UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 No. 33-21220
United Air Lines, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2675206
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Location: 1200 East Algonquin Road, Elk Grove Township, Illinois 60007
Mailing Address: P. O. Box 66100, Chicago, Illinois 60666
- ----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
--------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Series A Debentures due 2004 New York Stock Exchange
Series B Debentures due 2014 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
----
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
The number of shares of common stock outstanding as of March 1, 2000
was 205. The Registrant is a wholly-owned subsidiary of UAL
Corporation, and there is no market for the Registrant's common
stock.
The Registrant meets the conditions set forth in General Instructions
I(1)(a) and I(1)(b) of Form 10-K and is filing this form with the
reduced disclosure format pursuant to General Instructions I(2)(b)
and I(2)(c).
PART I
------
ITEM 1. BUSINESS.
United Air Lines, Inc. ("United" or the "Company") was
incorporated under the laws of the State of Delaware on December 30,
1968. The world headquarters of the Company are located at 1200 East
Algonquin Road, Elk Grove Township, Illinois 60007. The Company's
mailing address is P.O. Box 66100, Chicago, Illinois 60666. The
telephone number for the Company is (847) 700-4000.
United is the principal subsidiary of UAL Corporation, a
Delaware corporation ("UAL"), and is wholly owned by UAL. United
accounted for virtually all of UAL's revenues and expenses in 1999.
United is a major commercial air transportation company, engaged in
the transportation of persons, property and mail throughout the
United States and abroad.
Airline Operations
- ------------------
During 1999, United carried, on average, more than 243,000
passengers per day and flew more than 125 billion revenue passenger
miles. It is the world's largest airline as measured by revenue
passenger miles flown, providing passenger service in 26 countries.
United operates a global network, which encompasses major cities
such as Chicago, Denver, Los Angeles, New York, Miami, San Francisco,
Washington-Dulles, D.C., in the U.S., and Buenos Aires, Frankfurt,
Hong Kong, London, Mexico City, Paris, Sao Paulo, Sydney and Tokyo in
the international markets. United's network, supplemented with
strategic airline alliances, provides comprehensive transportation
service within North America (the domestic segment), within Latin
America, Europe, and the Pacific (the international segment), and
between these two segments. Operating revenues attributed to
United's North America segment were approximately $12.5 billion in
1999, $12.0 billion in 1998, and $11.2 billion in 1997. Operating
revenues attributed to United's international segment were
approximately $5.5 billion in 1999, $5.5 billion in 1998, and $6.1
billion in 1997.
Since October 1994, United has operated a service, United
Shuttle r,within its domestic segment. This service is designed to
provide both affordable and profitable air service in highly
competitive markets, as well as critical feed traffic. United
Shuttle(R) is principally concentrated on the West Coast and in Denver.
United Shuttle offers approximately 500 daily flights on 30 routes
among 22 cities in the western United States.
Pacific. Via its Tokyo hub, United provides passenger service
between its U.S. gateway cities (Chicago, Honolulu, Los Angeles, New
York, San Francisco and Seattle) and the Asian cities of Bangkok,
Beijing, Hong Kong, Seoul, Shanghai and Singapore. United also
provides nonstop service between Hong Kong and each of Chicago, Los
Angeles, San Francisco, Singapore, and Tokyo; between San Francisco
and each of Osaka, Sydney and Taipei; and between Los Angeles and
each of Auckland, Melbourne and Sydney. In February 2000, United
replaced its intra-Asian service between Hong Kong and Bangkok with
service between Hong Kong and Singapore. A U.S. - China agreement in
1999 granted United new route authorities, allowing United its first-
ever nonstop flights to China. In April 2000, United plans to add
non-stop service between San Francisco and Shanghai and, in June
2000, Beijing, replacing Tokyo - Beijing service. United will also
add non-stop service between San Francisco and Seoul, Korea in April
2000.
The air services agreement between the U.S. and Japan provides
an unlimited number of frequencies to certain carriers, including
United. United also holds significant traffic rights beyond Japan.
These rights will allow United to add service from Japan to other
Asian points as regulatory, competitive and economic conditions
warrant.
In 1999, United was the leading U.S carrier in the Pacific in
terms of transpacific available seat miles. United's Pacific
operations accounted for 14.9 % of United's revenues in 1999.
Atlantic. Washington-Dulles is United's primary gateway to
Europe, serving Amsterdam, Brussels, Frankfurt, London, Milan,
Munich, and Paris. United also provides nonstop passenger service
between six other U.S. cities and London, as well as service between
London and each of Brussels and Amsterdam; nonstop service between
Paris and each of Chicago and San Francisco; and nonstop service
between Chicago and each of Dusseldorf and Frankfurt. New nonstop
service between Los Angeles and Paris will begin in April 2000, and
new service between San Francisco and Frankfurt will begin in June
2000. In 1999, United's Atlantic operations accounted for 10.9 % of
United's revenues.
The European Commission's ("EC") investigation into
transatlantic alliances, such as the alliance between United,
Lufthansa, and SAS, is still on-going. The former Commission team
investigating the alliance proposed certain conditions, such as
frequency reductions, slot forfeitures, prohibitions on combining
frequent flyer programs, and restrictions on display screens of
computer reservation systems, which, if implemented, could impair the
efficiency of United's alliance with Lufthansa and SAS. A new EC
team is now in place following the resignation en masse of the former
Commission, but it has not yet given a clear indication of its
current position on these alliances.
In addition, the EC has issued a consultation paper regarding a
potential comprehensive passengers' bill of rights. United has filed
comments with the EC regarding the consultation paper. It is too
early to determine if any regulations will result from the
consultation paper, or if such regulations will have any material
impact upon United.
Latin America. During 1999, United's primary gateway was Miami,
providing passenger service between Miami and each of Buenos Aires,
Caracas, Lima, Montevideo (one stop), Rio de Janeiro, Santiago and
Sao Paolo. United also provided service between Los Angeles and each
of Guatemala City, Mexico City, and San Salvador; between New York
and each of Buenos Aires, Sao Paolo, and San Juan; between Chicago
and each of Buenos Aires, Mexico City, San Juan, St. Thomas, and Sao
Paolo; between Mexico City and each of San Francisco and Washington
Dulles; and between Washington-Dulles and St. Thomas. United also
provides service between San Jose, Costa Rica and each of Mexico City
and Guatemala City. New York - Caracas service was discontinued
during 1999 and effective March 3, 2000, service to Lima was
discontinued. In 1999, United's Latin America operations accounted
for 4.4 % of United's revenues.
Financial information relative to the Company's operating
segments can be found in Note 14 to the Consolidated Financial
Statements in this Form 10-K.
United Cargo. In 1999, United Cargo generated over $900 million
in freight and mail revenue, despite the fact that during the first
six months of the year, all four of its dedicated DC10-30 freighter
aircraft underwent heavy maintenance visits, for an aggregate of 151
days. United continued to carry the leading market share of its
largest customer, the U.S. Postal Service, of all U.S. combination
carriers.
During 1999, United Cargo introduced a premium express service,
TD.Guaranteed(sm), designed to serve the growing world market for
highly reliable, time definite shipments. A United Cargo website was
also launched, providing among other things immediate access to
flight information, booking capability, real-time tracking, and
tracing updates. Over the next three years, significant investments
to upgrade cargo facilities, both domestically and internationally,
are expected to be made, such as new facilities in Los Angeles and
Miami to support growing cargo activity in the Pacific and Latin
America.
United's Premier Partner(sm) Program is being enhanced for 2000
to allow for improved incentives to key freight forwarders. The
Premier Partner program offers select freight forwarders preferred
handling of cargo shipments, and provides recognition and rewards for
their loyalty. The goal is to develop a partnership with these
customers, while increasing the revenue they generate.
Fuel. Changes in fuel prices are industry-wide occurrences that
benefit or harm United's competitors as well as United, although fuel-
hedging activities may affect the degree to which fuel-price changes
affect individual companies. To assure adequate supplies of fuel and
to provide a measure of control over fuel costs, United ships fuel on
major pipelines and stores fuel close to its major hub locations.
United's results of operations are significantly affected by the
price and availability of jet fuel. It is estimated that, absent
hedging, every $.01 change in the average annual price-per-gallon of
jet fuel causes a change of approximately $31 million in United's
annual fuel costs. The average price per gallon of jet fuel in 1999
decreased 2%, as compared to the previous year. But in 2000, fuel
costs have been rising sharply, prompting airlines, United included,
to impose a fuel surcharge on the price of passenger tickets.
The impact of rising fuel costs is somewhat tempered by United's
fuel hedging program. United pursues an options based strategy in
which the upside is retained while the downside is eliminated. At
the end of 1999, 75% of United's fuel exposure was hedged, but the
goal is for fuel exposure in 2000 to be 100% hedged by the end of the
first quarter.
Insurance. United carries liability insurance of a type
customary in the air transportation industry, in amounts which it
deems adequate, covering passenger liability, public liability and
property damage liability. The amount recoverable by United under
aircraft-hull insurance covering all damage to its aircraft is not
subject to any deductible amount in the event of a total loss.
Marketing Strategy
- ------------------
Besides offering convenient scheduling throughout its domestic
and international segments, United seeks to attract high yield
customers and create customer preference by providing a comprehensive
network, an attractive frequent-flyer program, and enhanced service
initiatives.
Alliances. United has formed bilateral alliances with other
airlines to provide its customers more choices and to participate
worldwide in markets that it cannot serve directly for commercial or
governmental reasons. An alliance is a collaborative marketing
arrangement between carriers which can include joint frequent flyer
participation, code-sharing of flight operations, coordination of
reservations, baggage handling, and flight schedules, and other
resource sharing activities. "Code-sharing" is an agreement under
which a carrier's flights can be marketed under the two-letter
airline designator code of another carrier. Through an alliance,
carriers can provide their customers a seamless global travel network
under their own airline code. United now participates in a
multilateral alliance, the Star Alliance(TM).
The Star Alliance is an integrated worldwide transport network,
which provides customers with global recognition and a wide range of
other benefits. Collectively, the Star Alliance carriers served more
than 792 destinations in over 112 countries during 1999. The Star
Alliance should enable its member carriers to more effectively
compete with other worldwide alliances.
In addition to existing members United, Lufthansa, Air Canada,
SAS, Thai Airways, and Varig, the Star Alliance welcomed several new
carriers in 1999, including Air New Zealand, Ansett Australia, and
All Nippon Airways. In 2000, the Star Alliance will grow to include
Mexicana, Singapore Airways, the Austrian Airlines Group and British
Midland. United holds integrated antitrust immunity with Lufthansa
and SAS, and bilateral immunity with Air Canada.
Other bilateral alliance air carriers include Spanair, Aeromar,
ALM Antillean, Aloha, Cayman Airways, Continental Connection,
Emirates, Saudi Arabian Airlines, and TW Express.
In addition, United has a marketing program in North America
known as the United Express(R), under which independent regional
carriers, utilizing turboprop equipment and regional jets, feed
United's major airports and international gateways. The carriers in
the United Express program provide service to United at 182 airports.
Frequent Flyer Program. United established the Mileage Plus(R)
frequent flyer program to develop and retain passenger loyalty by
offering awards and services to frequent travelers. Over 38 million
members have enrolled in Mileage Plus since it was started in 1981.
Mileage Plus members earn mileage credit for flights on United,
United Shuttle, United Express, the Star Alliance carriers and
certain other airlines which participate in the program. Miles can
also be earned by utilizing the goods and services of other program
participants, such as hotels, car rental companies, bank credit card
issuers, and a variety of other businesses. Mileage credits can be
redeemed for free, discounted or upgraded travel awards on United and
other participating airlines, or, to a limited extent, other travel
and non-travel industry awards.
Travel awards can be redeemed at the "Standard" level for any
unsold seat on any United flight to every destination served by
United. Redemption at the "Saver" award level, however, is
restricted with blackout dates and capacity controlled inventory,
thereby limiting the use of Saver awards on certain flights.
When a travel award level is attained, liability is recorded for
the incremental costs of providing travel, based on expected
redemptions. United's incremental costs include the additional costs
of providing service to the award recipient, such as fuel, meal,
personnel and ticketing costs, for what would otherwise be a vacant
seat. The incremental costs do not include any contribution to
overhead or profit.
In August 1999, the Mileage Plus program changed its mileage
expiration policy so that miles will no longer expire, provided a
member earns or redeems any amount of miles at least once every 36
months. At December 31, 1999, the estimated number of outstanding
awards was approximately 7.0 million, as compared with 6.1 million at
the end of the prior year. United estimates that 5.8 million of such
awards will ultimately be redeemed and, accordingly, has recorded a
liability amounting to $175 million. Based on historical data, the
difference between the awards expected to be redeemed and the total
awards outstanding arises because: (1) some awards will never be
redeemed, (2) some will be redeemed for non-travel benefits, and (3)
some will be redeemed on partner carriers.
In 1999, 2.24 million Mileage Plus travel awards were used on
United. This number represents the number of free awards actually
flown in 1999 and not the number of seats that were allocated to
award travel. In 1998, 2.13 million awards were used, while 1.82
million awards were used in 1997. Such awards represented 8.7% of
United's total revenue passenger miles in 1999, 8.6% in 1998, and
7.7% in 1997. These low percentages, as well as passengers'
preference for the more restricted Saver awards, keep displacement,
if any, of revenue passengers by users of Mileage Plus awards to a
minimum. Free award seats flown on United represent 66% of the total
awards issued of which 83% are used for travel within the U.S. and
Canada. In addition to the awards issued for travel on United,
approximately 10% of the total awards issued are used for travel on
partner airlines.
Economy Plus(sm). United announced in August 1999 the
reconfiguration of the first six to eleven rows of the United Economy
cabins in its aircraft serving the domestic market, thereby providing
four to five additional inches of legroom for customers sitting in
the reconfigured rows. The number of seats in Economy Plus varies
depending on the aircraft type. This initiative is designed to serve
as recognition for United's Premier(R) frequent-flyer and full-fare
United Economy customers, many of whom often travel in the United
Economy cabin, and to increase their satisfaction with United.
United is the first U.S. airline to offer additional legroom to its
domestic customers. Approximately 450 aircraft will have been
reconfigured with Economy Plus by March 2000.
Electronic Commerce. While airlines continue to use computer
reservation systems ("CRS") to book travel, the cost conscious
leisure passengers, as well as the mid-market and corporate
consumers, are increasingly turning to online avenues to meet their
travel needs. Hence, United, as well as the airline industry in
general, is using e-commerce to strengthen and enhance its market
position. United added websites to capture new market segments, while
reducing the cost of booking transportation. United continued to
build its internet network in 1999 by establishing and/or expanding
its partnerships with companies such as GetThere.com, BuyTravel.com,
and Priceline.com. United also announced in November 1999 that it
had formed a partnership with other major U.S. air carriers to form a
new independently owned travel website, which will be the first multi-
airline travel portal.
