Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, for UAL Corporation (the holding company) and its principal subsidiary, United Air Lines, Inc. The airline industry faced an extremely challenging environment characterized by record-high crude oil prices (peaking at ~$145/barrel in July 2008), a weakening U.S. economy, and excess industry capacity. The Company is implementing aggressive operational plans to reduce costs, including significant capacity reductions, fleet retirements (specifically the B737 fleet), and a workforce reduction of approximately 7,000 employees by the end of 2009.
Key Financial Metrics (Nine Months Ended Sept 30, 2008)
| Metric | UAL Corporation (in millions) | United Air Lines, Inc. (in millions) |
|---|---|---|
| Operating Revenues | $15,647 | $15,688 |
| Operating Expenses | $19,273 | $19,302 |
| Net Income (Loss) | $(4,045) | $(4,033) |
| Operating Cash Flow | $(250) | $(193) |
| Cash and Cash Equivalents (Sept 30, 2008) | $2,931 | $2,868 |
| Total Debt (Current + Long-term) | $6,894 | $6,892 |
| Stockholders' Equity (Deficit) | $(1,282) | $(1,379) |
Note: UAL and United results are nearly identical as United is the primary operating subsidiary.
Material Changes vs. Prior Period
- Net Loss vs. Net Income: The Company reported a net loss of $4.0 billion for the nine months ended September 30, 2008, compared to net income of $456 million in the same period in 2007. This represents a deterioration of approximately $4.5 billion.
- Fuel Costs: Aircraft fuel expense increased by 64.8% to $5.884 billion (from $3.571 billion in 2007) due to higher market prices and unfavorable fuel hedge settlements.
- Asset Impairments: The Company recorded total impairment charges of $2.484 billion in the first nine months of 2008. This includes a $2.277 billion goodwill impairment, $64 million in intangible asset impairments, and $143 million in tangible asset impairments (including pre-delivery deposits and B737 aircraft).
- Revenue Growth: Total operating revenues increased by 3.5% to $15.647 billion, driven by higher yields (8.6% increase) and cargo revenue growth (23.2%), partially offset by a 4.4% decrease in traffic.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects mainline domestic capacity to be down approximately 15% year-over-year by Q4 2008 and 13% lower in 2009. The Company is eliminating its "Ted" leisure product and reconfiguring 56 A320 aircraft. While the Company believes it has sufficient liquidity to meet near-term obligations, future liquidity is highly sensitive to fuel prices, the ability to pass costs to customers, and compliance with debt covenants.
Unusual Items
- Goodwill Impairment: A full write-off of goodwill ($2.277 billion) was triggered by a decline in market capitalization below book value and high fuel costs.
- Co-branded Credit Card Amendment: In September 2008, the Company amended its agreement with its credit card partner, receiving approximately $1.0 billion in cash proceeds (including $600 million for advanced purchase of miles and $100 million for a license extension) and releasing $357 million in restricted cash reserves.
Risks and Contingencies
- Liquidity and Covenants: The Company must maintain a minimum unrestricted cash balance of $1.0 billion under its Amended Credit Facility. Failure to comply could result in a default. Additionally, credit card processing agreements require higher cash reserves if unrestricted cash falls below specific thresholds ($2.5B, $2.0B, $1.0B).
- Fuel Hedging: The Company has significant fuel derivative positions. As oil prices fell from their peak, the Company faced unrealized losses and collateral requirements of $378 million as of September 30, 2008. A $5 decrease in oil prices could require an additional $100 million in collateral.
- Legal Proceedings: Ongoing investigations by the European Commission regarding air cargo/passenger surcharge cartels pose a risk of substantial penalties. Bankruptcy-related litigation (SFO and LAX municipal bonds) remains pending.
Investor Verification Checklist
- Covenant Compliance: Verify the Company's ability to maintain the $1.0 billion unrestricted cash covenant and the EBITDAR to fixed charges ratio required starting Q2 2009.
- Fuel Hedge Exposure: Assess the impact of falling oil prices on the Company's liquidity due to cash collateral requirements for fuel derivatives.
- Asset Dispositions: Monitor the execution of the plan to retire 100 aircraft and the realization of proceeds from asset sales and sale-leaseback transactions.
- Bankruptcy Claims: Review the status of remaining unsecured claims and the final distribution of reserved shares to creditors.
- Regulatory Risks: Track developments in the European Commission's antitrust investigation regarding fuel surcharges.