body.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
FORM 10-Q
(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, 2007
|
OR
|
o
|
|
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
|
Exact Name of Registrant as Specified in
its Charter, Principal Office Address and
Telephone
Number
|
State
of
Incorporation
|
I.R.S. Employer
Identification No
|
001-06033
|
UAL
Corporation
|
Delaware
|
36-2675207
|
001-11355
|
United
Air Lines, Inc.
77
W. Wacker Drive
Chicago,
Illinois 60601
(312)
997-8000
|
Delaware
|
36-2675206
|
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.
UAL
Corporation Yes
x No
o
United
Air Lines,
Inc. Yes
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
UAL
Corporation Large
accelerated filer x
Accelerated filer
o
Non-accelerated filer o
United
Air Lines,
Inc. Large
accelerated filer ¨ Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
UAL
Corporation Yes
¨ No
x
United
Air Lines,
Inc. Yes
¨ No
x
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed
by a court.
UAL
Corporation Yes
x No
o
United
Air Lines,
Inc. Yes
x No
o
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of July 27, 2007.
|
UAL
Corporation
|
115,739,989 shares
of common stock ($0.01 par value)
|
|
United
Air Lines, Inc.
|
205
(100% owned by UAL Corporation)
|
|
There
is no market for United Air Lines, Inc. common
stock.
|
UAL
Corporation and Subsidiary Companies and
United
Air Lines, Inc. and Subsidiary Companies
For
the Quarter Ended June 30, 2007
|
|
|
|
|
PART I.
FINANCIAL INFORMATION
|
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
UAL
Corporation:
|
|
|
|
|
|
Condensed
Statements of Consolidated Operations (Unaudited)
|
|
|
3
|
|
|
Condensed
Statements of Consolidated Financial Position (Unaudited)
|
|
|
5
|
|
|
Condensed
Statements of Consolidated Cash Flows (Unaudited)
|
|
|
7
|
|
|
|
|
|
|
|
|
United
Air Lines, Inc.:
|
|
|
|
|
|
Condensed
Statements of Consolidated Operations (Unaudited)
|
|
|
8
|
|
|
Condensed
Statements of Consolidated Financial Position (Unaudited)
|
|
|
10
|
|
|
Condensed
Statements of Consolidated Cash Flows (Unaudited)
|
|
|
12
|
|
|
|
|
|
|
|
|
Combined
Notes to Condensed Consolidated Financial Statements (Unaudited)
(UAL
Corporation and United Air Lines, Inc.)
|
|
|
13
|
|
|
|
|
|
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
29
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
|
45
|
Item
4.
|
|
Controls
and Procedures
|
|
|
46
|
|
|
|
|
|
|
PART II.
OTHER INFORMATION
|
Item
1.
|
|
Legal
Proceedings
|
|
47
|
Item1A.
|
|
Risk
Factors
|
|
48 |
Item
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
49
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
49 |
Item
6.
|
|
Exhibits
|
|
49 |
Signatures
|
|
50 |
Exhibit Index
|
|
51 |
PART I.
FINANCIAL INFORMATION
|
ITEM
1. FINANCIAL STATEMENTS
|
UAL
Corporation and Subsidiary Companies
|
|
Condensed
Statements of Consolidated Operations
(Unaudited)
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues:
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
3,968
|
|
|
$ |
3,806
|
|
Passenger
- Regional Affiliates
|
|
|
804
|
|
|
|
761
|
|
Cargo
|
|
|
181
|
|
|
|
194
|
|
Other
operating revenues
|
|
|
260
|
|
|
|
352
|
|
|
|
|
5,213
|
|
|
|
5,113
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
1,206
|
|
|
|
1,250
|
|
Salaries
and related costs
|
|
|
1,019
|
|
|
|
1,071
|
|
Regional
affiliates
|
|
|
733
|
|
|
|
715
|
|
Purchased
services
|
|
|
335
|
|
|
|
321
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
284
|
|
|
|
257
|
|
Depreciation
and amortization
|
|
|
229
|
|
|
|
218
|
|
Landing
fees and other rent
|
|
|
215
|
|
|
|
225
|
|
Distribution
expenses (Note 1)
|
|
|
197
|
|
|
|
208
|
|
Aircraft
rent
|
|
|
105
|
|
|
|
109
|
|
Cost
of third party sales
|
|
|
77
|
|
|
|
190
|
|
Other
operating expenses
|
|
|
276
|
|
|
|
289
|
|
|
|
|
4,676
|
|
|
|
4,853
|
|
|
|
|
|
|
|
|
|
|
Earnings
from operations
|
|
|
537
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense (Note 11)
|
|
|
(139 |
) |
|
|
(211 |
) |
Interest
income
|
|
|
62
|
|
|
|
67
|
|
Interest
capitalized
|
|
|
4
|
|
|
|
4
|
|
Miscellaneous,
net
|
|
|
1
|
|
|
|
(4 |
) |
|
|
|
(72 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and equity in earnings
|
|
|
|
|
|
|
|
|
of
affiliates
|
|
|
465
|
|
|
|
116
|
|
Income
tax expense
|
|
|
192
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Earnings
before equity in earnings of affiliates
|
|
|
273
|
|
|
|
116
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
1
|
|
|
|
3
|
|
Net
income
|
|
$ |
274
|
|
|
$ |
119
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share, basic
|
|
$ |
2.31
|
|
|
$ |
1.01
|
|
Earnings
per share, diluted
|
|
$ |
1.83
|
|
|
$ |
0.93
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
UAL
Corporation and Subsidiary Companies
|
|
|
|
|
Condensed
Statements of Consolidated Operations
(Unaudited)
|
|
|
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Six
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
Ended
|
|
|
February
1
|
|
|
January
1
|
|
|
|
June
30,
|
|
|
to
June 30,
|
|
|
to
January 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
7,232
|
|
|
$ |
5,988
|
|
|
$ |
1,074
|
|
Passenger
- Regional Affiliates
|
|
|
1,479
|
|
|
|
1,226
|
|
|
|
204
|
|
Cargo
|
|
|
349
|
|
|
|
318
|
|
|
|
56
|
|
Other
operating revenues
|
|
|
526
|
|
|
|
588
|
|
|
|
124
|
|
|
|
|
9,586
|
|
|
|
8,120
|
|
|
|
1,458
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
2,247
|
|
|
|
1,955
|
|
|
|
362
|
|
Salaries
and related costs
|
|
|
2,087
|
|
|
|
1,797
|
|
|
|
358
|
|
Regional
affiliates
|
|
|
1,425
|
|
|
|
1,183
|
|
|
|
228
|
|
Purchased
services
|
|
|
636
|
|
|
|
527
|
|
|
|
98
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
565
|
|
|
|
436
|
|
|
|
80
|
|
Landing
fees and other rent
|
|
|
453
|
|
|
|
370
|
|
|
|
75
|
|
Depreciation
and amortization
|
|
|
449
|
|
|
|
366
|
|
|
|
68
|
|
Distribution
expenses (Note 1)
|
|
|
385
|
|
|
|
349
|
|
|
|
60
|
|
Aircraft
rent
|
|
|
205
|
|
|
|
184
|
|
|
|
30
|
|
Cost
of third party sales
|
|
|
170
|
|
|
|
318
|
|
|
|
65
|
|
Special
operating items (Note 2)
|
|
|
(22 |
) |
|
|
-
|
|
|
|
-
|
|
Other
operating expenses
|
|
|
541
|
|
|
|
494
|
|
|
|
86
|
|
|
|
|
9,141
|
|
|
|
7,979
|
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from operations
|
|
|
445
|
|
|
|
141
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (Note 11)
|
|
|
(345 |
) |
|
|
(352 |
) |
|
|
(42 |
) |
Interest
income
|
|
|
120
|
|
|
|
95
|
|
|
|
6
|
|
Interest
capitalized
|
|
|
9
|
|
|
|
7
|
|
|
|
-
|
|
Miscellaneous,
net
|
|
|
(1 |
) |
|
|
2
|
|
|
|
-
|
|
|
|
|
(217 |
) |
|
|
(248 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before reorganization items, income
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
and equity in earnings of affiliates
|
|
|
228
|
|
|
|
(107 |
) |
|
|
(88 |
) |
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
22,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before income taxes and equity in
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
of affiliates
|
|
|
228
|
|
|
|
(107 |
) |
|
|
22,846
|
|
Income
tax expense
|
|
|
108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before equity in earnings of affiliates
|
|
|
120
|
|
|
|
(107 |
) |
|
|
22,846
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
2
|
|
|
|
3
|
|
|
|
5
|
|
Net
income (loss)
|
|
$ |
122
|
|
|
$ |
(104 |
) |
|
$ |
22,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share, basic
|
|
$ |
1.00
|
|
|
$ |
(0.94 |
) |
|
$ |
196.61
|
|
Earnings
(loss) per share, diluted
|
|
$ |
0.88
|
|
|
$ |
(0.94 |
) |
|
$ |
196.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
UAL
Corporation and Subsidiary Companies
Condensed
Statements of Consolidated Financial Position (Unaudited)
(In
millions, except shares)
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,667
|
|
|
$ |
3,832
|
|
Short-term
investments
|
|
|
2,582
|
|
|
|
312
|
|
Restricted
cash
|
|
|
439
|
|
|
|
341
|
|
Receivables,
less allowance for doubtful accounts (2007—$30; 2006—$27)
|
|
|
1,138
|
|
|
|
820
|
|
Prepaid
fuel
|
|
|
414
|
|
|
|
283
|
|
Aircraft
fuel, spare parts and supplies, less
|
|
|
|
|
|
|
|
|
obsolescence
allowance (2007—$11; 2006—$6)
|
|
|
210
|
|
|
|
218
|
|
Deferred
income taxes
|
|
|
66
|
|
|
|
122
|
|
Prepaid
expenses and other
|
|
|
400
|
|
|
|
345
|
|
|
|
|
6,916
|
|
|
|
6,273
|
|
Operating
property and equipment:
|
|
|
|
|
|
|
|
|
Owned—
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
9,009
|
|
|
|
8,958
|
|
Advances
on flight equipment
|
|
|
103
|
|
|
|
103
|
|
Other
property and equipment
|
|
|
1,488
|
|
|
|
1,441
|
|
|
|
|
10,600
|
|
|
|
10,502
|
|
Less—accumulated
depreciation and amortization
|
|
|
(776 |
) |
|
|
(503 |
) |
|
|
|
9,824
|
|
|
|
9,999
|
|
Capital
leases:
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
1,511
|
|
|
|
1,511
|
|
Other
property and equipment
|
|
|
34
|
|
|
|
34
|
|
|
|
|
1,545
|
|
|
|
1,545
|
|
Less—accumulated
amortization
|
|
|
(127 |
) |
|
|
(81 |
) |
|
|
|
1,418
|
|
|
|
1,464
|
|
|
|
|
11,242
|
|
|
|
11,463
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Intangibles,
less accumulated amortization (2007—$247; 2006—$169)
|
|
|
2,950
|
|
|
|
3,028
|
|
Goodwill
|
|
|
2,697
|
|
|
|
2,703
|
|
Aircraft
lease deposits
|
|
|
557
|
|
|
|
539
|
|
Restricted
cash
|
|
|
432
|
|
|
|
506
|
|
Investments
|
|
|
116
|
|
|
|
113
|
|
Other,
net
|
|
|
755
|
|
|
|
744
|
|
|
|
|
7,507
|
|
|
|
7,633
|
|
|
|
$ |
25,665
|
|
|
$ |
25,369
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
UAL
Corporation and Subsidiary Companies
Condensed
Statements of Consolidated Financial Position
(Unaudited)
(In
millions, except shares)
|
|
June
30,
|
|
December 31,
|
|
|
2007
|
|
2006
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Advance
ticket sales
|
|
$ |
2,657
|
|
|
$ |
1,669
|
|
Mileage
Plus deferred revenue
|
|
|
1,269
|
|
|
|
1,111
|
|
Accounts
payable
|
|
|
861
|
|
|
|
667
|
|
Accrued
salaries, wages and benefits
|
|
|
818
|
|
|
|
795
|
|
Advanced
purchase of miles
|
|
|
703
|
|
|
|
681
|
|
Long-term
debt maturing within one year (Note 11)
|
|
|
601
|
|
|
|
1,687
|
|
Fuel
purchase commitments
|
|
|
414
|
|
|
|
283
|
|
Accrued
interest
|
|
|
259
|
|
|
|
241
|
|
Current
obligations under capital leases
|
|
|
101
|
|
|
|
110
|
|
Other
|
|
|
578
|
|
|
|
701
|
|
|
|
|
8,261
|
|
|
|
7,945
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note 11)
|
|
|
7,210
|
|
|
|
7,453
|
|
Long-term
obligations under capital leases
|
|
|
1,330
|
|
|
|
1,350
|
|
Other
liabilities and deferred credits:
|
|
|
|
|
|
|
|
|
Mileage
Plus deferred revenue
|
|
|
2,586
|
|
|
|
2,569
|
|
Postretirement
benefit liability
|
|
|
1,959
|
|
|
|
1,955
|
|
Deferred
income taxes
|
|
|
756
|
|
|
|
688
|
|
Deferred
pension liability
|
|
|
133
|
|
|
|
130
|
|
Other
|
|
|
753
|
|
|
|
770
|
|
|
|
|
6,187
|
|
|
|
6,112
|
|
Mandatorily
convertible preferred securities
|
|
|
366
|
|
|
|
361
|
|
Commitments
and contingent liabilities (Note 13)
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
—
|
|
|
|
—
|
|
Common
stock at par, $0.01 par value; authorized 1,000,000,000 shares;
outstanding 115,595,952 and 112,280,629 shares at June 30, 2007 and
December 31, 2006, respectively
|
|
|
1
|
|
|
|
1
|
|
Additional
capital invested
|
|
|
2,106
|
|
|
|
2,053
|
|
Retained
earnings
|
|
|
132
|
|
|
|
16
|
|
Stock
held in treasury, at cost (Note 4)
|
|
|
(15
|
)
|
|
|
(4
|
)
|
Accumulated
other comprehensive income
|
|
|
87
|
|
|
|
82
|
|
|
|
|
2,311
|
|
|
|
2,148
|
|
|
|
$ |
25,665
|
|
|
$ |
25,369
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
UAL
Corporation and Subsidiary Companies
Condensed
Statements of Consolidated Cash Flows (Unaudited)
|
|
Successor
|
|
|
Predecessor
|
|
|
Six Months
Ended
June
30,
|
|
Period from
February 1 to
June
30,
|
|
|
Period from
January 1 to
January 31,
|
|
|
2007
|
|
2006
|
|
|
2006
|
Cash
flows provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before reorganization items
|
|
$ |
122
|
|
|
$ |
(104
|
)
|
|
|
$ |
(83
|
)
|
Adjustments
to reconcile to net cash provided (used) by operating
activities—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in advance ticket sales
|
|
|
988
|
|
|
|
697
|
|
|
|
|
109
|
|
Increase
in receivables
|
|
|
(316
|
)
|
|
|
(128
|
)
|
|
|
|
(88
|
)
|
Depreciation
and amortization
|
|
|
449
|
|
|
|
366
|
|
|
|
|
68
|
|
Mileage
Plus deferred revenue and advanced purchase of miles
|
|
|
197
|
|
|
|
119
|
|
|
|
|
14
|
|
Other,
net
|
|
|
220
|
|
|
|
27
|
|
|
|
|
141
|
|
|
|
|
1,660
|
|
|
|
977
|
|
|
|
|
161
|
|
Cash
flows provided (used) by reorganization activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
items, net
|
|
|
—
|
|
|
|
—
|
|
|
|
|
22,934
|
|
Increase
in other liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
37
|
|
Increase
in non-aircraft claims accrual
|
|
|
—
|
|
|
|
—
|
|
|
|
|
429
|
|
Discharge
of claims and liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(24,628
|
)
|
Revaluation
of Mileage Plus frequent flyer deferred revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
|
2,399
|
|
Revaluation
of other assets and liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(2,106
|
)
|
Pension
curtailment, settlement and employee claims
|
|
|
—
|
|
|
|
—
|
|
|
|
|
912
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(23
|
)
|
Cash
flows provided (used) by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in short-term investments
|
|
|
(2,270
|
)
|
|
|
16
|
|
|
|
|
2
|
|
Additions
to property and equipment
|
|
|
(146
|
)
|
|
|
(129
|
)
|
|
|
|
(30
|
)
|
(Increase)
decrease in restricted cash
|
|
|
(24
|
)
|
|
|
254
|
|
|
|
|
(203
|
)
|
Decrease
in segregated funds
|
|
|
—
|
|
|
|
200
|
|
|
|
|
—
|
|
Other,
net
|
|
|
(15
|
)
|
|
|
54
|
|
|
|
|
(7
|
)
|
|
|
|
(2,455
|
)
|
|
|
395
|
|
|
|
|
(238
|
)
|
Cash
flows provided (used) by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from secured notes
|
|
|
694
|
|
|
|
—
|
|
|
|
|
—
|
|
Proceeds
from Credit Facility
|
|
|
—
|
|
|
|
2,961
|
|
|
|
|
—
|
|
Repayment
of Credit Facility
|
|
|
(986
|
)
|
|
|
(161
|
)
|
|
|
|
—
|
|
Repayment
of DIP Financing
|
|
|
—
|
|
|
|
(1,157
|
)
|
|
|
|
—
|
|
Repayment
of other long-term debt
|
|
|
(1,023
|
)
|
|
|
(456
|
)
|
|
|
|
(24
|
)
|
Principal
payments under capital leases
|
|
|
(48
|
)
|
|
|
(35
|
)
|
|
|
|
(5
|
)
|
Other,
net
|
|
|
(7
|
)
|
|
|
(61
|
)
|
|
|
|
(1
|
)
|
|
|
|
(1,370
|
)
|
|
|
1,091
|
|
|
|
|
(30
|
)
|
Increase
(decrease) in cash and cash equivalents during the period
|
|
|
(2,165
|
)
|
|
|
2,463
|
|
|
|
|
(130
|
)
|
Cash
and cash equivalents at beginning of the period
|
|
|
3,832
|
|
|
|
1,631
|
|
|
|
|
1,761
|
|
Cash
and cash equivalents at end of the period
|
|
$ |
1,667
|
|
|
$ |
4,094
|
|
|
|
$ |
1,631
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
|
|
Condensed
Statements of Consolidated Operations
(Unaudited)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues:
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
3,968
|
|
|
$ |
3,806
|
|
Passenger
- Regional Affiliates
|
|
|
804
|
|
|
|
761
|
|
Cargo
|
|
|
181
|
|
|
|
194
|
|
Other
operating revenues
|
|
|
263
|
|
|
|
350
|
|
|
|
|
5,216
|
|
|
|
5,111
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
1,206
|
|
|
|
1,250
|
|
Salaries
and related costs
|
|
|
1,018
|
|
|
|
1,070
|
|
Regional
affiliates
|
|
|
733
|
|
|
|
715
|
|
Purchased
services
|
|
|
335
|
|
|
|
321
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
284
|
|
|
|
257
|
|
Depreciation
and amortization
|
|
|
229
|
|
|
|
218
|
|
Landing
fees and other rent
|
|
|
215
|
|
|
|
226
|
|
Distribution
expenses (Note 1)
|
|
|
197
|
|
|
|
208
|
|
Aircraft
rent
|
|
|
105
|
|
|
|
110
|
|
Cost
of third party sales
|
|
|
76
|
|
|
|
188
|
|
Other
operating expenses
|
|
|
276
|
|
|
|
285
|
|
|
|
|
4,674
|
|
|
|
4,848
|
|
|
|
|
|
|
|
|
|
|
Earnings
from operations
|
|
|
542
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense (Note 11)
|
|
|
(139 |
) |
|
|
(222 |
) |
Interest
income
|
|
|
64
|
|
|
|
65
|
|
Interest
capitalized
|
|
|
4
|
|
|
|
4
|
|
Miscellaneous,
net
|
|
|
-
|
|
|
|
(2 |
) |
|
|
|
(71 |
) |
|
|
(155 |
) |
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and equity in earnings
|
|
|
|
|
|
|
|
|
of
affiliates
|
|
|
471
|
|
|
|
108
|
|
Income
tax expense
|
|
|
194
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Earnings
before equity in earnings of affiliates
|
|
|
277
|
|
|
|
108
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
1
|
|
|
|
3
|
|
Net
income
|
|
$ |
278
|
|
|
$ |
111
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
Condensed
Statements of Consolidated Operations (Unaudited)
(In
millions)
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Six
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
Ended
|
|
|
February
1
|
|
|
January
1
|
|
|
|
June
30,
|
|
|
to
June 30,
|
|
|
to
January 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
7,232
|
|
|
$ |
5,988
|
|
|
$ |
1,074
|
|
Passenger
- Regional Affiliates
|
|
|
1,479
|
|
|
|
1,226
|
|
|
|
204
|
|
Cargo
|
|
|
349
|
|
|
|
318
|
|
|
|
56
|
|
Other
operating revenues
|
|
|
533
|
|
|
|
585
|
|
|
|
120
|
|
|
|
|
9,593
|
|
|
|
8,117
|
|
|
|
1,454
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
2,247
|
|
|
|
1,955
|
|
|
|
362
|
|
Salaries
and related costs
|
|
|
2,086
|
|
|
|
1,795
|
|
|
|
358
|
|
Regional
affiliates
|
|
|
1,425
|
|
|
|
1,183
|
|
|
|
228
|
|
Purchased
services
|
|
|
636
|
|
|
|
527
|
|
|
|
97
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
565
|
|
|
|
436
|
|
|
|
80
|
|
Landing
fees and other rent
|
|
|
453
|
|
|
|
370
|
|
|
|
75
|
|
Depreciation
and amortization
|
|
|
449
|
|
|
|
366
|
|
|
|
68
|
|
Distribution
expenses (Note 1)
|
|
|
385
|
|
|
|
349
|
|
|
|
60
|
|
Aircraft
rent
|
|
|
206
|
|
|
|
185
|
|
|
|
30
|
|
Cost
of third party sales
|
|
|
168
|
|
|
|
314
|
|
|
|
63
|
|
Special
items (Note 2)
|
|
|
(22 |
) |
|
|
-
|
|
|
|
-
|
|
Other
operating expenses
|
|
|
540
|
|
|
|
490
|
|
|
|
85
|
|
|
|
|
9,138
|
|
|
|
7,970
|
|
|
|
1,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from operations
|
|
|
455
|
|
|
|
147
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (Note 11)
|
|
|
(345 |
) |
|
|
(353 |
) |
|
|
(42 |
) |
Interest
income
|
|
|
124
|
|
|
|
93
|
|
|
|
6
|
|
Interest
capitalized
|
|
|
9
|
|
|
|
7
|
|
|
|
-
|
|
Miscellaneous,
net
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
-
|
|
|
|
|
(213 |
) |
|
|
(254 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before reorganization items, income
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
and equity in earnings of affiliates
|
|
|
242
|
|
|
|
(107 |
) |
|
|
(88 |
) |
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
22,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before income taxes and equity in
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
of affiliates
|
|
|
242
|
|
|
|
(107 |
) |
|
|
22,621
|
|
Income
tax expense
|
|
|
114
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before equity in earnings of affiliates
|
|
|
128
|
|
|
|
(107 |
) |
|
|
22,621
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
2
|
|
|
|
3
|
|
|
|
5
|
|
Net
income (loss)
|
|
$ |
130
|
|
|
$ |
(104 |
) |
|
$ |
22,626
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
Condensed
Statements of Consolidated Financial Position
(Unaudited)
(In
millions, except shares)
|
|
|
|
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,645
|
|
$ |
3,779
|
|
Short-term
investments
|
|
|
2,547
|
|
|
308
|
|
Restricted
cash
|
|
|
406
|
|
|
303
|
|
Receivables,
less allowance for doubtful
|
|
|
|
|
|
|
|
accounts
(2007 - $30; 2006 - $27)
|
|
|
1,127
|
|
|
814
|
|
Prepaid
fuel
|
|
|
414
|
|
|
283
|
|
Aircraft
fuel, spare parts and supplies,
less
|
|
|
|
|
|
|
|
obsolescence
allowance (2007 - $11; 2006 - $6)
|
|
|
210
|
|
|
218
|
|
Deferred
income taxes
|
|
|
59
|
|
|
114
|
|
Receivables
from related parties
|
|
|
158
|
|
|
154
|
|
Prepaid
expenses and other
|
|
|
403
|
|
|
348
|
|
|
|
|
6,969
|
|
|
6,321
|
|
Operating
property and equipment:
|
|
|
|
|
|
|
|
Owned
-
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
9,004
|
|
|
8,952
|
|
Advances
on flight equipment
|
|
|
91
|
|
|
91
|
|
Other
property and equipment
|
|
|
1,488
|
|
|
1,441
|
|
|
|
|
10,583
|
|
|
10,484
|
|
Less
- accumulated depreciation and
amortization
|
|
|
(776 |
) |
|
(502 |
) |
|
|
|
9,807
|
|
|
9,982
|
|
Capital
leases:
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
1,511
|
|
|
1,511
|
|
Other
property and equipment
|
|
|
34
|
|
|
34
|
|
|
|
|
1,545
|
|
|
1,545
|
|
Less
- accumulated amortization
|
|
|
(127 |
) |
|
(81 |
) |
|
|
|
1,418
|
|
|
1,464
|
|
|
|
|
11,225
|
|
|
11,446
|