On January 13, 2000, United unveiled plans to launch an e-
commerce subsidiary that will be dedicated to maximizing the sale of
travel products over the Internet and Internet enabled-devices. By
dedicating resources and employees to e-commerce, United expects the
new e-commerce enterprise to focus on managing and growing its suite
of customer-focused e-commerce and e-service products. An e-commerce
division, consisting of a cross-functional team of nearly 70
employees from United's marketing and technical disciplines, was
initially created; ultimately, this group will be transferred to the
new subsidiary. This e-commerce unit will use technology and the
Internet to develop and increase lower-cost distribution channels and
to develop new customer interfaces for the purpose of enhancing
customer service opportunities. By establishing the e-commerce unit
now, United will be in a better position to further capitalize on
distribution cost savings and to enhance its value proposition to its
customers.
Our United Commitment(sm). To renew its commitment to improve key
areas of customer satisfaction and as part of an industry-wide,
voluntary initiative, United unveiled its comprehensive customer
service plan, Our United Commitment, in September 1999. Our United
Commitment addresses issues identified by United's frequent flyer
customers as being most important to them, such as improved
communication, increased information throughout the travel
experience, more efficient baggage handling and greater
responsiveness to customer inquiries. United began deploying Our
United Commitment in December 1999 after training nearly 24,000
customer service agents, reservation agents and United Express
partners on the implementation of the plan. The company plans to
train all employees who directly work with customers.
Industry Conditions
- -------------------
Seasonality. Air travel business is subject to seasonal
fluctuations. United's first- and fourth-quarter results normally
are affected by reduced travel demand in the fall and winter, and
United's operations are often affected adversely by winter weather.
Thus, operating results for the Company are generally better in the
second and third quarters. The fourth quarter of 1999 was also
adversely affected by world-wide public fear of the potentially
adverse impact of the "Y2K" problem on flight- related computer
systems.
Competition. The airline industry is highly competitive. In
domestic markets, new and existing carriers are free to initiate
service on any route. United's domestic competitors include all of
the other major U.S. airlines as well as regional carriers, some of
which have lower cost structures than United.
In its international service, United competes not only with U.S.
carriers but also with foreign carriers, including national flag
carriers, which in certain instances enjoy forms of governmental
support not available to U.S. carriers. Competition on certain
international routes is subject to varying degrees of governmental
regulations (see "Government Regulation"). United has advantages
over foreign air carriers in the United States because of its ability
to generate U.S. origin-destination traffic from its integrated
domestic route systems, and because foreign carriers are prohibited
by U.S. law from carrying local passengers between two points (known
as cabotage) in the United States. United experiences comparable
restrictions in foreign countries.
In addition, U.S. carriers are often constrained from carrying
passengers to points beyond designated international gateway cities
due to limitations in air service agreements or restrictions imposed
unilaterally by foreign governments. To compensate for these
structural limitations, U.S. and foreign carriers have entered into
alliances and marketing arrangements which allow the carriers to
provide feed to each others' flights. (See "Marketing Strategy -
Alliances")
In 1998, the U.S. Department of Transportation (DOT) proposed
its "Statement of Enforcement Policy Regarding Unfair and
Exclusionary Conduct." This proposal (Competition Guidelines) was in
response to alleged high airfares and complaints of predatory
activities by major carriers against new entrants. Competition
Guidelines would have injected government regulation into carrier
decisions on pricing and capacity. With Congressional and
Presidential elections slated for November of 2000, it is unclear
whether the DOT will issue final guidelines in 2000 because of their
controversial nature.
Distribution Channels. The overwhelming majority of United's
airline inventory continues to be distributed through the traditional
channels of travel agencies and computer reservation systems (CRS).
United's Apollo reservation system is hosted by Galileo
International, a CRS in which United holds approximately a 15% equity
interest. In December 1999, United and Galileo signed a new five
year agreement which provides, among other things, for joint sales
force initiatives, extension of the hosting of United's reservation
system, and significant increases in Galileo resources dedicated to
supporting the hosted services.
In recent years, the airline industry has initiated cuts in
travel agency commissions in an effort to control distribution costs.
In October 1999, United prompted a restructuring of base travel
agency commissions for tickets purchased in the U.S. and Canada for
all domestic and international travel by reducing the commission rate
to 5% and capping commissions at $50 for domestic travel and $100 for
international travel.
The use of electronic distribution systems also provides an
important tool for lowering costs and expanding United's reach to
potential customers. (See "Marketing Strategy -- Electronic
Commerce.")
Government Regulation
- ---------------------
General. All carriers engaged in air transportation in the
United States are subject to regulation by the U.S. Department of
Transportation ("DOT"). The DOT has authority to: issue certificates
of public convenience and necessity for domestic air transportation
and, through the Federal Aviation Administration ("FAA"), air-carrier
operating certificates; authorize the provision of foreign air
transportation by U.S. carriers; prohibit unjust discrimination;
prescribe forms of accounts and require reports from air carriers;
regulate methods of competition, including the provision and use of
computerized reservation systems; and administer regulations
providing for consumer protection, including regulations governing
the accessibility of air transportation facilities for handicapped
individuals. United holds certificates of public convenience and
necessity, as well as air-carrier operating certificates, and
therefore is subject to DOT regulations. The FAA administers the
U.S. air traffic control system and oversees aviation safety issues.
United's operations require licenses issued by the aviation
authorities of the foreign countries that United serves. Foreign
aviation authorities may from time to time impose a greater degree of
economic regulation than exists with respect to United's domestic
operations. United's ability to serve some international markets and
its expansion into many of these markets are presently restricted by
lack of aviation agreements to allow such service or, in some cases,
by the restrictive terms of such agreements.
In connection with its international services, United is
required to make regular filings with the DOT and to observe tariffs
establishing the fares charged and the rules governing the
transportation provided. In certain cases, fares and schedules
require the approval of the relevant foreign governments. Shifts in
United States or foreign government aviation policies can lead to the
alteration or termination of existing air service agreements between
the U.S. and other governments, and could diminish the value of
United's international route authority. United's operating rights
under the air services agreements may not be preservable in such
cases.
Airport Access. Take-off and landing rights ("slots") at
Chicago O'Hare International, New York John F. Kennedy International,
New York LaGuardia and Washington Reagan National airports are
limited by the "high density traffic rule." Under this rule, slots
may be bought, sold or traded. The DOT, however, can require
carriers to relinquish slots for reallocation if they fail to meet
certain minimum-use standards.
For the past few years, the DOT has been confiscating slots from
incumbent carriers at Chicago O'Hare, including United, to provide
more opportunities for foreign carriers. United holds a sufficient
number of slots at airports subject to the high-density rule, but its
ability to expand could be constrained if sufficient additional slots
are not available on satisfactory terms.
Throughout 1999, negotiations continued in Congress over
legislation to lift the high density rule at Chicago O'Hare and New
York City's LaGuardia and JFK airports. The proposed legislation
calls for the abolishment of the rule at O'Hare by 2002 and by 2007
for the New York City airports. In the interim, slot exemptions
would be available to new entrants and carriers providing service to
small and non-hub airports. On March 5, 2000, Congressional
negotiators from the House and Senate announced an agreement to
eliminate the high density rule. If the agreed legislation is
enacted, exemptions to the rule for some international flights and
service to smaller communities could be in place as early as May
2000.
United currently has a sufficient number of leased gates and
other airport facilities, but expansion by United may be constrained
at certain airports by insufficient availability of gates on
attractive terms or other factors, such as noise restrictions.
Safety. The FAA has regulatory jurisdiction over flight
operations generally, including equipment, ground facilities,
maintenance, communications and other matters. United's aircraft and
engines are maintained in accordance with the standards and
procedures recommended and approved by the manufacturers and the FAA.
From time to time, the FAA issues airworthiness directives
("ADs") which require air carriers to undertake inspections and to
make unscheduled modifications and improvements on aircraft, engines
and related components and parts. The ADs sometimes cause United to
incur substantial, unplanned expense when aircraft or engines are
removed from service prematurely in order to undergo mandated
inspections or modifications. The issuance of any particular AD may
have a greater or lesser impact on United, compared to its
competitors, depending upon the equipment covered by the directive.
Civil and criminal sanctions may be assessed for not complying with
the ADs.
The DOT announced in 1999 a new plan to require U.S. carriers to
establish DOT approved programs for auditing the safety and security
of their foreign code-share partners. The DOT has yet to announce
details of the program, but at a minimum, the program will require
compliance with the standards of the International Civil Aviation
Organization (ICAO). Safety audits must be conducted on both
prospective and on-going code-share partners. The FAA will review
the audits and make recommendations to the DOT. The Air Transport
Association, an industry organization to which United belongs, and
the DOT have signed a Memorandum of Understanding, setting out
procedures for auditing the safety of code-share partners that carry
Department of Defense personnel. These procedures may be a starting
point for auditing foreign code-share partners under the new DOT
regime.
Environmental Regulations. By December 31, 1999, United met
Stage 3 requirements by retiring some Stage 2 aircraft and replacing
them with newer Stage 3 aircraft, and by retrofitting the remaining
Stage 2 aircraft with special equipment (known in the industry as
"hushkits") or by restricting their takeoff gross weight. The cost
to do so has been minimal as most of the hushkits were acquired
through an exchange program with Federal Express.
United operates a number of underground and above-ground storage
tanks throughout its system. They are used for the storage of fuels
and deicing fluids. United has been identified as a potentially
responsible party in some state and federal recovery actions
involving soil and ground water contamination. The Company has been
working with the relevant government agencies to resolve the issues
and believes they will be resolved without material adverse effect on
the Company.
Other Government Matters. Other federal agencies with
jurisdiction over certain aspects of United's operations include the
Department of Justice (Antitrust Division and Immigration and
Naturalization Service); the Equal Employment Opportunity Commission;
the Department of Labor (Occupational Safety and Health
Administration, and Office of Federal Contract Compliance Programs of
the Employment Standards Administration); the National Mediation
Board; the National Transportation Safety Board; the Treasury
Department (U.S. Customs Service, the Bureau of Alcohol, Tobacco, and
Firearms, and the Internal Revenue Service); the Federal
Communications Commission (use of radio facilities by aircraft); and
the United States Postal Service (carriage of domestic and
international mail). United is also subject to varying degrees of
regulation by foreign governments. In time of war or certain other
national emergencies, the U.S. government may require United to
provide airlift services under the Civil Reserve Air Fleet Program.
Employees - Labor Matters
- -------------------------
At December 31, 1999, the Company and its subsidiaries had more
than 100,000 employees. Approximately 79 % of United's employees are
represented by various labor organizations.
The employee groups, number of employees, labor organization and
current contract status for each of United's major collective
bargaining groups as of December 31, 1999 are as follows:
Number of Contract Open
Employee Group Employees Union for Amendment
-------------- --------- ----- -------------
Pilots 9,612 ALPA April 12, 2000
Flight Attendants 23,578 AFA March 1, 2006
Mechanics 12,881 IAM July 12, 2000
Ramp & Cabin
Service 13,335 IAM July 12, 2000
Passenger Service 19,950 IAM July 12, 2000
ITEM 2. PROPERTIES.
Flight Equipment
- ----------------
As of December 31, 1999, United's operating aircraft fleet
totaled 594 jet aircraft, of which 277 were owned and 317 were
leased. These aircraft are listed below:
Average Average
Aircraft Type No. of Seats Owned Leased* Total Age (Years)
------------- ------------ ----- ------- ----- -----------
A319-100 126 11 17 28 1
A320-200 144 14 42 56 4
B727-200 147 67 8 75 21
B737-200 109 24 0 24 20
B737-300 129 10 91 101 11
B737-500 112 27 30 57 7
B747-200 369 0 7 7 23
B747-400 363 22 21 43 5
B757-200 182 41 57 98 8
B767-200 168 19 0 19 17
B767-300 218 12 20 32 5
B777-200 292 22 18 40 3
DC10-10 287 6 1 7 25
DC10-30 298 0 3 3 22
DC10-30F N/A 2 2 4 20
TOTAL OPERATING
FLEET 277 317 594 10
=== === ===
* United's aircraft leases have initial terms of 10 to 26 years,
and expiration dates range from 2000 through 2020. Under the
terms of leases for 310 of the aircraft in the operating fleet,
United has the right to purchase the aircraft at the end of the
lease term, in some cases at fair market value and in others at
fair market value or a percentage of cost.
As of December 31, 1999, 52 of the 277 aircraft owned by United
were encumbered under debt agreements.
The following table sets forth United's firm aircraft orders and
expected delivery schedules as of December 31, 1999:
Aircraft Type Number To Be Delivered Delivery Rate
------------- ------ --------------- -------------
A319-100 19 2000-2001 0-2 per month
A320-200 30 2000-2001 0-3 per month
B747-400 1 2000-2001
B767-300 5 2000-2001 0-1 per month
B777-200 21 2000-2002 0-2 per month
Total 76
Ground Facilities and Equipment
- -------------------------------
United has entered into various leases relating to its use of
airport-landing areas, gates, hangar sites, terminal buildings and
other airport facilities in most of the municipalities it serves.
Major leases expire at Chicago O'Hare in 2018, Los Angeles in 2021,
San Francisco in 2011, and Washington Dulles in 2014. United also
has leased ticketing, sales and general office space in the downtown
and outlying areas of most of the larger cities in its system. In
suburban Chicago, United owns a 106-acre complex consisting of more
than one million square feet of office space for its world
headquarters, a computer facility and a training center.
United's Maintenance Operation Center ("MOC") at San Francisco
International Airport occupies 129 acres of land, three-million
square feet of floor space and 12 aircraft hangar docks under a lease
expiring in 2003, with an option to extend for 10 years. United's
Indianapolis Maintenance Center, a major aircraft maintenance and
overhaul facility, is operated under a lease with the Indianapolis
Airport Authority that expires in 2031. United also has a major
facility at the Oakland, California airport, dedicated to widebody
airframe maintenance.
At Denver International Airport, United operates under a lease
and use agreement expiring in 2025, and occupies 48 gates and more
than one million square feet of exclusive or preferential use
terminal building space. United's flight training center, located at
the former Stapleton International Airport, was purchased by United
from the City and County of Denver and can accommodate 36 flight
simulators and more than 90 computer-based training stations.
