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, 2000
OR
Commission File No. 1-6033
United Air Lines, Inc.
(Exact name of registrant as specified in its charter)
| Delaware |
36-2675206
|
| (State or other jurisdiction of |
(IRS Employer
|
| incorporation or organization) |
Identification No.)
|
| Location: 1200 East Algonquin Road, Elk Grove Township, Illinois |
|
| Mailing Address: P. O. Box 66100, Chicago, Illinois |
|
| (Address of principal executive offices) |
|
Registrant's telephone number, including area code
(847) 700-4000
Securities registered pursuant to Section 12(b) of the
Act:
| NAME OF EACH EXCHANGE | |
| TITLE OF EACH CLASS | ON WHICH REGISTERED |
| Series A Debentures due 2004 | New York Stock Exchange |
| Series B Debentures due 2014 | New York Stock Exchange |
Securities registered pursuant to Section 12 (g) of the Act:
NONE
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
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. [ X ]
The number of shares of common stock outstanding as of
February 28, 2001 was 205. The Registrant is a wholly-owned subsidiary
of UAL Corporation, and there is no market for the Registrant's common
stock.
The Registrant meets the conditions set forth in General Instructions I(1)(a) and I(1)(b) of Form 10-K and is filing this form with the reduced disclosure format pursuant to General Instructions I(2)(b) and I(2)(c).
PART I
ITEM 1. BUSINESS.
United Air Lines, Inc.
("United" 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 66100, Chicago, Illinois 60666.
The telephone number for the Company is (847) 700-4000.
United is the principal
subsidiary of UAL Corporation, a Delaware corporation ("UAL"), and
is wholly owned by UAL. United accounted for virtually all of UAL's
revenues and expenses in 2000. 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
During 2000, United
carried, on average, more than 231,000 passengers per day and flew more
than 126 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's network, supplemented with strategic
airline alliances, provides comprehensive transportation service within
its North America segment and to international destinations within its
Pacific, Atlantic, and Latin America segments. Operating revenues
attributed to United's North America segment were $13.1 billion in 2000,
$12.5 billion in 1999 and $12.0 billion in 1998. Operating revenues
attributed to United's international segments were $6.2 billion in 2000,
$5.5 billion in 1999 and $5.5 billion in 1998.
North America.
United operates hubs in Chicago, Denver, Los Angeles, San Francisco and
Washington Dulles and has the most extensive U.S. route system of any airline,
ranking first in capacity share in all of its U.S. hubs. Within the
North America segment, United also operates United Shuttle®, which
is designed to provide high-frequency air service in competitive markets,
as well as critical traffic feed to United's mainline operations.
United Shuttle is principally concentrated on the West Coast and in Denver.
United Shuttle offers approximately 455 daily flights on 30 routes among
23 cities in the western U.S. United's North America operations accounted
for 67.7% of United's revenues in 2000.
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, Hong Kong, Seoul, Shanghai and Singapore.
United also provides nonstop service between Hong Kong and each of Chicago,
Los Angeles, San Francisco, and Singapore; between San Francisco and each
of Beijing, Osaka, Seoul, Shanghai, Sydney and Taipei; and between Los
Angeles and each of Auckland, Melbourne and Sydney.
In November 2000, United
received authority to fly two additional frequencies to China. The
new authority allows United to operate daily service between San Francisco
and Shanghai. Additionally, United plans to resume around-the-world
service in April 2001, adding service between Delhi and each of London
and Hong Kong. Also during April 2001, United plans to add nonstop
service between New York and Hong Kong.
The air services agreement
between the U.S. and Japan provides an unlimited number of frequencies
to United and certain other carriers. United also holds significant
traffic rights beyond Japan. These rights will allow United to add
service from Japan to other Asian points as regulatory, competitive and
economic conditions warrant.
In 2000, United was
the leading U.S carrier in the Pacific in terms of transpacific available
seat miles and the most flights available. United's Pacific operations
accounted for 16.4% of United's revenues in 2000.
Atlantic.
During 2000, Washington-Dulles served as United's primary gateway to Europe,
serving Amsterdam, Brussels, Frankfurt, London, Milan, Munich, and Paris.
Chicago has become United's secondary European gateway, offering nonstop
service in 2000 to each of Dusseldorf, Frankfurt, London and Paris.
United also provides nonstop service between: London and Boston, Los Angeles,
Newark, New York and San Francisco; Paris and each of Los Angeles and San
Francisco; and between Frankfurt and San Francisco.
In February 2001, United
inaugurated nonstop service between Chicago and Amsterdam. In April
2001, United plans to discontinue service between London and each of Amsterdam
and Brussels, concurrent with the resumption of service between London
and Delhi. In June 2001, United plans to add seasonal service between
Denver and Frankfurt. In 2000, United's Atlantic operations accounted
for 11.7% of United's operating revenues.
Latin America.
During 2000, United's primary gateway to Latin America was Miami, providing
passenger service between Miami and each of Buenos Aires, Caracas, Montevideo,
Rio de Janeiro, Santiago and Sao Paolo. United also provided service
between Los Angeles and each of Guatemala City, Mexico City, and San Salvador;
between New York and each of Buenos Aires, Sao Paolo, and San Juan; between
Chicago and each of Aruba, Buenos Aires, Mexico City, San Juan, St. Thomas,
and Sao Paolo; between Mexico City and each of San Francisco and Washington
Dulles; and between Washington-Dulles and St. Thomas. United also
provides service between San Jose, Costa Rica and each of Mexico City and
Guatemala City.
The newly amended air
services agreement between the U.S. and Argentina provides for additional
capacity in the U.S.-Argentina market and enables United to operate any
size aircraft on any or all of its 21 weekly flights to Argentina without
restriction. Prior to this amendment, United and American Airlines
were the only U.S. passenger carriers operating between the U.S. and Argentina.
Under the new agreement, Delta and Continental have each been awarded access
to Argentina and will respectively commence daily service in April and
December 2001. In 2000, United's Latin America operations accounted
for 4.2% of United's revenues.
Financial information
relative to the Company's operating segments can be found in Note 14 in
the Notes to Consolidated Financial Statements in this Form 10-K.
US Airways Acquisition.
During 2000, UAL announced plans to acquire US Airways Group, Inc.
in an all-cash transaction for $4.3 billion. The Company expects
that the new network created by the acquisition will make travel more convenient
for passengers, connecting US Airways eastern U.S. markets with United's
extensive east-west and international networks, and create the nation's
most comprehensive airline network. This transaction, which the Company
anticipates closing in the second quarter of 2001, is still subject to
regulatory clearance and other customary closing conditions.
In addition, UAL and
AMR Corporation announced in January 2001 the approval of a binding memorandum
of understanding, under which American Airlines will provide competitive
service on key hub-to-hub routes where United and US Airways currently
are the only competitors with non-stop flights. In addition, UAL
will transfer assets that would have been surplus to the needs of the combined
United/US Airways operations, consisting of gates, slots and up to 86 aircraft.
AMR will pay UAL approximately $1.2 billion in cash for this transaction
and assume certain US Airways obligations.
For more information
on the US Airways acquisition, see "US Airways Acquisition" in Item
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
United Cargo®.
United Cargo generated over $900 million in freight and mail revenue.
As a part of United's decision to retire its remaining DC-10 passenger
aircraft, United Cargo discontinued its international freighter operation
on December 24, 2000. With United's growing fleet of cargo-friendly
widebody aircraft, however, it is expected that revenues will continue
to increase through time-sensitive delivery services, e-commerce initiatives
and customer loyalty programs.
United Cargo's premium
international time-definite service, TD.Guaranteed, was expanded to more
U.S. destinations with intra-U.S. connections, which more than doubled
TD.Guaranteed revenue since the product was introduced in 1999. In
addition, another time-sensitive product, United Sameday, was introduced
in 2000 for the small package, door-to-door delivery service, which may
be booked via a toll-free number or the Internet (www.unitedsameday.com).
Fuel.
Changes in fuel prices are industry-wide occurrences that benefit or harm
United's competitors as well as United. 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.
United's results of
operations are significantly affected by the price and availability of
jet fuel. It is estimated that, absent hedging, 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. United's average price
per gallon of jet fuel in 2000 increased 40%, as compared to the previous
year. However, the average price of spot jet fuel in the U.S. Gulf
Coast increased 71% during that same period. United's price in 2000
was mitigated by a fuel hedging program that was primarily an options-based
strategy, through which the upside was retained while the downside was
eliminated.
Insurance.
United carries liability insurance of a type customary in the air transportation
industry, in amounts which it deems adequate, covering passenger liability,
public liability, property damage liability, and physical damage insurance
on United's aircraft and property.
Marketing Strategy
Besides offering convenient
scheduling throughout its domestic and international segments, United seeks
to attract high yield customers and create customer preference by providing
a comprehensive network, an attractive frequent-flyer program, and enhanced
service initiatives.
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, code-sharing of flight
operations, coordination of reservations, baggage handling, and flight
schedules, and other resource sharing activities. "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 AllianceÔ.
The Star Alliance is
an integrated worldwide transport network, which provides customers with
global recognition and a wide range of other benefits. Collectively,
the Star Alliance carriers served more than 815 destinations in over 130
countries during 2000. The Star Alliance enables its member carriers
to more effectively compete with other worldwide alliances. Founded
in 1997 by United and five other carriers, the Star Alliance has grown
to fifteen carriers. Besides United, the Star Alliance includes:
Air Canada, Air New Zealand, All Nippon Airways, Ansett Australia, Austrian
Airlines, British Midland, Lauda Air, Lufthansa, Mexicana, SAS, Singapore
Airways, Thai International Airways, Tyrolean and Varig. United currently
holds bilateral immunity with Air Canada and integrated antitrust immunity
with Lufthansa, SAS, and the Austrian Group.
United has also formed
independent alliances with other air carriers. Current agreements
exist between United and each of Aeromar, ALM Antillean, Aloha, BWIA, Cayman
Airways, Continental Connection, Emirates, Saudi Arabian Airlines, and
Spanair.
In addition, United
has a marketing program in North America known as United Express®,
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 serve small and medium-sized
cities in the U.S., linking those cities to United's hubs. United
Express carriers include Air Wisconsin Airlines Corporation, Atlantic Coast
Airlines, Great Lakes Aviation and Sky West Airlines. Effective May
1, 2001, Great Lakes Aviation will no longer be a United Express carrier,
but will continue its relationship with United as an alliance carrier.
Mileage Plus®.
United established the frequent flyer program to develop and retain
passenger loyalty by offering awards and services to frequent travelers.
Over 40 million members have enrolled in Mileage Plus since it was started
in 1981. Mileage Plus members earn mileage credit for flights on
United, United Shuttle, United Express, the Star Alliance carriers and
certain other airlines which participate in the program. Miles can
also be earned by utilizing the goods and services of non-airline program
participants, such as hotels, car rental companies, bank credit card issuers,
and a variety of other businesses. Mileage credits can be redeemed
for free, discounted or upgrade travel awards on United and other participating
airlines, or, to a limited extent, other travel and non-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 blackout dates and capacity controlled
inventory, 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 providing
travel, based on expected redemptions. United's incremental costs
include the additional costs of providing service to the award recipient,
such as fuel, meal, personnel and ticketing costs, for what would otherwise
be a vacant seat. The incremental costs do not include any contribution
to overhead or profit. For mileage sold to other program participants
prior to January 1, 2000, revenue was recognized when the miles were sold.
Beginning January 1, 2000, a portion of revenue from the sale of mileage
is deferred and recognized when the transportation is provided. (See Item
8, Note 1(i) "Summary of Significant Accounting Policies - Mileage Plus
Awards" in the Notes to Consolidated Financial Statements.)
At December 31, 2000,
the estimated number of outstanding awards was approximately 10.8 million,
as compared with 7.0 million at the end of the prior year. United
estimates that 8.9 million of such awards will ultimately be redeemed and,
accordingly, has recorded a liability amounting to $564 million, which
includes the deferred revenue from the sale of miles to program participants.
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.
In 2000, 1.97 million
Mileage Plus travel awards were used on United. This number represents
the number of awards for which travel was actually provided in 2000 and
not the number of seats that were allocated to award travel. In 1999,
2.24 million awards were used, while 2.13 million awards were used in 1998.
Such awards represented 7.2% of United's total revenue passenger miles
in 2000, 8.7% in 1999, and 8.6% in 1998. Passenger preference for
Saver awards, which have inventory controls, keep displacement of revenue
passengers at a minimum. Travel award seats flown on United represent
72% of the total awards issued, of which 87% are used for travel within
the U.S. and Canada. In addition to the awards issued for travel
on United, approximately 10% of the total awards issued are used for travel
on partner airlines.
Economy Plus®.
In late 1999, United announced Economy Plus, which is a reconfiguration
of the first six to eleven rows of the United Economy cabins on aircraft
serving the North America market. This reconfigured area provides
four to five additional inches of legroom for United's Premier®
frequent-flyers and full-fare United Economy customers, many of whom often
travel in the United Economy cabin. United was the first U.S. airline
to offer additional legroom on its North America flights and completed
the seat reconfiguration in early 2000.
