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 September 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 October 26, 2007.
UAL
Corporation 116,278,809
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 September 30, 2007
|
PART I.
FINANCIAL INFORMATION
|
|
Page
|
|
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
|
|
|
44
|
|
Item
4.
|
Controls
and Procedures
|
|
|
44
|
|
|
|
|
|
|
|
|
PART II.
OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
45
|
|
Item1A.
|
Risk
Factors
|
|
|
46
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
47
|
|
Item
6.
|
Exhibits
|
|
|
47
|
|
Signatures
|
|
|
|
|
Exhibit Index
|
|
|
|
|
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 September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues:
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
4,225
|
|
|
$ |
3,916
|
|
Passenger
- Regional Affiliates
|
|
|
819
|
|
|
|
773
|
|
Cargo
|
|
|
198
|
|
|
|
183
|
|
Special
operating items (Note 2) |
|
|
45 |
|
|
|
- |
|
Other
operating revenues
|
|
|
240
|
|
|
|
304
|
|
|
|
|
5,527
|
|
|
|
5,176
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
1,324
|
|
|
|
1,368
|
|
Salaries
and related costs
|
|
|
1,062
|
|
|
|
1,060
|
|
Regional
affiliates
|
|
|
751
|
|
|
|
713
|
|
Purchased
services
|
|
|
344
|
|
|
|
302
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
295
|
|
|
|
252
|
|
Depreciation
and amortization
|
|
|
245
|
|
|
|
226
|
|
Distribution
expenses (Note 1)
|
|
|
211
|
|
|
|
215
|
|
Landing
fees and other rent
|
|
|
201
|
|
|
|
199
|
|
Aircraft
rent
|
|
|
102
|
|
|
|
104
|
|
Cost
of third party sales
|
|
|
68
|
|
|
|
153
|
|
Special
operating items (Note 2)
|
|
|
(22 |
) |
|
|
(30 |
) |
Other
operating expenses
|
|
|
290
|
|
|
|
279
|
|
|
|
|
4,871
|
|
|
|
4,841
|
|
|
|
|
|
|
|
|
|
|
Earnings
from operations
|
|
|
656
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(161 |
) |
|
|
(164 |
) |
Interest
income
|
|
|
71
|
|
|
|
72
|
|
Interest
capitalized
|
|
|
5
|
|
|
|
3
|
|
Miscellaneous,
net
|
|
|
(6 |
) |
|
|
3
|
|
|
|
|
(91 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and equity in earnings
|
|
|
|
|
|
|
|
|
of
affiliates
|
|
|
565
|
|
|
|
249
|
|
Income
tax expense
|
|
|
232
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Earnings
before equity in earnings of affiliates
|
|
|
333
|
|
|
|
189
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
1
|
|
|
|
1
|
|
Net
income
|
|
$ |
334
|
|
|
$ |
190
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share, basic
|
|
$ |
2.82
|
|
|
$ |
1.62
|
|
Earnings
per share, diluted
|
|
$ |
2.21
|
|
|
$ |
1.30
|
|
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
|
|
|
|
Nine
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
Ended
|
|
|
February
1
|
|
|
January
1
|
|
|
|
September
30,
|
|
|
to
September 30,
|
|
|
to
January 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
11,457
|
|
|
$ |
9,904
|
|
|
$ |
1,074
|
|
Passenger
- Regional Affiliates
|
|
|
2,298
|
|
|
|
1,999
|
|
|
|
204
|
|
Cargo
|
|
|
547
|
|
|
|
501
|
|
|
|
56
|
|
Special
operating items (Note 2)
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
Other
operating revenues |
|
|
766 |
|
|
|
892 |
|
|
|
124 |
|
|
|
|
15,113
|
|
|
|
13,296
|
|
|
|
1,458
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
3,571
|
|
|
|
3,323
|
|
|
|
362
|
|
Salaries
and related costs
|
|
|
3,149
|
|
|
|
2,857
|
|
|
|
358
|
|
Regional
affiliates
|
|
|
2,176
|
|
|
|
1,896
|
|
|
|
228
|
|
Purchased
services
|
|
|
980
|
|
|
|
829
|
|
|
|
98
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
860
|
|
|
|
688
|
|
|
|
80
|
|
Depreciation
and amortization
|
|
|
694
|
|
|
|
592
|
|
|
|
68
|
|
Landing
fees and other rent
|
|
|
654
|
|
|
|
569
|
|
|
|
75
|
|
Distribution
expenses (Note 1)
|
|
|
596
|
|
|
|
564
|
|
|
|
60
|
|
Aircraft
rent
|
|
|
307
|
|
|
|
288
|
|
|
|
30
|
|
Cost
of third party sales
|
|
|
238
|
|
|
|
471
|
|
|
|
65
|
|
Special
operating items (Note 2)
|
|
|
(44 |
) |
|
|
(30 |
) |
|
|
-
|
|
Other
operating expenses
|
|
|
831
|
|
|
|
773
|
|
|
|
86
|
|
|
|
|
14,012
|
|
|
|
12,820
|
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from operations
|
|
|
1,101
|
|
|
|
476
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (Note 11)
|
|
|
(506 |
) |
|
|
(516 |
) |
|
|
(42 |
) |
Interest
income
|
|
|
191
|
|
|
|
167
|
|
|
|
6
|
|
Interest
capitalized
|
|
|
14
|
|
|
|
10
|
|
|
|
-
|
|
Miscellaneous,
net
|
|
|
(7 |
) |
|
|
5
|
|
|
|
-
|
|
|
|
|
(308 |
) |
|
|
(334 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before reorganization items, income
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
and equity in earnings of affiliates
|
|
|
793
|
|
|
|
142
|
|
|
|
(88 |
) |
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
22,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and equity in
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
of affiliates
|
|
|
793
|
|
|
|
142
|
|
|
|
22,846
|
|
Income
tax expense
|
|
|
340
|
|
|
|
60
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before equity in earnings of affiliates
|
|
|
453
|
|
|
|
82
|
|
|
|
22,846
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
Net
income
|
|
$ |
456
|
|
|
$ |
86
|
|
|
$ |
22,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share, basic
|
|
$ |
3.82
|
|
|
$ |
0.69
|
|
|
$ |
196.61
|
|
Earnings
per share, diluted
|
|
$ |
3.10
|
|
|
$ |
0.68
|
|
|
$ |
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)
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,263
|
|
|
$ |
3,832
|
|
Short-term
investments
|
|
|
2,899
|
|
|
|
312
|
|
Restricted
cash
|
|
|
341
|
|
|
|
341
|
|
Receivables,
less allowance for doubtful accounts (2007—$29; 2006—$27)
|
|
|
1,095
|
|
|
|
820
|
|
Prepaid
fuel
|
|
|
418
|
|
|
|
283
|
|
Aircraft
fuel, spare parts and supplies, less
|
|
|
|
|
|
|
|
|
obsolescence
allowance (2007—$22; 2006—$6)
|
|
|
230
|
|
|
|
218
|
|
Deferred
income taxes
|
|
|
77
|
|
|
|
122
|
|
Prepaid
expenses and other
|
|
|
643
|
|
|
|
345
|
|
|
|
|
6,966
|
|
|
|
6,273
|
|
Operating
property and equipment:
|
|
|
|
|
|
|
|
|
Owned—
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
9,212
|
|
|
|
8,958
|
|
Advances
on flight equipment
|
|
|
103
|
|
|
|
103
|
|
Other
property and equipment
|
|
|
1,536
|
|
|
|
1,441
|
|
|
|
|
10,851
|
|
|
|
10,502
|
|
Less—accumulated
depreciation and amortization
|
|
|
(918 |
) |
|
|
(503 |
) |
|
|
|
9,933
|
|
|
|
9,999
|
|
Capital
leases:
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
1,512
|
|
|
|
1,511
|
|
Other
property and equipment
|
|
|
34
|
|
|
|
34
|
|
|
|
|
1,546
|
|
|
|
1,545
|
|
Less—accumulated
amortization
|
|
|
(151 |
) |
|
|
(81 |
) |
|
|
|
1,395
|
|
|
|
1,464
|
|
|
|
|
11,328
|
|
|
|
11,463
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Intangibles,
less accumulated amortization (2007—$285; 2006—$169)
|
|
|
2,912
|
|
|
|
3,028
|
|
Goodwill
|
|
|
2,695
|
|
|
|
2,703
|
|
Restricted
cash
|
|
|
447
|
|
|
|
506
|
|
Aircraft
lease deposits
|
|
|
327
|
|
|
|
539
|
|
Investments
|
|
|
194
|
|
|
|
113
|
|
Other,
net
|
|
|
739
|
|
|
|
744
|
|
|
|
|
7,314
|
|
|
|
7,633
|
|
|
|
$ |
25,608
|
|
|
$ |
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)
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Advance
ticket sales
|
|
$ |
2,246
|
|
|
$ |
1,669
|
|
Mileage
Plus deferred revenue
|
|
|
1,201
|
|
|
|
1,111
|
|
Accounts
payable
|
|
|
830
|
|
|
|
667
|
|
Accrued
salaries, wages and benefits
|
|
|
823
|
|
|
|
795
|
|
Advanced
purchase of miles
|
|
|
708
|
|
|
|
681
|
|
Long-term
debt maturing within one year (Note 11)
|
|
|
654
|
|
|
|
1,687
|
|
Fuel
purchase commitments
|
|
|
418
|
|
|
|
283
|
|
Current
obligations under capital leases
|
|
|
319
|
|
|
|
110
|
|
Accrued
interest
|
|
|
162
|
|
|
|
241
|
|
Other
|
|
|
498
|
|
|
|
701
|
|
|
|
|
7,859
|
|
|
|
7,945
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note 11)
|
|
|
7,027
|
|
|
|
7,453
|
|
Long-term
obligations under capital leases
|
|
|
1,129
|
|
|
|
1,350
|
|
Other
liabilities and deferred credits:
|
|
|
|
|
|
|
|
|
Mileage
Plus deferred revenue
|
|
|
2,666
|
|
|
|
2,569
|
|
Postretirement
benefit liability
|
|
|
1,934
|
|
|
|
1,955
|
|
Deferred
income taxes
|
|
|
1,048
|
|
|
|
688
|
|
Deferred
pension liability
|
|
|
137
|
|
|
|
130
|
|
Other
|
|
|
802
|
|
|
|
770
|
|
|
|
|
6,587
|
|
|
|
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 116,035,322 and 112,280,629 shares at September 30, 2007
and December 31, 2006, respectively
|
|
|
1
|
|
|
|
1
|
|
Additional
capital invested
|
|
|
2,122
|
|
|
|
2,053
|
|
Retained
earnings
|
|
|
467
|
|
|
|
16
|
|
Stock
held in treasury, at cost (Note 4)
|
|
|
(15 |
) |
|
|
(4 |
) |
Accumulated
other comprehensive income
|
|
|
65
|
|
|
|
82
|
|
|
|
|
2,640
|
|
|
|
2,148
|
|
|
|
$ |
25,608
|
|
|
$ |
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
|
|
|
|
Nine
Months
Ended
September
30,
|
|
|
Period from
February 1 to
September
30,
|
|
|
Period from
January 1 to
January 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Cash
flows provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before reorganization items
|
|
$ |
456
|
|
|
$ |
86
|
|
|
$ |
(83 |
) |
Adjustments
to reconcile to net cash provided (used) by operating
activities—
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in advance ticket sales
|
|
|
577
|
|
|
|
339
|
|
|
|
109
|
|
Increase
in deferred income taxes
|
|
|
364
|
|
|
|
60
|
|
|
|
-
|
|
Increase
in receivables
|
|
|
(269 |
) |
|
|
(95 |
) |
|
|
(88 |
) |
Depreciation
and amortization
|
|
|
694
|
|
|
|
592
|
|
|
|
68
|
|
Mileage
Plus deferred revenue and advanced purchase of miles
|
|
|
214
|
|
|
|
153
|
|
|
|
14
|
|
Other,
net
|
|
|
(34 |
) |
|
|
(27 |
) |
|
|
141
|
|
|
|
|
2,002
|
|
|
|
1,108
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(purchases) sales of short-term investments
|
|
|
(2,587 |
) |
|
|
72
|
|
|
|
2
|
|
Purchases
of EETC securities (Notes 1 and 11)
|
|
|
(76 |
) |
|
|
—
|
|
|
|
—
|
|
Additions
to property and equipment
|
|
|
(428 |
) |
|
|
(222 |
) |
|
|
(30 |
) |
(Increase)
decrease in restricted cash
|
|
|
59
|
|
|
|
300
|
|
|
|
(203 |
) |
Decrease
in segregated funds
|
|
|
—
|
|
|
|
200
|
|
|
|
—
|
|
Other,
net
|
|
|
(25 |
) |
|
|
39
|
|
|
|
(7 |
) |
|
|
|
(3,057 |
) |
|
|
389
|
|
|
|
(238 |
) |
Cash
flows provided (used) by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from secured notes
|
|
|
694
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds
from Credit Facility
|
|
|
—
|
|
|
|
2,961
|
|
|
|
—
|
|
Repayment
of Credit Facility
|
|
|
(995 |
) |
|
|
(175 |
) |
|
|
—
|
|
Repayment
of DIP Financing
|
|
|
—
|
|
|
|
(1,157 |
) |
|
|
—
|
|
Repayment
of other long-term debt
|
|
|
(1,149 |
) |
|
|
(545 |
) |
|
|
(24 |
) |
Principal
payments under capital leases
|
|
|
(60 |
) |
|
|
(66 |
) |
|
|
(5 |
) |
Other,
net
|
|
|
(4 |
