UAL

Business Context and Reporting Period

This Form 10-Q covers UAL Corporation (United Airlines Holdings, Inc.) for the quarterly period ended March 31, 2002. The company is a holding company whose principal subsidiary is United Air Lines, Inc. The reporting period reflects the ongoing impact of the September 11, 2001 terrorist attacks, with the company executing a four-plank financial recovery plan focused on cost reduction, revenue generation, labor negotiations, and financing.

Key Financial Metrics

Liquidity: Total cash, cash equivalents, and short-term investments stood at $2.9 billion (including $201 million restricted cash). The daily cash burn rate improved to less than $5 million in Q1 2002 from approximately $10 million in Q4 2001.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 26% ($1.1 billion) year-over-year. Passenger revenues dropped 28% due to a 14% decrease in traffic and a 16% decrease in yield. Cargo revenues fell 27%.
• Expense Reduction: Operating expenses decreased 17% ($816 million). Significant drivers included a 40% drop in aircraft fuel costs (due to lower consumption and price) and a 14% reduction in salaries and related costs following workforce reductions.
• Widened Operating Loss: Despite lower expenses, the operating loss widened from $391 million to $711 million, primarily due to the steeper revenue decline and special charges.
• Special Items: The 2002 results included an $82 million pre-tax charge related to the closure of the Avolar subsidiary and a $46 million gain on the sale of a Cendant Corporation investment.
• Tax Benefit: The company received approximately $460 million in income tax refunds due to a legislative change extending the net operating loss carry-back period.

Guidance, Outlook, and Risks

Outlook: Management expects to report a significant loss for the second quarter of 2002 and for the full year. Capacity for Q2 is projected to be down 16-17% year-over-year, while unit costs (excluding fuel) are expected to increase 5%. Fuel prices are projected to be down 11%.

Management Commentary: The company is making progress on its financial recovery plan but faces delays in labor contract negotiations, specifically with the International Association of Machinists (IAM). A tentative agreement with IAM District 141 was reached in April 2002, pending ratification.

Risks and Contingencies:

• Labor Negotiations: Complications in negotiating labor contracts have slowed cost-reduction efforts.
• Market Risks: Exposure to fluctuations in crude oil/jet fuel prices, foreign currency exchange rates, and interest rates.
• Commitments: Approximately $2.2 billion in commitments for aircraft purchases remain, with $0.7 billion expected to be spent in the remainder of 2002.
• Insurance: Risks associated with the availability and cost of aircraft insurance coverage for acts of war and terrorism.

Investor Verification Checklist

• Avolar Charge: Verify the $52 million net-of-tax charge related to the closure of the Avolar subsidiary and the composition of costs (forfeitable payments, severance, termination fees).
• Tax Refund Realization: Confirm the receipt and accounting treatment of the $460 million tax refund resulting from the change in net operating loss carry-back rules.
• Labor Agreement Impact: Monitor the ratification of the tentative IAM contract and the potential impact of retroactive wage payments (payable starting December 2002) on future cash flows.
• Cash Burn Rate: Track the sustainability of the reduced cash burn rate (under $5 million/day) against the projected Q2 loss and capacity constraints.
• Debt Financing: Review the terms of the $775 million private debt financing closed in Q1 and its impact on the company's leverage and interest expense.