1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-6033 UAL CORPORATION --------------- (Exact name of registrant as specified in its charter) Delaware 36-2675207 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 East Algonquin Road, Elk Grove Township, Illinois 60007 Mailing Address: P. O. Box 66919, Chicago, Illinois 60666 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (847) 700-4000 ----------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class July 31, 1999 ------ ------------- Common Stock ($0.01 par value) 52,959,884
2 UAL Corporation and Subsidiary Companies Report on Form 10-Q For the Quarter Ended June 30, 1999 Index <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Page No. - ------ --------------------- ------- <S> <C> Item 1. Financial Statements Condensed Statements of Consolidated 3 Financial Position - as of June 30, 1999 (Unaudited) and December 31, 1998 Statements of Consolidated Operations 5 (Unaudited) - for the three months and six months ended June 30, 1999 and 1998 Condensed Statements of Consolidated 7 Cash Flows (Unaudited) - for the six months ended June 30, 1999 and 1998 Notes to Consolidated Financial 8 Statements (Unaudited) Item 2. Management's Discussion and Analysis of 12 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II. OTHER INFORMATION - ------- ----------------- Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Exhibit Index 23 </TABLE>
3 PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements - ------ -------------------- UAL Corporation and Subsidiary Companies Condensed Statements of Consolidated Financial Position (In Millions) <TABLE> <CAPTION> June 30, 1999 December 31, (Unaudited) 1998 -------- ------------ Assets <S> <C> <C> Current assets: Cash and cash equivalents $ 1,144 $ 390 Short-term investments 231 425 Receivables, net 1,360 1,138 Inventories, net 275 384 Deferred income taxes 252 256 Prepaid expenses and other 295 315 -------- -------- 3,557 2,908 -------- -------- Operating property and equipment: Owned 17,034 16,125 Accumulated depreciation and amortization (5,215) (5,174) -------- -------- 11,819 10,951 -------- -------- Capital leases 3,027 2,702 Accumulated amortization (599) (599) -------- -------- 2,428 2,103 -------- -------- 14,247 13,054 -------- -------- Other assets: Investments in affiliates 882 304 Intangibles, net 669 676 Aircraft lease deposits 535 545 Prepaid rent 657 631 Other 497 441 -------- -------- 3,240 2,597 -------- -------- $ 21,044 $ 18,559 ======== ======== </TABLE> See accompanying notes to consolidated financial statements.
4 UAL Corporation and Subsidiary Companies Condensed Statements of Consolidated Financial Position (In Millions) <TABLE> <CAPTION> June 30, 1999 December 31, (Unaudited) 1998 ---------- ------------ Liabilities and Stockholders' Equity <S> <C> <C> Current liabilities: Short-term borrowings $ -- $ 184 Current portions of long-term debt and capital lease obligations 277 274 Advance ticket sales 1,814 1,429 Accounts payable 1,054 1,151 Other 2,856 2,630 -------- -------- 6,001 5,668 -------- -------- Long-term debt 2,693 2,858 -------- -------- Long-term obligations under capital leases 2,374 2,113 -------- -------- Other liabilities and deferred credits: Deferred pension liability 230 89 Postretirement benefit liability 1,505 1,424 Deferred gains 1,022 1,180 Other 1,542 1,123 -------- -------- 4,299 3,816 -------- -------- Company-obligated mandatorily redeemable preferred securities of a subsidiary trust 100 100 -------- -------- Equity put options -- 32 -------- -------- Preferred stock committed to Supplemental ESOP 780 691 -------- -------- Stockholders' equity: Preferred stock -- -- Common stock at par 1 1 Additional capital invested 3,860 3,517 Retained earnings 1,713 1,028 Unearned ESOP preferred stock (83) (121) Accumulated other comprehensive income 493 (2) Treasury stock (1,186) (1,140) Other (1) (2) -------- -------- 4,797 3,281 -------- -------- Commitments and contingent liabilities (See note) $ 21,044 $ 18,559 ======== ======== </TABLE> See accompanying notes to consolidated financial statements.
