<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 33-21220 *
UNITED AIR LINES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2675206
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 East Algonquin Road, Elk Grove Township, Illinois 60007
Mailing Address: P. O. Box 66100, Chicago, Illinois 60666
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
-----------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1999
----- -------------
Common Stock ($5 par value) 205
* Registrant is the wholly-owned subsidiary of UAL Corporation (File 1-6033).
Registrant became subject to filing periodic reports under the Securities
Exchange Act of 1934 as a result of a public offering of securities which became
effective June 3, 1988 (Registration Nos. 33-21220 and 22-18246).
<PAGE> 2
United Air Lines, Inc. and Subsidiary Companies Report on Form 10-Q
For the Quarter Ended June 30, 1999
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
-------
<S> <C>
Item 1. Financial Statements
Condensed Statements of Consolidated 3
Financial Position - as of June 30, 1999
(Unaudited) and December 31, 1998
Statements of Consolidated Operations 5
(Unaudited) - for the three months and six months
ended June 30, 1999 and 1998
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the six
months ended June 30, 1999 and 1998
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
United Air Lines Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,088 $ 326
Short-term investments 221 360
Receivables, net 1,357 1,134
Related party receivables 250 46
Inventories, net 275 384
Deferred income taxes 254 259
Prepaid expenses and other 289 308
-------- --------
3,734 2,817
-------- --------
Operating property and equipment:
Owned 17,034 16,125
Accumulated depreciation and amortization (5,215) (5,174)
-------- --------
11,819 10,951
-------- --------
Capital leases 3,027 2,702
Accumulated amortization (599) (599)
-------- --------
2,428 2,103
-------- --------
14,247 13,054
-------- --------
Other assets:
Investments in affiliates 882 304
Intangibles, net 669 676
Related party receivables 463 430
Aircraft lease deposits 535 545
Prepaid rent 674 626
Other 437 378
-------- --------
3,660 2,959
-------- --------
$ 21,641 $ 18,830
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
United Air Lines Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
Liabilities and Stockholder's Equity (Unaudited)
<S> <C> <C>
Current liabilities:
Short-term borrowings $ -- $ 184
Current portions of long-term debt and
capital lease obligations 277 274
Related party debt maturing within one year 146 128
Advance ticket sales 1,814 1,429
Accounts payable 1,104 1,144
Other 2,795 2,551
-------- --------
6,136 5,710
-------- --------
Long-term debt 2,693 2,858
-------- --------
Long-term obligations under capital leases 2,373 2,113
-------- --------
Other liabilities and deferred credits:
Deferred pension liability 230 89
Postretirement benefit liability 1,505 1,424
Deferred gains 1,022 1,180
Other 1,553 1,132
-------- --------
4,310 3,825
-------- --------
Preferred stock committed to Supplemental ESOP 780 691
-------- --------
Stockholder's equity:
Common stock at par -- --
Additional capital invested 227 21
ESOP capital 2,868 2,630
Retained earnings 1,846 1,108
Unearned ESOP preferred stock (83) (121)
Accumulated other comprehensive income 493 (2)
Other (2) (3)
-------- --------
5,349 3,633
-------- --------
Commitments and contingent liabilities (See note)
$ 21,641 $ 18,830
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
United Air Lines, Inc and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions)
<TABLE>
<CAPTION>
Three Months
Ended June 30
------------------
1999 1998
------- -------
<S> <C> <C>
Operating revenues:
Passenger $ 3,989 $ 3,948
Cargo 227 224
Other 314 259
------- -------
4,530 4,431
------- -------
Operating expenses:
Salaries and related costs 1,420 1,300
ESOP compensation expense 182 232
Aircraft fuel 420 435
Commissions 291 328
Purchased services 379 376
Aircraft rent 220 219
Landing fees and other rent 248 232
Depreciation and amortization 213 192
Aircraft maintenance 176 141
Other 557 515
------- -------
4,106 3,970
------- -------
Earnings from operations 424 461
------- -------
Other income (expense):
Interest expense (94) (94)
Interest capitalized 17 30
Interest income 11 14
Equity in earnings of affiliates 15 21
