.88%
Variable rate debt $ 189 $ 18 $ 18 $ 18 $ 533 $ 25 $ 802 $ 802
Avg interest rate 6.42% 6.19% 6.19% 6.20% 6.15% 6.75% 6.23%
Japanese Yen denominated
Fixed rate debt $ 8 $ 9 $ 9 $ - $ - $ - $ 26 $ 27
Avg interest rate 7.90% 7.90% 7.90% - - - 7.90%
</TABLE>
Foreign Currency Risk - United has established a
foreign currency hedging program using currency forwards and
currency options (purchasing put options or selling call
options) to hedge exposure to the Japanese yen and Hong Kong
dollar. The goal of the hedging program is to effectively
manage risk associated with fluctuations in the value of the
foreign currency, thereby making financial results more
stable and predictable. United does not use currency
forwards or currency options for trading purposes.
<TABLE>
<CAPTION>
(In millions, except Notional Average Estimated
average contract rates) Amount Contract Rate Fair Value
------ ------------- ----------
<S> <C> <C> <C>
Forward exchange contracts
Japanese Yen $ 122 97.53 $ (29)
Currency options
Japanese Yen - Put options $ 200 120.35 $ 14
- Call options $ 132 112.42 $ (1)
Hong Kong Dollar - Put options $ 44 8.11 $ -
- Call options $ 46 7.88 $ (1)
</TABLE>
Price Risk (Aircraft Fuel) - At December 31, 1997, the
Company had contracted to purchase approximately 6% of the
Company's 1998 fuel requirements at an average fixed price
of $0.52 per gallon. To hedge a portion of the remaining
risk associated with changes in the price of aircraft fuel,
United has entered into certain fuel option contracts. The
option contracts, which involve either purchasing call
options and simultaneously selling put options (collar
strategy) or purchasing call options, are designed to
provide protection against sharp increases in the price of
aircraft fuel. In addition, to a limited extent United
trades short-term heating oil futures and option contracts,
which are immaterial.
<TABLE>
<CAPTION>
(In millions, except Notional Average Estimated
average contract rates) Amount Contract Rate Fair Value
------ ------------- ----------
<S> <C> <C> <C>
Purchased call contracts - Crude oil $ 458 $19.95/bbl $ 10
- Heating oil $ 206 $ 0.54/gal $ 3
Sold put contracts - Crude oil $ 403 $19.24/bbl $ (28)
- Heating oil $ 200 $ 0.53/gal $ (13)
</TABLE>
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 statements of consolidated
financial position of United Air Lines, Inc. (a Delaware
corporation) and subsidiary companies as of December 31,
1997 and 1996, and the related statements of consolidated
operations, consolidated cash flows and consolidated
stockholder's equity for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and
the results of their operations and their cash flows for
each of the three years in the period ended December 31,
1997, 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, 1998
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations
(In Millions)
Year Ended December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating revenues:
Passenger $15,342 $14,465 $13,227
Cargo 892 773 757
Other operating revenues 1,101 1,079 911
------ ------ ------
17,335 16,317 14,895
------ ------ ------
Operating expenses:
Salaries and related costs 5,019 4,720 4,527
ESOP compensation expense 987 685 504
Aircraft fuel 2,061 2,082 1,680
Commissions 1,508 1,466 1,471
Purchased services 1,285 1,187 1,062
Aircraft rent 942 952 1,009
Landing fees and other rent 879 851 810
Depreciation and amortization 724 759 707
Aircraft maintenance 603 449 407
Other operating expenses 2,101 2,036 1,869
------ ------ ------
16,109 15,187 14,046
------ ------ ------
Earnings from operations 1,226 1,130 849
------ ------ ------
Other income (expense):
Interest expense (290) (290) (359)
Interest capitalized 104 77 42
Interest income 51 44 85
Equity in earnings of affiliates 66 64 48
Gain on sale of partnership
interest 275 - -
Gain on sale of affiliate's
stock 103 - -
Miscellaneous, net (47) (55) (57)
------ ------ ------
262 (160) (241)
------ ------ ------
Earnings before income taxes
and extraordinary item 1,488 970 608
Provision for income taxes 547 369 237
------ ------ ------
Earnings before extraordinary item 941 601 371
Extraordinary loss on early
extinguishment of debt,
net of tax (9) (67) (30)
------ ------ ------
Net earnings $ 932 $ 534 $ 341
====== ====== ======
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 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 268 $ 203
Short-term investments 509 421
Receivables, less allowance for
doubtful accounts (1997 - $9;
1996 - $24) 1,049 951
Related party receivables 5 4
Aircraft fuel, spare parts and
