UAL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for UAL Corporation and its principal subsidiary, United Air Lines, Inc. The airline is operating in a severe economic downturn, implementing aggressive capacity reductions (removing 100 aircraft by year-end 2009) and workforce reductions (targeting 9,000 positions) to address industry over-capacity and fuel price volatility. The company emerged from Chapter 11 bankruptcy in 2006 and continues to resolve related legal matters.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 21.7% year-over-year, driven by an 11% drop in passenger revenue per available seat mile (PRASM) due to the global recession and a 13.1% reduction in mainline capacity.
• Fuel Cost Reduction: Aircraft fuel expense dropped 49.3% to $799 million, reflecting lower market prices and reduced consumption. This was partially offset by cash settlements on fuel hedges.
• Asset Impairments: The company recorded a $119 million charge for asset impairments and special items, primarily a $110 million write-down of tradenames due to lower estimated future revenues.
• Improved Operating Loss: Despite revenue declines, the operating loss narrowed significantly from $441 million to $282 million, aided by a 22.9% reduction in total operating expenses.
• Liquidity Improvement: Cash and cash equivalents increased by $418 million during the quarter, bolstered by a $160 million lease amendment payment from O'Hare airport and reduced fuel hedge collateral requirements.

Outlook, Risks, and Management Commentary

• Operational Plans: Management is executing a plan to permanently remove 100 aircraft (including the entire B737 fleet) and reduce the workforce by 9,000 by the end of 2009. Non-aircraft capital expenditures for 2009 were reduced to $350 million.
• Liquidity Risks: While the company holds $2.46 billion in unrestricted cash, liquidity remains sensitive to fuel price volatility. Falling fuel prices trigger cash payments on existing hedge contracts and collateral requirements, which could strain cash flow despite lower fuel purchase costs.
• Debt Covenants: The company must maintain an unrestricted cash balance of $1.0 billion under its Amended Credit Facility. Beginning in Q2 2009, it must also meet a minimum EBITDAR to fixed charges ratio. Failure to comply could result in a default.
• Legal Contingencies: Pending matters include the LAX municipal bond secured interest litigation (approx. $33 million obligation) and an ongoing European Commission investigation into air cargo/passenger surcharge cartels.
• Strategic Developments: The U.S. DOT tentatively approved United's application to join the Star Alliance with Continental Airlines, pending final approval.

Investor Verification Checklist

• Fuel Hedge Exposure: Verify the specific cash settlement obligations and collateral requirements associated with the company's fuel derivative portfolio as crude oil prices fluctuate.
• Debt Covenant Compliance: Monitor the company's ability to meet the EBITDAR to fixed charges ratio starting in the second quarter of 2009.
• Asset Impairment Triggers: Assess the risk of further impairment charges on aircraft or intangible assets if the economic environment or unit revenues deteriorate further.
• Labor Negotiations: Track the outcome of collective bargaining negotiations with six unions, which commenced in April 2009 and could materially impact future costs.
• Capital Commitments: Review the status of $2.3 billion in nonbinding aircraft purchase commitments and the potential forfeiture of $91 million in advance deposits.