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 September 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
-------- ----------
(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 October 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).
United Air Lines, Inc. and Subsidiary Companies Report on Form 10-Q
- -------------------------------------------------------------------
For the Quarter Ended September 30, 1999
----------------------------------------
Index
- -----
PART I. FINANCIAL INFORMATION Page No.
- ------ --------------------- --------
Item 1. Financial Statements
Condensed Statements of Consolidated 3
Financial Position - as of September 30,
1999 (Unaudited) and December 31, 1998
Statements of Consolidated Operations 5
(Unaudited) - for the three months and
nine months ended September 30, 1999
and 1998
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the nine
months ended September 30, 1999 and 1998
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 18
Market Risk
PART II. OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
- ----------
Exhibit Index 21
- -------------
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>
September 30, December 31,
1999 1998
Assets (Unaudited)
- ------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 870 $ 326
Short-term investments 463 360
Receivables, net 1,492 1,134
Related party receivables 250 46
Inventories, net 343 384
Deferred income taxes 229 259
Prepaid expenses and other 303 308
------ ------
3,950 2,817
------ ------
Operating property and equipment:
Owned 17,350 16,125
Accumulated depreciation and
amortization (5,257) (5,174)
------ ------
12,093 10,951
------ ------
Capital leases 3,027 2,702
Accumulated amortization (624) (599)
------ ------
2,403 2,103
------ ------
14,496 13,054
------ ------
Other assets:
Investments in affiliates 671 304
Intangibles, net 538 676
Related party receivables 465 430
Aircraft lease deposits 592 545
Prepaid rent 627 626
Other 452 378
------ ------
3,345 2,959
------ ------
$ 21,791 $ 18,830
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
<TABLE>
<CAPTION>
September 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 260 274
Related party debt maturing
within one year 159 128
Advance ticket sales 1,735 1,429
Accounts payable 1,011 1,144
Other 2,943 2,551
------ ------
6,108 5,710
------ ------
Long-term debt 2,676 2,858
------ ------
Long-term obligations under capital
leases 2,390 2,113
------ ------
Other liabilities and deferred credits:
Deferred pension liability 12 89
Postretirement benefit liability 1,543 1,424
Deferred gains 1,004 1,180
Other 1,537 1,132
------ ------
4,096 3,825
------ ------
Preferred stock committed to
Supplemental ESOP 815 691
------ ------
Stockholder's equity:
Common stock at par - -
Additional capital invested 235 21
ESOP capital 3,137 2,630
Retained earnings 2,200 1,108
Unearned ESOP preferred stock (213) (121)
Accumulated other comprehensive income 355 (2)
Other (8) (3)
------ ------
5,706 3,633
------ ------
Commitments and contingent liabilities (See note)
$ 21,791 $ 18,830
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions)
<TABLE>
<CAPTION>
Three Months
Ended September 30
------------------
1999 1998
---- ----
<S> <C> <C>
Operating revenues:
Passenger $ 4,282 $ 4,263
Cargo 223 228
Other 329 281
------ ------
4,834 4,772
------ ------
Operating expenses:
Salaries and related costs 1,420 1,350
ESOP compensation expense 175 173
Aircraft fuel 465 470
Commissions 316 354
Purchased services 408 384
Aircraft rent 218 221
Landing fees and other rent 239 225
Depreciation and amortization 214 199
Aircraft maintenance 168 165
Other 600 544
------ ------
4,223 4,085
------ ------
Earnings from operations 611 687
------ ------
Other income (expense):
Interest expense (92) (94)
Interest capitalized 19 26
Interest income 21 15
Equity in earnings(loss) of affiliates (1) 19
Miscellaneous, net (5) (16)
------ ------
(58) (50)
------ ------
Earnings before income taxes 553 637
Provision for income taxes 199 217
------ ------
Net earnings $ 354 $ 420
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------
1999 1998
---- ----
<S> <C> <C>
Operating revenues:
Passenger $ 11,951 $ 11,777
Cargo 658 666
Other 905 804
------ ------
13,514 13,247
------ ------
Operating expenses:
Salaries and related costs 4,249 3,959
ESOP compensation expense 539 663
Aircraft fuel 1,280 1,346
Commissions 890 1,000
Purchased services 1,167 1,098
Aircraft rent 657 673
Landing fees and other rent 714 664
Depreciation and amortization 637 582
Aircraft maintenance 523 462
Other 1,683 1,535
------ ------
12,339 11,982
------ ------
Earnings from operations 1,175 1,265
------ ------
Other income (expense):
Interest expense (280) (270)
Interest capitalized 56 82
Interest income 44 44
Equity in earnings of affiliates 38 62
Gain on sale of Galileo stock 669 -
Miscellaneous, net 9 (37)
------ ------
536 (119)
------ ------
Earnings before income taxes and
extraordinary item 1,711 1,146
Provision for income taxes 616 391
------ ------
Earnings before extraordinary item 1,095 755
Extraordinary loss on early
extinguishment of debt, net (3) -
------ ------
Net earnings $ 1,092 $ 755
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In Millions)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------
1999 1998
