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, 2000
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
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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, 2000
----- --------------
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
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For the Quarter Ended June 30, 2000
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Index
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PART I. FINANCIAL INFORMATION Page No.
------ --------------------- -------
Item 1. Financial Statements
------ --------------------
Condensed Statements of Consolidated 3
Financial Position - as of June 30, 2000
(Unaudited) and December 31, 1999
Statements of Consolidated Operations 5
(Unaudited) - for the six months
ended June 30, 2000 and 1999
Condensed Statements of Consolidated 7
Cash Flows (Unaudited) - for the six
months ended June 30, 2000 and 1999
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 16
Market Risk
PART II. OTHER INFORMATION
------- -----------------
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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Exhibit Index 19
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
June 30, 2000 December 31,
Assets (Unaudited) 1999
------ ----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 644 $ 235
Short-term investments 496 292
Receivables, net 1,686 1,275
Related party receivables 233 256
Inventories, net 361 340
Income tax receivables 34 85
Deferred income taxes 225 226
Prepaid expenses and other 386 363
------ ------
4,065 3,072
------ ------
Operating property and equipment:
Owned 18,650 17,695
Accumulated depreciation and
amortization (5,503) (5,207)
------ ------
13,147 12,488
------ ------
Capital leases 2,921 3,022
Accumulated amortization (589) (645)
------ ------
2,332 2,377
------ ------
15,479 14,865
------ ------
Other assets:
Investments in affiliates 379 533
Intangibles, net 580 568
Related party receivables 473 465
Aircraft lease deposits 581 594
Prepaid rent 652 626
Other, net 887 820
------ ------
3,552 3,606
------ ------
$23,096 $21,543
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position
(In Millions)
June 30, 2000 December 31,
Liabilities and Stockholder's Equity (Unaudited) 1999
------------------------------------ ------------- ------------
<S> <C> <C>
Current liabilities:
Short-term borrowings $ - $ 61
Current portions of long-term debt
and capital lease obligations 314 282
Related party debt maturing
within one year 170 187
Advance ticket sales 1,994 1,412
Accounts payable 1,114 1,030
Other 3,389 2,657
------ ------
6,981 5,629
------ ------
Long-term debt 2,554 2,650
------ ------
Long-term obligations under capital leases 2,202 2,336
------ ------
Other liabilities and deferred credits:
Deferred pension liability 126 70
Postretirement benefit liability 1,566 1,489
Deferred gains 949 986
Other 2,001 1,891
------ ------
4,642 4,436
------ ------
Preferred stock committed to
Supplemental ESOP 751 893
------ ------
Stockholder's equity:
Common stock at par - -
Additional capital invested 234 237
ESOP capital 3,295 3,035
Retained earnings 2,261 2,012
Unearned ESOP preferred stock - (28)
Accumulated other comprehensive income 182 352
Other (6) (9)
------ ------
5,966 5,599
------ ------
Commitments and contingent
liabilities (See note)
$23,096 $21,543
====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions)
Three Months
Ended June 30
2000 1999
---- ----
<S> <C> <C>
Operating revenues:
Passenger $ 4,567 $ 3,989
Cargo 233 227
Other 298 314
------ ------
5,098 4,530
------ ------
Operating expenses:
Salaries and related costs 1,589 1,420
ESOP compensation expense 55 182
Aircraft fuel 589 420
Commissions 252 291
Purchased services 429 379
Aircraft rent 223 220
Landing fees and other rent 250 248
Depreciation and amortization 247 213
Special charges 61 -
Aircraft maintenance 163 176
Other 643 557
------ ------
4,501 4,106
------ ------
Earnings from operations 597 424
------ ------
Other income (expense):
Interest expense (97) (94)
Interest capitalized 20 17
Interest income 20 11
Equity in earnings (loss) of affiliates (1) 15
Gain on sale of Galileo stock - 669
Miscellaneous, net (13) -
------ ------
(71) 618
------ ------
Earnings before income taxes
and extraordinary item 526 1,042
Provision for income taxes 195 376
------ ------
Earnings before extraordinary item 331 666