In early 2001, United
announced that it is reconfiguring its fleet of three-cabin international
aircraft to create Economy Plus seating. In doing so, United becomes
the first U.S. airline to offer premium seating area in the front of its
economy cabin on both its North America and international flights.
United also unveiled plans to enhance United Business class throughout
its international fleet to offer customers an additional seven inches of
legroom.
Distribution
Channels. The overwhelming majority of United's airline inventory
continues to be distributed through the traditional channels of travel
agencies and computer reservation systems (CRS). United uses the
Apollo reservation system, which is hosted by Galileo International, a
CRS in which United holds approximately a 15% equity interest. The
hosting agreement with Galileo continues through 2004.
Electronic Commerce.
Consumers are increasingly turning to online avenues to meet their travel
needs. United is using e-commerce capabilities to strengthen and
enhance its market position, attract new customer segments, and reduce
the overall costs of booking transportation. Additionally, United
is utilizing e-commerce capabilities in initiatives addressing opportunities
in the areas of cargo, process improvement and customer connectivity.
On October 3, 2000,
UAL formed United NewVentures, a new subsidiary to provide innovative solutions
for its customers, to strengthen United's airline business and to create
incremental value for UAL Corporation's stockholders. United NewVentures,
Inc. is a wholly owned subsidiary of UAL and a sister company to United.
United NewVentures
currently has two divisions, United NetVentures and United NetWorks.
United NetWorks incorporates the E-Commerce Division created in January,
2000. The focus of United NetVentures is business development of
non-United branded businesses, enhancing United's e-commerce partnerships
and identifying new e-commerce opportunities with strategic partners.
United's involvement in projects such as Orbitz, Hotwire and Cordiem, a
business-to-business Internet exchange, are managed by United NetVentures.
United NetWorks is
responsible for all United-branded e-commerce activities, such as strategy,
operations, planning, and support of united.com, the airline's web site,
as well as wireless initiatives, such as proactive customer notification
of flight information. United NetWorks is also responsible for the
Mileage Plus non-airline relationships, which currently include over ninety
partners among car rental, hotel, telecommunications, shopping, dining
and financial services companies.
Our United Commitmentsm.
To renew its commitment to improve key areas of customer satisfaction and
as part of an industry-wide, voluntary initiative, United implemented a
comprehensive customer service plan, Our United Commitment, in late 1999
and fully deployed it in 2000. Our United Commitment addresses issues
identified by United's frequent flyer customers as being most important
to them, such as improved communication, increased information throughout
the travel experience, more efficient baggage handling and greater responsiveness
to customer inquiries.
On February 13, 2001,
the Inspector General of the U.S. Department of Transportation released
its full-year report on the effectiveness of the airline industry's voluntary
initiatives. Although the report found that progress had been made
in some areas, it stressed that the industry continues to fall short in
notifying passengers about flight delays and cancellations. The report
is based on a review of the voluntary programs of 17 carriers, including
United.
Over the past year,
United introduced new services aimed at helping customers avoid delays,
keeping customers informed when delays and cancellations occur, and minimizing
the impact of cancellations and delays upon customers. Examples of
such new services include:
--Deploying an industry-leading proactive flight paging system;
--Installing United EasyCheck-Insm kiosks, allowing customers
with E-tickets to bypass airport lines and check themselves in;
--Deploying state-of-the-art mobile "chariot" workstations in all hub
airports, providing additional passenger check-in stations;
--Installing the United EasyInfosm digital electronic information
display systems, which give real-time information; and
--Launching the customer advocate center, which proactively accommodates
customers in anticipation of irregular operations.
While the report identified
where the airlines have been lacking, United received praise for measures
that went beyond actions required by Our United Commitment. The report
stated that initiatives such as more legroom between seats, expansion of
overhead baggage compartments and providing chariots to reduce lines were
additional efforts to make the travel experience better. Additionally,
United was one of only three airlines to incorporate its customer service
plan into its contract of carriage.
Industry Conditions
Operating Environment.
The air travel business is subject to seasonal fluctuations. United's
operations are often adversely impacted by winter weather and United's
first- and fourth-quarter results normally reflect reduced travel demand.
Operating results for the Company are generally better in the second and
third quarters. In addition to weather conditions, air traffic control
limitations and concerted employee job actions may from time-to-time cause
disruptions in operations.
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 foreign
carriers, including national flag carriers, 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 U.S. 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 in the U.S. United
experiences comparable restrictions 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 that allow the carriers to provide
traffic feed to each other's flights. (See "Marketing Strategy -
Alliances")
Government Regulation
General.
All carriers engaged in air transportation in the U.S. 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 also 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 North America operations. United's ability to serve some
international markets and its expansion into many of these markets are
presently restricted by a 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 make regular filings
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 U.S. 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 might not be preserved in such cases.
Airport Access.
Historically, take-off and landing rights ("slots") at Chicago O'Hare International,
New York John F. Kennedy International, New York LaGuardia and Washington
Reagan National airports have been limited by the "high density traffic
rule." Under this rule, slots may be bought, sold or traded.
In April 2000, the U.S. President signed the Wendell H. Ford Investment
and Reform Act for the 21st Century ("AIR 21") which includes a phase-out
of slots at Chicago's O'Hare International Airport and New York's LaGuardia
and JFK airports. Starting in May 2000, AIR 21 has allowed carriers
to operate foreign air service at Chicago O'Hare without slots, thereby
eliminating the government's need to withdraw slots from incumbent carriers.
As part of the phase-out
of the high density traffic rule, slot exemptions were made available for
new entrants, as well as for carriers providing service to small- to medium-sized
and non-hub airports. This exemption, however, led to a significant
increase of flights into and out of LaGuardia that far exceeded that airport's
capacity. As a result, all carriers operating at LaGuardia, including
United, incurred a significant number of delays and cancellations during
2000.
To reduce the resulting
traffic congestion problems, the FAA implemented a slot lottery system
for determining the additional carriers that may operate from LaGuardia.
The lottery system is currently in effect and has substantially reduced
delays and cancellations. The slot lottery was designed as a temporary
remedy; the FAA is currently considering a number of capacity management
alternatives at LaGuardia for long-term improvement, including making slot
lotteries permanent.
AIR 21 also provides
that nearly $40 billion from the U.S. Aviation Trust Fund is to be invested
in aviation facilities, equipment and training, examples of which could
be radar modernization, airport construction projects, and the hiring and
training of air traffic controllers.
Across the Atlantic,
the Commission of the European Union ("EU") has proposed a regulation that
would, if enacted, dramatically alter the manner in which airport slots
are held and allocated. The centerpiece of the proposal is that a
slot at major airports would have a life-span of only ten years, at which
time it would automatically revert to the airport slot controller.
The proposal has been met with fierce opposition from airlines. The
Commission will likely re-evaluate its original proposal and consider a
milder form of slot reform.
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.
The Air Transport Association
("ATA"), an industry organization to which United belongs, and the Department
of Defense ("DoD") have signed a memorandum of understanding, establishing
procedures for auditing international code-share partners that carry DoD
personnel. Based on the DOT/FAA Safety Program Guidelines issued
to all U.S. carriers, United has also established a safety review plan
for Star Alliance and code-share airlines. Audits are conducted on
both prospective and existing code-share partners. The FAA reviews
audit reports and makes code-share approval recommendations to the DOT.
Passenger Rights
Legislation. Following the February 2001 report of the DOT
Inspector General, several pieces of legislation were introduced by members
of the U.S. Congress to implement a variety of changes in the airline industry,
such as: requiring airlines to disclose all available fares; allowing consumers
to purchase any published fare from an airline or a travel agent; requiring
airlines to disclose the number of seats available for frequent flyer travelers;
and granting authority to the DOT to intervene and roll back fares in certain
markets.
In 2000, the EU's transport
commissioner proposed two legislative alternatives for limiting airlines'
use of overbooking as a revenue management device. The first alternative
would distinguish between an intention to fly and a confirmed booking.
If the passenger has only indicated an intention to fly, the passenger
would be allowed to cancel without penalty and the airline would be allowed
to give away the seat. For a confirmed booking, however, an airline
would have no choice but to provide a seat for a passenger with a confirmed
booking. The second alternative under consideration is to limit an
airline's ability to overbook. The limitation would be combined with
efforts to encourage airlines to stage auctions where the carrier improves
its compensation offer until someone is tempted to surrender his or her
seat.
It is not clear what
form that any of the U.S. or European legislation might ultimately take.
Privacy Laws.
An initiative of significant impact within the EU and elsewhere is the
introduction of privacy standards that apply to companies transmitting
private information from the EU to countries abroad. To comply with
the privacy directives, the U.S. Commerce Department and the EU Commission
have agreed to safe harbor principles. Although the safe harbor principles
are voluntary at this point, United plans to comply with them. In
mid-2001, the U.S. Commerce Department and the EU Commission will review
the status of voluntary compliance.
Canada, Argentina and
Australia have enacted new privacy laws covering the collection and disclosure
of personally identifiable information. These laws have either gone
into force or will go into force later this year, and may have an impact
on the way United collects and transmits personal identifiable information
in these jurisdictions.
Environmental
Regulations. 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. United has been identified
as a Potentially Responsible Party in some state and federal recovery actions
involving soil and ground water contamination. The Company has been
working with the relevant government agencies to resolve the issues and
believes they will be resolved without material adverse effect on the Company.
Employees - Labor Matters
At December 31, 2000,
the Company and its subsidiaries had more than 102,000 employees.
Approximately 80 % of United's employees are represented by various labor
organizations.
Collective bargaining
agreements are negotiated under the Railway Labor Act, which governs labor
relations in the transportation industry, and typically do not contain
an expiration date. Instead, they specify a date called the amendable
date, by which either party may notify the other of its desire to amend
the agreement. Upon reaching the amendable date, the contract is
considered "open for amendment." Prior to the amendable date, neither
party is required to agree to modifications to the bargaining agreement.
Nevertheless, nothing prevents the parties from agreeing to start negotiations
or to modify the agreement in advance of the amendable date.
Contracts remain in
effect while new agreements are negotiated. During the negotiating
period, both the Company and the negotiating union are required to maintain
the status quo. Recent operating disruptions suggest, however, that
some members of the negotiating employee group may engage in activities
designed to "slow down" the airline. These slowdown tactics may involve
refusal to work overtime, increased sick leave usage and other disruptive
behavior that could have an adverse impact on operations.
United's collective
bargaining agreements with the International Association of Machinists
and Aerospace Workers ("IAM") became amendable on July 12, 2000.
United is currently in negotiations with the IAM, under the auspices of
the National Mediation Board ("NMB"). Under the law, the parties
are not allowed to resort to self-help, such as strikes or lock-outs, until
they are released from mediation by the NMB, and then only after a 30 day
cooling-off period. However, the NMB can request the U.S. president
to create a Presidential Emergency Board, the creation of which imposes
an additional 60-day bar against self-help remedies. If the parties
fail to reach a resolution by the end of the 60 days, the U.S. Congress
can impose a settlement. The Company cannot predict when the current
negotiations will be resolved. For additional information on the
status of negotiations, see "Labor Agreements" in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The employee
groups, number of employees, labor organization and current contract status
for each of United's major collective bargaining groups in the U.S., as
of December 31, 2000, are as follows:
| Number of | Contract Open | ||
| Employee Group | Employees | Union | for Amendment |
| Pilots | 10,045 | ALPA | Sept. 1, 2004 |
| Flight Attendants | 24,199 | AFA | March 1, 2006* |
| Mechanics/Ramp | 15,706 | IAM | July 12, 2000 |
| Passenger Service | 31,606 | IAM | July 12, 2000 |
* The collective bargaining agreement between the Company and the AFA
provides for mid-term wage adjustments.
ITEM 2. PROPERTIES.
Flight Equipment
As of December 31,
2000, United's operating aircraft fleet totaled 604 jet aircraft, of which
289 were owned and 315 were leased. These aircraft are listed below:
| Average | Average | |||||
| Aircraft Type | No. of Seats | Owned | Leased* | Total | Age (Years) | |
| A319-100 | 120 | 14 | 18 | 32 | 2 | |
| A320-200 | 138 | 19 | 49 | 68 | 4 | |
| B727-200 | 141 | 67 | 8 | 75 | 22 | |
| B737-200 | 103 | 24 | 0 | 24 | 22 | |
| B737-300 | 120 | 10 | 91 | 101 | 12 | |
| B737-500 | 104 | 27 | 30 | 57 | 9 | |
| B747-400 | 368 | 23 | 21 | 44 | 6 | |
| B757-200 | 182 | 41 | 57 | 98 | 9 | |
| B767-200 | 168 | 19 | 0 | 19 | 18 | |
| B767-300 | 219 | 15 | 20 | 35 | 6 | |
| B777-200 | 288 | 30 | 18 | 48 | 3 | |
| DC10-30 | 298 | 0 | 3 | 3 | 23 | |
| TOTAL OPERATING | 289 | 315 | 604 | 10 | ||
| FLEET | ||||||
On February 1, 2001,
United exercised options to acquire 15 additional aircraft. The following
table sets forth United's firm aircraft orders and expected delivery schedules
as of December 31, 2000, plus the additional 15 aircraft:
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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, Los Angeles in 2021, San Francisco in 2011, and Washington Dulles
in 2014. 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 a lease expiring in 2003, with an option to extend for
10 years. United's Indianapolis Maintenance Center, a major aircraft
maintenance and overhaul facility, is operated under a lease with the Indianapolis
Airport Authority that expires in 2031. United also has a major facility
at the Oakland, California airport, dedicated to widebody airframe maintenance.