---- ----
<S> <C> <C>
Cash and cash equivalents at beginning
of period $ 326 $ 268
Cash flows from operating activities 2,200 2,776
Cash flows from investing activities:
Additions to property and equipment (1,758) (2,389)
Proceeds on disposition of property
and equipment 147 413
Proceeds on sale of common shares
in Galileo 766 -
Decrease (increase) in short-term
investments (103) 109
Increase in related party receivables (35) (15)
Other, net (56) (40)
------ ------
(1,039) (1,922)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 286 831
Repayment of long-term debt (492) (247)
Principal payments under capital
lease obligations (209) (270)
Decrease in short-term borrowings (184) -
Purchase of equipment certificates
under Company operating leases (47) (655)
Aircraft lease deposits (25) (160)
Dividend to parent company - (250)
Increase in related party debt 31 22
Other, net 23 1
------ ------
(617) (728)
------ ------
Increase in cash and cash equivalents 544 126
------ ------
Cash and cash equivalents at end
of period $ 870 $ 394
====== ======
Cash paid during the period for:
Interest (net of amounts capitalized) $ 186 $ 166
Income taxes $ 223 $ 128
Non-cash transactions:
Capital lease obligations incurred $ 482 $ 635
Net unrealized gain on investment
in Galileo $ 359 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
United Air Lines, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
The Company
- -----------
United Air Lines, Inc. ("United") is a wholly owned
subsidiary of UAL Corporation ("UAL").
Interim Financial Statements
- ----------------------------
The consolidated financial statements included herein
have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or
omitted pursuant to or as permitted by such rules and
regulations, although United believes that the disclosures
are adequate to make the information presented not
misleading. In management's opinion, all adjustments
(which include only normal recurring adjustments) necessary
for a fair presentation of the results of operations for
the three and nine month periods have been made. These
financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto
included in United's Annual Report on Form 10-K for the
year 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
agreements, stock to be issued to employees and the related
accounting treatment. Since January 1999, 2,305,479 shares
of Class 1 and Class 2 ESOP Preferred Stock have been
committed to be released by the Company.
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.
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 reduced United's
depreciation expense by $30 million for the nine months
ended September 30, 1999.
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:
<TABLE>
<CAPTION>
(In Millions) Three Months Ended September 30, 1999
- ------------- -------------------------------------
Consolidated
Latin and Reportable
Domestic Pacific America Atlantic Segment Total
-------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $3,340 $ 722 $ 201 $ 571 $4,834
Fully distributed earnings
before income taxes $ 500 $ 100 $ 22 $ 106 $ 728
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Three Months Ended September 30, 1998
- ------------- -------------------------------------
Consolidated
Latin and Reportable
Domestic Pacific America Atlantic Segment Total
-------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $3,269 $ 760 $ 209 $ 534 $4,772
Fully distributed earnings
before income taxes $ 625 $ 48 $ 13 $ 124 $ 810
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Nine Months Ended September 30, 1999
- ------------- ------------------------------------
Consolidated
Latin and Reportable
Domestic Pacific America Atlantic Segment Total
-------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $9,421 $2,006 $ 587 $1,500 $13,514
Fully distributed earnings
before income taxes $1,616 $ 262 $ 76 $ 296 $ 2,250
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Nine Months Ended September 30, 1998
- ------------- ------------------------------------
Consolidated
Latin and Reportable
Domestic Pacific America Atlantic Segment Total
-------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $9,057 $2,165 $ 625 $1,400 $13,247
Fully distributed earnings
before income taxes $1,478 $ 49 $ 49 $ 233 $ 1,809
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------- ---------------
(In Millions) 1999 1998 1999 1998
- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total fully distributed earnings
for reportable segments $ 728 $ 810 $2,250 $1,809
Less: ESOP compensation expense 175 173 539 663
---- ---- ----- -----
Total earnings before income taxes
and extraordinary item $ 553 $ 637 $1,711 $1,146
==== ==== ===== =====
</TABLE>
Included in the nine-months ended September 30, 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 available-for-sale. The market value of these
shares at September 30, 1999 ($642 million) is reflected in
Investments in Affiliates on the balance sheet and the
market value in excess of United's investment is classified
net-of-tax ($359 million) in accumulated other comprehensive
income. Equity earnings in Galileo were $16 million for the
three-month period ended September 30, 1998, and $40 million
and $54 million for the nine-month periods ended September
30, 1999 and 1998, respectively.