5 UAL Corporation and Subsidiary Companies Statements of Consolidated Operations (Unaudited) (In Millions, Except Per Share) <TABLE> <CAPTION> Three Months Ended June 30 ----------------- 1999 1998 ------- ------- <S> <C> <C> Operating revenues: Passenger $ 3,989 $ 3,948 Cargo 227 224 Other 325 270 ------- ------- 4,541 4,442 ------- ------- Operating expenses: Salaries and related costs 1,420 1,300 ESOP compensation expense 182 232 Aircraft fuel 420 435 Commissions 291 328 Purchased services 379 376 Aircraft rent 219 219 Landing fees and other rent 244 228 Depreciation and amortization 213 192 Aircraft maintenance 176 141 Other 564 521 ------- ------- 4,108 3,972 ------- ------- Earnings from operations 433 470 ------- ------- Other income (expense): Interest expense (91) (93) Interest capitalized 17 30 Interest income 12 14 Equity in earnings of affiliates 15 21 Gain on sale of Galileo stock 669 -- Miscellaneous, net (3) (13) ------- ------- 619 (41) ------- ------- Earnings before income taxes, distributions on preferred securities and extraordinary item 1,052 429 Provision for income taxes 379 146 ------- ------- Earnings before distributions on preferred securities and extraordinary item 673 283 Distributions on preferred securities, net of tax (1) (1) Extraordinary loss on early extinguishment of debt, net of tax (3) -- ------- ------- Net earnings $ 669 $ 282 ======= ======= Per share, basic: Earnings before extraordinary item $ 12.26 $ 4.43 Extraordinary loss on early extinguishment of debt, net (0.05) -- ------- ------- Net earnings $ 12.21 $ 4.43 ======= ======= Per share, diluted: Earnings before extraordinary item $ 5.80 $ 2.44 Extraordinary loss on early extinguishment of debt, net (0.02) -- ------- ------- Net earnings $ 5.78 $ 2.44 ======= ======= </TABLE> See accompanying notes to consolidated financial statements.
6 UAL Corporation and Subsidiary Companies Statements of Consolidated Operations (Unaudited) (In Millions, Except Per Share) <TABLE> <CAPTION> Six Months Ended June 30 ------------------- 1999 1998 -------- ------- <S> <C> <C> Operating revenues: Passenger $ 7,669 $ 7,514 Cargo 435 439 Other 598 544 ------- ------- 8,702 8,497 ------- ------- Operating expenses: Salaries and related costs 2,829 2,609 ESOP compensation expense 364 490 Aircraft fuel 815 876 Commissions 574 645 Purchased services 759 713 Aircraft rent 438 452 Landing fees and other rent 467 431 Depreciation and amortization 424 383 Aircraft maintenance 354 297 Other 1,099 1,008 ------- ------- 8,123 7,904 ------- ------- Earnings from operations 579 593 ------- ------- Other income (expense): Interest expense (184) (173) Interest capitalized 36 56 Interest income 23 30 Equity in earnings of affiliates 39 43 Gain on sale of Galileo stock 669 -- Miscellaneous, net 14 (24) ------- ------- 597 (68) ------- ------- Earnings before income taxes, distributions on preferred securities and extraordinary item 1,176 525 Provision for income taxes 423 179 ------- ------- Earnings before distributions on preferred securities and extraordinary item 753 346 Distributions on preferred securities, net of tax (3) (3) Extraordinary loss on early extinguishment of debt, net of tax (3) -- ------- ------- Net earnings $ 747 $ 343 ======= ======= Per share, basic: Earnings before extraordinary item $ 13.27 $ 5.05 Extraordinary loss on early extinguishment of debt, net (0.05) -- ------- ------- Net earnings $ 13.22 $ 5.05 ======= ======= Per share, diluted: Earnings before extraordinary item $ 6.33 $ 2.80 Extraordinary loss on early extinguishment of debt, net (0.03) -- ------- ------- Net earnings $ 6.30 $ 2.80 ======= ======= </TABLE> See accompanying notes to consolidated financial statements.
7 UAL Corporation and Subsidiary Companies Condensed Statements of Consolidated Cash Flows (Unaudited) (In Millions) <TABLE> <CAPTION> Six Months Ended June 30 -------------------- 1999 1998 ------- --------- <S> <C> <C> Cash and cash equivalents at beginning of period $ 390 $ 295 ------- ------- Cash flows from operating activities 1,592 1,787 ------- ------- Cash flows from investing activities: Additions to property and equipment (1,306) (1,580) Proceeds on disposition of property and equipment 141 351 Proceeds on sale of common shares in Galileo 766 -- Decrease in short-term investments 194 111 Other, net (25) (40) ------- ------- (230) (1,158) ------- ------- Cash flows from financing activities: Proceeds from issuance of long-term debt 286 823 Repayment of long-term debt (456) (103) Principal payments under capital lease obligations (165) (209) Purchase of equipment certificates under Company operating leases (47) (693) Increase (decrease) in short-term borrowings (184) 10 Aircraft lease deposits (25) (149) Other, net (17) (15) ------- ------- (608) (336) ------- ------- Increase in cash and cash equivalents 754 293 ------- ------- Cash and cash equivalents at end of period $ 1,144 $ 588 ======= ======= Cash paid during the period for: Interest (net of amounts capitalized) $ 133 $ 111 Income taxes $ 55 $ 67 Non-cash transactions: Capital lease obligations incurred $ 482 $ 465 Net unrealized gain on investment in Galileo $ 496 $ -- </TABLE> See accompanying notes to consolidated financial statements.