Gain on sale of Galileo stock 669 --
Miscellaneous, net -- (12)
------- -------
618 (41)
------- -------
Earnings before income taxes and extraordinary item 1,042 420
Provision for income taxes 376 143
------- -------
Earnings before extraordinary item 666 277
Extraordinary loss on early extinguishment of debt, net (3) --
------- -------
Net earnings $ 663 $ 277
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions)
<TABLE>
<CAPTION>
Six Months
Ended June 30
-------------------
1999 1998
------- --------
<S> <C> <C>
Operating revenues:
Passenger $ 7,669 $ 7,514
Cargo 435 439
Other 576 522
------- -------
8,680 8,475
------- -------
Operating expenses:
Salaries and related costs 2,829 2,609
ESOP compensation expense 364 490
Aircraft fuel 815 876
Commissions 574 645
Purchased services 759 713
Aircraft rent 439 452
Landing fees and other rent 475 439
Depreciation and amortization 424 383
Aircraft maintenance 354 297
Other 1,082 993
------- -------
8,115 7,897
------- -------
Earnings from operations 565 578
------- -------
Other income (expense):
Interest expense (188) (176)
Interest capitalized 36 56
Interest income 23 29
Equity in earnings of affiliates 39 43
Gain on sale of Galileo stock 669 --
Miscellaneous, net 14 (21)
------- -------
593 (69)
------- -------
Earnings before income taxes and extraordinary item 1,158 509
Provision for income taxes 417 174
------- -------
Earnings before extraordinary item 741 335
Extraordinary loss on early extinguishment of debt, net (3) --
------- -------
Net earnings $ 738 $ 335
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In Millions)
<TABLE>
<CAPTION>
Six Months
Ended June 30
-------------------
1999 1998
------- --------
<S> <C> <C>
Cash and cash equivalents at beginning
of period $ 326 $ 268
------- -------
Cash flows from operating activities 1,640 1,742
------- -------
Cash flows from investing activities:
Additions to property and equipment (1,306) (1,579)
Proceeds on disposition of property and
equipment 141 351
Proceeds on sale of common shares in Galileo 766 --
Decrease in short-term investments 139 93
Increase in related party receivables (32) (8)
Other, net (25) (39)
------- -------
(317) (1,182)
------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 286 823
Repayment of long-term debt (456) (103)
Principal payments under capital
lease obligations (165) (209)
Purchase of equipment certificates under
Company operating leases (47) (655)
Increase (decrease) in short-term borrowings (184) 10
Aircraft lease deposits (25) (149)
Increase in related party debt 18 18
Other, net 10 (12)
------- -------
(561) (277)
------- -------
Increase in cash and cash equivalents 762 283
------- -------
Cash and cash equivalents at end of period $ 1,088 $ 551
======= =======
Cash paid during the period for:
Interest (net of amounts capitalized) $ 137 $ 114
Income taxes $ 55 $ 65
Non-cash transactions:
Capital lease obligations incurred $ 482 $ 465
Net unrealized gain on investment in Galileo $ 496 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
United Air Lines, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
The Company
United Air Lines, Inc. ("United") is a wholly owned subsidiary of UAL
Corporation. ("UAL").
Interim Financial Statements
The consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to or as permitted by such
rules and regulations, although United believes that the disclosures are
adequate to make the information presented not misleading. In management's
opinion, all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the results of operations for the three-
and six-month periods have been made. These financial statements should be read
in conjunction with the consolidated financial statements and footnotes thereto
included in United's Annual Report on Form 10-K for the year 1998.
Employee Stock Ownership Plans
Pursuant to amended labor agreements which provide for wage and
benefit reductions and work-rule changes which commenced July 1994, UAL has
agreed to issue convertible preferred stock to employees. Note 2 of the Notes to
Consolidated Financial Statements in the 1998 Annual Report on Form 10-K
contains additional discussion of the recapitalization, stock to be issued to
employees and the related accounting treatment. Since January 1, 1999, an
additional 1,536,986 shares of Class 1 and Class 2 ESOP Preferred Stock have
been committed to be released.
