UAL

Business Context and Reporting Period

This Form 10-Q covers UAL Corporation (United Airlines Holdings, Inc.) for the quarterly period ended June 30, 2002, filed on August 14, 2002. The airline industry remains under severe stress due to the economic downturn and the aftermath of the September 11, 2001 terrorist attacks. UAL is actively pursuing a financial recovery plan involving significant cost reductions, labor negotiations, and an application for federal loan guarantees to address liquidity constraints.

Key Financial Metrics

*Includes $273 million in restricted cash. Total cash and short-term investments were $2.7 billion at June 30, 2002.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 19% in Q2 2002 and 22% for the six-month period compared to 2001. Passenger revenues dropped 21% in Q2 due to a 15% decrease in traffic and a 7% decrease in yield.
• Expense Reduction: Operating expenses decreased 17% in Q2 2002. Significant savings were realized in aircraft fuel (down 33% due to lower consumption and price) and commissions (down 61% following the discontinuation of base commissions).
• Loss Widening (YTD): While the Q2 net loss narrowed slightly year-over-year, the six-month net loss widened significantly from $678 million in 2001 to $850 million in 2002, driven by a larger operating loss of $1.2 billion.
• Government Assistance: The company received $80 million in airline stabilization grants in Q2 2002, which mitigated the reported loss. Total grants received through June 30, 2002, were $732 million.
• Special Charges: Q2 2002 included no special charges, whereas Q2 2001 included a $116 million charge related to a terminated merger. However, the first six months of 2002 included a $52 million charge for the closure of the Avolar subsidiary.

Guidance, Outlook, and Risks

• Liquidity Crisis: Management states that without federal loan guarantees, the company has insufficient access to capital markets to refinance nearly $900 million in debt maturing in Q4 2002. Current cash reserves may be insufficient to support ongoing obligations if negative operating cash flow continues.
• ATSB Loan Application: UAL has applied for a $2.0 billion loan guarantee (90% guaranteed by the government) from the Air Transportation Stabilization Board (ATSB). Approval is contingent on demonstrating a viable business plan and cost reductions.
• Financial Recovery Plan: The company is intensifying efforts to lower costs, including a tentative agreement with pilots (ALPA) for a 10% wage reduction and stock options. Agreements with other unions (IAM, AFA) are pending or rejected.
• Bankruptcy Risk: Management explicitly states it is preparing for the potential of a Chapter 11 bankruptcy filing in the fall if cost-reduction targets are not met or financing is not secured.
• Outlook: The company expects a significant loss for Q3 and the full year 2002. Q3 capacity is expected to be down 8% year-over-year, with unit costs increasing 2% (excluding fuel).
• Legal Contingencies: Seven lawsuits related to September 11 attacks are pending. Liability is expected to be limited to insurance coverage under federal law, but the company anticipates significant claims.

Investor Verification Checklist

• ATSB Loan Status: Verify the current status of the $2.0 billion loan guarantee application and any conditions imposed by the ATSB.
• Labor Agreement Ratification: Confirm the ratification status of the pilot (ALPA) wage reduction agreement and progress with other unions (IAM, AFA) to ensure cost savings are realized.
• Q4 Debt Maturities: Assess the specific schedule and amount of the ~$900 million in debt maturing in Q4 2002 and the company's refinancing strategy.
• Cash Burn Rate: Monitor the operating cash burn rate, which management noted is expected to increase in Q3 and Q4 due to seasonality.
• Insurance Coverage: Review the extent of war risk and hull insurance coverage and any changes in premiums or deductibles post-September 11.