Extraordinary loss on early
extinguishment of debt, net - (3)
------ ------
Net earnings $ 331 $ 663
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations (Unaudited)
(In Millions)
Six Months
Ended June 30
2000 1999
---- ----
<S> <C> <C>
Operating revenues:
Passenger $ 8,535 $ 7,669
Cargo 450 435
Other 646 576
------ ------
9,631 8,680
------ ------
Operating expenses:
Salaries and related costs 3,013 2,829
ESOP compensation expense 147 364
Aircraft fuel 1,128 815
Commissions 501 574
Purchased services 832 759
Aircraft rent 446 439
Landing fees and other rent 483 475
Depreciation and amortization 478 424
Special charges 64 -
Aircraft maintenance 352 354
Other 1,308 1,082
------ ------
8,752 8,115
------ ------
Earnings from operations 879 565
------ ------
Other income (expense):
Interest expense (198) (188)
Interest capitalized 40 36
Interest income 36 23
Equity in earnings (loss) of affiliates (2) 39
Gain on sale of Galileo stock - 669
Miscellaneous, net (25) 14
------ ------
(149) 593
------ ------
Earnings before income taxes,
extraordinary item and cumulative effect 730 1,158
Provision for income taxes 271 417
------ ------
Earnings before extraordinary item
and cumulative effect 459 741
Extraordinary loss on early
extinguishment of debt, net - (3)
Cumulative effect of accounting change,net (209) -
------ ------
Net earnings $ 250 $ 738
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In Millions)
Six Months
Ended June 30
2000 1999
---- ----
<S> <C> <C>
Cash and cash equivalents at
beginning of period $ 235 $ 326
------ ------
Cash flows from operating activities 2,127 1,640
------ ------
Cash flows from investing activities:
Additions to property and equipment (1,122) (1,306)
Proceeds on disposition of property
and equipment 6 141
Proceeds on sale of common shares
in Galileo - 766
Decrease (increase) in short-term
investments (204) 139
Increase in related party receivables (8) (32)
Other, net (153) (25)
------ ------
(1,481) (317)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 200 286
Repayment of long-term debt (279) (456)
Principal payments under capital
lease obligations (98) (165)
Purchase of equipment debt certificates
under Company leases - (47)
Decrease in short-term borrowings (61) (184)
Aircraft lease deposits 5 (25)
Increase (decrease) in related party debt (16) 18
Other, net 12 10
------ ------
(237) (561)
------ ------
Increase in cash and cash equivalents 409 762
------ ------
Cash and cash equivalents at
end of period $ 644 $ 1,088
====== ======
Cash paid during the period for:
Interest (net of amounts capitalized) $ 157 $ 137
Income taxes $ 16 $ 55
Non-cash transactions:
Capital lease obligations incurred $ 3 $ 482
Net unrealized gain (loss) on
investments $ (170) $ 495
</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 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
1999.
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 1999 Annual Report on
Form 10-K contains additional discussion of the agreements,
stock to be issued to employees and the related accounting
treatment. Shares earned in 1999 were allocated in March 2000
as follows: 434,465 shares of Class 2 ESOP Preferred Stock were
contributed to the Non-Leveraged ESOP and an additional 248,572
shares were allocated in "book entry" form under the
Supplemental Plan. Also, 2,390,931 shares of Class 1 ESOP
Preferred Stock were allocated under the Leveraged ESOP.
Finally, an additional 857,096 shares of Class 1 and Class 2
ESOP Preferred Stock have been committed to be released by the
Company since January 1, 2000.
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.
Other Comprehensive Income
--------------------------
Total comprehensive income for the three- and six-month
periods ending June 30, 2000 was $256 million and $80 million,
respectively, compared to $1,158 million and $1,233 million for
the three- and six-month periods ending June 30, 1999,
respectively. Other comprehensive income consisted of net
unrealized gains (losses) on securities of $(75) million and
$(170) million for the three- and six-month periods ending June
30, 2000, respectively and $495 million for both the three- and
six-month periods ending June 30, 1999.
Investments
-----------
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 ($428 million, net of tax). This sale reduced
United's holdings in Galileo from 32 percent to approximately 15
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.