) |
|
|
(65 |
) |
|
|
(1 |
) |
|
|
|
(1,514 |
) |
|
|
953
|
|
|
|
(30 |
) |
Increase
(decrease) in cash and cash equivalents during the period
|
|
|
(2,569 |
) |
|
|
2,450
|
|
|
|
(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
|
|
$ |
1,263
|
|
|
$ |
4,081
|
|
|
$ |
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 September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues:
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
4,225
|
|
|
$ |
3,916
|
|
Passenger
- Regional Affiliates
|
|
|
819
|
|
|
|
773
|
|
Cargo
|
|
|
198
|
|
|
|
183
|
|
Special
operating items (Note 2)
|
|
|
45
|
|
|
|
-
|
|
Other operating
revenues |
|
|
243 |
|
|
|
304 |
|
|
|
|
5,530
|
|
|
|
5,176
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
1,324
|
|
|
|
1,368
|
|
Salaries
and related costs
|
|
|
1,059
|
|
|
|
1,059
|
|
Regional
affiliates
|
|
|
751
|
|
|
|
713
|
|
Purchased
services
|
|
|
344
|
|
|
|
301
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
295
|
|
|
|
252
|
|
Depreciation
and amortization
|
|
|
245
|
|
|
|
225
|
|
Distribution
expenses (Note 1)
|
|
|
211
|
|
|
|
215
|
|
Landing
fees and other rent
|
|
|
201
|
|
|
|
199
|
|
Aircraft
rent
|
|
|
102
|
|
|
|
104
|
|
Cost
of third party sales
|
|
|
67
|
|
|
|
150
|
|
Special
operating items (Note 2)
|
|
|
(22 |
) |
|
|
(30 |
) |
Other
operating expenses
|
|
|
291
|
|
|
|
281
|
|
|
|
|
4,868
|
|
|
|
4,837
|
|
|
|
|
|
|
|
|
|
|
Earnings
from operations
|
|
|
662
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(161 |
) |
|
|
(165 |
) |
Interest
income
|
|
|
70
|
|
|
|
79
|
|
Interest
capitalized
|
|
|
5
|
|
|
|
3
|
|
Miscellaneous,
net
|
|
|
(6 |
) |
|
|
3
|
|
|
|
|
(92 |
) |
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and equity in earnings
|
|
|
|
|
|
|
|
|
of
affiliates
|
|
|
570
|
|
|
|
259
|
|
Income
tax expense
|
|
|
234
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Earnings
before equity in earnings of affiliates
|
|
|
336
|
|
|
|
194
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
1
|
|
|
|
1
|
|
Net
income
|
|
$ |
337
|
|
|
$ |
195
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
Nine
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
Ended
|
|
|
February
1
|
|
|
January
1
|
|
|
|
September
30,
|
|
|
to
September 30,
|
|
|
to
January 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
11,457
|
|
|
$ |
9,904
|
|
|
$ |
1,074
|
|
Passenger
- Regional Affiliates
|
|
|
2,298
|
|
|
|
1,999
|
|
|
|
204
|
|
Cargo
|
|
|
547
|
|
|
|
501
|
|
|
|
56
|
|
Special
operating items (Note 2)
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
Other
operating revenues |
|
|
776 |
|
|
|
889 |
|
|
|
120 |
|
|
|
|
15,123
|
|
|
|
13,293
|
|
|
|
1,454
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
3,571
|
|
|
|
3,323
|
|
|
|
362
|
|
Salaries
and related costs
|
|
|
3,145
|
|
|
|
2,854
|
|
|
|
358
|
|
Regional
affiliates
|
|
|
2,176
|
|
|
|
1,896
|
|
|
|
228
|
|
Purchased
services
|
|
|
980
|
|
|
|
828
|
|
|
|
97
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
860
|
|
|
|
688
|
|
|
|
80
|
|
Depreciation
and amortization
|
|
|
694
|
|
|
|
591
|
|
|
|
68
|
|
Landing
fees and other rent
|
|
|
654
|
|
|
|
569
|
|
|
|
75
|
|
Distribution
expenses (Note 1)
|
|
|
596
|
|
|
|
564
|
|
|
|
60
|
|
Aircraft
rent
|
|
|
308
|
|
|
|
289
|
|
|
|
30
|
|
Cost
of third party sales
|
|
|
235
|
|
|
|
464
|
|
|
|
63
|
|
Special
operating items (Note 2)
|
|
|
(44 |
) |
|
|
(30 |
) |
|
|
-
|
|
Other
operating expenses
|
|
|
831
|
|
|
|
771
|
|
|
|
85
|
|
|
|
|
14,006
|
|
|
|
12,807
|
|
|
|
1,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from operations
|
|
|
1,117
|
|
|
|
486
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (Note 11)
|
|
|
(506 |
) |
|
|
(518 |
) |
|
|
(42 |
) |
Interest
income
|
|
|
194
|
|
|
|
172
|
|
|
|
6
|
|
Interest
capitalized
|
|
|
14
|
|
|
|
10
|
|
|
|
-
|
|
Miscellaneous,
net
|
|
|
(7 |
) |
|
|
2
|
|
|
|
-
|
|
|
|
|
(305 |
) |
|
|
(334 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) before reorganization items, income
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes
and equity in earnings of affiliates
|
|
|
812
|
|
|
|
152
|
|
|
|
(88 |
) |
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
22,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and equity in
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
of affiliates
|
|
|
812
|
|
|
|
152
|
|
|
|
22,621
|
|
Income
tax expense
|
|
|
348
|
|
|
|
65
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before equity in earnings of affiliates
|
|
|
464
|
|
|
|
87
|
|
|
|
22,621
|
|
Equity
in earnings of affiliates, net of tax
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
Net
income
|
|
$ |
467
|
|
|
$ |
91
|
|
|
$ |
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)
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
$ |
1,246
|
|
|
$ |
3,779
|
|
Short-term
investments
|
|
|
|
2,860
|
|
|
|
308
|
|
Restricted
cash
|
|
|
|
308
|
|
|
|
303
|
|
Receivables,
less allowance for doubtful
|
|
|
|
|
|
|
|
|
|
accounts
(2007 - $29; 2006 - $27)
|
|
|
|
1,087
|
|
|
|
814
|
|
Prepaid
fuel
|
|
|
|
418
|
|
|
|
283
|
|
Aircraft
fuel, spare parts and supplies, less
|
|
|
|
|
|
|
|
|
|
obsolescence
allowance (2007 - $22; 2006 - $6)
|
|
|
|
230
|
|
|
|
218
|
|
Receivables
from related parties
|
|
|
|
168
|
|
|
|
154
|
|
Deferred
income taxes
|
|
|
|
70
|
|
|
|
114
|
|
Prepaid
expenses and other
|
|
|
|
639
|
|
|
|
348
|
|
|
|
|
|
7,026
|
|
|
|
6,321
|
|
Operating
property and equipment:
|
|
|
|
|
|
|
|
|
|
Owned
-
|
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
|
9,206
|
|
|
|
8,952
|
|
Advances
on flight equipment
|
|
|
|
91
|
|
|
|
91
|
|
Other
property and equipment
|
|
|
|
1,536
|
|
|
|
1,441
|
|
|
|
|
|
10,833
|
|
|
|
10,484
|
|
Less
- accumulated depreciation and amortization
|
|
|
|
(917 |
) |
|
|
(502 |
) |
|
|
|
|
9,916
|
|
|
|
9,982
|
|
Capital
leases:
|
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
|
1,512
|
|
|
|
1,511
|
|
Other
property and equipment
|
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
1,546
|
|
|
|
1,545
|
|
Less
- accumulated amortization
|
|
|
|
(151 |
) |
|
|
(81 |
) |
|
|
|
|
1,395
|
|
|
|
1,464
|
|
|
|
|
|
11,311
|
|
|
|
11,446
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Intangibles,
less accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
(2007-
$285; 2006-$169)
|
|
|
|
2,912
|
|
|
|
3,028
|
|
Goodwill
|
|
|
|
2,695
|
|
|
|
2,703
|
|
Restricted
cash
|
|
|
|
447
|
|
|
|
506
|
|
Aircraft
lease deposits
|
|
|
|
327
|
|
|
|
539
|
|
Investments
|
|
|
|
194
|
|
|
|
113
|
|
Note
receivable from affiliate
|
|
|
|
-
|
|
|
|
201
|
|
Other,
net
|
|
|
|
726
|
|
|
|
724
|
|
|
|
|
|
|
7,301
|
|
|
|
7,814
|
|
|
|
|
|
$ |
25,638
|
|
|
$ |
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)
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Liabilities
and Stockholder’s Equity
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Advance
ticket sales
|
|
$ |
2,246
|
|
|
$ |
1,669
|
|
Mileage
Plus deferred revenue
|
|
|
1,201
|
|
|
|
1,111
|
|
Accounts
payable
|
|
|
832
|
|
|
|
671
|
|
Accrued
salaries, wages and benefits
|
|
|
823
|
|
|
|
795
|
|
Advanced
purchase of miles
|
|
|
708
|
|
|
|
681
|
|
Long-term
debt maturing within one year (Note 11)
|
|
|
654
|
|
|
|
1,687
|
|
Fuel
purchase commitments
|
|
|
418
|
|
|
|
283
|
|
Current
obligations under capital leases
|
|
|
319
|
|
|
|
110
|
|
Accrued
interest
|
|
|
163
|
|
|
|
241
|
|
Accounts
payable to affiliates
|
|
|
6
|
|
|
|
2
|
|
Other
|
|
|
710
|
|
|
|
920
|
|
|
|
|
8,080
|
|
|
|
8,170
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note 11)
|
|
|
7,026
|
|
|
|
7,449
|
|
Long-term
obligations under capital leases
|
|
|
1,129
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities and deferred credits:
|
|
|
|
|
|
|
|
|
Mileage
Plus deferred revenue
|
|
|
2,666
|
|
|
|
2,569
|
|
Postretirement
benefit liability
|
|
|
1,934
|
|
|
|
1,955
|
|
Deferred
income taxes
|
|
|
966
|
|
|
|
596
|
|
Deferred
pension liability
|
|
|
137
|
|
|
|
130
|
|
Other
|
|
|
801
|
|
|
|
769
|
|
|
|
|
6,504
|
|
|
|
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 September 30, 2007 and December 31, 2006
|
|
|
-
|
|
|
|
-
|
|
Additional
capital invested
|
|
|
1,981
|
|
|
|
2,127
|
|
Retained
earnings
|
|
|
487
|
|
|
|
23
|
|
Accumulated
other comprehensive income
|
|
|
65
|
|
|
|
82
|
|
|
|
|
2,533
|
|
|
|
2,232
|
|
|
|
$ |
25,638
|
|
|
$ |
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
|
|
|
|
Nine
Months
Ended
September
30,
|
|
|
Period
from February 1 to September 30,
|
|
|
Period
from
January
1 to
January
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Cash
flows provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before reorganization items
|
|
$ |
467
|
|
|
$ |
91
|
|
|
$ |
(83 |
) |
Adjustments
to reconcile to net cash provided (used) by operating
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in advance ticket sales
|
|
|
577
|
|
|
|
339
|
|
|
|
109
|
|
Increase
in deferred income taxes
|
|
|
372
|
|
|
|
65
|
|
|
|
-
|
|
Increase
in receivables
|
|
|
(271 |
) |
|
|
(91 |
) |
|
|
(98 |
) |
Depreciation
and amortization
|
|
|
694
|
|
|
|
592
|
|
|
|
68
|
|
Mileage
Plus deferred revenue and advanced purchase of miles
|
|
|
214
|
|
|
|
153
|
|
|
|
14
|
|
Other,
net
|
|
|
(65 |
) |
|
|
(25 |
) |
|
|
153
|
|
|
|
|
1,988
|
|
|
|
1,124
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(purchases) sales of short-term investments
|
|
|
(2,552 |
) |
|
|
72
|
|
|
|
2
|
|
Purchases
of EETC securities (Notes 1 and 11)
|
|
|
(76 |
) |
|
|
-
|
|
|
|
-
|
|
Additions
to property and equipment
|
|
|
(428 |
) |
|
|
(222 |
) |
|
|
(30 |
) |
(Increase)
decrease in restricted cash
|
|
|
54
|
|
|
|
303
|
|
|
|
(203 |
) |
Decrease
in segregated funds
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
Other,
net
|
|
|
(26 |
) |
|
|
(15 |
) |
|
|
(7 |
) |
|
|
|
(3,028 |
) |
|
|
338
|
|
|
|
(238 |
) |
Cash
flows provided (used) by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from secured notes
|
|
|
694
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds
from Credit Facility
|
|
|
-
|
|
|
|
2,961
|
|
|
|
-
|
|
Repayment
of Credit Facility
|
|
|
(995 |
) |
|
|
(175 |
) |
|
|
-
|
|
Repayment
of DIP Financing
|
|
|
-
|
|
|
|
(1,157 |
) |
|
|
-
|
|
Repayment
of other long-term debt
|
|
|
(1,148 |
) |
|
|
(544 |
) |
|
|
(24 |
) |
Principal
payments under capital leases
|
|
|
(60 |
) |
|
|
(66 |
) |
|
|
(5 |
) |
Other,
net
|
|
|
16
|
|
|
|
(65 |
) |
|
|
(1 |
) |
|
|
|
(1,493 |
) |
|
|
954
|
|
|
|
(30 |
) |
Increase
(decrease) in cash and cash equivalents during the period
|
|
|
(2,533 |
) |
|
|
2,416
|
|
|
|
(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
|
|
$ |
1,246
|
|
|
$ |
4,012
|
|
|
$ |
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”).
