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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-6033
UAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-2675207
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Location: 1200 East Algonquin Road, Elk Grove Township, Illinois 60007
Mailing Address: P. O. Box 66919, Chicago, Illinois 60666
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 700-4000
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York, Chicago and
Pacific Stock Exchanges
Depositary Shares each representing
1/1,000 of a share of Series B
Preferred Stock, without par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
NONE
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was $ 3,315,554,070 as of March 11, 1999. The number
of shares of common stock outstanding as of March 11, 1999 was 51,419,567.
Documents Incorporated by Reference
Part III of this Form 10-K incorporates by reference certain
information from the Registrant's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on May 18, 1999.
PART I
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ITEM 1. BUSINESS.
UAL Corporation ("UAL" or the "Company") was incorporated under
the laws of the State of Delaware on December 30, 1968. The world
headquarters of the Company are located at 1200 East Algonquin Road,
Elk Grove Township, Illinois 60007. The Company's mailing address is
P.O. Box 66919, Chicago, Illinois 60666. The telephone number for
the Company is (847) 700-4000.
The Company is a holding company and its principal subsidiary is
United Air Lines, Inc., a Delaware corporation ("United"), which is
wholly owned. United accounted for virtually all of the Company's
revenues and expenses in 1998. United is a major commercial air
transportation company, engaged in the transportation of persons,
property and mail throughout the United States and abroad.
Airline Operations
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During 1998, United carried, on average, more than 238,000
passengers per day and flew more than 125 billion revenue passenger
miles. It is the world's largest airline as measured by revenue
passenger miles flown, providing passenger service in 28 countries.
United has a global network of major connecting airports:
Chicago, Denver, San Francisco, Los Angeles, Washington, D.C., Miami,
Frankfurt, London, Tokyo, and Toronto. This network of major
connecting airports is designed to fly travelers between North
America (domestic segment) and the Pacific, Latin America and Europe
(international segment). Operating revenues attributed to United's
North America segment were approximately $ 12.0 billion in 1998,
$11.2 billion in 1997, and $10.7 billion in 1996. Operating revenues
attributed to United's international segment were approximately $5.5
billion in 1998, $6.1 billion in 1997, and $5.6 billion in 1996.
Since October 1994, United has operated a service, United
Shuttle(R) within its domestic segment. This service is designed to
compete with low-cost carriers on routes fewer than 750 miles. While
United Shuttle is principally concentrated on the West Coast, it has
also expanded into the Denver market. United Shuttle offers
approximately 466 daily flights on 25 routes between 21 cities in the
western United States. United Shuttle provides critical feed traffic,
at competitive prices, for United.
Pacific. Via its Tokyo hub, United provides passenger service
between its U.S. gateway cities (Chicago, Honolulu, Los Angeles, New
York, San Francisco and Seattle) and the Asian cities of Bangkok,
Beijing, Hong Kong, Shanghai and Singapore. United also provides
nonstop service between Chicago and Hong Kong; between San Francisco
and Hong Kong, Osaka and Taipei; between Los Angeles and Hong Kong
and Osaka; and between Honolulu and Tokyo. Additionally, United
provides service between Hong Kong and Bangkok. Service between
Delhi and Hong Kong will be terminated in April 1999.
During 1998, the U.S. and Japan entered into a new air services
agreement providing that certain carriers, including United, will
have no limits on the number of frequencies they can operate,
permitting code-sharing between U.S. and Japanese carriers, and
settling long-standing disputes regarding the utilization of "beyond
Japan" flying rights. United holds significant traffic rights beyond
Japan; these rights, when economic conditions improve, will allow
United to add service from Japan to other Asian points.
United serves the South Pacific market with flights between
Sydney and each of Los Angeles and San Francisco, and between Los
Angeles and each of Auckland and Melbourne. In 1998, United was the
leading U.S. carrier in the Pacific in terms of available seat miles.
United's Pacific operations accounted for 16% of United's revenues in
1998.
Atlantic. United provides nonstop passenger service between
seven U.S. cities and London, as well as service between London and
Amsterdam; nonstop service between Paris and each of Chicago, San
Francisco, and Washington Dulles; nonstop service between Washington
Dulles and each of Amsterdam, Brussels, Frankfurt, Milan and Munich;
and nonstop service between Chicago and each of Dusseldorf and
Frankfurt. In April 1998, United initiated a second nonstop flight
between Chicago and London Heathrow and operates a third flight on a
seasonal basis. In 1998, United's Atlantic operations accounted for
11% of United's revenues. In 1999, new service between Boston and
London will be added, but service between London and Delhi will be
terminated. Possible trans-Atlantic service from the U.S. to Delhi
is under consideration.
The European Commission is investigating transatlantic
alliances, including the alliance between United, Lufthansa, and SAS,
and the impact that this and similar alliances may have upon
competition. The Commission has proposed certain conditions, such as
frequency reductions, slot forfeitures, prohibitions on combining
frequent flyer programs, and restrictions on display screens of
computer reservation systems, which, if implemented, may impair the
efficiency of United's alliance with Lufthansa and SAS.
Latin America. United provides passenger service between Miami
and each of Buenos Aires, Caracas, Lima, Montevideo (one stop), Rio
de Janeiro, Santiago and Sao Paolo; between Los Angeles and each of
Guatemala City, Mexico City, and San Salvador; between New York and
each of Buenos Aires, Caracas, Sao Paolo, and San Juan; between
Chicago and each of Buenos Aires, Mexico City, San Juan, and Sao
Paolo; and between Mexico City and each of San Francisco and
Washington Dulles. United also provides service between Costa Rica
and Mexico City. In July 1998, nonstop service was added between
Washington Dulles and San Salvador, but was cancelled effective
January 16, 1999. In 1998, United's Latin America operations
accounted for 5% of United's revenues.
Financial information relative to the Company's operating
segments can be found in Note 19 to the Consolidated Financial
Statements in this Form 10-K.
Alliances. United has formed bilateral alliances with other
airlines to provide its customers more choices and to participate
worldwide in markets that it cannot serve directly for commercial or
governmental reasons. An alliance is a collaborative marketing
arrangement between carriers which can include joint frequent flyer
participation, coordination of reservations, baggage handling, and
flight schedules, and code-sharing of operations. "Code-sharing" is
an agreement under which a carrier's flights can be marketed under
the two-letter airline designator code of another carrier. Through
an alliance, carriers can provide their customers a seamless global
travel network under their own airline code. United now participates
in a multilateral alliance, the STAR Alliance(TM).
The Star Alliance, of which United is a founding member,
includes Lufthansa, Air Canada, SAS, Thai Airways, and Varig. The
Star Alliance is an integrated worldwide transport network that
provides customers with global recognition and a wide range of other
benefits. The Star Alliance should enable its member carriers to
more effectively compete with other worldwide alliances. In May
1998, Air New Zealand and Ansett Australia announced their plans to
join the Star Alliance, effective April 1999. All Nippon Airways is
expected to join in October 1999.
Other bilateral alliance air carriers include Aeromar, Air New
Zealand, All Nippon, ALM Antillean, Aloha, British Midland, Cayman
Airways, Continental Connection, Emirates, Gulfstream International,
Mexicana, Saudi Arabian, and TW Express. United holds integrated
antitrust immunity with Lufthansa and SAS, and bilateral immunity
with Air Canada.
In April 1998, United and Delta Air Lines announced a tentative,
seven year bilateral alliance which included code-sharing, reciprocal
participation in their frequent flyer programs, and coordination of
marketing efforts. That agreement was mutually terminated as of
February 1, 1999, with the exception of reciprocal participation in
each carrier's frequent flyer program. The reciprocal frequent flyer
participation was implemented in September 1998.
In addition, United has a marketing program in North America,
known as the United Express(R), under which independent regional
carriers, utilizing turboprop equipment and regional jets, feed
United's major airports and international gateways. The carriers in
the United Express program provide service to United at 181 airports.
Cargo Service. In 1998, United's cargo division accounted for
approximately 5% of the Company's operating revenues. United
operates all-cargo service between the U.S. and Asia with four DC10-
30F freighter aircraft. A large cargo transfer facility was opened
in Honolulu during the second quarter of 1998. The Hawaii facility
is expected to be a major connection point for Japanese traffic to
and from the U.S. mainland, and for local traffic in and out of
Hawaii.
Frequent Flyer Program. United established the Mileage Plus(R)
frequent flyer program to retain and develop passenger loyalty by
offering awards to frequent travelers. Mileage Plus members earn
mileage credit for flights on United, United Shuttle, United Express
and certain other participating airlines, or for utilizing the goods
and services of other program participants, such as hotels, car
rental companies and bank credit card issuers. Mileage credits can
be redeemed for free, discounted or upgraded travel awards on United
and other participating airlines, or for other travel industry
awards.
Travel awards can be redeemed at the "Standard" level for any
unsold seat on any United flight to every destination served by
United. Redemption at the "Saver" award level, however, is
restricted with expiration dates, blackout periods and capacity
controlled bookings, thereby limiting the use of Saver awards on
certain flights.
When a travel award level is attained, liability is recorded for
the incremental costs of accrued credits based on expected
redemptions. United's incremental costs include the additional costs
of providing service for what would otherwise be a vacant seat, such
as fuel, meal, personnel and ticketing costs. The incremental costs
do not include any contribution to overhead or profit.
At December 31, 1998, the estimated number of outstanding awards
was approximately 6.1 million, as compared with 6.2 million at the
end of the prior year. United estimates that 4.6 million of such
awards will ultimately be redeemed and, accordingly, has recorded a
liability amounting to $195 million, which is unchanged from the
previous year. Based on historical data, the difference between the
awards expected to be redeemed and the total awards outstanding
arises because: (1) some awards will never be redeemed, (2) some
will be redeemed for non-travel benefits, and (3) some will be
redeemed on partner carriers.
The number of Mileage Plus awards used on United in 1998 was 2.1
million, compared to 1.8 million in 1997 and 1.5 million in 1996.
Such awards represented 9% of United's total revenue passenger miles
in 1998, 8% in 1997, and 7% in 1996. These low percentages, as well
as seat availability restrictions on the use of Saver awards (the
most popular redemption), kept displacement, if any, of revenue
passengers by users of Mileage Plus awards to a minimum.
Industry Conditions
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Seasonality. Air travel business is subject to seasonal
fluctuations. United's first- and fourth-quarter results normally
are affected by reduced travel demand in the fall and winter, and
United's operations are often affected adversely by winter weather.
Thus, operating results for the Company are generally better in the
second and third quarters.
Competition. The airline industry is highly competitive. In
domestic markets, new and existing carriers are free to initiate
service on any route. United's domestic competitors include all of
the other major U.S. airlines as well as regional carriers, some of
which have lower cost structures than United.
In its international service, United competes not only with U.S.
carriers but also with national flag carriers of foreign countries,
which in certain instances enjoy forms of governmental support not
available to U.S. carriers. Competition on certain international
routes is subject to varying degrees of governmental regulations (see
"Government Regulation"). United has advantages over foreign air
carriers in the United States because of its ability to generate U.S.
origin-destination traffic from its integrated domestic route
systems, and because foreign carriers are prohibited by U.S. law from
carrying local passengers between two points (known as cabotage) in
the United States. United experiences the same restriction in
foreign countries.
In addition, U.S. carriers are often constrained from carrying
passengers to points beyond designated international gateway cities
due to limitations in air service agreements or restrictions imposed
unilaterally by foreign governments. To compensate for these
structural limitations, U.S. and foreign carriers have entered into
alliances and marketing arrangements which allow the carriers to
provide feed to each other's flights. (See "Airline Operations -
Alliances")
Distribution Channels. Travel agents account for a substantial
percentage of United's sales. In November 1998, as part of its
ongoing effort to control costs, United capped at $100 the maximum
commission payable for international travel purchased in the U.S. or
Canada for travel outside those countries.
The use of electronic distribution systems is also an important
cost control initiative of United. United continues to expand the
capabilities of its web site and observed an increase in 1998 in its
internet bookings. The U.S. government and the European Commission
are considering placing restrictions on the Internet products offered
directly by the airlines as they also review the larger issue of
restrictions on computer reservation systems.
Government Regulation
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General. All carriers engaged in air transportation in the
United States are subject to regulation by the U.S. Department of
Transportation ("DOT"). The DOT has authority to: issue
certificates of public convenience and necessity for domestic air
transportation and, through the Federal Aviation Administration
("FAA"), air-carrier operating certificates; authorize the provision
of foreign air transportation by U.S. carriers; prohibit unjust
discrimination; prescribe forms of accounts and require reports from
air carriers; regulate methods of competition, including the
provision and use of computerized reservation systems; and administer
regulations providing for consumer protection, including regulations
governing the accessibility of air transportation facilities for
handicapped individuals. United holds certificates of public
convenience and necessity, as well as air-carrier operating
certificates, and therefore is subject to DOT regulations. The FAA
administers the U.S. air traffic control system and oversees aviation
safety issues.
United's operations require licenses issued by the aviation
authorities of the foreign countries that United serves. Foreign
aviation authorities may from time to time impose a greater degree of
economic regulation than exists with respect to United's domestic
operations. United's ability to serve some foreign markets and its
expansion into many of these markets are presently restricted by lack
of aviation agreements to allow such service or, in some cases, by
the restrictive terms of such agreements.
In connection with its international services, United is
required to file with the DOT and to observe tariffs establishing the
fares charged and the rules governing the transportation provided.
In certain cases, fares and schedules require the approval of the
relevant foreign governments. Shifts in United States or foreign
government aviation policies can lead to the alteration or
termination of existing air service agreements between the U.S. and
other governments, and could diminish the value of United's
international route authority. United's operating rights under the
air services agreements may not be preservable in such cases.
Airport Access. Take-off and landing rights ("slots") at
Chicago O'Hare International Airport, New York John F. Kennedy
International, New York LaGuardia and Washington Reagan National
airports, are limited by the "high density traffic rule." Under this
rule, slots may be bought, sold or traded. The DOT, however, can
require carriers to relinquish slots for reallocation if they fail to
meet certain minimum-use standards.
For the past few years, the DOT has been confiscating slots from
incumbent carriers at Chicago O'Hare, including United, to provide
more opportunities for foreign carriers. In 1997, the DOT began
creating slots at certain slot-controlled airports to allow the entry
of "new entrant" carriers. United holds a sufficient number of slots
at airports subject to the high-density rule, but its ability to
expand could be constrained if sufficient additional slots are not
available on satisfactory terms.
On February 9, 1999, federal transportation officials announced
a plan to abolish, over a five year period, the high density traffic
rule at Chicago's O'Hare and New York's Kennedy and Laguardia
airports. The plan requires Congressional action. It is too early
to determine what impact, if any, this proposal would have on the
Company if enacted.
United currently has a sufficient number of leased gates and
other airport facilities, but expansion by United may be constrained
at certain airports by insufficient availability of gates on
attractive terms or other factors, such as noise restrictions.
Safety. The FAA has regulatory jurisdiction over flight
operations generally, including equipment, ground facilities,
maintenance, communications and other matters. United's aircraft and
engines are maintained in accordance with the standards and
procedures recommended and approved by the manufacturers and the FAA.
From time to time, the FAA issues airworthiness directives
("ADs") which require air carriers to undertake inspections and to
make unscheduled modifications and improvements on aircraft, engines
and related components and parts. The ADs sometimes cause United to
incur substantial, unplanned expense when aircraft or engines are
removed from service prematurely in order to undergo mandated
inspections or modifications. The issuance of any particular AD may
have a greater or lesser impact on United, compared to its
competitors, depending upon the equipment covered by the directive.
Civil and criminal sanctions may be assessed for not complying with
the ADs.
Environmental Regulations. The Airport Noise and Capacity Act
of 1990 ("ANCA") requires the phase-out by December 31, 1999 of Stage
2 aircraft operations, subject to certain waivers. The "Stage 2" and
"Stage 3" terminology is industry vernacular referring to permissible
noise levels under various aircraft operating conditions. The
specific noise limitations are technical, but in general, Stage 3
aircraft will produce less overall noise than Stage 2 aircraft. By
the year 2000, all commercial aircraft within the United States must
meet the stricter Stage 3 noise requirements or be grounded.
United will generally meet Stage 3 requirements by retiring
Stage 2 aircraft and replacing some with newer Stage 3 aircraft, and
by retrofitting the remaining Stage 2 aircraft with special equipment
(known in the industry as "hushkits"). Most of the hushkits will be
acquired through a swap of retired or retiring DC10-10 aircraft. The
cost of acquiring the remaining hushkits is included in the Company's
capital commitments disclosed under "Liquidity and Capital Resources"
of Item 7.
Federal and state environmental laws require that underground
storage tanks (USTs) be upgraded to new construction standards and
equipped with leak detection. These requirements are phased in based
on the age, construction and use of existing tanks. United operates
a number of underground and above-ground storage tanks throughout its
system. They are used for the storage of fuels and deicing fluids.
A program for the removal or upgrading of USTs, ongoing since 1987,
was completed in 1998.
United has been identified as a potentially responsible party in
some state and federal recovery actions involving soil and groundwater
contamination. United estimates the total cost of remediation to
range from $43 million to $79 million.
The EPA and FAA signed a Memorandum of Agreement in February 1998
to develop a voluntary process with the airline industry to reduce
emissions that lead to ozone formation. This MOA includes a proposal
that carries a "voluntary engine retrofit program" to reduce emissions
from aircraft engines. As a result of this MOA, the carriers, EPA,
FAA and local and state regulators have been involved in negotiations
on the scope and content of the voluntary program. Despite proposals
from the airline industry, this process has not yet resulted in an agreed
program.
Other Government Matters. Other federal agencies with
jurisdiction over certain aspects of United's operations include the
Department of Justice (Antitrust Division and Immigration and
Naturalization Service); the Equal Employment Opportunity Commission;
the Department of Labor (Occupational Safety and Health
Administration, and Office of Federal Contract Compliance Programs of
the Employment Standards Administration); the National Mediation
Board; the National Transportation Safety Board; the Treasury
Department (U.S. Customs Service); the Federal Communications
Commission (use of radio facilities by aircraft); and the United
States Postal Service (carriage of domestic and international mail).
United is also subject to varying degrees of regulation by foreign
governments. In time of war or certain other national emergencies,
the U.S. government may require United to provide airlift services
under the Civil Reserve Air Fleet Program.
Fuel
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United's results of operations are significantly affected by the
price and availability of jet fuel. It is estimated that every $.01
change in the average annual price-per-gallon of jet fuel causes a
change of approximately $31 million in United's annual fuel costs.
The average price per gallon of jet fuel in 1998 declined 15.1%.
Changes in fuel prices are industry-wide occurrences that benefit or
harm United's competitors as well as United, although fuel-hedging
activities may affect the degree to which fuel-price changes affect
individual companies. To assure adequate supplies of fuel and to
provide a measure of control over fuel costs, United ships fuel on
major pipelines and stores fuel close to its major hub locations.
Insurance
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United carries liability insurance of a type customary in the
air transportation industry, in amounts which it deems adequate,
covering passenger liability, public liability and property damage
liability. The amount recoverable by United under aircraft-hull
insurance covering all damage to its aircraft is not subject to any
deductible amount in the event of a total loss.
Employees - Labor Matters
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UAL is the world's largest majority employee-owned company. At
December 31, 1998, the Company and its subsidiaries had more than
95,035 employees. Approximately 82% of United's employees are
represented by various labor organizations.