Segment Information
-------------------
United has a global route network designed to transport
passengers and cargo between destinations in North America, the
Pacific, Latin America and Europe. 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 June 30, 2000
Reportable
Latin Segment Consolidated
Domestic Pacific Atlanic America Total Other Total
-------- ------- ------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $3,536 $ 769 $ 597 $ 196 $5,098 $ - $5,098
Fully distributed earnings* $517 $ 35 $ 76 $ 14 $ 642 $ - $ 642
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Three Months Ended June 30, 1999
Reportable
Latin Segment Consolidated
Domestic Pacific Atlanic America Total Other Total
-------- ------- ------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $3,194 $ 636 $ 520 $ 180 $4,530 $ - $4,530
Fully distributed earnings* $458 $ 27 $ 68 $ 2 $ 555 $ - $ 555
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Six Months Ended June 30, 2000
Reportable
Latin Segment Consolidated
Domestic Pacific Atlanic America Total Other Total
-------- ------- ------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $6,726 $1,458 $1,043 $ 404 $9,631 $ - $9,631
Fully distributed earnings* $750 $ 67 $ 87 $ 37 $ 941 $ - $ 941
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Six Months Ended June 30, 1999
Reportable
Latin Segment Consolidated
Domestic Pacific Atlanic America Total Other Total
-------- ------- ------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $6,081 $1,284 $ 929 $ 386 $8,680 $ - $8,680
Fully distributed earnings* $723 $ 28 $ 84 $ 18 $ 853 $ - $ 853
</TABLE>
*Fully distributed earnings before special charges, gain on
sale, income taxes, cumulative effect of accounting change and
extraordinary loss on debt.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(In Millions) 2000 1999 2000 1999
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total fully distributed earnings
for reportable segments $ 642 $ 555 $ 941 $ 853
Special charges (61) - (102) -
Gain on sale - 669 - 669
ESOP compensation expense (55) (182) (147) (364)
---- ---- ---- ----
Total earnings before income
taxes, extraordinary item
and cumulative effect $ 526 $1,042 $ 730 $1,158
==== ===== ==== =====
</TABLE>
Accounting Changes
------------------
During the first quarter of 2000, United changed its method
of accounting for the sale of mileage to participating partners
in its Mileage Plus program, in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements."
Under the new accounting method, a portion of revenue from the
sale of mileage (previously recognized in other revenue) is
deferred and recognized as passenger revenue when the
transportation is provided. Accordingly, United has recorded a
charge of $209 million, net of tax, for the cumulative effect of
a change in accounting principle to reflect the application of
the accounting method to prior years. This change resulted in a
reduction to revenues of approximately $12 million and $17
million in the second quarter and six-month periods of 2000,
respectively and would have impacted the second quarter and six-
month periods of 1999 by $18 million and $25 million,
respectively. As of June 30, 2000, the deferred revenue balance
relating to Mileage Plus was $389 million.
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 June 30, 2000, commitments for the purchase of property
and equipment, principally aircraft, approximated $4.5 billion,
after deducting advance payments. An estimated $1.4 billion
will be spent during the remainder of 2000, $1.9 billion in 2001
and $1.2 billion in 2002 and thereafter. The major commitments
are for the purchase of A319, A320, B747, B767 and B777
aircraft, which are scheduled to be delivered through 2002.
These amounts include a recent conversion of 12 option aircraft
to firm orders to be delivered in 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 $1.1 billion at June 30, 2000, compared to $527
million at December 31, 1999. Cash flows from operating
activities amounted to $2.1 billion. Financing activities
included principal payments under debt and capital lease
obligations of $279 million and $98 million, respectively.
Additionally, the Company issued, and subsequently retired, $200
million in long-term debt during the period to finance the
acquisition of aircraft.
Property additions, including aircraft and aircraft spare
parts, amounted to $1.1 billion. Property dispositions resulted
in proceeds of $6 million. In the first six months of 2000,
United took delivery of two A319, four A320, one B747, two B767
and two B777 aircraft. All of these aircraft were purchased.
In addition, United retired three DC10 aircraft in the first six
months.
