UAL

Business Context and Reporting Period

This Form 10-Q covers UAL Corporation (United Airlines) for the quarterly period ended June 30, 2001, filed on August 9, 2001. The airline industry faced significant headwinds due to a weaker economy, resulting in reduced corporate travel budgets and lower yields. A major corporate development was the termination of the merger agreement with US Airways on July 27, 2001, following regulatory opposition.

Key Financial Metrics

Note: Debt figures include current portions of long-term debt and capital lease obligations.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 9% in Q2 and 6% YTD compared to 2000. Passenger revenue dropped 12% in Q2 due to a 10% decline in yield (revenue per passenger mile) to 12.22 cents.
• Cost Increases: Operating expenses rose 14% in Q2. Key drivers included a 14% increase in salaries (due to new programs and contract negotiations) and an 18% increase in aircraft fuel costs (average price rose to 88.2 cents/gallon).
• Merger Termination Charge: A one-time pre-tax charge of $116 million was recorded in Q2 2001 related to the terminated US Airways merger, including a $50 million termination fee.
• Accounting Changes: Adoption of SFAS No. 133 (Derivatives) resulted in a cumulative charge of $8 million. A prior year accounting change regarding mileage sales resulted in a $209 million charge in 2000.
• Liquidity: Cash and cash equivalents decreased from $1.679 billion at year-end 2000 to $798 million at June 30, 2001, driven by operating losses and capital expenditures of $1.324 billion.

Guidance, Outlook, and Risks

• Outlook: Management projects a loss for the third quarter and the full year 2001. Negative revenue trends are expected to continue. Capacity is expected to increase 2.4% in Q3, but full-year capacity growth is revised to 0.5%.
• Cost Measures: The company cut its 2001 capital spending plan by $100 million, reduced the common stock dividend, accelerated the retirement of the B727 fleet, delayed 2003 aircraft deliveries, and instituted a hiring freeze.
• Unit Costs: Full-year unit costs are expected to increase 7% due to fuel and labor costs, despite cost-reduction efforts.
• Risks: Significant risks include the airline pricing environment, fuel price volatility, the outcome of union contract negotiations (specifically with the IAM), and the general economic environment.
• Investments: United expects a gain of approximately $270 million from the pending sale of its 18% stake in Galileo International to Cendant Corporation.

Investor Verification Checklist

• Merger Termination Impact: Verify the full extent of the $116 million charge and any remaining legal or financial obligations from the failed US Airways merger.
• Labor Negotiations: Monitor the status of negotiations with the International Association of Machinists and Aerospace Workers (IAM) and the potential impact of the Aircraft Mechanics Fraternal Association (AMFA) representation challenge.
• Cash Burn Rate: Assess the sustainability of the current cash position ($798M) given the projected full-year loss and $1.5 billion in remaining capital commitments for 2001.
• Fuel Hedging: Review the effectiveness of fuel hedging strategies given the 18% increase in fuel costs and the company's exposure to crude oil price fluctuations.
• Galileo Sale: Confirm the regulatory approval status and closing timeline of the Galileo International acquisition by Cendant to realize the projected $270 million gain.