|
Other
assets:
|
|
|
|
|
|
|
|
Intangibles,
less accumulated amortization
|
|
|
|
|
|
|
|
(2007-$247;
2006-$169)
|
|
|
2,950
|
|
|
3,028
|
|
Goodwill
|
|
|
2,697
|
|
|
2,703
|
|
Aircraft
lease deposits
|
|
|
557
|
|
|
539
|
|
Restricted
cash
|
|
|
432
|
|
|
506
|
|
Note
receivable from affiliate
|
|
|
-
|
|
|
201
|
|
Investments
|
|
|
116
|
|
|
113
|
|
Other,
net
|
|
|
742
|
|
|
724
|
|
|
|
|
|
7,494
|
|
|
7,814
|
|
|
|
|
$ |
25,688
|
|
$ |
25,581
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
United
Air Lines, Inc. and Subsidiary Companies
Condensed
Statements of Consolidated Financial Position
(Unaudited)
(In
millions, except shares)
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Liabilities
and Stockholder’s Equity
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Advance
ticket sales
|
|
$ |
2,657
|
|
|
$ |
1,669
|
|
Mileage
Plus deferred revenue
|
|
|
1,269
|
|
|
|
1,111
|
|
Accounts
payable
|
|
|
866
|
|
|
|
671
|
|
Accrued
salaries, wages and benefits
|
|
|
818
|
|
|
|
795
|
|
Advanced
purchase of miles
|
|
|
703
|
|
|
|
681
|
|
Long-term
debt maturing within one year (Note 11)
|
|
|
601
|
|
|
|
1,687
|
|
Fuel
purchase commitments
|
|
|
414
|
|
|
|
283
|
|
Accrued
interest
|
|
|
259
|
|
|
|
241
|
|
Current
obligations under capital leases
|
|
|
101
|
|
|
|
110
|
|
Accounts
payable to affiliates
|
|
|
5
|
|
|
|
2
|
|
Other
|
|
|
789
|
|
|
|
920
|
|
|
|
|
8,482
|
|
|
|
8,170
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note 11)
|
|
|
7,207
|
|
|
|
7,449
|
|
Long-term
obligations under capital leases
|
|
|
1,330
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities and deferred credits:
|
|
|
|
|
|
|
|
|
Mileage
Plus deferred revenue
|
|
|
2,586
|
|
|
|
2,569
|
|
Postretirement
benefit liability
|
|
|
1,959
|
|
|
|
1,955
|
|
Deferred
income taxes
|
|
|
670
|
|
|
|
596
|
|
Deferred
pension liability
|
|
|
133
|
|
|
|
130
|
|
Other
|
|
|
754
|
|
|
|
769
|
|
|
|
|
6,102
|
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
Parent
company mandatorily convertible
preferred
securities
|
|
|
366
|
|
|
|
361
|
|
Commitments
and contingent liabilities (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder’s
equity:
|
|
|
|
|
|
|
|
|
Common
stock at par, $5 par value; authorized 1,000 shares; outstanding
205 at both June 30, 2007 and December 31, 2006
|
|
|
-
|
|
|
|
-
|
|
Additional
capital invested
|
|
|
1,959
|
|
|
|
2,127
|
|
Retained
earnings
|
|
|
155
|
|
|
|
23
|
|
Accumulated
other comprehensive income
|
|
|
87
|
|
|
|
82
|
|
|
|
|
2,201
|
|
|
|
2,232
|
|
|
|
$ |
25,688
|
|
|
$ |
25,581
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
United
Air Lines, Inc. and
Subsidiary Companies
Condensed
Statements of Consolidated Cash Flows (Unaudited)
(In
millions)
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Six
Months
Ended
June
30,
|
|
|
Period
from February 1 to June 30,
|
|
|
Period
from
January
1 to
January
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Cash
flows provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before reorganization items
|
|
$ |
130
|
|
|
$ |
(104 |
) |
|
$ |
(83 |
) |
Adjustments
to reconcile to net cash provided (used) by operating
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in advance ticket sales
|
|
|
988
|
|
|
|
697
|
|
|
|
109
|
|
Increase
in receivables
|
|
|
(309 |
) |
|
|
(121 |
) |
|
|
(98 |
) |
Depreciation
and amortization
|
|
|
449
|
|
|
|
366
|
|
|
|
68
|
|
Mileage
Plus deferred revenue and advanced purchase of miles
|
|
|
197
|
|
|
|
119
|
|
|
|
14
|
|
Other,
net
|
|
|
194
|
|
|
|
39
|
|
|
|
153
|
|
|
|
|
1,649
|
|
|
|
996
|
|
|
|
163
|
|
Cash
flows provided (used) by reorganization activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
22,709
|
|
Increase
in other liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
Increase
in non-aircraft claims accrual
|
|
|
-
|
|
|
|
-
|
|
|
|
421
|
|
Discharge
of claims and liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,389 |
) |
Revaluation
of Mileage Plus frequent flyer deferred revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
2,399
|
|
Revaluation
of other assets and liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,111 |
) |
Pension
curtailment, settlement and employee claims
|
|
|
-
|
|
|
|
-
|
|
|
|
912
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21 |
) |
Cash
flows provided (used) by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in short-term investments
|
|
|
(2,239 |
) |
|
|
16
|
|
|
|
2
|
|
Additions
to property and equipment
|
|
|
(146 |
) |
|
|
(129 |
) |
|
|
(30 |
) |
(Increase)
decrease in restricted cash
|
|
|
(29 |
) |
|
|
256
|
|
|
|
(203 |
) |
Decrease
in segregated funds
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
Other,
net
|
|
|
(17 |
) |
|
|
-
|
|
|
|
(7 |
) |
|
|
|
(2,431 |
) |
|
|
343
|
|
|
|
(238 |
) |
Cash
flows provided (used) by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from secured notes
|
|
|
694
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from Credit Facility
|
|
|
-
|
|
|
|
2,961
|
|
|
|
-
|
|
Repayment
of Credit Facility
|
|
|
(986 |
) |
|
|
(161 |
) |
|
|
-
|
|
Repayment
of DIP Financing
|
|
|
-
|
|
|
|
(1,157 |
) |
|
|
-
|
|
Repayment
of other long-term debt
|
|
|
(1,022 |
) |
|
|
(459 |
) |
|
|
(24 |
) |
Principal
payments under capital leases
|
|
|
(48 |
) |
|
|
(35 |
) |
|
|
(5 |
) |
Other,
net
|
|
|
10
|
|
|
|
(58 |
) |
|
|
(1 |
) |
|
|
|
(1,352 |
) |
|
|
1,091
|
|
|
|
(30 |
) |
Increase
(decrease) in cash and cash equivalents during the period
|
|
|
(2,134 |
) |
|
|
2,430
|
|
|
|
(126 |
) |
Cash
and cash equivalents at beginning of the period
|
|
|
3,779
|
|
|
|
1,596
|
|
|
|
1,722
|
|
Cash
and cash equivalents at end of the period
|
|
$ |
1,645
|
|
|
$ |
4,026
|
|
|
$ |
1,596
|
|
See
accompanying Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
UAL
Corporation and Subsidiary Companies and
United
Air Lines, Inc. and Subsidiary Companies
Combined
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
(1)
|
Basis
of Presentation
|
UAL
Corporation (together with its consolidated subsidiaries, “UAL”), is a holding
company and its principal, wholly-owned subsidiary is United Air
Lines, Inc. (together with its consolidated subsidiaries, “United”). We
sometimes use the words “we,” “our,” “us,” and the “Company” in this Form 10-Q
for disclosures that relate to both UAL and United.
This
Quarterly Report on Form 10-Q is a combined report of UAL and United. Therefore,
these Combined Notes to Condensed Consolidated Financial Statements
(Unaudited) apply to both UAL and United, unless otherwise noted. As UAL
consolidates United, disclosures that relate to activities of United also apply
to UAL.
Interim
Financial Statements. The UAL and United
unaudited condensed consolidated financial statements shown here have been
prepared as required by the Securities and Exchange Commission (the “SEC”). Some
information and footnote disclosures normally included in financial statements
that meet generally accepted accounting principles (“GAAP”) have been condensed
or omitted as permitted by the SEC. UAL and United believe that the disclosures
presented here are not misleading. The financial statements include all
adjustments, which include only normal recurring adjustments and adjustments
required by fresh-start reporting and reorganization items as described below,
that are considered necessary for a fair presentation of the financial position
and results of operations of UAL and United. These financial statements should
be read together with the information included in UAL’s and United’s Annual
Reports on Form 10-K for the year ended December 31, 2006 (the “2006 Annual
Reports”).
Mileage
Plus Accounting. The following is an
update to the accounting policy disclosures in the 2006 Annual Reports. For
further information related to Mileage Plus accounting, refer to the 2006 Annual
Reports and Critical Accounting Policies in this
Form 10-Q.
United
recognizes revenue for customer accounts that are cancelled after a period
of
inactivity as defined by the Mileage Plus program. United estimates the number
of accounts that it expects to deactivate and ratably recognizes revenue for
these accounts over the expiration period. In early 2007, United announced
a
reduction in the expiration period from 36 months to 18 months. Based on this
program change, United reduced the period over which it recognizes revenue
for
deactivated accounts from 36 months to 18 months. This change provided a benefit
to United’s operating revenues of approximately $47 million and $75 million
for the three and six month periods ended June 30, 2007, respectively, and
United estimates that it will provide a total benefit of approximately
$181 million for the year ended December 31, 2007. The diluted per
share benefit to UAL was approximately $0.31 and $0.49 for the three and six
months ended June 30, 2007, respectively.
Reclassifications. In
the first quarter of 2007, United and UAL changed their classification of
certain distribution-related costs, previously included in purchased services
and commissions, to classify these costs as distribution expenses in the
Condensed Statements of Consolidated Operations (Unaudited). The
distribution expenses previously reported for 2006 were reclassified to provide
a comparable presentation in each of the 2007 quarterly reports on
Form 10-Q. Amounts previously reported as commissions and purchased
services in the UAL and United 2006 quarterly reports on Form 10-Q are
shown below:
|
|
Predecessor
|
|
|
Successor
|
2006
(In
millions)
|
|
|
|
January 1 to
January 31,
|
|
|
Period from
February 1 to
March 31,
|
|
Three Months
Ended
June 30,
|
|
Three Months
Ended
September 30,
|
|
Three Months
Ended
December 31,
|
Commissions
(historical) (a)
|
|
$ |
24
|
|
|
|
$ |
51
|
|
|
$ |
82
|
|
|
$ |
91
|
|
|
$ |
67
|
|
Purchased
services (historical) (b)
|
|
|
36
|
|
|
|
|
90
|
|
|
|
126
|
|
|
|
124
|
|
|
|
107
|
|
Distribution
expenses (revised)
|
|
$ |
60
|
|
|
|
$ |
141
|
|
|
$ |
208
|
|
|
$ |
215
|
|
|
$ |
174
|
|
________________________
|
(a)
|
Commissions
were previously reported as a separate expense item in the UAL and
United
2006 quarterly reports on Form 10-Q and the 2006
Annual Reports.
|
|
(b)
|
Consists
of credit card transaction fees and global distribution systems (“GDS”)
transaction expenses that were classified as components of purchased
services in the UAL and United quarterly reports on Form 10-Q and the
2006 Annual
Reports. For 2007 Form 10-Q reporting purposes, the revised purchased
services amounts for the 2006 periods are the result of decreasing
the
amounts previously reported in the UAL and United 2006 quarterly
reports
on Form 10-Q by these same
adjustments.
|
Fresh-Start
Reporting. As a result of the adoption
of fresh-start reporting in accordance with American Institute of Certified
Public Accountants’ Statement of Position 90-7 “Financial Reporting by
Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”),
the financial statements prior to February 1, 2006 are not comparable with
the financial statements for periods on or after February 1, 2006.
SOP 90-7 requires that the financial statements for periods after a
Chapter 11 filing separate transactions and events that are directly
associated with the reorganization from the ongoing operations of the business.
Bankruptcy reorganization items are classified as reorganization items, net
in
the Condensed Statements of Consolidated Operations (Unaudited). UAL
common and preferred securities outstanding at January 31, 2006 were
cancelled and new securities were issued to unsecured creditors and employees.
In addition, fresh-start reporting required that most of the Company’s’ tangible
and intangible assets and liabilities be recorded at fair value upon its
emergence from bankruptcy. References to “Successor ” refer to UAL or United on
or after February 1, 2006, after giving effect to the adoption of
fresh-start reporting. References to “Predecessor” refer to UAL or United prior
to February 1, 2006.
(2) |
|
Voluntary
Reorganization Under
Chapter 11
|
Bankruptcy
Considerations. The following discussion provides general
background information regarding UAL and United pending litigation related
to
their bankruptcy reorganization, and is not intended to be an exhaustive
summary. Detailed information pertaining to the bankruptcy filings may be
obtained at www.pd-ual.com and in the 2006 Annual Reports.
On
December 9, 2002 (the “Petition Date”), UAL Corporation, United Air Lines,
Inc. and 26 direct and indirect wholly-owned subsidiaries (collectively, the
“Debtors”) filed voluntary petitions to reorganize their businesses under
Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Illinois, Eastern Division (the
“Bankruptcy Court”). On January 20, 2006, the Bankruptcy Court confirmed
the Plan of Reorganization, which became effective February 1, 2006 (the
“Effective Date”). On the Effective Date, UAL and United emerged from bankruptcy
protection and implemented fresh-start reporting.
The
Plan
of Reorganization generally provided for the full payment or reinstatement
of
allowed administrative claims, priority claims and secured claims, and the
distribution of new UAL equity and UAL and United debt securities to the
Debtors’ creditors and employees in satisfaction of allowed unsecured and deemed
claims. UAL common and preferred securities outstanding at January 31, 2006
were cancelled. The Plan of Reorganization contemplated UAL issuing up to
125 million shares of new UAL common stock consisting of 115 million
shares to be issued to unsecured creditors and employees and 10 million
shares to be issued pursuant to UAL’s share-based management and director
compensation plans. The new UAL common stock was listed on a NASDAQ market
and
began trading under the symbol “UAUA” on February 2, 2006.
Significant
Matters Resolved in Chapter 11 Cases Since Filing the UAL and United Annual
Reports on Form 10-K for the Fiscal Year ended December 31,
2006. The following material matters
have been resolved in the Bankruptcy Court since the filing of the 2006 Annual
Reports:
|
(a)
|
Pilot
Plan Termination Order. In December 2004, the Pension Benefit
Guaranty Corporation (“PBGC”) filed an involuntary termination proceeding
against United, as plan administrator for the United Airlines Pilot
Defined Benefit Pension Plan (the “Pilot Plan”), in the District
Court.
|
In
January 2005, the District Court granted a motion filed by United and
referred the involuntary termination proceeding to the Bankruptcy Court. Air
Line Pilots Association (“ALPA”) and United Retired Pilots Benefit Protection
Association and seven retired pilots (collectively, “URPBPA”) were later granted
leave to intervene in the involuntary termination proceeding.
After
several months, the Bankruptcy Court conducted a trial and determined that
the
Pilot Plan should be involuntarily terminated under the Employee Retirement
Income Security Act (“ERISA”) Section 4042 with a termination date of
December 30, 2004. Subsequently, on October 28, 2005 the Bankruptcy Court
entered an order authorizing termination of the Pilot Plan.
The
PBGC,
ALPA and URPBPA filed notices of appeal with the District Court. In
February 2006, the District Court reversed and remanded the Bankruptcy
Court’s termination order on the grounds that the matter was not a core
proceeding in which it could issue a final order, but rather, could only issue
proposed findings of fact and conclusions
of law for consideration by the District Court. Upon remand and after the
Bankruptcy Court made proposed findings of fact and conclusions of law, in
June 2006 the District Court entered an order approving the termination of
the Pilot Plan. ALPA, URPBPA and PBGC each filed an appeal with the Court of
Appeals. On October 25, 2006, the Court of Appeals
affirmed the District Court’s order approving the termination of the Pilot Plan
effective December 30, 2004. On November 6, 2006, ALPA filed a
petition for rehearing in the Court of Appeals which motion has been denied.
ALPA and URPBPA filed petitions for writ of certiorari
from the United States Supreme Court on the plan termination. On April 2,
2007, the Supreme Court denied such petitions, effectively terminating these
proceedings.
|
(b)
|
Pilot
Plan Non-Qualified Pension Benefits—October 2005 Order. After
the PBGC commenced its involuntary termination proceeding and sought
a
December 30, 2004 termination date, United suspended payment of
non-qualified pension benefits under the Pilot Plan pending the setting
of
such a termination date. In the first quarter of 2005, the Bankruptcy
Court required United to continue paying non-qualified pension benefits
to
retired pilots pending the outcome of the involuntary termination
proceeding, notwithstanding the possibility that the Pilot Plan might
be
terminated retroactively to December 30, 2004. Then, on
October 6, 2005, despite its oral ruling terminating the Pilot Plan,
the Bankruptcy Court entered an order requiring United to continue
paying
non-qualified pension benefits until entry of a written order. However,
United appealed that order and placed approximately $6 million
necessary to pay non-qualified benefits for the month of October 2005
in a segregated account.
|
Following
the entry of the Bankruptcy Court’s termination order on October 28, 2005,
United once again ceased paying non-qualified benefits. Subsequently, during
the
first quarter of 2006, the District Court dismissed United’s appeal of the
Bankruptcy Court’s October 6, 2005 order in light of its earlier decision
reversing the Bankruptcy Court’s termination order. United filed a notice of
appeal of the District Court’s ruling regarding the October 6, 2005 order
to the Court of Appeals. On October 25, 2006, the Court of Appeals reversed
the District Court’s order dismissing for lack of ripeness the Company’s appeal
of the Bankruptcy Court’s October 6, 2005 order and remanded the case with
instructions to reverse the Bankruptcy Court’s order compelling payment of
non-qualified benefits for October 2005 or later months. On
November 6, 2006, ALPA filed a petition for rehearing on the Court of
Appeals reversal of the October 6, 2005 order, which motion has been
denied. ALPA and URPBPA filed petitions for writ of certiorari from the Supreme
Court. On April 2, 2007, the Supreme Court denied such petitions,
effectively terminating these proceedings. The $6 million deposit was released
from the segregated account in June 2007.
|
(c)
|
Pilot
Plan Non-Qualified Pension Benefits—March 2006 Order. In
March 2006, in a separate proceeding related to the matter described
in item (b) above, the Bankruptcy Court ruled that United was obligated
to
make payment of all non-qualified pension benefits for the months
of
November and December 2005 and January 2006. The Bankruptcy
Court also ruled that United’s obligation to pay non-qualified pension
benefits ceased as of January 31, 2006. United filed a notice of
appeal of the Bankruptcy Court’s ruling to the District Court. URPBPA and
ALPA also filed notices of appeal with respect to the Bankruptcy
Court’s
order, which were subsequently consolidated with United’s appeal. United
agreed with URPBPA and ALPA to pay, into an escrow account, the disputed
non-qualified pension benefits for the months of November and
December 2005 and January 2006, an aggregate amount totaling
approximately $17 million. The District Court affirmed the Bankruptcy
Court’s ruling in September 2006. United filed a notice of appeal of
the District Court’s ruling to the Court of Appeals. URPBPA and ALPA also
appealed the District Court’s decision. The Company subsequently filed a
motion to consolidate its appeal from the Bankruptcy Court’s
October 2005 non-qualified benefits order with the three appeals from
the Bankruptcy Court’s March 2006 non-qualified benefits order. The
Court of Appeals denied the Company’s motion, but issued an order staying
briefing on the March 2006 non-qualified benefits order until further
order of the Court of Appeals. On April 19, 2007, the Court of
Appeals reversed the March 2006 order and remanded the case with
instructions to the District Court to enter judgment for entry of
an order
in United’s favor. The deadline for filing a petition for a writ of
certiorari, July 19, 2007, has passed without such a petition being
filed,
which effectively brings this matter to conclusion. The $17 million
deposit was released from the escrow account in July
2007.
|
Significant
Matters Remaining to be Resolved in Chapter 11 Cases.