ITEM 3. LEGAL PROCEEDINGS.
No material legal proceedings pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
United is a wholly-owned subsidiary of UAL.
Item 6. Selected Financial Data and Operating Statistics
------------------------------------------------
<TABLE>
<CAPTION>
(In Millions, Except Rates) Year Ended December 31
----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $17,967 $17,518 $17,335 $16,317 $14,895
Earnings before extraordinary item 1,207 803 941 601 371
Extraordinary loss on early
extinguishment of debt, net of tax (3) - (9) (67) (30)
Net earnings 1,204 803 932 534 341
Total assets at year-end 21,543 18,830 15,768 12,901 11,393
Long-term debt and capital lease
obligations,including current portion 5,455 5,373 4,259 3,309 3,553
Revenue passengers 87 87 84 82 79
Revenue passenger miles 125,465 124,609 121,426 116,697 111,811
Available seat miles 176,686 174,008 169,110 162,843 158,569
Passenger load factor 71.0% 71.6% 71.8% 71.7% 70.5%
Breakeven passenger load factor 64.9% 64.9% 66.0% 66.0% 66.1%
Passenger revenue per passenger mile
(in cents) 12.5 12.4 12.6 12.4 11.8
Operating revenue per availabe seat
mile (in cents) 10.2 10.1 10.3 10.0 9.4
Operating expense per available seat
mile (in cents) 9.4 9.2 9.5 9.3 8.9
Operating expense per available seat
mile excluding ESOP charges (in cents) 9.0 8.8 8.9 8.9 8.6
Fuel gallons consumed 3,065 3,029 2,964 2,883 2,822
Average price per gallon of jet
fuel (in cents) 57.9 59.0 69.5 72.2 59.5
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
This section contains various forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which are identified with an
asterisk (*). Forward-looking statements represent the
Company's expectations and beliefs concerning future events,
based on information available to the Company on the date of
the filing of this Form 10-K. The Company undertakes no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise. Factors that could significantly
impact the expected results referenced in the forward-
looking statements are listed in the last paragraph of the
section, "Outlook for 2000."
On July 12, 1994, the stockholders of UAL Corporation
("UAL") approved a plan of recapitalization that provides an
approximately 55% equity and voting interest in UAL to
certain employees of United Air Lines, Inc. ("United") in
exchange for wage concessions and work-rule changes. The
employees' equity interest is being allocated to individual
employee accounts through the year 2000 under Employee Stock
Ownership Plans ("ESOPs") which were created as part of the
recapitalization. Since the ESOP shares are being allocated
over time, the current ownership interest held in the ESOPs
is less than 55%. The entire ESOP voting interest is
currently exercisable, which is voted by the ESOP trustee at
the direction of, and on behalf of, the holders of the ESOP
stock.
Liquidity and Capital Resources
- -------------------------------
Liquidity -
United's total of cash and cash equivalents and short-
term investments was $527 million at December 31, 1999,
compared to $686 million at December 31, 1998. Operating
activities during the year generated $2.415 billion and the
Company's sale of part of its investments in Galileo
International, Inc. ("Galileo") and Equant N.V. ("Equant")
provided $828 million in cash proceeds (see Note 5
"Investments" in the Notes to Consolidated Financial
Statements). Cash was used primarily to fund net additions
to property and equipment.
Property additions, including aircraft, aircraft spare
parts, facilities and ground equipment, amounted to $2.383
billion, while property dispositions resulted in proceeds of
$154 million. In 1999, United took delivery of eight A319,
five A320, seven B747, two B757, five B767 and six B777
aircraft. Twenty-one of these aircraft were purchased and
twelve were acquired under capital leases. In addition,
United acquired two B727 aircraft off-lease during 1999 and
retired ten DC10 and six B747 aircraft.
Financing activities included principal payments under
debt and capital lease obligations of $513 million and $247
million, respectively. Additionally, the Company issued,
and subsequently retired, $286 million in debt to finance
the acquisition of aircraft.
Included in cash and cash equivalents at December 31,
1999 were $89 million of securities held by third parties
under securities lending agreements, as well as collateral
in the amount of 102% of the value of the securities lent.
United is obligated to reacquire the securities at the end
of the contract.
As of December 31, 1999, United had a working capital
deficit of $2.557 billion as compared to $2.893 billion at
December 31, 1998. Historically, United has operated with a
working capital deficit and, as in the past, United expects
to meet all of its obligations as they become due. In
addition, United may from time to time repurchase on the
open market, in privately negotiated purchases or otherwise,
its debt securities.
United has available approximately $1.7 billion in
short-term revolving credit facilities, as well as a
separate $227 million short-term borrowing facility, as
described in Note 7 "Short-Term Borrowings" in the Notes to
Consolidated Financial Statements.
Prior Years. Operating activities in 1998 generated
cash flows of $3.115 billion. Cash was used primarily to
fund net additions to property and equipment of $2.379
billion. Financing activities also included repayments of
long-term debt totaling $260 million and payments under
capital leases of $320 million, as well as aircraft lease
deposits of $154 million. Additionally, the Company issued
$928 million in debt and used part of the proceeds to
purchase $655 million in equipment certificates under
Company operating leases.
Operating activities in 1997 generated cash flows of
$2.562 billion and the Company's sale of its interest in the
Apollo Travel Services Partnership ("ATS") provided $539
million in cash proceeds. Cash was used primarily to fund
net additions to property and equipment of $2.812 billion.
Financing activities included the early extinguishment of
$135 million in principal amount of various debt securities,
mandatory repayments of long-term debt totaling $135 million
and payments under capital leases of $146 million. In
addition, the Company made payments of $112 million in
aircraft lease deposits and issued $597 million of enhanced
pass through certificates.
Capital Commitments -
At December 31, 1999, commitments for the purchase of
property and equipment, principally aircraft, approximated
$4.4 billion, after deducting advance payments. Of this
amount, an estimated $2.0 billion is due to be spent in
2000. For further details, see Note 13 "Commitments,
Contingent Liabilities and Uncertainties" in the Notes to
Consolidated Financial Statements.
Capital Resources -
Funds necessary to finance aircraft acquisitions are
expected to be obtained from internally generated funds,
external financing arrangements or other external sources.
At December 31, 1999, United's senior unsecured debt
was rated BB+ by Standard and Poor's and Baa3 by Moody's
Investors Service Inc.
Results of Operations
- ---------------------
Summary of Results -
United's earnings from operations were $1.342 billion
in 1999, compared to operating earnings of $1.447 billion in
1998. United's net earnings in 1999 were $1.204 billion
compared to net earnings of $803 million in 1998.
The 1999 earnings include an extraordinary loss of $3
million, after tax, on early extinguishment of debt, an
after-tax gain on the sale of certain of the Company's
investments as described in Note 5 "Investments" in the
Notes to Consolidated Financial Statements of $468 million,
as well as a one-time, after-tax charge of $11 million
associated with the write-down of two non-operating B747-200
aircraft.
1999 Compared with 1998 -
- -----------------------
Operating Revenues. Operating revenues increased $449
million (3%) and United's revenue per available seat mile
(unit revenue) increased 1% to 10.17 cents. Passenger
revenues increased $264 million (2%) due to a 1% increase in
United's revenue passenger miles and a 1% increase in yield
to 12.48 cents. Available seat miles across the system were
up 2% year over year; however, passenger load factor
decreased 0.6 points to 71.0% as traffic only increased 1%
system-wide. The following analysis by market is based on
information reported to the U.S. Department of
Transportation:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Available Revenue Revenue Per Revenue
Seat Miles Passenger Miles Passenger Mile
(Capacity) (Traffic) (Yield)
---------- --------------- -------------------
<S> <C> <C> <C>
Domestic 4% 2% 1%
Pacific (12%) (11%) 3%
Atlantic 14% 14% (7%)
Latin America (7%) (3%) (3%)
System 2% 1% 1%
</TABLE>
Pacific yields improved as the Asian economies
continue to recover. Yields in other international markets
have been impacted by a negative pricing environment
resulting from excess industry capacity.
Cargo revenues decreased $7 million (1%) despite
increased freight ton miles of 5%, as a 4% decline in
freight yield combined with a 3% decline in mail yield.
Other operating revenues increased $192 million (18%) due to
increases in frequent flyer program partner related
revenues, fuel sales to third parties and additional revenue
related to the Galileo services agreement (see Note 5
"Investments" in the Notes to Consolidated Financial
Statements.)
Operating Expenses. Operating expenses increased $554
million (3%) and United's cost per available seat mile
increased 2% from 9.24 to 9.41 cents, including ESOP
compensation expense. Excluding ESOP compensation expense,
United's 1999 cost per available seat mile would have been
8.98 cents, an increase of 3% from 1998. ESOP compensation
expense decreased $73 million (9%), reflecting the decrease
in the estimated average fair value of ESOP stock committed
to be released to employees as a result of UAL's lower
common stock price. Salaries and related costs increased
$330 million (6%) as a result of increased staffing in
customer-contact positions, as well as salary increases for
most labor groups which took effect July 1, 1998.
Commissions decreased $186 million (14%) due to a change in
the commission structure implemented in the third quarter
1998 as well as a slight decrease in commissionable
revenues. In addition, in October 1999, the Company reduced
the base commissions for tickets purchased in the U.S. and
Canada to 5%, subject to roundtrip caps of $50 domestic and
$100 international. Purchased services increased $70
million (5%) due to increases in computer reservations fees
and year 2000-related expenses. Depreciation and
amortization increased $74 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. In addition, during the fourth quarter,
United wrote-down two non-operating B747-200 aircraft to net
realizable value. Aircraft maintenance increased $65
million (10%) due to in increase in heavy maintenance
visits. Other operating expenses increased $233 million
(11%) primarily due to costs associated with fuel sales to
third parties.
Other Income and Expense. Other income (expense)
amounted to $543 million in income in 1999 compared to $227
million in expense in 1998. Interest capitalized, primarily
on aircraft advance payments, decreased $30 million (29%).
Interest income increased $9 million (15%) due to higher
investment balances. In addition, 1999 included a $669
million gain on the sale of Galileo stock and a $62 million
gain on the sale of Equant stock.
1998 Compared with 1997 -
- -----------------------
Operating Revenues. Operating revenues increased $183
million (1%) while United's revenue per available seat mile
(unit revenue) decreased 2% to 10.07 cents. Passenger
revenues increased $178 million (1%) due to a 3% increase in
United's revenue passenger miles despite a 1% decrease in
yield from 12.55 to 12.36 cents. Available seat miles
across the system were up 3% year over year; however,
passenger load factor decreased 0.2 point to 71.6%. The
following analysis by market is based on information
reported to the U.S. Department of Transportation:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
Available Revenue Revenue Per Revenue
Seat Miles Passenger Miles Passenger Mile
(Capacity) (Traffic) (Yield)
---------- --------------- -------------------
<S> <C> <C> <C>
Domestic 4% 5% 2%
Pacific (9%) (10%) (13%)
Atlantic 15% 11% (3%)
Latin America 17% 9% (8%)
System 3% 3% (1%)
</TABLE>
Pacific yields were negatively impacted by the
weakness of the Japanese yen compared to the dollar during
the first nine months of 1998, and the continued effects of
the Asian economic turmoil on demand for travel. Yields in
other international markets were impacted by a negative
pricing environment resulting from excess industry capacity
and weakened economies.
Cargo revenues increased $21 million (2%) on increased
freight ton miles of 6%. A relatively flat freight yield
together with a 1% lower mail yield, resulted in a 1%
decrease in cargo yield for the year. Other operating
revenues decreased $16 million (1%) due to the sale of ATS
in July 1997, partially offset by increases in frequent
flyer program partner-related revenues and contract sales to
third parties.
Operating Expenses. Operating expenses decreased $38
million (0.2%) and United's cost per available seat mile
including ESOP compensation expense decreased 3%, from 9.53
cents to 9.24 cents. Without the ESOP compensation expense,
United's cost per available seat mile would have been 8.76
cents, a decrease of 2% from 1997. ESOP compensation
expense decreased $158 million (16%) reflecting the decrease
in the estimated average fair value of stock committed to
the Supplemental ESOP due to UAL's lower common stock price.
Purchased services increased $220 million (17%) due to
increases in computer reservations fees, credit card
discounts, communications expense and year 2000-related
spending. Depreciation and amortization increased $69
million (10%) due to an increase in the number of owned
aircraft and an $11 million decrease in gains on asset
sales, from $23 million in 1997 to $12 million in 1998.
Salaries and related costs increased $322 million (6%) due
to two mid-term wage adjustments for ESOP participants which
took place in July of 1998 and 1997 and increased staffing
in customer-contact positions. Aircraft fuel decreased $273
million (13%) as a result of a 15% decrease in the average
cost of fuel from 69.5 cents to 59.0 cents a gallon.
Commissions decreased $183 million (12%) due to a change in
the commission structure implemented in the third quarter of
1997 as well as a slight decrease in commissionable
revenues. Aircraft rent decreased $48 million (5%) as a
result of refinancing aircraft under operating lease.
Other Income and Expense. Other income (expense)
amounted to $227 million in expense in 1998 compared to $262
million in income in 1997. Interest expense increased $72
million (25%) in 1998 due to the issuance of long-term debt
in 1997 and 1998. Interest income increased $8 million
(16%) due to higher investment balances. In 1998, foreign
exchange losses increased $65 million. Because not all
economic hedges qualify as accounting hedges, unrealized
gains and losses may be recognized in income in advance of
the actual foreign currency cash flows. This mismatch of
accounting gains and losses and foreign currency cash flows
was especially pronounced during the fourth quarter of 1998
as a result of the appreciation in value of the Japanese
yen, relative to the U.S. dollar. This mismatch resulted in
a pre-tax charge of $52 million which is included in foreign
exchange losses. In addition, 1997 included a $275 million
gain on the sale of ATS and a $103 million gain on the
initial public offering of Galileo stock.
Other Information
- -----------------
Labor Agreements and Wage Adjustments -
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 July 12, 1994 received an immediate
14.5% pay increase and benefits comparable to other affected
employees.
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 new contracts
with ALPA and the IAM. Wage rates for U.S.-based non-union
employees will be adjusted in April 2000 as well. 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.
Coupled with increased staffing levels, these
negotiations and wage rate adjustments are expected to
increase the Company's salaries and related costs above 1999
levels. While the amount of these increases cannot be fully
determined until contract negotiations are complete, the
Company currently estimates that salaries and related costs
will increase by over $750 million (14%) in 2000 as a result
of these wage rate adjustment processes.* 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.