8 UAL Corporation and Subsidiary Companies Notes to Consolidated Financial Statements (Unaudited) The Company - ----------- UAL Corporation ("UAL") is a holding company whose principal subsidiary is United Air Lines, Inc. ("United"). Interim Financial Statements - ---------------------------- The consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to or as permitted by such rules and regulations, although UAL believes that the disclosures are adequate to make the information presented not misleading. In management's opinion, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results of operations for the three- and six-month periods have been made. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in UAL's Annual Report on Form 10-K for the year 1998. Employee Stock Ownership Plans - ------------------------------ Pursuant to amended labor agreements which provide for wage and benefit reductions and work-rule changes which commenced July 1994, UAL has agreed to issue convertible preferred stock to employees. Note 2 of the Notes to Consolidated Financial Statements in the 1998 Annual Report on Form 10-K contains additional discussion of the recapitalization, stock to be issued to employees and the related accounting treatment. Since January 1, 1999, an additional 1,536,986 shares of Class 1 and Class 2 ESOP Preferred Stock have been committed to be released. Income Taxes - ------------ The provisions for income taxes are based on the estimated annual effective tax rate, which differs from the federal statutory rate of 35% principally due to state income taxes, dividends on ESOP Preferred Stock and certain nondeductible items. Per Share Amounts - ----------------- Basic earnings per share were computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the year. In addition, diluted earnings per share amounts include potential common shares including common shares issuable upon conversion of ESOP shares committed to be released.
9 Earnings Attributable to Common Stockholders (Millions) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 -------------------- ------------------- 1999 1998 1999 1998 -------------------- ------------------- <S> <C> <C> <C> <C> Earnings before extraordinary item and preferred stock dividends $ 672 $ 282 $ 750 $ 343 Preferred stock dividends (32) (25) (63) (52) ------- ------- ------- ------- Earnings attributable to common stockholders before extraordinary item (Basic and Diluted) $ 640 $ 257 $ 687 $ 291 ======= ======= ======= ======= Shares (Millions) Weighted average shares outstanding (Basic) 52.2 57.9 51.8 57.6 Convertible ESOP preferred stock 56.7 45.7 55.4 44.4 Other 1.4 1.7 1.4 1.8 ------- ------- ------- ------- Weighted average number of shares (Diluted) 110.3 105.3 108.6 103.8 ======= ======= ======= ======= Earnings Per Share (before extraordinary item) Basic $ 12.26 $ 4.43 $ 13.27 $ 5.05 Diluted $ 5.80 $ 2.44 $ 6.33 $ 2.80 </TABLE> Segment Information United has a global route network designed to transport passengers and cargo between Domestic, Pacific, Latin American and European destinations. These regions constitute United's four reportable segments. A reconciliation of the total amounts reported by reportable segments to the applicable amounts in the financial statements follows: <TABLE> <CAPTION> (In Millions) Three Months Ended June 30, 1999 - ------------- -------------------------------- Reportable Latin Segment Consolidated Domestic Pacific America Atlantic Total Other Total -------- ------- ------- -------- --------- ----- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Revenue $ 3,194 $636 $180 $520 $ 4,530 $ 11 $ 4,541 Fully distributed earnings before income taxes $ 851 $161 $ 38 $174 $ 1,224 $ 10 $ 1,234 (In Millions) Three Months Ended June 30, 1998 - ------------- -------------------------------- Reportable Latin Segment Consolidated Domestic Pacific America Atlantic Total Other Total -------- ------- ------- -------- --------- ----- ------------ Revenue $ 3,059 $690 $192 $490 $ 4,431 $ 11 $ 4,442 Fully distributed earnings before income taxes $ 561 $ 2 $ 5 $ 84 $ 652 $ 9 $ 661 (In Millions) Six Months Ended June 30, 1999 - ------------- ------------------------------ Reportable Latin Segment Consolidated Domestic Pacific America Atlantic Total Other Total -------- ------- ------- -------- --------- ----- ------------ Revenue $ 6,081 $ 1,284 $386 $929 $ 8,680 $ 22 $ 8,702 Fully distributed earnings before income taxes $ 1,116 $ 162 $ 54 $190 $ 1,522 $ 18 $ 1,540 </TABLE>