At Denver International
Airport, United operates under a lease and use agreement expiring in 2025,
and occupies 52 gates and more than one million square feet of exclusive
or preferential use terminal building space. United's flight training
center, located in the City and County of Denver, can accommodate 36 flight
simulators and more than 90 computer-based training stations.
In connection with
the Company's planned acquisition of US Airways, the Company has announce
plans to invest up to $160 million in constructing a 300,000 to 360,000
square foot maintenance complex in Pittsburgh. The Commonwealth of
Pennsylvania and Allegheny County have proposed to provide $60 million
in incentive assistance based, in part, on a job retention program.
ITEM 3. LEGAL PROCEEDINGS.
1. Frank, et al. v. United; EEOC v.
United
As previously reported
in our Form 10-Q for the quarter ended September 30, 2000, a class action
lawsuit against United was filed February 7, 1992 in federal district court
in California, alleging that United's former flight attendant weight program,
in effect from 1989 to 1994, unlawfully discriminated against flight attendants
on the grounds of sex, age and other factors, and seeking monetary relief.
On April 29, 1994, the class was certified as to the sex and age claims.
Following extensive motion practice, on March 10, 1998, the district court
dismissed all the claims against United. Following an appeal to the
Court of Appeals for the Ninth Circuit, a three judge panel of the Ninth
Circuit, on June 21, 2000, overturned the ruling and held that United's
former weight program violated the law. The court ruled that the
plaintiffs were entitled to judgment as a matter of law on their claims
for discrimination based on sex and that a trial was required for determination
on their claims for age discrimination. In addition, the appellate
court reversed the dismissal of all individual class representative claims
of discrimination and the case was remanded to the district court for further
proceedings. United's petition for en banc review by an 11-judge
panel was denied on August 11, 2000. On December 8, 2000, United
petitioned for a review of the Ninth Circuit decision by the U.S. Supreme
Court, but that petition was denied on March 5, 2001. In accordance
with the appellate court ruling, the case will go back to the district
court for further proceedings with respect to the age discrimination claims
and for a determination of damages with respect to the sex discrimination
claims.
2. United v. Mesa Airlines, Inc. and WestAir
Commuter Airlines, Inc.
As previously reported
in our Form 10-Q for the quarter ended September 30, 2000, United sued
Mesa Airlines, Inc. and its subsidiary, WestAir Commuter Airlines, Inc.,
on June 23, 1997, in the U.S. District Court for the Northern District
of Illinois, seeking an order declaring that United had the right to make
certain market adjustments in markets served by WestAir's United Express
service in California. On January 22, 1998, United notified Mesa
that it was terminating Mesa's United Express contract and United amended
its complaint to add claims against Mesa for failure to fly and for monetary
damages. Mesa and WestAir filed claims against United alleging, among
other things, wrongful termination of their contract and fraud, and seeking
monetary damages. On July 5, 2000, the Seventh Circuit Court of Appeals
affirmed the dismissal of Mesa's tort claims, including its claim alleging
fraud on the ground that those claims are preempted by the Airline Deregulation
Act. Mesa filed a petition for certiorari with the U.S. Supreme Court.
That petition was denied, ending the appeals process for the tort claims.
On March 5, 2001, the parties agreed to a settlement and have since dismissed
the remaining claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to
General Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
United is a wholly
owned subsidiary of UAL.
Item 6. Selected Financial Data and Operating
Statistics
| (In Millions, Except Rates) |
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| Income Statement Data: | |||||
| Operating revenues |
$ 19,331
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$ 17,967
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$ 17,518
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$ 17,335
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$ 16,317
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| Earnings before extraordinary item | |||||
| and cumulative effect |
267
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1,207
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803
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941
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601
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| Net earnings |
52
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1,204
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803
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932
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534
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| Pro Forma Income Statement Data1: | |||||
| Earnings before extraordinary item |
|
$ 1,178
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$ 756
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$ 914
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$ 554
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| Net earnings |
|
1,175
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756
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905
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487
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| Other Information: | |||||
| Total assets at year-end |
$ 25,069
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$ 21,543
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$ 18,830
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$ 15,768
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$ 12,901
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| Long-term debt and capital lease | |||||
| obligations, including current portion, | |||||
| and redeemable preferred stock |
7,594
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5,455
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5,373
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4,259
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3,309
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| Revenue passengers |
85
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87
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87
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84
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82
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| Revenue passenger miles |
126,933
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125,465
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124,609
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121,426
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116,697
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| Available seat miles |
175,485
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176,686
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174,008
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169,110
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162,843
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| Passenger load factor |
72.3%
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71.0%
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71.6%
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71.8%
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71.7%
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| Breakeven passenger load factor |
69.4%
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64.9%
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64.9%
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66.0%
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66.0%
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| Passenger revenue per passenger mile (cents) |
13.3
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12.5
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12.4
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12.6
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12.4
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| Operating revenue per available seat mile (cents) |
11.0
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10.2
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10.1
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10.3
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10.0
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| Operating expense per available seat mile (cents) |
10.6
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9.4
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9.2
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9.5
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9.3
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| Fuel gallons consumed |
3,101
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3,065
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3,029
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2,964
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2,883
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| Average price per gallon of jet fuel (cents) |
81.0
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57.9
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59.0
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69.5
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72.2
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1 The pro forma income statement amounts reflect
adjustments to the historical income statement data assuming the Company
had adopted the provisions of Staff Accounting Bulletin 101 ("SAB 101")
in prior periods. (See Note 1i "Summary of Significant Accounting
Policies - Mileage Plus Awards" in the Notes to Consolidated Financial
Statements.)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of
Operations
This section contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are identified with an asterisk (*). Forward-looking statements represent the Company's expectations and beliefs concerning future events, based on information available to the Company on the date of the filing of this Form 10K. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 2001."
US Airways Acquisition
On May 24, 2000, UAL
announced that it had entered into a definitive merger agreement with US
Airways Group, Inc. ("US Airways") pursuant to which US Airways will be
acquired by UAL in an all-cash transaction for $4.3 billion.
Additionally, UAL will assume approximately $1.7 billion in US Airways
net debt and $6.3 billion in operating leases. On October 12, 2000,
the stockholders of US Airways approved the merger. The transaction,
which the Company anticipates closing in the second quarter of 2001, is
still subject to regulatory clearance and other customary closing conditions.
Definitive financing arrangements have not yet been determined although
UAL expects to incur approximately $4.5 billion in additional indebtedness,
some or all of which may be incurred by United, through a combination of
bank and public financing, to cover the cost of the acquisition as well
as additional costs related to the integration of the airlines. Following
consummation of the transaction, the operations of US Airways will be integrated
with those of United, although, in the near term, US Airways will remain
as a separate subsidiary of UAL, not owned by United.
Subject to regulatory
approval of the transaction and the successful outcome of negotiations
with local authorities, the Company announced its intentions to expand
US Airways' maintenance facility in Pittsburgh at a total projected cost
of $160 million. Additionally, the Company recognizes that it will
incur significant costs associated with the integration of US Airways in
order to achieve the anticipated benefits to both the Company and the millions
of passengers and hundreds of communities served by United throughout the
United States. The Company expects that the new network will make
traveling more convenient for passengers, connecting US Airways' eastern
U.S. markets with United's east-west and international markets, thereby
creating the nation's most comprehensive airline network. However,
the Company recognizes that it may encounter difficulties in achieving
these significant benefits. As part of the agreement with US Airways,
UAL generally has agreed to pay US Airways a $50 million termination fee
in the event the merger does not take place.
In addition, UAL and
US Airways entered into a binding memorandum of understanding with Robert
Johnson, a member of the US Airways Group Board of Directors, under which
Mr. Johnson would buy certain of US Airways' assets and create a new airline,
to be called DC Air, which would compete on numerous routes currently served
by US Airways in the Washington D.C. area.
In a transaction designed
to enhance the competitive benefits of the proposed merger with US Airways
and address regulatory concerns, UAL and AMR Corporation ("AMR") on January
9, 2001 announced the approval of a binding memorandum of understanding,
under which AMR's American Airlines subsidiary ("American") will provide
competitive service on key hub-to-hub routes where United and US Airways
currently are the only competitors with non-stop flights. As part
of the agreement, American will also enter into a 20-year joint venture
with United to jointly provide service on routes currently served by the
US Airways Shuttle between New York's LaGuardia Airport, Washington, D.C.'s
Reagan National Airport and Boston's Logan Airport. In addition,
United will transfer a number of gates, slots and up to 86 aircraft acquired
in its merger with US Airways to American deemed to be surplus to the combined
United and US Airways entity.
AMR will pay UAL up
to $1.2 billion in cash for this transaction. In addition, American
will assume certain lease obligations and buy certain spare engines and
other parts associated with the aircraft being transferred. The transaction
will provide financial benefits to UAL by reducing the debt requirements
related to the acquisition of US Airways.
On March 2, 2001, UAL
announced that it had reached agreement with Atlantic Coast Airlines Holdings,
Inc. ("ACAI"), for US Airways to sell its three wholly owned regional airlines
to ACAI for an initial purchase price of $200 million. UAL and ACAI
will seek to agree upon the ultimate purchase price over an 18-month period.
If an ultimate purchase price is not agreed as to a carrier, then the transaction
as to that carrier is subject to being unwound. If ACAI is not the
ultimate purchaser of at least one of the carriers, they will receive a
fee of up to $10 million. The transaction, which is contingent upon
and will occur at the same time as closing of the proposed acquisition
of US Airways, is subject to regulatory approvals and to certain termination
rights by UAL. In addition, at closing, the three carriers (Allegheny
Airlines, Piedmont Airlines and PSA Airlines) are expected to execute agreements
to provide feeder service to the combined United and US Airways network.
Results of Operations
During 2000, the Company experienced significant operational disruptions, as a result of labor-related delays and cancellations, as well as weather and air traffic control limitations, which adversely affected both revenue and expense performance. The Company attempted to mitigate the impact of these operational difficulties by reducing capacity, particularly in the domestic markets, where most of the problems were concentrated. The Company estimates the revenue shortfall arising from these disruptions and associated schedule reductions and cancellations to be somewhere between $700 and $750 million for the year.
Summary of Results -
United's earnings from
operations were $673 million in 2000, compared to operating earnings of
$1.3 billion in 1999. United's net earnings in 2000 were $52 million,
compared to net earnings of $1.2 billion in 1999.
The 2000 earnings include
an extraordinary loss of $6 million, after tax, on early extinguishment
of debt and the cumulative effect of a change in accounting principle of
$209 million, net of tax. The 2000 earnings also include an impairment
loss of $38 million, net of tax, related to the Company's equity investment
in Priceline.com, as well as a gain of $69 million, net of tax, on the
sale of its investment in GetThere.com (see Note 5 "Investments" in the
Notes to Consolidated Financial Statements).
The 1999 earnings include
an extraordinary loss of $3 million, after tax, on early extinguishment
of debt and an after-tax gain of $468 million on the sale of certain of
the Company's investments as further described in Note 5 "Investments"
in the Notes to Consolidated Financial Statements.
2000 Compared with 1999 -
Operating Revenues.
Operating revenues increased $1.4 billion (8%) and United's revenue
per available seat mile (unit revenue) increased 8% to 11.02 cents.
Passenger revenues increased $1.1 billion (7%) primarily due to a 6% increase
in yield to 13.25 cents. United's revenue passenger miles increased
1%, while available seat miles decreased 1%, resulting in a passenger load
factor increase of 1.3 points to 72.3%. The decrease in available
seat miles reflects the Company's response to the operational difficulties
as well as the impact of Economy Plus. The following analysis by
market is based on information reported to the DOT:
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| North America |
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| Latin America |
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Cargo revenues increased $25 million (3%) on increased freight ton miles of 3%, as freight yields remained constant and mail yields increased 1%. Other operating revenues increased $191 million (15%) primarily due to increased fuel sales to third parties and additional revenues from operating agreements with Galileo International, Inc. ("Galileo"), offset by the decrease in other revenues related to the change in accounting for Mileage Plus sale of miles to third parties (see Note 1i "Summary of Significant Accounting Policies - Mileage Plus Awards" in the Notes to Consolidated Financial Statements).
Operating Expenses.
Operating expenses increased $2.0 billion (12%) and United's cost per available
seat mile increased 13% from 9.41 to 10.63 cents. Salaries and related
costs increased $1.1 billion (19%) due to a new salary program implemented
for non-contract employees, the impact of the new ALPA contract, and the
estimated costs of IAM contracts which became amendable in July 2000 and
are currently under negotiation. ESOP compensation expense decreased
$609 million (81%) as the Company discontinued recording ESOP compensation
expense once the final ESOP shares were committed to be released in April
2000. Aircraft fuel increased $735 million (41%) due to a 40% increase
in the cost of fuel to 81.0 cents per gallon. Commissions decreased
$109 million (10%) due to a change in the commission structure implemented
in the fourth quarter of 1999. Purchased services increased $145
million (9%) due to increases in computer reservations fees and credit
card discount fees. Depreciation and amortization increased $191
million (22%) due to an increase in the number of owned aircraft and losses
on disposition of aircraft and other equipment. Cost of sales increased
$436 million (72%) primarily due to costs associated with fuel sales to
third parties.
