UAL

Business Context and Reporting Period

Company: UAL Corporation (United Airlines Holdings, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: UAL is a holding company whose principal subsidiary is United Air Lines, Inc. The company operates a global airline network, managing passenger and cargo transport, frequent flyer programs, and aircraft leasing.

Key Financial Metrics

Revenue (Nine Months Ended Sept 30, 1998): $13,280 million (up 1% vs. prior year).
Net Earnings (Nine Months): $768 million (down 17% vs. prior year, which included a one-time gain).
Earnings Per Share (Diluted, Nine Months): $6.57 (vs. $9.02 in 1997).
Operating Cash Flow (Nine Months): $2,854 million.
Liquidity: Cash and cash equivalents totaled $447 million; short-term investments were $447 million. Total liquid assets (cash + short-term investments) were $894 million.
Debt: Long-term debt was $2,732 million; long-term capital lease obligations were $2,035 million. Current portions of debt totaled $325 million.
Margins: Operating margin for the nine months was approximately 9.7% ($1,288 million operating earnings / $13,280 million revenue).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased $137 million (1%) for the nine-month period, driven by a 2% increase in revenue passenger miles despite a 1% decrease in yield.
• Profitability Impact: Net earnings decreased significantly compared to 1997. The 1997 period included a one-time after-tax gain of $235 million from the sale of the Apollo Travel Services Partnership (ATS) to Galileo International. Excluding this gain, underlying operational performance improved.
• Cost Management: Operating expenses increased only $17 million (0.1%) despite revenue growth. Cost per available seat mile (CASM) decreased 3% to 9.22 cents (including ESOP expense) and 3% to 8.70 cents (excluding ESOP expense).
• Fuel Costs: Aircraft fuel expenses decreased $213 million (14%) due to a 15% drop in fuel prices (from 70.1 cents to 59.4 cents per gallon).
• Stock Repurchases: The company repurchased 3.6 million shares for $247 million during the quarter, with an additional 1.9 million shares repurchased in October.

Guidance, Outlook, and Risks

Outlook for Q4 and Full Year 1998:

• Capacity: Available seat miles expected to increase ~3% in Q4.
• Yields: Total system revenue per available seat mile expected to approximate 1997 levels (within 1% up or down).
• Costs: Unit costs (excluding ESOP) expected to be ~1% worse than the prior year, assuming lower fuel prices.
• Earnings: "Fully distributed" earnings per share for 1998 are expected to slightly exceed 1997 levels.

• Year 2000 (Y2K) Readiness: The company estimates a total cost of $70 million to achieve Y2K readiness. While IT systems are largely on track, risks remain regarding critical business partners (airports, air traffic control). Failure of these systems could materially impact operations.
• International Markets: Pacific yields are negatively impacted by the weakness of the Japanese yen and Asian economic turmoil. The company is uncertain if Pacific operations will be profitable for the full year.
• Labor Relations: The International Association of Machinists (IAM) was certified to represent 19,000 public contact employees, initiating contract negotiations. Additionally, wage adjustments for post-ESOP administrative employees are scheduled to begin in 1999/2000.
• United-Delta Alliance: The code-sharing aspect of the alliance with Delta was discontinued after the Delta pilots' union withdrew support, though frequent flyer reciprocity remains effective.
• Market Risk: Significant exposure to fuel price volatility and foreign currency fluctuations, particularly the Japanese yen. Fair value of sold call contracts on yen decreased by $35 million in October 1998 due to yen appreciation.

Investor Verification Checklist

• Verify the impact of the one-time $235 million ATS/Galileo gain in 1997 when comparing year-over-year earnings.
• Monitor the progress of Year 2000 remediation for critical business partners (airports, ATC) and potential cost overruns beyond the $70 million estimate.
• Assess the profitability of Pacific operations given the volatility of the Japanese yen and Asian economic conditions.
• Review the status of labor negotiations with the newly certified IAM union for public contact employees.
• Confirm the execution of the new international travel agency commission structure implemented in November 1998, projected to save $100 million annually.