Investments. The
Company’s cash equivalents and short-term investments are classified as
held-to-maturity. In addition, the Company has $76 million of debt securities
that are reported as non-current investments, which are classified as
available-for-sale. The non-current debt investments are certain of the
Company’s previously issued debt instruments that were acquired in open market
transactions during the third quarter of 2007. See Note 11, "Debt
Obligations," for further information related to the $76 million of non-current
debt securities.
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 $50 million and $125 million for
the three and nine month periods ended September 30, 2007, respectively, and
United estimates that it will provide a total benefit of approximately
$180 million for the year ended December 31, 2007. The pre-tax diluted
per share benefit to UAL was approximately $0.32 and $0.81 for the three and
nine months ended September 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 the
third quarter of 2006, the Company recorded a special item of $30
million
as a benefit to income from continuing operations to reduce the Company’s
recorded obligation for the SFO municipal bonds to a revised estimate
of a
probable amount to be allowed by the Bankruptcy Court, in accordance
with
AICPA Practice Bulletin 11, “Accounting for Preconfirmation
Contingencies in Fresh-Start Reporting” (“Practice Bulletin 11”). 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
September
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. At December
31, 2006, United had accrued $60 million for this matter. Trial on
this
matter occurred during April 2007 and the two parties filed
post-trial briefs in the second quarter of 2007. During the first
quarter
of 2007 the Company reduced its accrual for this matter by $19 million.
In
August 2007, the Bankruptcy Court issued its written opinion holding
that
the value of the security interest is approximately $33 million.
During
the third quarter of 2007, United adjusted the accrual for this matter
to
$33 million resulting in a favorable adjustment of $8 million that
is
classified as part of special items in the Company’s Condensed
Statements of Consolidated Operations
(Unaudited).
|
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 111.4 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 September 30, 2007. As of September 30, 2007,
approximately 46,000 valid unsecured claims aggregating to approximately
$29.1 billion in claim value had received those shares to partially satisfy
those claims. As of September 30, 2007, there are 3,560,374 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. In November 2007, approximately 1 million additional
UAL
common shares are expected to be distributed. The final distributions of shares
will not occur until 2008 or later, 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 $29.6 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
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
three and nine months ended September 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. Certain of
the accrual adjustments identified below are a direct result of the Company's
ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies
and
do not relate directly to the Company's ongoing performance; therefore, the
Company considers these adjustments to be special.
|
|
Three
months
|
|
|
Nine
months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(in
millions)
|
|
September
30, 2007
|
|
|
Balance
at beginning of period
|
|
$ |
213
|
|
|
$ |
325
|
|
|
Payments
|
|
|
-
|
|
|
|
(76 |
) |
|
Accruals
reclassified
|
|
|
(31 |
) |
|
|
(31 |
) |
(a)
|
Adjustments
impacting income:
|
|
|
|
|
|
|
|
|
|
Accrual
adjustments classified as special revenue credits
|
|
|
(45 |
) |
|
|
(45 |
) |
(b)
|
Other
changes in contingent liabilities classified as revenues
|
|
|
(26 |
) |
|
|
(26 |
) |
(c)
|
Accrual
adjustments classified as special expense credits
|
|
|
(8 |
) |
|
|
(30 |
) |
(d)
|
Accrual
adjustments classified as other operating expense credits
|
|
|
2
|
|
|
|
(12 |
) |
(e)
|
Total
adjustments impacting income
|
|
|
(77 |
) |
|
|
(113 |
) |
|
Balance
at September 30, 2007
|
|
$ |
105
|
|
|
$ |
105
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
credit to operating income during period from above items
|
|
$ |
(77 |
) |
|
$ |
(113 |
) |
|
Additional
special operating expense credit
|
|
|
(14 |
) |
|
|
(14 |
) |
(f)
|
Total
operating income benefit
|
|
$ |
(91 |
) |
|
$ |
(127 |
) |
|
______________________
|
(a)
|
This
amount relates to accruals that are still recognized in the Company’s
Condensed Statements of Consolidated Financial Position
(Unaudited); however, these accruals are now deemed to be no longer
directly related to bankruptcy proceedings; therefore, the accruals
are no
longer classified as part of bankruptcy administrative and priority
claims.
|
|
(b)
|
In
the third quarter of 2007, the Company recorded a change in estimate
for
certain liabilities relating to bankruptcy administrative claims.
This
adjustment resulted directly from the progression of the Company’s ongoing
efforts to resolve certain bankruptcy pre-confirmation contingencies;
therefore, it was classified as a special operating revenue
credit of $45 million that relates to both Mainline passenger revenues
($37 million) and United Express revenues ($8
million).
|
|
(c)
|
The
Company separately recorded a $26 million benefit from a change in
estimate to certain other contingent liabilities based largely on
changes
in underlying facts and circumstances occurring during the third
quarter.
This benefit was recorded as a credit to mainline passenger revenues
of
$22 million, and to regional affiliate revenues of $4
million.
|
|
(d)
|
Amount
relates to special operating expense credits of $8 million and $30
million
in the three and nine months ended September 30, 2007, respectively,
relating to ongoing litigation for San Francisco and Los Angeles
facility
lease secured interests as discussed above. A benefit of $30 million
was
recorded in the three and eight month periods ended September 30,
2006, as
a result of changes in estimate regarding these litigation
matters.
|
|
(e)
|
This
amount relates to accrual adjustments impacting various operating
expense
line items that the Company recorded due to a change in estimate
for
certain liabilities relating to bankruptcy administrative claims.
These
adjustments resulted directly from the progression of the Company’s
ongoing efforts to resolve certain bankruptcy pre-confirmation
contingencies.
|
|
(f)
|
This
amount relates to an accrual adjustment that the Company recorded
due to a
change in estimate for certain liabilities relating to bankruptcy
administrative claims. This adjustment, which was recorded as a credit
to
other operating expense, resulted directly from the progression of
the
Company’s ongoing efforts to resolve certain bankruptcy pre-confirmation
contingencies.
|
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
|
|
|
|
(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 nine month period ended September 30, 2007 were as
follows:
|
|
|
Nine
Months
|
|
|
|
|
Ended
|
|
|
UAL
|
|
September
30, 2007
|
|
|
UAL
common stock outstanding at beginning of period
|
|
|
112,280,629
|
|
|
Issuance
of UAL common stock to creditors
|
|
|
3,091,812
|
|
|
Issuance
of UAL common stock to employees
|
|
|
989,033
|
|
|
Forfeiture
of non-vested UAL restricted stock
|
|
|
(67,226 |
) |
|
Treasury
shares acquired
|
|
|
(258,926 |
) |
|
UAL
common stock outstanding at end of period
|
|
|
116,035,322
|
|
|
|
|
|
|
|
|
Treasury
shares at beginning of period
|
|
|
136,777
|
|
|
Shares
acquired for treasury
|
|
|
258,926
|
|
|
Treasury
shares at end of period
|
|
|
395,703
|
|
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 3,560,374 shares
that are reserved as of September 30, 2007 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 during the nine
month
period 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 available to common shareholders by the
weighted-average number of shares of common stock outstanding. Approximately
3.6 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 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 September 30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
Period
from February 1 to
September
30,
|
|
|
One
Month
Ended
January
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
334
|
|
|
$ |
190
|
|
|
$ |
456
|
|
|
$ |
86
|
|
|
$ |
22,851
|
|
Preferred
stock dividend requirements
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(1 |
) |
Earnings
available to common stockholders
|
|
$ |
331
|
|
|
$ |
187
|
|
|
$ |
448
|
|
|
$ |
79
|
|
|
$ |
22,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
117.5
|
|
|
|
115.6
|
|
|
|
117.3
|
|
|
|
115.3
|
|
|
|
116.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share, basic
|
|
$ |
2.82
|
|
|
$ |
1.62
|
|
|
$ |
3.82
|
|
|
$ |
0.69
|
|
|
$ |
196.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
available to common stockholders
|
|
$ |
331
|
|
|
$ |
187
|
|
|
$ |
448
|
|
|
$ |
79
|
|
|
$ |
22,850
|
|
Effect
of 2% preferred securities
|
|
|
3
|
|
|
|
3
|
|
|
|
8
|
|
|
|
7
|
|
|
|
-
|
|
Effect
of 4.5% senior limited-subordination convertible
notes
|
|
|
5
|
|
|
|
5
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of 5% convertible notes
|
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
Earnings
available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
the effect of dilutive securities
|
|
$ |
341
|
|
|
$ |
196
|
|
|
$ |
475
|
|
|
$ |
86
|
|
|
$ |
22,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
117.5
|
|
|
|
115.6
|
|
|
|
117.3
|
|
|
|
115.3
|
|
|
|
116.2
|
|
Effect
of non-vested stock options
|
|
|
0.4
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of non-vested restricted shares
|
|
|
1.2
|
|
|
|
0.7
|
|
|
|
1.1
|
|
|
|
0.5
|
|
|
|
-
|
|
Effect
of 2% preferred securities
|
|
|
11.0
|
|
|
|
10.8
|
|
|
|
11.0
|
|
|
|
10.8
|
|
|
|
-
|
|
Effect
of 4.5% senior limited-subordination convertible
notes
|
|
|
20.8
|
|
|
|
20.8
|
|
|
|
20.8
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of 5% convertible notes
|
|
|
3.2
|
|
|
|
3.2
|
|
|
|
3.2
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
weighted average shares outstanding
|
|
|
154.1
|
|
|
|
151.1
|
|
|
|
153.5
|
|
|
|
126.6
|
|
|
|
116.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share, diluted
|
|
$ |
2.21
|
|
|
$ |
1.30
|
|
|
$ |
3.10
|
|
|
$ |
0.68
|
|
|
$ |
196.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially
dilutive shares excluded from diluted per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
3.9
|
|
|
|
5.3
|
|
|
|
4.2
|
|
|
|
5.3
|
|
|
|
9.0
|
|
Restricted
shares
|
|
|
0.8
|
|
|
|
2.0
|
|
|
|
0.9
|
|
|
|
2.2
|
|
|
|
-
|
|
4.5%
senior limited-subordination convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20.9
|
|
|
|
-
|
|
5%
convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.2
|
|
|
|
-
|
|
|
|
|
4.7
|
|
|
|
7.3
|
|
|
|
5.1
|
|
|
|
31.6
|
|
|
|
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 856,852 and 996,536 awards were
available for grant as of September 30, 2007 and December 31, 2006,
respectively, under the MEIP and DEIP. UAL and United recognized share-based
compensation expense of $11 million and $37 million during the three
and nine months ended September 30, 2007 and $28 million and $137 million during
the three and eight months ended September 30, 2006, respectively. The Company’s
unrecognized share-based compensation expense was $51 million and
$80 million as of September 30, 2007 and December 31, 2006,
respectively.