Income Taxes
The provisions for income taxes are based on the estimated annual
effective tax rate, which differs from the federal statutory rate of 35%
principally due to state income taxes, dividends on ESOP Preferred Stock and
certain nondeductible items.
Segment Information
United has a global route network designed to transport passengers
and cargo between Domestic, Pacific, Latin American and European destinations.
These regions constitute United's four reportable segments.
A reconciliation of the total amounts reported by reportable segments
to the applicable amounts in the financial statements follows:
<PAGE> 9
<TABLE>
<CAPTION>
(In Millions) Three Months Ended June 30, 1999
- ------------- --------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 3,194 $636 $180 $520 $ 4,530 $ - $ 4,530
Fully distributed earnings
before income taxes $ 851 $161 $ 38 $174 $ 1,224 $ - $ 1,224
(In Millions) Three Months Ended June 30, 1998
- ------------- --------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- ---------- ----- ------------
Revenue $ 3,059 $690 $192 $490 $ 4,431 $ - $ 4,431
Fully distributed earnings
before income taxes $ 561 $ 2 $ 5 $84 $ 652 $ - $ 652
(In Millions) Six Months Ended June 30, 1999
- ------------- ------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- ---------- ----- ------------
Revenue $ 6,081 $ 1,284 $386 $929 $ 8,680 $ - $ 8,680
Fully distributed earnings
before income taxes $ 1,116 $ 162 $ 54 $190 $ 1,522 $ - $ 1,522
(In Millions) Six Months Ended June 30, 1998
- ------------- ------------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- ---------- ----- ------------
Revenue $ 5,788 $ 1,405 $416 $866 $ 8,475 $ - $ 8,475
Fully distributed earnings
before income taxes $ 853 $ 1 $ 36 $109 $ 999 $ - $ 999
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ----------------
June 30 June 30
--------------------- ----------------
(In Millions) 1999 1998 1999 1998
- ------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Total fully distributed earnings
for reportable segments $ 1,224 $ 652 $ 1,522 $ 999
Less: ESOP compensation expense 182 232 364 490
------- ----- ------- -----
Total earnings before income taxes and
extraordinary item $ 1,042 $ 420 $ 1,158 $ 509
======= ===== ======= =====
</TABLE>
Included in 1999 Domestic, Pacific, Latin American and Atlantic fully
distributed earnings before income taxes is $393 million, $134 million, $36
million and $106 million, respectively, of pre-tax gain on the sale of Galileo
stock.
Investments in Affiliates
In June 1999, United sold 17,500,000 common shares of Galileo
International, Inc. ("Galileo") in a secondary offering for $766 million,
resulting in a pre-tax gain of approximately $669 million. This sale reduced
United's holdings in Galileo from 32 percent to approximately 17 percent,
requiring United to discontinue the equity method of accounting for its
investment in Galileo. United has classified its remaining 15,940,000 shares of
Galileo common stock as
<PAGE> 10
available-for-sale. The market value of these shares at June 30, 1999 ($852
million) is reflected in Investments in Affiliates on the balance sheet and the
market value over United's investment is classified net-of-tax ($496 million) in
accumulated other comprehensive income. Equity earnings in Galileo were $17
million and $18 million for the three-month periods ended June 30, 1999 and
1998, respectively and $40 million and $38 million for the six-month periods
ended June 30, 1999 and 1998, respectively.
United owns approximately 2.1 million depository certificates in
Equant, a provider of international data network services to multinational
businesses and a single source for global desktop communications. Each
depository certificate represents a beneficial interest in an Equant common
share. These depository certificates are currently subject to certain
transferability restrictions and are carried at their original cost, which is
nominal. At June 30, 1999, the estimated fair value of United's investment in
Equant is approximately $198 million.