supplies, less obsolescence
allowance (1997 - $29; 1996 - $31) 355 369
Deferred income taxes 245 228
Prepaid expenses and other 484 446
------ ------
2,915 2,622
------ ------
Operating property and equipment:
Owned -
Flight equipment 10,382 8,393
Advances on flight equipment 972 943
Other property and equipment 2,842 2,989
------ ------
14,196 12,325
Less - Accumulated depreciation
and amortization 5,116 5,380
------ ------
9,080 6,945
------ ------
Capital leases -
Flight equipment 2,221 1,775
Other property and equipment 98 106
------ ------
2,319 1,881
Less - Accumulated amortization 625 583
------ ------
1,694 1,298
------ ------
10,774 8,243
------ ------
Other assets:
Investments in affiliates 223 103
Intangibles, less accumulated
amortization (1997 - $250;
1996 - $230) 703 522
Deferred income taxes - 122
Related party receivables 406 374
Aircraft lease deposits 318 168
Other 768 747
------ ------
2,418 2,036
------ ------
$16,107 $12,901
====== ======
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 Stockholder's Equity 1997 1996
---- ----
<S> <C> <C>
Current liabilities:
Long-term debt maturing within
one year $ 235 $ 164
Related party debt maturing
within one year 97 60
Current obligations under capital
leases 170 130
Advance ticket sales 1,267 1,189
Accounts payable 1,030 987
Accrued salaries, wages and benefits 869 904
Accrued aircraft rent 805 776
Other accrued liabilities 823 793
------ ------
5,296 5,003
------ ------
Long-term debt 2,081 1,633
------ ------
Long-term obligations under
capital leases 1,676 1,322
------ ------
Other liabilities and deferred credits:
Deferred pension liability 364 178
Postretirement benefit liability 1,361 1,290
Deferred gains 1,210 1,151
Accrued aircraft rent 368 352
Deferred income taxes 83 -
Other 451 414
------ ------
3,837 3,385
------ ------
Minority interest - 31
------ ------
Preferred stock committed to
Supplemental ESOP 514 165
------ ------
Stockholder's equity:
Common stock at par, $5.00 par
value; authorized 1,000 shares;
outstanding 200 shares - -
Additional capital invested 29 15
ESOP capital 2,053 1,441
Retained earnings 805 121
Unearned ESOP preferred stock (177) (202)
Other (7) (13)
------ ------
2,703 1,362
------ ------
Commitments and contingent
liabilities (Note 13) ------ ------
$16,107 $12,901
====== ======
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
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents at
beginning of year $ 203 $ 142 $ 444
----- ----- -----
Cash flows from operating activities:
Net earnings 932 534 341
Adjustments to reconcile to net
cash provided by operating activities -
ESOP compensation expense 987 685 504
Extraordinary loss on debt
extinguishment, net of tax 9 67 30
Gain on sale of partnership interest (275) - -
Gain on sale of affiliate's stock (103) - -
Pension funding less than
(greater than) expense 43 (279) (275)
Deferred postretirement benefit
expense 139 130 125
Depreciation and amortization 724 759 707
Provision for deferred income taxes 188 83 214
Undistributed earnings of affiliates (16) (49) (38)
Increase in receivables (232) (4) (60)
Decrease (increase) in related
party receivables (1) (3) 1
Decrease (increase) in other
current assets 2 (104) (107)
Increase in advance ticket sales 78 89 80
Increase (decrease) in accrued
income taxes 11 25 (74)
Increase in accounts payable
and accrued liabilities 24 303 44
Amortization of deferred gains (64) (63) (79)
Other, net 116 224 174
----- ----- -----
2,562 2,397 1,587
----- ----- -----
Cash flows from investing activities:
Additions to property and equipment (2,812) (1,537) (1,111)
Proceeds on disposition of
property and equipment 83 55 459
Proceeds on disposition of
partnership interest 539 - -
Decrease (increase) in short-term
investments (88) 4 432
Decrease (increase) in loans
to affiliates (32) 107 166
Other, net (30) 16 (19)
----- ----- -----
(2,340) (1,355) (73)
----- ----- -----
Cash flows from financing activities:
Proceeds from issuance of
long-term debt 597 - -
Repayment of long-term debt (284) (777) (838)
Principal payments under
capital leases (146) (111) (79)
Dividend to parent company (250) - (600)
Decrease in short-term borrowings - - (269)
Aircraft lease deposits (112) (110) (77)
Other, net 38 17 47
----- ----- -----
(157) (981) (1,816)
----- ----- -----
Increase (decrease) in cash and cash
equivalents during the year 65 61 (302)
----- ----- -----
Cash and cash equivalents at
end of year $ 268 $ 203 $ 142
===== ===== =====
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Stockholder's Equity
(In Millions)