Foreign Operations -
United generates revenues and incurs expenses in
numerous foreign currencies. These expenses include
aircraft leases, commissions, catering, personnel costs,
reservation and ticket office services, customer service
expenses and aircraft maintenance. Changes in foreign
currency exchange rates impact operating income through
changes in foreign currency-denominated operating revenues
and expenses. Despite the adverse (favorable) effects a
strengthening (weakening) foreign currency may have on U.S.
originating traffic, a strengthening (weakening) of foreign
currencies tends to increase (decrease) reported revenue and
operating income because United's foreign currency-
denominated operating revenue generally exceeds its foreign
currency-denominated operating expense for each currency.
By carrying passengers and cargo in both directions
between the U.S. and almost every major economic region in
the world and by selling its services in each local country,
United attempts to mitigate its exposure to fluctuations in
any single foreign currency. The Company's biggest net
exposures are typically for Japanese yen, Hong Kong dollars,
Australian dollars and British pounds. During 1999, yen-
denominated operating revenue net of yen-denominated
operating expense was approximately 26 billion yen
(approximately $206 million), Hong Kong dollar-denominated
operating revenue net of Hong Kong dollar-denominated
operating expense was approximately 1,299 million Hong Kong
dollars (approximately $166 million), Australian dollar-
denominated operating revenue net of Australian dollar-
denominated operating expense was approximately 208 million
Australian dollars (approximately $134 million) and British
pound-denominated operating revenue net of British pound-
denominated operating expense was approximately 67 million
British pounds (approximately $109 million).
To reduce the impact of exchange rate fluctuations on
United's financial results, the Company hedges some of the
risk of exchange rate volatility on its anticipated future
foreign currency revenues by purchasing put options
(consisting of yen, Euro, Australian dollars and British
pounds) and selling Hong Kong dollar forwards. To reduce
hedging costs, the Company sells a correlation basket option
in the four currencies referred to above. United also
attempts to reduce its exposure to transaction gains and
losses by converting excess local currencies generated to
U.S. dollars and by entering into currency forward or
exchange contracts. The total notional amount of
outstanding currency options and forward exchange contracts,
and their respective fair market values as of December 31,
1999, are summarized in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk.
United's foreign operations involve insignificant
amounts of physical assets; however, there are sizable
intangible assets related to acquisitions of Atlantic and
Latin America route authorities. Operating authorities in
international markets are governed by bilateral aviation
agreements between the United States and foreign countries.
Changes in U.S. or foreign government aviation policies can
lead to the alteration or termination of existing air
service agreements that could adversely impact the value of
United's international route authority. Significant changes
in such policies could also have a material impact on
United's operating revenues and results of operations.
Airport Rents and Landing Fees -
United is charged facility rental and landing fees at
virtually every airport at which it operates. In recent
years, many airports have increased or sought to increase
rates charged to airlines as a means of compensating for
increasing demands upon airport revenues. Airlines have
challenged certain of these increases through litigation and
in some cases have not been successful. The Federal
Aviation Administration ("FAA") and the DOT have instituted
an administrative hearing process to judge whether rate
increases are legal and valid. However, to the extent the
limitations on such charges are relaxed or the ability of
airlines to challenge such charges is restricted, the rates
charged by airports may increase substantially. Management
cannot predict the magnitude of any such increase.
Environmental and Legal Contingencies -
United has been named as a Potentially Responsible
Party at certain Environmental Protection Agency ("EPA")
cleanup sites which have been designated as Superfund Sites.
United's alleged proportionate contributions at the sites
are minimal; however, at sites where the EPA has commenced
litigation, potential liability is joint and several.
Additionally, United has participated and is participating
in remediation actions at certain other sites, primarily
airports. The estimated cost of these actions is accrued
when it is determined that it is probable that United is
liable. Environmental regulations and remediation processes
are subject to future change, and determining the actual
cost of remediation will require further investigation and
remediation experience. Therefore, the ultimate cost cannot
be determined at this time. However, while such cost may
vary from United's current estimate, United believes the
difference between its accrued reserve and the ultimate
liability will not be material.*
United has certain other contingencies resulting from
this and other litigation and claims incident to the
ordinary course of business. Management believes, after
considering a number of factors, including (but not limited
to) the views of legal counsel, the nature of such
contingencies and prior experience, that the ultimate
disposition of these contingencies is not likely to
materially affect United's financial condition, operating
results or liquidity.*
Year 2000 -
United completed a successful transition to the Year
2000 as systems performed without interruption during the
rollover from December 31, 1999 to January 1, 2000. As of
December 31, 1999, the Company had incurred $81 million in
project costs ($50 million in expense and $31 million in
capital.) During 1999, the Company incurred $52 million in
project costs ($26 million in expense and $26 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. In November, United
invested 93 million Canadian ($64 million) in Air Canada's
non-voting convertible preferred shares through an
investment partnership owned by United (40%) and Lufthansa
(60%).
The remaining United investment in Air Canada
consists of the purchase from and subsequent leaseback to
Air Canada of three Airbus A330 aircraft, two of which
occurred in 1999, and a commitment by the Company to
guarantee a 160 million Canadian dollar line of credit.
New Accounting Pronouncements -
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which establishes accounting
and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No.
133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income
statement, and requires that a company must formally
document, designate and assess the effectiveness of
transactions that receive hedge accounting.
The effective date of SFAS No. 133 has been delayed
one year, to fiscal years beginning after June 15, 2000.
The Company plans on adopting SFAS No. 133 in the first
quarter of 2001. United is in the process of reviewing its
various contracts to determine which contracts meet the
requirements of SFAS No. 133 and would need to be reflected
as derivatives under the standard and accounted for at fair
value. The Company has not yet quantified the impacts of
adopting SFAS No. 133 on the financial statements.
However, it could increase volatility in earnings and other
comprehensive income.
In September 1999, the Financial Accounting Standard
Board's ("FASB") Emerging Issues Task Force ("EITF") issued
EITF Issue No. 99-13, "Application of Issue No. 97-10, "The
Effect of Lessee Involvement in Asset Construction" and
FASB Interpretation No. 23, Leases of Certain Property
Owned by a Governmental Unit or Authority, to Entities that
Enter into Leases with Governmental Entities" ("EITF 99-
13"). EITF 99-13 discusses the application of lease
accounting for property owned by governmental authorities,
such as airport facilities. Historically, airlines have
received operating lease treatment for assets funded by
governmental units and separately disclosed the bond
guarantee and lease commitment in the footnotes to the
financial statements. EITF 99-13 would require United to
apply different guidelines for determining the accounting
treatment for special facility bonds and may result in
United's recording the property and related financing on
the balance sheet for future transactions. The EITF is
effective for transactions entered into after September 23,
1999.
In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements", ("SAB
101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial
statements. Although SAB 101 does not change existing
accounting rules on revenue recognition, changes in
accounting to apply the guidance in SAB 101 may be
accounted for as a change in accounting principle. In the
first quarter of 2000, United intends to change the method
it uses to account for the sale of mileage to participating
partners in its Mileage Plus program. Under the new
accounting method, a portion of the revenue from the sale
of mileage will be deferred and recognized when
transportation is provided. In accordance with the
provisions of SAB 101, United will recognize a charge for
the cumulative effect of a change in accounting principle
in the first quarter of 2000, to reflect application of the
accounting method to prior years.
Outlook for 2000 -
Information regarding guidance for United's 2000
outlook can be obtained from UAL Corporation's Annual Report
on Form 10-K for the year 1999.
The information included in the above outlook section,
as well as certain statements made throughout the
Management's Discussion and Analysis of Financial Condition
and Results of Operations that are identified by an asterisk
(*) is forward looking and involves risks and uncertainties
that could result in actual results differing materially
from expected results. It is not reasonably possible to
itemize all of the many factors and specific events that
could affect the outlook of an airline operating in the
global economy. Some factors that could significantly
impact expected capacity, unit revenues, wages, fully
distributed unit costs and fuel prices include: the success
of the Company's cost-control efforts, the outcome of
negotiations on new contracts with the union groups,
industry capacity decisions, the airline pricing
environment, the economic environment of the airline
industry, fuel prices, actions of the U.S., foreign and
local governments, the Asian economic environment and travel
patterns, foreign currency exchange rate fluctuations and
the general economic environment. With respect to the
forward-looking statements set forth in the "Environmental
and Legal Contingencies" section, some of the factors that
could affect the ultimate disposition of these contingencies
are changes in applicable laws, the development of facts in
individual cases, settlement opportunities and the actions
of plaintiffs, judges and juries.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Interest Rate Risk - United's exposure to market risk
associated with changes in interest rates relates primarily to
its debt obligations and short-term investments. United does
not use derivative financial instruments in its investments
portfolio. United's policy is to manage interest rate risk
through a combination of fixed and floating rate debt and
entering into swap agreements, depending upon market
conditions. A portion of the borrowings are denominated in
foreign currencies which exposes the Company to risks
associated with changes in foreign exchange rates. To hedge
against some of this risk, the Company has placed foreign
currency deposits (primarily for Japanese yen, French francs,
German marks and Euros) to meet foreign currency lease
obligations designated in the respective currencies. Since
unrealized mark-to-market gains or losses on the foreign
currency deposits are offset by the losses or gains on the
foreign currency obligations, the Company reduces its overall
exposure to foreign currency exchange rate volatility. The
fair value of these deposits is determined based on the present
value of future cash flows using an appropriate swap rate. The
fair value of long-term debt is based on the quoted market
prices for the same or similar issues or the present value of
future cash flows using a U.S. Treasury rate that matches the
remaining life of the instrument, adjusted by a credit spread.
<TABLE>
<CAPTION>
(In millions) Expected Maturity Dates 1999 1998
- ------------- ----------------------- ---- ----
Fair Fair
2000 2001 2002 2003 2004 Thereafter Total Value Total Value
---- ---- ---- ---- ---- ---------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash equivalents
Fixed rate $175 $ - $ - $ - $ - $ - $175 $175 $237 $237
Avg. interest rate 5.27% - - - - - 5.27% 4.94%
Variable rate $ 60 $ - $ - $ - $ - $ - $ 60 $ 60 $ 89 $ 89
Avg. interest rate 6.23% - - - - - 6.23% 5.32%
Short term investments
Fixed rate $230 $ - $ - $ - $ - $ - $230 $230 $327 $327
Avg. interest rate 5.96% - - - - - 5.96% 5.48%
Variable rate $ 62 $ - $ - $ - $ - $ - $ 62 $ 62 $ 33 $ 33
Avg. interest rate 6.42% - - - - - 6.42% 5.47%
Foreign currency deposits
Fixed rate -
yen deposits $ - $ - $ - $ - $ - $378 $378 $423 $330 $354
Avg. interest rate - - - - - 3.07% 3.07% 3.05%
Fixed rate -
FF deposits $ - $ - $ - $ - $ - $ 10 $ 10 $ 9 $ 11 $ 13
Avg. interest rate - - - - - 5.61% 5.61% 5.61%
Fixed rate -
DM deposits $ 1 $ 1 $ 1 $ 1 $ 1 $162 $167 $177 $193 $198
Avg. interest rate 6.49%6.49%6.49%6.49%6.49% 6.49% 6.49% 6.49%
Fixed rate -
EUR deposits $ - $ - $ - $ - $ - $ 27 $ 27 $ 23 $ - $ -
Avg. interest rate - - - - - 4.14% 4.14% -
LONG TERM DEBT
U.S. Dollar denominated
Fixed rate debt $ 26 $27 $30 $159 $279 $912 $1,433 $1,542 $1,491 $1,729
Avg. interest rate 8.18%8.42%8.41% 9.47%10.66% 7.31% 8.26% 8.80%
Variable rate debt $ 54 $56 $567 $522 $ 23 $ 85 $1,307 $1,307 $1,456 $1,456
Avg. interest rate 6.28%6.28%6.35% 6.12% 6.47% 6.52% 6.26% 5.67%
Japanese Yen denominated
Fixed rate debt $ 12 $ - $ - $ - $ - $ - $ 12 $ 12 $ 21 $ 23
Avg. interest rate 7.50% - - - - - 7.50% 7.50%
</TABLE>
Foreign Currency Risk - United has established a foreign
currency hedging program using currency forwards and currency
options to hedge exposure to the yen, Euro, Australian dollar,
British pound and Hong Kong dollar. The goal of the hedging
program is to effectively manage risk associated with
fluctuations in the value of the foreign currency, thereby
making financial results more stable and predictable. United
does not use currency forwards or currency options for trading
purposes.
<TABLE>
<CAPTION>
(In millions, except average
contract rates) Notional Average Estimated
Amount Contract Rate Fair Value
-------- ------------- ----------
(Pay)/Receive*
<S> <C> <C> <C>
Forward exchange contracts
Japanese Yen-Purchased forwards $ 144 101.69 $ (1)
-Sold forwards $ 62 102.30 $ -
Hong Kong Dollar-Sold forwards $ 91 7.83 $ -
French Franc-Purchased forwards $ 50 5.05 $ (1)
Euro-Purchased forwards $ 117 1.37 $ (5)
Currency options
Japanese Yen-Purchased put options $ 402 105.07 $ 7
Australian Dollar-Purchased put
options $ 114 0.61 $ -
British Pound-Purchased put options$ 62 1.53 $ -
Euro-Purchased put options $ 106 0.98 $ 1
Correlation Basket Option-Sold $ 684 N/A $ (3)
</TABLE>
As of December 31, 1998, United had $215 million of
Japanese yen forwards outstanding with a fair value of $3
million, $315 million yen put options with a fair value of $4
and $317 million yen call options with a fair value of $(50)
million.
Price Risk (Aircraft Fuel) - At December 31, 1999, the
Company had contracted to purchase approximately 6% of the
Company's 2000 fuel requirements at an average fixed price of
$0.51 per gallon. In addition, to a limited extent United
trades short-term heating oil futures and option contracts,
which are immaterial. When market conditions indicate risk
reduction is achievable, United enters into fuel option
contracts to reduce its price risk exposure to jet fuel. As
market conditions change, so may United's hedging program.
Currently United purchases call options to provide protection
against sharp increases in the price of aircraft fuel.
Through this approach, at December 31, 1999, United had hedged
75% of the Company's expected 2000 fuel purchases. It is the
Company's intent to be fully hedged for probable jet fuel
purchases for year 2000 by the end of the first quarter.
<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 (WTI) $1,121 $21.78/bbl $ 120
</TABLE>
At December 31, 1998, United had $496 million in purchased
call contracts for crude oil with an estimated fair value of
$13 million and $202 million in sold put contracts for crude
oil with an estimated fair value of $(50) million.