GetThere.com, formerly Internet Travel Network, is a leading provider
of internet-based travel planning products tailored to individual, corporate,
travel supplier and travel agency customers. United has a minority interest in
GetThere.com consisting of convertible preferred stock, warrants and options.
United's holdings are convertible into an approximate 25 percent interest in
GetThere.com. United accounts for its investment in GetThere.com using the
equity method of accounting.
In July 1999, United and Buy.com agreed to form a joint venture
(BuyTravel.com) to sell travel on all major airlines, as well as hotels, car
rentals and cruises via the internet. Both United and Buy.com will have a 50
percent interest in BuyTravel.com. United will account for its investment in
BuyTravel.com using the equity method of accounting.
Other Comprehensive Income
Total comprehensive income for the three- and six-month periods
ending June 30, 1999 was $1,158 million and $1,233 million, respectively,
compared to $276 million and $334 million for the three- and six-month periods
ending June 30, 1998, respectively. Other comprehensive income consisted of net
unrealized gains (losses) on securities of $495 million for the three- and
six-month periods ending June 30, 1999 and $(1) million for the three- and
six-month periods ending June 30, 1998, respectively.
Operating Property and Equipment
Effective April 1, 1999, United revised its estimate of depreciable
lives on certain of its aircraft types to 25 years and increased the residual
value of these aircraft to 10 percent. Previously, lives on these aircraft
ranged from 20 to 23 years and residual values ranged from 4.5 percent to 7.3
percent. United also shortened the estimated depreciable lives on certain other
aircraft from 10 years to 4 years. These changes did not have a significant
impact on United's results of operations.
Contingencies and Commitments
United has certain contingencies resulting from litigation and claims
(including environmental issues) incident to the ordinary course of business.
Management believes, after considering a number of factors, including (but not
limited to) the views of legal counsel, the nature of contingencies to which
United is subject and its prior experience, that the ultimate
<PAGE> 11
disposition of these contingencies is not expected to materially affect United's
consolidated financial position or results of operations.
At June 30, 1999, commitments for the purchase of property and
equipment, principally aircraft, approximated $5.5 billion, after deducting
advance payments. An estimated $1.3 billion will be spent during the remainder
of 1999, $2.0 billion in 2000, $1.9 billion in 2001 and $0.3 billion in 2002 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.
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
United's total of cash and cash equivalents and short-term
investments was $1.3 billion at June 30, 1999, compared to $686 million at
December 31, 1998. Cash flows from operating activities for the six-month period
amounted to $1.6 billion. Financing activities included principal payments under
debt and capital lease obligations of $456 million and $165 million,
respectively and $25 million in aircraft lease deposits. Additionally, the
Company issued, and subsequently retired, $286 million in debt during the period
to finance the acquisition of aircraft.
Property additions, including aircraft and aircraft spare parts,
amounted to $1.3 billion, while property dispositions resulted in proceeds of
$141 million. In the first six months of 1999, United took delivery of two A320,
eight A319, three B777, two B757, two B767 and six B747 aircraft. Eleven of the
aircraft were purchased and 12 were acquired under capital leases. In addition,
United acquired two B727 aircraft off-lease during the first six months and
retired four DC10 and three B747 aircraft.
United has certain non-core investments with market values
substantially in excess of their acquisition cost. It is United's policy to
monetize its non-core investments. In June 1999, United sold 17.5 million shares
of common stock of Galileo receiving aggregate proceeds of $766 million. These
proceeds will be used to achieve United's financial goals which include
investing in its core business, improving its credit worthiness and returning
cash to shareholders.
At June 30, 1999, commitments for the purchase of property and
equipment, principally aircraft, approximated $5.5 billion, after deducting
advance payments. Of this amount, an estimated $1.3 billion is expected to be
spent during the remainder of 1999. For further details, see "Contingencies and
Commitments" in the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
Summary of Results
United's earnings from operations were $565 million in the first six
months of 1999, compared to operating earnings of $578 million in the first six
months of 1998. United's net earnings before an extraordinary loss on early
extinguishment of debt were $741 million, compared to net earnings of $335
million during the same period of 1998.