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, 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
----- ----- ----- ----- ---- ---- -----
Year ended December 31, 1997:
Net earnings - - - 932 - - 932
Dividend to parent company - - - (250) - - (250)
Unearned compensation and
amortization from issuance
of ESOP preferred stock - - 993 - (6) - 987
Unearned compensation and
amortization of parent company
restricted stock plan - - - - - 6 6
Other - 14 (381) 2 31 - (334)
----- ----- ----- ----- ---- ---- -----
Balance at December 31, 1997 $ - $ 29 $2,053 $ 805 $(177) $ (7) $2,703
===== ===== ===== ===== ==== ==== =====
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. Certain prior-year financial
statement items have been reclassified to conform to the
current year's presentation.
(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) 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.
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.
At December 31, 1997 and 1996, $440 million and $418
million, respectively, of investments in debt securities
included in cash and cash equivalents and short-term
investments were classified as available-for-sale, and $287
million and $232 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 proceeds from
sales of available-for-sale securities are included in
interest income for each respective year.
(e) Derivative Financial Instruments -
Foreign Currency - From time to time, United enters into
Japanese yen forward exchange contracts to minimize gains and
losses on the revaluation of short-term yen-denominated
liabilities. The yen forwards typically have a 30-day
maturity and are marked to fair value at the end of each
accounting period. The unrealized mark-to-market gains and
losses generally offset the losses and gains recorded on the
liabilities.
United has also entered into forwards and swaps to reduce
exposure to currency fluctuations on yen-denominated capital
lease obligations. The forwards' and swaps' cash flows mirror
those of the capital leases. The premiums on the forwards and
swaps, as measured at inception, are being amortized over
their respective lives as components of interest expense. Any
gains or losses realized upon early termination of these
forwards and swaps are deferred and recognized in income over
the remaining life of the underlying exposure.
Finally, the Company hedges some of the risks of exchange
rate volatility on its anticipated future net yen and net Hong
Kong dollar cash flows by purchasing put options for each
respective currency with little or no intrinsic value. The
amount and duration of these options are synchronized with
specific expected inflows, and thus, the put options have been
designated as a hedge. The Company also sells call options in
each of these currencies from time to time. The premiums on
purchased option contracts are amortized over the lives of the
contracts. Unrealized gains on purchased put option contracts
are deferred until contract expiration and then recognized as
a component of passenger revenue, and unrealized losses on
written call options are recorded in "Miscellaneous, net" at
the end of each accounting period.
Interest Rates - United may from time to time enter into
swaps to reduce exposure to interest rate fluctuations in
connection with certain debt, capital leases and operating
leases. The swaps' cash flows mirror those of the underlying
exposures. The premiums on the swaps, as measured at
inception, are amortized over their respective lives as
components of interest expense. Any gains or losses realized
upon the early termination of these swaps are deferred and
recognized in income over the remaining life of the underlying
exposure.
Aircraft Fuel - United uses a collar option strategy to
hedge a portion of its price risk related to future aircraft
fuel purchases. The collars, which have been designated as a
hedge, involve the purchase of fuel call options with the
simultaneous sale of fuel put options with identical
expiration dates. Premiums on fuel collar option contracts
are deferred and amortized over the life of the contract.
Gains or losses recognized upon contract expiration are
recorded as a component of aircraft fuel expense. In
addition, to a limited extent, United trades short-term
heating oil futures and options contracts. Unrealized losses
on these contracts are recorded currently in income while
unrealized gains are deferred until contract expiration. Both
gains and losses are recorded as a component of aircraft fuel
expense.
(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.