*Estimated fair values represent the amount United would
pay/receive on December 31, 1999 to terminate the contracts.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
United Air Lines, Inc.:
We have audited the accompanying statements of consolidated
financial position of United Air Lines, Inc. (a Delaware
corporation) and subsidiary companies as of December 31, 1999
and 1998, and the related statements of consolidated
operations, consolidated cash flows and consolidated
stockholder's equity for each of the three years in the period
ended December 31, 1999. These financial statements and the
schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
financial position of United Air Lines, Inc. and subsidiary
companies as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule
referenced in Item 14(a)2 herein is presented for purposes of
complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 24, 2000
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations
(In Millions)
Year Ended December 31
Operating revenues: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Passenger $15,784 $15,520 $15,342
Cargo 906 913 892
Other operating revenues 1,277 1,085 1,101
------ ------ ------
17,967 17,518 17,335
------ ------ ------
Operating expenses:
Salaries and related costs 5,671 5,341 5,019
ESOP compensation expense 756 829 987
Aircraft fuel 1,776 1,788 2,061
Commissions 1,139 1,325 1,508
Purchased services 1,575 1,505 1,285
Aircraft rent 879 894 942
Landing fees and other rent 966 898 879
Depreciation and amortization 867 793 724
Aircraft maintenance 689 624 603
Other operating expenses 2,307 2,074 2,101
------ ------ ------
16,625 16,071 16,109
------ ------ ------
Earnings from operations 1,342 1,447 1,226
------ ------ ------
Other income (expense):
Interest expense (372) (362) (290)
Interest capitalized 75 105 104
Interest income 68 59 51
Equity in earnings of affiliates 37 72 66
Gain on sale of partnership
interest - - 275
Gain on sale of investments 731 - 103
Miscellaneous, net 4 (101) (47)
------ ------ ------
543 (227) 262
------ ------ ------
Earnings before income taxes and
extraordinary item 1,885 1,220 1,488
Provision for income taxes 678 417 547
------ ------ ------
Earnings before extraordinary item 1,207 803 941
Extraordinary loss on early
extinguishment of debt, net of tax (3) - (9)
------ ------ ------
Net earnings $ 1,204 $ 803 $ 932
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
December 31
Assets 1999 1998
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 235 $ 326
Short-term investments 292 360
Receivables, less allowance for
doubtful accounts (1999 - $13;
1998 - $16) 1,275 1,134
Related party receivables 256 46
Aircraft fuel, spare parts and
supplies, less obsolescence
allowance (1999 - $45; 1998 - $39) 340 384
Income tax receivables 85 -
Deferred income taxes 226 259
Prepaid expenses and other 363 308
------ ------
3,072 2,817
------ ------
Operating property and equipment:
Owned -
Flight equipment 13,518 12,006
Advances on flight equipment 809 985
Other property and equipment 3,368 3,134
------ ------
17,695 16,125
Less - Accumulated depreciation
and amortization 5,207 5,174
------ ------
12,488 10,951
------ ------
Capital leases -
Flight equipment 2,929 2,605
Other property and equipment 93 97
------ ------
3,022 2,702
Less - Accumulated amortization 645 599
------ ------
2,377 2,103
------ ------
14,865 13,054
------ ------
Other assets:
Investments in affiliates 533 304
Intangibles, less accumulated
amortization (1999-$279; 1998-$265) 568 676
Related party receivables 465 430
Aircraft lease deposits 594 545
Prepaid rent 626 626
Other 820 378
------ ------
3,606 2,959
------ ------
$21,543 $18,830
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
December 31
Liabilities and Stockholder's Equity 1999 1998
- ------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Notes payable $ 61 $ 184
Long-term debt maturing within one year 92 98
Related party debt maturing within
one year 187 128
Current obligations under capital leases 190 176
Advance ticket sales 1,412 1,429
Accounts payable 1,030 1,144
Accrued salaries, wages and benefits 1,002 952
Accrued aircraft rent 760 769
Other accrued liabilities 895 830
------ ------
5,629 5,710
------ ------
Long-term debt 2,650 2,858
------ ------
Long-term obligations under capital leases 2,336 2,113
------ ------
Other liabilities and deferred credits:
Deferred pension liability 70 89
Postretirement benefit liability 1,489 1,424
Deferred gains 986 1,180
Accrued aircraft rent 395 371
Deferred income taxes 1,156 404
Other 340 357
------ ------
4,436 3,825
------ ------
Preferred stock committed to
Supplemental ESOP 893 691
------ ------
Stockholder's equity:
Common stock at par, $5.00 par value;
authorized 1,000 shares; outstanding
200 shares - -
Additional capital invested 237 21
ESOP capital 3,035 2,630
Retained earnings 2,012 1,108
Unearned ESOP preferred stock (28) (121)
Accumulated other comprehensive income 352 (2)
Other (9) (3)
------ ------
5,599 3,633
------ ------
Commitments and contingent liabilities
(Note 13) ------ ------
$21,543 $18,830
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Cash Flows
(In Millions)
Year Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents at
beginning of year $ 326 $ 268 $ 203
----- ----- -----
Cash flows from operating activities:
Net earnings 1,204 803 932
Adjustments to reconcile to net cash
provided by operating activities -
ESOP compensation expense 756 829 987
Extraordinary loss on debt
extinguishment, net of tax 3 - 9
Gain on sale of partnership interest - - (275)
Gain on sale of investments (731) - (103)
Pension funding less than expense 94 101 43
Deferred postretirement benefit expense 155 149 139
Depreciation and amortization 867 793 724
Provision for deferred income taxes 591 307 188
Undistributed earnings of affiliates (20) (62) (16)
Increase in receivables (141) (120) (232)
Increase in related party receivables (210) (41) (1)
Decrease in other current assets 3 106 2
Increase (decrease) in advance
ticket sales (17) 162 78
Increase (decrease) in accrued
income taxes (11) 39 11
Increase (decrease) in accounts
payable and accrued liabilities (95) 62 24
Amortization of deferred gains (66) (64) (64)
Other, net 33 51 116
----- ----- -----
2,415 3,115 2,562
----- ----- -----
Cash flows from investing activities:
Additions to property and equipment (2,383) (2,831) (2,812)
Proceeds on disposition of
property and equipment 154 452 83
Proceeds on disposition of
partnership interest - - 539
Proceeds on sale of investments 828 - -
Decrease (increase) in short-term
investments 68 149 (88)
Decrease (increase) in loans to
affiliates (35) (24) (32)
Other, net (263) (63) (30)
----- ----- -----
(1,631) (2,317) (2,340)
----- ----- -----
Cash flows from financing activities:
Proceeds from issuance of long-term debt 286 928 597
Repayment of long-term debt (513) (260) (284)
Principal payments under capital leases (247) (320) (146)
Purchase of equipment certificates
under Company operating leases (47) (655) -
Dividend to parent company (300) (500) (250)
Increase (decrease) in short-term
borrowings (123) 184 -
Aircraft lease deposits (20) (154) (112)
Other, net 89 37 38
----- ----- -----
(875) (740) (157)
----- ----- -----
Increase (decrease) in cash and cash
equivalents during the year (91) 58 65
----- ----- -----
Cash and cash equivalents at end of year $ 235 $ 326 $ 268
===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Stockholder's Equity
(In Millions)
Unearned Accumulated
Additional ESOP Other
Common Capital ESOP Retained Preferred Comp
Stock Invested Capital Earnings Stock Income Other Total
----- ---------- ------- -------- --------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ - $ 15 $1,441 $ 121 $ (202) $ - $(13) $1,362
--- ---- ----- ---- ----- --- --- -----
Year ended December 31, 1997:
Net earnings - - - 932 - - - 932
Other comprehensive income, net:
Minimum pension liability adj. - - - - - (2) - (2)
---- --- -----
Total comprehensive income - - - 932 - (2) - 930
---- --- -----
Dividend to parent company - - - (250) - - - (250)
Unearned compensation and
amortization from issuance of
ESOP preferred stock - - 993 - (6) - - 987
Unearned compensation and
amortization of parent company
restricted stock plan - - - - - - 6 6
Preferred stock committed
to Supplemental ESOP - - (349) - - - - (349)
Other - 14 (32) 2 31 - 2 17
--- ---- ----- ---- ----- --- --- -----
Balance at December 31, 1997 - 29 2,053 805 (177) (2) (5) 2,703
--- ---- ----- ---- ----- --- --- -----
Year ended December 31,1998:
Net earnings - - - 803 - - - 803
Other comprehensive income, net:
Unrealized gains on
securities, net - - - - - 1 - 1
Minimum pension liability adj. - - - - - (1) - (1)
---- --- -----
Total comprehensive income - - - 803 - - - 803
---- --- -----
Dividend to parent company - - - (500) - - - (500)
Unearned compensation and
amortization from issuance of
ESOP preferred stock - - 823 - 6 - - 829
Unearned compensation and
amortization of parent company
restricted stock plan - - - - - - 2 2
Preferred stock committed
to Supplemental ESOP - - (177) - - - - (177)
Other - (8) (69) - 50 - - (27)
--- ---- ----- ----- ----- --- --- -----
Balance at December 31, 1998 - 21 2,630 1,108 (121) (2) (3) 3,633
--- ---- ----- ----- ----- --- --- -----
Year ended December 31, 1999:
Net earnings - - - 1,204 - - - 1,204
Other comprehensive income, net:
Unrealized gains on
securities, net - - - - - 354 - 354
Minimum pension liability adj. - - - - - - - -
----- --- -----
Total comprehensive income - - - 1,204 - 354 - 1,558
----- --- -----
Dividend to paent company - - - (300) - - - (300)
Unearned compensation and
amortization from issuance of
ESOP preferred stock - - 740 - 16 - - 756
Unearned compensation and
amortization of parent company
restricted stock plan - - - - - - 2 2
Preferred stock committed
to Supplemental ESOP - - (201) - - - - (201)
Issuance of common stock - 204 - - - - - 204
Other - 12 (134) - 77 - (8) (53)
--- ---- ----- ----- --- --- --- -----
Balance at December 31, 1999 $ - $ 237 $3,035 $2,012 $(28) $352 $ (9) $5,599
=== ==== ===== ===== === === === =====
</TABLE>
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
------------------------------------------
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Presentation - United Air Lines, Inc.
("United") is a wholly-owned subsidiary of UAL Corporation
("UAL"). The consolidated financial statements include the
accounts of United and all of its majority-owned affiliates
(collectively "the Company"). All significant intercompany
transactions are eliminated. Investments in affiliates are
carried on the equity basis. Certain prior-year financial
statement items have been reclassified to conform to the
current year's presentation.
(b) Use of Estimates - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(c) Airline Revenues - Passenger fares and cargo
revenues are recorded as operating revenues when the
transportation is furnished. The value of unused passenger
tickets is included in current liabilities.
(d) Cash and Cash Equivalents and Short-term
Investments - Cash in excess of operating requirements is
invested in short-term, highly liquid, income-producing
investments. Investments with a maturity of three months or
less on their acquisition date are classified as cash and
cash equivalents. Other investments are classified as short-
term investments.
From time to time, United lends certain of its
securities classified as cash and cash equivalents and short-
term investments to third parties. United requires
collateral in an amount exceeding the value of the
securities and is obligated to reacquire the securities at
the end of the contract. United accounts for these
transactions as secured borrowings rather than sales and
does not remove the securities from the balance sheet. At
December 31, 1999, United was obligated to repurchase $89
million of securities lent to third parties.
At December 31, 1999 and 1998, $300 million and $341
million, respectively, of investments in debt securities
included in cash and cash equivalents and short-term
investments were classified as available-for-sale, and $131
million and $197 million, respectively, were classified as
held-to-maturity. Investments in debt securities classified
as available-for-sale are stated at fair value based on the
quoted market prices for the securities, which does not
differ significantly from their cost basis. Investments
classified as held-to-maturity are stated at cost which
approximates market due to their short-term maturities. The
proceeds from sales of available-for-sale securities are
included in interest income for each respective year.
(e) Derivative Financial Instruments -
Foreign Currency - From time to time, United enters
into Japanese yen forward exchange contracts to minimize
gains and losses on the revaluation of short-term yen-
denominated liabilities. The yen forwards typically have
short-term maturities and are marked to fair value at the
end of each accounting period. The unrealized mark-to-
market gains and losses on the yen forwards generally offset
the losses and gains recorded on the yen liabilities.
United has also entered into forwards and swaps to
reduce exposure to currency fluctuations on yen- and French
franc-denominated capital lease obligations. The cash flows
of the forwards and swaps mirror those of the capital
leases. The premiums on the forwards and swaps, as measured
at inception, are being amortized over their respective
lives as components of interest expense. Any gains or
losses realized upon early termination of these forwards and
swaps are deferred and recognized in income over the
remaining life of the underlying exposure.
The Company hedges some of the risks of exchange rate
volatility on its anticipated future yen, Euro, Australian
dollar and British pound revenues by purchasing put options
with little or no intrinsic value and on Hong Kong dollar
revenues by entering into forward contracts. The amount and
duration of these options are synchronized with the expected
revenues, and thus, the put options have been designated as
a hedge. The premiums on purchased option contracts are
amortized over the lives of the contracts. Unrealized gains
on purchased put option contracts are deferred until
contract expiration and then recognized as a component of
passenger revenue. To reduce hedging costs, the Company
sells a correlation basket option in the four currencies
referred to above. The unrealized mark-to-market gains and
losses on the correlation options are included in
"Miscellaneous, net", net of premiums received.
Interest Rates - United may from time to time, enter
into swaps to reduce exposure to interest rate fluctuations
in connection with certain debt, capital leases and
operating leases. The cash flows of the swaps mirror those
of the underlying exposures. The premiums on the swaps, as
measured at inception, are amortized over their respective
lives as components of interest expense. Any gains or
losses realized upon the early termination of these swaps
are deferred and recognized in income over the remaining
life of the underlying exposure.
Aircraft Fuel - United uses purchased call options to
hedge a portion of its price risk related to aircraft fuel
purchases. The purchased call options have been designated
as a hedge. Gains or losses on hedge positions, net of
premiums paid, are recognized upon contract expiration as a
component of aircraft fuel inventory. In addition, to a
limited extent, United trades short-term heating oil futures
contracts. Unrealized losses on these contracts are
recorded currently in income while unrealized gains are
deferred until contract expiration. Both gains and losses
are recorded as a component of aircraft fuel expense.
(f) Aircraft Fuel, Spare Parts and Supplies - Aircraft
fuel and maintenance and operating supplies are stated at
average cost. Flight equipment spare parts are stated at
average cost less an obsolescence allowance.