United owns approximately 2.1 million depositary
certificates in Equant, a provider of international data
network services to multinational businesses and a single
source for global desktop communications. Each depositary
certificate represents a beneficial interest in an Equant
common share. These depositary certificates are currently
subject to certain transferability restrictions and are
carried at their original cost, which is nominal. At
September 30, 1999, the estimated fair value of United's
investment in Equant is approximately $171 million.
GetThere.com 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. After investing $19
million in exchange for preferred shares and warrants,
United's holdings are convertible into an approximate 22
percent equity interest in GetThere.com. In October 1999,
GetThere.com filed an initial public offering for 5.0
million common shares. United has participation rights
allowing for the purchase of 10 percent of the shares
offered in the initial public offering. 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 also received warrants
exercisable for 2.0 million shares of Buy.com common stock.
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 nine-
month periods ending September 30, 1999 was $217 million
and $1,450 million, respectively, compared to $421 million
and $756 million for the three- and nine-month periods
ending September 30, 1998, respectively. Other
comprehensive income (loss) consisted of net unrealized
gains (losses) on securities of $(137) million and $358
million for the three- and nine-month periods ending
September 30, 1999, respectively, and $1 million for the
three- and nine-month periods ending September 30, 1998.
Retirement and Postretirement Plans
- -----------------------------------
On June 30, 1999, the Company re-measured its pension
and postretirement plans due to the addition to the plan
of approximately 6,000 public contact employees hired after
January 1, 1994 (see "Labor Agreements" in Management's
Discussion and Analysis of Financial Condition and Results
of Operations). The assumptions used for the re-
measurement of the plans were unchanged from December 31,
1998, except for a revision in the discount rate from 7.0%
to 7.75%. As of June 30, 1999, the projected benefit
obligation and the fair value of plan assets for the
pension plans are $7,472 million and $7,946 million,
respectively. The projected benefit obligation and the
fair value of plan assets for the postretirement plans are
$1,512 million and $114 million, respectively.
Contingencies and Commitments
- -----------------------------
United has certain contingencies resulting from
litigation and claims (including environmental issues)
incident to the ordinary course of business. Management
believes, after considering a number of factors, including
(but not limited to) the views of legal counsel, the nature
of contingencies to which United is subject and its prior
experience, that the ultimate disposition of these
contingencies is not expected to materially affect United's
consolidated financial position or results of operations.
At September 30, 1999, commitments for the purchase
of property and equipment, principally aircraft,
approximated $4.7 billion, after deducting advance
payments. An estimated $0.9 billion will be spent during
the remainder of 1999, $1.8 billion in 2000, $1.6 billion
in 2001 and $0.4 billion in 2002 and thereafter. The major
commitments are for the purchase of B777, B747, B767, A320
and A319 aircraft, which are scheduled to be delivered
through 2002.
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 $1.333 billion at September 30, 1999,
compared to $686 million at December 31, 1998. Cash flows
from operating activities for the nine-month period
amounted to $2.2 billion. Financing activities included
principal payments under debt and capital lease obligations
of $492 million and $209 million, respectively, and $25
million in aircraft lease deposits. Additionally, the
Company issued, and subsequently retired, $286 million in
debt to finance the acquisition of aircraft.