The
table
below summarizes stock option activity pursuant to UAL’s MEIP stock options for
the nine months ended September 30, 2007:
|
|
Options
|
|
Outstanding
at beginning of period
|
|
|
5,064,672
|
|
Granted
|
|
|
199,366
|
|
Exercised
|
|
|
(857,799 |
) |
Canceled
|
|
|
(124,574 |
) |
Outstanding
at end of period
|
|
|
4,281,665
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,077,377
|
|
The
table
below summarizes UAL’s restricted stock activity for the nine months ended
September 30, 2007:
|
|
Restricted Stock
|
|
Nonvested
at beginning of period
|
|
|
2,712,787
|
|
Granted
|
|
|
131,234
|
|
Vested
|
|
|
(753,167 |
) |
Terminated
|
|
|
(67,226 |
) |
Nonvested
at end of period
|
|
|
2,023,628
|
|
(7)
Income Taxes
UAL
and
United had effective tax rates of 41% and 43% in the three and nine months
ended September 30, 2007, respectively, and 24% and 41% percent for the three
and eight months ended September 30, 2006, respectively. The effective tax
rates
were based upon forecasted annual income for each respective period. The most
significant items causing the difference between UAL’s and United’s effective
tax rates and the federal statutory rate of 35% 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 September 30, 2007, UAL and United had a federal
net operating loss (“NOL”) carry forward of $6.4 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 September 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 September 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 nine months ended
September 30, 2007 resulting from the adoption of FIN 48.
The
amount of unrecognized tax benefits did not materially change from
January 1, 2007 to September 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
Consolidated 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 September 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 $794 million and $782 million at September 30, 2007 and
December 31, 2006, respectively, resulting from an excess tax deduction of
$2,154 million and $2,121 million, 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.
The
Company has an NOL carry forward tax benefit of approximately $2.5 billion
for
federal and state income tax purposes that primarily originated before the
Company emerged from bankruptcy and will expire over a five to twenty year
period. The Company’s ability to utilize these benefits may be impaired if the
Company were to have a change of ownership within the meaning of Section 382
of
the Internal Revenue Code. To avoid a potential adverse effect on the Company’s
ability to utilize its NOL carry forward for federal income tax purposes, the
Company’s certificate of incorporation contains a “5% Ownership Limitation,”
applicable to all stockholders except the PBGC. The
5%
Ownership Limitation remains effective until February 1, 2011. Generally, the
5%
limitation prohibits (i) the acquisition by a single stockholder of shares
representing 5% or more of the common stock of UAL and (ii) any acquisition
or
disposition of common stock by a stockholder that already owns 5% or more of
UAL’s common stock, unless prior written approval is granted by the UAL Board of
Directors.
(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
September
30,
|
|
|
Three Months
Ended
September
30,
|
|
|
Three Months
Ended
September
30,
|
|
|
Three Months
Ended
September
30,
|
|
(In millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
2
|
|
|
$ |
3
|
|
|
$ |
11
|
|
|
$ |
9
|
|
Interest
cost
|
|
|
2
|
|
|
|
2
|
|
|
|
29
|
|
|
|
31
|
|
Expected
return on plan assets
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Amortization
of unrecognized gain
|
|
|
1
|
|
|
|
—
|
|
|
|
(4 |
) |
|
|
—
|
|
Net
periodic benefit costs
|
|
$ |
3
|
|
|
$ |
3
|
|
|
$ |
35
|
|
|
$ |
39
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
Nine
Months
Ended
September
30,
|
|
Period from
February 1
to
September
30,
|
|
Period from
January 1 to
January 31,
|
|
Nine
Months
Ended
September
30,
|
|
Period from
February 1
to
September
30,
|
|
Period from
January 1 to
January 31,
|
(In millions)
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
2007
|
|
2006
|
|
2006
|
Service
cost
|
|
$ |
7
|
|
|
$ |
7
|
|
|
$ |
1
|
|
|
$ |
29
|
|
|
$ |
24
|
|
|
$ |
3
|
|
Interest
cost
|
|
|
7
|
|
|
|
6
|
|
|
|
1
|
|
|
|
91
|
|
|
|
84
|
|
|
|
11
|
|
Expected
return on plan assets
|
|
|
(7
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
Amortization
of prior service credit including transition obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13
|
)
|
Amortization
of unrecognized (gain) loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
8
|
|
Net
periodic benefit costs
|
|
$ |
7
|
|
|
$ |
7
|
|
|
$ |
1
|
|
|
$ |
109
|
|
|
$ |
104
|
|
|
$ |
8
|
|
(9)
Segment Information
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 nine
month periods ended September 30, 2007, the eight month period ended September
30, 2006 and the one month period ended January 31, 2006. Amounts for the
2006 periods have been retrospectively changed from prior period presentation
to
conform to the new Mainline and United Express segments. See Note 2, “Voluntary
Reorganization Under Chapter 11,” for discussion of the special items presented
in the table below.
|
|
Successor
|
|
|
Predecessor
|
|
(In
millions)
|
|
Three
Months Ended
|
|
|
Nine
Months
Ended
|
|
|
Period
from
February
1 to
|
|
|
Period
from
January
1 to
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
January
31,
|
|
UAL
segment information:
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$ |
4,663
|
|
|
$ |
4,403
|
|
|
$ |
12,770
|
|
|
$ |
11,297
|
|
|
$ |
1,254
|
|
United
Express
|
|
|
819
|
|
|
|
773
|
|
|
|
2,298
|
|
|
|
1,999
|
|
|
|
204
|
|
Special
revenue items
|
|
|
45
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$ |
5,527
|
|
|
$ |
5,176
|
|
|
$ |
15,113
|
|
|
$ |
13,296
|
|
|
$ |
1,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$ |
431
|
|
|
$ |
160
|
|
|
$ |
585
|
|
|
$ |
13
|
|
|
$ |
(59 |
) |
United
Express
|
|
|
68
|
|
|
|
60
|
|
|
|
122
|
|
|
|
103
|
|
|
|
(24 |
) |
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,934
|
|
Special
revenue items
|
|
|
45
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
Special
expense items
|
|
|
22
|
|
|
|
30
|
|
|
|
44
|
|
|
|
30
|
|
|
|
-
|
|
Less:
equity earnings (a)
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
Consolidated
earnings before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes and equity in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
affiliates
|
|
$ |
565
|
|
|
$ |
249
|
|
|
$ |
793
|
|
|
$ |
142
|
|
|
$ |
22,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$ |
4,666
|
|
|
$ |
4,403
|
|
|
$ |
12,780
|
|
|
$ |
11,294
|
|
|
$ |
1,250
|
|
United
Express
|
|
|
819
|
|
|
|
773
|
|
|
|
2,298
|
|
|
|
1,999
|
|
|
|
204
|
|
Special
revenue items
|
|
|
45
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$ |
5,530
|
|
|
$ |
5,176
|
|
|
$ |
15,123
|
|
|
$ |
13,293
|
|
|
$ |
1,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$ |
436
|
|
|
$ |
170
|
|
|
$ |
604
|
|
|
$ |
23
|
|
|
$ |
(59 |
) |
United
Express
|
|
|
68
|
|
|
|
60
|
|
|
|
122
|
|
|
|
103
|
|
|
|
(24 |
) |
Reorganization
items, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,709
|
|
Special
revenue items
|
|
|
45
|
|
|
|
-
|
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
Special
expense items
|
|
|
22
|
|
|
|
30
|
|
|
|
44
|
|
|
|
30
|
|
|
|
-
|
|
Less: equity
earnings (a)
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
Consolidated
earnings before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes and equity in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
affiliates
|
|
$ |
570
|
|
|
$ |
259
|
|
|
$ |
812
|
|
|
$ |
152
|
|
|
$ |
22,621
|
|
|
(a)
|
Equity
earnings are part of the Mainline
segment.
|
(10)
Comprehensive Income (Loss)
For
the
three month periods ended September 30, 2007 and 2006, UAL’s total comprehensive
income was $352 million and $133 million, respectively. For the nine month
period ended September 30, 2007, the eight month period ended September 30,
2006, and the one month period ended January 31, 2006, UAL’s total
comprehensive income was $479 million, $71 million and $22.9 billion,
respectively. For the three month periods ended September 30, 2007 and 2006,
United’s total comprehensive income was $355 million and $144 million,
respectively. For the nine month period ended September 30, 2007, the eight
month period ended September 30, 2006, and the one month period ended
January 31, 2006, United’s total comprehensive income was
$490 million, $82 million and $22.6 billion,
respectively.
The
differences between net income and total comprehensive income 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 nine
months ended September 30, 2007, includes recognition and subsequent
amortization of deferred net periodic pension costs that were recorded as a
component of accumulated other comprehensive income in accordance with 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.
(11)
Debt Obligations
See
the
UAL and United 2006 Annual Reports on Form 10-K for a detailed discussion of
their respective debt obligations. The following includes 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 first nine months 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”) existing as of the closing date of the Amended
Credit Facility (February 2, 2007), (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, (d) accounts receivable, and (e) such other assets which shall
be reasonably satisfactory to the collateral agents.
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 14, “Lease Obligations,” 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. provided 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
do
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 September
30, 2007 or December 31, 2006.
Purchases
of EETC Securities
As
discussed in Note 1, “Basis of Presentation,” the Company purchased certain of
its previously issued and outstanding EETC securities in open market
transactions during the third quarter of 2007. The EETC securities purchased
by
the Company, totaling $76 million, were issued by third-party pass-through
trusts that are not consolidated by the Company. The pass-through
trusts' only investments are equipment notes issued by
United. The acquisition of the EETC securities does not legally
extinguish the corresponding equipment notes; therefore, the
certificates are classified as a non-current investment.
(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 nine month periods ended September 30,
2007 and the eight month period ended September 30, 2006, the Successor Company
entered into and settled various derivative positions that were classified
as
economic hedges.
In
the
three months ended September 30, 2007 and 2006, the Company recognized a net
hedge gain (loss) of $18 million and $(18) million, respectively, on economic
hedges that were classified as Mainline fuel expense in the Condensed
Statements of Consolidated Operations (Unaudited). In the nine months ended
September 30, 2007 and the eight months ended September 30, 2006, the Company’s
Mainline fuel expense included income (loss) of $57 million and
$(11) million, respectively, from net gains (losses) on economic hedges.
The net hedge gains recorded in the three and nine month periods ended September
30, 2007 included $10 million and $13 million, respectively, of unrealized
mark-to-market gains for contracts settling after September 30,
2007.
As
of
September 30, 2007, the Company had hedged 18% of forecasted fourth quarter
2007
fuel consumption primarily through heating oil three-way collars. On a
weighted-average basis, hedge protection begins if heating oil exceeds $2.04
per
gallon and is capped at $2.22 per gallon. Conversely, payment obligations
begin if heating oil, on a weighted-average basis, drops below $1.86 per
gallon.
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 September 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 September
30, 2007, the notional amount of these foreign currencies hedged with the
forward contracts in U.S. dollars terms was approximately $135 million. These
contracts expire at various dates from October 2007 to March 2008. For the
three
and nine months ended September 30, 2007, there were no material gains or losses
from these derivative positions. As of September 30, 2007, the fair value of
these contracts was a loss of $3 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
September 30, 2007, future commitments for the purchase of property and
equipment, principally aircraft, approximated $3.0 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, $0.3 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 that are not based on income (e.g., gross receipts
taxes, excise taxes and sales and use taxes) 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)
Lease
Obligations
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.
(15)
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
September 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. In September 2007, the U.S. Department of
Transportation granted United antitrust immunity with bmi. The immunity goes
into effect at the same time as the Open Skies treaty between the U.S. and
EU in
2008. 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.
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.
(16)
Statement of Consolidated Cash Flows—Supplemental
Disclosures
UAL
and
United supplemental cash flow disclosures are as follows:
|
|
Successor
|
|
Predecessor
|
|
|
|
Nine
Months
Ended
September
30,
|
|
Period from
February 1
to
September
30,
|
|
Period from
January 1 to 31,
|
|
(In millions)
|
|
2007
|
|
2006
|
|
2006
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
|
$ |
487
|
|
|
$ |
496
|
|
|
$ |
35
|
|
|
Income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt incurred for additions to other assets
|
|
$ |
—
|
|
|
$ |
242
|
|
|
$ |
—
|
|
|
Capital
lease obligations incurred to acquire assets
|
|
|
—
|
|
|
|
155
|
|
|
|
—
|
|
|
(17)
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.