The employee groups, number of employees, labor organization and
current contract status for each of United's major collective
bargaining groups as of December 31, 1998 are as follows:
Number of Contract Open
Employee Group Employees Union For Amendment
-------------- --------- ----- -------------
Mechanics, ramp
service & other
ground employees 26,446 IAM July 12, 2000
Passenger Service
Employee Group 19,198 IAM N/A*
Flight attendants 22,681 AFA March 1, 2006
Pilots 9,292 ALPA April 12, 2000
___________________________
*Began negotiations December 8, 1998 for a first contract.
Corporate Governance
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Background. On July 12, 1994, the stockholders of UAL approved
a plan of recapitalization that provided an approximately 55% equity
and voting interest in UAL to certain employees of United in exchange
for wage concessions and work-rule changes. The employees' equity
interest is being allocated to individual employee accounts through
the year 2000 under Employee Stock Ownership Plans ("ESOPs") which
were created as part of the recapitalization. Since the ESOP shares
are being allocated over time, the current ownership interest held in
the ESOPs is less than 55%. The entire ESOP voting interest,
however, is currently exercisable and is voted by the ESOP trustee at
the direction of, and on behalf of, the employees participating in
the ESOPs.
As part of the recapitalization, the Company's shareholders
approved an elaborate governance structure, which is contained principally
in the Company's Restated Certificate of Incorporation ("UAL Charter").
Among other matters, the UAL Charter provides that the Company's
Board of Directors is to consist of five public directors,
two of whom are members of senior management; four independent
directors; and three directors appointed by representatives of
various employee groups, including the pilots and machinists.
See the Company's Proxy Statement for its Annual Meeting of
Shareholders for information concerning the processes for electing
the directors and for the Board committee requirements. A number of
special shareholder and Board voting requirements were also established,
as summarized below.
Special Voting. In specified circumstances
("Extraordinary Matters"), actions by UAL or United Airlines require
approval of either (a) 75% of the entire Board, including at least
one union director, or (b) 75% of the voting stock present at a
stockholder meeting. "Extraordinary Matters" include, certain
business transactions outside the ordinary course of business,
significant asset dispositions, and most issuances of equity securities.
Most issuances of equity securities are also subject to a first
refusal agreement in favor of employees participating in the ESOPs.
Other special voting requirements apply to amendments to
the UAL Charter and certain Bylaws, repurchases of Common Stock,
stock sales to employee benefit plans, and business transactions with
labor.
"Sunset." The Voting Preferred Stock (See Item 8, Note 13
to Consolidated Financial Statements) outstanding at any time
commands voting power for approximately 55% of the vote of all
classes of capital stock in all matters requiring a stockholder vote,
other than for the election of members of the Board of Directors.
The Voting Preferred Stock will generally continue to represent
approximately 55% of the aggregate voting power until the "Sunset."
The "Sunset" will occur when the common shares issuable upon
conversion of the outstanding Class 1 and Class 2 ESOP Preferred
Stock, plus any common equity (generally common stock issued or
issuable at the time of the recapitalization) and available unissued
ESOP shares held in the ESOPs or any other employee benefit plans
sponsored by the Company for the benefit of its employees, represent,
in the aggregate, less than 20% of the common equity and available
unissued ESOP shares of the Company. For purposes of measuring the
Sunset, employee ownership is approximately 65.73% at December 31,
1998.
For a more complete description of the Company's governance
structure, see the UAL Charter, the Stockholders' Agreements and
the First Refusal Agreement, included as exhibits to this Form 10-K.
ITEM 2. PROPERTIES.
Flight Equipment
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As of December 31, 1998, United's operating aircraft fleet
totaled 577 jet aircraft, of which 268 were owned and 309 were
leased. These aircraft are listed below:
Average Average
Aircraft Type No. of Seats Owned Leased* Total Age (Years)
------------- ------------ ----- ------- ----- -----------
A319-100 126 10 10 20 1
A320-200 144 11 40 51 3
B727-200 147 65 10 75 20
B737-200 109 24 0 24 19
B737-300 129 10 91 101 10
B737-500 112 27 30 57 6
B747-100 450 4 0 4 28
B747-200 347 2 7 9 20
B747-400 363 15 21 36 5
B757-200 188 41 55 96 7
B767-200 168 19 0 19 16
B767-300 213 8 19 27 6
B777-200 290 16 18 34 2
DC10-10 288 13 3 16 22
DC10-30 298 1 3 4 20
DC10-30F N/A 2 2 4 19
TOTAL OPERATING
FLEET 268 309 577 10
=== === === ===
* United's aircraft leases have initial terms of 10 to 26 years,
and expiration dates range from 1999 through 2020. Under the
terms of leases for 302 of the aircraft in the operating fleet,
United has the right to purchase the aircraft at the end of the
lease term, in some cases at fair market value and in others at
fair market value or a percentage of cost.
As of December 31, 1998, 69 of the 268 aircraft owned by United
were encumbered under debt agreements.
The following table sets forth United's firm aircraft orders and
expected delivery schedules as of December 31, 1998:
Aircraft Type Number To Be Delivered Delivery Rate
------------- ------ --------------- -------------
A319-100 27 1999-2002 0-2 per month
A320-200 35 1999-2002 0-3 per month
B747-400 15 1999-2002 0-2 per month
B757-200 2 1999 0-2 per month
B767-300 10 1999-2002 0-1 per month
B777-200 18 1999-2002 0-2 per month
Total 107
Ground Facilities and Equipment
- -------------------------------
United has entered into various leases relating to its use of
airport-landing areas, gates, hangar sites, terminal buildings and
other airport facilities in most of the municipalities it serves.
Major leases expire at Chicago O'Hare in 2018, San Francisco in 2011,
Washington Dulles in 2014 and Los Angeles in 2021. United also has
leased ticketing, sales and general office space in the downtown and
outlying areas of most of the larger cities in its system. In
suburban Chicago, United owns a 106-acre complex consisting of more
than one-million square feet of office space for its world
headquarters, a computer facility and a training center.
United's Maintenance Operation Center ("MOC") at San Francisco
International Airport occupies 129 acres of land, three-million
square feet of floor space and 12 aircraft hangar docks under lease
expiring in 2007, with an option to extend for 10 years. United's
Indianapolis Maintenance Center ("IMC") is operated under a lease
with the Indianapolis Airport Authority that expires in 2031. IMC is
a major aircraft maintenance and overhaul facility and is being used
for maintenance of Boeing B737, B757, B767 and A320 aircraft. United
also has a major facility at the Oakland, California airport,
dedicated to airframe maintenance.
At Denver International Airport, United operates under a lease
and use agreement expiring in 2025, and occupies 44 gates and more
than one million square feet of exclusive or preferential use
terminal building space. United's flight training center, located at
the former Stapleton International Airport, was purchased by United
from the City and County of Denver and can accommodate 36 flight
simulators and more than 90 computer-based training stations.
ITEM 3. LEGAL PROCEEDINGS.
No material legal proceedings pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the
Company during the fourth quarter of 1998.
Executive Officers of the Registrant
- ------------------------------------
Information regarding the executive officers of the Company is
as follows:
Gerald Greenwald. Age 63. Mr. Greenwald has been Chairman and
Chief Executive Officer of the Company and United since July 12,
1994. During the year prior to joining the Company, he served as
Chairman of Tatra Truck Company, Czech Republic (a truck
manufacturer).
James E. Goodwin. Age 54. Mr. Goodwin has been President
and Chief Operating Officer of the Company and United since
September 1998. From April 1, 1995 to his current appointment, he
served as Senior Vice President - North America of United. From 1992
to 1995, he served as Senior Vice President - International of
United.
Christopher D. Bowers. Age 51. Mr. Bowers has been Senior Vice
President - North America of United since September 1998. From April
1, 1995 until his current appointment, he served as Senior Vice
President - International of United. From 1988 until 1995, he served
as Vice President and General Sales Manager of the sales division of
United.
David Coltman. Age 56. Mr. Coltman has been Senior Vice
President - Marketing of United since April 1, 1995. From 1989 until
assuming his current position, Mr. Coltman served as Vice President -
Atlantic Division.
Rono Dutta. Age 47. Mr. Dutta has been Senior Vice President -
Planning of United since November 7, 1994 and became an executive
officer of United on April 1, 1995. From 1991 until assuming his
current position, Mr. Dutta held other vice president positions at
United, overseeing cargo, information systems, and maintenance.
Douglas A. Hacker. Age 43. Mr. Hacker has been Senior Vice
President and Chief Financial Officer of the Company and United since
July 12, 1994 and had served previously as Senior Vice President -
Finance of United.
William P. Hobgood. Age 60. Mr. Hobgood has been Senior Vice
President - People of United since March 1, 1997. From 1981 until
joining United, he was in private practice as an attorney
specializing in mediation and arbitration, including labor-management
issues.
Shelley A. Longmuir. Age 42. Ms. Longmuir has been Senior Vice
President - International, Regulatory, and Governmental Affairs of
United since October 1998. From April 1994 until October 1998, Ms.
Longmuir served as Vice President - Governmental Affairs of United.
From March 1993 until April 1994, she was Senior Counsel -
Governmental Affairs of United.
Francesca M. Maher. Age 41. Ms. Maher has been Senior Vice
President, General Counsel and Secretary of the Company and United
since October 1998. From June 1997 until October 1998, she was Vice
President, General Counsel and Secretary of the Company and United.
From April 1993 until June 1997, she was Vice President - Law and
Corporate Secretary of the Company. With respect to United, she was
VP-Law, Deputy General Counsel and Corporate Secretary from October
1994 to June 1997, and from April 1993 until October 1994, she was
Vice President - Law and Corporate Secretary.
Stuart I. Oran. Age 48. Mr. Oran has been Senior Vice
President - International for United since October 1998. Prior to
that appointment, he had been Executive Vice President of the Company
and Executive Vice President - Corporate Affairs of United since July
12, 1994. Prior to joining the Company, he was a corporate partner
with the law firm of Paul, Weiss, Rifkind, Wharton and Garrison.
Andrew P. Studdert. Age 42. Mr. Studdert has been Senior Vice
President - Fleet Operations of United since September 1997.
Previously he served as Senior Vice President and Chief Information
Officer of United from April 1995 to September 1997. Prior to
joining United, he was an independent information systems consultant
from July 1994 to March 1995, Executive Vice President of First
Interstate Bancorp (banking) from February 1994 until June 1994, and
President of First Interstate of Southern Nevada Bank (a banking
corporation) from July 1991 to January 1994.
There are no family relationships among the executive officers
of the Company. The executive officers of the Company serve at the
discretion of the Board of Directors.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock, $.01 par value (the "Common Stock"),
is traded principally on the New York Stock Exchange (the "NYSE")
under the symbol UAL, and is also listed on the Chicago Stock
Exchange and the Pacific Stock Exchange. The following sets forth
for the periods indicated the high and low sales prices per share of
the Company's Common Stock on the NYSE Composite Tape.
High Low
---- ---
1998:
1st quarter $ 95 1/4 $ 82
2nd quarter 97 1/2 73 1/16
3rd quarter 94 56
4th quarter 70 7/8 55 1/4
1997:
1st quarter $ 71 1/2 $ 55 3/8
2nd quarter 81 3/8 63
3rd quarter 87 7/8 71 1/2
4th quarter 101 3/4 80 1/2
No dividends have been declared on the Company's common stock
during the past five years. The payment of any future dividends on
the Common Stock and the amount thereof will be determined by the
Board of Directors of the Company based on earnings, the financial
condition of the Company and other relevant factors. The Company has
no immediate plans to pay cash dividends. At March 11, 1999, based
on reports by the Company's transfer agent for the Common Stock,
there were 16,488 common stockholders of record.
Item 6. Selected Financial Data and Operating Statistics
- ----------------------------------------------------------
(In Millions, Except Per Share and Rates)
Year Ended December 31
----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating revenues $17,561 $17,378 $16,362 $14,943 $13,950
Earnings before extraordinary
item and cumulative effect
of accounting changes 821 958 600 378 77
Extraordinary loss on
early extinguishment of
debt, net of tax - (9) (67) (29) -
Cumulative effect of accounting
changes, net of tax - - - - (26)
Net earnings 821 949 533 349 51
Per share amounts, diluted:
Earnings before extraordinary
item and cumulative effect of
accounting changes 6.83 9.04 5.85 5.23 0.19
Extraordinary loss on early
extinguishment of debt - (0.09) (0.79) (0.41) -
Cumulative effect of
accounting changes - - - - (0.34)
Net earnings (loss) 6.83 8.95 5.06 4.82 (0.15)
Total assets at year-end 18,559 15,464 12,677 11,641 11,764
Long-term debt and capital lease
obligations, including current
portion, and redeemable
preferred stock 5,345 4,278 3,385 4,102 4,077
Revenue passengers 87 84 82 79 74
Revenue passenger miles 124,609 121,426 116,697 111,811 108,299
Available seat miles 174,008 169,110 162,843 158,569 152,193
Passenger load factor 71.6% 71.8% 71.7% 70.5% 71.2%
Breakeven passenger load factor 64.9% 66.0% 66.0% 66.1% 68.2%
Passenger revenue per
passenger mile (in cents) 12.4 12.6 12.4 11.8 11.3
Operating revenue per
available seat mile (in cents) 10.1 10.3 10.0 9.4 9.1
Operating expense per
available seat mile (in cents) 9.2 9.5 9.3 8.9 8.8
Operating expense per
available seat mile
excluding ESOP charges (in cents) 8.8 8.9 8.9 8.6 8.6
Fuel gallons consumed 3,029 2,964 2,883 2,822 2,697
Average price per gallon of
jet fuel (in cents) 59.0 69.5 72.2 59.5 58.8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -----------------------------------------------------------
This section contains forward-looking statements which
are identified with an asterisk (*). Factors that
could significantly impact the expected results
referenced in the forward-looking statements are listed
in the last paragraph of the section, "Outlook for
1999."
On July 12, 1994, the stockholders of UAL Corporation
("UAL") approved a plan of recapitalization that provides an
approximately 55% equity and voting interest in UAL to
certain employees of United Air Lines, Inc. ("United") in
exchange for wage concessions and work-rule changes. The
employees' equity interest is being allocated to individual
employee accounts through the year 2000 under Employee Stock
Ownership Plans ("ESOPs") which were created as part of the
recapitalization. Since the ESOP shares are being allocated
over time, the current ownership interest held in the ESOPs
is less than 55%. The entire ESOP voting interest is
currently exercisable, which is voted by the ESOP trustee at
the direction of, and on behalf of, the holders of the ESOP
stock.
Liquidity and Capital Resources
- -------------------------------
Liquidity -
UAL's total of cash and cash equivalents and short-
term investments was $815 million at December 31, 1998,
compared to $845 million at December 31, 1997. Operating
activities during the year generated $3.194 billion. Cash
was used primarily to fund net additions to property and
equipment and to repurchase common stock.
Property additions, including aircraft, aircraft spare
parts, facilities and ground equipment, amounted to $2.832
billion, while property dispositions resulted in proceeds of
$452 million. In 1998, United took delivery of ten A320,
sixteen A319, four B777, two B757, four B767 and five B747
aircraft. Thirty-four of these aircraft were purchased and
seven were acquired under capital leases. Eight of the
aircraft purchased during the year were later sold and then
leased back under capital leases. Additionally, United
acquired six B727 and three DC10-10 off-lease during 1998
and retired twenty-eight B737, five B747 and six DC10-10
aircraft.
Consistent with a plan announced earlier in the year,
the Company made payments of $459 million for the repurchase
of 7.1 million shares of common stock. In January 1999, the
Company completed its repurchase of up to $500 million of
the Company's common stock after acquiring a total of 7.7
million shares. Financing activities also included
principal payments under debt and capital lease obligations
of $271 million and $322 million, respectively and $154
million in aircraft lease deposits with certain banks in
connection with the financing of capital lease transactions.
Additionally, the Company issued $928 million in debt and
used part of the proceeds to purchase $693 million in
equipment certificates under Company operating leases.
Included in cash and cash equivalents at December 31,
1998 were $142 million of securities held by third parties
under securities lending agreements, as well as collateral
in the amount of 102% of the value of the securities lent.
United is obligated to reacquire the securities at the end
of the contract.
As of December 31, 1998, UAL had a working capital
deficit of $2.760 billion as compared to $2.300 billion at
December 31, 1997. Historically, UAL has operated with a
working capital deficit and, as in the past, UAL expects to
meet all of its obligations as they become due. In
addition, UAL may from time to time repurchase on the open
market, in privately negotiated purchases or otherwise, its
debt and equity securities.
United has available a $750 million revolving credit
facility, as well as a separate $227 million short-term
borrowing facility, as described in Note 8 "Short-Term
Borrowings" in the Notes to Consolidated Financial
Statements.
Prior Years. Operating activities in 1997 generated
cash flows of $2.567 billion and the Company's sale of its
interest in the Apollo Travel Services Partnership provided
$539 million in cash proceeds (see "Sale of Affiliate").
Cash was used primarily to fund net additions to property
and equipment of $2.812 billion and to repurchase common
stock in the amount of $250 million. Financing activities
also included the early extinguishment of $151 million in
principal amount of various debt securities, mandatory
repayments of long-term debt totaling $136 million and
payments under capital leases of $147 million. In addition,
the Company made $112 million in aircraft lease deposits
with certain banks in connection with the financing of
certain aircraft acquired under capital lease transactions
and issued $597 million of enhanced pass through
certificates.
Operating activities in 1996 generated cash flows of
$2.453 billion. Cash was used primarily to repay long-term
debt and to fund net additions to property and equipment.
In addition to the early extinguishment of $641 million in
principal amount of various debt securities, UAL made
mandatory repayments of long-term debt totaling $150 million
and payments under capital lease obligations of $112 million
during the year. Financing activities also included
payments of $324 million for conversions of all of UAL's
outstanding 6 3/8% convertible debentures, $84 million for
the reacquisition of UAL's Series B preferred stock and
aircraft lease deposits of $110 million with certain banks
in connection with the financing of certain capital lease
transactions. Net property additions amounted to $1.483
billion.
Capital Commitments -
At December 31, 1998, commitments for the purchase of
property and equipment, principally aircraft, approximated
$6.8 billion, after deducting advance payments. Of this
amount, an estimated $2.7 billion is due to be spent in
1999. For further details, see Note 18 "Commitments,
Contingent Liabilities and Uncertainties" in the Notes to
Consolidated Financial Statements.
Capital Resources -
Funds necessary to finance aircraft acquisitions are
expected to be obtained from internally generated funds,
external financing arrangements or other external sources.
At December 31, 1998, United's senior unsecured debt
was rated BB+ by Standard and Poor's ("S & P") and Baa3 by
Moody's Investors Service Inc. ("Moody's"). UAL's Series B
preferred stock and redeemable preferred securities were
rated BB- by S & P and Ba3 by Moody's.
Results of Operations
- ---------------------
Summary of Results -
UAL's earnings from operations were $1.478 billion in
1998, compared to operating earnings of $1.259 billion in
1997. UAL's net earnings in 1998 were $821 million ($6.83
per share, diluted), compared to net earnings of $949
million in 1997 ($8.95 per share, diluted).