(k) Advertising Costs - Advertising costs, which are
included in other operating expenses, are expensed as
incurred. Advertising expense was $190 million, $184 million
and $194 million in 1997, 1996 and 1995, respectively.
(2) Employee Stock Ownership Plans and Recapitalization
- --------------------------------------------------------
On July 12, 1994, the stockholders 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.
The ESOPs cover employees represented by the Air Line
Pilots' Association, International, the International
Association of Machinists and Aerospace Workers and U.S.
management and salaried 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, four of which have already taken place.
Based on Internal Revenue Code Limitations, shares of the
Class 2 ESOP Preferred Stock are either contributed to the Non-
Leveraged ESOP or allocated as "book entry" shares to the
Supplemental ESOP, annually through the year 2000.
The Leveraged ESOP and Non-Leveraged ESOP are being
accounted for under AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans"
("SOP"). For the Leveraged ESOP, as shares of Class 1 ESOP
Preferred Stock are sold to an ESOP trust, the Company reports
the issuance as a credit to additional capital invested and
records 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 market 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 market 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 $987 million, $685 million
and $504 million in 1997, 1996 and 1995, respectively. During
1997, 2,345,745 shares of Class 1 ESOP Preferred Stock,
190,307 shares of Class 2 ESOP Preferred Stock and 2,534,687
shares of Voting Preferred Stock were allocated to employee
accounts, and another 537,917 shares of Class 2 ESOP Preferred
Stock were allocated in the form of "book entry" shares,
effective December 31, 1996. Another 48,982 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, 1997, the year-end allocation of Class 1 ESOP
Preferred Stock to employee accounts had not yet been
completed. There were 2,087,535 shares of Class 1 ESOP
Preferred Stock committed to be released and 888,386 shares
held in suspense by the ESOP as of December 31, 1997. For the
Class 2 ESOP Preferred Stock, 986,438 shares were committed to
be contributed to employees at December 31, 1997. The market
value of the unearned ESOP shares recorded on the balance
sheet at December 31, 1997 and 1996 was $344 million and $309
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 market
value of such shares at December 31, 1997 and 1996 was $679
million and $206 million, respectively.
(3) Other Income (Expense) - Miscellaneous
- -------------------------------------------
Other income (expense) - "miscellaneous, net" consisted
of the following:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Foreign exchange gains (losses) $ (19) $ (8) $ (20)
Minority interests (15) (21) (23)
Travel agency litigation
settlement - (20) -
Other (13) (6) (14)
---- ---- ----
$ (47) $ (55) $ (57)
==== ==== ====
</TABLE>
(4) Affiliates
- ---------------
United owns 32% of Galileo International, Inc.
("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
$161 million of undistributed earnings of Galileo and its
predecessor companies. The market value of United's
investment in Galileo at December 31, 1997 was $924 million.
In July 1997, United completed the sale of its interest
in the Apollo Travel Services Partnership ("ATS"), a 77% owned
affiliate whose accounts were consolidated, to Galileo for
$539 million in cash. See Other Information, "Sale of
Affiliate" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for further
details on the transaction.
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 $159 million in 1997, $249 million in 1996
and $238 million in 1995. The cost to United of services
purchased from Galileo amounted to approximately $134 million
in 1997, $114 million in 1996 and $104 million in 1995. In
connection with the sale of ATS, United entered into an
additional services agreement with Galileo under which the
Company will provide certain marketing and other services
designed to increase the competitiveness of Galileo's business
and to generate additional bookings and revenues for Galileo.
Under this agreement, United could receive up to $154 million
(on a present value basis) in the sixth year following the
sale, based on specified improvements in air booking revenues
over a five-year period.
