UAL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for UAL Corporation (United Airlines Holdings, Inc.). The Company is currently operating as a Debtor-in-Possession following the voluntary filing of Chapter 11 bankruptcy petitions on December 9, 2002. Operations continue under the jurisdiction of the U.S. Bankruptcy Court for the Northern District of Illinois. The filing includes unaudited financial statements prepared in accordance with SOP 90-7, which requires the separation of reorganization items from ongoing business operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 3% ($104 million) year-over-year. Passenger revenues dropped 8% ($210 million) driven by a 9% decline in yield to 10.16 cents, despite a 1% increase in capacity (Available Seat Miles).
• Expense Volatility: While total operating expenses remained flat, aircraft fuel costs surged 44% ($173 million) due to a 46% increase in the average fuel price per gallon. Conversely, salaries and related costs decreased 3% ($53 million) due to furloughs and wage reductions.
• Reorganization Impact: The 2003 results include $248 million in reorganization items (including a $215 million non-cash write-off of lease certificates) and $137 million in non-operating special charges related to Air Canada's bankruptcy filing. The 2002 comparison period included an $82 million special charge for the shutdown of the Avolar subsidiary.
• Liquidity Reduction: Cash and cash equivalents decreased by $249 million during the quarter, primarily due to operating losses and reorganization activities, though the Company maintains significant restricted cash reserves.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Labor Agreements: In April 2003, the Company reached tentative agreements with major unions (pilots, flight attendants, mechanics, etc.). These agreements are expected to reduce annual costs by approximately $2.5 billion compared to previous contracts, with significant savings anticipated in the second quarter of 2003.
• Capacity and Demand: Due to the war in Iraq and the SARS outbreak, the Company reduced its schedule by an additional 8% in April and a further 3.7% for May. Domestic bookings are recovering, but Pacific bookings remain weak due to SARS.
• Government Aid: The Company expects to receive approximately $300 million in compensation under the Emergency Wartime Supplemental Appropriations Act, contingent on executive compensation limits.

Risks and Contingencies

• Bankruptcy Uncertainty: There is no assurance that a plan of reorganization will be confirmed or that the Company will successfully emerge from Chapter 11. The "exclusivity period" to file a plan was extended to October 2003.
• Aircraft Repossession: Under Section 1110 of the Bankruptcy Code, the automatic stay on certain aircraft leases expired in February 2003. While agreements were reached with many financiers, the risk of repossession for remaining aircraft remains, which could disrupt operations.
• Municipal Bonds: The Company has ceased payments on approximately $1.7 billion in special facilities revenue bonds (municipal bonds) classified as liabilities subject to compromise. This creates a risk of default on airport lease agreements, though the Bankruptcy Court has issued orders to mitigate immediate termination risks.
• Air Canada Exposure: The Company holds a net investment of approximately $88 million in leveraged leases with Air Canada, which faces potential rejection or renegotiation under Canadian bankruptcy laws.

Investor Verification Checklist

• Reorganization Plan Status: Verify the timeline and likelihood of confirming a Chapter 11 plan of reorganization by the October 2003 deadline.
• Liquidity Runway: Assess the sufficiency of the $1.6 billion liquidity position against ongoing operating losses and the $1.6 billion in aircraft purchase commitments.
• Labor Cost Savings Realization: Monitor the actual implementation of the new collective bargaining agreements and the realization of the projected $2.5 billion annual savings.
• Aircraft Lease Status: Confirm the status of Section 1110 elections and agreements with aircraft lessors to ensure no critical fleet assets are repossessed.
• Government Aid Receipt: Track the receipt of the anticipated $300 million in federal security compensation and compliance with executive pay restrictions.