(18)
Subsequent Event
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 transaction closed on October 25,
2007 and generated proceeds of $128 million and a pre-tax net gain of $41
million.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
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 3,300 flights
a day to more than 200 destinations through its Mainline and United Express
services. United offers more than 1,500 average daily Mainline (including
Ted(SM))
departures to more than 120 destinations in 27 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 1,800 average daily departures to more than 145
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
September 2007, UAL’s management and its Board of Directors completed a
strategic planning session to discuss the future of United. The Company
has developed a five-year plan, the ambition of which is to position
United as the global airline of choice for premium customers, employees
and investors, while maintaining our fundamental commitment to safety
and
balancing the needs of all of our stakeholders. The Company’s main focus
continues to be strengthening our core business, including a detailed
roadmap of more than 250 initiatives and significant capital investment
over the next five years. These investments will be targeted to
support improvements for customers and employees, and drive revenue
and
efficiency improvements. In addition to strengthening the performance
of
the airline, our plan also includes unlocking the value of business
units
such as United Services and Mileage Plus. Our goal is to generate
returns
to shareholders and stakeholders that are competitive with American
industry in general.
|
|
·
|
In
2006, United announced a program to reduce projected 2007 expenses
by $400
million. We are on track to achieve these savings in
2007.
|
|
·
|
In
July 2007, United entered into an agreement to sell its interest
in
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 transaction closed on
October
25, 2007 and generated proceeds of $128 million and a pre-tax net
gain of
$41 million.
|
|
·
|
In
July 2007, in order to refinance certain aircraft at a lower cost
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. The Company
purchased these aircraft at a total price in excess of $150 million,
largely with the proceeds of the EETC transaction executed by the
Company
in the second quarter of 2007. These two transactions combined did
not
change the total number of encumbered
aircraft.
|
|
·
|
In
2007, UAL’s operating cash flow improved by 58% as compared to the prior
periods, increasing to $2.0 billion for the nine months ended September
30, 2007. The improvement in cash flows was primarily due to improved
results of operations and certain working capital changes, as discussed
below.
|
|
·
|
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 December 16,
2007.
|
|
·
|
United
also 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 began on October 28, 2007.
|
|
·
|
The
Company will soon showcase the first of 97 international aircraft
to be
refitted with new premium seats, entertainment systems and other
product
enhancements with an inaugural flight from Washington Dulles to Frankfurt.
With this flight, United earns the distinction of becoming the first
U.S.
carrier to offer 180-degree, lie-flat beds in business class on overseas
flights.
|
|
·
|
United
and Aloha Airlines (“Aloha”) expanded their existing cooperation agreement
and strengthened their partnership in the Hawaii and Transpacific
markets,
effective July 3, 2007. This agreement 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 received a minority equity stake in Aloha that could
expand over time and a seat on Aloha’s board of
directors.
|
|
·
|
In
September 2007, the Company announced it received U.S. Department
of
Transportation (“DOT”) approval to become the first U.S. carrier to begin
daily nonstop service to Guangzhou, China. The service from San Francisco
will commence in June 2008.
|
|
·
|
In
September 2007, United announced that new daily passenger and cargo
service between Los Angeles and Frankfurt, Germany will commence
on
December 15, 2007. In response to increased customer demand for more
frequent flights to Europe this addition represents United’s eighth daily
flight to Frankfurt and with the new service from Los Angeles, United
now
serves Frankfurt from all four of its international
gateways.
|
|
·
|
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. In September 2007, the DOT granted authority to effectuate
antitrust immunity between United and bmi, and to include bmi in
the
multilateral group of Star Alliance carriers that had already been
granted
antitrust immunity by the DOT. The immunity goes into effect at the
same
time as the Open Skies treaty between the U.S. and the EU in March
2008.
|
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 nine month
periods ended September 30, 2007, to the combined results for the same three
and
nine month periods of 2006. The 2006 combined nine month period includes
Predecessor results for the one month period ended January 31, 2006. The
presentation of results for the combined nine month period of 2006 are non-GAAP
measures. However, management believes that analysis and explanation of the
combined nine month period of 2006 provides management and other users a useful
basis of comparison to the nine months ended September 30, 2007. The
discussion of financial results below includes a discussion of certain
bankruptcy related matters that the Company has classified as special items
in
its Condensed Statements of Consolidated Operations (Unaudited).
These items have been classified as special because they are directly
related to
the resolution of bankruptcy administrative claims and are not
indicative of the Company's ongoing financial performance.
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 nine month periods ended
September 30, 2007 as compared to the same periods in 2006:
|
|
Successor
|
|
|
Combined
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Nine
Months
|
|
|
Nine
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
Three
Months Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
February
1 to
|
|
|
January
1 to
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
January
31,
|
|
UAL |
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
(a)
|
|
|
2006
|
|
|
2006
|
|
Earnings
(loss) before reorganization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
items,
income taxes and equity in earnings of affiliates
|
|
$ |
565
|
|
|
$ |
249
|
|
|
$ |
793
|
|
|
$ |
54
|
|
|
$ |
142
|
|
|
$ |
(88 |
) |
Reorganization
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,934
|
|
|
|
-
|
|
|
|
22,934
|
|
Income
tax expense
|
|
|
(232 |
) |
|
|
(60 |
) |
|
|
(340 |
) |
|
|
(60 |
) |
|
|
(60 |
) |
|
|
-
|
|
Equity
in earnings of affiliates
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
9
|
|
|
|
4
|
|
|
|
5
|
|
UAL
net income
|
|
$ |
334
|
|
|
$ |
190
|
|
|
$ |
456
|
|
|
$ |
22,937
|
|
|
$ |
86
|
|
|
$ |
22,851
|
|
United
net income
|
|
$ |
337
|
|
|
$ |
195
|
|
|
$ |
467
|
|
|
$ |
22,717
|
|
|
$ |
91
|
|
|
$ |
22,626
|
|
__________________________
(a)
|
The
combined period includes the results for the one month period ended
January 31, 2006 (Predecessor) and the eight month period ended
September 30, 2006 (Successor).
|
UAL
In
the
three and nine month periods ended September 30, 2007, UAL’s income before
reorganization items, income taxes and equity in earnings of affiliates improved
by $316 million and $739 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.
|
·
|
Including
special items, passenger revenues increased by $400 million and $619
million in the three and nine month periods ended September 30, 2007,
respectively, as compared to the prior periods due to increases,
in yield
for the third quarter and in both traffic and yield for the nine
months
ended September 30, 2007. The special revenue items of $45 million
were recognized in the three and nine month periods of 2007 due to
an
accounting accrual adjustment made as a result of ongoing resolution
of
certain bankruptcy pre-confirmation contingencies. Additional accrual
adjustments of $26 million were recorded as a credit to Mainline
and
United Express passenger revenues in the third quarter of 2007 due
to a
change in estimate to certain other contingent liabilities. See Note
2,
“Voluntary Reorganization Under Chapter 11” in Combined Notes to
Condensed Consolidated Financial Statements (Unaudited) for a further
discussion of these adjustments.
|
|
·
|
During
the nine months ended September 30, 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
$30 million based on an updated analysis of its potential
obligations. A $22 million benefit was recorded in the first quarter
of
2007 with an additional benefit of $8 million in the third quarter
of
2007. Both items are classified as special items in the Condensed
Statements of Consolidated Operations (Unaudited). The Company also
recorded an additional special credit to expense of $14 million in
the
third quarter of 2007 due to accrual adjustments related to ongoing
resolution of certain bankruptcy pre-confirmation
contingencies.
|
|
·
|
In
the three and nine month periods ended September 30, 2007, UAL recognized
income tax expense of $232 million and $340 million, respectively.
Income tax expense of $60 million was recorded in both of the prior
year
periods.
|
|
·
|
UAL
interest expense, net of interest income, decreased by $2 million
and $70
million in the three and nine months ended September 30, 2007 as
compared
to the year-ago periods primarily due to the prepayment and amendment
of
the
Credit Facility in February 2007 as discussed below. The 2006 quarterly
net interest included a $30 million benefit due to the Company’s
discontinuance of the accrual of imputed interest expense associated
with
its advanced purchase of miles.
|
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 nine
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 bankruptcy 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 September 30, 2007, UAL had total cash, including
restricted cash and short-term investments, of $5.0 billion, of which $4.9
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 both generated cash
flow from operations of $2.0 billion during the nine month period ended
September 30, 2007, as compared to operating cash flow of $1.3 billion in the
combined nine month period of 2006. See Liquidity and Capital Resources
below for further information.
Capital
Commitments. As of September 30, 2007,
the Company’s future commitments for the purchase of property and equipment,
principally aircraft, approximated $3.0 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.
Results
of Operations
Third
Quarter 2007 Compared to Third 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 $656 million in the three months ended September
30, 2007 improved by $321 million as compared to the operating income of
$335 million in the year-ago period. UAL’s net income improved by $144
million to $334 million in the three month period ended September 30, 2007
as compared to net income of $190 million in the year-ago period. United had
similar improvements in its results of operations with operating income and
net
income improving by $323 million and $142 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,
special items and other factors discussed below. Income tax expense was
significantly higher in the 2007 period as compared to the 2006 period due
to
higher pre-tax income in the 2007 period and a lower effective tax rate in
the
2006 period, as income tax expense was not recorded by the Company until the
third quarter of 2006 as discussed below.
Operating
Revenues. The following table illustrates the year-over-year
percentage change in UAL and United operating revenues:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
(In
millions)
|
|
September
30,
|
|
|
$
|
|
|
|
%
|
|
UAL |
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
Passenger
- United Airlines
|
|
$ |
4,225
|
|
|
$ |
3,916
|
|
|
$ |
309
|
|
|
|
7.9
|
|
Passenger
- Regional Affiliates
|
|
|
819
|
|
|
|
773
|
|
|
|
46
|
|
|
|
6.0
|
|
Cargo
|
|
|
198
|
|
|
|
183
|
|
|
|
15
|
|
|
|
8.2
|
|
Special
operating items
|
|
|
45
|
|
|
|
-
|
|
|
|
45 |
|
|
|
- |
|
Other
operating revenues |
|
|
240 |
|
|
|
304 |
|
|
|
(64 |
) |
|
|
(21.1 |
) |
|
|
$ |
5,527
|
|
|
$ |
5,176
|
|
|
$ |
351
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
4,225
|
|
|
$ |
3,916
|
|
|
$ |
309
|
|
|
|
7.9
|
|
Passenger
- Regional Affiliates
|
|
|
819
|
|
|
|
773
|
|
|
|
46
|
|
|
|
6.0
|
|
Cargo
|
|
|
198
|
|
|
|
183
|
|
|
|
15
|
|
|
|
8.2
|
|
Special
operating items
|
|
|
45
|
|
|
|
-
|
|
|
|
45 |
|
|
|
- |
|
Other
operating revenues |
|
|
243 |
|
|
|
304 |
|
|
|
(61 |
) |
|
|
(20.1 |
) |
|
|
$ |
5,530
|
|
|
$ |
5,176
|
|
|
$ |
354
|
|
|
|
6.8
|
|
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 third quarter period-to-period changes. Passenger
revenues presented below include the effects of the $45 million special
revenue items on Mainline ($37 million) and United Express ($8 million) revenue.
The special revenue items resulted directly from the Company’s ongoing efforts
to resolve certain bankruptcy pre-confirmation contingencies.
2007
|
|
North
America
|
|
|
Pacific
|
|
|
Atlantic
|
|
|
Latin
|
|
|
Mainline
|
|
|
United
Express
|
|
|
Consolidated
|
|
Increase
(decrease) from 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenues (in millions)
|
|
$ |
119
|
|
|
$ |
125
|
|
|
$ |
104
|
|
|
$ |
(2 |
) |
|
$ |
346
|
|
|
$ |
54
|
|
|
$ |
400
|
|
Passenger
revenues
|
|
|
4.9 |
% |
|
|
15.8 |
% |
|
|
18.4 |
% |
|
|
(2.3 |
)% |
|
|
8.8 |
% |
|
|
7.0 |
% |
|
|
8.5 |
% |
Available
seat miles (ASMs)
|
|
|
(4.6 |
)% |
|
|
5.1 |
% |
|
|
4.6 |
% |
|
|
(13.5 |
)% |
|
|
(1.5 |
)% |
|
|
1.3 |
% |
|
|
(1.3 |
)% |
Revenue
passenger miles (RPMs)
|
|
|
(1.8 |
)% |
|
|
3.4 |
% |
|
|
4.2 |
% |
|
|
(15.3 |
)% |
|
|
(0.3 |
)% |
|
|
1.1 |
% |
|
|
(0.1 |
)% |
Load
factor (points)
|
|
2.4
|
pts. |
|
(1.4
|
)pts. |
(0.3
|
)pts. |
(1.8
|
)pts. |
1.1
|
pts. |
|
(0.2
|
)pts. |
0.9
|
pts. |
Yield
(a)
|
|
|
7.0 |
% |
|
|
12.0 |
% |
|
|
14.9 |
% |
|
|
15.8 |
% |
|
|
9.1 |
% |
|
|
5.8 |
% |
|
|
8.7 |
% |
__________________
(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.
Including
the
special items related to Mainline ($37 million) and United Express ($8 million),
Mainline and United Express passenger revenues increased $346 million and
$54 million, respectively, in the 2007 period as compared to the same
period in 2006. In the third quarter of 2007, Mainline revenues benefited from
a
1.1 point increase in load factor and a 9.1% increase in yield as compared
to
the third quarter of 2006. In the same periods, United Express load factor
remained relatively flat while yield increased 5.8% resulting in increased
revenue. Revenues for both segments benefited from increased Mileage Plus
revenue of approximately $45 million and $10 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 $50 million in the third 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 consistent with our breakage policy.