Prior to the sale to Galileo, ATS contributed the
following amounts to the Company's consolidated results, net
of intercompany eliminations and minority interests:
<TABLE>
<CAPTION>
(In Millions) Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating revenues $ 147 $ 239 $ 237
Operating income $ 63 $ 86 $ 90
Earnings before
income taxes $ 50 $ 70 $ 76
</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 1997, 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
1997, United utilized $92 million of AMT credits.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current -
Federal $ 305 $ 267 $ 20
State 54 19 3
---- ---- ----
359 286 23
---- ---- ----
Deferred -
Federal 172 60 191
State 16 23 23
---- ---- ----
188 83 214
---- ---- ----
$ 547 $ 369 $ 237
==== ==== ====
</TABLE>
The income tax provision differed from amounts computed
at the statutory federal income tax rate, as follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax provision at
statutory rate $ 521 $ 339 $ 213
State income taxes, net of
federal income tax benefit 46 28 17
Nondeductible employee meals 26 25 23
Foreign tax credits (2) (2) (2)
Other, net (44) (21) (14)
---- ---- ----
$ 547 $ 369 $ 237
==== ==== ====
</TABLE>
Temporary differences and carryforwards which give rise
to a significant portion of deferred tax assets and
liabilities for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(In Millions) 1997 1996
---- ----
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Employee benefits,
including postretirement
medical and ESOP $ 918 $ 156 $ 643 $ 93
Depreciation, capitalized
interest and transfers
of tax benefits - 1,451 - 1,156
Gains on sale and
leasebacks 398 - 428 -
Rent expense 382 - 351 -
AMT credit carryforwards 137 - 229 -
Other 405 471 266 318
----- ----- ----- -----
$2,240 $2,078 $1,917 $1,567
===== ===== ===== =====
</TABLE>
At December 31, 1997, United and its subsidiaries had
$137 million of federal AMT credit carryforwards available for
an indefinite period. Management believes it is more likely
than not that future taxable income will be sufficient to
utilize the deferred tax assets at December 31, 1997.
(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.
In addition, United has a separate short-term borrowing
facility with a maximum available borrowing amount of $227
million which expires in October 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, 1997):
<TABLE>
<CAPTION>
(In Millions) 1997 1996
---- ----
<S> <C> <C>
Secured notes, 6.13% to 8.90%,
averaging 7.16%, due through 2014 $ 1,284 $ 806
Debentures, 9.00% to 11.21%,
averaging 9.97%, due through 2021 785 936
Promissory notes, 6.33% to 11.00%,
averaging 6.51%, due through 2000 70 64
Special facility bonds, 5.625%,
due 2034 190 -
----- -----
2,329 1,806
----- -----
Less: Unamortized discount on debt (13) (9)
Current maturities (235) (164)
----- -----
$ 2,081 $ 1,633
===== =====
</TABLE>
In addition to scheduled principal payments, in 1997 and
1996 the Company repaid $84 million and $144 million,
respectively, in principal amount of secured notes and $51
million and $483 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 $9 million and $67 million,
respectively, net of tax benefits of $5 million and $40
million, respectively, were recorded, reflecting amounts paid
in excess of the debt carrying value.
During 1997, United issued $674 million in enhanced pass
through certificates to refinance certain owned aircraft and
aircraft under operating leases. Net proceeds after
refinancing the operating leases was $597 million.
Also in 1997, the California Statewide Communities
Development Authority (the "Authority") issued $190 million in
special facilities revenue bonds to finance the acquisition
and construction of certain facilities at the Los Angeles
International Airport ("LAX") which United guarantees payment
of under a payment agreement with the Authority. The bond
proceeds are restricted to expenditures on the LAX facilities
and unspent amounts are classified as other assets in the
balance sheet.
At December 31, 1997, United had outstanding a total of
$733 million of long-term debt bearing interest rates at 22 to
90 basis points over LIBOR.
Maturities of long-term debt for each of the four years
after 1998 are: 1999 - $50; 2000 - $52 million; 2001 - $45
million; and 2002 - $562 million. Various assets, principally
aircraft, having an aggregate book value of $1.451 billion at
December 31, 1997, were pledged as security under various loan
agreements.
(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, 1997,
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 -
1998 $ 926 $ 473 $ 287
1999 916 458 262
2000 932 447 241
2001 919 441 313
2002 911 429 277
After 2002 12,356 7,104 1,320
------ ------ ------
Total minimum leases payments $16,960 $ 9,352 $ 2,700
====== ======
Imputed interest (at rates of
5.3% to 12.2%) (854)
------
Present value of minimum lease payments 1,846
Current portion (170)
------
Long-term obligations under capital leases $ 1,676
======
</TABLE>
As of December 31, 1997, United leased 304 aircraft, 62
of which were under capital leases. These leases have terms
of 4 to 26 years, and expiration dates range from 1998 through
2020.
In connection with the financing of certain aircraft
accounted for as capital leases, United had on deposit at
December 31, 1997 an aggregate 33 billion yen ($254 million),
107 million German marks ($60 million) and 27 million French
francs ($4 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 $1.453 billion in 1997, $1.450 billion
in 1996 and $1.469 billion in 1995. Included in 1997 rental
expense was $16 million in contingent rentals, resulting from
changes in interest rates for operating leases under which the
rent payments are based on variable interest rates.