In the second quarter of 1999, United's earnings from operations were
$424 million compared to operating earnings of $461 million in the second
quarter of 1998. United had net earnings in the 1999 second quarter of $666
million before the extraordinary loss, compared to net earnings of $277 million
in the same period of 1998.
The 1999 earnings include a pre-tax gain of $669 million on the sale
of a portion of United's investment in Galileo (see "Investments in Affiliates"
in the Notes to Consolidated Financial Statements).
<PAGE> 13
Specific factors affecting United's consolidated operations for the
second quarter and first six months of 1999 are described below.
Second Quarter 1999 Compared with Second Quarter 1998
-----------------------------------------------------
Operating revenues increased $99 million (2%) and United's revenue
per available seat mile (unit revenue) decreased 1% to 10.19 cents. Passenger
revenues increased $41 million (1%) partially due to a slight increase in
United's revenue passenger miles. Strong domestic performance provided an
overall increase in yield from 12.58 to 12.69 cents. The slight increase in
revenue passenger miles in conjunction with system available seat miles
increasing 4% reduced passenger load factor to 70.1% as compared to 72.6%. The
following analysis by market is based on information reported to the U.S.
Department of Transportation:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Revenue Per Revenue
Capacity (ASMs) Traffic (RPMs) Passenger Mile (Yield)
--------------- -------------- ----------------------
<S> <C> <C> <C>
Domestic 6% 1% 3%
Pacific (11%) (13%) 2%
Atlantic 20% 17% (9%)
Latin America (6%) (1%) (6%)
System 4% -% 1%
</TABLE>
Despite capacity reductions in the region, weak demand for travel in
the Pacific markets led to a decline in load factor. The improvements in Pacific
yield were offset by a 2-point decline in load factor resulting in flat unit
revenue. Yields in other international markets continue to be impacted by weak
economies, a negative pricing environment and excess industry capacity.
Cargo revenues increased $3 million (1%) on increased freight ton
miles of 5%. Freight yield decreased 3% and mail yield decreased 2% for a total
decrease in cargo yield of 3% for the period. Other operating revenues increased
$55 million (21%) due to increases in frequent flyer program partner-related
revenues and fuel sales to third parties.
Operating expenses increased $136 million (3%) while United's cost
per available seat mile decreased 0.2%, from 9.25 cents to 9.23 cents, including
ESOP compensation expense. Without the ESOP compensation expense, United's cost
per available seat mile would have been 8.82 cents, an increase of 1% from the
1998 second quarter. ESOP compensation expense decreased $50 million (22%),
reflecting a decrease in the estimated average fair value of ESOP stock
committed to be released to employees. Salaries and related costs increased $120
million (9%) due to ESOP mid-term wage adjustments which took place in July 1998
and to increased staffing in certain customer-contact positions. Aircraft
maintenance increased $35 million (25%) due to an increase in heavy maintenance
visits. Depreciation and amortization increased $21 million (11%) due to an
increase in the number of owned aircraft and losses on disposition of aircraft
partially offset by changes in depreciable lives on certain aircraft. Other
expenses increased $42 million (8%) largely due to costs associated with fuel
sales to third parties. Commissions decreased $37 million (11%) due to a change
in the commission structure implemented in the third quarter of 1998 and lower
commissionable revenues. Aircraft fuel decreased $15 million (3%) as a 6%
decrease in the cost of fuel from 58.0 cents to 54.5 cents a gallon more than
offset increased consumption.
<PAGE> 14
Other expense amounted to $51 million in the second quarter of 1999
(excluding the gain on the Galileo transaction - see "Investments in Affiliates"
in the Notes to Consolidated Financial Statements) compared to $41 million in
the second quarter of 1998. Interest capitalized decreased $13 million (43%) as
a result of lower advance payments on the acquisition of aircraft and a lower
weighted average interest rate. Miscellaneous, net included foreign exchange
gains of $2 million in the second quarter of 1999 compared to foreign exchange
losses of $7 million in the second quarter of 1998.