The 1997 earnings include an extraordinary loss of $9
million, after tax, on early extinguishment of debt and an
after-tax gain on the ATS/Galileo transaction (see "Sale of
Affiliate") of $235 million ($2.40 per share, diluted).
Management believes that a more complete understanding
of UAL's results may be gained by viewing them on a pro
forma, "Fully Distributed" basis. This approach considers
all ESOP shares which will ultimately be distributed to
employees throughout the ESOP period (rather than just the
shares committed to be released) to be immediately
outstanding and thus Fully Distributed. Consistent with
this method, the ESOP compensation expense is excluded from
Fully Distributed net earnings, and ESOP convertible
preferred stock dividends are not deducted from earnings
attributable to common stockholders. No adjustments are
made to Fully Distributed earnings to reflect future salary
increases. A comparison of results reported on a Fully
Distributed basis to results reported under generally
accepted accounting principles (GAAP) is as follows:
December 31, 1998 December 31, 1997
----------------- -----------------
GAAP Fully GAAP Fully
(diluted) Distributed (diluted) Distributed
--------- ----------- --------- -----------
Net Income $ 821 $ 1,308 $ 949 $ 1,546
----- ------ ----- ------
Per Share:
Earnings before gains on sales
and extraordinary loss $ 6.83 $ 10.24 $ 6.64 $ 9.97
Gains on sales of
ATS/Galileo, net - - 2.40 1.79
Extraordinary loss, net - - (0.09) (0.07)
----- ------ ----- -----
$ 6.83 $ 10.24 $ 8.95 $ 11.69
===== ====== ===== =====
The current relationship of earnings and earnings per
share as computed on a GAAP basis versus a Fully Distributed
basis may not be representative of the relationship in
future periods because of various factors. These factors
include: the dependence of ESOP compensation expense on the
common stock price; trends and commitments with respect to
wages; and the increasing number of shares assumed
outstanding under the GAAP basis during the remainder of the
ESOP period.
1998 Compared with 1997 -
- -------------------------
Operating Revenues. Operating revenues increased $183
million (1%) while United's revenue per available seat mile
(unit revenue) decreased 2% to 10.07 cents. Passenger
revenues increased $178 million (1%) due to a 3% increase in
United's revenue passenger miles despite a 1% decrease in
yield from 12.55 to 12.36 cents. Available seat miles
across the system were up 3% year over year; however,
passenger load factor decreased 0.2 point to 71.6%. The
following analysis by market is based on information
reported to the U.S. Department of Transportation:
Increase (Decrease)
-------------------
Available Seat Revenue Passenger Miles Revenue Per Revenue
Miles (Capacity) (Traffic) Passenger Mile (Yield)
---------------- ----------------------- ---------------------
Domestic 4% 5% 2%
Pacific (9%) (10%) (13%)
Atlantic 15% 11% (3%)
Latin America 17% 9% (8%)
Pacific yields continue to be negatively impacted by
the weakness of the Japanese yen compared to the dollar
during the first nine months of 1998, and the continued
effects of the Asian economic turmoil on demand for travel.
Yields in other international markets have been impacted by
a negative pricing environment resulting from excess
industry capacity and weakened economies.
Cargo revenues increased $21 million (2%) on increased
freight ton miles of 6%. A relatively flat freight yield
together with a 1% lower mail yield, resulted in a 1%
decrease in cargo yield for the year. Other operating
revenues decreased $16 million (1%) due to the sale of ATS
in July 1997, partially offset by increases in frequent
flyer program partner-related revenues and contract sales to
third parties.
Operating Expenses. Operating expenses decreased $36
million (0.2%) and United's cost per available seat mile
including ESOP compensation expense decreased 3%, from 9.53
cents to 9.24 cents. Without the ESOP compensation expense,
United's cost per available seat mile would have been 8.76
cents, a decrease of 2% from 1997. ESOP compensation
expense decreased $158 million (16%) reflecting the decrease
in the estimated average fair value of stock committed to
the Supplemental ESOP. Purchased services increased $220
million (17%) due to increases in computer reservations
fees, credit card discounts, communications expense and Year
2000-related spending. Depreciation and amortization
increased $69 million (10%) due to an increase in the number
of owned aircraft and an $11 million decrease in gains on
asset sales, from $23 million in 1997 to $12 million in
1998. Salaries and related costs increased $323 million
(6%) due to ESOP mid-term wage adjustments which took place
in July 1998 and increased staffing in certain customer-
oriented positions. Aircraft fuel decreased $273 million
(13%) as a result of a 15% decrease in the average cost of
fuel from 69.5 cents to 59.0 cents a gallon. Commissions
decreased $183 million (12%) due to a change in the
commission structure implemented in the third quarter of
1997 as well as a slight decrease in commissionable
revenues. Aircraft rent decreased $49 million (5%) as a
result of refinancing aircraft under operating lease.
Other Income and Expense. Other income (expense)
amounted to $222 million in expense in 1998 compared to $265
million in income in 1997. Interest expense increased $69
million (24%) in 1998 due to the issuance of long-term debt
in 1997 and 1998. Interest income increased $7 million
(13%) due to higher investment balances. In 1998, foreign
exchange losses increased $65 million. Because not all
economic hedges qualify as accounting hedges, unrealized
gains and losses may be recognized in income in advance of
the actual foreign currency cash flows. This mismatch of
accounting gains and losses and foreign currency cash flows
was especially pronounced during the fourth quarter of 1998
as a result of the appreciation in value of the Japanese
yen, relative to the U.S. dollar. This mismatch resulted in
a pre-tax charge of $52 million which is included in foreign
exchange losses. In addition, 1997 included a $275 million
gain on the sale of ATS and a $103 million gain on the
initial public offering of Galileo stock.
1997 Compared with 1996 -
- -------------------------
Operating Revenues. Operating revenues increased
$1.016 billion (6%) and United's revenue per available seat
mile (unit revenue) increased 2% to 10.25 cents. Passenger
revenues increased $877 million (6%) due to a 4% increase in
United's revenue passenger miles and a 2% increase in yield
to 12.55 cents. Available seat miles across the system were
up 4% year over year resulting in a slight increase to
system passenger load factor of 0.1 points to 71.8%. The
following analysis by market is based on information
reported to the U.S. Department of Transportation ("DOT"):
Increase (Decrease)
-------------------
Available Seat Revenue Passenger Miles Revenue Per Revenue
Miles (Capacity) (Traffic) Passenger Mile (Yield)
---------------- ----------------------- ---------------------
Domestic 2% 3% 1%
Pacific 3% -% 2%
Atlantic 19% 20% 3%
Latin America -% 2% 8%
Latin American yield was impacted by strengthening
economies in Latin American countries as well as an improved
mix of high-yield passengers. Strong U.S. and European
economies provided a positive pricing environment resulting
in an increase in Atlantic yield. Pacific yields reflect a
weak Japanese economy and a stronger U.S. dollar. Domestic
yield increased despite the fact that the U.S. airline
ticket tax was in effect for only four months of 1996 versus
ten months of 1997.
Cargo revenues increased $119 million (15%) on
increases of 24% in freight ton miles and 6% in mail ton
miles, as a result of a new dedicated freighter operation
utilizing four DC10-30s and the introduction of long-range
B777-200B aircraft. A 5% lower freight yield was only
partially offset by a 2% higher mail yield for an overall
decrease in cargo yield of 4%.
Other operating revenues increased $20 million (2%)
due to increases in frequent flyer program partner related
revenues and fuel sales to third parties, partially offset
by the loss of ATS revenues resulting from its sale in July
1997 (see "Sale of Affiliate").
Operating Expenses. Operating expenses increased $880
million (6%) and United's cost per available seat mile
increased 2% from 9.33 to 9.53 cents, including ESOP
compensation expense. Without the ESOP compensation
expense, United's 1997 cost per available seat mile would
have been 8.94 cents, an increase of less than 1% from 1996.
ESOP compensation expense increased $302 million (44%),
reflecting the increase in the estimated average fair value
of ESOP stock committed to be released to employees as a
result of UAL's higher common stock price. Salaries and
related costs increased $299 million (6%) as a result of
increased staffing in certain customer-contact positions, as
well as mid-term wage adjustments which took effect July 1,
1997. Commissions increased $42 million (3%) due to
increased commissionable revenues, partially offset by the
change in the commission structure which United implemented
in the third quarter of 1997. United lowered the base
commission paid to travel agents from 10% to 8% (up to a
maximum of $50) on all tickets purchased in the U.S. and
Canada for both domestic and international travel. This
action is expected to save approximately $100 million
annually in commission costs. Purchased services increased
$98 million (8%) due principally to volume-related increases
in computer reservations fees, credit card discounts and
communication charges. Aircraft maintenance increased $154
million (34%) due to increased purchased maintenance as well
as the timing of maintenance cycles. Depreciation and
amortization decreased $35 million (5%) despite the
acquisition of new aircraft, due to lower depreciation on
DC10-10 aircraft which are scheduled for retirement, gains
on asset sales of $23 million in 1997 compared to $11
million in 1996, and a $30 million charge in 1996 to reduce
the carrying value of aircraft seats being replaced.
Aircraft fuel decreased $21 million (1%) despite a 3%
increase in consumption, due to a 4% decrease in the price
of fuel from 72.2 cents to 69.5 cents a gallon.
Other Income and Expense. Other income (expense)
amounted to $265 million in income in 1997 compared to $153
million in expense in 1996. Interest capitalized, primarily
on aircraft advance payments, increased $27 million (35%).
Interest expense decreased $9 million (3%) due to the
prepayment of long-term debt in 1996. Interest income
decreased $5 million (9%) due to lower average interest
rates. In addition, 1997 included a $275 million gain on
the sale of ATS and a $103 million gain on the initial
public offering of Galileo stock. Included in 1996 is a $20
million charge for the settlement of litigation related to
the travel agency commission cap implemented by the Company
in February 1995.
Other Information
- -----------------
Sale of Affiliate -
In July 1997, United completed the sale of its
interest in the Apollo Travel Services Partnership ("ATS"),
a 77% owned affiliate whose accounts were consolidated, to
Galileo International, Inc. ("Galileo"), heretofore a 38%
owned affiliate accounted for under the equity method, for
$539 million in cash. This transaction resulted in a pre-
tax gain of approximately $405 million. Of this amount,
$275 million was recognized during the third quarter of 1997
and the balance will be recognized over the next 25 years,
the estimated remaining life of the assets acquired by
Galileo.
Galileo raised a portion of the proceeds used to
purchase ATS through the completion of an initial public
offering of 16,799,700 shares of its common stock,
representing 16.0% of its economic interest, at $24.50 per
share for net proceeds of approximately $390 million. This
transaction resulted in a reduction of the Company's
ownership in Galileo from 38% to 32%. In accordance with
the Company's policy of recognizing gains or losses on the
sale of a subsidiary's stock based on the difference between
the offering price and the Company's carrying amount of such
stock, the Company recognized a pre-tax gain of $103 million
during the third quarter of 1997. The Company also recorded
$40 million of deferred taxes related to this gain.
United continues to account for Galileo under the
equity method and to purchase computer reservations services
under its existing services agreement with Galileo.
Labor Agreements and Wage Adjustments -
The 1994 recapitalization resulted in new labor
agreements for certain employee groups and a new corporate
governance structure, which was designed to achieve balance
between the various employee-owner groups and public
stockholders. The labor agreements and governance structure
could inhibit management's ability to alter strategy in a
volatile, competitive industry by restricting certain
operating and financing activities, including the sale of
assets, the issuance of equity securities and the ability to
furlough employees.
Consistent with the various agreements supporting the
1994 recapitalization, in 1997, employees represented by the
Air Line Pilots' Association, International ("ALPA") and the
International Association of Machinists and Aerospace
Workers ("IAM") ratified agreements providing for
restoration of wage rates for the two groups in the year
2000 to levels that existed prior to the recapitalization in
July 1994, as well as restoration of the Company's
contribution to the pilots' defined contribution plan from
its current rate of 1% to its pre-ESOP rate of 9% in the
year 2000.
On October 1, 1997, the Association of Flight
Attendants ("AFA") ratified a new contract which will remain
in effect through March 1, 2006. Included in the contract
were lump sum payments of 4% in December 1999 and 5% in
2001, 2003 and 2005; as well as minimum 2% wage increases in
2000, 2002 and 2004. Additionally, the contract includes a
series of arbitrations beginning in 2001 which can award
additional compensation increases, subject to meeting Vision
2000 goals as discussed below. The agreement also provides
for benefits and work rule changes and a number of service
quality and productivity enhancements designed to help the
Company achieve its customer satisfaction objectives.
On July 17, 1998, the International Association of
Machinists and Aerospace Workers ("IAM") became the
collective-bargaining representative for United's
approximately 19,000 public contact employees (primarily
customer service and reservations sales and service
representatives). In December, the Company and the IAM
began negotiations regarding a contract for the affected
employees.
Also in July 1998, United announced its intentions to
improve compensation and benefits for the Company's nearly
2,000 administrative employees hired on or after February 1,
1994 ("post-ESOP employees"). Currently, the Company's
administrative employees are being paid under a two-tier
wage structure which went into effect at the time of the
1994 recapitalization. Effective April 13, 2000, the two-
tiers will be merged and post-ESOP employees will be paid on
the same basis as those employees hired prior to February 1,
1994. In addition, on January 1, 1999, the benefits for
full-time post-ESOP employees will match those of employees
hired prior to February 1, 1994, including company-paid
medical, dental and pension, and the benefits for part-time
employees will be improved.
The wage, benefit and work-rule adjustments outlined
above are consistent with the Company's objective, known as
Vision 2000, to put employee compensation on a competitive
level with peer group compensation at the conclusion of the
agreements outlined above. The ultimate cost to the Company
of Vision 2000, particularly given that peer group
compensation is subject to change between now and the
conclusion of the agreements, is not determinable. However,
as a result of these changes, the Company expects that its
annual Salaries and related costs will increase at a faster
rate than its major competitors from now through the year
2000.
Foreign Operations -
United generates revenues and incurs expenses in
numerous foreign currencies. These expenses include
aircraft leases, commissions, catering, personnel costs,
reservation and ticket office services, customer service
expenses and aircraft maintenance. Changes in foreign
currency exchange rates impact operating income through
changes in foreign currency-denominated operating revenues
and expenses. Despite the adverse (favorable) effects a
strengthening (weakening) foreign currency may have on U.S.
originating traffic, a strengthening (weakening) of foreign
currencies tends to increase (decrease) reported revenue and
operating income because United's foreign currency-
denominated operating revenue generally exceeds its foreign
currency-denominated operating expense for each currency.
By carrying passengers and cargo in both directions
between the U.S. and almost every major economic region in
the world and by selling its services in each local country,
United attempts to mitigate its exposure to fluctuations in
any single foreign currency. The Company's biggest net
exposures are typically for Japanese yen, Hong Kong dollars,
Australian dollars and British pounds. During 1998, yen-
denominated operating revenue net of yen-denominated
operating expense was approximately 66 billion yen
(approximately $490 million), Hong Kong dollar-denominated
operating revenue net of Hong Kong dollar-denominated
operating expense was approximately 1,838 million Hong Kong
dollars (approximately $236 million), Australian dollar-
denominated operating revenue net of Australian dollar-
denominated operating expense was approximately 245 million
Australian dollars (approximately $153 million) and British
pound-denominated operating revenue net of British pound-
denominated operating expense was approximately 73 million
British pounds (approximately $122 million). United hedges
some of the risk of exchange rate volatility on its
anticipated future yen revenues and Hong Kong revenues by
purchasing put options for each respective currency. To
reduce some of the costs of this hedging program, the
Company also sells call options in each currency from time
to time. United continually monitors its foreign currency
hedging program and is no longer entering into yen option
contracts. At a point in the future, United may elect to
reestablish its yen hedging program. United also attempts
to reduce its exposure to transaction gains and losses by
converting excess local currencies generated to U.S. dollars
and by entering into currency forward or exchange contracts.
The total notional amount of outstanding currency options
and forward exchange contracts, and their respective fair
market values as of December 31, 1998, are summarized in
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
United's foreign operations involve insignificant
amounts of physical assets; however, there are sizable
intangible assets related to acquisitions of Atlantic and
Latin American route authorities. Operating authorities in
international markets are governed by bilateral aviation
agreements between the United States and foreign countries.
Changes in U.S. or foreign government aviation policies can
lead to the alteration or termination of existing air
service agreements that could adversely impact the value of
United's international route authority. Significant changes
in such policies could also have a material impact on UAL's
operating revenues and results of operations.
Airport Rents and Landing Fees -
United is charged facility rental and landing fees at
virtually every airport at which it operates. In recent
years, many airports have increased or sought to increase
rates charged to airlines as a means of compensating for
increasing demands upon airport revenues. Airlines have
challenged certain of these increases through litigation and
in some cases have not been successful. The Federal
Aviation Administration ("FAA") and the DOT have instituted
an administrative hearing process to judge whether rate
increases are legal and valid. However, to the extent the
limitations on such charges are relaxed or the ability of
airlines to challenge such charges is restricted, the rates
charged by airports may increase substantially. Management
cannot predict the magnitude of any such increase.
Update on Year 2000 Readiness -
The Company, like most corporations, faces potential
problems if software applications, computer equipment and
embedded computer chips fail to recognize calendar dates
beginning in the year 2000. The Company has developed a five-
step process to achieve Year 2000 readiness: Awareness,
Inventory, Assessment, Remediation, and Testing. Awareness
consists of the initial recognition that a program, system,
or device could be date-sensitive and susceptible to
malfunction. Inventory refers to the identification and
documentation of all such programs, systems, and devices.
Assessment refers to the evaluation and determination of
what course of action should be taken with respect to a
specific program, system or device. Remediation refers to
the corrective action taken, such as repairing or replacing,
to avoid malfunctions. Testing consists of all activities
undertaken to gain assurance that the remediated program,
system or device will function as expected for dates after
1999. The Company has established a Year 2000 Program
office to oversee this process.
The above-referenced five-step process is being applied
in four major areas. The first area consists of the
information systems maintained and supported by the
Company's Information Services Division, collectively
referred to as information technology or "IT" systems. The
IT systems include, among other things, (1) the hardware
related infrastructure, which includes voice and data
communications networks, and (2) mainframe and non-mainframe
based software applications. The Company develops and uses
these software applications in functions such as
reservations, ticketing, flight scheduling, seat inventory
and customer service.
The second area consists of user maintained
applications that generally are not supported by the
Company's Information Services Division. The third area
consists of operational systems and devices that include,
among other things, aircraft avionics, baggage handling,
aircraft ground handling, passenger loading bridges, and
flight simulators. User maintained applications and
operational systems and devices are collectively referred to
as "non-IT systems."
The fourth area consists of the Company's critical
business partners which would include, among others, air
traffic control systems, airport authorities,
telecommunications providers, computer reservation systems,
and airframe and engine manufacturers.
As discussed below, the Company remains on target in
completing its five-step process. The awareness and
inventory phases are complete. The assessment phase is
complete with respect to IT and non-IT systems, and
substantial progress has been made in the remediation phase
of the IT systems, and with a few exceptions for non-
critical systems, substantially all IT and non-IT systems
will be remediated by March 31, 1999. The assessment
process is still ongoing with respect to critical business
partners.
IT systems. The Company remains on schedule for
completing the remediation of its hardware infrastructure.