Property additions, including aircraft and aircraft
spare parts, amounted to $1.8 billion, while property
dispositions resulted in proceeds of $147 million. During
1999, United took delivery of two A320, eight A319, four
B777, two B757, three B767 and seven B747 aircraft.
Fourteen of the aircraft were purchased and twelve were
acquired under capital leases. In addition, United
acquired two B727 aircraft off-lease during 1999 and
retired five DC10 and six 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 September 30, 1999, commitments for the purchase
of property and equipment, principally aircraft,
approximated $4.7 billion, after deducting advance
payments. Of this amount, an estimated $0.9 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 $1.175 billion
in the nine months ended September 30 1999, compared to
$1.265 billion for the same period in 1998. United's net
earnings before an extraordinary loss on early
extinguishment of debt were $1,095 million compared to net
earnings of $755 million during the same period of 1998.
The 1999 nine-month 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).
In the third quarter of 1999, United's earnings from
operations were $611 million compared to operating earnings
of $687 million in the third quarter of 1998. United had
net earnings in the 1999 third quarter of $354 million,
compared to net earnings of $420 million in the same period
of 1998.
Specific factors affecting United's consolidated
operations for the third quarter and first nine months of
1999 are described below.
Third Quarter 1999 Compared with Third Quarter 1998
---------------------------------------------------
Operating revenues increased $62 million (1%) and
United's revenue per available seat mile (unit revenue)
increased slightly to 10.50 cents compared to 10.39 cents a
year ago. Despite a 1% decrease in revenue passenger
miles, passenger revenues increased $19 million (0.4%) due
to a 2% increase in yield from 12.10 to 12.29 cents. In
addition, third quarter 1998 revenues were favorably
impacted by a strike at Northwest airlines. Available seat
miles across the system were up slightly over the third
quarter of 1998; however, passenger load factor decreased
1.0 point to 75.1%. The following analysis by market is
based on information reported to the U.S. Department of
Transportation:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Available Seat Revenue Passenger Miles Revenue Per Revenue
Miles (Capacity) (Traffic) Passenger Mile (Yield)
---------------- ----------------------- ----------------------
<S> <C> <C> <C>
Domestic 5% 1% 1%
Pacific (18%) (16%) 10%
Atlantic 14% 14% (7%)
Latin America (13%) (4%) -
System - (1%) 2%
</TABLE>
Pacific yields improved on capacity reductions in the
region and improving Asian economies. Atlantic yield
continues to be impacted by a negative pricing environment
resulting from excess industry capacity. Improving
economic conditions and industry capacity reductions
resulted in increased unit revenue in the Latin market
although yields remained flat year-over-year.
Cargo revenues decreased $5 million (2%) despite a
slight increase in freight ton miles, as freight yields
declined 3% for the period. Other operating revenues
increased $48 million (17%) due to growth in frequent flyer
program partner-related revenues and fuel sales to third
parties.
Operating expenses increased $138 million (3%) and
United's cost per available seat mile inclusive of ESOP
compensation expense increased 3%, from 8.90 cents to 9.18
cents. Without the ESOP compensation expense, United's
cost per available seat mile would have been 8.80 cents, an
increase of 3% from the 1998 third quarter. Salaries and
related costs increased $70 million (5%) primarily due to
increased staffing in certain customer-contact positions.
Commissions decreased $38 million (11%) due to a change in
the commission structure implemented in the third quarter
of 1998 and lower commissionable revenues. Purchased
services increased $24 million (6%) due to increases in
computer reservations fees, credit card discounts and Year
2000 related spending. Depreciation and amortization
increased $15 million (8%) due to an increase in the number
of owned aircraft partially offset by changes in
depreciable lives of certain aircraft. Other operating
expense increased $56 million (10%) primarily due to costs
associated with fuel sales to third parties.
Other expense amounted to $58 million in the third
quarter of 1999 compared to $50 million in the third
quarter of 1998. Interest capitalized decreased $7 million
(27%) as a result of a lower weighted average interest
rate. Equity in earnings of affiliates decreased $20
million primarily due to the sale of the Company's
investment in Galileo (see "Investments in Affiliates" in
the Notes to Consolidated Financial Statements).
