Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for UAL Corporation (the holding company) and its principal subsidiary, United Air Lines, Inc. The filing is a combined report. The Company is operating under a plan to address industry over-capacity and the severe global recession, which includes permanently removing 100 aircraft from its Mainline fleet by the end of 2009 and reducing its workforce by approximately 9,000 positions.
Key Financial Metrics
Three Months Ended June 30, 2009 (in millions, except per share):
- Operating Revenues: $4,018 (Down 25.2% vs. prior year)
- Operating Expenses: $3,911 (Down 51.5% vs. prior year)
- Net Income: $28 (vs. Net Loss of $2,740 in prior year)
- Earnings Per Share (Basic & Diluted): $0.19 (vs. Loss of $21.57 in prior year)
- Operating Cash Flow: Not explicitly stated for the quarter, but six-month operating cash flow was $822 million.
Six Months Ended June 30, 2009 (in millions, except per share):
- Operating Revenues: $7,709 (Down 23.5% vs. prior year)
- Operating Expenses: $7,884 (Down 40.3% vs. prior year)
- Net Loss: $(354) (vs. Net Loss of $3,289 in prior year)
- Loss Per Share (Basic & Diluted): $(2.44) (vs. Loss of $26.52 in prior year)
- Operating Cash Flow: $822 (Provided by operations)
- Investing Cash Flow: $(9) (Used in investing)
- Financing Cash Flow: $(286) (Used in financing)
Liquidity and Balance Sheet (as of June 30, 2009):
- Cash and Cash Equivalents: $2,566 million
- Restricted Cash: $281 million
- Total Debt (Current + Long-term): $6,450 million
- Stockholders' Deficit: $(2,629) million
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased significantly due to capacity reductions and the severe global recession. Passenger revenue per available seat mile (PRASM) dropped 17.2% in the quarter and 14.4% for the six months. Cargo revenues fell 48.9% in the quarter.
- Fuel Cost Reduction: Aircraft fuel expense decreased by $1,183 million (64%) for the quarter and $1,959 million (57%) for the six months, driven by lower market prices and reduced consumption from capacity cuts.
- Impairment Charges: The Company recorded $40 million in intangible asset impairments (tradenames) for the quarter and $150 million for the six months. This is a significant improvement over the prior year, which included a $2,277 million goodwill impairment and $250 million in other impairments.
- Profitability: The Company returned to profitability for the quarter ($28 million net income) compared to a massive loss in the prior year, primarily due to lower fuel costs and the absence of the massive goodwill impairment recorded in 2008.
Outlook, Risks, and Contingencies
- Operational Plans: The Company plans to reduce international capacity by an additional 7% in the last four months of 2009. It is also pursuing a fleet modernization review for next-generation aircraft.
- Liquidity Risks: While the Company believes it has sufficient liquidity for the near term, it faces risks related to fuel price volatility, credit market conditions, and the ability to meet debt covenants (specifically the Amended Credit Facility requiring a $1.0 billion unrestricted cash balance).
- Legal and Regulatory:
- LAX Bonds: A Seventh Circuit Court ruling requires the Company to pay approximately $60 million to LAX bondholders, which has been accrued.
- EU Carbon Emissions: Potential inclusion of aviation in the EU carbon emission trading scheme starting in 2012 could significantly increase costs.
- Cartel Investigation: The European Commission is investigating air cargo/passenger surcharge cartels; the Company disputes allegations but notes penalties could be substantial.
- Labor Negotiations: All domestic labor contracts are amendable in 2010; negotiations began in Q2 2009.
- Subsequent Event: On July 2, 2009, United issued $175 million of 12.75% Senior Secured Notes due 2012, secured by aircraft spare parts.
Investor Verification Checklist
- Covenant Compliance: Verify the Company's ability to maintain the $1.0 billion unrestricted cash balance required by its Amended Credit Facility.
- Fuel Hedge Exposure: Review the specific terms of outstanding fuel hedges (collars, swaps) to understand potential cash outflows if fuel prices remain low or rise unexpectedly.
- Debt Maturity Profile: Assess the schedule of debt maturities and the Company's access to capital markets given its non-investment grade credit rating (B- / Caa1 / CCC).
- Workforce Reduction Costs: Monitor the execution of the 9,000 position reduction plan and associated severance/lease termination costs.
- Revenue Recovery: Evaluate the trajectory of business and premium travel demand, which has been disproportionately impacted by the recession.