Remediation and the initial system testing of the mainframe
hardware and software is substantially complete, while all
other hardware infrastructure, including data and voice
networks, is expected to be remediated and tested by March
31, 1999.
Remediation and initial testing of essentially all
internally developed IT software applications has been
completed as of December 31, 1998.
System integration testing for all IT systems that are
critical to the operations is expected to be completed by
June 30, 1999, and system integration testing for all other
systems is expected to be completed by June 30, 1999.
Non-IT Systems. The technical assessment stage for non-
IT systems is complete. Most airport systems (including
aircraft ground handling equipment, customer service
equipment at airports and passenger loading bridges) are not
date-sensitive and therefore will not require remediation.
Those non-IT systems that are date-sensitive and critical to
the Company's business, such as aircraft avionics and flight
simulators, are scheduled to be substantially remediated and
tested by June 30, 1999.
Critical Business Partners. The Company has grouped
its critical business partners into three categories:
strategic, preferred or commodity. The "strategic" category
consists of those partners, such as air traffic control
systems, airport authorities, telecommunications providers,
computer reservation systems, and airframe and engine
manufacturers, without which the Company would cease to
operate. The "preferred" category consists of partners that
have substantial interaction with the Company, but whose
absence would not necessarily cause an immediate or
irreversible interruption or cessation of business
operations. The "commodity" category consists of those
partners who provide goods or services that could be readily
replaced and whose absence would not materially impact the
business. The Company has been contacting its "strategic"
partners and performing site visits to ascertain their state
of Year 2000 readiness, and has contacted all of them as of
December 31, 1998. Preferred and commodity partners are
being contacted to evaluate their Year 2000 remediation
programs. To date the Company has contacted a significant
number of preferred and commodity partners. For those
partners without programs in place or not responding, the
Company may look for alternate suppliers unless a Year 2000
program is in place with a planned completion date no later
than June 30, 1999.
The Company is working closely with the Air Transport
Association ("ATA"), an industry organization consisting
mostly of North American airlines. The ATA has undertaken a
study to assess the process that major domestic airports are
using to achieve Year 2000 readiness. Preliminary results
of that study suggest most of the larger domestic airports
are making progress toward being Year 2000 compliant.
Certain of the smaller domestic airports do not, as yet,
have detailed Year 2000 plans in place. A similar project is
underway with the International Air Transport Association to
review the Year 2000 process at international airports.
Current information suggests that some key international
airports may be behind schedule.
The Company's aircraft manufacturers have concluded
that there are no flight safety issues. However, the
Company continues to test its aircraft systems and to work
with its manufacturers to ensure Year 2000 readiness.
To date, the Company has projected that it will cost
approximately $90 million ($38 million in capital spending
and $52 million in expense) to make the Company Year 2000
ready. Of that total, $28 million has already been spent,
while the remaining $62 million is expected to be spent in
1999. All the amounts expected to be recognized as expense
in 1999 have been taken into consideration in the earnings
outlook discussed in the "Outlook for 1999".
A series of airline readiness reviews are planned
during the second quarter of 1999 to ensure aircraft, air
traffic control, airports, support groups and critical
business partners are prepared for Year 2000 and can provide
uninterrupted operations. By September 30, 1999, the
Company will complete a risk analysis and develop risk
estimates after completing the airline readiness reviews.
Based on the results of the airline readiness review, the
Company will develop any contingency plans that are needed.
At this point in time, the Company does not have specific
Year 2000 contingency plans in place. It is likely that
certain international airports and air traffic control
systems will not complete their Year 2000 programs by
September 30, 1999. We will continue to evaluate Year 2000
readiness at these locations and develop contingency plans
as needed.
The Company believes that the current and planned
activities to modify its systems will reduce the risks of a
business interruption. A failure by its systems to be Year
2000 ready could materially and adversely impact the
Company's results of operations, liquidity and financial
condition. The Company also relies heavily upon its
critical business partners in its normal business
activities. Failure by critical business partners to be
Year 2000 ready could materially and adversely impact the
Company's results of operations, liquidity and financial
condition. Due to the general uncertainty surrounding the
Year 2000 problem, and the uncertainty surrounding the
readiness of its critical business partners, the Company is
unable at this time to determine if any failure will occur
or if such failure will have a material impact on the
Company's results of operations, liquidity and financial
condition.
Readers are cautioned that the Year 2000 section
contains forward-looking information. Please see the
"Outlook for 1999" for a list of some of the factors that
could cause actual results to differ materially from
expected results.*
Environmental and Legal Contingencies -
United has been named as a Potentially Responsible
Party at certain Environmental Protection Agency ("EPA")
cleanup sites which have been designated as Superfund Sites.
United's alleged proportionate contributions at the sites
are minimal; however, at sites where the EPA has commenced
litigation, potential liability is joint and several.
Additionally, United has participated and is participating
in remediation actions at certain other sites, primarily
airports. The estimated cost of these actions is accrued
when it is determined that it is probable that United is
liable. Environmental regulations and remediation processes
are subject to future change, and determining the actual
cost of remediation will require further investigation and
remediation experience. Therefore, the ultimate cost cannot
be determined at this time. However, while such cost may
vary from United's current estimate, United believes the
difference between its accrued reserve and the ultimate
liability will not be material.*
UAL has certain other contingencies resulting from
this and other litigation and claims incident to the
ordinary course of business. Management believes, after
considering a number of factors, including (but not limited
to) the views of legal counsel, the nature of such
contingencies and prior experience, that the ultimate
disposition of these contingencies is not likely to
materially affect UAL's financial condition, operating
results or liquidity.*
New Accounting Pronouncements -
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which establishes accounting
and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No.
133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income
statement, and requires that a company must formally
document, designate and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. The Company has not yet quantified
the impacts of adopting SFAS No. 133 on the financial
statements. However, it could increase volatility in
earnings and other comprehensive income.
Outlook for 1999 -
The Company anticipates continued strong performance in
1999 largely based on expected strong U.S. economic activity.
In addition, there are early indications of some modest
improvement in United's Pacific revenue and profit
performance. These factors are expected to outweigh the
anticipated negative impact on Atlantic unit revenues and
profits associated with industry capacity growth in the region.
The Company expects its 1999 system capacity to grow
3%, which is less than the forecasted industry capacity
growth rate. Unit revenues are estimated to range between
1% higher and 1% lower than 1998.
1999 unit costs excluding ESOP charge are estimated to
be about 1% higher than 1998, based on an average fuel price
of approximately 56 cents per gallon including taxes. Among
the factors affecting costs will be the cap in international
commissions instituted last year and the level of spending
on Year 2000 (see "Update on Year 2000 Readiness").
In summary, the Company forecasts 1999 earnings to
range between $10.00 and $12.00 per fully distributed share,
with its internal goal being to earn $11.00 per fully distributed
share. The Company's earnings per share performance will be
helped by the reduction in share count stemming from the
$500 million common stock repurchase program completed
earlier this year.
For the first quarter of 1999, the Company expects
system capacity growth of approximately 2.5%, with domestic
capacity growing by around 4.7%. Unit costs excluding ESOP
charge are estimated to be 1% higher and unit revenues are
expected to be 1% lower than the same quarter 1998. This
revenue assumption is based on a continuation of recent
results and current data trends that indicate a reversal of
the domestic revenue weakness that began in the fourth quarter
of last year and lingered into the early part of the first
quarter this year. This reversal could be attributable to
the dissipation of economic uncertainty and an improvement
in the pricing environment following the expiration of fares
sold in the aftermath of Northwest Airlines' pilot strike.
Separately, the Company also benefited this quarter from the
recent labor unrest at American Airlines.
Based on these assumptions, the Company's expectations
for first quarter earnings fall in a range around $1.35 per fully
distributed share, the highest First Call estimate as of March 11,
1999.
The information included in the above outlook section,
as well as certain statements made throughout the
Management's Discussion and Analysis of Financial Condition
and Results of Operations that are identified by an asterisk
(*) is forward-looking and involves risks and uncertainties
that could result in actual results differing materially
from expected results. It is not reasonably possible to
itemize all of the many factors and specific events that
could affect the outlook of an airline operating in the
global economy. Some factors that could significantly
impact expected capacity, unit revenues, revenues, fully
distributed unit costs, profits, fuel prices and fully
distributed earnings per share include: the success of the
Company's cost-control efforts, the outcome of negotiations
on new contracts with the union groups, industry capacity
decisions, the airline pricing environment, the economic
environment of the airline industry, fuel prices, actions of
the U.S., foreign and local governments, the Asian economic
environment and travel patterns, foreign currency exchange
rate fluctuations, and the general economic environment.
With respect to the forward-looking statements set forth in
the "Environmental and Legal Contingencies" section, some of
the factors that could affect the ultimate disposition of
these contingencies are changes in applicable laws, the
development of facts in individual cases, settlement
opportunities and the actions of plaintiffs, judges and
juries. Some factors that could significantly impact the
Company's expected Year 2000 readiness and the estimated
cost thereof include: the results of the technical
assessment, remediation and testing of date-sensitive
systems and equipment and the ability of critical business
partners, including domestic and international airport
authorities, aircraft manufacturers and the Federal Aviation
Administration, to achieve Year 2000 readiness.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
----------------------------------------------
Interest Rate Risk - United's exposure to market risk
associated with changes in interest rates relates primarily
to its debt obligations and short-term investments. United
does not use derivative financial instruments in its
investments portfolio. United's policy is to manage
interest rate risk through a combination of fixed and
floating rate debt and entering into swap agreements,
depending upon market conditions. A portion of the
borrowings are denominated in foreign currencies which
exposes the Company to risks associated with changes in
foreign exchange rates. In addition, the Company has placed
foreign currency deposits (primarily for Japanese yen,
French francs and German marks) to meet foreign currency
lease obligations designated in the respective currencies.
The Company is not exposed to foreign currency risk on these
deposits since unrealized mark-to-market gains or losses on
the foreign currency deposits are offset by the losses or
gains on the foreign currency obligations. The fair value
of these deposits is determined based on the present value
of future cash flows using an appropriate swap rate. The
fair value of long-term debt is based on the quoted market
prices for the same or similar issues or the present value
of future cash flows using a U.S. Treasury rate that matches
the remaining life of the instrument, adjusted by a credit
spread.
(In millions) Expected Maturity Dates 1998 1997
- ------------ ----------------------- ---- ----
Fair Fair
1999 2000 2001 2002 2003 Thereafter Total Value Total Value
---- ---- ---- ---- ---- ---------- ----- ----- ----- -----
ASSETS
Cash equivalents
Fixed rate $301 $ - $ - $ - $ - $ - $301 $301 $295 $295
Avg interest rate 4.94% - - - - - 4.94% 6.00%
Variable rate $ 89 $ - $ - $ - $ - $ - $ 89 $ 89 $ - $ -
Avg interest rate 5.32% - - - - - 5.32% -
Short term investments
Fixed rate $386 $ - $ - $ - $ - $ - $386 $386 $460 $460
Avg interest rate 5.48% - - - - - 5.48% 5.87%
Variable rate $ 39 $ - $ - $ - $ - $ - $ 39 $ 39 $ 90 $ 90
Avg interest rate 5.47% - - - - - 5.47% 5.90%
Foreign currency deposits
Fixed rate-yen deposits $ - $ - $ - $ - $ - $330 $330 $354 $254 $281
Avg interest rate - - - - - 3.05% 3.05% 3.23%
Fixed rate-FF deposits $ - $ - $ - $ - $ - $ 11 $ 11 $ 13 $ 4 $ 4
Avg interest rate - - - - - 5.61% 5.61% 5.82%
Fixed rate-DM deposits $ 1 $ 1 $ 1 $ 1 $ 1 $188 $193 $198 $ 60 $ 60
Avg interest rate 6.49% 6.49% 6.49% 6.49% 6.49% 6.49% 6.49% 6.86%
LONG TERM DEBT
U.S. Dollar denominated
Fixed rate debt $ 35 $26 $27 $30 $33 $1,338 $1,491 $1,729 $1,501 $1,725
Avg interest rate 7.45% 8.12% 8.18% 8.18% 8.18% 8.89% 8.88% 8.88%
Variable rate debt $ 52 $151 $56 $567 $522 $ 108 $1,456 $1,456 $ 813 $ 813
Avg interest rate 5.72% 5.66% 5.72% 5.85% 5.44% 5.80% 5.67% 6.23%
Japanese Yen denominated
Fixed rate debt $ 10 $ 11 $ - $ - $ - $ - $ 21 $ 23 $ 26 $ 27
Avg interest rate 7.50% 7.50% - - - - 7.50% 7.90%
Foreign Currency Risk - United has established a
foreign currency hedging program using currency forwards and
currency options (purchasing put options or selling call
options) to hedge exposure to the Japanese yen and Hong Kong
dollar. The goal of the hedging program is to effectively
manage risk associated with fluctuations in the value of the
foreign currency, thereby making financial results more
stable and predictable. United does not use currency
forwards or currency options for trading purposes. United
is no longer entering into yen option contracts. At a point
in the future, United may elect to reestablish its yen
hedging program.
(In millions, except average contract rates)
- --------------------------------------------
Notional Average Estimated
Amount Contract Rate Fair Value
-------- ------------- ----------
Forward exchange contracts
Japanese Yen-Purchased forwards $ 215 105.58 $ 3
-Sold forwards $ 25 122.38 $ (2)
Hong Kong Dollar-Sold forwards $ 86 7.89 $ (1)
French Franc-Purchased forwards $ 50 5.05 $ 1
Currency options
Japanese Yen-Put options $ 315 128.48 $ 4
-Call options $ 317 127.60 $(50)
As of December 31, 1997, United had $122 million of
Japanese yen forwards outstanding with a fair value of $(29)
million, $200 million yen put options with a fair value of
$14 and $132 million yen call options with a fair value of
$(1) million.
Price Risk (Aircraft Fuel) - At December 31, 1998, the
Company had contracted to purchase approximately 2% of the
Company's 1999 fuel requirements at an average fixed price
of $0.49 per gallon. When market conditions indicate risk
reduction is achievable, United enters into fuel option
contracts to reduce its price risk exposure to jet fuel.
Based on projected market conditions, United does not
believe risk reduction is presently achievable and is no
longer entering into new option contracts. As market
conditions change, so may United's hedging program. The
option contracts, which involve either purchasing call
options and simultaneously selling put options (collar
strategy) or purchasing call options, are designed to
provide protection against sharp increases in the price of
aircraft fuel. In addition, to a limited extent United
trades short-term heating oil futures and option contracts,
which are immaterial.
(In millions, except average contract rates)
Notional Average Estimated
Amount Contract Rate Fair Value
-------- ------------- ----------
Purchased call contracts - Crude oil $ 496 $ 15.88/bbl $ 13
Sold put contracts - Crude oil $ 202 $ 16.20/bbl $ (50)
At December 31, 1997, United had $458 million in
purchased call contracts for crude oil with an estimated
fair value of $10 million and $403 million in sold put
contracts for crude oil with an estimated fair value of
$(28) million.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors, UAL Corporation:
We have audited the accompanying statements of consolidated
financial position of UAL Corporation (a Delaware
corporation) and subsidiary companies as of December 31,
1998 and 1997, and the related statements of consolidated
operations, consolidated cash flows and consolidated
stockholders' equity for each of the three years in the
period ended December 31, 1998. These financial statements
and the schedule referred to below are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of UAL Corporation and subsidiary
companies as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The
schedule referenced in Item 14(a)2 herein is presented for
purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set
forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 24, 1999
UAL Corporation and Subsidiary Companies
Statements of Consolidated Operations
-------------------------------------
(In Millions, Except Per Share)
Year Ended December 31
1998 1997 1996
---- ---- ----
Operating revenues:
Passenger $15,520 $15,342 $14,465
Cargo 913 892 773
Other operating revenues 1,128 1,144 1,124
------ ------ ------
17,561 17,378 16,362
------ ------ ------
Operating expenses:
Salaries and related costs 5,341 5,018 4,719
ESOP compensation expense 829 987 685
Aircraft fuel 1,788 2,061 2,082
Commissions 1,325 1,508 1,466
Purchased services 1,505 1,285 1,187
Aircraft rent 893 942 952
Landing fees and other rent 881 863 846
Depreciation and amortization 793 724 759
Aircraft maintenance 624 603 449
Other operating expenses 2,104 2,128 2,094
------ ------ ------
16,083 16,119 15,239
------ ------ ------
Earnings from operations 1,478 1,259 1,123
------ ------ ------
Other income (expense):
Interest expense (355) (286) (295)
Interest capitalized 105 104 77
Interest income 59 52 57
Equity in earnings of affiliates 72 66 64
Gain on sale of partnership
interest - 275 -
Gain on sale of affiliate's stock - 103 -
Miscellaneous, net (103) (49) (56)
------ ------ ------
(222) 265 (153)
------ ------ ------
Earnings before income taxes,
distributions on preferred
securities and extraordinary item 1,256 1,524 970
Provision for income taxes 429 561 370
------ ------ ------
Earnings before distributions on
preferred securities and
extraordinary item 827 963 600
Distributions on preferred
securities,net (6) (5) -
Extraordinary loss on early
extinguishment of debt, net - (9) (67)
------ ------ ------
Net earnings $ 821 $ 949 $ 533
====== ====== ======
Per share, basic:
Earnings before extraordinary item $ 12.71 $ 14.98 $ 8.76
Extraordinary loss on early
extinguishment of debt, net - (0.15) (1.19)
------ ------ ------
Net earnings $ 12.71 $ 14.83 $ 7.57
====== ====== ======
Per share, diluted:
Earnings before extraordinary item $ 6.83 $ 9.04 $ 5.85
Extraordinary loss on early
extinguishment of debt, net - (0.09) (0.79)
------ ------ ------
Net earnings $ 6.83 $ 8.95 $ 5.06
====== ====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
December 31
-----------
Assets 1998 1997
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 390 $ 295
Short-term investments 425 550
Receivables, less allowance for
doubtful accounts (1998-$22; 1997-$15) 1,138 1,051
Aircraft fuel, spare parts and
supplies, less obsolescence allowance
(1998-$39; 1997-$29) 384 355
Deferred income taxes 256 244
Prepaid expenses and other 315 453
------ ------
2,908 2,948
------ ------
Operating property and equipment:
Owned -
Flight equipment 12,006 10,382
Advances on flight equipment 985 972
Other property and equipment 3,134 2,842
------ ------
16,125 14,196
Less - Accumulated depreciation
and amortization 5,174 5,116
------ ------
10,951 9,080
------ ------
Capital leases -
Flight equipment 2,605 2,221
Other property and equipment 97 98
------ ------
2,702 2,319
Less - Accumulated amortization 599 625
------ ------
2,103 1,694
------ ------
13,054 10,774
------ ------
Other assets:
Investments in affiliates 304 223
Intangibles, less accumulated
amortization (1998-$389; 1997-$374) 676 703
Aircraft lease deposits 545 318
Prepaid rent 631 60
Other 441 438
------ ------
2,597 1,742
------ ------
$18,559 $15,464
====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
December 31
-----------
Liabilities and Stockholders' Equity 1998 1997
- ------------------------------------ ---- ----
Current liabilities:
Notes payable $ 184 $ -
Long-term debt maturing within one year 98 235
Current obligations under capital leases 176 171
Advance ticket sales 1,429 1,267
Accounts payable 1,151 1,030
Accrued salaries, wages and benefits 952 869
Accrued aircraft rent 793 830
Other accrued liabilities 885 846
------ ------
5,668 5,248
------ ------
Long-term debt 2,858 2,092
------ ------
Long-term obligations under capital leases 2,113 1,679
------ ------
Other liabilities and deferred credits:
Deferred pension liability 89 25
Postretirement benefit liability 1,424 1,361
Deferred gains 1,180 1,210
Accrued aircraft rent 371 368
Deferred income taxes 398 79
Other 354 450
------ ------
3,816 3,493
------ ------
Company-obligated mandatorily redeemable
preferred securities of a subsidiary trust 100 101
------ ------
Equity put options 32 -
------ ------
Preferred stock committed to
Supplemental ESOP 691 514
------ ------
Stockholders' equity:
Serial preferred stock (Note 12) - -
ESOP preferred stock (Note 13) - -
Common stock at par, $0.01 par value;
authorized 200,000,000 shares; issued
63,005,869 shares at December 31, 1998
and 61,288,039 shares at December 31, 1997 1 1
Additional capital invested 3,517 2,876
Retained earnings 1,028 309
Unearned ESOP preferred stock (121) (177)
Stock held in treasury, at cost -
Preferred, 10,213,519 depositary shares at
December 31, 1998 and 10,149,219 depositary
shares at December 31, 1997 (Note 12) (305) (302)
Common, 11,201,216 shares at December 31,
1998 and 3,967,553 shares at
December 31, 1997 (835) (361)
Accumulated other comprehensive income (2) (2)
Other (2) (7)
------ ------
3,281 2,337
------ ------
Commitments and contingent
liabilities (Note 18) ------ ------
$18,559 $15,464
====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Statements of Consolidated Cash Flows
(In Millions)
Year Ended December 31
1998 1997 1996
---- ---- ----
Cash and cash equivalents at
beginning of year $ 295 $ 229 $ 194
----- ----- -----
Cash flows from operating activities:
Net earnings 821 949 533
Adjustments to reconcile to net
cash provided by operating activities -
ESOP compensation expense 829 987 685
Extraordinary loss on debt - 9 67
extinguishment, net of tax
Gain on sale of partnership interest - (275) -
Gain on sale of affiliate's stock - (103) -
Pension funding less than (greater
than) expense 101 43 (279)
Deferred postretirement benefit expense 149 139 130
Depreciation and amortization 793 724 759
Provision for deferred income taxes 307 194 69
Undistributed earnings of affiliates (62) (16) (49)
Increase in receivables (97) (222) (10)
Decrease (increase) in other current
assets 105 - (105)
Increase in advance ticket sales 162 78 89
Increase in accrued income taxes 38 20 84
Increase in accounts payable and
accrued liabilities 69 16 294
Amortization of deferred gains (64) (64) (63)
Other, net 43 88 249
------ ------ ------
3,194 2,567 2,453
------ ------ ------
Cash flows from investing activities:
Additions to property and equipment (2,832) (2,812) (1,538)
Proceeds on disposition of property
and equipment 452 83 55
Proceeds on disposition of
partnership interest - 539 -
Decrease (increase) in short-term
investments 125 (82) 482
Other, net (63) (29) 18
------ ------ ------
(2,318) (2,301) (983)
------ ------ ------
Cash flows from financing activities:
Reacquisition of preferred stock (3) - (84)
Repurchase of common stock (459) (250) -
Proceeds from issuance of long-term debt 928 597 -
Repayment of long-term debt (271) (301) (791)
Principal payments under capital leases (322) (147) (112)
Purchase of equipment certificates under
Company operating leases (693) - -
Conversion of subordinated debentures - - (324)
Increase in short-term borrowings 184 - -
Aircraft lease deposits (154) (112) (110)
Cash dividends (10) (10) (22)
Other, net 19 23 8
------ ------ ------
(781) (200) (1,435)
------ ------ ------
Increase in cash and cash equivalents
during the year 95 66 35
------ ------ ------
Cash and cash equivalents at end of year $ 390 $ 295 $ 229
====== ====== ======
See accompanying notes to consolidated financial statements.