Nine Months 1999 Compared with Nine Months 1998
-----------------------------------------------
Operating revenues increased $267 million (2%) and
United's revenue per available seat mile (unit revenue)
remained the same at 10.18 cents. Passenger revenues
increased $174 million (1%) because of a slight increase in
yield from 12.45 to 12.50 cents and a 1% increase in
United's revenue passenger miles. Available seat miles
across the system were up 2%; however passenger load factor
decreased 0.6 points to 71.5%. The following analysis by
market is based on information reported to the U.S.
Department of Transportation:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Available Seat Revenue Passenger Miles Revenue Per Revenue
Miles (Capacity) (Traffic) Passenger Mile (Yield)
---------------- ----------------------- ----------------------
<S> <C> <C> <C>
Domestic 5% 2% 1%
Pacific (13%) (11%) (2%)
Atlantic 17% 16% (7%)
Latin America (7%) (2%) (5%)
System 2% 1% -
</TABLE>
Despite improving second and third quarter Pacific
yields, weak first quarter demand for travel in Pacific
markets continues to negatively impact year-to-date yields.
Yields in other international markets have been impacted by
a negative pricing environment resulting from excess
industry capacity.
Cargo revenues decreased $8 million (1%) despite
increased freight ton miles of 2%. A 2% decline in freight
yield together with a 3% lower mail yield, resulted in a 3%
decrease in cargo yield for the period. Other operating
revenues increased $101 million (13%) due to increases in
frequent flyer program partner-related revenues and fuel
sales to third parties.
Operating expenses increased $357 million (3%) and
United's cost per available seat mile, inclusive of ESOP
compensation expense increased 1%, from 9.21 cents to 9.29
cents. Without the ESOP compensation expense, United's
cost per available seat mile would have been 8.89 cents, an
increase of 2% from the 1998 nine-month period. ESOP
compensation expense decreased $124 million (19%),
reflecting the decrease in the estimated average fair value
of stock committed to the supplemental ESOP as a result of
UAL's lower common stock price. Salaries and related costs
increased $290 million (7%) due to ESOP mid-term wage
adjustments which took place in July 1998 and increased
staffing in certain customer-contact positions. Aircraft
fuel decreased $66 million (5%) due to a 6% decrease in the
cost of fuel from 59.4 cents to 55.7 cents a gallon.
Commissions decreased $110 million (11%) due to a change in
the commission structure implemented in the third quarter
of 1998 as well as a slight decrease in commissionable
revenues. Purchased services increased $69 million (6%)
due to increases in computer reservations fees and year
2000 expenses. Depreciation and amortization increased $55
million (9%) 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.
Aircraft maintenance increased $61 million (13%) due to an
increase in heavy maintenance visits. Other operating
expenses increased $148 million (10%) primarily due to
costs associated with fuel sales to third parties.
Other expense amounted to $133 million in the first
nine months of 1999 (excluding the gain on the Galileo
transaction - see "Investments in Affiliates" in the Notes
to Consolidated Financial Statements) compared to $119
million in the first nine months of 1998. Interest
capitalized decreased $26 million (32%) as a result of
lower advance payments on the acquisition of aircraft and a
lower weighted average interest rate. Equity in earnings
of affiliates decreased $24 million (39%) due primarily to
the sale of the Company's investment in Galileo.
Miscellaneous, net included foreign exchange gains of $10
million in 1999 compared to foreign exchange losses of $24
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.
The Company's contracts with the Air Line Pilots'
Association International ("ALPA") and the IAM become
amendable in April and July 2000, respectively. The Company
is currently in the process of negotiating a new contract
with ALPA and expects to begin negotiations shortly for a
new contract with the IAM. Wage rates for U.S.-based non-
union employees will be adjusted in April 2000 as well.
These negotiations and wage rate adjustments are
expected to materially increase the Company's salaries and
related costs over 1999 levels. At the same time, once the
final ESOP shares are committed to be released in April
2000, the Company will no longer record ESOP compensation
expense. It is the Company's objective through this wage
adjustment process to provide compensation for its employees
that, on average over the life of the labor contracts, is
competitive with peer group compensation. In this regard,
wages for airline employees over the last year have
increased at faster than historical rates. Thus to achieve
competitive compensation will result in higher salaries and
related costs than the Company originally anticipated.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
-----------------------------------------
During the second quarter, United reinstated its jet
fuel-hedging program. This program consists of hedging
100% of probable jet fuel requirements with crude oil
purchased call options and fixed price jet fuel contracts.