The following material matters remain to be resolved in the
Bankruptcy Court or another court:
|
(a)
|
SFO
Municipal Bond Secured Interest. HSBC Bank Inc. (“HSBC”), as trustee
for the 1997 municipal bonds related to San Francisco International
Airport (“SFO”), filed a complaint against United asserting a security
interest
in United’s leasehold for portions of its maintenance base at SFO.
Pursuant to Section 506(a) of the Bankruptcy Code, HSBC alleges
that it is entitled to be paid the value of that security interest,
which
HSBC had claimed was as much as $257 million. HSBC and United went to
trial in April 2006 and the Bankruptcy Court rejected as a matter of
law HSBC’s $257 million claim. HSBC subsequently alleged that it was
entitled to $154 million, or at a minimum, approximately
$93 million. The parties tried the case and filed post-trial briefs
which were heard by the Bankruptcy Court. In October 2006, the
Bankruptcy Court issued its written opinion holding that the value
of the
security interest is approximately $27 million. United has accrued
this amount as its estimated obligation as of June 30, 2007. After
the
Bankruptcy Court denied various post-trial motions, both parties
have
appealed to the District Court and those appeals are
pending.
|
|
(b)
|
LAX
Municipal Bond Secured Interest. There is pending litigation before
the Bankruptcy Court regarding the extent to which the Los Angeles
International Airport (“LAX”) municipal bond debt is entitled to secured
status under Section 506(a) of the Bankruptcy Code. Trial on
this matter occurred during April 2007 and the two parties filed
post-trial briefs in the second quarter of 2007. United recorded
an
obligation of $41 million and $60 million at June 30, 2007 and
December 31, 2006, respectively, for this
matter.
|
Claims
Resolution Process. As permitted under
the bankruptcy process, the Debtors’ creditors filed proofs of claim with the
Bankruptcy Court. Through the claims resolution process, the Company identified
many claims which were disallowed by the Bankruptcy Court for a number of
reasons, such as claims that were duplicative, amended or superseded by later
filed claims, were without merit, or were otherwise overstated. Throughout
the
Chapter 11 proceedings, the Company resolved many claims through settlement
or objections ordered by the Bankruptcy Court. The Company will continue to
settle claims and file additional objections with the Bankruptcy
Court.
With
respect to unsecured claims, once a claim is deemed to be valid, either through
the Bankruptcy Court process or through other means, the claimant is entitled
to
a distribution of new UAL common stock. Pursuant to the terms of the Plan of
Reorganization, 115 million shares of new UAL common stock have been
authorized to satisfy valid unsecured claims. The Bankruptcy Court confirmed
the
Plan of Reorganization and established January 20, 2006 as the record date
for purposes of establishing the persons that are claimholders of record to
receive distributions. Approximately 111 million shares of UAL common stock
have been issued and distributed to holders of valid unsecured claims between
February 2, 2006, the first distribution date established in the Plan of
Reorganization, and June 30, 2007. As of June 30, 2007, approximately 45,000
valid unsecured claims aggregating to approximately $29.1 billion in claim
value had received those shares to partially satisfy those claims. There are
approximately 4 million remaining shares of UAL common stock being held in
reserve to satisfy all of the remaining disputed and undisputed unsecured claim
values, once the remaining claim disputes are resolved. The final distributions
may not occur until 2008 pending resolution of bankruptcy matters such as those
discussed above.
UAL
and
United currently estimate that the probable range of unsecured claims to be
ultimately allowed by the Bankruptcy Court will be between $29.3 billion
and $29.8 billion. Differences between claim amounts filed and management’s
estimates are being investigated and will be resolved in connection with the
claims resolution process. However, there will be no further financial impact
to
the Company associated with the settlement of such unsecured claims, as the
holders of all allowed unsecured claims will receive under the Plan of
Reorganization only their pro rata share of the distribution of the
115 million shares of new UAL common stock, together with the
previously-agreed issuance of certain other securities.
With
respect to valid administrative and priority claims, pursuant to the terms
of
the Plan of Reorganization these claims will be satisfied with cash. Many
asserted administrative and priority claims still remain unpaid, and the Company
will continue to settle claims and file objections with the Bankruptcy Court
to
eliminate or reduce such claims. In addition, certain disputes, the most
significant of which are discussed in “Significant Matters Remaining to be
Resolved in Chapter 11 Cases,” above, still remain with respect to the
valuation of certain claims. The Company accrued an obligation for claims it
believed were reasonably estimable and probable at the Effective Date. However,
the claims resolution process is uncertain and adjustments to claims estimates
could result in material adjustments to the Successor Company’s financial
statements in future periods as a result of court rulings, the receipt of new
or
revised information or the finalization of these matters. The most significant
item included in the adjustments made to this accrual for the six months ended
June 30, 2007 was a favorable $22 million adjustment for the LAX and SFO
municipal obligation litigation that is discussed above, which was recorded
as a
special item in the Condensed Statements of Consolidated Operations
(Unaudited) of UAL and United. In the first six months of 2007,
the Company also conclusively settled or revised its estimated obligations
for
various other matters which resulted in a net credit to income of
$14 million. The amounts comprising the $14 million were recorded as
credits to operating income against the various income statement expenses to
which they relate.
The
table
below includes activity related to the administrative and priority claims and
other bankruptcy-related claim reserves including reserves related to legal,
professional and tax matters, among others, for the Successor Company for the
six months ended June 30, 2007. These reserves are primarily classified in
other
current liabilities and other non-current liabilities in the Condensed
Statements of Consolidated Financial Position (Unaudited) based on the
expected timing of resolution of these matters.
|
|
(In millions)
|
Balance
at December 31, 2006
|
|
$ |
325
|
|
Accruals
|
|
|
4
|
|
Accrual
adjustments
|
|
|
(40
|
)
|
Payments
|
|
|
(76
|
)
|
Balance
at June 30, 2007
|
|
$ |
213
|
|
Reorganization
items, net. SOP 90-7 requires that the
financial statements for periods after a Chapter 11 filing separate
transactions and events that are directly associated with the reorganization
from the ongoing operations of the business. Accordingly, all transactions
(including, but not limited to, all professional fees, realized gains and losses
and provisions for losses) directly associated with the reorganization and
restructuring of the business are reported separately in the financial
statements as reorganization items, net. For the month ended January 31,
2006, Predecessor UAL and United recognized the following primarily non-cash
reorganization income (expense):
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
(In millions)
|
UAL
|
|
|
United
|
|
|
|
Discharge
of claims and liabilities |
$ |
24,628
|
|
|
$ |
24,389
|
|
(a)
|
|
Revaluation
of frequent flyer obligations |
|
(2,399 |
) |
|
|
(2,399
|
) |
(b)
|
|
Revaluation
of other assets and liabilities |
|
2,106
|
|
|
|
2,111
|
|
(c)
|
|
Employee-related
charges |
|
(898 |
) |
|
|
(898
|
) |
(d) |
|
Contract
rejection charges |
|
(429 |
) |
|
|
(421
|
) |
(e) |
|
Professional
fees |
|
(47 |
) |
|
|
(47
|
) |
|
|
Pension-related
charges |
|
(14 |
) |
|
|
(14
|
) |
|
|
Other |
|
(13 |
) |
|
|
(12
|
) |
|
|
|
$ |
22,934
|
|
|
$ |
22,709
|
|
|
_______________________
|
(a)
|
The
discharge of claims and liabilities primarily relates to those unsecured
claims arising during the bankruptcy process, such as those arising
from
the termination and settlement of United’s U.S. defined benefit pension
plans and other employee claims; aircraft-related claims, such as
those
arising as a result of aircraft rejections; other unsecured claims
due to
the rejection or modification of executory contracts, unexpired leases
and
regional carrier contracts; and claims associated with certain municipal
bond obligations based upon their rejection, settlement or the estimated
impact of the outcome of pending litigation. In accordance with the
Plan
of Reorganization, UAL and United discharged certain obligations
to
unsecured creditors in exchange for the distribution of 115 million
shares of new UAL common stock and the issuance of certain other
UAL
securities.
|
|
(b)
|
United
revalued its Mileage Plus frequent flyer obligations at fair value
as a
result of fresh-start reporting, which resulted in a $2.4 billion
non-cash reorganization charge.
|
|
(c)
|
In
accordance with fresh-start reporting, UAL and United recorded their
assets at estimated fair value and liabilities at estimated fair
value or
the present value of amounts to be paid. This resulted in a non-cash
reorganization gain of $2.1 billion, primarily as a result of newly
recognized intangible assets, offset partly by reductions in the
fair
value of tangible property and
equipment.
|
|
(d)
|
In
January 2006, UAL and United recorded the value of the deemed claim
that the salaried and management group received upon confirmation
of the
Plan of Reorganization. The deemed claim was based upon the cost
savings
provided by this employee group during the bankruptcy
process.
|
|
(e)
|
Contract
rejection charges are non-cash costs that include estimated claim
values
resulting from the Company’s rejection or negotiated modification of
certain contractual obligations such as executory contracts, unexpired
leases and regional carrier
contracts.
|
(3)
|
New
Accounting Pronouncements
|
In
June 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109 (“FIN 48”), which modifies the accounting and disclosure
associated with certain aspects of recognition and measurement related to
accounting for income taxes. UAL and United adopted the provisions of
FIN 48 effective January 1, 2007. See Note 7, “Income Taxes” for
disclosures related to the adoption of FIN 48.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (“SFAS 157”), which defines
fair value, establishes a framework for measuring fair value, and expands
disclosure about fair value measurements. SFAS 157 does not require any new
fair value measurements; rather it specifies valuation methods and disclosures
to be applied when fair value measurements are required under existing or future
accounting pronouncements. SFAS 157 is effective for UAL and United for
their fiscal year beginning January 1, 2008, and interim periods within
2008. UAL and United have not determined the impact, if any, that adoption
of
this statement will have on their consolidated financial
statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement No. 115
(“SFAS 159”). This statement permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS 159
is to improve financial reporting by providing entities with the opportunity
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 also established presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
This statement does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. This statement
is
effective for UAL and United as of January 1, 2008. UAL and United have not
determined the impact, if any, that adoption of this statement will have on
their consolidated financial statements.
(4)
|
Common
Stockholders’ Equity (UAL
Only)
|
Changes
in the number of shares of UAL common stock outstanding and held in treasury
during the six month period ended June 30, 2007 were as follows:
|
|
Six Months
|
|
|
Ended
|
UAL
|
|
June
30, 2007
|
UAL
common stock outstanding at beginning of period
|
|
|
112,280,629
|
|
Issuance
of UAL common stock to creditors
|
|
|
2,840,718
|
|
Issuance
of UAL common stock to employees
|
|
|
783,387
|
|
Forfeiture
of non-vested UAL restricted stock
|
|
|
(55,496
|
)
|
Treasury
shares acquired
|
|
|
(253,286
|
)
|
UAL
common stock outstanding at end of period
|
|
|
115,595,952
|
|
Treasury
shares at beginning of period
|
|
|
136,777
|
|
Shares
acquired for treasury
|
|
|
253,286
|
|
Treasury
shares at end of period
|
|
|
390,063
|
|
See
Note 2, “Voluntary Reorganization Under Chapter 11—Claims Resolution
Process” and Note 5, “Per Share Amounts” for information regarding shares
of UAL common stock distributed in 2007 and an additional 4 million shares
that are reserved and will be distributed periodically to employees and holders
of previously allowed claims and disputed claims that are pending final
resolution. All treasury shares acquired in 2007 were shares acquired for tax
withholding obligations under UAL’s share-based compensation plans.
(5)
|
Per
Share Amounts (UAL Only)
|
In
accordance with Statement of Financial Accounting Standards No. 128,
“Earnings per Share” (“SFAS 128”), UAL basic per share amounts
were computed by dividing earnings (loss) available to common shareholders
by
the weighted-average number of shares of common stock outstanding. Approximately
4 million shares of UAL common stock remaining to be issued to unsecured
creditors and employees under the Plan of Reorganization are included in UAL
outstanding
basic shares as the necessary conditions for issuance have been satisfied.
UAL’s
$500 million of 6% senior notes are callable at any time at 100% of par value,
and can be redeemed with either cash or UAL common stock at UAL’s option. These
notes are not included in the diluted earnings per share calculation as it
is
UAL’s intent to redeem these notes with cash. The table below represents the
computation of UAL basic and diluted earnings (loss) per share and the number
of
securities which have been excluded from the computation of diluted per share
amounts as they have an anti-dilutive effect.
|
|
Successor
|
|
|
Predecessor
|
|
(In
millions)
|
|
Three
Months
Ended
June 30,
|
|
|
Six
Months Ended
June
30,
|
|
|
Period
from February 1 to
June
30,
|
|
|
One
Month
Ended
January
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
274
|
|
|
$ |
119
|
|
|
$ |
122
|
|
|
$ |
(104 |
) |
|
$ |
22,851
|
|
Preferred
stock dividend requirements
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
Earnings
(loss) available to common stockholders
|
|
$ |
272
|
|
|
$ |
117
|
|
|
$ |
117
|
|
|
$ |
(108 |
) |
|
$ |
22,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
117.4
|
|
|
|
115.1
|
|
|
|
117.2
|
|
|
|
115.1
|
|
|
|
116.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share, basic
|
|
$ |
2.31
|
|
|
$ |
1.01
|
|
|
$ |
1.00
|
|
|
$ |
(0.94 |
) |
|
$ |
196.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) available to common stockholders
|
|
$ |
272
|
|
|
$ |
117
|
|
|
$ |
117
|
|
|
$ |
(108 |
) |
|
$ |
22,850
|
|
Effect
of 2% preferred securities
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of 4.5% senior limited-subordination convertible
notes
|
|
|
5
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of 5% convertible notes
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
Earnings
(loss) available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
the effect of dilutive securities
|
|
$ |
280
|
|
|
$ |
121
|
|
|
$ |
134
|
|
|
$ |
(108 |
) |
|
$ |
22,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
117.4
|
|
|
|
115.1
|
|
|
|
117.2
|
|
|
|
115.1
|
|
|
|
116.2
|
|
Effect
of non-vested restricted shares
|
|
|
1.1
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of 2% preferred securities
|
|
|
10.9
|
|
|
|
10.8
|
|
|
|
10.9
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of 4.5% senior limited-subordination convertible
notes
|
|
|
20.8
|
|
|
|
-
|
|
|
|
20.8
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of 5% convertible notes
|
|
|
3.2
|
|
|
|
3.2
|
|
|
|
3.2
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
weighted average shares outstanding
|
|
|
153.4
|
|
|
|
130.0
|
|
|
|
153.1
|
|
|
|
115.1
|
|
|
|
116.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share, diluted
|
|
$ |
1.83
|
|
|
$ |
0.93
|
|
|
$ |
0.88
|
|
|
$ |
(0.94 |
) |
|
$ |
196.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially
dilutive shares excluded from diluted per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
4.4
|
|
|
|
5.4
|
|
|
|
4.4
|
|
|
|
5.4
|
|
|
|
9.0
|
|
Restricted
shares
|
|
|
0.9
|
|
|
|
2.7
|
|
|
|
1.0
|
|
|
|
3.6
|
|
|
|
-
|
|
4.5%
senior limited-subordination convertible notes
|
|
|
-
|
|
|
|
15.5
|
|
|
|
-
|
|
|
|
15.5
|
|
|
|
-
|
|
5%
convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.2
|
|
|
|
-
|
|
2%
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10.7
|
|
|
|
-
|
|
|
|
|
5.3
|
|
|
|
23.6
|
|
|
|
5.4
|
|
|
|
38.4
|
|
|
|
9.0
|
|
(6)
|
Share-Based
Compensation Plans
|
Compensation
expense associated with the UAL share-based compensation plans has been pushed
down to United.
Predecessor—As
of January 31, 2006, a total of 9 million UAL stock options were
outstanding. Under the Plan of Reorganization, these stock options were canceled
upon the Effective Date. No material share-based compensation expense was
incurred as a result of these outstanding options for the month of
January 2006.
Successor—As
part of the Plan of Reorganization the Bankruptcy Court approved UAL’s
share-based compensation plans known as the Director Equity Incentive Plan
(“DEIP”) and the Management Equity Incentive Plan (“MEIP”) which became
effective on February 1, 2006. A total of 944,279 and 996,536 awards were
available for grant as of June 30, 2007 and December 31, 2006,
respectively, under the MEIP and DEIP. UAL and United recognized share-based
compensation
expense of $11 million and $26 million during the three and six months
ended June 30, 2007 and $40 million and $109 million during the three and five
months ended June 30, 2006, respectively. The Company’s unrecognized share-based
compensation expense was $60 million and $80 million as of
June 30, 2007 and December 31, 2006, respectively.
The
table
below summarizes stock option activity pursuant to UAL’s MEIP stock options for
the six months ended June 30, 2007:
|
|
Options
|
|
|
Outstanding
at beginning of period
|
|
5,064,672
|
|
|
Granted
|
|
128,866
|
|
|
Exercised
|
|
(699,153 |
) |
|
Canceled
|
|
(106,014 |
) |
|
Outstanding
at end of period
|
|
4,388,371
|
|
|
Exercisable
at end of period
|
|
1,208,375
|
|
The
table
below summarizes UAL’s restricted stock activity for the six months ended June
30, 2007:
|
|
Restricted Stock
|
|
Nonvested
at beginning of period
|
|
2,712,787
|
|
|
Granted
|
|
84,234
|
|
|
Vested
|
|
(734,259
|
)
|
|
Terminated
|
|
(55,496
|
)
|
|
Nonvested
at end of period
|
|
2,007,266
|
|
UAL
and
United both had effective tax rates of 41% and 47% in the three and six months
ended June 30, 2007, respectively, and zero percent for both the three and
five
months ended June 30, 2006. The effective tax rates were based upon forecasted
annual income for each respective period. The most significant items impacting
UAL’s and United’s effective tax rates were non-deductible meals and
entertainment expense and nondeductible interest on certain of UAL’s notes.
These increases to the effective tax rate were partially offset by a favorable
impact from the non-taxable Medicare Part D subsidy. Predecessor UAL and
United both had an effective tax rate of zero percent for the month ended
January 31, 2006. As of June 30, 2007, UAL and United had a federal net
operating loss carry forward of $6.6 billion.
The
Company’s management assesses the realizability of its deferred tax assets, and
records a valuation allowance for the deferred tax assets when it is more likely
than not that a portion, or all of the deferred tax assets, will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the
generation of future taxable income (including the reversals of deferred tax
liabilities) during the periods in which those temporary differences will become
deductible. As such, UAL had a valuation allowance against its deferred tax
assets of $2,248 million at June 30, 2007 and December 31, 2006, to
reflect management’s assessment regarding the realizability of the deferred tax
assets. United had a valuation allowance against its deferred tax assets of
$2,190 million at June 30, 2007 and December 31, 2006. The Company expects
to continue to maintain a valuation allowance on deferred tax assets until
other
positive evidence is sufficient to justify realization. Future reductions in
the
valuation allowance will be allocated to reduce goodwill and then other
intangible assets.
The
Company adopted the provisions of FIN 48 on January 1, 2007 and recorded a
$16 million decrease in the liability for uncertain income tax matters
recorded under Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies (“SFAS 5”). In addition, UAL and United
adjusted deferred tax assets for net operating loss carry forwards and deferred
taxes for certain other temporary differences; these entries were offset by
a
net adjustment to goodwill. As a result of the adoption of FIN 48, the
Company generated an unrecognized tax benefit of $49 million. Unrecognized
tax benefits of $6 million will impact the Company’s effective tax rate, if
recognized. Goodwill changed by $6 million during the six months ended
June 30, 2007 resulting from the adoption of FIN 48.
The
amount of unrecognized tax benefits did not materially change from
January 1, 2007 to June 30, 2007. Any change in the amount of unrecognized
tax benefits within the next twelve months is not expected to result in a
significant impact on the results of operations or the financial position of
the
Company.
UAL
and
United record interest expense associated with income taxes as interest expense
and penalties as other operating expense in the Condensed Statements of
Operations (Unaudited). As of January 1, 2007, the Company had accrued
interest of $1 million and had accrued no penalties. These amounts did not
materially change as of June 30, 2007.
UAL’s
income tax returns for tax years after 2002 remain subject to examination by
the
Internal Revenue Service and state taxing jurisdictions. United is included
in
UAL’s consolidated income tax returns.
As
a
result of the Company’s emergence from bankruptcy, the Company has an unrealized
tax benefit of $802 million and $782 million at June 30, 2007 and
December 31, 2006, respectively, resulting from an excess tax deduction of
$2.2 billion and $2.1 billion, respectively. The excess tax deduction
represents the difference between the total tax deduction available, which
is
equal to the fair value of the UAL common stock issued to certain unsecured
creditors and employees pursuant to the Plan of Reorganization, and the amount
of the deduction attributable to the amount expensed, which is the value of
the
stock determined in the Plan of Reorganization. The Company has accounted for
the excess tax deduction by analogy to Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share-Based Payment, and will
recognize this deduction when it is realized as a reduction of taxes
payable.
(8)
|
Retirement
and Postretirement Plans
|
UAL
and
United contribute to defined contribution plans on behalf of most of their
employees, particularly within the US. Internationally, the Company maintains
a
number of small pension plans covering much of its local, non-US workforce.
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
certain retirees, which are reflected as “Other Benefits” in the tables below.