UAL Corporation and Subsidiary Companies
Statements of Consolidated Stockholders' Equity
(In Millions, Except Per Share)
Unearned Accumulated
Additional Retained ESOP Other
Preferred Common Capital Earnings Preferred Treasury Comp
Stock Stock Invested (Deficit) Stock Stock Income Other Total
--------- ------ ---------- -------- --------- -------- ----------- ----- -----
Balance at December 31, 1995 $ - $ - $1,353 $(1,039) $(175) $(282) $(74) $(22) $(239)
---- --- ----- ------ ---- ---- --- --- ----
Year ended December 31, 1996:
Net earnings - - - 533 - - - - 533
Other comprehensive income, net:
Unrealized losses on
securities,net - - - - - - (1) - (1)
Minimum pension liability adj. - - - - - - 75 - 75
------ --- ---
Total comprehensive income - - - 533 - - 74 - 607
------ --- ---
Cash dividends on preferred
stock ($1.44 per Series B) - - - (20) - - - - (20)
Conversion of Series A debentures- - 217 - - - - - 217
Exchange of Series B
preferred stock - - (102) - - - - - (102)
Issuance and amortization of
ESOP preferred stock - - 735 - (50) - - - 685
Reacquisition of Series B
preferred stock - - - - - (84) - - (84)
ESOP dividend ($8.89 per share) - - 17 (40) 23 - - - -
Preferred stock committed to
Supplemental ESOP - - (106) - - - - - (106)
Other - 1 46 - - (19) - 9 37
---- --- ----- ------ ---- ---- --- --- ----
Balance at December 31, 1996 - 1 2,160 (566) (202) (385) - (13) 995
---- --- ----- ------ ---- ---- --- --- ----
Year ended December 31, 1997:
Net earnings - - - 949 - - - - 949
Other comprehensive income, net:
Minimum pension liability adj. - - - - - - (2) - (2)
------ --- ----
Total comprehensive income - - - 949 - - (2) - 947
------ --- ----
Cash dividends on preferred
stock ($1.44 per Series B) - - - (10) - - - - (10)
Common stock repurchases - - - - - (250) - - (250)
Issuance and amortization of
ESOP preferred stock - - 993 - (6) - - - 987
ESOP dividend ($8.89 per share) - - 36 (67) 31 - - - -
Preferred stock committed to
Supplemental ESOP - - (349) - - - - - (349)
Other - - 36 3 - (28) - 6 17
---- --- ----- ------ ---- ---- --- --- -----
Balance at December 31, 1997 - 1 2,876 309 (177) (663) (2) (7) 2,377
---- --- ----- ------ ---- ---- --- --- -----
Year ended December 31, 1998:
Net earnings - - - 821 - - - - 821
Other comprehensive income, net:
Unrealized gains on
securities,net - - - - - - 1 - 1
Minimum pension liability adj. - - - - - - (1) - (1)
------ --- -----
Total comprehensive income - - - 821 - - - - 821
------ --- -----
Cash dividends on preferred
stock ($1.44 per Series B) - - - (10) - - - - (10)
Common stock repurchases - - - - - (459) - - (459)
Issuance and amortization of
ESOP preferred stock - - 823 - 6 - - - 829
ESOP dividend ($8.89 per share) - - 42 (92) 50 - - - -
Preferred stock committed to
Supplemental ESOP - - (177) - - - - - (177)
Other - - (47) - - (18) - 5 (60)
---- --- ----- ------ ---- ----- --- --- -----
Balance at December 31, 1998 $ - $ 1 $3,517 $ 1,028 $(121) $(1,140) $ (2) $ (2) $3,281
==== === ===== ====== ==== ===== === === =====
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
------------------------------------------
(1) Summary of Significant Accounting Policies
- -----------------------------------------------
(a) Basis of Presentation - UAL Corporation ("UAL") is
a holding company whose principal subsidiary is United Air
Lines, Inc. ("United"). The consolidated financial
statements include the accounts of UAL and all of its
majority-owned affiliates (collectively "the Company"). All
significant intercompany transactions are eliminated.
Investments in affiliates are carried on the equity basis.
Certain prior-year financial statement items have been
reclassified to conform to the current year's presentation.
(b) Use of Estimates - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(c) Airline Revenues - Passenger fares and cargo
revenues are recorded as operating revenues when the
transportation is furnished. The value of unused passenger
tickets is included in current liabilities.
(d) Cash and Cash Equivalents and Short-term
Investments - Cash in excess of operating requirements is
invested in short-term, highly liquid, income-producing
investments. Investments with a maturity of three months or
less on their acquisition date are classified as cash and
cash equivalents. Other investments are classified as short-
term investments.
From time to time, United lends certain of its
securities classified as cash and cash equivalents and short-
term investments to third parties. United requires
collateral in an amount exceeding the value of the
securities and is obligated to reacquire the securities at
the end of the contract. United accounts for these
transactions as secured borrowings rather than sales, and so
does not remove the securities from the balance sheet. At
December 31, 1998, United is obligated to repurchase $142
million of securities lent to third parties.
At December 31, 1998 and 1997, $418 million and $440
million, respectively, of investments in debt securities
included in cash and cash equivalents and short-term
investments were classified as available-for-sale, and $241
million and $287 million, respectively, were classified as
held-to-maturity. Investments in debt securities classified
as available-for-sale are stated at fair value based on the
quoted market prices for the securities, which does not
differ significantly from their cost basis. Investments
classified as held-to-maturity are stated at cost which
approximates market due to their short-term maturities. The
proceeds from sales of available-for-sale securities are
included in interest income for each respective year.
(e) Derivative Financial Instruments -
Foreign Currency - From time to time, United enters
into Japanese yen forward exchange contracts to minimize
gains and losses on the revaluation of short-term yen-
denominated liabilities. The yen forwards typically have
short-term maturities and are marked to fair value at the
end of each accounting period. The unrealized mark-to-
market gains and losses on the yen forwards generally offset
the losses and gains recorded on the yen liabilities.
United has also entered into forwards and swaps to
reduce exposure to currency fluctuations on yen- and French
franc-denominated capital lease obligations. The cash flows
of the forwards and swaps mirror those of the capital
leases. The premiums on the forwards and swaps, as measured
at inception, are being amortized over their respective
lives as components of interest expense. Any gains or
losses realized upon early termination of these forwards and
swaps are deferred and recognized in income over the
remaining life of the underlying exposure.
The Company hedges some of the risks of exchange rate
volatility on its anticipated future yen and Hong Kong
dollar revenues by purchasing put options with little or no
intrinsic value for each respective currency. The amount
and duration of these options are synchronized with the
expected revenues, and thus, the put options have been
designated as a hedge. The premiums on purchased option
contracts are amortized over the lives of the contracts.
Unrealized gains on purchased put option contracts are
deferred until contract expiration and then recognized as a
component of passenger revenue. To reduce hedging costs,
the Company sells call options in each of these currencies
from time to time. At the end of each accounting period, the
written call option contracts are marked-to-market and
unrealized losses are recorded in "Miscellaneous, net".
Interest Rates - United may from time to time, enter
into swaps to reduce exposure to interest rate fluctuations
in connection with certain debt, capital leases and
operating leases. The cash flows of the swaps mirror those
of the underlying exposures. The premiums on the swaps, as
measured at inception, are amortized over their respective
lives as components of interest expense. Any gains or
losses realized upon the early termination of these swaps
are deferred and recognized in income over the remaining
life of the underlying exposure.
Aircraft Fuel - United uses a combination of a collar
option strategy, involving the simultaneous purchase of fuel
call options with the simultaneous sale of fuel put options
with identical expiration dates, and purchased call options
to hedge a portion of its price risk related to aircraft
fuel purchases. The collars and purchased call options have
been designated as a hedge. Gains or losses on hedge
positions are recognized upon contract expiration as a
component of aircraft fuel inventory. In addition, to a
limited extent, United trades short-term heating oil futures
contracts. Unrealized losses on these contracts are
recorded currently in income while unrealized gains are
deferred until contract expiration. Both gains and losses
are recorded as a component of aircraft fuel expense.
(f) Aircraft Fuel, Spare Parts and Supplies - Aircraft
fuel and maintenance and operating supplies are stated at
average cost. Flight equipment spare parts are stated at
average cost less an obsolescence allowance.
(g) Operating Property and Equipment - Owned operating
property and equipment is stated at cost. Property under
capital leases, and the related obligation for future lease
payments, are initially recorded at an amount equal to the
then present value of those lease payments.
Depreciation and amortization of owned depreciable
assets is based on the straight-line method over their
estimated service lives. Leasehold improvements are
amortized over the remaining period of the lease or the
estimated service life of the related asset, whichever is
less. Aircraft are depreciated to estimated salvage values,
generally over lives of 10 to 30 years; buildings are
depreciated over lives of 25 to 45 years; and other property
and equipment are depreciated over lives of 3 to 15 years.
Properties under capital leases are amortized on the
straight-line method over the life of the lease, or in the
case of certain aircraft, over their estimated service
lives. Lease terms are 10 to 30 years for aircraft and
flight simulators and 25 years for buildings. Amortization
of capital leases is included in depreciation and
amortization expense.
Maintenance and repairs, including the cost of minor
replacements, are charged to maintenance expense accounts.
Costs of additions to and renewals of units of property are
charged to property and equipment accounts.
(h) Intangibles - Intangibles consist primarily of
route acquisition costs and intangible pension assets (see
Note 16). Route acquisition costs are amortized over 40
years.
(i) Mileage Plus Awards - United accrues the estimated
incremental cost of providing free travel awards earned
under its Mileage Plus frequent flyer program (including
awards earned from mileage credits sold) when such award
levels are reached. United, through its wholly owned
subsidiary, Mileage Plus Holdings, Inc., sells mileage
credits to participating partners in the Mileage Plus
program. The resulting revenue is recorded in other
operating revenues during the period in which the credits
are sold.
(j) Deferred Gains - Gains on aircraft sale and
leaseback transactions are deferred and amortized over the
lives of the leases as a reduction of rental expense.
(2) Employee Stock Ownership Plans and Recapitalization
- --------------------------------------------------------
On July 12, 1994, the shareholders of UAL approved a
plan of recapitalization to provide an approximately 55%
equity interest in UAL to certain employees of United in
exchange for wage concessions and work-rule changes. The
employees' equity interest is being allocated to individual
employees through the year 2000 under Employee Stock
Ownership Plans ("ESOPs") which were created as a part of
the recapitalization.
The ESOPs cover employees represented by the Air Line
Pilots' Association, International, the International
Association of Machinists and Aerospace Workers and U.S.
management and salaried employees. The ESOPs include a
"Leveraged ESOP", a "Non-Leveraged ESOP" and a "Supplemental
ESOP." Both the Leveraged ESOP and the Non-Leveraged ESOP
are tax-qualified plans while the Supplemental ESOP is not a
tax-qualified plan. Shares are delivered to employees
primarily through the Leveraged ESOP, secondly, through the
Non-Leveraged ESOP, and lastly, through the Supplemental
ESOP.
The equity interests are being delivered to employees
through two classes of preferred stock (Class 1 and Class 2
ESOP Preferred Stock, collectively "ESOP Preferred Stock"),
and the voting interests are being delivered through three
separate classes of preferred stocks (Class P, M and S
Voting Preferred Stock, collectively, "Voting Preferred
Stock"). The Class 1 ESOP Preferred Stock is being
delivered to an ESOP trust in seven separate sales through
January 1, 2000 under the Leveraged ESOP, five of which have
already taken place. Based on Internal Revenue Code
Limitations, shares of the Class 2 ESOP Preferred Stock are
either contributed to the Non-Leveraged ESOP or allocated as
"book entry" shares to the Supplemental ESOP, annually
through the year 2000. The classes of preferred stock are
described more fully in Note 13, "ESOP Preferred Stock".
The Leveraged ESOP and Non-Leveraged ESOP are being
accounted for under AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans"
("SOP"). For the Leveraged ESOP, as shares of Class 1 ESOP
Preferred Stock are sold to an ESOP trust, the Company
reports the issuance as a credit to additional capital
invested and records a corresponding charge to unearned ESOP
preferred stock. Shares are committed to be released to
employees on a pro rata basis through April 12, 2000. ESOP
compensation expense is recorded for the average fair value
of the shares committed to be released during the period
with a corresponding credit to unearned ESOP preferred stock
for the cost of the shares. Any difference between the fair
value of the shares and the cost of the shares is charged or
credited to additional capital invested. For the Non-
Leveraged ESOP, the Class 2 ESOP Preferred Stock is recorded
as additional capital invested as the shares are committed
to be contributed, with the offsetting charge to ESOP
compensation expense. The ESOP compensation expense is
based on the average fair value of the shares committed to
be contributed. The Supplemental ESOP is being accounted
for under Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25").
Shares of ESOP Preferred Stock are legally released or
allocated to employee accounts as of year-end. Dividends on
the ESOP Preferred Stock are also paid at the end of the
year. Dividends on unallocated shares are used by the ESOP
to pay down the loan from UAL and are not considered
dividends for financial reporting purposes. Dividends on
allocated shares are satisfied by releasing shares from the
ESOP's suspense account to the employee accounts and are
charged to equity.
During 1998, 2,087,531 shares of Class 1 ESOP Preferred
Stock, 97,406 shares of Class 2 ESOP Preferred Stock and
2,182,628 shares of Voting Preferred Stock were allocated to
employee accounts, and another 889,031 shares of Class 2
ESOP Preferred Stock were allocated in the form of "book
entry" shares, effective December 31, 1997. Another 78,821
shares of Class 2 ESOP Preferred Stock previously allocated
in book entry form were issued and either contributed to the
qualified plan or converted and sold on behalf of
terminating employees. At December 31, 1998, the year-end
allocation of Class 1 ESOP Preferred Stock to employee
accounts had not yet been completed. There were 2,334,375
shares of Class 1 ESOP Preferred Stock committed to be
released and 565,823 shares held in suspense by the ESOP as
of December 31, 1998. For the Class 2 ESOP Preferred Stock,
739,598 shares were committed to be contributed to employees
at December 31, 1998. The fair value of the unearned ESOP
shares recorded on the balance sheet at December 31, 1998
and 1997 was $141 million and $344 million, respectively.
For the Class 2 ESOP Preferred Stock committed to be
contributed to employees under the Supplemental ESOP,
employees can elect to receive their "book entry" shares in
cash upon termination of employment. The estimated fair
value of such shares at December 31, 1998 and 1997 was $600
million and $679 million, respectively.