It is United's goal to hedge 100% of probable jet fuel
purchases for year 2000 by December 1999. 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 September 30,
1999, United has purchased call options on approximately
1.5 billion gallons of fuel products, which represents 89%
of United's anticipated fourth quarter fuel requirements
and 26% of its expected year 2000 fuel requirements. At
September 30, 1999, United has fixed price purchase
contracts for approximately 11% of its anticipated fourth
quarter fuel requirements and 6% of its expected 2000
requirements.
During the fourth quarter, United will reinstate its
foreign currency hedging program. United's strategy will
consist of purchasing put option contracts with little or
no intrinsic value in yen, euro, Australian dollars and
British pounds. The amount and duration of the options are
synchronized to anticipated sales, and thus the put options
will be designated as a hedge. A component of this
strategy includes selling correlation options in the
previously mentioned currencies. These written options
will not qualify for hedge accounting treatment and will be
marked-to-market with changes in the option's fair value
recorded in earnings.
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, Non-IT systems and Critical Business
Partners. The Company believes it has successfully
completed the five-step readiness plan. The Company
anticipates safe uninterrupted operations of the airlines
into the calendar year 2000. Through the remainder of 1999,
the Company will continue re-testing mission critical IT
systems and non-IT systems.
The Company expects to operate all scheduled domestic
flights into the calendar year 2000. The Company is in the
process of reviewing the air traffic control and airport
systems at international locations to determine if Year 2000
issues warrant cancellation of specific international
routes. Some international flights may be cancelled during
the New Year weekend due to low passenger demand.
The Company has developed contingency plans for all
mission critical business processes by revising existing
business interruption contingency plans to address
contingencies unique to the Year 2000 date rollover. These
contingency plans include performing processes manually,
repairing or obtaining replacement systems, changing
suppliers and reducing or suspending operations. During the
third quarter, the Company conducted airline readiness
reviews to ensure that all divisions of the Company have
completed their five-step readiness plan, including
validating all contingency plans. 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 $80 and $85 million, with approximately 35% being
capitalized. To date the Company has incurred $74 million
in project costs ($43 million in expense and $31 million in
capital). During 1999, the Company incurred $45 million in
project costs ($20 million in expense and $25 million in
capital).
AIR CANADA
----------
On October 19, 1999, the Company announced its
intentions, along with Deutsche Lufthansa AG ("Lufthansa"),
to provide a financial package of up to 730 million
Canadian dollars for Air Canada. United's investment in
Air Canada's non-voting convertible preferred shares will
be made through an investment partnership owned by UAL
(40%) and Lufthansa (60%).
The remaining investment in Air Canada will consist
of the purchase from and subsequent leaseback to Air Canada
of three Airbus A330 aircraft and a commitment by the Company
to guarantee a 160 million Canadian dollar line of credit.
OUTLOOK
-------
Information regarding guidance for United's 1999
outlook can be obtained from UAL Corporation's Report on
Form 10-Q for the quarter ended September 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, unit revenues, and fuel prices
include: industry capacity decisions, the airline pricing
environment, fuel prices, actions of travel agents, the
success of the Company's cost-control efforts, actions of
the U.S., foreign and local governments, willingness of
customers to travel, the Pacific 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 effectiveness of
the Company's contingency plans if such plans are needed, and the
sufficiency and effectiveness of the Year 2000 programs of
the Company's critical business partners, including domestic
and international airport authorities, aircraft
manufacturers and the Federal Aviation Administration, to
achieve Year 2000 readiness.