UAL
cargo
revenues increased by $15 million, or 8%, in the three month period ended
September 30, 2007 as compared to the same period in 2006, reflecting increased
freight volume in both Domestic and Atlantic regions.
UAL
other
operating revenues decreased by $64 million, or 21%, in the three month
period ended September 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 $85 million of the other revenue
decrease. This decrease in jet fuel sales was due to several factors, including
decreased UAFC sales to our regional affiliates, our decision not to renew
various low margin supply agreements to other carriers and, decreased sales
of
excess inventory. The decrease in UAFC revenue had no impact on our operating
margin because UAFC cost of sales simultaneously decreased by $85 million
in the three months ended September 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
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
$
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
Aircraft
fuel
|
|
$ |
1,324
|
|
|
$ |
1,368
|
|
|
$ |
(44 |
) |
|
|
(3.2 |
) |
Salaries
and related costs
|
|
|
1,062
|
|
|
|
1,060
|
|
|
|
2
|
|
|
|
0.2
|
|
Regional
affiliates
|
|
|
751
|
|
|
|
713
|
|
|
|
38
|
|
|
|
5.3
|
|
Purchased
services
|
|
|
344
|
|
|
|
302
|
|
|
|
42
|
|
|
|
13.9
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
295
|
|
|
|
252
|
|
|
|
43
|
|
|
|
17.1
|
|
Depreciation
and amortization
|
|
|
245
|
|
|
|
226
|
|
|
|
19
|
|
|
|
8.4
|
|
Distribution
expenses
|
|
|
211
|
|
|
|
215
|
|
|
|
(4 |
) |
|
|
(1.9 |
) |
Landing
fees and other rent
|
|
|
201
|
|
|
|
199
|
|
|
|
2
|
|
|
|
1.0
|
|
Aircraft
rent
|
|
|
102
|
|
|
|
104
|
|
|
|
(2 |
) |
|
|
(1.9 |
) |
Cost
of third party sales
|
|
|
68
|
|
|
|
153
|
|
|
|
(85 |
) |
|
|
(55.6 |
) |
Special
operating items
|
|
|
(22 |
) |
|
|
(30 |
) |
|
|
8
|
|
|
|
26.7
|
|
Other
operating expenses
|
|
|
290
|
|
|
|
279
|
|
|
|
11
|
|
|
|
3.9
|
|
|
|
$ |
4,871
|
|
|
$ |
4,841
|
|
|
$ |
30
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
$
|
|
|
%
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$ |
1,324
|
|
|
$ |
1,368
|
|
|
$ |
(44 |
) |
|
|
(3.2 |
) |
Salaries
and related costs
|
|
|
1,059
|
|
|
|
1,059
|
|
|
|
-
|
|
|
|
-
|
|
Regional
affiliates
|
|
|
751
|
|
|
|
713
|
|
|
|
38
|
|
|
|
5.3
|
|
Purchased
services
|
|
|
344
|
|
|
|
301
|
|
|
|
43
|
|
|
|
14.3
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
295
|
|
|
|
252
|
|
|
|
43
|
|
|
|
17.1
|
|
Depreciation
and amortization
|
|
|
245
|
|
|
|
225
|
|
|
|
20
|
|
|
|
8.9
|
|
Distribution
expenses
|
|
|
211
|
|
|
|
215
|
|
|
|
(4 |
) |
|
|
(1.9 |
) |
Landing
fees and other rent
|
|
|
201
|
|
|
|
199
|
|
|
|
2
|
|
|
|
1.0
|
|
Aircraft
rent
|
|
|
102
|
|
|
|
104
|
|
|
|
(2 |
) |
|
|
(1.9 |
) |
Cost
of third party sales
|
|
|
67
|
|
|
|
150
|
|
|
|
(83 |
) |
|
|
(55.3 |
) |
Special
operating items
|
|
|
(22 |
) |
|
|
(30 |
) |
|
|
8
|
|
|
|
26.7
|
|
Other
operating expenses
|
|
|
291
|
|
|
|
281
|
|
|
|
10
|
|
|
|
3.6
|
|
|
|
$ |
4,868
|
|
|
$ |
4,837
|
|
|
$ |
31
|
|
|
|
0.6
|
|
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 September 30, 2006.
Aircraft
fuel decreased $44 million, or 3%, in the three month period ended
September 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 $2.30 per gallon in the third quarter of 2006 to $2.22 per gallon in the
third quarter of 2007. This decrease resulted from favorable market conditions.
Also benefiting aircraft fuel was a $36 million increase in net hedge gains
that were $18 million in the 2007 period, as compared to a net hedge loss
of $18 million in the 2006 period.
UAL
salaries and related costs were flat in the third quarter of 2007 as compared
to
the year-ago period. The negative impact of certain wage increases was offset
by
lower share-based compensation expense, which was $28 million in the 2006
period, but only $11 million in the 2007 period. Share-based compensation
expense was lower in the third quarter of 2007 as compared to the third quarter
of 2006 due to the large number of grants made in early 2006 in connection
with
the Company’s emergence from bankruptcy.
Regional
affiliate expense increased $38 million, or 5%, during the third quarter of
2007 as compared to the same period last year. Regional affiliate expense
increased primarily due to an increase in capacity, which increased 1.3% in
the
third quarter of 2007 as compared to the prior period. Including the $8 million
special revenue item, our regional affiliate operating earnings was
$16 million higher in the 2007 period as compared to the 2006 period. This
increase is primarily due to the $8 million special revenue item and improved
yield due to a better industry revenue environment in the 2007 period as
compared to the 2006 period. The average price of regional affiliates fuel
increased by 5% while consumption increased 1%, resulting in a $11 million
increase in fuel costs during the 2007 period as compared to the 2006 period;
such fuel costs are classified as part of Regional affiliate
expense.
Purchased
services were up 14% in the third quarter of 2007, as compared to the year
ago
period, primarily due to increased information technology being deployed in
support of our customer and employee initiatives. Information technology
expenses increased due to an increase in non-capitalizable information
technology related expenditures, generally occurring during the planning and
scoping phases, for new applications in 2007. In addition, we increased
outsourcing initiatives versus the prior year and also had a small negative
impact from the weakening dollar.
For
the
three months ended September 30, 2007, aircraft maintenance materials and
outside repairs expense increased $43 million, or 17%, year-over-year
primarily due to a combination of higher maintenance volumes, higher
power-by-the- hour engine maintenance rates and increased volume of engine
work.
UAL
depreciation and amortization increased $19 million, or 8%, over the third
quarter of 2006 primarily due to a
non-cash
charge of $18 million to recognize surplus and obsolete maintenance
inventory.
UAL
landing fees and other rent remained relatively flat in the third 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 consistent with our operational needs.
UAL
distribution expenses, which include commissions, GDS fees and credit card
fees
decreased 2% from the 2006 period to $211 million for the quarter ended
September 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 distribution channels including online
channels.
The
decrease in UAL cost of sales of $85 million in the 2007 period as compared
to the 2006 period was primarily due to lower UAFC third party fuel sales as
discussed above.
Special
items of $22 million in the 2007 period include the benefit of a reduction
in
recorded accruals for pending bankruptcy litigation related to our LAX municipal
bond obligations of $8 million and a $14 million benefit due to the Company’s
ongoing efforts to resolve certain other bankruptcy pre-confirmation
contingencies. In the third quarter of 2006, UAL and United recorded a special
item of $30 million as a benefit to income from continuing operations to reduce
the Company’s recorded obligation for the SFO municipal bonds to a revised
estimate of a probable amount to be allowed by the Bankruptcy Court, in
accordance with Practice Bulletin 11. See Note 2, “Voluntary Reorganization
Under Chapter 11” in Combined Notes to Condensed Consolidated
Financial Statements (Unaudited) for further information on these pending
matters.
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
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Favorable/
|
|
|
%
|
UAL
|
|
|
|
2006
|
|
(Unfavorable)
|
|
Change
|
|
Interest
expense
|
|
$ |
(161 |
) |
|
$ |
(164 |
) |
|
$ |
3
|
|
|
|
|
Interest
income
|
|
|
71
|
|
|
|
72
|
|
|
|
(1 |
) |
|
(1.4
|
) |
Interest
capitalized
|
|
|
5
|
|
|
|
3
|
|
|
|
2
|
|
|
66.7
|
|
Miscellaneous,
net
|
|
|
(6 |
) |
|
|
3
|
|
|
|
(9 |
) |
|
-
|
|
|
|
$ |
(91 |
) |
|
$ |
(86 |
) |
|
$ |
(5 |
) |
|
(5.8
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(161 |
) |
|
$ |
(165 |
) |
|
$ |
4
|
|
|
2.4
|
|
Interest
income
|
|
|
70
|
|
|
|
79
|
|
|
|
(9 |
) |
|
(11.4
|
) |
Interest
capitalized
|
|
|
5
|
|
|
|
3
|
|
|
|
2
|
|
|
66.7
|
|
Miscellaneous,
net
|
|
|
(6 |
) |
|
|
3
|
|
|
|
(9 |
) |
|
-
|
|
|
|
$ |
(92 |
) |
|
$ |
(80 |
) |
|
$ |
(12 |
) |
|
(15.0
|
) |
UAL
interest expense decreased $3 million, or 2%, in the quarter ended
September 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 last
quarter of 2006 and in 2007 also reduced interest expense in the 2007 period
as
compared to the 2006 period. The year-over-year interest expense was
significantly improved as the 2006 period also included a $30 million non-cash
benefit resulting from our discontinuation of the accrual of imputed interest
expense associated with the advanced purchase of miles recorded in the Company’s
Condensed Statements of Consolidated Financial Position (Unaudited).
See Liquidity and Capital Resources below, for further details related
to financing activities.
Income
Taxes. UAL and United recorded income tax expense of $232
million and $234 million, respectively, for the third quarter ended September
30, 2007 based on an estimated effective tax rate of 41%. Income tax expense
for
UAL and United was recorded at $60 million and $65 million, respectively, in
the
same period of 2006 based on the year-to-date effective tax rate of 41%. See
Note 7, “Income Taxes” in Combined Notes to Condensed Consolidated Financial
Statements (Unaudited), for factors impacting the effective tax rates
recorded in these periods.
First
Nine Months of 2007 Compared to First Nine Months of
2006
UAL’s
earnings from operations of $1.1 billion in the nine months ended September
30,
2007 improved by $677 million as compared to earnings from operations of
$424 million in the combined nine months ended September 30, 2006. The
increase of more than 100% in operating earnings was due to increased revenues,
lower costs and special items as discussed in the third quarter Results of
Operations, above, and as further discussed below. UAL’s net income was
$456 million in the nine month period ended September 30, 2007 as compared
to net income of $22.9 billion in the combined nine month period ended
September 30, 2006. The most significant variance is reorganization income
of
$22.9 billion that was recorded in the 2006 period.
United’s
improvement in earnings from operations of $683 million was consistent with
UAL’s results. United’s net income was $467 million in the nine month
period ended September 30, 2007 as compared to net income of $22.7 billion
in the combined nine month period ended September 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.
Operating
Revenues. The following table illustrates the year-over-year
percentage change in UAL and United operating revenues:
|
|
Successor
|
|
|
Combined
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Nine
|
|
|
Nine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
February
1 to
|
|
|
January
1 to
|
|
|
|
|
|
|
|
(In
millions)
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
January
31,
|
|
|
$
|
|
|
% |
|
UAL
|
|
2007
|
|
|
2006
(a)
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
Passenger
- United Airlines
|
|
$ |
11,457
|
|
|
$ |
10,978
|
|
|
$ |
9,904
|
|
|
$ |
1,074
|
|
|
$ |
479
|
|
|
|
4.4
|
|
Passenger
- Regional Affiliates
|
|
|
2,298
|
|
|
|
2,203
|
|
|
|
1,999
|
|
|
|
204
|
|
|
|
95
|
|
|
|
4.3
|
|
Cargo
|
|
|
547
|
|
|
|
557
|
|
|
|
501
|
|
|
|
56
|
|
|
|
(10 |
) |
|
|
(1.8 |
) |
Special
operating items
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45 |
|
|
|
- |
|
Other
operating revenues |
|
|
766 |
|
|
|
1,016 |
|
|
|
892 |
|
|
|
124 |
|
|
|
(250 |
) |
|
|
(24.6 |
) |
|
|
$ |
15,113
|
|
|
$ |
14,754
|
|
|
$ |
13,296
|
|
|
$ |
1,458
|
|
|
$ |
359
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
- United Airlines
|
|
$ |
11,457
|
|
|
$ |
10,978
|
|
|
$ |
9,904
|
|
|
$ |
1,074
|
|
|
$ |
479
|
|
|
|
4.4
|
|
Passenger
- Regional Affiliates
|
|
|
2,298
|
|
|
|
2,203
|
|
|
|
1,999
|
|
|
|
204
|
|
|
|
95
|
|
|
|
4.3
|
|
Cargo
|
|
|
547
|
|
|
|
557
|
|
|
|
501
|
|
|
|
56
|
|
|
|
(10 |
) |
|
|
(1.8 |
) |
Special
operating items
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45 |
|
|
|
- |
|
Other
operating revenues |
|
|
776 |
|
|
|
1,009 |
|
|
|
889 |
|
|
|
120 |
|
|
|
(233 |
) |
|
|
(23.1 |
) |
|
|
$ |
15,123
|
|
|
$ |
14,747
|
|
|
$ |
13,293
|
|
|
$ |
1,454
|
|
|
$ |
376
|
|
|
|
2.5
|
|
_______________________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The
combined period includes the results for the one month period ended
January 31, 2006 (Predecessor) and the eight month period ended
September 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. Passenger revenues
include the impact of the $45 million special revenue items that resulted
from the Company’s ongoing efforts to resolve certain bankruptcy
pre-confirmation contingencies, which relates to both Mainline ($37 million)
and
UAX ($8 million).