(3) Other Income (Expense) - Miscellaneous
- -------------------------------------------
Other income (expense) - "miscellaneous, net" consisted
of the following:
(In Millions) 1998 1997 1996
- ------------- ---- ---- ----
Foreign exchange losses $ (84) $ (19) $ (8)
Minority interests - (15) (21)
Travel agency litigation settlement - - (20)
Other (19) (15) (7)
---- ---- ----
$(103) $ (49) $ (56)
==== ==== ====
(4) Other Comprehensive Income
- ------------------------------
On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which establishes standards for
displaying comprehensive income and its components. The
following table presents the tax effect of those items
included in other comprehensive income:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Tax Net of Tax Net of Tax Net of
Pre-Tax Effect Tax Pre-Tax Effect Tax Pre-Tax Effect Tax
------- ------ ------ ------- ------ ------ ------- ------ ------
Unrealized gains (losses)
on securities:
Unrealized holding gains
(losses) arising during
period $ 1 $ - $ 1 $ - $ - $ - $ (1) $ - $ (1)
Less: reclassification
adjustments realized in
net income - - - - - - - - -
--- --- -- --- --- -- --- --- ---
Net unrealized gains
(losses) $ 1 $ - $ 1 $ - $ - $ - $ (1) $ - $ (1)
Minimum pension liability (1) - (1) (4) 2 (2) 122 (47) 75
--- --- -- --- --- -- --- --- ---
Total other comprehensive
income $ - $ - $ - $ (4) $ 2 $(2) $121 $(47) $ 74
=== === == === === == === === ===
The components of accumulated other comprehensive
income consist of the following items:
Unrealized Gains Minimum Accumulated Other
(Losses) on Securities Pension Liability Comprehensive Income
---------------------- ----------------- --------------------
December 31, 1995 $ 1 $ (75) $ (74)
Current period change (1) 75 74
--- ---- ----
December 31, 1996 $ - $ - $ -
Current period change - (2) (2)
--- ---- ----
December 31, 1997 $ - $ (2) $ (2)
Current period change 1 (1) -
--- ---- ----
December 31, 1998 $ 1 $ (3) $ (2)
=== ==== ====
(5) Per Share Amounts
- ----------------------
Basic earnings per share were computed by dividing net
income by the weighted-average number of shares of common
stock outstanding during the year. In addition, diluted
earnings per share amounts include potential common shares
including ESOP shares committed to be released, and assume
the conversion of convertible debentures (for periods not
actually converted) and elimination of related interest
expense.
Earnings Attributable to Common 1998 1997 1996
Shareholders (Millions) ---- ---- ----
- -------------------------------
Net Income $ 821 $ 949 $ 533
Preferred stock dividends (102) (77) (60)
Preferred stock transactions(1) - - (48)
---- ---- ----
Earnings attributable to common
shareholders (Basic) $ 719 $ 872 $ 425
Interest on convertible debentures,
net of tax - - 2
Other - - 1
---- ---- ----
Earnings attributable to common
shareholders (Diluted) $ 719 $ 872 $ 428
==== ==== ====
Shares (Millions)
- -----------------
Weighted average shares outstanding (Basic) 56.5 58.8 56.1
Convertible preferred stock 47.1 35.9 24.0
Incremental shares related to convertible
debentures and other 1.6 2.7 4.5
----- ---- ----
Weighted average number of shares (Diluted) 105.2 97.4 84.6
===== ==== ====
Earnings Per Share
- ------------------
Basic $12.71 $14.83 $ 7.57
Diluted $ 6.83 $ 8.95 $ 5.06
(1) In December 1996, a UAL-controlled trust issued trust-
originated preferred securities in exchange for shares of
Series B preferred stock and recorded a non-cash decrease of
$27 million in additional paid in capital invested
representing the excess of the fair value of the new
securities over the carrying value of Series B. Also,
during 1996, the Company repurchased shares of its Series B
preferred stock, resulting in increases to additional
capital invested representing the excess of amounts paid to
reacquire the preferred stock over the liquidation
preference of such stock. These transactions had no effect
on earnings; however, their net impact on UAL's equity is
included in the computation of earnings per share.
At December 31, 1998, stock options to purchase
1,328,912 shares of common stock were outstanding, but were
not included in the computation of diluted earnings per
share because the options' exercise price was greater than
the average market price of the common shares.
(6) Affiliates
- ---------------
United owns 32% of Galileo International, Inc.
("Galileo") through a wholly owned subsidiary. United's
investment in Galileo, which owns the Apollo and Galileo
computer reservations systems, is carried on the equity basis.
Included in the Company's retained earnings is approximately
$218 million of undistributed earnings of Galileo and its
predecessor companies. The market value of United's investment
in Galileo at December 31, 1998 and 1997 was $1,455 million and
$924 million, respectively.
In July 1997, United completed the sale of its interest
in the Apollo Travel Services Partnership ("ATS") a 77%
owned affiliate whose accounts were consolidated, to Galileo
for $539 million in cash. See Other Information, "Sale of
Affiliate" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for further
details on the transaction.
Under operating agreements with Galileo, United
purchases computer reservations services from Galileo and
during 1998 provided communications services to Galileo,
while during 1997 and 1996 provided marketing, sales and
communication services to Galileo. Revenues derived from
the sale of services to Galileo amounted to approximately
$13 million in 1998, $159 million in 1997 and $249 million
in 1996. The cost to United of services purchased from
Galileo amounted to approximately $170 million in 1998, $134
million in 1997 and $114 million in 1996. In connection
with the sale of ATS, United entered into an additional
services agreement with Galileo under which the Company will
provide certain marketing and other services designed to
increase the competitiveness of Galileo's business and to
generate additional bookings and revenues for Galileo.
Under this agreement, United could receive additional
consideration in the sixth year following the sale, based on
specified improvements in air booking revenues over a five-
year period.
Prior to the sale to Galileo, ATS contributed the
following amounts to the Company's consolidated results, net
of intercompany eliminations and minority interests:
(In Millions) Year Ended December 31,
1997 1996
---- ----
Operating revenues $ 147 $ 239
Operating income $ 63 $ 86
Earnings before income taxes $ 50 $ 70
(7) Income Taxes
- -----------------
In 1998, the alternative minimum tax ("AMT") liability
of the Company exceeded the regular tax liability resulting
in additional AMT credits. The federal income tax liability
is the greater of the tax computed using the regular tax
system or the tax under the AMT system. If the regular tax
liability exceeds the AMT liability and AMT credits are
available, then AMT credits are used to reduce the net tax
liability to the amount of the AMT liability.
The provision for income taxes is summarized as
follows:
(In Millions) 1998 1997 1996
- ------------- ---- ---- ----
Current -
Federal $ 113 $ 312 $ 281
State 9 55 20
---- ---- ----
122 367 301
---- ---- ----
Deferred -
Federal 270 178 47
State 37 16 22
---- ---- ----
307 194 69
---- ---- ----
$ 429 $ 561 $ 370
==== ==== ====
The income tax provision differed from amounts computed
at the statutory federal income tax rate, as follows:
(In Millions) 1998 1997 1996
- ------------- ---- ---- ----
Income tax provision at
statutory rate $ 440 $ 533 $ 339
State income taxes, net of
federal income tax benefit 30 46 28
ESOP dividends (33) (25) (13)
Nondeductible employee meals 24 26 25
Tax credits (7) (2) (2)
Other, net (25) (17) (7)
---- ---- ----
$ 429 $ 561 $ 370
==== ==== ====
Temporary differences and carryforwards that give rise
to a significant portion of deferred tax assets and
liabilities for 1998 and 1997 are as follows:
(In Millions) 1998 1997
- ------------- ---- ----
Deferred Deferred Tax Deferred Deferred Tax
Tax Assets Liabilities Tax Assets Liabilities
---------- ------------ ---------- ------------
Employee benefits, including
postretirement medical and ESOP $ 964 $ 130 $ 918 $ 156
Depreciation, capitalized interest
and transfers of tax benefits - 1,937 - 1,466
Gains on sale and leasebacks 368 - 398 -
Rent expense 411 - 382 -
AMT credit carryforwards 198 - 137 -
Other 773 789 422 470
----- ----- ----- -----
$2,714 $2,856 $2,257 $2,092
===== ===== ===== =====
At December 31, 1998, UAL and its subsidiaries had $198
million of federal AMT credits and $8 million of foreign tax
credits which may be carried forward to reduce the tax
liabilities of future years.
(8) Short-Term Borrowings
- ---------------------------
United has an agreement with a syndicate of banks for a
$750 million revolving credit facility expiring in 2002.
Interest on drawn amounts under the facility is calculated
at floating rates based on the London interbank offered rate
("LIBOR") plus a margin which is subject to adjustment based
on certain changes in the credit ratings of United's long-
term senior unsecured debt. Among other restrictions, the
credit facility contains a covenant that restricts United's
ability to grant liens on or otherwise encumber certain
identified assets with a market value of approximately $1.1
billion.
In addition, United had outstanding $184 million under
a separate short-term borrowing facility, bearing an average
interest rate of 5.50%. Receivables amounting to $358
million were pledged by United to secure repayment of such
outstanding borrowings. The maximum available borrowing
amount under this arrangement is $227 million.
(9) Long-Term Debt
- -------------------
A summary of long-term debt, including current
maturities, as of December 31 is as follows (interest rates
are as of December 31, 1998):
(In Millions) 1998 1997
- ------------- ---- ----
Secured notes, 5.13% to 8.99%,
averaging 6.74%, due through 2014 $1,389 $1,295
Debentures, 9.00% to 11.21%, averaging
9.97%, due through 2021 785 785
Promissory notes, 5.63% to 11.00%,
averaging 6.13%, due through 2000 13 70
Commercial paper, 5.42%, due through 2003 591 -
Special facility bonds, 5.63%, due 2034 190 190
----- -----
2,968 2,340
----- -----
Less: Unamortized discount on debt (12) (13)
Current maturities (98) (235)
----- -----
$2,858 $2,092
===== =====
In March 1998, the Company, through a special-purpose
financing entity that is consolidated, issued $604 million
of commercial paper to refinance certain lease commitments.
Although the issued commercial paper has short maturities,
the Company expects to continually rollover this obligation
throughout the 5-year life of its supporting liquidity
facility or bank standby facility. As such, the commercial
paper is classified as a long-term obligation in the
Company's statement of financial position.
In addition to scheduled principal payments, in 1997
the Company repaid $84 million in principal amount of
secured notes and $51 million in principal amount of
debentures prior to maturity. These obligations were
scheduled to mature at various times from 2000 through 2021.
An extraordinary loss of $9 million, net of tax benefits of
$5 million was recorded reflecting amounts paid in excess of
the debt carrying value.
In 1997, the California Statewide Communities
Development Authority (the "Authority") issued $190 million
in special facilities revenue bonds to finance the
acquisition and construction of certain facilities at the
Los Angeles International Airport ("LAX") which United
guarantees payment of under a payment agreement with the
Authority. The bond proceeds are restricted to expenditures
on the LAX facilities and unspent amounts are classified as
other assets in the balance sheet.
At December 31, 1998, United had outstanding a total of
$1.456 billion of long-term debt bearing interest rates at
22 to 47.5 basis points over LIBOR.
Maturities of long-term debt for each of the four years
after 1999 are: 2000 - $188 million; 2001 - $83 million;
2002 - $597 million; and 2003 - $555 million. Various
assets, principally aircraft, having an aggregate book value
of $1.522 billion at December 31, 1998, were pledged as
security under various loan agreements.
(10) Lease Obligations
- -----------------------
The Company leases aircraft, airport passenger terminal
space, aircraft hangars and related maintenance facilities,
cargo terminals, other airport facilities, real estate,
office and computer equipment and vehicles.
Future minimum lease payments as of December 31, 1998,
under capital leases (substantially all of which are for
aircraft) and operating leases having initial or remaining
noncancelable lease terms of more than one year are as
follows:
(In Millions) Operating Leases Capital
Aircraft Non-aircraft Leases
-------- ------------ -------
Payable during -
1999 $ 869 $ 451 $ 317
2000 882 447 308
2001 865 439 399
2002 854 420 341
2003 892 413 242
After 2003 10,729 6,537 1,759
------ ------ ------
Total minimum lease payments $15,091 $ 8,707 $ 3,366
====== ======
Imputed interest (at rates of 5.3% to 12.2%) (1,077)
-----
Present value of minimum lease payments 2,289
Current portion (176)
-----
Long-term obligations under capital leases $ 2,113
=====
As of December 31, 1998, United leased 309 aircraft, 68
of which were under capital leases. These leases have terms
of 10 to 26 years, and expiration dates range from 1999
through 2020.
In connection with the financing of certain aircraft
accounted for as capital leases, United had on deposit at
December 31, 1998 an aggregate 38 billion yen ($330
million), 324 million German marks ($193 million), 60
million French francs ($11 million) and $11 million in
certain banks and had pledged an irrevocable security
interest in such deposits to certain of the aircraft
lessors. These deposits will be used to pay off an
equivalent amount of recorded capital lease obligations.
Amounts charged to rent expense, net of minor amounts
of sublease rentals, were $1.385 billion in 1998, $1.416
billion in 1997 and $1.424 billion in 1996. Included in
1998 rental expense was $15 million in contingent rentals,
resulting from changes in interest rates for operating
leases under which the rent payments are based on variable
interest rates.
(11) Company-Obligated Mandatorily Redeemable Preferred
Securities of a Subsidiary Trust
--------------------------------------------------
In December 1996, UAL Corporation Capital Trust I (the
"Trust") issued $75 million of its 13 1/4% Trust Originated
Preferred Securities (the "Preferred Securities") in
exchange for 2,999,304 depositary shares, each representing
1/1000 of one share of Series B 12 1/4% preferred stock (see
Note 12). Concurrent with the issuance of the Preferred
Securities and the related purchase by UAL of the Trust's
common securities, the Company issued to the Trust $77
million aggregate principal amount of its 13 1/4% Junior
Subordinated Debentures (the "Debentures") due 2026. The
Debentures are and will be the sole assets of the Trust.
The interest and other payment dates on the Debentures
correspond to the distribution and other payment dates on
the Preferred Securities. Upon maturity or redemption of
the Debentures, the Preferred Securities will be mandatorily
redeemed. The Debentures are redeemable at UAL's option, in
whole or in part, on or after July 12, 2004, at a redemption
price equal to 100% of the principal amount to be redeemed,
plus accrued and unpaid interest to the redemption date.
Upon the repayment of the Debentures, the proceeds thereof
will be applied to redeem the Preferred Securities.
There is a full and unconditional guarantee by UAL of
the Trust's obligations under the securities issued by the
Trust. However, the Company's obligations are subordinate
and junior in right of payment to certain other of its
indebtedness. UAL has the right to defer payments of
interest on the Debentures by extending the interest payment
period, at any time, for up to 20 consecutive quarters. If
interest payments on the Debentures are so deferred,
distributions on the Preferred Securities will also be
deferred. During any deferral, distributions will continue
to accrue with interest thereon. In addition, during any
such deferral, UAL may not declare or pay any dividend or
other distribution on, or redeem or purchase, any of its
capital stock.
The fair value of the Preferred Securities at December
31, 1998 and 1997 was $90 and $106 million, respectively.
(12) Serial Preferred Stock
- ----------------------------
At December 31, 1998, UAL had outstanding 3,203,177
depositary shares, each representing 1/1000 of one share of
Series B 12 1/4% preferred stock, with a liquidation
preference of $25 per depositary share ($25,000 per Series B
preferred share) and a stated capital of $0.01 per Series B
preferred share. Under its terms, any portion of the Series
B preferred stock or the depositary shares is redeemable for
cash after July 11, 2004, at UAL's option, at the equivalent
of $25 per depositary share, plus accrued dividends. The
Series B preferred stock is not convertible into any other
securities, has no stated maturity and is not subject to
mandatory redemption.
The Series B preferred stock ranks senior to all other
preferred and common stock, except the Preferred Securities,
as to receipt of dividends and amounts distributed upon
liquidation. The Series B preferred stock has voting rights
only to the extent required by law and with respect to
charter amendments that adversely affect the preferred stock
or the creation or issuance of any security ranking senior
to the preferred stock. Additionally, if dividends are not
paid for six cumulative quarters, the Series B preferred
stockholders are entitled to elect two additional members to
the UAL Board of Directors until all dividends are paid in
full. Pursuant to UAL's restated certificate of
incorporation, UAL is authorized to issue a total of 50,000
shares of Series B preferred stock.
During 1998, UAL repurchased 64,300 depositary shares,
at an aggregate cost of $3 million, to be held in treasury.
UAL is authorized to issue up to 15,986,584 additional
shares of serial preferred stock.
(13) ESOP Preferred Stock
- --------------------------
The following activity related to UAL's outstanding
ESOP preferred stocks (see Note 2 for a description of the
ESOPs):
Class 1 ESOP Class 2 ESOP ESOP Voting
------------ ------------ -----------
Balance December 31,1995 4,632,505 302,071 1,438,393
--------- ------- ---------
Shares issued 2,367,575 381,044 3,073,970
Converted to common (49,618) (38,605) (89,927)
--------- ------- ---------
Balance December 31, 1996 6,950,462 644,510 4,422,436
--------- ------- ---------
Shares issued 1,848,629 242,877 3,073,969
Converted to common (146,473) (81,127) (229,999)
--------- ------- ---------
Balance December 31, 1997 8,652,618 806,260 7,266,406
--------- ------- ---------
Shares issued 2,011,812 177,166 3,073,969
Converted to common (213,061) (116,104) (331,620)
--------- ------- ---------
Balance December 31, 1998 10,451,369 867,322 10,008,755
========== ======= ==========
An aggregate of 17,675,345 shares of Class 1 and Class
2 ESOP Preferred Stock will be issued to employees under the
ESOPs. Each share of ESOP Preferred Stock is convertible
into four shares of UAL common stock and shares are
converted to common as employees retire or otherwise leave
the Company. The stock has a par value of $0.01 per share
and is nonvoting. The Class 1 ESOP Preferred Stock has a
liquidation value of $126.96 per share plus all accrued and
unpaid dividends; the Class 2 does not have a liquidation
value. The Class 1 ESOP Preferred Stock provides a fixed
annual dividend of $8.8872 per share, which ceases on March
31, 2000; the Class 2 does not pay a fixed dividend.
Class P, M and S Voting Preferred Stocks were
established to provide the voting power to the employee
groups participating in the ESOPs. Additional Voting
Preferred Stock is issued as shares of the Class 1 and Class
2 ESOP Preferred Stock are allocated to employees. In the
aggregate, 17,675,345 shares of Voting Preferred Stock will
be issued through the year 2000. The Voting Preferred Stock
outstanding at any time commands voting power for
approximately 55% of the vote of all classes of capital
stock in all matters requiring a stockholder vote, other
than for the election of members of the Board of Directors.
The Voting Preferred Stock has a par value and liquidation
preference of $0.01 per share. The stock is not entitled to
receive any dividends and is convertible into .0004 shares
of UAL common stock.
Class Pilot MEC, IAM, SAM and I junior preferred stock
(collectively "Director Preferred Stocks") were established
to effectuate the election of one or more members to UAL's
Board of Directors. One share each of Class Pilot MEC and
Class IAM junior preferred stock is authorized and issued.
The Company is authorized to issue ten shares each of Class
SAM and Class I junior preferred stock. There are three
shares of Class SAM and four shares of Class I issued. Each
of the Director Preferred Stocks has a par value and
liquidation preference of $0.01 per share. The stock is not
entitled to receive any dividends and Class I will be
redeemed automatically upon the transfer of the shares to
any person not elected to the Board of Directors or upon the
occurrence of the "Sunset."
(14) Common Stockholders' Equity
- ---------------------------------
Changes in the number of shares of UAL common stock
outstanding during the years ended December 31 were as
follows:
1998 1997 1996
---- ---- ----
Shares outstanding at
beginning of year 57,320,486 58,817,480 50,718,424
Stock options exercised 382,136 840,100 500,174
Shares issued from treasury
under compensation arrangements 11,944 28,224 25,949
Shares acquired for treasury (7,237,975) (3,269,393) (180,565)
Forfeiture of restricted stock (7,600) (25,120) (70,488)
Conversion of Series A debentures - - 7,623,092
Conversion of ESOP preferred stock 1,316,786 911,300 352,929
Other 18,876 17,895 (152,035)
---------- ---------- ----------
Shares outstanding at end of year 51,804,653 57,320,486 58,817,480
========== ========== ==========
During 1998 and 1997, the Company repurchased 7,061,109
and 2,881,092 shares of common stock, respectively, at a
total purchase price of $459 million and $250 million,
respectively.