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
UAL
and United net periodic benefit cost included the following
components:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
June
30,
|
|
|
Three Months
Ended
June
30,
|
|
|
Three Months
Ended
June
30,
|
|
|
Three Months
Ended
June
30,
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
3
|
|
|
$ |
2
|
|
|
$ |
9
|
|
|
$ |
9
|
|
Interest
cost
|
|
|
3
|
|
|
|
2
|
|
|
|
31
|
|
|
|
32
|
|
Expected
return on plan assets
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Amortization
of unrecognized gain
|
|
|
(1 |
) |
|
|
—
|
|
|
|
(2 |
) |
|
|
—
|
|
Net
periodic benefit costs
|
|
$ |
2
|
|
|
$ |
2
|
|
|
$ |
37
|
|
|
$ |
39
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
Successor
|
|
Predecessor
|
|
|
Successor
|
|
Predecessor
|
|
|
Six Months
Ended
June
30,
|
|
Period from
February 1
to
June
30,
|
|
Period from
January 1 to
January 31,
|
|
|
Six Months
Ended
June
30,
|
|
Period from
February 1
to
June
30,
|
|
Period from
January 1 to
January 31,
|
(In millions)
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
|
2007
|
|
2006
|
|
2006
|
Service
cost
|
|
$ |
5
|
|
|
$ |
4
|
|
|
$ |
1
|
|
|
|
$ |
18
|
|
|
$ |
15
|
|
|
$ |
3
|
|
Interest
cost
|
|
|
5
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
62
|
|
|
|
53
|
|
|
|
11
|
|
Expected
return on plan assets
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Amortization
of prior service credit including transition obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13
|
)
|
Amortization
of unrecognized (gain) loss
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
8
|
|
Net
periodic benefit costs
|
|
$ |
4
|
|
|
$ |
4
|
|
|
$ |
1
|
|
|
|
$ |
74
|
|
|
$ |
65
|
|
|
$ |
8
|
|
We
manage
our business by two reportable segments: Mainline and United Express which
were
reported as segments in the 2006 Annual Reports. In 2006, in light of the
Company’s bankruptcy-related restructuring and organizational changes,
management reevaluated the Company’s segment reporting. As a result, management
determined that the geographic regions and UAL Loyalty Services, LLC, which
were
previously reported as segments, are no longer reportable segments requiring
disclosure under Statement of Financial Accounting Standards No. 131,
“Disclosures about Segments of an Enterprise and Related
Information.”
The
table
below includes segment information for UAL and United for the three and six
month periods ended June, 2007, the five month period ended June 30, 2006 and
the one month period ended January 31, 2006. Amounts for the 2006 periods
have been reclassified from prior period presentation to conform to the new
Mainline and United Express segments.
|
|
Successor
|
|
|
Predecessor
|
|
(In
millions)
|
|
Three
Months Ended
|
|
|
Six
Months
Ended
|
|
|
Period
from
February
1 to
|
|
|
Period
from
January
1 to
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
January
31,
|
|
UAL
segment information:
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$ |
4,409
|
|
|
$ |
4,352
|
|
|
$ |
8,107
|
|
|
$ |
6,894
|
|
|
$ |
1,254
|
|
United
Express
|
|
|
804
|
|
|
|
761
|
|
|
|
1,479
|
|
|
|
1,226
|
|
|
|
204
|
|
Total
|
|
$ |
5,213
|
|
|
$ |
5,113
|
|
|
$ |
9,586
|
|
|
$ |
8,120
|
|
|
$ |
1,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$ |
395
|
|
|
$ |
73
|
|
|
$ |
154
|
|
|
$ |
(147 |
) |
|
$ |
(59 |
) |
United
Express
|
|
|
71
|
|
|
|
46
|
|
|
|
54
|
|
|
|
43
|
|
|
|
(24 |
) |
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,934
|
|
Special
items
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
Less:
equity earnings (a)
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
Consolidated
earnings (loss) before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and equity in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of affiliates
|
|
$ |
465
|
|
|
$ |
116
|
|
|
$ |
228
|
|
|
$ |
(107 |
) |
|
$ |
22,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$ |
4,412
|
|
|
$ |
4,350
|
|
|
$ |
8,114
|
|
|
$ |
6,891
|
|
|
$ |
1,250
|
|
United
Express
|
|
|
804
|
|
|
|
761
|
|
|
|
1,479
|
|
|
|
1,226
|
|
|
|
204
|
|
Total
|
|
$ |
5,216
|
|
|
$ |
5,111
|
|
|
$ |
9,593
|
|
|
$ |
8,117
|
|
|
$ |
1,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$ |
401
|
|
|
$ |
65
|
|
|
$ |
168
|
|
|
$ |
(147 |
) |
|
$ |
(59 |
) |
United
Express
|
|
|
71
|
|
|
|
46
|
|
|
|
54
|
|
|
|
43
|
|
|
|
(24 |
) |
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,709
|
|
Special
items
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
Less: equity
earnings (a)
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
Consolidated
earnings (loss) before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and equity in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of affiliates
|
|
$ |
471
|
|
|
$ |
108
|
|
|
$ |
242
|
|
|
$ |
(107 |
) |
|
$ |
22,621
|
|
______________________
|
(a)
|
Equity
earnings are part of the
Mainline segment.
|
(10)
|
Comprehensive
Income (Loss)
|
For
the
three month periods ended June 30, 2007 and 2006, UAL’s total comprehensive
income was $272 million and $153 million, respectively. For the six month
period ended June 30, 2007, the five month period ended June 30, 2006, and
the
one month period ended January 31, 2006, UAL’s total comprehensive income
(loss) was $127 million, $(62) million and $22.9 billion,
respectively. For the three month periods ended June 30, 2007 and 2006, United’s
total comprehensive income was $275 million and $145 million, respectively.
For the six month period ended June 30, 2007, the five month period ended June
30, 2006, and the one month period ended January 31, 2006, United’s total
comprehensive income (loss) was $135 million, $(62) million and $22.6
billion, respectively.
The
differences between net income (loss) and total comprehensive income (loss)
are
due to changes in the fair value of an interest rate swap that was accounted
for
a cash flow hedge as discussed in Note 12, “Financial Instruments and Risk
Management.” In addition, comprehensive income for the three and six
months ended June 30, 2007, includes amortization of deferred net periodic
pension costs that were initially recorded as a component of accumulated other
comprehensive
income upon adoption of Statement of Financial Accounting Standard No. 158,
Employers’ Accounting for Pensions and Other Postretirement Plans,
an amendment of FASB Statements No. 87, 88, 106 and 132R, for the
year ended December 31, 2006.
See
the
UAL and United 2006 Annual Reports on Form 10-K for a detailed discussion of
their respective debt obligations. The following is a discussion of United’s
prepayment and amendment, in February 2007, of its $3.0 billion revolving
credit, term loan and guarantee agreement dated February 1, 2006 (the
“Credit Facility”). In addition, United issued and repaid various debt
instruments during the second quarter of 2007, as discussed below.
Amended
Credit Facility
On
February 2, 2007, United prepaid $972 million of its Credit Facility
debt and UAL and United entered into an amended and restated revolving credit,
term loan and guaranty agreement (the “Amended Credit Facility”) that, among
other things, reduced the size of the facility from $3.0 billion to $2.055
billion, reduced the applicable interest rates, and provided for a more limited
collateral package and a relaxation of certain restrictive covenants. There
were
no prepayment penalties associated with this debt retirement. In the first
quarter of 2007, United expensed $17 million of deferred financing costs
which were related to the portion of the Credit Facility prepaid in 2007 and
were included in other assets in the December 31, 2006 Statements of
Consolidated Financial Position. In connection with the amendment of the
Credit Facility in 2007, United incurred financing costs of $10 million, of
which $6 million was expensed and $4 million was capitalized. The
financing costs associated with the Credit Facility prepayment and amendment,
which were expensed in the first quarter of 2007, are classified as a component
of interest expense in our Condensed Statements of Consolidated Operations
(Unaudited).
The
Amended Credit Facility was provided by a syndicate of banks and other financial
institutions led by J.P. Morgan Securities Inc. and Citicorp Global
Markets, Inc. (“CITI”), as joint lead arrangers and joint bookrunners:
JPMorgan Chase Bank, N.A. (“JPMCB”) and CITI, as co-administrative agents and
co-collateral agents, Credit Suisse Securities (USA) LLC, as syndication agent,
and JPMCB, as paying agent. The Amended Credit Facility provides for a total
commitment of up to $2.055 billion, comprised of two separate tranches:
(i) a Tranche A consisting of $255 million revolving commitment
available for Tranche A loans and standby letters of credit and (ii) a
Tranche B consisting of a term loan commitment of $1.8 billion. The Tranche
A
loans mature on February 1, 2012, and the Tranche B loans mature on
February 1, 2014.
Borrowings
under the Amended Credit Facility bear interest at a floating rate, which,
at
United’s option, can be either a base rate or LIBOR, plus an applicable margin
of 1.0% in the case of base rate loans, and 2.0% in the case of LIBOR loans.
The
Tranche B term loan requires regularly scheduled semi-annual payments of
principal equal to $9 million. Interest is payable at least every three
months. United may prepay some or all of the Tranche B loans from time to time,
at a price equal to 100% of the principal amount prepaid plus accrued and unpaid
interest, if any, to the date of prepayment, but without penalty or
premium.
United’s
obligations under the Amended Credit Facility are unconditionally guaranteed
by
UAL and certain of its direct and indirect domestic subsidiaries, other than
certain immaterial subsidiaries (“Guarantors”). On the closing date for the
Amended Credit Facility, the obligations were secured by a security interest
in
the following tangible and intangible assets of United and the Guarantors:
(i) the Pacific (Narita, China and Hong Kong) and Atlantic (Heathrow)
routes (the “Primary Routes”), (ii) primary foreign slots, primary domestic
slots, certain gate interests in domestic airport terminals and certain
supporting route facilities, (iii) certain spare engines, (iv) certain
quick engine change kits, (v) certain owned real property and related
fixtures, and (vi) certain flight simulators (the “Collateral”). After the
closing date, and subject to certain conditions, United and the Guarantors
may
grant a security interest in the following assets, in substitution for certain
Collateral (which may be released from the lien in support of the Amended Credit
Facility upon the satisfaction of certain conditions): (a) certain
aircraft, (b) certain spare parts, (c) certain ground handling
equipment, and (d) accounts receivable.
The
Amended Credit Facility contains covenants that will limit the ability of United
and the Guarantors to, among other things, incur or guarantee additional
indebtedness, create liens, pay dividends on or repurchase stock, make certain
types of investments, enter into transactions with affiliates, sell assets
or
merge with other companies, modify corporate documents or change lines of
business. The Amended Credit Facility also requires compliance with the
following financial covenants: (i) a minimum ratio of EBITDAR to the sum of
cash interest expense, aircraft rent and scheduled debt payments, (ii) a
minimum unrestricted cash balance of $750 million, and (iii) a minimum
ratio of market value of collateral to the sum of (a) the aggregate
outstanding amount of the loans plus (b) the undrawn amount of outstanding
letters
of credit, plus (c) the unreimbursed amount of drawings under such letters
of credit and (d) the termination value of certain interest rate protection
and hedging agreements with the Amended Credit Facility lenders and their
affiliates, of 150% at any time, or 200% at any time following the release
of
Primary Routes having an appraised value in excess of $1 billion (unless the
Primary Routes are the only collateral then pledged). Failure to comply with
the
Amended Credit Facility covenants could result in a default under the Amended
Credit Facility unless United were to obtain a waiver of, or otherwise mitigate
or cure, the default. Additionally, the Amended Credit Facility contains a
cross-default provision with respect to any other agreement for indebtedness
that exceeds $50 million. A default under such other indebtedness
arrangement could result in a termination of the Amended Credit Facility and
a
requirement to accelerate repayment of all outstanding facility
borrowings.
EETC
Pass Through Certificates, Series 2007-1
On
June 26, 2007, United and Wilmington Trust Company, as subordination agent
and pass through trustee under three pass through trusts newly formed by United
(the “Trustee”) entered into a note purchase agreement, dated as of
June 26, 2007 (the “Note Purchase Agreement”). The Note Purchase Agreement
provides for the issuance by United of equipment notes (the “Equipment Notes”)
in the aggregate principal amount of approximately $694 million to finance
13
aircraft owned by United. Ten of these owned aircraft had been financed by
pre-existing aircraft mortgages which United repaid in full (approximately
$590
million principal amount) with most of the proceeds of the Equipment Notes.
The
mortgages related to these ten aircraft had been adjusted to fair market value
at the adoption of fresh-start reporting on February 1, 2006. The extinguishment
of the aircraft mortgages resulted in the recognition of a $22 million gain
for
the unamortized premium, which was accounted for as a reduction in interest
expense in the second quarter of 2007. The remaining three owned aircraft were
unencumbered prior to the closing of the Enhanced Equipment Trust Certificates
(“EETC”) transaction. This transaction combined with the July 2007 acquisition
of three 747-400 aircraft, as described in Note 17, “Subsequent Events,” did not
change the total number of encumbered aircraft.
The
payment obligations of United under the Equipment Notes are fully and
unconditionally guaranteed by UAL. The Class B and Class C certificates are
subject to transfer restrictions. They may be sold only to qualified
institutional buyers, as defined by Rule 144A under the Securities Act of 1933,
as amended, for so long as they are outstanding. Pursuant to the Note Purchase
Agreement, the Trustee for each pass through trust agreed to purchase Equipment
Notes issued under a Trust Indenture and Mortgage (each, an “Indenture” and,
collectively, the “Indentures”) with respect to each aircraft financing entered
into by United and Wilmington Trust Company, as Mortgagee.
Each
Indenture contemplated the issuance of Equipment Notes in three series: Series
A, bearing interest at the rate of 6.636% per annum, Series B, bearing
interest at the rate of 7.336% per annum, and Series C, bearing interest at
the rate of six-month LIBOR plus 2.25% per annum, in the aggregate
principal amount of approximately $694 million divided between the three series
as follows: $485 million in the case of Series A Equipment Notes,
$107 million in the case of Series B Equipment Notes, and $102 million in the
case of Series C Equipment Notes. The Equipment Notes were purchased by the
Trustee for each pass through trust using the proceeds from the sale of Pass
Through Certificates, Series 2007-1A, Pass Through Certificates, Series 2007-1B,
and Pass Through Certificates, Series 2007-1C (collectively, the
“Certificates”).
Interest
on the Equipment Notes is payable semiannually on each January 2 and
July 2, beginning on January 2, 2008. Principal payments are scheduled
on January 2 and July 2 in scheduled years, beginning on
January 2, 2008. The final payments will be due on July 2, 2022, in
the case of the Series A Equipment Notes, July 2, 2019, in the case of the
Series B Equipment Notes, and July 2, 2014, in the case of the Series C
Equipment Notes. Maturity of the Equipment Notes may be accelerated upon the
occurrence of certain events of default, including failure by United to make
payments under the applicable Indenture when due or to comply with certain
covenants, as well as certain bankruptcy events involving United. The Equipment
Notes issued with respect to each of the 13 aircraft are secured by a lien
on
each such aircraft and are cross-collateralized by the rest of the 13 aircraft
financed pursuant to the Note Purchase Agreement.
Distributions
on the Certificates are subject to certain subordination provisions whereby
Morgan Stanley Senior Funding, Inc. will provide a liquidity facility for each
of the Class A and Class B certificates. The liquidity facilities are expected
to provide an amount sufficient to pay up to three semiannual interest payments
on the certificates of the related pass through trust. The Class C certificates
will not have the benefit of a liquidity facility.
Denver
Special Facilities Airport Revenue Refunding Bonds, Series
2007A
On
June 28,
2007, the City and County of Denver issued approximately $270 million of Denver
airport refunding bonds (“Series 2007A Bonds”). The Series 2007A Bonds are
unconditionally guaranteed by United. The Series 2007 A Bonds were issued in
two
tranches – approximately $170 million aggregate principal amount of 5.25%
discount bonds and $100 million aggregate principal amount of 5.75% premium
bonds. The weighted average yield to the 2032 maturity is approximately
5.47%.
The
Series 2007A Bonds were issued to refinance United’s guaranteed principal of
$261 million, plus accrued interest and new issuance costs relating to the
City
and County of Denver, Colorado Special Facilities Airport Revenue Bonds (United
Air Lines Project) Series 1992A (the “1992 Bonds”) that were issued in 1992 to
finance certain facilities at the Denver International Airport. The 1992 Bonds
were due in 2032 unless United elected not to extend its airport facility lease,
in which case they were due in 2023. The Series 2007A Bonds similarly are due
in
2032 unless United makes a similar election not to extend its lease. The
outstanding bonds and related guarantee are not recorded in the Company’s
Condensed Statements of Consolidated Financial Position at June 30,
2007 or December 31, 2006.
(12)
|
Financial
Instruments and Risk
Management
|
Instruments
designated as cash flow hedges receive favorable accounting treatment under
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (“SFAS 133”), as long as
the hedge is highly effective and the underlying transaction is probable. If
both factors are present, the effective portion of the changes in fair value
of
these contracts is recorded in accumulated other comprehensive income (loss)
until earnings are affected by the cash flows being hedged. Instruments
classified as economic hedges do not qualify for hedge accounting under SFAS
133. Under this classification all changes in the fair value of these contracts
are recorded currently in operating income, with the offset to either current
assets or liabilities each reporting period.
Aircraft
Fuel Hedges. We have a risk management strategy to hedge a portion
of our price risk related to projected jet fuel requirements primarily through
collar options. The collars involve the simultaneous purchase and sale of call
and put options with identical expiration dates.
For
the
one month period ended January 31, 2006, the Predecessor Company had no
fuel hedges in place. In the three and six month periods ended June 30, 2007
and
the five month period ended June 30, 2006, the Successor Company entered into
and settled various derivative positions that were classified as economic
hedges.
In
the
three months ended June 30, 2007 and 2006, the Company recognized a net hedge
gain (loss) of $17 million and $(2) million, respectively, on economic hedges
that were classified as Mainline fuel expense in the Condensed Statements of
Consolidated Operations (Unaudited). In the six months ended June 30, 2007
and the five months ended June 30, 2006, the Company’s Mainline fuel expense
included income of $39 million and $7 million, respectively, from net
gains on economic hedges. The net hedge gains recorded in the three and six
month periods ended June 30, 2007 included $14 million and $16 million,
respectively, of unrealized mark-to-market gains for contracts settling after
June 30, 2007.
As
of
June 30, 2007, the Company had hedged 27% of forecasted third quarter 2007
fuel
consumption primarily through heating oil three-way collars. On a
weighted-average basis, hedge protection begins if heating oil exceeds $1.96
per
gallon and is capped at $2.14 per gallon. Conversely, payment obligations
begin if heating oil, on a weighted-average basis, drops below $1.84 per
gallon. The Company also hedged 15% of forecasted fourth quarter 2007 fuel
consumption through heating oil three-way collars. Hedge protection on average
begins if heating oil exceeds $2.03 per gallon and is capped at $2.22 per
gallon. Conversely, payment obligations begin if heating oil on average drops
below $1.85 per gallon.
Interest
Rate Swap. From time to time, we may use interest rate swap
agreements to limit our exposure to interest rate movements within the
parameters of our interest rate hedging policy. In February 2006, United
entered into an interest rate swap with an initial notional amount of
$2.45 billion that would have decreased to $1.8 billion over the term
of the swap. The swap would have expired in February 2012 and required
United pay a fixed rate of 5.14% and receive a floating rate based on the
three-month LIBOR. In January 2007, as a result of management’s
reevaluation of the mix of fixed-rate and floating-rate debt in its debt
portfolio, United terminated the swap for a payment of
$4 million.
Foreign
Exchange. During the second quarter of 2007, the Company began
hedging a portion of its remaining 2007 foreign currency risk exposure using
foreign currency forward contracts. As of June 30, 2007, the Company hedged
a
portion of its expected foreign currency cash flows in the Australian dollar,
Canadian dollar, British pound, European Euro and Japanese yen. As of June
30,
2007, the notional amount of these foreign currencies hedged with the forward
contracts in U.S, dollars terms was approximately $100 million. These contracts
expire at various dates from July to November 2007. For the three and six months
ended June 30, 2007, there were no material gains or losses from these
derivative positions. As of June 30, 2007, the fair value of these contracts
was
less than $1 million.
(13)
|
Commitments,
Contingent Liabilities and
Uncertainties
|
General
Guarantees and Indemnifications. In
the normal course of business, UAL and United enter into numerous real estate
leasing and aircraft financing arrangements that have various guarantees
included in the contracts. These guarantees are primarily in the form of
indemnities. In both leasing and financing transactions, the Company typically
indemnifies the lessors, and any financing parties, against tort liabilities
that arise out of the use, occupancy, operation or maintenance of the leased
premises or financed aircraft. Currently, management believes that any future
payments required under these guarantees or indemnities would be immaterial,
as
most tort liabilities and related indemnities are covered by insurance (subject
to deductibles). Additionally, certain leased premises such as fueling stations
or storage facilities include indemnities of such parties for any environmental
liability that may arise out of or relate to the use of the leased
premises.
Bankruptcy
Matters. See
Note 2, “Voluntary Reorganization Under Chapter 11—Significant Matters Remaining
to be Resolved in Chapter 11 Cases,” for a discussion of contingencies
associated with UAL’s and United’s bankruptcy proceedings.
Legal
and Environmental Contingencies. UAL
and United have 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 the contingencies and
prior experience, that the ultimate resolution of these contingencies will
not
materially affect UAL’s or United’s consolidated financial position or results
of operations. UAL and United record liabilities for legal and environmental
claims when a loss is probable and reasonably estimable. These amounts are
recorded based on management’s assessments of the likelihood of their eventual
disposition. The amounts of these liabilities could increase or decrease in
the
near term, based on revisions to estimates relating to the various
contingencies.
We
anticipate that if ultimately found liable, our damages from claims arising
from
the events of September 11, 2001 could be significant; however, we believe
that, under the Air Transportation Safety and System Stabilization Act of 2001,
United’s liability will be limited to its insurance coverage.