10 <TABLE> <CAPTION> (In Millions) Six Months Ended June 30, 1998 - ------------- ------------------------------ Reportable Latin Segment Consolidated Domestic Pacific America Atlantic Total Other Total -------- ------- ------- -------- ----- ----- ----- <S> <C> <C> <C> <C> <C> <C> <C> Revenue $ 5,788 $ 1,405 $416 $866 $ 8,475 $ 22 $ 8,497 Fully distributed earnings before income taxes $ 853 $ 1 $ 36 $109 $ 999 $ 16 $ 1,015 </TABLE> <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------ ------------------------ June 30 June 30 ------------------------ ------------------------ (In Millions) 1999 1998 1999 1998 - ------------- --------- ------- ------- ------ <S> <C> <C> <C> <C> Total fully distributed earnings for reportable segments $ 1,224 $ 652 $ 1,522 $ 999 UAL subsidiary earnings 10 9 18 16 Less: ESOP compensation expense 182 232 364 490 ------- ----- ------- ----- Total earnings before income taxes, extraordinary item and distributions on preferred securities $ 1,052 $ 429 $ 1,176 $ 525 ======= ===== ======= ===== </TABLE> Included in 1999 Domestic, Pacific, Latin American and Atlantic fully distributed earnings before income taxes is $393 million, $134 million, $36 million and $106 million, respectively, of pre-tax gain on the sale of Galileo stock. Investments in Affiliates - ------------------------- In June 1999, United sold 17,500,000 common shares of Galileo International, Inc. ("Galileo") in a secondary offering for $766 million, resulting in a pre-tax gain of approximately $669 million. This sale reduced United's holdings in Galileo from 32 percent to approximately 17 percent, requiring United to discontinue the equity method of accounting for its investment in Galileo. United has classified its remaining 15,940,000 shares of Galileo common stock as available-for-sale. The market value of these shares at June 30, 1999 ($852 million) is reflected in Investments in Affiliates on the balance sheet and the market value over United's investment is classified net-of-tax ($496 million) in accumulated other comprehensive income. Equity earnings in Galileo were $17 million and $18 million for the three-month periods ended June 30, 1999 and 1998, respectively and $40 million and $38 million for the six-month periods ended June 30, 1999 and 1998, respectively. United owns approximately 2.1 million depository certificates in Equant, a provider of international data network services to multinational businesses and a single source for global desktop communications. Each depository certificate represents a beneficial interest in an Equant common share. These depository certificates are currently subject to certain transferability restrictions and are carried at their original cost, which is nominal. At June 30, 1999, the estimated fair value of United's investment in Equant is approximately $198 million. GetThere.com, formerly Internet Travel Network, is a leading provider of internet-based travel planning products tailored to individual, corporate, travel supplier and travel agency
11 customers. United has a minority interest in GetThere.com consisting of convertible preferred stock, warrants and options. United's holdings are convertible into an approximate 25 percent interest in GetThere.com. United accounts for its investment in GetThere.com using the equity method of accounting. In July 1999, United and Buy.com agreed to form a joint venture (BuyTravel.com) to sell travel on all major airlines, as well as hotels, car rentals and cruises via the Internet. Both United and Buy.com will have a 50 percent interest in BuyTravel.com. United will account for its investment in BuyTravel.com using the equity method of accounting. Other Comprehensive Income Total comprehensive income for the three- and six-month periods ending June 30, 1999 was $1,164 million and $1,242 million, respectively, compared to $281 million and $342 million for the three- and six-month periods ending June 30, 1998, respectively. Other comprehensive income consisted of net unrealized gains (losses) on securities of $495 million for the three- and six-month periods ending June 30, 1999 and $(1) million for the three- and six-month periods ending June 30, 1998, respectively. Operating Property and Equipment Effective April 1, 1999, United revised its estimate of depreciable lives on certain of its aircraft types to 25 years and increased the residual value of these aircraft to 10 percent. Previously, lives on these aircraft ranged from 20 to 23 years and residual values ranged from 4.5 percent to 7.3 percent. United also shortened the estimated depreciable lives on certain other aircraft from 10 years to 4 years. These changes did not have a significant impact on United's results of operations. Contingencies and Commitments UAL 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 UAL is subject and its prior experience, that the ultimate disposition of these contingencies is not expected to materially affect UAL's consolidated financial position or results of operations. At June 30, 1999, commitments for the purchase of property and equipment, principally aircraft, approximated $5.5 billion, after deducting advance payments. An estimated $1.3 billion will be spent during the remainder of 1999, $2.0 billion in 2000, $1.9 billion in 2001 and $0.3 billion in 2002 and thereafter. The major commitments are for the purchase of B777, B747, B767, B757, A320 and A319 aircraft, which are scheduled to be delivered through 2002.