In connection with the Company's stock repurchase plan,
UAL sold equity put options, which entitle the holders to
sell shares of UAL common stock to the Company at specified
prices. At December 31, 1998, 500,000 put options were
outstanding at a strike price of $64.04. These put options
were exercised in January.
(15) Stock Options and Awards
- ------------------------------
The Company has granted options to purchase common
stock to various officers and employees. The option price
for all stock options is at least 100% of the fair market
value of UAL common stock at the date of grant. Options
generally vest and become exercisable in four equal, annual
installments beginning one year after the date of grant, and
generally expire in ten years.
As a result of the 1994 recapitalization, all
outstanding options became fully vested at the time of the
transaction and the holders of such options became eligible
to utilize the cashless exercise features of stock options.
Under a cashless exercise, the Company withholds, at the
election of the optionee, from shares that would otherwise
be issued upon exercise, that number of shares having a fair
market value equal to the exercise price and/or related
income taxes. For outstanding options eligible for cashless
exercise, changes in the market price of the stock are
charged (credited) to earnings currently. The expense
(credit) recorded for such eligible options was $(7) million
in 1998, $14 million in 1997 and $15 million in 1996.
Stock options which were outstanding at the time of the
recapitalization are exercisable for shares of old common
stock, each of which is in turn converted into two shares of
new common stock and $84.81 in cash upon exercise.
Subsequent to the recapitalization, the Company granted
stock options which are exercisable for shares of new common
stock.
The Company has also awarded shares of restricted stock
to officers and key employees. These shares generally vest
over a five-year period and are subject to certain transfer
restrictions and forfeiture under certain circumstances
prior to vesting. Unearned compensation, representing the
fair market value of the stock at the measurement date for
the award, is amortized to salaries and related costs over
the vesting period. During 1997, 5,000 shares of restricted
stock were issued from treasury. No shares were issued in
1998 and 1996. As of December 31, 1998, 221,040 shares were
restricted and still nonvested. Additionally, 309,120
shares were reserved for future awards under the plan.
SFAS No. 123 ("Accounting for Stock-Based
Compensation") establishes a fair value based method of
accounting for stock options. The Company has elected to
continue using the intrinsic value method of accounting
prescribed in APB 25, as permitted by SFAS No. 123. Had
compensation cost for awards been determined based on the
fair value at the grant dates consistent with the method of
SFAS No. 123, the Company's net income and earnings per
share would have instead been reported as the pro forma
amounts indicated below:
1998 1997 1996
---- ---- ----
Net income (millions) As reported $ 821 $ 949 $ 533
Pro forma $ 812 $ 944 $ 531
Basic earnings per share As reported $12.71 $14.83 $ 7.57
Pro forma $12.55 $14.75 $ 7.55
Diluted earnings per share As reported $ 6.83 $ 8.95 $ 5.06
Pro forma $ 6.74 $ 8.94 $ 5.07
The weighted-average grant date fair value of
restricted shares issued was $87.44 for shares issued in
1997. The fair value of each option grant was estimated on
the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.6% 6.4% 6.4%
Dividend yield 0.0% 0.0% 0.0%
Volatility 33.0% 32.0% 32.0%
Expected life (years) 4.0 4.0 4.0
Stock option activity for the past three years was as
follows:
1998 1997 1996
Old Share Options: ---- ---- ----
Wtd Avg Wtd Avg Wtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
------ ---------- ------ ---------- ------ ----------
Outstanding at beginning of year 168,393 $121.65 356,118 $120.80 480,610 $119.95
Exercised (49,918) $121.67 (187,725) $120.03 (124,117) $117.49
Terminated - - - - (375) $124.00
------- ------- -------
Outstanding at end of year 118,475 $121.64 168,393 $121.65 356,118 $120.80
Options exercisable at year-end 118,475 $121.64 168,393 $121.65 356,118 $120.80
1998 1997 1996
New Share Options: ---- ---- ----
Wtd Avg Wtd Avg Wtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
------ ---------- ------ ---------- ------ ----------
Outstanding at beginning of year 4,749,612 $36.27 4,828,990 $31.64 3,767,624 $23.47
Granted 1,064,200 $81.40 449,100 $77.86 1,319,800 $53.46
Exercised (282,300) $28.79 (464,650) $25.58 (251,934) $23.52
Terminated (119,676) $57.12 (63,828) $57.45 (6,500) $32.03
--------- --------- ---------
Outstanding at end of year 5,411,836 $45.07 4,749,612 $36.27 4,828,990 $31.64
Options exercisable at year-end 3,400,607 $29.97 2,518,238 $26.63 1,881,686 $22.89
Reserved for future grants at
year-end 3,422,904 4,397,428 4,782,700
Wtd avg fair value of options
granted during the year $ 27.95 $ 27.40 $ 18.94
The following information related to stock options
outstanding as of December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Average
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices December 31,1998 Contractual Life Exercise Price December 31,1998 Exercise Price
- --------------- ---------------- ---------------- ---------------- ---------------- ----------------
Old Share Options:
$ 91 to 177 118,475 3.0 years $ 121.64 118,475 $ 121.64
New Share Options:
$ 20 to 29 2,705,340 5.6 years $ 22.78 2,654,840 $ 22.71
$ 37 to 57 1,264,747 7.3 years $ 52.46 636,999 $ 52.03
$ 60 to 88 1,441,749 9.1 years $ 80.42 108,768 $ 77.87
--------- ---------
5,411,836 3,400,607
(16) Retirement and Postretirement Plans
- -----------------------------------------
The Company has various retirement plans, both defined
benefit and defined contribution, which cover substantially
all employees. The Company also provides certain health
care benefits, primarily in the U.S., to retirees and
eligible dependents, as well as certain life insurance
benefits to retirees. The Company has reserved the right,
subject to collective bargaining agreements, to modify or
terminate the health care and life insurance benefits for
both current and future retirees.
The following table sets forth the reconciliation of
the beginning and ending balances of the benefit obligation
and plan assets, the funded status and the amounts
recognized in the statement of financial position for the
defined benefit and other postretirement plans as of
December 31:
(In Millions)
Change in Benefit Obligation Pension Benefits Other Benefits
- ---------------------------- ---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Benefit obligation at
beginning of year $7,272 $6,133 $1,706 $1,323
Service cost 276 232 48 44
Interest cost 533 477 109 107
Plan participants' contributions 1 1 - -
Amendments 1 245 - -
Actuarial (gain) loss 274 502 (169) 288
Foreign currency exchange
rate changes 13 (14) - -
Benefits paid (332) (304) (68) (56)
----- ----- ----- -----
Benefit obligation at end of year $8,038 $7,272 $1,626 $1,706
===== ===== ===== =====
Change in Plan Assets
- --------------------- 1998 1997 1998 1997
---- ---- ---- ----
Fair value of plan assets at
beginning of year $6,859 $5,919 $ 107 $ 103
Actual return on plan assets 934 1,075 8 7
Employer contributions 187 173 - -
Plan participants' contributions 1 1 - -
Foreign currency exchange
rate changes 5 (5) - -
Benefits paid (332) (304) (3) (3)
----- ----- ----- -----
Fair value of plan assets at
end of year $7,654 $6,859 $ 112 $ 107
===== ===== ===== =====
Funded status $ (384) $ (413) $(1,514) $(1,599)
Unrecognized actuarial
(gains) losses (122) 28 19 183
Unrecognized prior service costs 660 648 - -
----- ----- ----- -----
Net amount recognized $ 154 $ 263 $(1,495) $(1,416)
===== ===== ===== =====
Amounts recognized in the statement
of financial position consist of:
1998 1997 1998 1997
---- ---- ---- ----
Prepaid (accrued) benefit cost $ 154 $ 263 $(1,495) $(1,416)
Accrued benefit liability (275) (290) - -
Intangible asset 271 286 - -
Accumulated other comprehensive
income 4 4 - -
----- ----- ----- -----
Net amount recognized $ 154 $ 263 $(1,495) $(1,416)
===== ===== ===== =====
Weighted-average assumptions 1998 1997 1998 1997
- ---------------------------- ---- ---- ---- ----
Discount rate 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets 9.75% 9.75% 8.00% 8.00%
Rate of compensation increase 4.05% 3.85% - -
The assumed health care cost trend rates for gross
claims paid were 5.0% and 5.5% for 1998 and 1997,
respectively, declining annually to a rate of 4.0% by the
year 1999 and remaining level thereafter.
The net periodic benefit cost included the following
components:
(In Millions) Pension Benefits Other Benefits
- ------------- ---------------- --------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Service cost $ 276 $ 232 $ 234 $ 48 $ 44 $ 44
Interest cost 533 477 438 109 107 97
Expected return on plan assets (581) (531) (479) (8) (8) (8)
Amortization of prior service
cost including transition
obligation/(asset) 57 36 29 - - -
Recognized actuarial (gain)/loss 9 1 16 (4) (5) (5)
---- ---- ---- ---- ---- ----
Net period benefit costs $ 294 $ 215 $ 238 $ 145 $ 138 $ 128
==== ==== ==== ==== ==== ====
Total pension expense for all retirement plans
(including defined contribution plans) was $304 million in
1998, $229 million in 1997 and $252 million in 1996.
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the plans with
accumulated benefit obligations in excess of plan assets
were $1.688 billion, $1.510 billion, and $1.118 billion,
respectively, as of December 31, 1998, and $1.482 billion,
$1.273 billion, and $908 million, respectively, as of
December 31, 1997.
Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plan. A
one-percentage-point change in assumed health care trend
rate would have the following effects:
(In Millions) 1% Increase 1% Decrease
- ------------- ----------- -----------
Effect on total service and
interest cost $ 26 $ 21
Effect on postretirement
benefit obligation $ 223 $ 178
Changes in interest rates or rates of inflation may
impact the assumptions used in the valuation of pension
obligations and postretirement obligations including
discount rates and rates of increase in compensation,
resulting in increases or decreases in United's pension and
postretirement liabilities and pension and postretirement
costs.
(17) Financial Instruments and Risk Management
- -----------------------------------------------
See Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ("Item 7A") for a discussion of the
Company's foreign currency and fuel price risk management
activities, and the fair value of all significant financial
instruments.
Credit Exposures of Derivatives
The Company's theoretical risk in the derivative
financial instruments described in Item 7A is the cost of
replacing the contracts at current market rates in the event
of default by any of the counterparties. However, the
Company does not anticipate such default as counterparties
are selected based on credit ratings and the relative market
positions with each counterparty are monitored.
Financial Guarantees
Special facility revenue bonds have been issued by
certain municipalities to build or improve airport and
maintenance facilities leased by United. Under the lease
agreements, United is required to make rental payments in
amounts sufficient to pay the maturing principal and
interest payments on the bonds. At December 31, 1998,
$1.229 billion principal amount of such bonds was
outstanding. As of December 31, 1998, UAL and United had
jointly guaranteed $35 million of such bonds and United had
guaranteed $1.211 billion of such bonds, including accrued
interest. The payments required to satisfy these
obligations are included in the future minimum lease
payments disclosed in Note 10 "Lease Obligations".
Concentrations of Credit Risk
The Company does not believe it is subject to any
significant concentration of credit risk. Most of the
Company's receivables result from sales of tickets to
individuals through geographically dispersed travel agents,
company outlets or other airlines, often through the use of
major credit cards. These receivables are short term,
generally being settled shortly after the sale.
(18) Commitments, Contingent Liabilities and Uncertainties
- -----------------------------------------------------------
The Company has certain contingencies resulting from
litigation and claims (including environmental issues)
incident to the ordinary course of business. Management
believes, after considering a number of factors, including
(but not limited to) the views of legal counsel, the nature
of contingencies to which the Company is subject and its
prior experience, that the ultimate disposition of these
contingencies is not expected to materially affect UAL's
consolidated financial position or results of operations.
UAL records liabilities for legal and environmental claims
against it in accordance with generally accepted accounting
principles. These amounts are recorded based on the
Company's assessments of the likelihood of their eventual
settlements. The amounts of these liabilities could
increase or decrease in the near term, based on revisions to
estimates relating to the various claims.
At December 31, 1998, commitments for the purchase of
property and equipment, principally aircraft, approximated
$6.8 billion, after deducting advance payments. An
estimated $2.7 billion will be spent in 1999, $1.8 billion
in 2000, $2.0 billion in 2001 and $0.3 billion in 2002 and
thereafter. The major commitments are for the purchase of
B777, B747, B767, B757, A320 and A319 aircraft, which are
scheduled to be delivered through 2002. These commitments,
combined with aircraft retirements, are part of the
Company's plan to eventually increase the fleet to an
expected 645 aircraft at the end of 2001.
In connection with the construction of the Indianapolis
Maintenance Center, United agreed to spend an aggregate $800
million on capital investments by the year 2001 and employ
at least 7,500 individuals by the year 2004. In the event
such targets are not reached, United may be required to make
certain payments to the city of Indianapolis and state of
Indiana.
In July 1998, the International Association of
Machinists and Aerospace Workers ("IAM") became the
bargaining representative for United's public contact
employees and negotiations have begun regarding a contract.
As a result, approximately 82% of United's employees are
represented by various labor organizations. The labor
contracts with the Air Line Pilots' Association and the IAM
become amendable in 2000. In October 1997, the Association
of Flight Attendants ratified a new contract, which will
remain in effect through 2006.
(19) Segment Information
- -------------------------
During the fourth quarter of 1998, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". United has a global route network
designed to transport passengers and cargo between
destinations in North America, the Pacific, Latin America
and Europe. These regions constitute United's four
reportable segments. The accounting policies for each of
these segments are the same as those described in Note 1,
"Summary of Significant Accounting Policies," except that
segment financial information has been prepared using a
management approach which is consistent with how the
Company's management internally disaggregates financial
information for the purpose of making internal operating
decisions. UAL evaluates performance based on United's
fully distributed earnings before income taxes. Revenues
are attributed to each reportable segment based on the
allocation guidelines provided by the U.S. Department of
Transportation, which classifies flights between the U.S.
and foreign designations as part of each respective region.
A reconciliation of the total amounts reported by reportable
segments to the applicable amounts in the financial
statements follows:
(In Millions) Year Ended December 31, 1998
- ------------- ----------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
Revenue $11,997 $2,843 $ 832 $ 1,846 $17,518 $ 43 $17,561
Interest income 33 14 3 8 58 1 59
Interest expense 207 84 22 49 362 (7) 355
Equity in earnings
of affiliates 41 17 4 10 72 - 72
Depreciation and amortization 520 145 45 95 805 (12) 793
Fully distributed earnings
before income taxes 1,641 63 68 277 2,049 36 2,085
(In Millions) Year Ended December 31, 1997
- ------------- ----------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
Revenue $11,214 $3,552 $ 824 $1,745 $17,335 $ 43 $17,378
Interest income 29 13 3 6 51 1 52
Interest expense 166 73 15 36 290 (4) 286
Equity in earnings
of affiliates 38 17 3 8 66 - 66
Depreciation and amortization 474 159 38 76 747 (23) 724
Fully distributed earnings
before income taxes 1,410 589 129 347 2,475 36 2,511
(In Millions) Year Ended December 31, 1996
- ------------- ----------------------------
Reportable
Latin Segment Consolidated
Domestic Pacific America Atlantic Total Other Total
-------- ------- ------- -------- --------- ----- ------------
Revenue $10,717 $3,438 $ 750 $1,412 $16,317 $ 45 $16,362
Interest income 26 11 2 5 44 13 57
Interest expense 171 72 16 31 290 5 295
Equity in earnings
of affiliates 38 16 3 7 64 - 64
Depreciation and amortization 509 134 39 58 740 19 759
Fully distributed earnings
before income taxes 1,048 423 45 139 1,655 - 1,655
(In Millions) 1998 1997 1996
- ------------- ---- ---- ----
Total fully distributed earnings
for reportable segments $ 2,049 $ 2,475 $ 1,655
UAL subsidiary earnings 36 36 -
Less: ESOP compensation expense 829 987 685
------ ------ ------
Total earnings before income taxes,
distributions on preferred
securities and extraordinary item $ 1,256 $ 1,524 $ 970
====== ====== ======
UAL's operations involve an insignificant level of
dedicated revenue producing assets by reportable segment.
The overwhelming majority of UAL's revenue producing assets
can be deployed in any of the four reportable segments. UAL
has significant intangible assets related to the acquisition
of its Atlantic and Latin American route authorities.
(20) Statement of Consolidated Cash Flows - Supplemental
Disclosures
---------------------------------------------------
Supplemental disclosures of cash flow information and
non-cash investing and financing activities were as follows:
(In Millions) 1998 1997 1996
- ------------- ---- ---- ----
Cash paid during the year for:
Interest (net of amounts
capitalized) $ 234 $ 152 $ 244
Income taxes 160 362 242
Non-cash transactions:
Capital lease obligations incurred 701 643 503
Long-term debt incurred in connection
with additions to equipment - 185 82
Note receivables recorded in
connection with the sale of
equipment and leasehold improvements - 61 -
Increase (decrease) in pension
intangible assets (15) 200 (191)
Increase in additional capital
invested in connection with the
conversion of subordinated debentures
to common stock - - 217
Decrease in additional capital
invested in connection with the
conversion of subordinated debentures
to mandatorily redeemable preferred
securities - - (102)
(21) Selected Quarterly Financial Data (Unaudited)
- ---------------------------------------------------
(In Millions) 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
1998: ------- ------- ------- ------- ----
Operating revenues $4,055 $4,442 $4,783 $4,281 $17,561
Earnings from operations 123 470 695 191 1,478
Net earnings $ 61 $ 282 425 54 821
Earnings per share, basic $ 0.60 $ 4.43 $ 6.91 $ 0.53 $ 12.71
Earnings per share, diluted $ 0.34 $ 2.44 $ 3.71 $ 0.27 $ 6.83
1997:
Operating revenues $4,121 $4,382 $4,640 $4,235 $17,378
Earnings from operations 194 412 563 91 1,259
Earnings before extraordinary item 105 242 579 32 958
Extraordinary loss on early
extinguishment of debt - - - (9) (9)
Net earnings $ 105 $ 242 $ 579 $ 23 $ 949
Per share amounts, basic:
Earnings before extraordinary item $ 1.45 $ 3.77 $ 9.39 $ 0.21 $ 14.98
Extraordinary loss on early
extinguishment of debt - - - (0.15) (0.15)
Net earnings $ 1.45 $ 3.77 $ 9.39 $ 0.06 $ 14.83
Net earnings per share, diluted $ 0.92 $ 2.31 $ 5.61 $ 0.04 $ 8.95
The sum of quarterly earnings per share amounts is not
the same as annual earnings per share amounts because of
changing numbers of shares outstanding.