(9) Related Party Transactions
- -------------------------------
Air Wis Services, Inc., a wholly-owned subsidiary of UAL,
owns Air Wisconsin, Inc. At December 31, 1997 and 1996,
United had outstanding loans from Air Wisconsin, Inc. in the
amount of $97 milllion and $60 million, respectively. The
loans bear interest at market rates.
At December 31, 1997 and 1996, United had accounts
receivable from UAL of $205 million and $378 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, UAL 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 $14 million for 1997, $15 million in 1996 and $27
million in 1995.
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, UAL granted stock options which are
exercisable for shares of new common stock.
UAL 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. During 1995, 892,852 shares of restricted
stock were issued from treasury. No shares were issued in
1996 and 5,000 shares were issued in 1997. As of December 31,
1997, 434,220 shares were restricted and still nonvested.
Additionally, 309,120 shares were reserved for future awards
under the plan. In 1997, 1996 and 1995, 25,120, 70,488 and
43,000 shares, respectively, were forfeited and returned to
treasury stock.
In October 1995, the FASB issued 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. Had
compensation cost for awards been determined based on the fair
value at the grant dates consistent with the method of SFAS
No. 123, the Company's net income would have instead been
reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income As reported $ 932 $ 534 $ 341
(millions) Pro forma $ 927 $ 532 $ 342
</TABLE>
The weighted-average grant date fair value of restricted
shares issued was $87.44 and $28.88 for shares issued in 1997
and 1995, respectively. The fair value of each option grant
was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.4% 6.4% 6.0%
Dividend yield 0.0% 0.0% 0.0%
Volatility 32.0% 32.0% 30.0%
Expected life (years) 4.0 4.0 4.0
</TABLE>
(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 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>
(In Millions) 1997 1996
---- ----
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit
obligation $ (5,263) $ (1,273) $ (5,344) $ (235)
Actuarial present value of
projected benefit
obligation $ (5,792) $ (1,481) $ (5,812) $ (335)
Plan assets at fair value 5,950 908 5,850 60
------ ------ ------ ------
Projected benefit obligation
in excess of plan assets 158 (573) 38 (275)
Unrecognized net (gain) loss 22 (10) 138 (70)
Prior service cost not yet
recognized in net periodic
pension cost 159 489 230 216
Remaining unrecognized
net asset (1) 19 (16) 37
Adjustment required to
recognize minimum liability - (289) - (86)
------ ------ ------ ------
Pension asset (liability)
recognized in the statement
of consolidated financial
position $ 338 $ (364) $ 390 $ (178)
====== ====== ====== ======
Actuarial assumptions:
Weighted average discount rate 7.25% 7.75%
Rate of increase in compensation 3.85% 3.15%
</TABLE>
Total pension expense for all retirement plans (including
defined contribution plans) was $229 million in 1997, $252
million in 1996 and $193 million in 1995.
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) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 232 $ 237 $ 173
Interest cost on projected
benefit obligation 477 440 396
Actual return on plan assets (1,078) (703) (934)
Net amortization and deferral 585 268 545
----- ----- -----
Net periodic pension cost $ 216 $ 242 $ 180
===== ===== =====
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) 1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $ 606 $ 498
Other fully eligible participants 254 193
Other active participants 846 648
----- -----
Total accumulated postretirement
benefit obligation 1,706 1,339
Unrecognized net gain (loss) (183) 109
Fair value of plan assets (107) (103)
----- -----
Accrued postretirement benefit
obligation $1,416 $1,345
===== =====
Discount rate 7.25% 7.75%
</TABLE>
Net postretirement benefit costs included the following
components:
<TABLE>
<CAPTION>
(In Millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits
attributed to service
during the period $ 44 $ 44 $ 37
Amortization of unrecognized
net gain (6) (5) (5)
Actual return on assets (7) (7) (7)
Interest cost on benefit
obligation 107 98 100
---- ---- ----
Net postretirement benefit
costs $ 138 $ 130 $ 125
==== ==== ====
</TABLE>
The assumed health care cost trend rates were 6.9% and
7.4% for 1997 and 1996, respectively, declining annually to a
rate of 4.0% by the year 2001 and remaining level thereafter.