At June 30, 2000, commitments for the purchase of property
and equipment, principally aircraft, approximated $4.5 billion,
after deducting advance payments. Of this amount, an estimated
$1.4 billion is expected to be spent during the remainder of
2000. 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 $879 million in the
first six months of 2000, compared to operating earnings of $565
million in the first six months of 1999. United's net earnings
before the cumulative effect of an accounting change were $459
million compared to net earnings before an extraordinary loss on
early extinguishment of debt of $741 million in the same period
of 1999.
In the second quarter of 2000, United's earnings from
operations were $597 million compared to operating earnings of
$424 million in the second quarter of 1999. United had net
earnings in the 2000 second quarter of $331 million, compared to
net earnings before the extraordinary loss of $666 million in
the same period of 1999.
The 2000 earnings for the quarter and six months include a
special charge of $15 million, net of tax, for seven leased B747-
238 aircraft that will continue to be leased but will no longer
be used for operating purposes beyond 2000 and a special charge
of $23 million, net of tax, for the retirement of the inflight
video system on certain B777-222 aircraft, which is being
replaced by an enhanced and more reliable inflight video system.
In addition, the 2000 earnings for the six-month period include
a special charge of $3 million, net of tax, associated with the
asset write-down on non-operating British Aerospace Advanced
Turbo-Prop ("ATP") aircraft previously used in the United
Express operation.
The 1999 earnings include a gain of $428 million, net of
tax, on the sale of a portion of United's investment in Galileo
(see "Investments" in the Notes to Consolidated Financial
Statements).
Specific factors affecting United's consolidated operations
for the second quarter and first six months of 2000 are described
below.
Second Quarter 2000 Compared with Second Quarter 1999
-----------------------------------------------------
Operating revenues increased $568 million (13%) and
United's revenue per available seat mile (unit revenue)
increased 14% to 11.57 cents. Passenger revenues increased $578
million (15%) due to a 7% increase in yield to 13.62 cents.
United's revenue passenger miles increased 7%, while available
seat miles across the system were down 1% over the second
quarter of 1999, resulting in a passenger load factor increase
of 5.5 points to 75.6%. 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 (4%) 4% 8%
Pacific 11% 18% 7%
Atlantic 3% 6% 11%
Latin America (13%) 5% 6%
System (1%) 7% 7%
</TABLE>
Cargo revenues increased $6 million (3%), despite a
decrease in cargo yield of 1%. Other operating revenues
decreased $16 million (5%) primarily due to the decrease in
frequent-flyer program partner-related revenues as a result of a
change in accounting principle.
Operating expenses increased $395 million (10%) and
United's cost per available seat mile (unit cost) increased 11%,
from 9.23 cents to 10.21 cents. Salaries and related costs
increased $169 million (12%) due to increased salaries in April
2000 as a result of the end of the ESOP. ESOP compensation
expense decreased $127 million (70%) as the Company discontinued
recording ESOP compensation expense when the final ESOP shares
were committed to be released in April 2000. Aircraft fuel
increased $169 million (40%) due to a 38% increase in the cost
of fuel from 54.5 cents to 75.0 cents a gallon. Commissions
decreased $39 million (13%) due to a change in the commission
structure implemented in the fourth quarter of 1999. Purchased
services increased $50 million (13%) due to increases in
computer reservations fees and credit card discounts.
Depreciation and amortization increased $34 million (16%) due to
an increase in the number of owned aircraft. Other operating
expenses increased $86 million (15%) primarily due to costs
associated with fuel sales to third parties.
Other non-operating expense amounted to $71 million in the
second quarter of 2000 compared to $51 million in the second
quarter of 1999 (excluding the gain on the Galileo transaction -
see "Investments" in the Notes to Consolidated Financial
Statements). Equity in earnings of affiliates decreased $16
million as a result of the Company discontinuing the equity
method of accounting for its investment in Galileo.
Miscellaneous, net includes $3 million in losses on currency
options and $4 million in foreign exchange losses in the second
quarter 2000 compared to $2 million in gains on currency options
and $3 million in foreign exchange losses in the 1999 second
quarter.
