UAL

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009, for UAL Corporation (the holding company) and its principal subsidiary, United Air Lines, Inc. (the operating airline). The report is a combined filing. United operates a global network with hubs in Chicago, Denver, Los Angeles, San Francisco, and Washington Dulles, serving over 230 destinations. The company operates through two segments: Mainline (full-sized jets) and Regional Affiliates (United Express). The reporting period was characterized by a severe global recession, which significantly reduced passenger demand, particularly in business and premium cabins, and necessitated aggressive capacity reductions and cost-cutting measures.

Key Financial Metrics

Unit Metrics (Mainline):

• Yield: 11.81 cents per revenue passenger mile (down 15.0% from 2008).
• CASM (Cost per Available Seat Mile): 11.05 cents (down 29.8% from 2008).
• Load Factor: 81.9% (up 0.9 points from 2008).

Material Changes vs. Prior Period

• Revenue Decline: Total revenues dropped 19.1% primarily due to a 22.3% decline in Mainline passenger revenues. This was driven by a 15% decrease in yield and an 8.7% decrease in traffic (RPMs), reflecting the global recession and reduced business travel.
• Expense Reduction: Operating expenses fell 33.0%, significantly outpacing the revenue decline. This was largely due to a 55.9% drop in aircraft fuel expense (driven by lower market prices and favorable hedge settlements) and a 12.5% reduction in salaries and related costs due to workforce reductions.
• Asset Impairments: The company recorded $243 million in impairment charges in 2009 (primarily tradenames and nonoperating aircraft), a significant decrease from the $2.6 billion in impairments recorded in 2008 (which included a full goodwill write-off).
• Capacity Reductions: United permanently removed 100 aircraft from its fleet in 2008-2009, including its entire B737 fleet. Mainline capacity decreased 9.7% for the full year 2009.

Guidance, Outlook, and Risks

Management Commentary: Management highlighted that while the global recession severely impacted demand, the company successfully reduced unit costs and improved liquidity. The company expects to meet liquidity needs in 2010 through operating cash flows and existing capital. Signs of recovery were noted in the fourth quarter of 2009, with modest growth in December.

Strategic Initiatives:

• Focus on Five: Continued emphasis on on-time performance, clean planes, courteous employees, industry-leading revenues, and competitive costs.
• Alliances: Continental Airlines joined the Star Alliance in October 2009, creating new revenue opportunities. United, Continental, and All Nippon Airways applied for antitrust immunity for a transpacific joint venture.
• Fleet Modernization: In December 2009, United announced orders for 25 Boeing 787-8 Dreamliners and 25 Airbus A350 XWB aircraft to replace older widebody fleets.

Key Risks and Contingencies:

• Liquidity and Debt Covenants: The company must maintain a minimum unrestricted cash balance of $1.0 billion and specific fixed charge coverage ratios under its Amended Credit Facility. Failure to comply could trigger a default.
• Fuel Price Volatility: While fuel prices were lower in 2009, volatility remains a significant risk. The company had hedged approximately 36% of its 2010 fuel consumption.
• Labor Negotiations: All six domestic labor contracts became amendable in January 2010. Negotiations were ongoing, with mediation filed for four unions. Outcomes could materially impact future costs.
• Legal Proceedings: The company is subject to investigations regarding air cargo and passenger surcharges (potential price-fixing) by the European Commission and other authorities. No reserve was recorded, but penalties could be substantial.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the company's ability to maintain the $1.0 billion unrestricted cash balance and the required fixed charge coverage ratio (1.2 to 1.0 for the period ending Dec 31, 2009; increasing to 1.5 to 1.0 by Sept 30, 2010).
• Labor Contract Outcomes: Monitor the results of collective bargaining negotiations with the six labor unions, as new agreements could significantly alter the cost structure.
• Fuel Hedge Exposure: Review the effectiveness of the fuel hedging program and potential cash collateral requirements if oil prices fluctuate significantly from the strike prices ($76-$77/barrel).
• Asset Impairment Triggers: Assess the risk of future impairment charges on the remaining $9.8 billion of operating property and equipment and $2.5 billion of intangible assets if economic conditions or fuel prices deteriorate.
• Legal Liability: Track the status of the European Commission's air cargo cartel investigation and potential fines.