2007
|
|
North
America
|
|
|
Pacific
|
|
|
Atlantic
|
|
|
Latin
|
|
|
Mainline
|
|
|
United
Express
|
|
|
Consolidated
|
|
Increase
(decrease) from 2006 (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
revenues (in millions)
|
|
$ |
(18 |
) |
|
$ |
246
|
|
|
$ |
296
|
|
|
$ |
(8 |
) |
|
$ |
516
|
|
|
$ |
103
|
|
|
$ |
619
|
|
Passenger
revenues
|
|
|
(0.3 |
)% |
|
|
11.3 |
% |
|
|
20.2 |
% |
|
|
(2.2 |
)% |
|
|
4.7 |
% |
|
|
4.7 |
% |
|
|
4.7 |
% |
Available
seat miles (ASMs)
|
|
|
(2.7 |
)% |
|
|
2.3 |
% |
|
|
6.7 |
% |
|
|
(12.8 |
)% |
|
|
(0.8 |
)% |
|
|
4.5 |
% |
|
|
(0.3 |
)% |
Revenue
passenger miles (RPMs)
|
|
|
(0.5 |
)% |
|
|
1.1 |
% |
|
|
6.8 |
% |
|
|
(13.4 |
)% |
|
|
0.3 |
% |
|
|
4.5 |
% |
|
|
0.7 |
% |
Load
factor (points)
|
|
1.9
|
pts. |
|
(0.9
|
)pts. |
-
|
pts. |
|
(0.5
|
)pts. |
|
0.9
|
pts. |
|
(0.1
|
)pts. |
0.7
|
pts. |
Yield
(b)
|
|
|
0.3 |
% |
|
|
10.0 |
% |
|
|
13.2 |
% |
|
|
13.1 |
% |
|
|
4.4 |
% |
|
|
(0.1 |
)% |
|
|
4.0 |
% |
____________________
(a)
|
Variances
are from the combined 2006 period that includes the results for the
one
month period ended January 31, 2006 (Predecessor) and the eight month
period ended September 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.
|
Including
the $45 million special revenue items, Mainline and United Express passenger
revenues increased by $516 million and $103 million, respectively, in
the 2007 period as compared to the same period in 2006. In the first nine months
of 2007, Mainline revenues benefited from a 0.9 point increase in load factor
and a 4.4% increase in yield as compared to the first nine months of 2006.
In
the same periods, United Express load factor and yield were both relatively
flat. United Express traffic increased 4.5%, which contributed to the increase
in revenue. Overall, passenger revenues increased due to a better revenue
environment for the industry which was partly due to industry-wide capacity
constraint. In addition, the change in the Mileage Plus breakage policy also
contributed to the increase in revenues in the 2007 period. Partially offsetting
the improved passenger revenues were the negative effects of the accounting
for
deferred revenue under our Mileage Plus program and severe storms in first
quarter of 2007 that decreased total passenger revenue by an estimated
$32 million. Mileage Plus revenue was approximately $6 million lower
in the 2007 period due to an increase in outstanding mileage credits due to
various promotional programs and other activity contributing to an increase
in
outstanding miles 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. The change in the Mileage
Plus expiration period policy from 36 months to 18 months is 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 consistent with the Company’s breakage
policy.
Cargo
revenues decreased by $10 million, or 2%, in the nine month period ended
September 30, 2007 as compared to the same period in 2006. Decreased traffic
and
yield for the Pacific region due to increased competition contributed to
the
decrease in cargo revenues. In addition, cargo revenues from the new
domestic U.S. Postal Service (“USPS”) contract, which commenced in April 2007,
were lower than the revenue generated in 2006 from the former USPS contract
that
terminated on June 30, 2006. These negative impacts were partially
offset by increased freight volumes experienced in Domestic and Atlantic
regions
in the third quarter of 2007.
UAL
other
operating revenues decreased by $250 million, or 25%, in the nine month
period ended September 30, 2007 as compared to the same period in 2006. Lower
jet fuel sales to third parties by UAFC accounted for $257 million of the
other revenue decrease, which was due to the factors described in the third
quarter Results of Operations above, and had no material impact on the
Company’s operating margin, because UAFC cost of sales decreased by
$257 million in the first nine 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
|
|
|
|
|
|
|
|
|
|
Nine
Months
|
|
|
Nine
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
February
1 to
|
|
|
January
1 to
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
January
31,
|
|
|
$
|
|
|
%
|
|
(In
millions)
|
|
2007
|
|
|
2006
(a)
|
|
|
2006
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
UAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$ |
3,571
|
|
|
$ |
3,685
|
|
|
$ |
3,323
|
|
|
$ |
362
|
|
|
$ |
(114 |
) |
|
|
(3.1 |
) |
Salaries
and related costs
|
|
|
3,149
|
|
|
|
3,215
|
|
|
|
2,857
|
|
|
|
358
|
|
|
|
(66 |
) |
|
|
(2.1 |
) |
Regional
affiliates
|
|
|
2,176
|
|
|
|
2,124
|
|
|
|
1,896
|
|
|
|
228
|
|
|
|
52
|
|
|
|
2.4
|
|
Purchased
services
|
|
|
980
|
|
|
|
927
|
|
|
|
829
|
|
|
|
98
|
|
|
|
53
|
|
|
|
5.7
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
860
|
|
|
|
768
|
|
|
|
688
|
|
|
|
80
|
|
|
|
92
|
|
|
|
12.0
|
|
Depreciation
and amortization
|
|
|
694
|
|
|
|
660
|
|
|
|
592
|
|
|
|
68
|
|
|
|
34
|
|
|
|
5.2
|
|
Landing
fees and other rent
|
|
|
654
|
|
|
|
644
|
|
|
|
569
|
|
|
|
75
|
|
|
|
10
|
|
|
|
1.6
|
|
Distribution
expenses
|
|
|
596
|
|
|
|
624
|
|
|
|
564
|
|
|
|
60
|
|
|
|
(28 |
) |
|
|
(4.5 |
) |
Aircraft
rent
|
|
|
307
|
|
|
|
318
|
|
|
|
288
|
|
|
|
30
|
|
|
|
(11 |
) |
|
|
(3.5 |
) |
Cost
of third party sales
|
|
|
238
|
|
|
|
536
|
|
|
|
471
|
|
|
|
65
|
|
|
|
(298 |
) |
|
|
(55.6 |
) |
Special
operating items
|
|
|
(44 |
) |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
-
|
|
|
|
(14 |
) |
|
|
(46.7 |
) |
Other
operating expenses
|
|
|
831
|
|
|
|
859
|
|
|
|
773
|
|
|
|
86
|
|
|
|
(28 |
) |
|
|
(3.3 |
) |
|
|
$ |
14,012
|
|
|
$ |
14,330
|
|
|
$ |
12,820
|
|
|
$ |
1,510
|
|
|
$ |
(318 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$ |
3,571
|
|
|
$ |
3,685
|
|
|
$ |
3,323
|
|
|
$ |
362
|
|
|
$ |
(114 |
) |
|
|
(3.1 |
) |
Salaries
and related costs
|
|
|
3,145
|
|
|
|
3,212
|
|
|
|
2,854
|
|
|
|
358
|
|
|
|
(67 |
) |
|
|
(2.1 |
) |
Regional
affiliates
|
|
|
2,176
|
|
|
|
2,124
|
|
|
|
1,896
|
|
|
|
228
|
|
|
|
52
|
|
|
|
2.4
|
|
Purchased
services
|
|
|
980
|
|
|
|
925
|
|
|
|
828
|
|
|
|
97
|
|
|
|
55
|
|
|
|
5.9
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
860
|
|
|
|
768
|
|
|
|
688
|
|
|
|
80
|
|
|
|
92
|
|
|
|
12.0
|
|
Depreciation
and amortization
|
|
|
694
|
|
|
|
659
|
|
|
|
591
|
|
|
|
68
|
|
|
|
35
|
|
|
|
5.3
|
|
Landing
fees and other rent
|
|
|
654
|
|
|
|
644
|
|
|
|
569
|
|
|
|
75
|
|
|
|
10
|
|
|
|
1.6
|
|
Distribution
expenses
|
|
|
596
|
|
|
|
624
|
|
|
|
564
|
|
|
|
60
|
|
|
|
(28 |
) |
|
|
(4.5 |
) |
Aircraft
rent
|
|
|
308
|
|
|
|
319
|
|
|
|
289
|
|
|
|
30
|
|
|
|
(11 |
) |
|
|
(3.4 |
) |
Cost
of third party sales
|
|
|
235
|
|
|
|
527
|
|
|
|
464
|
|
|
|
63
|
|
|
|
(292 |
) |
|
|
(55.4 |
) |
Special
operating items
|
|
|
(44 |
) |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
-
|
|
|
|
(14 |
) |
|
|
(46.7 |
) |
Other
operating expenses
|
|
|
831
|
|
|
|
856
|
|
|
|
771
|
|
|
|
85
|
|
|
|
(25 |
) |
|
|
(2.9 |
) |
|
|
$ |
14,006
|
|
|
$ |
14,313
|
|
|
$ |
12,807
|
|
|
$ |
1,506
|
|
|
$ |
(307 |
) |
|
|
(2.1 |
) |
_____________________
(a)
|
The
combined period includes the results for the one month ended
January 31, 2006 (Predecessor) and the eight months ended
September 30, 2006 (Successor).
|
Aircraft
fuel decreased $114 million, or 3%, in the nine month period ended
September 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 $2.14 per gallon in the first nine months of 2006 to $2.07 per gallon
in
the first nine months of 2007, resulting from favorable market conditions,
and a
$68 million increase in net hedge gains that were $57 million in the
2007 period as compared to net hedge losses of $11 million in the 2006
period.
UAL
salaries and related costs decreased $66 million, or 2%, in the first nine
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 $137 million
in the 2006 period, but only $37 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 certain wage increases.
Regional
affiliate expense increased $52 million, or 2%, during the first nine
months of 2007 as compared to the same period last year. Regional affiliate
capacity increased 5% for the same periods, which was a major contributor to
the
increase in expense. Including the special revenue item of $8 million, our
regional affiliate operating income was $51 million higher in the 2007
period as compared to the 2006 period. The margin improvement was due to
improved revenue performance, which was primarily due to increased traffic,
and
cost control which resulted in increased costs of only 2%. Factors impacting
regional affiliate margin include 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 increased by 0.7% and consumption increased 1.8%. The net impact of these
changes was a $15 million increase in fuel cost in the 2007 period as compared
to the 2006 period.
For
the nine months ended September 30, 2007, aircraft maintenance materials and
outside repairs expense increased $92 million, or 12%, 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.
A non-cash
charge of $18 million for surplus and obsolete maintenance inventory contributed
to the 5% increase in depreciation and amortization.
Landing
fees and other rent increased $10 million, or 2%, in the nine months ended
September 30, 2007 as compared to the year-ago period. 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
4.5% from $624 million in the 2006 period to $596 million for the nine
months ended September 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 $298 million in the 2007 period as
compared to the 2006 period was primarily due to lower UAFC third party fuel
sales of $257 million as described in the discussion of revenue variances
above.