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>
September 30, 1999
------------------
(In millions, except average contract rates) Notional Average Estimated
- -------------------------------------------- Amount Contract Rate Fair Value
-------- ------------- ----------
(Pay)/Receive)*
<S> <C> <C> <C>
Forward exchange contracts
Japanese Yen - Purchased forwards $ 113 107.11 $ 1
- Sold forwards $ 62 105.92 $ -
Hong Kong Dollar - Sold forwards $ 77 7.85 $ (1)
French Franc - Purchased forwards $ 50 5.05 $ (1)
Euro - Purchased forwards $ 117 1.37 $ (3)
Currency options
Japanese Yen - Call options $ 30 114.80 $ (3)
- Put options $ 30 115.57 $ -
</TABLE>
<TABLE>
<CAPTION>
September 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 $ 772 $20.02/bbl $ 130
</TABLE>
*Estimated fair values represent the amount United would pay/receive on
September 30, 1999 to terminate the contracts.
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 third
quarter of 1999.
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: November 11, 1999
Exhibit Index
-------------
Exhibit No. Description
- ---------- -----------
10.1 Letter Agreement No. 6-1162-BRB-400 to the
Agreement dated December 18, 1990 between Boeing
and United Air Lines, Inc. ("United") (and United
Worldwide Corporation) for acquisition of Boeing
777-200 aircraft (as previously amended and
supplemented, the "777-200 Purchase Agreement"
(filed as Exhibit 10.7 to UAL's Form 10-K for the
year ended December 31, 1990, and incorporated
herein by reference; supplements thereto filed as
(i) Exhibits 10.1, 10.2 and 10.22 to UAL's Form
10-Q for the quarter ended June 30, 1993, (ii)
Exhibit 10.2 to UAL's Form 10-K for the year
ended December 31, 1993, (iii) Exhibit 10.14 to
UAL's Form 10-Q for the quarter ended June 30,
1994, (iv) Exhibits 10.27 and 10.28 to UAL's Form
10-K for the year ended December 31, 1994, (v)
Exhibits 10.2 and 10.3 to UAL's Form 10-Q for the
quarter ended March 31, 1995, (vi) Exhibits 10.4,
through 10.6 to UAL's Form 10-Q for the quarter
ended June 30, 1995, (vii) Exhibits 10.37 through
10.40 to UAL's Form 10-K for the year ended
December 31, 1995, (viii) Exhibits 10.9 through
10.12 and 10.17 through 10.19 to UAL's Form 10-Q
for the quarter ended June 30, 1996, (ix)
Exhibits 10.38 through 10.43 to UAL's Form 10-K
for the year ended December 31, 1998, and (x)
Exhibit 10.1 to UAL's Form 10-Q for the quarter
ended March 31, 1999 and incorporated herein by
reference)). (Filed as Exhibit 10.2 to UAL's
Form 10-Q for the quarter ended September 30,
1999 with a request for confidential treatment of
certain portions, and incorporated herein by
reference.)
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
Exhibit 12
United Air Lines, Inc. and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
1999 1998
---- ----
(In Millions)
<S> <C> <C>
Earnings:
Earnings before income taxes $ 1,711 $ 1,146
Fixed charges, from below 766 742
Undistributed earnings of affiliates (26) (53)
Interest capitalized (56) (82)
------ ------
Earnings $ 2,395 $ 1,753
====== ======
Fixed charges:
Interest expense $ 280 $ 270
Portion of rental expense representative
of the interest factor 486 472
------ ------
Fixed charges $ 766 $ 742
====== ======
Ratio of earnings to fixed charges 3.13 2.36
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM UNITED AIR LINES, INC.'S STATEMENT OF CONSOLIDATED
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000,000
<S>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<CASH> 870
<SECURITIES> 463
<RECEIVABLES> 1,742
<ALLOWANCES> 0
<INVENTORY> 343
<CURRENT-ASSETS> 3,950
<PP&E> 20,377
<DEPRECIATION> 5,881
<TOTAL-ASSETS> 21,791
<CURRENT-LIABILITIES> 6,108
<BONDS> 5,066
0
0
<COMMON> 0
<OTHER-SE> 5,706
<TOTAL-LIABILITY-AND-EQUITY> 21,791
<SALES> 0
<TOTAL-REVENUES> 13,514
<CGS> 0
<TOTAL-COSTS> 12,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280
<INCOME-PRETAX> 1,711
<INCOME-TAX> 616
<INCOME-CONTINUING> 1,095
<DISCONTINUED> 0
<EXTRAORDINARY> 3
<CHANGES> 0
<NET-INCOME> 1,092
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
