UAL

Business Context and Reporting Period

This Form 10-Q covers UAL Corporation (United Airlines) for the quarterly period ended September 30, 2001. The reporting period is dominated by the September 11 terrorist attacks, which resulted in the destruction of two United aircraft, a three-day FAA ground stop, and a subsequent 23% reduction in system capacity. In response, the Company announced the furlough of approximately 20,000 employees and the retirement of its B727-200 and B737-200 fleets.

Key Financial Metrics

Note: The Net Loss includes a $391 million Airline Stabilization Grant received from the federal government.

Material Changes Versus Prior Period

• Revenue Decline: Operating revenues decreased 16% ($798 million) in the third quarter compared to 2000, driven by a 14% drop in passenger yield and a 6% decrease in traffic. Cargo revenues fell 33% due to the ground stop.
• Operating Loss: The Company reported an operating loss of $2.0 billion in Q3 2001, a significant deterioration from an operating loss of only $41 million in Q3 2000.
• Special Charges: The Company recorded $1.313 billion in operating special charges and $49 million in non-operating special charges related to the September 11 attacks. These charges include $788 million for aircraft groundings and impairment, $217 million for reduction in force (severance), and $181 million for early termination fees.
• Debt Increase: Long-term debt increased from $4.7 billion at year-end 2000 to $6.2 billion at September 30, 2001, following the issuance of $1.8 billion in debt to finance aircraft and refinance obligations.
• Equity Reduction: Stockholders' equity declined from $5.2 billion to $3.1 billion, largely due to the net loss and a $311 million reduction in equity from pension plan revaluation.

Guidance, Outlook, and Risks

Outlook: Management expects the fourth quarter net loss (excluding special charges) to be substantially greater than the third quarter. Capacity for Q4 is projected to be down 21% year-over-year. Unit costs (excluding fuel) are expected to increase 6% due to capacity reductions, while fuel prices are projected to be down 13%.

Liquidity: As of October, the Company's cash burn was approximately $15 million per day. Management anticipates receiving over $1 billion in cash during the fourth quarter from credit facilities and remaining government payments under the Air Transportation Safety and System Stabilization Act.

Risks and Contingencies:

• Insurance: Aircraft liability insurance for acts of war/terrorism was cancelled and replaced with significantly higher premiums and reduced coverage limits.
• Commitments: The Company may fail to meet capital investment and employment targets for the Indianapolis Maintenance Center, potentially triggering payments to the city and state.
• Future Deliveries: The Company is negotiating with Boeing and Airbus to delay aircraft deliveries beyond 2003 to manage cash flow.
• Rating Downgrades: Moody's and S&P downgraded United's senior unsecured debt ratings in September 2001.

Investor Verification Checklist

• Verify the sufficiency of the $2.7 billion in cash and short-term investments against the projected $15 million daily cash burn rate.
• Confirm the status of negotiations with aircraft manufacturers regarding the delay of $3.2 billion in committed aircraft purchases.
• Monitor the final settlement of the Air Transportation Safety and System Stabilization Act payments (expected total $780 million, with $391 million received).
• Assess the impact of the $311 million pension liability adjustment on future funding requirements.
• Review the outcome of union contract negotiations, particularly with the International Association of Machinists and Aerospace Workers (IAM).