Six Months 1999 Compared with Six Months 1998
---------------------------------------------
Operating revenues increased $205 million (2%) and United's revenue
per available seat mile (unit revenue) decreased 1% to 10.01 cents. Passenger
revenues increased $155 million (2%) despite a slight decrease in yield from
12.67 to 12.61 cents. Available seat miles across the system were up 3%
resulting in a passenger load factor of 69.6%, down 0.3 points. The following
analysis by market is based on information reported to the U.S. Department of
Transportation:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Revenue Per Revenue
Capacity (ASMs) Traffic (RPMs) Passenger Mile (Yield)
--------------- -------------- ----------------------
<S> <C> <C> <C>
Domestic 5% 3% 1%
Pacific (10%) (8%) (3%)
Atlantic 18% 17% (8%)
Latin America (4%) (1%) (7%)
System 3% 3% -%
</TABLE>
Despite capacity reductions in the region, weak demand for travel in
Pacific markets continues to negatively impact yields. Yields in other
international markets continue to be impacted by weak economies, a negative
pricing environment and excess industry capacity.
Cargo revenues decreased $4 million (1%) despite increased freight
ton miles of 3%. A 2% lower freight yield and a 4% lower mail yield resulted in
a 3% decrease in cargo yield for the period. Other operating revenues increased
$54 million (10%) due to increases in frequent flyer program partner-related
revenues and fuel sales to third parties.
Operating expenses increased $218 million (3%) and United's cost per
available seat mile decreased slightly, from 9.38 cents to 9.36 cents, including
ESOP compensation expense. Without the ESOP compensation expense, United's cost
per available seat mile would have been 8.94 cents, an increase of 2% from the
1998 six-month period. ESOP compensation expense decreased $126 million (26%),
reflecting the decrease in the estimated average fair value of ESOP stock
committed to be released to employees. Purchased services increased $46 million
(6%) due to increases in computer reservations fees and Y2K expenses.
Depreciation and amortization increased $41 million (11%) due to an increase in
the number of owned aircraft and losses on disposition of aircraft partially
offset by changes in depreciable lives of certain aircraft. Salaries and related
costs increased $220 million (8%) due to ESOP mid-term wage adjustments which
took place in July 1998 and increased staffing in certain customer-contact
positions. Aircraft maintenance increased $57 million (19%) due to an increase
in heavy maintenance visits. Commissions decreased $71 million (11%) due to a
change in the commission structure
<PAGE> 15
implemented in the third quarter of 1998 as well as a slight decrease in
commissionable revenues. Aircraft fuel decreased $61 million (7%) due to a 9%
decrease in the cost of fuel from 59.8 cents to 54.4 cents a gallon. Aircraft
rent decreased $13 million (3%) due to aircraft refinancing completed in the
first quarter of 1998.
Other expense amounted to $76 million in the first six months of 1999
(excluding the gain on the Galileo transaction - see "Investments in Affiliates"
in the Notes to Consolidated Financial Statements) compared to $69 million in
the first six months of 1998. Interest capitalized decreased $20 million (36%)
as a result of lower advance payments on the acquisition of aircraft and a lower
weighted average interest rate. Miscellaneous, net included foreign exchange
gains of $23 million in 1999 compared to foreign exchange losses of $11 million
in 1998.