Six Months 2000 Compared with Six Months 1999
---------------------------------------------
Operating revenues increased $951 million (11%) and
United's revenue per available seat mile (unit revenue)
increased 11% to 11.12 cents. Passenger revenues increased $866
million (11%) due to an 8% increase in yield to 13.60 cents.
United's revenue passenger miles increased 3%, while available
seat miles across the system remained unchanged, resulting in a
passenger load factor increase of 2.4 points to 72.0%. 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 (1%) 3% 8%
Pacific 4% 5% 9%
Atlantic 3% 4% 10%
Latin America (12%) 1% 3%
System - 3% 8%
</TABLE>
Cargo revenues increased $15 million (3%), despite a
decrease in cargo yield of 3%. Other operating revenues
increased $70 million (12%) due to increased fuel sales to third
parties, partially offset by the decrease in frequent-flyer
program partner-related revenues as a result of a change in
accounting principle.
Operating expenses increased $637 million (8%) and
United's cost per available seat mile (unit cost) increased 8%,
from 9.36 cents to 10.11 cents. Salaries and related costs
increased $184 million (7%) due to increased salaries in April
2000 as a result of the end of the ESOP. ESOP compensation
expense decreased $217 million (60%) as the Company discontinued
recording ESOP compensation expense once the final ESOP shares
were committed to be released in April 2000. Aircraft fuel
increased $313 million (38%) due to a 36% increase in the cost
of fuel from 54.4 cents to 74.1 cents a gallon. Commissions
decreased $73 million (13%) due to a change in the commission
structure implemented in the fourth quarter of 1999. Purchased
services increased $73 million (10%) due to increases in
computer reservations fees and credit card discounts.
Depreciation and amortization increased $54 million (13%) due to
an increase in the number of owned aircraft. Other operating
expenses increased $226 million (21%) primarily due to costs
associated with fuel sales to third parties.
Other non-operating expense amounted to $149 million in
2000 compared to $76 million in 1999 (excluding the gain on the
Galileo transaction - see "Investments" in the Notes to
Consolidated Financial Statements). Equity in earnings of
affiliates decreased $41 million as a result of the Company
discontinuing the equity method of accounting for its investment
in Galileo. Miscellaneous, net includes $10 million in losses
on foreign currency options and $1 million in other foreign
exchange gains in the first six months of 2000, compared to $16
million in gains on written yen call options and $4 million of
other foreign exchange gains for the same period in 1999.
LABOR AGREEMENTS
----------------
On April 12, 2000, the Company's contract with the Air Line
Pilots' Association International ("ALPA") became amendable. The
Company has been in negotiations with ALPA since December 1998
for a new contract. However, on April 14, 2000, United and ALPA,
in a joint meeting with the National Mediation Board ("NMB"),
briefed the NMB on the status of negotiations and formally
requested their mediation assistance.
On July 12, 2000, the Company's contracts with the
International Association of Machinists and Aerospace Workers
("IAM") became amendable. The Company has been in negotiations
with the IAM since January for new contracts. Under the terms
of the Railway Labor Act, United's current agreements with ALPA
and the IAM will remain in effect while negotiations continue.
US AIRWAYS ACQUISITION
----------------------
UAL and US Airways Group, Inc. ("US Airways") announced
May 24 that their boards of directors had approved a definitive
merger agreement pursuant to which US Airways will be acquired
by United in an all-cash transaction valued at $4.3 billion.
The combination of United and US Airways will deliver
significant benefits to millions of passengers and hundreds of
communities throughout the United States. The new network will
make traveling more convenient for passengers, connecting US
Airways' eastern U.S. markets with United's east-west and
international markets. The merger is conditioned upon, among
other things, the approvals of US Airways stockholders,
regulatory clearance and other customary closing conditions. As
part of the agreement with US Airways, United has agreed to pay
a $50 million termination fee, under certain conditions, in the
event the merger does not take place. In addition, US Airways
has agreed to pay United a termination fee of $150 million, plus
up to a maximum of $10 million for reimbursement of expenses,
under certain conditions, if the merger does not take place.