UAL
and
United special items of $44 million in the nine months ended September 30,
2007 include the benefit of a reduction in recorded accruals for pending
bankruptcy litigation related to our SFO and LAX municipal bond obligations
of
$30 million and a $14 million benefit due to the Company’s ongoing efforts to
resolve certain other bankruptcy pre-confirmation contingencies. In the third
quarter of 2006, UAL and United recorded a special item of $30 million as a
benefit to income from continuing operations to reduce the Company’s recorded
obligation for the SFO municipal bonds to a revised estimate of a probable
amount to be allowed by the Bankruptcy Court, in accordance with Practice
Bulletin 11. See Note 2, “Voluntary Reorganization Under Chapter 11”
in Combined Notes to Condensed Consolidated Financial Statements
(Unaudited) for further information on these pending matters.
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
|
|
|
|
|
|
|
|
|
|
Nine
Months
|
|
|
Nine
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
February
1 to
|
|
|
January
1 to
|
|
|
|
|
|
|
|
(In
millions)
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
January
31,
|
|
|
Favorable/
|
|
|
%
|
|
UAL
|
|
2007
|
|
|
2006
(a)
|
|
|
2006
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
Change
|
|
Interest
expense
|
|
$ |
(506 |
) |
|
$ |
(558 |
) |
|
$ |
(516 |
) |
|
$ |
(42 |
) |
|
$ |
52
|
|
|
|
9.3 |
|
Interest
income
|
|
|
191
|
|
|
|
173
|
|
|
|
167
|
|
|
|
6
|
|
|
|
18
|
|
|
|
10.4
|
|
Interest
capitalized
|
|
|
14
|
|
|
|
10
|
|
|
|
10
|
|
|
|
-
|
|
|
|
4
|
|
|
|
40.0
|
|
Miscellaneous,
net
|
|
|
(7 |
) |
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
|
|
(12 |
) |
|
|
-
|
|
|
|
$ |
(308 |
) |
|
$ |
(370 |
) |
|
$ |
(334 |
) |
|
$ |
(36 |
) |
|
$ |
62
|
|
|
|
16.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(506 |
) |
|
$ |
(560 |
) |
|
$ |
(518 |
) |
|
$ |
(42 |
) |
|
$ |
54
|
|
|
|
9.6 |
|
Interest
income
|
|
|
194
|
|
|
|
178
|
|
|
|
172
|
|
|
|
6
|
|
|
|
16
|
|
|
|
9.0
|
|
Interest
capitalized
|
|
|
14
|
|
|
|
10
|
|
|
|
10
|
|
|
|
-
|
|
|
|
4
|
|
|
|
40.0
|
|
Miscellaneous,
net
|
|
|
(7 |
) |
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
(9 |
) |
|
|
-
|
|
|
|
$ |
(305 |
) |
|
$ |
(370 |
) |
|
$ |
(334 |
) |
|
$ |
(36 |
) |
|
$ |
65
|
|
|
|
17.6 |
|
___________________
(a) The
combined period includes the results for the one month period ended
January 31, 2006 (Predecessor) and the eight month period ended
September 30, 2006 (Successor).
UAL
interest expense decreased $52 million, or 9%, in the nine months ended
September 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 $18 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 $340 million
and $348 million (an effective tax rate of 43%), respectively, for the nine
month period ended September 30, 2007. UAL and United recorded income taxes
of
$60 million and $65 million (an effective tax rate of 41%), respectively, in
the
same period of 2006. See Note 7, “Income Taxes” in Combined Notes
to Condensed Consolidated Financial Statements (Unaudited) for further
discussion of permanent items impacting the effective tax rates.
Liquidity
and Capital Resources
The
following table provides a summary of UAL’s and United’s cash position at
December 31, 2006 and September 30, 2007, and net cash provided (used) by
operating, financing and investing activities for the nine month periods ended
September 30, 2007 and 2006.
|
|
UAL
|
|
|
UNITED
|
|
(In
millions)
|
|
As
of September 30, 2007
|
|
|
As
of
December
31, 2006
|
|
|
As
of September 30, 2007
|
|
|
As
of December 31, 2006
|
|
Cash,
short-term investments & restricted cash
|
|
$ |
4,950
|
|
|
$ |
4,991
|
|
|
$ |
4,861
|
|
|
$ |
4,896
|
|
Restricted
cash included in total cash
|
|
|
788
|
|
|
|
847
|
|
|
|
755
|
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Combined
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Nine
Months
|
|
|
Nine
Months
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
Ended
|
|
|
Ended
|
|
|
February
1 to
|
|
|
January
1 to
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
January
31,
|
|
UAL
|
|
2007
|
|
|
2006
(a)
|
|
|
2006
|
|
|
2006
|
|
Net
cash provided by operating activities
|
|
$ |
2,002
|
|
|
$ |
1,269
|
|
|
$ |
1,108
|
|
|
$ |
161
|
|
Net
cash provided (used) by investing activities
|
|
|
(3,057 |
) |
|
|
151
|
|
|
|
389
|
|
|
|
(238 |
) |
Net
cash provided (used) by financing activities
|
|
|
(1,514 |
) |
|
|
923
|
|
|
|
953
|
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
1,988
|
|
|
$ |
1,287
|
|
|
$ |
1,124
|
|
|
$ |
163
|
|
Net
cash provided (used) by investing activities
|
|
|
(3,028 |
) |
|
|
100
|
|
|
|
338
|
|
|
|
(238 |
) |
Net
cash provided (used) by financing activities
|
|
|
(1,493 |
) |
|
|
924
|
|
|
|
954
|
|
|
|
(30 |
) |
______________________
(a)
The
combined period includes the results for the one month period ended
January 31, 2006 (Predecessor) and the eight month period ended
September 30, 2006 (Successor).
The
Company’s
significant cash and short-term investment position represents a source of
liquidity. The change in cash from December 31, 2006 to September 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 $453 million and $459 million,
respectively, in the first nine months of 2007, as compared to the first nine
months of 2006. These amounts include the impact of a change in non-cash income
tax expense of $280 million and $283 million for UAL and United,
respectively, in 2007 over the prior period. 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.
Investing
Activities. UAL and United’s cash released from
restricted funds was $59 million and $54 million, respectively, in the 2007
period as compared to $297 million and $300 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 $2.6 billion for both UAL and United in the 2007 period
as compared to cash provided from net sales of short-term investments of less
than $100 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. Investing
activities also includes the Company’s use of $76 million of cash to acquire
certain of the Company’s previously issued and outstanding debt instruments. The
debt instruments repurchased by the Company remain outstanding. See Note
11, "Debt Obligations," for further information related to the $76 million
of purchased debt securities.
Capital
expenditures for both UAL and United were $428 million and
$252 million in the 2007 and 2006 periods, respectively. During the nine
month period ended September 30, 2007, the Company purchased three 747-400
aircraft, using existing cash, that had previously been financed by United
through operating leases which were terminated at closing. In addition, three
owned and unencumbered aircraft were financed as part of the secured Enhanced
Equipment Trust Certificates (“EETC”) financing described below. The Company did
not sell or acquire any aircraft in the nine month period ended September 30,
2006.
In
2006,
UAL generated $51 million more cash from investing activities as compared to
United primarily due to $56 million of proceeds from the sale of MyPoints,
a
direct subsidiary of UAL.
Financing
Activities. Cash used by financing activities for both UAL and
United was $1.5 billion in the nine month period ended September 30, 2007,
as
compared to $0.9 billion of cash provided by financing activities during
the first nine months of 2006. In 2007, cash of approximately $2.2 billion
was used to prepay approximately $1.0 billion of Credit Facility
obligations, refinance certain aircraft as discussed below and to make other
debt and capital lease payments.
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 September 30, 2007, $154 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.
During
the combined nine months of 2006, we generated proceeds of $3.0 billion
from United’s new credit facility but used approximately $1.9 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.
Other
Investing and Financing Matters. The Company may, from
time to time, make open market purchases of certain of its debt securities
or
other financing instruments depending on, among other factors, favorable market
conditions and the Company’s liquidity position.
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 the 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 September 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 $50 million and $125 million in
the three and nine months periods ended September 30, 2007, respectively, and
is
expected to provide a benefit of approximately $180 million for the full
year 2007.
At
September 30, 2007, the outstanding number of miles in the Mileage Plus
liability was approximately 527 billion. United currently estimates that
approximately 450 billion of these miles will ultimately be redeemed and,
accordingly, has recorded deferred revenue of $3.9 billion. A hypothetical
1% change in the weighted-average ticket value or the outstanding number of
miles would have approximately a $45 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
September 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. In September 2007,
the DOT granted United and bmi antitrust immunity. The immunity goes into effect
at the same time as the Open Skies treaty between the U.S. and the EU in 2008.
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 used 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 September 30, 2007, the fair value of United’s fuel-related
derivatives was a positive $13 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 September 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 September 30, 2007, the
notional amount of these foreign currencies hedged with the forward contracts
in
U.S. dollars terms was approximately $135 million. These contracts expire at
various dates from October 2007 to March 2008. Subsequent to September 30,
2007,
the Company has entered into and plans to continue entering into additional
forward contracts for the 2008 period.
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 September 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 September 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 nine 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 continued through the nine months ended September 30, 2007 and
is
likely to continue through the remainder of 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 investigations, not a target. Separately, United received additional
information requests regarding 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 government investigations, United and other air cargo carriers
were named as defendants in over ninety class action lawsuits alleging civil
damages as a result of the purported air cargo pricing conspiracy. Those
lawsuits were consolidated for pretrial activities in the United States Federal
Court for the Eastern District of New York. United 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 and United is no longer named as a defendant in the civil
lawsuit.
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 15, “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.
The
Company’s certificate of incorporation limits voting rights of certain foreign
persons.
The
Company’s restated certificate of incorporation limits the voting rights of
persons holding any of the Company's equity securities who are not "citizens
of
the United States" as defined in Section 40102(a)(15) of Title 49 United States
Code to 24.9% of the aggregate votes of all equity securities outstanding.
This
restriction is applied pro rata among all holders of equity securities who
fail
to qualify as "citizens of the United States," based on the number of votes
the
underlying securities are entitled to.
The
Company’s net operating loss carry forward may be
limited.
The
Company has a net operating loss (“NOL”) carry forward tax benefit of
approximately $2.5 billion for federal and state income tax purposes that
primarily originated before UAL’s emergence from bankruptcy and will expire over
a five to twenty year period. This tax benefit is mostly attributable to federal
NOL carry forwards of $6.4 billion. If the Company were to have a change of
ownership within the meaning of Section 382 of the Internal Revenue Code,
under current conditions, its annual federal NOL utilization could be limited
to
an amount equal to its market capitalization at the time of the ownership change
multiplied by the federal long-term tax exempt rate. A change of ownership
under
Section 382 of the Internal Revenue Code is defined as a cumulative change
of 50
percentage points or more in the ownership positions of certain stockholders
owning 5% or more of the Company’s common stock over a three year rolling
period.
To
avoid
a potential adverse effect on the Company’s ability to utilize its NOL carry
forward for federal income tax purposes, UAL’s certificate of incorporation
contains a “5% Ownership Limitation,” applicable to all stockholders except the
PBGC. The 5% Ownership Limitation remains effective until February 1, 2011.
The 5% Ownership Limitation prohibits (i) the acquisition by a single
stockholder of shares representing 5% or more of the common stock of UAL
Corporation and (ii) any acquisition or disposition of common stock by a
stockholder that already owns 5% or more of UAL Corporation’s common stock,
unless prior written approval is granted by the UAL Board of Directors. The
percentage ownership of a single stockholder can be computed by dividing the
number of shares of common stock held by the stockholder by the sum of the
shares of common stock issued and outstanding plus the number of shares of
common stock still held in reserve for payment to unsecured creditors under
the
Plan of Reorganization. For additional information regarding the 5% Ownership
Limitation, please refer to the Restated Certificate of UAL Corporation
available on the Company’s website.
While
the
purpose of these transfer restrictions is to prevent a change of ownership
from
occurring within the meaning of Section 382 of the Internal Revenue Code
(which ownership change might materially and adversely affect the Company’s
ability to utilize its NOL carry forward or other tax attributes), no assurance
can be given that such an ownership change will not occur, in which case the
availability of the Company’s substantial NOL carry forward and other federal
income tax attributes might be significantly limited or possibly
eliminated.
ITEM
2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
The
following table presents repurchases of UAL common stock made in the third
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
|
07/01/07
- 07/31/07
|
|
|
634
|
|
|
$ |
45.60
|
|
|
—
|
|
(b)
|
08/01/07
- 08/31/07
|
|
|
1,089
|
|
|
|
42.45
|
|
|
—
|
|
(b)
|
09/01/07
- 09/30/07
|
|
|
3,917
|
|
|
|
46.11
|
|
|
—
|
|
(b)
|
Total
|
|
|
5,640
|
|
|
|
45.34
|
|
|
—
|
|
(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
6. EXHIBITS.
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: October
31, 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: October
31, 2007
|
By: /s/
Frederic F. Brace
|
|
Frederic
F. Brace
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|
(principal
financial officer)
|
|
|
Date: October
31, 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
|
|
|
|
|
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)
|