Other Income
and Expense. Other income (expense) amounted to $248 million in
expense in 2000 compared to $543 million in income in 1999.
Interest expense increased $44 million (12%) due to increased debt issuances
in 2000. Interest income increased $31 million (46%) due to higher
investment balances. In addition, 2000 included a $109 million gain
on the sale of GetThere.com stock and a $61 million investment impairment
related to warrants held in Priceline.com, while 1999 included a $669 million
gain on the sale of Galileo stock and a $62 million gain on the sale of
Equant N.V. ("Equant") stock.
1999 Compared with 1998 -
Operating Revenues.
Operating revenues increased $449 million (3%) and United's revenue per
available seat mile (unit revenue) increased 1% to 10.17 cents. Passenger
revenues increased $264 million (2%) due to a 1% increase in United's revenue
passenger miles and a 1% increase in yield to 12.48 cents. Available
seat miles across the system were up 2% year over year; however, passenger
load factor decreased 0.6 points to 71.0% as traffic only increased 1%
system-wide. The following analysis by market is based on information
reported to the DOT:
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| North America |
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| Pacific |
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Cargo revenues decreased
$7 million (1%) despite increased freight ton miles of 5%, as a 4% decline
in freight yield combined with a 3% decline in mail yield. Other
operating revenues increased $192 million (18%) due to increases in frequent
flyer program partner related revenues and fuel sales to third parties.
Operating Expenses.
Operating expenses increased $554 million (3%) and United's cost per available
seat mile increased 2% from 9.24 to 9.41 cents. ESOP compensation
expense decreased $73 million (9%), reflecting the decrease in the estimated
average fair value of ESOP stock committed to be released to employees
as a result of UAL's lower common stock price. Salaries and related
costs increased $330 million (6%) as a result of increased staffing in
customer-contact positions, as well as salary increases for most labor
groups which took effect July 1, 1998. Commissions decreased $186
million (14%) due to a change in the commission structure implemented in
the third quarter 1998 as well as a slight decrease in commissionable revenues.
In addition, in October 1999, the Company reduced the base commissions
for tickets purchased in the U.S. and Canada to 5%, subject to roundtrip
caps of $50 and $100 for domestic and international tickets, respectively.
Purchased services increased $70 million (5%) due to increases in computer
reservations fees and year 2000-related expenses. Depreciation and
amortization increased $74 million (9%) due to an increase in the number
of owned aircraft and losses on disposition of aircraft partially offset
by changes in depreciable lives of certain aircraft. In addition,
United wrote-down two non-operating B747-200 aircraft to net realizable
value. Cost of sales increased $128 million (27%) primarily due to
costs associated with fuel sales to third parties. Aircraft maintenance
increased $65 million (10%) due to an increase in heavy maintenance visits.
Other Income
and Expense. Other income (expense) amounted to $543 million
in income in 1999 compared to $227 million in expense in 1998. Interest
capitalized, primarily on aircraft advance payments, decreased $30 million
(29%). Interest income increased $9 million (15%) due to higher investment
balances. In addition, 1999 included a $669 million gain on the sale
of Galileo stock and a $62 million gain on the sale of Equant stock.
Liquidity and Capital Resources
Liquidity -
United's total of cash
and cash equivalents and short-term investments was $2.1 billion at December
31, 2000, compared to $527 million at December 31, 1999. Operating
activities during the year generated $2.4 billion.
Property additions,
including aircraft, aircraft spare parts, facilities and ground equipment,
amounted to $2.5 billion, while property dispositions resulted in proceeds
of $324 million. In 2000, United took delivery of four A319, twelve
A320, one B747, three B767 and eight B777 aircraft. Twenty-six of
these aircraft were purchased and two were acquired under capital leases.
Five of the aircraft purchased during the year were later sold and then
leased back under capital leases. In addition, United retired three
DC10-10, four DC10-30F and seven B747 aircraft.
Financing activities
included the issuance of $2.4 billion in equipment trust certificates,
as well as principal payments under debt and capital lease obligations
of $441 million and $283 million, respectively. Included in the debt
payments was the retirement of $116 million of long-term debt prior to
maturity. Additionally, United issued, and subsequently retired,
$200 million in long-term debt during the period to finance the acquisition
of aircraft. United may also from time to time repurchase on the
open market, in privately negotiated purchases or otherwise, its debt securities.
Included in cash and
cash equivalents at December 31, 2000 were $39 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,
2000, United had a working capital deficit of $1.9 billion as compared
to $2.6 billion at December 31, 1999. Historically, United has operated
with a working capital deficit and, as in the past, United expects to meet
all of its obligations as they become due.
Prior Years.
Operating activities in 1999 generated cash flows of $2.4 billion and the
Company's sale of part of its investments in Galileo and Equant provided
$828 million in cash. Cash was used primarily to fund net additions
to property and equipment of $2.2 billion. Financing activities also
included principal payments under debt and capital lease obligations of
$513 million and $247 million, respectively.
Operating activities
in 1998 generated cash flows of $3.1 billion. Cash was used primarily
to fund net additions to property and equipment of $2.4 billion.
Financing activities also included repayments of long-term debt totaling
$260 million and payments under capital leases of $320 million, as well
as aircraft lease deposits of $154 million. Additionally, the Company
issued $928 million in debt and used part of the proceeds to purchase $655
million in equipment certificates under Company operating leases.
Capital Commitments -
At December 31, 2000,
commitments for the purchase of property and equipment, principally aircraft,
approximated $4.7 billion, after deducting advance payments. Of this
amount, an estimated $2.5 billion is due to be spent in 2001. For
further details, see Note 13 "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.
Additionally, during 2001, UAL anticipates requiring additional financing
for its planned acquisition of US Airways, some or all of which may be
incurred by United.
At December 31, 2000,
UAL and United had an effective shelf registration statement on file with
the Securities and Exchange Commission to offer up to $2.5 billion of securities,
including secured and unsecured debt, equipment trust and pass through
certificates or a combination thereof. United also has available
approximately $1.7 billion in short-term revolving credit facilities, as
well as a separate $227 million short-term borrowing facility, as described
in Note 7 "Short-Term Borrowings" in the Notes to Consolidated Financial
Statements.
At December 31, 2000,
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"). Immediately
following UAL's announcement of the planned acquisition of US Airways,
S&P placed United securities on CreditWatch with negative implications.
Other Information
Labor Agreements -
On April 12, 2000, the Company's
contract with ALPA became amendable and in October 2000, the parties signed
a new contract. The agreement, which will become amendable September
1, 2004, includes provisions for an immediate increase in wages of 21.5%
to 28.7%, retroactive to April 12, as well as additional annual increases
of 4.5% to 5.6% for the duration of the contract. Additionally, the
contract allows United Express carriers to increase the number of small
jets beyond the current 65-jet limit up to an additional 150 immediately
as replacements for existing turboprops, with additional increases in small
jets as United's fleet grows. United may also share in profits and
losses of revenues with foreign carriers with whom United has antitrust
immunity, provided United gets its proportionate share of the flying.
In addition, the Company has reached agreement with ALPA to provide United
pilots with protections that are realistically representative of their
pre-merger expectations.
On July 12, 2000, the Company's
contracts with the IAM became amendable. The Company has been in
negotiations with the IAM since January 2000 for new contracts. Since
September 2000, the negotiations have been conducted with the assistance
of the National Mediation Board. Under the terms of the Railway Labor
Act, United's current agreements with the IAM will remain in effect while
negotiations continue. The Company has agreed that wage increases
under the new IAM contracts will be retroactive to July 12, 2000 and the
estimated costs of those contracts have been included in the Company's
results for 2000. The Company and the IAM had also initialed an agreement
on December 12, 2000 that would have provided for job protection benefits
to most mechanics, including relocation protection in the case of displacement
due to the merger transaction. The IAM has recently notified the
Company that they consider that agreement to be rescinded. Talks
are ongoing and United hopes to reach agreement with the IAM on these issues.
The Company's contract with
the AFA, which becomes amendable in 2006, provides for a mid-term wage
conference in the first quarter of 2001. However, in September 2000,
United and the AFA began wage discussions unrelated to the contract that
would have avoided the need for this wage conference. The parties
also began addressing integration issues related to United's acquisition
of US Airways at this time. The Company and the AFA have not reached
agreement on these issues to date and the Company began wage conference
negotiations per the contract in February 2001. The Company is continuing
to seek to resolve all outstanding issues with the AFA, although arbitration
may be required per the collective bargaining agreement, if an agreement
cannot be reached on wages. It is the Company's desire through these
discussions to avoid any AFA operational action that would significantly
inconvenience its customers or disrupt schedules. However, should
such action occur, the Company will take appropriate steps to minimize
the impact to the Company and its customers.
E-Commerce -
In October 2000, UAL
announced the formation of United NewVentures, Inc., a wholly owned subsidiary
which will create businesses to provide innovative solutions for its customers,
strengthen United's airline business and create incremental value for UAL's
stockholders. The subsidiary employs about 100 people, primarily
from the Company's former e-commerce organization and consists of two divisions,
United NetWorks and United NetVentures.
United NetWorks focuses
on expanding United-branded e-commerce and wireless activities, including
the recently redesigned united.com web site, as well as assuming responsibility
for marketing the sale of Mileage Plus miles to third parties. Gross
air bookings on united.com in 2000 grew more than 101% over last year.
Total passenger revenue from sales over the Internet reached $755 million
for the year compared to $400 million for 1999, an 89% increase.
United NetVentures
will manage United's investments in other Internet ventures, including
two new multi-airline travel-oriented web sites, Orbitz and Hotwire, and
identify new business opportunities in e-commerce.
Foreign Operations -
United generates revenues
and incurs expenses in numerous foreign currencies. These expenses
include aircraft leases, commissions, catering, personnel expense, advertising
and distribution costs, 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.
With a worldwide network
and significant sales and marketing efforts in the U.S. as well as every
major economic region in the world, United is able 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, British pounds and the euro. During 2000, yen-denominated
operating revenue net of yen-denominated operating expense was approximately
21 billion yen (approximately $195 million), Hong Kong dollar-denominated
operating revenue net of Hong Kong dollar-denominated operating expense
was approximately 1,397 million Hong Kong dollars (approximately $179 million),
British pound-denominated operating revenue net of British pound-denominated
operating expense was approximately 97 million British pounds (approximately
$142 million), Australian dollar-denominated operating revenue net of Australian
dollar-denominated operating expense was approximately 154 million Australian
dollars (approximately $90 million), and euro-denominated operating revenue
net of euro-denominated operating expense was approximately 34 million
euro (approximately $33 million).
To reduce the impact
of exchange rate fluctuations on United's financial results, the Company
hedged some of the risk of exchange rate volatility on its anticipated
future foreign currency revenues by purchasing put options (consisting
of Japanese yen, euro, Australian dollars and British pounds) and selling
Hong Kong dollar forwards. To reduce hedging costs, the Company sells
a correlation option in the first four currencies referred to above.
United also attempts to reduce its exposure to transaction gains and losses
by converting excess local currencies generated to U.S. dollars on a timely
basis 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, 2000,
are summarized in Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
United's foreign operations
involve insignificant amounts of physical assets; however, the Company
does have sizable intangible assets related to acquisitions of Atlantic
and Latin America 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 United's operating revenues and results
of operations. In addition, the Financial Accounting Standards Board
("FASB") has issued an Exposure Draft, "Business Combinations and Intangible
Assets - Accounting for Goodwill," which could impact the Company's accounting
for these assets. For further details, see "New Accounting Pronouncements"
below.
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
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 either the
likelihood or the magnitude of any such increase.
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.*
United 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 United's financial condition, operating results or liquidity.*
New Accounting Pronouncements -
In June 1998, the FASB 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.
The effective date of SFAS No. 133 was delayed one year, to fiscal years
beginning after June 15, 2000. The Company plans to adopt SFAS No.
133, which was subsequently amended by SFAS No. 138, in the first quarter
of 2001. United has reviewed its various contracts to determine which
contracts meet the requirements of SFAS No. 133, as amended and need to
be reflected as derivatives under the standard and accounted for at fair
value. Accordingly, the Company will recognize a credit for the cumulative
effect of a change in accounting principle of $3 million, net of tax, in
the first quarter 2001. In addition, the Company believes the adoption
of SFAS 133 will increase volatility in earnings and other comprehensive
income.
On February 14, 2001, the FASB issued an Exposure Draft "Business Combinations
and Intangible Assets - Accounting for Goodwill." The Exposure Draft
requires the use of a non-amortization approach to account for purchased
goodwill and for separately recognized (non-goodwill) intangible assets
that have an indefinite useful economic life. Under this approach,
goodwill and certain intangibles would not be amortized, but would be written
down and expensed against earnings only in periods in which the recorded
value is more than the fair value. The Company has not yet quantified
the impacts of adopting the new Exposure Draft, but it could result in
significant changes to the classification and recording of intangibles
and amortization expense currently on the books, as well as the accounting
for the planned acquisition of US Airways.