Commitments. At
June 30, 2007, future commitments for the purchase of property and equipment,
principally aircraft, approximated $2.9 billion, after deducting advance
payments. The Company’s current commitments are primarily for the purchase of,
in the aggregate, 42 A319 and A320 aircraft. However, United has the right
to cancel these orders. Such action could cause the forfeiture of
$91 million of advance payments if United does not take delivery of these
aircraft. The Company’s current commitments would require the payment of an
estimated $0.4 billion in 2007, $0.2 billion for the combined years of
2008 and 2009, $0.7 billion for the combined years of 2010 and 2011 and
$1.6 billion thereafter.
Municipal
Bond Guarantees. UAL and United
have entered into long-term agreements to lease certain airport and maintenance
facilities that are financed through tax-exempt municipal bonds. These bonds
were issued by various local municipalities to build or improve airport and
maintenance facilities. Under these lease agreements, United is required to
make
rental payments in amounts sufficient to pay the maturing principal and interest
payments on the bonds. As a result of the bankruptcy proceedings, many of the
agreements were considered unsecured pre-petition debt. In 2006, as a result
of
final Bankruptcy Court decisions, certain leases were considered to be
financings resulting in United’s guarantees being discharged in bankruptcy.
United’s lease of certain facilities at the Denver International Airport was not
rejected in bankruptcy; therefore, United continued to have a guarantee under
this lease. In June 2007, United refinanced the Denver Bonds under favorable
market conditions as discussed in Note 11, “Debt Obligations.”
Tax
Contingencies. UAL and United have
recorded reserves for taxes and associated interest that may become payable
in
future years as a result of audits by tax authorities. Certain of these reserves
are for uncertain income tax positions taken on income tax returns which are
accounted for in accordance with FIN 48, effective January 1, 2007.
Contingencies for taxes which are not based on income (i.e., gross receipts,
revenues, sales taxes, etc.) are accounted for in accordance with
SFAS 5. Although management believes that the positions taken on
previously filed tax returns are reasonable, UAL and United nevertheless have
established tax and interest reserves in recognition that various taxing
authorities may challenge certain of the positions taken by the Company,
potentially resulting in additional liabilities for taxes and interest. The
Company’s tax contingency reserves are reviewed periodically and are adjusted as
events occur that affect its estimates, such as the availability of new
information, the lapsing of applicable statutes of limitations, the conclusion
of tax audits, the measurement of additional estimated liability based on
current calculations, the identification of new tax contingencies, the
release of administrative tax guidance affecting its estimates of tax
liabilities, or the rendering of relevant court decisions. See Note 7,
“Income Taxes,” for further information related to uncertain income tax
positions and the adoption of FIN 48.
(14)
|
Open
Skies Agreement
|
On
April 30, 2007, the U.S. government and the European Union (“EU”) signed a
transatlantic aviation agreement to replace the existing bilateral arrangements
between the U.S. Government and the 27 EU member states. The agreement is
expected to become effective at the end of March 2008.
The
agreement is based on the U.S. open skies model and authorizes U.S. airlines
to
operate between the United States and any point in the EU and beyond, free
from
government restrictions on capacity, frequencies and scheduling and provides
EU
carriers with reciprocal rights in these U.S./EU markets. The agreement also
authorizes all U.S. and EU carriers to operate services between the United
States and London Heathrow, thereby potentially adding new competition to
United’s Heathrow operation, although Heathrow is currently subject to both slot
and facility constraints which may practically limit the extent of new
competition in the near term. This agreement does not provide for a reallocation
of existing slots among carriers.
As
of
June 30, 2007 and December 31, 2006, United has recorded an indefinite-lived
intangible asset of $255 million for its Heathrow slots, based upon its
estimation of the fair value for those slots as of the adoption of fresh-start
reporting on February 1, 2006. United, however, determined at fresh-start that
its rights relating to its actual route authorities to Heathrow had a fair
value
of zero. The EU/U.S. open skies agreement is expected to directly impact the
future value and expected lives of route authorities to Heathrow; however,
there
is no direct impact from the open skies agreement on airport slot rights,
including those at Heathrow. The open skies agreement is also
expected to provide United an opportunity to secure antitrust immunity for
certain of its Star
Alliance®
carrier relationships, and to provide United and other carriers with access
to
new markets in EU countries. Because of the diverse nature of these potential
impacts on United’s business, the overall future impact of the agreement on
United’s business in the EU region cannot be predicted with
certainty. United has concluded that, in certain circumstances, the
open skies agreement could indirectly and adversely affect the fair value of
its
slot rights at Heathrow, and therefore has further concluded that the signing
of
the open skies agreement on April 30, 2007 constituted an indicator of
impairment with respect to United’s Heathrow slots intangible
asset.
During
the second quarter of 2007, United performed an impairment review of the
Heathrow slots intangible asset using the guidance in Statement of Financial
Accounting Standards 142, “Goodwill and Other Intangible Assets,” and
concluded that no impairment was currently indicated and that, furthermore,
no
change was currently required to the fresh-start assignment of an indefinite
life to this intangible asset. United’s initial annual impairment test for its
Heathrow slots was performed as of October 1, 2006 and no impairment was
indicated at that time.
The
implementation of the EU/U.S. open skies agreement, however, may result in
a
future determination that the Heathrow slots are impaired in whole or in part,
or in a future determination that they should be reclassified as definite-lived
intangible assets with amortization expense recognized thereon. Such future
determination could result in material charges to earnings in those future
periods.
(15)
|
Statement
of Consolidated Cash Flows—Supplemental
Disclosures
|
UAL
and
United supplemental cash flow disclosures are as follows:
|
|
Successor
|
|
|
Predecessor
|
|
|
Six Months
Ended
June 30,
|
|
Period from
February 1
to June
30,
|
|
|
Period from
January 1 to 31,
|
(In millions)
|
|
2007
|
|
2006
|
|
|
2006
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
|
$ |
329
|
|
|
$ |
311
|
|
|
|
$ |
35
|
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt incurred for additions to other assets
|
|
$ |
—
|
|
|
$ |
137
|
|
|
|
$ |
—
|
|
(16)
|
Related
Party Transactions
|
In
the
second quarter of 2007, UAL, United and Mileage Plus, Inc. (“MPI,” a wholly
owned subsidiary of United), executed a note payment agreement to pay and
thereby cancel a $200 million note payable (plus $14 million of accrued
interest) between UAL and MPI. This transaction had no effect in the UAL
consolidated financial statements and was treated as a forgiveness of debt
in
United’s financial statements, resulting in a decrease in paid in capital equal
to the total decrease in notes and interest receivable.
On
July
3, 2007, United, along with certain other major air carriers, entered into
a
stock purchase agreement related to the sale of their interests in the equity
investment, Aeronautical Radio, Inc. (“ARINC”), to Radio Acquisition Corp., an
affiliate of The Carlyle Group. ARINC is a provider of transportation
communications and systems engineering. The proposed transaction is expected
to
close prior to October 31, 2007 and generate proceeds of approximately $130
million and a net gain of more than $40 million. The closing of the transaction
is subject to the satisfaction of a number of conditions, many of which are
beyond the Company’s control, and no assurance can be given that such closing
will occur.
In
July
2007, United purchased three 747-400 aircraft that had previously been financed
by United through operating leases. The lease agreements were simultaneously
terminated upon the closing of the acquisition. United used existing cash to
acquire these aircraft. This transaction
combined with the June 2007 EETC transaction, as described in Note 11, “Debt
Obligations,” did not change the total number of encumbered
aircraft.
ITEM
2. |
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
UAL
Corporation (together with its consolidated subsidiaries, “UAL”), is a holding
company and its principal, wholly-owned subsidiary is United Air
Lines, Inc., (together with its consolidated subsidiaries, “United”). We
sometimes use the words “we,” “our,” “us,” and the “Company” in this Form 10-Q
for disclosures that relate to both UAL and United. United’s operations consist
primarily of the transportation of persons, property, and mail throughout the
U.S. and abroad. United provides these services through full-sized jet aircraft
(which we refer to as its “Mainline” operations), as well as smaller aircraft in
its regional operations conducted under contract by “United Express®”
carriers.
United
is
one of the largest passenger airlines in the world with more than 3,600 flights
a day to more than 200 destinations through its Mainline and United Express
services. United offers more than 1,550 average daily Mainline (including
Ted(SM))
departures to more than 120 destinations in 28 countries and two U.S.
territories. United provides regional service, connecting primarily via United’s
domestic hubs, through marketing relationships with United Express carriers,
which provide more than 2,050 average daily departures to approximately 160
destinations. United serves virtually every major market around the world,
either directly or through its participation in the Star Alliance®, the world’s
largest airline network.
Bankruptcy
Matters. On December 9, 2002 (the
“Petition Date”), UAL, United and 26 direct and
indirect wholly-owned
subsidiaries (collectively, the “Debtors”) filed voluntary petitions to
reorganize their businesses under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of Illinois, Eastern Division (the “Bankruptcy Court”). On January 20,
2006, the Bankruptcy Court confirmed the Debtors’ Second Amended Joint Plan of
Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code
(the “Plan of Reorganization”). The Plan of Reorganization became effective and
the Debtors emerged from bankruptcy protection on February 1, 2006 (the
“Effective Date”). On the Effective Date, UAL and United implemented fresh-start
reporting, which resulted in significant changes as compared to the historical
financial statements. See Note 2, “Voluntary Reorganization Under
Chapter 11” in Combined Notes to Condensed Consolidated Financial
Statements (Unaudited) for further information regarding bankruptcy
matters.
Recent
Developments. We believe our
restructuring has made United competitive with its network airline peers.
However, we seek to continuously improve the delivery of our products and
services to our customers, reduce our costs, and increase our revenues. Some
of
these initiatives and other 2007 developments include the
following:
|
·
|
In
June 2007, United completed the issuance of $694 million of secured
debt
financing. A portion of the proceeds from this transaction were used
to
repay certain secured notes related to a total of ten aircraft, and
to
finance three additional unencumbered aircraft. In June 2007, we
also
completed a refinancing of the original $261 million principal amount
of
City and County of Denver, Colorado Special Facilities Airport Revenue
Bonds Series 1992A with $270 million in new Series 2007A bonds. In
February 2007, United prepaid $972 million of Credit Facility
debt and amended certain terms of the Credit Facility. The Company
expects
these transactions to reduce rent expense and interest expense, net
of
interest income, by approximately $100 million in 2008. See Liquidity
and Capital Resources below and Note 11, “Debt Obligations” in
Combined Notes to Condensed Consolidated Financial Statements
(Unaudited) for further information related to these
transactions.
|
|
·
|
In
2007, UAL’s operating cash flow improved by more than 40% as compared to
the prior periods, increasing to $1.0 billion and $1.7 billion for
the
three and six months ended June 30, 2007, respectively. The improvement
in
cash flows was primarily due to improved results of operations and
certain
working capital changes, as discussed
below.
|
|
·
|
In
2006, United announced a program to reduce projected 2007 expenses
by
$400 million. United has identified some specific programs to realize
a portion of these savings, and continues to identify and evaluate
other
savings opportunities. For example, we expect to reduce costs by
approximately $200 million through savings in such areas as
telecommunications, airport services, catering, maintenance materials,
aircraft ground handling
and regional affiliates. United also expects to reduce advertising
and
marketing costs by as much as $60 million. The implementation of a
new flight planning system, and reduced block time opportunities,
are
expected to generate approximately $40 million in savings. In
addition, we estimate a $100 million reduction in general and
administrative expense, which includes a reduction of salaried and
management positions. We realized approximately $135 million of these
cost reductions in 2006 and are on track to achieve the remaining
$265 million in 2007.
|
|
·
|
We
continue to identify and implement continuous improvement programs,
and
are actively training key employees in continuous improvement strategies
and techniques. These programs include initiatives such as optimization
of
aircraft and airport facilities and selected outsourcing of activities
to
more cost-effective service providers. We expect that these programs,
as
well as the aforementioned expense reduction programs, will produce
economic benefits that will be necessary to mitigate inflationary
cost
pressures in other categories of operating expenses, such as airport
usage
fees, aircraft maintenance, and employee healthcare benefits, among
others.
|
|
·
|
United
received final U.S. Department of Transportation (“DOT”) approval for its
nonstop service between Washington Dulles International Airport (“Dulles”)
and Beijing in February of 2007. This new service commenced on
March 28, 2007. In addition, United’s new nonstop service between
Dulles and Rome commenced on April 1,
2007.
|
|
·
|
In
July 2007, the Company announced it applied to the DOT to begin
daily, nonstop service from San Francisco and Los Angeles to China
to
address the rapidly rising, unmet demand for service to China from
the
West Coast. The application requests that service from San Francisco
to
Guangzhou commences in 2008 and from Los Angeles to Shanghai in
2009.
|
|
·
|
In
reaction to a weaker domestic yield environment, United announced
plans in
May 2007 to reduce 2007 Mainline domestic capacity growth by approximately
2.0% from previously planned levels. This reduction in planned domestic
capacity growth enables the Company to meet increasing international
demand and further optimize its revenue
performance.
|
|
·
|
United
will strengthen its passenger and cargo service to the Middle East,
one of
the world’s most rapidly growing business regions, by adding more flights
between Washington, D.C. and Kuwait City and by signing a code sharing
agreement with Qatar Airways. Customer response to United’s thrice-weekly
Kuwait service has been strong, and the Company recently announced
an
increase of this service to daily frequency, effective January 2,
2008.
|
|
·
|
The
Company recently announced that it was further strengthening its
international network by launching two new non-stop flights from
the U.S.
to Asia and South America. Daily, non-stop passenger and cargo service
between Los Angeles and Hong Kong and between Washington, D.C. and
Rio de
Janeiro will begin October 2007.
|
|
·
|
In
April 2007, United announced it has signed a long-term contract with
the U.S. Postal Service (“USPS”) for the carriage of domestic mail.
The contract began in April 2007 and terminates in
September 2011. United has continued to carry international mail for
the USPS after its former domestic mail contract ended in
June 2006.
|
|
·
|
United
and Aloha Airlines (“Aloha”) announced plans to expand their existing
cooperation agreement and strengthen their partnership in the Hawaii
and
Transpacific markets. The agreement, which became effective July
3, 2007,
capitalizes on both Aloha’s and United’s 60 years of experience in serving
Hawaii and expands marketing, operational and financial opportunities
for
both carriers. Under the agreement, United receives a minority equity
stake in Aloha that could expand over time and a seat on Aloha’s board of
directors.
|
|
·
|
As
part of its International Premium Travel Experience initiative, the
Company has announced its new 180o lie-flat
international business class seat. This initiative, which also includes
a
new first class product and new décor in economy class, offers United’s
customers a premium cabin experience that surpasses its North American
competitors and rivals the major global
carriers.
|
|
·
|
The
U.S. government and the European Union (“EU”) recently signed a
transatlantic aviation agreement to replace the existing bilateral
arrangements between the U.S. Government and the 27 EU member states.
The
agreement will become effective at the end of March 2008. The future
benefits of this agreement cannot be predicted due to potential increased
competition; however, we have already taken actions to capitalize
on
opportunities under the new agreement, including United’s recent
application to complete its antitrust immunity with bmi that would
allow
the two airlines to integrate their operations at London’s Heathrow
airport.
|
Financial
Results.
UAL and United adopted fresh-start reporting in accordance with American
Institute of Certified Public Accountants’ Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy
Code (“SOP 90-7”), upon emerging from bankruptcy. Thus, the consolidated
financial statements before February 1, 2006 reflect results based upon the
historical cost basis of UAL and United while the post-emergence consolidated
financial statements reflect the new basis of accounting, which incorporates
fair value adjustments recorded from the application of SOP 90-7. Therefore,
financial statements for the post-emergence periods are not comparable to the
pre-emergence period financial statements. References to “Successor” refer to
UAL or United on or after February 1, 2006, after giving effect to the
adoption of fresh-start reporting. References to “Predecessor” refer to UAL or
United before exiting bankruptcy on February 1, 2006.
For
purposes of preparing year-over-year discussions of the results of operations,
management has compared the Successor results for the three and six month
periods ended June 30, 2007, to the combined results for the same three and
six
month periods of 2006. The 2006 combined six month period includes Predecessor
results for the one month period ended January 31, 2006. The presentation of
results for the combined six month period of 2006 are non-GAAP measures.
However, management believes that analysis and explanation of the combined
six
month period of 2006 provides management and other users a useful basis of
comparison to the six months ended June 30, 2007.
The
air
travel business is subject to seasonal fluctuations and, historically, the
Company’s results of operations are better in the second and third quarters as
compared to the first and fourth quarters of each year, since our first and
fourth quarter results normally reflect weaker travel demand. The Company’s
results of operations can be impacted by adverse weather, air traffic control
delays and other factors in any period.
The
table
below presents certain financial statement items to provide an overview of
UAL’s
and United’s financial performance in the three and six month periods ended June
30, 2007 as compared to the same periods in 2006:
|
|
Successor
|
|
|
Combined
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Six
Months
|
|
|
Six
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
Three
Months
|
|
|
Ended
|
|
|
Ended
|
|
|
February
1 to
|
|
|
January
1 to
|
|
|
|
Ended
June 30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
January
31,
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
(a)
|
|
|
2006
|
|
|
2006
|
|
UAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before reorganization items, income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
and equity in earnings of affiliates
|
|
$ |
465
|
|
|
$ |
116
|
|
|
$ |
228
|
|
|
$ |
(195 |
) |
|
$ |
(107 |
) |
|
$ |
(88 |
) |
Reorganization
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,934
|
|
|
|
-
|
|
|
|
22,934
|
|
Income
tax expense
|
|
|
(192 |
) |
|
|
-
|
|
|
|
(108 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equity
in earnings of affiliates
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
|
|
8
|
|
|
|
3
|
|
|
|
5
|
|
UAL
net income (loss)
|
|
$ |
274
|
|
|
$ |
119
|
|
|
$ |
122
|
|
|
$ |
22,747
|
|
|
$ |
(104 |
) |
|
$ |
22,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
net income (loss)
|
|
$ |
278
|
|
|
$ |
111
|
|
|
$ |
130
|
|
|
$ |
22,522
|
|
|
$ |
(104 |
) |
|
$ |
22,626
|
|
____________________
|
(a)
|
The
combined period includes the results for the one month period ended
January 31, 2006 (Predecessor) and the five month period ended
June 30, 2006 (Successor).
|
In
the
three and six month periods ended June 30, 2007, UAL’s income before
reorganization items, income taxes and equity in earnings of affiliates improved
by $349 million and $423 million, respectively, as compared to the same
periods in 2006. The following items highlight some of the more significant
variances in the 2007 period as compared to the 2006 period. For a more detailed
discussion of these items and additional factors impacting our financial
performance see Results of Operations, below.
|
·
|
Passenger
revenues increased by $205 million and $219 million in the three
and six
month periods ended June 30, 2007, respectively, as compared to the
prior
periods due to increases in both traffic and
yield.
|
|
·
|
In
the first quarter of 2007, the Company reduced its accrual for bankruptcy
litigation associated with potential security interests in its San
Francisco International Airport (“SFO”) and Los Angeles International
Airport (“LAX”) facility leases by a total of $22 million based on an
updated analysis of its potential obligations. This benefit to income
is
classified as a special item in the Condensed Statements of
Consolidated Operations
(Unaudited).
|
|
·
|
In
the three and six month periods ended June 30, 2007, UAL recognized
income
tax expense of $192 million and $108 million, respectively. Income
tax expense was not recorded in the prior
periods.
|
|
·
|
UAL
interest expense, net of interest income, decreased by more than
$60
million in both 2007 periods as compared to the year-ago periods
primarily
due to the prepayment and amendment of the Credit Facility in February
2007 as discussed below.
|
United
The
improvement in United’s results was largely consistent with that of UAL. The
primary difference between United’s and UAL’s net income for the combined six
months of 2006 was a $225 million variance in reorganization income that was
primarily due to $239 million of additional UAL income from the discharge of
certain claims and liabilities that existed at UAL, but not at
United.
Liquidity. Despite
the $972 million debt prepayment of the Credit Facility in the first
quarter of 2007, as of June 30, 2007, UAL had total cash, including restricted
cash and short-term investments, of $5.1 billion, of which $5.0 billion was
held by United. This strong cash position resulted from the Company’s
recapitalization upon emerging from bankruptcy and strong operating cash flows
since emerging from bankruptcy. UAL and United generated cash flow from
operations of $1,660 million and $1,649 million, respectively, during the
six month period ended June 30, 2007, as compared to operating cash flow of
$1,138 million and $1,159 million, respectively, in the combined six month
period of 2006. See Liquidity and Capital Resources, below, for further
information.
Capital
Commitments. As of June 30, 2007, the
Company’s future commitments for the purchase of property and equipment,
principally aircraft, approximated $2.9 billion, after deducting advance
payments. Our current commitments are primarily for the purchase of A319 and
A320 aircraft. United has the right to cancel these orders. Such action could
cause the forfeiture of $91 million of advance payments if United does not
take future delivery of these aircraft. For further details, see Note 13,
“Commitments, Contingent Liabilities and Uncertainties” in Combined Notes to
Condensed Consolidated Financial Statements (Unaudited).
Contingencies. During
the course of the Company’s Chapter 11 proceedings, we successfully reached
settlements with most of our creditors and resolved most pending claims against
the Debtors. The following discussion provides an overview of the status of
unresolved bankruptcy matters as well as other contingencies. For further
details on these matters, see Note 2, “Voluntary Reorganization Under
Chapter 11—Bankruptcy Considerations” and Note 13, “Commitments,
Contingent Liabilities and Uncertainties” in Combined Notes to Condensed
Consolidated Financial Statements (Unaudited).
Municipal
Bond Obligations & Off-Balance Sheet Financing. We are a party to
numerous long-term agreements to lease certain airport and maintenance
facilities that are financed through tax-exempt municipal bonds issued by
various local municipalities to build or improve airport and maintenance
facilities. United had been advised that these municipal bonds may have been
unsecured (or in certain instances, partially secured) pre-petition debt. In
2006,
certain of United’s municipal bond obligations relating to LAX and SFO were
conclusively adjudicated through the Bankruptcy Court as financings and not
true
leases; however, there remains pending litigation to determine the value of
the
security interests, if any, that the bondholders at LAX and SFO have in our
underlying leaseholds.