(g) Operating Property and Equipment - Owned operating
property and equipment is stated at cost. Property under
capital leases, and the related obligation for future lease
payments, are initially recorded at an amount equal to the
then present value of those lease payments.
Depreciation and amortization of owned depreciable
assets is based on the straight-line method over their
estimated service lives. Leasehold improvements are
amortized over the remaining period of the lease or the
estimated service life of the related asset, whichever is
less. Aircraft are depreciated to estimated salvage values,
generally over lives of 4 to 30 years; buildings are
depreciated over lives of 25 to 45 years; and other property
and equipment are depreciated over lives of 3 to 15 years.
Properties under capital leases are amortized on the
straight-line method over the life of the lease, or in the
case of certain aircraft, over their estimated service
lives. Lease terms are 10 to 30 years for aircraft and
flight simulators and 25 years for buildings. Amortization
of capital leases is included in depreciation and
amortization expense.
Maintenance and repairs, including the cost of minor
replacements, are charged to maintenance expense accounts.
Costs of additions to and renewals of units of property are
charged to property and equipment accounts.
(h) Intangibles - Intangibles consist primarily of
route acquisition costs and intangible pension assets (see
Note 11, "Retirement and Postretirement Plans"). Route
acquisition costs are amortized over 40 years.
(i) Mileage Plus Awards - United accrues the estimated
incremental cost of providing free travel awards earned
under its Mileage Plus frequent flyer program (including
awards earned from mileage credits sold) when such award
levels are reached. United, through its wholly owned
subsidiary, Mileage Plus Holdings, Inc., sells mileage
credits to participating partners in the Mileage Plus
program. The resulting revenue is recorded in other
operating revenues during the period in which the credits
are sold. Effective January 1, 2000, the Company intends to
change the method of accounting for the sale of mileage.
See "New Accounting Pronouncements" in Management's
Discussion and Analysis of Financial Condition and Results
of Operations.
(j) Deferred Gains - Gains on aircraft sale and
leaseback transactions are deferred and amortized over the
lives of the leases as a reduction of rental expense.
(2) Employee Stock Ownership Plans and Recapitalization
---------------------------------------------------
On July 12, 1994, the shareholders of UAL approved a
plan of recapitalization to provide an approximately 55%
equity interest in UAL to certain employees of United in
exchange for wage concessions and work-rule changes. The
employees' equity interest is being allocated to individual
employees through the year 2000 under Employee Stock
Ownership Plans ("ESOPs") which were created as a part of
the recapitalization.
The ESOPs cover employees represented by the Air Line
Pilots' Association, International, the International
Association of Machinists and Aerospace Workers and U.S.
management and salaried employees. The ESOPs include a
"Leveraged ESOP," a "Non-Leveraged ESOP" and a "Supplemental
ESOP." Both the Leveraged ESOP and the Non-Leveraged ESOP
are tax-qualified plans while the Supplemental ESOP is not a
tax-qualified plan. Shares are delivered to employees
primarily through the Leveraged ESOP, then through the Non-
Leveraged ESOP, and finally, through the Supplemental ESOP.
The equity interests are being delivered to employees
through two classes of preferred stock (Class 1 and Class 2
ESOP Preferred Stock, collectively "ESOP Preferred Stock"),
and the voting interests are being delivered through three
separate classes of preferred stocks (Class P, M and S
Voting Preferred Stock, collectively, "Voting Preferred
Stock"). The Class 1 ESOP Preferred Stock is being
delivered to an ESOP trust in seven separate sales under the
Leveraged ESOP, the last of which occurred on January 5,
2000. Based on Internal Revenue Code Limitations, shares of
the Class 2 ESOP Preferred Stock are either contributed to
the Non-Leveraged ESOP or allocated as "book entry" shares
to the Supplemental ESOP, annually through the year 2000.
The classes of preferred stock are described more fully in
Note 13, "ESOP Preferred Stock."
The Leveraged ESOP and Non-Leveraged ESOP are being
accounted for under AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans"
("SOP"). For the Leveraged ESOP, as shares of Class 1 ESOP
Preferred Stock are sold to an ESOP trust, the Company
reports the issuance as a credit to additional capital
invested and records a corresponding charge to unearned ESOP
preferred stock. ESOP compensation expense is recorded for
the average fair value of the shares committed to be
released during the period with a corresponding credit to
unearned ESOP preferred stock for the cost of the shares.
Any difference between the fair value of the shares and the
cost of the shares is charged or credited to additional
capital invested. For the Non-Leveraged ESOP, the Class 2
ESOP Preferred Stock is recorded as additional capital
invested as the shares are committed to be contributed, with
the offsetting charge to ESOP compensation expense. The
ESOP compensation expense is based on the average fair value
of the shares committed to be contributed. The Supplemental
ESOP is being accounted for under Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to
Employees."
Shares of ESOP Preferred Stock are legally released or
allocated to employee accounts as of year-end. Dividends on
the ESOP Preferred Stock are also paid at the end of the
year. Dividends on unallocated shares are used by the ESOP
to pay down the loan from UAL and are not considered
dividends for financial reporting purposes. Dividends on
allocated shares are satisfied by releasing shares from the
ESOP's suspense account to the employee accounts and are
charged to equity.
During 1999, 2,334,370 shares of Class 1 ESOP Preferred
Stock, 123,841 shares of Class 2 ESOP Preferred Stock and
2,453,337 shares of Voting Preferred Stock were allocated to
employee accounts, and another 615,757 shares of Class 2
ESOP Preferred Stock were allocated in the form of "book
entry" shares, effective December 31, 1998. Another 100,180
shares of Class 2 ESOP Preferred Stock previously allocated
in book entry form were issued and either contributed to the
qualified plan or converted and sold on behalf of
terminating employees. At December 31, 1999, the year-end
allocation of Class 1 ESOP Preferred Stock to employee
accounts had not yet been completed. There were 2,390,935
shares of Class 1 ESOP Preferred Stock committed to be
released and 130,643 shares held in suspense by the ESOP as
of December 31, 1999. For the Class 2 ESOP Preferred Stock,
683,038 shares were committed to be contributed to employees
at December 31, 1999. The fair value of the unearned ESOP
shares recorded on the balance sheet at December 31, 1999
and 1998 was $41 million and $141 million, respectively.
For the Class 2 ESOP Preferred Stock committed to be
contributed to employees under the Supplemental ESOP,
employees can elect to receive their "book entry" shares in
cash upon termination of employment. The estimated fair
value of such shares at December 31, 1999 and 1998 was $954
million and $600 million, respectively.
(3) Other Income (Expense) - Miscellaneous
--------------------------------------
Other income (expense) - "Miscellaneous, net" consisted
of the following:
<TABLE>
<CAPTION>
(In Millions) 1999 1998 1997
- ------------- ---- ---- ----
<S> <C> <C> <C>
Foreign exchange gains (losses) $ 4 $ (84) $ (19)
Minority interests - - (15)
Other - (17) (13)
---- ---- ----
$ 4 $(101) $ (47)
==== ==== ====
</TABLE>
(4) Other Comprehensive Income
--------------------------
The following table presents the tax effect of those
items included in other comprehensive income:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
Tax Net of Tax Net of Tax Net of
Pre-Tax Effect Tax Pre-Tax Effect Tax Pre-Tax Effect Tax
------- ------ ------ ------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains
arising during period $547 $(193) $354 $ 1 $ - $ 1 $ - $ - $ -
Minimum pension liability - - - (1) - (1) (4) 2 (2)
--- ---- --- -- -- -- -- -- --
Total other comprehensive income$547 $(193) $354 $ - $ - $ - $(4) $ 2 $(2)
=== ==== === == == == == == ==
</TABLE>
The components of accumulated other comprehensive
income consist of the following items:
<TABLE>
<CAPTION>
Unrealized Minimum Accumulated Other
Gains on Pension Comprehensive
Securities Liability Income
---------- --------- -----------------
<S> <C> <C> <C>
December 31, 1996 $ - $ - $ -
Current period change - (2) (2)
---- ---- ----
December 31, 1997 $ - $ (2) $ (2)
Current period change 1 (1) -
---- ---- ----
December 31, 1998 $ 1 $ (3) $ (2)
Current period change 354 - 354
---- ---- ----
December 31, 1999 $ 355 $ (3) $ 352
==== ==== ====
</TABLE>
Unrealized gains on securities primarily represents
gains on the Company's investments in Galileo International,
Inc. and Equant N.V. as discussed in Note 5 "Investments".
(5) 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. 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. The market value of these
shares at December 31, 1999 ($477 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 ($253 million) in accumulated other comprehensive
income. The market value of United's investment in Galileo
at December 31, 1998 was $1,455 million. Included in the
Company's retained earnings is approximately $240 million of
undistributed earnings of Galileo and its predecessor
companies.
In July 1997, United completed the sale of its interest
in the Apollo Travel Services Partnership ("ATS") a 77%
owned affiliate whose accounts were consolidated, to Galileo
for $539 million in cash. This transaction resulted in a
pre-tax gain of approximately $405 million. Of this amount,
$275 million was recognized in 1997, $7 million in 1998 and
$4 million in 1999. The remaining balance ($119 million)
reduced the basis of the Company's investment in Galileo.
Under operating agreements with Galileo, United
purchases computer reservations services from Galileo and
during 1999 and 1998 provided communications services to
Galileo, while during 1997 provided marketing, sales and
communication services to Galileo. Revenues derived from
the sale of services to Galileo amounted to approximately $4
million in 1999, $13 million in 1998 and $159 million in
1997. The cost to United of services purchased from Galileo
amounted to approximately $170 million in 1999, $170 million
in 1998 and $134 million in 1997. In connection with the
sale of ATS, United entered into an additional services
agreement with Galileo under which the Company provides
certain marketing and other services designed to increase
the competitiveness of Galileo's business and to generate
additional bookings and revenues for Galileo. In December
1999, United recognized $14 million in other operating
revenues related to the achievement of improvements in
Galileo's air booking revenues as specified in the
agreements.
Prior to the sale to Galileo, ATS contributed the
following amounts to the Company's consolidated results, net
of intercompany eliminations and minority interests:
<TABLE>
<CAPTION>
(In Millions) Year Ended December 31, 1997
- ------------- ----------------------------
<S> <C>
Operating revenues $ 147
Operating income $ 63
Earnings before income taxes $ 50
</TABLE>
United owns depositary certificates in Equant N.V.
("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.
During the fourth quarter of 1999, transferability
restrictions on these shares were removed and the investment
was classified as available-for-sale. The market value in
excess of United's investment is classified net-of-tax ($100
million) in accumulated other comprehensive income. In
December 1999, United sold 709,000 shares of common stock in
Equant in a secondary offering by Equant for $62 million.
At December 31, 1999, the estimated fair value of United's
remaining investment in Equant was approximately $156
million.
GetThere.com is a leading provider of internet-based
travel planning products tailored to individual, corporate,
travel supplier and travel agency customers. During 1999,
United invested approximately $51 million in GetThere.com,
resulting in a 28% minority interest in GetThere.com
consisting of common stock, warrants and options. 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.
In November 1999, United entered into a participation
agreement with Priceline.com to provide inventory to
Priceline.com. In exchange, United received 5.5 million
warrants for Priceline.com common stock exercisable in five
years. The participation agreement contains early exercise
provisions allowing United to exercise the warrants if in
three years specific performance criteria are met. The
warrants have been valued at $61 million by an investment
bank and are being recognized as passenger revenue over a
three-year period. In 1999, the total revenue recognized
was $6 million.
(6) Income Taxes
------------
United, its subsidiaries and other affliated companies
file a consolidated federal income tax return with UAL.
Under an intercompany tax allocation policy, United and its
subsidiaries compute, record and pay UAL for their own tax
liability as if they were separate companies filing separate
returns. In determining their own tax liabilities, United
and each of its subsidiaries take into account all tax
credits or benefits generated and utilized as separate
companies, and they are compensated for the aforementioned
tax benefits only if they would be able to use those
benefits on separate company bases.
In 1999, the alternative minimum tax ("AMT") liability
of the Company exceeded the regular tax liability resulting
in additional AMT credits. The federal income tax liability
is the greater of the tax computed using the regular tax
system or the tax under the AMT system. If the regular tax
liability exceeds the AMT liability and AMT credits are
available, then AMT credits are used to reduce the net tax
liability to the amount of the AMT liability.
The provision for income taxes is summarized as
follows:
<TABLE>
<CAPTION>
(In Millions) 1999 1998 1997
- ------------- ---- ---- ----
<S> <C> <C> <C>
Current -
Federal $ 73 $ 102 $ 305
State 14 8 54
---- ---- ----
87 110 359
---- ---- ----
Deferred -
Federal 537 271 172
State 54 36 16
---- ---- ----
591 307 188
---- ---- ----
$ 678 $ 417 $ 547
==== ==== ====
</TABLE>
The income tax provision differed from amounts computed
at the statutory federal income tax rate, as follows:
<TABLE>
<CAPTION>
(In Millions) 1999 1998 1997
- ------------- ---- ---- ----
<S> <C> <C> <C>
Income tax provision at statutory rate $ 660 $ 427 $ 521
State income taxes, net of federal
income tax benefit 44 29 46
Nondeductible employee meals 24 24 26
Tax credits - (7) (2)
Other, net (50) (56) (44)
---- ---- ----
$ 678 $ 417 $ 547
==== ==== ====
</TABLE>
Temporary differences and carryforwards that give rise
to a significant portion of deferred tax assets and
liabilities for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(In Millions) 1999 1998
- ------------- ---- ----
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Employee benefits, including
postretirement medical and ESOP $ 989 $ 135 $ 964 $ 130
Depreciation, capitalized interest
and transfers of tax benefits - 2,477 - 1,924
Gains on sale and leasebacks 335 - 368 -
Rent expense 435 - 411 -
AMT credit carryforwards 210 - 198 -
Other 751 1,038 764 796
----- ----- ----- -----
$2,720 $3,650 $2,705 $2,850
===== ===== ===== =====
</TABLE>
At December 31, 1999, United and its subsidiaries had
$210 million of federal AMT credits which may be carried
forward to reduce the tax liabilities of future years.
(7) Short-Term Borrowings
---------------------
United has an agreement with a syndicate of banks for a
$750 million revolving credit facility expiring in 2002.
Interest on drawn amounts under the facility is calculated
at floating rates based on the London interbank offered rate
("LIBOR") plus a margin which is subject to adjustment based
on certain changes in the credit ratings of United's long-
term senior unsecured debt. Among other restrictions, the
credit facility contains a covenant that restricts United's
ability to grant liens on or otherwise encumber certain
identified assets with a market value of approximately $1.1
billion.