E-COMMERCE AND MILEAGE PLUS
---------------------------
United continues to deliver on its commitment to create
shareholder value by further developing its core airline
business, enhancing the Company's relationships with its
customers and building strategic businesses that leverage the
value of the United franchise.
In January, United announced its intentions to launch an e-
commerce subsidiary that will be dedicated to maximizing the
sale of travel products over the Internet and Internet- enabled
devices. Accordingly, United has established an e-commerce
division, consisting of a cross-functional team of nearly 70
employees from United's marketing and technical disciplines to
develop and expand lower-cost distribution channels and develop
new customer interfaces for enhancing customer service
opportunities; ultimately, this group will be transferred to the
new subsidiary.
A major part of this initiative is the recently redesigned
united.com web site. Gross air bookings on united.com in the
first six months of 2000 grew over 130 percent from the same
period last year. Total passenger revenue from sales over the
Internet reached $204 million in the second quarter compared to
$80 million in the same period of 1999. In addition, United
continues to build its Internet network by establishing and
expanding its partnerships with companies such as GetThere.com,
BuyTravel.com and Priceline.com. These investments build upon
United's long-standing investments in technology ventures such
as Galileo International, Inc. and Equant N.V., which are valued
at $332 million and $60 million, respectively at June 30, 2000.
United's Mileage Plus frequent flyer program continues to
grow due to such partnerships as First USA Mileage Plus Visa and
Master Card, MCI WorldCom and E*TRADE. Revenue from third-party
mileage sales reached $220 million during the first six months
of 2000, compared to $187 million in 1999, as adjusted for the
change in accounting principle.
OUTLOOK FOR 2000
----------------
Information regarding guidance for United's 2000 outlook can
be obtained from UAL Corporation's Report on Form 10-Q for the
quarter ended June 30, 2000.
Information included in the "Outlook for 2000" and "US
Airways Acquisition" paragraphs is forward-looking and involves
risks and uncertainties that could result in actual results
differing materially from expected results. Factors that could
significantly impact revenues, unit revenues and unit costs
include: the airline pricing environment; industry capacity
decisions; the success of the Company's cost-control efforts; the
cost of crude oil and jet fuel; the success of fuel hedging
strategies; the results of union contract negotiations and their
impact on labor costs; operational disruptions as a result of bad
weather, air traffic control-related difficulties and the impact
of labor issues; the growth of e-commerce and off-tariff
distribution channels; the implementation of customer service
improvement strategies; actions of the U.S., foreign and local
governments; the Pacific economic environment and travel
patterns; the stability of the U.S. economy; inflation; the
economic environment of the airline industry and the economic
environment in general .
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 1999. Significant changes which have occurred
since year-end are as follows:
Foreign Currency Risk -
<TABLE>
<CAPTION>
(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 $ 123 105.96 $ -
- Sold forwards $ 68 105.41 $ -
Hong Kong Dollar - Sold forwards $ 46 7.81 $ -
French Franc - Purchased forwards $ 50 5.05 $ (2)
Euro - Purchased forwards $ 117 1.37 $ (7)
Currency options
Japanese Yen - Purchased put options $ 315 103.02 $ 9
Australian Dollar - Purchased put options $ 66 0.62 $ 2
British Pound - Purchased put options $ 43 1.53 $ 1
Euro - Purchased put options $ 72 0.98 $ 2
Correlation Basket Option - Sold $ 496 N/A $ (2)
</TABLE>
Price Risk (Aircraft fuel) -
<TABLE>
<CAPTION>
(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 $ 717 $ 22.53/bbl $ 189
</TABLE>
*Estimated fair values represent the amount United would pay/receive on
June 30, 2000 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) Form 8-K dated May 26, 2000, reporting a joint press
release that announced the execution of the Agreement
and Plan of Merger between United and USAirways.
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
And 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 4, 2000
Exhibit Index
-------------
Exhibit No. Description
---------- -----------
10.1 United Employees Performance Incentive Plan (filed
as Exhibit 10.2 to UAL's Form 10-Q for the quarter
ended June 30, 2000 and is incorporated herein by
reference).
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
