UAL

Business Context and Reporting Period

Company: UAL Corporation (United Airlines Holdings, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Filing Date: March 28, 2003

UAL Corporation is a holding company whose principal subsidiary is United Air Lines, Inc., the second-largest scheduled passenger airline in the world. The company operates through five segments: North America, Pacific, Atlantic, Latin America, and UAL Loyalty Services. On December 9, 2002, UAL and its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. The company is operating as a "debtor-in-possession" and is subject to the jurisdiction of the Bankruptcy Court in Chicago.

Key Financial Metrics

Liquidity and Debt: As of December 31, 2002, the company held $1.9 billion in total cash, cash equivalents, and short-term investments (including restricted cash). The company secured $1.5 billion in Debtor-in-Possession (DIP) financing, consisting of a $300 million facility from Bank One and a $1.2 billion facility from a syndicate led by JPMorgan Chase. Pre-petition debt totaling approximately $8.2 billion is classified as "liabilities subject to compromise."

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 12% to $14.3 billion, driven by a 14% drop in passenger revenues due to a 6% decrease in traffic and an 8% decrease in yield. This follows the severe impact of the September 11, 2001 attacks and a weak U.S. economy.
• Increased Losses: The net loss widened to $3.2 billion from $2.1 billion in 2001. The 2002 results included a $149 million special charge for the closure of the Avolar subsidiary and severance costs, offset partially by a $46 million gain on the sale of Cendant Corporation investments and $130 million in airline stabilization grants.
• Cost Reductions: Operating expenses decreased 8% to $17.1 billion. Aircraft fuel costs dropped 22% to $1.9 billion due to lower consumption and price. Commissions decreased 41% following the discontinuation of base commissions on U.S. and Canadian tickets.
• Bankruptcy Filing: The most significant change is the Chapter 11 filing, which resulted in the classification of $13.8 billion in liabilities as subject to compromise and the suspension of dividend payments on common and preferred stock.

Guidance, Outlook, and Risks

Outlook for 2003: Management expects to report an operating loss of approximately $900 million for the first quarter of 2003. The outlook is heavily influenced by the war in Iraq, which has caused a significant decline in revenues and international bookings. The company implemented an 8% capacity reduction effective April 6, 2003, and placed employees on temporary unpaid leave.

Plan for Transformation: The company's reorganization plan focuses on reducing labor and non-labor costs and developing a low-cost offering. Key elements include:

• Labor Agreements: The company reached a tentative agreement with the Air Line Pilots Association (ALPA) for a 30% pay cut and benefit reductions, effective May 1, 2003. Interim wage reductions were imposed on other unions and management. The company filed a motion to reject collective bargaining agreements (CBAs) under Section 1113 of the Bankruptcy Code to meet DIP financing covenants.
• Cost Savings: The company targets over $1 billion in cost savings in 2003 and $1.4 billion in 2004 through restructuring, renegotiated aircraft leases, and capacity reductions.

Risks and Contingencies:

• Going Concern: There is substantial doubt about the company's ability to continue as a going concern without a confirmed plan of reorganization.
• DIP Covenants: Failure to meet EBITDAR covenants could lead to foreclosure on substantial assets by DIP lenders.
• Asset Repossession: Under Section 1110 of the Bankruptcy Code, lessors may repossess aircraft if the company fails to cure defaults or negotiate extensions, though the company believes this is unlikely given market conditions.
• Insurance: Commercial insurers cancelled war risk coverage post-9/11; the company relies on FAA-provided coverage which may not be extended beyond August 2003.

Investor Verification Checklist

• Bankruptcy Plan Status: Verify the progress of the plan of reorganization and the likelihood of court confirmation by the October 2003 deadline.
• Labor Agreement Ratification: Confirm the ratification of the tentative pilot agreement and the outcome of the Section 1113 motion to reject other CBAs.
• DIP Financing Compliance: Monitor the company's ability to meet EBITDAR covenants to avoid default on the $1.5 billion DIP facility.
• Asset Retention: Assess the risk of aircraft repossession under Section 1110 and the status of negotiations with lessors.
• Equity Value: Recognize that existing equity may be substantially reduced or eliminated in the reorganization; the company has restricted trading to protect Net Operating Losses (NOLs).
• Government Assistance: Track the status of potential government relief packages regarding security costs, taxes, and terrorism insurance.