Additionally, United has available $900 million in
short-term secured aircraft financing facilities. Interest
on drawn amounts under the facilities is calculated at
floating rates based on LIBOR plus a margin.
At December 31, 1999, United had outstanding $61
million under a separate short-term borrowing facility,
bearing an average interest rate of 5.72%. Receivables
amounting to $233 million were pledged by United to secure
repayment of such outstanding borrowings. The maximum
available borrowing amount under this arrangement is $227
million.
(8) Long-Term Debt
--------------
A summary of long-term debt, including current
maturities, as of December 31 is as follows (interest rates
are as of December 31, 1999):
<TABLE>
<CAPTION>
(In Millions) 1999 1998
- ------------- ---- ----
<S> <C> <C>
Secured notes, 5.71% to 8.99%,
averaging 6.38%, due through 2014 $ 1,229 $ 1,389
Debentures, 9.00% to 11.21%, averaging
9.98%, due through 2021 762 785
Promissory notes, 11.00%, due 2000 1 13
Commercial paper, 6.10%, due through 2003 571 591
Special facility bonds, 5.63%, due 2034 190 190
------ ------
2,753 2,968
------ ------
Less: Unamortized discount on debt (11) (12)
Current maturities (92) (98)
------ ------
$ 2,650 $ 2,858
====== ======
</TABLE>
In addition to scheduled principal payments, in 1999
the Company repaid $23 million in principal amount of
debentures prior to maturity. The debentures were scheduled
to mature through 2021. An extraordinary loss of $3
million, net of tax benefits of $2 million was recorded
reflecting amounts paid in excess of the debt carrying
value.
In March 1998, the Company, through a special-purpose
financing entity that is consolidated, issued $604 million
of commercial paper to refinance certain lease commitments.
Although the issued commercial paper has short maturities,
the Company expects to continually rollover this obligation
throughout the 5-year life of its supporting liquidity
facility or bank standby facility. As such, the commercial
paper is classified as a long-term obligation in the
Company's statement of financial position.
In 1997, the California Statewide Communities
Development Authority (the "Authority") issued $190 million
in special facilities revenue bonds to finance the
acquisition and construction of certain facilities at the
Los Angeles International Airport which United guarantees
payment of under a payment agreement with the Authority.
The bond proceeds are restricted to expenditures on the Los
Angeles facilities and unspent amounts are classified as
other assets in the balance sheet.
At December 31, 1999, United had outstanding a total of
$1.307 billion of long-term debt bearing interest rates at
22 to 47.5 basis points over LIBOR.
Maturities of long-term debt for each of the four years
after 2000 are: 2001 - $83 million; 2002 - $597 million;
2003 - $681 million; and 2004 - $302 million. Various
assets, principally aircraft, having an aggregate book value
of $1.348 billion at December 31, 1999, were pledged as
security under various loan agreements.
(9) Lease Obligations
-----------------
The Company leases aircraft, airport passenger terminal
space, aircraft hangars and related maintenance facilities,
cargo terminals, other airport facilities, real estate,
office and computer equipment and vehicles.
Future minimum lease payments as of December 31, 1999,
under capital leases (substantially all of which are for
aircraft) and operating leases having initial or remaining
noncancelable lease terms of more than one year are as
follows:
<TABLE>
<CAPTION>
(In Millions) Operating Leases Capital
Aircraft Non-aircraft Leases
-------- ------------ -------
<S> <C> <C> <C>
Payable during -
2000 $ 889 $ 458 $ 350
2001 864 442 445
2002 854 401 385
2003 891 389 286
2004 929 376 296
After 2004 9,789 5,628 1,905
------ ----- -----
Total minimum lease payments $14,216 $7,694 3,667
====== =====
Imputed interest (at rates of 5.3% to 12.2%) (1,141)
-----
Present value of minimum lease payments 2,526
Current portion (190)
-----
Long-term obligations under capital leases $2,336
=====
</TABLE>
As of December 31, 1999, United leased 317 aircraft, 76
of which were under capital leases. These leases have terms
of 10 to 26 years, and expiration dates range from 2000
through 2020.
In connection with the financing of certain aircraft
accounted for as capital leases, United had on deposit at
December 31, 1999 an aggregate 39 billion yen ($379
million), 326 million German marks ($167 million), 64
million French francs ($10 million), 27 million Euro ($27
million) and $11 million in certain banks and had pledged an
irrevocable security interest in such deposits to certain of
the aircraft lessors. These deposits will be used to pay
off an equivalent amount of recorded capital lease
obligations.
Amounts charged to rent expense, net of minor amounts
of sublease rentals, were $1.452 billion in 1999, $1.424
billion in 1998 and $1.453 billion in 1997. Included in
1999 rental expense was $11 million in contingent rentals,
resulting from changes in interest rates for operating
leases under which the rent payments are based on variable
interest rates.
(10) Related Party Transactions
--------------------------
Air Wis Services, Inc., a wholly-owned subsidiary of
UAL, owns Air Wisconsin, Inc. At December 31, 1999 and
1998, United had outstanding loans from Air Wisconsin, Inc.
in the amount of $187 million and $128 million,
respectively. The loans bear interest at market rates.
At December 31, 1999 and 1998, United had accounts
receivable from UAL of $264 million and $230 million,
respectively.
Certain officers and key employees of United
participate in UAL stock award plans. As a result of the
1994 recapitalization, all outstanding options became fully
vested at the time of the transaction and the holders of
such options became eligible to utilize the cashless
exercise features of stock options. Under a cashless
exercise, the Company withholds, at the election of the
optionee, from shares that would otherwise be issued upon
exercise, that number of shares having a fair market value
equal to the exercise price and/or related income taxes.
For outstanding options eligible for cashless exercise,
changes in the market price of the stock are charged
(credited) to earnings currently. The expense (credit)
recorded for such eligible options was $4 million in 1999,
$(7) million in 1998 and $14 million in 1997.
Stock options which were outstanding at the time of the
recapitalization are exercisable for shares of old common
stock, each of which is in turn converted into two shares of
new common stock and $84.81 in cash upon exercise.
Subsequent to the recapitalization, UAL granted stock
options which are exercisable for shares of new common
stock.
UAL has also awarded shares of restricted UAL stock to
officers and key employees. These shares generally vest
over a five-year period and are subject to certain transfer
restrictions and forfeiture under certain circumstances
prior to vesting. Unearned compensation, representing the
fair market value of the stock at the measurement date for
the award, is amortized to salaries and related costs over
the vesting period. During 1999 and 1997, respectively,
75,000 and 5,000 shares of restricted stock were issued from
treasury. No shares were issued in 1998. As of December
31, 1999, 154,400 shares were restricted and still
nonvested. Additionally, 277,250 shares were reserved for
future awards under the plan.
SFAS No. 123 ("Accounting for Stock-Based
Compensation") establishes a fair value based method of
accounting for stock options. The Company has elected to
continue using the intrinsic value method of accounting
prescribed in APB 25, as permitted by SFAS No. 123. Had
compensation cost for awards been determined based on the
fair value at the grant dates consistent with the method of
SFAS No. 123, the Company's net income would have instead
been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (millions) As reported $1,204 $ 803 $ 932
Pro forma $1,188 $ 794 $ 927
</TABLE>
The weighted-average grant date fair value of
restricted shares issued was $69.51 for shares issued in
1999 and $87.44 for shares issued in 1997. The fair value
of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.2% 5.6% 6.4%
Dividend yield 0.0% 0.0% 0.0%
Volatility 34.0% 33.0% 32.0%
Expected life (years) 4.0 4.0 4.0
</TABLE>
The weighted-average fair value of options granted
during 1999, 1998 and 1997 was $22.31, $27.95 and $27.40,
respectively.
(11) Retirement and Postretirement Plans
-----------------------------------
The Company has various retirement plans, both defined
benefit and defined contribution, which cover substantially
all employees. The Company also provides certain health
care benefits, primarily in the U.S., to retirees and
eligible dependents, as well as certain life insurance
benefits to retirees. The Company has reserved the right,
subject to collective bargaining agreements, to modify or
terminate the health care and life insurance benefits for
both current and future retirees.
The following table sets forth the reconciliation of
the beginning and ending balances of the benefit obligation
and plan assets, the funded status and the amounts
recognized in the statement of financial position for the
defined benefit and other postretirement plans as of
December 31:
<TABLE>
<CAPTION>
(In Millions)
Change in Benefit Obligation Pension Benefits Other Benefits
- ---------------------------- ---------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year $8,038 $7,272 $1,626 $1,706
Service cost 295 276 53 48
Interest cost 583 533 116 109
Plan participants' contributions 1 1 7 -
Amendments 1 1 - -
Actuarial (gain) loss (1,161) 274 (254) (169)
Foreign currency exchange
rate changes 12 13 - -
Benefits paid (388) (332) (83) (68)
----- ----- ----- -----
Benefit obligation at
end of year $7,381 $8,038 $1,465 $1,626
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Change in Plan Assets
- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fair value of plan assets
at beginning of year $7,654 $6,859 $ 112 $ 107
Actual return on plan assets 1,255 934 6 8
Employer contributions 175 187 71 -
Plan participants' contributions 1 1 7 -
Foreign currency exchange
rate changes 4 5 - -
Benefits paid (388) (332) (83) (3)
----- ----- ---- ----
Fair value of plan assets
at end of year $8,701 $7,654 $ 113 $ 112
===== ===== ==== ====
Funded status $1,320 $ (384) $(1,352) $(1,514)
Unrecognized actuarial
(gains) losses (1,870) (122) (229) 19
Unrecognized prior
service costs 604 660 - -
----- ----- ----- -----
Net amount recognized $ 54 $ 154 $(1,581) $(1,495)
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Amounts recognized in the statement
of financial position consist of:
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Prepaid (accrued) benefit cost $ 54 $ 154 $(1,581) $(1,495)
Accrued benefit liability (151) (274) - -
Intangible asset 148 271 - -
Accumulated other
comprehensive income 3 3 - -
---- ----- ----- -----
Net amount recognized $ 54 $ 154 $(1,581) $(1,495)
==== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Weighted-average assumptions 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 8.25% 7.00% 7.00% 7.00%
Expected return on plan assets 9.75% 9.75% 8.00% 8.00%
Rate of compensation increase 4.10% 4.05% - -
</TABLE>
The assumed health care cost trend rates for gross
claims paid were 4.0% and 5.0% for 1999 and 1998,
respectively.
The net periodic benefit cost included the following
components:
<TABLE>
<CAPTION>
(In Millions) Pension Benefits Other Benefits
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 295 $ 276 $ 232 $ 53 $ 48 $ 44
Interest cost 583 533 477 116 109 107
Expected return on plan assets (665) (581) (531) (9) (8) (8)
Amortization of prior service
cost including transition
obligation/(asset) 57 57 36 - - -
Recognized actuarial (gain)/loss 1 9 1 (5) (4) (5)
---- ---- ---- ---- ---- ----
Net period benefit cost $ 271 $ 294 $ 215 $ 155 $ 145 $ 138
==== ==== ==== ==== ==== ====
</TABLE>
Total pension expense for all retirement plans
(including defined contribution plans) was $285 million in
1999, $304 million in 1998 and $229 million in 1997.
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the plans with
accumulated benefit obligations in excess of plan assets
were $500 million, $444 million, and $47 million,
respectively, as of December 31, 1999, and $1.688 billion,
$1.510 billion, and $1.118 billion, respectively, as of
December 31, 1998.
Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plan. A
one-percentage-point change in assumed health care trend
rate would have the following effects:
<TABLE>
<CAPTION>
(In Millions) 1% Increase 1% Decrease
- ------------- ----------- -----------
<S> <C> <C>
Effect on total service and interest cost $ 28 $ 23
Effect on postretirement benefit obligation $ 186 $ 154
</TABLE>
Changes in interest rates or rates of inflation may
impact the assumptions used in the valuation of pension
obligations and postretirement obligations including
discount rates and rates of increase in compensation,
resulting in increases or decreases in United's pension and
postretirement liabilities and pension and postretirement
costs.
(12) Financial Instruments and Risk Management
-----------------------------------------
See Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ("Item 7A") for a discussion of the
Company's foreign currency and fuel price risk management
activities, and the fair value of all significant financial
instruments.
Credit Exposures of Derivatives
The Company's theoretical risk in the derivative
financial instruments described in Item 7A is the cost of
replacing the contracts at current market rates in the event
of default by any of the counterparties. However, the
Company does not anticipate such default as counterparties
are selected based on credit ratings and the relative market
positions with each counterparty are monitored.
Financial Guarantees
Special facility revenue bonds have been issued by
certain municipalities to build or improve airport and
maintenance facilities leased by United. Under the lease
agreements, United is required to make rental payments in
amounts sufficient to pay the maturing principal and
interest payments on the bonds. At December 31, 1999,
$1.274 billion principal amount of such bonds was
outstanding. As of December 31, 1999, UAL and United had
jointly guaranteed $35 million of such bonds and United had
guaranteed $1.258 billion of such bonds, including accrued
interest. The payments required to satisfy these
obligations are included in the future minimum lease
payments disclosed in Note 10, "Lease Obligations."
Concentrations of Credit Risk
The Company does not believe it is subject to any
significant concentration of credit risk. Most of the
Company's receivables result from sales of tickets to
individuals through geographically dispersed travel agents,
company outlets or other airlines, often through the use of
major credit cards. These receivables are short term,
generally being settled shortly after the sale.
(13) Commitments, Contingent Liabilities and Uncertainties
-----------------------------------------------------
The Company has certain contingencies resulting from
litigation and claims (including environmental issues)
incident to the ordinary course of business. Management
believes, after considering a number of factors, including
(but not limited to) the views of legal counsel, the nature
of contingencies to which the Company is subject and its
prior experience, that the ultimate disposition of these
contingencies is not expected to materially affect United's
consolidated financial position or results of operations.
United records liabilities for legal and environmental
claims against it in accordance with generally accepted
accounting principles. These amounts are recorded based on
the Company's assessments of the likelihood of their
eventual settlements. The amounts of these liabilities
could increase or decrease in the near term, based on
revisions to estimates relating to the various claims.
At December 31, 1999, commitments for the purchase of
property and equipment, principally aircraft, approximated
$4.4 billion, after deducting advance payments. An
estimated $2.0 billion will be spent in 2000, $1.8 billion
in 2001 and $0.6 billion in 2002. The major commitments
are for the purchase of A319, A320, B747, B767, and B777
aircraft, which are scheduled to be delivered through 2002.