12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------ ----------------------------------------------------------------------- OF OPERATIONS ------------- LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- UAL's total of cash and cash equivalents and short-term investments was $1.4 billion at June 30, 1999, compared to $815 million at December 31, 1998. Cash flows from operating activities for the six-month period amounted to $1.6 billion. Financing activities included principal payments under debt and capital lease obligations of $456 million and $165 million, respectively and $25 million in aircraft lease deposits. Additionally, the Company issued, and subsequently retired, $286 million in debt during the period to finance the acquisition of aircraft. Property additions, including aircraft and aircraft spare parts, amounted to $1.3 billion, while property dispositions resulted in proceeds of $141 million. In the first six months of 1999, United took delivery of two A320, eight A319, three B777, two B757, two B767 and six B747 aircraft. Eleven of the aircraft were purchased and 12 were acquired under capital leases. In addition, United acquired two B727 aircraft off-lease during the first six months and retired four DC10 and three B747 aircraft. United has certain non-core investments with market values substantially in excess of their acquisition cost. It is United's policy to monetize its non-core investments. In June 1999, United sold 17.5 million shares of common stock of Galileo receiving aggregate proceeds of $766 million. These proceeds will be used to achieve United's financial goals which include investing in its core business, improving its credit worthiness and returning cash to shareholders. At June 30, 1999, commitments for the purchase of property and equipment, principally aircraft, approximated $5.5 billion, after deducting advance payments. Of this amount, an estimated $1.3 billion is expected to be spent during the remainder of 1999. For further details, see "Contingencies and Commitments" in the Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS - --------------------- Summary of Results UAL's earnings from operations were $579 million in the first six months of 1999, compared to operating earnings of $593 million in the first six months of 1998. UAL's net earnings before an extraordinary loss on early extinguishment of debt were $750 million ($6.33 per share, diluted), compared to net earnings of $343 million during the same period of 1998 ($2.80 per share, diluted). In the second quarter of 1999, UAL's earnings from operations were $433 million compared to operating earnings of $470 million in the second quarter of 1998. UAL had net earnings in the 1999 second quarter of $672 million ($5.78 per share, diluted) before the extraordinary loss, compared to net earnings of $282 million in the same period of 1998 ($2.44 per share, diluted).
13 The 1999 earnings include a pre-tax gain of $669 million ($3.95 per share for the six-month period; $3.88 per share for the quarter) on the sale of a portion of United's investment in Galileo (see "Investments in Affiliates" in the Notes to Consolidated Financial Statements). Management believes that a more complete understanding of UAL's results may be gained by viewing them on a pro forma, "Fully Distributed" basis. This approach considers all ESOP shares which will ultimately be distributed to employees throughout the ESOP (rather than just the shares committed to be released) to be immediately outstanding and thus Fully Distributed. Consistent with this method, the ESOP compensation expense is excluded from Fully Distributed net earnings and ESOP convertible preferred stock dividends are not deducted from earnings attributable to common stockholders. A comparison of results reported on a Fully Distributed basis to results reported under generally accepted accounting principles (GAAP) is as follows (in millions, except per share): <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 ------------- ------------- ------------- ------------- GAAP Fully GAAP Fully GAAP Fully GAAP Fully (diluted) Distributed (diluted) Distributed (diluted) Distributed (diluted) Distributed --------- ----------- --------- ----------- --------- ----------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Net income, before gain on sale and extraordinary item $ 244 $ 349 $ 282 $418 $322 $ 537 $343 $ 637 ----- ----- ----- ----- ----- ----- ----- ----- Per Share, Diluted: Earnings before gain on sale and extraordinary item $1.92 $2.86 $2.44 $3.24 $2.38 $4.40 $2.80 $4.91 Gain on sale 3.88 3.43 - - 3.95 3.43 - - Extraordinary item (0.02) (0.02) - - (0.03) (0.02) - - ----- ----- ----- ----- ----- ----- ----- ----- $5.78 $6.27 $2.44 $3.24 $6.30 $7.81 $2.80 $4.91 ===== ===== ===== ===== ===== ===== ===== ===== </TABLE> The current relationship of earnings and earnings per share as computed on a GAAP basis versus a Fully Distributed basis may not be representative of the relationship in future periods because of various factors. These factors include, but are not limited to, the dependence of ESOP compensation expense on the common stock price; trends and commitments with respect to wages; and the convergence of shares assumed outstanding under the GAAP basis as compared to the Fully Distributed basis. Specific factors affecting UAL's consolidated operations for the second quarter and first six months of 1999 are described below.