LABOR AGREEMENTS
- ----------------
On May 27, 1999, United's public contact employees (primarily
customer service and reservations sales and service representatives) ratified
the tentative agreement between the Company and the International Association of
Machinists and Aerospace Workers ("IAM"). The contract provides for an
across-the-board wage increase of 5.5 percent effective April 13, 2000. In
addition, certain employees hired after January 1, 1994 received an immediate
14.5% pay increase and benefits comparable to other affected employees. Terms of
the contract are amendable in July 2000.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
- -----------------------------------------
During the second quarter, United reinstated its jet fuel hedging
program. This program now consists of hedging 100% of probable jet fuel
requirements with crude oil purchased call options and fixed price jet fuel
contracts. The purchased call options have been designated as a hedge of
anticipated jet fuel purchases; accordingly, gains or losses on hedge positions
are recognized upon contract expiration as a component of aircraft fuel
inventory. At June 30, 1999, United has purchased call options on approximately
1.4 billion gallons of fuel products, which represents 69% of United's
anticipated third and fourth quarter fuel requirements and 8% of its expected
2000 fuel requirements. At June 30, 1999, United has contracted to purchase
approximately 8% of its anticipated third and fourth quarter fuel requirements.
As of July 31, 1999, United has hedged 100% of its probable third and fourth
quarter jet fuel requirements.
UPDATE ON YEAR 2000 READINESS*
- ------------------------------
Readers should refer to "Update on Year 2000 Readiness" in Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
1998 Annual Report on Form 10-K for background information.
IT systems. The Company has substantially completed the remediation,
initial system testing and business process integration testing of mainframe
hardware and software and other hardware infrastructure including voice and data
networks and all internally developed IT software applications.
<PAGE> 16
Non IT systems. The remediation and testing of date-sensitive, critical
non-IT systems is complete. Re-testing of mission critical systems will continue
throughout the year.
Critical Business Partners. The Company has contacted all of its
"Strategic" and "Preferred" Critical Business Partners. United believes these
partners have a satisfactory Year 2000 program in place.
The results of the study undertaken by the Air Transport Association
("ATA") to determine the process domestic airports are using to achieve Year
2000 readiness, shows that most large domestic airports have made substantial
progress towards being Year 2000 ready. A similar project undertaken by the
International Air Transport Association ("IATA") shows that although most
international airports have made progress during the past few months, certain
key airports are behind schedule.
The Company's aircraft manufacturers have concluded that there are no
safety of flight issues related to the Year 2000 date rollover as to their
aircraft.
Concurrent with ensuring that all the systems will be remediated and
tested for the Year 2000 date rollover, the Company continues to develop
contingency plans for all mission critical business processes. These contingency
plans, together with the airline readiness reviews planned during the third
quarter of 1999, are designed to reduce the likelihood that the Company's
operations will be interrupted by Year 2000 related issues. In addition, the
Company will set up a corporate Command Center to monitor and respond to
potential Year 2000 issues worldwide.
The Company anticipates that project costs will range between $85 and
$90 million, with approximately 34% being capitalized. To date the Company has
incurred $53 million in project costs ($37 million in expense and $16 million in
capital). During 1999, the Company incurred $25 million in project costs ($14
million in expense and $11 million in capital). During the third quarter, the
Company plans to spend up to $17 million on the replacement of desktop
computers.
OUTLOOK FOR 1999*
- -----------------
Information regarding guidance for United's 1999 outlook can be
obtained from UAL Corporation's Report on Form 10-Q for the quarter ended June
30, 1999.
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains sections with forward-looking statements which
are identified with an asterisk (*). Information included in the "Update on Year
2000 Readiness" and the "Outlook for 1999" sections is forward-looking and
actual results could differ materially from expected results. Factors that could
significantly impact expected capacity, international revenues and profits, unit
revenues, fully distributed unit costs and fuel prices include: industry
capacity decisions, the airline pricing environment, fuel prices, the success of
the Company's cost-control efforts, actions of the U.S., foreign and local
governments, willingness of customers to travel, the Asian economic environment
and travel patterns, foreign currency exchange rate fluctuations, the stability
of the U.S. economy, UAL common stock price fluctuations, the economic
environment of the airline industry and the global economic environment. Some
factors that could significantly impact the Company's expected Year 2000
readiness and the estimated cost thereof include: the results of the system
integration testing and the sufficiency and effectiveness of the Year 2000
programs of the
<PAGE> 17
Company's critical business partners, including domestic and international
airport authorities, aircraft manufacturers and the Federal Aviation
Administration, to achieve Year 2000 readiness.