These commitments, combined with aircraft retirements, are
part of the Company's plan to eventually increase the fleet
to an expected 645 aircraft at the end of 2001.
In connection with the construction of the Indianapolis
Maintenance Center, United agreed to spend an aggregate $800
million on capital investments by the year 2001 and employ
at least 7,500 individuals by the year 2004. In the event
such targets are not reached, United may be required to make
certain payments to the city of Indianapolis and state of
Indiana.
Approximately 79% of United's employees are represented
by various labor organizations. The labor contracts with
the Air Line Pilots' Association and the International
Association of Machinists and Aerospace Workers become
amendable in April and July 2000, respectively. The Company
is currently in the process of negotiating these contracts.
The contract with the Association of Flight Attendants
becomes amendable in 2006. See Other Information, "Labor
Agreements and Wage Adjustments" in Management's Discussion
and Analysis of Financial Condition and Results of
Operations for details.
(14) 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. The
accounting policies for each of these segments are the same
as those described in Note 1, "Summary of Significant
Accounting Policies," except that segment financial
information has been prepared using a management approach
which is consistent with how the Company's management
internally disaggregates financial information for the
purpose of making internal operating decisions. United
evaluates performance based on fully distributed earnings
before income taxes and gains on sales. Revenues are
attributed to each reportable segment based on the
allocation guidelines provided by the U.S. Department of
Transportation, which classifies flights between the U.S.
and foreign designations as part of each respective region.
A reconciliation of the total amounts reported by reportable
segments to the applicable amounts in the financial
statements follows:
<TABLE>
<CAPTION>
(In Millions) Year Ended December 31, 1999
- ------------- ----------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $12,516 $2,691 $ 787 $1,973 $17,967 $ - $17,967
Interest income 40 14 4 10 68 - 68
Interest expense 217 79 21 55 372 - 372
Equity in earnings of affiliates 21 9 2 5 37 - 37
Depreciation and amortization 550 145 42 115 852 15 867
Fully distributed earnings
before income taxes &
gains on sales 1,460 171 49 230 1,910 - 1,910
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Year Ended December 31, 1998
- ------------- ----------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $11,997 $2,843 $ 832 $1,846 $17,518 $ - $17,518
Interest income 33 14 3 8 58 1 59
Interest expense 207 84 22 49 362 - 362
Equity in earnings of affiliates 41 17 4 10 72 - 72
Depreciation and amortization 520 145 45 95 805 (12) 793
Fully distributed earnings
before income taxes 1,641 63 68 277 2,049 - 2,049
</TABLE>
<TABLE>
<CAPTION>
(In Millions) Year Ended December 31, 1997
- ------------- ----------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $11,214 $3,552 $ 824 $1,745 $17,335 $ - $17,335
Interest income 29 13 3 6 51 - 51
Interest expense 166 73 15 36 290 - 290
Equity in earnings of affiliates 38 17 3 8 66 - 66
Depreciation and amortization 474 159 38 76 747 (23) 724
Fully distributed earnings
before income taxes &
gains on sales 1,189 512 109 287 2,097 - 2,097
</TABLE>
<TABLE>
<CAPTION>
(In Millions) 1999 1998 1997
- ------------- ---- ---- ----
<S> <C> <C> <C.
Total fully distributed
earnings for reportable segments $1,910 $2,049 $2,097
Gains on sales 731 - 378
Less: ESOP compensation expense 756 829 987
----- ----- -----
Total earnings before income taxes
and extraordinary item $1,885 $1,220 $1,488
===== ===== =====
</TABLE>
United's operations involve an insignificant level of
dedicated revenue producing assets by reportable segment.
The overwhelming majority of United's revenue producing
assets can be deployed in any of the four reportable
segments. United has significant intangible assets related
to the acquisition of its Atlantic and Latin America route
authorities.
(15) Statement of Consolidated Cash Flows - Supplemental
Disclosures
---------------------------------------------------
Supplemental disclosures of cash flow information and
non-cash investing and financing activities were as follows:
<TABLE>
<CAPTION>
(In Millions) 1999 1998 1997
- ------------- ---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts capitalized) $ 269 $ 241 $ 156
Income taxes 294 158 359
Non-cash transactions:
Capital lease obligations incurred 482 701 643
Defeasance of capital lease obligations - - 66
Long-term debt incurred in connection
with additions to equipment - - 185
Note receivables recorded in connection
with the sale of equipment and
leasehold improvements - - 127
Increase (decrease) in pension
intangible assets (123) (15) 200
Net unrealized gain on investment
in affiliates 356 - -
</TABLE>
(16) Selected Quarterly Financial Data (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
(In Millions) 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
1999:
Operating revenues $4,150 $4,530 $4,834 $4,453 $17,967
Earnings from operations 140 424 611 167 1,342
Earnings before extraordinary item 75 666 354 112 1,207
Extraordinary loss on early
extinguishment of debt - (3) - - (3)
Net earnings $ 75 $ 663 $ 354 $ 112 $ 1,204
1998:
Operating revenues $4,044 $4,431 $4,772 $4,270 $17,518
Earnings from operations 117 461 687 183 1,447
Net earnings $ 57 $ 277 $ 420 $ 49 $ 803
</TABLE>
During the second quarter of 1999, United recognized a
pre-tax gain of $669 million on the sale of a portion of its
investment in Galileo. Additionally, in the fourth quarter
1999, United recognized a pre-tax gain of $62 million on the
sale of a portion of its investment in Equant. (See Note 5,
"Investments").
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) 1. Financial Statements. The financial statements
required by this item are listed in Item 8, "Financial Statements
and Supplementary Data" herein.
2. Financial Statement Schedules. The financial statement
schedule required by this item is listed below and included in
this report after the signature page hereto.
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1999, 1998 and 1997.
All other schedules are omitted because they are not
applicable, not required or the required information is
shown in the consolidated financial statements or notes
thereto.
3. Exhibits. The exhibits required by this item are
listed in the Exhibit Index which immediately precedes the
exhibits filed with this Form 10-K or incorporated in this report
by reference, and is incorporated herein by this reference.
(b) Reports on Form 8-K.
-------------------
Form 8-K dated October 19, 1999 to report a press release in
which UAL Corporation announced a strategic investment in Air
Canada.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 14th day of March, 2000.
UNITED AIR LINES, INC.
By: /s/ James E. Goodwin
--------------------
James E. Goodwin
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on the 14th day of March,
2000 by the following persons on behalf of the registrant and in
the capacities indicated.
/s/ James E. Goodwin
- --------------------
James E. Goodwin
Chairman of the Board and Chief
Executive Officer and a Director
(principal executive officer)
/s/ Douglas A. Hacker
- ---------------------
Douglas A. Hacker
Executive Vice President and
Chief Financial Officer and a
Director (principal financial officer)
/s/ M. Lynn Hughitt
- -------------------
M. Lynn Hughitt
Vice President and Controller
(principal accounting officer)
/s/ Rono J. Dutta
- -----------------
Rono J. Dutta
Director
/s/ Christopher D. Bowers
- -------------------------
Christopher D. Bowers
Director
/s/ William P. Hobgood
- ----------------------
William P. Hobgood
Director
/s/ Stuart I. Oran
- ------------------
Stuart I. Oran
Director
/s/ Andrew P. Studdert
- ----------------------
Andrew P. Studdert
Director
United Air Lines, Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
(In Millions) Additions Charged to
Balance at -------------------- Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 16 $ 11 $ - $ 14(1) $ 13
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 39 $ 4 $ 1 $ (1)(1) $ 45
=== === === === ===
</TABLE>
F-1
- -------------------
(1) Deduction from reserve for purpose for which reserve was created.
United Air Lines, Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
(In Millions) Additions Charged to
Balance at -------------------- Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 9 $ 17 $ - $ 10(1) $ 16
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 29 $ 36 $ 4 $ 30(1) $ 39
=== === === === ===
</TABLE>
F-2
- ---------------------
(1) Deduction from reserve for purpose for which reserve was created.
United Air Lines, Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
(In Millions) Additions Charged to
Balance at -------------------- Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 24 $ 17 $ - $ 32(1) $ 9
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 31 $ 26 $ 5 $ 33(2) $ 29
=== === === === ===
</TABLE>
F-3
- -------------------
(1) Includes deduction from reserve due to the sale of the Apollo Travel
Services Partnership.
(2) Deduction from reserve for purpose for which reserve was created.
EXHIBIT INDEX
-------------
3.1 Restated Certificate of Incorporation of United Air
Lines, Inc. ("United") (filed as Exhibit 3.1 to United's
Form 10-Q for the quarter ended June 30, 1994 and
incorporated herein by reference).
3.2 By-laws (filed as Exhibit 3.2 to United's Form 10-K for
the year ended December 31, 1995 and incorporated herein
by reference).
4.1 United's indebtedness under any single instrument does
not exceed 10% of United's total assets on a
consolidated basis. Copies of such instruments will be
furnished to the Securities and Exchange Commission upon
request.
10.1 Supplemental Agreement No. 8, dated as of February 10,
1999, to the Agreement dated December 18, 1990, between
The Boeing Company and 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) Exhibit 10.38 to UAL's Form 10-K for the year
ended December 31, 1998, (x) Exhibit 10.1 to UAL's Form
10-Q for the quarter ended March 31, 1999, and (xi) and
Exhibit 10.2 to UAL's Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by
reference)). (Filed as Exhibit 10.42 to UAL's Form 10-K
for the year ended December 31, 1999, and incorporated
herein by reference.)
10.2 Supplemental Agreement No. 13, dated as of February 10,
1999, to the Agreement dated December 18, 1990, between
The Boeing Company and United for acquisition of Boeing
747-400 aircraft (as previously amended and
supplemented, the "747-400 Purchase Agreement" (filed as
Exhibit 10.8 to UAL's Form 10-K for the year ended
December 31, 1990, and incorporated herein by reference;
supplements thereto filed as (i) Exhibits 10.4 and 10.5
to UAL's Form 10-K for the year ended December 31, 1991,
(ii) Exhibits 10.3 through 10.6 and Exhibit 10.22 to
UAL's Form 10-Q for the quarter ended June 30, 1993,
(iii) Exhibit 10.3 to UAL's Form 10-K for the year ended
December 31, 1993, (iv) Exhibit 10.14 to UAL's Form 10-Q
for the quarter ended June 30, 1994, (v) Exhibits 10.29
and 10.30 to UAL's Form 10-K for the year ended December
31, 1994, (vi) Exhibits 10.4 through 10.8 to UAL's
Form 10-Q for the quarter ended March 31, 1995,
(vii) Exhibits 10.7 and 10.8 to UAL's Form 10-Q for the
quarter ended June 30, 1995, (viii) Exhibit 10.41 to
UAL's Form 10-K for the year ended December 31, 1995,
(ix) Exhibits 10.4 through 10.8 and Exhibit 10.17 to
UAL's Form 10-Q for the quarter ended June 30, 1996, (x)
Exhibits 10.1 through 10.3 to UAL's Form 10-Q for the
quarter ended March 31, 1997, (xi) Exhibits 10.47 and
10.48 to UAL's Form 10-K for the year ended December 31,
1998, and (xii) Exhibit 10.2 of UAL's Form 10-Q for the
quarter ended March 31, 1999, and incorporated herein by
reference)). (Filed as Exhibit 10.43 to UAL's Form 10-K
for the year ended December 31, 1999, and incorporated
herein by reference.)
10.3 Letter Agreement No. 6-1162-PJG-064, Pratt and Whitney
Engine Model PW4074 Surge Mapping, dated as of December
8, 1999, to Purchase Agreement No. 1663 dated December
18, 1990, between Boeing and United Air Lines, Inc. 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) Exhibit 10.38 to UAL's Form 10-K for the year
ended December 31, 1998, (x) Exhibit 10.1 to UAL's Form
10-Q for the quarter ended March 31, 1999, and (xi) and
Exhibit 10.2 to UAL's Form 10-Q for the quarter ended
September 30, 1999. (Filed as Exhibit 10.44 to UAL's
Form 10-K for the year ended December 31, 1999, with a
request for confidential treatment of certain portions,
and incorporated herein by reference.)
12 Computation of Ratio of Earnings to Fixed Charges.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
Exhibit 12
United Air Lines, Inc. and Subsidiary Companies
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Earnings: (In Millions)
<S> <C> <C> <C> <C> <C>
FEarnings before income taxes
and extraordinary item $1,885 $1,220 $1,488 $ 970 $ 608
Undistributed earnings
of affiliate (20) (62) (16) (49) (38)
Fixed charges, from below 1,012 1,002 1,009 1,113 1,200
Interest capitalized (75) (105) (104) (77) (42)
----- ----- ----- ----- -----
Earnings $2,802 $2,055 $2,377 $1,957 $1,728
===== ===== ===== ===== =====
Fixed charges:
Interest expense $ 372 $ 362 $ 290 $ 290 $ 359
Portion of rental expense
representative of the
interest factor 640 640 719 823 841
----- ----- ----- ----- -----
Fixed charges $1,012 $1,002 $1,009 $1,113 $1,200
===== ===== ===== ===== =====
Ratio of earnings to
fixed charges 2.77 2.05 2.36 1.76 1.44
===== ===== ===== ===== =====
</TABLE>
Exhibit 23
----------
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our report included in the United Air Lines,
Inc. Form 10-K for the year ended December 31, 1999, into the
Company's previously filed Form S-3 Registration Statement (File
No. 33-46033), as amended, and the Form S-3 Registration
Statement (File No. 333-90657).
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
March 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM UNITED AIR LINES, INC.'S STATEMENT OF CONSOLIDATED
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND STATEMENT
OF CONSOLIDATED FINANCIAL POSITION AS OF DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<PERIOD-TYPE> 12-MOS
<CASH> 235
<SECURITIES> 292
<RECEIVABLES> 1,531
<ALLOWANCES> 13
<INVENTORY> 340
<CURRENT-ASSETS> 3,072
<PP&E> 20,717
<DEPRECIATION> 5,852
<TOTAL-ASSETS> 21,543
<CURRENT-LIABILITIES> 5,629
<BONDS> 4,986
0
0
<COMMON> 0
<OTHER-SE> 5,599
<TOTAL-LIABILITY-AND-EQUITY> 21,543
<SALES> 0
<TOTAL-REVENUES> 17,967
<CGS> 0
<TOTAL-COSTS> 16,625
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372
<INCOME-PRETAX> 1,885
<INCOME-TAX> 678
<INCOME-CONTINUING> 1,207
<DISCONTINUED> 0
<EXTRAORDINARY> 3
<CHANGES> 0
<NET-INCOME> 1,204
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