14 Second Quarter 1999 Compared with Second Quarter 1998 ----------------------------------------------------- Operating revenues increased $99 million (2%) and United's revenue per available seat mile (unit revenue) decreased 1% to 10.19 cents. Passenger revenues increased $41 million (1%) partially due to a slight increase in United's revenue passenger miles. Strong domestic performance provided an overall increase in yield from 12.58 to 12.69 cents. The slight increase in revenue passenger miles in conjunction with system available seat miles increasing 4% reduced passenger load factor to 70.1% as compared to 72.6%. The following analysis by market is based on information reported to the U.S. Department of Transportation: <TABLE> <CAPTION> Increase (Decrease) ------------------- Revenue Per Revenue Capacity (ASMs) Traffic (RPMs) Passenger Mile (Yield) --------------- -------------- ---------------------- <S> <C> <C> <C> Domestic 6% 1% 3% Pacific (11%) (13%) 2% Atlantic 20% 17% (9%) Latin America (6%) (1%) (6%) System 4% -% 1% </TABLE> Despite capacity reductions in the region, weak demand for travel in the Pacific markets led to a decline in load factor. The improvements in Pacific yield were offset by a 2-point decline in load factor resulting in flat unit revenue. Yields in other international markets continue to be impacted by weak economies, a negative pricing environment and excess industry capacity. Cargo revenues increased $3 million (1%) on increased freight ton miles of 5%. Freight yield decreased 3% and mail yield decreased 2% for a total decrease in cargo yield of 3% for the period. Other operating revenues increased $55 million (20%) due to increases in frequent flyer program partner-related revenues and fuel sales to third parties. Operating expenses increased $136 million (3%) while United's cost per available seat mile decreased 0.2%, from 9.25 cents to 9.23 cents, including ESOP compensation expense. Without the ESOP compensation expense, United's cost per available seat mile would have been 8.82 cents, an increase of 1% from the 1998 second quarter. ESOP compensation expense decreased $50 million (22%), reflecting a decrease in the estimated average fair value of ESOP stock committed to be released to employees. Salaries and related costs increased $120 million (9%) due to ESOP mid-term wage adjustments which took place in July 1998 and to increased staffing in certain customer-contact positions. Aircraft maintenance increased $35 million (25%) due to an increase in heavy maintenance visits. Depreciation and amortization increased $21 million (11%) due to an increase in the number of owned aircraft and losses on disposition of aircraft partially offset by changes in depreciable lives on certain aircraft. Other expenses increased $43 million (8%) largely due to costs associated with fuel sales to third parties. Commissions decreased $37 million (11%) due to a change in the commission structure implemented in the third quarter of 1998 and lower commissionable revenues. Aircraft fuel decreased $15 million (3%) as a 6% decrease in the cost of fuel from 58.0 cents to 54.5 cents a gallon more than offset increased consumption. Other expense amounted to $50 million in the second quarter of 1999 (excluding the gain on the Galileo transaction - see "Investments in Affiliates" in the Notes to Consolidated
15 Financial Statements) compared to $41 million in the second quarter of 1998. Interest capitalized decreased $13 million (43%) as a result of lower advance payments on the acquisition of aircraft and a lower weighted average interest rate. Miscellaneous, net included foreign exchange gains of $2 million in the second quarter of 1999 compared to foreign exchange losses of $7 million in the second quarter of 1998. Six Months 1999 Compared with Six Months 1998 --------------------------------------------- Operating revenues increased $205 million (2%) and United's revenue per available seat mile (unit revenue) decreased 1% to 10.01 cents. Passenger revenues increased $155 million (2%) despite a slight decrease in yield from 12.67 to 12.61 cents. Available seat miles across the system were up 3% resulting in a passenger load factor 69.6%, down 0.3 points. The following analysis by market is based on information reported to the U.S. Department of Transportation: <TABLE> <CAPTION> Increase (Decrease) ------------------- Revenue Per Revenue Capacity (ASMs) Traffic (RPMs) Passenger Mile (Yield) --------------- -------------- ---------------------- <S> <C> <C> <C> Domestic 5% 3% 1% Pacific (10%) (8%) (3%) Atlantic 18% 17% (8%) Latin America (4%) (1%) (7%) System 3% 3% -% </TABLE> Despite capacity reductions in the region, weak demand for travel in Pacific markets continues to negatively impact yields. Yields in other international markets continue to be impacted by weak economies, a negative pricing environment and excess industry capacity. Cargo revenues decreased $4 million (1%) despite increased freight ton miles of 3%. A 2% lower freight yield and a 4% lower mail yield resulted in a 3% decrease in cargo yield for the period. Other operating revenues increased $54 million (10%) due to increases in frequent flyer program partner-related revenues and fuel sales to third parties. Operating expenses increased $219 million (3%) and United's cost per available seat mile decreased slightly, from 9.38 cents to 9.36 cents, including ESOP compensation expense. Without the ESOP compensation expense, United's cost per available seat mile would have been 8.94 cents, an increase of 2% from the 1998 six-month period. ESOP compensation expense decreased $126 million (26%), reflecting the decrease in the estimated average fair value of ESOP stock committed to be released to employees. Purchased services increased $46 million (6%) due to increases in computer reservations fees and Y2K expenses. Depreciation and amortization increased $41 million (11%) due to an increase in the number of owned aircraft and losses on disposition of aircraft partially offset by changes in depreciable lives of certain aircraft. Salaries and related costs increased $220 million (8%) due to ESOP mid-term wage adjustments which took place in July 1998 and increased staffing in certain customer-contact positions. Aircraft maintenance increased $57 million (19%) due to an increase in heavy maintenance visits. Commissions decreased $71 million (11%) due to a change in the commission structure implemented in the third quarter of 1998 as well as a slight decrease in commissionable revenues. Aircraft fuel decreased $61 million (7%) due to a 9% decrease in the cost of fuel from 59.8 cents