United
has guaranteed $270 million of the City and County of Denver, Colorado
Special Facilities Airport Revenue Bonds (United Air Lines Project)
Series 2007A (the “Denver Bonds”). This guarantee replaces our prior
guarantee of $261 million of bonds issued by the City and County of Denver,
Colorado in 1992. These bonds are callable by United. The outstanding bonds
and
related guarantee are not recorded in the Company’s Condensed Statements of
Consolidated Financial Position (Unaudited).
Legal
and Environmental. 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 UAL and United are subject and prior experience,
that
the ultimate disposition of these contingencies will not materially affect
UAL’s
or United’s consolidated financial position or results of operations. When
appropriate, United accrues for these matters based on its assessments of the
likely outcomes of their eventual disposition. The amounts of these liabilities
could increase or decrease in the near term, based on revisions to estimates
relating to the various claims.
New
regulations surrounding the emission of greenhouse gases (such as carbon
dioxide) are being considered for promulgation both internationally and within
the United States. We will be carefully evaluating the potential impact of
such
proposed regulations.
We
anticipate that if ultimately found liable, our damages from claims arising
from
the events of September 11, 2001, could be significant; however, we believe
that, under the Air Transportation Safety and System Stabilization Act of 2001,
our liability will be limited to its insurance coverage.
Second
Quarter 2007 Compared to Second Quarter 2006
United’s
operating revenues and operating expenses comprise nearly 100% of UAL’s revenues
and operating expenses. Therefore, the following qualitative discussion is
applicable to both UAL and United, unless otherwise noted. Any significant
differences between UAL and United results are separately disclosed and
explained.
UAL’s
income from operations of $537 million in the three months ended June 30,
2007 improved by $277 million as compared to the operating income of
$260 million in the year-ago period. UAL’s net income improved by $155
million to $274 million in the three month period ended June 30, 2007 as
compared to net income of $119 million in the year-ago period. United had
similar improvements in its results of operations with operating income and
net
income improving by $279 million and $167 million, respectively, in these same
periods. The improvement in our results of operations was due to improved
revenue performance, cost control initiatives, debt repayment and restructuring,
and other factors discussed below. Net income was impacted in the 2007 periods
as compared to the 2006 periods due to recording of income tax expense in the
2007 periods. We did not record any income tax expense in the comparable 2006
periods.
See
Note 2, “Voluntary Reorganization Under Chapter 11—Reorganization
items” in Combined Notes to Condensed Consolidated Financial Statements
(Unaudited) for further information on reorganization items.
Operating
Revenues. The following table illustrates the year-over-year
percentage change in UAL and United operating revenues:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
$
|
|
|
%
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
UAL:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
3,968
|
|
|
$ |
3,806
|
|
|
$ |
162
|
|
|
|
4
|
|
Passenger - Regional Affiliates
|
|
|
804
|
|
|
|
761
|
|
|
|
43
|
|
|
|
6
|
|
Cargo
|
|
|
181
|
|
|
|
194
|
|
|
|
(13 |
) |
|
|
(7 |
) |
Other operating revenues
|
|
|
260
|
|
|
|
352
|
|
|
|
(92 |
) |
|
|
(26 |
) |
|
|
$ |
5,213
|
|
|
$ |
5,113
|
|
|
$ |
100
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
3,968
|
|
|
$ |
3,806
|
|
|
$ |
162
|
|
|
|
4
|
|
Passenger
- Regional Affiliates
|
|
|
804
|
|
|
|
761
|
|
|
|
43
|
|
|
|
6
|
|
Cargo
|
|
|
181
|
|
|
|
194
|
|
|
|
(13 |
) |
|
|
(7 |
) |
Other
operating revenues
|
|
|
263
|
|
|
|
350
|
|
|
|
(87 |
) |
|
|
(25 |
) |
|
|
$ |
5,216
|
|
|
$ |
5,111
|
|
|
$ |
105
|
|
|
|
2
|
|
The
table
below presents selected UAL and United passenger revenues and operating data
from our Mainline segment, broken out by geographic region, and from our United
Express segment, expressed as second quarter period-to-period
changes:
2007
|
|
North
America
|
|
|
Pacific
|
|
Atlantic
|
|
Latin
|
|
Mainline
|
|
United
Express
|
|
Consolidated
|
Increase
(decrease) from 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenues (in millions)
|
$ |
(52
|
) |
|
$ |
89
|
|
|
$ |
130
|
|
|
$ |
(5
|
) |
|
$ |
162
|
|
|
$ |
43
|
|
|
$ |
205
|
|
|
Passenger
revenues
|
|
(2.1
|
)
|
% |
|
12.2
|
|
%
|
|
25.5
|
|
%
|
|
(3.3
|
) |
%
|
|
4.3
|
|
%
|
|
5.7
|
|
%
|
|
4.5
|
|
%
|
Available
seat miles (ASMs)
|
|
(3.3
|
)
|
% |
|
0.8
|
|
%
|
|
9.8
|
|
%
|
|
(9.5
|
) |
%
|
|
(0.9
|
) |
%
|
|
7.4
|
|
%
|
|
(0.1
|
) |
%
|
Revenue
passenger miles (RPMs)
|
|
(0.3
|
)
|
% |
|
(1.1
|
) |
%
|
|
9.1
|
|
%
|
|
(13.8
|
) |
%
|
|
0.3
|
|
%
|
|
7.2
|
|
%
|
|
0.9
|
|
%
|
Load
factor (points)
|
|
2.6
|
|
pts. |
|
(1.6
|
) |
pts.
|
|
(0.6
|
) |
pts.
|
|
(4.0
|
) |
pts.
|
|
1.0
|
|
pts.
|
|
(0.2
|
) |
pts.
|
|
0.8
|
|
pts.
|
Yield
(a)
|
|
(1.7
|
)
|
% |
|
13.4
|
|
%
|
|
14.9
|
|
%
|
|
14.0
|
|
%
|
|
4.0
|
|
%
|
|
(1.4
|
) |
%
|
|
3.6
|
|
%
|
____________________
|
(a)
|
Yield
is a measure of average price paid per passenger mile, which is calculated
by dividing passenger revenues by RPMs. Yields for geographic regions
exclude charter revenue and RPMs.
|
Mainline
and United Express passenger revenues increased $162 million and
$43 million, respectively, in the 2007 period as compared to the same
period in 2006. In the second quarter of 2007, Mainline revenues benefited
from
a 1.0 point increase in load factor and a 4.0% increase in yield as compared
to
the second quarter of 2006. In the same periods, United Express load factor
decreased by 0.2 point and yield decreased 1.4%; however, revenues still
increased due to the 7.2% increase in traffic. Revenues for both segments
benefited from increased Mileage Plus revenue of approximately $27 million
and
$6 million for Mainline and United Express, respectively, in the 2007 period
as
compared to 2006. A change in the Mileage Plus expiration period policy from
36
months to 18 months provided a benefit of $47 million in the second quarter
of
2007, as discussed in Critical Accounting Policies, below. Mileage Plus
customer accounts are deactivated after 18 months of inactivity, effective
December 31, 2007. We estimate the number of accounts that will eventually
become deactivated and ratably reduce the deferred revenue balance for estimated
deactivated accounts over the expiration period.
UAL
cargo
revenues decreased by approximately $13 million, or 7%, in the three month
period ended June 30, 2007 as compared to the same period in 2006. Decreased
traffic and yield for the Pacific region contributed to the decrease in cargo
revenues. The traffic and yield decreases were due to increased competition
in
the region, primarily from capacity added by foreign carriers. The
termination of our former contract to carry U.S. domestic mail for the USPS
as
of June 30, 2006 also contributed to the decrease in cargo
revenues. However, since this contract termination we have continued
to carry international mail for the USPS, and recently entered into a new
contract to carry domestic mail, as discussed above.
UAL
other
operating revenues decreased by $92 million, or 26%, in the three month
period ended June 30, 2007 as compared to the same period in 2006. Lower jet
fuel sales to third parties by our subsidiary, United Aviation Fuel Corporation
(“UAFC”) accounted for $91 million of the other revenue decrease. This
decrease was due to several factors, including decreased UAFC sales to our
regional affiliates; decreased sales due to our decision not to renew various
supply agreements to other carriers; and, decreased sales of excess inventory.
The decrease in UAFC sales had virtually no impact on our operating margin,
because UAFC cost of sales decreased by $90 million in the three months
ended June 30, 2007 as compared to the year-ago period.
Operating
Expenses. The table below includes the year-over-year dollar and
percentage changes in UAL and United operating expenses. Significant
fluctuations are discussed below.
|
|
Three
Months
|
|
|
|
|
|
|
|
|
|
Ended
June 30,
|
|
|
$
|
|
|
%
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
UAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$ |
1,206
|
|
|
$ |
1,250
|
|
|
$ |
(44 |
) |
|
|
(4 |
) |
Salaries
and related costs
|
|
|
1,019
|
|
|
|
1,071
|
|
|
|
(52 |
) |
|
|
(5 |
) |
Regional
affiliates
|
|
|
733
|
|
|
|
715
|
|
|
|
18
|
|
|
|
3
|
|
Purchased
services
|
|
|
335
|
|
|
|
321
|
|
|
|
14
|
|
|
|
4
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
284
|
|
|
|
257
|
|
|
|
27
|
|
|
|
11
|
|
Depreciation
and amortization
|
|
|
229
|
|
|
|
218
|
|
|
|
11
|
|
|
|
5
|
|
Landing
fees and other rent
|
|
|
215
|
|
|
|
225
|
|
|
|
(10 |
) |
|
|
(4 |
) |
Distribution
expenses
|
|
|
197
|
|
|
|
208
|
|
|
|
(11 |
) |
|
|
(5 |
) |
Aircraft
rent
|
|
|
105
|
|
|
|
109
|
|
|
|
(4 |
) |
|
|
(4 |
) |
Cost
of third party sales
|
|
|
77
|
|
|
|
190
|
|
|
|
(113 |
) |
|
|
(59 |
) |
Other
operating expenses
|
|
|
276
|
|
|
|
289
|
|
|
|
(13 |
) |
|
|
(4 |
) |
|
|
$ |
4,676
|
|
|
$ |
4,853
|
|
|
$ |
(177 |
) |
|
|
(4 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$ |
1,206
|
|
|
$ |
1,250
|
|
|
$ |
(44 |
) |
|
|
(4 |
) |
Salaries
and related costs
|
|
|
1,018
|
|
|
|
1,070
|
|
|
|
(52 |
) |
|
|
(5 |
) |
Regional
affiliates
|
|
|
733
|
|
|
|
715
|
|
|
|
18
|
|
|
|
3
|
|
Purchased
services
|
|
|
335
|
|
|
|
321
|
|
|
|
14
|
|
|
|
4
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
284
|
|
|
|
257
|
|
|
|
27
|
|
|
|
11
|
|
Depreciation
and amortization
|
|
|
229
|
|
|
|
218
|
|
|
|
11
|
|
|
|
5
|
|
Landing
fees and other rent
|
|
|
215
|
|
|
|
226
|
|
|
|
(11 |
) |
|
|
(5 |
) |
Distribution
expenses
|
|
|
197
|
|
|
|
208
|
|
|
|
(11 |
) |
|
|
(5 |
) |
Aircraft
rent
|
|
|
105
|
|
|
|
110
|
|
|
|
(5 |
) |
|
|
(5 |
) |
Cost
of third party sales
|
|
|
76
|
|
|
|
188
|
|
|
|
(112 |
) |
|
|
(60 |
) |
Other
operating expenses
|
|
|
276
|
|
|
|
285
|
|
|
|
(9 |
) |
|
|
(3 |
) |
|
|
$ |
4,674
|
|
|
$ |
4,848
|
|
|
$ |
(174 |
) |
|
|
(4 |
) |
As
discussed in Note 1, “Basis of Presentation” in Combined Notes to
Condensed Consolidated Financial Statements (Unaudited), distribution
expenses include commissions, global distribution systems (“GDS”) and credit
card transaction fees. Prior period information has been reclassified to conform
to the current period presentation. Previously, GDS and credit card transaction
fees were classified as components of purchased services and commissions
were reported as a separate expense item in the UAL and United quarterly reports
on Form 10-Q for the quarterly period ended June 30, 2006.
Aircraft
fuel decreased $44 million, or 4%, in the three month period ended June 30,
2007 as compared to the same period in 2006. This net fuel variance was due
to a
4% decrease in the average price per gallon of jet fuel from $2.16 per gallon
in
the second quarter of 2006 to $2.08 per gallon in the second quarter of 2007.
This resulted from favorable market conditions and from a $19 million
increase in net hedge gains of $17 million in the 2007 period, as compared
to a net hedge loss of $2 million in the 2006 period.
UAL
salaries and related costs decreased $52 million, or 5%, in the second
quarter of 2007 as compared to the year-ago period. This variance was largely
due to a reduction in share-based compensation expense, which was
$40 million in the 2006 period, but only $11 million in the 2007
period. Less compensation expense was recognized in the 2007 period, as compared
to the prior period, for awards that were granted in
2006. Share-based compensation expense was lower in the second
quarter of 2007 as compared to the 2006 quarter due to the large number of
grants made in early 2006 in connection with the Company’s emergence from
bankruptcy. Also benefiting salaries and related costs in the 2007 period as
compared to the same period in 2006 was the absence of the $22 million severance
charge incurred during the second quarter of 2006.
Regional
affiliate expense increased $18 million, or 3%, during the second quarter
of 2007 as compared to the same period last year. Regional affiliate expense
increased primarily due to an increase in capacity, which increased 7% in the
second quarter of 2007 as compared to the prior period. Our regional affiliate
operating margin was $71 million in the 2007 period as compared to
$46 million in the 2006 period. This improvement is due to the
restructuring of lower-cost regional carrier capacity agreements, the
replacement of some 50-seat regional jets with 70-seat regional jets and
regional carrier network optimization. All of these improvements were put in
place throughout 2006; however, we are still realizing some year-over-year
benefits in 2007. The average price of regional affiliates fuel decreased by
2%;
however, consumption increased 4% resulting in a $5 million increase in
fuel costs during the 2007 period as compared to the 2006 period; such fuel
costs are classified as Regional affiliate expense.
For
the
three months ended June 30, 2007, aircraft maintenance materials and outside
repairs expense increased $27 million, or 11%, year-over-year primarily due
to inflationary increases related to our V2500 engine maintenance contract
and
the cost of component parts.
UAL
landing fees and other rent decreased $10 million, or 4%, in the second
quarter of 2007 as compared to the year-ago period due to a reduction in the
amount of facilities rented based upon our ongoing efforts to optimize our
rented facilities with our operational needs.
UAL
distribution expenses, which include commissions, GDS fees and credit card
fees
decreased 5% from the 2006 period to $197 million for the quarter ended
June 30, 2007. This decrease was due to cost savings realized as the
Company continues to drive reductions across the full spectrum of costs of
sale.
Impact areas included renegotiation of contracts with various channel providers,
rationalization of commission plans and programs, and continued emphasis on
movement of volumes toward lower cost channels including online
channels.
The
decrease in UAL cost of sales of $113 million in the 2007 period as
compared to the 2006 period was primarily due to lower UAFC third party fuel
sales and third-party maintenance work as described in the discussion of revenue
variances above. The decrease in cost of sales is consistent with the
$92 million decrease in UAL other revenues for the same
periods.
Other
income (expense). The following table illustrates the year-over-year dollar
and percentage changes in UAL and United other income (expense).
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Favorable/
|
|
|
%
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
Change
|
|
UAL
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(139 |
) |
|
$ |
(211 |
) |
|
$ |
72
|
|
|
|
34
|
|
Interest
income
|
|
|
62
|
|
|
|
67
|
|
|
|
(5 |
) |
|
|
(7 |
) |
Interest
capitalized
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
Miscellaneous,
net
|
|
|
1
|
|
|
|
(4 |
) |
|
|
5
|
|
|
|
-
|
|
|
|
$ |
(72 |
) |
|
$ |
(144 |
) |
|
$ |
72
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(139 |
) |
|
$ |
(222 |
) |
|
$ |
83
|
|
|
|
37
|
|
Interest
income
|
|
|
64
|
|
|
|
65
|
|
|
|
(1 |
) |
|
|
(2 |
) |
Interest
capitalized
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
Miscellaneous,
net
|
|
|
-
|
|
|
|
(2 |
) |
|
|
2
|
|
|
|
-
|
|
|
|
$ |
(71 |
) |
|
$ |
(155 |
) |
|
$ |
84
|
|
|
|
54
|
|
UAL
interest expense decreased $72 million, or 34%, in the quarter ended June
30, 2007 as compared to the year-ago period. The 2007 period was favorably
impacted by the prepayment and amendment of the Credit Facility, which lowered
United’s interest rate on these obligations and decreased outstanding debt by
$972 million. Repayments of scheduled debt obligations in the second half of
2006 and in 2007 also reduced interest expense in the 2007 period as compared
to
the 2006 period. The refinancing of certain aircraft in 2007 provided an
additional benefit of $22 million to interest expense due to the recognition
of
a gain on the extinguishment of certain aircraft mortgages. See Liquidity
and Capital Resources below, for further details related to this
transaction.
Income
Taxes. UAL and United recorded income tax expense for the second
quarter ended June 30, 2007 based on an estimated effective tax rate of 41%.
Income tax expense was not recorded in the same period of 2006. See Note 7,
“Income Taxes” in Combined Notes to Condensed Consolidated Financial
Statements (Unaudited), for factors impacting the effective tax rate
recorded in the 2007 period.
First
Six Months of 2007 Compared to First Six Months of 2006
UAL’s
earnings from operations of $445 million in the six months ended June 30,
2007 improved by $356 million as compared to earnings from operations of
$89 million in the combined six months ended June 30, 2006. UAL’s net
income was $122 million in the six month period ended June 30, 2007 as
compared to net income of $22.7 billion in the combined six month period
ended June 30, 2006. The most significant variance is reorganization
income of $22.9 billion that was recorded in the 2006 period. Except for
reorganization items, earnings improved in 2007 due to the items discussed
in
the second quarter Results of Operations, above, and additional factors
discussed below.
United’s
improvement in earnings from operations of $360 million was consistent with
UAL’s results. United’s net income was $130 million in the six month period
ended June 30, 2007 as compared to net income of $22.5 billion in the
combined six month period ended June 30, 2006, with the difference in net income
primarily due to reorganization income that was recorded in the 2006
period.
See
Note 2, “Voluntary Reorganization Under Chapter 11—Reorganization
items” in Combined Notes to Condensed Consolidated Financial Statements
(Unaudited) for further information on reorganization items.
OperatingRevenues.
The following table illustrates the year-over-year
percentage change in UAL and United operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Six
|
|
|
Six
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
January
1 to
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
|
January
31,
|
|
|
$
|
|
%
|
(In
millions)
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
Change
|
|
Change
|
UAL:
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
7,232
|
|
|
$ |
7,062
|
|
|
$ |
5,988
|
|
|
$ |
1,074
|
|
|
$ |
170
|
|
2
|
|
Passenger
- Regional
Affiliates
|
|
|
1,479
|
|
|
|
1,430
|
|
|
|
1,226
|
|
|
|
204
|
|
|
|
49
|
|
3
|
|
Cargo
|
|
|
349
|
|
|
|
374
|
|
|
|
318
|
|
|
|
56
|
|
|
|
(25 |
) |
(7 |
) |
Other
operating revenues
|
|
|
526
|
|
|
|
712
|
|
|
|
588
|
|
|
|
124
|
|
|
|
(186 |
) |
(26 |
) |
|
|
$ |
9,586
|
|
|
$ |
9,578
|
|
|
$ |
8,120
|
|
|
$ |
1,458
|
|
|
$ |
8
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
7,232
|
|
|
$ |
7,062
|
|
|
$ |
5,988
|
|
|
$ |
1,074
|
|
|
$ |
170
|
|
2
|
|
Passenger
- Regional
Affiliates
|
|
|
1,479
|
|
|
|
1,430
|
|
|
|
1,226
|
|
|
|
204
|
|
|
|
49
|
|
3
|
|
Cargo
|
|
|
349
|
|
|
|
374
|
|
|
|
318
|
|
|
|
56
|
|
|
|
(25 |
) |
(7 |
) |
Other
operating revenues
|
|
|
533
|
|
|
|
705
|
|
|
|
585
|
|
|
|
120
|
|
|
|
(172 |
) |
(24 |
) |
|
|
$ |
9,593
|
|
|
$ |
9,571
|
|
|
$ |
8,117
|
|
|
$ |
1,454
|
|
|
$ |
22
|
|
-
|
|
______________________
|
(a)
|
The
combined period includes the results for the one month period ended
January 31, 2006 (Predecessor) and the five month period ended
June 30, 2006 (Successor).
|
The
table
below presents selected UAL and United passenger revenues and operating data
from our Mainline segment, broken out by geographic region, and from our United
Express segment, expressed as period-to-period changes:
2007
|
|
North
America
|
|
Pacific
|
|
Atlantic
|
|
Latin
|
|
Mainline
|
|
United
Express
|
|
Consolidated
|
Increase
(decrease) from 2006: (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenues (in millions)
|
$ |
(137
|
) |
|
$ |
121
|
|
|
$ |
192
|
|
|
$ |
(6
|
) |
|
$ |
170
|
|
|
$ |
49
|
|
|
$ |
219
|
|
|
Passenger
revenues
|
|
(3.0
|
) |
%
|
|
8.7
|
|
%
|
|
21.3
|
|
%
|
|
(2.1
|
) |
%
|
|
2.4
|
|
%
|
|
3.4
|
|
%
|
|
2.6
|
|
%
|
Available
seat miles (ASMs)
|
|
(1.7
|
) |
%
|
|
0.8
|
|
%
|
|
7.9
|
|
%
|
|
(12.5
|
) |
%
|
|
(0.4
|
) |
%
|
|
6.3
|
|
%
|
|
0.3
|
|
%
|
Revenue
passenger miles (RPMs)
|
|
0.1
|
|
%
|
|
-
|
|
%
|
|
8.3
|
|
%
|
|
(12.5
|
) |
%
|
|
0.6
|
|
%
|
|
6.3
|
|
%
|
|
1.1
|
|
%
|
Load
factor (points)
|
|
1.5
|
|
pts.
|
|
(0.7
|
) |
pts.
|
|
0.4
|
|
pts.
|
|
-
|
|
pts.
|
|
0.8
|
|
pts.
|
|
-
|
|
pts.
|
|
0.7
|
|
pts.
|
Yield
(b)
|
|
(3.1
|
) |
%
|
|
8.9
|
|
%
|
|
12.2
|
|
%
|
|
11.8
|
|
%
|
|
1.8
|
|
%
|
|
(2.8
|
) |
%
|
|
1.4
|
|
%
|
_________________________
|
(a)
|
Variances
are from the combined 2006 period that includes the results for the
one
month period ended January 31, 2006 (Predecessor) and the five month
period ended June 30, 2006
(Successor).
|
|
(b)
|
Yield
is a measure of average price paid per passenger mile, which is calculated
by dividing passenger revenues by RPMs. Yields for geographic regions
exclude charter revenue and RPMs.
|
Mainline
and United Express passenger revenues increased by $170 million and
$49 million, respectively, in the 2007 period as compared to the same
period in 2006. In the first six months of 2007, Mainline revenues benefited
from a 0.8 point increase in load factor and a 1.8% increase in yield as
compared to the first six months of 2006. In the same periods, United Express
load factor was flat and yield decreased 2.8%. However, United Express traffic
increased 6.3%, which was the primary driver of the increase in revenue.