<PAGE> 18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
For information regarding the Company's exposure to certain market
risks, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk
in United's Annual Report on Form 10-K for the year 1998 and "Financial
Instruments and Risk Management" in Management's Discussion and Analysis of
Financial Condition and Results of Operations. Significant changes which have
occurred since year-end are as follows:
Foreign Currency Risk -
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------------------
(In millions, except average contract rates) Notional Average Estimated
Amount Contract Rate Fair Value
----------- ------------- ----------
Forward exchange contracts (Pay)/Receive*
<S> <C> <C> <C>
Japanese Yen - Purchased forwards $ 90 118.76 $ (2)
- Sold forwards $ 55 120.88 $ -
Hong Kong Dollar - Sold forwards $ 75 7.84 $ (1)
French Franc - Purchased forwards $ 50 5.05 $ -
Euro - Purchased forwards $ 117 1.37 $ (2)
Currency options
Japanese Yen - Call options $ 149 125.08 $ (7)
- Put options $ 148 125.89 $ 1
</TABLE>
Price Risk (Aircraft fuel) -
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------
(In millions, except average contract rates) Notional Average Estimated
Amount Contract Rate Fair Value
----------- ------------- -----------
(Pay)/Receive*
<S> <C> <C> <C>
Purchased call contracts - Crude oil $ 570 $ 17.65/bbl $ 37
</TABLE>
*Estimated fair values represent the amount United would pay/receive
on June 30, 1999 to terminate the contracts.
<PAGE> 19
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
A list of exhibits included as part of this Form 10-Q is set
forth in an Exhibit Index which immediately precedes such
exhibits.
(b) No reports on Form 8-K have been filed during the second quarter of
1999.
<PAGE> 20
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED AIR LINES, INC.
By: /s/ Douglas A. Hacker
-----------------------------------
Douglas A. Hacker
Executive Vice President -
Finance & Planning and
Chief Financial Officer
(principal financial officer)
By: /s/ M. Lynn Hughitt
-----------------------------------
M. Lynn Hughitt
Vice President and Controller
(principal accounting officer)
Dated: August 16, 1999
<PAGE> 21
Exhibit Index
Exhibit No. Description
- ----------- -----------
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
<PAGE> 1
Exhibit 12
United Air Lines, Inc. and Subsidiary Companies
-----------------------------------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
------------------
June 30
1999 1998
---- ----
(In Millions)
Earnings:
<S> <C> <C>
Earnings before income taxes and extraordinary item $ 1,158 $ 509
Fixed charges, from below 508 482
Undistributed earnings of affiliates (27) (37)
Interest capitalized (36) (56)
------- -------
Earnings $ 1,603 $ 898
======= =======
Fixed charges:
Interest expense $ 188 $ 176
Portion of rental expense representative
of the interest factor 320 306
------- -------
Fixed charges $ 508 $ 482
======= =======
Ratio of earnings to fixed charges 3.15 1.86
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED AIR
LINES, INC.'S STATEMENT OF CONSOLIDATED OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 1999 AND CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,088
<SECURITIES> 221
<RECEIVABLES> 1,607
<ALLOWANCES> 0
<INVENTORY> 275
<CURRENT-ASSETS> 3,734
<PP&E> 20,061
<DEPRECIATION> 5,814
<TOTAL-ASSETS> 21,641
<CURRENT-LIABILITIES> 6,136
<BONDS> 5,066
0
0
<COMMON> 0
<OTHER-SE> 5,349
<TOTAL-LIABILITY-AND-EQUITY> 21,641
<SALES> 0
<TOTAL-REVENUES> 8,680
<CGS> 0
<TOTAL-COSTS> 8,115
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188
<INCOME-PRETAX> 1,158
<INCOME-TAX> 417
<INCOME-CONTINUING> 741
<DISCONTINUED> 0
<EXTRAORDINARY> 3
<CHANGES> 0
<NET-INCOME> 738
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