Outlook for 2001-
Information regarding
guidance for United's 2001 outlook can be obtained from UAL Corporation's
Annual Report on Form 10-K for the year 2000.
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. Forward-looking statements
represent the Company's expectations and beliefs concerning future events,
based on information available to the Company as of the date of this filing.
Some factors that could significantly impact revenues, expenses, unit costs,
and the results and benefits of the pending merger between United and US
Airways include, without limitation, the airline pricing environment; industry
capacity decisions; competitors' route decisions; obtaining regulatory
approvals for the United and US Airways merger; successfully integrating
the businesses of United and US Airways; costs related to the United and
US Airways merger; achieving cost-cutting synergies resulting from the
United and US Airways merger; labor integration issues; the ultimate outcome
of existing litigation; the success of the Company's cost-control efforts;
the cost of crude oil and jet fuel; the results of union contract negotiations
and their impact on labor costs; operational disruptions as a result of
bad weather, air traffic control-related difficulties and labor issues;
the growth of e-commerce and off-tariff distribution channels; the effective
deployment of customer service tools and resources; actions of the U.S.,
foreign and local governments; foreign currency exchange rate fluctuations;
the economic environment of the airline industry and the economic environment
in general.
Investors should not
place undue reliance on the forward-looking information contained herein,
which speaks only as of the date of this filing. United disclaims
any intent or obligation to update or alter any of the forward-looking
statements whether in response to new information, unforeseen events, changed
circumstances or otherwise.
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. To hedge against some of
this risk, the Company has placed foreign currency deposits (primarily
for Japanese yen, French francs, German marks and euros) to meet foreign
currency lease obligations designated in the respective currencies.
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 Company reduces its overall exposure to foreign currency exchange rate
volatility. 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) |
|
|
|
|||||||
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ASSETS | ||||||||||
| Cash equivalents | ||||||||||
| Fixed rate |
$1,463
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$1,463
|
$1,463
|
$ 175
|
$ 175
|
| Avg. interest rate |
6.68%
|
-
|
-
|
-
|
-
|
-
|
6.68%
|
5.27%
|
||
| Variable rate |
$ 5
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 5
|
$ 5
|
$ 60
|
$ 60
|
| Avg. interest rate |
6.96%
|
-
|
-
|
-
|
-
|
-
|
6.96%
|
6.23%
|
||
| Short term investments | ||||||||||
| Fixed rate |
$ 581
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 581
|
$ 581
|
$ 230
|
$ 230
|
| Avg. interest rate |
6.96%
|
-
|
-
|
-
|
-
|
-
|
6.96%
|
5.96%
|
||
| Variable rate |
$ 74
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 74
|
$ 74
|
$ 62
|
$ 62
|
| Avg. interest rate |
6.77%
|
-
|
-
|
-
|
-
|
-
|
6.77%
|
6.42%
|
||
| Lease deposits | ||||||||||
| Fixed rate - yen deposits |
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 348
|
$ 348
|
$ 394
|
$ 378
|
$ 423
|
| Avg. interest rate |
-
|
-
|
-
|
-
|
-
|
3.06%
|
3.06%
|
3.07%
|
||
| Fixed rate - FF deposits |
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 10
|
$ 10
|
$ 9
|
$ 10
|
$ 9
|
| Avg. interest rate |
-
|
-
|
-
|
-
|
-
|
5.61%
|
5.61%
|
5.61%
|
||
| Fixed rate - DM deposits |
$ 2
|
$ 2
|
$ 2
|
$ 2
|
$ 2
|
$ 304
|
$ 314
|
$ 354
|
$ 167
|
$ 177
|
| Avg. interest rate |
4.57%
|
4.53%
|
4.57%
|
4.60%
|
4.63%
|
6.79%
|
6.72%
|
6.49%
|
||
| Fixed rate - EUR deposits |
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 26
|
$ 26
|
$ 24
|
$ 27
|
$ 23
|
| Avg. interest rate |
-
|
-
|
-
|
-
|
-
|
4.14%
|
4.14%
|
4.14%
|
||
| Fixed rate- USD deposits |
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ 12
|
$ 12
|
$ 13
|
$ 11
|
$ 10
|
| Avg. interest rate |
-
|
-
|
-
|
-
|
-
|
6.49%
|
6.49%
|
6.49%
|
||
| LONG-TERM DEBT | ||||||||||
| U. S. Dollar denominated | ||||||||||
| Fixed rate debt |
$ 87
|
$ 86
|
$ 218
|
$ 333
|
$ 246
|
$ 2,567
|
$3,537
|
$3,669
|
$1,433
|
$1,542
|
| Avg. interest rate |
7.62%
|
7.63%
|
8.43%
|
9.85%
|
7.73%
|
7.64%
|
7.90%
|
8.26%
|
||
| Variable rate debt |
$ 83
|
$ 569
|
$ 523
|
$ 17
|
$ 17
|
$ 174
|
$1,383
|
$1,383
|
$1,307
|
$1,307
|
| Avg. interest rate |
6.23%
|
5.91%
|
6.70%
|
6.34%
|
6.34%
|
6.43%
|
6.30%
|
6.26%
|
||
Foreign Currency
Risk - United has established a foreign currency hedging program using
currency forwards and options (purchasing put options and selling correlation
options) to hedge exposure to the Japanese yen, Hong Kong dollar, British
pound, Australian dollar and the euro. 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.
|
|
|||
| (In millions, except average contract rates) |
|
|
|
|
|
|
|
|
| Forward exchange contracts |
|
||
| Japanese Yen - Purchased forwards |
|
|
|
| - - Sold forwards |
|
|
|
| Hong Kong Dollar - Sold forwards |
|
|
|
| French Franc - Purchased forwards |
|
|
|
| Euro - Purchased forwards |
|
|
|
As of December 31,
1999, United had $144 million of Japanese yen purchased forwards outstanding
with a fair value of $(1) million, $62 million yen sold forwards with a
fair value of $0 and $402 million yen put options with a fair value of
$7 million.
Price Risk (Aircraft
Fuel) - When market conditions indicate risk reduction is achievable,
United enters into fuel option contracts to reduce its price risk exposure
to jet fuel. The option contracts are designed to provide protection
against sharp increases in the price of aircraft fuel. Based on current
market conditions, United does not believe risk reduction is achievable
and is no longer entering into new option contracts. As market conditions
change, so may United's hedging program. In addition, to a limited
extent, United trades short-term heating oil futures and option contracts,
which are immaterial.
At December 31, 1999,
United had $1.1 billion in purchased call option contracts for crude oil
with an estimated fair value of $120 million.
*Estimated fair values represent the amount United would pay/receive on December 31, 2000 to terminate the contracts.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
United Air Lines, Inc.:
We have audited the accompanying statements of consolidated financial
position of United Air Lines, Inc. (a Delaware corporation) and subsidiary
companies as of December 31, 2000 and 1999, and the related statements
of consolidated operations, consolidated cash flows and consolidated stockholder's
equity for each of the three years in the period ended December 31, 2000.
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 auditing standards generally
accepted in the United States. 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 United
Air Lines, Inc. and subsidiary companies as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
As explained in Note 1 of the Notes to Consolidated Financial Statements,
effective January 1, 2000, the Company changed certain of its accounting
principles for revenue recognition as a result of the adoption of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
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
February 22, 2001
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Operations
(In Millions)
|
|
|||
| Operating revenues: |
|
|
|
| Passenger |
$ 16,932
|
$ 15,784
|
$ 15,520
|
| Cargo |
931
|
906
|
913
|
| Other operating revenues |
1,468
|
1,277
|
1,085
|
|
19,331
|
17,967
|
17,518
|
|
| Operating expenses: | |||
| Salaries and related costs |
6,726
|
5,671
|
5,341
|
| ESOP compensation expense |
147
|
756
|
829
|
| Aircraft fuel |
2,511
|
1,776
|
1,788
|
| Commissions |
1,030
|
1,139
|
1,325
|
| Purchased services |
1,720
|
1,575
|
1,505
|
| Aircraft rent |
923
|
879
|
894
|
| Landing fees and other rent |
974
|
966
|
898
|
| Depreciation and amortization |
1,058
|
867
|
793
|
| Aircraft maintenance |
698
|
689
|
624
|
| Cost of sales |
1,038
|
602
|
474
|
| Other operating expenses |
1,833
|
1,705
|
1,600
|
|
18,658
|
16,625
|
16,071
|
|
| Earnings from operations |
673
|
1,342
|
1,447
|
| Other income (expense): | |||
| Interest expense |
(416)
|
(372)
|
(362)
|
| Interest capitalized |
77
|
75
|
105
|
| Interest income |
99
|
68
|
59
|
| Equity in earnings (losses) of affiliates |
(8)
|
37
|
72
|
| Gain on sale of investments |
109
|
731
|
-
|
| Investment impairment |
(61)
|
-
|
-
|
| Miscellaneous, net |
(48)
|
4
|
(101)
|
|
(248)
|
543
|
(227)
|
|
| Earnings before income taxes, extraordinary | |||
| item and cumulative effect |
425
|
1,885
|
1,220
|
| Provision for income taxes |
158
|
678
|
417
|
| Earnings before extraordinary item | |||
| and cumulative effect |
267
|
1,207
|
803
|
| Extraordinary loss on early extinguishment of debt, net |
(6)
|
(3)
|
- -
|
| Cumulative effect of accounting change, net |
(209)
|
- -
|
- -
|
| Net earnings |
$ 52
|
$ 1,204
|
$ 803
|
|
=====
|
=====
|
=====
|
|
See accompanying Notes to Consolidated Financial Statements.
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Financial Position
(In Millions)
|
|
||
| Assets |
|
|
| Current assets: | ||
| Cash and cash equivalents |
$ 1,468
|
$ 235
|
| Short-term investments |
655
|
292
|
| Receivables, less allowance for doubtful | ||
| accounts (2000 - $14; 1999 - $13) |
1,212
|
1,275
|
| Related party receivables |
553
|
256
|
| Aircraft fuel, spare parts and supplies, less | ||
| obsolescence allowance (2000 - $55; 1999 - $45) |
424
|
340
|
| Income tax receivables |
175
|
85
|
| Deferred income taxes |
230
|
226
|
| Prepaid expenses and other |
456
|
363
|
|
5,173
|
3,072
|
|
| Operating property and equipment: | ||
| Owned - | ||
| Flight equipment |
14,888
|
13,518
|
| Advances on flight equipment |
810
|
809
|
| Other property and equipment |
3,713
|
3,368
|
|
19,411
|
17,695
|
|
| Less - Accumulated depreciation and amortization |
5,583
|
5,207
|
|
13,828
|
12,488
|
|
| Capital leases - | ||
| Flight equipment |
3,056
|
2,929
|
| Other property and equipment |
99
|
93
|
|
3,155
|
3,022
|
|
| Less - Accumulated amortization |
640
|
645
|
|
2,515
|
2,377
|
|
|
16,343
|
14,865
|
|
| Other assets: | ||
| Investments |
416
|
750
|
| Intangibles, less accumulated amortization | ||
| (2000 - $306; 1999 - $279) |
671
|
568
|
| Related party receivables |
467
|
465
|
| Aircraft lease deposits |
710
|
594
|
| Prepaid rent |
499
|
626
|
| Other |
790
|
603
|
|
3,553
|
3,606
|
|
|
$ 25,069
|
$ 21,543
|
|
|
=====
|
=====
|
|
See accompanying Notes to Consolidated Financial Statements.
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Financial Position
(In millions, except share data)
|
|
||
| Liabilities and Stockholder's Equity |
|
|
| Current liabilities: | ||
| Notes payable |
$
- -
|
$ 61
|
| Long-term debt maturing within one year |
170
|
92
|
| Related party debt maturing within one year |
155
|
187
|
| Current obligations under capital leases |
268
|
190
|
| Advance ticket sales |
1,454
|
1,412
|
| Accounts payable |
1,149
|
1,030
|
| Accrued salaries, wages and benefits |
1,508
|
1,002
|
| Accrued aircraft rent |
820
|
760
|
| Other accrued liabilities |
1,522
|
895
|
|
7,046
|
5,629
|
|
| Long-term debt |
4,740
|
2,650
|
| Long-term obligations under capital leases |
2,261
|
2,336
|
| Other liabilities and deferred credits: | ||
| Deferred pension liability |
136
|
70
|
| Postretirement benefit liability |
1,557
|
1,489
|
| Deferred gains |
912
|
986
|
| Accrued aircraft rent |
418
|
395
|
| Deferred income taxes |
1,265
|
1,156
|
| Other |
511
|
340
|
|
4,799
|
4,436
|
|
| Commitments and contingent liabilities (Note 13) | ||
| Preferred stock committed to Supplemental ESOP |
571
|
893
|
| Stockholder's equity: | ||
| Common stock at par, $5.00 par value; authorized | ||
| 1,000 shares; outstanding 200 shares |
-
|
-
|
| Additional capital invested |
232
|
237
|
| ESOP capital |
3,432
|
3,035
|
| Retained earnings |
1,833
|
2,012
|
| Unearned ESOP preferred stock |
-
|
(28)
|
| Accumulated other comprehensive income |
163
|
352
|
| Other |
(8)
|
(9)
|
|
5,652
|
5,599
|
|
|
$ 25,069
|
$ 21,543
|
|
|
======
|
======
|
|
See accompanying Notes to Consolidated Financial Statements.