During the third quarter of 1997, UAL recognized a pre-
tax gain of $275 million of the sale of its interest in the
Apollo Travel Services Partnership (see Other Information,
"Sale of Affiliate" in Management's Discussion and Analysis
of Financial Condition and Results of Operations).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is incorporated by
reference from the Company's definitive proxy statement for its
1999 Annual Meeting of Stockholders. Information regarding the
executive officers is included in Part I of this Form 10-K under
the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is incorporated by
reference from the Company's definitive proxy statement for its
1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information required by this item is incorporated by
reference from the Company's definitive proxy statement for its
1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is incorporated by
reference from the Company's definitive proxy statement for its
1999 Annual Meeting of Stockholders.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) 1. Financial Statements. The financial statements
required by this item are listed in Item 8, "Financial Statements
and Supplementary Data" herein.
2. Financial Statement Schedules. The financial statement
schedule required by this item is listed below and included in
this report after the signature page hereto.
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1998, 1997 and 1996.
All other schedules are omitted because they are not
applicable, not required or the required information is
shown in the consolidated financial statements or notes
thereto.
3. Exhibits. The exhibits required by this item are
listed in the Exhibit Index which immediately precedes the
exhibits filed with this Form 10-K, and is incorporated herein by
this reference. Each of Exhibits 10.25 through 10.34 and 10.36
to 10.37 listed in the Exhibit Index is a management contract
or compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
-------------------
Form 8-K dated October 21, 1998 to report a cautionary
statement for purposes of the "Safe Harbor for Forward Looking
Statements" provision of the Private Securities Litigation Reform
Act.
Form 8-K dated December 16, 1998 to report a press release
in which UAL announces 1999 fully distributed EPS goals and goal
to limit fully distributed unit cost growth in year 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 25th day of February, 1999.
UAL CORPORATION
By: /s/ Gerald Greenwald
--------------------
Gerald Greenwald
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on the 25th day of
February, 1999 by the following persons on behalf of the
registrant and in the capacities indicated.
/s/ Gerald Greenwald /s/ Douglas A. Hacker
- ------------------------------- -------------------------------
Gerald Greenwald Douglas A. Hacker
Chairman of the Board and Chief Senior Vice President and
Executive Officer (principal Chief Financial Officer
executive officer) (principal financial and
accounting officer)
/s/ James E. Goodwin /s/ James J. O'Connor
- ------------------------------- -------------------------------
James E. Goodwin James J. O'Connor
Director Director
/s/ John W. Creighton, Jr. /s/ Deval L. Patrick
- ------------------------------- -------------------------------
John W. Creighton, Jr. Deval L. Patrick
Director Director
/s/ Duanne D. Fitzgerald /s/ John F. Peterpaul
- ------------------------------- -------------------------------
Duane D. Fitzgerald John F. Peterpaul
Director Director
/s/ Michael H. Glawe /s/ Paul E. Tierney, Jr.
- ------------------------------- -------------------------------
Michael H. Glawe Paul E. Tierney, Jr.
Director Director
/s/ Richard D. McCormick /s/ John K. Van de Kamp
- ------------------------------- -------------------------------
Richard D. McCormick John K. Van de Kamp
Director Director
/s/ John F. McGillicuddy
- -------------------------------
John F. McGillicuddy
Director
UAL Corporation and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1998
Additions Charged to
--------------------
(In Millions) Balance at Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- ---------- --------- -------- ---------- ----------
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 15 $ 17 $ - $ 10(1) $ 22
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 29 $ 36 $ 4 $ 30(1) $ 39
=== === === === ===
F-1
- -----------------
(1) Deduction from reserve for purpose for which reserve was created.
UAL Corporation and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1997
Additions Charged to
--------------------
(In Millions) Balance at Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- ---------- --------- -------- ---------- ----------
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 24 $ 17 $ - $ 26(1) $ 15
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 31 $ 26 $ 5 $ 33(2) $ 29
=== === === === ===
F-2
- -----------------
(1) Includes deduction from reserve due to the sale of the Apollo Travel Services Partnership.
(2) Deduction from reserve for purpose for which reserve was created.
UAL Corporation and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1996
Additions Charged to
--------------------
(In Millions) Balance at Balance at
Beginning Costs and Other End of
Description of Year Expenses Accounts Deductions Year
----------- ---------- --------- -------- ---------- ----------
Reserve deducted from asset to which it applies:
Allowance for doubtful accounts $ 19 $ 23 $ - $ 18(1) $ 24
=== === === === ===
Obsolescence allowance -
Flight equipment spare parts $ 38 $ 14 $ 2 $ 23(1) $ 31
=== === === === ===
F-3
_______________________________
(1) Deduction from reserve for purpose for which reserve was created.
EXHIBIT INDEX
-------------
3.1 Restated Certificate of Incorporation of UAL Corporation
("UAL"), as amended (filed as Exhibit 3.1 to UAL's Form
10-K for the year ended December 31, 1996 and
incorporated herein by reference).
3.2 By-laws (filed as Exhibit 3.2 to UAL's Form 10-Q for the
quarter ended June 30, 1994 and incorporated herein by
reference).
4.1 Deposit Agreement dated as of July 12, 1994 between UAL
Corporation and holders from time to time of Depository
Receipts described herein (filed as Exhibit 4.2 to UAL's
Form 10-Q for the quarter ended June 30, 1994 and
incorporated herein by reference).
4.2 Indenture dated as of December 20, 1996 between UAL
Corporation and The First National Bank of Chicago, as
Trustee (filed as Exhibit 4.2 to UAL's Form 10-K for the
year ended December 31, 1996 and incorporated herein by
reference).
4.3 Officer's Certificate relating to UAL's 13-1/4% Junior
Subordinated Debentures due 2026 (filed as Exhibit 4.3
to UAL's Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
4.4 Form of UAL's 13-1/4% Junior Subordinated Debenture due
2026 (filed as Exhibit 4.4 to UAL's Form 10-K for the
year ended December 31, 1996 and incorporated herein by
reference).
4.5 Guarantee Agreement dated as of December 30, 1996 with
respect to the 13-1/4% Trust Originated Preferred
Securities of UAL Corporation Capital Trust I (filed as
Exhibit 4.5 to UAL's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
4.6 Amended and Restated Declaration of Trust of UAL
Corporation Capital Trust I dated as of December 30,
1996 (filed as Exhibit 4.6 to UAL's Form 10-K for year
ended December 31, 1996 and incorporated herein by
reference).
UAL's indebtedness under any single instrument does not
exceed 10% of UAL's total assets on a consolidated
basis. Copies of such instruments will be furnished to
the Securities and Exchange Commission upon request.
10.1 Amended and Restated Agreement and Plan of
Recapitalization, dated as of March 25, 1994 (the
"Recapitalization Agreement"), as amended, among UAL
Corporation, the Air Line Pilots Association,
International ("ALPA") and the International Association
of Machinists and Aerospace Workers ("IAM") (filed as
Exhibit A to Exhibit 10.1 of UAL's Form 8-K dated June
2, 1994 and incorporated herein by reference; amendment
thereto filed as Exhibit 10.1 of UAL's Form 8-K dated
June 29, 1994 and incorporated herein by reference).
10.2 Agreement, dated as of July 16, 1996, pursuant to
Section 1.6q of the Recapitalization Agreement among
UAL, ALPA and IAM (filed as Exhibit 10.3 to UAL's Form
10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference).
10.3 UAL Corporation Employee Stock Ownership Plan, effective
as of July 12, 1994 (filed as Exhibit 10.1 to UAL's Form
10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.4 First Amendment to UAL Corporation Employee Stock
Ownership Plan, dated December 28, 1994 (filed as
Exhibit 10.39 to UAL's Form 10-K for the year ended
December 31, 1994, as amended, and incorporated herein
by reference).
10.5 Second Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of August 17, 1995 (filed as
Exhibit 10.1 to UAL's Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by
reference).
10.6 Third Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of December 28, 1995 (filed as
Exhibit 10.7 to UAL's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
10.7 Fourth Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of July 16, 1996 (filed as
Exhibit 10.1 to UAL's Form 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference).
10.8 Fifth Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of December 31, 1996 (filed as
Exhibit 10.10 of UAL's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
10.9 Sixth Amendment to UAL Corporation Employee Stock
Ownership Plan, dated as of August 11, 1997 (filed as
Exhibit 10.3 to UAL's Form 10-Q for the quarter ended
September 30, 1997, as amended, and incorporated herein
by reference).
10.10 UAL Corporation Employee Stock Ownership Plan Trust
Agreement between UAL Corporation and State Street Bank
and Trust Company ("State Street"), effective July 12,
1994 (filed as Exhibit 10.2 to UAL's Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein
by reference).
10.12 UAL Corporation Supplemental ESOP, effective as of July
12, 1994 (filed as Exhibit 10.3 to UAL's Form 10-Q for
the quarter ended September 30, 1994 and incorporated
herein by reference).
10.13 First Amendment to UAL Corporation Supplemental ESOP,
dated February 22, 1995 (filed as Exhibit 10.1 to UAL's
Form 10-Q for the quarter ended March 31, 1995, as
amended, and incorporated herein by reference).
10.14 Second Amendment to UAL Corporation Supplemental ESOP,
dated as of August 17, 1995 (filed as Exhibit 10.2 to
UAL's Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
10.15 Third Amendment to UAL Corporation Supplemental ESOP,
dated as of December 28, 1995 (filed as Exhibit 10.12 to
UAL's Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
10.16 Fourth Amendment to UAL Corporation Supplemental ESOP,
dated as of July 16, 1996 (filed as Exhibit 10.2 to
UAL's Form 10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference).
10.17 Fifth Amendment to UAL Corporation Supplemental ESOP,
dated as of December 31, 1996 (filed as Exhibit 10.17 to
UAL's Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.18 Sixth Amendment to UAL Corporation Supplemental ESOP,
dated as of August 11, 1997 (filed as Exhibit 10.4 of
UAL's Form 10-Q for the quarter ended September 30,
1997, as amended, and incorporated herein by reference).
10.19 UAL Corporation Supplemental ESOP Trust Agreement
between UAL Corporation and State Street, effective July
12, 1994 (filed as Exhibit 10.4 to UAL's Form 10-Q for
the quarter ended September 30, 1994 and incorporated
herein by reference).
10.20 Preferred Stock Purchase Agreement, dated as of August
12, 1997, between UAL Corporation and State Street Bank
and Trust Company (filed as Exhibit 10.25 of UAL's Form
10-K for the year ended December 31, 1997 and
incorporated herein by reference).
10.21 Preferred Stock Purchase Agreement, dated as of August
12, 1998, between UAL Corporation and State Street Bank
and Trust Company.
10.22 Class I Junior Preferred Stockholders' Agreement, dated
as of June 12, 1994 (filed as Exhibit 10.12 to UAL's
Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.23 Class SAM Preferred Stockholders' Agreement, dated as of
July 12, 1994 (filed as Exhibit 10.13 to UAL's Form 10-Q
for the quarter ended September 30, 1994 and
incorporated herein by reference).
10.24 First Refusal Agreement, dated as of July 12, 1994, as
amended (filed as Exhibit 10.25 to UAL's Form 10-K for
the year ended December 31, 1996 and incorporated herein
by reference).
10.25 UAL Corporation 1981 Incentive Stock Plan, as amended
March 26, 1998 (filed as Exhibit 10.2 to UAL's Form 10-Q
for the quarter ended March 31, 1998 and incorporated
herein by reference).
10.26 UAL Corporation 1998 Restricted Stock Plan (filed as
Exhibit 10.1 to UAL's Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference).
10.27 UAL Corporation Incentive Compensation and Profit
Sharing Plan (filed as Exhibit 10.1 to UAL's Form 10-Q
for the quarter ended March 31, 1998 and incorporated
herein by reference).
10.28 Description of Complimentary Travel and Cargo Carriage
Benefits for UAL Directors (filed as Exhibit 10.29 to
UAL's Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.29 UAL Corporation 1995 Directors Plan, as amended June 26,
1997 (filed as Exhibit 10.1 of UAL's Form 10-Q for the
quarter ended September 30, 1997, as amended, and
incorporated herein by reference).
10.30 Employment Agreement between UAL Corporation and Gerald
Greenwald (filed as Exhibit 10.5 to UAL's Form 10-Q for
the quarter ended June 30, 1994 and incorporated herein
by reference).
10.31 Amendment No. 1 to Employment Agreement between UAL
Corporation and Gerald Greenwald (filed as Exhibit 10.6
to UAL's Form 10-Q for the quarter ended June 30, 1994
and incorporated herein by reference).
10.32 Restricted Stock Deposit Agreement between UAL
Corporation and Gerald Greenwald (filed as Exhibit 10.7
to UAL's Form 10-Q for the quarter ended June 30, 1994
and incorporated herein by reference).
10.33 Non-Qualified Stock Option Agreement between UAL
Corporation and Gerald Greenwald (filed as Exhibit 10.9
to UAL's Form 10-Q for the quarter ended June 30, 1994
and incorporated herein by reference).
10.34 Employment Agreement, dated September 25, 1998, between
John A. Edwardson and United Air Lines, Inc. and UAL
Corporation (filed as Exhibit 10.1 of UAL's 10-Q for the
quarter ended September 30, 1998 and incorporated herein
by reference).
10.35 United Supplemental Retirement Plan
10.36 Description of Officer Benefits.
10.37 Form of Severance Agreement between UAL Corporation and
certain officers.
10.38 Supplemental Agreement No. 6 dated as of November 6,
1998 to the Agreement dated December 18, 1990 between
Boeing and United Air Lines, Inc. ("United") (and United
Worldwide Corporation) for acquisition of Boeing 777-200
aircraft (as previously amended and supplemented, the
"777-200 Purchase Agreement" (filed as Exhibit 10.7 to
UAL's Form 10-K for the year ended December 31, 1990,
and incorporated herein by reference; supplements
thereto filed as (i) Exhibits 10.1, 10.2 and 10.22 to
UAL's Form 10-Q for the quarter ended June 30, 1993,
(ii) Exhibit 10.2 to UAL's Form 10-K for the year ended
December 31, 1993, (iii) Exhibit 10.14 to UAL's
Form 10-Q for the quarter ended June 30, 1994, (iv)
Exhibits 10.27 and 10.28 to UAL's Form 10-K for the year
ended December 31, 1994, (v) Exhibits 10.2 and 10.3 to
UAL's Form 10-Q for the quarter ended March 31, 1995,
(vi) Exhibits 10.4, through 10.6 to UAL's Form 10-Q for
the quarter ended June 30, 1995, and (vii) Exhibits
10.37 through 10.40 to UAL's Form 10-K for the year
ended December 31, 1995, and (viii) Exhibits 10.9
through 10.12 and 10.17 through 10.19 to UAL's Form 10-Q
for the quarter ended June 30, 1996 and incorporated
herein by reference)). (Exhibit 10.38 hereto is filed
with a request for confidential treatment of certain
portions thereof.)
10.39 Supplemental Agreement No. 7 dated as of November 6,
1998 to the 777-200 Purchase Agreement. (Exhibit 10.39
hereto is filed with a request for confidential
treatment of certain portions thereof.)
10.40 Change Order No. 9 dated as of November 6, 1998 to the
777-200 Purchase Agreement. (Exhibit 10.40 hereto is
filed with a request for confidential treatment of
certain portions thereof.)
10.41 Change Order No. 9A dated as of November 6, 1998 to the
777-200 Purchase Agreement. (Exhibit 10.41 hereto is
filed with a request for confidential treatment of
certain portions thereof.)
10.42 Change Order No. 10 dated as of November 6, 1998 to the
777-200 Purchase Agreement. (Exhibit 10.42 hereto is
filed with a request for confidential treatment of
certain portions thereof.)
10.43 Change Order No. 10A dated as of November 6, 1998 to the
777-200 Purchase Agreement. (Exhibit 10.43 hereto is
filed with a request for confidential treatment of
certain portions thereof.)
10.44 Letter Agreement No. 6-1162-MDH-638 dated as of January
5, 1998 to the Agreement dated October 25, 1988 between
Boeing and United Air Lines, Inc. ("United") for
acquisition of 757-200 aircraft (as previously amended
and supplemented, the "757-200 Purchase Agreement"
(filed as Exhibit 10(K) to UAL's Form 10-K for the year
ended December 31, 1989, and incorporated herein by
reference; supplements thereto filed as (i) Exhibits
10.14 through 10.19 and Exhibit 10.22 to UAL's Form 10-Q
for the quarter ended June 30, 1993, (ii) Exhibit 10.14
to UAL's Form 10-Q for the quarter ended June 30, 1994,
(iii) Exhibit 10.9 to UAL's Form 10-Q for the quarter
ended March 31, 1995, and (iv) Exhibits 10.13 through
10.17 to UAL's Form 10-Q for the quarter ended June 30,
1996, and incorporated herein by reference)). (Exhibit
10.44 hereto is filed with a request for confidential
treatment of certain portions thereof.)
10.45 Letter Agreement No. 6-1162-MDH-657 dated as of
September 29, 1998 to the 757-200 Purchase Agreement.
(Exhibit 10.45 hereto is filed with a request for
confidential treatment of certain portions thereof.)
10.46 Letter Agreement No. 6-1162-MDH-668 dated as of
September 29, 1998 to the 757-200 Purchase Agreement.
(Exhibit 10.46 hereto is filed with a request for
confidential treatment of certain portions thereof.)
10.47 Letter Agreement No. 6-1162-BRB-132 dated as of January
5, 1998 to the Agreement dated December 18, 1990 between
Boeing and United Air Lines, Inc. ("United") for
acquisition of 747-400 aircraft (as previously amended
and supplemented, the "747-400 Purchase Agreement"
(filed as Exhibit 10.8 to UAL's Form 10-K for the year
ended December 31, 1990, and incorporated herein by
reference; supplements thereto filed as (i) Exhibits
10.4 and 10.5 to UAL's Form 10-K for the year ended
December 31, 1991, (ii) Exhibits 10.3 through 10.6 and
Exhibit 10.22 to UAL's Form 10-Q for the quarter ended
June 30, 1993, (iii) Exhibit 10.3 to UAL's Form 10-K for
the year ended December 31, 1993, (iv) Exhibit 10.14 to
UAL's Form 10-Q for the quarter ended June 30, 1994, (v)
Exhibits 10.29 and 10.30 to UAL's Form 10-K for the year
ended December 31, 1994, (vi) Exhibits 10.4 through 10.8
to UAL's Form 10-Q for the quarter ended March 31, 1995,
(vii) Exhibits 10.7 and 10.8 to UAL's Form 10-Q for the
quarter ended June 30, 1995, (viii) Exhibit 10.41 to
UAL's Form 10-K for the year ended December 31, 1995,
(ix) Exhibits 10.4 through 10.8 and Exhibit 10.17 to
UAL's Form 10-Q for the quarter ended June 30, 1996, and
(x) Exhibits 10.1 through 10.3 to UAL's Form 10-Q for
the quarter ended March 31, 1997, and incorporated
herein by reference)). (Exhibit 10.47 hereto is filed
with a request for confidential treatment of certain
portions thereof.)
10.48 Letter Agreement No. 6-1162-MDH-666 dated as of
September 29, 1998 to the 747-400 Purchase Agreement.
(Exhibit 10.48 hereto is filed with a request for
confidential treatment of certain portions thereof.)
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividend Requirements.
21 List of Registrant's subsidiaries (filed as Exhibit 21
to UAL's Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
99 Annual Report on Form 11-K for Employees' Stock
Purchase Plan of UAL Corporation.