Revenues and yields for both segments were negatively impacted by the accounting
for deferred revenue under our Mileage Plus program and to a lesser extent,
severe storms in first quarter of 2007 that decreased total passenger revenue
by
an estimated $32 million. Mileage Plus revenue was approximately
$60 million lower in the 2007 period due to an increase in outstanding
mileage credits due to various promotional programs and one additional month
of
the application of the deferred revenue model of accounting for Mileage Plus
in
2007, as this accounting policy was initially applied as of February 1,
2006. Partially offsetting these negative Mileage Plus impacts was a benefit
due
to a change in the Mileage Plus expiration period policy from 36 months to
18
months as discussed in Critical Accounting Policies, below. Mileage
Plus customer accounts are deactivated after 18 months of inactivity, effective
December 31, 2007. We estimate the number of accounts that will eventually
become deactivated and ratably reduces the deferred revenue balance for
estimated deactivated accounts over the expiration period.
Cargo
revenues decreased by $25 million, or 7%, in the six month period ended June
30,
2007 as compared to the same period in 2006. This decrease was partly due to
the
termination of our former contract to carry U.S. domestic mail for the USPS
as
of June 30, 2006. However, since this contract termination we have
continued to carry international mail for the USPS, and recently entered into
a
new contract to carry domestic mail as discussed above. Decreased traffic and
yield for the Pacific region also contributed to the decrease in cargo revenues.
The traffic and yield decreases were due to increased competition in the region,
primarily from capacity added by foreign carriers.
UAL
other
operating revenues decreased by $186 million, or 26%, in the six month
period ended June 30, 2007 as compared to the same period in 2006. Lower jet
fuel sales to third parties by UAFC accounted for $172 million of the other
revenue decrease, which was due to the factors described in the second quarter
Results of Operations above, and had no material impact on the
Company’s operating margin, because UAFC cost of sales decreased by
$172 million in the first six months of 2007 as compared to the year-ago
period.
Operating
Expenses. The table below includes the year-over-year dollar
and percentage changes in UAL and United operating expenses. Significant
fluctuations are discussed below.
|
|
Successor
|
|
|
Combined
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Six
Months
|
|
|
Six
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
February
1 to
|
|
|
January
1 to
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
January
31,
|
|
|
$
|
|
|
|
|
(In
millions)
|
|
2007
|
|
|
2006
(a)
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
UAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$ |
2,247
|
|
|
$ |
2,317
|
|
|
$ |
1,955
|
|
|
$ |
362
|
|
|
$ |
(70 |
) |
|
|
(3 |
) |
Salaries
and related costs
|
|
|
2,087
|
|
|
|
2,155
|
|
|
|
1,797
|
|
|
|
358
|
|
|
|
(68 |
) |
|
|
(3 |
) |
Regional
affiliates
|
|
|
1,425
|
|
|
|
1,411
|
|
|
|
1,183
|
|
|
|
228
|
|
|
|
14
|
|
|
|
1
|
|
Purchased
services
|
|
|
636
|
|
|
|
625
|
|
|
|
527
|
|
|
|
98
|
|
|
|
11
|
|
|
|
2
|
|
Aircraft
maintenance materials and outside
repairs
|
|
|
565
|
|
|
|
516
|
|
|
|
436
|
|
|
|
80
|
|
|
|
49
|
|
|
|
9
|
|
Landing
fees and other rent
|
|
|
453
|
|
|
|
445
|
|
|
|
370
|
|
|
|
75
|
|
|
|
8
|
|
|
|
2
|
|
Depreciation
and amortization
|
|
|
449
|
|
|
|
434
|
|
|
|
366
|
|
|
|
68
|
|
|
|
15
|
|
|
|
3
|
|
Distribution
expenses
|
|
|
385
|
|
|
|
409
|
|
|
|
349
|
|
|
|
60
|
|
|
|
(24 |
) |
|
|
(6 |
) |
Aircraft
rent
|
|
|
205
|
|
|
|
214
|
|
|
|
184
|
|
|
|
30
|
|
|
|
(9 |
) |
|
|
(4 |
) |
Cost
of third party sales
|
|
|
170
|
|
|
|
383
|
|
|
|
318
|
|
|
|
65
|
|
|
|
(213 |
) |
|
|
(56 |
) |
Special
operating items
|
|
|
(22 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22 |
) |
|
|
-
|
|
Other
operating expenses
|
|
|
541
|
|
|
|
580
|
|
|
|
494
|
|
|
|
86
|
|
|
|
(39 |
) |
|
|
(7 |
) |
|
|
$ |
9,141
|
|
|
$ |
9,489
|
|
|
$ |
7,979
|
|
|
$ |
1,510
|
|
|
$ |
(348 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$ |
2,247
|
|
|
$ |
2,317
|
|
|
$ |
1,955
|
|
|
$ |
362
|
|
|
$ |
(70 |
) |
|
|
(3 |
) |
Salaries
and related costs
|
|
|
2,086
|
|
|
|
2,153
|
|
|
|
1,795
|
|
|
|
358
|
|
|
|
(67 |
) |
|
|
(3 |
) |
Regional
affiliates
|
|
|
1,425
|
|
|
|
1,411
|
|
|
|
1,183
|
|
|
|
228
|
|
|
|
14
|
|
|
|
1
|
|
Purchased
services
|
|
|
636
|
|
|
|
624
|
|
|
|
527
|
|
|
|
97
|
|
|
|
12
|
|
|
|
2
|
|
Aircraft
maintenance materials and outside
repairs
|
|
|
565
|
|
|
|
516
|
|
|
|
436
|
|
|
|
80
|
|
|
|
49
|
|
|
|
9
|
|
Landing
fees and other rent
|
|
|
453
|
|
|
|
445
|
|
|
|
370
|
|
|
|
75
|
|
|
|
8
|
|
|
|
2
|
|
Depreciation
and amortization
|
|
|
449
|
|
|
|
434
|
|
|
|
366
|
|
|
|
68
|
|
|
|
15
|
|
|
|
3
|
|
Distribution
expenses
|
|
|
385
|
|
|
|
409
|
|
|
|
349
|
|
|
|
60
|
|
|
|
(24 |
) |
|
|
(6 |
) |
Aircraft
rent
|
|
|
206
|
|
|
|
215
|
|
|
|
185
|
|
|
|
30
|
|
|
|
(9 |
) |
|
|
(4 |
) |
Cost
of third party sales
|
|
|
168
|
|
|
|
377
|
|
|
|
314
|
|
|
|
63
|
|
|
|
(209 |
) |
|
|
(55 |
) |
Special
operating items
|
|
|
(22 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22 |
) |
|
|
-
|
|
Other
operating expenses
|
|
|
540
|
|
|
|
575
|
|
|
|
490
|
|
|
|
85
|
|
|
|
(35 |
) |
|
|
(6 |
) |
|
|
$ |
9,138
|
|
|
$ |
9,476
|
|
|
$ |
7,970
|
|
|
$ |
1,506
|
|
|
$ |
(338 |
) |
|
|
(4 |
) |
____________________
|
(a)
|
The
combined period includes the results for the one month ended
January 31, 2006 (Predecessor) and the five months ended June
30, 2006 (Successor).
|
Aircraft
fuel decreased $70 million, or 3%, in the six month period ended June 30,
2007 as compared to the same period in 2006. This net fuel variance was due
to a
3% decrease in the average price per gallon of jet fuel from $2.06 per gallon
in
the first six months of 2006 to $1.99 per gallon in the first six months of
2007, resulting from favorable market conditions, and a $32 million
increase in net hedge gains that were $39 million in the 2007 period as
compared to $7 million in the 2006 period.
UAL
salaries and related costs decreased $68 million, or 3%, in the first six
months of 2007 as compared to the year-ago period. This benefit was largely
due
to a reduction in share-based compensation expense which was $109 million
in the 2006 period, but only $26 million in the 2007 period. Less
compensation expense was recognized in the 2007 period as compared to the 2006
period for awards that were granted in 2006. Immediate recognition of 100%
of
the cost of awards granted to retirement-eligible employees, on the grant date,
accounts for a significant amount of this decrease. There were no significant
grants in the 2007 period as compared to the 2006 period, which included a
large
number of grants associated with our emergence from bankruptcy. Also benefiting
the 2007 period was the absence of the $22 million severance charge incurred
in
2006. Partially offsetting the benefit of decreased share-based compensation
expense was a slight increase in salaries and health care benefits as a result
of inflationary pressures.
Regional
affiliate expense increased $14 million, or 1%, during the first six months
of 2007 as compared to the same period last year. Regional affiliate capacity
increased 6% for the same periods. Our regional affiliate operating income
was
$54 million in the 2007 period as compared to $19 million in the 2006
period. This improvement is due to the restructuring of lower-cost regional
carrier capacity agreements, the replacement of some 50-seat regional jets
with
70-seat regional jets and regional carrier network optimization. All of these
improvements were put in place throughout 2006; however, we are still realizing
some year-over-year benefits in 2007. The average price of regional affiliates
fuel decreased by 1% and consumption increased 2%. The net impact of these
changes was a $4 million increase in fuel cost in the 2007 period as compared
to
the 2006 period.
For
the six months ended June 30, 2007, aircraft maintenance materials and outside
repairs expense increased $49 million, or 9%, year-over-year primarily due
to inflationary increases related to our V2500 engine maintenance
contract and the cost of component parts, as well as the impact of changes
in
airframe and engine volumes.
Landing
fees and other rent increased $8 million, or 2%, in the six months ended
June 30, 2007 as compared to the year-ago period. In 2006, we received an
$8 million credit from one of our airports upon completion of an audit of
expenses for multiple years. Landing fees and other rent were relatively flat
in
the 2007 period due to our ongoing efforts to optimize our rented facilities
with our operational needs.
Distribution
expenses, which include commissions, GDS fees and credit card fees decreased
6%
from the 2006 period to $385 million for the six months ended June 30,
2007. This decrease was due to cost savings realized as the Company
continues to drive reductions across the full spectrum of costs of
sale. Impact areas included renegotiation of contracts with various
channel providers, rationalization of commission plans and programs, and
continued emphasis on movement of volumes toward lower cost channels including
online channels.
The
decrease in UAL cost of sales of $213 million in the 2007 period as
compared to the 2006 period was primarily due to lower UAFC third party fuel
sales as described in the discussion of revenue variances above. The decrease
in
cost of sales is consistent with the $186 million decrease in UAL other
revenues for the same periods.
UAL
and
United special items of $22 million include the benefit of a reduction in
recorded accruals for pending bankruptcy litigation related to our SFO and
LAX
municipal bond obligations. See Note 2, “Voluntary Reorganization Under
Chapter 11” in Combined Notes to the Condensed Consolidated Financial
Statements (Unaudited) for further information on these pending
matters.
UAL
other
operating expense decreased $39 million, or 7%, in the first six months of
2007, as compared to the first six months of 2006. This decrease was primarily
due to a $26 million reduction in advertising expenditures.
Other
income
(expense). The following table illustrates the
year-over-year dollar and percentage changes in UAL and United other income
(expense).
|
|
Successor
|
|
|
Combined
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Six
|
|
|
Six
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
February
1 to
|
|
|
January
1 to
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
January
31,
|
|
|
Favorable/
|
|
|
%
|
|
(In
millions)
|
|
2007
|
|
|
2006
(a)
|
|
|
2006
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
Change
|
|
UAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(345 |
) |
|
$ |
(394 |
) |
|
$ |
(352 |
) |
|
$ |
(42 |
) |
|
$ |
49
|
|
|
|
12
|
|
Interest
income
|
|
|
120
|
|
|
|
101
|
|
|
|
95
|
|
|
|
6
|
|
|
|
19
|
|
|
|
19
|
|
Interest
capitalized
|
|
|
9
|
|
|
|
7
|
|
|
|
7
|
|
|
|
-
|
|
|
|
2
|
|
|
|
29
|
|
Miscellaneous,
net
|
|
|
(1 |
) |
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
(3 |
) |
|
|
-
|
|
|
|
$ |
(217 |
) |
|
$ |
(284 |
) |
|
$ |
(248 |
) |
|
$ |
(36 |
) |
|
$ |
67
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(345 |
) |
|
$ |
(395 |
) |
|
$ |
(353 |
) |
|
$ |
(42 |
) |
|
$ |
50
|
|
|
|
13
|
|
Interest
income
|
|
|
124
|
|
|
|
99
|
|
|
|
93
|
|
|
|
6
|
|
|
|
25
|
|
|
|
25
|
|
Interest
capitalized
|
|
|
9
|
|
|
|
7
|
|
|
|
7
|
|
|
|
-
|
|
|
|
2
|
|
|
|
29
|
|
Miscellaneous,
net
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$ |
(213 |
) |
|
$ |
(290 |
) |
|
$ |
(254 |
) |
|
$ |
(36 |
) |
|
$ |
77
|
|
|
|
27
|
|
|
(a)
|
The
combined period includes the results for the one month period ended
January 31, 2006 (Predecessor) and the five month period ended
June 30, 2006 (Successor).
|
UAL
interest expense decreased $49 million, or 12%, in the six months ended
June 30, 2007 as compared to the year-ago period. The 2007 period was favorably
impacted by the amendment and prepayment of the Credit Facility, which lowered
United’s interest rate on these obligations and reduced the total obligations
outstanding by $972 million. Repayments of scheduled maturities of debt
obligations also reduced interest expense. The 2007 period also included a
$22
million reduction in interest expense due to the recognition of a gain on debt
extinguishment. These benefits were offset by interest expense of
$17 million for previously capitalized debt issuance costs that were
associated with the prepaid portion of the Credit Facility, and $6 million
for financing costs in connection with the February amendment of the Credit
Facility.
UAL
interest income increased $19 million year-over-year reflecting a higher
average cash balance in 2007, as well as higher rates of return on certain
investments; interest income also increased due to the classification of
$6 million of interest income as reorganization items in the
January 2006 predecessor period in accordance with SOP 90-7.
Income
Taxes. UAL and United recorded income tax expense of $108 million
and $114 million (an effective tax rate of 47%), respectively, for the six
month
period ended June 30, 2007. See Note 7, “Income Taxes” in Combined Notes to
the Condensed Consolidated Financial Statements (Unaudited) for further
discussion of permanent items impacting the effective tax rates. Income taxes
were not recorded in the same period of 2006.
Liquidity
and Capital Resources
The
following table provides a summary of UAL’s and United’s cash position at
December 31, 2006 and June 30, 2007, and net cash provided (used) by operating,
financing and investing activities for the six month periods ended June 30,
2007
and 2006.
|
|
UAL
|
|
|
United
|
|
(In
millions)
|
|
As
of June 30, 2007
|
|
|
As
of
December
31, 2006
|
|
|
As
of June 30, 2007
|
|
|
As
of December 31, 2006
|
|
Cash,
short-term investments & restricted cash
|
|
$ |
5,120
|
|
|
$ |
4,991
|
|
|
$ |
5,030
|
|
|
$ |
4,896
|
|
Restricted
cash included in total cash
|
|
|
871
|
|
|
|
847
|
|
|
|
838
|
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAL
|
|
Six
Months Ended June 30, 2007
|
|
|
Combined Six
Months Ended
June
30, 2006
|
|
|
Period
from February 1 to June 30, 2006
|
|
|
Period
from January 1 to January 31, 2006
|
|
Net
cash provided by operating activities
|
|
$ |
1,660
|
|
|
$ |
1,138
|
|
|
$ |
977
|
|
|
$ |
161
|
|
Net
cash provided (used) by investing activities
|
|
|
(2,455 |
) |
|
|
157
|
|
|
|
395
|
|
|
|
(238 |
) |
Net
cash provided (used) by financing activities
|
|
|
(1,370 |
) |
|
|
1,061
|
|
|
|
1,091
|
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
1,649
|
|
|
$ |
1,159
|
|
|
$ |
996
|
|
|
$ |
163
|
|
Net
cash provided (used) by investing activities
|
|
|
(2,431 |
) |
|
|
105
|
|
|
|
343
|
|
|
|
(238 |
) |
Net
cash provided (used) by financing activities
|
|
|
(1,352 |
) |
|
|
1,061
|
|
|
|
1,091
|
|
|
|
(30 |
) |
________________________
|
(a)
|
The
combined period includes the results for the one month period ended
January 31, 2006 (Predecessor) and the five month period ended
June 30, 2006 (Successor).
|
Liquidity. The
Company’s significant cash position represents a source of liquidity. The change
in cash from December 31, 2006 to June 30, 2007 is explained below. Restricted
cash primarily represents cash collateral to secure workers’ compensation
obligations, security deposits for airport leases and reserves with institutions
that process our credit card ticket sales. We may be required to post
significant additional cash collateral to meet such obligations in the
future.
Operating
Activities. UAL’s and United’s net income before
reorganization items improved by $309 million and $317 million,
respectively, in the first six months of 2007, as compared to the first six
months of 2006. These amounts include the impact of non-cash income tax expense
of $108 million for UAL and $114 million for United in 2007. Cash from
operations improved due to the Company’s improved performance in 2007, as
discussed above in Results of Operations. In addition, cash generated
from operations increased due to changes in working capital. Significant
year-over-year changes in UAL and United working capital items included deferred
revenue and advance ticket sales of $64 million and $182 million,
respectively, which increased primarily due to increased ticket sales in advance
of the summer travel season.
Investing
Activities. UAL and United’s cash used for restricted funds
was $24 million and $29 million, respectively, in the 2007 period as compared
to
$251 million and $253 million that was provided by a decrease in the
segregated and restricted funds for UAL and United, respectively, in the year
ago period. The significant cash generated from restricted accounts in the
2006
period was due to our improved financial position upon our emergence from
bankruptcy. Net purchases of short-term investments used cash of $2.3 billion
and $2.2 billion for UAL and United, respectively, in the 2007 period as
compared to cash provided of $18 million for both UAL and United in the
year-ago period. This change was due to normal cash management activities as
our
short-term investments are part of our overall cash management policy. Capital
expenditures for both UAL and United were $146 million and
$159 million in the 2007 and 2006 periods,
respectively.
During
the six month periods ended June 30, 2007 and 2006, the Company did not sell
or
acquire any aircraft. However in 2007, three owned and unencumbered aircraft
were financed as part of the secured Enhanced
Equipment
Trust Certificates (“EETC”) financing described below.
In
2006,
UAL generated $52 million more cash from investing activities as compared to
United primarily due to proceeds from the sale of MyPoints, a direct subsidiary
of UAL.
Financing
Activities. Cash used by financing activities for both UAL and
United was $1.4 billion in the six month period ended June 30, 2007, as compared
to $1.1 billion of cash provided by financing activities during the first
six months of 2006. In 2007, cash of approximately $2.1 billion was used to
prepay approximately $1.0 billion of Credit Facility obligations and to
make other debt and capital lease payments. A combination of the proceeds from
United’s initial Credit Facility upon exiting bankruptcy and significant cash
generated from operations in 2006 provided us with a larger than optimal cash
balance.
In
June
2007, the Company completed financing transactions totaling approximately $964
million which included the $694 million EETC secured financing and the $270
million Denver Airport financing. A portion of the proceeds of the $694 million
EETC transaction was used to payoff $590 million of debt obligations that were
secured by ten previously mortgaged, owned aircraft and to finance three
previously unencumbered owned aircraft. The proceeds of the Denver
Airport bonds were used to refinance the existing $261 million of Denver Series
1992A bonds. See Note 11, “Debt Obligations” in Combined Notes to Condensed
Consolidated Financial Statements (Unaudited) for further details regarding
these transactions.
In
February 2007 United amended certain terms of its Credit Facility,
resulting in a reduction in the amount of the Amended Credit Facility from
$3.0 billion to $2.055 billion, consisting of a $1.8 billion term
loan commitment and a $255 million revolving commitment. At United’s
option, interest payments are based on either a base rate, as defined in the
Amended Credit Facility, or LIBOR plus 2%. This applicable margin on LIBOR
rate
loans is a significant reduction of 1.75% from the original terms of the Credit
Facility. The Amended Credit Facility also unencumbers a significant amount
of
assets that had been pledged as collateral under the original Credit Facility.
At June 30, 2007, $174 million was available for loans or standby letters
of credit under the Amended Credit Facility. See Note 11, “Debt
Obligations” in Combined Notes to Condensed Consolidated Financial
Statements (Unaudited) for further information related to the Amended
Credit Facility.
In
January 2007, United paid $4 million to terminate the interest rate
swap that had been used to hedge a portion of the future interest payments
under
the original Credit Facility term loan of $2.45 billion. See Note 12,
“Financial Instruments and Risk Management” in Combined Notes to Condensed
Consolidated Financial Statements (Unaudited) for further information
related to this swap agreement.
During
the combined six months of 2006, we generated proceeds of $3.0 billion from
United’s new credit facility but used approximately $1.8 billion of these
proceeds to repay the $1.2 billion debtor-in-possession credit facility and
make other scheduled and revolving payments under long-term debt and capital
lease agreements.
Critical
Accounting Policies
|
|
For
complete information regarding UAL’s and United’s critical accounting policies,
see “Critical Accounting Policies” in Management’s Discussion and Analysis
of Financial Condition and Results of Operations in the 2006 Annual
Reports.