16 to 54.4 cents a gallon. Aircraft rent decreased $14 million (3%) due to aircraft refinancing completed in the first quarter of 1998. Other expense amounted to $72 million in the first six months of 1999 (excluding the gain on the Galileo transaction - see "Investments in Affiliates" in the Notes to Consolidated Financial Statements) compared to $68 million in the first six months of 1998. Interest capitalized decreased $20 million (36%) as a result of lower advance payments on the acquisition of aircraft and a lower weighted average interest rate. Miscellaneous, net included foreign exchange gains of $23 million in 1999 compared to foreign exchange losses of $11 million in 1998. LABOR AGREEMENTS - ---------------- On May 27, 1999, United's public contact employees (primarily customer service and reservations sales and service representatives) ratified the tentative agreement between the Company and the International Association of Machinists and Aerospace Workers ("IAM"). The contract provides for an across-the-board wage increase of 5.5 percent effective April 13, 2000. In addition, certain employees hired after January 1, 1994 received an immediate 14.5% pay increase and benefits comparable to other affected employees. Terms of the contract are amendable in July 2000. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT - ----------------------------------------- During the second quarter, United reinstated its jet fuel hedging program. This program now consists of hedging 100% of probable jet fuel requirements with crude oil purchased call options and fixed price jet fuel contracts. The purchased call options have been designated as a hedge of anticipated jet fuel purchases; accordingly, gains or losses on hedge positions are recognized upon contract expiration as a component of aircraft fuel inventory. At June 30, 1999, United has purchased call options on approximately 1.4 billion gallons of fuel products, which represents 69% of United's anticipated third and fourth quarter fuel requirements and 8% of its expected 2000 fuel requirements. At June 30, 1999, United has contracted to purchase approximately 8% of its anticipated third and fourth quarter fuel requirements. As of July 31, 1999, United has hedged 100% of its probable third and fourth quarter jet fuel requirements. UPDATE ON YEAR 2000 READINESS* - ------------------------------ Readers should refer to "Update on Year 2000 Readiness" in Management's Discussion and Analysis of Financial Condition and Results of Operations in the 1998 Annual Report on Form 10-K for background information. IT systems. The Company has substantially completed the remediation, initial system testing and business process integration testing of mainframe hardware and software and other hardware infrastructure including voice and data networks and all internally developed IT software applications. Non IT systems. The remediation and testing of date-sensitive, critical non-IT systems is complete. Re-testing of mission critical systems will continue throughout the year.
17 Critical Business Partners. The Company has contacted all of its "Strategic" and "Preferred" Critical Business Partners. United believes these partners have a satisfactory Year 2000 program in place. The results of the study undertaken by the Air Transport Association ("ATA") to determine the process domestic airports are using to achieve Year 2000 readiness, shows that most large domestic airports have made substantial progress towards being Year 2000 ready. A similar project undertaken by the International Air Transport Association ("IATA") shows that although most international airports have made progress during the past few months, certain key airports are behind schedule. The Company's aircraft manufacturers have concluded that there are no safety of flight issues related to the Year 2000 date rollover as to their aircraft. Concurrent with ensuring that all the systems will be remediated and tested for the Year 2000 date rollover, the Company continues to develop contingency plans for all mission critical business processes. These contingency plans, together with the airline readiness reviews planned during the third quarter of 1999, are designed to reduce the likelihood that the Company's operations will be interrupted by Year 2000 related issues. In addition, the Company will set up a corporate Command Center to monitor and respond to potential Year 2000 issues worldwide. The Company anticipates that project costs will range between $85 and $90 million, with approximately 34% being capitalized. To date the Company has incurred $53 million in project costs ($37 million in expense and $16 million in capital). During 1999, the Company incurred $25 million in project costs ($14 million in expense and $11 million in capital). During the third quarter, the Company plans to spend up to $17 million on the replacement of desktop computers. OUTLOOK FOR 1999* - ----------------- The Company expects its 1999 system capacity to grow 2%, which is less than the forecasted industry capacity growth rate. Unit revenues are estimated to range between zero and 1% higher than 1998. Unit costs for 1999, excluding ESOP charge, are estimated to range between 1.5% and 2% higher than 1998, based on an average fuel price of approximately 59 cents per gallon including taxes. Among the factors affecting costs will be the cap in international commissions instituted last year and the level of spending on Year 2000 (see "Update on Year 2000 Readiness"). The following guidance pertaining to fully distributed earnings per share is consistent with the corresponding guidance set forth in UAL's Form 8-K dated June 7, 1999. The Company forecasts 1999 earnings to range between $9.00 and $11.00 per fully distributed share, with its internal goal being to earn $11.00 per fully distributed share. The forecasted range of fully distributed earnings per share excludes the impact of the gain on sale of 17.5 million shares of Galileo. The Company's earnings per share performance will be helped by the reduction in share count stemming from the $500 million common stock repurchase program completed earlier this year.