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Cash Flows
(In Millions)
|
|
|||
|
|
|
|
|
| Cash and cash equivalents at beginning of year |
$ 235
|
$ 326
|
$ 268
|
| Cash flows from operating activities: | |||
| Net earnings |
52
|
1,204
|
803
|
| Adjustments to reconcile to net cash provided by | |||
| operating activities - | |||
| ESOP compensation expense |
147
|
756
|
829
|
| Cumulative effect of accounting change, net of tax |
209
|
-
|
-
|
| Extraordinary loss on debt extinguishment, net of tax |
6
|
3
|
-
|
| Gain on sale of investments |
(109)
|
(731)
|
-
|
| Investment impairment |
61
|
-
|
-
|
| Pension funding less than (greater than) expense |
(21)
|
94
|
101
|
| Deferred postretirement benefit expense |
153
|
155
|
149
|
| Depreciation and amortization |
1,058
|
867
|
793
|
| Provision for deferred income taxes |
325
|
591
|
307
|
| Undistributed (earnings) losses of affiliates |
9
|
(20)
|
(62)
|
| Decrease (increase) in receivables |
54
|
(141)
|
(120)
|
| Increase in related party receivables |
(297)
|
(210)
|
(41)
|
| Decrease (increase) in other current assets |
(210)
|
3
|
106
|
| Increase (decrease) in advance ticket sales |
42
|
(17)
|
162
|
| Increase (decrease) in accrued income taxes |
1
|
(11)
|
39
|
| Increase (decrease) in accounts payable | |||
| and accrued liabilities |
872
|
(95)
|
62
|
| Amortization of deferred gains |
(68)
|
(66)
|
(64)
|
| Other, net |
74
|
33
|
51
|
|
2,358
|
2,415
|
3,115
|
|
| Cash flows from investing activities: | |||
| Additions to property and equipment |
(2,508)
|
(2,383)
|
(2,831)
|
| Proceeds on disposition of property and equipment |
324
|
154
|
452
|
| Proceeds on sale of investments |
147
|
828
|
-
|
| Decrease (increase) in short-term investments |
(363)
|
68
|
149
|
| Decrease (increase) in loans to affiliates |
(2)
|
(35)
|
(24)
|
| Other, net |
(180)
|
(263)
|
(63)
|
|
(2,582)
|
(1,631)
|
(2,317)
|
|
| Cash flows from financing activities: | |||
| Proceeds from issuance of long-term debt |
2,567
|
286
|
928
|
| Repayment of long-term debt |
(441)
|
(513)
|
(260)
|
| Principal payments under capital leases |
(283)
|
(247)
|
(320)
|
| Purchase of equipment certificates under Company leases |
-
|
(47)
|
(655)
|
| Decrease in equipment certificates under Company leases |
53
|
33
|
22
|
| Increase (decrease) in short-term borrowings |
(61)
|
(123)
|
184
|
| Aircraft lease deposits |
(138)
|
(20)
|
(154)
|
| Dividend to parent company |
(208)
|
(300)
|
(500)
|
| Other, net |
(32)
|
56
|
15
|
|
1,457
|
(875)
|
(740)
|
|
| Increase (decrease) in cash and cash equivalents during the year |
1,233
|
(91)
|
58
|
| Cash and cash equivalents at end of year |
$ 1,468
|
$ 235
|
$ 326
|
|
=====
|
=====
|
=====
|
|
See accompanying Notes to Consolidated Financial Statements.
United Air Lines, Inc. and Subsidiary Companies
Statements of Consolidated Stockholder's Equity
(In Millions)
|
|
||||||||
|
|
|
Other | ||||||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
Income |
|
|
|
| Balance at December 31, 1997 |
$ -
|
$ 29
|
$ 2,053
|
$ 805
|
$ (177)
|
$ (2)
|
$ (5)
|
$ 2,703
|
| Year ended December 31, 1998: | ||||||||
| Net earnings |
-
|
-
|
-
|
803
|
-
|
-
|
-
|
803
|
| Other comprehensive income, net: | ||||||||
| Unrealized gains on securities, net |
-
|
-
|
-
|
-
|
-
|
1
|
-
|
1
|
| Minimum pension liability adj. |
-
|
-
|
- -
|
- -
|
-
|
(1)
|
-
|
(1)
|
| Total comprehensive income |
-
|
-
|
- -
|
803
|
-
|
- -
|
-
|
803
|
| Dividend to parent company |
-
|
-
|
-
|
(500)
|
-
|
-
|
-
|
(500)
|
| Unearned compensation and | ||||||||
| amortization from issuance of | ||||||||
| ESOP preferred stock |
-
|
-
|
823
|
-
|
6
|
-
|
-
|
829
|
| Unearned compensation and | ||||||||
| amortization of parent company | ||||||||
| restricted stock plan |
-
|
-
|
-
|
-
|
-
|
-
|
2
|
2
|
| Preferred stock committed to | ||||||||
| Supplemental ESOP |
-
|
-
|
(177)
|
-
|
-
|
-
|
-
|
(177)
|
| Other |
- -
|
(8)
|
(69)
|
- -
|
50
|
- -
|
- -
|
(27)
|
| Balance at December 31, 1998 |
- -
|
21
|
2,630
|
1,108
|
(121)
|
(2)
|
(3)
|
3,633
|
| Year ended December 31, 1999: | ||||||||
| Net earnings |
-
|
-
|
-
|
1,204
|
-
|
-
|
-
|
1,204
|
| Other comprehensive income, net: | ||||||||
| Unrealized gains on securities, net |
-
|
-
|
- -
|
- -
|
-
|
354
|
-
|
354
|
| Total comprehensive income |
-
|
-
|
- -
|
1,204
|
-
|
354
|
-
|
1,558
|
| Dividend to parent company |
-
|
-
|
-
|
(300)
|
-
|
-
|
-
|
(300)
|
| Unearned compensation and |
|
|
|
|
|
|
||
| amortization from issuance of | ||||||||
| ESOP preferred stock |
-
|
-
|
740
|
-
|
16
|
-
|
-
|
756
|
| Unearned compensation and | ||||||||
| amortization of parent company | ||||||||
| restricted stock plan |
-
|
-
|
-
|
-
|
-
|
-
|
2
|
2
|
| Preferred stock committed to | ||||||||
| Supplemental ESOP |
-
|
-
|
(201)
|
-
|
-
|
-
|
-
|
(201)
|
| Issuance of common stock |
-
|
204
|
-
|
-
|
-
|
-
|
-
|
204
|
| Other |
- -
|
12
|
(134)
|
- -
|
77
|
- -
|
(8)
|
(53)
|
| Balance at December 31, 1999 |
- -
|
237
|
3,035
|
2,012
|
(28)
|
352
|
(9)
|
5,599
|
| Year ended December 31, 2000: | ||||||||
| Net earnings |
-
|
-
|
-
|
52
|
-
|
-
|
-
|
52
|
| Other comprehensive income, net: | ||||||||
| Unrealized losses on securities, net |
-
|
-
|
-
|
-
|
-
|
(185)
|
-
|
(185)
|
| Minimum pension liability adj. |
-
|
-
|
-
|
- -
|
-
|
(4)
|
-
|
(4)
|
| Total comprehensive income |
-
|
-
|
-
|
52
|
-
|
(189)
|
-
|
(137)
|
| Dividend to parent company |
-
|
-
|
-
|
(231)
|
-
|
-
|
-
|
(231)
|
| Unearned compensation and | ||||||||
| amortization from issuance of |
|
|
|
|
||||
| ESOP preferred stock |
-
|
-
|
147
|
-
|
-
|
-
|
-
|
147
|
| Preferred stock committed to | ||||||||
| Supplemental ESOP |
-
|
-
|
322
|
-
|
-
|
-
|
-
|
322
|
| Other |
- -
|
(5)
|
(72)
|
- -
|
28
|
- -
|
1
|
(48)
|
| Balance at December 31, 2000 |
$ -
|
$ 232
|
$ 3,432
|
$ 1,833
|
$ -
|
$ 163
|
$ (8)
|
$ 5,652
|
|
====
|
====
|
====
|
=====
|
====
|
====
|
====
|
====
|
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Basis
of Presentation - United Air Lines, Inc. ("United") is a wholly
owned subsidiary of UAL Corporation ("UAL"). The consolidated financial
statements include the accounts of United and all of its majority-owned
affiliates (collectively "the Company"). All significant intercompany
transactions are eliminated. 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 does
not remove the securities from the balance sheet. At December 31,
2000, United was obligated to repurchase $39 million of securities lent
to third parties.
At December 31, 2000
and 1999, $543 million and $300 million, respectively, of investments in
debt securities included in cash and cash equivalents and short-term investments
were classified as available-for-sale, and $1.5 billion and $131 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 gains or losses 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
Japanese yen-, euro- 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
Japanese yen, euro, Australian dollar and British pound revenues by purchasing
put options with little or no intrinsic value and on Hong Kong dollar revenues
by entering into forward contracts. 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 a correlation option in the first four
currencies referred to above. The unrealized mark-to-market gains
and losses on the correlation options are included in Miscellaneous, net,
net of premiums received.
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
- - Under favorable market conditions, United uses purchased call options
to hedge a portion of its price risk related to aircraft fuel purchases.
The purchased call options have been designated as a hedge. Gains
or losses on hedge positions, net of premiums paid, 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 4 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 11 "Retirement and Postretirement Plans").
Route acquisition costs are amortized over 40 years. During 2001,
the FASB issued an Exposure Draft "Business Combinations and Intangible
Assets - Accounting for Goodwill" which could impact the Company's accounting
for intangible assets. See Other Information, "New Accounting
Pronouncements" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(i) Mileage
Plus Awards - United accrues the estimated incremental cost of
providing free travel awards earned under its Mileage Plus frequent flyer
program 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.
Effective January 1,
2000, the Company changed its method of accounting for the sale of mileage
to participating partners in its Mileage Plus program, in accordance with
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
Under the new accounting method, a portion of revenue from the sale of
mileage (previously recognized in other revenue) is deferred and recognized
as passenger revenue when the transportation is provided. Accordingly,
United has recorded a charge of $209 million, net of tax, for the cumulative
effect of a change in accounting principle to reflect the application of
the accounting method to prior years. This change resulted in a reduction
to revenues of approximately $38 million for 2000 and would have reduced
1999 revenues by $45 million.
The pro forma effect
of the accounting change on net income and net earnings as previously reported
for 1999 and prior years is as follows:
|
|
|
|
|
|
||
| Earnings before extraordinary | ||||||
| items (millions) | As reported |
$ 1,207
|
$ 803
|
$ 941
|
$ 601
|
$ 371
|
| Pro forma |
$ 1,178
|
$ 756
|
$ 914
|
$ 554
|
$ 341
|
|
| Net earnings (millions) | As reported |
$ 1,204
|
$ 803
|
$ 932
|
$ 534
|
$ 341
|
| Pro forma |
$ 1,175
|
$ 756
|
$ 905
|
$ 487
|
$ 311
|
(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.
(k)
Advertising - Advertising costs, which are included in other
operating expenses, are expensed as incurred. Advertising expense
was $269 million, $232 million and $213 million for the years ended December
31, 2000, 1999 and 1998, respectively.
(2) Employee Stock Ownership Plans and Recapitalization
On July 12, 1994, the
stockholders 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
was 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 ALPA, the IAM 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, then through
the Non-Leveraged ESOP, and finally, through the Supplemental ESOP.
The equity interests
were 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 were 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 was delivered
to an ESOP trust in seven separate sales under the Leveraged ESOP, the
last of which occurred on January 5, 2000. 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 Leveraged ESOP
and Non-Leveraged ESOP are being accounted for under AICPA Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
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. 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 2000, 2,390,931
shares of Class 1 ESOP Preferred Stock, 434,465 shares of Class 2 ESOP
Preferred Stock and 2,819,479 shares of Voting Preferred Stock were allocated
to employee accounts, and another 248,572 shares of Class 2 ESOP Preferred
Stock were allocated in the form of "book entry" shares, effective December
31, 1999. Another 198,629 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, 2000, the year-end allocation of Class 1 ESOP Preferred
Stock to employee accounts had not yet been completed; however, there were
669,820 shares of Class 1 ESOP Preferred Stock committed to be released.
For the Class 2 ESOP Preferred Stock, 187,276 shares were committed to
be contributed to employees at December 31, 2000. The fair value
of the unearned ESOP shares recorded on the balance sheet at December 31,
1999 was $41 million.
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, 2000 and 1999 was $304 million and $954 million,
respectively.