These rates were driven by assumed health care cost trend
rates for gross covered charges of 5.5% and 6.0% for 1997 and
1996, respectively, declining annually to a rate of 4.0% by
the year 1999 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, 1997 by $234 million and the aggregate of the
service and interest cost components of net postretirement
benefit cost for 1997 by $25 million.
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
- -----------------------------------------------
See Other Information "Foreign Operations" in
Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 7A. Quantitative and
Qualitative Disclosures About Market Risk ("Item 7A") for a
discussion of the Company's foreign currency and fuel price
risk management activities, and the fair value of all
significant financial instruments.
Credit Exposures of Derivatives
The Company's theoretical risk in the derivative
financial instruments described in Item 7A 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.
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, 1997, $1.239 billion
principal amount of such bonds was outstanding. As of
December 31, 1997, UAL and United had jointly guaranteed $35
million of such bonds and United had guaranteed $1.221 billion
of such bonds, including accrued interest. The payments
required to satisfy these obligations are included in the
future minimum lease payments disclosed in Note 8 "Lease
Obligations".
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 $35 million at
December 31, 1997. At that date, United had granted mortgages
on aircraft and engines having a total book value of $165
million as security for indemnity obligations under tax leases
and letters of credit.
Concentrations 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, 1997, commitments for the purchase of
property and equipment, principally aircraft, approximated
$5.6 billion, after deducting advance payments. An estimated
$2.6 billion will be spent in 1998, $1.6 billion in 1999, $0.6
billion in 2000 and $0.8 billion in 2001 and thereafter. The
major commitments are for the purchase of B777, B747, B767,
B757, A320 and A319 aircraft, which are scheduled to be
delivered through 2002. The above amounts do not include a
recent order with Airbus Industrie for an additional 10 A319
and 20 A320 aircraft to be delivered through 2001. The
aircraft included in this latest order are expected to be used
to satisfy growth opportunities, and thus, the Company now
expects its passenger fleet to grow by at least 30 aircraft by
the year 2002.
During the fourth quarter, The Boeing Company ("Boeing")
notified United that production problems would delay aircraft
scheduled to be delivered between fourth quarter 1997 and mid-
1999. Specifically, deliveries on nine B747s, three B757s and
four B767s scheduled for delivery from the fourth quarter of
1997 through mid-1999 will be delayed from one to two months.
United expects to receive compensation from Boeing and also
expects to make schedule adjustments and take other possible
actions to offset the effects of the delays. As a result, the
Company expects the impact of the announced delivery delays to
be minimal.
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 61% of United's employees are represented
by various labor organizations. In connection with the 1994
employee investment transaction, members of the Air Line
Pilots' Association and the International Association of
Machinists and Aerospace Workers entered into labor contracts
with United which become amendable in 2000. In October 1997,
the Association of Flight Attendants ("AFA") ratified a new
contract, which will remain in effect through 2006. See Other
Information, "Labor Agreements and Wage Adjustments" in
Management's Discussion and Analysis of Financial Condition
and Results of Operations for details.
(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 revenue 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) 1997 1996 1995
---- ---- ----
Operating Operating Operating Operating Operating Operating
Entity Revenue Income Revenue Income Revenue Income
------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Domestic $11,214 $ 652 $10,717 $ 738 $ 9,586 $ 460
Pacific 3,552 267 3,438 288 3,336 348
Atlantic 1,745 238 1,412 86 1,287 10
Latin America 824 69 750 18 686 14
------ ----- ------ ----- ------ -----
Total $17,335 $1,226 $16,317 $1,130 $14,895 $ 832
====== ===== ====== ===== ====== =====
</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) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts
capitalized) $ 156 $ 222 $ 313
Income taxes 359 239 6
Non-cash transactions:
Capital lease obligations
incurred 643 503 374
Defeasance of capital lease
obligations 66 - -
Long-term debt incurred in
connection with additions to
equipment 185 82 26
Note receivables recorded in
connection with the sale of
equipment and leasehold
improvements 127 - -
Increase (decrease) in
pension intangible 200 (191) 2
</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>
1997:
Operating revenues $ 4,109 $ 4,372 $ 4,630 $ 4,224 $17,335
Earnings from operations 189 404 548 85 1,226
Earnings before
extraordinary item 103 239 571 28 941
Extraordinary loss on early
extinguishment of debt - - - (9) (9)
Net earnings $ 103 $ 239 $ 571 $ 19 $ 932
1996:
Operating revenues $ 3,723 $ 4,153 $ 4,477 $ 3,964 $16,317
Earnings from operations 64 400 613 53 1,130
Earnings 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
</TABLE>
During the third quarter of 1997, United recognized a pre-
tax gain of $275 million of the sale of its interest in the
Apollo Travel Services Partnership (see Other Information,
"Sale of Affiliate" in Management's Discussion and Analysis of
Financial Condition and Results of Operations).