18 The Company anticipates a modest year-over-year increase in unit revenue for the third quarter, based on continued strong domestic economic performance and gradual improvements in the Pacific. Given this positive environment, the Company expects third quarter fully distributed earnings per share to range between $3.60 and $4.00. Management's Discussion and Analysis of Financial Condition and Results of Operations contains sections with forward-looking statements which are identified with an asterisk (*). Information included in the "Update on Year 2000 Readiness" and the "Outlook for 1999" sections is forward-looking and actual results could differ materially from expected results. Factors that could significantly impact expected capacity, international revenues and profits, unit revenues, fully distributed unit costs, fuel prices and fully distributed earnings per share include: industry capacity decisions, the airline pricing environment, fuel prices, the success of the Company's cost-control efforts, actions of the U.S., foreign and local governments, willingness of customers to travel, the Asian economic environment and travel patterns, foreign currency exchange rate fluctuations, the stability of the U.S. economy, UAL common stock price fluctuations, the economic environment of the airline industry and the global economic environment. Some factors that could significantly impact the Company's expected Year 2000 readiness and the estimated cost thereof include: the results of the system integration testing and the sufficiency and effectiveness of the Year 2000 programs of the Company's critical business partners, including domestic and international airport authorities, aircraft manufacturers and the Federal Aviation Administration, to achieve Year 2000 readiness.
19 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- For information regarding the Company's exposure to certain market risks, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in UAL's Annual Report on Form 10-K for the year 1998 and "Financial Instruments and Risk Management" in Management's Discussion and Analysis of Financial Condition and Results of Operations. Significant changes which have occurred since year-end are as follows: Foreign Currency Risk - <TABLE> <CAPTION> June 30, 1999 ----------------------------------------------------------- (In millions, except average contract rates) Notional Average Estimated Amount Contract Rate Fair Value --------------- ----------------- ---------------- Forward exchange contracts (Pay)/Receive* <S> <C> <C> <C> Japanese Yen - Purchased forwards $ 90 118.76 $ (2) - Sold forward $ 55 120.88 $ - Hong Kong Dollar - Sold forwards $ 75 7.84 $ (1) French Franc - Purchased forwards $ 50 5.05 $ - Euro - Purchased forwards $ 117 1.37 $ (2) Currency options Japanese Yen - Call options $ 149 125.08 $ (7) - Put options $ 148 125.89 $ 1 </TABLE> Price Risk (Aircraft fuel) - <TABLE> <CAPTION> June 30, 1999 ------------------------------------------------------------- (In millions, except average contract rates) Notional Average Estimated Amount Contract Rate Fair Value --------------- ----------------- --------------- (Pay)/Receive* <S> <C> <C> <C> Purchased call contracts - Crude oil $ 570 $ 17.65/bbl $ 37 </TABLE> *Estimated fair values represent the amount United would pay/receive on June 30, 1999 to terminate the contracts.
20 PART II. OTHER INFORMATION -------------------------- Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- At the annual meeting of the stockholders of UAL Corporation on May 18, 1999, the following matters were voted upon: <TABLE> <CAPTION> Description Votes ----------- ----- 1. Election of Board of Directors <S> <C> <C> Public Directors: James E. Goodwin 45,652,763 For 162,211 Withheld Gerald Greenwald 45,645,933 For 169,041 Withheld John F. McGillicuddy 45,647,947 For 167,027 Withheld James J. O'Connor 45,647,965 For 167,009 Withheld Paul E. Tierney, Jr. 45,614,741 For 200,233 Withheld Independent Directors: John W. Creighton, Jr. 4 For 0 Withheld Richard D. McCormick 4 For 0 Withheld Hazel R. O'Leary 4 For 0 Withheld John K. Van de Kamp 4 For 0 Withheld ALPA Director: Michael H. Glawe 1 For 0 Withheld IAM Director: John F. Peterpaul 1 For 0 Withheld Salaried/Management Employee Director: Deval L. Patrick 3 For 0 Withheld 2. Ratification of the Appointment of Independent Public 104,645,089 For Accountants 2,635,958 Against 1,481,282 Abstain </TABLE>
21 Item 6. Exhibits and Reports on Form 8-K. - ------ --------------------------------- (a) Exhibits A list of exhibits included as part of this Form 10-Q is set forth in an Exhibit Index which immediately precedes such exhibits. (b) Form 8-K dated April 20, 1999, to report a cautionary statement for purposes of the "Safe Harbor for Forward-Looking Statements" provision of the Private Securities Litigation Reform Act of 1995. Form 8-K dated June 7, 1999 to report a press release (United Airlines May traffic declines 1.3%)
22 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UAL CORPORATION By: /s/ Douglas A. Hacker ------------------------------ Douglas A. Hacker Executive Vice President and Chief Financial Officer (principal financial and accounting officer) Dated: August 16, 1999
23 Exhibit Index ------------- Exhibit No. Description - ----------- ----------- 10.1 Employment Agreement, effective as of April 12, 1999, between UAL Corporation, United Air Lines, Inc. and James E. Goodwin 10.2 Amendment No. 2 to Employment Agreement, dated as of April 5, 1999, between UAL Corporation and Gerald Greenwald 12 Computation of Ratio of Earnings to Fixed Charges 12.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements 27 Financial Data Schedule