Frequent
Flyer Accounting. Management’s estimate of the expected breakage of miles
as of the fresh-start date, and for recognition of breakage post-emergence,
requires significant management judgment. In 2006, United’s policy for the
cancellation of miles was to deactivate Mileage Plus customer accounts for
which
there was no activity for 36 months. Accordingly, United recognized revenue
from
breakage of miles by amortizing such estimated breakage over the 36 month
expiration period. In early 2007, United announced a reduction in the expiration
period from 36 months to 18 months effective December 31, 2007.
Accordingly, in 2007 United began to recognize revenue from breakage of miles
by
amortizing such estimated breakage over the 18 month expiration period.
Management considers historical patterns of account breakage to be a useful
indicator when estimating future breakage. Future program redemption
opportunities can significantly alter customer behavior from historical patterns
with respect to inactive accounts. Such changes may result in material changes
to the deferred revenue balance, as well as recognized revenues from the
program. A hypothetical 1% change in United’s breakage rate, estimated to be
approximately 15% annually as of June 30, 2007, has an effect of approximately
$19 million on the liability. At December 31, 2006, a hypothetical 1%
change in United’s breakage rate, which was estimated at 14% annually, would
have had an impact of approximately $18 million on the liability. The
change in the expiration policy for inactive customer accounts provided a
revenue benefit of approximately $47 million and $75 million in the three
and six months periods ended June 30, 2007, respectively, and is expected to
provide a benefit of approximately $181 million for the full year
2007.
At
June
30, 2007, the outstanding number of miles in the Mileage Plus liability was
approximately 523 billion. United currently estimates that approximately
446 billion of these miles will ultimately be redeemed and, accordingly,
has recorded deferred revenue of $3.8 billion. A hypothetical 1% change in
the weighted-average ticket value or the outstanding number of miles would
have
approximately a $44 million impact on the liability.
Goodwill
and Intangible Assets. In accordance with Statement of Financial
Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”), UAL and United apply a fair value-based impairment test to
the book value of goodwill and indefinite-lived intangible assets on an annual
basis and, if events or circumstances indicate that an impairment loss may
have
been incurred, on an interim basis. An impairment charge could have a material
adverse effect on UAL’s or United’s financial position and results of operations
in the period of recognition.
As
of
June 30, 2007 and December 31, 2006, United has recorded an indefinite-lived
intangible asset of $255 million for its Heathrow slots, based upon its
estimation of the fair value for those slots as of the adoption of fresh-start
reporting on February 1, 2006. United, however, determined at fresh-start that
its rights relating to its actual route authorities to Heathrow had a fair
value
of zero. The EU/U.S. open skies agreement is expected to directly impact the
future value and expected lives of route authorities to Heathrow; however,
there
is no direct impact from the open skies agreement on airport slot rights,
including those at Heathrow. The open skies agreement is also
expected to provide United an opportunity to secure antitrust immunity for
certain of its Star Alliance carrier relationships, and to provide United and
other carriers with access to new markets in EU countries. Because of the
diverse nature of these potential impacts on United’s business, the overall
future impact of the agreement on United’s business in the EU region cannot be
predicted with certainty. United has concluded that, in certain
circumstances, the open skies agreement could indirectly and adversely affect
the fair value of its slot rights at Heathrow, and therefore has further
concluded that the signing of the open skies agreement on April 30, 2007
constituted an indicator of impairment with respect to United’s Heathrow slots
intangible asset.
During
the second quarter of 2007, United performed an impairment review of the
Heathrow slots intangible asset using the guidance in SFAS 142 and concluded
that no impairment was currently indicated and that, furthermore, no change
was
currently required to the fresh-start assignment of an indefinite life to this
intangible asset. The methodology use to estimate fair value is described in
the
UAL and United 2006 Annual Reports. United’s initial annual
impairment test for its Heathrow slots was performed as of October 1, 2006
and
no impairment was indicated at that time.
The
implementation of the EU/U.S. open skies agreement, however, may result in
a
future determination that the Heathrow slots are impaired in whole or in part,
or in a future determination that they should be reclassified as definite-lived
intangible assets with amortization expense recognized thereon. Such future
determination could result in material charges to earnings in those future
periods.
Forward-Looking
Information
|
|
Certain
statements throughout Management’s Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report are
forward-looking and thus reflect our current expectations and beliefs with
respect to certain current and future events and financial performance. Such
forward-looking statements are and will be subject to many risks and
uncertainties relating to our operations and business environment that may
cause
actual results to differ materially from any future results expressed or implied
in such forward-looking statements. Words such as “expects,” “will,” “plans,”
“anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “outlook” and
similar expressions are intended to identify forward-looking
statements.
Additionally,
forward-looking statements include statements which do not relate solely to
historical facts, such as statements which identify uncertainties or trends,
discuss the possible future effects of current known trends or uncertainties,
or
which indicate that the future effects of known trends or uncertainties cannot
be predicted, guaranteed or assured. All forward-looking statements in this
report are based upon information available to us on the date of this report.
We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events, changed
circumstances or otherwise.
Our
actual
results could differ materially from these forward-looking statements due to
numerous factors including, without limitation, the following: our ability
to
comply with the terms of our Amended Credit Facility and other financing
arrangements; the costs and availability of financing; our ability to execute
our business plan; our ability to realize benefits from our resource
optimization efforts and cost reduction initiative programs; our ability to
utilize our net operating losses; our ability to attract, motivate and/or retain
key employees; our ability to attract and retain customers; demand for
transportation in the markets in which we operate; general economic conditions
(including interest rates, foreign currency exchange rates, crude oil prices,
costs of aviation fuel and refining capacity in relevant markets); our ability
to cost-effectively hedge against increases in the price of aviation fuel;
the
effects of any hostilities, act of war or terrorist attack; the ability of
other
air carriers with whom we have alliances or partnerships to provide the services
contemplated by the respective arrangements with such carriers; the costs and
availability of aircraft insurance; the costs associated with security measures
and practices; labor costs; competitive pressures on pricing and on demand;
capacity decisions of United and/or our competitors; U.S. or foreign
governmental legislation, regulation and other actions (including open skies
agreements); our ability to maintain satisfactory labor relations; any
disruptions to operations due to any potential actions by our labor groups;
weather conditions; and other risks and uncertainties set forth under the
caption “Risk Factors” in Item 1A. of the UAL and United Annual Reports on
Form 10-K for the year ended December 31, 2006, as well as other risks
and uncertainties set forth from time to time in the reports we file with United
States Securities and Exchange Commission. Consequently, forward-looking
statements should not be regarded as representations or warranties by UAL or
United that such matters will be realized.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
discussion below describes changes in our market risks since December 31,
2006. For additional information regarding our exposure to certain market risks,
see Item 7A. Quantitative and Qualitative Disclosures About Market Risk
in the 2006 Annual Reports.
Interest
Rate Risk—In the first quarter of 2006, United entered into an interest
rate swap whereby it fixed the rate of interest on $2.45 billion notional
value of floating-rate debt at 5.14% plus a fixed credit margin. The swap had
a
fair value of negative $12 million at December 31, 2006. In
January 2007, United terminated the swap. The termination value of the swap
was negative $4 million. As discussed in Note 11, “Debt Obligations”
in Combined Notes to Condensed Consolidated Financial Statements
(Unaudited), United prepaid $972 million of its debt obligations in
February 2007 which reduced the amount of United’s debt obligations that
are sensitive to interest rate fluctuations.
Commodity
Price Risk (Jet Fuel)—When market conditions indicate risk reduction is
achievable, United may use commodity option contracts or other derivative
instruments to reduce its price risk exposure to jet fuel. The derivative
instruments are designed to provide protection against increases in the price
of
aircraft fuel. United may change its hedging program based on changes in market
conditions. At June 30, 2007, the fair value of United’s fuel-related
derivatives was a positive $16 million, as compared to a negative
$2 million at December 31, 2006.
Foreign
Exchange Risk—The Company previously disclosed in its 2006 Annual
Reports it has exposure to changes in certain foreign currency exchange rates
and as of December 31, 2006, the Company did not have any foreign currency
derivative instruments. The following is an update to that disclosure as during
the second quarter of 2007 the Company began using foreign currency forward
contracts to hedge a portion of its exposure to changes in foreign currency
exchange rates. As of June 30, 2007, the Company hedged a portion of its
expected foreign currency cash flows in the Australian dollar, Canadian dollar,
British pound, European Euro and Japanese yen. As of June 30, 2007, the notional
amount of these foreign currencies hedged with the forward contracts in U.S,
dollars terms was approximately $100 million. These contracts expire at various
dates from July to November 2007. For the three and six months ended June 30,
2007, there were no material gains or losses from these derivative positions.
As
of June 30, 2007, the fair value of these contracts was less than $1
million.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
This
section should be read in conjunction with Item 9A., “Controls and
Procedures” included the respective UAL and United Annual Reports on Form 10-K
for the year ended December 31, 2006.
UAL
and
United each maintain controls and procedures that are designed to ensure that
information required to be disclosed in the reports UAL and United each file
with the Securities and Exchange Commission (“SEC”) is recorded, processed,
summarized, and reported, within the time periods specified by the SEC’s
rules and forms, and is accumulated and communicated to management
including the Chief Executive Officer and Chief Financial Officer as appropriate
to allow timely decisions regarding required disclosure. The management of
UAL
and United, including each company’s Chief Executive Officer and Chief Financial
Officer, performed an evaluation to conclude with reasonable assurance that
its
disclosure controls and procedures were designed and operating effectively
to
report the information each company is required to disclose in the reports
they
file with the SEC on a timely basis. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer of both UAL and United have
concluded that as of June 30, 2007, the disclosure controls and
procedures of both UAL and United were not effective due to a material weakness
related to the operation of each company’s internal control over financial
reporting with respect to the accounting and disclosure for income taxes, as
previously disclosed in Item 9A, Controls and Procedures in the
2006 Annual Reports. Additional review, evaluation and oversight have been
undertaken to ensure both UAL’s and United’s unaudited condensed consolidated
financial statements were prepared in accordance with generally accepted
accounting principles and, as a result, both UAL and United have concluded
that
their consolidated financial statements in this Form 10-Q fairly present,
in all material respects, their financial position, results of operations and
cash flows for the periods presented.
There
were no changes to either UAL’s or United’s internal control over financial
reporting that occurred during the quarter ended June 30, 2007 that have
materially affected or are reasonably likely to materially affect either
company’s internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934).
Internal
Controls Surrounding Accounting for Income
Taxes
|
|
As
discussed in the 2006 Annual Reports, the management of UAL and United concluded
that while each company had appropriately designed control procedures for income
tax accounting and disclosures, high staff turnover caused UAL and United to
poorly execute the controls for evaluating and recording current and deferred
income tax provision and related deferred tax balances. In response to the
material weakness, the management of UAL and United is implementing a
remediation plan that includes enhancing staff resources and skill sets,
upgrading the tax technology infrastructure and optimizing workflow and
processes. During the first six months of 2007, the Company hired a significant
number of experienced tax professionals and implemented plans designed to
materially reduce staff turnover.
PART II.
OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS.
|
In
addition to the legal proceedings described below, UAL and United are parties
to
other legal proceedings as described in their respective Annual Reports on
Form 10-K for the year ended December 31, 2006 (the “2006 Annual
Reports”).
In
re: UAL Corporation, et. al.
As
discussed above, on the Petition Date the Debtors filed voluntary petitions
to
reorganize their businesses under Chapter 11 of the Bankruptcy Code. On
October 20, 2005, the Debtors filed the Debtor’s First Amended Joint Plan
of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code
and the Disclosure Statement. The Bankruptcy Court approved the Disclosure
Statement on October 21, 2005.
Commencing
on October 27, 2005, the Disclosure Statement, ballots for voting to accept
or reject the proposed plan of reorganization and other solicitation documents
were distributed to all classes of creditors eligible to vote on the proposed
plan of reorganization. After a hearing on confirmation, on January 20,
2006, the Bankruptcy Court confirmed the Plan of Reorganization. The Plan of
Reorganization became effective and the Debtors emerged from bankruptcy
protection on the Effective Date.
Numerous
pre-petition claims still await resolution in the Bankruptcy Court due to the
Company’s objections to either the existence of liability or the amount of the
claim. The process of determining whether liability exists and liquidating
the
amounts due is likely to continue through 2007, and possibly longer.
Additionally, certain significant matters remain to be resolved in the
Bankruptcy Court. For details see Note 2, “Voluntary Reorganization Under
Chapter 11,” in Combined Notes to Condensed Consolidated Financial
Statements (Unaudited).
Air
Cargo/Passenger Surcharge Investigations
In
February 2006, the European Commission and the U.S. Department of Justice
commenced an international investigation into what government officials describe
as a possible price fixing conspiracy relating to certain surcharges included
in
tariffs for carrying air cargo. In June 2006, United received a subpoena
from the U.S. Department of Justice requesting information related to certain
passenger pricing practices and surcharges applicable to international passenger
routes. We are cooperating fully. United is considered a source of information
for the investigation, not a target. Separately, United received additional
information requests regarding these cargo pricing matters from the competition
authorities of Brazil in March 2007, the European Union in April and June 2007,
and from the Australian Competition and Consumer Commission in June 2007. In
addition to the U.S. federal grand jury investigation, United and other air
cargo carriers have been named as defendants in over ninety class action
lawsuits alleging civil damages as a result of the purported air cargo pricing
conspiracy. Those lawsuits have been consolidated for pretrial activities in
the
United States Federal Court for the Eastern District of New York. United has
entered into an agreement with the majority of the private plaintiffs to dismiss
United from the class action lawsuits in return for an agreement to cooperate
with the plaintiffs’ factual investigation. More than fifty additional putative
class actions have also been filed alleging violations of the antitrust laws
with respect to passenger pricing practices. Those lawsuits have been
consolidated for pretrial activities in the United States Federal Court for
the
Northern District of California (“Federal Court”). United has entered into a
settlement agreement with a number of the plaintiffs in the passenger pricing
cases to dismiss United from the class action lawsuits in return for an
agreement to cooperate with the plaintiffs’ factual investigation. The
settlement agreement is subject to review and approval by the Federal Court.
Penalties for violating competition laws can be severe, involving both criminal
and civil liability. We are cooperating with the grand jury investigations
while
carrying out our own internal review of our pricing practices, and are not
in a
position to evaluate the potential financial impact of this litigation at this
time. However, a finding that we violated either U.S. antitrust laws or the
competition laws of some other jurisdiction could have a material adverse impact
on our results of operations or financial condition.
See
Part
I, Item 1A., “Risk Factors,” of the 2006 Annual Reports for a detailed
discussion of the risk factors affecting UAL and United. The information below
provides updates to the previously disclosed risk factors and should be read
in
conjunction with the risk factors and information disclosed in the 2006 Annual
Reports.
Extensive
government regulation could increase the Company’s operating costs and restrict
its ability to conduct its business.
Airlines
are subject to extensive regulatory and legal compliance requirements that
result in significant costs. In addition to the enactment of the Aviation
Security Act, laws, regulations, taxes and airport rates and charges have been
proposed from time to time that could significantly increase the cost of airline
operations or reduce airline revenue. The Federal Aviation Authority (“FAA”)
from time to time also issues directives and other regulations relating to
the
maintenance and operation of aircraft that require significant expenditures
by
United. The Company expects to continue incurring material expenses to comply
with the regulations of the FAA and other agencies.
United
operates under a certificate of public convenience and necessity issued by
the
DOT. If the DOT altered, amended, modified, suspended or revoked our
certificate, it could have a material adverse effect on the Company’s business.
The FAA can also limit United’s airport access by limiting the number of
departure and arrival slots at “high density traffic airports” and local airport
authorities may have the ability to control access to certain facilities or
the
cost of access to such facilities, which could have an adverse effect on the
Company’s business.
Many
aspects of United’s operations are also subject to increasingly stringent
federal, state and local laws protecting the environment. Future regulatory
developments in the U.S. and abroad could adversely affect operations and
increase operating costs in the airline industry. For example, potential future
actions that may be taken by the U.S. government, foreign governments, or the
International Civil Aviation Organization to limit the emission of greenhouse
gases by the aviation industry are uncertain at this time, but the impact to
the
Company and its industry would likely be adverse and could be
significant.
The
ability of United States carriers to operate international routes is subject
to
change because the applicable arrangements between the United States and foreign
governments may be amended from time to time, or because appropriate slots
or
facilities may not be made available. United currently operates on a number
of
international routes under government arrangements that limit the number of
carriers, capacity, or the number of carriers allowed access to particular
airports. If an open skies policy were to be adopted for any of these routes,
such an event could have a material adverse impact on the Company’s financial
position and results of operations and could result in the impairment of
material amounts of related intangible assets. Recently, the United States
and
the European Union entered into an “open skies” agreement that will become
effective at the end of March 2008. See Note 14, “Open Skies Agreement,” in
Combined Notes to Condensed Consolidated Financial Statements
(Unaudited).
Further,
the Company’s operations in foreign countries are subject to various laws and
regulations in those countries. The Company cannot provide any assurance that
current laws and regulations, or laws or regulations enacted in the future,
will
not adversely affect its financial condition or results of
operations.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
The
following table presents repurchases of UAL common stock made in the second
quarter of fiscal year 2007:
Period
|
|
Total number
of shares
purchased(a)
|
|
Average price
paid
per share
|
|
Total number of
shares purchased as
part of publicly
announced
plans
or programs
|
|
Maximum number of
shares (or approximate
dollar value) of shares
that may yet be
purchased under the
plans or programs
|
04/01/07
- 04/30/07
|
|
|
3,491
|
|
$ |
38.15
|
|
|
—
|
|
(b)
|
05/01/07
- 05/31/07
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(b)
|
06/01/07
- 06/30/07
|
|
|
1,177
|
|
|
40.89
|
|
|
—
|
|
(b)
|
Total
|
|
|
4,668
|
|
|
38.84
|
|
|
—
|
|
(b)
|
_____________________
|
(a)
|
Shares
withheld from employees to satisfy certain tax obligations due upon
the
vesting of restricted stock.
|
|
(b)
|
The
MEIP provides for the withholding of shares to satisfy tax obligations
due
upon the vesting of restricted stock. The MEIP does not specify a
maximum
number of shares that may be
repurchased.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
The
Annual Meeting of Stockholders of UAL Corporation was held on May 10, 2007.
The
election of directors was the only matter voted upon at the meeting. The
following director nominees were elected:
Directors
Elected by Holders of Common Stock:
|
Nominee
|
Votes
For
|
Votes
Withheld
|
Richard
J. Almeida
|
89,788,880
|
|
9,901,332
|
|
Mary
K. Bush
|
92,749,545
|
|
6,940,666
|
|
W.
James Farrell
|
90,093,853
|
|
9,596,359
|
|
Walter
Isaacson
|
90,240,678
|
|
9,449,534
|
|
Robert
D. Krebs
|
90,183,727
|
|
9,506,485
|
|
Robert
S. Miller
|
88,782,103
|
|
10,908,109
|
|
James
J. O’Connor
|
89,182,715
|
|
10,507,497
|
|
Glenn
F. Tilton
|
88,503,766
|
|
11,186,445
|
|
David
J. Vitale
|
89,334,295
|
|
10,355,916
|
|
John
H. Walker
|
88,851,935
|
|
10,838,277
|
|
|
|
|
|
|
|
|
|
|
|
Director
Elected by Class Pilot MEC Junior Preferred
Stock:
|
Nominee
|
Votes
For
|
Votes
Withheld
|
Mark
A. Bathurst
|
1
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Director
Elected by Class IAM Junior Preferred Stock:
|
Nominee
|
Votes
For
|
Votes
Withheld
|
Stephen
R. Canale
|
1
|
|
0
|
|
A
list of
exhibits included as part of this Form 10-Q is set forth in an
Exhibit Index that immediately precedes the exhibits.
Pursuant
to the requirements of the Securities Exchange Act of 1934, each registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. The signature for each undersigned company shall be deemed
to
relate only to matters having reference to such company or its
subsidiaries.
|
UAL
CORPORATION
|
|
(Registrant)
|
|
|
Date: July
30, 2007
|
By: /s/
Frederic F. Brace
|
|
Frederic
F. Brace
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|
(principal
financial and
|
|
accounting
officer)
|
|
UNITED
AIR LINES, INC.
|
|
(Registrant)
|
|
|
Date: July
30, 2007
|
By: /s/
Frederic F. Brace
|
|
Frederic
F. Brace
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|
(principal
financial officer)
|
|
|
|
|
Date: July
30, 2007
|
By: /s/
David M. Wing
|
|
David
M. Wing
|
|
Vice
President and Controller
|
|
(principal
accounting officer)
|
|
|
The
documents listed below are being filed on behalf of UAL and United as
indicated.
|
Registrant
|
|
|
|
|
†10.1
|
UAL
United
|
Amendment
No. 2 dated June 4, 2007 to the Peter D. McDonald Secular Trust Agreement
dated September 29, 2006
|
|
|
|
12.1
|
UAL
|
UAL’s
Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings
to
Fixed Charges and Preferred Stock Dividend Requirements
|
|
|
|
12.2
|
United
|
United’s
Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings
to
Fixed Charges and Preferred Stock Dividend Requirements
|
|
|
|
31.1
|
UAL
|
Certification
of the Principal Executive Officer Pursuant to 15 U.S.C. 78m(a) or
78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) of
UAL
|
|
|
|
31.2
|
UAL
|
Certification
of the Principal Financial Officer Pursuant to 15 U.S.C. 78m(a) or
78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) of
UAL
|
|
|
|
31.3
|
United
|
Certification
of the Principal Executive Officer Pursuant to 15 U.S.C. 78m(a) or
78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) of
United
|
|
|
|
31.4
|
United
|
Certification
of the Principal Financial Officer Pursuant to 15 U.S.C. 78m(a) or
78o(d) (Section 302 of the Sarbanes-Oxley Act of 2002) of
United
|
|
|
|
32.1
|
UAL
|
Certification
of the Chief Executive Officer and Chief Financial Officer Pursuant
to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
2002)
|
|
|
|
32.2
|
United
|
Certification
of the Chief Executive Officer and Chief Financial Officer Pursuant
to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
2002)
|
† Indicates
management contract or compensatory plan or arrangement