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 after the signature page hereto.
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1997, 1996 and 1995.
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 1997.
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 26th day of February, 1998.
UNITED AIR LINES, INC.
/s/ Gerald Greenwald
--------------------
By: 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 26th day of
February, 1998 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 - Finance
(principal accounting officer)
/s/ John A. Edwardson
- --------------------------------
John A. Edwardson
Director
/s/ James E. Goodwin
- --------------------------------
James E. Goodwin
Director
/s/ William P. Hobgood
- --------------------------------
William P. Hobgood
Director
/s/ Stuart I. Oran
- --------------------------------
Stuart I. Oran
Director
/s/ Andrew P. Studdert
- --------------------------------
Andrew P. Studdert
Director
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1997
(In Millions) Balance at Additions Charged to Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deduction Year
----------- ------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to
which it applies:
Allowance for
doubtful accounts $ 24 $ 17 $ - $ 321(1) $ 9
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 31 $ 26 $ 5 $ 332(2) $ 29
=== === === === ===
(1) Includes deduction from reserve due to the sale of the Apollo Travel Services Partnership.
(2) Deduction from reserve for purpose for which reserve was created.
F-1
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1996
(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 $ 19 $ 23 $ - $ 181(1) $ 24
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 38 $ 14 $ 2 $ 231(1) $ 31
=== === === === ===
(1) Deduction from reserve for purpose for which reserve was created.
F-2
</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 $ - $ 231(1) $ 19
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 44 $ 14 $ 3 $ 231(1) $ 38
=== === === === ===
(1) Deduction from reserve for purpose for which reserve was created.
F-3
</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
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Earnings: (In Millions)
<S> <C> <C> <C> <C> <C>
Earnings (loss)
before income taxes
and extraordinary items $1,488 $ 970 $ 608 $ 153 $ (26)
Undistributed earnings
of affiliate (16) (49) (38) (19) -
Fixed charges, from below 1,009 1,113 1,200 1,046 1,077
Interest capitalized (104) (77) (42) (41) (51)
----- ----- ----- ----- -----
Earnings $2,377 $1,957 $1,728 $1,139 $1,000
===== ===== ===== ===== =====
Fixed charges:
Interest expense $ 290 $ 290 $ 359 $ 362 $ 347
Interest expense on
affiliate's guaranteed debt - - - - 5
Portion of rental expense
representative of the
interest factor 719 823 841 684 725
----- ----- ----- ----- -----
Fixed charges $1,009 $1,113 $1,200 $1,046 $1,077
===== ===== ===== ===== =====
Ratio of earnings to
fixed charges 2.36 1.76 1.44 1.09 (a)
===== ===== ===== ===== =====
_____________
(a) Earnings were inadequate to cover fixed charges by $77
million in 1993.
</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, 1997, 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 6, 1998
<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, 1997 AND STATEMENT
OF CONSOLIDATED FINANCIAL POSITION AS OF DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 268
<SECURITIES> 509
<RECEIVABLES> 1,049
<ALLOWANCES> 9
<INVENTORY> 355
<CURRENT-ASSETS> 2,915
<PP&E> 16,515
<DEPRECIATION> 5,741
<TOTAL-ASSETS> 16,107
<CURRENT-LIABILITIES> 5,296
<BONDS> 3,757
0
0
<COMMON> 0
<OTHER-SE> 2,703
<TOTAL-LIABILITY-AND-EQUITY> 16,107
<SALES> 0
<TOTAL-REVENUES> 17,335
<CGS> 0
<TOTAL-COSTS> 16,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 290
<INCOME-PRETAX> 1,488
<INCOME-TAX> 547
<INCOME-CONTINUING> 941
<DISCONTINUED> 0
<EXTRAORDINARY> (9)
<CHANGES> 0
<NET-INCOME> 932
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