(3) Other Income (Expense) - Miscellaneous
Included in Other income
(expense) - "Miscellaneous, net" was $(22) million, $4 million and $(84)
million in foreign exchange gains (losses) in 2000, 1999 and 1998, respectively.
(4) Other Comprehensive Income
The following table
presents the tax effect of those items included in other comprehensive
income:
|
|
|||||||||
| (In Millions) |
|
|
|
||||||
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
| Unrealized holding gains (losses) | |||||||||
| Arising during period |
$(280)
|
$ 95
|
$ (185)
|
$ 547
|
$ (193)
|
$ 354
|
$ 1
|
$ -
|
$ 1
|
| Minimum pension liability |
(6)
|
2
|
(4)
|
-
|
-
|
-
|
(1)
|
-
|
(1)
|
| Total other comprehensive income |
$(286)
|
$ 97
|
$ (189)
|
$ 547
|
$ (193)
|
$ 354
|
$ -
|
$ -
|
$ -
|
|
===
|
===
|
===
|
===
|
===
|
===
|
===
|
===
|
===
|
|
Unrealized gains (losses)
on securities primarily represent gains (losses) on the Company's investments
in Galileo and Equant as discussed in Note 5 "Investments."
(5) Investments
During 1998 and 1999,
United invested approximately $51 million in GetThere.com (a leading provider
of Internet-based travel planning products tailored to individual, corporate,
travel supplier and travel agency customers), resulting in a 28% minority
interest consisting of common stock, warrants and options. United accounted
for its investment in GetThere.com using the equity method of accounting.
On October 6, 2000,
Sabre Holdings Corporation acquired all of the outstanding common stock
of GetThere.com for $17.75 per share. Accordingly, after converting
its options and warrants, United tendered all of its shares for net proceeds
of $147 million, resulting in a gain of approximately $69 million, net
of tax.
During 2000, United
recorded an impairment loss of $38 million, net of tax, related to its
warrants held in Priceline.com.
In June 1999, United
sold 17,500,000 common shares of Galileo in a secondary offering for $766
million, resulting in a gain of approximately $428 million, net of tax.
This sale reduced United's holdings in Galileo from 32 percent to approximately
15 percent, requiring United to discontinue the equity method of accounting
for its investment in Galileo. United has classified its remaining
15,940,000 shares of Galileo common stock as available-for-sale.
The market value of these shares at December 31, 2000 ($319 million) is
reflected in investments on the balance sheet and the market value in excess
of United's investment is classified net-of-tax ($144 million) in accumulated
other comprehensive income. The market value of United's investment
in Galileo at December 31, 1999 was $477 million. Included in the
Company's retained earnings is approximately $248 million of undistributed
earnings of Galileo and its predecessor companies.
United owns 1,391,791
depositary certificates in Equant, a provider of international data network
services to multinational businesses and a single source for global desktop
communications. Each depositary certificate represents a beneficial
interest in an Equant common share and the investment is classified as
available-for-sale. The market value in excess of United's investment
is classified net-of-tax ($24 million) in accumulated other comprehensive
income. In December 1999, United sold 709,000 shares of common stock
in Equant in a secondary offering by Equant for $62 million. At December
31, 2000 and 1999, the estimated fair value of United's remaining investment
in Equant was approximately $36 million and $156 million, respectively.
(6) Income Taxes
United, its subsidiaries
and other affiliated companies file a consolidated federal income tax return
with UAL. Under an intercompany tax allocation policy, United and
its subsidiaries compute, record and pay UAL for their own tax liability
as if they were separate companies filing separate returns. In determining
their own tax liabilities, United and each of its subsidiaries take into
account all tax credits or benefits generated and utilized as separate
companies, and they are compensated for the aforementioned tax benefits
only if they would be able to use those benefits on separate company bases.
In 2000, United and
its subsidiaries incurred both a regular and an alternative minimum tax
("AMT") loss. The carryback of the regular tax loss to 1998 and 1999
and the carryback of the AMT loss to 1998 will produce federal and state
refunds and generate additional AMT credits. The primary differences
between United's regular tax loss and AMT loss are the depreciation adjustments
and preferences.
The provision for income
taxes is summarized as follows:
| (In Millions) |
|
|
|
| Current - | |||
| Federal |
$ (141)
|
$ 73
|
$ 102
|
| State |
(26)
|
14
|
8
|
|
(167)
|
87
|
110
|
|
| Deferred - | |||
| Federal |
284
|
537
|
271
|
| State |
41
|
54
|
36
|
|
325
|
591
|
307
|
|
|
$ 158
|
$ 678
|
$ 417
|
|
|
====
|
====
|
====
|
The income tax provision
differed from amounts computed at the statutory federal income tax rate,
as follows:
| (In Millions) |
|
|
|
| Income tax provision at statutory rate |
$ 149
|
$ 660
|
$ 427
|
| State income taxes, net of federal income | |||
| tax benefit |
10
|
44
|
29
|
| Nondeductible employee meals |
24
|
24
|
24
|
| Tax credits |
-
|
-
|
(7)
|
| Other, net |
(25)
|
(50)
|
(56)
|
|
$ 158
|
$ 678
|
$ 417
|
|
|
====
|
====
|
====
|
Temporary differences
and carryforwards that give rise to a significant portion of deferred tax
assets and liabilities for 2000 and 1999 are as follows:
| (In Millions) |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
| Employee benefits, including | ||||
| postretirement medical and ESOP |
$ 1,071
|
$ 214
|
$ 989
|
$ 135
|
| Depreciation, capitalized interest | ||||
| and transfers of tax benefits |
-
|
3,011
|
-
|
2,477
|
| Gains on sale and leasebacks |
307
|
-
|
335
|
-
|
| Rent expense |
461
|
-
|
435
|
-
|
| AMT credit carryforwards |
371
|
-
|
210
|
-
|
| Other |
999
|
1,022
|
751
|
1,038
|
|
$ 3,209
|
$ 4,247
|
$ 2,720
|
$ 3,650
|
|
|
=====
|
=====
|
=====
|
=====
|
|
At
December 31, 2000, United and its subsidiaries had $371 million of federal
AMT credits and $43 million of federal and state net operating losses which
may be carried forward to reduce the tax liabilities of future years.
(7) 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.
Additionally, United
has available $900 million in short-term secured aircraft financing facilities.
Interest on drawn amounts under the facilities is calculated at floating
rates based on LIBOR plus a margin.
At December 31, 1999,
United had outstanding $61 million under a separate short-term borrowing
facility, bearing an average interest rate of 5.72%. Receivables
amounting to $233 million were pledged by United to secure repayment of
such outstanding borrowings. The maximum available borrowing amount
under this arrangement is $227 million. There were no borrowings
outstanding under this arrangement at December 31, 2000.
(8) 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, 2000):
| (In Millions) |
|
|
| Secured notes, 5.97% to 8.99%, averaging | ||
| 7.33%, due through 2014 |
$ 3,469
|
$ 1,229
|
| Debentures, 9.00% to 11.21%, averaging | ||
| 9.89%, due through 2021 |
646
|
762
|
| Promissory notes, 11.00%, due 2000 |
-
|
1
|
| Commercial paper, 6.71%, due through 2003 |
549
|
571
|
| Special facility bonds, 5.63% to 6.25%, | ||
| averaging 5.71%, due through 2034 |
255
|
190
|
|
4,919
|
2,753
|
|
| Less: Unamortized discount on debt |
(9)
|
(11)
|
| Current maturities |
(170)
|
(92)
|
|
$ 4,740
|
$ 2,650
|
|
|
=====
|
=====
|
|
See Item 7a "Quantitative
and Qualitative Disclosures About Market Risk" for disclosures regarding
the fair values of debt.
In addition to scheduled
principal payments, in 2000 and 1999 the Company repaid $116 million and
$23 million, respectively, in principal amount of debentures prior to maturity.
The debentures were scheduled to mature at various times through 2021.
Extraordinary losses of $6 million and $3 million, respectively, net of
tax benefits of $4 million and $2 million, respectively, was recorded reflecting
amounts paid in excess of the debt carrying value.
The Company, through
a special-purpose financing entity that is consolidated, has issued 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 July 2000, the Company
issued $921 billion in enhanced equipment trust certificates to refinance
certain owned aircraft and aircraft under operating leases. Net proceeds
after refinancing the operating leases was $674 million. In December
2000, the Company issued an additional $1.5 billion in enhanced equipment
trust certificates to refinance certain owned aircraft.
At December 31, 2000,
United had recorded $255 million in special facilities revenue bonds to
finance the acquisition and construction of certain facilities at Los Angeles,
San Francisco and Miami. United guarantees the payment of these bonds
under various payment and loan agreements. The bond proceeds are
restricted to expenditures on the facilities and unspent amounts are classified
as other assets in the balance sheet.
In February 2001, United
recorded an additional $200 million in special facility bonds to finance
the acquisition and construction of certain facilities at Chicago.
At December 31, 2000,
United had outstanding a total of $1.4 billion of long-term debt bearing
interest rates at 22.5 to 60.0 basis points over LIBOR.
Maturities of long-term
debt for each of the four years after 2001 are: 2002 - $655 million;
2003 - $741 million; 2004 - $350 million; and 2005 - $264 million.
Various assets, principally aircraft, having an aggregate book value of
$4.1 billion at December 31, 2000, were pledged as security under various
loan agreements.
(9) 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, 2000, 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) |
|
|
|
|
|
|
|
|
| Payable during - | |||
| 2001 |
$ 921
|
$ 612
|
$ 472
|
| 2002 |
905
|
574
|
415
|
| 2003 |
952
|
541
|
316
|
| 2004 |
991
|
514
|
325
|
| 2005 |
1,004
|
504
|
293
|
| After 2005 |
9,397
|
7,279
|
1,867
|
| Total minimum lease payments |
$14,170
|
$10,024
|
3,688
|
| Imputed interest (at rates of 5.3% to 12.2%) |
======
|
=====
|
(1,158)
|
| Present value of minimum lease payments |
2,530
|
||
| Current portion |
(269)
|
||
| Long-term obligations under capital leases |
$ 2,261
|
||
|
=====
|
|||
As of December 31,
2000, United leased 315 aircraft, 82 of which were under capital leases.
These leases have terms of 10 to 26 years, and expiration dates range from
2001 through 2020.
In connection with
the financing of certain aircraft accounted for as capital leases, United
had on deposit at December 31, 2000 an aggregate 40 billion yen ($348 million),
661 million German marks ($314 million), 67 million French francs ($10
million), 28 million Euro ($26 million) and $12 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 $1.5 billion
in 2000, $1.5 billion in 1999 and $1.4 billion in 1998. Included
in 2000 rental expense was $21 million in contingent rentals, resulting
from changes in interest rates for operating leases under which the rent
payments are based on variable interest rates.
(10) Related Party Transactions
Air Wis Services, Inc.,
a wholly owned subsidiary of UAL, owns Air Wisconsin, Inc. At December
31, 2000 and 1999, United had outstanding loans from Air Wisconsin, Inc.
in the amount of $155 and $187 million, respectively. The loans bear
interest at market rates.
At December 31, 2000
and 1999, United had accounts receivable from UAL of $266 million and $264
million, respectively.
Certain officers and
key employees of United participate in UAL stock award plans. 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.
Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") 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 would have instead been reported as the pro forma
amounts indicated below:
|
|
|
|
||
| Net income (millions) | As reported |
$ 52
|
$ 1,204
|
$ 803
|
| Pro forma |
$ 35
|
$ 1,188
|
$ 794
|
The weighted-average
grant date fair value of restricted shares issued was $51.83 for shares
issued in 2000 and $69.51 for shares issued in 1999. 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:
|
|
|
|
|
| Risk-free interest rate |
6.4%
|
5.2%
|
5.6%
|
| Dividend yield |
2.4%
|
0.0%
|
0.0%
|
| Volatility |
35.0%
|
34.0%
|
33.0%
|
| Expected life (years) |
4.0
|
4.0
|
4.0
|
The weighted-average
fair value of options granted during 2000, 1999 and 1998 was $17.80, $22.31
and $27.95, respectively.
The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single measure
of the fair value of its stock options.
