United Airlines Holdings, Inc. quarterly report, Q3 FY2001

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

Metric Q2 2001 Q2 2000 YTD 6mo 2001 YTD 6mo 2000
Operating Revenues $4,658M $5,109M $9,082M $9,654M
Operating Expenses $5,127M $4,504M $9,942M $8,796M
Operating Income (Loss) $(469)M $605M $(860)M $858M
Net Earnings (Loss) $(365)M $336M $(678)M $237M
Diluted EPS $(6.87) $2.86 $(12.85) $1.68
Cash & Equivalents $798M $1,679M (Dec 2000) N/A
Short-term Investments $482M $665M (Dec 2000) N/A
Total Debt (Current + Long-term) $5,451M $5,127M (Dec 2000) N/A
Operating Cash Flow (6mo) N/A $391M $2,102M

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.