(11) 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 |
|
|
||
|
|
|
|
|
|
| Benefit obligation at beginning of year |
$ 7,381
|
$ 8,038
|
$ 1,465
|
$ 1,626
|
| Service cost |
269
|
295
|
47
|
53
|
| Interest cost |
629
|
583
|
120
|
116
|
| Plan participants' contributions |
1
|
1
|
8
|
7
|
| Amendments |
260
|
1
|
3
|
-
|
| Actuarial (gain) loss |
1,162
|
(1,161)
|
164
|
(254)
|
| Foreign currency exchange rate changes |
(15)
|
12
|
-
|
-
|
| Benefits paid |
(435)
|
(388)
|
(101)
|
(83)
|
| Benefit obligation at end of year |
$ 9,252
|
$ 7,381
|
$ 1,706
|
$ 1,465
|
|
=====
|
=====
|
=====
|
=====
|
|
| Change in Plan Assets | ||||
|
|
|
|
|
|
| Fair value of plan assets at beginning of year |
$ 8,701
|
$ 7,654
|
$ 113
|
$ 112
|
| Actual return on plan assets |
21
|
1,255
|
8
|
6
|
| Employer contributions |
230
|
175
|
88
|
71
|
| Plan participants' contributions |
1
|
1
|
8
|
7
|
| Foreign currency exchange rate changes |
(7)
|
4
|
-
|
-
|
| Benefits paid |
(435)
|
(388)
|
(101)
|
(83)
|
| Fair value of plan assets at end of year |
$ 8,511
|
$ 8,701
|
$ 116
|
$ 113
|
|
=====
|
=====
|
=====
|
=====
|
|
| Funded status |
$ (741)
|
$ 1,320
|
$ (1,590)
|
$ (1,352)
|
| Unrecognized actuarial (gains) losses |
14
|
(1,870)
|
(54)
|
(229)
|
| Unrecognized prior service costs |
806
|
604
|
2
|
- -
|
| Net amount recognized |
$ 79
|
$
54
|
$ (1,642)
|
$ (1,581)
|
|
=====
|
=====
|
=====
|
=====
|
|
| Amounts recognized in the statement of | ||||
| financial position consist of: |
|
|
|
|
| Prepaid (accrued) benefit cost |
$ 79
|
$ 54
|
$ (1,642)
|
$ (1,581)
|
| Accrued benefit liability |
(266)
|
(151)
|
-
|
-
|
| Intangible asset |
255
|
148
|
-
|
-
|
| Accumulated other comprehensive income |
11
|
3
|
- -
|
- -
|
| Net amount recognized |
$ 79
|
$ 54
|
$ (1,642)
|
$ (1,581)
|
|
=====
|
=====
|
=====
|
=====
|
|
| Weighted-average assumptions |
|
|
|
|
| Discount rate |
|
|
|
|
| Expected return on plan assets |
|
|
|
|
| Rate of compensation increase |
|
|
|
|
The assumed health
care cost trend rates for gross claims paid were 4.5% and 4.0% for 2000
and 1999, respectively.
The net periodic benefit
cost included the following components:
| (In Millions) |
|
|
||||
|
|
|
|
|
|
|
|
| Service cost |
$ 269
|
$ 295
|
$ 276
|
$ 47
|
$ 53
|
$ 48
|
| Interest cost |
629
|
583
|
533
|
120
|
116
|
109
|
| Expected return on plan assets |
(740)
|
(665)
|
(581)
|
(9)
|
(9)
|
(8)
|
| Amortization of prior service cost | ||||||
| including transition obligation/(asset) |
58
|
57
|
57
|
-
|
-
|
-
|
| Recognized actuarial (gain)/loss |
(7)
|
1
|
9
|
(9)
|
(5)
|
(4)
|
| Net period benefit costs |
$ 209
|
$ 271
|
$ 294
|
$ 149
|
$ 155
|
$ 145
|
|
=====
|
=====
|
=====
|
=====
|
=====
|
=====
|
|
Total pension expense
for all retirement plans (including defined contribution plans) was $302
million in 2000, $285 million in 1999 and $304 million in 1998.
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 $1.0 billion, $632 million and $61 million, respectively, as of December
31, 2000 and $500 million and $444 million and $47 million, respectively,
as of December 31, 1999.
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) |
|
|
| Effect on total service and interest cost |
|
|
| Effect on postretirement benefit obligation |
|
|
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.
(12) 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, 2000, $1.2 billion principal amount of such bonds was outstanding.
As of December 31, 2000, UAL and United had jointly guaranteed $35 million
of such bonds and United had guaranteed $1.2 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 9,
"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.
(13) 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 United's consolidated
financial position or results of operations. United 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, 2000,
commitments for the purchase of property and equipment, principally aircraft,
approximated $4.7 billion, after deducting advance payments. An estimated
$2.5 billion will be spent in 2001, $1.7 billion in 2002 and $0.5 in 2003.
The major commitments are for the purchase of A319, A320, B767, and B777
aircraft, which are scheduled to be delivered through 2003. The above
numbers include a recent conversion of 15 option aircraft to firm orders
to be delivered in 2003.
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.
Approximately 80% of
United's employees are represented by various labor organizations.
The labor contracts with the IAM became amendable in July 2000. The
Company is currently in the process of negotiating these contracts.
The contracts with ALPA and the AFA become amendable in 2004 and 2006,
respectively. See Other Information, "Labor Agreements" in
Management's Discussion and Analysis of Financial Condition and Results
of Operations for details.
(14) Segment Information
United has a global
route network designed to transport passengers and cargo between destinations
in North America, the Pacific, the Atlantic and Latin America. 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.
United evaluates performance based on earnings before income taxes and
gains on sales. 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) |
|
||||||
|
|
|||||||
|
|
|
|
|
||||
| America |
|
|
|
|
|
|
|
| Revenue |
$ 13,094
|
$ 3,161
|
$ 2,260
|
$ 816
|
$ 19,331
|
$ -
|
$ 19,331
|
| Interest income |
55
|
23
|
16
|
5
|
99
|
-
|
99
|
| Interest expense |
234
|
95
|
66
|
21
|
416
|
-
|
416
|
| Equity in losses of affiliates |
(5)
|
(2)
|
(1)
|
-
|
(8)
|
-
|
(8)
|
| Depreciation and amortization |
630
|
176
|
141
|
43
|
990
|
68
|
1,058
|
| Earnings before income taxes, | |||||||
| investment impairment and | |||||||
| gains on sales |
205
|
60
|
102
|
10
|
377
|
-
|
377
|
| (In Millions) |
|
||||||
|
|
|||||||
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
| Revenue |
$ 12,516
|
$ 2,691
|
$ 1,973
|
$ 787
|
$ 17,967
|
$ -
|
$ 17,967
|
| Interest income |
40
|
14
|
10
|
4
|
68
|
-
|
68
|
| Interest expense |
217
|
79
|
55
|
21
|
372
|
-
|
372
|
| Equity in earnings of affiliates |
21
|
9
|
5
|
2
|
37
|
-
|
37
|
| Depreciation and amortization |
550
|
145
|
115
|
42
|
852
|
15
|
867
|
| Earnings before income taxes | |||||||
| and gains on sales |
889
|
81
|
164
|
20
|
1,154
|
-
|
1,154
|
| (In Millions) |
|
||||||
|
|
|||||||
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
| Revenue |
$ 11,997
|
$ 2,843
|
$ 1,846
|
$ 832
|
$ 17,518
|
$ -
|
$ 17,518
|
| Interest income |
33
|
14
|
8
|
3
|
58
|
1
|
59
|
| Interest expense |
207
|
84
|
49
|
22
|
362
|
-
|
362
|
| Equity in earnings of affiliates |
41
|
17
|
10
|
4
|
72
|
-
|
72
|
| Depreciation and amortization |
520
|
145
|
95
|
45
|
805
|
(12)
|
793
|
| Earnings (loss) before | |||||||
| income taxes |
1,118
|
(105)
|
185
|
22
|
1,220
|
-
|
1,220
|
| (In Millions) |
|
|
|
| Total earnings for reportable segments |
$ 377
|
$ 1,154
|
$ 1,220
|
| Gains on sales |
109
|
731
|
-
|
| Investment impairment |
(61)
|
- -
|
-
|
| Total earnings before income taxes, | |||
| extraordinary item and cumulative effect |
$ 425
|
$ 1,885
|
$ 1,220
|
|
=====
|
=====
|
=====
|
United's operations
involve an insignificant level of dedicated revenue producing assets by
reportable segment. The overwhelming majority of United's revenue
producing assets can be deployed in any of the four reportable segments.
United has significant intangible assets related to the acquisition of
its Atlantic and Latin America route authorities.
(15) 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) |
|
|
|
| Cash paid during the year for: | |||
| Interest (net of amounts capitalized) |
$ 307
|
$ 269
|
$ 241
|
| Income taxes |
17
|
294
|
158
|
| Non-cash transactions: | |||
| Capital lease obligations incurred |
339
|
482
|
701
|
| Long-term debt incurred in connection | |||
| with additions to equipment |
32
|
-
|
-
|
| Increase (decrease) in pension intangible assets |
107
|
(123)
|
(15)
|
| Net unrealized gain (loss) on investments |
(185)
|
354
|
-
|
(16) Selected Quarterly Financial Data (Unaudited)
| (In Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
| 2000: | |||||
| Operating revenues |
$ 4,533
|
$ 5,098
|
$ 4,916
|
$ 4,784
|
$ 19,331
|
| Earnings (loss) from operations |
281
|
597
|
(30)
|
(175)
|
673
|
| Earnings (loss) before extraordinary item | |||||
| and cumulative effect |
128
|
331
|
(105)
|
(87)
|
267
|
| Extraordinary loss on early | |||||
| extinguishment of debt, net |
-
|
-
|
(6)
|
-
|
(6)
|
| Cumulative effect of accounting change, net |
(209)
|
-
|
-
|
-
|
(209)
|
| Net earnings (loss) |
$ (81)
|
$ 331
|
$ (111)
|
$ (87)
|
$
52
|
| 1999: | |||||
| Operating revenues |
$ 4,150
|
$ 4,530
|
$ 4,834
|
$ 4,453
|
$ 17,967
|
| Earnings from operations |
140
|
424
|
611
|
167
|
1,342
|
| Earnings before extraordinary item |
75
|
666
|
354
|
112
|
1,207
|
| Extraordinary loss on early | |||||
| extinguishment of debt, net |
-
|
(3)
|
-
|
-
|
(3)
|
| Net earnings |
$ 75
|
$ 663
|
$ 354
|
$ 112
|
$ 1,204
|
During the third quarter
of 2000, United recorded an investment impairment of $61 million related
to its warrants in Priceline.com. Additionally, in the fourth quarter
2000, United recognized a pre-tax gain of $109 million on the sale of its
investment in GetThere.com. (See Note 5 "Investments".)
During the second quarter
of 1999, United recognized a pre-tax gain of $669 million on the sale of
a portion of its investment in Galileo. Additionally, in the fourth
quarter 1999, United recognized a pre-tax gain of $62 million on the sale
of a portion of its investment in Equant. (See Note 5 "Investments".)
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.
Omitted pursuant to
General Instruction I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to
General Instruction I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Omitted pursuant to
General Instruction I(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to
General Instruction I(2)(c) of Form 10-K.
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.
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.
(b) Reports on Form 8-K.
Form 8-K dated December
18, 2000 to report the exhibit index of an S-3 Registration.
Form 8-K dated December
21, 2000 to report a Regulation FD disclosure.
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 15th day of March, 2001.
UNITED AIR LINES, INC.
/s/ James E. Goodwin
James E. Goodwin
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 15th day of March, 2001 by the
following persons on behalf of the registrant and in the capacities indicated.
| /s/ James E. Goodwin |
| James E. Goodwin |
| Chairman of the Board and Chief Executive Officer and a Director (principal executive officer) |
| /s/ Douglas A. Hacker |
| Douglas A. Hacker |
| Executive Vice President and Chief Financial Officer and a Director |
| (principal financial officer) |
| /s/ M. Lynn Hughitt |
| M. Lynn Hughitt |
| Vice President and Controller
(principal accounting officer) |
| /s/ Rono J. Dutta |
| Rono J. Dutta |
| Director
|
| /s/ Christopher D. Bowers |
| Christopher D. Bowers |
| Director
|
| /s/ William P. Hobgood |
| William P. Hobgood |
| Director |
| /s/ Stuart I. Oran |
| Stuart I. Oran |
| Director |
| /s/ Andrew P. Studdert |
| Andrew P. Studdert |
| Director |
United Air Lines, Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 2000
| (In Millions) |
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
|
|
| Reserve deducted from
asset to which it applies:
|
|||||
| Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
|
|
|
| Obsolescence allowance - - | |||||
| Flight equipment spare parts |
|
|
|
|
|
|
|
|
|
|
|
|
F-1
1Deduction from reserve for purpose for which
reserve was created.
United Air Lines, Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1999
| (In Millions) |
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
|
|
| Reserve deducted from
asset to which it applies:
|
|||||
| Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
|
|
|
| Obsolescence allowance - - | |||||
| Flight equipment spare parts |
|
|
|
|
|
|
|
|
|
|
|
|
F-2
1Deduction from reserve for purpose for which
reserve was created.
United Air Lines, Inc. and Subsidiary Companies
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1998
| (In Millions) |
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
|
|
| Reserve deducted from
asset to which it applies:
|
|||||
| Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
|
|
|
| Obsolescence allowance - - | |||||
| Flight equipment spare parts |
|
|
|
|
|
|
|
|
|
|
|
|
F-3
1Deduction from reserve for purpose for which
reserve was created.
| 3.1 | Restated Certificate of Incorporation of United. |
| 3.2 | By-laws of United. |
| 4.1 | United's indebtedness under any single instrument does not exceed 10% of United's total assets on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. |
| 10.1 | 2000 Agreement between United Air Lines, Inc. and the Air Line Pilots in the service of United Air Lines, Inc. represented by the Air Line Pilots Association, International (filed as Exhibit 10.41 of UAL's Form 10-K for the year ended December 31, 2000, and incorporated herein by reference). |
| 12 | Computation of Ratio of Earnings to Fixed Charges. |
| 23 | Consent of Independent Public Accountants. |